Lexicon Pharmaceuticals Inc (LXRX) 2002 Q3 法說會逐字稿

Thank you for holding and welcome to the Lexicon Genetics third quarter 2002 conference call. At this time all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon's request. At this time I would like to introduce your host or today's call, Phil Caudill (ph), Vice President of corporate communications. Please go ahead, sir.

Phil Caudill (ph): Good afternoon and welcome to the Lexicon Genetics third quarter 2002 conference call. I'm Phil Caudill (ph), Vice President of corporate communications 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 each of you have seen a copy of our earnings press release that was distributed this afternoon. During this call we'll review the information provided in the release, then use the remainder of our time to answer your questions. The agenda for the call will begin with Dr. Sands who will discuss our key scientific and business development accomplishments during the third quarter. Ms. Gregory will then review our financial results for the third quarter and discuss our financial guidance for the fourth quarter and full year of 2002. Dr. Sands will then open the call to your questions.

Before I turn 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 express written consent of Lexicon Genetics is strictly prohibited.

During the call we'll be making forward-looking statements, including the 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, our dependence upon strategic alliances as we are developing commercialized products and services based on our work, difficulty or delays in obtaining regulatory approvals 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 list and a description of the risks and uncertainties that we face, please see the reports we filed with the Securities and Exchange Commission.

I'd now like to turn the call over to Dr. Sands.

Thank you, Phil (ph), and good afternoon, everyone. On behalf of Lexicon Genetics I am very pleased with our strong performance through the first nine months of fiscal year 2002. I'd like to start the call by reviewing the key events of the third quarter, which demonstrate momentum in our drug discovery programs and business development strategy.

We announced the discovery of a new NV (ph) validated drug target in the quarter. LG 653 is the new target for the development of potential treatment for obesity. The target was uncovered through our industrial gene knock out program which in which mites (ph) lacking specific genes are associated with desired medical profiles. In order to advance any target into the Lexicon's discovery program the target must meet three criteria. Number one, it must achieve a favorable therapeutic medical program in the mammalian physiology. Number two, it must work via a novel mechanism of actions that is druggable meaning it can be modulated by a small molecule, antibody or therapeutic protein to achieve a desired medical effect. And number three it must address large medical markets.

LG 653 represents one of 14 targets for which Lexicon has initiated drug discovery programs and one of three targets in our obesity and metabolism program. Our drug discovery programs have all been established within the last year and cover five major disease groups: Heart disease, diabetes and obesity, autoimmune disease and inflammation, central nervous system disorders and cancer. We continue to make excellent progress in our program, having identified hits (ph) from our high throughput screens. We are now working for lead compounds in our most advanced programs.

Also in the third quarter we announced the issuance of a new U.S. patent broadening our patent estate in the field of gene trapping now covered by six issued U.S. patents. We also announced the recent issuance of U.S. patents covering two full length sequences of potential drug targets identified in our gene discovery programs. These two patents mark the beginning of what we anticipate to be a continuous flow of patents we expect to receive from Lexicon’s portfolio of applications covering more than 300 full-length human gene sequences. We are also actively pursuing patent coverage for all of Lexicon's drug discovery programs.

In summary, we're pleased to see the continued expansion of our collaborative research operations in the third quarter reflecting the growing demand for our drug discovery capabilities. We believe the combination of our patented technologies, our world-class discovery team and our financial position represent significant competitive strength. Now I'd like to turn the call over to Julia Gregory, our Chief Financial Officer, to review our third quarter financial results and update you on our guidance for the remainder of 2002.

Thank you, Arthur. We ended the third quarter of 2002 in sound financial condition, with continued growth in our collaborations. I'd like to review the third quarter with you and discuss our guidance for the remainder of 2002.

Lexicon's total revenues decreased 41 percent to 8 million in the three months ended September 30, 2002 from 13-and-a-half million in the corresponding period in 2001. However, for the nine months ended September 30, 2002, revenues increased 24 percent to 25.1 million from 20.3 million in the corresponding period of 2001. Revenues for the 2002 third quarter included subscription and license fees of 3.3 million, consisting primarily of access fees from the Lexicon -- from the company's LexVision collaboration and technology license fees from sublicenses of the company's gene targeting technology. And collaborative research revenues of 4.6 million consisting primarily of revenues from Lexicon's therapeutic protein drug discovery collaboration and revenues from functional genomic collaborations with pharmaceutical and biotechnology companies.

