Lexicon Pharmaceuticals, Inc. (LXRX-NASDAQ) is a biotech company that many have not heard of, and those who do know it may have a painful history from it.  Anyone who got in the stock over the last week will have a new cheer on Monday as the company has secured a $205 million investment from The Invus Group, LLC over the course of 2007 with the potential for up to an additional $345 million over the next four years.

Simultaneously, Lexicon announced it has entered into a $60 million product development collaboration with Symphony Capital Partners, L.P. and its co-investors ("Symphony") to move its first three drug candidates into advanced clinical development:

-LX6171 for cognitive disorders, currently completing Phase 1b;
-LX1031 for irritable bowel syndrome, currently in Phase 1b;
-LX1032 for gastrointestinal disorders, currently in preclinical development.

Back in 2000, this stock traded north of $40.00, then traded to under $10.00 in 2001, and the stock slid lower and lower to around $3.00 recently.  This is the sort of investment news that brings biotech zombies back to life.  Lexicon had a market cap of $241 million as of Friday’s close, and it had just over $59.5 million in cash and equivalents and more than $98 million in total liabilities as of its most recent quarter.  Below are the details of each transaction from the press release:

FROM INVUS:

Invus has received warrants to purchase 16.4 million shares of Lexiconcommon stock, for a per share purchase price of $3.09, the ten-dayvolume weighted average as of June 14, 2007. Upon shareholder approval,Invus will purchase, at that price, the number of shares that remainsubject to the warrants, and the warrants will terminate. Invus alsowill purchase approximately 20.4 million additional shares of commonstock which, when added to the shares already owned by Invus, willbring Invus’ ownership to 40% of the post-transaction outstandingshares of common stock. The purchase price for these additional 20.4million shares will be $4.50, a 46% premium over the Friday, June 15th,2007 closing price of $3.08.

To assure long-term adequate financing, Invus will have the right torequire the company to initiate up to two rights offerings, which wouldprovide all shareholders with pro rata rights to acquire additionalcommon stock in an aggregate amount not to exceed $345 million. Thefirst rights offerings may be initiated, subject to certainadjustments, beginning 27 months from the closing of the initialinvestment, and the second rights offering may be initiated beginning12 months after the initiation of the first, or 39 months from theclosing of the initial investment if the first rights offering does nottake place. The initial investment and subsequent rights offerings aredesigned to achieve up to approximately $550 million in proceeds toLexicon. Invus would participate in the rights offering for up to itspro rata portion of the offering, and would commit to purchase theentire portion of the offering not subscribed for by other stockholders.

As part of its agreement with Invus, Lexicon will have the right toissue common stock before the commencement of the rights offerings at aprice above $4.50 per share. Such offerings will reduce the totalamount required to be raised under the rights offerings. Invus willhave the right to participate in future equity issuances by the companyso as to maintain its percentage ownership of the company. Invus willalso agree to customary standstill restrictions that will not apply tothe rights offerings and will have other exceptions. Invus will haveinitially three members on the Lexicon board of directors, which willbe expanded from eight to eleven members.

The transaction will be submitted to Lexicon stockholders for approval at a meeting planned for August or September.

FROM SYMPHONY:

Under the terms of the $60 million Symphony transaction, $45 millionhas been provided to Symphony Icon, Inc., a newly-created company thatwas established to accelerate development of Lexicon’s first threeproduct candidates and hold the license to the intellectual property ofLX6171, LX1031 and LX1032. An additional $15 million of equity capitalwas provided directly to Lexicon for general corporate purposes.

Through a purchase option, Lexicon retains the exclusive right, but notthe obligation, to acquire 100% of the equity of Symphony Icon atexercise prices that range from $72 million in the second year up to$90 million in the fourth year of the collaborative development period.The option exercise may be paid in cash or a combination of cash andLexicon common stock at Lexicon’s sole discretion. If Lexicon choosesnot to exercise the purchase option, Symphony Icon will retain therights to the three programs. In exchange for the purchase option and$60 million of funding, Lexicon issued approximately 7.7 million sharesof Lexicon common stock to Symphony Icon’s investors at a purchaseprice of $3.14, the ten-day closing price average as of June 12, 2007.The collaboration is intended to last up to four years.

Jon C. Ogg
June 18, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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