Introduction & Thesis

Shares of biopharma Lexicon Prescription drugs, Inc. (NASDAQ:LXRX) are ~60% off their Could highs, regardless of holding an FDA-approved key drug (Inpefa) for coronary heart failure in its portfolio. The sell-off is basically attributed to investor considerations over Inpefa’s market uptake amid an ideal storm of competitors from pharma heavyweights like Eli Lilly, in addition to the novel GLP-1 marvel medicine. Nonetheless, I believe the sell-off could also be overdone as a result of 1. All these medicine can co-exist and nonetheless thrive, given the massive TAM for Coronary heart Failure, which can also be one of many main causes of hospitalizations within the U.S. 2. The broader approval label for Inpefa in Coronary heart Failure, its early medical advantages inside ~100 days of use and powerful rehospitalization information can seemingly be key differentiators for the drug. Newest developments like insider shopping for, acceleration in prescription information and rising payer protection for Inpefa in Q3 (the primary full quarter because the drug’s launch) with expectations for continued momentum in This autumn and 2024 – render credence to my ‘Purchase’ ranking on LXRX. In the remainder of the article, I’ll endeavor to completely clarify why I imagine Lexicon Pharma will seemingly flip the nook and see a big inventory re-rating.

Inpefa: Late to the Occasion, however Worth Proposition Stems from Vital Medical Advantages in ~3 Months

Inpefa with the generic identify sotagliflozin was accredited by FDA in Could 2023, to decrease the chance of cardiovascular loss of life, pressing coronary heart failure go to and hospitalization for coronary heart failure in adults with coronary heart failure or persistent kidney illness, kind 2 diabetes mellitus, and different cardiovascular danger components.

Inpefa’s label covers sufferers with coronary heart failure or in danger for coronary heart failure, with lowered (“HFrEF”) and preserved (“HFpEF”) ejection fraction, no matter whether or not the affected person is diabetic or not.

Only for extra readability, Ejection fraction (EF) is a measure of the blood pumped out by the left ventricle of the center with every contraction. EF is expressed as a proportion and a traditional EF worth is ~55-70%. HFrEF is a coronary heart failure with lowered EF of <= 40%, whereas HFpEF reveals that even with preserved EF of >= 50%, coronary heart failure can nonetheless happen because of a stiff coronary heart muscle that deprives the left ventricle of its capacity to loosen up usually.

The FDA approval for Inpefa was based mostly on the info from two section 3 cardiovascular outcomes trials enrolling a mixed ~12k sufferers. Inpefa lowered the chance of complete incidence of cardiovascular loss of life, hospitalization for coronary heart failure, and pressing coronary heart failure visits by 33% vs. placebo in sufferers who had been lately hospitalized for worsening coronary heart failure.

The breadth of the label is extremely related given the ~1.3 million annual hospitalizations triggered by coronary heart failure, and readmission of ~25% of sufferers inside 30 days post-discharge and ~65% of sufferers inside a 12 months of discharge. The cycle is a pricey problem as hospitalizations symbolize ~80% of coronary heart failure prices. It ought to be famous that Inpefa lowered cardiovascular loss of life and coronary heart failure by ~50% over the primary 30- and 90-days post-discharge, with early advantages mirrored in a discount in 30-day hospital readmissions. This places it in a candy spot of care – specializing in sufferers able to be discharged after stabilization in a hospital setting.

Inpefa inhibits two proteins accountable for glucose regulation often called sodium glucose co-transporter varieties 1 and a pair of (SGLT1 and SGLT2). It’s also the primary twin SGLT1/SGLT2 inhibitor to be accredited with the power to dam SGLT2 within the kidneys and SGLT1 within the intestines. There are some blockbuster SGLT2 inhibitors already in the marketplace from established rivals, together with Boehringer Ingelheim and Eli Lilly’s Jardiance (that generated gross sales of ~$1.95 billion within the first 3 quarters of 2023, up ~34% Y/Y), and AstraZeneca’s Farxiga that generated gross sales of $4.4 billion for the primary 9 months of 2023, up ~37% Y/Y). so, is Inpefa late to the social gathering? That may be a particular sure. Nonetheless, the worth proposition ought to originate from Inpefa’s capacity to rapidly enhance outcomes associated to coronary heart failure and main hostile cardiovascular occasions (“MACE”) in as early as about 3 months. The publish hoc evaluation of Inpefa’s medical information from its SCORED trial confirmed vital danger reductions of 26% vs. placebo in complete cardiovascular deaths, hospitalizations for coronary heart failure, or pressing visits for coronary heart failure in 95 days. For MACE, the relative danger discount noticed in sufferers handled with Inpefa was 23% vs. placebo in 94 days. This could possibly be a gamechanger within the adoption of Inpefa by coronary heart failure clinicians and payers.

