Lexicon Pharmaceuticals Inc (LXRX) 2002 Q4 法說會逐字稿

Good day and thank you for holding. Welcome to the Lexicon Genetics fourth-quarter and year end 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 for today's call, Julie Kim, manager of corporate communications. Please go ahead, ma'am.

Good afternoon, and welcome to the Lexicon Genetics fourth-quarter and year end 2002 conference call. I'm Julie Kim, manager 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 will review the information provided in the release, and 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 for 2002. Miss Gregory will then review our financial results and discuss our financial guidance for 2003.

Dr. Sands will then open the call to your questions.

Before I turn the call to Dr. Sands, I would like to say that 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 discovery efforts, our ability to obtain patent protections for our discovery, commercial limitations imposed by patents owned or controlled by a third party, or dependence upon strategic alliances as we're developing commercialized products and services based on our work 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 consider reports that we have filed with the Securities and Exchange Commission.

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

Thank you Julie and good afternoon everyone.

On behalf of Lexicon, I'm pleased with our strong revenue performance for 2002, and we will discuss the components of that performance later in the call. In the past year, we have achieved a number of significant milestones, demonstrating our growth as the leader in drug discovery.

We closed 2002 by adding an exciting new collaboration with Genentech, a leader in biotechnology, to discover new therapeutic proteins and antibody targets. This alliance combines Lexicon's powerful, physiology-driven approach to drug discovery, with Genentech's broad portfolio of candidate therapeutic proteins and antibody targets.

These candidates derived from Genentech's Secreted Protein Discovery Initiative or SPDI Program. Genentech's SPDI Program has involved the use of genomics to identify, isolate and characterize a large number of proprietary genes with significant therapeutic potential. Lexicon's Physiology Discovery Program, using knock-out mice will provide Genentech with an in-depth understanding of a biological role that these genes play and their therapeutic application.

We are very enthusiastic about our new relationship with Genentech. Both teams have actively begun to work to prioritize genes under this alliance. Many of these genes had already been included in our Genome 5000 Program giving us great confidence that this alliance will be rapidly productive.

We finished 2002 with a total of 14 in vivo validated drug discovery programs across five therapeutic areas. All these targets were uncovered through our industrialized gene knock-out program in which specific genes are associated with desirable medical profiles. We have discovered compounds for our most advanced programs, LG653 and LG314 for diabetes and obesity, LG914 for cardiovascular disease and LG293 for immune disorders and organ transplant rejection.

We have moved these compounds into lead optimizations under the leadership of our superb medicinal chemists at Lexicon Pharmaceuticals.

Most recently we discovered compounds in our cancer program LG152 advancing this program to medicinal chemistry. We anticipate selecting pre-clinical development candidates from among these programs this year.

2002 also marked the first full year of the Genome 5000 program, Lexicon's program to determine the physiological function of 5000 genes over five years for the discovery of new drug targets. The company finished the year with a total of 750 targets analyzed in vivo using our new genome pharmaceutical center, which opened in April 2002. We have approximately 300,000 square feet for our laboratories, offices, and state-of-the-art vivarium, which comprises approximately 100,000 square feet of the total. We believe our vivarium, which is among the largest and most sophisticated installations of its kind in the world, provides us with a significant strategic and operational advantage. With the new facility fully operational, Lexicon anticipates accelerating the rate of in vivo analysis in 2003.

Our patent estate now has 12 major sub-licensees validating the importance of physiology to the biotechnology and pharmaceutical communities. We granted an internal use sub-license to our patented gene targeting technology to Genentech. Millennium Pharmaceuticals took an additional sub-license, and Biogen renewed and expanded its sub-license to our patented gene targeting technology. In 2002, we also announced the issuance of a new U.S. patent, broadening our patent estate in the field of gene trapping, which is now covered by six issued U.S. patents. We also received issuance of U.S. patents covering nine full-length sequences of potential drug targets identified in our gene discovery programs. These nine patents mark the beginning of a pipeline of expected patent issuances from our portfolio of patent applications covering more than 300 full-length human gene sequences.

