What changed in this filing

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Item 1. Financial Statements

2020-10-30 compared with 2020-07-29 · 199 added, 128 removed, 330 unchanged (50% of the section changed)

3 unchanged sentences

(In thousands, except par value)

As of June 30, As of December 31,

As of September 30, As of December 31,

Assets (unaudited)

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Goodwill 44,543 44,543

Intangible assets, net of accumulated amortization of $ 5,886 and $ 5,003 , respectively

18,833 19,716

Intangible assets, net — 19,716

Other assets 1,341 1,655

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Commitments and contingencies

Stockholders’ Equity/(Deficit):

Stockholders’ Equity:

Preferred stock, $ 0.01 par value;

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( 4,843 ) ( 3,817 )

Total stockholders’ equity/(deficit) ( 10,687 ) 117,101

Total liabilities and equity/(deficit) $ 322,540 $ 417,715

Total stockholders’ equity 87,639 117,101

Total liabilities and equity $ 178,928 $ 417,715

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share amounts)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Impairment loss on buildings

1,600 — 1,600 —

Impairment loss on intangible asset — 28,638 — 28,638

Total operating expenses 52,777 69,772 196,956 124,684

Loss from operations ( 64,579 ) ( 18,545 ) ( 127,017 ) ( 36,014 )

Other operating income:

Gain on sale of XERMELO 132,818 — 132,818 —

Income (loss) from operations 86,675 224,676 ( 40,342 ) 188,662

Loss on debt extinguishments, net ( 255 ) — ( 255 ) —

Interest expense ( 4,118 ) ( 5,204 ) ( 14,374 ) ( 15,485 )

Interest and other income, net 301 600 1,892 2,080

Net loss $ ( 69,071 ) $ ( 23,018 ) $ ( 135,682 ) $ ( 44,815 )

Net loss per common share, basic and diluted $ ( 0.65 ) $ ( 0.22 ) $ ( 1.27 ) $ ( 0.42 )

Shares used in computing net loss per common share, basic and diluted

107,073 106,272 106,804 106,164

Other comprehensive loss:

Net income (loss) before taxes 82,603 220,072 ( 53,079 ) 175,257

Income tax benefit — 6,014 — 6,014

Net income (loss) $ 82,603 $ 226,086 $ ( 53,079 ) $ 181,271

Net income (loss) per common share, basic $ 0.77 $ 2.13 $ ( 0.50 ) $ 1.71

Net income (loss) per common share, diluted $ 0.71 $ 1.95 $ ( 0.50 ) $ 1.59

Shares used in computing net income (loss) per common share, basic 107,309 106,272 106,974 106,200

Shares used in computing net income (loss) per common share, diluted 117,552 116,640 106,974 116,742

Other comprehensive income (loss):

Unrealized gain (loss) on investments

( 277 ) ( 50 ) ( 49 ) 48

Comprehensive loss

$ ( 69,619 ) $ ( 22,965 ) $ ( 135,454 ) $ ( 44,717 )

Comprehensive income (loss) $ 82,326 $ 226,036 $ ( 53,128 ) $ 181,319

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Balance at June 30, 2019 106,679 106 1,455,131 ( 1,516,392 ) 86 ( 3,817 ) ( 64,886 )

Stock-based compensation — — 3,562 — — — 3,562

Net income — — — 226,086 — — 226,086

Unrealized loss on investments — — — — ( 50 ) — ( 50 )

Balance at September 30, 2019 106,679 $ 106 $ 1,458,693 $ ( 1,290,306 ) $ 36 $ ( 3,817 ) $ 164,712

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

Common Stock Additional Accumulated Other

Shares Par Value Paid-In Capital Accumulated Deficit Comprehensive Gain (Loss) Treasury Stock Total

Balance at December 31, 2019 106,679 $ 106 $ 1,462,172 $ ( 1,341,444 ) $ 84 $ ( 3,817 ) $ 117,101

