SNYNF - Lexicon Pharmaceuticals Secures Key FDA Approval But Heavy Lifting Remains

2023-06-01 11:28:37 ET

Summary

• Lexicon Pharmaceuticals received FDA approval to market its heart failure drug Inpefa, as well as a broad label compared to rivals like AstraZeneca's Farxiga and Lilly's Jardiance.
• The company faces significant challenges in marketing Inpefa against established competitors and will need to invest heavily in sales and marketing efforts to gain market share.
• Lexicon's stock has potential for growth if the Inpefa launch is successful, and a buyout or partnership with a larger pharmaceutical company is possible, but LXRX remains a high-risk proposition for investors.

Lexicon Pharmaceuticals, Inc. ( LXRX ) scored a big win before the end of May, when the FDA approved the company's application to market sotagliflozin (brand name: Inpefa ) for heart failure. On the plus side, the FDA granted about as good of a label for the drug as could reasonably be expected. The clinical efficacy and safety of Inpefa stack up well against established drugs like AstraZeneca PLC 's ( AZN ) Farxiga , Eli Lilly & Company's ( LLY ) / Boehringer, Ingelheim 's Jardiance , and Johnson & Johnson 's ( JNJ ) Invokana. On the minus side, there's a lot of expensive work left to be done if Lexicon is going to capture enough market share to make the drug meaningfully profitable.

I expected Lexicon to garner FDA approval, so not a lot has changed in my assessment of the company or stock. Likewise, I have written repeatedly in the past that the company would need to raise money to fund its go-it-alone marketing strategy, so the recent announcement of a large secondary offering of shares is in line with my expectations. While I do believe that Inpefa alone can support a fair value above $4/share, and a marketing partnership or acquisition by a larger pharmaceutical company is possible, investors shouldn't ignore the significant work that will go into building Inpefa into a competitive, let alone profitable (or highly profitable) drug.

Success At Long Last

It took quite a while for Lexicon to reach the finish line, but on May 26 the company got FDA approval to market Inpefa for heart failure in a broad range of patients. The dissolution of the company's prior development and marketing partnership with Sanofi ( SNY ) in 2019 was a major blow, but the rise of SGLT-2 inhibitors ( Inpefa is technically a dual SGLT-1/-2 inhibitor) as a treatment for heart failure has given the company a meaningful second chance with this compound.

A Good Label

The FDA gave Inpefa a pretty broad label that I believe will help with the challenges of marketing the drug against entrenched rivals - the label was perhaps not all that investors may have wished for, but was still good on balance.

Inpefa is labeled for use to reduce the risk of cardiovascular (or CV) death, hospitalization for heart failure (or HHF), and urgent heart failure visits (or UHFV) in adults with heart failure or, type 2 diabetes (or T2D), chronic kidney disease (or CKD), and other CV risk factors. There were no specified limitations on use, nor any contraindications beyond the standard hypersensitivity contraindication (the familiar "don't use X if you are allergic to X" that you hear all the time in drug ads).

By comparison, Jardiance 's indicated usage includes reducing the risk of CV death/HHF in patients with heart failure and reducing the risk of CV death in adults with T2D and established CV disease. This label also specifically doesn't recommend use in patients with Type 1 diabetes (or T1D), and it is contraindicated for patients on dialysis.

The label for Farxiga includes reducing the risk of CV death, HHF, and UHFVs in adults with heart failure and reducing the risk of HHF in adults with T2D with either established CV disease or high risk of such disease. The label also extends to use in reducing the risk of sustained eGFR decline (a measure of kidney function), end-stage renal disease, CV death, and HHF in adults with CKD. The label doesn't recommend use in patients with Type 1 diabetes and is contraindicated for allergies.

The Invokana label calls out reduced risk of major cardiovascular events in adults with T2D and established CV disease, as well as reduced risk of end-stage kidney disease, CV death, and HHF in adults with T2D and diabetic nephropathy. Invokana is not recommended for T1D and is contraindicated for dialysis patients.

I like the broad label Inpefa got in terms of reducing CV death, HHF, and UHFV across the spectrum of potential users (adults with HF, T2D, CKD, and/or other risk factors), and the lack of limitation on Type 1 diabetes was a positive as well. While Farxiga arguably has a slightly better label with respect to CKD, I believe Lexicon could run future studies for expanded labeling here.

Solid Efficacy, But Superiority Arguments Are More Nuanced

A key ongoing debate around Inpefa will be whether Lexicon has established truly differentiated efficacy for the drug. I'm more cautious here. While there does appear to be a meaningful benefit for patients who've previously been hospitalized (particularly very recent admits), it remains to be seen whether those benefits will hold up over large comparable studies - a key issue here is that comparing across trials that don't specifically compare drugs head-to-head is always challenging and limited.

At worst Inpefa is just as good as its major rivals, in my view, and there are definitely signs of superiority in some respects.

Looking at a combined endpoint of CV death, HHF, and UVHF, the SOLOIST and SCORED studies of Inpefa showed 33% and 25% risk reductions versus the control groups (hazard ratios, or HRs, of 0.67 and 0.75, respectively). The EMPEROR-REDUCED ("E-REDUCED") and EMPEROR-PRESERVED ("E-PRESERVED) studies of Jardiance showed 25% and 21% reductions, respectively, in CV death or HHF. For Farxiga , the DECLARE study showed a 17% risk reduction for CV death or HHF, while DAPA-HF and DELIVER showed 26% and 18% reductions in the risk of CV death, HHF, and/or UVHF.