In summary, our progress on all fronts continues to strengthen our company. Our integrated technology platform enables us to move rapidly from the human genome to medically relevant drug discovery programs. We have built a powerful organization, having attracted superb chemists from major pharmaceutical and academic institutions worldwide. We believe the combination of our powerful technologies, world-class drug discovery team, and solid financial position represent significant competitive strengths.

I would now like to turn the call over to Julia Gregory, our Chief Financial Officer, to review our year-end financial results and update you on our guidance for 2003.

Thank you, Arthur.

Lexicon ended 2002 in strong financial condition while consistently executing our business plan and delivering on our milestones. Despite a challenging business environment, we successfully grew year-over-year revenues for the seventh consecutive year. I would like to review the fourth quarter and full-year performance with you and discuss our guidance for the first quarter and year of 2003.

Lexicon's revenues for the three months ended December 31, 2002 were 10.1 million compared to 10.3 million for the corresponding period in 2001. However, we experienced a 47 percent revenue increase to 10.1 million for the 2002 quarter from 6.9 million in the comparable 2001 quarter from revenue sources other than compound library sales and optimization services. Compound library sales and optimization services, which accounted for 3.4 million of revenues in the three months ended December 31, 2001, were significantly reduced by the end of 2001 as a result of our strategic decision after the acquisition of Coelacanth in 2001 to use our compound libraries principally in our own drug discovery efforts. For the year ended December 31, 2002, total revenues increased by 15 percent to 35.2 million from 30.6 million in 2001 and 35 percent if compound library sales and optimization services are excluded. The increase in revenues for the year ended December 31, 2002 was primarily the result of increased subscription fees from our LexVision collaborations and increased activity under Lexicon's drug discovery alliance and functional genomic agreements 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.

Research and development expenses for the three months ended December 31, 2002 increased eight percent to 19.2 million from 17.8 million for the corresponding period in 2001. Research and development expenses for the three months ended December 31, 2002 and 2001 included 1.3 million and 1.4 million respectively of non-cash stock-based compensation expense, primarily relating to option grants made prior to Lexicon's April, 2000, initial public offering.

For the year ended December 31, 2002, research and development expenses increased 40 percent to 74.9 million from 53.4 million in 2001. The increase primarily reflects the completion of the scale-up of the company's gene knockout and functional analysis programs, as well as a full year of our medicinal chemistry operations in New Jersey. Research and development expenses for the year ended December 31, 2002 and 2001 included non-cash stock-based compensation expense of 5.2 million and 5.5 million respectively.

General and administrative expenses for the three months ended December 31, 2002 increased eight percent to 5.5 million from 5.1 million for the corresponding period in 2001. For the year ended December 31, 2002, general and administrative expenses increased 11 percent to 23.2 million, from 20.9 million in 2001. The increase in general and administrative expenses reflect additional personnel costs offset by a reduction in legal costs as a result of the September, 2001 settlement of the company's patent infringement litigation against Deltagen.

General and administrative expenses for the three months and year ended December 31, 2002 included non-cash stock-based compensation expense of 1.3 million and 5.1 million, respectively, compared to 1.3 million and 5.2 million respectively for the corresponding periods in 2001.

Net loss for the three months ended December 31, 2002 increased to 13.9 million, or 26 cents per share, from a net loss of 11 million, or 21 cents per share, in the corresponding period of 2001. For the year ended December 31, 2002, net loss increased to 59.7 million, or $1.14 per share, compared to a net loss of 35.2 million, or 70 cents per share, in 2001.

Excluding non-cash stock-based compensation charges, net loss for the three months ended December 31, 2002 was 11.3 million, or 22 cents per share, as compared to a net loss of 8.3 million, or 16 cents per share, for the corresponding period of 2001.

I would like to note that the net loss of 22 cents per share compares favorably to the FirstCall mean estimate of a net loss of 29 cents per share. For the year ended December 31, 2002, net loss excluding non-cash stock-based compensation charges was 49.4 million, or 95 cents per share, compared to a net loss of 24.4 million, or 49 cents per share in 2001. This also compares favorably to the FirstCall mean estimate of a net loss of $1.02 per share.

