Lexicon Pharmaceuticals Inc (LXRX) 2002 Q2 法說會逐字稿

Please stand by.

Thank you for holding and welcome to the Lexicon Genetics second quarter 2002 conference call.

At this time, all participants are in a listen-only mode. There will be a question-and-answer session following the presentation. Now please be advised that this call is being taped at Lexicon's request.

Now I'd like to introduce your host for today's call, , with Lexicon's corporate communications department.

Please go ahead, ma'am.

Good afternoon and welcome to the Lexicon Genetics second quarter 2002 conference call.

I'm 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 was distributed this afternoon. 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 this call is as follows.

First, Dr. Sands will discuss our key scientific and business development accomplishments during the second quarter. Ms. Gregory will then review our financial results for the second quarter and discuss our financial guidance for the third quarter and the remainder of 2002. Dr. Sands will then open the call to your questions.

Before I turn the call over to Dr. Sands, I would like to say 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 to our ability to enter into additional collaborations and 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 or dependence upon strategic alliances, as we are developing commercialized products and services based on our work; difficulty or delays in obtaining regulatory approval to market products and services, resulting from our development efforts; and the requirements of substantial funding to conduct research and development and to expand commercialization activities. For a 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, Julia, and good afternoon, everyone.

On behalf of Lexicon, I'm extremely pleased with our strong performance in the second quarter of 2002. I would like to start the call by reviewing the key events of the quarter, which demonstrate significant momentum in our drug discovery programs and business development strategy.

We announced the discovery of a new in vivo validated drug target in the second quarter of 2002. is the new target for the development of potential treatments for obesity. The target was 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. First, it must achieve a favorable therapeutic profile in vivo. Second, it must work via a novel mechanism of action that is , meaning that it can modulated by a small molecule, antibody, or protein therapeutic to achieve a desirable medical effect. And third, it must address large medical markets.

represents one of now 14 targets across a range of therapeutic areas for which we have initiated drug discovery programs all within the last year. We are continuing to make excellent progress in our drug discovery programs, having identified hits and made advances in optimizing compounds in some of our lead programs.

In the second quarter, we also granted a non-exclusive sub-license to Millennium Pharmaceuticals under the patent covering the use of our isogenic DNA technology in gene targeting. We had previously granted Millennium a non-exclusive sub-license under patents covering our positive/negative selection technology. We believe these licenses provide further affirmation that our patented gene targeting technologies are an integral resource to validate targets for drug discovery.

Lexicon has attracted many highly qualified employees this quarter as we selectively expand our capabilities. One of our key hires during the quarter was that of Dr. as Director of Pharmaceutical Discovery. Dr. will be responsible for the design and implementation of high-throughput screens for therapeutic agents which act on Lexicon's proprietary drug targets, a key area in Lexicon's gene-based drug discovery program.

Dr. has nearly a decade of experience in genomics-based drug discovery, most recently as a Senior Research Fellow at Merck Research Laboratories. He completed his post-doctoral work in the Department of Biological Chemistry and Molecular Pharmacology at Harvard Medical School and holds a Ph.D. from Yale University.

Finally, we recently completed a lease of a new - on a new laboratory and office facility near Princeton, New Jersey that will provide sufficient space for our expanding medicinal chemistry operations and eventually allow us to consolidate all of our New Jersey operations at a single location.

With our physical infrastructure now largely complete, we will accelerate the progress of our drug discovery programs towards optimized lead compounds. In summary, we believe Lexicon achieved excellent results in the second quarter and is very well positioned to build on this success through our drug discovery programs and to establish a 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 financial results.

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

Total revenues increased 169 percent to 9.4 million in the three months ended June 30, 2002, from 3.5 million in the corresponding period in 2002. We recognized 5 million of subscription and license fee revenue, consisting primarily of access fees from the company's LexVision collaborations with Bristol-Myers Squibb Company and Incyte Genomics, and technology license fees from sublicensees of the company's gene targeting technology. And we recognized 4.3 million of collaborative research revenues, consisting primarily of revenues from Lexicon's therapeutic protein collaboration with Incyte Genomics, and revenues from functional genomics collaborations with pharmaceutical and biotechnology companies.

