SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



þ☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



q☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-30111

Lexicon Pharmaceuticals, Inc.



Delaware			76-0474169
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification Number)

~~8800~~2445 Technology Forest ~~Place~~Blvd.

The Woodlands, Texas 77381

(Address of Principal Executive Offices and Zip Code)

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Smaller reporting company ☑ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registration has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. q☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of November ~~6, 2017~~, ~~105,587,794~~8, 2021, 148,895,707 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

Lexicon Pharmaceuticals, Inc.

The Lexicon name and logo ~~and XERMELO®~~ are registered trademarks of Lexicon Pharmaceuticals, Inc.

Factors Affecting Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Part II, Item 1A. - Risk Factors” and in our annual report on Form 10-K for the year ended December 31, ~~2016,~~2020, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, future results, levels of activity, performance or achievements may vary materially from our expectations. We are not undertaking any duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual results, unless required by law.

Part I – Financial Information

Item 1. Financial Statements

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value)


	As of September 30,		As of December 31,
	2021		2020
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	92,118	$	126,263
Short-term investments	28,800		26,012
Accounts receivable	23		395


Prepaid expenses and other current assets	3,064		5,049
Total current assets	124,005		157,719
Property and equipment, net of accumulated depreciation and amortization of $4,849 and $5,815, respectively	1,311		295
Goodwill	44,543		44,543

Other assets	2,471		1,231
Total assets	$	172,330	$	203,788
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,345	$	5,469
Accrued liabilities	14,208		29,691

Current portion of long-term debt, net of deferred issuance costs	11,693		11,646
Total current liabilities	34,246		46,806



Other long-term liabilities	1,481		611
Total liabilities	35,727		47,417
Commitments and contingencies	0		0
Stockholders’ Equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.001 par value; 225,000 shares authorized; 149,987 and 142,289 shares issued, respectively	150		142
Additional paid-in capital	1,606,142		1,561,096
Accumulated deficit	(1,462,165)		(1,400,018)
Accumulated other comprehensive loss	(6)		(6)
Treasury stock, at cost, 1,165 and 793 shares, respectively	(7,518)		(4,843)
Total stockholders’ equity	136,603		156,371
Total liabilities and stockholders’ equity	$	172,330	$	203,788

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss)

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Net product revenue	$	—	$	6,542	$	—	$	23,404
Collaborative agreements	—		—		—		33
Royalties and other revenue	23		92		284		359
Total revenues	23		6,634		284		23,796
Operating expenses:
Cost of sales (including finite-lived intangible asset amortization)	—		633		—		1,929
Research and development, including stock-based compensation of $1,138, $1,029, $3,608 and $5,154, respectively	15,682		40,147		38,548		152,629

Selling, general and administrative, including stock-based compensation of $1,574, $875, $4,741 and $5,440, respectively	7,303		11,997		23,496		40,798

Impairment loss on buildings	—		—		—		1,600

Total operating expenses	22,985		52,777		62,044		196,956
Other operating income:
Gain on sale of XERMELO	—		132,818		—		132,818
Income (loss) from operations	(22,962)		86,675		(61,760)		(40,342)

Loss on debt extinguishments, net	—		(255)		—		(255)
Interest expense	(171)		(4,118)		(507)		(14,374)
Interest and other income, net	11		301		120		1,892


Net income (loss)	$	(23,122)	$	82,603	$	(62,147)	$	(53,079)
Net income (loss) per common share, basic	$	(0.16)	$	0.77	$	(0.43)	$	(0.50)
Net income (loss) per common share, diluted	$	(0.16)	$	0.71	$	(0.43)	$	(0.50)

Shares used in computing net income (loss) per common share, basic	145,820		107,309		144,558		106,974
Shares used in computing net income (loss) per common share, diluted	145,820		117,552		144,558		106,974

Other comprehensive income (loss):
Unrealized gain (loss) on investments	—		(277)		1		(49)
Comprehensive income (loss)	$	(23,122)	$	82,326	$	(62,146)	$	(53,128)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenues:
Net product revenue $ 5,830
$ —
$ 10,443
$ —
Collaborative agreements 21,112
27,686
46,781
60,181
Subscription and license fees —
31
64
119
Total revenues 26,942
27,717
57,288
60,300
Operating expenses:
Cost of sales (including finite-lived intangible asset amortization) 599
—
1,361
—
Research and development, including stock-based compensation of $1,345, $1,051, $3,698 and $3,013, respectively 39,137
52,533
109,653
137,751
Increase (decrease) in fair value of Symphony Icon, Inc. purchase liability —
(2,146 ) 2,101
(703 )
Selling, general and administrative, including stock-based compensation of $1,235, $879, $3,516 and $2,709, respectively 16,724
12,263
50,069
29,077
Total operating expenses 56,460
62,650
163,184
166,125
Loss from operations (29,518 ) (34,933 ) (105,896 ) (105,825 )
Interest expense (1,619 ) (1,646 ) (4,821 ) (4,933 )
Interest and other income, net 415
564
1,393
1,748
Net loss before taxes (30,722 ) (36,015 ) (109,324 ) (109,010 )
Income tax benefit —
—
8,652
—
Net loss $ (30,722 ) $ (36,015 ) $ (100,672 ) $ (109,010 )
Net loss per common share, basic and diluted $ (0.29 ) $ (0.35 ) $ (0.96 ) $ (1.05 )
Shares used in computing net loss per common share, basic and diluted 105,582
103,885
105,119
103,799

Other comprehensive loss:
Unrealized gain (loss) on investments 151
(258 ) 132
297
Comprehensive loss $ (30,571 ) $ (36,273 ) $ (100,540 ) $ (108,713 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity / (Deficit)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Common Stock Additional Accumulated Other
Shares Par Value Paid-In Capital Accumulated Deficit Comprehensive Gain (Loss) Treasury Stock Total
Balance at December 31, 2015 103,860
$ 104
$ 1,397,646
$ (1,108,934 ) $ (219 ) $ (2,747 ) $ 285,850
Stock-based compensation —
—
5,722
—
—
—
5,722
Issuance of common stock under Equity Incentive Plans 463
—
2,943
—
—
—
2,943
Repurchase of common stock —
—
—
—
—
(621 ) (621 )
Net loss —
—
—
(109,010 ) —
—
(109,010 )
Unrealized gain on investments —
—
—
—
297
—
297
Balance at September 30, 2016 104,323
$ 104
$ 1,406,311
$ (1,217,944 ) $ 78
$ (3,368 ) $ 185,181

Balance at December 31, 2016 104,582
$ 105
$ 1,411,222
$ (1,250,363 ) $ (195 ) $ (3,368 ) $ 157,401
Cumulative effect of change in accounting principle —
—
1,991
(1,991 ) —
—
—
Issuance of common stock to designees of Symphony Icon Holdings LLC 660
—
10,499
—
—
—
10,499
Stock-based compensation —
—
7,214
—
—
—
7,214
Issuance of common stock under Equity Incentive Plans 468
1
5,480
—
—
—
5,481
Issuance of treasury stock —
—
(3,143 ) —
—
3,143
—
Repurchase of common stock —
—
—
—
—
(1,679 ) (1,679 )
Net loss —
—
—
(100,672 ) —
—
(100,672 )
Unrealized gain on investments —
—
—
—
132
—
132
Balance at September 30, 2017 105,710
$ 106
$ 1,433,263
$ (1,353,026 ) $ (63 ) $ (1,904 ) $ 78,376

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(62,147)	$	(53,079)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	180		2,590
Stock-based compensation	8,349		10,594
Amortization of debt issuance costs	46		995
Gain on sale of XERMELO assets	—		(132,818)
Impairment loss on buildings	—		1,600
Loss on debt extinguishments, net	—		255
Changes in operating assets and liabilities:
Decrease in accounts receivable	372		52,201
Decrease in inventory	—		345
Decrease (increase) in prepaid expenses and other current assets	1,985		(6,008)
Decrease in other assets	459		314
(Decrease) increase in accounts payable and other liabilities	(13,433)		14,281

Net cash used in operating activities	(64,189)		(108,730)
Cash flows from investing activities:
Purchases of property and equipment	(1,198)		(33)

Proceeds from XERMELO sale	—		160,385
Purchases of investments	(28,880)		(53,197)
Maturities of investments	26,092		229,500
Net cash (used in) provided by investing activities	(3,986)		336,655
Cash flows from financing activities:
Proceeds from issuance of common stock, net of fees	36,705		—
Repurchase of common stock	(2,675)		(1,026)

Repayment of debt borrowings	—		(210,760)

Net cash provided by (used in) financing activities	34,030		(211,786)
Net (decrease) increase in cash and cash equivalents	(34,145)		16,139
Cash and cash equivalents at beginning of period	126,263		36,112
Cash and cash equivalents at end of period	$	92,118	$	52,251

Supplemental disclosure of cash flow information:
Cash paid for interest	$	307	$	16,892

Supplemental disclosure of non-cash activities:
Right-of-use asset	$	1,704	$	—
Liabilities assumed by TerSera from the XERMELO sale	$	—	$	3,180