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Balance at June 30, 2020 107,898 108 1,470,862 ( 1,477,126 ) 312 ( 4,843 ) ( 10,687 )

Stock-based compensation — — 1,904 — — — 1,904

Issuance of common stock, net of fees 9,333 9 14,087 — — — 14,096

Net income — — — 82,603 — — 82,603

Unrealized loss on investments — — — — ( 277 ) — ( 277 )

Balance at September 30, 2020 117,231 $ 117 $ 1,486,853 $ ( 1,394,523 ) $ 35 $ ( 4,843 ) $ 87,639

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

Net loss $ ( 135,682 ) $ ( 44,815 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net income (loss) $ ( 53,079 ) $ 181,271

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization 2,590 2,719

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Amortization of debt issuance costs 995 1,087

Impairment loss on building 1,600 —

Deferred tax benefit — ( 6,014 )

Gain on sale of XERMELO assets ( 132,818 ) —

Impairment loss on buildings 1,600 —

Impairment loss on intangible asset — 28,638

Loss on debt extinguishments, net 255 —

Changes in operating assets and liabilities:

Decrease in accounts receivable 25,656 344

(Increase) decrease in accounts receivable 52,201 ( 50,917 )

Decrease in inventory 345 204

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Decrease in deferred revenue — ( 25,929 )

Net cash used in operating activities ( 68,352 ) ( 52,520 )

Net cash (used in) provided by operating activities ( 108,730 ) 138,178

Cash flows from investing activities:

Purchases of property and equipment ( 33 ) ( 70 )

Proceeds from XERMELO sale 160,385 —

Purchases of investments ( 53,197 ) ( 176,987 )

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Net cash used in financing activities ( 211,786 ) ( 1,904 )

Net increase (decrease) in cash and cash equivalents 50,831 ( 69,280 )

Net increase in cash and cash equivalents 16,139 89,817

Cash and cash equivalents at beginning of period 36,112 80,386

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Cash paid for interest $ 16,892 $ 13,243

Supplemental disclosure of non-cash investing and financing activities:

Liabilities assumed by TerSera from the XERMELO sale 3,180 —

Common stock issued in satisfaction of convertible debt exchanges 14,096 —

The accompanying notes are an integral part of these condensed consolidated financial statements.

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In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the six-month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.

Operating results for the nine-month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.

The accompanying condensed consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries.

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Use of Estimates:

The preparation of financial statements in conformity with U.

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.

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Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.

As of June 30, 2020, short-term investments consisted of U.S.

As of September 30, 2020, short-term investments consisted of U.S.

treasury bills and corporate debt securities.

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Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services, net of an allowance for expected credit losses.

Inventory is comprised of the Company’s approved product it is commercializing in the United States, XERMELO ® (telotristat ethyl).

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 June 30, As of December 31,

(in thousands)

Raw materials $ 1,154 $ 3,182

Work-in-process $ 2,185 $ 153

Finished goods 650 908

Total inventory $ 3,989 $ 4,243

Inventory was comprised of supplies of XERMELO supporting the Company’s commercialization of the product in the United States.

Inventories were determined at the lower of cost or market value, with cost determined under the specific identification method.

As of December 31, 2019, inventory in the accompanying condensed consolidated balance sheet consisted of raw materials, work in process and finished goods in the amounts of $ 3.2 million, $ 0.2 million and $ 0.9 million, respectively.

See Note 3, Asset Sale, for additional information relating to inventory.

Intangible Assets :

Intangible assets, net consisted of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization.

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 U.S.

Food and Drug Administration (the “FDA”).

Intangible assets with finite lives are amortized using the straight-line method over their estimated lives.

As of December 31, 2019, the net carrying value of the finite-lived intangible assets was $ 19.7 million.

During the three and nine months ended September 30, 2020, the remaining net carrying value of $ 18.5 million for the intangible assets relating to XERMELO was reduced to zero as a result of the Xermelo sale.

