PIONEERING
MEDICINES
THAT TRANSFORM
PATIENT LIVES
A N N U A L R E P O R T 2 0 1 9
Our mission
is to pioneer
medicines
that transform
patients’ lives.
We deliver on this
mission by using
precision scienc e to
discover and develop
medicin es t ha t help
patients l ive better,
more empowered lives.
LEXICON INNOVATION
TRANSPARENCY
RESPECT
INTEGRITY
OWNERSHIP
Our values describe
the core beliefs and
behaviors that we
commit to live by
and demonstrate in
all that we do.
2 APPROVED
PRODUCTS
1 PENDING MARKETING
APPLICATION
3 CLINICAL-STAGE
THERAPEUTIC CANDIDATES
PIPELINE
We are committed to building a robust portfolio of
compounds, all of which originated from our own
internal drug discovery efforts.
These efforts were driven by a systematic, target biology-driven approach in which
we used gene knockout technologies and an integrated platform of advanced
medical technologies to systematically study the physiological and behavioral
functions of almost 5,000 genes in mice and assessed the utility of the proteins
encoded by the corresponding human genes as potential drug targets. We have
identified and validated in living animals, or in vivo, more than 100 targets with
promising profiles for drug discovery.
PRECLINICAL
PHASE 1
PHASE 2
PHASE 3
REGISTRATION
MARKETED
PARTNER
XERMELO® (TELOTRISTAT ETHYL)
TARGET: TPH1
Carcinoid syndrome diarrhea US
Carcinoid syndrome diarrhea EU
Biliary tract cancer (BTC)
ZYNQUISTA™ (SOTAGLIFLOZIN)
TARGET: SGLT1 / SGLT2
Type 1 diabetes (T1D) EU
Type 1 diabetes (T1D) US
Type 2 diabetes (T2D), heart failure (HF),
diabetic kidney disease (DKD)
LX9211
TARGET: AAK1
Neuropathic pain
Wholly owned
(US/Japan)
Ipsen
(ex-US/ex-Japan)
Wholly owned
(US/Japan)
Wholly owned
Wholly owned
Wholly owned
Wholly owned
Lonnel Coats
PRESIDENT & CHI EF EX EC UT I VE OF F IC E R
TO OUR SHAREHOLDE R S:
OUR PATH to creating value for patients and
for shareholders lies in commercial execution and in
delivering positive clinical and regulatory outcomes
on our portfolio of product candidates. We made
significant progress on our XERMELO® (telotristat
ethyl) business in carcinoid syndrome diarrhea in 2019,
achieving net US sales of $31 million, up nearly 25%
from the prior year. In addition, we initiated a Phase 2
study of telotristat ethyl in biliary tract cancer and
were pleased that the safety review of the first dose
cohort supported continuation of the study. Numerous
investigator-initiated studies of telotristat ethyl
should also help inform future development priorities.
We regained full rights to Zynquista™ (sotagliflozin) following the
termination of our alliance with Sanofi and settlement of our related
disputes. We obtained regulatory approval of Zynquista in Europe for
type 1 diabetes with a differentiated label that includes a reduction
in the incidence and rates of hypoglycemia. In the U.S., we engaged
in formal dispute resolution proceedings with the FDA’s Office of
New Drugs and Center for Drug Evaluation and Research (CDER),
each of which ultimately denied our appeals of the FDA’s previously
issued complete response letter for sotagliflozin in type 1 diabetes.
We obtained preliminary topline results from the first four Phase 3
studies of sotagliflozin in type 2 diabetes and continued to conduct
our comprehensive Phase 3 development program for sotagliflozin,
which includes two long-term outcomes studies, SCORED and SOLOIST,
that are designed to demonstrate benefits in and support labeling for
heart failure and chronic kidney disease.
Lastly, we announced positive topline data from our Phase 1 multiple
ascending dose study of LX9211, in development for the treatment of
neuropathic pain, that support advancement of LX9211 into proof-of-
concept studies.
Every drug candidate in our pipeline was discovered using our genomic
technology platform. Research and development (R&D) remains an
important and integral part of our organization and we are committed
to visionary science and to the development of new therapies that can
transform patients’ lives. Reflecting on our R&D performance in 2019, I
am pleased with our progress and believe that advancements we have
made to date position us for long-term growth.
Importantly, we continue to maintain a strong financial position by appropriately
managing our cash while investing in programs and products that are supported
by robust data, and we ended 2019 with approximately $272 million in cash
and equivalents.
We enter 2020 with a well-defined strategy to position the company for future
growth, to build long-term sustainable value for shareholders and to continue
to deliver on our commitments to patients. This year, we expect efficacy data
from our Phase 2 clinical study of telotristat ethyl in biliary tract cancer and
initiation of a proof-of-concept Phase 2 study of LX9211 in diabetic peripheral
neuropathic pain. In type 1 diabetes, we will be evaluating the feedback CDER
provided in its recent response to our appeal. In type 2 diabetes, we expect to
receive topline data from the remaining core Phase 3 studies for sotagliflozin and
We are committed to visionary science and to the development
of new therapies that can transform patients’ lives. Reflecting
on our R&D performance in 2019, I am pleased with our
progress and believe that advancements we have made to
date position us for long-term growth.
to present Phase 3 data at several medical conferences. Event accrual in the fully
enrolled SCORED study for sotagliflozin in heart failure and chronic kidney disease
remains ongoing, as does patient enrollment in SOLOIST for decompensated acute
heart failure. We are engaged in discussions around potential partnerships for
sotagliflozin, which will be necessary to complete SCORED and SOLOIST.
I would like to thank everyone who has contributed to the progress we have
achieved, none of which would have been possible without our patients and their
families and caregivers, our employees, clinical investigators, physicians, board
members and shareholders. We remain committed to all our stakeholders and look
forward to delivering on our objectives. Thank you for your continued support.
Regards,
Lonnel Coats
President and Chief Executive Officer
ANTICIPATED MILESTONES
XERMELO™ – Carcinoid Syndrome Diarrhea
Manuscript publications
TELOTRISTAT ETHYL – Oncology
Completion of patient enrollment in the first efficacy cohort of the Phase 2
study for biliary tract cancer
Data from the first efficacy cohort of the Phase 2 study in biliary tract cancer
SOTAGLIFLOZIN – Type 2 Diabetes, Heart Failure and Chronic Kidney Disease
Patient enrollment in SOLOIST (acute decompensated heart failure)
Event accrual in fully enrolled SCORED study (heart failure and chronic
kidney disease)
Topline results from core Phase 3 studies (type 2 diabetes)
2020
H1 2020
Q4 2020
Ongoing
Ongoing
H1 2020
Presentation of Phase 3 data at ADA, EASD
June, September 2020
LX9211 – Neuropathic Pain
Initiation of Phase 2 study in diabetic peripheral neuropathic pain
H1 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File Number: 000-30111
Lexicon Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
76-0474169
(I.R.S. Employer Identification Number)
8800 Technology Forest Place
(281) 863-3000
The Woodlands
77381
(Address of Principal Executive Offices and Zip
Code)
Securities registered pursuant to Section 12(b) of the Act:
Texas
(Registrant's Telephone Number, Including
Area Code)
Title of Each Class
Common Stock, par value $0.001 per share
Trading
Symbol(s)
LXRX
Name of Each Exchange on which Registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. (check one): Large accelerated filer ☐ Accelerated filer ☑
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act of 1934. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐
No ☑
The aggregate market value of voting stock held by non-affiliates of the registrant as of the last day of the registrant’s most recently
completed second quarter was approximately $259.5 million, based on the closing price of the common stock on the Nasdaq Global Select Market
on June 30, 2019 of $6.29 per share. For purposes of the preceding sentence only, our directors, executive officers and controlling stockholders
are assumed to be affiliates. As of March 6, 2020, 106,969,973 shares of common stock were outstanding.
Certain sections of the registrant’s definitive proxy statement relating to the registrant’s 2020 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of the registrant’s fiscal year ended December 31,
2019, are incorporated by reference into Part III of this annual report on Form 10-K.
Documents Incorporated by Reference
Lexicon Pharmaceuticals, Inc.
Table of Contents
PART I
Item
1. Business
1A. Risk Factors
1B. Unresolved Staff Comments
2. Properties
3. Legal Proceedings
4. Mine Safety Disclosures
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6. Selected Financial Data
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A. Controls and Procedures
9B. Other Information
10. Directors, Executive Officers and Corporate Governance
11. Executive Compensation
PART III
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, and Director Independence
14. Principal Accounting Fees and Services
PART IV
15. Exhibits and Financial Statement Schedules
16. Form 10-K Summary
Signatures
1
17
34
35
35
35
36
37
38
47
48
48
48
50
50
50
50
50
50
51
53
54
The Lexicon name and logo and XERMELO® are registered trademarks of Lexicon Pharmaceuticals, Inc.
Zynquista™ is a trademark of Lexicon Pharmaceuticals, Inc.
_____________________________________________________
In this annual report on Form 10-K, “Lexicon Pharmaceuticals,” “Lexicon,” “we,” “us” and “our” refer to Lexicon
Pharmaceuticals, Inc. and its subsidiaries.
_____________________________________________________
This annual report on Form 10-K contains forward-looking statements. These statements relate to future events or our
future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,”
“believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should” or “will”
or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors,” that may cause our
or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We are not under any duty to update any of the
forward-looking statements after the date of this annual report on Form 10-K to conform these statements to actual results,
unless required by law.
Item 1. Business
Overview
PART I
Lexicon Pharmaceuticals is a biopharmaceutical company with a mission of pioneering medicines that transform
patients’ lives. We are devoting most of our resources to the commercialization or development of our three most advanced
drugs and drug candidates:
• We are commercializing XERMELO® (telotristat ethyl), an orally-delivered small molecule drug, in the United States
for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog, or SSA, therapy in adults
inadequately controlled by SSA therapy. We have granted Ipsen Pharma SAS, or Ipsen, an exclusive, royalty-bearing
right to commercialize XERMELO outside of the United States and Japan. Ipsen is commercializing XERMELO in
the United Kingdom, Germany and multiple additional countries. We are also developing telotristat ethyl as a
treatment for biliary tract cancer and are conducting a Phase 2a clinical trial of telotristat ethyl in biliary tract cancer
patients.
• We are developing ZynquistaTM (sotagliflozin), an orally-delivered small molecule drug candidate, as a treatment for
type 1 diabetes. The U.S. Food and Drug Administration, or FDA, has issued a complete response letter regarding our
application for regulatory approval to market sotagliflozin for type 1 diabetes in the United States and has confirmed
that position in denying two appeals of the complete response letter. Zynquista has been approved in the European
Union for use as an adjunct to insulin therapy to improve glycemic control in adults with type 1 diabetes and a body
mass index > 27 kg/m2 , who could not achieve adequate glycemic control despite optimal insulin therapy.
We are also developing sotagliflozin as a treatment for type 2 diabetes, heart failure and chronic kidney disease. We
are conducting a comprehensive Phase 3 development program, which includes one long-term outcomes study
designed to demonstrate benefits in chronic heart failure and chronic kidney disease in type 2 diabetes patients and
another long-term outcomes study designed to demonstrate benefits in acute decompensated heart failure in patients
with and without type 2 diabetes. We have reported preliminary top-line results from the first four Phase 3 clinical
trials of sotagliflozin in adults living with type 2 diabetes.
• We are developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain.
We have reported top-line results from two Phase 1 clinical trials of LX9211 and are preparing to initiate a Phase 2
clinical trial of LX9211.
Compounds from our most advanced drug programs, as well as compounds from a number of additional drug
discovery and development programs that we have advanced into various stages of clinical and preclinical development,
originated from our own internal drug discovery efforts. These efforts were driven by a systematic, target biology-driven
approach in which we used gene knockout technologies and an integrated platform of advanced medical technologies to
systematically study the physiological and behavioral functions of almost 5,000 genes in mice and assessed the utility of the
proteins encoded by the corresponding human genes as potential drug targets. We have identified and validated in living
animals, or in vivo, more than 100 targets with promising profiles for drug discovery.
We are working both independently and through strategic collaborations and alliances with third parties to capitalize
on our drug target discoveries and drug discovery and development programs. We seek to retain exclusive or co-exclusive
rights to the benefits of certain drug discovery and development programs by developing and commercializing drug candidates
from those programs internally, particularly in the United States for indications treated by specialist physicians. We seek to
collaborate with other pharmaceutical and biotechnology companies with respect to drug discovery or the development and
commercialization of certain of our drug candidates, particularly with respect to commercialization in territories outside the
United States or commercialization in the United States for indications treated by primary care physicians, or when the
collaboration may otherwise provide us with access to expertise and resources that we do not possess internally or are
complementary to our own.
Lexicon Pharmaceuticals was incorporated in Delaware in July 1995, and commenced operations in September
1995. Our corporate headquarters are located at 8800 Technology Forest Place, The Woodlands, Texas 77381, and our
telephone number is (281) 863-3000.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available
1
free of charge on our corporate website located at www.lexpharma.com as soon as reasonably practicable after the filing of
those reports with the Securities and Exchange Commission. Information found on our website should not be considered part
of this annual report on Form 10-K.
Drugs and Drug Candidates
We are devoting most of our resources to the commercialization or development of our three most advanced drugs and
drug candidates: XERMELO (telotristat ethyl), which we are commercializing for carcinoid syndrome diarrhea and developing
for biliary tract cancer; sotagliflozin, which we are developing for type 1 diabetes and type 2 diabetes, heart failure and chronic
kidney disease; and LX9211, which we are developing for neuropathic pain. We have also advanced a number of additional
compounds into various stages of clinical and preclinical development.
XERMELO (telotristat ethyl)
We commercially launched XERMELO, an orally-delivered small molecule compound, following regulatory approval
in the United States in February 2017 for the treatment of carcinoid syndrome diarrhea in combination with SSA therapy in
adults inadequately controlled by SSA therapy. XERMELO was discovered by our scientists and inhibits tryptophan
hydroxylase, or TPH, the rate-limiting enzyme for serotonin production which ordinarily is found primarily in enterochromaffin
cells of the gastrointestinal tract. Carcinoid syndrome is characterized by frequent and debilitating diarrhea and can result when
these cells become cancerous and metastasize to the liver or other organs, where they overproduce serotonin. The
recommended dose of XERMELO is 250mg three times daily, and the full prescribing information for XERMELO includes
certain warnings and precautions relating to constipation.
We have entered into a license and collaboration agreement under which we granted Ipsen an exclusive, royalty-
bearing right and license to commercialize XERMELO outside of the United States and Japan. Ipsen has received approval
from the European Commission to market XERMELO for the treatment of carcinoid syndrome diarrhea in all member states of
the European Union, Norway and Iceland and from certain other regulatory authorities to market XERMELO in additional
countries. Ipsen has commercially launched XERMELO in the United Kingdom, Germany and multiple additional countries.
As part of our life cycle management of the program, we are conducting our TELE-ABC Phase 2a clinical trial
evaluating the safety and tolerability of telotristat ethyl and its effects on biliary tract cancer. The trial is expected to enroll
approximately 53 patients with unresectable, locally advanced, recurrent or metastatic biliary tract cancer in an open-label, two-
stage study of a 250mg three times daily dose of telotristat ethyl over an initial 7-day treatment period, followed by a 500mg
three times daily dose of telotristat ethyl over subsequent 21-day treatment cycles until cessation of treatment for disease
progression, toxicity or patient withdrawal. Standard of care, first-line chemotherapy doses of cisplatin and gemcitabine are
administered on days one and eight of each 21-day treatment cycle. The trial is designed to be conducted in two stages, of
which the first stage is expected to enroll approximately 20 patients and the second stage is expected to enroll approximately 33
patients. The primary efficacy endpoint under evaluation is the progression-free survival rate at six months, with secondary
endpoints including progression-free survival at 12 months, overall survival rate, survival rates at six and twelve months,
disease control rates and weight change. A safety analysis of the first six patients who completed at least the first 21-day
treatment cycle supported the continuation of enrollment with no adjustment in the dosing regimen.
Sotagliflozin
Sotagliflozin is an orally-delivered small molecule compound that we are developing for the treatment of type 1
diabetes and type 2 diabetes, heart failure and chronic kidney disease. Sotagliflozin was discovered by our scientists and
inhibits both sodium-glucose cotransporter type 2, or SGLT2, a transporter responsible for most of the glucose reabsorption
performed by the kidney, and sodium-glucose cotransporter type 1, or SGLT1, a transporter responsible for glucose and
galactose absorption in the gastrointestinal tract. Our scientists discovered that mice lacking SGLT1, SGLT2 or both exhibit
potent anti-diabetic phenotypes across multiple measures of glucose control and metabolism, and found that compounds
inhibiting both targets had a favorable preclinical profile relative to compounds selective for SGLT2.
We had previously granted Sanofi-Aventis Deutschland GmbH, or Sanofi, an exclusive, worldwide (excluding Japan),
royalty-bearing right to develop, manufacture and commercialize sotagliflozin. In September 2019, we and Sanofi agreed to
terminate our collaboration, pursuant to which we have regained all rights to sotagliflozin and have assumed full responsibility
for the worldwide development and commercialization of sotagliflozin in all indications.
2
Type 1 Diabetes.
The FDA issued a complete response letter in March 2019 regarding our application for regulatory approval to market
sotagliflozin for type 1 diabetes in the United States and has confirmed that position in denying two appeals of the complete
response letter in November 2019 and March 2020. We are currently evaluating the feedback provided in the FDA’s most
recent response. In April 2019, Zynquista was approved in the European Union for use as an adjunct to insulin therapy to
improve glycemic control in adults with type 1 diabetes and a body mass index > 27 kg/m2 , who could not achieve adequate
glycemic control despite optimal insulin therapy. We have not commercially launched Zynquista for the treatment of type 1
diabetes in the European Union or any other region.
We have completed three Phase 3 clinical trials evaluating the safety and tolerability of sotagliflozin and its effects on
glycemic parameters associated with type 1 diabetes.
Our pivotal inTandem1 Phase 3 clinical trial enrolled 793 patients with type 1 diabetes in the United States and Canada
in a randomized, double-blind, placebo-controlled study of 200mg and 400mg once daily doses of sotagliflozin over a 24-week
treatment period, followed by a 28-week extension. Insulin therapy was optimized in patients over a 6-week period prior to
dosing. The primary efficacy endpoint under evaluation in the trial was the reduction of hemoglobin A1c, or A1C, versus
placebo on optimized insulin treatment at 24 weeks, with secondary endpoints including percentage of patients achieving A1C
levels of less than 7% without experiencing an event of severe hypoglycemia or diabetic ketoacidosis, or DKA, change in meal-
time, or bolus, insulin use, body weight, fasting plasma glucose and patient-reported assessments. Data from the study showed
that patients treated with sotagliflozin experienced statistically significant reductions in A1C from baseline of 0.43% for the
200mg dose (p<0.001) and 0.48% for the 400mg dose (p<0.001), as compared to a reduction of 0.07% on placebo after 24
weeks of treatment, meeting the study’s primary efficacy endpoint at both dose levels. The A1C benefit achieved with
sotagliflozin was sustained with statistically significant results over the full 52-week duration of the study for both the 200mg
and 400mg doses. Benefits in all secondary efficacy endpoints were observed in both the 200mg and 400mg dose arms
compared to placebo, with statistically significant improvements in all secondary efficacy endpoints observed in the 400mg
dose arm and in the percentage of patients achieving A1C levels of less than 7% without any severe hypoglycemia or DKA
events and weight loss observed in the 200mg dose arm and statistically significant improvements in all secondary efficacy
endpoints observed in the 400mg dose arm. Over the full 52-week treatment period, the incidences of treatment-emergent
adverse events in the placebo, 200mg and 400mg dose arms were 80.6%, 81.7% and 79.8%, respectively; the incidences of
serious adverse events were 7.5%, 10.3% and 11.1%, respectively; and the incidences of discontinuation due to adverse events
were 4.1%, 4.9% and 6.5%, respectively. Potential cases of severe hypoglycemia and DKA were reviewed by a blinded
adjudication panel, which determined whether such cases met pre-established diagnostic criteria. The number of patients with
positively adjudicated severe hypoglycemic events during the full 52-week treatment period was 26 (9.7%), 17 (6.5%) and 17
(6.5%) in the placebo, 200mg and 400mg dose arms, respectively. The number of patients with positively adjudicated DKA
events during the full 52-week treatment period was 1 (0.4%), 9 (3.4%) and 11 (4.2%) in the placebo, 200mg and 400mg dose
arms, respectively.
Our pivotal inTandem2 Phase 3 clinical trial enrolled 782 patients with type 1 diabetes in Europe and Israel in a
randomized, double-blind, placebo-controlled study of 200mg and 400mg once daily doses of sotagliflozin over a 24-week
treatment period, followed by a 28-week extension. Insulin therapy was optimized in patients over a 6-week period prior to
dosing. As with inTandem1, the primary efficacy endpoint under evaluation in the trial was the reduction of A1C versus
placebo on optimized insulin treatment at 24 weeks, with secondary endpoints including percentage of patients achieving A1C
levels of less than 7% without experiencing a severe hypoglycemia or DKA event, change in bolus insulin use, body weight,
fasting plasma glucose and patient-reported assessments. Data from the study showed that patients treated with sotagliflozin
experienced statistically significant reductions in A1C from baseline of 0.39% for the 200mg dose (p<0.001) and 0.37% for the
400mg dose (p<0.001), as compared to a reduction of 0.02% on placebo after 24 weeks of treatment, meeting the study’s
primary efficacy endpoint at both dose levels. The A1C benefit achieved with sotagliflozin was sustained with statistically
significant results over the full 52-week duration of the study for both the 200mg and 400mg doses. Statistically significant
improvements in all secondary efficacy endpoints were observed in both the 200mg and 400mg dose arms compared to
placebo. Over the full 52-week treatment period, the incidences of treatment-emergent adverse events in the placebo, 200mg
and 400mg dose arms were 61.2%, 68.2% and 68.8%, respectively; the incidences of serious adverse events were 6.6%, 10.0%
and 8.0%, respectively; and the incidences of discontinuation due to adverse events were 3.5%, 3.8% and 6.8%, respectively.
Potential cases of severe hypoglycemia and DKA were reviewed by a blinded adjudication panel, which determined whether
such cases met pre-established diagnostic criteria. The number of patients with positively adjudicated severe hypoglycemic
events during the full 52-week treatment period was 13 (5.0%), 13 (5.0%) and 6 (2.3%) in the placebo, 200mg and 400mg dose
arms, respectively. The number of patients with positively adjudicated DKA events during the full 52-week treatment period
was 0 (0.0%), 6 (2.3%) and 9 (3.4%) in the placebo, 200mg and 400mg dose arms, respectively.
3
We have additionally reported pooled continuous glucose monitoring, or CGM, data from the inTandem1 and
inTandem2 clinical trials. The percentage of time during the initial 24-week treatment period spent inside the target range for
CGM glucose (70-180 mg/dL) increased from 52.2% to 57.8% in patients treated with 200mg of sotagliflozin and from 50.7%
to 64.1% in patients treated with 400mg of sotagliflozin, with no relevant change observed in patients receiving placebo. The
differences from placebo were clinically significant for both the 200mg and 400mg dose groups (p=0.026 and p<0.001,
respectively). The increase in time spent in range by both sotagliflozin dose groups was a result of significantly reduced time
spent above 180 mg/dL, while the time spent below 70 mg/dL was not increased. These results translate into an additional 1.41
hours and 3.02 hours that a patient would spend within the 70-180 mg/dL target range in a 24-hour period, for the 200mg and
400mg dose groups respectively.
Our inTandem3 Phase 3 clinical trial enrolled 1,405 patients with type 1 diabetes in the United States and Europe in a
randomized, double-blind, placebo-controlled study of a 400mg once daily dose of sotagliflozin over a 24-week treatment
period. Insulin therapy was not optimized in patients and eligibility criteria included any background insulin therapy. The
primary efficacy endpoint under evaluation in the trial was the proportion of patients achieving A1C levels of less than 7% at
24 weeks without experiencing a severe hypoglycemic or DKA event, with secondary endpoints including the change from
baseline in A1C, body weight, systolic blood pressure and bolus insulin use. Data from the study showed statistically
significant superiority of sotagliflozin (28.6%) compared to placebo (15.2%) in the proportion of patients achieving A1C levels
of less than 7% without experiencing a severe hypoglycemic or DKA event (p<0.001), meeting the study’s primary endpoint.
Patients treated with sotagliflozin also experienced statistically significant improvements in all secondary efficacy endpoints
compared to placebo. The incidences of treatment-emergent adverse events in the placebo and 400mg dose arms were 52.5%
and 55.1%, respectively; the incidences of serious adverse events were 3.3% and 6.9%, respectively; and the incidences of
discontinuation due to adverse events were 2.3% and 6.3%, respectively. Potential cases of severe hypoglycemia and DKA
were reviewed by a blinded adjudication panel, which determined whether such cases met pre-established diagnostic criteria.
The number of patients with positively adjudicated severe hypoglycemic events during the 24-week treatment period was 17
(2.4%) and 21 (3.0%) in the placebo and 400mg dose arms, respectively. The number of patients with positively adjudicated
DKA events during the 24-week treatment period was 4 (0.6%) and 21 (3.0%) in the placebo and 400mg dose arms,
respectively. Results from the inTandem3 trial were published in the New England Journal of Medicine in September 2017.
Type 2 Diabetes, Heart Failure and Chronic Kidney Disease.
We are conducting a comprehensive Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure
and chronic kidney disease. This Phase 3 program includes two long-term outcomes studies: SCORED, which is designed to
demonstrate benefits in chronic heart failure and chronic kidney disease in type 2 diabetes patients, and SOLOIST, which is
designed to demonstrate benefits in acute decompensated heart failure in patients with and without type 2 diabetes. We have
cooperated with Sanofi in the transition of responsibility for such Phase 3 development program, which was previously
conducted by Sanofi, and other activities relating to sotagliflozin.
We have reported preliminary top-line results from the first four Phase 3 clinical trials of sotagliflozin in adults living
with type 2 diabetes.
We reported preliminary top-line results in July 2019 from our SOTA-MET Phase 3 clinical trial. SOTA-MET
enrolled 518 patients with type 2 diabetes and inadequate blood sugar control on background metformin therapy in a
randomized, double-blind, placebo-controlled study of a 400mg once daily dose of sotagliflozin over a 26-week core treatment
period, followed by a 53-week extension treatment period. The primary efficacy endpoint under evaluation in the trial was the
reduction of A1C versus placebo at 26 weeks. Preliminary results from the study showed that patients treated with sotagliflozin
experienced a statistically significant reduction in A1C at 26 weeks versus placebo, meeting the study's primary efficacy
endpoint. Sotagliflozin was generally well-tolerated in the trial, with similar overall incidences of serious adverse events in
patients treated with sotagliflozin and placebo.
We reported preliminary top-line results in July 2019 from our SOTA-CKD3 Phase 3 clinical trial. SOTA-CKD3
enrolled 787 patients with type 2 diabetes and moderate, or stage 3, chronic kidney disease in a randomized, double-blind,
placebo-controlled study of 200mg and 400mg once daily doses of sotagliflozin over a 26-week core treatment period, followed
by a 26-week extension period. The primary efficacy endpoint under evaluation in the trial was the reduction of A1C versus
placebo at 26 weeks in the overall population of patients with stage 3 chronic kidney disease and in each of the subpopulations
of patients with stage 3a and 3b chronic kidney disease. Preliminary results from the study showed that patients in the overall
stage 3 population and patients with stage 3a chronic kidney disease who were treated with the 400mg dose of sotagliflozin
experienced a statistically significant reduction in A1C at 26 weeks versus placebo. Although sotagliflozin demonstrated
numerical improvement on A1C at 26 weeks, a statistically significant reduction in A1C at 26 weeks versus placebo was not
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achieved in patients with stage 3b chronic kidney disease. Sotagliflozin was generally well-tolerated in the trial, with similar
overall incidences of serious adverse events in patients treated with sotagliflozin and placebo.
We reported preliminary top-line results in July 2019 from our SOTA-CKD4 Phase 3 clinical trial. SOTA-CKD4
enrolled 277 patients with type 2 diabetes and severe, or stage 4, chronic kidney disease in a randomized, double-blind,
placebo-controlled study of 200mg and 400mg once daily doses of sotagliflozin over a 26-week core treatment period, followed
by a 26-week extension period. The primary efficacy endpoint under evaluation in the trial was the reduction of A1C versus
placebo at 26 weeks. Preliminary results from the study showed that patients treated with the 400mg dose of sotagliflozin
experienced a clinically meaningful reduction in A1C at 26 weeks that narrowly missed statistical significance versus placebo
and achievement of the primary efficacy endpoint. Sotagliflozin was generally well-tolerated in the trial, with similar overall
incidences of serious adverse events in patients treated with sotagliflozin and placebo.
We reported top-line results in December 2019 from our SOTA-EMPA Phase 3 clinical trial. SOTA-EMPA enrolled
770 type 2 diabetes patients on dipeptidyl peptidase-4 inhibitors, with or without metformin therapy, in a randomized, double-
blind, placebo-controlled study of a 400mg once daily dose of sotagliflozin and a 25mg once daily dose of empagliflozin over a
26-week treatment period. The primary efficacy endpoint under evaluation in the trial was the reduction of A1C versus placebo
at 26 weeks. Data from the study showed that patients treated with sotagliflozin experienced a statistically significant reduction
in A1C at 26 weeks versus placebo, meeting the study's primary efficacy endpoint. The trial also achieved a key secondary
endpoint of noninferiority of sotagliflozin versus empagliflozin on A1C reduction at 26 weeks. Sotagliflozin was generally
well-tolerated in the trial, with safety results comparable to previously reported safety results in type 2 diabetes.
In addition to such trials, the Phase 3 development program also includes the following randomized, double-blind,
placebo-controlled studies:
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Our SOTA-MONO study of 200mg and 400mg once daily doses of sotagliflozin as monotherapy in approximately 400
patients over a 26-week treatment period;
Our SOTA-SU study of a 400mg once daily dose of sotagliflozin in approximately 500 patients added to sulfonylurea
alone or in combination with metformin therapy over a 26-week core treatment period, followed by a 53-week
extension treatment period;
Our SCORED long-term outcomes study of a 200mg once daily dose of sotagliflozin, titrated to 400mg if the 200mg
dose is tolerated, in approximately 10,500 patients with cardiovascular risk factors and moderate or severe renal
impairment over a study duration to be determined by cardiovascular outcome events;
Our SOTA-INS study of 200mg and 400mg once daily doses of sotagliflozin in approximately 560 patients on
background basal insulin alone or in addition to other oral antidiabetic drug therapies over a 52-week treatment period;
Our SOTA-GLIM study of 200mg and 400mg once daily doses of sotagliflozin in approximately 930 patients on
background metformin therapy compared to up to a maximum daily dose of 6mg of glimepiride over a 52-week
treatment period;
Our SOTA-BONE study of 200mg and 400mg once daily doses of sotagliflozin in approximately 360 patients aged 55
years or older, with or without any stable anti-diabetes therapy, evaluating efficacy and bone safety over a 26-week
core treatment period, followed by a 78-week double-blind extension treatment period; and
Our SOLOIST long-term outcomes study of a 200mg once daily dose of sotagliflozin, titrated to 400mg if the 200mg
is tolerated, in approximately 3,000 patients with acute decompensated heart failure and with or without type 2
diabetes over a study duration to be determined by cardiovascular outcome events.
