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Morningstar | Maintaining Our Lexicon FVE; Xermelo Sales Remain Slow, Zynquista Differentiation Uncertain

We’re maintaining our $9.70 per share fair value estimate for Lexicon following second-quarter results, as slight reductions to our Xermelo forecast are countered by slightly increased projections for Lexicon and partner Sanofi's Zynquista (sotagliflozin) following steady long-term data presented at the annual meeting of the American Diabetes Association in June. We see very high uncertainty surrounding the value of Lexicon shares, and we note that upcoming additional data for SGLT2 inhibitors Forxiga and Jardiance (Jardiance data to be presented in October) in Type 1 diabetes should give investors a clearer picture of the Zynquista's potential differentiation. Lexicon has yet to establish an economic moat, given its one approved drug and one key pipeline therapy. While potential differentiation of these products contributes to a positive moat trend, we may revisit our moat trend rating if future competing SGLT2 data mirrors Astra's recent data or if Xermelo’s launch fails to accelerate. Lexicon's $210 million in cash should be sufficient to get through the Zynquista launch next year, particularly as the firm has completed its obligation for R&D funding to Sanofi for Zynquista in type 2 diabetes. We also expect initial data for LX2761 (SGLT1) in type 2 diabetes later this year, but we don’t yet incorporate sales from these programs into our valuation.

U.S. sales of carcinoid syndrome drug Xermelo grew slightly sequentially, from $5.4 million in the first quarter to $6 million in the second quarter, as Lexicon continues to see headwinds related to affordability and more patients requiring assistance than expected. We still expect Xermelo sales to grow as doctors gain more experience with the drug and as Lexicon reorganizes its marketing strategy; however, we think the goal of doubling sales in 2018 looks increasingly difficult to hit, and we've lowering our Xermelo sales forecast, which now calls for peak Xermelo sales in the U.S. around $400 million.

We're encouraged by recent presentations of long-term data for Zynquista in type 1 diabetes, and we've slightly increased our estimates for long-term sales of the drug. We assume peak probability-adjusted sales of Zynquista in type 1 and type 2 diabetes combined will reach $1.4 billion (up from $1 billion previously). Lexicon’s partner Sanofi filed Zynquista with regulators in the U.S. and Europe in March as a treatment for type 1 diabetes, and should gain approval by March 2019 in the U.S. We expect Lexicon to gain approval in type 1 diabetes, but we still have some reservations on the ultimate uptake (depending on whether both doses are approved, and the competitive landscape) and risk management (diabetic ketoacidosis will one of the key side effects discussed at an upcoming FDA advisory committee meeting). Astra filed its SGLT2 therapy Farxiga with European regulators in March and expects to file in the U.S. later this year, and Lilly and Boehringer Ingelheim recently reported positive top-line data for Jardiance (details in October), creating competition in type 1 diabetes for Lexicon and Sanofi.

While Sanofi may be able to carve out a niche for Zynquista in type 2 diabetes in patients with renal impairment, we think it could prove difficult to differentiate this late entrant from established SGLT2 inhibitors. Sanofi has also started 10 phase 3 studies in type 2 diabetes, including 2 studies focused on patients with renal impairment, which could allow the drug to prove differentiation on renal outcomes versus other SGLT2 inhibitors, in addition to a large study in type 2 diabetes patients with heart failure. Sanofi expects type 2 diabetes data in 2019, with filings in late 2019 and early 2020, which we see as consistent with our expectation for a 2021 launch. The program includes a head-to-head study against leading SGLT2 inhibitor Jardiance, but we continue to believe that Lexicon’s late entry creates significant obstacles to strong uptake in type 2 diabetes, unless it proves to have significant advantages to entrenched products (Jardiance has already shown a significant cardiovascular benefit in Type 2 diabetes in a large-scale controlled trial, and Invokana recently showed a benefit in renal outcomes in patients with chronic kidney disease and type 2 diabetes).