Accrued liabilities:

Accrued liabilities consisted of the following:

As of June 30, As of December 31,

As of September 30, As of December 31,

(in thousands)

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Product Revenues

Product revenues consist of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen Pharma SAS (“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 U.S.

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.

The Company’s net product revenues reflect the Company’s best estimates of the amounts of consideration to which it is entitled based on the terms of the respective underlying contracts.

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.

Product revenues consisted of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen Pharma SAS (“Ipsen”).

Product revenues were recognized when the customer obtained control of XERMELO, which occurred upon delivery to the customer.

The Company recognized 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 U.S.

These estimates were 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.

The Company’s net product revenues reflected the Company’s best estimates of the amounts of consideration to which it was entitled based on the terms of the respective underlying contracts.

Product shipping and handling costs were considered a fulfillment activity when control transferred to the Company’s customers and such costs were included in cost of sales.

Collaborative Agreements

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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.

At contract inception, the Company assesses the goods or services promised within each contract, 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.

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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.

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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, 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).

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).

The Company may receive payments from its licensees based on billing schedules established in each contract.

Up-front 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.

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 the relevant agreement.

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.

Cost of sales consisted of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO.

Product shipping and handling costs are included in cost of sales.

Cost of sales also includes the amortization of the in-process research and development intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

For the three and nine months ended September 30, 2020, cost of sales in the accompanying condensed consolidated statement of income (loss) includes amortization expense of $ 0.3 million and $ 1.2 million, respectively, and for the three and nine months ended September 30, 2019, includes $ 0.4 million and $ 1.3 million, respectively.

Research and Development Expenses:

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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, including the costs to close out those studies, were based on actual costs incurred for activities completed subsequent to the transition date and estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the CRO that has conducted and managed and is now closing out the clinical studies on its behalf.

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, including the costs to close out those studies, are based on actual costs incurred for activities completed subsequent to the transition date and estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the contract research organization that has conducted and managed and is now closing out 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.

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Stock-Based Compensation:

The Company recognizes compensation expense in its condensed consolidated statements of comprehensive 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.

The Company recognizes compensation expense in its condensed consolidated statements of comprehensive loss for share-based payments, including stock options and restricted stock units granted 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.

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Expected volatility is based on the historical volatility in the Company’s stock price.

The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock option compensation granted, with the following weighted-average assumptions for options granted in the six months ended June 30, 2020 and 2019:

The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock option compensation granted, with the following weighted-average assumptions for stock options granted in the nine months ended September 30, 2020 and 2019:

Expected Volatility Risk-free Interest Rate Expected Term Dividend

June 30, 2020:

September 30, 2020:

Employees 91 % 1.3 % 4 — %

Officers and non-employee directors 78 % 1.4 % 8 — %

June 30, 2019:

September 30, 2019:

Employees 88 % 2.2 % 4 — %

Officers and non-employee directors 78 % 2.6 % 8 — %

The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the six months ended June 30, 2020:

The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, 2020:

Options Weighted Average Exercise Price

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Forfeited (1) ( 1,909 ) 5.71

Outstanding at June 30, 2020 10,606 7.05

Exercisable at June 30, 2020 4,972 $ 9.72

During the six months ended June 30, 2020, Lexicon granted its employees annual restricted stock units.

Outstanding at September 30, 2020 8,995 7.35

Exercisable at September 30, 2020 5,108 $ 9.63

(1) In connection with the reduction in force in September 2020, unvested stock options were forfeited or cancelled.

During the nine months ended September 30, 2020, Lexicon also granted its employees annual restricted stock units.

Outstanding employee restricted stock units vest in three to four annual installments.

The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the six months ended June 30, 2020:

The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, 2020:

Shares Weighted Average Grant Date

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Forfeited (1) ( 1,892 ) 4.13

Outstanding at June 30, 2020 4,416 $ 4.27

Outstanding at September 30, 2020 2,863 $ 4.35

(1) In connection with the reduction in force in September 2020, unvested restricted stock units were forfeited or cancelled.