LX9211
LX9211 is an orally-delivered small molecule compound that we are developing for the treatment of neuropathic pain.
LX9211 was discovered by scientists working within our drug discovery alliance with Bristol-Myers Squibb and inhibits
adaptor associated kinase 1, or AAK1. Our scientists discovered that mice lacking AAK1 exhibit increased resistance to
induced neuropathic pain in preclinical models.
We reported top-line data in December 2018 and December 2019 from two Phase 1 clinical trials evaluating the safety,
tolerability and pharmacokinetics of LX9211. The first trial enrolled ten cohorts of healthy volunteers in a randomized, double-
blind, placebo-controlled, ascending single dose study of daily doses of LX9211. The second trial enrolled five cohorts of
healthy volunteers in a randomized, double-blind, placebo-controlled, ascending multiple dose study of daily doses of LX9211,
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followed by a maintenance dose for 14 days. In both trials, LX9211 demonstrated a safety, tolerability and pharmacokinetics
profile identifying the maximum tolerated dose and supportive of once-daily dosing, while exhibiting dose proportional
pharmacokinetics. The most common adverse events were headache and dizziness, and there were no drug-related serious
adverse events.
We are preparing to initiate a Phase 2a clinical trial evaluating the safety and tolerability of LX9211 and its effects on
diabetic peripheral neuropathic, or DPN, pain. The trial is expected to enroll approximately 282 patients experiencing DPN
pain in a randomized, double-blind, placebo-controlled study of initial 100mg or 200mg loading doses of LX9211, followed by
10mg or 20mg once daily doses of LX9211, respectively. The effects of LX9211 will be assessed over an 11-week evaluation
period. The primary efficacy endpoint under evaluation is the reduction in an average daily pain score at 6 weeks, with
secondary endpoints including the proportion of patients with 30% or greater and 50% or greater reduction in pain intensity at 6
weeks and the proportion of patients discontinuing treatment due to lack of efficacy. Certain patient-reported outcome
measures will also be assessed.
We have obtained exclusive research, development and commercialization rights to LX9211 and additional
compounds acting through AAK1 from our alliance with Bristol-Myers Squibb.
Drug Target Discoveries
Our internal drug discovery efforts were driven by a systematic, target biology-driven approach in which we used gene
knockout technologies and an integrated platform of advanced medical technologies to systematically study the physiological
and behavioral functions of almost 5,000 genes in mice and assessed the utility of the proteins encoded by the corresponding
human genes as potential drug targets. We have identified and validated in living animals, or in vivo, more than 100 targets with
promising profiles for drug discovery.
Collaborations
We are working both independently and through strategic collaborations and alliances with third parties to capitalize
on our drug target discoveries and drug discovery and development programs. Consistent with this approach, we seek to retain
exclusive rights to the benefits of certain drug discovery and development programs by developing and commercializing drug
candidates from those programs internally, particularly in the United States for indications treated by specialist physicians, as
we have with XERMELO in the United States. We seek to collaborate with other pharmaceutical and biotechnology companies
with respect to drug discovery or the development and commercialization of certain of our drug candidates, particularly with
respect to commercialization in territories outside the United States or commercialization in the United States for indications
treated by primary care physicians, or when the collaboration may provide us with access to expertise and resources that we do
not possess internally or are complementary to our own. We also seek to collaborate with other pharmaceutical and
biotechnology companies, research institutes and academic institutions to capitalize on our drug target discoveries.
Strategic Collaborations
Ipsen. We entered into a license and collaboration agreement with Ipsen in October 2014 under which we granted
Ipsen an exclusive, royalty-bearing right and license to commercialize XERMELO outside of the United States, Canada and
Japan. The collaboration was expanded in March 2015 to include Canada. We have received $24.5 million in upfront
payments and $22.7 million in regulatory and commercial launch milestones under the agreement. In addition, we are eligible
to receive up to an additional $9.6 million upon the achievement of additional specified regulatory and commercial launch
milestones and up to €72 million upon the achievement of specified sales milestones. We are also entitled to tiered, escalating
royalties ranging from low twenties to mid-thirties percentages of net sales of XERMELO in the licensed territory, subject to a
credit for Ipsen’s payments to us for the manufacture and supply of such units of XERMELO and customary royalty reduction
provisions.
Bristol-Myers Squibb. We established a drug discovery alliance with Bristol-Myers Squibb Company in December
2003 to discover, develop and commercialize small molecule drugs in the neuroscience field. Bristol-Myers Squibb extended
the target discovery term of the alliance in May 2006. We initiated the alliance with a number of neuroscience drug discovery
programs at various stages of development and used our gene knockout technologies to identify additional drug targets with
promise in the neuroscience field. For those targets that were selected for the alliance, we and Bristol-Myers Squibb worked
together, on an exclusive basis, to identify, characterize and carry out the preclinical development of small molecule drugs.
Bristol-Myers Squibb has the first option to assume full responsibility for clinical development and commercialization of any
drugs resulting from the alliance which enter clinical trials, other than LX9211 and additional compounds acting through
AAK1. We received $86 million in upfront payments and research funding under the agreement during the target discovery
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portion of the alliance, which expired in October 2009. In addition, we are entitled to receive clinical and regulatory milestone
payments ranging, depending on the timing and extent of our efforts in the alliance, up to $76 million for each drug developed
by Bristol-Myers Squibb under the alliance. We will also earn royalties on sales of drugs commercialized by Bristol-Myers
Squibb under the alliance.
We jointly developed LX9211 with Bristol-Myers Squibb as part of the alliance, and obtained from the alliance
exclusive research, development and commercialization rights to LX9211 and additional compounds acting through AAK1.
We have agreed to pay Bristol-Myers Squibb up to $34.5 million in clinical and regulatory milestones for the first indication
and up to $16 million in clinical and regulatory milestones for each of the second and third indications, if applicable. We have
also agreed to pay single digit royalties on worldwide net sales and up to $40 million in commercial milestones.
Genentech. We established a drug discovery alliance with Genentech, Inc. in December 2002 to discover novel
therapeutic proteins and antibody targets. We and Genentech expanded the alliance in November 2005 for the advanced
research, development and commercialization of new biotherapeutic drugs. Under the original alliance agreement, we used our
target validation technologies to discover the functions of secreted proteins and potential antibody targets identified through
Genentech’s internal drug discovery research. In the expanded alliance, we conducted additional, advanced research on a broad
subset of those proteins and targets. We have exclusive rights to develop and commercialize biotherapeutic drugs for two of
these targets, while Genentech has exclusive rights to develop and commercialize biotherapeutic drugs for the other targets. We
retain certain other rights to discoveries made in the alliance, including non-exclusive rights, along with Genentech, for the
development and commercialization of small molecule drugs addressing the targets included in the alliance. We received
$58 million in upfront payments, research funding and research milestone payments under the agreement during the research
collaboration term, which expired in November 2008. In addition, we are entitled to receive clinical and regulatory milestone
payments ranging, depending on the extent of our efforts in the alliance, up to $25 million for each drug target for which
Genentech develops a biotherapeutic drug under the alliance. We will also earn royalties on sales of biotherapeutic drugs
commercialized by Genentech under the alliance. Genentech is entitled to receive milestone payments and royalties on sales of
biotherapeutic drugs which we develop or commercialize under the alliance.
Other Collaborations
We have established collaborations with a number of pharmaceutical and biotechnology companies, research institutes
and academic institutions under which we have received fees in exchange for generating knockout mice for genes requested by
the collaborator, providing phenotypic data with respect to such knockout mice or otherwise granting access to some of our
technologies and discoveries. In some cases, we remain eligible to receive milestone or royalty payments on the sale of mice
and phenotypic data or on products that our collaborators discover or develop using our technology.
Manufacturing and Product Supply
We do not own or operate manufacturing or distribution facilities or resources for clinical or commercial production
and distribution of XERMELO or any of our drug candidates. Instead, we have multiple contractual agreements in place with
third-party contract manufacturing organizations, or CMOs, who, on our behalf, manufacture commercial supplies of
XERMELO and clinical supplies of our drug candidates, and will continue to do so for the foreseeable future. We have
selected well-established and reputable global CMOs for our active pharmaceutical ingredient, or API, and drug product
manufacturing that have good regulatory standing, large manufacturing capacities, and multiple manufacturing sites within their
business footprint. We employ highly skilled personnel with both technical and manufacturing experience to diligently manage
the activities at our CMOs. Our quality department audits these suppliers on a periodic basis. Our commercial suppliers are
subject to routine inspections by regulatory agencies. We work closely with our third-party manufacturers to ensure
compliance with current good manufacturing practices, or cGMP, and other stringent regulatory requirements enforced by the
FDA and foreign regulatory agencies in other territories, as applicable.
Raw materials that are used to manufacture our API are sourced from multiple third-party suppliers in Asia and
Europe. Third-party API contract manufacturers in Asia and Europe stock sufficient quantities of these materials to ensure they
can manufacture adequate API quantities per our requirements, for both clinical and commercial purposes. We store API at
third-party facilities, and provide appropriate amounts to third-party drug product contract manufacturers in Asia and North
America who then manufacture, package and label our specified quantities of finished goods for XERMELO and our drug
candidates. We rely on sole source third-party drug product contract manufacturers in the United States to manufacture,
package and label finished drug product for commercial distribution of XERMELO. We also rely on a single third-party
logistics provider, with two distribution locations, to provide shipping and warehousing services for our commercial supply of
XERMELO in the United States. Our third-party contract manufacturers also need to obtain materials such as excipients,
components and reagents to manufacture our API and finished drug products.
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Within our supply chain, we have established safety stock amounts for both our API and drug products, and store those
quantities for XERMELO in multiple locations. The quantities that we store are based on our business needs and take into
account scenarios for demand, production lead times, potential supply interruptions and shelf life for our API and drug
products. In parallel, for business continuity reasons, we have established a backup supplier for our API and are in the process
of evaluating and expect to establish an additional or backup supplier for our drug product in the near future. We believe that
our current manufacturing network has the appropriate capacity to produce sufficient commercial quantities of XERMELO for
both our and Ipsen’s commercialization efforts in support of the current approved indication of carcinoid syndrome diarrhea, as
well as the potential indication of biliary tract cancer, if clinical development in that indication proves to be successful and
gains regulatory approval in the future.
Marketing, Sales and Distribution
We have a fully integrated commercial team consisting of sales, marketing, market access, and commercial operations
functions. Our specialized sales team promotes XERMELO in the United States, concentrating their efforts on oncologists,
oncology nurses and pharmacists. We have also built an internal medical affairs function with responsibility for responding to
external inquiries regarding the appropriate use of XERMELO with regularly updated and well-substantiated scientific and
medical information. We have a limited distribution network consisting of specialty pharmacies and specialty distributors who
distribute XERMELO in fulfillment of prescriptions in the United States. We rely on Ipsen for the commercialization and
distribution of XERMELO in territories outside of the United States.
To help ensure that all eligible patients in the United States have appropriate access to XERMELO, we have
established a comprehensive reimbursement and support program called LexCares. Through LexCares, we provide co-pay
assistance to qualified, commercially insured patients to help minimize out-of-pocket costs and provide free drug to uninsured
or under-insured patients who meet certain clinical and financial criteria. In addition, LexCares is designed to provide
comprehensive reimbursement support services, such as benefits investigation and, if needed, appeals support.
Competition
The biotechnology and pharmaceutical industries are highly competitive and characterized by rapid technological
change. We face significant competition in each of the aspects of our business from other pharmaceutical and biotechnology
companies, as well as academic research institutions, clinical reference laboratories and governmental agencies that are
pursuing research or development activities similar to ours. Many of our competitors have substantially greater research,
development and commercialization capabilities and financial, scientific, marketing and human resources than we do. As a
result, our competitors may succeed in developing products earlier than we do, obtaining approvals from the FDA or other
regulatory agencies for those products more rapidly than we do, developing products that are more effective than those we
develop or commercializing products more effectively and profitably than we do. Similarly, our collaborators face similar
competition from other competitors who may succeed in developing products more quickly, developing products that are more
effective than those developed by our collaborators or commercialize products more effectively and profitably than our
collaborators.
The competition for our products and drug candidates includes both marketed products and drug candidates that are
being developed by others, including pharmaceutical products that are currently in a more advanced stage of clinical
development or commercialization than are our own drug candidates. These competitive marketed products and drug
candidates include compounds that employ different mechanisms of action in addressing diseases and conditions for which we
are developing our own drug candidates and, in some cases such as sotagliflozin, that employ the same or similar mechanisms
of action.
We believe that our ability to successfully compete with these potentially competitive drug candidates and other
competitive products currently on the market will depend on, among other things:
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the efficacy, safety and reliability of our products;
our ability, and the ability of our collaborators, to complete preclinical and clinical development and obtain regulatory
approvals for our drug candidates;
the timing and scope of regulatory approvals of our products;
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our ability, and the ability of our collaborators, to obtain product acceptance by physicians and other health care
providers and secure coverage and adequate reimbursement for product use in approved indications;
our ability, and the ability of our collaborators, to manufacture and sell commercial quantities of our products;
the skills of our employees and our ability to recruit and retain skilled employees;
protection of our intellectual property; and
the availability of substantial capital resources to fund development and commercialization activities.
Our principal competition for XERMELO includes the use, above their maximum labeled dose, of the established SSA
therapies octreotide and lanreotide, injectable products currently marketed by Novartis and Ipsen, respectively, as well as
lutetium Lu 177 dotatate, a radiopharmaceutical product currently marketed for the treatment of gastroenteropancreatic
neuroendocrine tumors by Advanced Accelerator Applications (a subsidiary of Novartis).
We expect that our principal competition for sotagliflozin in the treatment of type 1 diabetes would include established
insulin therapies, as well as selective SGLT2 inhibitors currently being prescribed off-label, but which may gain regulatory
approval, for the treatment of type 1 diabetes in the United States. Such selective SGLT2 inhibitors include dapagliflozin,
empagliflozin and canagliflozin, currently marketed for the treatment of type 2 diabetes by AstraZeneca, Boehringer Ingelheim
and Eli Lilly, and Janssen (a subsidiary of Johnson & Johnson), respectively. In addition, AstraZeneca has received approval in
the European Union for the use of dapagliflozin in type 1 diabetes as an adjunct to insulin in patients with a body mass index of
27 kg/m² or greater, when insulin alone does not provide adequate glycaemic control despite optimal insulin therapy.
We expect that our principal competition for sotagliflozin for the treatment of type 2 diabetes would include such
selective SGLT2 inhibitors, as well as DPP-4 inhibitors such as sitagliptin, currently marketed for the treatment of type 2
diabetes by Merck. We expect that our principal competition for sotagliflozin for the treatment of heart failure would include
such selective SGLT2 inhibitors which may gain regulatory approval for the treatment of heart failure, as well as angiotensin-
converting enzyme, or ACE, inhibitors and the combination drug sacubitril/valsartan, currently marketed for the treatment of
heart failure by Novartis. We expect that our principal competition for sotagliflozin for the treatment of chronic kidney disease
would include canagliflozin and such other selective SGLT2 inhibitors which may gain regulatory approval for the treatment of
chronic kidney disease.
Government Regulation
The development, manufacture and sale of pharmaceutical products are subject to extensive regulation by United
States and foreign governmental authorities, including federal, state and local authorities. In the United States, new drugs are
subject to regulation under the Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or the FDC
Act. The FDA and comparable governmental authorities regulate, among other things, research and development activities and
the testing, manufacture, quality control, safety, efficacy, record keeping, reporting, labeling, storage, approval, advertising,
promotion, sale, distribution, export and import of pharmaceutical products.
The standard process required by the FDA before a drug candidate may be marketed in the United States generally
includes the following:
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preclinical laboratory and animal tests performed under current good laboratory practices, or cGLP;
submission of an IND, which must become effective before human clinical trials may commence;
adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug candidate for its
intended use;
submission of a New Drug Application, or NDA, for approval of commercial marketing and sale, or of an NDA
supplement, or sNDA, for approval of a new indication if the product is already approved for another indication;
pre-approval inspection of manufacturing facilities and selected clinical investigators for their compliance with cGMP
and current good clinical practices, or cGCP;
if FDA convenes an advisory committee, satisfactory completion of the advisory committee review; and
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FDA approval of the NDA or sNDA.
This process for the testing and approval of drug candidates requires substantial time, effort and financial
resources. Preclinical development of a drug candidate can take from one to several years to complete, with no guarantee that
an IND based on those studies will become effective to even permit clinical testing to begin. Before commencing the first
clinical trial of a drug candidate in the United States, we must submit an IND to the FDA. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about
the conduct of the clinical trial. In such a case, we and the FDA must resolve any outstanding concerns before the clinical trial
may begin. Submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to
the existing IND must be made for each successive clinical trial conducted during product development, and the FDA must
grant permission for each clinical trial to start and continue. Further, an independent institutional review board for each medical
center proposing to participate in the clinical trial must review and approve the plan for any clinical trial before it commences at
that center. Regulatory authorities or an institutional review board or we may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
For purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may
overlap.
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Phase 1 clinical trials are conducted in a limited number of healthy human volunteers or, in some cases, patients, to
evaluate the safety, dosage tolerance, absorption, metabolism, distribution and excretion of the drug candidate;
Phase 2 clinical trials are conducted in groups of patients afflicted with a specified disease or condition to obtain
preliminary data regarding efficacy as well as to further evaluate safety and optimize dosing of the drug candidate.
Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger and more expensive
Phase 3 clinical trials; and
Phase 3 clinical trials are conducted in larger patient populations at multiple clinical trial sites to obtain statistically
significant evidence of the efficacy of the drug candidate for its intended use and to further test for safety in an
expanded patient population.
In addition, the FDA may require, or companies may pursue, additional clinical trials after a product is
approved. These so-called Phase 4 studies may be made a condition to be satisfied after a drug receives approval. Failure to
satisfy such post-marketing commitments can result in FDA enforcement action, up and to including withdrawal of NDA
approval. The results of Phase 4 studies can confirm the effectiveness of a drug candidate and can provide important safety
information to augment the FDA’s adverse drug reaction reporting system.
After completion of clinical trials, FDA approval of an NDA must be obtained before a new drug may be marketed in
the United States. The submission of an NDA requires payment of a substantial user fee to the FDA. An NDA must contain,
among other things, information on chemistry, manufacturing controls and potency and purity, non-clinical pharmacology and
toxicology, human pharmacokinetics and bioavailability and clinical data. There can be no assurance that the FDA will accept
an NDA for filing and, even if accepted for filing, that approval will be granted. The FDA may convene an advisory committee
to provide clinical insight on NDA review questions. Although the FDA is not required to follow the recommendations of an
advisory committee, the agency typically does so. Among other things, the FDA reviews an NDA to determine whether a
product is safe and effective for its intended use and whether the facility in which it is manufactured, processed, packed, or held
meets standards designed to assure the product’s continued safety, purity and potency. The FDA may deny approval of an
NDA by way of a Complete Response letter if the applicable regulatory criteria are not satisfied, or it may require additional
clinical data or an additional pivotal Phase 3 clinical trial. Even if such data are submitted, the FDA may ultimately decide that
the NDA does not satisfy the criteria for approval. An NDA may be approved with significant restrictions on its labeling,
marketing and distribution under a Risk Evaluation and Mitigation Strategy or otherwise that could restrict the commercial
applications of a product or impose costly procedures in connection with the commercialization or use of the product. Once
issued, the FDA may withdraw product approval if ongoing regulatory standards are not met or if safety problems occur after
the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of
approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a
product based on the results of these post-marketing programs.
In addition to obtaining FDA approval for each product, each drug manufacturing establishment must be inspected and
approved by the FDA. All manufacturing establishments are subject to inspections by the FDA and by other federal, state and
local agencies and must comply with current Good Manufacturing Practices requirements. Non-compliance with these
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requirements can result in, among other things, total or partial suspension of production, failure of the government to grant
approval for marketing and withdrawal, suspension or revocation of marketing approvals.
Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes
many years, with the actual time required varying substantially based on, among other things, the nature, novelty and
complexity of the drug candidate and of the disease or condition. Government regulation may delay or prevent marketing of
drug candidates or new diseases for a considerable period of time and impose costly procedures upon our activities. The FDA
or any other regulatory agency may not grant approvals for new indications for our product candidates on a timely basis, if at
all. Success in earlier-stage clinical trials does not ensure success in later-stage clinical trials. Targets and pathways identified
in vitro may be determined to be less relevant in clinical studies and results in animal model studies may not be predictive of
human clinical results. Furthermore, data obtained from clinical activities is not always conclusive and may be susceptible to
varying interpretations, which could delay, limit or prevent regulatory approval. Even if a drug candidate receives regulatory
approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even
after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions
on the product or even complete withdrawal of the product from the market.
Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy
information. Product changes as well as certain changes in a manufacturing process or facility would necessitate additional
FDA review and approval. Other post-approval changes may also necessitate further FDA review and approval. Additionally,
a manufacturer must meet other requirements including those related to adverse event reporting and record keeping.
Products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the
FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their
subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic
unannounced inspections by the FDA and certain state agencies for compliance with cGMP, which impose certain procedural
and documentation requirements upon us and our third-party manufacturers.
The FDA closely regulates the marketing and promotion of drugs, including restricting the promotion of uses for
which a drug is not approved by the agency. Not only must a company have appropriate substantiation to support claims made
about a drug, under the FDA’s current interpretation of relevant laws, a company can make only those claims relating to safety
and efficacy that are for indications for which FDA has approved the drug and are otherwise consistent with the FDA-approved
label for the drug. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective
advertising and potential civil and criminal penalties. Physicians may, in their independent medical judgment, prescribe legally
available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by
the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the
best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice
of treatments. The FDA does, however, restrict manufacturers’ communications on the subject of off-label use. Additionally, a
significant number of pharmaceutical companies have been the target of inquiries and investigations by various United States
federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of
products for off-label uses and other sales practices. These investigations have alleged violations of various United States
federal and state laws and regulations, including claims asserting antitrust violations, violations of the FDC Act, false claims
laws, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with the promotion of
products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement.
The United States Orphan Drug Act is intended to incentivize the development of products for rare diseases or
conditions that affect fewer than 200,000 people in the United States. If a drug is being developed for a rare disease or
condition, to be eligible for designation as an orphan drug, the FDA must not have previously approved a drug considered the
“same drug” for the same orphan indication. If the FDA has previously approved another same drug for the same indication,
the sponsor of the subsequent drug would be required to provide a plausible hypotheses of clinical superiority over the
previously approved drug to obtain an orphan designation. Upon FDA receipt of orphan drug designation, the sponsor is
eligible for tax credits of up to 25% for qualified clinical trial expenses, the ability to apply for annual grant funding and waiver
of PDUFA application fee. In addition, upon marketing approval, an orphan-designated drug could be eligible for seven years
of market exclusivity for the approved orphan-designated indication. Such orphan drug exclusivity, if awarded, would only
block the approval of any drug considered the same drug for the same orphan indication. Moreover, a subsequent same drug
could break a previously approved drug’s orphan exclusivity through a demonstration of clinical superiority over the previously
approved drug.
The FDA has various programs, including Fast Track, priority review and accelerated approval, which are intended to
expedite or simplify the process for developing and reviewing promising drugs, or to provide for the approval of a drug on the
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basis of a surrogate endpoint. Generally, drugs that are eligible for these programs are those for serious or life-threatening
conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing
treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to
treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give drugs
that treat serious conditions and offer major advances in treatment or provide a treatment where no adequate therapy exists an
initial review within six months of NDA filing as compared to a standard review time of 10 months from NDA filing. Certain
other types of drug applications are also eligible for priority review. Although Fast Track and priority review do not affect the
standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track-designated
drug and expedite review of the application for a drug designated for priority review. Accelerated approval provides for an
earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet
medical need based on a surrogate endpoint. As a condition of approval, the FDA may require that a sponsor of a product
candidate receiving accelerated approval perform post-marketing clinical trials to confirm the clinically meaningful outcome as
predicted by the surrogate marker trial. In addition to the Fast Track, accelerated approval and priority review programs, the
FDA also designates Breakthrough Therapy status to drugs that are intended, alone or in combination with one or more other
drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may
demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial
treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for
accelerated approval. The FDA will seek to ensure the sponsor of a breakthrough therapy product candidate receives intensive
guidance on an efficient drug development program, intensive involvement of senior managers and experienced staff on a
proactive, collaborative and cross-disciplinary review and rolling review.
Additional programs intended to expedite the development of drug products were included in the 21st Century Cures
Act, or the Cures Act. The Cures Act includes various provisions to accelerate the development and delivery of new treatments,
such as those intended to expand the types of evidence manufacturers may bring to the FDA to support drug approval, to
encourage patient-centered drug development, to liberalize the communication of healthcare economic information to payers,
and to create greater transparency with regard to manufacturer expanded access programs. Central to the Cures Act are
provisions that enhance and accelerate the FDA’s processes for reviewing and approving new drugs and supplements to
approved NDAs, including provisions that:
•
•
•
•
require the FDA to establish a program to evaluate the potential use of real world evidence to help support the
approval of a new indication for an approved drug and to help support or satisfy post-approval study requirements;
provide that the FDA may rely upon qualified data summaries to support the approval of a supplemental application
with respect to a qualified indication for an already approved drug;
require the FDA to issue guidance for purposes of assisting sponsors in incorporating complex adaptive and other
novel trial designs into proposed clinical protocols and applications for new drugs; and
require the FDA to establish a process for the qualification of drug development tools for use in supporting or
obtaining FDA approval for or investigational use of a drug.
The Cures Act amends Section 114 of the Food and Drug Administration Modernization Act of 1997 to help clarify
and facilitate the dissemination of healthcare economic information, including by broadening the definition of healthcare
economic information, expressly extending the dissemination of healthcare economic information to payors, and clarifying that
healthcare economic information must only relate to an FDA-approved indication rather than directly relate to the indication.
Regulation Outside of the United States
In addition to regulations in the United States, we are subject to the regulations of other countries governing clinical
trials and the manufacturing, commercial sales and distribution of our products outside of the United States. Whether or not we
obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of
the United States before we can commence clinical trials in such countries and approval of the regulators of such countries or
economic areas, such as the European Union, before we may market products in those countries or areas. The approval process
and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place
to place, and the time may be longer or shorter than that required for FDA approval.
Under European Union regulatory systems, a company may submit marketing authorization applications, or MAAs,
either under a centralized or decentralized procedure. Under the centralized procedure, MAAs are submitted to the European
Medicines Agency, or EMA, whose Committee for Medicinal Products for Human Use reviews the application and issues an
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opinion on it. The opinion is considered by the European Commission which is responsible for deciding applications. If the
application is approved, the European Commission grants a single marketing authorization that is valid for all European Union
member states as well as Iceland, Liechtenstein and Norway, or the EEA. The national authorization procedures, the
decentralized and mutual recognition procedures, as well as national applications, are available for products for which the
centralized procedure is not compulsory. The mutual recognition procedure provides for the European Union member states
selected by the applicant to mutually recognize a national marketing authorization that has already been granted by the
competent authority of another member state, referred to as the Reference Member State, or RMS. The decentralized procedure
is used when the product in question has yet to be granted a marketing authorization in any member state. Under this procedure
the applicant can select the member state that will act as the RMS. In both the mutual recognition and decentralized procedures,
the RMS reviews the application and submits its assessment of the application to the member states where marketing
authorizations are being sought, referred to as Concerned Member States or CMS. Within 90 days of receiving the application
and assessment report, each CMS must decide whether to recognize the RMS assessment. If a member state does not agree
with the assessment, and the disputed points cannot be resolved the matter is eventually referred to the European Commission,
whose decision is binding on all member states. If the application is successful national marketing authorizations will be
granted by the competent authorities in each of the member states chosen by the applicant.
Conditional marketing authorizations may be granted for a limited number of medicinal products for human use
referenced in European Union law applicable to conditional marketing authorizations where the clinical dataset is not
comprehensive, if the risk-benefit balance of the product is positive, it is likely that the applicant will be in a position to provide
the required comprehensive clinical trial data, unmet medical needs will be fulfilled and the benefit to public health of the
immediate availability on the market of the medicinal product outweighs the risk inherent in the fact that additional data are still
required. Specific obligations, such as the completion of ongoing or new studies and obligations relating to the collection of
pharmacovigilance data, may be amongst the conditions stipulated in the marketing authorization.
As in the United States, we may apply for designation of a product as an Orphan drug for the treatment of a specific
indication in the European Union before the application for marketing authorization is made. In the European Union, orphan
designation is available for products in development which are either intended for the diagnosis, prevention or treatment of life-
threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in the European Union, or
intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition
in the community and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient
to justify the necessary investment in developing the medicinal product. Additionally, the sponsor of an application for orphan
drug designation must establish that there exists no satisfactory authorized method of diagnosis, prevention, or treatment of the
condition or even if such treatment exists, the product will be of significant benefit to those affected by that condition.
Orphan drugs in the European Union enjoy economic and marketing benefits, including up to ten years of market
exclusivity for the approved indication unless another applicant can show that its product is safer, more effective or otherwise
clinically superior to the orphan-designated product. The period of market exclusivity may be reduced to six years if at the end
of the fifth year it is established that the criteria for orphan designation are no longer met, including where it is shown that the
product is sufficiently profitable not to justify maintenance of market exclusivity.
Healthcare Regulation
Federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, also
apply to our business. If we fail to comply with those laws, we could face substantial penalties and our business, results of
operations, financial condition and prospects could be adversely affected. The laws that may affect our ability to operate
include, but are not limited to: the federal Anti-Kickback Statute, which prohibits. among other things, soliciting, receiving,
offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or
service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; and federal civil and
criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from
knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that
are false or fraudulent. Additionally, we are subject to state law equivalents of each of the above federal laws, which may be
broader in scope and apply regardless of whether the payer is a federal healthcare program, and many of which differ from each
other in significant ways and may not have the same effect, further complicate compliance efforts.
