Lexicon Pharmaceuticals Inc (LXRX) 2002 Q1 法說會逐字稿

Welcome to the Lexicon Genetics first quarter 2002 conference call. CALLER INSTRUCTIONS)

At this time I would like to introduce your host for today's call, Julie Kim [phonetic] with Lexicon's Corporate Communications Department. Please go ahead Ma'am.

Good morning, and welcome to the Lexicon Genetics first quarter 2002 conference call. I'm Julie Kim with Lexicon's Corporate Communications Department, and with me today are Dr. Arthur Sands, President and Chief Executive Officer of Lexicon, and Julia Gregory, Executive Vice President and Chief Financial Officer. We expect that by now all of you have seen a copy of our earnings press release that went out this morning. During this call we will review the information provided in the press release and then use the remainder of our time to answer your questions. The agenda for the call is as follows.

First Dr. Sands will discuss our key scientific and business development accomplishments during the first quarter. Ms. Gregory will then review our financial results for the first quarter and discuss our financial guidance for the second quarter. Dr. Sands will then open the call to your questions.

Before I turn the call over to Dr. Sands, I would like to state that this call is copyrighted by Lexicon Genetics, any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Lexicon Genetics, is strictly prohibited. During the call we will be making forward-looking statements, including statements about our growth and future operating results, discovery and development of products, strategic alliances and intellectual property. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward looking statements, including uncertainties related our ability to enter into additional collaboration alliances, the success and productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, commercial limitations imposed by patents owned or controlled by third parties, our dependence upon strategic alliances as we are developing commercialized products and services based on our work. Visibility or delays in obtaining regulatory approval to market products and services resulting from our development efforts, and the requirement of the central funding to conduct research and development and to expand commercialization activities. For a fuller description of the risks and uncertainties that we face, please see the report we have filed with the Securities and Exchange Commission.

I would like to now turn the call over to Dr. Sands.

Thank you Julie for that excellent introduction, and good morning everyone. First off, we've had a few small technical difficulties on this call in dealing with the conference call coordinator, so I hope everyone can hear us fine. We're going to go ahead and proceed with the call, and with our first quarter results. So on behalf of Lexicon, I'm extremely pleased with our strong revenue performance for the first quarter 2002. You will hear more about the components of that performance later in the call. I'd like to start the call by reviewing the key events of the quarter, which demonstrate significant momentum in our drug discovery programs, and for our business development strategy.

We announced the discovery of three new in vivo validated drug targets in the first quarter of 2002. LG527 is a new target for the development of potential treatments for depression. LG914 is a new target for the development of potential treatments for atherosclerosis. And LG152 is a new target for the development of potential treatments for solid tumor cancers. All three targets were uncovered through our industrialized gene knockout program, in which mice lacking specific genes are associated with desirable medical profiles. In order to advance any target into Lexicon's drug discovery program, the target must meet three criteria. Number one it must achieve a favorable therapeutic profile and it must be seen in vivo. Number two, it must work via a novel mechanism of action that is drugable, that is, it can be modulated by a small molecule, antibody or protein therapeutic to achieve a desired medical effect.. And number three, it must address large medical markets. LG527, LG914 and LG152 represent just three of 11 of our superior targets, drug targets across the range of our therapeutic areas, for which we have initiated drug discovery programs. All 11 have come to us through our own system within the last 9 months.

We are continuing to make excellent progress in our lead drug discovery program, including those related to our LG314 cardiovascular and metabolic disease target, and our LG293 immunology target. The two programs were publicly announced last year.

We announced earlier this year that we were very pleased when Dr. Stephen McAndrew joined Lexicon's Business Development Group as the Vice President of Pharmaceutical Business Development. Dr. McAndrew is focusing his business development expertise on key collaborations and alliances to maximize the commercial potential of our drug discovery program. Dr. McAndrew brings more than 20 years of pharmaceutical industry experience to Lexicon. Before joining Lexicon he was Director of Biotechnology and Licensing at the Bristol-Myers Squibb Pharmaceutical Research Institute, where he was primarily responsible for identifying, evaluating and negotiating numerous pre-clinical lead compound collaborations and platform technology alliances.

