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Item 7. Management’s Discussion and Analysis

2021-03-12 compared with 2020-03-12 · 118 added, 162 removed, 171 unchanged (62% of the section changed)

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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/m 2 , 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 devoting most of our resources to the research and development of our most advanced drug candidates:

• 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 reported results from two Phase 1 clinical trials of LX9211 and are now conducting a Phase 2 clinical trial of LX9211 in diabetic peripheral neuropathic pain and a second Phase 2 clinical trial of LX9211 in post-herpetic neuralgia.

LX9211 has received Fast Track designation from the FDA for development in diabetic peripheral neuropathic pain.

• We are developing sotagliflozin, an orally-delivered small molecule drug candidate, as a treatment for heart failure and type 1 diabetes.

We have reported positive results from two Phase 3 clinical trials evaluating the effect of sotagliflozin on long-term outcomes related to cardiovascular death and heart failure in approximately 10,500 and 1,200 patients, respectively.

We are now working towards an application for regulatory approval to market sotagliflozin for heart failure and seeking a strategic collaboration for the commercialization of sotagliflozin, if approved.

We have reported positive results from three Phase 3 clinical trials evaluating the effect of sotagliflozin on type 1 diabetes in approximately 800, 800 and 1,400 patients, respectively.

The FDA issued a complete response letter regarding our application for regulatory approval to market sotagliflozin for type 1 diabetes in the United States and, at our request, has issued a public Notice of Opportunity for Hearing on whether there are grounds for denying approval of our application.

Sotagliflozin has been approved in the European Union for use as an adjunct to insulin therapy in the treatment of type 1 diabetes, but has not yet been commercially launched.

• We are conducting preclinical research and development and preparing to conduct clinical development of compounds from a number of additional drug programs originating from our internal drug discovery efforts.

LX9211 originated from our collaborative neuroscience drug discovery efforts with Bristol-Myers Squibb, and sotagliflozin and compounds from a number of additional drug programs originated from our own internal drug discovery efforts.

Those 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 are working both independently and through collaborations and strategic 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.

We have derived substantially all of our revenues from strategic collaborations and other research and development collaborations and technology licenses, as well as from commercial sales of our XERMELO product following its commercial launch in February 2017 until our sale of XERMELO and related assets to TerSera in September 2020.

To date, we have generated a substantial portion of our revenues from a limited number of sources.

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;

Our operating results and, in particular, our ability to generate additional revenues are dependent on many factors, including the success of our ongoing nonclinical and clinical development efforts and the ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts;

TerSera’s ability to successfully develop and commercialize XERMELO for biliary tract cancer and our receipt of milestone payments and royalties from such efforts;

success in establishing new collaborations and licenses, particularly for the commercialization of sotagliflozin for heart failure;

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.

Future revenues from our sale of XERMELO to TerSera are uncertain because they depend on the achievement of milestones and payment of royalties we earn from TerSera’s development and commercialization of XERMELO in biliary tract cancer.

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.

We may determine, as we have with certain of our drug candidates, 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, 2020, we had an accumulated deficit of $1.4 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.

We expect to continue to incur significant research and development costs in connection with the continuing research and development of our drug candidates.

As a result, we will need to generate significantly higher revenues to achieve profitability.

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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.

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.

Prior to our sale of XERMELO and related assets to TerSera in September 2020, product revenues consisted of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen.

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

We 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 United States, as discussed below.

Our 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.

Our net product revenues reflected our best estimates of the amounts of consideration to which we were entitled based on the terms of the respective underlying contracts.

Product shipping and handling costs were considered a fulfillment activity when control transferred to our customers and such costs were 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.

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.

Our customers were offered various forms of consideration, including allowances, service fees and prompt payment discounts.

We expected that our customers would earn prompt payment discounts.

As a result, we deducted the full amount of those discounts from total product sales when revenues were recognized.

Service fees were also deducted from product sales as they were earned.

Allowances for rebates included mandated discounts under the Medicaid Drug Rebate Program.

Rebate amounts were 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.

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.

The allowance for rebates was based on statutory discount rates and expected utilization.

Our estimates for expected utilization of rebates were based on third party market research data and data received from the specialty pharmacies.

Rebates were generally invoiced and paid in arrears so that the accrual balance consisted 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 rebates varied from estimates, we adjusted prior period accruals, which affected revenue in the period of adjustment.

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.

