What happened

Shares of Lexicon Pharmaceuticals (NASDAQ:LXRX) fell more than 28% today after the company announced that it was unable to adequately address the concerns of American regulators relating to its lead drug candidate, Zynquista, in type 1 diabetes.

Individuals taking the drug candidate during clinical trials were at risk of developing diabetic ketoacidosis, a potentially life-threatening condition, which prompted the U.S. Food and Drug Administration (FDA) to issue a complete response letter after receiving the new drug application (NDA). Lexicon Pharmaceuticals responded to the letter, but the FDA reaffirmed its previous position.

As of 11:28 a.m. EST, the pharma stock had settled to a 6.9% loss.

A declining graph on a chalkboard.

Image source: Getty Images.

So what

Today's news could have far-reaching consequences for Lexicon Pharmaceuticals and its shareholders.

The company and Sanofi had been developing Zynquista for the last four years as a potential treatment for both type 1 diabetes and type 2 diabetes. But Sanofi walked away from the collaboration after the FDA issued a complete response letter for the drug candidate in type 1 diabetes and the asset underwhelmed in a late-stage trial for type 2 diabetes, missing a key endpoint.

The issue is that Zynquista faces steep competition within its drug class. There's Jardiance from Eli Lilly and Boehringer Ingelheim, Invokana from Johnson & Johnson subsidiary Janssen, Steglatro from Merck and Pfizer, and Farxiga from AstraZeneca. To be fair, all of those drugs are SGLT2 inhibitors, while Zynquista inhibits both SGLT1 and SGLT2, but the difference hasn't mattered in clinical trials to date.

Lexicon Pharmaceuticals needs a partner to complete mandatory cardiovascular outcome studies for Zynquista in type 2 diabetes, but potential partners might wait to see how upcoming data readouts from cardiovascular outcome studies for the competition play out. If peers show promising results, then the return on investment for Zynquista could be pretty slim (or negative). Resolving the issue with the FDA in type 1 diabetes might have been a nice bargaining chip in courting a collaborator, since none of the SGLT2 inhibitors on the market today are approved for type 1 diabetes, but that persuasion tactic is off the table (for now).

Now what

There's still a chance that Zynquista can be salvaged in the United States (it's approved to treat type 1 diabetes in the European Union), albeit a slim one. Lexicon Pharmaceuticals said it intends to coordinate with a different office at the FDA in an attempt to resolve its outstanding issue in type 1 diabetes, but that process will take until the end of February 2020 to play out. That could make potential partners wait even longer before making a decision, but the longer this dance drags out, the more time there will be for well-funded peers to make inroads with doctors and release new data. Simply put, Lexicon Pharmaceuticals finds itself in a pretty difficult position.