NVO - Lexicon Pharmaceuticals Underway With Inpefa But A Lot Of Hard Work

2023-08-28 08:15:00 ET

Summary

• Lexicon Pharmaceuticals managed to launch Inpefa within 30 days of approval, but it will take at least a few quarters before the success of the commercialization program can be assessed.
• I expect Lexicon to continue to increase its SG&A spending to support Inpefa, likely doubling or tripling Q2'23's spending if corporate resources allow.
• A study of semaglutide in obese patients with heart failure (preserved ejection fraction) suggests that GLP-1 drugs could become a major player in heart disease, adding to Inpefa's competitive risks.
• It is possible that GLP-1/SGLT-2 combos could become more common, and the SGLT-2 heart failure opportunity is still seriously under-penetrated, supporting a path forward for Inpefa and Lexicon.

Now the hard work begins.

Lexicon Pharmaceuticals ( LXRX ) received FDA approval to market Inpefa (sotagliflozin) on May 26, securing an attractive broad label in the process, and managed to launch the drug’s commercialization efforts within 30 days of that approval. It will take several quarters to assess the efficacy and quality of Lexicon’s launch strategy, and in the meantime the company will have to continue to invest considerable resources in building out its sales and marketing infrastructure; engaging with doctors to increase awareness of the benefits of SGLT2 inhibitor therapy in general and Inpefa in particular.

Lexicon shares have lost almost a third of their value sinc e I wrote at the beginning of June , rat her more than a typical “sell the news” reaction. While I believe there was some “sell the news” activity here, I think there are also growing concerns that Inpefa is simply too late to the party and that the drug will not only struggle to take meaningful share in the SGLT2 market, but will also be overshadowed by the growing adoption of GLP-1 drugs like Lilly ’s ( LLY ) Mounjaro and Novo Nordisk ’s ( NVO ) Wegovy and Ozempic (both semaglutide, with Wegovy labeled specifically for obesity), particularly as evidence of the cardio-protective benefits of the GLP-1 class continues to grow.

Evaluating Lexicon’s investment potential is tricky. While I do think the shares are undervalued on what I think should be realistic (if not conservative) estimates of Inpefa adoption (and the likelihood of success for the LX9211 program in diabetic neuropathy), the reality is that market clearly disagrees and this is very much a “show me” story. I believe Lexicon faces long odds and a tough road ahead, but if they can navigate that road more adroitly than I expect there is upside potential.

Q2 Earnings Don’t Matter Much, Really

Lexicon’s second quarter earnings release was largely a non-event; there was too little time after the late May approval of Inpefa to have a meaningful commercial launch. Likewise, it takes time to get onto insurance companies’ formulary lists, so the next few quarters won’t really tell the tale about Inpefa ’s commercial potential or the success of Lexicon’s commercialization efforts.

As far as metrics to watch, SG&A spending accelerated from $19M in the first quarter of 2023 to $30M in the second quarter; I expect at least another doubling, if not tripling, from here before Lexicon reaches a steady-state level of SG&A spending, provided that the company has the capital to fund that sort of expansion. To that end, the company ended the quarter with $257M in cash.

While the company did log some product revenue this quarter (just under $0.3M), again I believe prescription data for the next quarter or two is likely to be less than helpful. It will be important to see prescriptions and revenue ramp from here, with the Street looking for $2.4M next quarter and $5.7M in the fourth quarter, but a quarter or two of below-expectations performance wouldn’t be any sort of definitive proof of trouble.

But Competition DOES Matter

What has always concerned me most about the Inpefa launch and outlook is the competitive landscape in the heart failure market. Rivals like AstraZeneca ( AZN ) an d Lilly ha ve enjoyed a meaningful head start on Lexicon in marketing their SGLT-2 inhibitors for heart failure (technically Inpefa is a dual SGLT-1/SGLT-2 inhibitor), and while Lexicon enjoys the strongest label in the space, these two companies have enormous, well-established marketing infrastructures in place.

