Lexicon Pharma Stock: Significant Upside Tied To Successful Inpefa Commercialization (2024)

It's been an interesting few months for Lexicon Pharmaceuticals (NASDAQ:LXRX) since I last wrote about this small, commercialization-stage biotech. While the share price fell below $1 on a few occasions, increased optimism around the company's efforts to get its lead drug Inpefa onto formularies and see meaningful growth in prescriptions has helped the stock gain back enough ground to be more or less flat with where it was at the time of that last article.

The debate around Lexicon really hasn't changed - while Inpefa has demonstrated impressive clinical results in patients with congestive heart failure (arguably superior to rivals like AstraZeneca's (AZN) Farxiga and Eli Lilly (LLY) / Boehringer Ingelheim's Jardiance), it remains to be seen if this late entrant into the market can gain meaningful share and build a revenue base large enough to drive the company to profitability. It's simply too soon to say from a reported prescriptions basis, though the company has definitely made some high-profile progress on reimbursem*nt/formulary inclusion.

I believe the opportunity in heart failure can support a fair value of around $3/share, while LX9211 is worth another $1/share or so. That's substantially higher than today's price around $1.80, but I again caution readers that commercial failure is very much a possible outcome and this is by no means a "money for nothing" sort of proposition.

Bringing Payors On Board

As of the company's presentation at a major sell-side conference earlier in January, the company now has coverage/reimbursem*nt agreements in place with insurers representing 42% of covered lives in the United States. Among those are Cigna Group's (CI) Express Scripts, the largest pharmacy benefits manager in the country, which has listed Inpefa on both its basic and high-performance formularies for commercial insurance clients and as a preferred product on its Medicare formularies (essentially meaning lower out-of-pocket costs for patients).

To be honest, there are too few comparable companies to Lexicon to fairly gauge this process. I can name some other commercial-stage biotechs that saw faster coverage adoption, but in many cases those were rarer diseases with fewer treatment options. In any case, I would argue that 40%+plus coverage in approximately seven months of commercial availability is okay but not outstanding.

It does remain to be seen what inclusion on Express Scripts' lists will cost the company. It's not exactly a secret that Express Scripts (and other PBMs) offer a pretty simple deal to drug companies - give us a meaningful discount and you'll be our preferred pick - but the details of these agreements are kept highly confidential. Discounts of more than 50% aren't unheard of, and I wouldn't be at all surprised if the number here were in the ballpark of 30%.

Still, given a 90%-plus gross margin and the need to gain share and build a revenue base that can support ongoing marketing efforts (and the development of the pipeline), I don't think this is really a problem. While I do believe that Inpefa is superior to its rivals in at least some respects, the reality is that its rivals are far larger and have had more time on the market, making the "boost" from preferred status with insurers all the more important.

Cost Efficacy Data Won't Hurt

Back in mid-October, two studies were presented regarding the cost efficacy of Inpefa versus the standard of care in heart failure. As you might expect, the inclusion of Inpefa increased the overall cost of care, but with a 0.425 improvement in Quality-Adjusted Life Years (or QALY), the incremental cost of including Inpefa was under $46,000 - well within the threshold (often $100K to $150K) of what is usually considered a cost-effective new therapy.

Of course, investors should take this with at least a few grains of salt. An earlier study of Inpefa demonstrated a lower QALY (0.39) and higher cost (around $75,000), but that's still a solid outcome. I'd also note that the QALY's seen with Inpefa are comparatively quite good - other studies I've seen that looked at Jardiance and Farxiga calculated QALYs of 0.13 ranging to 0.23 and accordingly higher (worse) values for the incremental cost.

A lot of the benefit to Inpefa seems to come from the reduced incidence of hospitalization (including urgent visits), and that makes sense - hospital care, particularly in an emergency department setting is notoriously expensive. If real-world experience tracks these early papers (and believe me, insurers track these data carefully), over time the argument for Inpefa could become compelling enough for insurers to more aggressively push the use of this drug over its rivals.

By the same token, though, it's well worth remembering that Lexicon will see some of these competing drugs lose patent protection in the coming years and the entrance of generic options will change the math on the comparative value rather significantly. Likewise, increased use of GLP-1 drugs could alter the long-term landscape for heart failure care, as these drugs do appear to have meaningful benefits here as well.

Opportunities Outside Of Inpefa In Heart Failure Still Count For Something

Inpefa's commercial potential in heart failure is far and away the most important contributor to Lexicon's value, but it's not the only one.

Lexicon enrolled its first patients into its Phase IIb PROGRESS study of LX9211 in diabetic peripheral neuropathic pain (or DPNP) back in late November, and this dosing study should facilitate a Phase III program. I do have some concerns that the placebo-adjusted reductions in Average Daily Pain Score (or ADPS) weren't all that impressive (0.67pts in the best group versus 0.8 to 1.2 pts in trials for Lyrica and Cymbalta), but cross-trial comparisons are tricky and I think there is enough evidence of efficacy here to make further clinical studies worthwhile, especially as a successful product could be worth more than $600M (and perhaps meaningfully more).

Lexicon management also informed investors that it had paused proceedings against the FDA related to its refusal to approve sotagliflozin (the chemical name of Inpefa) for Type 1 diabetes in lieu of discussions (which are underway) about a potential path forward. As a reminder, while sotagliflozin demonstrated good efficacy in glucose control for Type 1 diabetics (for whom there are virtually no pharmaceutical options outside of insulin), the FDA flatly refused to approve sotagliflozin (or any other drug in the class) due to concerns about diabetic ketoacidosis.

I felt then, and still feel now, that these concerns were overblown and could be dealt with through patient education and monitoring. Whether this actually leads to approval is another question, as I'd be surprised if the FDA relents with anything less than another clinical study. Marketing sotagliflozin to the Type 1 patient community will be an expensive endeavor (particularly as the Inpefa marketing effort focuses on hospitals and not GP's/FP's or endocrinologists), but that's a bridge that can be crossed later.

The Outlook

I've made some adjustments to my model to account for modestly different pricing assumptions for Inpefa, the timing of LX9211 clinical development, and Lexicon's still-growing share count. The net impact is a reduction in my fair value estimate from $5 to a little more than $4/share, but every 1% of added CHF market share adds about $0.30/share in incremental value, and there's still value to be had if LX9211 succeeds and/or if the company eventually wins approval to market sotagliflozin for Type 1 diabetes.

At this point I still think Inpefa could be a $500M to $600M a year drug, but there's clearly a lot of work to do between the $0.2M logged in Q3'23, the $3.9M or so expected in Q4'23 (sell-side average estimate), the $46M expected in 2024 (again, average sell-side estimate), and so on. I want to see further progress in getting the drug added to formularies, and I want to see evidence of not just meaningful growth in prescriptions, but also meaningful absolute numbers (100% growth off a small number is still a small number).

The Bottom Line

I still regard Lexicon as a company and investment with a lot to prove. The track record here is not particularly good - the commercial launch of Xermelo was basically a failure and in my opinion management has a track record of overstating the progress and potential of the business (long-term investors/followers may remember the conversations had about potential partners for sotagliflozin and how a partnership was seemingly always just around the corner).

Still, Inpefa is a real drug addressing a real (and meaningful) market opportunity. I can't say that this stock is suitable for investors who can't accept well above-average risks, but for those willing to take the risk, the cost-benefit calculus around Inpefa could yet drive better returns.

Stephen Simpson