Lexicon Pharmaceuticals Inc (LXRX) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the Lexicon Genetics first quarter 2003 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 now like to introduce your host for today's call, Julie Kim (ph), Manager of Corporate Communications. Please go ahead, ma'am.

Good morning and welcome to the Lexicon Genetics first quarter 2003 conference call. I'm Julie Kim, Manager of Corporate Communications, and with me today are Dr. 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 morning. 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 first quarter. Ms. Gregory will then review our financial results for the first quarter and discuss our financial guidance for the second quarter and full year 2003. Dr. Sands will then open the call to your questions.

Before I turn the call over to Dr. Sands, I would like to state that 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 new collaborations and alliances, the success and productivity of our drug discovery effort, our ability to obtain patent protection for our discoveries, commercial limitations imposed by patents owned or controlled by third parties, our dependence upon collaborations to develop and commercialize products and the requirements of substantial funding to conduct our business. For a list and a description of the risks and uncertainties that we face, please see the reports 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 morning, everyone. I'd like to start the call by reviewing the key events of the first quarter, which demonstrate momentum in our drug discovery programs and business development strategy.

We announced the discovery of a new in-vivo-validated drug target in the first quarter. LG881 is a new target for the development of drugs to treat osteoporosis. In female mice, with the target knocked out, Lexicon scientists observed a substantial increase in bone mineral density within the vertebral spinal column and in the femur bone of the leg, both of which are among the locations osteoporosis sufferers are most likely to experience fractures. LG881 represents one of more than 15 targets for which Lexicon has initiated drug discovery programs. We continue to make excellent progress in drug discovery, having identified multiple lead compound series in our most advanced programs.

In the first quarter, we announced the extension of our OmniBank Universal agreements with Boehringer Ingleheim and Johnson & Johnson, reflecting the continued demand for our core validation capabilities. In March we announced that Alan Nies (ph) joined as chairman of Lexicon's medical advisory board. In his new role, Dr. Nies will assist in the formulation and implementation of strategies for clinical development of potential products arising from Lexicon's drug discovery program. Dr. Nies brings over 40 years of clinical and pharmacological expertise to Lexicon, having most recently served as Senior Vice President, Clinical Sciences, at Merck and Company.

In addition, Phil Brown has joined Lexicon as Vice President of Clinical Development, responsible for directing clinical affairs. Dr. Brown brings Lexicon extensive experience in managing clinical programs across multiple therapeutic areas, having advanced compounds from pre-clinical studies into clinical development and managed programs from I&D through product commercialization. In fact, Dr. Brown has conducted over 200 Phase 1 studies as an investigator. These two new additions to Lexicon will accelerate our most advanced programs.

Early in the quarter, we published a key validation of our approach to drug discovery in the January 2003 issue of ”Nature Review Drug Discovery.“ In the article, we provided a retrospective evaluation of the targets of the 100 best-selling drugs of 2001, as modeled by mouse knock-out physiology. The article concluded that in 85% of cases there is a direct correlation between the knock-out model and the therapeutic effect of the drug.

I would like now to give you a quick update on the status of our drug discovery alliance with Genentech (ph). The industrialized nature of our operations should allow us to initiate almost all of the 500 projects under this collaboration by the end of the second quarter of 2003. As we discover the medical utility of the potential therapeutic proteins and antibody targets that are the focus of this alliance, selected programs will move forward into drug development. We receive performance-based payments during the initial phases of the collaboration, pre-commercialization milestone payments as drug candidates are identified and advanced, and royalties on products that reach the market.

In summary, we have made significant progress on both business and scientific fronts during the first quarter. Now I'd like to turn the call over to Julia Gregory, our Chief Financial Officer, to review our first quarter financial results and our guidance for the remainder of 2003.

Thank you, Arthur. We ended the first quarter of 2003 in sound financial condition. I'd like to review the first quarter with you and discuss our guidance for the remainder of 2003.

Lexicon's revenues for the three months ended March 31, 2003, increased 6% to $8.1m from $7.7m for the corresponding period of 2002. Revenues for the three months ended March 31, 2003, included subscription licenses of $3.1m consisting primarily of access fees from the company's LexVision collaboration and technology license fees from sub-licenses of the company's gene-targeting technology. In addition, revenues included $5m from collaborative research consisting primarily of revenues from Lexicon's therapeutic protein collaboration and revenues from functional genomics collaborations with pharmaceutical and biotechnology companies.