The decrease in the third quarter revenues was primarily the result of the company's recognition of revenues in the third quarter of 2001 -- for technology license fees under sublicense agreements completed in that period and for access to chemical libraries and optimization services following the company's July 2001 acquisition of Sealacam (ph). Revenues from compound library sales and optimization services have been reduced as a result of the company's decision to use its compound libraries principally in its own drug discovery efforts, and not subject to limited exceptions to make them available for purchase. These decreases were offset in part by a 26 percent increase in revenues derived from the company's functional genomic collaboration for the development and analysis of knock out mice.

Had revenues from the renewal and expansion of the sublicense agreement announced in early October taken place in September, as we had expected, we would have been well within our guidance for the quarter. The increasing revenues for the nine months ended September 30, 2002 was primarily the result of increased subscription and license fees from the company's LexVision program and increased collaborative research revenues from the company's therapeutic protein discovery and functional genomics collaboration with pharmaceutical and biotechnology companies. Revenues have historically fluctuated from period to period and will likely fluctuate substantially in the future based upon the timing and composition of funding under existing and future collaboration and license agreements.

Our revenues from sublicenses to our gene targeting technology in particular are subject to fluctuation because revenue is recognized in the period the new agreements are signed. Research and development expenses for the three months ended September 30, 2002 increased 32 percent to 19.8 million from 15 million in the corresponding period in 2001. The increase of 4.8 million was primarily attributable to increased personnel costs to support the expansion of the company's drug discovery programs, the development and analysis of knock out mice and our other functional genomics research effort. Research and development expenses for both three-month periods included 1.3 million of stock based compensation expense, primarily relating to option grants made prior to the company's April 2000 initial public offering.

Research and development expenses for the nine months ended September 30th, 2002 increased 56 percent to 55.6 million from 35.6 million in the corresponding period in 2001. Research and development expenses for the nine months ended September 30, 2002 and 2001 included stock based compensation expense of 3.9 million and 4.1 million respectively.

With Lexicon's infrastructure in place the company currently does not foresee any material increase in personnel. General and administrative expenses for the three months ending September 30, 2002 decreased 11 percent to 5.8 million from 6.4 million for the corresponding quarter of 2001. For the nine months ended September 30, 2002, general and administrative expenses increased 13 percent to 17.7 million or 15.8 million for the corresponding period in 2001. General and administrative expenses for the three and nine months ended September 30, 2002, included stock base compensation expense of 1.3 million and 3.8 million respectively, compared to 1.3 million and 4 million respectively for the corresponding periods in 2001.

Net loss in the three months ended September 30, 2002 was 16.8 million or 32 cents per share compared to a net loss of 6.2 million or 12 cents per share in the corresponding quarter of 2001. For the nine months ended September 30, 2002 net loss was 45.8 million or 88 cents per share compared to a net loss of 24.2 million or 49 cents per share in the corresponding period in 2001. Excluding non-cash stock based compensation expenses, net loss for the three and nine months ended September 30, 2002 were 14.2 million and 38.1 million respectively, or 27 cents and 73 cents per share. Compared to a net loss of 3.6 million and 16.1 million or 7 cents and 32 cents per share for the corresponding period in 2001. As of September 30, 2002 Lexicon had approximately 119.6 million in cash and investments compared to 135.1 million as of June 30, 2002 and 166.8 million as of December 31, 2001.

Now let me turn to our guidance for the remainder of 2002. Our revenue guidance for the fourth quarter of 2002 is to expect revenues roughly in line with those in the third quarter. Revenues should range from 7 and a half to eight and a half million. This range is based on our current contracts and should result in revenues of 32 and a half to 33 and a half million for the full year. I am not including any revenues in the fourth quarter from new collaborations that we are negotiating at the present time. As I have said on previous calls, we have a very active business development effort. We continue to hold many business development meetings and due diligence sessions at our headquarters here in Texas. I am confident we will conclude these negotiations in a positive way for all parties, yet given the general economic environments, the timing of their conclusion is not predictable.

Operating expenses for the fourth quarter are projected to be approximately 25 and a half to 26 and a half million, including non-cash stock based compensation expenses of 2.6 million. For the year-ending December 31st, total operating expenses are expected to be approximately 98.5 to 99.5 million, including non-cash, stock based compensation expense of 10.3 million. We are projecting our net loss for the fourth quarter to range from 34 cents to 35 cents per share, excluding stock based compensation that figure is expected to be from 29 cents to 30 cents per share. For the full year-ending December 31, we are projecting a net loss of $1.22 to $1.23 per share or $1.02 to $1.03 per share excluding stock based compensation.

We expect to end 2002 with cash and investments between 103 and 105 million, including restricted cash of 57 million. We expect unrestricted cash and investments, together with projected revenue will be sufficient to take at us at least through the end of 2003.

