Lexicon Pharmaceuticals (LXRX) Spikes on Diabetes Trial, Pulls Back Sharply

Small-cap biotech stock Lexicon Pharmaceuticals (LXRX) leapt as much as 17 percent in early trading on news that its lead therapy LX4211 showed positive top-line results in treating type 1 diabetes. However, early gains were followed by a rapid decline that ultimately saw the stock trading down over 2 percent.

The downward shift appears odd given the fact that the gains were driven by a positive news item. However, several key technical indicators could serve as an explanation for the reversal. Shares opened up 12.6 percent at $1.79 a share and peaked at $1.86 in the first five minutes of trading. After hitting that peak, though, the sell-off was swift, with the stock eventually reaching its previous close as it headed into the final hour of trading and then dipping into a loss before the bell.

While the reasons for the steep decline aren’t entirely clear, it could be that the early gain resulted in the stock hitting some technical barriers that resulted in traders backing off of early gains. A look at Lexicon’s chart shows a downward wedge pattern that formed in early October of 2013, with a lengthy downtrend as declining resistance and support lines converged.

The early-morning gains pushed the stock past resistance levels and resulted in the price crossing its 50-day SMA from below. Other technical data likely contributed to the decline, including the way the MACD line failed to cross the signal line during a rally on April 9. The failure to stay above resistance wasn’t a promising sign for the stock. The downward wedge is a pattern that typically leads to a bullish breakout, and today’s news would appear to be an ideal catalyst for that. However, the fact that the stock pulled back from gains after clearing resistance could mean the stock lacks the strength to break out of its downtrend.

Regardless, the major sell-off despite positive news is a curious one and would seem to indicate that there's more to this picture than meets the eye.

Small-cap pharma Lexicon is developing therapies based on gene knockout technology. From its website:

“Initiated in 2001, our Genome5000 program was designed to discover the function of nearly 5,000 mammalian genes through comprehensive phenotyping of gene knockout mice.  We focused our efforts on genes from the human genome that encode “druggable” targets, that is, those genes encoding proteins with the greatest potential pharmaceutical applications as either small molecule or antibody drug targets. “

The success of the LX2411 was big news for Lexicon, which previously hit its 52-week high in early October following news that it had met its primary endpoint in mid-stage clinical trials. The data showed that type 2 diabetes patients with stage 3 or 4 kidney disease saw a reduction in after meal glucose, a key time where diabetes patients experience spikes in blood sugar.

LX2411, a first-in-class inhibitor of sodium glucose transporters 1 and 2 (SGLT1 and SGLT2), has now also demonstrated effectiveness in treating type 1 diabetes patients. In a 28-day double-blind study, LX2411 reduced the total daily mealtime bolus insulin dose by 32 percent as compared to just 6 percent for placebo.

"The results from this study provide a clear demonstration of proof-of-concept of LX4211 as an oral, investigational new drug for type 1 diabetes complementing insulin therapy," said President and CEO Dr. Arthur Sands, M.D., Ph.D.  "The magnitude of improved glycemic control by several measures, including HbA1c in only four weeks, and lower insulin requirements are highly encouraging and support the progression of LX4211 into late-stage development for type 1 diabetes."