Research and development expenses increased 78 percent to 19 million in the three months ended June 30, 2002, from 10.7 million in the corresponding period in 2001. These figures included 1.3 million and 1.4 million, respectively, of non-cash, stock-based compensation, related primarily to option grants made prior to our April, 2000 initial public offering. The increase in expenses in the second quarter of 2002 over those in the prior year quarter primarily reflect increased investments toward the scale up of the company's drug discovery program and its gene knockout and functional analysis programs for the discovery of new drugs -- new drug targets, as well as expenses of the company's medicinal chemistry operation.

Consistent with the company's focus on these programs for the second quarter of 2002, Lexicon's total workforce grew to 551 people, including 442 scientific staff. We believe that future expansion of the workforce will occur primarily in areas that are important for the advancement of Lexicon's drug discovery program. General and administrative expenses increased 19 percent, to 6 million in the three months ended June 30, 2002, from 5 million in the corresponding period in 2001. Each figure includes 1.3 million of non-cash, stock-based compensation.

Interest in other income decreased to 0.7 million in the three months ended June 30, 2002, from 2.4 million in the corresponding period in 2001. This decrease resulted from lower average cash and investment balances, and lower average interest rates during the 2002 period. Net loss increased to 14.9 million in the three months ended June 30, 2002, from 9.9 million in the corresponding period in 2001. Net loss per common share increased to 29 cents in the three months ended June 30, 2002, from 20 cents in the corresponding period of 2001.

Excluding non-cash, stock-based compensation expense, we would have had a net loss of 12.4 million, and a net loss per common share of 24 cents in the three months ended June 30, 2002. That's compared to a net loss of 7.2 million, and a net loss per common share of 15 cents in the corresponding period in 2001. In summary, revenues for the second quarter of 2002 were significantly ahead of our guidance for the quarter, and operating expenses were less than our guidance range.

We continue to maintain a strong cash position. Our cash and investments were 135.1 million as of June 30, 2002 verses 148.8 million at March 31, 2002. Now lets turn to our guidance for the third quarter and the remainder of 2002. Consistent with our performance so far this year, we expect revenues for the third quarter of 2002 to be in the 9 to 10 million dollar range, in line with our revenues for the second quarter of 2002. Operating expenses for the third quarter are projected to be approximately 26 to 28 million, including non-cash stock base compensation expense of 2.6 million, including non-cash stock base compensation expense.

We confirm our original guidance for the full year 2002 and continue to expect to achieve revenues of 45 to 50 million for the full year. Now, at the midpoint of 2002, we have generated revenues of 17.1 million, and expect an additional 15 million in committed revenues from our existing agreements. These revenues comprise about 32 million of our total projected revenues for the full year 2002. We expect to generate the remainder of our projected revenues through new agreements in the second half of the year. Historically, our second half has been the higher revenue period for the year.

The strength of our business strategy is that we have multiple opportunities for revenue generation. We can generate revenues through target validation agreements, vision agreements, drug discovery agreements, sublicense agreements and compound sales. In this uncertain market environment, we will review all revenue possibilities as an opportunity to mitigate cash burn. I've been very pleased with the intense level of business level activity Lexicon is experiencing this year. We have had more business development meetings and due-diligence sessions at our headquarters in Texas than ever before.

However, as you know, there is no guarantee of concluding these agreements. Overall, assuming we achieve our revenue expectations of 45 to 50 million for the year, we expect to be well within our previous guidance of 50 to 55 million in net cash burn for the full year. About 13 million, or 41% of our net cash burn for the first half of 2002 was due to capital expenditures, which will decline to about 6 to 8 million for the remainder of the year.

As a result of the completion earlier this year of our Genome pharmaceutical center. We are continuing to look closely at opportunities to moderate our expenses and improve our productivity in achieving our business and scientific objective. 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 quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Once again, I am very pleased with our solid financial results for the second quarter of this year. And now I would like to turn the call back over to Arthur to take your questions.

