Before the market opened today, Lexicon Pharmaceuticals (LXRX) reported second quarter earnings, about in line with our estimates. However, revenue from operations declined 69% year over year and 30% sequentially to $3 million. This was well below our estimate of $5.7 million.

Lexicon derives its revenue mainly from collaborations and subscription from its genetic information. The huge decline in revenue was primarily due to lower collaborative income recognized by the company. Since Lexicon’s alliances with both Bristol-Myers Squibb (BMY) and NV Organon are almost over, we expect collaboration revenue to decline further going forward.

Though the company reported a huge decline in revenues for the second quarter, the net loss remained unchanged at $ 20.1 million ($0.15 per share) compared to the same period last year. This was mainly due to the reduction in operating expenses. Operating expenses declined 28% year over year due to lower R&D and G&A expenses. There was a marginal decline of 6% in G&A expenses at $5.6 million due to lower salary related costs.

In addition to financials, Lexicon updated the pipeline status which seems to be quite encouraging:

• LX1032 (with fast track status from FDA) has been progressed to a phase IIa study for the treatment of gastrointestinal symptoms associated with carcinoid syndrome. Recently, it received orphan drug designation from the European Medicines Agency
• Lexicon completed the multiple ascending dose study of LX4211 (for glaucoma) and the company expects to come out with results later this quarter
• The phase IIa study of LX2931 for the treatment of rheumatoid arthritis will be initiated during the third quarter
• Patient enrollment is continuing for the phase IIa trial of LX1031 meant for the treatment of irritable bowel syndrome (IBS)

The financial position of the company is quite strong especially after the collaboration with Invus Group and Symphony Capital Partners. At the end of the second quarter, Lexicon had $106.9 million in cash and investments. But the company’s clinical programs require substantial financial investment as new candidates are moved into advanced trials. At this stage, forming a partnership with a cash rich pharma player is very important especially at a time Lexicon is witnessing eroding top-line.

We believe Lexicon’s “gene knockout” technology will be able to attract partners going forward. Any kind of partnership will boost the top-line in the form of upfront and milestone payments as well as royalties. We maintain our Buy recommendation.

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