Generally speaking long term investing is the way to go. But along the way some stocks are going to perform badly. For example the Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) share price dropped 69% over five years. We certainly feel for shareholders who bought near the top. And we doubt long term believers are the only worried holders, since the stock price has declined 28% over the last twelve months. The falls have accelerated recently, with the share price down 23% in the last three months.

On a more encouraging note the company has added US$51m to its market cap in just the last 7 days, so let's see if we can determine what's driven the five-year loss for shareholders.

We don't think Lexicon Pharmaceuticals' revenue of US$2,310,000 is enough to establish significant demand. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Lexicon Pharmaceuticals has the funding to invent a new product before too long.

Companies that lack both meaningful revenue and profits are usually considered high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets to raise equity. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Lexicon Pharmaceuticals has already given some investors a taste of the bitter losses that high risk investing can cause.

When it last reported its balance sheet in March 2024, Lexicon Pharmaceuticals had cash in excess of all liabilities of US$227m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. With the share price down 11% per year, over 5 years , it seems likely that the need for cash is weighing on investors' minds. You can see in the image below, how Lexicon Pharmaceuticals' cash levels have changed over time (click to see the values).

It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

Lexicon Pharmaceuticals shareholders are down 28% for the year, but the market itself is up 23%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 11% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. It's always interesting to track share price performance over the longer term. But to understand Lexicon Pharmaceuticals better, we need to consider many other factors. Even so, be aware that Lexicon Pharmaceuticals is showing 4 warning signs in our investment analysis , you should know about...

Lexicon Pharmaceuticals is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.