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Introduction & Thesis
Shares of biopharma Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) are ~60% off their May highs, despite holding an FDA-approved key drug (Inpefa) for heart failure in its portfolio. The sell-off is largely attributed to investor concerns over Inpefa’s market uptake amid a perfect storm of competition from pharma heavyweights like Eli Lilly, as well as the novel GLP-1 wonder drugs. However, I think the sell-off may be overdone because 1. All these drugs can co-exist and still thrive, given the huge TAM for Heart Failure, which is also one of the leading causes of hospitalizations in the U.S. 2. The broader approval label for Inpefa in Heart Failure, its early clinical benefits within ~100 days of use and strong rehospitalization data can likely be key differentiators for the drug. Latest developments like insider buying, acceleration in prescription data and growing payer coverage for Inpefa in Q3 (the first full quarter since the drug’s launch) with expectations for continued momentum in Q4 and 2024 – render credence to my ‘Buy’ rating on LXRX. In the rest of the article, I will endeavor to fully explain why I believe Lexicon Pharma will likely turn the corner and see a significant stock re-rating.
Inpefa: Late to the Party, but Value Proposition Stems from Significant Clinical Benefits in ~3 Months
Inpefa with the generic name sotagliflozin was approved by FDA in May 2023, to lower the risk of cardiovascular death, urgent heart failure visit and hospitalization for heart failure in adults with heart failure or chronic kidney disease, type 2 diabetes mellitus, and other cardiovascular risk factors.
Inpefa’s label covers patients with heart failure or at risk for heart failure, with reduced (“HFrEF”) and preserved (“HFpEF”) ejection fraction, regardless of whether the patient is diabetic or not.
Just for more clarity, Ejection fraction (EF) is a measure of the blood pumped out by the left ventricle of the heart with each contraction. EF is expressed as a percentage and a normal EF value is ~55-70%. HFrEF is a heart failure with reduced EF of <= 40%, while HFpEF shows that even with preserved EF of >= 50%, heart failure can still occur due to a stiff heart muscle that deprives the left ventricle of its ability to relax normally.
The FDA approval for Inpefa was based on the data from two phase 3 cardiovascular outcomes trials enrolling a combined ~12k patients. Inpefa reduced the risk of total occurrence of cardiovascular death, hospitalization for heart failure, and urgent heart failure visits by 33% vs. placebo in patients who had been recently hospitalized for worsening heart failure.
The breadth of the label is highly relevant given the ~1.3 million annual hospitalizations triggered by heart failure, and readmission of ~25% of patients within 30 days post-discharge and ~65% of patients within a year of discharge. The cycle is a costly challenge as hospitalizations represent ~80% of heart failure costs. It should be noted that Inpefa reduced cardiovascular death and heart failure by ~50% over the first 30- and 90-days post-discharge, with early benefits reflected in a reduction in 30-day hospital readmissions. This puts it in a sweet spot of care – focusing on patients ready to be discharged after stabilization in a hospital setting.
Inpefa inhibits two proteins responsible for glucose regulation known as sodium glucose co-transporter types 1 and 2 (SGLT1 and SGLT2). It is also the first dual SGLT1/SGLT2 inhibitor to be approved with the ability to block SGLT2 in the kidneys and SGLT1 in the intestines. There are some blockbuster SGLT2 inhibitors already on the market from established rivals, including Boehringer Ingelheim and Eli Lilly’s Jardiance (that generated sales of ~$1.95 billion in the first 3 quarters of 2023, up ~34% Y/Y), and AstraZeneca’s Farxiga that generated sales of $4.4 billion for the first 9 months of 2023, up ~37% Y/Y). so, is Inpefa late to the party? That would be a definite yes. However, the value proposition should originate from Inpefa’s ability to quickly improve outcomes related to heart failure and major adverse cardiovascular events (“MACE”) in as early as about 3 months. The post hoc analysis of Inpefa’s clinical data from its SCORED trial showed significant risk reductions of 26% vs. placebo in total cardiovascular deaths, hospitalizations for heart failure, or urgent visits for heart failure in 95 days. For MACE, the relative risk reduction observed in patients treated with Inpefa was 23% vs. placebo in 94 days. This could be a gamechanger in the adoption of Inpefa by heart failure clinicians and payers.