Numerous federal and state laws, including state security breach notification laws, state health information privacy
laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other
countries also have, or are developing, laws governing the collection, use and transmission of personal information. In
addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health
information, are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of
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1996, as amended by the Health Information Technology and Clinical Health Act, or HIPAA. Although we are not directly
subject to HIPAA, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information
from a HIPAA-covered entity, including healthcare providers, in a manner that is not authorized or permitted by HIPAA. The
legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing
amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws
in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of
doing business. International laws, such as the EU Data Privacy Directive and Swiss Federal Act on Data Protection, regulate
the processing of personal data within the European Union and between countries in the European Union and countries outside
of the European Union, including the United States. Failure to provide adequate privacy protections and maintain compliance
with safe harbor mechanisms could jeopardize business transactions across borders and result in significant penalties.
In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation
Act, or the PPACA, created a federal requirement under the federal Open Payments program, that requires certain
manufacturers to track and report to the Centers for Medicare and Medicaid Services, or CMS, annually certain payments and
other transfers of value provided to physicians and teaching hospitals made in the previous calendar year. In addition, there are
also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing
information. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and
compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our
reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.
For those marketed products which are covered in the United States by the Medicaid program, we have various
obligations, including government price reporting and rebate requirements, which generally require products be offered at
substantial rebates/discounts to Medicaid and certain purchasers. We are also required to discount such products to authorized
users of the Federal Supply Schedule of the General Services Administration, under which additional laws and requirements
apply. These programs require submission of pricing data and calculation of discounts and rebates pursuant to complex
statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition
Regulations, and the guidance governing such calculations is not always clear. Compliance with such requirements can require
significant investment in personnel, systems and resources, but failure to properly calculate our prices, or offer required
discounts or rebates could subject us to substantial penalties.
Other Regulations
In addition to the foregoing, our business is subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances
Control Act. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive
substances used in and wastes generated by our operations. We believe that we are in material compliance with applicable
environmental laws and that our continued compliance with these laws will not have a material adverse effect on our
business. We cannot predict, however, whether new regulatory restrictions will be imposed by state or federal regulators and
agencies or whether existing laws and regulations will adversely affect us in the future.
Patents and Proprietary Rights
We are able to protect our proprietary rights from unauthorized use by third parties only to the extent that those rights
are covered by valid and enforceable patents or are effectively maintained as trade secrets. Accordingly, patents and other
proprietary rights are an essential element of our business. We own or exclusively license patents and/or patent applications
throughout the world that claim our products and drug candidates, including:
•
•
•
issued patents and pending patent applications in Europe, the United States, and other countries throughout the world,
including Australia, Argentina, Brazil, Canada, China, Europe, India, Israel, Japan, Mexico, New Zealand, South
Africa, and South Korea, that claim telotristat ethyl and associated crystalline forms, pharmaceutical compositions
comprising telotristat ethyl, and methods of its manufacture and use;
issued patents and pending patent applications in Europe, the United States, and other countries throughout the world,
including Australia, Argentina, Brazil, Canada, China, Europe, India, Israel, Japan, Mexico, New Zealand, South
Africa, and South Korea, that claim sotagliflozin and associated crystalline forms, pharmaceutical compositions
comprising sotagliflozin, and methods of its manufacture and use; and
issued patents and pending patent applications in Europe, the United States, and other countries throughout the world,
including Australia, Brazil, Canada, China, Europe, India, Israel, Japan, Mexico, New Zealand, South Africa, and
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South Korea, that disclose and/or claim LX9211, pharmaceutical compositions comprising LX9211, and methods of
its use.
Additionally, we hold rights to a number of patents and patent applications under license agreements with third
parties. Many of these licenses are nonexclusive, although some are exclusive in specified fields. Most of the licenses have
terms that extend for the life of the licensed patents.
Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the
various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country
to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country. We
have filed patent applications and hold issued patents covering our approved drug, XERMELO, and each of our drug
candidates. None of our United States patents that claim XERMELO or one of our drug candidates has a normal expiration
date earlier than 2026.
All of our employees, consultants and advisors are required to execute a proprietary information agreement upon the
commencement of employment or consultation. In general, the agreement provides that all inventions conceived by the
employee or consultant, and all confidential information developed or made known to the individual during the term of the
agreement, shall be our exclusive property and shall be kept confidential, with disclosure to third parties allowed only in
specified circumstances. We cannot assure you, however, that these agreements will provide useful protection of our proprietary
information in the event of unauthorized use or disclosure of such information.
Our patent and intellectual property rights are subject to certain rights and uncertainties. See “Risks Related to Our
Intellectual Property” under “Item 1A. Risk Factors.”
Executive Officers
Our executive officers and their ages and positions are listed below.
Name
Lonnel Coats
Pablo Lapuerta, M.D.
Alan J. Main, Ph.D.
Alexander A. Santini
Praveen Tyle, Ph.D.
Jeffrey L. Wade
Brian T. Crum
James F. Tessmer
President and Chief Executive Officer and Director
Executive Vice President and Chief Medical Officer
Executive Vice President, Commercial Supply Operations
Age Position with the Company
55
56
66
61
59
Executive Vice President and Chief Commercial Officer
Executive Vice President, Research and Development
Executive Vice President, Corporate and Administrative Affairs and Chief
Financial Officer
Vice President and General Counsel
Vice President, Finance and Accounting
55
47
60
Lonnel Coats has been our president and chief executive officer and a director since July 2014. Mr. Coats previously
served in a series of executive leadership positions at Eisai Inc. and Eisai Corporation of North America, where he worked for
18 years before joining our company, most recently as chief executive officer from 2010 to 2014. Prior to joining Eisai, Mr.
Coats spent eight years with Janssen Pharmaceuticals, Inc., a division of Johnson & Johnson, where he held a variety of
management and sales positions. Mr. Coats serves as a director of Blueprint Medicines Corporation and holds a B.S. from
Oakland University.
Pablo Lapuerta, M.D. has been our executive vice president and chief medical officer since February 2015 and
previously served in a series of medical and clinical leadership positions since joining our company in 2011. Dr. Lapuerta was
formerly vice president at Bristol-Myers Squibb Company with responsibility for global development of an Alzheimer’s disease
drug candidate, and prior to that served as senior vice president, clinical strategy and chief medical officer of Cogentus
Pharmaceuticals, Inc. and in a variety of clinical development leadership roles at Bristol-Myers Squibb, where he worked for
11 years before joining Cogentus. He holds a B.A. in biology from Harvard College and an M.D. from Harvard Medical
School.
Alan J. Main, Ph.D. has been our executive vice president, commercial supply operations since May 2017 and
previously served in a series of manufacturing and scientific leadership positions since joining our company in 2001. Dr. Main
was president and chief executive officer of Coelacanth Corporation, a leader in using proprietary chemistry technologies to
rapidly discover new chemical entities for drug development, until our acquisition of Coelacanth in 2001. Dr. Main was
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formerly senior vice president, U.S. Research at Novartis Pharmaceuticals Corporation, where he worked for 20 years before
joining Coelacanth. Dr. Main holds a B.S. from the University of Aberdeen, Scotland and a Ph.D. in organic chemistry from
the University of Liverpool, England and completed postdoctoral studies at the Woodward Research Institute.
Alexander A. Santini has been our executive vice president and chief commercial officer since November 2016 and
previously served in a series of commercial leadership positions since joining our company in April 2015. Mr. Santini was
formerly vice president of market access and an executive member at Bayer Healthcare Pharmaceuticals, where he had
executive responsibility for market access, pricing, trade and channel management and payer account management, and prior to
that served in a variety of commercial leadership roles of increasing responsibility during eight years of service at Bayer and 22
years of service at Berlex Laboratories. Mr. Santini served as a non-commissioned officer in the United States Air Force,
where he completed the Radiologic Technology Program at the United States Air Force School of Health Care Science and an
AAS in business marketing from Westchester Community College.
Praveen Tyle, Ph.D. has been our executive vice president of research and development since May 2016. Dr. Tyle was
previously a member of the executive management team at Osmotica Pharmaceutical Corp., serving as president and chief
executive officer from January 2013 through April 2016 and prior to that as executive vice president and chief scientific officer.
Prior to his service at Osmotica, Dr. Tyle held a series of scientific leadership positions within the pharmaceutical industry,
including executive vice president and chief science officer for the United States Pharmacopeia, senior vice president and
global head of research and development and business development and licensing at Novartis OTC, corporate senior vice
president of global research and development and chief scientific officer at Bausch & Lomb Incorporated and vice president
and global head of pharmaceutical sciences at Pharmacia Corporation. Dr. Tyle serves as director of Eyegate Pharmaceuticals,
Inc. and Orient Europharma Ltd. Dr. Tyle received his B.Pharm. from the Indian Institute of Technology, Banaras Hindu
University and his Ph.D. in pharmaceutics and pharmaceutical chemistry from the Ohio State University.
Jeffrey L. Wade has been our executive vice president, corporate and administrative affairs and chief financial officer
since February 2015 and previously served in a series of finance and legal leadership positions since joining our company in
1999. Mr. Wade was previously a corporate securities and finance attorney for ten years with the law firm of Andrews &
Kurth L.L.P., where he represented companies in the biotechnology, information technology and energy industries. Mr. Wade
is a member of the board of directors of the Texas Healthcare and Bioscience Institute. He received his B.A. and J.D. from the
University of Texas.
Brian T. Crum has been our vice president and general counsel since May 2010 and previously served in a series of
legal leadership positions since joining our company in 2001. Mr. Crum was previously a corporate securities attorney with the
law firms of Brobeck, Phleger & Harrison LLP and Andrews & Kurth L.L.P., where he represented companies in the energy
and information technology industries. Mr. Crum received his B.B.A. and J.D. from the University of Texas.
James F. Tessmer has been our vice president, finance and accounting since November 2007 and previously served in
a series of finance and accounting leadership positions since joining our company in 2001. Mr. Tessmer was previously
assistant controller for Mariner Health Network, Inc. and prior to that served in a variety of financial and accounting
management positions for HWC Distribution Corp. and American General Corporation. Mr. Tessmer is a certified public
accountant and received his B.B.A. from the University of Wisconsin – Milwaukee and his M.B.A. from the University of
Houston.
Employees
As of February 28, 2020, we employed 184 persons, of whom 29 hold M.D. or Ph.D. degrees and another 53 hold
other advanced degrees. All of our employees are located in the United States. None of our employees are represented by a
labor union and we believe that our relationship with our employees is good.
Research and Development Expenses
In 2019, 2018 and 2017, respectively, we incurred expenses of $91.9 million, $100.2 million and $152.2 million in
company-sponsored as well as collaborative research and development activities, including $7.1 million, $6.0 million and
$4.9 million of stock-based compensation expense in 2019, 2018 and 2017, respectively.
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Item 1A. Risk Factors
The following risks and uncertainties are important factors that could cause actual results or events to differ materially
from those indicated by forward-looking statements. The factors described below are not the only ones we face and additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We depend heavily on the commercial success of XERMELO. If we do not achieve commercial success with XERMELO, our
business will suffer and our stock price will likely decline.
We expect that a significant portion of our total revenues for the next several years will be attributable to sales of
XERMELO in the United States, but we cannot be certain that XERMELO will be commercially successful. Our future sales
of XERMELO will depend on numerous factors, including:
•
•
•
•
•
•
the number of patients with carcinoid syndrome diarrhea who are inadequately controlled by SSA therapy, as well as
the number of newly diagnosed carcinoid syndrome diarrhea patients;
competition from SSA therapies, radiopharmaceutical products and any additional products for the treatment of
carcinoid syndrome diarrhea that may be approved by the FDA in the future;
the safety profile of XERMELO, including whether previously unknown side effects or increased incidence or severity
of known side effects as compared to those seen during development are identified with the commercial use of
XERMELO;
the effectiveness of our commercial strategy for marketing XERMELO and our execution of that strategy, including
our pricing strategy and the effectiveness of our efforts to obtain and maintain adequate third-party reimbursement;
the acceptance of XERMELO by patients, the medical community and third-party payers; and
our ability to meet the demand for commercial supplies of XERMELO and to maintain and successfully monitor
commercial manufacturing arrangements for XERMELO with third-party manufacturers to ensure they meet our
standards and those of the FDA, which extensively regulates and monitors pharmaceutical manufacturing facilities.
While we believe that XERMELO has a competitive commercial profile, our current estimates of the revenues that
XERMELO could generate in future periods may change based upon the above factors, and could prove to be incorrect. If our
revenues, market share or other indicators of market acceptance of XERMELO fail to meet the expectations of investors or
public market analysts, the market price of our common stock could decline. In addition, if one or more of the factors above
negatively affects XERMELO sales, our business and financial condition could be materially harmed and we may be more
heavily dependent on the success of our other drug programs.
We depend heavily on our ability to obtain regulatory approval in the United States for sotagliflozin in type 1 diabetes. If we
fail to obtain such regulatory approval or fail to successfully commercialize sotagliflozin for type 1 diabetes upon such
regulatory approval, our business will suffer and our stock price will likely decline.
The FDA issued a complete response letter in March 2019 regarding our application for regulatory approval to market
sotagliflozin for type 1 diabetes in the United States and has confirmed that position in denying two appeals of the complete
response letter in November 2019 and March 2020.
We cannot offer any assurances that the FDA will grant marketing approval for sotagliflozin in type 1 diabetes, on
acceptable timelines or at all. Furthermore, regulatory approval in the United States for sotagliflozin in type 1 diabetes, even if
obtained, may limit the type of patients in which sotagliflozin may be used, such as on the basis of body mass index as in the
European Union, or otherwise require specific warning or labeling language or a formal risk evaluation and mitigation strategy,
or REMS, any of which may reduce the commercial potential of sotagliflozin in type 1 diabetes. Even if approved, our existing
capital resources and commercial infrastructure are insufficient to commercially launch sotagliflozin for type 1 diabetes and we
may not be successful in obtaining such resources, building such infrastructure or otherwise effectively commercializing
sotagliflozin for type 1 diabetes. Should we fail to obtain regulatory approval in the United States for sotagliflozin in type 1
diabetes, or fail to successfully commercialize sotagliflozin upon such regulatory approval, our business and financial condition
could be materially harmed and we may be more heavily dependent on the success of our other drug programs.
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We depend heavily on our ability to successfully complete Phase 3 clinical development of sotagliflozin in type 2 diabetes, heart
failure and chronic kidney disease, and obtain regulatory approvals for sotagliflozin in those indications. If we fail to
successfully complete such Phase 3 clinical development and obtain such regulatory approvals, or fail to successfully
commercialize sotagliflozin for type 2 diabetes, heart failure and chronic kidney disease upon such regulatory approvals, our
business will suffer and our stock price will likely decline.
We are conducting a comprehensive Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure
and chronic kidney disease. Our existing capital resources are insufficient to complete the two long-term outcomes studies
included in such Phase 3 development program that are designed to demonstrate benefits in heart failure and chronic kidney
disease. Although we seek to collaborate with another pharmaceutical or biotechnology company with respect to the
development and commercialization of sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease under terms
which would provide additional funding for the completion of the Phase 3 development program, we may be unable to
successfully enter into any such collaborative arrangement on reasonable terms, or at all. If we are unable to enter into any such
collaborative arrangement, or if we are otherwise unable to raise sufficient additional capital, we will likely elect to, and may be
forced to, delay, reduce or wind down the long-term outcomes studies included in such Phase 3 development program.
Even if such additional funding is secured, we cannot offer any assurances or predict with any certainty that such
Phase 3 development will be successfully completed, that positive clinical data will be obtained from such Phase 3 development
efforts or that regulatory authorities will grant marketing approval for sotagliflozin in type 2 diabetes, heart failure or chronic
kidney disease, in any such case on the expected timelines. Furthermore, regulatory approvals for sotagliflozin, even if
obtained, may limit the type of patients in which sotagliflozin may be used for type 2 diabetes, heart failure or chronic kidney
disease or otherwise require specific warning or labeling language, each of which may reduce the commercial potential of
sotagliflozin in those indications. We cannot offer any assurances that the Phase 3 clinical development program will
demonstrate a competitive commercial profile for sotagliflozin in type 2 diabetes, heart failure or chronic kidney disease. Even
if approved with a competitive commercial profile, our existing resources and commercial infrastructure are insufficient to
commercially launch sotagliflozin for type 2 diabetes, heart failure and chronic kidney disease and we or any potential
collaborator may be unsuccessful in obtaining such resources, building such infrastructure or otherwise effectively
commercializing sotagliflozin for type 2 diabetes, heart failure or chronic kidney disease. Should we or any potential
collaborator fail to obtain regulatory approvals for sotagliflozin in those indications or fail to successfully commercialize
sotagliflozin upon such regulatory approvals, our business and financial condition could be materially harmed and we may be
more heavily dependent on the success of our other drug programs.
Clinical testing of our drug candidates in humans is an inherently risky and time-consuming process that may fail to
demonstrate safety and efficacy, which could result in the delay, limitation or prevention of regulatory approval.
In order to obtain regulatory approvals for the commercial sale of any products that we or our collaborators may
develop, we or our collaborators are required to complete extensive clinical trials in humans to demonstrate the safety and
efficacy of our drug candidates. We or our collaborators may not be able to obtain authority from the FDA, or other equivalent
foreign regulatory agencies, to initiate or complete any clinical trials. In addition, we have limited internal resources for
making regulatory filings and interacting with regulatory authorities.
Clinical trials are inherently risky and the results from nonclinical testing of a drug candidate that is under
development may not be predictive of results that will be obtained in human clinical trials. In addition, the results of early
human clinical trials may not be predictive of results that will be obtained in larger-scale, advanced stage clinical trials. A
number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after
achieving positive results in earlier trials. Although Phase 2 proof-of-concept clinical trials of sotagliflozin in type 2 diabetes
patients were positive, we cannot assure you that the Phase 3 development program for sotagliflozin being conducted in type 2
diabetes, heart failure and chronic kidney disease will yield positive results. Negative or inconclusive results from a nonclinical
study or a clinical trial could cause us, our collaborators or the FDA or other equivalent foreign regulatory agencies to terminate
a nonclinical study or clinical trial or require that we or our collaborators repeat or modify it. Furthermore, we, one of our
collaborators or a regulatory agency with jurisdiction over the trials may suspend clinical trials at any time if the subjects or
patients participating in such trials are being exposed to unacceptable health risks or for other reasons.
Any nonclinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory
authorities. Nonclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory
approval. The FDA or institutional review boards at the medical institutions and healthcare facilities where we or our
collaborators sponsor clinical trials may suspend any trial indefinitely if they find deficiencies in the conduct of these
trials. Clinical trials must be conducted in accordance with the FDA’s current Good Clinical Practices. The FDA and these
institutional review boards have authority to oversee our and our collaborators’ clinical trials, and the FDA may require large
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numbers of subjects or patients. In addition, we or our collaborators must manufacture, or contract for the manufacture of, the
drug candidates that we use in our clinical trials under the FDA’s current Good Manufacturing Practices.
The rate of completion of clinical trials is dependent, in part, upon the rate of enrollment of patients. Patient accrual is
a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility
criteria for the study, the nature of the study, the existence of competitive clinical trials and the availability of alternative
treatments. Delays in planned patient enrollment may result in increased costs and prolonged clinical development, which in
turn could allow our competitors to bring products to market before we do and impair our ability to commercialize our products
or potential products.
We or our collaborators may not be able to successfully complete any clinical trial of a drug candidate within any
specified time period. In some cases, we or our collaborators may not be able to complete the trial at all. Moreover, clinical
trials may not show our drug candidates to be both safe and effective. Thus, the FDA and other regulatory authorities may not
approve any additional drug candidates that we develop for any indication or may limit the approved indications or impose
other conditions.
Our drug candidates are subject to a lengthy and uncertain regulatory process that may not result in the necessary regulatory
approvals, which could adversely affect our and our collaborators’ ability to commercialize products.
Our drug candidates, as well as the activities associated with their research, development and commercialization, are
subject to extensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in
other countries. Failure to obtain regulatory approval for any drug candidate would prevent us from commercializing that drug
candidate. The process of obtaining regulatory approvals is expensive, and often takes many years, if approval is obtained at
all, and can vary substantially based upon the type, complexity and novelty of the drug candidates involved. Before a new drug
application can be filed with the FDA, the drug candidate must undergo extensive clinical trials, which can take many years and
may require substantial expenditures. Any clinical trial may fail to produce results satisfactory to the FDA. For example, the
FDA could determine that the design of a clinical trial is inadequate to produce reliable results. Furthermore, prior to approving
a new drug, the FDA typically requires that the efficacy of the drug be demonstrated in two double-blind, controlled studies.
The regulatory process also requires nonclinical testing, and data obtained from nonclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or rejections
may be encountered based upon changes in regulatory policy for product approval during the period of product development
and regulatory agency review. Changes in regulatory approval policy, regulations or statutes or the process for regulatory
review during the development or approval periods of our drug candidates may cause delays in the approval or rejection of an
application. Even if the FDA or a comparable authority in another country approves a drug candidate, the approval may impose
significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production
of such product and may impose ongoing requirements for post-approval studies, including additional research and
development and clinical trials. These agencies also may impose various civil or criminal sanctions for failure to comply with
regulatory requirements, including withdrawal of product approval.
The commercial success of any products that we or our collaborators may develop will depend upon the degree of market
acceptance among physicians, patients, health care payers and the medical community.
Our or our collaborators’ ability to commercialize any products that we or they may develop will be highly dependent
upon the extent to which such products gain market acceptance among physicians, patients, health care payers, such as
commercial health insurers, Medicare and Medicaid, and the medical community. If such products do not achieve an adequate
level of acceptance, we may not generate adequate product revenues and we may not become profitable. The degree of market
acceptance of such products will depend upon a number of factors, including:
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the effectiveness, or perceived effectiveness, of our products in comparison to competing products;
the existence of any significant side effects, as well as their severity in comparison to any competing products;
potential advantages or disadvantages in relation to alternative treatments;
current and future indications for which our products may be approved;
the ability to offer our products for sale at competitive prices;
relative convenience and ease of administration;
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the strength of marketing and distribution support; and
sufficient third-party coverage or reimbursement.
If we are unable to maintain an effective sales force, marketing infrastructure and distribution capabilities, we will not be able
to successfully commercialize any products that we or our collaborators may develop.
In order to successfully commercialize any product that we or our collaborators may develop, we or they must build or
maintain an effective commercialization infrastructure supporting such product, including sales force, marketing organization
and distribution capabilities. Factors that may hinder efforts to effectively establish, manage and maintain such infrastructure
for products that we or our collaborators may develop include:
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inability to recruit, retain and effectively manage adequate numbers of effective sales and marketing personnel;
inability to maintain relationships with third-party logistics providers, pharmacies, third-party manufacturers and other
third parties instrumental in the commercial manufacture and distribution of such products;
inability to establish or implement internal controls and procedures required in connection with sales of such products;
inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe such products;
and
potential lack of complementary products to be offered by sales personnel, which may put us or our collaborators at a
competitive disadvantage relative to companies with more extensive product lines.
If we or our collaborators are unable to sustain our or their sales force, marketing infrastructure and distribution
capability for such products, we may not be able to generate any product revenue, may generate increased expenses and may
never become profitable.
We or our collaborators will need to expend significant time and resources to train our sales forces to be credible,
persuasive and compliant in discussing such products with the physicians treating the patients indicated under the label. We or
our collaborators will also need to continue to train our sales forces to ensure that a consistent and appropriate message about
such products is being delivered to potential customers. If we or our collaborators are unable to effectively train our sales
forces and equip them with effective materials, including medical and sales literature to help them inform and educate potential
customers about the benefits and risks of such products and their proper administration, our and their ability to successfully
commercialize such products could be diminished, which could have a material adverse effect on our financial condition, stock
price and operations.
If we are unable to maintain adequate coverage and reimbursement from third-party payers for any products that we or our
collaborators may develop, our revenues and prospects for profitability will suffer.
Our ability to successfully commercialize any products that we or our collaborators may develop is highly dependent
on the extent to which coverage and reimbursement for such products are available from third-party payers, including
governmental payers, such as Medicare and Medicaid, and private health insurers, including managed care organizations and
group purchasing organizations. Many patients are not capable of paying themselves for the products that we or our
collaborators may develop, and rely on third-party payers to pay for, or subsidize, their medical needs. If third-party payers do
not provide coverage or reimbursement for such products, our revenues and prospects for profitability will suffer. In addition,
even if third-party payers provide some coverage or reimbursement for such products, the availability of such coverage or
reimbursement for prescription drugs under private health insurance and managed care plans often varies based on the type of
contract or plan purchased.
In addition, in some foreign countries, particularly the countries in the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these countries, price negotiations with governmental authorities can
take six to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement and/
or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that compares the cost
effectiveness of our drug candidates or products to other available therapies. The conduct of such a clinical trial could be
expensive and result in delays in the commercialization of our drug candidates. Third-party payers are challenging the prices
charged for medical products and services, and many third-party payers limit reimbursement for newly approved health care
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products. In particular, third-party payers may limit the indications for which they will reimburse patients who use any
products that we or our collaborators may develop. Cost-control initiatives could decrease prices we or our collaborators might
establish for products that may be developed, which would result in lower product revenues to us.
We may not be able to manufacture products that we or our collaborators may develop in commercial quantities, which would
impair our ability to commercialize such products.
Other than XERMELO, our drug candidates have been manufactured in relatively small quantities for nonclinical and
clinical trials. If any of these drug candidates are approved by the FDA or other regulatory agencies for commercial sale, we or
our collaborators will need to manufacture them in larger quantities. We may not be able to successfully increase the
manufacturing capacity, whether in collaboration with third-party manufacturers or on our own, for any approved product in a
timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which
the FDA must review and approve. If we or our collaborators are unable to successfully increase the manufacturing capacity
for any such product, the regulatory approval or commercial launch of that product may be delayed or there may be a shortage
in supply. Pharmaceutical products typically require precise, high-quality manufacturing. The failure to achieve and maintain
these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could
seriously hurt our business.
We and our collaborators are subject to extensive and rigorous ongoing regulation relating to any products that we or our
collaborators may develop.
We and our collaborators are subject to extensive and rigorous ongoing domestic and foreign government regulation
of, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution and
marketing of any products which receive regulatory approvals from the FDA or foreign regulatory authorities. The failure to
comply with these requirements or the identification of safety problems during commercial marketing could lead to the need for
product marketing restrictions, product withdrawal or recall or other voluntary or regulatory action, which could delay further
marketing until the product is brought into compliance. The failure to comply with these requirements may also subject us or
our collaborators to stringent penalties.
We are subject to certain healthcare laws, regulation and enforcement; our failure to comply with those laws could have a
material adverse effect on our results of operations and financial condition.
We are subject to certain healthcare laws and regulations and enforcement by the federal government and the states in
which we conduct our business. The laws that may affect our ability to operate include, without limitation:
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the federal Anti-Kickback Law, which constrains our marketing practices, educational programs, pricing policies,
relationships with healthcare providers or other entities, and other business activities, by prohibiting, among other
things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or
recommendation of, any good or service for which payment may be made under federal healthcare programs such as
the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third-party payers that are false or fraudulent;
federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false
statements relating to healthcare matters;
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply
to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the
privacy and security of health information in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance efforts;
the Foreign Corrupt Practices Act, a United States law which regulates certain financial relationships with foreign
government officials (which could include, for example, certain medical professionals);
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federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and
activities that potentially harm consumers;
state and federal government price reporting laws that require us to calculate and report complex pricing metrics to
government programs, where such reported price may be used in the calculation of reimbursement and/or discounts on
our marketed drugs (participation in these programs and compliance with the applicable requirements may subject us
to potentially significant discounts on our products, increased infrastructure costs, and potentially limit our ability to
offer certain marketplace discounts); and
state and federal marketing expenditure tracking and reporting laws, which generally require certain types of
expenditures in the United States to be tracked and reported. Compliance with such requirements may require
investment in infrastructure to ensure that tracking is performed properly, and some of these laws result in the public
disclosure of various types of payments and relationships, which could potentially have a negative effect on our
business and/or increase enforcement scrutiny of our activities.
In addition, certain marketing practices, including off-label promotion, may also violate certain federal and state health
regulatory fraud and abuse laws as well as false claims laws, including the civil False Claims Act. Suits filed under the civil
False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such
individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or
settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical device and other healthcare
companies to defend a civil False Claims Act action. When an entity is determined to have violated the civil False Claims Act,
it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each
separate false claim.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations
that apply to us, we, or our officers or employees, may be subject to penalties, including administrative civil and criminal
penalties, damages, fines, withdrawal of regulatory approval, the curtailment or restructuring of our operations, the exclusion
from participation in Medicare, Medicaid and other federal and state healthcare programs, individual imprisonment, contractual
damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we
become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these
laws, any of which could adversely affect our ability to sell our products or operate our business and also adversely affect our
financial results. Defending against any such actions can be costly, time-consuming and may require significant financial and
personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us,
our business may be impaired.
Numerous federal and state laws, including state security breach notification laws, state health information privacy
laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other
countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition,
most healthcare providers who may be expected to prescribe our products and from whom we may obtain patient health
information are subject to privacy and security requirements under the federal Health Insurance Portability and Accountability
Act of 1996, or HIPAA. Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we
knowingly obtain individually identifiable health information from a HIPAA-covered entity in a manner that is not authorized
or permitted by HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there
has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including
recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or
increase our cost of doing business. International laws, such as the EU Data Privacy Directive and Swiss Federal Act on Data
Protection, regulate the processing of personal data within Europe and between European countries and the United States.
Failure to provide adequate privacy protections and maintain compliance with safe harbor mechanisms could jeopardize
business transactions across borders and result in significant penalties.
Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may negatively
affect our revenues and prospects for profitability.
A primary trend in the United States and some foreign countries is toward reform and cost containment in the health
care industry. The United States and some foreign jurisdictions are considering or have enacted a number of legislative and
regulatory proposals that may have the effect of reducing the prices that we are able to charge for products we or our
collaborators may develop. Healthcare reform measures which may be adopted in the future in the United States and foreign
jurisdictions may result in more rigorous coverage criteria and significant downward pressure on the prices drug manufacturers
may charge. As a result, our revenues and prospects for profitability could be significantly harmed.
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As a result of the overall trend towards cost-effectiveness criteria and managed healthcare in the United States, third-
party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of
new drugs. They may use tiered reimbursement and may adversely affect demand for products we or our collaborators may
develop by placing them in an expensive tier. They may also refuse to provide any coverage of uses of approved products for
medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists
as to whether and how much third-party payers will reimburse for newly approved drugs, which in turn will put pressure on the
pricing of drugs. Further, we do not have experience in ensuring approval by applicable third-party payers outside of the
United States for coverage and reimbursement of pharmaceutical products. We also anticipate pricing pressures in connection
with the sale of products we or our collaborators may develop due to the increasing influence of health maintenance
organizations and additional legislative proposals.