Research and development expenses for the three months ended March 31, 2003, increased 18% to $19.8m from $16.9m for the corresponding period of 2002. The increase primarily reflects the completion of the scale-ups of Lexicon's gene knock-out and functional analysis programs, and continued expansion of the company's drug discovery programs and medicinal chemistry operations. With Lexicon's infrastructure in place, the company does not see any material expansion in personnel required for the near term. Research and development expenses for the three months ended March 31, 2003, and 2002 each included $1.3m of non-cash, stock-based compensation expense primarily relating to option grants made prior to the company's April 2000 initial public offering.

General and administrative expenses for the three months ended March 31, 2003 decreased 3% to $5.8m from $6m for the corresponding period of 2002. General and administrative expenses for the three months ended March 31, 2003 and 2002 each included $1.3m of non-cash, stock-based compensation expense. Net interest and other income decreased to $0.4m for the three months ended March 31, 2003 from $1.1m in the corresponding period of 2002 due to lower average cash and investment balances, lower average interest rates and the accrual of interest expense under our December 2002 loan from Genentech.

Net loss for the three months ended March 31, 2003, increased to $17.1m or 33 cents per share from a net loss of $14.1m or 27 cents per share in the corresponding period of 2002. Excluding non-cash, stock-based compensation charges, net loss for the three months ended March 31, 2003, was $14.6m or 28 cents per share as compared to a net loss of $11.5m or 22 cents per share for the corresponding period of 2002.

As a complement to reporting net loss and net loss per common share, in accordance with generally accepted accounting principles or GAAP, Lexicon provides net loss and net loss per common share results excluding non-cash, stock-based compensation. Lexicon uses these results in establishing budgets and believes it is useful in measuring the performance of the company's business. A reconciliation of these results to GAAP is included in the selected financial data set forth in our press release, which is available on our web site, located at www.lexicon-genetics.com.

We will continue to report both the GAAP and non-GAAP measures through the end of the year, but plan to report only the GAAP measures beginning in 2004 as we complete the amortization of the stock-based compensation resulting from options granted before our April 2000 IPO. We will also continue, for the remainder of the year, to provide information about the amount of stock-based compensation included in our forward-looking expense numbers. However, to aid in the transition, we will be giving forward-looking guidance as to net loss and net loss per share exclusively on a GAAP basis.

As of March 31, 2003, Lexicon had approximately $107.6m in cash and investments, including restricted cash and investments, compared to $123.1m as of December 31, 2002. Restricted cash and investments were $57.7m on both such dates.

Now let me turn to our guidance for the remainder of 2003. Our revenue guidance for the second quarter of 2003 is expected to be in line with revenues in the first quarter. Revenues should range from $8m to $9m. Operating expenses for the second quarter are projected to be approximately $27.5m to $28.5m, including non-cash, stock-based compensation expense of $2.6m, which translates to approximately 5 cents per share.

We are projecting our net loss for the second quarter to range from 37 cents to 38 cents per share. We confirm our original guidance for 2003 and continue to expect to achieve revenues of $40m to $42m and a net loss of $1.42 to $1.47 for the full year. The net loss includes approximately $10m in non-cash, stock-based compensation expenses, which translates to approximately 20 cents per share.

We expect to end 2003 with cash and investments of approximately $80m. We have typically enjoyed the successful conclusion of our new business efforts in the second half of the year. While we cannot guarantee signing new collaborations, our business development efforts continue to be strong.

As I indicated on our last conference call, we are currently reviewing various proposals to unwind our synthetic lease to free some of the cash and investments that are restricted under that facility. Among the possibilities we may consider are financing the purchase of the buildings and land with a mortgage or entering into a sale/lease-back arrangement.

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. In summary, I am pleased with our financial results for the first quarter of this year. Now I'd like to return the call to Arthur to take your questions.

Thanks, Julia. Lexicon has arrived at the end of the first quarter 2003 in a strong position. Our progress on all fronts continues to demonstrate our leadership in drug discovery. Thank you very much and now we are happy to take your questions.

Thank you, Dr. Sands. Today's question-and-answer session will be conducted electronically. At this time, if you would like to ask a question, please press the star key followed by the digit one on your touchtone telephone. If you're using a speaker phone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment. Once again, if you would like to ask a question at this time, please press star-one. We'll go first to David Witzke with Morgan Stanley.