Thank you Julia. Lexicon has arrived at the mid point of 2002 in a very strong position. Our patent portfolio has been externally validated with major sublicensees to our technology. More importantly, we have built considerable barriers to entry represented by our industrialization of gene targeting, and our OmniBank Library knock out clones. Our integrated technology platform enables us to rapidly from target discoveries to medically relevant drug discovery programs. We've attracted some excellent employee base, some major pharmaceutical companies and academic institutions world wide. We achieve revenue growth of 169% for the second quarter, and our cash position remains strong at $135.1 million. We are continuing to advance validated targets into drug discovery programs, and we are achieving significant progress in those programs.

At this time, we are happy to take your questions.

And to ask your questions today, please signal us by pressing star, then one, on your telephone keypad. Again, that's star, one to ask your questions, please.

We'll take just a moment to assemble the roster.

First up, from J.P. Morgan, is Franklin Berger.

Good afternoon.

Good afternoon, Franklin.

You know a couple of days ago the mouse genome was published, and I'm sure you guys . How are you positioned to utilize this new data source?

Yes, that's an excellent point. And another step forward in the genomics revolution. We have, of course, our own internal for . And we have for some time been pulling in all of the human genome projects gene sequence information and the published genome sequence information.

What we do with that is align them in our computers through alignment algorithms. And, therefore, we can move very rapidly from our human gene target pipeline to the mouse or the similar mouse gene to immediately identify the knockout locations that we can generate using our patented technologies. Knock off that target, and then determine the function.

Now while they just officially published the mouse genome sequence information, I'd like to add that that kind of data has been moving into the databases for quite some time. And we have, in fact, been working with the mouse genome sequence information for quite some time as that data has been accumulating. But it is part of the acceleration in our ability to move very rapidly to targets from - and translate from human to mouse.

One thing I'd like to note as you line these up, that's very telling, is that when you look for the mouse version of a human gene, how often do you find it? The answer is greater than 99 percent of the time. And that is a question that some people have been having for us in the past, which is, you know, can you always find a mouse gene. And the answer is happily 99 percent of the time we find the mouse or the matching mouse gene for the human.

That means that given the tens of thousands of human genes that are there, and the targets in our pipeline, we can reliably switch over to our validation systems to find that gene. And we can do that with great confidence. And I don't know if, in fact, there is no other mammal that has been completely sequenced that allows you that kind of flexibility and discovery power.

Just a quick follow-up. Has any of this data been useful in selecting the current 14 targets you're working on?

Yes. In fact, the way our target selection procedure goes, we first select based on human gene targets. So all of the targets are, of course, human genes. Those that move into the programs must have a mouse . And, of course, 99 percent of the time we find that.

So then we can determine the function that way. But all of those 14 programs have gone through this translation process, and we've determined the function through that process. But we have then the human genes in hand from the very beginning for these 14 drug discovery programs. We initiate human protein expression process. And then, of course, high-throughput screening is always directed against a human protein because the drugs that come out the other end, of course, must recognize the human target and work in humans.

Thank you.

Thanks.

We'll continue now with a question from at UBS Warburg.

Hi. This is .

Couple of questions - can you give us an update on how the insight secreted protein in the antibody programs are going and just an update on how Genome5000 and, you know, how OmniBank are going in terms of, you know, are you nearing saturation on OmniBank?

And also on forward to when you start thinking about , is still on track to be your first and what type of timeframe are we looking at? Thanks.

OK, great. Thank you, .

First, on your first question regarding insight in the therapeutic protein alliance, just to briefly review that alliance, it's a three-year alliance. It is an alliance that, as you can tell from our revenue statements, is very important to our revenue-generating capabilities and has been moving forward very rapidly. So in that three years, we anticipate covering 150 genes that are selected by a joint committee between the two companies that are candidate therapeutic proteins or potential therapeutic secreted proteins.

Now they're, of course, potential candidates until they're validated in vivo, which is the very reason, of course, that we are doing this. Now on the case of therapeutic proteins, the approach is actually two-fold. It's very interesting. One is the knockout approach which gives us that baseline of the function of the therapeutic protein, and the second is an over-expression approach which can be applied selectively to certain proteins very efficiently in our system to see what those proteins do when they're produced basically in vivo to see the therapeutic effect. So we have a knockout approach and then we have an over-expression approach that we apply selectively, and thereby we see the true physiologic function of what are I believe hard to get at therapeutic proteins.