Pricing for pharmaceutical products has come under increasing scrutiny by governments, legislative bodies and enforcement
agencies. These activities may result in actions that have the effect of reducing our revenue or harming our business or
reputation.
Many companies in our industry have received a governmental request for documents and information relating to drug
pricing and patient support programs. We may become subject to similar requests, which would require us to incur significant
expense and result in distraction for our management team. Additionally, to the extent there are findings, or even allegations, of
improper conduct on the part of our company, such findings could further harm our business, reputation and/or prospects. It is
possible that such inquiries could result in negative publicity or other negative actions that could harm our reputation, changes
in our product pricing and distribution strategies, reduced demand for our approved products and/or reduced reimbursement of
approved products, including by federal health care programs such as Medicare and Medicaid and state health care programs.
Our competitors may develop products that impair the value of any products that we or our collaborators may develop.
The pharmaceutical and biotechnology industries are highly diversified and are characterized by rapid technological
change. We and our collaborators face, and will continue to face, intense competition from biotechnology and pharmaceutical
companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing
research and development activities similar to ours. In addition, significant delays in the development of our drug candidates
could allow our competitors to bring products to market before us, which would impair our or our collaborators’ ability to
commercialize our drug candidates. Any products that we or our collaborators develop will compete in highly competitive
markets. Further, our competitors may be more effective at using their technologies to develop commercial products. Many of
the organizations competing with us have greater capital resources, larger research and development staff and facilities, more
experience in obtaining regulatory approvals and more extensive product manufacturing and marketing capabilities. As a
result, our competitors may be able to more easily develop products that would render any products that we or our collaborators
develop obsolete and noncompetitive. For example, dapagliflozin, empagliflozin and canagliflozin are currently being
marketed by AstraZeneca, Boehringer Ingelheim and Eli Lilly, and Janssen (a subsidiary of Johnson & Johnson), respectively,
for the treatment of type 2 diabetes and certain other indications, such as heart failure, cardiovascular death, major adverse
cardiovascular events and end-stage kidney disease. Each of those products act through SGLT2, one of the targets of
sotagliflozin. In addition, there may be drug candidates of which we are not aware at an earlier stage of development that may
compete with our drug candidates.
We face business disruption and related risks resulting from the recent outbreak of the novel coronavirus 2019 (COVID-19),
which could have a material adverse effect on our business.
Our commercialization efforts and development programs could be disrupted and materially adversely affected by the
recent outbreak of COVID-19. As a result of measures imposed by the governments in affected regions, many commercial
activities, businesses and schools have been suspended as part of quarantines and other measures intended to contain this
outbreak. The spread of COVID-19 from China to other countries has resulted in the International Health Regulations
Emergency Committee of the World Health Organization declaring the outbreak of COVID-19 as a “public health emergency
of international concern,” and the World Health Organization characterizing COVID-19 as a pandemic. While the COVID-19
outbreak may still be in early stages, international stock markets have begun to reflect the uncertainty associated with the
potential economic impact of the outbreak and the significant declines in the Dow Industrial Average at the end of February and
in March 2020 has been largely attributed to the effects of COVID-19. We are still assessing the potential impact COVID-19
may have on our ability to effectively conduct our commercialization efforts and development programs and otherwise conduct
our business operations as planned, but there can be no assurance that we will be able to avoid part or all of any impact from the
spread of COVID-019 or its consequences, including downturns in business sentiment generally or in our industry and business
in particular.
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Risks Related to Our Capital Requirements and Financial Results
We will need additional capital in the future and, if it is unavailable, we will be forced to delay, reduce or eliminate our
commercialization efforts or product development programs. If additional capital is not available on reasonable terms, we will
be forced to obtain funds, if at all, by entering into financing agreements on unattractive terms.
As of December 31, 2019, we had $271.7 million in cash, cash equivalents and investments. We anticipate that our
existing capital resources and the cash and revenues we expect to derive from product revenues, collaborations and other
sources will enable us to fund our currently planned operations for at least the next 12 months. However, we caution you that
we may generate less cash and revenues or incur expenses more rapidly than we currently anticipate. Our currently planned
operations for the next twelve months include the continued commercialization of XERMELO in the United States and the
continued nonclinical and clinical development of telotristat ethyl, sotagliflozin, LX9211 and our other drug candidates.
Although difficult to accurately predict, the amount of our future capital requirements will be substantial and will
depend on many factors, including:
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the success of our sales, marketing, distribution and other commercialization activities for XERMELO in the United
States and the revenues we generate from such activities;
the success of Ipsen’s sales, marketing, distribution and other commercialization activities for XERMELO outside of
the United States and Japan and our receipt of any milestone payments and royalties;
our ability to obtain regulatory approval for the marketing and sale of sotagliflozin for type 1 diabetes in the United
States;
the timing, progress and results of our clinical trials of telotristat ethyl, sotagliflozin, LX9211 and our other drug
candidates and our ability to obtain necessary regulatory approvals based on such clinical trials;
our success in establishing new collaborations and licenses, including for the development and commercialization of
sotagliflozin;
the amount and timing of our research, development and commercialization expenditures;
the effect of competing programs and products, and of technological and market developments; and
the filing, maintenance, prosecution, defense and enforcement of patent claims and other intellectual property rights.
If our capital resources are insufficient to meet future capital requirements, we will need to raise additional funds to
continue our currently planned operations. Our ability to raise additional capital is dependent on a number of factors, including
the market demand for our securities, which itself is subject to a number of pharmaceutical development and business risks and
uncertainties, as well as uncertainty that we would be able to raise such additional capital at a price or on terms that are
favorable to us. If we raise additional capital by issuing equity securities, our then-existing stockholders will experience
dilution and the terms of any new equity securities may have preferences over our common stock. The affirmative and
restrictive covenants and the pledge of substantially all of our assets as collateral under our existing term loan with BioPharma
Credit PLC and BioPharma Credit Investments IV Sub LP, or the BioPharma Term Loan, restrict our ability to raise additional
capital by issuing debt securities. We cannot be certain that additional financing, whether debt or equity, will be available in
amounts or on terms acceptable to us, if at all. We may be unable to raise sufficient additional capital on reasonable terms, and
if so, we will be forced to delay, reduce or eliminate our clinical development programs or commercialization efforts or obtain
funds, if at all, by entering into financing agreements on unattractive terms.
We have a history of net losses, and we expect to continue to incur net losses and may not achieve or maintain profitability.
We have incurred net losses since our inception, including an aggregate net loss of $113.4 million for the three years
ended December 31, 2019. As of December 31, 2019, we had an accumulated deficit of $1.3 billion. Because of the numerous
risks and uncertainties associated with successfully developing and commercializing drug products, we are unable to predict the
extent of any future losses or whether or when we will become profitable, if at all. The size of our net losses will depend, in
part, on the rate of decline or growth in our revenues and on the amount of our expenses. We expect to continue to incur
significant expenses over the next several years as we expect to make significant investments in the commercialization of
XERMELO in the United States and the continued nonclinical and clinical development of telotristat ethyl, sotagliflozin,
LX9211 and our other drug candidates.
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Prior to the commercial launch of XERMELO, we derived substantially all of our revenues from strategic
collaborations and other research and development collaborations and technology licenses. Future revenues from our
commercialization of XERMELO are uncertain because they depend on a number of factors, including market acceptance of
XERMELO, the success of our sales, marketing, distribution and other commercialization activities and the cost and availability
of reimbursement for XERMELO. Future revenues from our existing collaborations are uncertain because they depend, to a
large degree, on the achievement of milestones and payment of royalties we earn from any products developed or
commercialized under the collaborations. Our ability to secure future revenue-generating agreements will depend upon our
ability to address the needs of our potential future collaborators and licensees, and to negotiate agreements that we believe are
in our long-term best interests. We may determine that our interests are better served by retaining rights to our discoveries and
advancing our therapeutic programs to a later stage, which could limit our near-term revenues and increase expenses. Because
of these and other factors, our operating results have fluctuated in the past and are likely to do so in the future, and we do not
believe that period-to-period comparisons of our operating results are a good indication of our future performance.
We expect to spend significant amounts to fund our commercialization activities with respect to XERMELO in the
United States and our planned nonclinical and clinical development of telotristat ethyl, sotagliflozin, LX9211 and our other
drug candidates. As a result, we will need to generate substantial additional revenues to achieve profitability in future
periods. Even if we do achieve profitability in future periods, we may not be able to sustain or increase such profitability on a
quarterly or annual basis.
Our operating results have been and likely will continue to fluctuate, and we believe that period-to-period comparisons of our
operating results are not a good indication of our future performance.
Our operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of
which we cannot control, could subject our operating results to volatility, including:
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our ability to successfully commercialize XERMELO in the United States and the amount of revenues generated from
such commercialization efforts;
our ability to obtain regulatory approval of sotagliflozin for type 1 diabetes in the United States;
the success of our ongoing nonclinical and clinical development efforts;
the timing and amount of expenses incurred with respect to our nonclinical and clinical development and
commercialization efforts;
our success in establishing new collaborations and technology licenses, including for the development and
commercialization of sotagliflozin, and the timing and financial terms of such arrangements;
the success rate of our development efforts leading to opportunities for new collaborations and licenses, as well as
milestone payments and royalties;
the timing and willingness of our collaborators to commercialize pharmaceutical products that would result in
milestone payments and royalties;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our products and technologies;
general and industry-specific economic conditions, which may affect our and our collaborators’ research and
development expenditures.
Because of these and other factors, including the risks and uncertainties described in this section, our operating results
have fluctuated in the past and are likely to do so in the future. Due to the likelihood of fluctuations in our revenues and
expenses, we believe that period-to-period comparisons of our operating results are not a good indication of our future
performance.
We have substantial indebtedness that may limit cash flow available to invest in the ongoing needs of our business.
We have incurred $245.2 million of indebtedness. Although the affirmative and restrictive covenants and the pledge
of substantially all of our assets as collateral under the BioPharma Term Loan restrict our ability to obtain additional debt
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financing, we could in the future incur additional indebtedness beyond such amount. Our substantial debt combined with our
other financial obligations and contractual commitments could have significant adverse consequences, including:
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requiring us to dedicate a substantial portion of cash flow from operations to the payment of interest on, and principal
of, our debt, which will reduce the amounts available to fund working capital, capital expenditures, product
commercialization and development efforts and other general corporate purposes;
increasing our vulnerability to adverse changes in general economic, industry and market conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete;
and
placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing
options.
We intend to satisfy our current and future debt service obligations with our existing cash and cash equivalents and
marketable securities and funds from external sources. However, we may not have sufficient funds or may be unable to arrange
for additional financing to pay the amounts due under our existing debt. Funds from external sources may not be available on
acceptable terms, if at all. In addition, a failure to comply with the covenants under our existing debt instruments could result in
an event of default under those instruments. In the event of an acceleration of amounts due under our debt instruments as a
result of an event of default, including upon the occurrence of an event that would reasonably be expected to have a material
adverse effect on our business, operations, properties, assets or condition or a failure to pay any amount due, we may not have
sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated
payments, and the lenders could seek to enforce their security interests in the collateral securing such indebtedness.
If we do not effectively manage our affirmative and restrictive covenants under the BioPharma Term Loan, our financial
condition and results of operations could be adversely affected.
Our obligations under the BioPharma Term Loan are secured by a first lien security interest in substantially all of our
assets. In addition, the BioPharma Term Loan requires that we comply with certain affirmative and restrictive covenants,
including among other things, covenants restricting dispositions, fundamental changes in our business, mergers or acquisitions,
indebtedness, encumbrances, distributions, investments, transactions with affiliates and subordinated debt, any of which could
restrict our business and operations, particularly our ability to respond to changes in our business or to take specified actions to
take advantage of certain business opportunities that may be presented to us. Our failure to comply with any of these covenants
could result in a default under the BioPharma Term Loan, which could permit the lenders to declare all or part of any
outstanding borrowings to be immediately due and payable. If we are unable to repay those amounts, the lenders could enforce
the security interest granted to them to secure that debt, which would seriously harm our business.
Risks Related to Our Relationships with Third Parties
We are significantly dependent upon our collaborations with Ipsen and other pharmaceutical and biotechnology companies. If
pharmaceutical products are not successfully and timely developed and commercialized under our collaborations, our
opportunities to generate revenues from milestones and royalties will be greatly reduced.
We have entered into a collaboration agreement with Ipsen for the commercialization of XERMELO outside of the
United States and Japan. We have also established collaborative arrangements with other pharmaceutical and biotechnology
companies with respect to the research, development and commercialization of drug candidates from other programs. We have
derived a substantial majority of our revenues to date from these strategic collaborations and other research and development
collaborations and technology licenses. Future revenues from our existing collaborations depend upon the achievement of
milestones and payment of royalties we earn from any future products developed under the collaborations. If our relationship
terminates with any of our collaborators, as occurred with our terminated collaboration agreement with Sanofi, our reputation in
the business and scientific community may suffer and revenues will be negatively impacted to the extent such losses are not
offset by additional collaboration agreements. If milestones are not achieved under our collaborations or our collaborators are
unable to successfully develop and commercialize products from which milestones and royalties are payable, we will not earn
the revenues contemplated by those collaborations.
We have limited or no control over the resources that any collaborator may devote to the development and
commercialization of products under our alliances. Any of our present or future collaborators may not perform their obligations
as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct research,
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development or commercialization activities successfully or in a timely manner. Further, our collaborators may elect not to
develop pharmaceutical products arising out of our collaborative arrangements or may not devote sufficient resources to the
development, regulatory approval, manufacture, marketing or sale of these products. If any of these events occurs, we may not
receive collaboration revenue or otherwise realize anticipated benefits from such collaborations, our product development
efforts may be delayed and our business, operating results and financial condition could be adversely affected.
Conflicts with our collaborators could jeopardize the success of our collaborative agreements and harm our product
development efforts.
We may pursue opportunities in specific disease and therapeutic modality fields that could result in conflicts with our
collaborators, if any of our collaborators takes the position that our internal activities overlap with those activities that are
exclusive to our collaboration. Moreover, disagreements could arise with our collaborators over rights to our intellectual
property or our rights to share in any of the future revenues of compounds or therapeutic approaches developed by our
collaborators. Any conflict with or among our collaborators could result in the termination of our collaborative agreements,
delay collaborative research or development activities, impair our ability to renew or obtain future collaborative agreements or
lead to costly and time consuming litigation. Conflicts with our collaborators could also have a negative impact on our
relationship with existing collaborators, materially impairing our business and revenues. Some of our collaborators are also
potential competitors or may become competitors in the future. Our collaborators could develop competing products, preclude
us from entering into collaborations with their competitors or terminate their agreements with us prematurely. Any of these
events could harm our product development efforts.
We depend on third-party manufacturers, including sole source suppliers, to manufacture commercial quantities of XERMELO.
We may not be able to maintain these relationships and could experience supply disruptions outside of our control.
We rely on a network of third-party manufacturers to manufacture and supply XERMELO for commercial sale. As a
result of our reliance on these third-party manufacturers and suppliers, including sole source suppliers for certain steps in the
manufacture of XERMELO, we could be subject to significant supply disruptions. Our supply chain for sourcing raw materials
and manufacturing drug product ready for distribution is a multi-step endeavor. Third-party contract manufacturers procure
raw materials, convert these raw materials into API, and then convert the API into final dosage form. Establishing and
managing this supply chain requires a significant financial commitment and the creation and maintenance of numerous third
party contractual relationships. Although we attempt to effectively manage the business relationships with companies in our
supply chain, we do not have control over their operations.
We require our own commercial supply of XERMELO for sale in the United States, and are required under our
collaboration agreement to supply Ipsen’s commercial requirements of XERMELO in the European Union and other territories
outside of the United States and Japan. We currently rely, and expect to continue to rely, on sole source third-party
manufacturers to produce final drug product and package and label XERMELO. While we have identified and expect to
qualify and engage back-up third-party manufacturers as additional or alternative suppliers for the production of final drug
product and packaging and labeling of XERMELO, we currently do not have such arrangements in place. Moreover, some of
these alternative manufacturers will need to be approved by the FDA before we can use them for manufacturing XERMELO. It
is also possible that supplies of materials that cannot be second-sourced can be managed with inventory planning. There can be
no assurance, however, that failure of any of our sole source third-party manufacturers to meet our and Ipsen’s commercial
demands for XERMELO in a timely manner, or our failure to engage qualified additional or back-up suppliers for the
production of final drug product and packaging and labeling of XERMELO, would not have a material adverse effect on
commercialization of XERMELO and our business.
Supply disruptions may result from a number of factors, including shortages in product raw materials, labor or
technical difficulties, regulatory inspections or restrictions, shipping or customs delays or any other performance failure by any
third-party manufacturer on which we rely. Any supply disruptions could disrupt sales of XERMELO, which could have a
material adverse impact on our business.
We rely on a single third-party logistics provider and a limited distribution network of specialty pharmacies and specialty
distributors for distribution of XERMELO in fulfillment of prescriptions in the United States, and their failure to distribute
XERMELO effectively would adversely affect sales of XERMELO.
We rely on a single third-party logistics provider for shipping and warehousing of our commercial supply of
XERMELO and a limited distribution network of specialty pharmacies and specialty distributors for dispensation of
XERMELO to patients in fulfillment of prescriptions in the United States. Although our third-party logistics provider stores
our commercial supply of XERMELO at two separate warehouses, the use of a single third-party logistics provider increases
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the risk that a fire or damage from another type of disaster at either of the warehouses may result in a disruption of our
commercialization efforts. Our use of a limited distribution network of specialty pharmacies and specialty distributors for
dispensation of XERMELO involves certain additional risks, including, but not limited to, risks that these specialty pharmacies
and specialty distributors will:
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not provide us accurate or timely information regarding their inventories, the number of patients who are using
XERMELO or complaints about XERMELO;
reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support XERMELO;
not devote the resources necessary to sell XERMELO in the volumes and within the time frames that we expect;
be unable to satisfy their financial obligations to us; or
cease operations.
If our third-party logistics provider or any of our specialty pharmacies or specialty distributors do not fulfill their
contractual obligations to us, or refuse or fail to adequately distribute XERMELO and serve patients, or the agreements are
terminated without adequate notice, shipments of XERMELO, and associated revenues, would be adversely affected. In
addition, we expect that it may take a significant amount of time if we were required to change our third-party logistics provider
or any of our specialty pharmacies or specialty distributors.
We rely on third parties to carry out drug development activities.
We rely on clinical research organizations and other third-party contractors to carry out many of our drug development
activities, including the performance of nonclinical laboratory and animal tests under the FDA’s current Good Laboratory
Practices regulations and the conduct of clinical trials of our drug candidates in accordance with protocols we establish. If these
third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, our drug
development activities may be delayed, suspended or terminated. Such a failure by these third parties could significantly impair
our ability to develop and commercialize the affected drug candidates.
We lack the capability to manufacture materials for nonclinical studies, clinical trials or commercial sales and rely on third
parties to manufacture our drug candidates, which may harm or delay our product development and commercialization efforts.
We currently do not have the manufacturing capabilities or experience necessary to produce materials for nonclinical
studies, clinical trials or commercial sales and intend in the future to continue to rely on collaborators and third-party
contractors to produce such materials. We will rely on selected manufacturers to deliver materials on a timely basis and to
comply with applicable regulatory requirements, including the current Good Manufacturing Practices of the FDA, which relate
to manufacturing and quality control activities. These manufacturers may not be able to produce material on a timely basis or
manufacture material at the quality level or in the quantity required to meet our development timelines and applicable
regulatory requirements. In addition, there are a limited number of manufacturers that operate under the FDA’s current Good
Manufacturing Practices and that are capable of producing such materials, and we may experience difficulty finding
manufacturers with adequate capacity for our needs. If we are unable to contract for the production of sufficient quantity and
quality of materials on acceptable terms, our product development and commercialization efforts may be delayed. Moreover,
noncompliance with the FDA’s current Good Manufacturing Practices can result in, among other things, fines, injunctions, civil
and criminal penalties, product recalls or seizures, suspension of production, failure to obtain marketing approval and
withdrawal, suspension or revocation of marketing approvals.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our intellectual property, third parties may be able to use our products and technologies,
which could adversely affect our ability to compete in the market.
Our success will depend in part upon our ability to obtain patents and maintain adequate protection of the intellectual
property related to our products and technologies. The patent positions of biotechnology and pharmaceutical companies,
including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to
protect our intellectual property rights from unauthorized use by third parties only to the extent that our products and
technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will continue to
apply for patents covering our products and technologies as, where and when we deem appropriate. However, pending patent
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applications do not provide protection against competitors because they are not enforceable until they issue as patents. Further,
the disclosures contained in our current and future patent applications may not be sufficient to meet statutory requirements for
patentability and our applications may fail to result in issued patents. Once issued, patents still may not provide commercially
meaningful protection. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others
from developing competing products and technologies. Furthermore, others may independently develop similar or alternative
products or technologies or design around our patents. If anyone infringes upon our or our collaborators’ patent rights,
enforcing these rights may be difficult, costly and time-consuming and, as a result, it may not be cost-effective or otherwise
expedient to pursue litigation to enforce those patent rights.
Our patents may be challenged by third parties as invalid or unenforceable under U.S. or foreign laws, or they may be
infringed by third parties. As a result, we may be involved in the defense and enforcement of our patent or other intellectual
property rights in a court of law, U.S. Patent and Trademark Office inter partes review or reexamination proceeding, foreign
opposition proceeding or related legal and administrative proceeding in the United States and elsewhere. The costs of
defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings and litigation may be
substantial and the outcome can be uncertain. An adverse outcome may allow third parties to use our intellectual property
without a license and negatively impact our business.
In addition, because patent applications can take many years to issue, third parties may have pending applications,
unknown to us, which may later result in issued patents that cover the production, manufacture, commercialization or use of our
products and drug candidates. If any such patents are issued to other entities, we will be unable to obtain patent protection for
the same or similar discoveries that we make relating to our products and drug candidates. Moreover, we may be blocked from
using our drug targets or drug candidates or developing or commercializing our products and other drug candidates, or may be
required to obtain a license that may not be available on reasonable terms, if at all. Further, others may discover uses for our
drug targets and drug candidates other than those covered in our issued or pending patents, and these other uses may be
separately patentable. Even if we have a patent claim on a particular technology or product, the holder of a patent covering the
use of that technology or product could exclude us from selling a product that is based on the same use of that product.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the
United States, and many companies have encountered significant problems in protecting and defending such rights in foreign
jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to third parties (for example, if the patent owner has failed to “work” the invention in
that country or the third party has patented improvements). In addition, many countries limit the enforceability of patents
against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which
could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly
popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be
extended to include some of our products and drug candidates, which could limit our potential revenue
opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the
aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement.
We rely on trade secret protection for some of our confidential and proprietary information. We have taken security
measures to protect our proprietary information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering into confidentiality agreements with employees,
collaborators and consultants, we cannot assure you that our proprietary information will not be disclosed, or that we can
meaningfully protect our trade secrets. In addition, our competitors may independently develop substantially equivalent
proprietary information or may otherwise gain access to our trade secrets.
We may be involved in patent litigation and other disputes regarding intellectual property rights and may require licenses from
third parties for our planned nonclinical and clinical development and commercialization activities. We may not prevail in any
such litigation or other dispute or be able to obtain required licenses.
Our products and those of our collaborators, as well as our nonclinical and clinical development efforts, may give rise
to claims that they infringe the patents of others. We are aware that other companies and institutions are developing products
acting through the same drug targets through which some of our drug candidates currently in clinical development act, have
conducted research on many of the same targets that we have identified and have filed patent applications potentially covering
drug targets that we have identified and certain therapeutic products addressing such targets. In some cases, patents have issued
from these applications. In addition, many companies and institutions have well-established patent portfolios directed to
common techniques, methods and means of developing, producing and manufacturing pharmaceutical products. These or other
companies or institutions could bring legal actions against us or our collaborators for damages or to stop us or our collaborators
from engaging in certain nonclinical or clinical development activities or from manufacturing and marketing therapeutic
products that allegedly infringe their patent rights. If any of these actions are successful, in addition to our potential liability for
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damages, these entities would likely require us or our collaborators to obtain a license in order to continue engaging in the
infringing activities or to manufacture or market the infringing therapeutic products or may force us to terminate such activities
or manufacturing and marketing efforts.
We may deem it advisable to pursue litigation against others to enforce our patents and intellectual property rights and
may be the subject of litigation brought by third parties to enforce their patent and intellectual property rights. In addition, we
may become involved in litigation based on intellectual property indemnification undertakings that we have given to certain of
our collaborators. Patent litigation is expensive and requires substantial amounts of management attention. The eventual
outcome of any such litigation is uncertain and involves substantial risks.
We believe that there will continue to be significant litigation in our industry regarding patent and other intellectual
property rights. We have expended and many of our competitors have expended and are continuing to expend significant
amounts of time, money and management resources on intellectual property litigation. If we become involved in future
intellectual property litigation, it could consume a substantial portion of our resources and could negatively affect our results of
operations.
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause
significant damage to our business and reputation.
In the ordinary course of our business, we collect, maintain and transmit sensitive data on our networks and systems,
including our intellectual property and proprietary or confidential business information (such as research data and personal
information) and confidential information with respect to our customers, clinical trial patients and our business partners. We
have also outsourced significant elements of our information technology infrastructure and, as a result, third parties may or
could have access to our confidential information. The secure maintenance of this information is critical to our business and
reputation. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and
other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an
individual hacker to a state-sponsored attack and motive (including corporate espionage). Cyber threats may be generic, or they
may be custom-crafted against our information systems. Our network and storage applications and those of our vendors may be
subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often
difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and
any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property
and expose sensitive business information. A data security breach could also lead to public exposure of personal information of
our clinical trial patients, customers and others. Cyber-attacks could cause us to incur significant remediation costs, result in
product development delays, disrupt key business operations and divert attention of management and key information
technology resources. Our network security and data recovery measures and those of our vendors may not be adequate to
protect against such security breaches and disruptions. These incidents could also subject us to liability, expose us to
significant expense and cause significant harm to our reputation and business.
We may be subject to damages resulting from claims that we, our employees or independent contractors have wrongfully used
or disclosed alleged trade secrets of their former employers.
Many of our employees and independent contractors were previously employed at universities or other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these
employees, independent contractors or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful
in defending against these claims, litigation could result in substantial costs and divert management’s attention. If we fail in
defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A
loss of key research personnel and/or their work product could hamper or prevent our ability to commercialize certain drug
candidates, which could severely harm our business.
Risks Related to Employees and Facilities Operations
If we are unable to manage our growth, our business, financial condition, results of operations and prospects may be adversely
affected.
We have experienced and may continue to experience growth in the number of our employees and in the scope of our
operations. This growth places significant demands on our management, operational and financial resources, and our current
and planned personnel, systems, procedures and controls may not be adequate to support our growth. To effectively manage
our potential growth, we must continue to improve existing, and implement new, operational and financial systems, procedures
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and controls and must expand, train and manage our growing employee base, and there can be no assurance that we will
effectively manage our growth without experiencing operating inefficiencies or control deficiencies. We may need to increase
our medical, clinical, commercial and other personnel, and recruiting and retaining qualified individuals is difficult. If we are
unable to manage our growth effectively, or are unsuccessful in recruiting qualified personnel when advisable, our business,
financial condition, results of operations and prospects may be adversely affected.
The loss of key personnel or the inability to attract and retain additional personnel could impair our ability to operate and
expand our operations.
We are highly dependent upon the principal members of our management, as well as medical, clinical and commercial
staff, the loss of whose services might adversely impact the achievement of our objectives. Retaining and, where advisable,
recruiting qualified medical, clinical and commercial personnel are critical to support activities related to successfully executing
on our commercial plan for XERMELO and advancing our nonclinical and clinical development programs for telotristat ethyl,
sotagliflozin, LX9211 and our other drug candidates. Competition is intense for experienced medical, clinical and commercial
personnel, and we may be unable to retain or recruit such personnel with the expertise or experience necessary to allow us to
successfully develop and commercialize our products. Further, all of our employees are employed “at will” and, therefore, may
leave our employment at any time.
Facility security breaches may disrupt our operations, subject us to liability and harm our operating results.
Any break-in or trespass of our facilities that results in the misappropriation, theft, sabotage or any other type of
security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in
damage to our equipment and assets could subject us to liability and have a material adverse impact on our business, operating
results and financial condition.
Our facilities are located near coastal zones, and the occurrence of a hurricane or other disaster could damage our facilities
and equipment, which could harm our operations.
Our facilities are located in The Woodlands, Texas and Basking Ridge, New Jersey, and therefore our facilities are
vulnerable to damage from hurricanes. We are also vulnerable to damage from other types of disasters, including fire, floods,
power loss, communications failures, terrorism and similar events and any insurance we may maintain may not be adequate to
cover our losses. If any disaster were to occur, our ability to operate our business at our facilities could be seriously, or
potentially completely, impaired.
Risks Related to Environmental and Product Liability
We have used hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper
handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes have historically involved the controlled use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations have produced hazardous waste products. We
cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state
and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may
face liability for any injury or contamination that results from our use or the use by third parties of these materials, and such
liability may exceed our insurance coverage and our total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our research, development and production efforts.
In addition, our collaborators may use hazardous materials in connection with our collaborative efforts. In the event of
a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release
of, these hazardous materials used by these parties. Further, we may be required to indemnify our collaborators against all
damages and other liabilities arising out of our development activities or products produced in connection with these
collaborations.
Our business has a substantial risk of product liability and we face potential product liability exposure far in excess of our
limited insurance coverage.
We may be held liable if any product that we or our collaborators develop or commercialize, or any product that is
made with the use or incorporation of any of our technologies, causes injury or is found otherwise unsuitable during product
testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, product liability claims could result in
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decreased demand for our products and product candidates, injury to our reputation, withdrawal of patients from our clinical
trials, product recall, substantial monetary awards to third parties and the inability to commercialize any products that we may
develop. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling
or testing our products. We have obtained limited product liability insurance coverage for our clinical trials and commercial
activities. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we
may suffer. Moreover, if insurance coverage becomes more expensive, we may not be able to maintain insurance coverage at a
reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, juries have awarded large
judgments in class action lawsuits for claims based on drugs that had unanticipated side effects. In addition, the pharmaceutical
and biotechnology industries, in general, have been subject to significant medical malpractice litigation. A successful product
liability claim or series of claims brought against us could harm our reputation and business.
Risks Related to Our Common Stock
Invus, L.P., Invus C.V. and their affiliates own a controlling interest in our outstanding common stock and may have interests
which conflict with those of our other stockholders.
