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Morningstar | Lexicon’s High-Risk Pipeline and One-Product Portfolio Lead to a Very High Uncertainty Rating

Lexicon's mouse knockout technology helped the firm usher Xermelo to market as a treatment for a rare disease known as carcinoid syndrome, and a second drug, Zynquista (sotagliflozin) in diabetes, could receive U.S./European regulatory approval in 2019. However, Xermelo's launch has been slow, and safety risks surrounding Zynquista in Type 1 diabetes could delay the launch, create additional commercial or R&D costs for Lexicon, and reduce uptake. We don't think Lexicon has established an economic moat, and uncertainty surrounding its shares is very high.Xermelo is Lexicon's first approved drug and launched in the United States in 2017. Lexicon now has an ex-U.S. commercialization partnership with French drug firm Ipsen for this rare-disease drug, which is a first-in-class treatment for carcinoid syndrome. While initial sales are still small, we think U.S. market potential among patients no longer responding to standard somatostatin therapy could be above $400 million.For Zynquista, Lexicon raised cash to conduct pivotal trials in Type 1 diabetes independently, then partnered the drug with Sanofi, which is leading development in Type 2 diabetes. We believe sales of sotagliflozin could exceed $500 million globally in Type 1 diabetes despite the need to monitor for safety risk (diabetic ketoacidosis), as Lexicon could be first-in-class. Sotagliflozin appeared to reduce mealtime insulin needs and led to better blood sugar control and weight loss without increasing hypoglycemia risk, and approval could come in the first half of 2019. However, strong recent data from SGLT2 inhibitors approved in Type 2 diabetes, such as Astra's Forxiga and Lilly's Jardiance, damps our enthusiasm. In Type 2 diabetes, Sanofi expects data in 2019, with potential filing in 2020. We think its dual mechanism of action as an SGLT1/SGLT2 inhibitor could differentiate it from marketed SGLT2 inhibitors in Type 2 diabetes, particularly among patients with severe renal impairment, but we assume peak sales of roughly $300 million in this indication, as the competitive landscape is tough.