LEXICON PHARMACEUTICALS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read with “Selected Financial Data” and our financial statements and notes included elsewhere in this annual report on Form 10-K. Overview We are a biopharmaceutical company with a mission of pioneering medicines that transform patients’ lives. We are devoting most of our resources to the 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 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 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 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 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; our 36 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 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, 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 units 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 research and development of our drug candidates. As a result, we will need to generate significantly higher revenues to achieve profitability. Critical Accounting Policies Revenue Recognition Product Revenues 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 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. Rebates: 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 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: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy or distributor, who acts as a retailer. Contracted customers, which consisted primarily of Public Health Service 37 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 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 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 we fulfill our performance obligations under each of our agreements: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation. We apply this five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. At contract inception, we evaluate whether development milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal will not occur, the associated development milestone value is included in the transaction price. Development milestones that are not within our control or the control of our licensee, including those requiring regulatory approval, are not considered probable of being achieved until those approvals are received. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue when (or as) the performance obligation is satisfied. At the end of each reporting period, we re-evaluate the probability of achievement of the development milestones and any related constraint, and if necessary, adjust our estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues in the period of adjustment. In agreements in which a license to our intellectual property is determined distinct from other performance obligations identified in the agreement, we recognize revenue when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed to be the predominant item to which the royalties relate and we recognize revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). We may receive payments from our licensees based on billing schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these agreements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. 38 Research and Development Expenses Research and development expenses consist of costs incurred for research and development activities solely sponsored by us as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. We are presently devoting most of our resources to the 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; and • Sotagliflozin, an orally-delivered small molecule drug candidate that we are developing as a treatment for heart failure and type 1 diabetes. 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. The drug development process takes many years to complete. The cost and length of time varies due to many factors including the type, complexity and intended use of the drug candidate. We estimate that drug development activities are typically completed over the following periods: Phase Estimated Completion Period Preclinical development 1-2 years Phase 1 clinical trials 1-2 years Phase 2 clinical trials 1-2 years Phase 3 clinical trials 2-4 years We expect research and development costs to remain substantial in the future as we continue to fund our nonclinical and clinical development efforts and advance new drug candidates into clinical development. Due to the variability in the length of time necessary for drug development, the uncertainties related to the cost of these activities and ultimate ability to obtain 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 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. Substantial portions of our nonclinical studies and clinical trials are performed by third party laboratories, medical centers, contract research organizations and other vendors. For nonclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the vendors and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by our vendors regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive. Although we use consistent milestones or subject or patient enrollment to drive expense recognition, the assessment of these costs is a subjective process that requires judgment. Upon settlement, these costs may differ materially from the amounts accrued in our consolidated financial statements. Our estimates of the clinical study costs and costs to transition activities from Sanofi for 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 39 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 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. We record our research and development costs by type or category, rather than by project. Significant categories of costs include personnel, facilities and equipment costs and third-party and other services. In addition, a significant portion of our research and development expenses is not tracked by project as it benefits multiple projects. Consequently, fully-loaded research and development cost summaries by project are not available. Impairment of Long-Lived Assets 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. The recoverability of long-lived assets, other than goodwill, is measured by comparing the assets carrying amount to the expected undiscounted future cash flows that the asset is expected to generate. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. We use internal cash flow estimates, quoted market prices 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, 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. We have determined that the reporting unit is the single operating segment disclosed in our current financial statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill. We determined that the market capitalization approach is the most appropriate method of measuring fair value of the reporting unit. Under this approach, fair value is calculated as the average closing price of our common stock for the 30 days preceding the date that the annual impairment test is performed, multiplied by the number of outstanding shares on that date. A control premium, which is representative of premiums paid in the marketplace to acquire a controlling interest in a company, is then added to the market capitalization to determine the fair value of the reporting unit. If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired. There was no impairment of goodwill in 2020, 2019 and 2018. Recent Accounting Pronouncements See Note 3, Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements, for a discussion of the impact of new accounting standards on our consolidated financial statements. 40 Results of Operations – Comparison of Years Ended December 31, 2020, 2019 and 2018 The following discussion and analysis should be read with “Results of Operations” and our financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2020. Revenues Total revenues and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are presented in millions): Year Ended December 31, 2020 2019 2018 Total revenues $ 24.0 $ 322.1 $ 63.2 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 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 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 2020, two specialty pharmacies, Biologics, Inc. and Diplomat Pharmacy, represented 65% and 22% 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 Total cost of sales and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are presented in millions): Year Ended December 31, 2020 2019 2018 Total cost of sales $ 1.9 $ 3.2 $ 2.5 Dollar (decrease) increase $ (1.3) $ 0.7 Percentage (decrease) increase (40) % 30 % Years Ended December 31, 2020 and 2019 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. Cost of sales in 2020 and 2019 included $1.2 million and $1.8 million, respectively, of amortization of intangible assets related to XERMELO. 41 Research and Development Expenses Research and development expenses and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are presented in millions): Year Ended December 31, 2020 2019 2018 Total research and development expense $ 153.6 $ 91.9 $ 100.2 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 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 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 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 were $5.1 million and $5.5 million, respectively, in 2020 and 2019. Selling, General and Administrative Expenses Selling, general and administrative expenses and dollar and percentage changes as compared to the prior year are as follows (dollar amounts are presented in millions): Year Ended December 31, 2020 2019 2018 Total selling, general and administrative expense $ 47.2 $ 56.8 $ 63.8 Dollar decrease $ (9.6) $ (6.9) Percentage decrease (17) % (11) % Selling, general and administrative expenses consist primarily of personnel costs to support the commercialization of XERMELO and our research and development activities, professional and consulting fees, stock-based compensation expense, and facility and equipment costs. Years Ended December 31, 2020 and 2019 • 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. 42 • 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 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. Interest and other income, net was $2.8 million and $3.4 million in the years ended December 31, 2020 and 2019, respectively. Income Tax Benefit The income tax benefit for the year ended December 31, 2019 was $6.0 million, due to the release of the deferred tax liability related to the impairment of the indefinite-lived intangible asset (see Note 8, Income Taxes of the Notes to Consolidated Financial Statements, for more information). There was no income tax expense or benefit in 2020. Net Income (Loss) and Net Income (Loss) per Common Share 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 We have financed our operations from inception primarily through sales of common and preferred stock, contract and milestone payments we received under our strategic and other collaborations, target validation, database subscription and technology license agreements, product sales, government grants and contracts, and financing under debt and lease arrangements. We have also financed certain of our research and development activities under our agreements with Symphony Icon, Inc. 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 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 43 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. Facilities. 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. Debt . 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; the resources we devote to developing and supporting our products and other factors. Our capital requirements will also be affected by any expenditures we make in connection with license agreements and acquisitions of and investments in complementary technologies and businesses. We expect to continue to devote substantial capital resources to successfully complete our nonclinical and clinical development efforts with respect to LX9211, sotagliflozin and our other drug candidates; and for other general corporate activities. We believe that our current unrestricted cash and investment balances and cash and revenues we expect to derive from strategic and other collaborations and other sources will be sufficient to fund our operations for at least the next 12 months. During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirements, we will need to sell additional equity or debt securities or obtain additional credit arrangements. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. 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. 44 Disclosure about Market Risk We are exposed to limited market and credit risk on our cash equivalents which have maturities of three months or less at the time of purchase. We maintain a short-term investment portfolio which consists of U.S. Treasury bills and corporate debt securities that mature three to 12 months from the time of purchase, which we believe are subject to limited market and credit risk. We currently do not hedge interest rate exposure or hold any derivative financial instruments in our investment portfolio. We had approximately $152.3 million in cash and cash equivalents and short-term investments as of December 31, 2020. 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. We have operated primarily in the United States and substantially all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See “Disclosure about Market Risk” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for quantitative and qualitative disclosures about market risk. Item 8. Financial Statements and Supplementary Data The financial statements required by this Item are incorporated under Item 15 in Part IV of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.