Invus, L.P. and Invus C.V., which we collectively refer to as Invus, and their affiliates currently own approximately
60.8% of the outstanding shares of our common stock and are thereby able to control the election and removal of our directors
and determine our corporate and management policies, including potential mergers or acquisitions, asset sales, the amendment
of our articles of incorporation or bylaws and other significant corporate transactions. This concentration of ownership may
delay or deter possible changes in control of our company, which may reduce the value of an investment in our common stock.
The interests of Invus and its affiliates may not be aligned with the interests of other holders of our common stock.
Invus has additional rights under our stockholders’ agreement with Invus, L.P. relating to the membership of our board of
directors, which provides Invus with substantial influence over significant corporate matters.
Under our stockholders’ agreement with Invus, L.P., Invus has the right to designate a number of directors equal to the
percentage of all the outstanding shares of our common stock owned by Invus and its affiliates, rounded up to the nearest whole
number of directors. Invus has designated three of the nine current members of our board of directors. While Invus has not
presently exercised its director designation rights in full, it may exercise them at any time in the future in its sole discretion. To
facilitate the exercise of such rights, we have agreed, upon written request from Invus, to take all necessary steps in accordance
with our obligations under the stockholders’ agreement to (1) increase the number of directors to the number specified by Invus
(which number shall be no greater than reasonably necessary for the exercise of Invus’ director designation rights under the
stockholders’ agreement) and (2) cause the appointment to the newly created directorships of directors so designated by Invus
pursuant to its rights under the stockholders’ agreement.
Invus also has the right to require proportionate representation of Invus-appointed directors on the audit, compensation
and corporate governance committees of our board of directors, subject to certain restrictions. Invus-designated directors
currently serve as one of the three members of each of the compensation committee and the corporate governance committee of
our board of directors. No Invus-designated directors currently serve on the audit committee of our board of directors.
The provisions of the stockholders’ agreement relating to Invus’ rights to designate members of our board of directors
and its audit, compensation and corporate governance committees will terminate if the percentage of all the outstanding shares
of our common stock owned by Invus and its affiliates falls below 10%. Invus also has the right to terminate these provisions at
any time in its discretion.
Our stock price may be extremely volatile.
The trading price of our common stock has been highly volatile, and we believe the trading price of our common stock
will remain highly volatile and may fluctuate substantially due to factors such as the following, many of which we cannot
control:
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the commercial success of XERMELO and the revenues we generate from sales of XERMELO;
results or delays in our or our collaborators’ clinical trials;
the announcement of FDA approval or non-approval, or delays in the FDA review process, of our or our collaborators’
drug candidates or those of our competitors or actions taken by regulatory agencies with respect to our, our
collaborators’ or our competitors’ clinical trials;
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actions taken by regulatory agencies with respect to XERMELO, sotagliflozin, LX9211 and our other drug candidates;
the announcement of new products by our competitors;
quarterly variations in our or our competitors’ results of operations;
developments in our relationships with our collaborators, including conflicts, litigation or the termination or
modification of our agreements;
the announcement of an in-licensed drug candidate or strategic acquisition;
litigation, including intellectual property infringement and product liability lawsuits, involving us;
failure to achieve operating results projected by securities analysts;
changes in earnings estimates or recommendations by securities analysts;
the satisfaction of outstanding debt obligations or entry into new financing arrangements;
developments in the biotechnology or pharmaceutical industry;
sales of large blocks of our common stock or sales of our common stock by our executive officers, directors and
significant stockholders;
departures of key personnel or board members;
FDA or international regulatory actions;
third-party coverage and reimbursement policies;
disposition of any of our drug programs or other technologies; and
other factors, including general market, economic and political conditions and other factors unrelated to our operating
performance or the operating performance of our competitors.
These factors may materially adversely affect the market price of our common stock. In addition, the stock markets in
general, and the markets for biotechnology and pharmaceutical stocks in particular, have historically experienced significant
volatility that has often been unrelated or disproportionate to the operating performance of particular companies. For example,
negative publicity regarding drug pricing and price increases by pharmaceutical companies has negatively impacted, and may
continue to negatively impact, the markets for biotechnology and pharmaceutical stocks. Likewise, the broader financial
markets could experience significant volatility that could also negatively impact the markets for biotechnology and
pharmaceutical stocks. These broad market fluctuations have adversely affected and may in the future adversely affect the
trading price of our common stock. Excessive volatility may continue for an extended period of time.
In the past, following periods of volatility in the market price of a company’s securities, securities class action
litigation has often been instituted. A securities class action suit against us, such as the securities litigation which is currently
pending, could result in substantial costs and divert management’s attention and resources, which could have a material and
adverse effect on our business.
We are subject to securities litigation, which is expensive and could divert management attention.
Companies that have experienced volatility in the market price of their stock have been subject to securities class action
litigation and we are currently a target of this type of litigation. On January 28, 2019, a purported securities class action
complaint captioned Daniel Manopla v. Lexicon Pharmaceuticals, Inc., Lonnel Coats, Jeffrey L. Wade and Pablo Lapuerta,
M.D. was filed against us, and certain of our officers in the U.S. District Court for the Southern District of Texas, Houston
Division. A first amended complaint was filed on July 30, 2019 and we filed a motion to dismiss such first amended complaint
on September 30, 2019. The plaintiff filed an opposition to our motion to dismiss on November 14, 2019 and we filed a reply in
support of our motion to dismiss on December 13, 2019. The lawsuit purports to be a class action brought on behalf of
purchasers of our securities during the period from March 11, 2016 through January 17, 2019. The complaint alleges that the
defendants violated federal securities laws by making materially false and misleading statements and/or omissions concerning
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data from our Phase 3 clinical trials of sotagliflozin in type 1 diabetes patients and the prospects of FDA approval of
sotagliflozin for the treatment of type 1 diabetes. The complaint purports to assert claims for violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks, on behalf of the
purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other
relief. This case, and other litigation of this type, could result in substantial costs and diversion of management’s attention and
resources, which could adversely impact our business. Any adverse determination in litigation could also subject us to
significant liabilities.
Future sales of our common stock, or the perception that such sales may occur, may depress our stock price.
A substantial number of shares of our common stock is reserved for issuance upon conversion of notes evidencing our
current indebtedness, upon the exercise of stock options and upon vesting of restricted stock units. If our stockholders sell
substantial amounts of our common stock (including shares issued upon the conversion of notes, exercise of stock options or
vesting of restricted stock units) in the public market, or if the market perceives that such sales may occur, the market price of
our common stock could fall and it may become more difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. For example, following an acquisition, a significant number of shares of our common
stock held by new stockholders may become freely tradable or holders of registration rights could cause us to register their
shares for resale. Sales of these shares of common stock held by existing stockholders could cause the market price of our
common stock to decline.
Conversion of our 5.25% Convertible Senior Notes due 2021 may dilute the ownership interest of our existing stockholders,
including holders who had previously converted their notes, or may otherwise depress the price of our common stock.
The conversion of some or all of our 5.25% Convertible Senior Notes due 2021 will dilute the ownership interests of
existing stockholders to the extent we deliver shares upon conversion of any of the notes. Any sales in the public market of the
common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In
addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes
could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress
the price of our common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry
analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish
inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts
cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which
might cause our stock price and trading volume to decline.
We may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize
anticipated benefits.
We may acquire additional businesses, technologies and products if we determine that these businesses, technologies
and products complement our existing technology or otherwise serve our strategic goals. If we do undertake any transactions of
this sort, the process of integrating an acquired business, technology or product may result in operating difficulties and
expenditures and may not be achieved in a timely and non-disruptive manner, if at all, and may absorb significant management
attention that would otherwise be available for ongoing development of our business. If we fail to integrate acquired
businesses, technologies or products effectively or if key employees of an acquired business leave, the anticipated benefits of
the acquisition would be jeopardized. Moreover, we may never realize the anticipated benefits of any acquisition, such as
increased revenues and earnings or enhanced business synergies. Future acquisitions could result in potentially dilutive
issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to
intangible assets, which could materially impair our results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
34
Item 2. Properties
We currently own approximately 260,000 square feet of space for our corporate offices and laboratories in buildings
located in The Woodlands, Texas, a suburb of Houston, Texas, and lease approximately 25,000 square feet of office space in
Basking Ridge, New Jersey.
In August 2018, our subsidiary Lex-Gen Woodlands, L.P. entered into a term loan and security agreement refinancing
the previously existing mortgage on our facilities in The Woodlands, Texas. The loan agreement provides for a $12.9 million
mortgage on the property and has a two-year term with a 10-year amortization. The mortgage loan bears interest at a rate per
annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5% and (b) 7.5% and provides for a balloon payment of $10.3
million due in August 2020. The mortgage debt, net of issuance costs, was $11.0 million as of December 31, 2019.
In January 2020, Lex-Gen Woodlands, L.P. entered into a real estate purchase and sale agreement under which we
agreed to sell our facilities in The Woodlands, Texas for a purchase price of $15.0 million. Such sale is subject to normal and
customary closing conditions, including a study period, which extends until April 9, 2020, during which the purchaser may
conduct inspections, analyses and other studies of the property and may terminate the agreement in its discretion. Such sale is
also subject to the negotiation and execution by the parties of a leaseback agreement for a period of up to six months with
respect to a portion of the property concurrently with closing.
In March 2015, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc. leased a 25,000 square-foot office space in
Basking Ridge, New Jersey. The term of the lease extends from June 1, 2015 through December 31, 2022, and provides for
escalating yearly base rent payments starting at $482,000 and increasing to $646,000 in the final year of the lease.
We believe that our facilities are well-maintained, in good operating condition and acceptable for our current
operations.
Item 3. Legal Proceedings
On January 28, 2019, a purported securities class action complaint captioned Daniel Manopla v. Lexicon
Pharmaceuticals, Inc., Lonnel Coats, Jeffrey L. Wade and Pablo Lapuerta, M.D. was filed against us and certain of our officers
in the U.S. District Court for the Southern District of Texas, Houston Division. A first amended complaint was filed on July 30,
2019 and we filed a motion to dismiss such first amended complaint on September 30, 2019. The plaintiff filed an opposition to
our motion to dismiss on November 14, 2019 and we filed a reply in support of our motion to dismiss on December 13, 2019.
The lawsuit purports to be a class action brought on behalf of purchasers of our securities during the period from March 11,
2016 through July 29, 2019. The complaint alleges that the defendants violated federal securities laws by making materially
false and misleading statements and/or omissions concerning data from our Phase 3 clinical trials of sotagliflozin in type 1
diabetes patients and the prospects of FDA approval of sotagliflozin for the treatment of type 1 diabetes. The complaint
purports to assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The complaint seeks, on behalf of the purported class, an unspecified amount of monetary damages,
interest, fees and expenses of attorneys and experts, and other relief.
In addition, we are from time to time party to claims and legal proceedings that arise in the normal course of our
business and that we believe will not have, individually or in the aggregate, a material adverse effect on our results of
operations, financial condition or liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on The Nasdaq Global Select Market under the symbol “LXRX.” As of March 6, 2020,
there were approximately 359 holders of record of our common stock.
We have never paid cash dividends on our common stock. We anticipate that we will retain all of our future earnings,
if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable
future.
Performance Graph
The following performance graph compares the performance of our common stock to the Nasdaq Composite Index and
the Nasdaq Biotechnology Index for the period beginning December 31, 2014 and ending December 31, 2019. The graph
assumes that the value of the investment in our common stock and each index was $100 at December 31, 2014, and that all
dividends were reinvested.
Lexicon Pharmaceuticals, Inc.
Nasdaq Composite Index
Nasdaq Biotechnology Index
December 31,
2014
2015
2016
2017
2018
2019
100
100
100
209
106
111
217
114
87
155
146
106
104
140
96
65
189
119
The foregoing stock price performance comparisons shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by
reference by any general statement incorporating by reference this annual report on Form 10-K into any filing under the
Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate such
comparisons by reference.
36
Period EndingIndex ValueLexicon Pharmaceuticals, Inc.NASDAQ CompositeNasdaq Biotechnology Index201420152016201720182019406080100120140160180200220
Item 6. Selected Financial Data
The statements of comprehensive income (loss) data for the years ended December 31, 2019, 2018 and 2017 and the
balance sheet data as of December 31, 2019 and 2018 have been derived from our audited financial statements included
elsewhere in this annual report on Form 10-K. The statements of comprehensive income (loss) data for the years ended
December 31, 2016 and 2015, and the balance sheet data as of December 31, 2017, 2016 and 2015 have been derived from our
audited financial statements not included in this annual report on Form 10-K. Our historical results are not necessarily
indicative of results to be expected for any future period. The data presented below has been derived from financial statements
that have been prepared in accordance with accounting principles generally accepted in the United States and should be read
with our financial statements, including the notes, and with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this annual report on Form 10-K.
Statements of Comprehensive Income (Loss) Data:
(in thousands, except per share data)
Revenues
$
322,073
$
63,209
$
91,689
$
79,256
$
130,014
Year Ended December 31,
2019
2018
2017
2016
2015
Operating expenses:
Cost of sales (including finite-lived intangible asset
amortization)
Research and development, including stock-based
compensation of $7,096 in 2019, $6,010 in 2018, $4,905 in
2017, $3,938 in 2016 and $3,693 in 2015
Increase (decrease) in fair value of Symphony Icon, Inc.
purchase liability
Selling, general and administrative, including stock-based
compensation of $7,122 in 2019, $5,686 in 2018, $4,567 in
2017, $3,514 in 2016 and $3,150 in 2015
Impairment loss
Total operating expenses
Income (loss) from operations
Interest and other income (expense), net
Net income (loss) before taxes
Income tax benefit
Net income (loss)
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Shares used in computing net income (loss) per common share,
basic
Shares used in computing net income (loss) per common share,
diluted
3,231
2,491
1,899
—
—
91,924
100,243
152,223
163,973
95,065
—
—
2,101
(703)
5,927
56,835
28,638
180,628
141,445
63,754
66,090
43,157
—
—
—
23,835
3,597
166,488
222,313
206,427
128,424
(103,279)
(130,624)
(127,171)
(17,326)
(17,269)
(5,030)
(4,274)
124,119
(120,548)
(135,654)
(131,445)
6,014
—
12,661
—
1,590
(6,150)
(4,560)
—
$
$
$
130,133
$ (120,548) $ (122,993) $ (131,445) $
(4,560)
1.23
1.16
$
$
(1.14) $
(1.17) $
(1.27) $
(0.04)
(1.14) $
(1.17) $
(1.27) $
(0.04)
106,218
105,830
105,237
103,863
103,591
116,747
105,830
105,237
103,863
103,591
2019
2018
2017
2016
2015
As of December 31,
Balance Sheet Data:
(in thousands)
Cash, cash equivalents and short-term investments
$
271,659
$
160,052
$
310,788
$
346,504
$
521,352
Working capital
Total assets
Long-term debt, net of current portion
Accumulated deficit
272,413
417,715
234,171
136,573
284,136
243,887
216,506
436,539
231,576
205,618
475,625
85,167
409,565
651,960
100,960
(1,341,444)
(1,471,577)
(1,365,241)
(1,240,257)
(1,108,812)
Lexicon Pharmaceuticals, Inc. stockholders’ equity (deficit)
117,101
(26,405)
68,265
167,507
285,972
37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read with “Selected Financial Data” and our financial statements
and notes included elsewhere in this annual report on Form 10-K.
Overview
We are a biopharmaceutical company with a mission of pioneering medicines that transform patients’ lives. We are
devoting most of our resources to the commercialization or development of our three most advanced drugs and drug candidates:
• We are commercializing XERMELO (telotristat ethyl), an orally-delivered small molecule drug, in the United States
for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog, or SSA, therapy in adults
inadequately controlled by SSA therapy. We have granted Ipsen Pharma SAS, or Ipsen, an exclusive, royalty-bearing
right to commercialize XERMELO outside of the United States and Japan. Ipsen is commercializing XERMELO in
the United Kingdom, Germany and multiple additional countries. We are also developing telotristat ethyl as a
treatment for biliary tract cancer and are conducting a Phase 2a clinical trial of telotristat ethyl in biliary tract cancer
patients.
• We are developing Zynquista (sotagliflozin), an orally-delivered small molecule drug candidate, as a treatment for
type 1 diabetes. The FDA has issued a complete response letter regarding our application for regulatory approval to
market sotagliflozin for type 1 diabetes in the United States and has confirmed that position in denying two appeals of
the complete response letter. Zynquista has been approved in the European Union for use as an adjunct to insulin
therapy to improve glycemic control in adults with type 1 diabetes and a body mass index > 27 kg/m2 , who could not
achieve adequate glycemic control despite optimal insulin therapy.
We are also developing sotagliflozin as a treatment for type 2 diabetes, heart failure and chronic kidney disease. We
are conducting a comprehensive Phase 3 development program, which includes one long-term outcomes study
designed to demonstrate benefits in chronic heart failure and chronic kidney disease in type 2 diabetes patients and
another long-term outcomes study designed to demonstrate benefits in acute decompensated heart failure in patients
with and without type 2 diabetes. We have reported preliminary top-line results from the first four Phase 3 clinical
trials of sotagliflozin in adults living with type 2 diabetes.
• We are developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain.
We have reported top-line results from two Phase 1 clinical trials of LX9211 and are preparing to initiate a Phase 2
clinical trial of LX9211.
Compounds from our most advanced drug programs, as well as compounds from a number of additional drug
discovery and development programs that we have advanced into various stages of clinical and preclinical development,
originated from our own internal drug discovery efforts. These efforts were driven by a systematic, target biology-driven
approach in which we used gene knockout technologies and an integrated platform of advanced medical technologies to
systematically study the physiological and behavioral functions of almost 5,000 genes in mice and assessed the utility of the
proteins encoded by the corresponding human genes as potential drug targets. We have identified and validated in living
animals, or in vivo, more than 100 targets with promising profiles for drug discovery.
We are working both independently and through strategic collaborations and alliances with third parties to capitalize
on our drug target discoveries and drug discovery and development programs. We seek to retain exclusive or co-exclusive
rights to the benefits of certain drug discovery and development programs by developing and commercializing drug candidates
from those programs internally, particularly in the United States for indications treated by specialist physicians. We seek to
collaborate with other pharmaceutical and biotechnology companies with respect to drug discovery or the development and
commercialization of certain of our drug candidates, particularly with respect to commercialization in territories outside the
United States or commercialization in the United States for indications treated by primary care physicians, or when the
collaboration may otherwise provide us with access to expertise and resources that we do not possess internally or are
complementary to our own.
We commercially launched XERMELO following regulatory approval in the United States in February 2017 for the
treatment of carcinoid syndrome diarrhea in combination with SSA therapy in adults inadequately controlled by SSA therapy.
Prior to the launch of XERMELO, we derived substantially all of our revenues from strategic collaborations and other research
and development collaborations and technology licenses. To date, we have generated a substantial portion of our revenues from
a limited number of sources.
38
Our operating results and, in particular, our ability to generate additional revenues are dependent on many factors,
including our ability to successfully commercialize XERMELO in the United States and the amount of revenues generated from
such commercialization efforts; Ipsen’s ability to successfully commercialize XERMELO outside of the United States and
Japan and our receipt of any milestone payments and royalties; the success of our ongoing nonclinical and clinical development
efforts and ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts; our
success in establishing new collaborations and licenses, including for the development and commercialization of sotagliflozin;
and general and industry-specific economic conditions which may affect research and development expenditures.
Future revenues from our commercialization of XERMELO are uncertain because they depend on a number of factors,
including market acceptance of XERMELO, the success of our sales, marketing, distribution and other commercialization
activities and the cost and availability of reimbursement for XERMELO.
Future revenues from our collaboration with Ipsen are uncertain because they depend, to a large degree, on the
achievement of milestones and payment of royalties we earn from Ipsen's commercialization of XERMELO. Our ability to
secure future revenue-generating agreements will depend upon our ability to address the needs of our potential future
collaborators and licensees, and to negotiate agreements that we believe are in our long-term best interests. We may determine,
as we have with certain of our drug candidates, including XERMELO in the United States and Japan, that our interests are
better served by retaining rights to our discoveries and advancing our therapeutic programs to a later stage, which could limit
our near-term revenues and increase expenses. Because of these and other factors, our operating results have fluctuated in the
past and are likely to do so in the future, and we do not believe that period-to-period comparisons of our operating results are a
good indication of our future performance.
Since our inception, we have incurred significant losses and, as of December 31, 2019, we had an accumulated deficit
of $1.3 billion. Our losses have resulted principally from costs incurred in research and development, selling, general and
administrative costs associated with our operations, and non-cash stock-based compensation expenses associated with stock
options and restricted stock granted to employees and consultants. Research and development expenses consist primarily of
salaries and related personnel costs, external research costs related to our nonclinical and clinical efforts, material costs, facility
costs, depreciation on property and equipment, and other expenses related to our drug discovery and development programs.
Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales and
marketing, and administrative personnel, professional fees and other corporate expenses, including information technology,
facilities costs and general legal activities. We expect to continue to incur significant research and development costs in
connection with the continuing development of our drug candidates. As a result, we will need to generate significantly higher
revenues to achieve profitability.
Critical Accounting Policies
Revenue Recognition
Product Revenues
Product revenues consist of commercial sales of XERMELO in the United States and sales of bulk tablets of
XERMELO to Ipsen. Product revenues are recognized when the customer obtains control of our product, which occurs upon
delivery to the customer. We recognize product revenue net of applicable reserves for variable consideration, including
allowances for customer credits, estimated rebates, chargebacks, discounts, returns, distribution service fees, and government
rebates, such as Medicare Part D coverage gap reimbursements in the United States, as discussed below. Our net product
revenues reflect our best estimates of the amounts of consideration to which we are entitled based on the terms of the respective
underlying contracts. Product shipping and handling costs are considered a fulfillment activity when control transfers to our
customers and such costs are included in cost of sales.
Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and
prompt payment discounts. We expect that our customers will earn prompt payment discounts. As a result, we deduct the full
amount of those discounts from total product sales when revenues are recognized. Service fees are also deducted from product
sales as they are earned.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate
amounts are based upon contractual agreements or legal requirements with public sector (e.g., Medicaid) benefit providers.
Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual
agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount
39
rates and expected utilization. Our estimates for expected utilization of rebates are based on third party market research data
and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance
consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for
known unpaid rebates from the prior quarter. If actual future rebates vary from estimates, we may need to adjust prior period
accruals, which would affect revenue in the period of adjustment.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty
pharmacy or distributor, who acts as a retailer. Contracted customers, which currently consist primarily of Public Health
Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally
purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to us the difference
between the price paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or
distributor by the customer. The allowance for chargeback is based on known sales to contracted customers.
Medicare Part D Coverage Gap: The Medicare Part D prescription drug benefit mandates manufacturers to fund a
portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the
expected Medicare Part D coverage gap are based on data received from the specialty pharmacies and projections based on
historical data. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an
estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior
quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect
revenues in the period of adjustment.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may
receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and
estimates of program redemption using data provided by third-party administrators.
Collaborative Agreements
Revenues under collaborative agreements include both license revenue and contract research revenue. We perform the
following five steps in determining the amount of revenue to recognize as it fulfills its performance obligations under each of its
agreements: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligation in the contract, and (v) recognize revenue
when (or as) we satisfy the performance obligation. We apply this five-step model to contracts when it is probable that we will
collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer. At contract
inception, we assess the goods or services promised within each contract and determine those that are performance obligations,
and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price
that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We develop
assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the
contract.
At contract inception, we evaluate whether development milestones are considered probable of being reached and
estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a
significant revenue reversal will not occur, the associated development milestone value is included in the transaction price.
Development milestones that are not within our control or the control of our licensee, including those requiring regulatory
approval, are not considered probable of being achieved until those approvals are received. The transaction price is allocated to
each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue when (or as) the
performance obligation is satisfied. At the end of each reporting period, we re-evaluate the probability of achievement of the
development milestones and any related constraint, and if necessary, adjust our estimates of the overall transaction price. Any
such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues in the period of
adjustment.
In agreements in which a license to our intellectual property is determined distinct from other performance obligations
identified in the agreement, we recognize revenue when the license is transferred to the licensee and the licensee is able to use
and benefit from the license.
For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed
to be the predominant item to which the royalties relate and we recognize revenue at the later of (i) when the related sales occur
or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially
satisfied).
40
We may receive payments from our licensees based on billing schedules established in each contract. Upfront
payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition
to a future period until we perform our obligations under these agreements. Amounts are recorded as accounts receivable when
our right to consideration is unconditional.
Research and Development Expenses
Research and development expenses consist of costs incurred for research and development activities solely sponsored
by us as well as collaborative research and development activities. These costs include direct and research-related overhead
expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development
and have no alternative future use are expensed when incurred.
We are presently devoting most of our resources to the commercialization or development of our three most advanced
drugs and drug candidates:
•
•
•
XERMELO (telotristat ethyl), an orally-delivered small molecule drug that we are commercializing for carcinoid
syndrome diarrhea and developing for biliary tract cancer;
Zynquista (sotagliflozin), an orally-delivered small molecule drug candidate that we are developing as a treatment for
type 1 diabetes and type 2 diabetes, heart failure and chronic kidney disease; and
LX9211, an orally-delivered small molecule drug candidate, that we are developing as a treatment for neuropathic
pain.
Compounds from our most advanced drug programs, as well as compounds from a number of additional drug
discovery and development programs that we have advanced into various stages of clinical and preclinical development,
originated from our own internal drug discovery efforts. These efforts were driven by a systematic, target biology-driven
approach in which we used gene knockout technologies and an integrated platform of advanced medical technologies to
systematically study the physiological and behavioral functions of almost 5,000 genes in mice and assessed the utility of the
proteins encoded by the corresponding human genes as potential drug targets. We have identified and validated in living
animals, or in vivo, more than 100 targets with promising profiles for drug discovery.
The drug development process takes many years to complete. The cost and length of time varies due to many factors
including the type, complexity and intended use of the drug candidate. We estimate that drug development activities are
typically completed over the following periods:
Phase
Preclinical development
Phase 1 clinical trials
Phase 2 clinical trials
Phase 3 clinical trials
Estimated Completion Period
1-2 years
1-2 years
1-2 years
2-4 years
We expect research and development costs to remain substantial in the future as we continue to fund our nonclinical
and clinical development efforts and advance new drug candidates into clinical development. Due to the variability in the
length of time necessary for drug development, the uncertainties related to the cost of these activities and ultimate ability to
obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our
potential drug candidates to market are not available.
We record significant accrued liabilities related to unbilled expenses for products or services that we have received
from service providers, specifically related to ongoing nonclinical studies and clinical trials. These costs primarily relate to
clinical study management, monitoring, laboratory and analysis costs, drug supplies, toxicology studies and investigator
grants. We have multiple drugs in concurrent nonclinical studies and clinical trials at clinical sites throughout the world. In
order to ensure that we have adequately provided for ongoing nonclinical and clinical development costs during the period in
which we incur such costs, we maintain accruals to cover these expenses. Substantial portions of our nonclinical studies and
clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For
nonclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones
remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study.
We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal
reviews of data reported to us by the vendors and clinical site visits. Our estimates depend on the timeliness and accuracy of
41
the data provided by our vendors regarding the status of each program and total program spending. We periodically evaluate
the estimates to determine if adjustments are necessary or appropriate based on information we receive. Although we use
consistent milestones or subject or patient enrollment to drive expense recognition, the assessment of these costs is a subjective
process that requires judgment. Upon settlement, these costs may differ materially from the amounts accrued in our
consolidated financial statements.
Our estimates of the clinical study costs and costs to transition activities from Sanofi for development of sotagliflozin
for type 2 diabetes, heart failure and chronic kidney disease were based on estimates of the services to be received and efforts to
be expended pursuant to contracts with multiple vendors and the CRO that will conduct and manage the clinical studies on our
behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract. In accruing the
relevant costs, we estimated the time period over which services will be performed and the level of effort required to complete
each study. Upon completion and settlement, these costs may differ materially from the amounts accrued in our consolidated
financial statements.
We record our research and development costs by type or category, rather than by project. Significant categories of
costs include personnel, facilities and equipment costs and third-party and other services. In addition, a significant portion of
our research and development expenses is not tracked by project as it benefits multiple projects. Consequently, fully-loaded
research and development cost summaries by project are not available.
Stock-based Compensation Expense
We recognize compensation expense in our statements of comprehensive income (loss) for share-based payments,
including stock options and restricted stock units issued to employees, based on their fair values on the date of the grant, with
the compensation expense recognized over the period in which an employee is required to provide service in exchange for the
stock award. Stock-based compensation expense for awards without performance conditions is recognized on a straight-line
basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date
the performance condition is determined to be probable of occurring through the time the applicable condition is met. We had
stock-based compensation expense of $14.2 million for the year ended December 31, 2019. As of December 31, 2019, stock-
based compensation cost for all outstanding unvested options and restricted stock units was $24.0 million, which is expected to
be recognized over a weighted-average vesting period of 1.1 years.
The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. For
purposes of determining the fair value of stock options, we segregate our options into two homogeneous groups, based on
exercise and post-vesting employment termination behaviors, resulting in different assumptions used for expected option
lives. Historical data is used to estimate the expected option life for each group. Expected volatility is based on the historical
volatility in our stock price. The following weighted-average assumptions were used for options granted in the years ended
December 31, 2019, 2018 and 2017, respectively:
December 31, 2019:
Employees
Officers and non-employee directors
December 31, 2018:
Employees
Officers and non-employee directors
December 31, 2017:
Employees
Officers and non-employee directors
Impairment of Long-Lived Assets
Expected
Volatility
Risk-free
Interest Rate
Expected
Term
Dividend
Rate
88 %
77 %
58 %
63 %
61 %
70 %
2.2 %
2.6 %
2.6 %
2.8 %
1.7 %
2.2 %
4
8
4
8
4
8
0 %
0 %
0 %
0 %
0 %
0 %
Our long-lived assets include property, plant and equipment, right-of-use assets for leases, finite-lived intangible assets
and goodwill. We regularly review long-lived assets for impairment. The recoverability of long-lived assets, other than
goodwill, is measured by comparing the assets carrying amount to the expected undiscounted future cash flows that the asset is
expected to generate. Determining whether an impairment has occurred typically requires various estimates and assumptions,
including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash
flows will occur, their amount, and the asset's residual value, if any. We use internal cash flow estimates, quoted market prices
42
when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates
from our historical experience and our internal business plans and apply an appropriate discount rate. There were no significant
impairments of long-lived assets in 2019, 2018 or 2017.