Net Loss per Common Share:

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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.

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.

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The adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

In September 2020, the Company completed the sale of its XERMELO ® (telotristat ethyl) product and related assets (the “XERMELO sale”) to TerSera Therapeutics LLC (“TerSera”) pursuant to an Asset Purchase and Sale Agreement entered into in July 2020.

The upfront consideration paid by TerSera, subject to a working capital adjustment as set forth in the Asset Purchase and Sale Agreement, was $ 160.4 million and the net gain recognized in connection with the XERMELO sale was $ 132.8 million.

The gain is reflected on the condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

The Company remains eligible to receive development, regulatory and sales milestone payments of up to an aggregate of $ 65 million for the development and commercialization of telotristat ethyl in patients with biliary tract cancer and mid-teens royalty payments on net sales of XERMELO in biliary tract cancer.

The Company has determined that these amounts are constrained until the achievement, if any, of specific events.

If or when the constraint is determined to be resolved, the Company will re-evaluate the overall gain in connection with the XERMELO sale and recognize an adjustment on a cumulative catch-up basis in the period that the determination is made.

The XERMELO sale did not meet the criteria for reporting discontinued operations as there was not a strategic shift that has (or will have) a major effect on the Company’s operations.

For the three and nine months ended September 30, 2020, the pretax net loss on the condensed consolidated statement of comprehensive income (loss) for the Company’s XERMELO operations is $ 2.1 million and $ 12.1 million, respectively, and for the three and nine months ended September 30, 2019, the pretax net loss for the Company’s XERMELO operations is $ 4.1 million and $ 10.8 million, respectively.

As a result of the XERMELO sale, the Company implemented a reduction in force which reduced its workforce by approximately fifty percent.

The Company currently expects severance charges to approximate $ 5.7 million, of which $ 5.5 million was incurred through September 30, 2020.

Of this charge, $ 2.5 million was recorded in research and development expense and $ 3.0 million was recorded in selling, general and administrative expense in the accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

Cash and Cash Equivalents and Investments

The fair value of cash and cash equivalents and investments held at June 30, 2020 and December 31, 2019 are as follows:

As of June 30, 2020

The fair value of cash and cash equivalents and investments held at September 30, 2020 and December 31, 2019 are as follows:

As of September 30, 2020

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value

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$ 271,575 $ 94 $ ( 10 ) $ 271,659

There were no realized losses during either of the six months ended June 30, 2020 and 2019, respectively.

There were no realized losses during either of the nine months ended September 30, 2020 and 2019, respectively.

The cost of securities sold is based on the specific identification method.

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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 table provides the fair value measurements of applicable Company assets that are measured at fair value on a recurring basis according to the fair value levels defined above as of June 30, 2020 and December 31, 2019.

Assets and Liabilities at Fair Value as of June 30, 2020

Assets and Liabilities at Fair Value as of September 30, 2020

Level 1 Level 2 Level 3 Total

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Total cash and cash equivalents and investments $ 271,659 $ — $ — $ 271,659

The Company did not have any Level 3 assets or liabilities as of June 30, 2020 or December 31, 2019.

Transfers between levels are recognized at the actual date of circumstance that caused the transfer.

The Company did not have any Level 3 assets or liabilities as of September 30, 2020 or December 31, 2019.

Transfers between levels are recognized at the actual date of the 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.

These assets include goodwill associated with the acquisitions of Coelacanth Corporation in 2001 and Symphony Icon, Inc.

in 2010, and intangible assets associated with the acquisition of Symphony Icon, Inc.

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.

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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 condensed 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.

In September 2020, the Company entered into separate, privately negotiated exchange agreements to exchange $ 75.8 million aggregate principal amount of the Convertible Notes for consideration valued at 85% of the principle amount of the Convertible Notes.

