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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-09 · 56 added, 62 removed, 72 unchanged (62% of the section changed)

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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.

Food and Drug Administration, or FDA, has accepted for filing our submission of an application for regulatory approval to market sotagliflozin for the reduction of the risk of cardiovascular death, hospitalization for heart failure and urgent heart failure visits in adults with heart failure, including those with worsening heart failure, and reduction in the risk of cardiovascular death, hospitalization for heart failure, urgent heart failure visits, nonfatal myocardial infarction and nonfatal stroke in adults with type 2 diabetes, chronic kidney disease and other cardiovascular risk factors, including a history of heart failure.

We are now preparing for the commercial launch of sotagliflozin in the United States, 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.

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.

• We have a pending NDA for sotagliflozin, an orally-delivered small molecule drug candidate, as a treatment for heart failure.

The NDA is currently under review by the FDA and has been assigned a PDUFA target action date of May 27, 2023.

The NDA is supported by 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.

Under the NDA, we are seeking regulatory approval to market sotagliflozin to reduce the risk of cardiovascular death and hospitalization for heart failure in adults with heart failure and in adults with type 2 diabetes mellitus, chronic kidney disease and other cardiovascular risk factors.

We are now preparing for the anticipated commercial launch of sotagliflozin in the United States following approval.

We have also engaged in the development of sotagliflozin in type 1 diabetes, which was the subject of a separate NDA.

That NDA was supported by 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 NDA for sotagliflozin in type 1 diabetes.

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

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

We have reported positive top-line results from a Phase 2 clinical trial of LX9211 in painful diabetic neuropathic pain and are conducting a second Phase 2 clinical trial of LX9211 in post-herpetic neuralgia, from which we expect top-line results in the fourth quarter of 2022.

We have reported positive results from a Phase 2 clinical trial of LX9211 in diabetic peripheral neuropathic pain.

We have reported top-line results from a separate Phase 2 clinical trial of LX9211 in post-herpetic neuralgia which demonstrated clear evidence of effect.

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.

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.

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

Our 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.

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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;

our success in establishing new collaborations and

licenses and our receipt of milestones, royalties and other payments under such arrangements;

Our operating results and, in particular, our ability to generate additional revenues are dependent on many factors, including the success of our planned commercial launch of sotagliflozin in the United States for heart failure, if approved;

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;

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.

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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 September 30, 2022, we had an accumulated deficit of $1.6 billion.

Since our inception, we have incurred significant losses and, as of March 31, 2023, we had an accumulated deficit of $1.6 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.

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We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), which removes the separation models for convertible debt with cash conversion or beneficial conversion features.

ASU 2020-06 also requires the application of the if-converted method for calculating earnings per diluted share, as the treasury stock method will no longer be permitted for convertible instruments.

The adoption of ASU 2020-06 during the first quarter of 2022 did not have a material impact on the condensed consolidated financial statements.

Results of Operations

Research and Development Expenses

Research and development expenses and dollar and percentage changes as compared to the corresponding periods in the prior year are as follows (dollar amounts are presented in millions):

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

2022 2021 2022 2021

Research and development expenses and dollar and percentage changes as compared to the corresponding period in the prior year are as follows (dollar amounts are presented in millions):

Three Months Ended March 31,

Total research and development expense $ 12.0 $ 14.9

Dollar (decrease) increase $ (5.1) $ 0.3

Percentage (decrease) increase (33) % 1 %

Dollar decrease $ (2.9)

Percentage decrease (19) %

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, stock-based compensation expense, and facility and equipment costs.

• Third-party and other services – Third-party and other services for the three months ended September 30, 2022 decreased 54% to $4.9 million, and for the nine months ended September 30, 2022 decreased 6% to $21.9 million, as compared to the corresponding periods in 2021 primarily due to decreases in external research development costs and professional and consulting fees relating to preparations for the submission of our application for regulatory approval to market sotagliflozin in the United States for heart failure.

• Third-party and other services – Third-party and other services for the three months ended March 31, 2023 decreased 42% to $5.5 million as compared to the corresponding period in 2022 primarily due to decreases in external research development costs and professional and consulting fees relating to preparations for the submission of our application for regulatory approval to market sotagliflozin in the United States for heart failure.

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 for the three months ended September 30, 2022 increased 39% to $3.5 million, and for the nine months ended September 30, 2022 increased 34% to $10.2 million, as compared to the corresponding periods in 2021, primarily due to higher employee salaries and benefit costs as a result of increasing headcount during 2022 in preparation for commercialization of sotagliflozin.

• Personnel – Personnel costs for the three months ended March 31, 2023 increased 24% to $4.0 million as compared to the corresponding period in 2022, primarily due to higher employee salaries and benefit costs as a result of increasing headcount.

