Lexicon Pharmaceuticals (NASDAQ:LXRX) just sold 15% of itself to billionaire Ray Debbane, who turned Weight Watchers around. This information was just made public in an 8-K filing on Dec. 11. Investors now hope his company, Invus LP, can do the same with LXRX stock.
Now known as WW International (NASDAQ:WW), the stock rose from a very low price several years ago before Mr. Debbane got Oprah Winfrey involved. Both of them made a “windfall” as a Dec. 2018 Forbes article detailed.
The article describes how Mr. Debbane conceived of the idea of getting Oprah Winfrey involved in Weight Watchers. She was bought in at a low point for the stock when she started promoting their products. Year later and now she is $400 million richer and Debbane made 27 times his company’s investment.
However, since he sold a large portion of his stake, WW stock has fallen from its peak. Nevertheless, he gets the credit for the WW turnaround. Investors now hope he can work the same magic with Lexicon.
The Debbane Deal
Lexicon Pharma just received fast-track approval by the FDA for its drug addressing diabetic pain. The hope is that this drug could be a blockbuster. However, the company still has to enroll people in a fast-track study and then prove its results.
Nevertheless, Mr. Debbane has given Lexicon Pharma a lifeline of sorts. His firm agreed to buy 20.3 million shares at $3.20. This effectively provides $65 million before offering expenses to the company.
As Lexicon had 117.474 million shares outstanding prior to the sale, this provides Debbane’s private equity company, Invus, a 14.7% post-money stake (i.e., 20.3 million divided by 137.774 million shares).
However, the truth is this deal couldn’t have come at a better time for Lexicon Pharma. For one, the company is losing money head over feet.
For example, as of Sept. 30, the company had burnt through $108.7 million in its firm nine months in cash flow from operations. This can be seen on page seven of its latest 10-Q filing with the SEC in its Consolidated Statement of Cash Flows.
As a result, its cash balance had fallen $160.2 million in the first nine months of 2020 to just $111.5 million. Moreover, Lexicon Pharma also has $20 million in debt on its balance sheet. So its net cash was only $91 million.
Therefore, if this burn rate continued much longer the company would soon be running out of cash. The addition of $65 million from Debbane’s company and the likelihood of further support provides a lifeline. However, there is no guarantee that Debbane will continue giving keep to the company.
Moreover, Lexicon Pharma has a terrible track record. They have been public for 20 years or so, with essentially nothing of significance to show for this.
What’s Next With LXRX Stock
The reality of the situation with Lexicon is that its revenue will not cover its R&D and capital expenditure (capex) costs. For example, quarterly revenue is between $6 and $7 million. But its R&D expenses are at least $40 million and overhead is $11 million each quarter.
So something big has to happen. And soon. Maybe Debbane can recruit Oprah Winfrey to do marketing again. But they need a blockbuster drug. Maybe that will be the diabetic drug, if it gets approved. Or maybe it will be something different.
But there clearly does not yet appear to be any sort of path to profitability. At least I cannot see one.
Therefore, that means most investors should take a wait-and-see approach to LXRX stock. It’s nice that the company was able to snag a billionaire to put money in the company. But where that leads it is anybody’s guess.
The bottom line is that Lexicon Pharma needs a turnaround. If LXRX stock can get a plan of action like Weight Watchers did with Debbane and Winfrey, maybe there is some hope. But right now, I don’t see it.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any stock mentioned in this article.