Common stock issued in satisfaction of convertible debt exchanges	$	—	$	14,096

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net loss $ (100,672 ) $ (109,010 )
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
Depreciation and amortization 2,475
1,548
Increase (decrease) in fair value of Symphony Icon, Inc. purchase liability 2,101
(703 )
Stock-based compensation 7,214
5,722
Amortization of debt issuance costs 412
389
Deferred tax benefit (8,652 ) —
Loss on disposal of property and equipment 2
12
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,105 ) 173
(Increase) in inventory (2,149 ) —
(Increase) decrease in prepaid expenses and other current assets (580 ) 7,694
(Increase) decrease in other assets 32
(25 )
Increase (decrease) in accounts payable and other liabilities (11,738 ) 18,705
Decrease in deferred revenue (37,023 ) (51,342 )
Net cash used in operating activities (151,683 ) (126,837 )
Cash flows from investing activities:
Purchases of property and equipment (224 ) (83 )
Purchases of investments (59,237 ) (336,649 )
Maturities of investments 245,749
298,525
Net cash provided by (used in) investing activities 186,288
(38,207 )
Cash flows from financing activities:
Proceeds from issuance of common stock 5,481
2,943
Repurchase of common stock (1,679 ) (621 )
Repayment of debt borrowings (1,714 ) (1,495 )
Net cash provided by financing activities 2,088
827
Net increase (decrease) in cash and cash equivalents 36,693
(164,217 )
Cash and cash equivalents at beginning of period 46,600
202,989
Cash and cash equivalents at end of period $ 83,293
$ 38,772

Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,272
$ 3,406

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in satisfaction of Symphony Icon payment obligation $ 10,499
$ —
Unrealized gain on investments $ 132
$ 297

The accompanying notes are an integral part of these condensed consolidated financial statements.

Lexicon Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

1.Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, ~~2017~~2021 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2017.~~2021.

The accompanying condensed consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

For further information, refer to the financial statements and footnotes thereto included in Lexicon’s annual report on Form 10-K for the year ended December 31, ~~2016,~~2020, as filed with the SEC.

Use of Estimates: The preparation of financial statements in conformity with ~~U. S.~~U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent ~~assets and~~ liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of September 30, ~~2017 and December 31, 2016,~~2021, short-term investments ~~consist~~consisted of U.S. treasury bills and corporate debt securities. As of December 31, 2020, short-term investments consisted of corporate debt securities. The Company’s short-term investments are classified as available-for-sale securities and are carried at fair value, based on quoted market prices of the securities. The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security. Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity. Net realized gains and losses, interest and dividends are included in interest income. The cost of securities sold is based on the specific identification method.

~~Accounts Receivable:~~ Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services. The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the economic climate and other factors that could affect collectibility. Write-offs are evaluated on a case by case basis.

~~Inventory:~~ Inventories are determined at the lower of cost or market value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods. The Company began capitalizing inventory during the nine months ended September 30, 2017 once the U.S. Food and Drug Administration (“FDA”) approved XERMELO® (telotristat ethyl) as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO were recorded as research and development expense in the consolidated statements of comprehensive loss. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. InventoryAccrued liabilities: Accrued liabilities consisted of the ~~following as~~following:


	As of September 30,		As of December 31,
	2021		2020
	(in thousands)
Accrued research and development services	$	7,544	$	21,962
Accrued compensation and benefits	4,172		6,200
Short term lease liability	1,027		553
Other	1,465		976
Total accrued liabilities	$	14,208	$	29,691

Leases: Lexicon determines if a contract is or contains a lease at inception or upon modification of ~~September 30, 2017 (in thousands):~~

Raw materials $ 734
Work-in-process 41
Finished goods 1,374
Total inventory $ 2,149

~~Concentration~~the contract. A contract is or contains a lease if it conveys the right to control the use of ~~Credit Risk:~~ ~~Lexicon’s cash equivalents, investments and accounts receivable represent potential concentrations~~an identified asset for a period in exchange for consideration. Control over the use of ~~credit risk. The Company attempts~~the identified asset means the lessee has both (a) the right to minimize potential concentrations of risk in cash equivalents and investments by placing investments in high-quality financial instruments. The Company’s accounts receivable are unsecured and are concentrated in pharmaceutical and biotechnology companies located in Europe and the United States. The Company has not experienced any significant credit losses to date.

~~Segment Information and Significant Customers:~~ ~~Lexicon operates in one business segment, which primarily focuses on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease. Substantially~~obtain substantially all of the ~~Company’s revenues have been derived~~economic benefits from ~~drug discovery alliances, target validation collaborations for~~ the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology licenses, subscriptions to its databases, government grants and contracts, compound library sales and product sales.

~~Property and Equipment:~~ Property and equipment that is held and used is carried at cost and depreciated using the straight-line method over the estimated useful life of the assets which ranges from three to 40 years. Maintenance, repairs and minor replacements are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. Significant renewals and betterments are capitalized.

~~Other Intangible Assets:~~ Other intangible assets, net consist of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives. During the nine months ended September 30, 2017, intangible assets relating to XERMELO of $24.7 million were reclassified from indefinite-lived to finite-lived assets once the FDA approved XERMELO. The Company recorded $0.4 million and $1.0 million in amortization expense related to this asset, which is recorded as cost of sales in the accompanying consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017, respectively.

During the nine months ended September 30, 2017, the Company’s valuation allowance for its deferred tax assets decreased by $8.7 million due to the reclassification of intangible assets relating to XERMELO from indefinite-lived to finite-lived assets, which resulted in the related deferred tax liability now being considered a source of taxable income. The Company recorded a $8.7 million deferred tax benefit with a corresponding reduction in its deferred tax liability in the nine months ended September 30, 2017 as a result of this reclassification.

~~Impairment of Long-Lived Assets:~~ Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There was no impairment of long-lived assets in the nine months ended September 30, 2017 and 2016.

Indefinite lived intangible assets are also tested annually for impairment and whenever indicators of impairment are present. When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its intangible assets. If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates the asset’s fair value. If the carrying valueuse of the asset ~~exceeds its fair~~and (b) the right to direct the use of the asset. Lexicon does not apply this accounting to those leases with terms of twelve (12) months or less.

Operating lease right-of-use assets and associated lease liabilities are recorded in the balance sheet at the lease commencement date based on the present value ~~then~~of future lease payments to be made over the ~~intangible asset is written down to its fair value.~~

~~Goodwill Impairment:~~ ~~Goodwill~~expected lease term. As the implicit rate is not ~~amortized, but is tested at least annually for impairment~~determinable in its leases, Lexicon uses its incremental borrowing rate of 9% at the ~~reporting unit level. The Company has determined that~~commencement date in determining the reporting unit is the single operating segment disclosed in its current financial statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step in the impairment process is to determine the fairpresent value of the reporting unit and then compare it to the carrying value, including goodwill. If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired. There was no impairment of goodwill in the nine months ended September 30, 2017 and 2016.future payments.

Revenue Recognition: Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

~~Product~~Prior to the Company’s sale of XERMELO and related assets to TerSera Therapeutics LLC (“TerSera”) in September 2020, product revenues ~~consist~~consisted of ~~U.S.~~commercial sales of XERMELO in the United States and sales of bulk tablets of ~~telotristat ethyl~~XERMELO to Ipsen Pharma SAS (“Ipsen”). Product revenues ~~are~~were recognized ~~once~~when the ~~Company meets all four revenue recognition criteria described above. In March 2017, Lexicon began shipping~~customer obtained control of XERMELO, which occurred upon delivery to ~~its customers in~~ the ~~U.S.~~customer. The Company ~~recognizes~~recognized product revenue ~~for product sales of XERMELO at the time the product is received by its specialty pharmacy customers~~ net of applicable reserves for variable consideration, including allowances for customer credits, ~~including~~ estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. These estimates were based on the most likely amount method for relevant factors such as current contractual and statutory requirements, industry data and forecasted customer buying and payment patterns. The Company’s net product revenues reflected the Company’s best estimates of the amounts of consideration to which it was entitled based on the terms of the respective underlying contracts. Product shipping and handling costs ~~are~~were considered a fulfillment activity when control transferred to the Company’s customers and such costs were included in cost of sales.

Customer Credits: The specialty pharmacies are offered various forms of consideration, including allowances, service fees and prompt payment discounts. Lexicon expects the specialty pharmacies will earn prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates are based in part on third party market research data, and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy, in turn, charges back to Lexicon the difference between the price initially paid by the specialty pharmacy and the discounted price paid to the specialty pharmacy by the customer. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Collaborative Agreements

Revenues under collaborative agreements include both license revenue and contract research revenue. ~~Activities~~The Company performs the following five steps in determining the amount of revenue to recognize as it fulfills its performance obligations under ~~collaborative agreements~~each of its agreements: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company applies this five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract, determines those that are ~~evaluated~~performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company develops assumptions that require judgment to determine ~~if they represent~~the stand-alone selling price for each performance obligation identified in the contract.