Risk reduction for CV death was broadly similar. In SOLOIST and SCORED, Inpefa showed 16% and 10% reduced risk, respectively. For E-REDUCED and E-PRESERVED, Jardiance showed an 8% and 9% risk reduction, while for Farxiga , DECLARE showed a 2% risk reduction, DAPA-CKD showed a 19% risk reduction, DAPA-HF an 18% risk reduction, and DELIVER a 12% reduction.

SOLOIST and SCORED both showed significant reductions in HHFs and UVHFs for Inpefa , with hazard ratios of 0.60/0.64 and 0.73/0.67, respectively. The Jardiance studies weren't structured exactly the same, but delivered HRs of 0.69 and 0.70 for HHF and first/recurrent HHFs in E-REDUCED and 0.71 and 0.73 in E-PRESERVED. In the DAPA-HF and DELIVER studies, Farxiga saw HRs of 0.70/0.43 and 0.77/0.76 for HHFs and UVHFs, respectively.

The on-label studies for Invokana really aren't comparable, but I would note that the CREDENCE study in patients with diabetic nephropathy showed a 31% reduction (HR=0.69) in CV death or HHF.

Absent head-to-head studies, I'm reluctant to say that Inpefa is clearly superior (though there seems to be a bigger gap with Jardiance than Farxiga ), but the data do seem to trend that way for at least some of the metrics. Moreover, this comes without any meaningful issues on the tolerability or safety side.

Marketing Will Still Be A Major Challenge For Lexicon

Now that Inpefa is approved, the next challenge is for Lexicon to market it effectively against its established rivals ( Jardiance, Farxiga , Invokana ). This is not going to be a simple task. These drugs have a considerable head start on Inpefa and are marketed by well-established pharmaceutical giants with huge marketing resources. Moreover, I think it's difficult to argue that Inpefa 's efficacy is so compelling as to drive meaningful switchovers - by and large, if a patient is being well-managed by their current treatment, doctors are reluctant to switch them unless there's a clear and meaningful benefit to doing so.

As I've written in prior pieces, Amylin spent close to $300M in SG&A in 2006 to market Byetta and Bydureon under a co-promotion agreement with Lilly. These drugs were marketed for T2D, but the primary care and specialty clinician target markets were nevertheless similar to what Lexicon will be targeting, so I believe it's still an at least somewhat valid mile-marker for what Lexicon may have to spend to gain real traction in the market (and Amylin was marketing against an established rival, Novo Nordisk (NVO), at the time and without clinical evidence of superiority).

Assuming that Lexicon can achieve a gross margin of around 90%, and using an inflation calculator to adjust 2006 dollars to 2023 dollars (a roughly 50% adjustment), Lexicon will need around $500M in revenue to break even on marketing Inpefa , before counting in the cost of ongoing R&D for Inpefa (future clinical studies, regulatory filings in other countries, et al.) or the broader pipeline.

I do think 10% market share can be worth around $650 million, but it will take time to get there, and there are potential future risks to pricing as competitors see generic competition (insurers will force doctors and patients to use generic SGLT-2 inhibitors unless there's a compelling argument for Inpefa ). That said, with broad labels and increasing clinician and patient awareness, the addressable market may also prove to be larger than I expect (so 10% share could translate into more revenue).

Of course, Lexicon may not go it alone forever. Now that the drug is approved, it's at least plausible that larger pharmaceutical companies could come knocking on Lexicon's door. There have been plenty of deals in the past for single-drug biotechs and there are many drug companies with established primary care salesforces that could slot Inpefa in without any real difficulty.

The Outlook

I still believe it will take time for Lexicon Pharmaceuticals, Inc. to establish its marketing presence and gain a real share against its established SGLT-2 rivals. If it takes 10 years to get to 10% share, the value of Inpefa would be somewhere in the range of $4. If the company can do it in 5 years, the value is closer to $8, and this excludes any potential contributions from LX9211 in potential pain indications (which the company intends to pursue with pivotal clinical trials).

As I said before, I'm currently assuming that 10% share is worth around $650M in revenue, but there are plenty of moving parts. My patient census estimate could prove too low if these drugs do expand the number of patients treated (and treated early, which would be preferable), but there could be more risk on the pricing side if eventual generic competition pressures net realized pricing for Lexicon.

I'd also note that for some time I've been valuing Lexicon on the assumption of 290M shares outstanding. The company just announced a roughly 48M share offering (closer to 52M including the overallotment provision) that will raise gross proceeds of $125M ($134M with the overallotment), and I do think another round of funding further in the future (say with a successful LX9211 pivotal trial program, should that occur) is possible.

As of today, though, with these offerings Lexicon Pharmaceuticals, Inc. should have the cash it needs to get Inpefa on the market. Establishing traction with the sales force and direct-to-consumer marketing (which I assume will be necessary) will take time and money, but the company at least has breathing room for now.

The Bottom Line

I continue to believe that Lexicon Pharmaceuticals, Inc. remains a high-risk proposition. I can argue for a fair value of around $6.50 today on the basis of Inpefa and LX9211 (with 50% approval odds), but there is certainly upside if the Inpefa launch ramps more quickly than I expect. Likewise, I could see a buyout in the high single-digits to low double-digits depending upon what Lexicon can achieve in terms of early uptake.

Still, there are abundant risks. Lexicon Pharmaceuticals, Inc.'s prior attempt to market a drug was not particularly successful, and the challenges of commercialization are different than R&D, particularly with such well-established rivals. I think Lexicon Pharmaceuticals, Inc. is a worthwhile name for very aggressive investors, but visions of revenue upside ought to be tempered by the realities of the challenges of competing with some of the largest fish in the pharma ocean.

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