LLY - Lexicon Pharma: Advancing A Worthwhile Pipeline But Commercialization Remains A Key Risk

2023-03-05 02:23:39 ET

Summary

• Lexicon is getting closer to FDA approval for sotagliflozin, and the ongoing labeling discussions with the agency may prove critical in differentiating the drug from established rivals.
• Sotagliflozin may be superior in terms of reducing hospitalizations and cardiac events, but a lack of direct head-to-head studies could be an issue for more expansive labeling.
• Despite equivocal results in Phase II testing, management is planning a pivotal clinical trial program for LX9211 in diabetic peripheral neuropathy.
• LX9211 does appear to produce pain relief, and with an attractive safety/risk profile, but it is unclear whether that relief will reach clinical significance in a well-designed pivotal study.
• I can argue for a fair value close to $6 on the basis of sotagliflozin and LX9211, but there are considerable challenges ahead.

Lexicon Pharmaceuticals ( LXRX ) is getting closer to what should be another pivotal point in the company’s history – the FDA approval of the company’s New Drug Application for sotagliflozin for the treatment of heart failure. This approval would put Lexicon into a multibillion-dollar market with a competitive product for a disease that badly needs better treatments. The company is also moving forward with further development of LX9211, a pain drug candidate that could prove significant in a market that very much needs new and better drugs.

Here’s the trouble – all of the company’s prior pivotal events have ultimately gone sour for investors. The approval and marketing of Xermelo ultimately led to very little and the company’s partnership with Sanofi ( SNY ) for sotagliflozin in diabetes ended prematurely and somewhat acrimoniously, with Sanofi bailing out due to what they saw as a lack of differentiation for the drug versus established drugs in the market.

A great deal of potential shareholder value now rests on management’s ability to effectively market sotagliflozin in a market that already has established options backed by the sales and marketing infrastructure of major multinational drug companies. An advantageous label, if Lexicon can get one, would certainly help, but even then the commercial launch will be expensive and this is very much a “show me” story with a lot of hard work ahead.

Approaching Approval … What Will Sotagliflozin’s Label Look Like?

Lexicon’s NDA for sotagliflozin has a May PDUFA date (meaning that the FDA is supposed to give an approval/rejection decision on or before the date), and management has indicated that they’ve already been in discussions with the agency about the proposed label. That’s normal at this stage and doesn’t alter the approval odds, but I have long considered FDA approval to be extremely likely given the data Lexicon have submitted.

The question now is what sort of label the drug will get. There are multiple similar drugs on the market already (including AstraZeneca ’s ( AZN ) Farxiga, Johnson & Johnson ’s ( JNJ ) Invokana, and Boehringer Ingelheim / Lilly ’s ( LLY ) Jardiance), and while sotagliflozin has shown some potential efficacy advantages (particularly with respect to hospitalization and cardiac events like heart attack and stroke), it remains to be seen what the agency will allow on the label.

Competing against established drugs is difficult, and Lexicon will not be able to afford to out-market these multinational rivals. That leaves labeling as a key competitive differentiator – while investors fool themselves if they believe rank-and-file physicians spend their days (or evenings) reading clinical literature and studying up on which drug is the best option for every patient, the reality is that success with thought leaders at major institutions can make a difference.

With that, a strong label that allows Lexicon to claim superiority in some meaningful aspect(s) will be highly valuable, and would at least conceivably allow the company to leverage their limited commercialization resources toward leading physicians at leading centers.

Still, this is an uphill climb. There have been no head-to-head studies comparing sotagliflozin to any other SGLT2 inhibitor (sotagliflozin is technically a dual SGLT1/2-inhibitor) and the FDA has a mixed track record of allowing advantageous labeling that isn’t backed by extensive clinical evidence.

As I’ve said in prior articles, marketing a drug is expensive and time-consuming, and even more so in “mass market” indications like heart failure. While the number of people with heart failure who need better medications is a key positive for the commercial potential of sotagliflozin, it also creates more challenges and costs, as the commercialization effort has to be large or at least very well-focused on the most impactful potential prescribers.