Overall, while revenues for 2002, for which we have clear visibility, will be less than had been expected, I am pleased that our drug discovery and functional genomics business will have replaced all revenues generated by compound library sales by the end of this year. The completion of our genome pharmaceutical discovery center ends our capital expansion program in Texas and enables us to move forward with our plan to discover 5,000 genes for our important therapeutic program. With that infrastructure in place, I believe we are poised to capitalize on the progress we have made and continue to make in our drug discovery program. Now I'd like to return the call to Arthur to take your questions.

Thanks, Julia. Lexicon has arrived at the end of the third quarter 2002 in a very solid position. Our progress on all fronts continues to strengthen our company. Our integrated technology platform enables us to move rapidly from invivo (ph) target discovery to medically relevant drug discovery program. We built a powerful drug discovery organization and attracted chemists from our major -- from major pharmaceutical and academic institutions worldwide. We have achieved revenue growth of 24 percent for the nine months and our cash position remains strong at 119.6 million. In summary I'm very pleased with the progress made by our company through the first three quarters of this year. We expect continued strong performance for the balance of the year and the future. Thank you very much. Now we would be very happy to take your questions.

Thank you very much, sir. At this time if you would like to ask a question, please press star, one on your telephone keypad. And once again, that's star, one to ask a question. And our first question comes from David Lipsky (ph) with Morgan Stanley.

David Lipsky (ph): Good afternoon.

Hello, David (ph).

David Lipsky (ph): How are you? Question, can you give us an update on the number of programs currently in level 2 and level 3 as well as screening and of I guess the five candidates, you know, furthest along in screening, you know, an update on progress this quarter towards the small molecule candidate identification goals?

All right. Certainly, we can, David (ph). Our number of level 3 programs remains at 14 programs as we have listed them previously. We continue to make progress in screening. and as that screening progress is made, and after development, we choose to disclose the medical indication of those programs, as you've seen in this past quarter with LD 653 because it's a march forward in that progress is being a very productive program in screening for which we already have hits, and that is the obesity program.

So, now, probably your question was getting to the level 2 program. We have not disclosed the numbers of level 2 programs that we have. However, we stand by the fact that we harvest about two to 3 percent of all of our programs as level three programs. Some of those, what that means is some jump directly from a level 1 hit to level 3, which is a very encouraging and exciting occurrence. Others go through the level 2 phase where we do more in-depth biology before they are selected and truly level 3 program. Nonetheless, however they get there, all go through the thorough scientific analysis program and again we arrive at a number of 2 to 3 percent that becomes very exciting level 3 programs for drug screening. Now, will we act on all of those ourselves? That's been an ongoing question. Clearly, Lexicon's resources will have to focus on really the very top tier of those, and we have multiple ways to partner with the other programs that may include target based partnerships as well.

So, now, to get to the specific programs and where they stand, LG 293, which is one of our lead immunology programs which we discussed before, continues to be I'd say at the front in terms of making that hit to lead transition where we actually will have -- be looking for a molecule that when we go back into the animal, creates the anti-inflammatory immune suppression effect on physiology. There we are looking for the discovery of a compound that would block inflammation for other immune disease and potentially be potent enough to be used for organ transplant rejections. So that program continues to be, I'd say, one of our top lead programs. That is followed very quickly by our obesity programs in which we have three targets moving. We featured 653 this quarter. These are progressing very rapidly as well, and I think are very, very promising of course addressing a very large market and we're looking for a compound there that is safe and effective that will block the obesity phenotype. That's a very exciting program.

I think LG 914 in cardiology is a advanced program that attacks atherosclerosis; that’s both an antibody program with Abgenix, but also a small molecule development program. Of course the antibody aspects are very important because of the speed at which antibodies can move forward and the safety profile, one of them which is now very well established. So our partnership with Abgenix is important in that regard. And that's also one of the very I'd say leading programs.

So those right now appear to be the ones that are at the fore in terms of level 3 programs. The productivity and the discovery power we've seen all year continues to march forward with the genome 5,000 program so we're very encouraged about that, and the technology base, again, give us the ability to transition into drug discovery rather naturally, and that's a very big advantage in the field.

David Lipsky (ph): And, Arthur, the number of level three emerge very rapidly over the last year. With your current resources, is there kind of a steady state number of programs you'd like to have over the next year or two at any one time?

Yes, there is. And I think that number is in the 12 to 14 or 15 range. That corresponds nicely with the number of screens that we're able to probably run during the course of the year in our high throughput screening department. I think programs on top of that that will occur give Lexicon additional latitude and partnership. Because we know we'll find more candidate level 3 programs, but we're not going to be able to fit them through our current, you know, our bottleneck is now at screening and chemistry. So we can monetize. We can partner those in a variety of ways and that's what we have as our business model.

