Companies Targeting SGLT2 + Intrinsic value of Lexicon Pharma. (LXRX)

Brief Summary of Industry 

SGLT2 inhibitors are currently approved mainly to treat type 2 diabetes mellitus and the diseases stemming from that indication (heart failure, diabetic nephropathy, etc.) This class of drugs, identified by their suffix of -gliflozin, have four players domestically: canagliflozin, dapagliflozin, ertugliflozin, and empagliflozin. By pack units sold globally, we see empagliflozin or Jardiance from Boehringer Ingelheim Pharmaceuticals, Inc. and Eli Lily leading the pack. Below is the market share in packs from 2013-2020.

Domestically, revenue is concentrated among the three main players: Johnson and Johnson with Invokana, AstraZeneca with Farxiga, and Boehringer Ingelheim Pharmaceuticals, Inc.+Eli Lily with Jardiance. Pfizer is the latest to enter the race with their SGLT-2 inhibitor, Steglatro, approved in 2017. Steglatro is having a harder time acquiring market share and currently only represent 2% of the domestic market in 2020.  

The competitive landscape is expected to drastically change in the coming years. With patents expiring and expired for Invokana and Farxiga respectively, generic competition will be hard to combat for any new compounds being approved. In addition to this, Jardiance is expected to keep patent protection until 2029. So from increasing generic competition to continued dominance from Jardiance, a company looking to introduce its own SGLT-2 would ideally have to show data points that demonstrates some semblance of superiority to Jardiance.     

Below are all of the players in this market (foreign and domestic): 

Moving onto the broader market, SGLT-2's market share has been flat in the range of 5% < x < 10% for the past three years. Below is the list of treatments for T-2 and their corresponding market share for 2019. 

In the T2 diabetes space, SGLT2 inhibitors are third to fourth line treatments. According to Bloomberg, we see human insulin and insulin analogs dominate the market with 54% of the total market share in the treatment of T2, followed by GLP-1 analogs, DPP-4 inhibitors, and finally SGLT-2 inhibitors.       

DCF Valuation of Lexicon Pharma. (LXRX)

I decided to focus on the only compound going through the clinical trial process currently, Sotagliflozin. Sotagliflozin (Sota, Zynquista) is being developed currently by Lexicon Pharmaceuticals, a company founded in 1995 and previously known for developing the compound Xermelo. Lexicon's current pipeline is not looking great, with the only approved compound being Sotagliflozin in the EU for T1 diabetes (2019). This approval has not been particularly fruitful for Lexicon so far, with revenues, excluding one-time transactions, averaging around $32.5 million per year. Looking forward, Lexicon has two tailwinds that investors should be attentive of: 

1. SOLOIST and SCORED studies for sota demonstrated promising data for heart failure in patients with T2 diabetes. The FDA says they would support an NDA for a sota label that covers reducing the risk of CV death, hospitalization for heart failure, and urgent visits for heart failure in T2D adults.    
2. RELIEF-DPN-1 and RELIEF-PHN-1 announced positive topline data in phase 1 and is expected to announce results for phase 2 trials in 4Q21.     

Just telling these two points, however, would not put the full story for Lexicon Pharma. into frame. Originally, sota was a partnership development between Sanofi and Lexicon that started in 2015 to jump into the SGLT2 race that all major pharmaceuticals were jumping into. It is important to note that Sanofi and Lexicon showed up late to the race, with the 3 major SGLT2's already dominating the market at the point when Lexicon starts clinical trials. 

Not only has Lexicon shown up late to the race, but they have also encountered a major roadblock as well with the FDA regarding the risk of diabetic ketoacidosis (DKA) in patients using sota. Ultimately, the partnership between Sanofi and Lexicon was terminated in September 2019. Another important note is that sota is estimated to lose patent protection in 2026. 

With all of that in mind, below are the revenue assumptions for Sota in the U.S.: 

(A) The first projected five years (2020-2025)

(B) The next projected five years (2025-2030)

Some notes regarding the assumptions: 

• The build-up of the diabetes population in the U.S.  was projected by finding the average of the % of people with diabetes for the past 10 years and multiplying that by the live births 10 years previous to that current year.  