We ended 2002 with cash and investments of 123.1 million as compared to 119.6 million as of September 30, 200 and 166.8 million as of December 31, 2001.

Restrictive cash and investments comprised 57.7 million of this total at December 31, 2002. In addition at the end of 2002, we reduced the covenant in our synthetic lease requiring us to maintain cash and investments in excess of restricted cash and investments to $12 million from $30 million. Consequently, our net cash burn for 2002 was 43.7 million, which was substantially under our original guidance of 50 to 55 million for the year 2002.

Given the current business environment, we focused our efforts to reduce spending without compromising quality, throughput or reducing our work force. I believe that our lower than anticipated cash burn is a true reflection of Lexicon's ability to carefully navigate through challenging business conditions.

Now let's turn to our forward-looking guidance for Lexicon's financial outlook in 2003.

I am pleased to announce that we begin 2003 with committed revenues of more than $30 million, the highest level of committed revenues going into a year than previously achieved. The estimate that our annual revenues for 2003 will be in the range of 40 to 42 million, reflecting our ongoing functional Genomics collaborations and drug discovery alliances and our anticipation of new revenues from a combination of an additional drug discovery alliance, new and renewed target validation collaborations and additional technology license agreements. These projected revenues reflect visible opportunities based on the discussions we are having at this time, with the caveat of course, that there can be no assurances that such discussions will result in collaborations this year or at all.

Total operating expenses should increase 18 to 20 percent over 2002, as we have a full year of personnel at the appropriate level to execute our business strategy. We expect to increase personnel by approximately 10 percent in 2003. Consequentially, research and development expenses for the year 2003 should be between 88 to 91 million including non-cash, stock based compensation of approximately five million, as we continue to invest in the rapid advancement of our drug program.

General and administrative expenses in 2003 should grow to 26 to 29 million, including non-cash stock based compensation of approximately five million. We expect our total non-cash stock based compensation to be approximately 10 million in 2003. It should be noted that these are non-cash charges and principally relate to stock options granted prior to our IPO.

We anticipate that interest rates will remain at relatively low levels. We estimate one million to 1.2 million of interest income in 2003.

Capital expenditures are projected to be in the range of five to seven million for 2003, as compared to 20 million spent in 2002. We estimate our capital expenditures at this lower level since we have completed our new facilities in the Woodland, Texas in 2002, as well as much of our facilities at Lexicon Pharmaceuticals in New Jersey.

We expect to have an overall net cash burn for 2003 of roughly to 45 to $50 million. We expect unrestricted cash and investments, together with projected revenues will be sufficient to take us at a minimum through the end of 2003.

Overall we are projecting our net loss per share for 2003 to range from $1.42 to $1.47 per share. Excluding stock-based compensation, our net loss per share is expected to be from $1.22 to $1.27 per share.

In addition, we are currently reviewing various opportunities to free restricted cash from our synthetic lease. Such opportunities include unwinding the lease by financing the purchase of the buildings and land with a mortgage or entering into a conventional sale/leaseback arrangement. If we do not unwind the lease, we anticipate bringing the lease onto our financial statements in the third quarter of 2003. Additional depreciation of approximately one million for the second half of 2003 is included in our 2003 guidance.

Now, let's turn to our guidance for the first quarter of 2003. Revenues for the first quarter 2003 should range from approximately eight to nine million. These revenues will include our subscriptions, our Genentech and Incyte drug discovery alliances, and continued activity from our functional genomics collaborations. Operating expenses for the first quarter are projected to range from 28 to 29 million, including deferred compensation of 2.6 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 quarter to quarter comparisons of our operating results are not a good indication of our future performance.

Overall, I am very pleased with our outstanding financial performance for the fourth quarter and the year 2002 and particularly pleased with Lexicon's ability to replace all related revenues from our 2001 acquisition of Coelacanth with 35 percent revenue growth in 2002 from our pharmaceutical and biotechnology research collaborations and licensing activities.

Thank you, and now I would like to turn the call back to Arthur.

