Lexicon Pharmaceuticals Inc (LXRX) 2003 Q2 法說會逐字稿

Welcome to the Lexicon Genetics second-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 this call, Julie Kim, Manager of Corporate Communications. Please go ahead ma'am.

Welcome to the Lexicon Genetics second-quarter 2003 conference call. I am Julie Kim Manager of Corporate Communications and with me today are Dr. Arthur Sand, 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 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 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 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 cooperations and alliances, the success and productivity of our drug discovery effort, our ability to obtain patent protections for our discoveries, commercial limitations imposed by patents owned or controlled by third parties, our dependence upon collaborators to develop and commercialize products and their 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 would like to now turn the call over to Dr. Sands.

Good afternoon, everyone. I would like to start the call by briefly reviewing some of the key events and developments of the second-quarter which demonstrate momentum in our drug discovery programs. We announced a discovery of a new in-vivo validated drug target in the second quarter. LG617 is a new target for learning and memory that could have applications in Alzheimer's disease and other cognitive disorders. Lexicon scientists discovered that inhibiting the LG617 protein in knock out mice resulted in statistically significant increase in performance in a test of learning and memory even as they aged. Lexicon's LG617 gene encodes a membrane protein that is expressed only in the brain. LG617 represents one of more than 20 targets for which Lexicon has initiated drug discovery programs.

We continue to make excellent progress in drug discovery. We are now in small molecule lead optimization for three of our programs, as well as developing high (indiscernible) antibodies in other programs. During the second quarter we appointed two key additions to our clinical development team, Dr. Philip Brown as Vice President of Clinical Development and Dr. William Heydorn as Vice President of Preclinical Development. Dr. Brown brings Lexicon more than a decade of experience in managing medical affairs, drug safety and clinical programs in the pharmaceutical industry. Having advanced compounds from preclinical studies into clinical development and managed programs through product commercialization and cardiovascular are disease. Dr. Heydorn brings Lexicon more than 15 years of experience in preclinical and clinical drug development, pharmaceutical operations, project management and regulatory affairs in the pharmaceutical industry. Having been responsible for filing new drug applications for candidates in depression, anxiety, Alzheimer's disease, hypertension and acute pain. These individuals along with Dr. Alan Nies, Chairman of Lexicon's medical advisory board and former head of Clinical Sciences at Merck are in position to move our drug discovery programs forward along with developments halfway.

This past June, Lexicon received Computerworld's 2003 21st Century Achievement Award in medicine for our integration of enterprise software systems with science and business processes. Lexicon was chosen by a panel of distinguished judges from more than 400 nominations submitted this year in the very important category of medicine.

In summary we have made significant progress during the second quarter. Now I would like to turn the call over to Julia Gregory, our Chief Financial Officer to review our second-quarter financial results, and our guidance for the remainder of 2003.

I assume that you have seen our earnings press release that we issued this afternoon. We ended the second quarter of 2003 in sound financial condition. I would like to summarize the second quarter with you and discuss our guidance for the remainder of 2003. Lexicon's revenues for the three months ended June 30, 2003, decreased approximately $500,000 or 5 percent to 8.9 million from 9.4 million for the corresponding period of 2002. Primarily as a result of higher revenues in the 2002 period from technology license agreements. Revenues increased 10 percent over the revenues in the first quarter of this year.

Total operating expenses increased 7 percent to 26.8 million for the three months ended June 30, 2003, as compared to 25.1 million for the corresponding period in 2002. Total operating expenses included non-cash stock based compensation expense of 2.6 million and 2.5 million in the three months ended June 30, 2003, and 2002, respectively. The increase primarily reflects the expansion of the Company's drug discovery program. Net loss for the three months ended June 30, 2003, increased to 17.6 million or 34 cents per share from a net loss of 14.9 million or 29 cents per share in the corresponding period of 2002.

Excluding non-cash, stock based compensation charges net loss for the three months ended June 30, 2003, was 15.1 million or 29 cents per share, compared to a net loss of 12.4 million or 24 cents per share for the corresponding period of 2002. The net loss of 29 cents per share excluding non-cash stock based compensation charges compares favorably to the First Call estimate of a net loss of 30 cents per share.

As a compliment to reporting net loss and net loss per common share in the course of generally accounting principles or GAAP Lexicon provides net loss and net loss per common share results excluding non-cash stock based compensation. Lexicon uses these measures in establishing budget and believes they are useful in measuring the performance of the Company's business. A reconciliation of these results to GAAP is included in the selected financial data in our press release which is available on our Website located at www.lexicon-genetics.com. We will continue to report both the GAAP and non-GAAP measures through the end of this year. We 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 facilitate the transition we will be giving forward-looking guidance as net loss and net loss per share exclusively on a GAAP basis.