Indefinite-lived intangible assets, composed primarily of in-process research and development, or IPR&D, projects
acquired in business combinations which have not reached technological feasibility, are reviewed annually for impairment and
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Estimating future cash
flows of an IPR&D product candidate for purposes of an impairment analysis requires us to make significant estimates and
assumptions regarding the amount and timing of costs to complete the project and the amount, timing and probability of
achieving revenues from the completed product similar to how the acquisition date fair value of the project was determined. In
2019, we terminated certain research and development activities related to a program for treatment of irritable bowel syndrome
and as a result, recognized $28.6 million of impairment to indefinite-lived intangible assets. There were no impairments to
indefinite-lived intangible assets in 2018 or 2017.
Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level. We have
determined that the reporting unit is the single operating segment disclosed in our current financial statements. Impairment is
the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step in the impairment
process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill. We
determined that the market capitalization approach is the most appropriate method of measuring fair value of the reporting
unit. Under this approach, fair value is calculated as the average closing price of our common stock for the 30 days preceding
the date that the annual impairment test is performed, multiplied by the number of outstanding shares on that date. A control
premium, which is representative of premiums paid in the marketplace to acquire a controlling interest in a company, is then
added to the market capitalization to determine the fair value of the reporting unit. If the fair value exceeds the carrying value,
no further action is required and no impairment loss is recognized. Additional impairment assessments may be performed on an
interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying
value of goodwill has been impaired. There was no impairment of goodwill in 2019, 2018 and 2017.
Business Combinations
We allocate the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities
assumed based upon their estimated fair values on the acquisition date. The purchase price allocation process requires
management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets and
in-process research and development.
These assumptions are based in part on historical experience and are inherently uncertain. Examples of critical
estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
the feasibility and timing of achievement of development, regulatory and commercial milestones; expected costs to develop the
in-process research and development into commercially viable products; and future expected cash flows from product sales.
In connection with the purchase price allocations for acquisitions, we estimate the fair value of the contingent
payments. The estimated fair value of any contingent payments is determined utilizing a probability-based income approach
inclusive of an estimated discount rate.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual results.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements, for a discussion
of the impact of new accounting standards on our consolidated financial statements.
43
Results of Operations – Comparison of Years Ended December 31, 2019, 2018 and 2017
The following discussion and analysis should be read with “Results of Operations” and our financial statements and notes
included in our annual report on Form 10-K for the year ended December 31, 2018.
Revenues
Total revenues and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are
presented in millions):
Total revenues
Dollar increase (decrease)
Percentage increase (decrease)
Years Ended December 31, 2019 and 2018
Year Ended December 31,
2019
2018
2017
$
$
$
$
322.1
258.9
410 %
63.2
$
91.7
(28.5)
(31)%
•
•
Net product revenues – Net product revenue increased 22% in 2019 to $32.3 million, primarily from revenues
recognized from the sale of XERMELO in the United States. Sales of bulk tablets of XERMELO to Ipsen were
comparable in both years. Product revenues are recorded net of estimated product returns, pricing discounts including
rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts
and distribution fees and co-pay assistance. Revenue recognition policies require estimates of the aforementioned
sales allowances each period.
Collaborative agreements – Revenue from collaborative agreements increased in 2019 to $289.2 million, due to
$260 million in revenues recognized from amounts payable by Sanofi pursuant to the termination of our collaboration
agreement and recognition of amounts allocated to the performance obligation for development activities of
sotagliflozin in the Sanofi collaboration agreement.
•
Royalties and other revenue – Revenues from royalties and other revenue increased 44% in 2019 to $0.5 million.
In 2019, no customers for XERMELO sales represented more than 10% of revenues. In 2018, two specialty
pharmacies, Biologics, Inc. and Diplomat Pharmacy, represented 25% and 14% of revenues, respectively.
In 2019 and 2018, Sanofi represented 89% and 53% of revenues, respectively.
Cost of Sales
Total cost of sales and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are
presented in millions):
Total cost of sales
Dollar increase
Percentage increase
Years Ended December 31, 2019 and 2018
Year Ended December 31,
2019
2018
2017
$
$
3.2
0.7
$
$
30 %
$
2.5
0.6
31 %
1.9
Cost of sales increased 30% in 2019 to $3.2 million. We began capitalizing inventory in 2017 following FDA
approval of XERMELO, as the related costs were expected to be recoverable through the commercialization of the product.
Costs incurred prior to FDA approval were recorded as research and development expenses in the consolidated statements of
comprehensive income (loss). Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs
associated with sales of XERMELO. The pre-commercialized inventory is expected to be sold over approximately the next
twelve months. As a result, cost of sales will reflect a lower average per unit cost of materials. Cost of sales in each of 2019
and 2018 included $1.8 million of amortization of intangible assets related to XERMELO.
44
Research and Development Expenses
Research and development expenses and dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):
Total research and development expense
Dollar decrease
Percentage decrease
Year Ended December 31,
2019
2018
2017
$
$
91.9
$
(8.3) $
(8)%
100.2
$
152.2
(52.0)
(34)%
Research and development expenses consist primarily of third-party and other services principally related to
nonclinical and clinical development activities, salaries and other personnel-related expenses, facility and equipment costs and
stock-based compensation.
Years Ended December 31, 2019 and 2018
•
•
•
•
•
Third-party and other services – Third-party and other services decreased 12% in 2019 to $55.9 million, primarily due
to decreases in professional and consulting fees and lower external clinical development costs relating to sotagliflozin.
Third-party and other services relate principally to our clinical trial and related development activities, such as
nonclinical and clinical studies and contract manufacturing.
Personnel – Personnel costs decreased 3% in 2019 to $20.7 million, primarily due to lower headcount. Salaries,
bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs.
Stock-based compensation – Stock-based compensation expense increased 18% in 2019 to $7.1 million, primarily due
to a shorter vesting period of the annual restricted stock unit awards granted in 2019 and 2018.
Facilities and equipment – Facilities and equipment costs decreased 3% in 2019 to $2.7 million.
Other – Other costs decreased 13% in 2019 to $5.5 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses and dollar and percentage changes as compared to the prior year are as
follows (dollar amounts are presented in millions):
Total selling, general and administrative expense
Dollar decrease
Percentage decrease
Year Ended December 31,
2019
2018
2017
$
$
56.8
$
(6.9) $
(11)%
63.8
$
66.1
(2.3)
(4)%
Selling, general and administrative expenses consist primarily of personnel costs to support the commercialization of
XERMELO and our research and development activities, professional and consulting fees, stock-based compensation expense,
and facility and equipment costs.
Years Ended December 31, 2019 and 2018
•
•
Personnel – Personnel costs increased 1% in 2019 to $28.4 million, primarily due to higher incentive compensation
costs. Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel
costs.
Professional and consulting fees – Professional and consulting fees decreased 39% in 2019 to $12.2 million, primarily
due to lower marketing costs.
45
•
•
•
Stock-based compensation – Stock-based compensation expense increased 25% in 2019 to $7.1 million, primarily due
to a shorter vesting period of the annual restricted unit awards granted in 2019 and 2018.
Facilities and equipment – Facilities and equipment decreased 8% in 2019 to $1.8 million.
Other – Other costs decreased 8% in 2019 to $7.3 million, primarily due to decreases in sponsorships and
contributions to charitable foundations.
Impairment Loss
Impairment loss of $28.6 million in the year ended December 31, 2019 was recognized to an indefinite-lived intangible
asset associated with the 2010 acquisition of Symphony Icon, due to the decision to terminate research and development
activities related to a program for irritable bowel syndrome that was among the assets acquired.
Interest Expense and Interest and Other Income, Net
Interest Expense. Interest expense was $20.7 million and $20.8 million in the years ended December 31, 2019 and
2018, respectively.
Interest and Other Income (Expense), Net. Interest and other income, net was $3.4 million and $3.5 million in the
years ended December 31, 2019 and 2018, respectively.
Income Tax Benefit
The income tax benefit for the year ended December 31, 2019 was $6.0 million, due to the release of the deferred
tax liability related to the impairment of the indefinite-lived intangible asset (see Note 7, Income Taxes of the Notes to
Consolidated Financial Statements, for more information). There was no income tax expense or benefit in 2018.
Net Income (Loss) and Net Income (Loss) per Common Share
Net income was $130.1 million, or $1.16 per diluted share, in 2019 as compared to a net loss of $120.5 million, or loss
of $1.14 per share in 2018.
Liquidity and Capital Resources
We have financed our operations from inception primarily through sales of common and preferred stock, contract and
milestone payments we received under our strategic and other collaborations, target validation, database subscription and
technology license agreements, product sales, government grants and contracts, and financing under debt and lease
arrangements. We have also financed certain of our research and development activities under our agreements with Symphony
Icon, Inc. In December 2017, we entered into a loan agreement with BioPharma Credit PLC and BioPharma Credit
Investments IV Sub LP (the “BioPharma Term Loan”) under which $150 million was funded.
As of December 31, 2019, we had $271.7 million in cash, cash equivalents and short-term investments. As of
December 31, 2018, we had $160.1 million in cash, cash equivalents and short-term investments. We generated cash of $113.8
million from operations in 2019. This consisted primarily of the net income for the year of $130.1 million and non-cash charges
of $28.6 million related to impairment of intangible assets, $14.2 million related to stock-based compensation expense and $5.1
million related to depreciation and amortization expense, including amortization of debt issuance costs. Partially offsetting this
was a net increase in operating assets, net of liabilities of $58.3 million. Investing activities used cash of $155.9 million in
2019, primarily due to net purchases of investments of $155.8 million. Financing activities used cash of $2.2 million, primarily
to repay $1.3 million of debt borrowings and to repurchase $0.9 million of common stock.
Facilities. In August 2018, our subsidiary Lex-Gen Woodlands, L.P. entered into a term loan and security agreement
refinancing the previously existing mortgage on our facilities in The Woodlands, Texas. The loan agreement provides for a
$12.9 million mortgage on the property and has a two-year term with a 10-year amortization. The mortgage loan bears interest
at a rate per annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5% and (b) 7.5% and provides for a balloon
payment of $10.3 million due in August 2020.
In January 2020, Lex-Gen Woodlands, L.P. entered into a real estate purchase and sale agreement under which we
agreed to sell our facilities in The Woodlands, Texas for a purchase price of $15.0 million. Such sale is subject to normal and
customary closing conditions, including a study period, which extends until April 9, 2020, during which the purchaser may
46
conduct inspections, analyses and other studies of the property and may terminate the agreement in its discretion. Such sale is
also subject to the negotiation and execution by the parties of a leaseback agreement for a period of up to six months with
respect to a portion of the property concurrently with closing.
In March 2015, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc. leased a 25,000 square-foot office space in
Basking Ridge, New Jersey. The term of the lease extends from June 1, 2015 through December 31, 2022, and provides for
escalating yearly base rent payments starting at $482,000 and increasing to $646,000 in the final year of the lease.
Including the lease and debt obligations described above, we had incurred the following contractual obligations as of
December 31, 2019:
Contractual Obligations
Debt
Interest payment obligations
Total
Payments due by period (in millions)
Total
Less than 1
year
2-3 years
4-5 years
More than 5
years
$
$
248.6
$
11.1
$
237.5
$
50.0
18.9
31.1
298.6
$
30.0
$
268.6
$
— $
—
— $
—
—
—
Our future capital requirements will be substantial and will depend on many factors, including our ability to
successfully commercialize XERMELO in the United States and the amount of revenues generated from such
commercialization efforts; Ipsen’s ability to successfully commercialize XERMELO outside of the United States and Japan and
our receipt of any milestone payments and royalties; the success of our ongoing nonclinical and clinical development efforts
and ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts; our success in
establishing new collaborations and licenses, including for the development and commercialization of sotagliflozin; the amount
and timing of our research, development and commercialization expenditures; the resources we devote to developing and
supporting our products and other factors. Our capital requirements will also be affected by any expenditures we make in
connection with license agreements and acquisitions of and investments in complementary technologies and businesses. We
expect to continue to devote substantial capital resources to continue commercializing XERMELO in the United States; to
successfully complete our nonclinical and clinical development efforts with respect to telotristat ethyl, sotagliflozin, LX9211
and our other drug candidates; and for other general corporate activities. We believe that our current unrestricted cash and
investment balances and cash and revenues we expect to derive from strategic and other collaborations and other sources will be
sufficient to fund our operations for at least the next 12 months. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we will need to sell additional equity or debt securities or obtain additional
credit arrangements. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity
or convertible debt securities may result in additional dilution to our stockholders.
Disclosure about Market Risk
We are exposed to limited market and credit risk on our cash equivalents which have maturities of three months or less
at the time of purchase. We maintain a short-term investment portfolio which consists of U.S. Treasury bills and corporate debt
securities that mature three to 12 months from the time of purchase, which we believe are subject to limited market and credit
risk. We currently do not hedge interest rate exposure or hold any derivative financial instruments in our investment portfolio.
We had approximately $271.7 million in cash and cash equivalents and short-term investments as of December 31,
2019. We believe that the working capital available to us will be sufficient to meet our cash requirements for at least the next
12 months. We are not subject to interest rate sensitivity on our outstanding Convertible Notes and our BioPharma Term Loan
as each generally have a fixed rate of 5.25% and 9% per annum, respectively. The Convertible Notes interest is payable in cash
semi-annually in arrears and matures in December 2021, unless earlier converted or repurchased in accordance with their terms.
The BioPharma Term Loan bears interest payable quarterly in arrears, and provides for interest-only payments followed by
payment of principal at maturity in December 2022.
We have operated primarily in the United States and substantially all sales to date have been made in U.S. dollars.
Accordingly, we have not had any material exposure to foreign currency rate fluctuations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See “Disclosure about Market Risk” under “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” for quantitative and qualitative disclosures about market risk.
47
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are incorporated under Item 15 in Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated
the effectiveness of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of
December 31, 2019 to ensure that the information required to be disclosed by us in the reports we file under the Securities
Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework (2013 Framework).
Based on such assessment using those criteria, management concluded that, as of December 31, 2019, our internal
control over financial reporting was effective.
Changes in Internal Control Over Financial Reporting
Subsequent to our evaluation described above, there were no significant changes in internal controls or other factors
during the fiscal quarter ended December 31, 2019 that could significantly affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Lexicon Pharmaceuticals, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Lexicon Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission 2013 framework (the COSO criteria). In our opinion, Lexicon Pharmaceuticals, Inc. (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated
statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the
period ended December 31, 2019, and the related notes and our report dated March 12, 2020 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
March 12, 2020
49
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is hereby incorporated by reference from (a) the information appearing under the
captions “Election of Directors,” “Stock Ownership of Certain Beneficial Owners and Management,” “Corporate Governance”
and “Executive and Director Compensation” in our definitive proxy statement which involves the election of directors and is to
be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the
end of our fiscal year on December 31, 2019 and (b) the information appearing under Item 1 in Part I of this report.
Item 11. Executive Compensation
The information required by this Item is hereby incorporated by reference from the information appearing under the
captions “Corporate Governance” and “Executive and Director Compensation” in our definitive proxy statement which
involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within
120 days of the end of our fiscal year on December 31, 2019. Notwithstanding the foregoing, in accordance with the
instructions to Item 407(e)(5) of Regulation S-K, the information contained in our proxy statement under the sub-heading
“Compensation Committee Report” shall not be deemed to be filed as part of or incorporated by reference into this annual
report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is hereby incorporated by reference from the information appearing under the
captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in
our definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2019.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is hereby incorporated by reference from the information appearing under the
captions “Corporate Governance” and “Transactions with Related Persons” in our definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of our fiscal year on December 31, 2019.
Item 14. Principal Accounting Fees and Services
The information required by this Item as to the fees we pay our principal accountant is hereby incorporated by
reference from the information appearing under the caption “Ratification and Approval of Independent Auditors” in our
definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2019.
50
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
Documents filed as a part of this report:
1.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Page
F-1
F-2
F-3
F-4
F-5
F-6
All other financial statement schedules are omitted because they are not applicable or not required, or because the
required information is included in the financial statements or notes thereto.
3.
Exhibits
Exhibit No.
Description
3.1 — Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report
on Form 8-K dated April 26, 2012 and incorporated by reference herein).
3.2 — Certificate of Amendment to Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K dated May 20, 2015 and incorporated by reference herein).
3.3 — Second Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on
Form 8‑ K dated April 26, 2012 and incorporated by reference herein).
4.1 — Securities Purchase Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein).
4.2 — Amendment, dated October 7, 2009, to Securities Purchase Agreement, dated June 17, 2007, with Invus,
L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 7, 2009 and
incorporated by reference herein).
4.3 — Registration Rights Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein).
4.4 — Stockholders’ Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.4 to the Company’s
Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein).
4.5 — Supplement to Transaction Agreements, dated March 15, 2010, with Invus, L.P. and Invus C.V. (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 15, 2010 and incorporated by
reference herein).
4.6 — Supplement No. 2 to Transaction Agreements, dated February 23, 2012, with Invus, L.P. and Invus C.V.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 23, 2012 and
incorporated by reference herein).
4.7 — Indenture related to the 5.25% Convertible Senior Notes due 2021, dated as of November 26, 2014, with
Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated
November 26, 2014 and incorporated by reference herein).
4.8 — Form of 5.25% Convertible Senior Notes due 2021 (filed as Exhibit A to Exhibit 4.1 to the Company’s
Current Report on Form 8-K dated November 26, 2014 and incorporated by reference herein).
10.1 — Offer Letter, dated July 1, 2014, with Lonnel Coats, as amended (filed as Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference
herein).
10.2 — Offer Letter, dated March 10, 2011, with Pablo Lapuerta, M.D. (filed as Exhibit 10.5 to the Company’s
Annual Report on Form 10-K for the period ended December 31, 2011 and incorporated by reference
herein).
10.3 — Offer Letter, dated March 23, 2016, with Praveen Tyle, Ph.D. (filed as Exhibit 10.4 to the Company’s
Annual Report on Form 10-K for the period ended December 31, 2016 and incorporated by reference
herein).
51
Exhibit No.
Description
10.4 — Offer Letter, dated March 16, 2015, with Alexander A. Santini, as amended (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by
reference herein).
10.5 — Employment Agreement with Jeffrey L. Wade, J.D. (filed as Exhibit 10.3 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-96469) and incorporated by reference herein).
10.6 — Form of Indemnification Agreement with Officers and Directors (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 (Registration No. 333-96469) and incorporated by reference herein).
10.7 — Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended March 31, 2019 and incorporated by reference herein).
*10.8 — 2017 Equity Incentive Plan, as amended.
10.9 — 2017 Non-Employee Directors’ Equity Incentive Plan, as amended (filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference
10.10 — Form of Stock Option Agreement with Officers under the 2017 Equity Incentive Plan (filed as Exhibit
10.11 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2017 and
*10.11 — Form of Restricted Stock Unit Agreement with Officers.
10.12 — Form of Notice of Stock Option Grant to Directors under the 2017 Non-Employee Directors’ Equity
Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2019 and incorporated by reference herein).
10.13 — Form of Notice of Restricted Stock Unit Grant to Directors under the 2017 Non-Employee Directors’
Equity Incentive Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
period ended March 31, 2019 and incorporated by reference herein).
†10.14 — Collaboration and License Agreement, dated November 5, 2015, with Sanofi (filed as Exhibit 10.14 to the
Company’s Annual Report on Form 10-K/A for the period ended December 31, 2015 and incorporated by
reference herein).
†10.15 — Amendment No. 1, dated July 1, 2017, to Collaboration and License Agreement, dated November 5, 2015,
with Sanofi (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended
September 30, 2017 and incorporated by reference herein).
§10.16 — Confidential Termination and Settlement Agreement and Mutual Releases, dated September 9, 2019, with
Sanofi-Aventis Deutschland GmbH (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-
Q for the period ended September 30, 2019 and incorporated by reference herein).
†10.17 — License and Collaboration Agreement, dated October 21, 2014, with Ipsen Pharma SAS (filed as Exhibit
10.1 to the amendment to the Company’s Quarterly Report on Form 10-Q/A for the period ended
September 30, 2014, as filed on December 23, 2014, and incorporated by reference herein).
†10.18 — First Amendment, dated March 17, 2015, to License and Collaboration Agreement, dated October 21,
2014, with Ipsen Pharma SAS (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the period ended March 31, 2015 and incorporated by reference herein).
*10.19 — Second Amendment, dated January 28, 2020, to License and Collaboration Agreement, dated October 21,
2014, with Ipsen Pharma SAS.
10.20 — Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers Squibb Company
(filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2015 and incorporated by reference herein).
10.21 — First Amendment, dated May 30, 2006, to Collaboration and License Agreement, dated December 17,
2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the period ended March 31, 2015 and incorporated by reference herein).
†10.22 — Second Amendment, dated November 2, 2016, to Collaboration and License Agreement, dated December
17, 2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K dated November 2, 2016 and incorporated by reference herein).
†10.23 — Second Amended and Restated Collaboration and License Agreement, dated November 30, 2005, with
Genentech, Inc. (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the period
ended December 31, 2005 and incorporated by reference herein).
10.24 — Amendment, dated June 8, 2009, to Second Amended and Restated Collaboration and License Agreement,
dated November 30, 2005, with Genentech, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K/A dated June 8, 2009 and incorporated by reference herein).
†10.25 — Commercial Supply Agreement, dated June 6, 2016, with Catalent CTS, LLC (filed as Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q/A for the period ended March 31, 2017 and incorporated by
reference herein).
52
Exhibit No.
Description
†10.26 — Amendment One to Commercial Supply Agreement, dated April 4, 2018, with Catalent CTS, LLC (filed as
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018 and
incorporated by reference herein).
†10.27 — Amendment Two to Commercial Supply Agreement, dated April 27, 2018, with Catalent CTS, LLC (filed
as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018
and incorporated by reference herein).
10.28 — Term Loan and Security Agreement, dated August 30, 2018, between Lex-Gen Woodlands, L.P. and
Revere Credit Opportunities Fund III, LP (filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K dated August 30, 2018 and incorporated by reference herein).
†10.29 — Loan Agreement, dated December 4, 2017, with BioPharma Credit PLC and BioPharma Credit
Investments IV Sub LP (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
December 4, 2017 and incorporated by reference herein).
10.30 — Real Estate Purchase and Sale Agreement, dated January 20, 2020, between Lex-Gen Woodlands, L.P. and
FFC Equity Holdings, L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
January 10, 2020 and incorporated by reference herein).
21.1 — Subsidiaries (filed as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2010 and incorporated by reference herein).
*23.1 — Consent of Independent Registered Public Accounting Firm.
*24.1 — Power of Attorney (contained in signature page).
*31.1 — Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 — Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 — Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*101.INS — XBRL Instance Document.
*101.SCH — XBRL Taxonomy Extension Schema Document.
*101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document.
*101.DEF — XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB — XBRL Taxonomy Extension Label Linkbase Document.
*101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document.
______________
* Filed herewith.
† Confidential treatment has been requested for a portion of this exhibit. The confidential portions of this exhibit have been
omitted and filed separately with the Securities and Exchange Commission.
§ Portions of the exhibit have been omitted.
Item 16. Form 10-K Summary
Not applicable.
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Signatures
Date: March 12, 2020
Date: March 12, 2020
Lexicon Pharmaceuticals, Inc.
By:
/s/ LONNEL COATS
Lonnel Coats
President and Chief Executive Officer
By:
/s/ JEFFREY L. WADE
Jeffrey L. Wade
Executive Vice President, Corporate and
Administrative Affairs and Chief Financial Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Lonnel Coats and Jeffrey L. Wade, or either of them, each with the power of substitution, his or her attorney-in-fact, to
sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, here ratifying and confirming all that each of said attorneys-in-fact,
or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ LONNEL COATS
Lonnel Coats
/s/ JEFFREY L. WADE
Jeffrey L. Wade
/s/ JAMES F. TESSMER
James F. Tessmer
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 12, 2020
Executive Vice President, Corporate and
Administrative Affairs and Chief Financial Officer
(Principal Financial Officer)
March 12, 2020
Vice President, Finance and Accounting
(Principal Accounting Officer)
March 12, 2020
/s/ RAYMOND DEBBANE
Chairman of the Board of Directors
March 12, 2020
Raymond Debbane
/s/ PHILIPPE J. AMOUYAL
Director
Philippe J. Amouyal
/s/ SAMUEL L. BARKER
Samuel L. Barker, Ph.D.
Director
/s/ ROBERT J. LEFKOWITZ
Director
Robert J. Lefkowitz, M.D.
/s/ ALAN S. NIES
Alan S. Nies, M.D.
Director
/s/ FRANK P. PALANTONI
Director
Frank P. Palantoni
/s/ CHRISTOPHER J. SOBECKI
Director
Christopher J. Sobecki
/s/ JUDITH L. SWAIN
Judith L. Swain, M.D.
Director
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Lexicon Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lexicon Pharmaceuticals, Inc. (the “Company”) as of
December 31, 2019 and 2018, the related consolidated statements of comprehensive income (loss), stockholders’ equity
(deficit), and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019, in conformity with US generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework) and our report dated March 12, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for
revenues in 2018 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
March 12, 2020
F-1
Lexicon Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $4
Inventory
Prepaid expenses and other current assets
Total current assets
Property and equipment, net of accumulated depreciation and amortization of $61,741 and
$60,006, respectively
Goodwill
Intangible assets
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Liabilities and Equity
Current portion of deferred revenue
Current portion of long-term debt, net of deferred financing costs
Total current liabilities
Deferred revenue, net of current portion
Long-term debt, net of deferred financing costs
Deferred tax liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued and outstanding
Common stock, $.001 par value; 225,000 shares authorized; 106,679 and 106,162 shares
issued, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain (loss)
Treasury stock, at cost, 407 and 236 shares, respectively
Total stockholders' equity (deficit)
Total liabilities and equity (deficit)
As of December 31,
2019
2018
$
36,112
$
235,547
56,532
4,243
5,320
80,386
79,666
5,924
4,680
2,668
337,754
173,324
14,047
44,543
19,716
1,655
15,865
44,543
50,119
285
$
417,715
$
284,136
$
12,178
$
42,151
—
11,012
65,341
—
12,052
21,245
2,339
1,115
36,751
23,651
234,171
243,887
—
1,102
6,014
238
300,614
310,541
—
106
—
106
1,462,172
1,447,954
(1,341,444)
(1,471,577)
84
(3,817)
117,101
(12)
(2,876)
(26,405)
$
417,715
$
284,136
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Lexicon Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share amounts)
Revenues:
Net product revenue
Collaborative agreements
Royalties and other revenue
Total revenues
Operating expenses:
Year Ended December 31,
2019
2018
2017
$
32,331
$
26,583
$
289,231
511
322,073
36,271
355
63,209
15,890
75,621
178
91,689
Cost of sales (including finite-lived intangible asset amortization)
3,231
2,491
1,899
Research and development, including stock-based compensation of
$7,096, $6,010 and $4,905, respectively
91,924
100,243
152,223
—
—
Increase in fair value of Symphony Icon, Inc. purchase liability
Selling, general and administrative, including stock-based
compensation of $7,122, $5,686 and $4,567, respectively
Impairment loss on intangible asset
Total operating expenses
Income (loss) from operations
Interest expense
Interest and other income, net
Net income (loss) before taxes
Income tax benefit
Net income (loss)
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Shares used in computing net income (loss) per common share, basic
Shares used in computing net income (loss) per common share, diluted
56,835
28,638
180,628
141,445
(20,676)
3,350
124,119
6,014
130,133
1.23
1.16
106,218
116,747
$
$
$
2,101
66,090
—
222,313
(130,624)
(6,984)
1,954
(135,654)
12,661
63,754
—
166,488
(103,279)
(20,777)
3,508
(120,548)
—
$
$
$
(120,548) $
(122,993)
(1.14) $
(1.14) $
105,830
105,830
(1.17)
(1.17)
105,237
105,237
Other comprehensive income (loss):
Unrealized gain (loss) on investments
Comprehensive income (loss)
96
210
(27)
$
130,229
$
(120,338) $
(123,020)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Lexicon Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands)
Common Stock
Shares
104,582
Par Value
105
$
Additional
Paid-In
Capital
$ 1,411,222
Accumulated
Deficit
(1,240,257) $
$
Accumulated
Other
Comprehensive
Gain (Loss)
Treasury
Stock
(195) $
(3,368) $
Balance at December 31, 2016
Cumulative effect of change in accounting
principle
Stock-based compensation
Issuance of common stock to designees of Symphony
Icon Holdings LLC
Issuance of common stock under Equity Incentive
Plans
Issuance of treasury stock
Repurchase of common stock
Net loss
Unrealized loss on investments
Balance at December 31, 2017
Cumulative effect of change in accounting principle
Stock-based compensation
Issuance of common stock under Equity Incentive
Plans
Repurchase of common stock
Net loss
Unrealized gain on investments
Balance at December 31, 2018
Stock-based compensation
Issuance of common stock under Equity Incentive
Plans
Repurchase of common stock
Net income
Unrealized gain on investments
—
—
660
469
—
—
—
—
105,711
—
—
451
—
—
—
106,162
—
517
—
—
—
—
—
—
1
—
—
—
—
106
—
—
—
—
—
—
106
—
—
—
—
—
1,991
9,472
10,499
5,485
(3,143)
—
—
—
(1,991)
—
—
—
—
—
(122,993)
—
1,435,526
(1,365,241)
—
11,696
732
—
—
—
14,212
—
—
—
(120,548)
—
1,447,954
(1,471,577)
14,218
—
—
—
—
—
—
—
130,133
—
Balance at December 31, 2019
106,679
$
106
$ 1,462,172
$
(1,341,444) $
Total
167,507
—
9,472
10,499
5,486
—
(1,679)
(122,993)
(27)
68,265
14,212
11,696
732
(972)
(120,548)
210
—
—
—
—
3,143
(1,679)
—
—
(1,904)
—
—
—
(972)
—
—
(2,876)
(26,405)
—
—
(941)
—
—
14,218
—
(941)
130,133
96
$
(3,817) $
117,101
—
—
—
—
—
—
—
(27)
(222)
—
—
—
—
—
210
(12)
—
—
—
—
96
84
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Lexicon Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Impairment loss on intangible asset
Increase in fair value of Symphony Icon, Inc. purchase liability
Stock-based compensation
Loss on disposal of property and equipment
Amortization of debt issuance costs
Deferred tax benefit
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
(Increase) decrease in prepaid expenses and other current assets
Decrease in other assets
Increase (decrease) in accounts payable and other liabilities
Decrease in deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchases of investments
Maturities of investments
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of fees
Repurchase of common stock
Proceeds from debt borrowings, net of fees
Repayment of debt borrowings
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Supplemental disclosure of noncash investing and financing activities:
Common stock issued in satisfaction of Symphony Icon payment obligation
Year Ended December 31,
2018
2017
2019
$
130,133
$
(120,548) $
(122,993)
3,654
28,638
—
14,218
—
1,465
(6,014)
(50,608)
437
(2,652)
429
20,097
(25,990)
113,807
(70)
(322,385)
166,600
(155,855)
—
(941)
—
(1,285)
(2,226)
(44,274)
80,386
36,112
$
3,683
—
—
11,696
—
1,336
—
(1,099)
(2,732)
1,766
144
(19,913)
(22,940)
(148,607)
(95)
(119,987)
289,658
169,576
732
(972)
12,529
(14,533)
(2,244)
18,725
61,661
80,386
$
3,399
—
2,101
9,472
3
599
(12,661)
166
(1,948)
(557)
33
(11,875)
(51,133)
(185,394)
(228)
(267,873)
318,623
50,522
7,987
(1,679)
145,905
(2,280)
149,933
15,061
46,600
61,661
19,211
$
16,465
$
5,870
— $
— $
10,499
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Lexicon Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
December 31, 2019
1. Organization and Operations
Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) is a Delaware corporation incorporated on July 7, 1995.