Thank you, Julia. Lexicon has entered 2003 in a very strong position. Our progress on all fronts continues to strengthen our company and demonstrate our leadership in drug discovery. In 2003, we look forward to selecting pre-clinical development candidates, entering into new drug discovery collaborations, and advancing additional breakthrough targets into drug discovery programs. Thank you very much, and now we're happy to take your questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off so your signal may reach our equipment. Once again, that's star, one to ask a question.

And we'll take our first question from Meirav Chovav with UBS Warburg.

Hi. It's . Julia, could you go over the synthetic lease and the plans and the guidance for that I missed some of the things when I was trying to write it down. Thank you.

Well, as you know, we have a synthetic lease which covers a $55 million facility here in The Woodlands, Texas, and we elected to finance the expansion of our facility in The Woodlands using this type of financing structure. At this point in time, we are looking at different opportunities to put Lexicon, as always, in a - to maintain Lexicon - keep Lexicon in a very strong capital position. And so we are considering opportunities such as unwinding our synthetic lease, and if we do that, we have opportunities to either mortgage the facility or to explore a sale/leaseback opportunity for our facility at this time.

In any event, what we will do is put the synthetic lease on our financial statement in the third quarter of 2003, and what that will do is clearly put the assets and on our books, and the liability as well. And we will also book $1 million in depreciation expense for the second half of the year.

OK, thanks, that helps a lot. And I guess, second question, Arthur, could you discuss what your academic -- I know you have a lot of academics that you're collaborating with that are using some of the knockouts that you've developed. Can you give us an update on what you're seeing being delivered from this extra group of scientists that you essentially have working on your projects?

Yes . You're referring to our academic collaboration program. Sometimes we call it the OmniBank e-Biology program. And we have tracked now well over 150 agreements that we have formed.

Now, many of these agreements are focused in drug target families that may not normally have been prioritized by us. Some cover as well, though, the druggable gene families. What I can tell you is that the agreements are arranged such that Lexicon is allowed to of course be aware of the discoveries made by the academic institutions. And in some cases, in fact in all cases, we have a right to negotiate to a license back if their invention is made using our materials.

Now, also we pursue these targets if we so choose in parallel because these are all non-exclusive agreements that we have. And in some cases, I will say that some of these have led to very interesting drug discovery programs that we've moved forward on. So the program is performing as designed, that is, to break down some of the traditional barriers that can exist between companies and academic institutions and turn it into really a win-win for the company as well as the institution. And it is in a way like having some 150 laboratories around the world collaborating with you that, of course, we don't have to support financially. In fact, they pay us for access to the clones.

So the programs perform as designed, and in fact there have been more than one significant discovery made. I can't detail which discoveries have derived from that program, but suffice it to say that the world is a big place and you never know where the discoveries are going to come from. So we value these outside collaborators very highly, and they've led us to some very interesting genes.

Great. Thanks a lot.

Thank you, .

And once again, to our audience, that's star, one if you have a question today. Moving on, we'll take a question from Sharon Seiler with Punk, Ziegel & Company.

Hi, it's Sharon Seiler. I just had some questions first of all with respect to nominating compounds for preclinical development. When -- I mean, would this be for pre-IND work up? I mean, what exactly is your definition for that?

Yes, thank you, Sharon. It would be for pre-IND work up. These are two levels of preclinical research. One which -- we call discovery preclinical, which is the first mammal phase, when these compounds, which are addressing novel targets, never been before tested of course other than through our knockout experimentation, we move them into mammals. We test them in normal mice first, and we ask the basic question, does the compound recapitulate the phenotype.

OK.

In the case of developing antagonists, of course that's what we want to see. As we see a desirable medical outcome. The next phase, then, if we achieve compounds that are recapitulating phenotype, the appropriate response in mammals, we move into more of the regulatory phase of preclinical work up, which in large measure will be outside of Lexicon, done through rather traditional outsourcing and contract research organizations.

Of course, these are very standardized approaches which are required by the FDA.

OK, would you then expect to be able to file an IND sometime, the would that likely be in 2004?

