LEXICON PHARMACEUTICALS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and the commercialization of our approved drug, INPEFA ® (sotagliflozin): • We are developing sotagliflozin, an orally-delivered small molecule drug candidate, as a treatment for hypertrophic cardiomyopathy, or HCM, and are conducting the SONATA-HCM pivotal Phase 3 clinical trial of sotagliflozin in that indication. • We are separately pursuing regulatory approval of ZYNQUISTA ® (sotagliflozin) as a treatment for type 1 diabetes. The U.S. Food and Drug Administration, or FDA, issued complete response letters regarding our New Drug Application, or NDA, for ZYNQUISTA in type 1 diabetes in March 2019 and December 2024. At our request, the FDA has issued a public Notice of Opportunity for Hearing, or NOOH, on whether there are grounds for denying approval of our NDA and those proceedings are ongoing. The FDA has separately provided feedback that a third-party-funded, investigator-initiated study of sotagliflozin appears to be of adequate design and employs sufficient data collection methods to provide viable evidence of the incidence of diabetic ketoacidosis, or DKA, with adequate safety data, prior to its completion, to support review of a resubmission of the NDA. We are preparing to potentially resubmit the NDA for ZYNQUISTA in type 1 diabetes if supported by patient exposure and safety data from such study. • We are developing pilavapadin, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain. We have completed two Phase 2 clinical trials evaluating the safety and tolerability of pilavapadin and its effects on diabetic peripheral neuropathic pain, or DPNP. We have reported results from our PROGRESS Phase 2b clinical trial of pilavapadin in DPNP, which demonstrated clear evidence of effect at the 10 mg dose, and positive results from our RELIEF-DPN-1 Phase 2a clinical trial of pilavapadin in DPNP. We have received Fast Track designation from the FDA for development of pilavapadin in that indication and are currently advancing third party collaboration discussions for its further development and commercialization. • We developed LX9851, an orally-delivered small molecule drug candidate, as a treatment for obesity and associated cardiometabolic disorders. We have granted Novo Nordisk an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize LX9851 and Novo Nordisk is currently conducting Phase 1 development. • We continue to make INPEFA (sotagliflozin) commercially available in the United States. INPEFA is approved to reduce the risk of cardiovascular death, hospitalization for heart failure, and urgent heart failure visits in adults with heart failure or type 2 diabetes mellitus, chronic kidney disease, or CKD, and other cardiovascular risk factors. • We are conducting preclinical research and development of compounds from a number of additional drug programs originating from our internal drug discovery efforts. Sotagliflozin, LX9851 and compounds from a number of additional drug programs originated from our own internal drug discovery efforts and pilavapadin 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. We have worked both independently and through collaborations and strategic alliances with third parties to capitalize on our drug target discoveries and research and development programs. We seek to retain exclusive or co-exclusive rights to the benefits of certain research 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 the research, 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. 16 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 approved drug products. 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 research and 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. 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 sotagliflozin in the United States and Europe, 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 March 31, 2026, we had an accumulated deficit of approximately $2.0 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 and material costs related to our nonclinical efforts and clinical trials, 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 The preparation of financial statements in conformity with generally accepted accounting principles requires us to make judgments, estimates and assumptions in the preparation of our condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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, 2025. Results of Operations Revenues Revenues were $21.1 million and $1.3 million, respectively, for the three months ended March 31, 2026 and 2025. Revenues for the three months ended March 31, 2026 included $20.0 million in development milestone revenue recognized from the Novo Nordisk licensing agreement. See Note 5, Collaborations and Strategic Alliances , for further information. Total revenues for each of the periods presented also include product revenues from sales of INPEFA. 17 Cost of Sales Cost of sales during the three months ended March 31, 2026 and 2025 were $0.1 million and $0.03 million, respectively, and primarily consist of third-party manufacturing costs and freight associated with sales of INPEFA. Prior to receiving regulatory approval of INPEFA in May 2023, we had completed or begun the manufacturing of certain INPEFA raw materials. These raw materials were either received at “zero-cost” to us in conjunction with a terminated agreement in 2019 or recorded as research and development expense. Based on our expectations for future manufacturing costs, we estimate these amounts totaled approximately $39.0 million. We began capitalizing inventory manufactured subsequent to regulatory approval of INPEFA as the related costs were expected to be recoverable through the commercialization of the product. At March 31, 2026, substantially all of the “zero-cost” INPEFA raw materials remains available to us. However, the time period over which this inventory is consumed will depend on a number of factors, including the amount of future INPEFA sales, use of this inventory to satisfy manufacturing and supply agreements associated with strategic alliances (for further information, see our Annual Report on Form 10-K for the year ended December 31, 2025) or in clinical development or other research activities, production lead times, and/or the ability to utilize inventory prior to its expiration date. Any future sales of INPEFA will utilize this “zero-cost” inventory and will result in a lower average per unit cost of materials during that period. We estimate our cost of goods sold as a percentage of net product revenue will be less than 10% subsequent to the utilization of all of the remaining “zero-cost” inventory. Research and Development Expenses 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, 2026 2025 Total research