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

• Stock-based compensation – Stock-based compensation expenses for the three months ended September 30, 2022 decreased 18% to $0.9 million, and for the nine months ended September 30, 2022 decreased 15% to $3.1 million, as compared to the corresponding periods in 2021, primarily due to cancellation of unvested share-based awards during 2021.

• Facilities and equipment – Facilities and equipment costs for each of the three months ended September 30, 2022 and 2021 was $0.4 million.

Facilities and equipment costs for the nine months ended September 30, 2022 and 2021 were $1.0 million and $1.2 million, respectively.

• Other – Other costs for each of the three months ended September 30, 2022 and 2021 were $0.9 million.

Other costs for the nine months ended September 30, 2022 and 2021 were $2.7 million and $2.8 million, respectively.

• Stock-based compensation – Stock-based compensation expenses for the three months ended March 31, 2023 increased 17% to $1.2 million as compared to the corresponding period in 2022, primarily due to increased headcount.

• Facilities and equipment – Facilities and equipment costs for the three months ended March 31, 2023 and 2022 were $0.4 million and $0.3 million, respectively.

• Other – Other costs for each of the three months ended March 31, 2023 and 2022 were $1.0 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses and dollar and percentage changes as compared to the corresponding periods in the prior year are as follows (dollar amounts are presented in millions):

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

2022 2021 2022 2021

Selling, general and administrative expenses and dollar and percentage changes as compared to the corresponding period in the prior year are as follows (dollar amounts are presented in millions):

Three Months Ended March 31,

Total selling, general and administrative expense $ 19.1 $ 8.5

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Selling, general and administrative expenses consist primarily of personnel costs to support our research and development activities, professional and consulting fees, stock-based compensation expense, and facility and equipment costs.

• Personnel – Personnel costs for the three months ended September 30, 2022 increased 96% to $4.7 million, and for the nine months ended September 30, 2022 increased 54% to $12.2 million, as compared to the corresponding periods in 2021, primarily due to higher employee salaries and benefit costs as a result of increasing headcount during 2022 in preparation for commercialization of sotagliflozin.

• Professional and consulting fees – Professional and consulting fees for the three months ended March 31, 2023 increased 213% to $7.1 million as compared to the corresponding period in 2022, primarily due to higher marketing and professional fees.

• Personnel – Personnel costs for the three months ended March 31, 2023 increased 131% to $7.7 million as compared to the corresponding period in 2022, primarily due to higher employee salaries and benefit costs as a result of increasing headcount during 2023 in preparation for commercialization of sotagliflozin.

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

• Professional and consulting fees – Professional and consulting fees for the three months ended September 30, 2022 increased 117% to $4.9 million, and for the nine months ended September 30, 2022 increased 43% to $10.6 million, as compared to the corresponding periods in 2021, primarily due to higher marketing and professional fees, partially offset by lower legal fees.

• Stock-based compensation – Stock-based compensation expenses for the three months ended September 30, 2022 increased 9% to $1.7 million, and for the nine months ended September 30, 2022 increased 9% to $5.2 million as compared to the corresponding periods in 2021 due to increasing headcount in the current year.

• Facilities and equipment – Facilities and equipment costs for the three months ended September 30, 2022 and 2021 was $0.4 million.

Facilities and equipment costs for the nine months ended September 30, 2022 and 2021 were $0.9 million and $1.1 million, respectively.

• Other – Other costs for the three months ended September 30, 2022 and 2021 were $1.0 million and $0.7 million, respectively.

Other costs for the nine months ended September 30, 2022 and 2021 were $2.8 million and $2.3 million, respectively.

• Stock-based compensation – Stock-based compensation expenses for the three months ended March 31, 2023 increased 27% to $2.2 million as compared to the corresponding period in 2022 due to increasing headcount in the current period.

• Facilities and equipment – Facilities and equipment costs for the three months ended March 31, 2023 and 2022 were $0.4 million and $0.3 million, respectively.

• Other – Other costs for the three months ended March 31, 2023 increased to $1.7 million from $0.9 million in the corresponding period in 2022, primarily due to travel, training and software licenses in preparation for commercialization of sotagliflozin.

Interest Expense and Interest and Other Income, Net

Interest Expense.

Interest expense was $1.8 million during the three months ended March 31, 2023, due to the Oxford debt financings during March and December of 2022.

Interest and Other Income (Expense), Net.

Interest and other income, net increased to $1.0 million during the three months ended March 31, 2023 from the corresponding period in 2022.

Net Loss and Net Loss per Common Share

Net loss and Net loss per Common Share.

