Lexicon Pharmaceuticals (NASDAQ:LXRX) announced that it has initiated phase 3 studies for telotristat etiprate, an investigational drug targeting treatment of carcinoid syndrome. The clinical trial will include around 105 patients in a 12-week study followed by a 36-week open-label period.

What it means
Carcinoid syndrome occurs when a cancerous tumor -- typically in the gastrointestinal tract, but sometimes in the lungs -- secretes chemicals into the bloodstream. Common symptoms include severe diarrhea and skin flushing. The condition can lead to malnutrition, heart disease, and death. Carcinoid syndrome is very rare, with only around 5 new diagnoses each year per 100,000 persons in the U.S.

Lexicon's news follows a successful phase 2 trial for telotristat etiprate. The results from phase 2 showed significant reduction in bowel movements with participating patients. Other symptom improvements were also found, including reduction of abdominal pain and cutaneous flushing episodes.

The phase 3 study greatly expands the number of patients involved. Phase 2 only included 15 patients. However, low numbers of patients are not uncommon with orphan drug trials because the diseases targeted by these drugs affect so few individuals.

Looking ahead
While positive phase 2 results don't always mean that phase 3 will go well, it's hard not to look ahead a little. If phase 3 does go well and telotristat etiprate ultimately receives regulatory approval, Lexicon could profit very nicely. 2011 sales for Sandostatin from Novartis (NYSE: NVS), another drug used to treat carcinoid syndrome, topped $1.4 billion.

Lexicon also hopes to succeed with telotristat etiprate with another condition. The company has a phase 2 study under way for using the drug to treat ulcerative colitis. 

The company's pipeline includes drugs targeting treatment of diabetes, irritable bowel syndrome, rheumatoid arthritis, and glaucoma. The drug farthest along (other than telotristat etiprate)  is LX4211, which is in phase 2.

LX4211 is a diabetes pill that inhibits two types of transporters of glucose. Other diabetes drugs -- including dapaglifozin from Bristol-Myers Squibb (NYSE:BMY) and AstraZeneca (NYSE:AZN), as well as canaglifozin from Johnson & Johnson (NYSE:JNJ) -- only inhibit one glucose transporter.

Lexicon's balance sheet as of June 30 shows more than $231 million in cash, equivalents, and short-term investments.That amount should be sufficient to carry the company into at least late 2013.

Foolish take
The company appears to have solid potential with telotristat etiprate and LX4211 and sufficient cash to carry it well into 2013. However, the stock's current price puts the market cap for Lexicon at a little over $1 billion. That's with revenue barely more than $1 million. A lot of the company's potential is already baked into the price. Any bumps in the road would likely hit the stock very hard.

Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca plc (ADR) and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.