and development expense $ 12.8 $ 15.3 Dollar decrease $ (2.5) Percentage decrease (16) % Research and development expenses consist primarily of third-party services primarily including external research costs related to our nonclinical and clinical efforts and material costs, salaries and related personnel costs, stock-based compensation and facilities, equipment and other costs related to our drug discovery and development programs each of which are described below. • Third-party services – Third-party services relate principally to our clinical trial and related development activities, such as preclinical and clinical studies and contract manufacturing. Overall, third-party services for the three months ended March 31, 2026 decreased 29% to $5.7 million from $8.0 million as compared to the corresponding period in 2025 primarily driven by lower clinical and preclinical external research expense associated with our current drug candidates. • Personnel – Salaries, bonuses, employee benefits, payroll taxes and recruiting costs are included in personnel costs. Personnel costs for the three months ended March 31, 2026 decreased 2% to $4.3 million from $4.4 million as compared to the corresponding period in 2025. • Stock-based compensation – Stock-based compensation expenses for the three months ended March 31, 2026 decreased 13% to $1.4 million from $1.6 million as compared to the corresponding period in 2025. • Facilities, equipment, and other – Facilities, equipment, and other costs relate primarily to rent, insurance, travel and training, and software licensing costs. Facilities, equipment, and other costs for the three months ended March 31, 2026 increased 8% to $1.4 million from $1.3 million as compared to the corresponding period in 2025. 18 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 March 31, 2026 2025 Total selling, general and administrative expense $ 9.2 $ 11.6 Dollar decrease $ (2.4) Percentage decrease (21) % Selling, general and administrative expenses consist primarily of personnel costs to support the continued commercialization of INPEFA and support of our research and development activities, professional and consulting fees, stock-based compensation expense, and facilities, equipment and other costs, each of which are described further below. • Personnel – Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs. Personnel costs for the three months ended March 31, 2026 decreased 38% to $3.1 million from $5.0 million as compared to the corresponding period in 2025, primarily due to decreased headcount. • Professional and consulting fees – Professional and consulting fees for the three months ended March 31, 2026 decreased 21% to $3.1 million from $3.9 million as compared to the corresponding period in 2025, primarily due to lower marketing costs. • Stock-based compensation – Stock-based compensation expenses for the three months ended March 31, 2026 increased 13% to $1.7 million from $1.5 million as compared to the corresponding period in 2025. • Facilities, equipment, and other – Facilities, equipment, and other costs relate primarily to rent, insurance, travel and training, and software licensing costs. Facilities, equipment, and other costs for the three months ended March 31, 2026 increased 8% to $1.3 million from $1.2 million as compared to the corresponding period in 2025. Interest and Other Expense Interest and Other Expense. Interest on the outstanding debt principal, amortization/accretion of debt issuance cost and discount and other related items are included in interest and other expense. Interest and other expense for the three months ended March 31, 2026 decreased to $1.6 million from $1.8 million as compared to the corresponding period in 2025 reflecting the repayment of $3 million and $5 million to Oxford, our lenders, in December 2025 and February 2026, respectively. Interest Income and Other Interest Income and Other. Interest earned on cash, cash equivalents and short-term investments is included in interest income and other. Interest income and other for the three months ended March 31, 2026 decreased to $1.5 million from $2.2 million as compared to the corresponding period in 2025. Net Loss and Net Loss per Common Share Net loss was $1.0 million, or less than $0.01 per share, in the three months ended March 31, 2026 as compared to a net loss of $25.3 million, or $0.07 per share, in the corresponding period in 2025. 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. 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 collaborations and strategic licenses, target validation, database subscription and technology license agreements, government grants and contracts, and financing under debt, lease and other project financing arrangements, as well as from commercial sales of our approved drug products. As of March 31, 2026 and December 31, 2025, total cash, cash equivalents, short-term investments and restricted cash were $199.7 million and $125.2 million, respectively. These balances include $29 million in restricted cash as further described 19 below. We used cash of $14.7 million from operations in the three months ended March 31, 2026, primarily reflective of the net loss for the period of $1.0 million (which included total non-cash stock-based compensation expense of $3.1 million) and working capital changes. Investing activities used cash of $70.3 million in the three months ended March 31, 2026, primarily due to net purchases of investments. Financing activities provided cash of $88.8 million, primarily due to the common and preferred stock issuance as further described below. Common and Preferred Stock Issuance. In February 2026, we received approximately $96.5 million in net cash proceeds from the issuance of our common and preferred stock as follows: • 34,089,403 shares of our common stock sold in an underwritten public offering for $1.30 per share, resulting in net cash proceeds of approximately $40.9 million (after deducting underwriting discounts and commissions and other offering expenses); and • 22,400,000 shares of our common stock and 408,434.7 shares of our Series B Convertible Preferred Stock sold to affiliates of Invus, L.P. for $1.30 per share and $65.00 per share, respectively, resulting in aggregate gross cash proceeds of $55.6 million. In April 2026, each share of preferred stock was converted into 50 shares of our common stock, or into 20,421,735 shares in the aggregate following the satisfaction of certain conditions. For further details, please see Note 9 of the Notes to Condensed Consolidated Financial Statements. Open Market Sale Agreement . In December 2023, we entered into an Open Market Sale Agreement SM with Jefferies LLC pursuant to which we may offer and sell shares of our common stock having an aggregate sales