What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-10 compared with 2021-03-12 · 59 added, 76 removed, 213 unchanged (39% of the section changed)

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.

The following discussion and analysis should be read with our financial statements and notes included elsewhere in this annual report on Form 10-K.

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 devoting most of our resources to the research, development and preparation for commercialization of our most advanced drug candidates:

• 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 are now preparing a resubmission of our application for regulatory approval to market sotagliflozin in the United States for heart failure after voluntarily withdrawing our initial application to correct a technical issue with the initial submission.

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.

The FDA issued a complete response letter regarding our application for regulatory approval to market sotagliflozin for type 1 diabetes in the United States.

At our request, the FDA has issued a public Notice of Opportunity for Hearing on whether there are grounds for denying approval of our application and the hearing process is ongoing.

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 developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain.

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

• 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.

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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;

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 success in establishing new collaborations and licenses and our receipt of milestones, royalties and other payments under such arrangements;

and general and industry-specific economic conditions which may affect research, development and commercialization expenditures.

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.

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Critical Accounting Policies

Our Consolidated Financial Statements included in this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require that we make numerous estimates and assumptions.

Actual results could differ from those estimates and assumptions, thus impacting our reported results of operations and financial position.

The critical accounting policies and estimates described in this section are those that are most important to the depiction of our financial condition and results of operations and the application of which requires our most subjective judgments in making estimates about the effect of matters that are inherently uncertain.

We describe our significant accounting policies more fully in Note 2, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Revenue Recognition

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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.

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

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.

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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

Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price.

Contracted customers, which consisted primarily of Public Health Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchased XERMELO 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.

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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.

Our estimates for the expected Medicare Part D coverage gap were based on data received from the specialty pharmacies dispensing XERMELO 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.

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Co-payment assistance:

Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance.

Patients with commercial insurance who met certain eligibility requirements were eligible to 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.

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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:

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

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

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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).

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.

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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;

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

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.

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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.

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

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.

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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.

There were no impairments to indefinite-lived intangible assets in 2021 or 2020.

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

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Total revenues $ 0.3 $ 24.0 $ 322.1

Dollar (decrease) increase $ (298.1) $ 258.9

Percentage (decrease) increase (93) % 410 %

Dollar decrease $ (23.7) $ (298.1)

Percentage decrease (99) % (93) %

Years Ended December 31, 2021 and 2020

• 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.

• Net product revenues – Net product revenue recognized from XERMELO sales were $23.4 million in 2020 prior to the sale of XERMELO and related assets to TerSera on September 8, 2020.

Product revenues were 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.

• Royalties and other revenue – Revenues from royalties and other revenue decreased to $0.3 million in 2021 from $0.6 million in 2020.

In 2021, two companies, AC Biosciences Ltd.

and Taconic Farms, Inc.

represented 76% and 24% of revenues, respectively.

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.

Cost of sales was $1.9 million in 2020 prior to the sale of XERMELO in September 2020.

Research and Development Expenses

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Total research and development expense $ 55.0 $ 153.6 $ 91.9

Dollar increase (decrease) $ 61.7 $ (8.3)

Percentage increase (decrease) 67 % (8) %

Dollar (decrease) increase $ (98.6) $ 61.7

Percentage (decrease) increase (64) % 67 %

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, 2021 and 2020

• 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 – Third-party and other services decreased 71% in 2021 to $34.9 million, primarily due to decreases in external clinical development costs relating to sotagliflozin subsequent to the wind down of the activities beginning in March 2020.

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).

• Personnel – Personnel costs decreased 41% in 2021 to $10.8 million, primarily due to lower headcount as a result of the reduction in force of our personnel in September 2020.

Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs.

• Stock-based compensation – Stock-based compensation expense decreased 33% in 2021 to $4.3 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.

• Facilities and equipment – Facilities and equipment costs decreased to $1.5 million in 2021 from $2.5 million in 2020, primarily due to lower depreciation expense subsequent to the sale of our facilities in December 2020.

• Other – Other costs decreased to $3.5 million in 2021 from $5.1 million in 2020, primarily due to lower insurance and software license expenses.

Selling, General and Administrative Expenses

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Years Ended December 31, 2021 and 2020

• 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).

• Personnel – Personnel costs decreased 57% in 2021 to $10.8 million, primarily due to lower headcount as a result of the reduction in force of our personnel in September 2020.

Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs.

• 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.

• Professional and consulting fees – Professional and consulting fees increased 18% in 2021 to $10.8 million, primarily as a result of higher legal expenses, partially offset by lower marketing expenses.

• Stock-based compensation – Stock-based compensation expense decreased 9% in 2021 to $6.3 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.

• Facilities and equipment – Facilities and equipment costs decreased to $1.4 million in 2021 from $1.7 million in 2020, primarily due to lower property taxes and depreciation expense subsequent to the sale of our facilities in December 2020.

• Other – Other costs decreased to $3.1 million in 2021 from $4.6 million in 2020, primarily due to decreases in travel expenses due to the COVID-19 pandemic and lower software license expenses.

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

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Interest and other income, net was $0.1 million and $2.8 million in the years ended December 31, 2021 and 2020, 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.

Net Loss and Net Loss per Common Share

Net loss was $87.8 million, or a loss of $0.60 per share, in 2021 as compared to a net loss of $58.6 million, or $0.53 per share in 2020.

Liquidity and Capital Resources

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We used cash of $87.0 million in our operations in 2021.

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.

This consisted primarily of the net loss for the year of $87.8 million, and a net decrease in operating liabilities net of assets of $10.2 million, partially offset by non-cash charges of $10.9 million primarily related to stock-based compensation expense.

Investing activities provided cash of $2.1 million in 2021, primarily due to net maturities of investments of $3.3 million partially offset by $1.2 million of asset purchases.

Financing activities provided cash of $22.7 million, primarily as a result of $37.1 million net proceeds from the sales of common stock during January, August and September of 2021 under our Open Market Agreement with Jefferies LLC which was partially offset by $11.7 million used to pay off the matured convertible notes and $2.7 million used to repurchase common stock.

Other commitments.

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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.

As a result of the commencement of the Phase 2 trial, we were required to make a royalty payment to Bristol-Myers Squibb 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.

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, which ended on June 15, 2021.

In February 2021, we leased a 25,000 square-foot office space in The Woodlands, Texas and in June 2021, we relocated 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.

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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.

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;

our success in establishing new collaborations and licenses and our receipt of milestones, royalties and other payments under such arrangements;

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 successfully complete our nonclinical and clinical development efforts with respect to LX9211, sotagliflozin and our other drug candidates;

We expect to continue to devote substantial capital resources to prepare for the commercialization of sotagliflozin, if approved;

successfully complete our nonclinical and clinical

development efforts with respect to sotagliflozin, LX9211 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.

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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.

From time to time, our board of directors may authorize us to repurchase shares of our common stock.

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.

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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.

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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