At contract inception, the Company evaluates whether development milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a ~~multiple element~~significant revenue ~~agreement. The Company identifies~~reversal will not occur, the ~~deliverables~~associated development milestone value is included in the transaction price. Development milestones that are not within the ~~agreement and evaluates which deliverables represent separate units~~control of ~~accounting.~~the Company or the licensee, including those requiring regulatory approval, are not considered probable of being achieved until those milestones are achieved. The ~~Company accounts for those components as separate units of accounting if the following two criteria are met:~~

~~Factors considered in this determination include, among other things, whether~~ any ~~other vendors sell the items separately~~related constraint, and if ~~the licensee could use the delivered item for~~necessary, adjusts its ~~intended purpose without the receipt~~estimates of the ~~remaining deliverables. If multiple deliverables included in an arrangement~~overall transaction price. Any such adjustments are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting basedrecorded on ~~their relative estimated selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.~~

~~Future milestone payments that are contingent upon the achievement of~~ a ~~substantive milestone are recognized in their entirety~~cumulative catch-up basis, which would affect collaboration revenues in the period of adjustment.

In agreements in which ~~the milestone is achieved. A milestone is substantive if:~~

~~Is reasonable relative~~

For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed to be the predominant item to which the royalties relate and the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the ~~other deliverables~~royalty has been allocated has been satisfied (or partially satisfied).

The Company may receive payments from its licensees based on billing schedules established in each contract. Upfront payments and ~~payments within the arrangement.~~

~~Commercial milestones will be accounted for as royalties and~~fees are recorded as deferred revenue upon ~~achievement~~receipt or when due, and may require deferral of ~~the milestone, assuming all other~~ revenue recognition ~~criteria~~to a future period until the Company performs its obligations under the relevant agreement. Amounts are ~~met. Subscription and license fees are recognized~~recorded as ~~revenue upon~~accounts receivable when the ~~grant of the technology license when performance~~Company’s right to consideration is complete and there is no continuing involvement. Royalty revenues are recognized as earned in accordance with the contract terms at the time the royalty amount is fixed and determinable based on information received from the sublicensees and at the time collectibility is reasonably assured.unconditional.

Cost of Sales: Cost of sales ~~consists~~consisted of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The Company began capitalizing inventory during the nine months ended September 30, 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO have been recorded as research and development expense in the consolidated statements of comprehensive loss. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Product shipping and handling costs ~~are~~were included in cost of sales. Cost of sales also ~~includes~~included the amortization of the ~~in-process research and development~~ intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Research and Development Expenses: Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. The Company’s estimates of the clinical study costs and costs to transition activities from Sanofi for the development of sotagliflozin for type 2 diabetes and heart failure, as well as the wind down of those activities, were based on estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the CRO that conducted and managed the clinical studies on its behalf. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.

Stock-Based Compensation: The Company recognizes compensation expense in its condensed consolidated statements of comprehensive loss for share-based payments, including stock options and restricted stock units ~~issued~~granted to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award. Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met.

The fair value of stock options is estimated at the date of grant using the Black-Scholes method. The Black-Scholes option-pricing model requires the input of subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in a change in the assumptions used for expected option ~~lives and forfeitures.~~lives. Historical data is used to estimate the expected option life for each group. Expected volatility is based

on the historical volatility in the Company’s stock price.

The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock option compensation granted, with the following weighted-average assumptions for stock options granted in the nine months ended September 30, ~~2017~~2021 and ~~2016:~~2020:


	Expected Volatility		Risk-free Interest Rate		Expected Term	Dividend Rate
September 30, 2021:
Employees	102	%	0.6	%	4	—	%
Officers and non-employee directors	90	%	1.1	%	7	—	%
September 30, 2020:
Employees	91	%	1.3	%	4	—	%
Officers and non-employee directors	78	%	1.4	%	8	—	%

Expected Volatility Risk-free Interest Rate Expected Term
Dividend
Rate
September 30, 2017:
Employees 61 % 1.7 % 4 — %
Officers and non-employee directors 70 % 2.2 % 8 — %
September 30, 2016:
Employees 63 % 1.1 % 4 — %
Officers and non-employee directors 83 % 1.6 % 8 — %

The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, ~~2017:~~2021:


	Options	Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2020	8,397	$	7.12
Granted	1,448	6.88
Exercised	(281)	4.31
Expired	(191)	12.50
Forfeited	(733)	8.92
Outstanding at September 30, 2021	8,640	6.90
Exercisable at September 30, 2021	5,092	$	8.16

Options Weighted Average Exercise Price
(in thousands)
Outstanding at December 31, 2016 4,834
$ 11.24
Granted 847
14.51
Exercised (458 ) 11.98
Expired (149 ) 26.59
Forfeited (82 ) 13.55
Outstanding at September 30, 2017 4,992
11.23
Exercisable at September 30, 2017 2,896
$ 11.06

During the nine months ended September 30, ~~2017,~~2021, Lexicon also granted its employees and non-employee directors annual restricted stock units. ~~These~~Outstanding employee restricted stock units vest in ~~four~~three annual installments. Outstanding non-employee director restricted stock units vest fully on the first anniversary of the grant. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, ~~2017:~~

Shares
Weighted Average Grant Date
Fair Value
(in thousands)
Outstanding at December 31, 2016 875
$ 8.13
Granted 418
14.44
Vested (286 ) 8.78
Forfeited (38 ) 10.98
Outstanding at September 30, 2017 969
$ 10.55
2021:


	Shares	Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2020	2,769	$	4.35
Granted	663	8.22
Vested	(1,239)	5.04
Forfeited	(217)	4.96
Outstanding at September 30, 2021	1,976	$	5.15

~~During the~~ ~~nine~~ months ended September 30, 2017, Lexicon granted its non-employee directors 10,248 shares of restricted stock awards. The restricted stock awards had a weighted average grant date fair value of $15.61 per share and vested immediately.

Net Loss per Common Share: Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units are not included because they are antidilutive.

2. Recent Accounting Pronouncements

In ~~May 2014,~~December 2019, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) No. ~~2014-09, “Revenue from Contracts with Customers”, which~~2019-12, Income Taxes (Topic 740) Simplifying Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The guidance amended certain disclosure requirements that had become redundant, outdated or superseded. Additionally, this guidance amends ~~FASB ASC Topic 606. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles~~accounting for the ~~determination~~interim period effects of changes in tax laws or rates, and simplifies aspects of the ~~measurement of revenue and the timing of when such revenue~~accounting for franchise taxes. The guidance is recognized. Revenue recognition will reflect the transfer of goods or services to customers at an amount that is expected to be earned in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of Effective Date”, which defers the effective ~~date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual periods after December 15, 2017 including interim periods within that reporting period. Early application is permitted only~~ for annual periods beginning after December 15, ~~2016,~~2020, including interim periods ~~within that reporting period. Management plans to adopt~~therein. The adoption of ASU ~~2014-09 using~~2019-12 in the ~~modified retrospective method.~~

~~The Company does~~first quarter of 2021 did not ~~expect that ASU 2014-09 will~~ have a material impact on the recognition of revenue from product sales. Management is also currently evaluating the impact of the new standard on historical revenue recorded for its collaboration agreements. Specifically, the timing of recognition for certain contingent payments from the Company’s collaborators may be impacted by the adoption of the new revenue standard. ASU 2014-09 differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments or contingent payments, which are not dependent on the Company’s performance. Under the Company’s current accounting policy, Lexicon recognizes contingent or milestone payments as revenue in the period that the payment-triggering event occurs or is achieved. However, under the new revenue standard, it is possible to start to recognize contingent or milestone payments before the payment-triggering event is completely achieved, subject to management’s assessment of whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Management does not expect the adoption of this pronouncement to have a material impact on Lexicon’scondensed consolidated financial statements.

~~In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires companies that lease assets to recognize a right-of-use asset~~

3. Cash and ~~a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The pronouncement will also require additional disclosures about the amount, timing~~Cash Equivalents and uncertainty of cash flows arising from leases. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this pronouncement on Lexicon’s consolidated financial statements.Investments

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation,” which is intended to simplify several aspects of the accounting for share-based payment award transactions. The Company adopted this pronouncement effective January 1, 2017. Upon adoption, the Company recognized approximately $6.1 million of accumulated excess tax benefits as deferred tax assets that under the previous guidance could not be recognized until the benefits were realized through a reduction in cash taxes paid. This part of the guidance is applied using a modified retrospective method with a cumulative-effect adjustment to the accumulated deficit for the excess tax benefits not previously recognized. However, given the full valuation allowance placed on the additional $6.1 million of deferred tax assets, the recognition of this provision of ASU 2016-09 had no impact to the Company’s accumulated deficit as of January 1, 2017. Additionally, the Company recorded an adjustment to accumulated deficit of $2.0 million as a result of making an entity-wide accounting policy election to account for forfeitures of share-based payment awards as they occur instead of estimating the number of awards that are expected to vest.

