No News Becoming Bad News For Lexicon Pharmaceuticals

By Stephen Simpson,

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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 among clinicians.

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 drug companies).

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 Lexicon?

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.

See also Bank Stocks Insiders Are Still Buying on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Stocks
Referenced Stocks: BMY , JNJ , LXRX , MRK , PFE

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