What: Shares of Lexicon Pharmaceuticals (NASDAQ:LXRX), a clinical-stage biopharmaceutical company focused on the development of small-molecule treatments to fight a host of diseases, rocketed higher by as much as 38% shortly after the start of Friday's trading session after announcing its third-quarter earnings results and inking a licensing and collaborative deal with Sanofi (NYSE:SNY) for its lead experimental drug.

So what: Although it was the smaller of the two catalysts, Lexicon managed to report a narrowing in its quarterly net loss to $35.3 million, or $0.34 per share, from the $40.5 million, or $0.55 per share, recorded in Q3 2014. Wall Street had been forecasting a $0.36 per share loss; particularly for a company without any approved products, a narrower than expected loss is a positive.

The far bigger news was a collaborative deal announced with Sanofi regarding sotagliflozin, the company's SGLT-1 and SGLT-2 inhibitor for type 1 & 2 diabetes. Under the terms of the deal, Sanofi will pay $300 million upfront to Lexicon, and Lexicon will be afforded the opportunity to earn up to $1.4 billion more in development, regulatory, and sales milestones. Lexicon is also eligible for tiered royalty payments on sotagliflozin. Sanofi will handle the clinical development of sotagliflozin as it relates to type 2 diabetes (which represents 90% to 95% of all diabetes cases), with Lexicon handling type 1 diabetes development.

With $256.4 million in and cash equivalents remaining on its balance sheet at the end of Q3, this $300 million should remove any immediate cash concerns.

Image source: Sanofi US Diabetes.

Now what: This deal is exactly what Lexicon needed. It removes the immediate cash concerns associated with being a clinical-stage company, provides a valuable marketing partner for its lead drug, and comes shortly after reporting positive phase 3 results in the TELESTAR trial for telotristat etiprate. Drug launches aren't cheap, and the upfront payment from Sanofi could be useful if telotristat etiprate is approved by the Food and Drug Administration. But, most importantly, it validates the potential of sotagliflozin.

What makes sotagliflozin such an exciting next-generation experimental therapy is that it tackles SGLT-1 and SGLT-2 inhibitors. You've probably noticed the rash of newly-approved SGLT-2 inhibitors on the market -- and thus far they've performed quite well. SGLT-2 inhibitors block glucose absorption in the kidneys, whereas SGLT-1 inhibitors do so in the intestines. It's unclear if a drug that focuses on inhibiting both pathways can provide superior glycemic balance (although sotagliflozin looked promising in midstage studies), but Sanofi appears convinced enough to think so.

Considering that diabetes encompasses such a large patient pool, I'd certainly suggest adding Lexicon to your radar.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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