Well, you know, Sharon we've, we have never make predictions about the timing of the filing of the IND, so what we're saying now is that we expect to select pre-clinical candidates and that we're going to move forward as quickly as possible to the regulatory steps and into the IND filing, but we have not made those timing predictions yet.

OK, thank you.

Thanks.

And we'll now take a question from Franklin Berger with JP Morgan.

Good afternoon.

Good afternoon Franklin.

Hi Franklin.

Congratulations on your great quarter there.

Thank you.

Could you recap a little bit about the history that lead up to the Genentech agreement? I know that the SPDI Program has been a little bit mysterious to investors in Genentech, and perhaps maybe just give us a little more insight as to which disease areas are involved, and finally just some insight as what the economics might be?

Yes, Franklin I can. So one of the reasons I think that the SPDI Program has been mysterious to investors is that it, of course, involves a highly confidential set of genes and some of the, what I think is some of the most interesting and potential future products in the area of therapeutic proteins and antibody targets. As we all know, Genentech is the leader in this space.

So these are highly confidential genes. It's a very significant commitment. I can only describe publicly what we've agreed with Genentech to disclose about this most interesting program.

So on the research side, it involves a large number of candidate-created proteins and antibody targets. The genesis of working together is that as Genentech really took the lead in identifying these genes early on in the whole genomics evolution. They found through mostly invitro testing that they really needed to go in vivo and they needed to see first hand the physiologic function of the genes. And I think that it was a realization to them that they needed to be at the forefront of the physiologic validation and therapeutic application of these genes rather rapidly, because of the tremendous investments they, of course, they'd already made in the genomic identification and sequencing of the genes, sequencing and in many cases, patenting of these genes.

So Genentech has a very impressive patent portfolio on this set of genes, which is very important when you consider the therapeutic protein applications and the patent applications can cover the actual ultimate product itself in this case.

So we were very attracted to Genentech as well, because of their, not only their expertise and track record and really fantastic research organization that they have, but of course, they were very smart in building up a patent portfolio around this highly valued set of genes. And really I think they were the first movers into this area.

So it was a very natural putting together of these two technology platforms to get to therapeutics rapidly.

Now on the financial, what we have disclosed is that the collaboration involves $39 million in payments to Lexicon to commence and bring work in this program over a three-year period. These payments take the form of an up-front payment, which is substantial. Also various performance-based payments, which are highly visible to us, given our knowledge base in this area and our ongoing activities on these genes, and as well, $4 million convertible loan, which is convertible at our option through the term of the collaboration at the then market price.

What was attractive, was very tangible financial results associated with this program. Then in addition to all that, we also are eligible for a milestone payment with the clinical development of these genes and therapeutic proteins and antibodies as well as royalties on the ultimate therapeutic product. So, it's going to be a very productive collaboration. And you know, you can - you can tell how these things get started really tells a lot, and it's already off to a great start.

We also were given through that collaboration - they provided to us a $4 million convertible loan in 2002. Very little of this is accounted for in 2002. Most of this will be accounted for - recognized over the three-year term of the collaboration, and the performance-based payments will be recognized when the performance objectives are achieved, which we anticipate during the three-year term.

So the 39 - so the $39 million is exclusive cash payment. It does include the $4 million convertible bond?

It includes the $4 million convertible bond.

It does not include any other performance royalties or ...

It includes the performance-based payments, but it does not include milestones or royalties.

I see. Thank you.

Thank you, Franklin.

We now have a question from David Witzke with Morgan Stanley Dean Witter.

Hello. Good afternoon.

Good afternoon.

Good afternoon, David.

Arthur, can you review your therapeutic partnership strategy, the current activity level of discussions, and discuss the type of deal you would do and, if you can, any terms that you would avoid?

Well, I'll discuss what our strategy is certainly. We are pursuing a therapeutic area alliance strategy currently which really can envelope I'd say certain therapeutic areas where Lexicon feels a partner would be very wise to have because of likely expenses that one would face in the clinic. And some therapeutic areas are certainly more difficult than others and require a lot more funding and investment, and so we're looking for partners in certain therapeutic areas.

