Lexicon Pharma Falls on Concerns Raised by Merck-Pfizer Diabetes Partnership

Updated with analyst quote.

THE WOODLANDS, Tex. ( TheStreet) -- Lexicon Pharmaceuticals ( LXRX) are down 15% Monday following the announcement of a diabetes partnership between Merck ( MRK) and Pfizer ( PFE), raising worries that Lexicon may be having trouble nailing a diabetes deal of its own.

Merck and Pfizer -- more often viewed as bitter rivals -- are taking the unusual step of collaborating on the development and marketing of Pfizer's diabetes drug ertugliflozin, the companies announced Monday.

Lexicon is developing a similar drug, LX4211, but can't or won't advance it into phase III studies without a partner to help pay the costs. Merck choosing Pfizer immediately raised concerns that Lexicon might be having trouble finding a partner of its own.

Lexicon shares are down 18% to $1.86 in Monday trading.

Pfizer's ertugliflozin and Lexicon's LX4211 belong to a new class of oral diabetes drugs known as sodium-dependent glucose transporter (SGLT) inhibitors that work by blocking the reabsorption of glucose into the bloodstream.

The FDA approved the first SGLT inhibitor from Johnson & Johnson ( JNJ), known as Invokana, at the end of March.

A competing drug co-developed by Bristol-Myers Squibb ( BMY) and AstraZeneca ( AZN) was rejected by FDA last year due to safety concerns, although the drug was approved in Europe.

Merck and Pfizer will share the costs of developing ertugliflozin as a standalone diabetes medicine but will also work to combine the new drug with Merck's biggest-selling diabetes drug Januvia.

Lexicon has completed a phase II study of LX4211 but is seeking a Big Pharma partner to take on the responsibility of paying for phase III studies. The company was asked about the progress of partnership talks for LX4211 on its last quarterly confererence call held on Feb. 21.

Jeffrey Wade, Lexicon's CFO:

Sure. So we're continuing to make good progress in our partnership discussions for LX4211, it's a -- I mean, we're pleased with the progress, there is not anything that we're waiting on in particular for that. And we are continuing to plan for the advancement of LX4211 into Phase III this year with a partnership in place. So that continues to be our expectation.

CEO Arthur Sands:

So the only thing I'd add there is that you also asked if there were any particular issues or problems identified, and there are not. So we're very pleased with all the diligence proceeding as they've gone forward. It's a very thorough process and it takes time. But we do think we're on a good track there.

Lexicon is presenting at an investor conference on Tuesday. No doubt, management will be asked for another LX4211 partnership update given Monday's Merck-Pfizer tie-up.

"We had the chance to speak with LXRX Lexicon management this morning who remains very confident in the ongoing partnering process for LX4211 and that a Phase 3 program for the drug will start in 2H13, with a partner in place. Management stated that the MRK/PFE deal does not alter its go forward partnering plans in any way," wrote J.P. Morgan analyst Cory Kasimov, in an email note to clients.

-- Reported by Adam Feuerstein in Boston.

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