Contracted customers, which consisted 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, charged 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 was 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.

Our estimates for the expected Medicare Part D coverage gap were based on data received from the specialty pharmacies and projections based on historical data.

Funding of the coverage gap was generally invoiced and paid in arrears so that the accrual balance consisted 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 funding varied from estimates, we adjusted prior period accruals, which affected 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.

We accrued 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:

We perform the following five steps in determining the amount of revenue to recognize as we fulfill our performance obligations under each of our agreements:

(i) identify the contract(s) with a customer;

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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;

We are presently devoting most of our resources to the research and development of our most advanced drug candidates:

• LX9211, an orally-delivered small molecule drug candidate, that we are developing as a treatment for neuropathic pain;

• Sotagliflozin, an orally-delivered small molecule drug candidate that we are developing as a treatment for heart failure and type 1 diabetes.

We have identified and validated in living animals, or in vivo, more than 100 targets with promising profiles for drug discovery.

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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.

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 regulatory approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our 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.

We may 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.

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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

the data provided by our vendors regarding the status of each program and total program spending.

Our estimates depend on the timeliness and accuracy of 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.

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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.

Our estimates of the clinical study costs and costs to transition activities from Sanofi for the development of sotagliflozin for type 2 diabetes, heart failure and chronic kidney disease, as well as the wind down of those activities, were based on estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the

contract research organization that conducted and managed 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.

In accruing the relevant costs, we estimated the time period over which services were to be performed and the level of effort required to complete or wind down each study.

Upon completion and settlement, these costs may differ materially from the amounts accrued in our consolidated financial statements.

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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:

Expected Volatility Risk-free Interest Rate Expected Term Dividend

December 31, 2019:

Employees 88 % 2.2 % 4 0 %

Officers and non-employee directors 77 % 2.6 % 8 0 %

December 31, 2018:

Employees 58 % 2.6 % 4 0 %

Officers and non-employee directors 63 % 2.8 % 8 0 %

December 31, 2017:

Employees 61 % 1.7 % 4 0 %

Officers and non-employee directors 70 % 2.2 % 8 0 %

Impairment of Long-Lived Assets

Our long-lived assets include property, plant and equipment, right-of-use assets for leases, finite-lived intangible assets and goodwill.

Our long-lived assets include property, plant and equipment, right-of-use assets for leases and goodwill.

We regularly review long-lived assets for impairment.

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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

when available and independent appraisals as appropriate to determine fair value.

We use internal cash flow estimates, quoted market prices 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.

In 2020, we recognized an impairment loss of $1.6 million to reduce the carrying value of the assets comprising our campus in The Woodlands, Texas, which were sold in December 2020, to an estimated fair value, less estimated selling costs.

There were no significant impairments of long-lived assets in 2019 or 2018.

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.

Indefinite-lived intangible assets, which was comprised primarily of in-process research and development, or IPR&D, projects acquired in business combinations which had not reached technological feasibility, is reviewed annually for impairment and whenever events or changes in circumstances indicated that the carrying amount may not have been recoverable.

In 2019, we terminated certain research and development activities related to a program for the 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.

Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level.

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There was no impairment of goodwill in 2020, 2019 and 2018.

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

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Total revenues $ 24.0 $ 322.1 $ 63.2

Dollar increase (decrease) $ 258.9 $ (28.5)

Percentage increase (decrease) 410 % (31) %

Dollar (decrease) increase $ (298.1) $ 258.9

Percentage (decrease) increase (93) % 410 %

Years Ended December 31, 2020 and 2019

• 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.

• Net product revenues – Net product revenue recognized from the sale of XERMELO in the United States decreased 25% in 2020 to $23.4 million, primarily due to the sale of XERMELO and related assets to TerSera on September 8, 2020.

Sales of bulk tablets of XERMELO to Ipsen were zero in 2020 compared to $1.3 million in 2019.

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.

• Collaborative agreements – Revenue from collaborative agreements was $289.2 million in 2019.

Revenue from collaborative agreements in 2019 included $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 9% in 2020 to $0.6 million.

In 2019, no customers for XERMELO sales represented more than 10% of revenues.

In 2020, two specialty pharmacies, Biologics, Inc.

and Diplomat Pharmacy, represented 65% and 22% of revenues, respectively.

In 2019 and 2018, Sanofi represented 89% and 53% of revenues, respectively.

