Rating Update: Stock Rating Z-unrated (11/27/19)-Lexicon Pharmaceuticals Inc (LXRX).

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BUSINESS

Lexicon Pharmaceuticals, Inc., a biopharmaceutical company, focuses on the development and commercialization of pharmaceutical products for the treatment of human diseases. The company offers XERMELO, an orally-delivered small molecule drug candidate for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog therapy in adults. Its orally-delivered small molecule drug candidates under development comprise Sotagliflozin that is in Phase 3 clinical trials for the treatment of type 1 and type 2 diabetes; LX2761, which is in Phase 1 clinical development for the treatment of diabetes; and LX9211 that is in Phase 1 clinical development for the treatment of neuropathic pain. The company has strategic collaboration and license agreements with Sanofi; Ipsen Pharma SAS; Bristol-Myers Squibb Company; and Genentech, Inc.
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INVESTMENT RATING

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LXRX is expected to be a major Value Eraser reflecting capital returns that are forecasted to fall short of the cost of capital.

LXRX is currently unrated.

LXRX’s targeted value is not available.
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LXRX has a Power Rating of 1. (This very low Power Rating indicates that LXRX only has a better chance of achieving attractive investment performance over the near to intermediate term than 1% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; is currently in an unfavorable positi; and the trend in LXRX’s earnings estimates has been unfavorable in recent months.

INVESTMENT PROFILE

LXRX’s financial strength is poor. Financial strength rating is 9.
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Relative to the S&P 500 Composite, Lexicon Pharmaceuticals Inc has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that LXRX is higher risk. High expected growth is a positive for LXRX. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high financial leverage, and low historical growth. LXRX’s valuation is high: low dividend yield, low P/E ratio, and high price/book ratio. LXRX has unusually low market capitalization.

CURRENT SIGNALS

LXRX’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

LXRX’s current technical position is mixed. The stock price is in a 3.0 month up move. The stock has appreciated 228.8% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Lexicon Pharmaceuticals Inc (NASDAQ: LXRX) has benefited from small positive changes in fundamentals: significant quarterly sales acceleration occurred.
The stock is currently unrated.
On 11/27/19, Lexicon Pharmaceuticals Inc (NASDAQ: LXRX) stock enjoyed a major increase of 11.3%, closing at $0.89. However, trading volume in this advance was unusually low at 58% of normal. Relative to the market the stock has been extremely weak over the last nine months and has declined -2.5% during the last week.

CASH FLOW

In 2018, LXRX experienced a very significant reduction in cash of -$150.74 million (-49%). Sources of cash were much lower than uses. Cash consumed from 2018 EBITDA totaled -$99.60 million. Non-operating sources contributed +$3.51 million (-4% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$75.24 million (+76% of EBITDA). On a net basis, debt investors received -$21.45 million (+22% of EBITDA) while equity investors provided +$42.04 million (-42% of EBITDA).
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LXRX’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Lexicon Pharmaceuticals Inc Peer Group. In most years, LXRX was in the top quartile and second quartile. Currently, LXRX is at median at -4% of EBITDA (+$3.51 million).

LXRX’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Lexicon Pharmaceuticals Inc Peer Group. In most years, LXRX was in the top quartile and second quartile. Currently, LXRX is at the upper quartile at 0% of EBITDA ( $0.00 million).

LXRX’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Lexicon Pharmaceuticals Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has decelerated very sharply.) In most years, LXRX was in the top quartile and third quartile. Currently, LXRX is below median at +76% of EBITDA (-$75.24 million).

LXRX’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Lexicon Pharmaceuticals Inc Peer Group. In most years, LXRX was in the top quartile and lower quartile. Currently, LXRX is substantially above median at +22% of EBITDA (-$21.45 million).

LXRX’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Lexicon Pharmaceuticals Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, LXRX was in the second quartile and top quartile. Currently, LXRX is substantially above median at -42% of EBITDA (+$42.04 million).