In April we officially opened our Genome Pharmaceutical Discovery Center. Our 300,000 square feet of industrialized biology research and high throughput screening laboratories in The Woodlands, Texas, is critical to our competitive position to commercialize the important medically relevant genes from our drug discovery programs. This infrastructure, with our strong cash position, and our Industrialized Medicinal Chemistry Division in New Jersey, will allow us to move forward with unprecedented efficiency.

In summary, we believe Lexicon achieved excellent results in the first quarter, and is very well positioned to build on this success through our drug discovery programs to establish our leadership position in small molecule, antibody and therapeutic protein discovery.

And now I would like to turn the call over to Julia Gregory, our Chief Financial Officer, to review our first quarter financial results in detail, and update you on our guidance for the second quarter.

Thank you Arthur. We entered the first quarter of 2002 in strong financial condition. I would like to review the first quarter with you, and discuss our guidance for the second quarter of 2002.

Total revenues increased 131 percent to 7.7 million in the three months ended March 31, 2002, from 3.3 million in the corresponding period in 2001. We recognized 3.4 million of subscription licensee revenue, including access fees from our LexVision collaborations with Bristol-Myers Squibb, and Incyte Genomics, and technology license fees from sub-licensees of our gene targeting technology. We also recognized 4.3 million of collaborative research revenues, including revenues under our portfolio of functional genomics collaborations with many of the world's pharmaceutical and biotechnology companies, and under our therapeutic protein discovery alliance with Incyte Genomics. Research and Development expenses, including non-cash stock-based compensation expense, increased to 16.9 million in the three months ended March 31, 2002, from 9.9 million in the corresponding period in 2001. These figures included 1.3 million and 1.4 million respectively of non-cash stock-based compensation, primarily relating to option grants made prior to our April 2000 initial public offering. The increase in expenses in the first quarter of 2002, over those in the prior year quarter, primarily reflect increased investments towards the scale-up of the company's drug discovery programs and its gene knockout and functional analysis programs, to determine the function of 5000 genes over 5 years, for the discovery of new targets, as well as expenses of the company's new medicinal chemistry operations.

Consistent with the company's focus on these programs through the first quarter of 2002, Lexicon's total workforce grew to 505 people, including 398 scientific staff. General and Administrative expenses, including stock-based compensation expense, increased to 6 million in the three months ended March 31, 2002, from 4.3 million in the corresponding period in 2001. Each figure includes 1.3 million of stock-based compensation. Interest and other income decreased to 1.1 million in the 3 month ended March 31, 2002, from 2.9 million in the corresponding period in 2001. this decrease resulted from lower interest rates and decreased average cash and investment balances during the 2002 period.

Net loss increased to 14.1 million in the three months ended March 31, 2002, from 8 million in the corresponding period in 2001. Net loss per common share increased to 27 cents in the three months period ended March 31, 2002, from 17 cents in the corresponding period 2001. Excluding non-cash stock-based compensation expense, we would have had a net loss of 11.5 million, and a net loss per common share of 22 cents in the three months ended March 31, 2002, as compared to a net loss of 5.3 million in our net loss per common share of 11 cents in the corresponding period in 2001. It is this number, our first quarter 2002 loss of 22 cents per share, excluding non-cash stock-based compensation, which is compared to the Wall Street First Call Consensus of 28 cents per share. In summary, revenues for the first quarter 2002 were 10 percent ahead of the top end of our guidance for the quarter, and operating expenses were 10.6 percent less than the average of our guidance range. We continue to maintain a strong cash position. Our cash and investments were 148.8 million as of March 31, 2002, versus 166.8 million at December 31, 2001. Approximately 50 percent of the change in cash from the quarter resulted from capital expenditures as we completed our Genome Pharmaceutical Center. The majority of these capital expenditures were the delayed items from 2001 we discussed on the last earnings call.