Making matters more challenging, it’s not just established SGLT-2 competitors that will factor into the story. Cardiovascular outcomes studies have shown that GLP-1 drugs have cardio-protective benefits, and just today (August 25, 2023), The New England Journal of Medicine published a study on Wegovy showing an exceptional 17-point improvement (7.8-points, placebo-adjusted) in the Kansas City Cardiomyopathy Questionnaire summary score, an important measure of heart failure severity.

This study was conducted with 529 patients with both obesity (BMI of 30 or higher) and heart failure with preserved ejection fraction, and while comparing across studies can be misleading, the combined SOLOIST and SCORED studies of Inpefa showed a placebo-adjusted improvement in the KCCQ score of 4.1pts.

Again, this is a tricky, and maybe even specious, comparison, but if future studies of the cardio-protective impact of GLP-1 drugs like Wegovy deliver similar results, it will likely drive clinical practice – particularly given that heart failure with preserved ejection fraction (as opposed to reduced ejection fraction) has historically been so much harder to treat.

Said differently, it appears as though the GLP-1 class (assuming similar outcomes results for Mounjaro in the SUMMIT study) could become a real contender in the heart failure space. Of course, it will take time and additional studies to support label expansions, but given the cardio-protective data already seen so far and the relative prevalence of obesity among people with heart failure, off-label use before FDA label extensions is certainly possible.

It's Not All Bad, Though

I’m clearly concerned, then, that Lexicon’s marketing efforts for Inpefa will simply be drowned out by physician and patient interest in GLP-1 drugs, particularly considering the significant weight loss benefits shown by those drugs. That may well lead to reduced interest in Inpefa and the company may feel pressured to compete more on price (at present, Inpefa is priced similarly to both Farxiga and Jardiance ).

The good news is that, even assuming further clinical studies back up the efficacy of GLP-1 drugs in heart failure, it may not be an “either or” situation. There are already known benefits to combining SGLT-2 and GLP-1 drugs and GLP-1 drugs won’t fully displace SGLT-2 drugs if combo therapy becomes more commonplace.

Moreover, it’s important to remember that the SGLT2 heart failure opportunity is still seriously under-penetrated. Studies published over the last few months of SGLT2 usage show that, even despite years of strong clinical data, not that many patients hospitalized for heart failure (either preserved or reduced ejection fraction) are discharged with prescriptions for the drugs – one observational study including 49,000+ patients found that only about 20% of hospitalized HFrEF patients were getting SGLT2 drugs at discharge, and a larger study (nearly 210,000 patients) of patients with diabetes and atherosclerotic cardiovascular disease showed a similar percentage (20%) on the drugs.

Given the cost, safety, and convenience of these drugs, particularly relative to the consequences and costs of under-treated heart failure, this is unacceptably low and I would expect concerted efforts from thought-leaders to continue pushing for increased use of the class. Even if Lexicon’s marketing efforts aren’t sufficient to out-compete Astra or Lilly, a rising tide (increased usage) can still lift Inpefa over time.

The Outlook

Nothing has really changed in my outlook at this point – I won’t really pay much attention to prescription and revenue trends for Inpefa until the fourth quarter, and the SG&A build-out is proceeding more or less as I expected.

One update that I did like was the company confirming that, as part of its future development plans for LX9211 (which it’s focusing on the diabetic neuropathy indication), it will run a Phase IIb dose-optimization study. I believe that’s an important de-risking opportunity, and though I’m still skeptical given the equivocal data seen so far from this drug, it’s an opportunity large enough to be worth further exploration at this point.

The Bottom Line

I’ve adjusted my timelines to peak revenue for Inpefa and LX9211 slightly and also adjusted my discount rate, and those changes move my fair value from around $6.50 to $5. While that is arguably significant, I’d argue it’s less so in the context of a sub-$2 share price.

Said differently, this is a binary sort of investment opportunity. If Inpefa gains some traction and/or LX9211 looks a real contender in diabetic neuropathy, the shares should be meaningfully higher in 12-24 months. If Inpefa struggles to gain any traction, GLP-1 drugs eventually dominate the heart failure space, and/or LX9211 flames out, there’s really nothing to support the share price. I’m still holding on to a small position here, and I do see a path to meaningful gains, but investors need to at least appreciate that this is a high-risk situation.

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