Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Effective Tax Rate Reconciliation. A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2023, 2022 and 2021 consists of the following:

	Year Ended December 31,
	2023		2022		2021
	(in thousands)
Expected income tax expense (benefit) at 21%	$	(37,196)	$	(21,408)	$	(18,429)
State income taxes, net of federal benefit	(3,895)		—		—
Equity compensation	1,530		1,627		851
Research and development credit	(712)		—		—
State income taxes, tax rate change	(4,723)		—		—
Change in valuation allowance	44,410		19,543		17,210
Other (1)	586		238		368
Income tax benefit	$	—	$	—	$	—

(1) Other is primarily comprised of expiring NOLs and nondeductible expenses for the year ended December 31, 2023 and nondeductible expenses for the years ended December 31, 2022 and 2021.

Deferred Tax Assets and Liabilities. Lexicon recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized differently in the financial statements and tax returns. The components of Lexicon’s deferred tax assets (liabilities) at December 31, 2023 and 2022 are as follows:

 

	As of December 31,
	2023		2022
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	288,264	$	251,331
Research and development tax credits	30,002		29,290
Orphan drug credits	24,524		24,524
Capitalized research and development	37,357		33,813
Stock-based compensation	6,965		5,445
Interest	1,359		398
Other	3,308		2,255
Total deferred tax assets	391,779		347,056
Deferred tax liabilities:
Other	(1,608)		(1,295)
Total deferred tax liabilities	(1,608)		(1,295)
Less: valuation allowance	(390,171)		(345,761)
Net deferred tax liabilities	$	—	$	—

Net Operating Losses/Valuation Allowance. At December 31, 2023, Lexicon had both federal and state NOL carryforwards of approximately $1.3 billion and $169.6 million, respectively.  The Company had $606.5 million of U.S. federal NOL carryforwards as of December 31, 2023, which can be carried forward indefinitely. The remaining federal and state NOL carryforwards will begin to expire in 2024. 

The Company maintains a valuation allowance on net operating losses and other deferred tax assets. Accordingly, the Company has not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit carryforwards that are available for utilization in future periods. On a periodic basis, the valuation allowance is reassessed on deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In 2023, the Company reassessed the valuation allowance and considered negative evidence, including the cumulative losses over the three years ended December 31, 2023 and positive evidence including the projections of future income. After assessing both the negative and the positive evidence, the Company concluded that it should continue to maintain the valuation allowance on net operating losses and other deferred tax assets as of December 31, 2023 given the significance of the weight of the negative evidence. Based on recent financial performance and future projections, the Company could record a reversal of all, or a portion of the valuation allowance associated with U.S. deferred tax assets in future periods. However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment. Significant judgment is required in making these assessments to maintain or reverse valuation allowances and, to the extent future expectations change the Company would have to assess the recoverability of these deferred tax assets at that time.

Based on the federal tax law limits and the Company’s cumulative loss position, the Company concluded it was appropriate to establish a full valuation allowance for its net deferred tax assets until an appropriate level of profitability is sustained.  During the year ended December 31, 2023, the valuation allowance increased $44.4 million, primarily due to NOLs generated, increases in deferred tax assets associated with capitalized research and development expense and deferred tax assets for state jurisdictions.

Other. As of December 31, 2023 and 2022, the Company did not have any unrecognized tax benefits and had no accruals for interest or penalties related to income tax matters. Any interest and penalties related to uncertain tax positions will be reflected as a component of income tax expense. The Company is subject to U.S. federal and state income taxes. The tax years 2020 through 2022 remain open to examination by the Internal Revenue Service of the United Sates and the tax years 2019 through 2022 remain open to examination by various state tax authorities.