I'm not going to describe which ones per se would be at the top of our list, but I will say that some of the most attractive to partners of course are those that are furthest along where we're approaching compounds already. So, we're very active in the area of metabolism and diabetes and obesity, which I think everyone is widely recognizing now as really one of the largest future areas of growth in medicine because of the number of diseases associated with the - both conditions.

And I'll note that recently in a review in "Time Magazine" and they were talking to , who was talking about his vision for applications of genomics going forward. He cited Type II Diabetes and Obesity as being one of the major disease areas that we have to go to the genome to find new solutions for and new targets. So I think that one is probably one of the primaries. It's a very large market. We've got some fantastic programs in there where we're finding new switches that we can push, as you know, either up or down to regulate body fat conditions. So that is probably one of the prime areas.

I think another one following that would be CNS - central nervous system neuropsychiatric diseases. We've uncovered some tremendous targets that we have disclosed in the past in the area of depression, which I think is another very large area, and other neuropsychiatric diseases that we're finding.

So, the nice thing about this - our system, David, is that the nature of it gives us therapeutic area leads in all the major human disease categories, of course, because we're - we cover all mammalian physiology with our mammalian-based approach in the knockouts. And that gives Lexicon a lot of opportunities for partnership and allows us to make the choices as to which direction we want to go based upon where we feel we need partners and what the partners are willing to offer at a particular time.

So it's a very, very busy time for us on the business development front, crossing multiple therapeutic areas.

And on the actual programs, I guess LG653 and 747, just an update on how those are progressing and on track for, you know, identifying optimized leads?

Right, so for LG653, which is an enzyme, we have found hit compound inhibitors and we are optimizing those to make them into leads. And that program is going very, very well. I'd say there's mature chemistry around this particular class of enzymes that we're working on, and we're very, very encouraged by that. So this is a very fast-moving program. And developing antagonists, of course, is a fairly straightforward exercise with enzymes, which you probably know.

Now, with 747, that's a G-protein coupled receptor, which when knocked out, results in the obese condition, and it's quite dramatic, and therefore, we want to develop an agonist that is an activator of that target, that receptor, and G-protein coupled receptors are amenable to such activation. That program is in screening already. And so we're using our compound libraries to discover hits.

So that program is not as far advanced as 653, but we have two very important opportunities there. We have a third program in that area, which is LG314, and metabolic syndrome, which includes obesity, but also very interesting effects on lowering cholesterol. All together, obesity, cholesterol, triglycerides, and that program is at the hit stage. And so our portfolio in this area has gone forward very rapidly. We're very encouraged, because these are all very clean targets. The knockout shows us virtually no on-target side-effects, which you have to have in this field of medicine.

And without the knockouts, it's very hard to get at these kinds of clean targets. It's very rare. We've gone through, as I've said, over 750 targets by gene knockouts already in the past year, and we've cherrypicked these three as being key switches in regulating this area. So we're very enthusiastic about this, and I feel they're going to continue to move forward rapidly.

Thank you.

Thanks. And once again, to our audience, that is star, one if you have a question. We do have a follow up from Ms. Seiler with Punk Ziegel.

Ah yes, I had a question with respect to the hit rate regarding targets. I mean, at this point, you've analyzed 750 genes and you have 14 versus -- you've generated 14 drug discovery programs, and that's a rate of a little less than two percent. And I guess do you feel that that's going to be the rate at which these targets will -- which you'll generate targets going forward. Do you think that's -- I mean, have you looked at the best genes first, or do you think that the situation will actually prove to be richer?

Yes. So, Sharon, those are 14 programs which we've publicly disclosed. Of course, in the early days of this program, we felt the need to let our investors know, let everyone know, the programs and see the scientific progress. So we chose selectively to disclose certain programs. Now, as we go forward, we'll probably reduce the rate of disclosure that we have, but it doesn't mean that we're not making the discoveries. However, I do think we'll continue to disclose selected targets as we think our necessary and prudent.

