EUR 850.00 For Business Accounts Only

Morningstar | Slightly Increasing Our Lexicon FVE as Zynquista 2019 Launch and Milestones Approach

We’ve slightly raised our fair value estimate for Lexicon to $10.20 from $9.70 following third-quarter results. While a slight reduction to our Xermelo forecast was countered by lower expected operating expenses for the remainder of the year, we've increased our assumed probability of approval for Zynquista from 60% to 70% in Type 1 diabetes. We see very high uncertainty surrounding the value of Lexicon shares, largely due to a tough competitive landscape with SGLT2 inhibitors approved in Type 2 diabetes and progressing in Type 1 diabetes. 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 reduces the likelihood of Lexicon and Sanofi's SGLT1/SGLT2 inhibitor Zynquista offering a differentiated profile. Lexicon’s $187 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.

Lexicon is on track to start receiving significant milestone payments from Sanofi in 2019, given the combination of likely regulatory milestones (approval of Zynquista in Type 1 diabetes in the U.S. in March) and development milestones (Zynquista data in Type 2 diabetes in the first half of 2019), however we expect these payments to be volatile, and 2020 could see a significant dip. We probability-weight our milestone assumptions according to our assumed probability of the drug in Type 2 (50%) and Type 1 (70%) diabetes.

We've slightly reduced our assumptions for Xermelo for the remainder of the year, based on continued slow progress for the U.S. launch. Lexicon's U.S. Xermelo sales grew 5% sequentially to $6.3 million; while management sounded encouraged on patient compliance rates, they do not think they will achieve prior guidance of doubling sales in 2018 (versus $15.1 million), and now guide to a range of $24 million-$27 million. However, Lexicon has also significantly lowered its operating expense forecast for 2018, as the firm has completed its R&D expense obligation under the Sanofi agreement and has maintained strong control of SG&A expenses.

In Type 2 diabetes, Zynquista would benefit from recent consensus guidelines that favor use of SGLT and GLP-1 targeted therapies earlier in treatment. However, Lexicon and Sanofi are in a more precarious position in this indication, in our opinion, given the well-entrenched nature of SGLT2 inhibitors like Lilly's Jardiance, which has also generated strong cardiovascular outcomes data. Jardiance and Invokana both have data showing slower kidney disease progression in patients with Type 2 diabetes (where Lexicon and Sanofi hope to differentiate). In addition, Novo's oral semaglutide is likely to reach the market in 2020 (slightly ahead of Zynquista), and its compelling efficacy and weight loss benefits will likely be difficult for SGLT-focused oral therapies to match.