LEXICON PHARMACEUTICALS, INC. 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 commercialization or development of our three most advanced drugs and drug candidates:
•We are commercializing XERMELO (telotristat ethyl), an orally-delivered small molecule drug, inthe United States for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog, or SSA, therapy in adults inadequately controlled by SSA therapy. We have granted Ipsen Pharma SAS, or Ipsen, an exclusive, royalty-bearing right to commercialize XERMELO outside ofthe United States andJapan . Ipsen is commercializing XERMELO in theUnited Kingdom ,Germany and multiple additional countries. We are also developing telotristat ethyl as a treatment for biliary tract cancer and are conducting a Phase 2a clinical trial of telotristat ethyl in biliary tract cancer patients. •We are developing Zynquista (sotagliflozin), an orally-delivered small molecule drug candidate, as a treatment for type 1 diabetes. The FDA has issued a complete response letter regarding our application for regulatory approval to market sotagliflozin for type 1 diabetes inthe United States and has confirmed that position in denying two appeals of the complete response letter. Zynquista has been approved in theEuropean 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/m2 , who could not achieve adequate glycemic control despite optimal insulin therapy. We are also developing sotagliflozin as a treatment for type 2 diabetes, heart failure and chronic kidney disease. We are conducting a comprehensive Phase 3 development program, which includes one long-term outcomes study designed to demonstrate benefits in chronic heart failure and chronic kidney disease in type 2 diabetes patients and another long-term outcomes study designed to demonstrate benefits in acute decompensated heart failure in patients with and without type 2 diabetes. We have reported preliminary top-line results from the first four Phase 3 clinical trials of sotagliflozin in adults living with type 2 diabetes. •We are developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain. We have reported top-line results from two Phase 1 clinical trials of LX9211 and are preparing to initiate a Phase 2 clinical trial of LX9211. Compounds from our most advanced drug programs, as well as compounds from a number of additional drug discovery and development programs that we have advanced into various stages of clinical and preclinical development, originated from our own internal drug discovery efforts. These efforts were driven by a systematic, target biology-driven approach in which we used gene knockout technologies and an integrated platform of advanced medical technologies to systematically study the physiological and behavioral functions of almost 5,000 genes in mice and assessed the utility of the proteins encoded by the corresponding human genes as potential drug targets. We have identified and validated in living animals, or in vivo, more than 100 targets with promising profiles for drug discovery. We are working both independently and through strategic collaborations and alliances with third parties to capitalize on our drug target discoveries and drug discovery and development programs. We 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 inthe 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 outsidethe United States or commercialization inthe United States for indications treated by primary care physicians, or when the collaboration may otherwise provide us with access to expertise and resources that we do not possess internally or are complementary to our own. We commercially launched XERMELO following regulatory approval inthe United States inFebruary 2017 for the treatment of carcinoid syndrome diarrhea in combination with SSA therapy in adults inadequately controlled by SSA therapy. Prior to the launch of XERMELO, we derived substantially all of our revenues from strategic collaborations and other research and development collaborations and technology licenses. To date, we have generated a substantial portion of our revenues from a limited number of sources. 38 -------------------------------------------------------------------------------- Our operating results and, in particular, our ability to generate additional revenues are dependent on many factors, including our ability to successfully commercialize XERMELO inthe United States and the amount of revenues generated from such commercialization efforts; Ipsen's ability to successfully commercialize XERMELO outside ofthe United States andJapan and our receipt of any milestone payments and royalties; the success of our ongoing nonclinical and clinical development efforts and ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts; our success in establishing new collaborations and licenses, including for the development and commercialization of sotagliflozin; and general and industry-specific economic conditions which may affect research and development expenditures.
Future revenues from our commercialization of XERMELO are uncertain because they depend on a number of factors, including market acceptance of XERMELO, the success of our sales, marketing, distribution and other commercialization activities and the cost and availability of reimbursement for XERMELO.
Future revenues from our collaboration with Ipsen are uncertain because they depend, to a large degree, on the achievement of milestones and payment of royalties we earn from Ipsen's commercialization of XERMELO. Our ability to secure future revenue-generating agreements will depend upon our ability to address the needs of our potential future collaborators and licensees, and to negotiate agreements that we believe are in our long-term best interests. We may determine, as we have with certain of our drug candidates, including XERMELO inthe United States andJapan , 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 ofDecember 31, 2019 , we had an accumulated deficit of$1.3 billion . Our losses have resulted principally from costs incurred in research and development, selling, general and administrative costs associated with our operations, and non-cash stock-based compensation expenses associated with stock options and restricted stock granted to employees and consultants. Research and development expenses consist primarily of salaries and related personnel costs, external research costs related to our nonclinical and clinical efforts, material costs, facility costs, depreciation on property and equipment, and other expenses related to our drug discovery and development programs. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales and marketing, and administrative personnel, professional fees and other corporate expenses, including information technology, facilities costs and general legal activities. We expect to continue to incur significant research and development costs in connection with the continuing development of our drug candidates. As a result, we will need to generate significantly higher revenues to achieve profitability. Critical Accounting Policies Revenue Recognition Product Revenues Product revenues consist of commercial sales of XERMELO inthe United States and sales of bulk tablets of XERMELO to Ipsen. Product revenues are recognized when the customer obtains control of our product, which occurs upon delivery to the customer. We recognize product revenue net of applicable reserves for variable consideration, including allowances for customer credits, estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements inthe United States , as discussed below. Our net product revenues reflect our best estimates of the amounts of consideration to which we are entitled based on the terms of the respective underlying contracts. Product shipping and handling costs are considered a fulfillment activity when control transfers to our customers and such costs are included in cost of sales. Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect that our customers will earn prompt payment discounts. As a result, we deduct the full amount of those discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned. Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g., Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount 39 -------------------------------------------------------------------------------- rates and expected utilization. Our estimates for expected utilization of rebates are based on third party market research data and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known unpaid rebates from the prior quarter. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. 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 currently consist primarily of Public Health Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to us the difference between the price paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or distributor by the customer. The allowance for chargeback is based on known sales to contracted customers. Medicare Part D Coverage Gap: The Medicare Part D prescription drug benefit mandates manufacturers to fund a portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies and projections based on historical data. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenues in the period of adjustment. Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.
Collaborative Agreements
Revenues under collaborative agreements include both license revenue and contract research revenue. We perform the following five steps in determining the amount of revenue to recognize as it fulfills its performance obligations under each of its agreements: (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).
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--------------------------------------------------------------------------------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.
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 commercialization or development of our three most advanced drugs and drug candidates:
•XERMELO (telotristat ethyl), an orally-delivered small molecule drug that we
are commercializing for carcinoid syndrome diarrhea and developing for biliary
tract cancer;
•Zynquista (sotagliflozin), an orally-delivered small molecule drug candidate
that we are developing as a treatment for type 1 diabetes and type 2 diabetes,
heart failure and chronic kidney disease; and
•LX9211, an orally-delivered small molecule drug candidate, that we are
developing as a treatment for neuropathic pain.
Compounds from our most advanced drug programs, as well as compounds from a
number of additional drug discovery and development programs that we have
advanced into various stages of clinical and preclinical development, originated
from our own internal drug discovery efforts. These efforts were driven by a
systematic, target biology-driven approach in which we used gene knockout
technologies and an integrated platform of advanced medical technologies to
systematically study the physiological and behavioral functions of almost 5,000
genes in mice and assessed the utility of the proteins encoded by the
corresponding human genes as potential drug targets. We have 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 governmental approval
for commercialization, accurate and meaningful estimates of the ultimate costs
to bring our potential drug candidates to market are not available.
We record significant accrued liabilities related to unbilled expenses for
products or services that we have received from service providers, specifically
related to ongoing nonclinical studies and clinical trials. These costs
primarily relate to clinical study management, monitoring, laboratory and
analysis costs, drug supplies, toxicology studies and investigator grants. We
have multiple drugs in concurrent nonclinical studies and clinical trials at
clinical sites throughout the world. 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
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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 development of sotagliflozin for type 2 diabetes, heart failure
and chronic kidney disease were based on estimates of the services to be
received and efforts to be expended pursuant to contracts with multiple vendors
and the CRO that will conduct and manage the clinical studies on our behalf. The
financial terms of these agreements are subject to negotiation and vary from
contract to contract. In accruing the relevant costs, we estimated the time
period over which services will be performed and the level of effort required to
complete each study. 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.
Stock-based Compensation Expense
We recognize compensation expense in our statements of comprehensive income (loss) for share-based payments, including stock options and restricted stock units issued to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award. Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. We had stock-based compensation expense of$14.2 million for the year endedDecember 31, 2019 . As ofDecember 31, 2019 , stock-based compensation cost for all outstanding unvested options and restricted stock units was$24.0 million , which is expected to be recognized over a weighted-average vesting period of 1.1 years. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. For purposes of determining the fair value of stock options, we segregate our options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in different assumptions used for expected option lives. Historical data is used to estimate the expected option life for each group. Expected volatility is based on the historical volatility in our stock price. The following weighted-average assumptions were used for options granted in the years endedDecember 31, 2019 , 2018 and 2017, respectively: Risk-free Interest Dividend Expected Volatility Rate Expected Term RateDecember 31, 2019 : Employees 88 % 2.2 % 4 0 % Officers and non-employee directors 77 % 2.6 % 8 0 % December 31, 2018: Employees 58 % 2.6 % 4 0 % Officers and non-employee directors 63 % 2.8 % 8 0 % December 31, 2017: Employees 61 % 1.7 % 4 0 % Officers and non-employee directors 70 % 2.2 % 8 0 %
Impairment of Long-Lived Assets
Our long-lived assets include property, plant and equipment, right-of-use assets
for leases, finite-lived intangible assets and goodwill. 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
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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. There
were no significant impairments of long-lived assets in 2019, 2018 or 2017.
Indefinite-lived intangible assets, composed primarily of in-process research
and development, or IPR&D, projects acquired in business combinations which have
not reached technological feasibility, are reviewed annually for impairment and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Estimating future cash flows of an IPR&D product
candidate for purposes of an impairment analysis requires us to make significant
estimates and assumptions regarding the amount and timing of costs to complete
the project and the amount, timing and probability of achieving revenues from
the completed product similar to how the acquisition date fair value of the
project was determined. In 2019, we terminated certain research and development
activities related to a program for treatment of irritable bowel syndrome and as
a result, recognized $28.6 million of impairment to indefinite-lived intangible
assets. There were no impairments to indefinite-lived intangible assets in 2018
or 2017.
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 2019, 2018 and 2017.
Business Combinations
We allocate the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets and in-process research and development. These assumptions are based in part on historical experience and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: the feasibility and timing of achievement of development, regulatory and commercial milestones; expected costs to develop the in-process research and development into commercially viable products; and future expected cash flows from product sales. In connection with the purchase price allocations for acquisitions, we estimate the fair value of the contingent payments. The estimated fair value of any contingent payments is determined utilizing a probability-based income approach inclusive of an estimated discount rate.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Recent Accounting Pronouncements
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.
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Results of Operations - Comparison of Years Ended
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
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,
2019 2018 2017
Total revenues $ 322.1 $ 63.2 $ 91.7
Dollar increase (decrease) $ 258.9 $ (28.5)
Percentage increase (decrease) 410 % (31) %
Years Ended
•Net product revenues - Net product revenue increased 22% in 2019 to$32.3 million , primarily from revenues recognized from the sale of XERMELO inthe United States . Sales of bulk tablets of XERMELO to Ipsen were comparable in both years. Product revenues are recorded net of estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance. Revenue recognition policies require estimates of the aforementioned sales allowances each period. •Collaborative agreements - Revenue from collaborative agreements increased in 2019 to$289.2 million , due to$260 million in revenues recognized from amounts payable by Sanofi pursuant to the termination of our collaboration agreement and recognition of amounts allocated to the performance obligation for development activities of sotagliflozin in the Sanofi collaboration agreement.
•Royalties and other revenue - Revenues from royalties and other revenue
increased 44% in 2019 to
In 2019, no customers for XERMELO sales represented more than 10% of revenues.
In 2018, two specialty pharmacies,
In 2019 and 2018, Sanofi represented 89% and 53% of revenues, respectively.
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,
2019 2018 2017
Total cost of sales $ 3.2 $ 2.5 $ 1.9
Dollar increase $ 0.7 $ 0.6
Percentage increase 30 % 31 %
Years Ended
Cost of sales increased 30% in 2019 to$3.2 million . We began capitalizing inventory in 2017 following FDA approval of XERMELO, as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to FDA approval were recorded as research and development expenses in the consolidated statements of comprehensive income (loss). Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The pre-commercialized inventory is expected to be sold over approximately the next twelve months. As a result, cost of sales will reflect a lower average per unit cost of materials. Cost of sales in each of 2019 and 2018 included$1.8 million of amortization of intangible assets related to XERMELO. 44 --------------------------------------------------------------------------------
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,
2019 2018 2017
Total research and development expense $ 91.9 $ 100.2 $ 152.2
Dollar decrease $ (8.3) $ (52.0)
Percentage decrease (8) % (34) %
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
•Third-party and other services - Third-party and other services decreased 12% in 2019 to$55.9 million , primarily due to decreases in professional and consulting fees and lower external clinical development costs relating to sotagliflozin. Third-party and other services relate principally to our clinical trial and related development activities, such as nonclinical and clinical studies and contract manufacturing. •Personnel - Personnel costs decreased 3% in 2019 to$20.7 million , primarily due to lower headcount. Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs. •Stock-based compensation - Stock-based compensation expense increased 18% in 2019 to$7.1 million , primarily due to a shorter vesting period of the annual restricted stock unit awards granted in 2019 and 2018.
•Facilities and equipment - Facilities and equipment costs decreased 3% in 2019
to
•Other - Other costs decreased 13% in 2019 to
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,
2019 2018 2017
Total selling, general and administrative expense
$ 66.1 Dollar decrease$ (6.9) $ (2.3) Percentage decrease (11) % (4) %
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
•Personnel - Personnel costs increased 1% in 2019 to$28.4 million , primarily due to higher incentive compensation costs. Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs. •Professional and consulting fees - Professional and consulting fees decreased 39% in 2019 to$12.2 million , primarily due to lower marketing costs. 45 -------------------------------------------------------------------------------- •Stock-based compensation - Stock-based compensation expense increased 25% in 2019 to$7.1 million , primarily due to a shorter vesting period of the annual restricted unit awards granted in 2019 and 2018.
•Facilities and equipment - Facilities and equipment decreased 8% in 2019 to
•Other - Other costs decreased 8% in 2019 to
Impairment Loss
Impairment loss of
Interest Expense and Interest and Other Income, Net
Interest Expense. Interest expense was
Interest and Other Income (Expense), Net. Interest and other income, net was$3.4 million and$3.5 million in the years endedDecember 31, 2019 and 2018, respectively. Income Tax Benefit The income tax benefit for the year endedDecember 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 7, Income Taxes of the Notes to Consolidated Financial Statements, for more information). There was no income tax expense or benefit in 2018. Net Income (Loss) and Net Income (Loss) per Common Share Net income was$130.1 million , or$1.16 per diluted share, in 2019 as compared to a net loss of$120.5 million , or loss of$1.14 per share in 2018.
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 withSymphony Icon, Inc. InDecember 2017 , we entered into a loan agreement with BioPharma Credit PLC andBioPharma Credit Investments IV Sub LP (the "BioPharma Term Loan") under which$150 million was funded. As ofDecember 31, 2019 , we had$271.7 million in cash, cash equivalents and short-term investments. As ofDecember 31, 2018 , we had$160.1 million in cash, cash equivalents and short-term investments. We generated cash of$113.8 million from operations in 2019. This consisted primarily of the net income for the year of$130.1 million and non-cash charges of$28.6 million related to impairment of intangible assets,$14.2 million related to stock-based compensation expense and$5.1 million related to depreciation and amortization expense, including amortization of debt issuance costs. Partially offsetting this was a net increase in operating assets, net of liabilities of$58.3 million . Investing activities used cash of$155.9 million in 2019, primarily due to net purchases of investments of$155.8 million . Financing activities used cash of$2.2 million , primarily to repay$1.3 million of debt borrowings and to repurchase$0.9 million of common stock. Facilities. InAugust 2018 , our subsidiaryLex-Gen Woodlands, L.P. entered into a term loan and security agreement refinancing the previously existing mortgage on our facilities inThe Woodlands, Texas . The loan agreement provides for a$12.9 million mortgage on the property and has a two-year term with a 10-year amortization. The mortgage loan bears interest at a rate per annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5% and (b) 7.5% and provides for a balloon payment of$10.3 million due inAugust 2020 . InJanuary 2020 ,Lex-Gen Woodlands, L.P. entered into a real estate purchase and sale agreement under which we agreed to sell our facilities inThe Woodlands, Texas for a purchase price of$15.0 million . Such sale is subject to normal and customary closing conditions, including a study period, which extends untilApril 9, 2020 , during which the purchaser may 46 -------------------------------------------------------------------------------- conduct inspections, analyses and other studies of the property and may terminate the agreement in its discretion. Such sale is also subject to the negotiation and execution by the parties of a leaseback agreement for a period of up to six months with respect to a portion of the property concurrently with closing. InMarch 2015 , our subsidiaryLexicon Pharmaceuticals (New Jersey ), Inc. leased a 25,000 square-foot office space inBasking Ridge, New Jersey . The term of the lease extends fromJune 1, 2015 throughDecember 31, 2022 , and provides for escalating yearly base rent payments starting at$482,000 and increasing to$646,000 in the final year of the lease.
Including the lease and debt obligations described above, we had incurred the
following contractual obligations as of
Payments due by period (in millions)
Less than 1
Contractual Obligations Total year 2-3 years 4-5 years More than 5 years
Debt $ 248.6 $ 11.1 $ 237.5 $ - $ -
Interest payment obligations 50.0 18.9 31.1 - -
Total $ 298.6 $ 30.0 $ 268.6 $ - $ -
Our future capital requirements will be substantial and will depend on many
factors, including our ability to successfully commercialize XERMELO in the
United States and the amount of revenues generated from such commercialization
efforts; Ipsen's ability to successfully commercialize XERMELO outside of the
United States and Japan and our receipt of any milestone payments and royalties;
the success of our ongoing nonclinical and clinical development efforts and
ability to obtain necessary regulatory approvals of the drug candidates which
are the subject of such efforts; our success in establishing new collaborations
and licenses, including for the development and commercialization of
sotagliflozin; 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 continue
commercializing XERMELO in the United States ; to successfully complete our
nonclinical and clinical development efforts with respect to telotristat ethyl,
sotagliflozin, LX9211 and our other drug candidates; 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.
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 ofU.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$271.7 million in cash and cash equivalents and short-term investments as ofDecember 31, 2019 . We believe that the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months. We are not subject to interest rate sensitivity on our outstanding Convertible Notes and our BioPharma Term Loan as each generally have a fixed rate of 5.25% and 9% per annum, respectively. The Convertible Notes interest is payable in cash semi-annually in arrears and matures inDecember 2021 , unless earlier converted or repurchased in accordance with their terms. The BioPharma Term Loan bears interest payable quarterly in arrears, and provides for interest-only payments followed by payment of principal at maturity inDecember 2022 . We have operated primarily inthe United States and substantially all sales to date have been made inU.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.
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