But to get to the rate then, I think, we're sticking by our initial assessment of two to three percent. So you're right on those that are disclosed if you do the math of where that lands us, but I think the rate of two to three percent is right and I think that the future targets that we're finding are you know, every bit as exciting as some of the first that came through the pipeline. It is a true discovery process. I will say that the hypothesis-driven approach has not been a great way to predict these targets. And that's, you know, the whole reason we do this experiment. And it is very fruitful.

So I think two to three percent is a fair assessment. And you know, the implication for the industry are significant, because if you do 5000 genes, that'll take you to 100 to 150 in vivo validated drug targets where the physiology's well described and as you're probably aware a recent review of the top 100 selling drugs in the industry, addressing only 43 targets, that's, you know, at least a doubling, if not tripling of the total number of physiologically validated drug targets that Lexicon will be pursuing, compared to the entire industry.

So I think the numbers fit. They're realistic numbers. They're very realistic. I think for some in the industry, they may be a little sobering for those that believe that there are thousands or hundreds and hundreds of drug targets, but we simply don't believe that. We don't believe that the physiologic, that holds up to physiology as the test.

So you got to know which ones to work on, and that's what we know and for those that don't know it, it's starts to get very difficult.

OK, and can you give us a sense of how many knock-outs you would expect to analyze this year?

I'd say at least 750, an additional 750. We do want, we do plan to ramp the program up through time, but we're taking a very measured approach to this, so we're really planning on an additional 750. That may be our rate, I mean, our rate, you know, fluctuates depending on the targets that are going through at the time. We have a capacity, I'd say of over 1,000, and some weeks are, and some months our rates are approaching a 1,000 a year. But I think conservatively we can forecast 750.

OK, thank you.

Thanks.

We now have a question from with CIBC World Markets.

Hi Arthur and Julie. Congratulations on the quarter. I just had a couple questions, specific questions about your targets that are in medicinal chemistry and lead optimization at this point. I believe you said the LG152 you're into or you're about to move in?

Yes, thank you for bringing that up , because I forgot to, I really probably didn't emphasize that enough. That was, it's a recent advance into and that's a very significant step program, significant step forward. That's a program in cancer where we see by knocking out the gene, a significant decrease in proliferative capacity of cells, that if cells don't divide as well. We know by over expressing this gene we can actually driver tumor of genesis in a mouth model of cancer. And very importantly, we found that this gene is in fact over expressed in a number of human tumor cell lines. Most highly in breast and colon.

So this gene has all the tickets. I might also add that when you block this gene, by knock-out technology, you actually do obtain a relatively normal mouth. That is, it appears to be a relatively non-toxic way to throw up a block to proliferation.

So you know, what you want to do in cancer is tip the scales, and at the same time of course, do it in a relatively non-toxic way. So this is very interesting, I think class of targets, which our system gives us and then to have compounds already, this is gone very fast. It's a program. So we like the for cancer. I think has shown how successful and how specific the target can be for tumor of genesis. So yes, go ahead.

Are these receptors in or receptors or or have you not said.

We have not specified . We'll focus just on the fact that it's a and which makes of course, screening rather straight forward. But, no we have not specific the subclass.

And much the other targets that are in lead optimization, I believe last year, it seemed like you were most excited about the progress of LG293 perhaps. Would you pick one that you think is leading the way in development right now?

Well in terms of leading the way, there really are, you know, it's kind of a horse race, there are three that are contending for the top spot right now.

OK.

Very exciting, LG653 in obesity, LG293 in immunology continues to move forward and I did not have time to talk about LG914 in cardiovascular disease, but that's moving very rapidly forward too in the lead optimization stages. So we've kind of three that are getting, and then 152 have come up very fast.

So I think we're going to be in very good shape.

OK, great. Thank you very much for answering my questions.

thank you.

Thanks.

And we do have a question from, actually at this time there are no further questions, I'll turn the conference back over to our speakers for any concluding or final comments.

Well thank you everyone. That concludes our update for the quarter and we thank you for participating. Good-bye.

And that does conclude today's program. Thank you everyone for joining us.