Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX)

it will give back its recent upside

Lexicon is what I like to call a "Buttercap" stock. You see the share price under 1.5 and wonder why the company is valued so low. Then you look at the pipeline and it has some potential. Glucose reabsorption inhibitor LX4211 is cruising along in a phase IIb trial with data expected in mid 2012. Tryptophan hydroxylase inhibitor LX1032 has shown encouraging results in a small phase II study in carcinoid syndrome and will enter a phase II trial in ulcerative colitis in the near future. Several other compounds are also in phase II development.

Turning around and looking at financials, you see the company had 144M in cash as of the last earnings statement which will be buttressed by about 160M from a rights offering last November. The company does have a high burn rate of about 25M per quarter but if the rights offering is included there's sufficient cash for another three years.

You're kind of liking what you see so far, and you're thinking about making your move when the stock suddenly turns around from the bar and ........ UGH! You see the market cap of 500M. That's due to a bloated 338M share count, the result of massive dilution in 2010. Lexicon was forced into the dilution to repurchase their pipeline by acquiring all equity of venture capital firm Symphony Icon. I can't get to the bottom of this transaction, but it looks like Lexicon sold their soul to Symphony in 2007 and whoever ran that outfit (probably Lexicon management) ate existing shareholder's lunch.

The recent 143M share rights offering won't make the share count or market cap any prettier. The way I've seen these events play out before is a continuing erosion in share price followed by a reverse split, followed by more dilution. So next time you see a low share price with a decent pipeline, make sure you aren't investing in a company where everything looks good but her cap.