Does Lexicon Own the Future of Type 2 Diabetes?

Does Lexicon Own the Future of Type 2 Diabetes?

Developmental stage biotech company Lexicon Pharmaceuticals reported that its lead diabetes drug, LX4211, successfully reduced high blood sugar levels after meals in patients with type 2 diabetes and moderate to severe kidney disease. You may wonder how an announcement from a small proof-of-concept study has lifted shares more than 25% higher in intraday trading, but there are several positive takeaways for investors. Can Lexicon continue its successful journey through clinical trials and one day rule the type 2 diabetes market?

Why does it matter?
LX4211 poses several potential advantages to currently available treatments. First, moderate to severe kidney disease occurs in approximately 30% of patients with type 2 diabetes patients, which represent 90% of all diabetes cases -- which the International Diabetes Federation estimates will swell to 552 million people by 2030. That's a pretty big market. Second, there were no serious adverse events observed in the study. There were only 30 patients total, so investors shouldn't get too excited. But several currently approved diabetes treatments pose risks of pancreatitis and cardiovascular events. If LX4211 reproduces a (relatively) clean safety profile in larger trials, it could have a major leg up on the competition.

The biggest value in the drug is that it inhibits two proteins responsible for transporting glucose: SGLT1 dictates sugar absorption in the gastrointestinal tract and SGLT2 dictates sugar absorption in the kidney. The market is already heralding the arrival of SGLT2 inhibitors as the next big thing in diabetes treatment, but only LX4211 possesses dual inhibition.

The reigning champ of type 2 diabetes treatment is the Januvia/Janumet franchise from Merck , which has generated first half sales of $2.84 billion this year. Januvia was the first DPP-4 inhibitor to hit the market -- and it has used time as its greatest advantage to build a formidable safety record and relationship with doctors and patients. Sales got off to a slow start this year, but being on track to capture more than $5.5 billion in annual sales is nothing to sneeze at.

That hasn't stopped others from trying to wrestle away the franchise's market share. Johnson & Johnson gained approval for the first SGLT2 inhibitor, Invokana, in the second quarter. Investors are hoping that will allow the company to build a lead over its competitors -- not unlike Merck and Januvia. Is that a reasonable expectation? Well, Invokana bested Januvia in lowering blood glucose levels in a head-to-head comparison. Beating the incumbent is usually a good place to start. Further, the next closest competing SGLT2 inhibitors are ertugliflozin from Pfizer and empagliflozin from Eli Lilly , which are both currently in phase 3 trials. That pushes any potential approval dates into late 2014 or later and bodes well for Invokana to build up its lead.

Of course, that could also be beneficial to Lexicon's development timelines. With the initiation of phase 3 trials for LX4211 in type 2 diabetes occurring later this year it will still lag behind Pfizer and Lilly, but things could get interesting down the road. The key for all three is living up to or exceeding the high bar set by Invokana. Falling just short simply won't cut it in this high stakes game, although there could be room if treatments improve upon Januvia.

Foolish bottom line
The results of the proof-of-concept trial will allow Lexicon to feel good about moving into larger planned phase 3 trials later this year and hints that the dual inhibition provided by LX4211 could have significant clinical advantages. While the type 2 diabetes market has produced plenty of blockbuster treatments, I'm not so sure I would be buying into Lexicon any time soon. The company may look cheap near $3 per share, but it sports a market cap in excess of $1.5 billion! That seems to price a lot of hype into shares. I'll be sitting on the sideline until I take a deeper look at the company's pipeline.

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Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on biopharmaceuticals, industrial biotech, and the bioeconomy.The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of 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.

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