In 2019, Sanofi represented 89% of revenues and no customers for XERMELO sales represented more than 10% of revenues.

Cost of Sales

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Total cost of sales $ 1.9 $ 3.2 $ 2.5

Dollar increase $ 0.7 $ 0.6

Percentage increase 30 % 31 %

Dollar (decrease) increase $ (1.3) $ 0.7

Percentage (decrease) increase (40) % 30 %

Years Ended December 31, 2020 and 2019

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 decreased 40% in 2020 to $1.9 million.

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.

Cost of sales in 2020 and 2019 included $1.2 million and $1.8 million, respectively, of amortization of intangible assets related to XERMELO.

Research and Development Expenses

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Total research and development expense $ 153.6 $ 91.9 $ 100.2

Dollar decrease $ (8.3) $ (52.0)

Percentage decrease (8) % (34) %

Dollar increase (decrease) $ 61.7 $ (8.3)

Percentage increase (decrease) 67 % (8) %

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, 2020 and 2019

• 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 – Third-party and other services increased 117% in 2020 to $121.2 million, primarily due to increases in external clinical development costs relating to sotagliflozin subsequent to the termination of our collaboration with Sanofi in September 2019.

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.

• Personnel – Personnel costs decreased 11% in 2020 to $18.4 million, primarily due to lower headcount as a result of the reduction in force of our personnel in September 2020, partially offset by severance costs related to the reduction in force (Refer to Note 4, Asset Sale, of the Notes to Consolidated Financial Statements, for more information).

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.

• Stock-based compensation – Stock-based compensation expense decreased 10% in 2020 to $6.4 million, primarily due to cancellation of unvested share-based awards as a result of the reduction in force of our personnel in September 2020.

• Facilities and equipment – Facilities and equipment costs decreased 6% in 2020 to $2.6 million.

• Other – Other costs decreased 13% in 2019 to $5.5 million.

• Other – Other costs were $5.1 million and $5.5 million, respectively, in 2020 and 2019.

Selling, General and Administrative Expenses

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Years Ended December 31, 2020 and 2019

• Personnel – Personnel costs increased 1% in 2019 to $28.4 million, primarily due to higher incentive compensation costs.

• Personnel – Personnel costs decreased 12% in 2020 to $24.9 million, primarily due to lower headcount as a result of the reduction in force of our personnel in September 2020, partially offset by severance costs related to the reduction in force (Refer to Note 4, Asset Sale, of the Notes to Consolidated Financial Statements, for more information).

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.

• 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.

• Professional and consulting fees – Professional and consulting fees decreased 25% in 2020 to $9.2 million, primarily due to lower marketing costs and legal fees.

• Stock-based compensation – Stock-based compensation expense decreased 3% in 2020 to $6.9 million, primarily due to cancellation of unvested share-based awards as a result of the reduction in force of our personnel in September 2020.

• Facilities and equipment – Facilities and equipment were $1.7 million and $1.8 million, respectively, in 2020 and 2019.

• Other – Other costs decreased 37% in 2020 to $4.6 million, primarily due to decreases in travel expenses due to the COVID-19 pandemic.

Impairment Losses

An impairment loss of $1.6 million in the year ended December 31, 2020 was recognized as a result of writing down the assets related to our campus in The Woodlands, Texas to the estimated selling price.

An impairment loss of $28.6 million in the year ended December 31, 2019 was recognized to an indefinite-lived intangible asset associated with our 2010 acquisition of Symphony Icon, Inc., due to the decision to terminate research and development activities related to a program for irritable bowel syndrome that was among the assets acquired.

Gain on the sale of XERMELO

A gain of $132.6 million in the year ended December 31, 2020 was recognized in connection with the sale of XERMELO and related assets to TerSera.

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 expense decreased to $14.5 million in 2020 from $20.7 million in 2019, primarily due to the $150 million payoff of the BioPharma term loan in September 2020 and the $75.8 million exchange of convertible notes in September and October 2020.

Interest and Other Income (Expense), Net.

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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.

Net loss was $58.6 million, or a loss of $0.53 per share, in 2020 as compared to net income of $130.1 million, or $1.16 per diluted share in 2019.

Liquidity and Capital Resources

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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, 2020, we had $152.3 million in cash, cash equivalents and short-term investments.

As of December 31, 2019, we had $271.7 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.

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

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.

We used cash of $143.0 million in our operations in 2020.