The fair value of cash and cash equivalents and investments held at September 30, ~~2017~~2021 and December 31, ~~2016~~2020 are as follows:


	As of September 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	92,118	$	—	$	—	$	92,118
Securities maturing within one year:
U.S. treasury securities	15,123		1		—		15,124
Corporate debt securities	13,683		—		(7)		13,676
Total short-term investments	$	28,806	$	1	$	(7)	$	28,800
Total cash and cash equivalents and investments	$	120,924	$	1	$	(7)	$	120,918

	As of December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
			(in thousands)
Cash and cash equivalents	$	126,263	$	—	$	—	$	126,263
Securities maturing within one year:

Corporate debt securities	26,018		5		(11)		26,012
Total short-term investments	$	26,018	$	5	$	(11)	$	26,012
Total cash and cash equivalents and investments	$	152,281	$	5	$	(11)	$	152,275

As of September 30, 2017
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
(in thousands)
Cash and cash equivalents $ 83,293
$ —
$ —
$ 83,293
Securities maturing within one year:
U.S. treasury securities 90,533
—
(57 ) 90,476
Corporate debt securities 23,054
—
(6 ) 23,048
Total short-term investments $ 113,587
$ —
$ (63 ) $ 113,524
Total cash and cash equivalents and investments $ 196,880
$ —
$ (63 ) $ 196,817

As of December 31, 2016
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
(in thousands)
Cash and cash equivalents $ 46,600
$ —
$ —
$ 46,600
Securities maturing within one year:
U.S. treasury securities 227,911
1
(107 ) 227,805
Corporate debt securities 72,188
1
(90 ) 72,099
Total short-term investments $ 300,099
$ 2
$ (197 ) $ 299,904
Total cash and cash equivalents and investments $ 346,699
$ 2
$ (197 ) $ 346,504

There were ~~$7,000 in~~no realized losses ~~for~~during either of the nine months ended September 30, ~~2017~~,2021 and no ~~realized gains or losses for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2016~~.2020, respectively. The cost of securities sold is based on the specific identification method.

4. Fair Value Measurements

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities:

•Level 1 - quoted prices in active markets for identical investments, which include U.S. treasury securities

•Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.), which includes corporate debt securities

•Level 3 - significant unobservable inputs ~~(including the Company’s own assumptions in determining the fair value of the Symphony Icon purchase consideration liability)~~

The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities. The following table provides the fair value measurements of applicable Company assets ~~and liabilities~~ that are measured at fair value on a recurring basis according to the fair value levels ~~described~~defined above as of September 30, ~~2017~~2021 and December 31, ~~2016~~:2020.


	Assets and Liabilities at Fair Value as of September 30, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	92,118	$	—	$	—	$	92,118
Short-term investments	15,124		13,676		—		28,800
Total cash and cash equivalents and investments	$	107,242	$	13,676	$	—	$	120,918


	Assets and Liabilities at Fair Value as of December 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	126,263	$	—	$	—	$	126,263
Short-term investments	—		26,012		—		26,012
Total cash and cash equivalents and investments	$	126,263	$	26,012	$	—	$	152,275

Assets and Liabilities at Fair Value as of September 30, 2017
Level 1 Level 2 Level 3 Total
(in thousands)
Assets
Cash and cash equivalents $ 83,293
$ —
$ —
$ 83,293
Short-term investments 90,476
23,048
—
113,524
Total cash and cash equivalents and investments $ 173,769
$ 23,048
$ —
$ 196,817

Assets and Liabilities at Fair Value as of December 31, 2016
Level 1 Level 2 Level 3 Total
(in thousands)
Assets
Cash and cash equivalents $ 45,093
$ 1,507
$ —
$ 46,600
Short-term investments 227,805
72,099
—
299,904
Total cash and cash equivalents and investments $ 272,898
$ 73,606
$ —
$ 346,504
Liabilities
Accrued liabilities $ —
$ —
$ 18,912
$ 18,912
Total liabilities $ —
$ —
$ 18,912
$ 18,912

The ~~Company’s~~Company did not have any Level 3 assets or liabilities ~~which consisted~~as of September 30, 2021 or December 31, 2020. Transfers between levels are recognized at the actual date of the ~~Symphony Icon purchase consideration liability,~~circumstance that caused the transfer. There were no transfers between Level 1 and Level 2 during the periods presented.

Refer to Note 6, Debt Obligations, for fair value measurements of debt obligations.

5. Property and Equipment

Property and equipment was ~~estimated using a probability-based income approach utilizing~~comprised of the following:


	Estimated Useful Lives	As of
	In Years	September 30, 2021		December 31, 2020
		(in thousands)
Computers and software	3-5	$	3,112	$	3,826
Furniture and fixtures	5-7	1,762		1,867
Leasehold improvements	3-7	1,286		417
Total property and equipment		6,160		6,110
Less: Accumulated depreciation and amortization		(4,849)		(5,815)
Net property and equipment		$	1,311	$	295

During the nine months ended September 30, 2021, the Company retired $1.1 million of computers and software and furniture and fixtures, which had been fully depreciated. During the nine months ended September 30, 2021, the Company purchased $1.2 million of assets comprised of leasehold improvements, computers and software and furniture. The leasehold improvements are being amortized over the lease term.

In 2020, the Company recorded an ~~appropriate discount rate. Subsequent changes in~~impairment loss of $1.6 million to reduce the ~~fair~~carrying value of the ~~Symphony Icon purchase consideration liability~~assets comprising its campus in The Woodlands, Texas, which were ~~recorded as an increase or decrease~~sold in Symphony Icon purchase liability expense in the accompanying consolidated statements of comprehensive loss. The following table summarizes the change in consolidated balance sheet carrying value associated with Level 3 liabilities for the ~~nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~and~~ ~~2016~~ ~~(in thousands):~~

Balance at December 31, 2016 $ 18,912
Change in valuation of purchase consideration payable to former Symphony Icon stockholders 2,101
Payment of contingent payment obligation with common stock and cash (21,013 )
Balance at September 30, 2017 $ —

Balance at December 31, 2015 $ 22,815
Change in valuation of purchase consideration payable to former Symphony Icon stockholders (703 )
Payment of contingent payment obligation with cash (3,200 )
Balance at September 30, 2016 $ 18,912

~~The Company also has assets that under certain conditions are subject~~December 2020, to ~~measurement at~~its estimated fair value, ~~on a non-recurring basis. These assets include goodwill associated~~less estimated selling costs. Concurrent with the ~~acquisitions of Coelacanth Corporation in 2001 and Symphony Icon in 2010 and intangible assets associated~~sale, the Company entered into a leaseback agreement with the ~~acquisition~~purchaser with respect to a portion of ~~Symphony Icon~~the facilities for a period of up to six months and in ~~2010. See Note 6, Arrangements with Symphony Icon, Inc., for additional information. For these assets, measurement at fair value in periods subsequent~~June 2021, the Company relocated its corporate offices to ~~their initial recognition is applicable if one or more is determined to be impaired.~~another facility.

Convertible Debt. In November 2014, Lexicon completed an offering of $87.5 million in aggregate principal amount of its 5.25% Convertible Senior Notes due 2021 (the ~~“Notes”~~“Convertible Notes”). The conversion feature did not meet the criteria for bifurcation as required by generally accepted accounting principles and the entire principal amount was recorded as long-term debt on the Company’s condensed consolidated balance sheets.

In September 2020, the Company entered into separate, privately negotiated exchange agreements to exchange $75.8 million aggregate principal amount of the Convertible Notes for consideration valued at 85% of the principal amount of the Convertible Notes. In September 2020, the Company issued 9,332,471 shares of the Company’s common stock and paid $44.0 million in cash, which included $1.1 million of accrued interest, to exchange $67.1 million aggregate principal amount of such Convertible Notes. The Company recorded the exchanges under the accounting requirements for debt extinguishment of convertible instruments. As a result, a debt extinguishment gain of $8.4 million was recorded and is included in the accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020. As of September 30, 2021, the carrying value of the remaining Convertible Notes was $11.7 million and is included in the current portion of long-term debt, net of deferred issuance costs in the accompanying condensed consolidated balance sheet.

The remaining Convertible Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the Company and Wells Fargo Bank, N.A., as trustee. The Convertible Notes bear interest at a rate of 5.25% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The Convertible Notes mature on December 1, 2021. The Company may not redeem the Convertible Notes prior to the maturity date, and no sinking fund is provided for the Convertible Notes.

Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the Company will deliver for each $1,000 principal amount of converted Convertible Notes a number of shares of its common stock equal to the conversion rate, as described in the Indenture. The conversion rate is initially 118.4553 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of $8.442 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances.

If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In connection with the issuance of the Notes, the Company incurred $3.4 million of debt issuance costs, which offsets long-term debt on the consolidated balance sheets. The debt issuance costs are amortized as interest expense over the expected life of the Notes using the effective interest method. The Company determined the expected life of the debt was equal to the seven-year term of the Notes. As of September 30, 2017, the balance of unamortized debt issuance costs was $2.0 million.

The fair value of the remaining Convertible Notes was ~~$141.6~~$11.9 million as of September 30, ~~2017~~2021 and was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Convertible Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

~~Mortgage~~BioPharma Term Loan. In ~~April 2004, Lexicon obtained a~~ ~~$34.0 million~~ ~~mortgage on its facilities in The Woodlands, Texas. The mortgage loan originally had a ten-year term with a 20-year amortization and a fixed interest rate of~~ ~~8.23%. The mortgage was amended in September 2013 to extend the maturity date from April 2014 to April~~December 2017, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged. In April 2017, the mortgage was amended to extend the maturity date to April 2018, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged. The mortgage had a principal balance outstanding of $14.7 million as of September 30, 2017. This entire balance is recorded as current portion of long-term debt in the accompanying consolidated balance sheet as of September 30, 2017 as there is a balloon payment due in April 2018. The buildings and land that serve as collateral for the mortgage loan are included in property and equipment at $59.2 million and $2.7 million, respectively, before accumulated depreciation, as of September 30, 2017. The fair value of Lexicon’s mortgage loan approximates its carrying value. The fair value of Lexicon’s mortgage loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

~~On June 15, 2007,~~ Lexicon entered into a ~~series~~loan agreement with BioPharma under which $150.0 million was funded in December 2017 (the “BioPharma Term Loan”). The BioPharma Term Loan was scheduled to mature in December 2022, bore interest at 9% per year, subject to additional interest if an event of ~~related agreements providing for~~default occurred and was continuing, and was payable quarterly.

