It's been a rough year for Lexicon Pharmaceuticals (NASDAQ:LXRX). In fact, it's been a rough five years for the pharmaceutical stock, which has lost 49% in that span.

The business has struggled to generate much momentum for its lone drug product, Xermelo, a treatment for carcinoid syndrome diarrhea. Management once expected the product to generate peak annual sales of up to $350 million. Sales during the first nine months of 2019 stood at just $24 million. 

Xermelo hasn't even been the most pressing concern for investors this year. That distinction belongs to Zynquista (sotagliflozin), the company's lead drug candidate and a potential treatment for type 1 and type 2 diabetes. Sanofi (NASDAQ:SNY) walked away from a collaboration in September, but Lexicon remains committed to developing the asset by itself. It's a risky move. 

A woman sitting with her doctor.

Image source: Getty Images.

How did we get here?

Prior to the collaboration's termination, Lexicon Pharmaceuticals and Sanofi had been working together for four years to develop Zynquista as a treatment for type 1 and type 2 diabetes. 

The drug compound inhibits two proteins, sodium-glucose co-transporter 1 (SGLT1) and sodium-glucose co-transporter 2 (SGLT2), that sabotage glucose control and glucose metabolism. Therefore, blocking the proteins may help individuals with diabetes to lower their blood sugar levels.

While phase 3 clinical trials demonstrated that Zynquista lowered hemoglobin A1c, body weight, and blood pressure compared with insulin alone in individuals with type 1 diabetes, the studies also revealed that the drug compound increased the risk of developing diabetic ketoacidosis and genital infections. 

That was in line with similar drugs, but led to mixed feelings from regulators. An advisory committee for the U.S. Food and Drug Administration voted 8-8 on recommending Zynquista for marketing approval in type 1 diabetes. The FDA isn't bound by advisory committee recommendations, but regulators issued a complete response letter to Lexicon and Sanofi two months later. The drug didn't earn marketing approval in the U.S.

But regulators in Europe felt differently. Zynquista earned marketing approval as a treatment for type 1 diabetes in April, one month after the development duo received their complete response letter from the FDA. 

Unfortunately, that didn't change the financial calculus for Sanofi, which tapped out of the collaboration in September. Lexicon Pharmaceuticals is forging ahead alone, but investors are shouldering considerable risks.

A kid looking through a monocular.

Image source: Getty Images.

Can Zynquista be salvaged?

On the one hand, Lexicon earned a $260 million termination payout from Sanofi and ended September with $296 million in cash. That should be enough to complete the primary late-stage studies for Zynquista in type 2 diabetes and support potential regulatory submissions in the U.S. and Europe in the first half of 2020.

On the other hand, on the third-quarter 2019 earnings conference call, management admitted that the company doesn't have enough cash to see two late-stage outcome studies for Zynquista to full completion. The two outcome studies are evaluating cardiovascular and renal function outcomes in individuals with type 2 diabetes and either kidney impairment or heart failure. Lexicon will require funding from a partnership to wrap up the outcome trials, which are required for all new type 2 diabetes drugs.

How likely is a partnership? Well, the outlook isn't great. The main obstacle is that there's a jam-packed field of SGLT2 inhibitors on the market for treating type 2 diabetes. Eli Lilly and Boehringer offer Jardiance. Johnson & Johnson subsidiary Janssen sells Invokana. Merck and Pfizer offer Steglatro. AstraZeneca developed Farxiga. The competitive landscape likely played into Sanofi's decision to walk away.

While Zynquista is the only dual inhibitor (targeting both SGLT1 and SGLT2) among the group, many of the top pharmaceutical companies with experience in the type 2 diabetes market have already made their bets on the drug class. 

Any company interested in Zynquista may wait until the SGLT2 drugs above report results from cardiovascular-outcome studies that are underway. Ironically, completing those studies for Zynquista is exactly the reason Lexicon Pharmaceuticals needs a partner. If any drugs in the field show a reduced risk in cardiovascular events or death (Jardiance was the first to do so; Steglatro may report results by the end of 2019), then the return on investment for a partner may be slim.

A pretty risky bet

Lexicon needs multiple developments to fall in its favor in a relatively short time. The company has to report positive results from phase 3 trials evaluating Zynquista in type 2 diabetes. Data readouts are expected in late 2019 or early 2020.

The company also needs to adequately respond to the FDA's complete response letter for Zynquista in type 1 diabetes, work with regulators on an acceptable path forward, and communicate the timeline to investors. And it needs to find a partner for Zynquista in type 2 diabetes to finance the two outcome studies to completion. 

All of those things could certainly happen, but hoping for a good-news hat trick is a risky bet for investors to make. Simply put, this pharma stock should be avoided until more information is available.