This consisted primarily of the net loss for the year of $58.6 million, gain from the sale of

XERMELO and related assets to TerSera of $132.6 million and net gain related to debt extinguishments of $1.0 million, partially offset by a net decrease in operating assets net of liabilities of $31.1 million, non-cash charges of $13.3 million related to stock-based compensation expense, $3.9 million related to depreciation and amortization expense, including amortization of debt issuance costs and $1.6 million related to the impairment loss on buildings.

Investing activities provided cash of $380.8 million in 2020, primarily due to $209.4 million of net maturities of investments, $160.4 million of proceeds from the sale of XERMELO and $11.0 million of proceeds from the sale of property and equipment.

Financing activities used cash of $147.6 million, primarily to repay $216.6 million of debt borrowings and to repurchase $1.0 million of common stock, partially offset by $70.0 million of net proceeds from common stock sales, including $7.0 million of net proceeds from the sale of 3,709,233 shares of common stock on November 17, 2020 under our Open Market Sale Agreement SM with Jefferies LLC.

We sold an additional 2,000,000 shares of common stock under the Open Market Sale Agreement SM with Jefferies on January 14, 2021, resulting in an additional $16.4 million in net proceeds.

On December 11, 2020, we entered into a subscription agreement with Invus and certain other institutional investors, pursuant to which we issued and sold 20,312,500 shares of our common stock and received net proceeds of $63.0 million.

Other commitments.

In April 2019, sotagliflozin 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/m 2 , who could not achieve adequate glycemic control despite optimal insulin therapy.

Upon the achievement of certain European regulatory pricing approvals, we will be required to make certain royalty payments, totaling $4.5 million, in three equal annual installments of $1.5 million.

In September 2020, we initiated a Phase 2 clinical trial of LX9211 in diabetic peripheral neuropathic pain.

As a result of the commencement of the Phase 2 trial, we were required to make a royalty payment of $2.5 million, which was paid in October 2020.

In December 2020, our subsidiary, Lex-Gen Woodlands, L.P., sold our facilities in The Woodlands, Texas for $11.9 million.

Concurrent with such sale, we entered into a leaseback agreement with respect to 38,000 square feet of such facilities for a period of up to six months, with monthly gross rent payments of $101,000.

In February 2021, we leased a 25,000 square-foot office space in The Woodlands, Texas to which we plan to relocate our corporate offices.

The term of the sublease extends from March 1, 2021 through August 31, 2025, and provides for escalating yearly base rent payments starting at $506,000 and increasing to $557,000 in the final year of the lease.

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:

Payments due by period (in millions)

Contractual Obligations Total Less than 1 year 2-3 years 4-5 years More than 5 years

Debt $ 248.6 $ 11.1 $ 237.5 $ — $ —

Interest payment obligations 50.0 18.9 31.1 — —

Total $ 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;

We have $12.3 million of convertible debt, including $0.6 million of interest, due in December 2021.

Our future capital requirements will be substantial and will depend on many factors, including the success of our ongoing nonclinical and clinical development efforts and the ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts;

TerSeras ability to successfully develop and commercialize XERMELO for biliary tract cancer and our receipt of milestone payments and royalties from such efforts;

our success in establishing new collaborations and licenses, particularly for the commercialization of sotagliflozin for heart failure;

the amount and timing of our research, development and commercialization expenditures;

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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;

We expect to continue to devote substantial capital resources to successfully complete our nonclinical and clinical development efforts with respect to LX9211, sotagliflozin and our other drug candidates;

and for other general corporate activities.

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The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.

From time to time, our board of directors may authorize us to repurchase shares of our common stock, repurchase, in cash or common stock, our outstanding convertible notes, or make a cash payment to holders of our convertible notes to induce conversion pursuant to the terms of the convertible notes, in each case, in privately negotiated transactions, publicly announced programs or otherwise.

If and when our board of directors should determine to authorize any such action, it would be on terms and under market conditions that our board of directors determines are in the best interest of us and our stockholders.

Any such actions could deplete significant amounts of our cash resources and/or result in additional dilution to our stockholders.

Disclosure about Market Risk

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We had approximately $152.3 million in cash and cash equivalents and short-term investments as of December 31, 2020.

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.

We believe that t he 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 as they are subject to a fixed rate of 5.25% per annum.

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.

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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-K

Item 7. Management’s Discussion and Analysis