Wedbush Securities said Lexicon Pharmaceuticals Inc.'s (NASDAQ: LXRX) phase 2a LX2931 for rheumatoid arthritis data presented at ACR confirm safety and support testing of higher doses.

Lexicon presented clinical data at the American College of Rheumatology conference from a Phase 2a proof-of-concept study testing LX2931 in rheumatoid arthritis patients on methotrexate background therapy.

The 208 patient, double-blind, randomized, placebo controlled clinical trial was designed to assess three doses of LX2931 (70 mg, 110 mg, and 150 mg once daily) versus placebo on the primary endpoint of ACR20 response at week 12 as well as safety and tolerability.

Secondary endpoints included ACR20, ACR50, ACR70 and DAS28 at weeks four, eight, and twelve. LX2931 is an oral sphingosine 1-phosphate (S1P) lyase inhibitor that has been shown to reduce the inflammatory response in preclinical animal models of arthritis, multiple sclerosis and transplantation with the theoretical benefits of lymphoid selective action and limited lymphopenia.

On an intent-to-treat basis, the 150 mg dose did not show a statistically significant benefit versus placebo on ACR20 response (p=0.14). However, a pooled analysis of the placebo plus low-dose cohorts (70 mg and 110 mg) versus the 150 mg cohort did show a statistically significant benefit on ACR20 response (60 percent 150 mg versus 44.3 percent placebo/70 mg/110 mg; p=0.038).

Furthermore, an analysis of patients with trough drug plasma levels of > 60 ng/mL also showed a statistically significant benefit on ACR20 response in these patients (80 percent >60 ng/mL patients versus 49 percent placebo; p<0.001). Importantly, a dose response was also observed with higher doses resulting in higher mean plasma levels (70 mg-26.2 ng/mL; 110 mg-39.6 ng/mL; 150 mg-71.5 ng/mL).

Therefore, in our view, the data suggest that higher doses of LX2931 may result in higher drug plasma levels and, consequently, better ACR20 responses. Importantly, LX2931 exhibited a favorable safety profile at all three doses tested giving us some comfort that higher doses will not produce unwanted side effects, said Liana Moussatos, an analyst at Wedbush Securities.

In Moussatos' view, these results support the clinical rationale for the ongoing dose-ranging study with data from that trial expected in the first quarter of 2012. The dose-ranging study is currently ongoing with the goal of identifying doses of LX2931 that produce sustained higher drug exposure.

Through the remainder of 2011 and in 2012, she believes potential partnership announcements and clinical data releases could be major value drivers.

Moussatos speculated that a LX1032 partnership announcement could occur by year-end and cause about 10 percent to 20 percent upside. The company disclosed that it is in negotiations for a partnership and suggested that a potential partner would want to be involved with the Phase 3 design.

With an end-of-phase 2 meeting with the FDA expected by year-end, she believes this suggests that a partnership announcement could occur by year-end.

As this will be the first partnership for Lexicon's clinical pipeline, she believes investors will view this as a validation of Lexicon's platform and expects 10 percent to 20 percent upside and possibly more depending on the terms.

Also, she believes that clinical data releases are likely to be major value drivers in 2012. In mid-2012, she anticipates material data releases from LX4211 Phase 2b diabetes trial, the LX2931 dose-escalation in RA patients, and potentially more data from the EU carcinoid study.

We believe that Lexicon is currently at an attractive valuation trading at almost one-third of our fair value of about $3 per share. With Lexicon only trading at around $1.12 per share after recent market weakness, we believe Lexicon is trading at an exceptionally attractive valuation, said Moussatos.

Moussatos calculated Lexicon's fair value of $3 based on a 30 percent annual discount and a 1 to 10 times premium range on her net peak annual sales estimate for each product and indication in the clinic to reflect risk. Her fair value includes candidates/disease areas which, in her view, have at least shown proof-of-concept clinical efficacy.

Lexicon Pharma stock closed Wednesday's regular trading down 1.77 percent at $1.11 on the NASDAQ Stock Market.

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