Now let's turn to our guidance for the second quarter of 2002. Revenues for the second quarter of 2002 should be comparable to the first quarter, or slightly higher, which should results in 100 percent growth over second quarter of 2001. Operating expenses for the second quarter are projected to range from 25 to 26 million, excluding deferred compensations of 2.6 million. Our guidance for the full year 2002 remains the same, as we have previously stated to you, with revenues of approximately 45 to 60 million and our net cash burn about 50 to 55 million. I should note that our quarterly operating results have fluctuated in the past, and are likely to do so in the future. And we believe that this quarter to quarter comparison of our operating results are not a good indication of our future performance. Having said that, I am very pleased with our solid financial results for the first quarter of this year.

And now I'd like to turn the call back over to Arthur, to take your questions.

Thank you very much Julia. At this time we're happy to take your questions.

CALLER INSTRUCTIONS) And our first question will come from Matthew Geller, please go ahead.

Hi. I want to talk a little bit about your plans to evolve from a discovery into a development company in terms of which products you might want to file IND's on the future, what the timing might be, and the infrastructure you're building in order to accomplish that?

Thank you for that question Matt. We have, as you've witnessed, a portfolio of target opportunities that span each of the major therapeutic areas. What that enables Lexicon to do as we develop lead compounds addressing each of these targets - we anticipate leads this year, by the way, in at least some of our target areas. What it allows us to do is to choose which compounds and which programs we can partner at a variety of stages. So, for example, our advanced cardiology and metabolism programs, LG314, the low cholesterol, low triglycerides, low fat product that we're seeking, that may be something that, because of the size of the trials, if the right partnership can be found, is found, then we might be more inclined to partner that early and share the burdens of development -- clinical development, with a partner.

Now having said that, that is all dependent on us of course obtaining the right value, otherwise we may choose to take that piece of our portfolio and keep it for Lexicon 100 percent, and develop it ourselves. Or we could partner at different stages of clinical development along the way. So we feel very confident, by witnessing first hand these discoveries and the power and the speed at which we can bring compounds now against these discoveries, that will have a portfolio approach to your question Matt, and we'll manage that portfolio with financial principles working as well as attention to the clinical demands and costs.

In terms of filings of IND's, I think unlike others, we do not make statements about timing and days to filings of IND's. We don't feel that that's a productive set of predictions to make. What we do say is that we have an extremely powerful portfolio, we're moving that portfolio as quickly as possible towards the clinic, and we're very confident that we're going to be initiating our clinical development programs in a very timely fashion.

Great, thanks a lot, Arthur.

And our next question is from Franklin Berger, please go ahead.

Good morning. A couple of questions. One would be, I noticed a very strong subscription growth, can you tell us a little bit about how many sub-licensees you now have and what sort of renewals there may be?

We have approximately 13 sub-licensees at the present time. We continue to roll over those sub-licensees, meaning that in many cases they have an upfront fee that's pretty significant, and those fees have increased dramatically in size over the years. And we have practically every month or two we have renewals taking place. It continues to be an active program for us, in fact we do see increased activity for this year.

And if I could add something to that answer for you, Franklin, I think one of the most important things about witnessing the success and the value associated with that sub-licensing program, is the fact that our technology is being more and more and more widely recognized as truly the invaluable way to go for target discovery and drug discovery among a wide base of companies. The system works extremely well. Also we engineer those sub-licenses very carefully so that those companies that are implementing their own target discovery programs based on our gene knockout patents, are limited in nature. They are allowed to do certain numbers of targets per year using the technology, and that provides us, of course, a way to maintain our competitive advantage in that we are a truly high throughput implementer of the technology to really get the massive discovery power channeled into Lexicon's own drug discovery program.

If I could add sort of an ancillary question to that is, can you tell us a little bit about Dr. McAndrew's role in going forward and maximizing Lexicon's discovery and development plans, because I gather from his short CV that's in the press-release he's quite some extensive experience?

Yes, I'd certainly be happy to. Dr. McAndrew joined us from BMS, he is of course a senior person in the Business Development Group at Lexicon. He reports to Randy Riggs, who is the Senior Vice President of Business Development at Lexicon, and Dr. McAndrew is focusing his energies on the pharmaceutical aspects of our alliances and our new collaborations. His core expertise of course is from the pharmaceutical world, and has been focused on such alliances on the buy side working for Bristol-Myers Squibb. He is an excellent, fantastic addition to the group. We then -- of course with Randy Riggs in place, his expertise has been from Eli Lilly and in pharmaceutical collaborations as well, so now we have two very senior level people, experienced people, heading up the Business Development Group, and they're aided by a number of excellent directors under them. So we have a team in place to really place and channel these drug discovery programs in the highest value partnership arrangements.