Now, this is a new approach to finding therapeutic proteins. Again, it's the in vivo approach, and I believe we're able to see the more subtle functions - the far more subtle functions of some of these therapeutic proteins.

The second part of your question regarding , we have submitted to in vivo validated antigens. We continue to submit them. That alliance is going very well.

The one antigen which we have announced in terms of description of the antigen is , a very fascinating secreted protein that we believe is amenable to an antibody approach - that is, we want to knockout the secreted protein as a therapeutic - . And when you do so in our knockout lines, what you witness is an ability to block what we believe is the proliferative component of atherosclerosis very specifically with no related discernable negative side effects that we can detect in our complete in vivo workup. So we have seen in an atherosclerosis-challenged model in vivo that by blocking , you can actually block the plaque - proliferative component of the plaque formation.

That alliance continues to progress, and I think can represent a very rapid way towards drug discovery.

The third component of your question was regarding the Genome5000 and our progress on that front and the saturation point of OmniBank. Actually, OmniBank, we believe, based on our statistics, we can hit all - basically, virtually, all genes with it. We're at 54 percent. We're probably going to hold there while we mine from that 54 percent. But when we actually stop producing OmniBank at 54 percent, the line was linear.

We could keep going and get more and more genes. But the point now is for Lexicon to focus on drug discovery. So we're harvesting some that -- some 35,000 genes that we have in our freezers right now as mouse embryonic stem cell clones -- harvesting from that to contribute to our drug discovery programs. And they contribute, the OmniBank resource, contributes about 50 percent of the total number of targets we look at. So it covers 54 percent of the genome, contributes 50 percent of which -- about aligns with what you'd expect.

The other 50 percent comes from our gene targeting laboratories, which is by combination. So we're moving forward on the Genome 5000, which is to use half from OmniBank to get to that 5000 number over five years, and half from gene targeting, which allows us to enhance the specificity of those alleles, and of course, both of these technologies are patented. The third -- fourth question you had, or component of your question, was with regard to LG314 and is that still the lead and when would we expect . We have several programs in screening, and I have in the LG314 as a lead. It continues to be in our screening deck. We have hits against it. But also, another lead, very closely competing in terms of scientific progress, is LG293, that is the immunology target.

And as well, coming fast on those two -- on the heels of those two programs are the obesity programs we have. LG747 is moving very fast and LG653, a program that has been listed as one of our key 14 in obesity, key 14 programs, which was not described in detail, I might add, but that is also moving very fast and is a very exciting program. So I think our metabolism, and obesity, cardiology area continues to be racing ahead, fast followed by immunology.

Now, these are scientific programs and you can't tell, always. There are always going to be twists and turns. It's a bit like watching racehorses move forward. I'm very happy to see rapid progress on multiple fronts, because you don't know which one's going to win in the end. And that brings me to the last point about . It's because you don't know, and because they're scientific programs, we have, as you know, not made predictions about filings. I think that that is not a productive sort of scientific prediction to make, research prediction. And I think we've all seen the fact that generally when companies try to make those predictions, they're usually wrong.

So what we do say is that we are extremely committed to moving very, very fast, as fast as possible, to move these programs forward towards the clinic, and we are -- as one of our main goals, dedicated to finding a lead molecule this year, in 2002, against one of our lead programs. So I know it's a long answer, but it was a four-part questions.

And this is a . I know it might be still early to think about it, but what's going to be your strategy about partnering those targets or leads, or what stage would you consider entering into discussion.

Hi, , and it's because we have so many, and you're right, I think in inferring that partnering is a key part of the strategy with so many opportunities. We enter into discussions, basically, very early. When we release -- have our press releases on the -- we receive calls, basically that -- that very day from potential partners, and we initiate discussions. Now, they have to be able to recognize the value of some of these breakthrough opportunities, and so those discussions tend to take time, because we're talking about high value discoveries.

But we initiate discussions early. I think partnership, optimally, in the drug discovery program, is when we have leads, because then you tend to command a better premium for such agreements. However, earlier phase agreements can be done. They tend to be a little bit more difficult to gain a consensus as to what is the value of an earlier phase when you don't have the lead yet. So that's why, of course, it's one of our main goals for this year to get to that lead phase. But we will be partnering, through time and in the future, the majority of these programs. And we will, as we evolve, be trying to preserve perhaps some of these programs, 100 percent for Lexicon.