The BioPharma Term Loan was subject to mandatory prepayment provisions that required prepayment upon a change of control or receipt of proceeds from certain non-ordinary course transfers of assets. The Company repaid the ~~financing~~BioPharma Term Loan in whole, together with required prepayment and make-whole premiums, upon closing of the ~~clinical development of certain of its drug candidates, including~~ XERMELO ~~along with any other pharmaceutical compositions modulating~~sale in September 2020. The Company recorded the ~~same targets as those drug candidates (the “Programs”). The agreements included a Novated~~repayment under the accounting requirements for debt extinguishment and Restated Technology License Agreement pursuant to which the Company licensed to Symphony Icon, a then wholly-owned subsidiary of Symphony Icon Holdings LLC (“Holdings”), the Company's intellectual property rights related to the Programs. Holdings contributed ~~$45 million~~ ~~to Symphony Icon in order to fund the clinical development of the Programs.~~

Under a Share Purchase Agreement, dated June 15, 2007, between the Company and Holdings, the Company issued and sold to Holdings 1,092,946 shares of its common stock on June 15, 2007 in exchange for $15 million and an exclusive purchase option (the “Purchase Option”) that gave the Company the right to acquire all of the equity of Symphony Icon, thereby allowing the Company to reacquire all of the Programs. On July 30, 2010, Lexicon entered into an Amended and Restated Purchase Option Agreement (the “Purchase Option Agreement”) with Symphony Icon and Holdings and simultaneously exercised the Purchase Option, thereby reacquiring the Programs. Pursuant to the amended terms of the Purchase Option, Lexicon paid Holdings $10 million on July 30, 2010 and issued 1,891,074 shares of common stock to designees of Holdings on July 30, 2012 in satisfaction of an additional $35 million base payment obligation.

Lexicon also agreed to make up to $45 million in additional contingent payments, which would consist of 50% of any consideration Lexicon receives pursuant to any licensing transaction (a “Licensing Transaction”) under which Lexicon grants a third party rights to commercialize XERMELO or other pharmaceutical compositions modulating the same target as XERMELO (the “LG103 Programs”), subject to certain exceptions. The contingent payments would be due if and when Lexicon receives such consideration from a Licensing Transaction. In the event Lexicon received regulatory approval in the United States for the marketing and sale of any product resulting from the LG103 Programs prior to entering into a Licensing Transaction for the commercialization of such product in the United States, in lieu of any contingent payment from such a Licensing Transaction, Lexicon would pay Holdings the sum of $15 million and the amount of certain expenses Lexicon incurred after its exercise of the Purchase Option which were attributable to the development of such product, reduced by up to 50% of such sum on account of any contingent payments paid prior to such United States regulatory approval attributable to any such Licensing Transaction outside of the United States with respect to such product. In the event Lexicon made any such payment upon United States regulatory approval, Lexicon would have no obligation to make subsequent contingent payments attributable to any such Licensing Transactions for the commercialization of such product outside the United States until the proceeds of such Licensing Transactions exceed 50% of the payment made as a result, a loss of ~~such United States regulatory approval. The contingent payments were payable in cash or a combination of cash~~$8.6 million was recognized and common stock, in Lexicon’s discretion, provided that no more than 50% of any contingent payment would be paid in common stock. In December 2014, Lexicon paid $5.8 million in cash and issued 666,111 shares of common stock to designees of Holdings in satisfaction of a $11.5 million contingent payment obligation as a result of receiving an upfront payment pursuant to Lexicon’s license and collaboration agreement with Ipsen. In April 2015, Lexicon paid $0.75 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving an additional upfront payment from Ipsen in March 2015. In September 2016, Lexicon paid $3.2 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving a milestone payment from Ipsen in August 2016 (see Note 8, Collaboration and License Agreements).

In September 2016, Lexicon entered into an amendment (the “Amendment”) to the Purchase Option Agreement with Holdings and Symphony Icon pursuant to which Lexicon agreed to pay Holdings $21.0 million upon Lexicon’s receipt of regulatory approval in the United States for the marketing and sale of XERMELO, such buyout amount to be in lieu of any remaining payments which may be or become payable to Holdings under the Purchase Option Agreement. The buyout amount may be paid in cash or a combination of cash and common stock, in Lexicon’s discretion, provided that no more than 50% of any contingent payment will be paid in common stock. In March 2017, Lexicon paid $10.5 million in cash and issued 659,905 shares of common stock to designees of Holdings in satisfaction of its remaining contingent payment obligation as a result of receiving regulatory approval in the United States for the marketing and sale of XERMELO.

Lexicon accounted for the exercise of the Purchase Option and acquisition of Symphony Icon as a business combination. In connection with its acquisition of Symphony Icon, Lexicon paid $10.0 million in cash, and also agreed to pay Holdings additional base and contingent payments as discussed above. The fair value of the base and contingent consideration payments was $45.6 million and was estimated by applying a probability-based income approach utilizing an appropriate discount rate. This estimation was based on significant inputs that are not observable in the market, referred to as Level 3 inputs. Key assumptions include: (1) a discount rate of 14% for the base payments; (2) a discount rate of 18% for the contingent payments; and (3) a probability adjusted contingency. No discount rate was used in the valuation of the contingent consideration liability as of December 31, 2016 as the expected buyout was short-term in nature. As programs progress, the probability adjusted contingency was adjusted as necessary. Subsequent changes in the fair value of the Symphony Icon purchase consideration liability were recorded as increase or decrease in fair value of Symphony Icon purchase liability expenseis included in the accompanying condensed consolidated ~~statements~~statement of comprehensive ~~loss. The fair value of~~income (loss) for the ~~Symphony Icon purchase consideration liability increased by $2.1 million during the~~three and nine months ended September 30, ~~2017 and decreased by $0.7 million during the nine months ended September 30, 2016.~~2020.

7. Commitments and Contingencies

Operating Lease Obligations: ~~A Lexicon subsidiary~~Lexicon’s operating leases include office space in The Woodlands, Texas and Basking Ridge, New Jersey ~~under an~~and will expire in August 2025 and December 2022, respectively. Under its lease agreements, Lexicon is obligated to pay property taxes, insurance, and maintenance costs.

As of September 30, 2021, the right-of-use assets for the office space leases had a balance of $2.5 million, which is included in other assets in the condensed consolidated balance sheet. Current and non-current liabilities relating to the leases were $1.0 million and $1.5 million, respectively, which are included in accrued liabilities and other long-term liabilities in the condensed consolidated balance sheet, respectively.

The following table reconciles the undiscounted cash flows of the operating lease ~~agreement,~~liability to the ~~term~~recorded lease liability at September 30, 2021:



	(in thousands)
2021	$	286
2022	1,163
2023	531
2024	544
2025	370
Thereafter	—
Total undiscounted operating lease liability	2,894
Less: amount of lease payments representing interest	(386)
Present value of future lease payments	2,508
Less: short-term operating lease liability	(1,027)
Long-term operating lease liability	$	1,481

Legal Proceedings. On January 28, 2019, a purported securities class action complaint captioned Daniel Manopla v. Lexicon Pharmaceuticals, Inc., Lonnel Coats, Jeffrey L. Wade and Pablo Lapuerta, M.D. was filed against the Company and certain of ~~which began~~its officers in ~~June 2015~~the U.S. District Court for the Southern District of Texas, Houston Division. The Company’s motion to dismiss was granted and ~~terminates~~the action was dismissed with prejudice by the District Court on August 14, 2020. The judgment of the District Court was affirmed by the U.S. Court of Appeals for the Fifth Circuit on September 10, 2021. The lawsuit purported to be a class action brought on behalf of purchasers of the Company’s securities during the period from March 11, 2016 through July 29, 2019. The complaint alleged that the defendants violated federal securities laws by making materially false and misleading statements and/or omissions concerning data from the Company’s Phase 3 clinical trials of sotagliflozin in ~~December 2022. Rent expense is recognized~~type 1 diabetes patients and the prospects of FDA approval of sotagliflozin for the treatment of type 1 diabetes. The complaint purported to assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint sought, on ~~a straight-line basis over~~behalf of the ~~lease term. The maximum potential~~purported class, an unspecified amount of ~~future payments~~monetary damages, interest, fees and expenses of attorneys and experts, and other relief.