In September 2020, the Company issued 9,332,471 shares of the Company’s common stock and paid $ 44.0 million in cash, which included $ 1.1 million of accrued interest, to exchange $ 67.1 million aggregate principal amount of such Convertible Notes.

The Company recorded the exchanges under the accounting requirements for debt extinguishment of convertible instruments.

As a result, a debt extinguishment gain of $ 8.4 million was recorded and is included in the accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

As of September 30, 2020, the carrying value of the remaining Convertible Notes was $ 20.0 million.

In October 2020, the Company issued 1,036,484 shares of the Company’s common stock and paid $ 6.0 million in cash, which included $ 0.2 million of accrued interest, to exchange an additional $ 8.8 million aggregate principal amount of such Convertible Notes.

As of September 30, 2020, these notes are included in the current portion of long-term debt, net of deferred issuance costs in the accompanying condensed consolidated balance sheet.

The remaining 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.

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The Company determined the expected life of the debt was equal to the seven-year term of the Convertible Notes.

As of June 30, 2020, the balance of unamortized debt issuance costs was $ 0.7 million, which offsets long-term debt on the condensed consolidated balance sheets.

As of June 30, 2020, the carrying value of the Convertible Notes was $86.8 million.

The fair value of the Convertible Notes was $ 44.7 million as of June 30, 2020 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.

As of September 30, 2020, the balance of unamortized debt issuance costs was $ 0.13 million, which was adjusted in September 2020 upon execution of the exchange agreements and offsets long-term debt on the condensed consolidated balance sheets.

The fair value of the remaining Convertible Notes was $ 15.4 million as of September 30, 2020 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.

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 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 condensed consolidated balance sheets and are amortized as interest expense over the two-year term of the loan agreement.

As of June 30, 2020, the balance of unamortized debt issuance costs was $ 0.03 million.

The condensed consolidated balance sheet includes mortgage debt, the carrying value of the debt, of $ 10.5 million as of June 30, 2020 and is included in current portion of long-term debt.

The buildings and land that serve as collateral for the mortgage loan are included in property and equipment at $ 57.6 million and $ 2.7 million, respectively, before accumulated depreciation, as of June 30, 2020.

The fair value of the loan agreement approximates its carrying value.

The loan agreement provided for a $ 12.9 million mortgage on the Property and had a two-year term with a 10-year amortization.

The mortgage loan bore 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 provided for a balloon payment of $ 10.3 million, which was paid in full in August 2020.

At December 31, 2019, the condensed consolidated balance sheet includes mortgage debt, the carrying value of the debt, of $ 11.0 million and is included in current portion of long-term debt.

The fair value of the loan agreement approximated its carrying value.

The fair value of the loan agreement was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

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 $ 150.0 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 the 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 December 2017, Lexicon entered into a loan agreement with BioPharma under which $ 150.0 million was funded in December 2017 (the “BioPharma Term Loan”).

The BioPharma Term Loan was scheduled to mature in December 2022, bore interest at 9 % per year, subject to additional interest if an event of default occurred and was continuing, and was payable quarterly.

The BioPharma Term Loan was subject to mandatory prepayment provisions that required prepayment upon a change of control or receipt of proceeds from certain non-ordinary course transfers of assets.

The Company repaid the BioPharma Term Loan in whole, together with required prepayment and make-whole premiums, upon closing of the XERMELO sale in September 2020.

The Company recorded the repayment under the accounting requirements for debt extinguishment and as a result, a loss of $ 8.6 million was recognized and is included in the accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

The Company’s obligations under the BioPharma Term Loan were 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 contained 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 the business, mergers or acquisitions, indebtedness, encumbrances, distributions,

investments, transactions with affiliates and subordinated debt.

If an event of default occurred and was continuing, all amounts outstanding under the BioPharma Term Loan may have been 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 debt issuance costs were being 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 June 30, 2020, the balance of unamortized debt issuance costs was $ 2.0 million, which offsets long-term debt on the condensed consolidated balance sheets.

