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Lexicon an Attractive Takeover Candidate

Erik Kobayashi-Solomon

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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Kobayashi-Solomon: Well, that's what I like to hear. So, one of the other things that you mentioned before was the possibility of Lexicon maybe being acquired. Obviously, so this is small company kind of a speculative pipeline, what do you see is the possibility for Lexicon being acquired? Who do you think might have an interest in this?

Andersen: Well, I do think that at this moment their diabetes drug candidate is – they are most promising. We do expect to see data from a couple of the other Phase II drug candidates it's around year end. So, that's the rheumatoid arthritis drug candidate and then there is another rare disorder known as carcinoid syndrome.

So, there could be a lot more clarity kind of surrounding the potential of Lexicon around year end, and I think that that could be an appropriate time for an offer.

In terms of acquirers, I think it makes sense to focus on companies that are interested in diabetes. So, for example, a company like Merck, they don't have drug in development at least in mid or late stage development that is similar to Lexicon's drug candidate.

Kobayashi-Solomon: So, this would really kind of fill a hole in their product portfolio there?

Andersen: Yes, I think they would really be able to use the sales force that they've already established for Januvia, which is another class of diabetes drug to really kind of capitalize on that. And then you've got another – other companies like Sanofi-Aventis or Eli Lilly that have historically been very focused on diabetes that I think could be very logical.

Kobayashi-Solomon: And right now across with Genzyme acquisition is swirling there is a lot more I think interest and maybe concentration on these smaller biotech names?

Andersen: No. I think that's true, I think that a lot of the larger drug firms are really kind of looking closely at the potential of their own portfolios and kind of what they might be able to find that could complement those, so…

Kobayashi-Solomon: Well, Karen thanks for coming in and talking about Lexicon.

Andersen: Sure. No, my pleasure.

Kobayashi-Solomon: And thank you for joining us. Please stop by the OptionInvestor website, where there are many more option ideas, based on Morningstar's fundamental research.