The rollercoaster ride of Lexicon Pharmaceuticals (NASDAQ:LXRX) has surely left investors feeling as if they’ve just ridden through a tempestuous storm. Since the last analysis, where the shares dipped below $1, they have managed to reclaim lost ground and are now stuttering around break-even.
The central argument about this pharma company has remained static – despite its Inpefa demonstrating remarkable clinical outcomes in patients battling congestive heart failure (arguably surpassing rivals like AstraZeneca‘s Farxiga and Eli Lilly / Boehringer Ingelheim‘s Jardiance), the ultimate test lies in whether this late arrival in the market can claim significant market share and generate sufficient revenue to push the company towards profitability. Reaching a verdict based on prescription reports remains inconclusive, but the strides made in securing reimbursement and formulary inclusion are certainly noteworthy.
Consensus indicates that the prospect in heart failure could prop up a fair valuation of approximately $3 per share, with LX9211 adding another $1 per share to the tally. This projection towers over the prevailing price of around $1.80. However, I must caution investors that commercial failure is a distinct possibility. This is by no means a “money for nothing” scenario.
Securing Buy-In from Payors
As of the company’s presentation at a prominent sell-side conference in January, agreements with insurers covering 42% of lives in the United States are now in place, including the notable addition of Cigna Group‘s (CI) Express Scripts, the largest pharmacy benefits manager in the nation. The latter has incorporated Inpefa into both its basic and high-performance formularies for commercial insurance clients and endorsed it as the preferred product on its Medicare formularies, effectively resulting in reduced patient out-of-pocket costs.
It cannot be denied that there are few equivalent companies to Lexicon, making a fair comparison of this process a challenging task. Although I can cite instances of other commercial-stage biotechs witnessing faster coverage adoption, these primarily involved rare diseases with limited treatment alternatives. Nevertheless, the achievement of securing 40%+ coverage within roughly seven months of commercial availability is commendable if not outstanding.
The exact expense of inclusion on Express Scripts’ lists remains to be seen. An open secret is that Express Scripts (and other PBMs) typically demand a substantial discount from drug companies for preferential treatment, although the specifics of these agreements are kept under wraps. Discounts exceeding 50% are not uncommon, and given Lexicon’s gross margin of over 90%, and the imperative to capture market share and construct a revenue base to sustain ongoing marketing and pipeline development, this shouldn’t pose a significant hurdle. Even if Inpefa possesses superior attributes compared to its rivals, the reality is that these competitors boast sizeable market presence and have spent more time in the arena, underlining the critical importance of the “boost” from preferred status with insurers.
Data on Cost Efficiency Serves as a Boon
In mid-October, two studies delineating the cost efficiency of Inpefa versus the standard heart failure treatments were presented. As anticipated, the incorporation of Inpefa augmented the overall cost of care. However, with a 0.425 amelioration in Quality-Adjusted Life Years (QALY), the incremental cost of integrating Inpefa remained under $46,000. This falls comfortably within the customary threshold (often $100K to $150K) for the consideration of a cost-effective novel therapy.
Naturally, investors should ingest this information with a pinch of skepticism. An earlier study of Inpefa displayed a lower QALY of 0.39 and a higher cost of around $75,000, although this is still a commendable result. It’s worth noting that the QALYs associated with Inpefa are notably strong – other studies examining Jardiance and Farxiga reported QALYs ranging from 0.13 to 0.23, along with correspondingly higher (worse) values for incremental costs.
A large part of the benefit from Inpefa appears to stem from the reduced frequency of hospitalization, including emergency visits, which is understandable given the exorbitant costs associated with hospital care, particularly in an emergency department setting. If real-world data mirrors these early papers (and believe me, insurers scrutinize this data vigilantly), over time, the argument for Inpefa could become compelling enough for insurers to actively promote the use of this drug over its rivals.
Conversely, it’s prudent to bear in mind that Lexicon will witness some of these competing drugs lose patent protection in the coming years. The introduction of generic options will substantially alter the calculus regarding the comparative value. Similarly, the accelerated utilization of GLP-1 drugs could reshape the long-term landscape for heart failure care, given their observable benefits in this domain.
Diversified Avenues Beyond Inpefa In Heart Failure Hold Significance
While the commercial potential of Inpefa in heart failure undoubtedly forms the critical pillar of Lexicon’s worth, it’s not the solitary one.
Lexicon initiated enrollment of the first cohort into its Phase IIb PROGRESS study of LX9211 in diabetic peripheral neuropathic pain (DPNP) towards the end of November. This dosing study is expected to expedite a Phase III program. Although there are reservations about the placebo-adjusted reductions in Average Daily Pain Score (ADPS) not being overly impressive (0.67pts in the superior group compared to 0.8 to 1.2 pts in Lyrica and Cymbalta trials), comparisons across trials are intricate, and there is adequate evidence of efficacy to justify further clinical investigations. The successful fruition of this product could potentially command a value exceeding $600M.
Additionally, Lexicon management disclosed the suspension of actions against the FDA concerning its denial to approve sotagliflozin (the chemical identity of Inpefa) for
Inpefa’s Potential and the Future of Lexicon Pharmaceuticals
The Path Forward for Sotagliflozin
Amid ongoing debates regarding the future of sotagliflozin, particularly in the context of treating Type 1 diabetes, concerns over diabetic ketoacidosis have impeded the FDA’s approval of this drug, which has shown promising efficacy in glucose control for individuals with Type 1 diabetes. The lack of pharmaceutical alternatives for these patients underscores the significance of finding a viable solution beyond insulin.
While the FDA’s refusal to approve sotagliflozin based on ketoacidosis concerns may seem overblown, the path to approval remains uncertain, possibly requiring further clinical studies. Marketing this drug to the Type 1 diabetes community is also anticipated to be an expensive endeavor, focusing on hospitals rather than general practitioners or endocrinologists. Despite these challenges, there is still hope for a way forward.
Assessed Outlook and Investment Perspective
In light of adjustments made to the financial model, taking into account varied pricing assumptions for Inpefa, LX9211 clinical development timing, and the expanding share count of Lexicon, the fair value estimate has been revised from $5 to just over $4 per share. Nevertheless, even a modest increase in CHF market share can significantly enhance the company’s value. Moreover, potential success for LX9211 and eventual approval for marketing sotagliflozin in Type 1 diabetes treatment could further augment this value.
While Inpefa is considered a potential $500 million to $600 million annual drug, the journey from the $0.2 million returns in Q3’23 to the anticipated $46 million in 2024 (as per the sell-side average estimate) is fraught with challenges. Further progress in formulary inclusion and substantial growth in actual prescription numbers are essential benchmarks for measuring success.
The Investment Verdict
Lexicon Pharmaceuticals stands as a company and investment that still has much to demonstrate. Previous endeavors, such as the commercial launch of Xermelo, have fallen short, and management’s tendency to inflate the company’s progress and potential raises skepticism. However, Inpefa presents a tangible opportunity to address a substantial market need. While the stock may not suit risk-averse investors, those open to above-average risks could find Inpefa’s cost-benefit analysis promising.