Net loss was $23.4 million, or $0.13 per share, in the three months ended September 30, 2022 as compared to a net loss of $23.1 million, or $0.16 per share, in the corresponding period in 2021.

Net loss was $71.5 million, or $0.45 per share, in the nine months ended September 30, 2022 as compared to a net loss of $62.1 million, or $0.43 per share, in the corresponding period in 2021.

Net loss was $31.9 million, or $0.17 per share, in the three months ended March 31, 2023 as compared to a net loss of $23.5 million, or $0.16 per share, in the corresponding period in 2022.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future, and we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

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We have financed our operations from inception primarily through sales of common and preferred stock, contract and milestone payments we received under our collaborations and strategic licenses, target validation, database subscription and technology license agreements, product sales, government grants and contracts, and financing under debt and lease arrangements, 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 Therapeutics, LLC in September 2020.

We have also financed certain of our research and development activities under financing arrangements with Symphony Icon, Inc.

In March 2022, we entered into a loan and security agreement with Oxford Finance LLC that provides up to $150 million in borrowing capacity, available in four tranches, under which $50 million has been funded.

As of September 30, 2022, we had $136.2 million in cash, cash equivalents and short-term investments.

As of March 31, 2023, we had $105.9 million in cash, cash equivalents and short-term investments.

As of December 31, 2022, we had $138.4 million in cash, cash equivalents and short-term investments.

We used cash of $67.3 million from operations in the nine months ended September 30, 2022.

We used cash of $31.6 million from operations in the three months ended March 31, 2023.

This consisted primarily of the net loss for the period of $31.9 million and a net decrease in operating liabilities net of assets of $3.5 million, partially offset by non-cash charges of $3.4 million related to stock-based compensation expense.

Investing activities used cash of $95.3 million in the nine months ended September 30, 2022, primarily due to net purchases of investments.

Financing activities provided cash of $117.3 million primarily from $94.3 million of net proceeds from the issuance of common stock and $23.9 million of net proceeds from the Oxford debt financing, which were partially offset by $0.9 million used to repurchase common stock by retaining shares in substitution of the tax withholding obligations of recipients of restricted stock units granted under our 2017 Equity Incentive Plan with respect to the vesting of such restricted stock units.

Investing activities provided cash of $12.1 million in the three months ended March 31, 2023, primarily due to net maturities of investments.

Financing activities used cash of $0.8 million to repurchase common stock in satisfaction of tax withholding obligations of recipients of vested restricted stock units granted under our 2017 Equity Incentive Plan with respect to the vesting of such restricted stock units.

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.

In March 2022, we filed an application for withdrawal of such approval for business reasons, which request was granted by the European Commission.

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

In January 2021, sotagliflozin was approved in the United Kingdom 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/m2, who could not achieve adequate glycemic control despite optimal insulin therapy.

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

Under our drug discovery alliance with Bristol-Myers Squibb, we will be required to make a milestone payment of $5 million upon dosing of the first patient in a Phase 3 clinical trial of LX9211.

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

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.

In July 2022, Lexicon Pharmaceuticals (New Jersey), Inc.

entered into an agreement to lease a 22,000 square-foot office space in Bridgewater, New Jersey to which we plan to relocate our New Jersey offices.

The lease agreement will extend for ten years and 11 months from the date that Lexicon occupies the building and provides for escalating yearly base rent payments starting at $820,000 and increasing to $986,000 in the final year of the lease.

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;

In July 2022, our subsidiary, Lexicon Pharmaceuticals (New Jersey), Inc., leased a 22,000 square-foot office space in Bridgewater, New Jersey.

The term of the lease extends from February 2023 through January 2034 and provides for escalating yearly base rent payments starting at $820,000 and increasing to $986,000 in the final year of the lease.

Our future capital requirements will be substantial and will depend on many factors, including the success of our planned commercial launch of sotagliflozin in heart failure, if approved;

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;

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

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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;

to 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.

If we are unable to obtain adequate financing when needed, we may have to delay or reduce the scope of one or more of our clinical trials, or research and development programs.

Additional financing may not be available on terms acceptable to us or at all.

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We currently do not hedge interest rate exposure or hold any derivative financial instruments in our investment portfolio.

We had approximately $136.2 million in cash and cash equivalents and short-term investments as of September 30, 2022.

We believe that the working capital available to us will be sufficient to meet our cash requirements for at least the next

We had approximately $105.9 million in cash and cash equivalents and short-term investments as of March 31, 2023.

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 subject to interest rate sensitivity on our outstanding Oxford Term Loans as they contain a floating rate tied to the 30-day LIBOR rate.

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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-Q

Item 2. Management’s Discussion and Analysis