We are pleased to support research in areas important to heart failure clinicians and payors, and we are confident that the early clinical benefit of INPEFA observed in the SCORED post hoc analysis will play a role in care decisions made by these stakeholders,” said Craig Granowitz, M.D., Ph.D., Lexicon’s senior vice president and chief medical officer. “Avoiding a stroke or myocardial infarction can have great benefit to both patients and the healthcare system, and we believe that the observed reductions in MACE as early as approximately three months are additional points of differentiation for INPEFA. – Excerpt
Growing Traction for Inpefa: Accelerating Prescription Data, Growing Payer coverage, GPO Contracts
In an encouraging sign, the unique prescriber base for Inpefa expanded to ~500 health care professionals through Q3 (the first full commercial quarter since launch), and clinical demand data outpaced filled prescription data by ~5x. The demand should translate to filled prescriptions as Inpefa grows its payer coverage across Medicare and commercial formularies. For more clarity, a formulary is a list of prescription medications covered by a health insurance plan. Last month, pharmacy benefits manager (“PBM”) Express Scripts placed Inpefa as a preferred product on its Medicare national formularies, as well as its formularies for commercially insured patients. PBMs typically provide broader access and coverage for drugs on their preferred product formularies. Lexicon is also targeting IDNs, and has already executed 2 contracts with major group purchasing organizations (“GPOs”), representing ~60% of heart failure lives in its targeted institutions. The momentum is expected to get better in 2024, as IDNs have the chance to evaluate Inpefa and to potentially include it in their formularies.
Change of Sotagliflozin Strategy Indicates Resourcefulness
I like the way Lexicon made lemon juice with its lemons. When the FDA refused approval in March 2019 for sotagliflozin in a previous form called Zynquista, targeted as an insulin add-on for Type 1 Diabetes patients, the company appealed the decision, but was still rebuffed. It also faced the double whammy of partner Sanofi walking away from the collaboration. Zynquista was rejected because it increased the risk for diabetic ketoacidosis (“DKA”), a serious complication of diabetes and is more common in type 1 diabetes vs. type 2 diabetes, and a known risk associated with SGLT-2 inhibitors. However, the European Medicines Agency (“EMA”) took a more liberal view and decided to approve Zynquista as an Insulin adjunct therapy for Type 1 Diabetes in April 2019. In 2022, Lexicon filed a New Drug Application (“NDA”) with the FDA for Sotagliflozin for treating Heart Failure in Adults with Type 2 Diabetes. This was approved with a broad heart failure label in May 2023. When Sanofi ended its sotagliflozin partnership with Lexicon, the latter used the ~$260 million breakup fee to stay afloat. Pursuing a new indication for a rejected drug and using breakup fee productively, seem like good strategy to me. Besides, the approval after a rejection (twice) clearly shows the thorough scrutiny that Inpefa has been put through before being endorsed by the FDA for heart failure treatment.
Growing TAM for SGLT Inhibitors in Heart Failure Still Underpenetrated
New treatment guidelines recommending the use of SGLT inhibitors in heart failure, issued by the American Heart Association (“AHA”)/American College of Cardiology (“ACC”)/Heart Failure Society of America (“HFSA”) are fueling growth for this class of medication. The use of SGLT inhibitors in heart failure has grown by ~73% through August of 2023, with the entire heart failure branded market growing by ~40% from 2021 to 2022, representing a rapidly growing opportunity of at least $3 billion. Despite the momentum, there is just ~10% penetration with SGLT inhibitor2 representing only ~1 in ~10 heart failure prescriptions through August 2023. The huge TAM implies that SGLT drugs can coexist, while differentiated data implies a strong growth runway for Inpefa.