Thanks.

CALLER INSTRUCTIONS) And we will go to Sharon Seiler, please go ahead.

I just want to know if you could give us some color on your discussions with potential pharmaceutical partners in terms of their reactions and what it is that specifically they are looking for?

Yes, Sharon. What I can tell you is that as we've all witnessed I think in this industry recently, an unacceptable level of productivity for the large pharmaceutical companies, and that's starting to manifest itself quite dramatically. And we are seeing is that the fact that their discovery engine is not supplying them with new products at the rate required for growth, is actually excellent for our business. And so we are seeing a concomitant increase in our business development activities, and discussions around new product opportunities. In fact truly novel mechanism of action and product opportunities. So we are meeting the industry as I'd say, almost now ravenous appetite for new products, and this year, 2002, is a very interesting year for watching our discoveries channeled into these kinds of partnerships. So of course I can't be specific on any programs, but the farther the program is advanced, obviously the more interesting and more valuable it is seen, and I would not be surprised if we see some very competitive situations arising with buyers that are seeking new products that address very large medical markets.

I think one thing I will say is that our strategy of addressing the real breakthrough treatments in large medical markets, and using genetics to find that, is really producing a tremendous amount of business development activity for us. Because of course they're looking for products that can generate the kind of revenue that will make a difference to them, and that's what we've channeled our genetic technologies to find. So I seen our increase in business development activities matching what we're seeing in terms of their decrease in pharmaceutical discovery productivity, and I think it's very encouraging for the future of our business.

I'm certainly glad to hear that. And can you characterize their interest, I mean is their interest in particular therapeutic indications or that varies by company?

Well I'd say that the area of metabolic disease and cardiology continues to be one of the highest areas of interest and heist value associated with that, so it's not surprise when you look at the number associated with certain products in that area. 47 million Americans are forecast to be suffering from metabolic syndrome, including diabetes, obesity and atherosclerosis. So that area is extremely hot, and several companies are very interested in that, and of course because the market is so large.

I'd say the another area that's moving very rapidly is the area of inflammation, and we've seen such rapid successes in that area. And our LG293 program there is of course addressing directly inflammation. We have other programs in immunology as well, that's moving very fast.

I think another area that's going to be a next generation area for us, and for our technology, is the CNS area. We now have four level three projects in CNS, and our technology is revealing to us very powerful behavioral and neurologic targets addressing depression and anxiety, and we're able to see that readout in vivo in the mammalian system, and I think that's a very important next generation, and a very difficult area, by the way, for anyone to find new targets in. So I'd say those areas are very critical and moving the most rapidly.

Okay, thanks very much.

We will now go to Ajin Butt [phonetic], please go ahead.

Thank you for taking my call. I was wondering if you might be able to give us update on the Abgenix collaboration, how it's progressing and the timing of any updates from that collaboration?

Yes, the Abgenix collaboration is progressing very, very well. As you know we have accelerated that collaboration, we announced that a few months ago, such that the partners can move very rapidly, more rapidly on the latest in vivo findings as they roll off of our level three programs. So it is proceeding extremely well. We have already submitted antigens, as we publicly disclosed, to Abgenix, several of which have been accepted by them and are moving an antibody development program. So we're very happy about that.

The future of the collaboration looks very bright when you consider that our Genome 5000 program, if you analyze the genes in it, we of course filter through and prioritize genes of a drugable nature in general, but specifically self surface antigens that maybe receptors and amenable to antibody intervention as well as secreted proteins comprised on the order of 40 to 50 percent of genes we're pushing through our Genome 5000 program. So I see a large number of opportunities there. Our two companies work very well together, I think we understand the power of using in vivo mouse genetics. Of course they understand that very well. The human monochromal antibodies producing mouse being originally a knockout mouse and re-engineered with the locus for human antibody production. So you see a tremendous amount of synergy, and we're very positive about the collaboration.

