Short LXRX

Today we short Lexicon Pharmaceuticals. They had a good phase 3 trial result. Lets look at the news:

What: Shares of Lexicon Pharamceuticals (NASDAQ:LXRX) skyrocketed by over 50% today on massive volume after the tiny biopharma announced that the experimental drug, oral telotristat etiprate, met its primary endpoint in a pivotal late-stage trial of lowering the average number of daily bowel movements in cancer patients with carcinoid syndrome not adequately controlled by the current standard of care. Carcinoid syndrome is a rare disorder affecting patients with neuroendocrine tumors, causing patients to experience severe bouts of diarrhea. 

So what: Since its inception, Lexicon has seen numerous clinical products flame out. Today's news marks the struggling biopharma's first late-stage clinical success of any kind, and potentially the turning point in the company's operating history. 

Now what: Following these positive top-line results, Lexicon plans on filing oral telotristat etiprate's regulatory application for this indication with the U.S. Food and Drug Administration in the near future. Given that the drug was previously granted Fast Track designation by the FDA, it could be on the market as soon as the first-half of 2016, assuming approval.

While the drug's peak sales potential is somewhat fuzzy due to the rare nature of this disorder (typical of orphan drugs in general), oral telotristat etiprate was granted "Orphan Drug Status" by the FDA for this patient population, meaning that it would likely garner a premium pricing structure upon approval.

But perhaps more importantly for investors, at least in the short-term, is the fact that the industry's appetite for gobbling up orphan drugmakers with promising clinical-stage products has gone largely unchecked this year. Lexicon's name is therefore almost certainly going to make its way into the buyout rumor mill in the wake of this positive clinical update. 

The news today was basically like a loose football that everyone piled on. I think it was too premature, the stock wont have a product out on the market making any money until next year. On top of that, it still has another stage of approval to get through with the FDA, and it could be halted at any time. I think a 50% jump is an emotional overreaction to something that is not yet making any money. The options were out of range with this stock, so we just short it at 13.56.

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