What happened

Shares of Lexicon Pharmaceuticals (NASDAQ:LXRX) rose over 15% today and have gained about 90% in the last five days as investors continue to digest the fallout from a major partner walking away. 

On Sept. 10, the company and Sanofi terminated a collaboration to develop and commercialize Zynquista in type 1 and type 2 diabetes. Sanofi has agreed to pay Lexicon Pharmaceuticals $260 million just to rid itself of the headache from the drug candidate, which has failed to earn regulatory approval in the United States in type 1 diabetes. 

As of 12:40 p.m. EDT, the small-cap pharmaceutical stock had settled to a 7.7% gain.

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Image source: Getty Images.

So what

On the one hand, Lexicon Pharmaceuticals has an opportunity to put the $260 million windfall to good use. The business exited June with $106 million in cash and reported a first-half 2019 operating loss of $36 million. The pipeline currently includes three early-stage drug candidates in addition to Zynquista, which could receive more attention going forward in an attempt to diversify opportunities. 

On the other hand, now that Lexicon Pharmaceuticals has full rights to Zynquista, it will be responsible for regulatory matters and any additional clinical trials that have to be conducted. That will cause research and development expenses to balloon and suggests first-half 2019 operating metrics aren't great indicators of the financial health of the business.

That said, the asset hasn't been a complete failure. Zynquista earned marketing approval in Europe for type 1 diabetes earlier this year, but failed to earn marketing approval from regulators in the United States, the largest market. It's also being developed as a potential treatment for type 2 diabetes, but there's ample competition from other drugs in its class.

Now what

Investors have largely given up on Lexicon Pharmaceuticals, which boasted a market cap of just $140 million a few days ago. The recent surge has pushed its valuation to just $233 million. There appears to be an opportunity to generate value from Zynquista, although it seems unlikely to live up to the blockbuster potential investors had originally hoped for. Investors would be better off waiting to see how management navigates the next few quarters before deciding to buy this troubled pharma stock.

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.