We’re happy to help analysis in areas vital to coronary heart failure clinicians and payors, and we’re assured that the early medical advantage of INPEFA noticed within the SCORED publish hoc evaluation will play a job in care choices made by these stakeholders,” mentioned Craig Granowitz, M.D., Ph.D., Lexicon’s senior vp and chief medical officer. “Avoiding a stroke or myocardial infarction can have nice profit to each sufferers and the healthcare system, and we imagine that the noticed reductions in MACE as early as roughly three months are extra factors of differentiation for INPEFA. – Excerpt

Rising Traction for Inpefa: Accelerating Prescription Knowledge, Rising Payer protection, GPO Contracts

In an encouraging signal, the distinctive prescriber base for Inpefa expanded to ~500 well being care professionals by means of Q3 (the primary full industrial quarter since launch), and medical demand information outpaced stuffed prescription information by ~5x. The demand ought to translate to stuffed prescriptions as Inpefa grows its payer protection throughout Medicare and industrial formularies. For extra readability, a formulary is a listing of prescription drugs lined by a medical health insurance plan. Final month, pharmacy advantages supervisor (“PBM”) Categorical Scripts positioned Inpefa as a most well-liked product on its Medicare nationwide formularies, in addition to its formularies for commercially insured sufferers. PBMs sometimes present broader entry and protection for medicine on their most well-liked product formularies. Lexicon can also be focusing on IDNs, and has already executed 2 contracts with main group buying organizations (“GPOs”), representing ~60% of coronary heart failure lives in its focused establishments. The momentum is anticipated to get higher in 2024, as IDNs have the possibility to judge Inpefa and to doubtlessly embody it of their formularies.

Change of Sotagliflozin Technique Signifies Resourcefulness

I like the best way Lexicon made lemon juice with its lemons. When the FDA refused approval in March 2019 for sotagliflozin in a earlier type known as Zynquista, focused as an insulin add-on for Kind 1 Diabetes sufferers, the corporate appealed the choice, however was nonetheless rebuffed. It additionally confronted the double whammy of accomplice Sanofi strolling away from the collaboration. Zynquista was rejected as a result of it elevated the chance for diabetic ketoacidosis (“DKA”), a severe complication of diabetes and is extra frequent in kind 1 diabetes vs. kind 2 diabetes, and a recognized danger related to SGLT-2 inhibitors. Nonetheless, the European Medicines Company (“EMA”) took a extra liberal view and determined to approve Zynquista as an Insulin adjunct remedy for Kind 1 Diabetes in April 2019. In 2022, Lexicon filed a New Drug Software (“NDA”) with the FDA for Sotagliflozin for treating Coronary heart Failure in Adults with Kind 2 Diabetes. This was accredited with a broad coronary heart failure label in Could 2023. When Sanofi ended its sotagliflozin partnership with Lexicon, the latter used the ~$260 million breakup payment to remain afloat. Pursuing a brand new indication for a rejected drug and utilizing breakup payment productively, seem to be good technique to me. Moreover, the approval after a rejection (twice) clearly reveals the thorough scrutiny that Inpefa has been put by means of earlier than being endorsed by the FDA for coronary heart failure therapy.

Rising TAM for SGLT Inhibitors in Coronary heart Failure Nonetheless Underpenetrated

New therapy pointers recommending the usage of SGLT inhibitors in coronary heart failure, issued by the American Coronary heart Affiliation (“AHA”)/American Faculty of Cardiology (“ACC”)/Coronary heart Failure Society of America (“HFSA”) are fueling development for this class of treatment. Using SGLT inhibitors in coronary heart failure has grown by ~73% by means of August of 2023, with the complete coronary heart failure branded market rising by ~40% from 2021 to 2022, representing a quickly rising alternative of a minimum of $3 billion. Regardless of the momentum, there’s simply ~10% penetration with SGLT inhibitor2 representing solely ~1 in ~10 coronary heart failure prescriptions by means of August 2023. The massive TAM implies that SGLT medicine can coexist, whereas differentiated information implies a robust development runway for Inpefa.