As of June 30, 2020, the carrying value of the BioPharma Term Loan was $148.0 million.

The fair value of the BioPharma Term Loan approximates its carrying value.

The remaining balance of the debt issuance costs were written off and included as part of the debt extinguishment loss.

At December 31, 2019, the fair value of the BioPharma Term Loan approximated 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.

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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 Company’s motion to dismiss was granted and the action was dismissed with prejudice by the District Court on August 14, 2020.

The lead plaintiffs filed a notice of appeal to the U.S.

Court of Appeals for the Fifth Circuit on September 11, 2020.

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.

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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.

Sanofi Arbitration.

On October 16, 2020, the Company initiated arbitration proceedings against Sanofi-Aventis Deutschland GmbH (“Sanofi”) seeking to recover damages for breach of contract relating to the Termination and Settlement Agreement and Mutual Releases with Sanofi, dated September 9, 2019 (the “Termination Agreement”).

In September 2020, Sanofi withheld approximately $ 23.2 million from the final $ 26 million payment due to the Company under the Termination Agreement, offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by the Company under the terms of the Termination Agreement.

The Company disputes that at least a significant portion of such costs are properly reimbursable by the Company under the terms of the Termination Agreement and asserts that, in any event, Sanofi was not permitted to withhold any of such costs under the terms of the Termination Agreement.

The Company is seeking payment of up to $23.2 million in such disputed costs, together with late interest and attorneys’ fees and costs.

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.

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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”).

The Ipsen Agreement was assigned to TerSera in September 2020 in connection with the XERMELO sale.

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 June 30, 2020, consisting of $ 24.5 million in upfront payments and a $ 6.4 million milestone payment 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 that are contingent upon the achievement of a substantive milestone 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 will supply Ipsen’s commercial requirements of XERMELO, and Ipsen pays an agreed upon transfer price for such commercial supply.

Ipsen was 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 had 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 were to be allocated between the parties based on the nature of such clinical trials.

Under the Ipsen Agreement, Ipsen paid Lexicon an aggregate of $ 47.2 million through September 30, 2020, consisting of $ 24.5 million in upfront payments and a $ 6.4 million milestone payment 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 was 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 that were contingent upon the achievement of a substantive milestone were deemed constrained.

Lexicon was 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 had entered into a commercial supply agreement pursuant to which Lexicon supplied Ipsen’s commercial requirements of XERMELO, and Ipsen paid 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 payments:

• 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;

• The development services Lexicon was performing for XERMELO;

• The obligation to participate in committees which governed the development of XERMELO until commercialization;

• 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 gives Ipsen the right to develop and commercialize XERMELO or to sublicense its rights.

The Company determined that the license had stand-alone value because it was an exclusive license that gave 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 Ipsen Agreement to be separate performance obligations.

As a result, the Company considered the license and the development services under the Ipsen 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 recognized as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performed the 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.

The Company determined that the commercial supply agreement was a contingent deliverable at its onset.

There was inherent uncertainty in obtaining regulatory approval at the time of entry into the commercial supply agreement, thus making the applicability of the commercial supply agreement outside the control of Lexicon and Ipsen.

As a result, the Company determined the commercial supply agreement did not meet the definition of a performance obligation that needed to be accounted for at the inception of the arrangement.

The Company also determined that there was no significant and incremental discount related to the commercial supply agreement that should have been accounted for at the inception of the arrangement.

The Company determined that the initial transaction price was the $ 24.5 million in 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.

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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 payments for the license in 2014, and an additional $ 1.4 million in 2015 upon entering into the amendment.

As a result of the allocation, the Company recognized $ 21.2 million of the $ 24.5 million in upfront payments 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 performance obligation over the period of performance as development occurred, and recognized the $ 0.1 million allocated to the committee participation performance obligation ratably over the 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.

Revenue recognized under the Agreement was $0.2 million and $ 3.1 million for the six months ended June 30, 2020 and 2019, respectively.