That was a Texas thunderstorm lightning bolt that occurred -- landed close to where I'm sitting, but we're fine. But at any rate, we are -- that's the partnering strategy, that's the approach. The majority will be partnered, preferably first at lead. As we evolve our company and our clinical capabilities, I'd like to see later and later stage partnerships that are more value loaded towards the back end.

OK, thanks a lot.

Thank you.

Thanks, and .

We'll move on to a question from at and Company.

Hi, I actually had a follow up on question. First of all, with regard to Incyte, can you give us some sense of how many of the 150 genes have at this point been, you know, moved into any kind of either knockout analysis or overexpression analysis? And with regard to Abgenix, a similar sort of question. I mean, can you quantify how many antigens have been submitted and how many antibodies have been generated?

Yes, thank you, . What I can say for the Incyte agreement is, we've revealed is 150 over three years. I think we should consider the rate to be essentially spread evenly over that time period. So, from initiation of the program, of course it takes some time to generate these. We generally forecast approximately 12 months from initiation of any one gene to starting to see the knockouts and then the in vivo results from 12 months to 18 months. So once you establish the pipeline, though, this becomes a very rapid process where these genes are rolling off the pipeline and things start to move very fast. But -- that's how I can give you some guidance of the rate and the distribution of those projects.

On the Abgenix agreement, we have not provided disclosure as to the actual numbers and mechanisms through time. That is a 50-50 alliance where both parties bear the -- their own costs and make judgments about the numbers of programs that are to be supported under that. Now, initially, we did reveal that 13 had gone into the program. And we did also disclose the individual LG914, which is the target that I spoke of earlier.

OK, thank you.

Thanks.

Now just a reminder to press star, one with any questions.

And we'll hear now from at .

Hi guys. Thanks for taking my call.

Hello, .

Hi. Most of my questions have been answered. So I'll just say congratulations and let the next person take...

Well we appreciate that, . Thank you.

And, once again, if you have any questions, please signal us now by pressing star, one.

There is a follow-up question from Franklin Berger at J.P. Morgan.

Maybe you could just quickly go over developments of Lexicon Pharmaceuticals over the last six months of 2002 and where you might be with some of the outside programs you had before.

Yes, Franklin. The first part of your question, development of Lexicon Pharmaceuticals, as you know, just to review, that division is headed up by , who is a senior vice president of Lexicon Pharmaceuticals. He was formerly the CEO of , the company that we acquired. And before that, head of research for in the United States.

So he continues to head that team and build that team quite effectively. As we announced earlier, the buildup of the operations there has gone very well with the recruitment of Senior Level Director, from , which we announced earlier - much earlier. And a number of senior level and medicinal chemists have now continued to join.

We continue to reap the benefits of having that division in the New Jersey area in that we are able to recruit from - at a very experienced talent pool in that area. And we're seeing that as a big advantage in that very difficult area to find great medicinal chemists. But we're getting them.

We're up to approximately I believe 75 employees. We are on track for establishing the number of medicinal chemistry teams that we wanted in place.

Now to get to the second part of your question, how previous operations are different and what is moving forward there. The industrialized approach that they had before, as you know, was targeted towards making truly novel highly pure medicinal libraries. So that operation has continued.

In fact, we've generated some very interesting novel libraries in the past year. Although libraries continue to be of interest by potential partners, and I would not rule out under the right circumstances allowing certain sales of fractions of those libraries to potential partners as , but we have engineered the industrialized approach to to focus more on our targets. In fact, we're 100 percent focused on our targets today, which is extremely exciting and really brings our big guns in line with being able to create large numbers of optimized leads rapidly. And that requires this industrial approach that, again, we're extremely pleased with.

Thanks.

Thanks.

At this time, there are no further questions in the roster. So I'll turn things back over to you for any additional or closing remarks.

Well I'd like to thank you, everyone, for participating on this call today. That concludes our update for the quarter. And we look forward to talking with you in the future.

Goodbye.