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By Erik Kobayashi-Solomon | 08-03-2010 12:43 PM

Lexicon an Attractive Takeover Candidate

The small-cap biotech firm's experimental diabetes drug could make it a M&A target says Morningstar's Karen Anderson.

Erik Kobayashi-Solomon: Hi, I am Erik Kobayashi-Solomon, Co-Editor of Morningstar's OptionInvestor, and today it's my great pleasure to welcome back Karen Andersen, who is Senior Biotech Analyst here at Morningstar and also Co-Editor of Morningstar's Healthcare Observer. Karen, thanks for coming.

Karen Andersen: Good to be here.

Kobayashi-Solomon: And I just wanted to bring in a follow-up on a company that we did an investment article about last year, Lexicon Pharmaceuticals. Lexicon actually – I just love the story because it deals with knockout mice, the previous video talked about this technology a little bit.

Now, within the last half year basically, a little more than that, I know that Lexicon has gone through some different business changes and so forth. Could you talk a little about what's been going on with Lexicon operationally?

Andersen: Sure. So, one of the biggest boost they got was one of their Phase II drug candidates, the diabetes drug candidate showed very promising early stage data. And Lexicon chose to sort of take advantage of this positive news to raise some additional cash.

Kobayashi-Solomon: So they issued some shares?

Andersen: They did, and they issued quite a few shares. So they've actually had a history of diluting shareholders unfortunately. That's been their primary method of raising cash to fund their clinical trials.

Kobayashi-Solomon: But even despite that the share price really hasn't moved around that much. When you were here before Lexicon had I think it was four drugs in Phase II trials, where does that stand right now, and when is the next kind of information – when is the next, let's say, critical inversion point for these?

Andersen: Well, officially they still do have to have four drugs in Phase II trials.

Kobayashi-Solomon: Okay.

Andersen: So, it's difficult on the surface to see where the progress is coming. But we did see some more detailed data on the diabetes drug candidate just recently.

Kobayashi-Solomon: And I think as far as diabetes go, the Healthcare Observer is going to have a special issue about diabetes treatments just coming up, right?

Andersen: Yes, the August issue is focused on diabetes and we do have a section. We have a section specifically on this type of diabetes drug class as well as an article highlighting Lexicon as one of our top small cap biotech picks.

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