price of up to $75 million from time to time through Jefferies as sales agent. As of March 31, 2026, the full amount is still available for issuance under the agreement. Financing Obligations. On May 4, 2026, we entered into a loan and security agreement with Hercules Capital, Inc. and certain of its affiliates that provides up to $100 million in borrowing capacity available in three tranches, each maturing in May 2030. Monthly interest-only payments are due during an initial 18-month period, which may be extended to 24 or 30 months if specified performance milestones are achieved. The interest-only period will be followed by an amortization period extending through the maturity date. The first $55 million tranche was funded at closing. The second $20 million tranche is available for draw at our option by no later than June 15, 2028, subject to the achievement of specified performance milestones and certain additional timing restrictions. The third $25 million tranche is available for draw at our option, subject to Hercules’s consent, at any time prior to the expiration of the interest-only payment period. The amounts funded under the Hercules term loans bear interest at a floating rate equal to the prime rate plus 3.10%, but not less than 9.85%. We may prepay the Hercules term loans in whole or in part at our option at any time. Any prepayment of the Hercules term loans is subject to prepayment fees equal to 3.0% of the outstanding principal being repaid, subject to a declining scale depending on when prepayment occurs relative to the applicable closing date. A final payment equal to 6.25% of the amount funded under the Hercules term loans is due upon prepayment or maturity. Our obligations under the Hercules term loans are secured by a first lien security interest in all of our assets. Financial covenants include (a) a minimum cash covenant beginning on June 1, 2027, which will be extended to January 1, 2028 upon achievement of specified performance milestones and waived at any time we meet specified market capitalization requirements and (b) a minimum revenue covenant relating to net sales of our products beginning only at specified times after we draw the second or third tranche, which will be waived at any time we meet specified minimum cash and/or market capitalization requirements. Concurrent with our execution of the loan and security agreement with Hercules, we repaid all amounts due under our previous loan and security agreement with Oxford Finance LLC, under which $100 million had been funded from inception through March 31, 2026. In April 2025, we repaid $45 million to Oxford, including pro-rata final payment exit fees equal to 7% of the amount funded under the Oxford term loans. In December 2025 and February 2026, we repaid an additional $3 million and $5 million to Oxford, respectively, including a pro-rata portion of the final payment exit fees. Under the Oxford loan and security agreement, we were subject to a financial covenant requiring us to maintain a minimum balance of unrestricted cash, cash equivalents, short-term investments, and restricted cash, including a required minimum amount of $29 million to be maintained in a blocked account, in an amount equal to not less than the greater of (a) fifty percent (50%) of the outstanding principal amount of the Oxford Term Loans and (b) the required minimum amount of $29 million. As of March 31, 2026, we maintained $29 million in the blocked account and were in compliance with our debt covenants under the Oxford loan and security agreement. 20 Collaborations and Strategic Alliances. In March 2025, we entered into an exclusive license agreement with Novo Nordisk A/S for the worldwide development, manufacture and commercialization of LX9851, our preclinical drug candidate for obesity and associated cardiometabolic disorders, pursuant to which we received an upfront payment of $45 million in April 2025 and development milestone payments of $10 million each in February and April 2026. For additional information on our exclusive license agreement with Novo Nordisk, refer to Note 5 of the Notes to Condensed Consolidated Financial Statements . In October 2024, we entered into an exclusive license agreement with Viatris for the development and commercialization of sotagliflozin in all markets outside of the United States and Europe, pursuant to which we received an upfront payment of $25 million. For additional information on our exclusive license agreement with Viatris, please refer to Note 5 of the Notes to Condensed Consolidated Financial Statements. Other commitments. Upon the regulatory approval of sotagliflozin for the treatment of type 1 diabetes in a major market, 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 pilavapadin. For a further discussion of our commitments and contingencies see Note 7 of the Notes to Condensed Consolidated Financial Statements . Outlook . Our future capital requirements will be substantial and will depend on many factors, including the success of our ongoing research and 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; the amount and timing of our research, development and commercialization expenditures; the resources we devote to commercializing, 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 the research and development of our 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 currently planned operations for at least the next 12 months from the date of this report. In future periods, if cash on hand or generated by operations is insufficient to satisfy our liquidity requirements, we will need to obtain additional liquidity through future strategic and other collaborations or 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, and the sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we are unable to obtain adequate financing when needed, we may have to delay or reduce the scope of our commercialization efforts or one or more of our clinical trials and other research and development programs. 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 had approximately $199.7 million in cash and cash equivalents, short-term investments and restricted cash as of March 31, 2026. 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. As of March 31, 2026, we are subject to interest rate sensitivity on our outstanding Oxford Term Loans which bear interest at a floating rate equal to the 1-month CME Term SOFR rate. For further details see Note 6 of the Notes to Condensed Consolidated Financial Statements . 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 3. Quantitative and Qualitative Disclosures About Market Risk See “Disclosure about Market Risk” under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for quantitative and qualitative disclosures about market risk. 21