By Stephen Simpson :
Normally you would think that having a differentiated and
proprietary diabetes compound with solid supporting data would make
a biotech relatively popular. That would often be particularly true
in cases where the drug class has already proven to be pretty
popular with drug companies and started to generate real interest
Unfortunately for Lexicon Pharmaceuticals' ( LXRX ) shareholders,
things aren't going to plan yet. The company's LX4211 remains the
only compound I'm aware of that inhibits both SGLT1 and SGLT2
(other drugs just address SGLT2) and the data have been good so
far. Yet, another SGLT2 partnership deal has gone off in the space
without including Lexicon - forcing investors to wonder whether a
good partnership deal actually is out there to be had and/or
whether the company will have to contemplate going it alone into
Phase III studies.
The Latest Deal Is Unusual
It's not all that uncommon to see major pharmaceutical companies
splitting drugs. Oftentimes it comes about when a Big Pharma
company buys out a biotech that had a preexisting partnership, or
when a company wants to diversify risk and leverage better regional
coverage (as is often the case with partnerships involving Japanese
It's still somewhat unusual to see Big Pharma companies
partnering on novel compounds, but that's what happened Monday.
Pfizer ( PFE ) and
Merck ( MRK ) announced a
partnership whereby the companies will split Pfizer's SGLT2 drug
candidate ertugliflozin. Merck paid an upfront sum of $60 million
will be on the hook for additional (unspecified) milestones as the
product advances. Merck and Pfizer will split the costs on a 60/40
basis and will likewise split the revenue that way if and when the
drug is approved.
Should This Have Been Lexicon's Ride?
Given that ertugliflozin is a Phase II drug about to start Phase
III studies, it's basically in the same stage of development as
Lexicon's key drug '4211. I haven't seen Phase II data on
ertugliflozin, and I do not think it has been publicly released
yet, and the only data available so far has been relatively basic
pharmokinetic and metabolic data. So I can't say whether or not
this is a stronger drug.
What I can say, though, is that the data on '4211 has been
pretty compelling so far. A prior Phase II study showed an adjusted
HbA1c reduction of 0.86% at the highest dose in a 12-week study
against a placebo, as well as a 2kg weight loss. That makes it one
of the more compelling compounds out there, including
Johnson & Johnson 's ( JNJ ) recently-approved
Invokana (canagliflozin) and the troubled Bristol-Myers
Squibb ( BMY )/
AstraZeneca (AZN) Forxiga (dapagliflozin).
So here we have a biotech with an anti-diabetes drug that has
already shown solid efficacy and encouraging safety, not to mention
management's explicit intention to partner the drug prior to
starting Phase III studies. Why didn't Merck choose to go with
There are so many factors that go into these partnerships, it's
impossible to offer much more than conjecture. Maybe Lexicon has
(or had) multiple interested parties and Merck dropped out of the
running when the terms got too steep. Perhaps the data on Pfizer's
compound really is compelling.
There is a third possibility that investors in Lexicon can't
afford to completely ignore. That's the possibility that potential
partners are spooked by the safety profile of '4211 and/or the
possible development pathway. As I mentioned before, '4211 is the
only dual-SGLT inhibitor in trials. Because of its unique mechanism
of action, and the fact that SGLT1 inhibition involves the
cardiovascular system, there is a chance that the FDA will get
spooked and/or require a greater amount of clinical data prior to
approval (essentially treating it as a totally separate compound
from SGLT2 inhibitors).
A Dwindling Supply Of Partners
With this deal, another potential partner is out of the running
for Lexicon. Johnson & Johnson has its own drug, as do
Bristol-Myers and AstraZeneca (assuming they want to continue
working on it and not acquire a new late-stage candidate).
Likewise, Lilly (LLY) has its own SGLT2 drug in
partnership with Boehringer, and Sanofi (SNY)
partnered with Chugai in late 2012 on a drug that
Roche (RHHBY.OB) had earlier returned to Chugai
(and remember, Roche owns more than half of Chugai).
That doesn't leave too many high-potential partners left in the
traditional diabetes scene. In particular, Roche, Novo
Nordisk (NVO), and Takeda would appear to be the biggest
names in diabetes without an SGLT2 presence. Roche isn't nearly as
active in the metabolic space as in years before and may feel it's
fine with its position vis a vis Chugai, and Novo Nordisk isn't
quite famous for partnering with other companies. That leaves
Lexicon with increasingly few good options among the well-heeled
Big Pharma companies with a real presence in diabetes.
The Bottom Line
I own shares in Lexicon, and I'm still bullish on the potential
of '4211, as I believe the dual inhibition of SGLT1 and SGLT2 will
produce meaningful differentiated outcomes for patients. That said,
I can't blame Big Pharma if managers are looking around the sector,
seeing how hard it is to get a new diabetes drug to market and also
seeing how hard it is to be the second or third drug to market, and
thinking that maybe it's more hassle than it's worth.
If Lexicon has to go it alone, that will clearly be bad for the
stock in the short term as the company will need to raise capital
and will likely dilute shareholders in the process. Ultimately,
though, I think it will still work out for the company as effective
diabetes drugs with good side-effect profiles are worth quite a
lot. Given that I believe '4211 alone is worth more than $3 per
share, I'd still be a buyer of Lexicon on this disappointment, but
prospective investors need to appreciate this is a volatile stock
and a risky story.
Disclosure: I am long [[LXRX]], [[RHHBY.OB]]. I
wrote this article myself, and it expresses my own opinions. I am
not receiving compensation for it (other than from Seeking Alpha).
I have no business relationship with any company whose stock is
mentioned in this article.
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