Sanofi Arbitration. On October 16, 2020, the Company ~~could~~initiated arbitration proceedings against Sanofi-Aventis Deutschland GmbH (“Sanofi”) seeking to recover damages for breach of contract relating to the Termination and Settlement Agreement and Mutual Releases with Sanofi, dated September 9, 2019 (the “Termination Agreement”). In September 2020, Sanofi withheld approximately $23.2 million from the final $26 million payment due to the Company under the Termination Agreement, offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be ~~required~~payable by the Company under the terms of the Termination Agreement. The Company disputed that at least a significant portion of such costs were properly reimbursable by the Company under the terms of the Termination Agreement and asserted that, in any event, Sanofi was not permitted to ~~make~~withhold any of such costs under the terms of the Termination Agreement. The Company was seeking payment of $15.6 million in such disputed costs, together with late interest and attorneys’ fees and costs. Sanofi was seeking declaratory judgment that the Company is liable for all disputed costs previously withheld and damages for any additional costs properly reimburseable under the terms of the Termination Agreement in excess of those previously withheld, together with late interest and attorneys’ fees. On November 5, 2021, the arbitration panel issued a judgment in Sanofi’s favor. The amount of Sanofi’s attorneys’ fees and costs subject to reimbursement cannot be reasonably estimated at this ~~agreement is~~ ~~$3.3 million~~ ~~as of~~ ~~September 30, 2017. Additionally, Lexicon leases certain equipment under operating leases.~~time.

~~Legal Proceedings.~~

In addition, Lexicon is from time to time party to claims and legal proceedings that arise in the normal course of its business and that it believes will not have, individually or in the aggregate, a material adverse effect on its results of operations, financial condition or liquidity.

8. Collaboration and License Agreements

Lexicon has derived substantially all of its revenues from drug discovery and development ~~collaborations,~~alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, product sales, government grants and contracts, technology licenses, subscriptions to its databases and compound library sales.

Ipsen. In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen for the development and commercialization of XERMELO outside of the United States and Japan (the “Licensed Territory”). The Ipsen Agreement was assigned to TerSera in September 2020 in connection with the XERMELO sale.

Prior to the XERMELO sale, Lexicon had earned certain milestone payments and royalties from Ipsen. Revenue, including royalty revenue, recognized under the Ipsen Agreement was $0.3 million for the nine months ended September 30, 2020.

Sanofi. In November 2015, Lexicon entered into a Collaboration and License Agreement, which was subsequently amended in July 2017 (collectively, the “Sanofi Agreement”), with Sanofi for the worldwide development of Lexicon’s ~~diabetes~~ drug candidate sotagliflozin. In December 2016, Sanofi terminated its rights under the Sanofi Agreement with respect to Japan.

Effective as of September 9, 2019 (the “Settlement Date”), Lexicon entered into the Termination Agreement with Sanofi, pursuant to which the Sanofi Agreement was terminated and certain associated disputes between Lexicon and Sanofi were settled.

Under the terms of the Termination Agreement, Lexicon regained all rights to sotagliflozin and assumed full responsibility for the worldwide development and commercialization of sotagliflozin in all indications. Sanofi paid Lexicon $208 million in September 2019 and $26 million in each of March and September 2020 (less amounts withheld by Sanofi offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by Lexicon under the terms of the Termination Agreement), and neither party owes any additional payments pursuant to the Sanofi Agreement. The parties have cooperated in the transition of responsibility for ongoing clinical studies and other activities, and each party is responsible for its own expenses associated with such transition, subject to certain exceptions. See Note 7, Commitments and Contingencies, for additional information. Beginning in March 2020, Lexicon closed out early the clinical studies related to the Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease. Subsequent to the Termination Agreement, Lexicon has ~~granted Sanofi~~no remaining performance obligations to Sanofi.

9.Other Capital Agreements

Common Stock: In 2020, Lexicon entered into an exclusive, worldwide (excluding Japan), royalty-bearing right and license under its patent rights and know-how to develop, manufacture and commercialize sotagliflozin. Subject to specified exceptions, neither party may (a) perform clinical development activitiesOpen Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) relating to ~~any other compound which inhibits sodium-glucose cotransporters type 1 or type 2 or (b) commercialize any such compounds~~the shares of its common stock. Lexicon may offer and sell common stock having an aggregate sales price of up to $50.0 million from time to time through Jefferies acting as its sales agent. In 2020, Lexicon sold 3,709,233 shares of its common stock at a price of $1.992 per share pursuant to the Sales Agreement, resulting in net proceeds of $7.0 million. In January 2021, Lexicon sold 2,000,000 shares of its common stock at a price of $8.463 per share pursuant to the Sales Agreement, resulting in net proceeds of $16.4 million. In August and September 2021, Lexicon sold an aggregate of 4,176,953 shares of its common stock at a price of $4.732 per share pursuant to the Sales Agreement, resulting in net proceeds of $19.1 million. The net proceeds are reflected as issuances of common stock in the ~~United States, countries~~accompanying condensed consolidated financial statements.

In September 2020, the Company completed the sale of ~~the European Union~~XERMELO® and ~~certain other specified countries, in each case during the royalty terms applicable in such countries. Among the specified exceptions is~~related assets to TerSera. The upfront consideration paid by TerSera, subject to a ~~right Lexicon retained to pursue the development of its LX2761 drug candidate, with respect to which Lexicon granted Sanofi certain rights of first negotiation specified~~working capital adjustment as set forth in the ~~Sanofi Agreement.~~Asset Purchase and Sale Agreement, was $160.4 million and the net gain recognized in connection with the XERMELO sale was $132.8 million. The gain is reflected on the condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

~~Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $300 million. In addition, Lexicon is~~

The Company remains eligible to receive ~~from Sanofi (a)~~development, regulatory and sales milestone payments of up to an aggregate of ~~$110~~$65 million upon the achievement of four development milestones relating to the results of certain Phase 3 clinical trials of sotagliflozin in type 2 diabetes patients, (b) up to an aggregate of $220 million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate to type 1 diabetes, (c) $100 million upon the achievement of a milestone based on the results of either of two outcomes studies in type 2 diabetes patients, the completion of which would likely occur after initial regulatory approval of sotagliflozin in type 2 diabetes, and (d) up to an aggregate of $990 million upon the achievement of six commercial milestones that will be achieved upon reaching specified levels of sales. The Company believes that each of the development and regulatory milestones under the Sanofi Agreement is substantive. Due to the uncertainty surrounding the achievement of the future development and regulatory milestones, these payments will not be recognized as revenue unless and until they are earned, as the Company is not able to reasonably predict if and when the milestones will be achieved. Commercial milestones, which are not encompassed within the definition of milestones under generally accepted accounting principles, will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met. Lexicon is also entitled to tiered, escalating royalties ranging from low double digit percentages to forty percent of net sales of sotagliflozin, based on indication and territory, with royalties for the higher band of such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty reduction provisions.

Lexicon will continue to be responsible for all clinical development activities relating to type 1 diabetes and has exercised an exclusive option to co-promote and have a significant role, in collaboration with Sanofi, in the commercialization of sotagliflozin for the treatment of type 1 diabetes in the United States. Under the terms of its exercised co-promotion option, Lexicon will fund forty percent of the commercialization costs relating to such co-promotion activities. Sanofi will be responsible for all clinical development and commercialization of sotagliflozin for the treatment of type 2 diabetes worldwide and will be solely responsible for the commercialization of sotagliflozin for the treatment of type 1 diabetes outside the United States. Lexicon will share in the funding of a portion of the planned type 2 diabetes development costs over the next three years, up to an aggregate of $100 million. Sanofi will book sales worldwide in all indications.

The parties are responsible for using commercially reasonable efforts to perform their development and commercialization obligations pursuant to mutually approved development and commercialization plans.

The parties’ activities under the Sanofi Agreement are governed by a joint steering committee and certain other governance committees which reflect equal or other appropriate representation from both parties. If the applicable governance committee is not able to make a decision by consensus and the parties are not able to resolve the issue through escalation to specified senior executive officers of the parties, then Sanofi will have final decision-making authority, subject to limitations specified in the Sanofi Agreement.

The Sanofi Agreement will expire upon the expiration of all applicable royalty terms for all licensed products in all countries. The royalty term for each licensed product in each country is the period commencing on the effective date of the Sanofi Agreement and ending on the latest of expiration of specified patent coverage, expiration of specified regulatory exclusivity and 10 years following the first commercial sale in the applicable country. Either party may terminate the Sanofi Agreement in the event of an uncured material breach by the other party. Prior to completion of the core development activities for type 2 diabetes specified in the development plan, Sanofi may terminate the Sanofi Agreement on a country-by-country and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c) the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual property rights.

~~The Company considered the following deliverables with respect to the revenue recognition of the $300 million upfront payment:~~

~~• The exclusive worldwide license granted to Sanofi to develop and commercialize sotagliflozin;~~

~~• The development services Lexicon is performing for sotagliflozin relating to type 1 diabetes; and~~

~~• The funding Lexicon will provide for development relating to type 2 diabetes.~~

The Company determined that the license had stand-alone value because it is an exclusive license that gives Sanofi the right to develop and commercialize sotagliflozin or to sublicense its rights. In addition, sotagliflozin is currently in development and it is possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Sanofi Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services for type 1 diabetes and the obligation to provide funding for development services for type 2 diabetes over the period of time Lexicon performs services or provides funding, currently expected to be through 2020.

The Company determined that the initial allocable arrangement consideration was the $300 million upfront payment because it was the only payment that was fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments or royalty payments. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of the license included: exercising the option to co-promote, estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services for type 1 diabetes by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $100 million in funding.