Well, actually, it is Han Li. I'm filling in for David Witzke, who is at our health care conference. I just have a quick question for Dr. Sands. Can you give us an update on your lead compounds, LG293 and LG653?

Yes. Thank you, Han Li. The question is, could I give an update on our lead drug discovery programs, LG653, which is in diabetes and obesity, and LG293, this is in inflammation and immunology.

That's correct.

And those are two programs out of our top 15 drug discovery programs.

So, yes, LG653 -- we have highly-potent lead molecules that block that enzyme now. These are what we consider two separate chemotypes, which as you know is very important to have two types of compounds that can achieve the same results, that is, blocking the enzyme, to take them forward into pre-clinical research. So that program has gone extremely well through the industrialized med-chem phases where we work to optimize those and they are highly potent lead molecules in the single-digit nanomolar range, which I think very impressive speed at which we've achieved this rate of inhibition. So that's LG653.

LG293 is moving forward as rapidly as well in that we have now lead series in that enzyme class, as well, again looking for an inhibitor. And, as you recall, that program, blocking that enzyme blocks the inflammatory response at many levels but specifically has the capability of blocking deployment of lymphocytes from the spleen and thymus into the periphery, which is a new mechanism of intervention and also one for which there are very rapid biomarker readouts. So those two programs are at the lead phases. That is, we have molecules that are highly active at blocking the biochemical action of the target enzymes and we look forward to moving those forward into pre-clinical work this year.

OK, what about the other one, LG152 for solid tumor?

Well, LG152 also -- I'm glad you brought that up -- is actually moving very well forward. This is a kinase (ph) and we've achieved highly potent inhibitors of the kinase in the 20 nanomolar range, some of them, but we have five separate chemotype series that are all offering excellent avenues for lead optimization there. So that has been a very successful screen. We've screened over 180,000 compounds and we have over 200 hits and then these five hit series that are in the potency range for optimization. That's a very important program. It's going very rapidly at the chemistry level. To remind everyone, this is a novel kinase that, when blocked, blunts the ability of cells to proliferate. However, we still get whole animals who are otherwise rather healthy. So we can create a proliferation defect without the toxicity, the mechanism-based toxicity, of traditional chemotherapies.

Also recently, I might add, we've found new data on this program that pertains to its expression pattern in human tumor cell lines and it's expressed in a wide variety of human tumor cell lines, which include breast cancer cell lines, ovarian cancer lines, colon cancer cell lines and others, including prostate. So we're very intrigued by this program. Of course, we also know that when you over-express this particular kinase, in fact, in mouse models you can form a tumor. You can drive tumor genesis.

So this program is going forward very rapidly and I have to say we're very pleased with the rate of progress on the chemistry front, which is, I think, a reflection of the power of the underlying chemistry technology, as well as the leadership that we have at our medicinal chemistry division outside of Princeton.

Thank you.

Thanks.

We'll take our next question from Derik DeBruin with UBS Warburg.

Hi. Good morning. A couple of questions. So just looking -- you've got 15 programs now that are ongoing and I'm just wondering about some of the partnering potentials, particularly in light of the fact that other companies in the space right now are indicating that business has been pulled back, certainly outsourcing activities and there also seems to be a reluctance for some of the companies to enter new agreements for, certainly, if they do want to do it, it's less than ideal terms. Can you just give me some idea of what the strategy is, given the difficult environment that's ongoing?

Yes, sure, Derik. Thank you for your question. We are busier than we have ever been on the business development front. So I mean, we do not see what you describe, at least in our own activities. I think that's a reflection of the fact that these programs, and you're right, there are 15 programs covering all the major therapeutic areas, are an opportunity for our partners to gain a strategic advantage in each of these therapeutic areas. And that drives the interest level in the partnership discussions we're having.

Now we currently own all of those 15 programs and, in fact, there are more behind those. We disclose and discuss the top 15. So it makes perfect sense for us to consider partnership. In fact, it is a central part of our business strategy because we are covering a very wide variety of therapeutic programs and, of course, there are multiple break-throughs in each of these categories and only with the right partnerships can they be most rapidly developed. And, of course, we generate additional revenue and monetize some of these assets early under different business models.

So it makes perfect sense for us to pursue a therapeutic area alliance in 2003. We're in active discussions with potential partners on these alliances. They center on, again, the major therapeutic categories, metabolism and obesity is one of the-- clearly one of the hottest areas right now and will be in the foreseeable future in the western world in terms of medical need and potential. And we have, I think, some of the most striking programs in that area. Also, neuropsychiatric disease has been a very, very interesting area and I think we're seeing a high degree of competition for access to the Lexicon portfolio at this point.