Royalty revenue of $ 0.2 million and $ 0.1 million was recognized for the six months ended June 30, 2020 and 2019, respectively.

Milestone payments that were contingent upon the achievement of a substantive milestone were

deemed constrained.

If or when the constraint was determined to be resolved, the Company would re-evaluate the overall transaction price and recognize an adjustment on a cumulative catch-up basis in the period that the adjustment was evaluated.

Revenue recognized under the Ipsen Agreement was $ 0.3 million and $ 3.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Royalty revenue of $ 0.3 million was recognized for each of the nine months ended September 30, 2020 and 2019, respectively.

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 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 certain associated disputes between Lexicon and Sanofi were settled.

Effective as of September 9, 2019 (the “Settlement Date”), Lexicon entered into the Termination Agreement with Sanofi, pursuant to which the Sanofi Agreement was terminated and certain 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 $ 26 million within twelve months of the Settlement Date, and neither party will owe any additional payments pursuant to the Sanofi Agreement.

Sanofi paid Lexicon $ 208 million in September 2019 and $ 26 million in each of March and September 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 neither party will owe any 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.

In March 2020, Lexicon announced its plan to close out the clinical studies related to the Phase 3

development program for sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease.

See Note 7, Commitments and Contingencies, for additional information.

In March 2020, Lexicon announced its plan to close out the clinical studies related to the Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease.

Revenue relating to the Termination Agreement was recognized in the third quarter of 2019.

Revenue recognized under collaboration agreements with Sanofi was $ 0.3 million for the six months ended June 30, 2019.

Revenue recognized under the Sanofi Agreement was $ 286.0 million for the nine months ended September 30, 2019.

Impairment Loss on Buildings

In July 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 for a purchase price of $11.5 million.

The sale agreement is subject to normal and customary closing conditions, including a study period, which extends until August 24, 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 nine months with respect to a portion of the property concurrently with closing.

As of June 30, 2020, the assets are classified as held and used.

The Company determined the net carrying value of the buildings and related assets exceeds the estimated purchase price, which is deemed the current fair value, by $ 1.6 million.

As a result, the Company recorded an impairment loss on the buildings in the accompanying condensed consolidated statement of comprehensive loss for the six months ended June 30, 2020.

In October 2020, Lex-Gen Woodlands, L.P.

entered into a real estate purchase and sale agreement under which the Company agreed to sell its facilities in The Woodlands, Texas for a purchase price of $ 11.9 million.

The sale agreement is subject to normal and customary closing conditions, including a study period, which extends until November 20, 2020, during which the purchaser may conduct inspections, analyses and other studies of the property and may terminate the agreement at its discretion.

The property did not meet the criteria for classification as held for sale at September 30, 2020.

Due to the negotiations to sell the property in 2020, the Company evaluated for impairment and recognized an impairment charge of $ 1.6 million in the second quarter of 2020 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs.

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 data) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income (loss) $ 82,603 $ 226,086 $ ( 53,079 ) $ 181,271

Add interest on Convertible Notes 1,258 1,277 — 3,790

Adjusted net income (loss) $ 83,861 $ 227,363 $ ( 53,079 ) $ 185,061

Shares used in computing net income (loss) per common share, basic 107,309 106,272 106,974 106,200

Add effect of potential dilutive securities:

Share based compensation awards 51 3 — 177

Convertible Notes 10,192 10,365 — 10,365

Shares used in computing net income (loss) per common share, diluted 117,552 116,640 106,974 116,742

Net income (loss) per share - basic $ 0.77 $ 2.13 $ ( 0.50 ) $ 1.71

Net income (loss) per share - diluted $ 0.71 $ 1.95 $ ( 0.50 ) $ 1.59

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 11,773 and 10,576 , respectively, for the three months ended September 30, 2020 and 2019, and 11,859 and 8,452 , respectively, for the nine months ended September 30, 2020 and 2019.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements