The U.S. Food and Drug Administration (FDA) recently rejected the marketing application for sotagliflozin as a once-daily oral treatment for type 1 diabetes in combination with insulin. The decision follows a rare deadlock from an FDA advisory committee, comprising experts who weigh in on clinical trial data before regulators make an official decision. After eight members voted in favor of approval and eight voted against, the FDA erred on the side of caution by ruling against the application.

The rejection is a setback for the co-developers of sotagliflozin, Lexicon Pharmaceuticals (LXRX -3.80%) and Sanofi (SNY -0.31%), especially considering some analysts expected the drug to hit annual sales of $450 million for type 1 diabetes in 2024. Shares of the former have fallen by more than 50% since their June 2018 peak. 

But how significant is the setback in the grand scheme of things? Will it affect an upcoming regulatory decision in Europe? Let's review where things stand now, and what the likely next steps are in the near future.

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How did Lexicon Pharmaceuticals get here?

Lexicon Pharmaceuticals is developing sotagliflozin, branded as Zynquista, to help treat symptoms of both type 1 and type 2 diabetes. The drug targets two proteins that affect how well the kidneys and intestines eliminate glucose from the body. If successful, then it could be another tool helping patients manage their blood glucose levels in addition to insulin therapy. If approved for both types of diabetes, some analysts think the drug could reach peak annual sales of $1.3 billion by the mid-2020s.

That blockbuster potential was challenged on Jan. 18 when an FDA advisory committee reached an impasse on the risk-benefit profile of the drug. The primary concern among dissenters: Zynquista caused a significant increase in the number of cases of diabetic ketoacidosis, which occurs when there's too little glucose in the body. In other words, the drug can be a little too efficient at glycemic control in patients with type 1 diabetes -- a potentially life-threatening overshoot of the intended goal.

Optimism was injected back into the drug's future on March 1 when the Committee for Medicinal Products for Human Use (CHMP), the European Union's equivalent to an FDA advisory committee, voted in favor of approval in type 1 diabetes. That recommendation will be taken into consideration by the European Medicines Agency (EMA) when it makes a final marketing approval decision in the coming months.

The roller coaster ride continued for investors on March 22, when the FDA officially rejected the marketing application for Zynquista in type 1 diabetes. The risk of diabetic ketoacidosis was too great, according to regulators, even with the controls and monitoring proposed by Lexicon Pharmaceuticals and Sanofi. What happens from here?

Check out the latest earnings call transcripts for Lexicon Pharmaceuticals and other companies we cover.

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What are the next steps for Lexicon Pharmaceuticals?

There are three things for investors to watch going forward:

  1. The regulatory decision from EMA regarding the marketing application for Zynquista in type 1 diabetes, which is expected in 2019.
  2. The results from meetings between the FDA, Lexicon Pharmaceuticals, and Sanofi on the next steps for Zynquista in type 1 diabetes.
  3. Updates from clinical trials for Zynquista in type 2 diabetes.

First, it's not uncommon for EMA and the FDA to go in different directions on a drug candidate. Investors shouldn't necessarily expect the FDA rejection to influence the decision made by European regulators in the coming months. Of course, that doesn't make the upcoming decision any less important or uncertain.

Second, Lexicon Pharmaceuticals and Sanofi both expressed confidence that they could work to address the concerns of American regulators. Whether that involves running additional clinical trials or developing a more robust monitoring program (which would add to the cost of treatment and degrade the ease of use) is unknown at this time, but earning U.S. marketing approval in type 1 diabetes is crucial for the future of Zynquista.

Third, the drug still has tremendous potential in type 2 diabetes -- there's just more competition. Zynquista works by targeting two proteins that affect glycemic control. Three similar drugs are already approved for use in type 2 diabetes, but each only targets one of the two proteins worked on by Zynquista.

Will the unique mechanism of action give Lexicon Pharmaceuticals and Sanofi an advantage over currently approved treatments while avoiding the increased risk of diabetic ketoacidosis observed in type 1 diabetes patients? It's possible -- and Sanofi is currently conducting 11 phase 3 trials across the globe to find out. It expects to have data in hand soon to support regulatory filings in the United States and Europe in early 2020. 

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A difficult decision for investors

Lexicon Pharmaceuticals is a difficult company to read right now. Its market cap is less than $700 million, which is far from the predicted market value of Zynquista across all indications. Of course, there's a significant amount of uncertainty as to whether or not the drug can live up to its lofty potential. That makes this stock suitable only for investors who have a heightened appetite for risk.