Promising LX9211 Opportunity
Two completed proof-of-concept studies of Lexicon’s LX9211 show promise in treating diabetic peripheral neuropathic pain or DPNP, that affected ~5 million people in the U.S. in 2022. In a phase 2, proof-of-concept Relief-DPN-1 study involving 319 patients, on high/low dose regimens of LX9211 and a placebo group, the low dose regimen showed statistically significant reduction in average daily pain score (“ADPS”) at Week 6 vs. placebo, while patients on both low and high doses demonstrated significant benefits in both burning pain and pain interference with sleep vs. placebo-treated patients. Lexicon has commenced enrolling patients in a phase 2-b study of DPNP to determine dose optimization data for a Phase 3 pivotal study design. The first data readout from this study is slated for Q2-2025. A Fast Track status for LX9211 in DPNP shows the unmet need for new, non-opioid treatment options for this indication. Any potential partnerships for this indication may also be a key catalyst to look out for and look forward to. If all goes as planned, LX9211 could represent significant commercial upside optionality in the future in several other pain indications.
Active Insider Buying in the Last 3 Months
About 1.3 million shares were bought by insiders in the last 3 months at prices between ~$1-1.14 This includes ~100k purchases by CEO Lonnel Coats, and ~1 million shares bought by Raymond Debbane, who turned around the fortunes of Weight Watchers now known as WW International. This seems quite positive to me. Who’s to say that Debbane will not recreate the same magic with Lexicon. It should be noted that there was no sale activity by insiders in the same 3-month period.
Adequate Cash Position
Lexicon Pharma ended Q3-2023 with $218.4 million in cash and investments. Given its cash burn of ~$42-45 million/quarter based on operating expenses of ~$125 million for the first 9 months of 2023, and guidance for FY23 operating expenses of $180 million at the mid-point, the cash can last up to at least Q4-2024. This combined with up to $50 million in additional borrowing capacity should see the year through. The company is more optimistic and sees the resources carrying it well into 2025.
Valuation
Using Bay Bridge Bio’s valuation model, let us try to assess the value of LXRX based on its portfolio and pipeline relevant as of now. As I’ve already used this model in my previous article on SpringWorks Therapeutics, which has exceeded my conservative price expectations of at least ~50% upside. I would like to gently remind readers that the value of a drug increases exponentially with de-risking via successful outcomes from the several phases of clinical trials and I’m not a count-your-chickens-before-the eggs-hatch person. So, I don’t believe in speculating on how the future trials may pan out, instead would like to work on the data that is relevant as of now.
My SOTP valuation for LXRX includes
- Inpefa has a value of > $1.1 billion having cleared the FDA hurdle. Even if this value is discounted by ~50% (assuming erosion by competitive threats), it would still be a significant $550 million in value. It should be noted that I am not including any future additional indications for Inpefa.
- LX9211 has a value of ~$285 million (as a phase 2 compound based on the Bay Bridge Bio model). However, this value could easily become zero, if the phase 2b trial flops.
- These two compounds together have a combined value of ~$550-835 million, which is well above the current market value of $369 million for LXRX (at the time of submission), representing at least ~40% upside potential from current price levels.
Risks
Other than the typical high risk/reward characteristics of biotech/pharma stocks, some concerns specific to LXRX would be…
- High levels of short interest in the stock: More than 20% of the float is short.
- Inpefa may crumble in the face of competition and fail to gain sales traction. However, this in my mind is a remote concern because of the rehospitalization data and early clinical benefits that are key differentiators for Inpefa, which I believe will motivate the market uptake for the drug. Besides, heart failure has enough space for the drug to co-exist with competitors.
- Lexicon may fail to find partners for LX9211 and in a worst-case scenario the experimental drug may not produce any meaningful outcome in DPNP.
- Cash burn may be more than expected. But, this should likely be offset by increasing adoption of Inpefa that should likely start generating more meaningful revenues.
However, the stock already appears to be priced for these dismal scenarios though, representing an asymmetric opportunity.
Conclusion
I give LXRX a “Buy” rating based on 1. the cheap valuation for a company with a key approved drug for heart failure. 2. Endorsement by expert investor and insider Raymond Debbane 3. Growing traction for SGLT inhibitors in heart failure. 4. Accelerating prescription and payer coverage for Inpefa. 5. The promising potential of LX9211 in DPNP.