• From the projected population with diabetes, 95% and 15.5% were multiplied to represent the diabetes population with T2 and heart failure. 
• Then that population was further multiplied by % segmentation by drug class, a terminal market share of 10% was given to SGLT2 inhibitors and converged from the present year's market share. 
• Finally, market share was segmented by current SGLT2 inhibitors in the market. Acknowledging the patent expirations for Invokana in 2024, Farxiga in 2020, Jardiance in 2029, Steglatro in 2030, Zynquista in 2026, and the generic market competition resulting. 
• The price per patient per year was determined through an analysis of the current pricing of SGLT2 inhibitors on the market. I took an average of the prices, although that may be a bit generous. 
  

               **On all terminal assumptions, I have set a bull, base, and bear case as well.    

Below is the full revenue assumptions model, I have decided to exclude LX211 at this time due to it only being in phase 2, I may come back to change the model in 4Q. 

Finally, for the DCF itself, a WACC of 9% was used in addition to a 0% terminal growth rate for all bull, base, and bear cases. In addition to the terminal growth rate, an exit multiple was calculated using recent comparable M&A transactions to help determine the terminal value, an average of the two methods was calculated (Also note, in the bear case I did not use an exit multiple).  Operating margin, CAPEX, and change in net-working capital were calculated using industry averages and converged from current rates to terminal rates. 

Below is an example of the base case terminal assumptions. 

   

The resulting intrinsic values calculated were as follows 

• Bull Case: $13.11 
• Base Case: $7.52 
• Bear Case: $2.33 

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 Learn more about SGLT2 inhibitors below... 

 What are nephrons? 

• The nephron is the microscopic structural and functional unit of the kidney. 

How does the nephron work? 

• The blood enters the glomerulus through the afferent arteriole 
• Exits through the efferent arteriole 
• As the blood flows through the glomerulus, podocytes filter the blood into the bowman’s capsule, more specifically into the bowman’s space. 
• The resulting product in the bowman’s space is the filtrate, which will be processed further into urine 
• Filtrate includes ions, sodium, small molecules like glucose, amino acids, etc., basically micro molecules.   
• Things that do not get filtered are red blood cells, larger molecules, and proteins. 
• The bowman’s capsule leads into a series of tubules which dips down into the renal medulla of the kidney and reverts back to the renal cortex. 
• The filtrate now moves into the proximal tubule (proximal convoluted tubule) 
• In this tubule, useful small molecules (glucose, amino acids, sodium, etc.) are reabsorbed into the bloodstream actively. 
• The filtrate then moves into the loop of Henle, which dips down and loops back up. 
• Why does it loop? 
• Makes the renal medulla salty (hypertonic), by actively (using ATP) pumping out salts (sodium, potassium, chlorine, etc.) 
• Water is also filtered out as a result of the tonicity of the medulla 
• Then from the loop, the filtrate moves into the distal convoluted tubule 
• In this tubule, we see more reabsorption. Things like calcium, sodium, etc., and more H2O are pumped back into the bloodstream.   
• At the end of the distal tube, most of the useful products have been reabsorbed and what remains mostly is waste. 
• This waste is collected into the collecting ducts, where multiple nephrons dump their waste. 
• These collecting ducts go further into the medulla again 
• Anti-diuretics (hormones) dictate how porous the collecting ducts are. The more porous the ducts are, the more water flows into the medulla 
• Finally, the water plus waste in the kidney builds up (now urine). Then exits the kidney through the ureters to the urinary bladder.

What are SGLT2’s? 

They are proteins found in the nephrons of kidneys and are located in the proximal convoluted tubule that acts to reabsorb filtered glucose back into the blood. Approximately 97% of the filtered glucose is reabsorbed into the body through SGLT2. The remaining 3% is reabsorbed through SGLT1. 

• However, SGLT2’s are also expressed in the kidney, brain, liver, thyroid, muscle, and heart. 

What do SGLT2 inhibitors do? 

As the name suggests, the SGLT2 inhibitors bind to SGLT2 and prevent the reabsorption of glucose back into the body. As a result, more glucose is excreted through the urine and lowers glucose levels in the bloodstream.