Shares of Lexicon fell nearly 40 per cent in extended trading.
Sanofi said the termination of the partnership comes after the results of three late-stage studies of the oral drug, Zynquista, which is being jointly developed by the two companies.
In a separate statement, Lexicon said it had not yet received the underlying data from the studies and that it expects to conduct its own review. The company also said it considers Sanofi to be in breach of contract and the termination invalid.
"While we are disappointed in the position taken by Sanofi, we are confident in the strength of the data we have seen thus far in the type 2 diabetes program," Lexicon Chief Executive Officer Lonnel Coats said.
"In the event of a valid termination of the Sanofi alliance, we will also look forward to regaining full rights to Zynquista in type 1 diabetes in the United States, as well as rights in the remainder of the world," he said.
However, Sanofi said trials of the drug will continue without Lexicon.
In March, the U.S. Food and Drug Administration declined to approve the drug for use with insulin in patients with type 1 diabetes, two months after a panel raised concerns of the risk of diabetic ketoacidosis (DKA), leaving them divided over whether the treatment's benefits outweighed the risks.
DKA is a life-threatening condition in which acids called ketones build up when the body starts to use fat instead of glucose as a source of energy.
Zynquista, which contains the active substance sotagliflozin, works by inhibiting the proteins SGLT1 and SGLT2 to help regulate blood glucose levels and reduce the risk of weight gain.