So I think that that's steady state level between 12 and 16 right now we're at 14, will be what we'll maintain. It's very important to maintain focus as you know in a drug discovery company. And I like the areas of inflammation, obesity and cardiology, I think those are very important areas for us and our system has been scoring very well there. I didn't talk about our neuroprograms, but those programs, I think are also very exciting because this system allows us to find the key switches in the brain. Of course you need to be able to operate with the milinium (ph) nervous central system intact to be able to find those new targets for depression and cognition. That area I would see primarily for partnership because I think there are additional difficulties --- in moving forward those kinds of drugs through the clinic.

David Lipsky (ph): And just a final question, where are you at as far as your current utilization of Sealacam (ph) resources and would you reconsider engaging in customs library deals or give your thoughts there?

Yeah. We have now fully integrated the Sealacam (ph) process into our medicinal chemistry process now. It really is an industrialized medcam (ph) process focused on our level 3 program. We've had interest and we've had people that would like to access our chemistry libraries. I wouldn't rule it out under the right conditions. If it expands our drug discovery capabilities in terms of partnership, I would see that as a potential type of agreement. But really, the emphasis is on getting to those breakthrough therapeutics very quickly and not be focusing ours chemists from that mingle.

David Lipsky (ph): Okay. Thank you.

Thank you, David (ph).

And our next question comes from Matthew Geller with CIBC World Markets.

Can you talk about your partnership strategy right now? What kind of partnerships are you looking for single compound multiple compound, what kind of disease area and your strategy going forward in terms of proprietary versus partnerships?

Yes. So the partnership strategy that we see with really tremendous traction in our negotiations right now focus on disease areas, specific disease areas with partners who have a vested interest and demonstrated ability to develop compounds in those disease areas and to market those compounds effectively. So that kind of focus allows us to approach partners with the capability to say to cherry pick over the 5,000 genes diabetes and obesity, or for neuropsychiatric or other CNS disorders. And so forth and so on through each of the major human disease categories. That is really where I think the future partnership for 2003 will lie in these disease focus areas.

Now, they will likely contemplate multiple compounds being developed against multiple targets in each of those. I think that's a very important aspect of this because as we all know, you need to have more than one opportunity, you need to in fact have a discovery pipeline that's robust to achieve success in the end. Now, also, though, targets within those disease categories that are not acted on by the partner would revert to Lexicon under a prescribed arrangement. That will give us maximum flexibility to develop our own programs, but also to leverage our abilities with our partner to move programs forward rapidly. That's really where the future is. It's in harvesting these breakthroughs in disease categories and moving them forward into compounds, discovery rapidly as well. I think we've seen some examples of this most recently with Exilexis’ (ph) recent announcement with GlaxoSmithKline, although covering -- that covering perhaps multiple disease categories. But where you take compounds quite a way forward with the partner.

Great. Thanks a lot, Arthur.

And Derrick Debruin (ph) with UBS Warburg has our next question.

Derrick Debruin (ph): Hi, a couple questions. I know you said you had committed cash about 32 million. Is that about the same run rate we can assume in 2003? For the cash back (ph)?

Derek (ph), are you talking about committed revenues?

Derrick Debruin (ph): Right, committed cash revenue.

Well, we really haven't given our guidance for 2003 at this point, and let me just reiterate that our business development efforts right now are extremely busy. And while I feel uncomfortable guaranteeing a number for the fourth quarter, I think we will have a pretty good 2003. So while we haven't put our guidance together yet for 2003, we will make that available in the earliest part of January.

Derrick Debruin (ph): Okay. And you said you had your infrastructure set up and that you wouldn't be expecting a big R&D ramp. So, assuming modest growth up for what we see third quarter level?

For fourth quarter?

Derrick Debruin (ph): Yeah, fourth quarter -- if you're still looking at doing R and D in '03, I'm trying to get an idea…

You're looking for some '03 guidance again?

Derrick Debruin (ph): Just looking for some clarity.

I think that in terms of operating expenses for '03 --- are still I feel very comfortable with where we are on the expense level that I've guided you for fourth quarter. Perhaps you could take a look at that for 2003. But as I said, I haven't really given guidance for 2003 yet, but I don't see any significant -- any material ramp in our expenditures, operating expenditures either in terms of head count or in terms of capital expenditures for 2003 from 2002.

Derrick Debruin (ph): Okay. Thank you.

And once again, if you do have a question, please press star, one on your telephone keypad. And there appear to be no questions. Just final reminder, that is star, one if you'd like to ask a question. And there appear to be no questions at this time.

All right. Well, thank you all very much. That concludes our update for the quarter. Thank you for participating in our conference call. Goodbye.

And that does conclude our conference call. Thank you all for joining us and have a great day.