What happened

Shares of Lexicon Pharmaceuticals (NASDAQ:LXRX) fell over 74% today after the company told investors that Sanofi (NASDAQ:SNY) was terminating their collaboration related to Zynquista (sotagliflozin). The news, announced on Friday afternoon, was delivered alongside mixed preliminary results from a phase 3 clinical trial for the drug candidate in type 2 diabetes.  

While Lexicon Pharmaceuticals put a positive spin on the preliminary results and said it hasn't had time to fully evaluate the data, the fact that Sanofi is walking away told investors everything they needed to know. The smaller company will regain global rights to the drug candidate, but investors clearly aren't optimistic about its future. 

As of 11:46 a.m. EDT, the stock had settled to a 71.9% loss.

A hand pounding on a table as a declining stock chart displays on a tablet below.

Image source: Getty Images.

So what

The term "mixed results" summarizes the drug's existence to date. Lexicon Pharmaceuticals and Sanofi were developing Zynquista to improve blood sugar control in individuals with either type 1 or type 2 diabetes. It targets two proteins that dictate the glucose-clearing efficiency of the kidneys and gastrointestinal tract. Similar drugs are on the market today, but they target only one of the two proteins in the sights of Zynquista.

The two-protein approach was worth exploring, but results collected to date suggest it won't create the blockbuster drug franchise once envisioned. Zynquista received marketing approval in Europe to treat type 1 diabetes, but was rejected by regulators in the United States based on the same data. American regulators were concerned about the number of patients taking the drug who experienced diabetic ketoacidosis, which is characterized by too little production of insulin and poor conversion of glucose.

The preliminary data from the phase 3 trial in type 2 diabetes shows a similar mixed bag. Patients with later stages of chronic kidney disease (CKD) and therefore less efficient blood filtration rates didn't appear to benefit from Zynquista as much as patients with more manageable CKD. If the results hold up, then the drug might not benefit the patients who need it most.

Now what

Sanofi's decision to terminate the collaboration means Lexicon Pharmaceuticals will be on the hook for future development costs related to Zynquista. That could prove very expensive and quickly burn through the small company's cash balance of $133 million, reported at the end of March. Whether or not Sanofi will have to pay a break fee (which could help with development expenses) is unknown at this time, but clinical results to date suggest investors might not want to get too excited about regaining full global rights to the once-promising drug. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.