LXRX’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Lexicon Pharmaceuticals Inc Peer Group. In most years, LXRX was in the top quartile and third quartile. Currently, LXRX is upper quartile at +151% of EBITDA (-$150.74 million).
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LXRX’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Lexicon Pharmaceuticals Inc Peer Group. (Since 2012 Cash, %Revenue has decelerated very sharply.) In most years, LXRX was in the top quartile. Currently, LXRX is at the upper quartile at +253%.

PROFITABILITY

LXRX’s return on equity reached a new post-2018 low in 2019.
The productivity of LXRX’s assets rose over the full period 2009-2019: asset turnover has enjoyed a very strong overall uptrend.
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LXRX’s return on equity is upper quartile (99.9%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is upper quartile (35.6%) reflecting asset turnover that is above median (0.74X) and upper quartile pretax margin (48.0%).
Tax “keep” rate (income tax management) is at the upper quartile (103.8%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is upper quartile (2.70X).

GROWTH RATES

There are no significant differences between Lexicon Pharmaceuticals’ longer term growth and growth in recent years.
Lexicon Pharmaceuticals’ historical income statement and balance sheet growth are not available.

Annual revenue growth has been 86.0% per year.

Total asset growth has been 19.5% per year.

Annual E.P.S. growth is not available.

Equity growth has been 7.2% per year.
No consensus growth rate forecast is available for Lexicon Pharmaceuticals.
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Relative to the Lexicon Pharmaceuticals Inc Peer Group, LXRX’s historical growth measures are highly erratic. Revenue growth (86.0%) has been upper quartile. Total asset growth (19.5%) has been above median. Equity growth (7.2%) has been slightly below median. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Lexicon Pharmaceuticals’ stock price performance has been volatile and significantly below market. Between January, 2009 and November, 2019, Lexicon Pharmaceuticals’ stock price fell -57%; relative to the market, this was a -89% loss. Significant price moves during the period: 1) June, 2019 – September, 2019: -52%; 2) June, 2018 – January, 2019: -61%; 3) June, 2017 – April, 2018: -51%; 4) September, 2011 – July, 2012: +163%; 5) February, 2011 – September, 2011: -53%; and 6) February, 2009 – September, 2009: +132%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -52.6% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -52.6% is substantially below median relative to Lexicon Pharmaceuticals Inc Peer Group.

Current 5-year total return performance of -18.2% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -18.2% relative to S&P 500 Composite, LXRX’s total return performance is lower quartile relative to Lexicon Pharmaceuticals Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, LXRX’s overall valuation is exceptionally high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is above median. Price/equity ratio is unavailable. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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LXRX has no value gap compared to the median. For LXRX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 12.09X to 11.49X. If LXRX’s ratio of enterprise value/revenue were to fall to 11.49X, its stock price would be lower by $-0 to $3.
For LXRX to achieve upper quartile valuation relative to the Lexicon Pharmaceuticals Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 12.09X to 13.90X. If LXRX’s ratio of enterprise value/revenue were to rise to 13.90X, its stock price would increase by $1 from the current level of $3.56.

VALUE TARGETS

LXRX is expected to be a major Value Eraser reflecting capital returns that are forecasted to fall short of the cost of capital.
Lexicon Pharmaceuticals’ current Price Target is not available.
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Lexicon Pharmaceuticals’ current Price Target is not available.
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PTR’s return on equity forecast is -0.0% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is below the 2017 low of 4%.

PTR’s growth forecast is 25.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2015 and 2018. The current forecast is significantly above the 2015 low of 8%.

PTR’s cost of equity forecast is 10.5% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2010 and 2018. The current forecast is well above the 2010 low of 4.6%.
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At Lexicon Pharmaceuticals’ current price of $3.56, investors are placing -Na on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 35.0% per year, and a return on equity of 67.4% versus a cost of equity of 9.4%.
PTR’s 2020 Price Target of $-Na is based on these forecasts and reflects an estimated value of existing assets of $-Na .

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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