Promising LX9211 Alternative

Two accomplished proof-of-concept research of Lexicon’s LX9211 present promise in treating diabetic peripheral neuropathic ache or DPNP, that affected ~5 million individuals within the U.S. in 2022. In a section 2, proof-of-concept Aid-DPN-1 research involving 319 sufferers, on excessive/low dose regimens of LX9211 and a placebo group, the low dose routine confirmed statistically vital discount in common every day ache rating (“ADPS”) at Week 6 vs. placebo, whereas sufferers on each high and low doses demonstrated vital advantages in each burning ache and ache interference with sleep vs. placebo-treated sufferers. Lexicon has commenced enrolling sufferers in a section 2-b research of DPNP to find out dose optimization information for a Section 3 pivotal research design. The primary information readout from this research is slated for Q2-2025. A Quick Monitor standing for LX9211 in DPNP reveals the unmet want for brand new, non-opioid therapy choices for this indication. Any potential partnerships for this indication may additionally be a key catalyst to look out for and stay up for. If all goes as deliberate, LX9211 may symbolize vital industrial upside optionality sooner or later in a number of different ache indications.

Lively Insider Shopping for within the Final 3 Months

About 1.3 million shares have been purchased by insiders within the final 3 months at costs between ~$1-1.14 This consists of ~100k purchases by CEO Lonnel Coats, and ~1 million shares purchased by Raymond Debbane, who turned across the fortunes of Weight Watchers now often called WW Worldwide. This appears fairly constructive to me. Who’s to say that Debbane won’t recreate the identical magic with Lexicon. It ought to be famous that there was no sale exercise by insiders in the identical 3-month interval.

Sufficient Money Place

Lexicon Pharma ended Q3-2023 with $218.4 million in money and investments. Given its money burn of ~$42-45 million/quarter based mostly on working bills of ~$125 million for the primary 9 months of 2023, and steering for FY23 working bills of $180 million on the mid-point, the money can last as long as a minimum of This autumn-2024. This mixed with as much as $50 million in extra borrowing capability ought to see the 12 months by means of. The corporate is extra optimistic and sees the sources carrying it effectively into 2025.

Valuation

Utilizing Bay Bridge Bio’s valuation mannequin, allow us to attempt to assess the worth of LXRX based mostly on its portfolio and pipeline related as of now. As I’ve already used this mannequin in my earlier article on SpringWorks Therapeutics, which has exceeded my conservative value expectations of a minimum of ~50% upside. I want to gently remind readers that the worth of a drug will increase exponentially with de-risking by way of profitable outcomes from the a number of phases of medical trials and I’m not a count-your-chickens-before-the eggs-hatch particular person. So, I don’t imagine in speculating on how the longer term trials might pan out, as an alternative want to work on the info that’s related as of now.

My SOTP valuation for LXRX consists of

1. Inpefa has a worth of > $1.1 billion having cleared the FDA hurdle. Even when this worth is discounted by ~50% (assuming erosion by aggressive threats), it might nonetheless be a big $550 million in worth. It ought to be famous that I’m not together with any future extra indications for Inpefa.
2. LX9211 has a worth of ~$285 million (as a section 2 compound based mostly on the Bay Bridge Bio mannequin). Nonetheless, this worth may simply develop into zero, if the section 2b trial flops.
3. These two compounds collectively have a mixed worth of ~$550-835 million, which is effectively above the present market worth of $369 million for LXRX (on the time of submission), representing a minimum of ~40% upside potential from present value ranges.

Dangers

Aside from the standard excessive danger/reward traits of biotech/pharma shares, some considerations particular to LXRX could be…

1. Excessive ranges of brief curiosity within the inventory: Greater than 20% of the float is brief.
2. Inpefa might crumble within the face of competitors and fail to realize gross sales traction. Nonetheless, this in my thoughts is a distant concern due to the rehospitalization information and early medical advantages which can be key differentiators for Inpefa, which I imagine will encourage the market uptake for the drug. Moreover, coronary heart failure has sufficient house for the drug to co-exist with opponents.
3. Lexicon might fail to seek out companions for LX9211 and in a worst-case state of affairs the experimental drug might not produce any significant consequence in DPNP.
4. Money burn could also be greater than anticipated. However, this could seemingly be offset by growing adoption of Inpefa that ought to seemingly begin producing extra significant revenues.

Nonetheless, the inventory already seems to be priced for these dismal eventualities although, representing an uneven alternative.

Conclusion

I give LXRX a “Purchase” ranking based mostly on 1. a budget valuation for a corporation with a key accredited drug for coronary heart failure. 2. Endorsement by skilled investor and insider Raymond Debbane 3. Rising traction for SGLT inhibitors in coronary heart failure. 4. Accelerating prescription and payer protection for Inpefa. 5. The promising potential of LX9211 in DPNP.