As a result of the allocation, the Company recognized $126.8 million of the $300 million upfront payment for the license in 2015. The Company is recognizing the $113.8 million allocated to the development services deliverable and the $59.4 million allocated to the funding deliverable over the estimated period of performance as the development and funding occurs. Revenue recognized under the Sanofi Agreement was $39.5 million and $52.7 million for the nine months ended September 30, 2017 and 2016, respectively.

~~Ipsen Pharma SAS.~~ ~~In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen~~ for the development and commercialization of telotristat ethyl ~~outside of the United States~~in patients with biliary tract cancer and ~~Japan (the “Licensed Territory”).~~

Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent rights and know-how to commercialize telotristat ethyl in the Licensed Territory. Ipsen is responsible for using diligent efforts to commercialize telotristat ethyl in the Licensed Territory pursuant to a mutually approved commercialization plan. Subject to certain exceptions, Lexicon will be responsible for conducting clinical trials required to obtain regulatory approval for telotristat ethyl for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan, and will have the first right to conduct most other clinical trials of telotristat ethyl. Lexicon is responsible for the costs of all clinical trials contemplated by the initial development plan. The costs of additional clinical trials will be allocated between the parties basedmid-teens royalty payments on the nature of such clinical trials. Under the Ipsen Agreement, Ipsen has paid Lexicon an aggregate of $30.9 million through September 30, 2017, consisting of $24.5 million in upfront payments and a $6.4 million milestone payment in August 2016 upon the acceptance of the filing submitted by Ipsen to the European Medicines Agency for telotristat ethyl as an adjunct to somatostatin analog therapy for the long-term treatment of carcinoid syndrome. In September 2017, Ipsen received approval from the European Commission for the marketing of telotristat ethyl in all member states of the European Union, Norway and Iceland, thereby Lexicon earning a milestone payment, which was received in October 2017. In addition, Lexicon is eligible to receive from Ipsen (a) up to an aggregate of approximately $21 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an aggregate of €72 million upon the achievement of specified sales milestones. Due to the uncertainty surrounding the achievement of the future regulatory and sales milestones, these payments will not be recognized as revenue unless and until they are earned as the Company is not able to reasonably predict if and when the milestones will be achieved. Lexicon is also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of ~~telotristat ethyl~~XERMELO in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture and supply of such units of telotristat ethyl. Lexicon and Ipsen have entered into a commercial supply agreement pursuant to which Lexicon will supply Ipsen’s commercial requirements of telotristat ethyl, and Ipsen will pay an agreed upon transfer price for such commercial supply.

biliary tract cancer. The ~~Company considered the following deliverables with respect to the revenue recognition of the $24.5 million upfront payments:~~

•~~The development services Lexicon is performing for telotristat ethyl;~~

•~~The obligation to supply commercial supply of telotristat ethyl, under a commercial supply agreement.~~

The Company determined that the license had stand-alone value because it is an exclusive license that gives Ipsen the right to develop and commercialize telotristat ethyl or to sublicense its rights. In addition, telotristat ethyl is currently in development and it is possible that Ipsen or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Ipsen Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performs services, currently expected to be complete by mid-2018.

~~Due to the inherent uncertainty in obtaining regulatory approval, the applicability of the commercial supply agreement is outside the control of Lexicon and Ipsen. Accordingly, the~~ Company has determined that these amounts are constrained until the ~~commercial supply agreement~~achievement, if any, of specific events. If or when the constraint is ~~a contingent deliverable at the onset of the Ipsen Agreement. As a result,~~determined to be resolved, the Company ~~has determined~~will re-evaluate the ~~commercial supply agreement does~~overall gain in connection with the XERMELO sale and recognize an adjustment on a cumulative catch-up basis in the period that the determination is made.

The XERMELO sale did not meet the ~~definition of~~criteria for reporting discontinued operations as there was not a ~~deliverable~~strategic shift that ~~needs to be accounted for at the inception of the arrangement. The Company~~ has ~~also determined that there is no significant and incremental discount related to the commercial supply agreement that should be accounted for at the inception of the arrangement.~~

The Company determined that the initial allocable arrangement consideration was the $24.5 million upfront payments because they were the only payments that were fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished drug product. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based(or will have) a major effect on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of

the license included: estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the selling price of the obligation to participate in committees by using internal estimates of the number of internal hours and salary and benefits costs to perform these services.

As a result of the allocation, the Company recognized $21.2 million of the $24.5 million upfront payments for the license in 2014, and an additional $1.4 million in 2015 upon entering into the amendment. The Company is recognizing the $1.7 million allocated to the development services deliverable over the estimated period of performance as development occurs, and is recognizing the $0.1 million allocated to the committee participation deliverable ratably over the estimated period of performance. Milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. The Company recognized the $5.1 million milestone payment earned in 2017 inCompany’s operations. For the three and nine months ended September 30, ~~2017,~~2020, the pretax net loss on the condensed consolidated statement of comprehensive income (loss) for the Company’s XERMELO operations is $2.1 million and $12.1 million, respectively.

As a result of the XERMELO sale, the Company implemented a reduction in force which reduced its workforce by approximately fifty percent. The Company incurred and recognized severance charges of approximately $5.5 million through September 30, 2020. Of this charge, $2.5 million was recorded in research and development expense and $3.0 million was recorded in selling, general and administrative expense in the ~~$6.4 million milestone payment earned in 2016 in~~accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, ~~2016. Revenue recognized under~~2020.

11. Earnings (Loss) Per Share

The following is a summary of Lexicon’s earnings (loss) per share calculations and reconciliations of the ~~Ipsen Agreement~~numerators and the denominators of the basic and diluted per share calculations.


(in thousands, except per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator:
Net income (loss)	$	(23,122)	$	82,603	$	(62,147)	$	(53,079)
Add interest on Convertible Notes	—		1,258		—		—
Adjusted net income (loss)	$	(23,122)	$	83,861	$	(62,147)	$	(53,079)

Denominator:
Shares used in computing net income (loss) per common share, basic	145,820		107,309		144,558		106,974
Add effect of potential dilutive securities:
Share based compensation awards	—		51		—		—
Convertible Notes	—		10,192		—		—
Shares used in computing net income (loss) per common share, diluted	145,820		117,552		144,558		106,974

Net income (loss) per share - basic	$	(0.16)	$	0.77	$	(0.43)	$	(0.50)
Net income (loss) per share - diluted	$	(0.16)	$	0.71	$	(0.43)	$	(0.50)

For periods presented with a net loss, the weighted average number of shares outstanding are the same for both basic and diluted net loss per common share. The average number of shares associated with stock options and restricted stock units that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future was ~~$7.9 million~~10,615 and ~~$6.8 million~~11,773, respectively, for the three months ended September 30, 2021 and 2020, and 10,615 and 11,859, respectively, for the nine months ended September 30, ~~2017~~2021 and ~~2016, respectively. Revenue for~~2020. For periods presented with a net loss, the ~~nine months ended September 30, 2017 includes $0.8 million from sales~~shares associated with the Convertible Notes are not included in the computation of ~~bulk tablets of telotristat ethyl to Ipsen.~~diluted earnings per share because they are antidilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a biopharmaceutical company ~~focused on the development and commercialization~~with a mission of ~~breakthrough treatments for human disease.~~pioneering medicines that transform patients’ lives. We are ~~presently~~ devoting most of our resources to the ~~commercialization or~~research and development of our ~~four~~ most advanced drug ~~programs:~~candidates:

~~We have obtained approval from the FDA to sell our first commercial product, XERMELO~~^® (telotristat ethyl), an orally-delivered small molecule drug for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog, or SSA, therapy in adults inadequately controlled by SSA therapy. We have commenced sales and marketing of XERMELO, and it is now commercially available to patients in the United States. We have granted Ipsen Pharma SAS an exclusive, royalty-bearing right to commercialize XERMELO outside of the United States and Japan, and Ipsen has obtained approval from the European Commission to market XERMELO in the member states of the European Union, Norway and Iceland.

•We are developing sotagliflozin, an orally-delivered small molecule drug candidate, as a treatment for ~~type 1~~heart failure and type 21 diabetes. We have reported positive ~~top-line data~~results from two ~~pivotal~~ Phase 3 clinical trials evaluating the effect of sotagliflozin on long-term outcomes related to cardiovascular death and ~~a third~~heart failure in approximately 10,500 and 1,200 patients, respectively. We are now preparing an application for regulatory approval to market sotagliflozin for heart failure in the United States and, if approved, for the commercial launch of sotagliflozin in the United States.

We have reported positive results from three Phase 3 clinical ~~trial~~trials evaluating the effect of sotagliflozin inon type 1 diabetes ~~patients. We have~~in approximately 800,800 and 1,400 patients, respectively. The FDA issued a complete response letter regarding our application for regulatory approval to market sotagliflozin for type 1 diabetes in the United States and, at our request, has issued a public Notice of Opportunity for Hearing on whether there are grounds for denying approval of our application. The Office of the FDA Commissioner has granted ~~Sanofi~~our joint request with the FDA’s Center for Drug Evaluation and Research to extend the previously granted abeyance of such proceedings until November 26, 2021 to allow for the continuation of good faith discussions between the parties. Sotagliflozin has been approved in the European Union for use as an ~~exclusive, worldwide (excluding Japan), royalty-bearing right~~adjunct to ~~develop, manufacture and commercialize sotagliflozin, and Sanofi is presently conducting Phase 3 development~~insulin therapy in the treatment of ~~sotagliflozin in~~ type ~~2 diabetes.~~1 diabetes, but has not yet been commercially launched.