Lexicon was organized to discover the functions and pharmaceutical utility of genes and use those gene function discoveries in
the discovery and development of pharmaceutical products for the treatment of human disease.
Lexicon has financed its operations from inception primarily through sales of common and preferred stock, contract
and milestone payments to it under strategic collaborations and other research and development collaborations, target
validation, database subscription and technology license agreements, product sales, government grants and contracts and
financing under debt and lease arrangements. The Company’s future success is dependent upon many factors, including, but not
limited to, its ability to successfully commercialize XERMELO in the United States and the amount of revenues generated from
such commercialization efforts; Ipsen Pharma SAS’s (“Ipsen”) ability to successfully commercialize XERMELO outside of the
United States and Japan and Lexicon’s receipt of any milestone payments and royalties; the success of its ongoing nonclinical
and clinical development efforts and ability to obtain necessary regulatory approvals of the drug candidates which are the
subject of such efforts; its success in establishing new collaborations and licenses, including for the development and
commercialization of sotagliflozin; general and industry-specific economic conditions which may affect research and
development expenditures; and its ability to obtain and enforce patents and other proprietary rights in its discoveries, comply
with federal and state regulations, and maintain sufficient capital to fund its activities. As a result of the aforementioned factors
and the related uncertainties, there can be no assurance of the Company’s future success.
2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements include the accounts of Lexicon and its
wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. In 2018, accounts payable
included $5.7 million related to its accrual for clinical studies. The Company has reclassified this amount to accrued liabilities
in the consolidated balance sheet for comparable presentation of accounts payable and accrued liabilities.
Use of Estimates: The preparation of financial statements in conformity with U. S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original
maturities of three months or less to be cash equivalents. As of December 31, 2019 and December 31, 2018, short-term
investments consist of U.S. treasury bills and corporate debt securities. The Company’s short-term investments are classified as
available-for-sale securities and are carried at fair value, based on quoted market prices of the securities. The Company views
its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the
security. Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity. Net
realized gains and losses, interest and dividends are included in interest income. The cost of securities sold is based on the
specific identification method.
Accounts Receivable: Lexicon records trade accounts receivable in the normal course of business related to the sale of
products or services. The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the
economic climate and other factors that could affect collectibility. Write-offs are evaluated on a case by case basis.
Inventory: Inventories are determined at the lower of cost or market value with cost determined under the specific
identification method and may consist of raw materials, work in process and finished goods. Inventory consisted of the
following as of December 31, 2019 and 2018 (in thousands):
F-6
Raw materials
Work-in-process
Finished goods
Total inventory
As of December 31,
2019
2018
$
$
3,182
$
153
908
4,243
$
3,564
232
884
4,680
Concentration of Credit Risk: Lexicon’s cash equivalents, investments and accounts receivable represent potential
concentrations of credit risk. The Company attempts to minimize potential concentrations of risk in cash equivalents and
investments by placing investments in high-quality financial instruments. The Company’s accounts receivable are unsecured
and are concentrated in pharmaceutical and biotechnology companies located in Europe and the United States. The Company
has not experienced any significant credit losses to date. In 2019, customers in Germany and the United States represented 89%
and 10% of revenue, respectively. In 2018, customers in Germany and the United States represented 53% and 40%,
respectively. In 2017, customers in Germany, France and the United States represented 65%, 18% and 17% of revenue,
respectively. At December 31, 2019, management believes that the Company has no significant concentrations of credit risk.
Segment Information and Significant Customers: Lexicon operates in one business segment, which primarily focuses
on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease.
Substantially all of the Company’s revenues have been derived from drug discovery alliances, target validation collaborations
for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology
licenses, subscriptions to its databases, product sales, government grants and contracts and compound library sales. In 2019,
Sanofi-Aventis Deutschland GmbH (“Sanofi”) represented 89% of revenues and no other individual customer represented more
than 10% of revenues. In 2018, Sanofi represented 53% of revenues and two independent specialty pharmacies, Biologics, Inc.
and Diplomate Pharmacy, represented 25% and 14% of revenues, respectively. In 2017, Sanofi and Ipsen represented 65% and
18% of revenues, respectively.
Intangible Assets: Intangible assets, net consist of in-process research and development acquired in business
combinations, which are reported at fair value, less accumulated amortization. Intangible assets with finite lives are amortized
using the straight-line method over their estimated useful lives. During 2017, intangible assets relating to XERMELO of $24.7
million were reclassified from indefinite-lived to finite-lived assets following the approval of XERMELO by the FDA. The
Company has recorded $1.8 million in amortization expense related to this asset in each of the years ended December 31, 2019
and 2018, respectively, and $1.5 million for the year ended December 31, 2017. Amortization expense is recorded as cost of
sales in the accompanying consolidated statements of comprehensive income (loss).
Estimated future amortization expense for intangible assets as of December 31, 2019 is as follows:
2020
2021
2022
2023
2024
Thereafter
For the Year Ending
December 31
(in thousands)
$
$
1,766
1,766
1,766
1,766
1,766
10,886
19,716
Property and Equipment: Property and equipment that is held and used is carried at cost and depreciated using the
straight-line method over the estimated useful life of the assets which ranges from three to 40 years. Maintenance, repairs and
minor replacements are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the
estimated useful life or the remaining lease term. Significant renewals and betterments are capitalized.
F-7
Impairment of Long-Lived Assets: Long-lived assets, right-of-use assets for leases and finite-lived intangible assets are
reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairments of long-
lived assets, including finite-lived intangible assets, in 2019, 2018 or 2017.
Indefinite-lived intangible assets are also tested annually for impairment and whenever indicators of impairment are
present. When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is
necessary to recalculate the fair value of its intangible assets. If management believes, as a result of the qualitative assessment,
that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates
the asset’s fair value. If the carrying value of the asset exceeds its fair value, then the intangible asset is written down to its fair
value. Lexicon determined that a triggering event occurred upon execution of the Termination Agreement with Sanofi (as
defined in Note 13) and Lexicon's resulting decision to substantially reallocate resources from the development of certain
programs, including LX1031 and LX1033 for irritable bowel syndrome, to the development of sotagliflozin. In connection
with such triggering event, Lexicon determined that its LX1031 and LX1033 programs for irritable bowel syndrome,
collectively an intangible asset, were considered to be impaired and recorded an impairment charge of $28.6 million to IPR&D
for the year ended December 31, 2019. The impairment reduced the remaining book value to zero. There were no impairments
of indefinite-lived intangible assets in 2018 or 2017.
Goodwill Impairment: Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit
level. The Company has determined that the reporting unit is the single operating segment disclosed in its current financial
statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The
first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value,
including goodwill. If the fair value exceeds the carrying value, no further action is required and no impairment loss is
recognized. Additional impairment assessments may be performed on an interim basis if the Company encounters events or
changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been
impaired. There was no impairment of goodwill in 2019, 2018 or 2017.
Revenue Recognition:
Product Revenues
Product revenues consist of commercial sales of XERMELO in the United States and sales of bulk tablets of
XERMELO to Ipsen. Product revenues are recognized when the customer obtains control of the Company’s product, which
occurs upon delivery to the customer. The Company recognizes product revenue net of applicable reserves for variable
consideration, including allowances for customer credits, estimated rebates, chargebacks, discounts, returns, distribution service
fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States, as discussed below.
These estimates are based on the most likely amount method for relevant factors such as current contractual and statutory
requirements, industry data and forecasted customer buying and payment patterns. Product shipping and handling costs are
considered a fulfillment activity when control transfers to the Company’s customers and such costs are included in cost of sales.
Customer Credits: The Company’s customers are offered various forms of consideration, including allowances,
service fees and prompt payment discounts. The Company expects that its customers will earn prompt payment discounts. As
a result, the Company deducts the full amount of those discounts from total product sales when revenues are recognized.
Service fees are also deducted from product sales as they are earned.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate
amounts are based upon contractual agreements or legal requirements with public sector (e.g., Medicaid) benefit providers.
Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual
agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount
rates and expected utilization. The Company’s estimates for expected utilization of rebates are based on third party market
research data and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the
accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual
balance for known unpaid rebates from the prior quarter. If actual future rebates vary from estimates, the Company may need
to adjust prior period accruals, which would affect revenue in the period of adjustment.
F-8
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty
pharmacy or distributor, who acts as a retailer. Contracted customers, which currently consist primarily of Public Health
Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally
purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to Lexicon the
difference between the price paid by the specialty pharmacy or distributor and the discounted price paid to the specialty
pharmacy or distributor by the customer. The allowance for chargeback is based on known sales to contracted customers.
Medicare Part D Coverage Gap: The Medicare Part D prescription drug benefit mandates manufacturers to fund a
portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s
estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies and
projections based on historical data. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual
balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance
for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals,
which would affect revenues in the period of adjustment.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may
receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program
participation and estimates of program redemption using data provided by third-party administrators.
Collaborative Agreements
The Company adopted ASU NO. 2014-09, “Revenue from Contracts with Customers”, on January 1, 2018, using the
modified retrospective method. In its adoption, the Company recorded a $14.2 million cumulative-effect adjustment to its
accumulated deficit related to a contract with the Texas Institute for Genomic Medicine. Subsequent to adoption, the Company
was notified that all performance obligations related to the contract have been fulfilled.
Revenues under collaborative agreements include both license revenue and contract research revenue. The Company
performs the following five steps in determining the amount of revenue to recognize as it fulfills its performance obligations
under each of its agreements: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract,
and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company applies this five-step
model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods
or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance
obligation when (or as) the performance obligation is satisfied. The Company develops assumptions that require judgment to
determine the stand-alone selling price for each performance obligation identified in the contract.
At contract inception, the Company evaluates whether development milestones are considered probable of being
reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable
that a significant revenue reversal will not occur, the associated development milestone value is included in the transaction
price. Development milestones that are not within the control of the Company or the licensee, including those requiring
regulatory approval, are not considered probable of being achieved until those approvals are received. The transaction price is
allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes
revenue when (or as) the performance obligation is satisfied. At the end of each reporting period, the Company re-evaluates the
probability of achievement of the development milestones and any related constraint, and if necessary, adjusts its estimates of
the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect
collaboration revenues in the period of adjustment.
In agreements in which a license to the Company’s intellectual property is determined distinct from other performance
obligations identified in the agreement, the Company recognizes revenue when the license is transferred to the licensee and the
licensee is able to use and benefit from the license.
For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed
to be the predominant item to which the royalties relate and the Company recognizes revenue at the later of (i) when the related
sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or
partially satisfied).
F-9
The Company may receive payments from its licensees based on billing schedules established in each contract.
Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue
recognition to a future period until the Company performs its obligations under these agreements. Amounts are recorded as
accounts receivable when the Company’s right to consideration is unconditional.
Cost of Sales: Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated
with sales of XERMELO. The Company began capitalizing inventory during 2017 once the FDA approved XERMELO as the
related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of
XERMELO have been recorded as research and development expense in the consolidated statements of comprehensive income
(loss). As a result, cost of sales for approximately the next twelve months will reflect a lower average per unit cost of materials.
Product shipping and handling costs are included in cost of sales. Cost of sales also includes the amortization of the intangible
asset for XERMELO using the straight-line method over the estimated useful life of 14 years.
Research and Development Expenses: Research and development expenses consist of costs incurred for company-
sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead
expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development
and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical
trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For
preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract
milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of
the study. The Company's estimates of the clinical study costs and costs to transition activities from Sanofi for development of
sotagliflozin for type 2 diabetes, heart failure and chronic kidney disease was based on estimates of the services to be received
and efforts to be expended pursuant to contracts with multiple vendors and the CRO that will conduct and manage the clinical
studies on its behalf. The Company monitors patient enrollment, the progress of clinical studies and related activities to the
extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The
Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each
program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are
necessary or appropriate based on information it receives.
Stock-Based Compensation: The Company recognizes compensation expense in its statements of comprehensive
income (loss) for share-based payments, including stock options and restricted stock units issued to employees, based on their
fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required
to provide service in exchange for the stock award. Stock-based compensation expense for awards without performance
conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is
recognized over the period from the date the performance condition is determined to be probable of occurring through the time
the applicable condition is met. As of December 31, 2019, stock-based compensation cost for all outstanding unvested options
and restricted stock units was $24.0 million, which is expected to be recognized over a weighted-average period of 1.1 years.
The fair value of stock options is estimated at the date of grant using the Black-Scholes method. The Black-Scholes
option-pricing model requires the input of subjective assumptions. Because the Company’s employee stock options have
characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of determining the fair value of stock options, the
Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination
behaviors, resulting in different assumptions used for expected option lives. Historical data is used to estimate the expected
option life for each group. Expected volatility is based on the historical volatility in the Company’s stock price. The following
weighted-average assumptions were used for options granted in the years ended December 31, 2019, 2018 and 2017,
respectively:
F-10
December 31, 2019:
Employees
Officers and non-employee directors
December 31, 2018:
Employees
Officers and non-employee directors
December 31, 2017:
Employees
Officers and non-employee directors
Expected
Volatility
Risk-free
Interest Rate
Expected
Term
Dividend
Rate
88%
77%
58%
63%
61%
70%
2.2%
2.6%
2.6%
2.8%
1.7%
2.2%
4
8
4
8
4
8
0 %
0 %
0 %
0 %
0 %
0 %
Income Taxes: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized differently in the financial statements and tax returns. The Company uses the liability method
in accounting for income taxes. Under this method, deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of liabilities and assets using enacted tax rates and laws in
effect in the years in which the differences are expected to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be provided.
The Company maintains a valuation allowance on net operating losses and other deferred tax assets. Accordingly, the
Company has not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit
carryforwards that are available for utilization in future periods. On a periodic basis, the valuation allowance is reassessed on
deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In
2019, the Company reassessed the valuation allowance and considered negative evidence, including the cumulative losses over
the three years ended December 31, 2019, and positive evidence, including the income during the year ended December 31,
2019 and projections of future income. After assessing both the negative evidence and the positive evidence, the Company
concluded that it should continue to maintain the valuation allowance on net operating losses and other deferred tax assets as of
December 31, 2019 given the significance of the weight of the negative evidence. Based on recent financial performance and
future projections, the Company could record a reversal of all, or a portion of the valuation allowance associated with U.S.
deferred tax assets in future periods. However, any such change is subject to actual performance and other considerations that
may present positive or negative evidence at the time of the assessment. The total deferred tax asset balance subject to the
valuation allowance was approximately $333.6 million at December 31, 2019.
Significant judgment is required in making these assessments to maintain or reverse valuation allowances and, to the
extent future expectations change the Company would have to assess the recoverability of these deferred tax assets at that time.
The Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017. The 2017 Tax Act significantly changes
U.S. corporate income tax laws, including a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent,
reduction of certain tax credits, limitations on, or deductibility of interest expense and executive compensation, and limitations
on the use of net operating loss carryforwards.
Net Income (Loss) per Common Share: Net income (loss) per common share is computed using the weighted average
number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units
that could potentially dilute earnings per share in the future are not included in the computation of diluted earnings per share
because they are antidilutive.
3. Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2016-02, “Leases.” ASU 2016-02 requires companies that lease assets to recognize a right-of-use asset and a lease liability,
initially measured at the present value of the lease payments, in its balance sheet. The pronouncement also requires additional
disclosures about the amount, timing and uncertainty of cash flows arising from leases. This pronouncement was effective for
fiscal years, and interim periods within those years, beginning after December 15, 2018. This ASU was required to be adopted
using a modified retrospective approach. Management adopted ASU 2016-02 on the effective date of January 1, 2019 and
elected the practical expedient that allows entities to not apply the new guidance in the comparative periods they present in their
financial statements in the year of adoption. Consequently, prior year financial information has not been updated and the
disclosures required under the new standard have not been provided for periods prior to January 1, 2019. Upon adoption, the
Company recognized $2.1 million for right-of-use assets and corresponding liabilities on the consolidated balance sheet,
F-11
primarily related to leases of office space. The adoption of this ASU on January 1, 2019 did not have a material impact on
Lexicon’s consolidated financial statements.
Pronouncements Not Yet Adopted. In November 2018, the FASB issued ASU No. 2018-18, "Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606". This targeted amendment to Topic
808 clarifies that certain transactions resulting from a collaborative agreement should be accounted for as revenue under Topic
606 when the collaborative arrangement participant is a customer for a good or service that is a distinct unit-of-account. This
amendment is effective for fiscal years, and interim periods within years presented, beginning after December 15, 2019, and
should be applied retrospectively to the date of initial application of Topic 606. The Company has applied the provisions of
Topic 606 to account for its transactions for collaboration arrangements, including recognition, measurement, presentation and
disclosure requirements, and does not expect adoption of this ASU to have a material impact on its consolidated financial
statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other,” which is intended to simplify
the subsequent measurement of goodwill. The pronouncement allows an entity, during its annual or interim goodwill
impairment evaluation, to compare the fair value of a reporting unit with its carrying amount. An impairment charge is
immediately recognized by which the carrying amount exceeds the fair value. This ASU is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2019. The Company does not expect adoption of this ASU to
have a material impact on its consolidated financial statements.
4. Cash and Cash Equivalents and Investments
The fair value of cash and cash equivalents and investments held at December 31, 2019 and 2018 are as follows:
Cash and cash equivalents
Securities maturing within one year:
U.S. treasury securities
Total short-term investments
Total cash and cash equivalents and investments
Cash and cash equivalents
Securities maturing within one year:
U.S. treasury securities
Corporate debt securities
Total short-term investments
Total cash and cash equivalents and investments
Amortized
Cost
As of December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated Fair
Value
36,112
$
— $
— $
36,112
235,463
235,463
271,575
$
$
94
94
94
$
$
(10)
(10) $
(10) $
235,547
235,547
271,659
Amortized
Cost
As of December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated Fair
Value
80,386
$
— $
— $
80,386
73,983
5,695
79,678
160,064
$
$
—
—
— $
— $
(9)
(3)
(12) $
(12) $
73,974
5,692
79,666
160,052
$
$
$
$
$
$
There were no realized gains or losses for the years ended December 31, 2019 and 2018.
F-12
5. Fair Value Measurements
The Company uses various inputs in determining the fair value of its investments and measures these assets on a
recurring basis. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized by the level of
objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of
subjectivity associated with the inputs to fair valuation of these assets and liabilities:
•
•
•
Level 1 – quoted prices in active markets for identical assets, which include U.S. treasury securities
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated
inputs, etc.), which include corporate debt securities
Level 3 – significant unobservable inputs
The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated
with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and
liabilities that are measured at fair value on a recurring basis according to the fair value levels defined above as of
December 31, 2019 and 2018.
Assets
Cash and cash equivalents
Short-term investments
Total cash and cash equivalents and investments
Assets
Cash and cash equivalents
Short-term investments
Total cash and cash equivalents and investments
Assets and Liabilities at Fair Value
As of December 31, 2019
Level 1
Level 2
Level 3
Total
(in thousands)
36,112
235,547
271,659
$
$
— $
—
— $
— $
—
— $
36,112
235,547
271,659
Assets and Liabilities at Fair Value
As of December 31, 2018
Level 1
Level 2
Level 3
Total
(in thousands)
80,386
73,974
154,360
$
$
— $
5,692
5,692
$
— $
—
80,386
79,666
— $
160,052
$
$
$
$
The Company did not have any Level 3 assets or liabilities at December 31, 2019 or 2018. Transfers between levels
are recognized at the actual date of circumstance that caused the transfer. There were no transfers between Level 1 and Level 2
during the periods presented.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets include goodwill associated with the acquisitions of Coelacanth Corporation in 2001 and Symphony Icon in
2010 and intangible assets associated with the acquisition of Symphony Icon in 2010. For these assets, measurement at fair
value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired.
Refer to Note 9, Debt Obligations, for fair value measurements of debt obligations.
F-13
6. Property and Equipment
Property and equipment at December 31, 2019 and 2018 are as follows:
Computers and software
Furniture and fixtures
Laboratory equipment
Leasehold improvements
Buildings
Land
Total property and equipment
Less: Accumulated depreciation and amortization
Net property and equipment
Estimated Useful
Lives
In Years
As of December 31,
2019
2018
(in thousands)
3-5
5-7
3-7
3-7
15-40
—
$
4,587
$
5,629
3,279
417
59,212
2,664
75,788
(61,741)
$
14,047
$
4,557
5,644
3,378
416
59,212
2,664
75,871
(60,006)
15,865
7. Income Taxes
Lexicon recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been
recognized differently in the financial statements and tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement carrying amounts and tax bases of liabilities and assets
using enacted tax rates and laws in effect in the years in which the differences are expected to reverse. Deferred tax assets are
evaluated for realization based on a more-likely-than-not criteria in determining if a valuation allowance should be provided.
The components of Lexicon’s deferred tax assets (liabilities) at December 31, 2019 and 2018 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credits
Orphan drug credits
Capitalized research and development
Stock-based compensation
Deferred revenue
Interest
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred tax liability related to acquisition of Symphony Icon
Other
Total deferred tax liabilities
Less: valuation allowance
Net deferred tax liabilities
F-14
As of December 31,
2019
2018
(in thousands)
$
193,270
$
206,789
46,306
24,524
58,596
5,340
—
—
5,533
333,569
(4,140)
(3)
(4,143)
(329,426)
$
— $
47,087
24,524
71,047
4,641
5,458
3,625
6,044
369,215
(10,525)
(2)
(10,527)
(364,702)
(6,014)
Deferred tax assets associated with net operating losses (NOLs), deferred revenue and interest decreased in 2019 due
to the Termination Agreement (as defined in Note 13) with Sanofi. Refer to Note 13, Collaboration and License Agreements,
for additional information. The $4.1 million deferred tax liability relates to the tax impact of future amortization or possible
impairments associated with intangible assets acquired with Symphony Icon, which are not deductible for tax purposes.
A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2019, 2018 and
2017 consists of the following:
Year Ended December 31,
2019
2018
2017
(in thousands)
Expected income tax expense (benefit) at 21%, 21% and 35%,
respectively
$
26,065
$
(25,315)
$
(47,479)
State income taxes, net of federal benefit
Equity compensation
Research and development credit
Orphan drug credit
Deferred true-up
Tax rate change
Symphony Icon fair value adjustment
Change in valuation allowance
Other (1)
Income tax benefit
445
1,688
—
—
—
—
—
(35,276)
1,064
(6,014)
$
$
(809)
1,059
(978)
—
—
—
—
25,928
115
—
(2,324)
1,447
(1,993)
(189)
(5,316)
169,464
735
(126,634)
(372)
$
(12,661)
(1) Other is primarily comprised of expiring Research and Development credits for the year ended December 31, 2019.
At December 31, 2019, Lexicon had both federal and state NOL carryforwards of approximately $879.7 million and
$83.0 million, respectively. In 2019, federal NOLs decreased by $62.2 million primarily due to utilization against taxable
income. The state NOL carryforwards decreased due to a legislative change from pre-apportionment to post-apportionment
reporting in New Jersey. The federal and state NOL carryforwards will begin to expire in 2022. The Company’s R&D tax
credit carryforwards of approximately $46.3 million begin to expire in 2020. The orphan drug credit relates to a credit that is
calculated as a percentage of expenditures for development of XERMELO, which has received Orphan Drug designation from
the FDA. Utilization of the NOL, R&D credit and orphan drug credit carryforwards may be subject to a significant annual
limitation due to ownership changes that have occurred previously or could occur in the future provided by Section 382 of the
Internal Revenue Code. Although NOLs were utilized in 2019, based on the federal tax law limits and the Company's
cumulative loss position, Lexicon concluded it was appropriate to establish a full valuation allowance for its net deferred tax
assets until an appropriate level of profitability is sustained. During the year ended December 31, 2019, the valuation
allowance decreased $35.3 million, primarily due to the Company’s utilization of NOLs and decreases to deferred revenue and
interest deferred tax assets.
Lexicon recorded an income tax benefit of $6.0 million in the year ended December 31, 2019 despite reporting pretax
income for the year. The result reflects the impact of the impairment of intangible assets associated with Symphony Icon and
the benefit from the utilization of federal NOLs for which a tax benefit had not previously been recognized, partially offset by
nondeductible expenses. There were no income tax benefits in the year ended December 31, 2018. Income tax benefits of
$12.7 million were recorded for the year ended December 31, 2017. Of the $12.7 million tax benefits, $8.7 million is the
release of a valuation allowance as a result of the ability to estimate the reversal of the deferred tax liability related to the
intangible associated with XERMELO and $4.0 million was recorded to remeasure the deferred tax liability associated with the
remaining indefinite-lived intangible asset associated with Symphony Icon at the newly enacted U.S. corporate income tax rate.
As of December 31, 2019 and 2018, the Company did not have any unrecognized tax benefits.
The Company is primarily subject to U.S. federal and New Jersey and Texas state income taxes. The tax years 1995 to
current remain open to examination by U.S. federal authorities and 2004 to current remain open to examination by state
authorities. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax
F-15
expense. As of December 31, 2019 and 2018, the Company had no accruals for interest or penalties related to income tax
matters.
8. Goodwill
On July 12, 2001, Lexicon completed the acquisition of Coelacanth Corporation in a merger. Coelacanth, now Lexicon
Pharmaceuticals (New Jersey), Inc., formed the core of the Company’s division responsible for small molecule compound
discovery. The results of Lexicon Pharmaceuticals (New Jersey), Inc. are included in the Company’s results of operations for
the period subsequent to the acquisition. Goodwill associated with the acquisition of $25.8 million, which represents the excess
of the $36.0 million purchase price over the fair value of the underlying net identifiable assets, was assigned to the consolidated
entity, Lexicon.
On July 30, 2010, Lexicon exercised its Purchase Option and completed the acquisition of Symphony Icon, Inc.
Goodwill associated with the acquisition of $18.7 million, which represents the assets recognized in connection with the
deferred tax liability acquired and did not result from excess purchase price, was assigned to the consolidated entity, Lexicon.
Goodwill is not subject to amortization, but is tested at least annually for impairment at the reporting unit level, which
is the Company’s single operating segment. The Company performed an impairment test of goodwill on its annual impairment
assessment date. This test did not result in an impairment of goodwill.
9. Debt Obligations
Convertible Notes. In November 2014, Lexicon completed an offering of $87.5 million in aggregate principal amount
of its 5.25% Convertible Senior Notes due 2021 (the “Convertible Notes”). The conversion feature did not meet the criteria for
bifurcation as required by generally accepted accounting principles and the entire principal amount was recorded as long-term
debt on the Company’s consolidated balance sheets.
The Convertible Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the
Company and Wells Fargo Bank, N.A., as trustee. The Convertible Notes bear interest at a rate of 5.25% per year, payable
semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The Convertible Notes mature on
December 1, 2021. The Company may not redeem the Convertible Notes prior to the maturity date, and no sinking fund is
provided for the Convertible Notes.
Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of
business on the business day immediately preceding the maturity date. Upon conversion, the Company will deliver for each
$1,000 principal amount of converted Convertible Notes a number of shares of its common stock equal to the conversion rate,
as described in the Indenture. The conversion rate is initially 118.4553 shares of common stock per $1,000 principal amount of
Convertible Notes (equivalent to an initial conversion price of $8.442 per share of common stock). The conversion rate is
subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain
corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to
convert its Convertible Notes in connection with such a corporate event in certain circumstances.
If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any
portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the
Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase
date.
In connection with the issuance of the Convertible Notes, the Company incurred $3.4 million of debt issuance costs.
The debt issuance costs are amortized as interest expense over the expected life of the Convertible Notes using the effective
interest method. The Company determined the expected life of the debt was equal to the seven-year term of the Convertible
Notes. As of December 31, 2019, the balance of unamortized debt issuance costs was $0.9 million, which offsets long-term
debt on the consolidated balance sheets. As of December 31, 2019, the carrying value of the Convertible Notes was
$86.6 million.
The fair value of the Convertible Notes was $64.8 million as of December 31, 2019 and was determined using Level 2
inputs based on the indicative pricing published by certain investment banks or trading levels of the Convertible Notes, which
are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.
F-16
Mortgage Loan. In August 2018, a wholly owned subsidiary of Lexicon entered into a term loan and security
agreement, refinancing the previously existing mortgage on its facilities in The Woodlands, Texas (the “Property”). The
Company recorded the refinancing as a debt extinguishment, with no recognition of gain or loss on the transaction. The loan
agreement provides for a $12.9 million mortgage on the Property and has a two-year term with a 10-year amortization. The
mortgage loan bears interest at a rate per annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5% and (b) 7.5% and
provides for a balloon payment of $10.3 million due in August 2020. Lexicon incurred $0.4 million of debt issuance costs in
connection with the mortgage loan, which offsets the current portion of long-term debt on the consolidated balance sheets and
will be amortized as interest expense over the two-year term of the loan agreement. As of December 31, 2019, the balance of
unamortized debt issuance costs was $0.1 million. The consolidated balance sheet includes mortgage debt, the carrying value
of the debt, of $11.0 million as of December 31, 2019. The buildings and land that serve as collateral for the mortgage loan are
included in property and equipment at $59.2 million and $2.7 million, respectively, before accumulated depreciation, as of
December 31, 2019. The fair value of Lexicon’s mortgage loan approximates its carrying value. The fair value of Lexicon’s
mortgage loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated
current incremental borrowing rate.
In January 2020, Lexicon’s wholly owned subsidiary entered into a real estate purchase and sale agreement under
which Lexicon agreed to sell its facilities in The Woodlands, Texas. Such sale is subject to normal and customary closing
conditions, including a study period, which extends until April 9, 2020, during which the purchaser may conduct inspections,
analyses and other studies of the property and may terminate the agreement in its discretion. Such sale is also subject to the
negotiation and execution by the parties of a leaseback agreement for a period of six months with respect to a portion of the
property concurrently with closing.