Adding to those difficulties is the reality that Farxiga will likely see generic competition in a few years’ time. It’s not uncommon for branded drug prices to come under pressure when a generic within the class becomes available, and likewise insurers will usually push that the generic be tried first. This adds to the importance of sotagliflozin securing a distinct and differentiated label.

Moving Forward With LX9211 – Reasonable, But Risky

Lexicon announced in late December that LX9211 missed its primary endpoint in its second major Phase II proof of concept trial, this one for post-herpetic neuralgia (or PHN). While the drug did show improvement in pain (as measured by Average Daily Pain Score), and that improvement was relatively rapid, consistent, and meaningful (0.80 on a placebo-adjusted basis), it did not reach statistical significance (p=0.12).

This follows the earlier results from a similar study of LX9211 in diabetic peripheral neuropathy (or DPN) that likewise showed a benefit to the drug, but a benefit that didn’t reach the prespecified statistical hurdle rate (though the low-dose did hit the mark).

Management is choosing to move forward into a pivotal study in DPN and management claims to be in discussions with potential commercial partners. Should a partnership be struck soon, the partner would almost certainly be responsible for the pivotal study design and execution. History has made me skeptical here, though, as the company has often claimed to be in active discussions with potential partners on various drugs, only to see nothing materialize from those discussions. I expect Lexicon will ultimately go it alone into Phase III testing, though a successful outcome would certainly support a commercial partnership.

I have mixed feelings about this program at this point. On one hand, the drug does seem to produce pain relief, and does so with a better side-effect and tolerability profile than many established drugs (and, I believe, without addiction/dependence risks). On the other hand, management said at the start that they carefully designed these proof-of-concept studies to produce the clearest signals possible (elevated pre-screening requirements were previously cited as a reason for slower enrollment/delayed results). Yet, the results were still not clean clinical successes with strong statistically-significant outperformance on the primary endpoints.

I’d also note that the efficacy seen so far is arguably borderline. Lyrica and Cymbalta were approved for pain indications on the basis of placebo-adjusted improvements in daily pain scores of 0.8 to 1.2; LX9211 has delivered 0.72 placebo-adjusted improvement in the DPN study and 0.80 in the PHN study. I personally think that a 0.7-0.8 improvement will be enough to get the drug through the FDA and onto the market if pivotal study data are clean, but that seems like it could be a big “if” at this point given the equivocal results in Phase II.

The Outlook

Investors won’t have much longer to wait on the sotagliflozin PDUFA, but I don’t expect that the debate will end there. Even if the label is a comprehensive win for Lexicon, bears will argue that Lexicon doesn’t have the resources to market the drug effectively and that the clinical/label differences aren’t important enough. I’d also note that there is ongoing competitive R&D in the space, including AstraZeneca’s exploration of Farxiga in combination with balcinrenone (an MR modulator).

Bulls will argue pretty much the opposite – that data will win out and that the market will eagerly embrace a superior drug for a serious and still under-treated condition.

At this point, I still have major reservations about Lexicon’s ability to effectively market this drug, but even $600M in revenue, a fraction of the addressable market opportunity, would support over $3.50/share in fair value (before the cost of the marketing efforts).

For LX9211, I give the drug a 50-50 shot of success in DPN and only a token chance now in other indications. A 50% chance of success is below-average for a Phase III drug, but I’d note that the Phase II was not a clean success and the odds of success in pain drug development are below average. Even so, risk-adjusted peak revenue of around $350M supports around $2/share of value.

The Bottom Line

My remaining position in Lexicon is small, and I basically regard this is a speculative “let’s see what happens” position. It’s certainly possible that a strong and differentiated label for sotagliflozin in heart failure is a game-changing event for the company, and I wouldn’t dismiss the possibility of a buyout if that all develops. On the other hand, this company has serially disappointed investors and the challenges ahead in commercializing sotagliflozin are considerable. The current share price arguably reflects that to an overly bearish extent, but investors shouldn’t go into this thinking its anything like a sure thing.

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