Thank you.

And Franklin Berger has a follow-up question.

One last questions was regarding Lexicon Pharmaceuticals in Princeton. What is the status now of your outside, non-Lexicon directed business? I know there are still some extensive tails there potentially with Pfizer?

You're referring to the chemical side of our business, post the merger with Coelacanth Corporation. As we announced then, we intended after about 6 months of operating that business to internalize that business completely and move it to the higher value business model. So we've done that quite successfully. Of course the partners that were in the previous business model, obtaining chemical compound libraries, will now have to deal with us at a different level, which is of course the intent. But they have -- we've completed those agreements, we have a very, I think, satisfied customer base and now we're going to move them to the next level in a drug discovery type arrangement. So it has been a successful transition and internalization.

I do want to comment on the merger in general. We have been extremely pleased, it has gone so well, essentially a textbook case of when you bring two synergistic organizations together, what can be achieved. So we're already screening and using the compound libraries and internalizing the whole operation and working as a team, and I just have to say that so often that's not the case in the world of mergers, there tend to be controversial -- everyone's applauded the merger. The leadership of Lexicon Pharmaceuticals, Alan Main, his seniority in the industry is so well recognized, and he has implemented the business plan very effectively. Of course the founder of Coelacanth having won the Nobel Prize in Chemistry in 2001 didn't hurt things either. We're very happy about that.

So in general I think it's just been a great experience for everyone and our productivity has increased because of it.

If I could reflect one moment back to the previous question - I'm sorry - on the antibodies, I did want to mention that we have disclosed that LG914, a very exciting target for atherosclerosis, a secretive protein, is in that collaboration with Abgenix, and the idea there is, and what is so amazing about this target is to make an antibody against this protein. We know that by blocking it and by knocking it out you can basically inhibit the atherosclerosis process. And it's very specific, we saw no side effects from inhibition of the enzyme, and that is in that Abgenix alliance for development of a full human monochromal antibody for atheroscelrosis. So I'll stop there.

If there are any other questions we can take a few more.

Yes, we have a question from Matt Osborne, please go ahead.

On LG527 and 914, if you can provide any timeframe guidance on possibly identifying lead compounds for these products?

Yes, again we're expecting to have lead compounds -- what we say in terms of timeframes, we are expecting lead compounds in 2002 against some of our level three programs, so we have 11. And it's hard to say, it's kind of like racehorses, sometimes some move ahead of others and it's hard to predict which ones we're expecting within 2002. Some of them will have lead compounds. LG914, being an antibody amenable target, that may move very, very quickly. The biologics move very fast of course in creation of potential therapeutics, and so that one may surge ahead. LG314 we've already announced we have hit series against LG314 which is the other cardiology target and obesity and metabolic syndrome target. 527, the neurologic target, is an enzyme that we're working to find inhibitors of. That is, I'd say, a little bit more difficult project because of course you have to deal with the blood/brain barrier. But we are seeking small molecule inhibitors which should be able to traverse the blood/brain barrier and exert their effect on this highly specific CNS. It's expressed only in the brain, this target by the way, as you could imagine. So that's where that one is moving.

Great, thanks.

And there are no further questions, so at this time I'll turn the conference back to Mr. Sands and Ms. Gregory.

Well thank you very much. In summary it's very clear Lexicon performed exceptionally well in the first quarter, and we're very pleased with our progress. Looking ahead we believe our accomplishments have placed us in an excellent position to maximize the value of our discoveries. We are very excited about the rollout of our drug discovery pipeline and the expansion of our chemistry expertise, to move these targets further down the value chain. We're equally excited about the progress we're making in our Genome 5000 program, our continued strong cash position, and the completion of our Genome Pharmaceutical Discovery Center, all of which give us enormous momentum to execute our plan and to take a leadership role in the discovery of drugs in the post genomic era.

That concludes our update for the quarter; thank you very much for participating in our conference call, and good-bye.

Thank you, and that concludes our conference for today.