BioPharma Term Loan. In December 2017, Lexicon entered into a loan agreement with BioPharma Credit PLC and
BioPharma Credit Investments IV Sub LP under which $150 million was funded in December 2017 (the “BioPharma Term
Loan”). The BioPharma Term Loan matures in December 2022, bears interest at 9% per year, subject to additional interest if
an event of default occurs and is continuing, and is payable quarterly.
The BioPharma Term Loan is subject to mandatory prepayment provisions that require prepayment upon a change of
control or receipt of proceeds from certain non-ordinary course transfers of assets. The Company may prepay the BioPharma
Term Loan in whole at its option at any time. Any prepayment of the BioPharma Term Loan is subject to customary make-
whole premiums and prepayment premiums.
The Company’s obligations under the BioPharma Term Loan are secured by a first lien security interest in
substantially all of the assets of the Company and certain of its subsidiaries, other than its facilities in The Woodlands, Texas.
The loan agreement contains certain customary representations and warranties, affirmative and negative covenants and events
of default applicable to the Company and certain of its subsidiaries, including among other things, covenants restricting
dispositions, fundamental changes in our business, mergers or acquisitions, indebtedness, encumbrances, distributions,
investments, transactions with affiliates and subordinated debt. If an event of default occurs and is continuing, all amounts
outstanding under the BioPharma Term Loan may be declared immediately due and payable.
In connection with the BioPharma Term Loan, the Company incurred $4.1 million of debt issuance costs. The debt
issuance costs are amortized as interest expense over the expected life of the BioPharma Term Loan using the effective interest
method. The Company determined the expected life of the debt was equal to the five-year term of the BioPharma Term Loan.
As of December 31, 2019, the balance of unamortized debt issuance costs was $2.4 million, which offsets long-term debt on the
consolidated balance sheets. As of December 31, 2019, the carrying value of the BioPharma Term Loan was $147.6 million.
The fair value of the BioPharma Term Loan approximates its carrying value. The fair value of the BioPharma Term
Loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current
incremental borrowing rate.
F-17
The following table includes the aggregate scheduled future principal payments of the Company’s long-term debt as of
December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Total debt
Less deferred financing costs
Less current portion
Total long-term debt
10. Commitments and Contingencies
For the Year Ending
December 31
(in thousands)
$
$
11,130
87,500
150,000
—
—
—
248,630
(3,447)
(11,012)
234,171
Operating Lease Obligations: A Lexicon subsidiary leases office space in Basking Ridge, New Jersey under a lease
agreement, the term of which began in June 2015 and terminates in December 2022. As disclosed in Note 3, Lexicon adopted
ASU 2016-02, "Leases", on January 1, 2019. As of December 31, 2019, the office space lease right-of-use (ROU) asset had a
balance of $1.7 million, which is included in other assets in the consolidated balance sheet, and current and non-current
liabilities relating to the ROU asset were $0.6 million and $1.1 million, respectively, which are included in accrued liabilities
and other long-term liabilities in the consolidated balance sheet, respectively. The discount rate used to record the office space
lease was Lexicon's estimated borrowing rate of 9%. Lexicon elected to apply the short-term lease exception to all leases one
year or less.
The following table reconciles the undiscounted cash flows of the operating lease liability to the recorded lease
liability at December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Total undiscounted operating lease liability
Less: amount of lease payments representing interest
Present value of future lease payments
Less: short-term operating lease liability
Long-term operating lease liability
(in thousands)
620
632
645
—
—
—
1,897
(242)
1,655
(553)
1,102
$
$
Employment Arrangements: Lexicon has entered into employment arrangements with certain of its corporate officers.
Under the arrangements, each officer receives a base salary, subject to adjustment, with an annual discretionary bonus based
upon specific objectives to be determined by the compensation committee. The employment arrangements are at-will and some
contain non-competition agreements. Some of the arrangements also provide for certain severance payments for either six or 12
months and, in some cases, payment of a specified portion of the officer’s bonus target for such year, in the event of a specified
termination of the officer’s employment.
F-18
Legal Proceedings: On January 28, 2019, a purported securities class action complaint captioned Daniel Manopla v.
Lexicon Pharmaceuticals, Inc., Lonnel Coats, Jeffrey L. Wade and Pablo Lapuerta, M.D. was filed against the Company and
certain of its officers in the U.S. District Court for the Southern District of Texas, Houston Division. A first amended
complaint was filed on July 30, 2019 and Lexicon filed a motion to dismiss such first amended complaint on September 30,
2019. The plaintiff filed an opposition to Lexicon's motion to dismiss on November 14, 2019 and Lexicon filed a reply in
support of its motion to dismiss on December 13, 2019. The lawsuit purports to be a class action brought on behalf of
purchasers of the Company’s securities during the period from March 11, 2016 through July 29, 2019. The complaint alleges
that the defendants violated federal securities laws by making materially false and misleading statements and/or omissions
concerning data from its Phase 3 clinical trials of sotagliflozin in type 1 diabetes patients and the prospects of FDA approval of
sotagliflozin for the treatment of type 1 diabetes. The complaint purports to assert claims for violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks, on behalf of the
purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other
relief.
In addition, Lexicon is from time to time party to claims and legal proceedings that arise in the normal course of its
business and that it believes will not have, individually or in the aggregate, a material adverse effect on its results of operations,
financial condition or liquidity.
11. Equity Incentive Awards
Equity Incentive Plans
2017 Equity Incentive Plan: In September 1995, Lexicon adopted the 1995 Stock Option Plan, which was
subsequently amended and renamed the 2017 Equity Incentive Plan (the “Equity Incentive Plan”).
The Equity Incentive Plan provides for the grant of incentive stock options to employees and nonstatutory stock
options to employees, directors and consultants of the Company. The plan also permits the grant of stock bonus awards,
restricted stock awards, restricted stock unit awards, stock appreciation rights and performance stock awards. Incentive and
nonstatutory stock options have an exercise price of 100% or more of the fair market value of the Company’s common stock on
the date of grant. Most stock options granted under the Equity Incentive Plan become vested and exercisable over a period of
four years; however some have been granted with different vesting schedules. Stock options granted under the Equity Incentive
Plan have a term of ten years from the date of grant.
The total number of shares of common stock that may be issued pursuant to stock awards under the Equity Incentive
Plan shall not exceed in the aggregate 20,000,000 shares at December 31, 2019. In the first quarter of 2020, the Company
amended the 2017 Equity Incentive Plan, subject to stockholder approval, to increase the aggregate number of shares that may
be issued under the plan to 30,000,000 shares. As of December 31, 2019, options to purchase 7,456,905 shares and 2,801,928
restricted stock units were outstanding, 1,909,515 shares had been issued upon the exercise of stock options, 1,968,979 shares
had been issued pursuant to restricted stock units and 113,940 shares had been issued pursuant to stock bonus awards or
restricted stock awards granted under the Equity Incentive Plan.
2017 Non-Employee Directors’ Equity Incentive Plan: In February 2000, Lexicon adopted the 2000 Non-Employee
Directors’ Stock Option Plan, which was subsequently amended and renamed the 2017 Non-Employee Directors’ Equity
Incentive Plan (the “Directors’ Plan”). Under the Directors’ Plan, non-employee directors may be granted awards under the
plan with an aggregate grant date fair value of no more than $500,000 during any calendar year, taken together with any cash
fees paid to such non-employee director in compensation for service on Lexicon’s board of directors during such calendar
year. Stock options granted under the Directors’ Plan have an exercise price equal to the fair market value of the Company’s
common stock on the date of grant and a term of ten years from the date of grant.
The total number of shares of common stock that may be issued pursuant to stock awards under the Directors’ Plan
shall not exceed in the aggregate 600,000 shares. As of December 31, 2019, stock options to purchase 237,850 shares were
outstanding, none had been issued upon the exercise of stock options, 27,728 restricted stock units were outstanding and
103,208 shares had been issued pursuant to restricted stock awards granted under the Directors’ Plan.
F-19
Stock Option Activity: The following is a summary of stock option activity under Lexicon’s equity incentive plans:
(in thousands, except exercise price data)
Options
2019
2018
2017
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Options
Options
Outstanding at beginning of year
6,152
$
10.68
4,961
$
Granted
Exercised
Expired
Forfeited
Outstanding at end of year
Exercisable at end of year
2,435
—
(212)
(680)
7,695
5.06
—
9.95
10.42
8.95
1,916
(97)
(239)
(389)
6,152
4,275
$
10.56
3,620
$
11.17
10.00
7.55
14.21
12.04
10.68
10.72
4,834
$
892
(458)
(157)
(150)
4,961
3,077
$
11.24
14.31
11.97
26.42
13.84
11.17
10.95
The weighted average estimated grant date fair value of stock options granted during the years ended December 31,
2019, 2018 and 2017 were $3.18, $5.63 and $8.59, respectively. The total intrinsic value of stock options exercised during the
years ended December 31, 2018 and 2017 were $0.2 million and $2.0 million, respectively. The weighted average remaining
contractual term of stock options outstanding and exercisable was 6.8 and 5.3 years, respectively, as of December 31, 2019. At
December 31, 2019, the aggregate intrinsic value of the outstanding stock options was $0.2 million. At December 31, 2019,
there was no intrinsic value of exercisable stock options.
Stock Bonus and Restricted Stock Unit Activity:
During the year ended December 31, 2019, Lexicon granted its non-employee directors 27,728 restricted stock units
and during the year ended December 31, 2018 and 2017, granted its non-employee directors 20,512 and 10,248 shares,
respectively, of restricted stock awards. The restricted stock in 2019, 2018 and 2017 had weighted average grant date fair
values of $5.67, $7.80 and $15.61 per share, respectively. Vesting of restricted stock units occurs on the first anniversary of the
grant date and vesting of restricted stock awards is immediate.
During the years ended December 31, 2019, 2018 and 2017, Lexicon granted its employees restricted stock units in
lieu of or in addition to annual stock option awards. These restricted stock units vest in three to four annual installments. The
total fair value of shares vested in 2019, 2018 and 2017 was $2.9 million, $3.3 million and $4.7 million, respectively.
The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the
year ended December 31, 2019:
Outstanding at December 31, 2018
Granted
Vested
Forfeited
Outstanding at December 31, 2019
Aggregate Shares Reserved for Issuance
Weighted Average
Grant Date Fair
Value
Shares
(in thousands)
1,286
$
2,446
(517)
(385)
2,830
$
10.17
5.05
9.60
6.50
6.35
As of December 31, 2019, an aggregate of 10,524,411 shares of common stock were reserved for issuance upon
exercise of outstanding stock options and vesting of outstanding restricted stock units and 5,979,947 additional shares were
available for future grants under Lexicon’s equity incentive plans. The Company has a policy of using either authorized and
unissued shares or treasury shares, including shares acquired by purchase in the open market or in private transactions, to
satisfy equity award exercises.
F-20
12. Benefit Plan
Lexicon maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all full-time employees. Participating employees may defer a portion of their pretax earnings, up to the
Internal Revenue Service annual contribution limit. Beginning in 2000, the Company was required to match employee
contributions according to a specified formula. The matching contributions totaled $1.2 million, $1.0 million and $1.0 million
in the years ended December 31, 2019, 2018 and 2017, respectively. Company contributions are vested based on the
employee’s years of service, with full vesting after four years of service.
13. Collaboration and License Agreements
Lexicon has derived substantially all of its revenues from drug discovery and development alliances, target validation
collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice,
product sales, government grants and contracts, technology licenses, subscriptions to its databases and compound library sales.
Sanofi. In November 2015, Lexicon entered into a Collaboration and License Agreement, which was subsequently
amended in July 2017 (collectively, the “Sanofi Agreement”), with Sanofi for the worldwide development and
commercialization of Lexicon’s diabetes drug candidate sotagliflozin. In December 2016, Sanofi terminated its rights under the
Sanofi Agreement with respect to Japan.
Effective as of September 9, 2019 (the “Settlement Date”), Lexicon entered into a Termination and Settlement
Agreement and Mutual Releases (the “Termination Agreement”) with Sanofi, pursuant to which the Sanofi Agreement was
terminated and associated disputes between Lexicon and Sanofi were settled.
Under the terms of the Termination Agreement, Lexicon regained all rights to sotagliflozin and assumed full
responsibility for the worldwide development and commercialization of sotagliflozin in all indications. Sanofi paid Lexicon
$208 million in September 2019, $26 million in March 2020 (less amounts withheld by Sanofi offsetting certain third party
costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by Lexicon under the terms of the Termination
Agreement) and is obligated to pay an additional $26 million within twelve months of the Settlement Date, and neither party
will owe additional payments pursuant to the Sanofi Agreement. The parties have cooperated in the transition of responsibility
for ongoing clinical studies and other activities, and each party is responsible for its own expenses associated with such
transition, subject to certain exceptions. The following is a summary description of the Sanofi Agreement without giving effect
to the Termination Agreement.
Under the Sanofi Agreement, Lexicon had granted Sanofi an exclusive, worldwide (excluding Japan), royalty-bearing
right and license under its patent rights and know-how to develop, manufacture and commercialize sotagliflozin. Subject to
specified exceptions, neither party could (a) perform clinical development activities relating to any other compound which
inhibits sodium-glucose cotransporters type 1 or type 2 or (b) commercialize any such compounds in the United States,
countries of the European Union and certain other specified countries, in each case during the royalty terms applicable in such
countries. Among the specified exceptions was a right Lexicon retained to pursue the development of its development
candidate LX2761, with respect to which Lexicon granted Sanofi certain rights of first negotiation specified in the Sanofi
Agreement.
Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $300 million. In addition, Lexicon was
eligible to receive from Sanofi (a) up to an aggregate of $110 million upon the achievement of four development milestones
relating to the results of certain Phase 3 clinical trials of sotagliflozin in type 2 diabetes patients, (b) up to an aggregate of $220
million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval
of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones
representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate
to type 1 diabetes, (c) $100 million upon the achievement of a milestone based on the results of either of two outcomes studies
in type 2 diabetes patients, the completion of which would likely occur after initial regulatory approval of sotagliflozin in type 2
diabetes, and (d) up to an aggregate of $990 million upon the achievement of six commercial milestones that will be achieved
upon reaching specified levels of sales. The Company believed that each of the development and regulatory milestones under
the Sanofi Agreement was substantive. Due to the uncertainty surrounding the achievement of the future development and
regulatory milestones, these payments were deemed constrained and were not recognized as revenue. Commercial milestones
would have been accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other
revenue recognition criteria were met. Lexicon was also entitled to tiered, escalating royalties ranging from low double digit
percentages to forty percent of net sales of sotagliflozin, based on indication and territory, with royalties for the higher band of
F-21
such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty
reduction provisions.
Lexicon continued to be responsible for all clinical development activities relating to type 1 diabetes and exercised an
exclusive option to co-promote and have a significant role, in collaboration with Sanofi, in the commercialization of
sotagliflozin for the treatment of type 1 diabetes in the United States. Under the terms of its co-promotion option, Lexicon
would have funded forty percent of the commercialization costs relating to such co-promotion activities. Sanofi was responsible
for all clinical development and commercialization of sotagliflozin for the treatment of type 2 diabetes worldwide and would
have been solely responsible for the commercialization of sotagliflozin for the treatment of type 1 diabetes outside the United
States. Lexicon shared in the funding of a portion of the planned type 2 diabetes development costs over the first three years of
the collaboration, up to an aggregate of $100 million, which was satisfied in 2018. Sanofi would have booked sales worldwide
in all indications.
The parties were responsible for using commercially reasonable efforts to perform their development and
commercialization obligations pursuant to mutually approved development and commercialization plans.
The parties’ activities under the Sanofi Agreement were governed by a joint steering committee and certain other
governance committees which reflected equal or other appropriate representation from both parties. If the applicable
governance committee was not able to make a decision by consensus and the parties were not able to resolve the issue through
escalation to specified senior executive officers of the parties, then Sanofi would have final decision-making authority, subject
to limitations specified in the Sanofi Agreement.
The Sanofi Agreement would have expired upon the expiration of all applicable royalty terms for all licensed products
in all countries. The royalty term for each licensed product in each country was the period commencing on the effective date of
the Sanofi Agreement and ending on the latest of expiration of specified patent coverage, expiration of specified regulatory
exclusivity and 10 years following the first commercial sale in the applicable country. Either party could terminate the Sanofi
Agreement in the event of an uncured material breach by the other party. Prior to completion of the core development activities
for type 2 diabetes specified in the development plan, Sanofi could terminate the Sanofi Agreement on a country-by-country
and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed
product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement
that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c)
the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party
intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual
property rights.
The Company considered the following as its performance obligations with respect to the revenue recognition of the
$300 million upfront payment:
•
•
•
The exclusive worldwide license granted to Sanofi to develop and commercialize sotagliflozin;
The development services Lexicon is performing for sotagliflozin relating to type 1 diabetes; and
The funding Lexicon will provide for development relating to type 2 diabetes.
The Company determined that the license had stand-alone value because it was an exclusive license that gave Sanofi
the right to develop and commercialize sotagliflozin or to sublicense its rights. In addition, sotagliflozin is currently in
development and it was possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon.
As a result, the Company considered the license and the development services under the Sanofi Agreement to be separate
performance obligations. The Company recognized the portion of the transaction price allocated to the license immediately
because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company was
recognizing as revenue the amount allocated to the development services for type 1 diabetes over the period of time Lexicon
performed services, which was expected to be through 2027, and recognized as revenue the obligation to provide funding for
development services for type 2 diabetes over the period of time Lexicon provided the funding, which was completed in 2018.
The Company determined that the initial transaction price was the $300 million upfront payment because it was the
only payment that was fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the
date of the agreement as to whether Lexicon would earn milestone payments or royalty payments. As such, the Company did
not include those payments in the allocable consideration. The Company allocated the transaction price based on the relative
best estimate of selling price of each performance obligation. The Company estimated the selling price of the license
deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the
Company used to determine the projected income of the license included: exercising the option to co-promote, estimated future
F-22
product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The
Company estimated the selling price of the development services for type 1 diabetes by using internal estimates of the cost to
hire third parties to perform the services over the expected period to perform the development. The Company estimated the
obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $100
million in funding.
As a result of the allocation of the Sanofi Agreement, the Company recognized $126.8 million of the $300 million
upfront payment for the license in 2015. The Company was recognizing the $113.8 million allocated to the development
services performance obligation and the $59.4 million allocated to the funding performance obligation over the estimated period
of performance as the development and funding occurred. The Termination Agreement was accounted for as a modification
under ASC 606. Upon execution of the Termination Agreement in September 2019, the Company recognized the remaining
$23.5 million allocated to Lexicon's performance obligations as revenue and reduced its remaining deferred revenue balance
accordingly. In addition, the Company recognized revenue of $260 million, representing the full cash consideration from the
Termination Agreement. The Company has no remaining performance obligations to Sanofi. Revenue recognized under the
collaboration agreements with Sanofi was $286 million, $33.2 million and $60.1 million for the years ended December 31,
2019, 2018 and 2017, respectively.
Ipsen. In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently
amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen for the development and commercialization of
XERMELO outside of the United States and Japan (the “Licensed Territory”).
Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent
rights and know-how to commercialize XERMELO in the Licensed Territory. Ipsen is responsible for using diligent efforts to
commercialize XERMELO in the Licensed Territory pursuant to a mutually approved commercialization plan. Subject to
certain exceptions, Lexicon was responsible for conducting clinical trials required to obtain regulatory approval for XERMELO
for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan,
and has the first right to conduct most other clinical trials of XERMELO. Lexicon was responsible for the costs of all clinical
trials contemplated by the initial development plan. The costs of additional clinical trials will be allocated between the parties
based on the nature of such clinical trials. Under the Ipsen Agreement, Ipsen has paid Lexicon an aggregate of $47.2 million
through December 31, 2019, consisting of $24.5 million in upfront payments, a $6.4 million milestone upon the acceptance of
the filing submitted by Ipsen to the European Medicines Agency for XERMELO as an adjunct to somatostatin analog therapy
for the long-term treatment of carcinoid syndrome, a $5.1 million milestone upon Ipsen’s receipt of approval from the European
Commission for the marketing of XERMELO in all member states of the European Union, Norway and Iceland, a $3.8 million
milestone upon Ipsen’s first commercial sale in Germany, a $3.8 million milestone upon Ipsen’s first commercial sale in the
United Kingdom, a $1.3 million milestone upon Ipsen’s receipt of approval from Health Canada and a $2.3 million milestone
upon Ipsen's first commercial sale in Canada. In addition, Lexicon is eligible to receive from Ipsen (a) up to an aggregate of
approximately $9.6 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an
aggregate of €72 million upon the achievement of specified sales milestones. Milestone payments are deemed constrained.
Lexicon is also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of
XERMELO in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture
and supply of such units of XERMELO. Lexicon and Ipsen have entered into a commercial supply agreement pursuant to
which Lexicon supplies Ipsen’s commercial requirements of XERMELO, and Ipsen pays an agreed upon transfer price for such
commercial supply.
The Company considered the following as its performance obligations with respect to the revenue recognition of the
$24.5 million upfront payment:
•
•
•
•
The exclusive license granted to Ipsen to develop and commercialize XERMELO in the Licensed
Territory;
The development services Lexicon is performing for XERMELO;
The obligation to participate in committees which govern the development of XERMELO
until commercialization; and
The obligation to supply commercial supply of XERMELO, under a commercial supply agreement.
The Company determined that the license had stand-alone value because it is an exclusive license that grants Ipsen the
right to develop and commercialize XERMELO or to sublicense its rights. In addition, at the time of the agreement, it would
have been possible for Ipsen or another third party to conduct clinical trials without assistance from Lexicon. As a result, the
Company considers the license and the development services under the Agreement to be separate performance obligations. The
Company recognized the portion of the transaction price allocated to the license immediately because Lexicon delivered the
F-23
license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount
allocated to the development services and the obligation to participate in committees over the period of time Lexicon performs
services, which was completed in 2018.
The Company determined that the commercial supply agreement is a contingent deliverable at the onset of the
Agreement. There was inherent uncertainty in obtaining regulatory approval at the time of the agreement, thus, making the
applicability of the commercial supply agreement outside the control of Lexicon and Ipsen. As a result, the Company has
determined the commercial supply agreement does not meet the definition of a performance obligation that needs to be
accounted for at the inception of the arrangement. The Company has also determined that there is no significant and
incremental discount related to the commercial supply agreement that should be accounted for at the inception of the
arrangement.
The Company determined that the initial transaction price was the $24.5 million upfront payments because they were
the only payments that were fixed and determinable at the inception of the arrangement. There was considerable uncertainty at
the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished
drug product. As such, the Company did not include those payments in the transaction price. The Company allocated the
transaction price based on the relative best estimate of selling price of each performance obligation. The Company estimated
the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount
rate. The significant inputs the Company used to determine the projected income of the license included: estimated future
product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The
Company estimated the selling price of the development services by using internal estimates of the cost to hire third parties to
perform the services over the expected period to perform the development. The Company estimated the selling price of the
obligation to participate in committees by using internal estimates of the number of internal hours and salary and benefits costs
to perform these services.
As a result of the allocation, the Company recognized $21.2 million of the $24.5 million upfront payment for the
license in 2014, and an additional $1.4 million in 2015 upon entering into the amendment. The Company recognized the $1.7
million allocated to the development services deliverable over the estimated period of performance as development occurs, and
recognized the $0.1 million allocated to the committee participation deliverable ratably over the estimated period of
performance. Milestone payments that are contingent upon the achievement of a substantive milestone are deemed constrained.
If or when the constraint is determined to be resolved, the Company will re-evaluate the overall transaction price and recognize
an adjustment on a cumulative catch-up basis in the period that the adjustment was evaluated. During 2019, the milestone
earned when Ipsen made its first commercial sale in Canada was determined to be a distinct performance obligation relating to
the development activities and accordingly, was recognized as revenue without further allocation to the remaining performance
obligations. Revenue recognized under the Agreement was $4.9 million, $4.6 million and $16.2 million for the years ended
December 31, 2019, 2018 and 2017, respectively. Revenue for the years ended December 31, 2019, 2018 and 2017 include
$0.3 million, $0.3 million and $0.1 million, respectively, of royalties from Ipsen. Revenue for the years ended December 31,
2019, 2018 and 2017 include $1.3 million, $1.6 million and $0.8 million, respectively, from sales of bulk tablets of
XERMELO to Ipsen.
F-24
14. Earnings (Loss) Per Share
The following is a summary of Lexicon's earnings (loss) per share calculations and reconciliations of basic to diluted
earnings (loss) per share:
(In thousands, except per share amounts)
2019
2018
2017
Year Ended December 31,
Numerator:
Net income (loss)
Add interest expense on Convertible Notes
Adjusted net income (loss)
Denominator:
Shares used in computing net income (loss) per
common share, basic
Add effect of potential dilutive securities
Share based awards
Convertible Notes
Shares used in computing net income (loss) per
common share, diluted
Net income (loss) per share - basic
Net income (loss) per share - diluted
$
$
$
$
130,133
5,067
135,200
$
$
(120,548)
—
(120,548)
$
$
(122,993)
—
(122,993)
106,218
105,830
105,237
164
10,365
—
—
—
—
116,747
105,830
105,237
1.23
1.16
$
$
(1.14)
(1.14)
$
$
(1.17)
(1.17)
For periods presented with a net loss, the weighted average number of shares outstanding are the same for both basic
and diluted net loss per common share. The average number of shares associated with stock options and restricted stock units
that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future was 8,206,390,
7,438,134 and 5,907,643, respectively, for the years ended December 31, 2019, 2018 and 2017. For periods presented with a
net loss, the shares associated with the Convertible Notes are not included in the computation of diluted earnings per share
because they are antidilutive.
F-25
15. Selected Quarterly Financial Data (Unaudited)
The table below sets forth certain unaudited statements of comprehensive income (loss) data, and net income (loss)
per common share data, for each quarter of 2019 and 2018:
(in thousands, except per share data)
2019
Revenues (1)
Income (loss) from operations
Net income (loss)
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Shares used in computing net income (loss) per
common share, basic
Shares used in computing net income (loss) per
common share, diluted
2018
Revenues
Loss from operations
Net loss
Net loss per common share, basic and diluted
Shares used in computing net loss per common
share, basic and diluted
March 31
June 30
September 30
December 31
Quarter Ended
(Unaudited)
$
$
$
$
$
$
$
$
$
9,216
$
(17,469) $
(21,797) $
(0.21) $
(0.21) $
9,682
$
(18,545) $
(23,018) $
(0.22) $
(0.22) $
$
$
$
$
294,448
224,676
226,086
2.13
1.95
8,727
(47,217)
(51,138)
(0.48)
(0.48)
106,054
106,272
106,272
106,272
106,054
106,272
116,640
106,272
25,374
$
(37,713) $
(41,821) $
(0.40) $
13,798
$
(30,272) $
(34,549) $
(0.33) $
6,966
$
(22,927) $
(27,396) $
(0.26) $
17,071
(12,367)
(16,782)
(0.16)
105,668
105,848
105,881
105,920
(1) Revenues for the three months ended September 30, 2019 include $260 million from the Sanofi Termination Agreement, as
defined in Note 13.
For periods presented with a net loss, the weighted average number of shares outstanding are the same for both basic
and diluted net loss per common share. For these periods, shares associated with convertible debt, stock options and restricted
stock units are not included in the weighted average number of shares of common stock outstanding because they are
antidilutive.
F-26
C O R P O R A T E S U M M A R Y
EXECUTIVE OFFICERS
LONNEL COATS
President and Chief Executive Officer
PABLO LAPUERTA, M.D.
Executive Vice President and
Chief Medical Officer
ALAN J. MAIN, PH.D.
Executive Vice President,
Commercial Supply Operations
ALEXANDER A. SANTINI
Executive Vice President
and Chief Commercial Officer
PRAVEEN TYLE, PH.D.
Executive Vice President,
Research and Development
JEFFREY L. WADE
Executive Vice President,
Corporate and Administrative Affairs
and Chief Financial Officer
BRIAN T. CRUM
Vice President and General Counsel
JAMES F. TESSMER
Vice President, Finance
and Accounting
BOARD OF DIRECTORS
RAYMOND DEBBANE
Chairman
President and Chief Executive Officer,
The lnvus Group, LLC
ALAN S. NIES, M.D.
Former Senior Vice President,
Clinical Sciences,
Merck & Co., Inc.
PHILIPPE J. AMOUYAL
Managing Director,
The lnvus Group, LLC
FRANK P. PALANTONI
Chief Executive Officer,
Laboratory M2
SAMUEL L. BARKER, PH.D.
Former President, U.S. Pharmaceutical
Group, Bristol-Myers Squibb Company
CHRISTOPHER J. SOBECKI
Managing Director,
The lnvus Group, LLC
JUDITH L. SWAIN, M.D.
Visiting Professor of Medicine,
National University of Singapore
and Chief Medical Officer,
Physiowave, Inc.
LONNEL COATS
President and Chief Executive Officer,
Lexicon Pharmaceuticals, Inc.
ROBERT J. LEFKOWITZ, M.D.
Investigator, Howard Hughes Medical
Institute and James B. Duke Professor of
Medicine and Professor of Biochemistry
Duke University Medical Center:
Recipient of 2012 Nobel Prize in Chemistry
©2020 Lexicon Pharmaceuticals
CORPORATE HEADQUARTERS
8800 Technology Forest Place
The Woodlands, TX 77381-1160
(281) 863-3000 tel
(281) 863-8088 fax
www.lexpharma.com
TRANSFER AGENT
Computershare
PO Box 30170
College Station, TX 77845
(877) 854-4583
www-us.computershare.com/investor
ANNUAL REPORT
Our 2019 annual report on Form 10-K is
available, without charge, upon request
by contacting our Investor Relations
Department at (281) 863-3000.
ANNUAL MEETING
Our annual meeting of shareholders will be
held at 8:00 a.m. CDT on April 23, 2020 at
Lexicon’s corporate headquarters at:
8800 Technology Forest Place
The Woodlands, TX 77381
This annual report to shareholders contains forward-
looking statements relating to Lexicon's commercial
products and clinical and preclinical development
programs and
therapeutic and
the potential
commercial potential of those commercial products
and drug candidates. These statements involve risks,
uncertainties and other important factors that may
cause Lexicon's actual results to be materially different
from any future results expressed or implied by such
forward-looking statements. Informa tion identifying
such risks, uncertainties and other important factors
is contained in the section entitled “Risk Factors”
and elsewhere in our annual report on Form 10-K for
the year ended December 31, 2019, as filed with the
Securities and Exchange Commission and included as
part of this annual report to shareholders.
CORPORATE HEADQUARTERS
8800 Technology Forest Place
The Woodlands, TX 77381-1160
(281) 863-3000 tel
(281) 863-8088 fax
www.lexpharma.com