We are developing LX2761, an orally-delivered small molecule drug candidate, as a treatment for diabetes. We are presently conducting Phase 1 clinical development of LX2761. We have granted Sanofi certain rights of first negotiation with respect to the future development and commercialization of LX2761.

•We are developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain. We ~~are presently conducting~~have reported results from two Phase 1 clinical trials of LX9211 and are now conducting a Phase 2 clinical trial of LX9211 in diabetic peripheral neuropathic pain and a second Phase 2 clinical trial of LX9211 in post-herpetic neuralgia. LX9211 has received Fast Track designation from the FDA for development in diabetic peripheral neuropathic pain.

•We are conducting preclinical research and development and preparing to conduct clinical development of ~~LX9211.~~

~~Compounds from our most advanced drug programs, as well as~~ compounds from a number of additional drug programs originating from our internal drug discovery efforts.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001	LXRX	The Nasdaq Global Select Market



		Page
Factors Affecting Forward-Looking Statements		32
Part I – Financial Information		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets - September 30, ~~2017~~2021 (unaudited) and December 31, ~~2016~~ 2020	3
	Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) (unaudited) - Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~ 2020	4
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) - Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~ 2020	5
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~ 2020	67
	Notes to Condensed Consolidated Financial Statements (unaudited)	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2118
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2623
Item 4.	Controls and Procedures	2623
Part II – Other Information		2625
Item 1.	Legal Proceedings	2725
Item 1A.	Risk Factors	2725
~~Item 6.~~	~~Exhibits~~

Item 6.	Exhibits	28
	Signatures		29



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Total revenues	$	26.9		$	27.7	$	57.3		$	60.3
Dollar decrease	$	(0.8	)			$	(3.0	)
Percentage decrease	(3		)%			(5		)%


	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
Total research and development expense	$	15.7		$	40.1	$	38.5		$	152.6
Dollar decrease	$	(24.4)				$	(114.1)
Percentage decrease	(61)		%			(75)		%



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Total research and development expense	$	39.1		$	52.5	$	109.7		$	137.8
Dollar decrease	$	(13.4	)			$	(28.1	)
Percentage decrease	(26		)%			(20		)%


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Gain (Loss)		Treasury Stock
	Shares	Par Value										Total
Balance at December 31, 2019	106,679	$	106	$	1,462,172	$	(1,341,444)	$	84	$	(3,817)	$	117,101


Stock-based compensation	—	—		4,432		—		—		—		4,432
Issuance of common stock under Equity Incentive Plans	1,032	2		—		—		—		—		2

Repurchase of common stock	—	—		—		—		—		(923)		(923)
Net loss	—	—		—		(66,611)		—		—		(66,611)
Unrealized gain on investments	—	—		—		—		776		—		776

Balance at March 31, 2020	107,711	108		1,466,604		(1,408,055)		860		(4,740)		54,777
Stock-based compensation	—	—		4,258		—		—		—		4,258
Issuance of common stock under Equity Incentive Plans	187	—		—		—		—		—		—
Repurchase of common stock	—	—		—		—		—		(103)		(103)
Net loss	—	—		—		(69,071)		—		—		(69,071)
Unrealized loss on investments	—	—		—		—		(548)		—		(548)
Balance at June 30, 2020	107,898	108		1,470,862		(1,477,126)		312		(4,843)		(10,687)
Stock-based compensation	—	—		1,904		—		—		—		1,904
Issuance of common stock under Equity Incentive Plans	9,333	9		14,087		—		—		—		14,096
Net income	—	—		—		82,603		—		—		82,603
Unrealized loss on investments	—	—		—		—		(277)		—		(277)
Balance at September 30, 2020	117,231	$	117	$	1,486,853	$	(1,394,523)	$	35	$	(4,843)	$	87,639


	Common Stock			Additional				Accumulated Other
	Shares	Par Value		Paid-In Capital		Accumulated Deficit		Comprehensive Gain (Loss)		Treasury Stock		Total
Balance at December 31, 2020	142,289	$	142	$	1,561,096	$	(1,400,018)	$	(6)	$	(4,843)	$	156,371

Stock-based compensation	—	—		2,851		—		—		—		2,851
Issuance of common stock under Equity Incentive Plans	1,263	1		547		—		—		—		548
Issuance of common stock under an Open Market Sale Agreement, net of issuance fees	2,000	2		16,397		—		—		—		16,399

Repurchase of common stock	—	—		—		—		—		(2,675)		(2,675)
Net loss	—	—		—		(20,958)		—		—		(20,958)

Unrealized gain on investments	—	—		—		—		11		—		11
Balance at March 31, 2021	145,552	145		1,580,891		(1,420,976)		5		(7,518)		152,547
Stock-based compensation	—	—		2,786		—		—		—		2,786
Issuance of common stock under Equity Incentive Plans	88	1		7		—		—		—		8
Issuance fees related to Open Market Sale Agreement	—	—		(31)		—		—		—		(31)
Net loss	—	—		—		(18,067)		—		—		(18,067)
Unrealized loss on investments	—	—		—		—		(10)		—		(10)

Balance at June 30, 2021	145,640	146		1,583,653		(1,439,043)		(5)		(7,518)		137,233
Stock-based compensation	—	—		2,712		—		—		—		2,712
Issuance of common stock under Equity Incentive Plans	170	—		658		—		—		—		658
Issuance of common stock under an Open Market Sale Agreement, net of issuance fees	4,177	4		19,119		—		—		—		19,123
Net loss	—	—		—		(23,122)		—		—		(23,122)
Unrealized loss on investments	—	—		—		—		(1)		—		(1)
Balance at September 30, 2021	149,987	$	150	$	1,606,142	$	(1,462,165)	$	(6)	$	(7,518)	$	136,603



Raw materials	$	734
Work-in-process	41
Finished goods	1,374
Total inventory	$	2,149



	As of September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	83,293	$	—	$	—		$	83,293
Securities maturing within one year:
U.S. treasury securities	90,533		—		(57		)	90,476
Corporate debt securities	23,054		—		(6		)	23,048
Total short-term investments	$	113,587	$	—	$	(63	)	$	113,524
Total cash and cash equivalents and investments	$	196,880	$	—	$	(63	)	$	196,817

	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
Cash and cash equivalents	$	46,600	$	—	$	—		$	46,600
Securities maturing within one year:
U.S. treasury securities	227,911		1		(107		)	227,805
Corporate debt securities	72,188		1		(90		)	72,099
Total short-term investments	$	300,099	$	2	$	(197	)	$	299,904
Total cash and cash equivalents and investments	$	346,699	$	2	$	(197	)	$	346,504



Balance at December 31, 2016	$	18,912
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	2,101
Payment of contingent payment obligation with common stock and cash	(21,013		)
Balance at September 30, 2017	$	—

Balance at December 31, 2015	$	22,815
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	(703		)
Payment of contingent payment obligation with cash	(3,200		)
Balance at September 30, 2016	$	18,912


~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~


~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~



Exhibit No.				Description
*†10.1	—	~~Amendment No. 1 to Collaboration and License Agreement, dated July 1, 2017, with Sanofi-Aventis Deutschland GmbH~~
*31.1			—	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2			—	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1			—	Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS			—	XBRL Instance Document
101.SCH			—	XBRL Taxonomy Extension Schema Document
101.CAL			—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			—	XBRL Taxonomy Extension Label Linkbase Document
101.PRE			—	XBRL Taxonomy Extension Presentation Linkbase Document
104			—
		Cover Page Interactive Data File (embedded within the Inline XBRL document)


*		Filed herewith.

*	~~Filed herewith.~~
†	Confidential treatment has been requested for a portion of this exhibit. The confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.



		Lexicon Pharmaceuticals, Inc.

Date:	November ~~8, 2017~~9, 2021	By:	/s/ Lonnel Coats
			Lonnel Coats
			~~President and~~ Chief Executive Officer


2.	~~Recent Accounting Pronouncements~~


4.	~~Fair Value Measurements~~


5.	~~Debt Obligations~~


8.	~~Collaboration and License Agreements~~



Date:	November ~~8, 2017~~9, 2021	By:	/s/ Jeffrey L. Wade
			Jeffrey L. Wade
			~~Executive Vice~~ President ~~Corporate and Administrative Affairs~~ and Chief Financial Officer



~~Exhibit No.~~		~~Description~~
*†10.1	—	~~Amendment No. 1 to Collaboration and License Agreement, dated July 1, 2017, with Sanofi-Aventis Deutschland GmbH~~
*31.1	—	~~Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
*31.2	—	~~Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
*32.1	—	~~Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
~~101.INS~~	—	~~XBRL Instance Document~~
~~101.SCH~~	—	~~XBRL Taxonomy Extension Schema Document~~
~~101.CAL~~	—	~~XBRL Taxonomy Extension Calculation Linkbase Document~~
~~101.DEF~~	—	~~XBRL Taxonomy Extension Definition Linkbase Document~~
~~101.LAB~~	—	~~XBRL Taxonomy Extension Label Linkbase Document~~
~~101.PRE~~	—	~~XBRL Taxonomy Extension Presentation Linkbase Document~~