So I see high activity levels on the business development front, which leads me to be very favorably inclined towards what 2003 will ultimately look like for Lexicon. I don't see pull-back. I see major pharmaceutical companies that want early-stage programs that can be the future for them, a whole pipeline, a strategic advantage in their chosen area of expertise. And that's what we're generating.

OK. And I guess one other question, going along with this. I mean, looking at your guidance for your cash burn for the year is -- or your end of the cash in the year is $80m and it was at $123m at the end of December, so -- and $107m this quarter, so that's $16m. So what was the -- why was the first quarter so high and why do you expect the next ones to, roughly, be I guess about $9m per quarter?

Well, first I think that as I indicated earlier in our comments that the second half of the year is typical for us to conclude some of the successful negotiations we have going on. So I feel very confident, given the negotiations we have ongoing today, that the $80m figure is actually a conservative number.

OK. Thank you.

You're welcome.

Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone telephone. We'll go next to Sharon Seiler with Punk, Ziegel and Company.

Good morning. Actually, if I could follow up on Derik's question, what do you think are the gating issues currently in actually concluding some of the negotiations that are now ongoing?

Time. There's only 24 hours in a day. I think we are, as Arthur said earlier, incredibly busy. I think those are the key issues. Arthur, you might want to comment on that, too.

Well, yes. I mean, there is a process of scientific diligence, as you can imagine, associated with any large alliance and it's a very thorough process and it involves, you know, the key scientists through the key leadership of these corporations. And so it is-- there are scheduling and time issues to make these things happen and complete the diligence process for each of the parties that are interested. And then to balance access for the parties so there's a fair evaluation had by each party and then, at the end of the day, we go with the best partner.

OK and if I--. As a follow up question, you renewed some of your OmniBank agreements this quarter. Can you comment on some of the ones that have expired about which there have not been announcements? You know, Exo-Novel [ph], or Searle now Pharmacia now Pfizer and I guess also, Wyeth, which, I believe is due to -- also expired in the first quarter?

Well, yes, Sharon. There's a number of different issues with each of these companies. Some of them are heavily involved in very significant mergers and restructurings, which do cause pause for some of their activities.

Right.

Others we're in discussion with on renewal and, in some cases, we're actually-- we're talking about moving them more into drug discovery relationships. Our future business development relationships will focus on the drug discovery areas, so it is clearly our preference to evolve those relationships rather than necessarily rush in to a renewal.

Now in the case of, if a renewal is desired by the partner and that is the way to go forward at this particular time, we entertain that because we see genetics as a growing business and that revenue base is very nice and so we're certainly not going to argue with those. We're going to continue to do them. But our preference would be to evolve them into the higher-value relationships that are more vertically integrated, taking us to compounds and, of course, much more significant downstream participation in each of the drug discovery programs. So to give you some color on that I think those are my comments.

OK. Thank you.

Thanks.

As a reminder, ladies and gentlemen, that is star-one for questions. We'll pause for just a moment to give everyone a chance to signal. We'll take a question from Charles Leavy (ph) with Smith Barney.

Yeah, I'd just like to follow up again on the cash flow and cash burn statements. It sounds like the second quarter's going to be similar to the first based on what you said. That would imply, roughly speaking, about a $12m burn in the second half. Does that sound about right?

Well, I haven't guided on the specific burn for the second half, but I would say that it's going to be somewhat similar.

Well, I just subtracted your number.

Yes, I would say it would be somewhat similar.

We've been told for, I think, the last one or two conference calls that you're considering doing something to release that restricted cash.

Right.

May I ask what's taking so long? It would seem as though something that's going to have to be done sooner or later.

Well, I don't know that -- it is a process, as you can imagine. I don't consider it long since I just started the process relatively recently in entertaining proposals. So I don't anticipate concluding the process until third quarter. And I think if I do that, that's a very timely fashion.

So third quarter's your target right now?

Third quarter is my target.

Thank you very much.

You’re welcome.

This does conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Dr. Sands.

Thank you all very much. That concludes our update for the quarter. We appreciate your participation in our call. Goodbye.

Once again, this does conclude today's Lexicon Genetics first quarter 2003 conference call. We thank you for your participation. You may now disconnect.