As of June 30, 2003, Lexicon had approximately 95.6 million in cash and investments including restricted cash and investment compared to 107.6 million as of March 31, 2003, and 123.1 million as of December 31, 2002. Restricted cash and investments were 57.7 million on each of these days.

In July 2003 Lexicon successfully completed a 10 million share common stock offering increasing our cash and investments by $49 million. Now let me turn to our guidance for the remainder of 2003. First, I would like to begin with accounting changes we will see in the third quarter as they impact the presentation of our financial results. As you know in 2000 we elected to finance the expansion of our facilities in the woodland (ph) using a cash collateralized synthetic lease. We believe it's economic benefits to the Company and to our stockholders have been substantial, principally because of the favorable lease expense associated with its structure during a period of declining interest rates. In the current economic environment we would like to take advantage of the interest rate climate to refinance our synthetic lease into a sale leaseback structure and unrestrict a substantial amount of the cash collateral. That process is proceeding nicely.

The accounting treatments focused primarily on the impact of consolidating our synthetic lease into our financial statement. On July 1, 2003, Lexicon was required to consolidate our synthetic lease into our financial statements in accordance with FASB interpretation number 46, or FIN46. (ph) Our statement of operations for the third quarter will reflect a non-cash charge of approximately $2.3 million for depreciation through June 30, 2003, as a cumulative effect of an accounting change. This accounting impact treats the facilities as if Lexicon had consolidated the assets at the time they were purchased or construction was completed. If the synthetic lease remains in place at the end of the third quarter, or under certain refinancing structures, Lexicon's balance sheet may reflect additional property and equipment assets approximating the 55 million funded under the synthetic lease. Less accumulated depreciation and a similar amount as a liability. We will also be required to depreciate these assets over their useful lives.

Now I would like to turn to our financial expectations for the third quarter. Our revenues for the third quarter of 2003 are expected to increase from our second-quarter revenues and range from 9 to 11 million. Operating expenses for the third quarter are projected to be approximately 28 to 29 million, including non-cash stock based compensation expense of 2.5 million. We're projecting our net loss for the third quarter to range from 20 to 21 million or 34 cents to 35 cents per share based on weighted average shares outstanding of slightly under 60 million shares for the quarter.

The projected net loss includes a non-cash charge for the cumulative effect of an accounting change related to the consolidation of our synthetic lease of 2.3 million and a non-cash stock based compensation expense of 2.5 million. For the full year 2003 we continue to expect to achieve revenues of 40 to 42 million. We expect a net loss of 72 to 75 million for the full year or $1.26 to $1.31 per share based on weighted average shares outstanding of approximately 57 million shares for the year. The projected net loss includes the non-cash charge for the accumulative effect of accounting change related to the consolidation of our synthetic lease of 2.3 million and the non-cash stock based compensation expense of approximately 10 million.

Including the net proceeds from our recent common stock offering we expect to end 2003 with cash and investments of between 125 and 130 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. In summary I am pleased with our financial results for the second quarter of this year and with the success of our capital raising efforts.

Now I would like to return the call to Arthur to take your questions.

I would like to comment we have arrived at the second 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.

(CALLER INSTRUCTIONS) David Witzke with Morgan Stanley.

Arthur, first question, small molecule leads you mention there are three in optimization currently. Can you discuss any of the timing of those when you would have optimized leads identified and will begin to preclinical?

Excellent question. I think I was referring to three small molecule programs; the first LG653 which as you know is our lead program in Type II diabetes and obesity, a very exciting program whereby blocking this enzyme you can actually block the deposition of body fat and have an antidiabetic effect as well. That is clearly at the lead stage already. That is our lead program in the metabolic area. There we have two lead molecules that are already highly potent molecules and we are refining those and developing more highly potent molecules to optimize them in our preclinical research because they are in preclinical research at this stage.

The next program is LG152 in cancer which is a novel kinase which is at the hit to lead stage that we are optimizing the (indiscernible) to create highly potent leads, and this is an exciting kinase program, cancer program because by blocking it we believe you can have a block to cell growth, which is excellent for cancer, without some of the toxic side effects, because we do not see significant toxicities associated with blocking the kinase.

The third program that I focused on some in our recent financing was LG617 which is the novel program I referred to in my introduction in learning and memory. This is at the hit to lead stage; it is his out to my thing rather rapidly. I would expect both LG152 and 617 to produce optimized lead molecules before the close of 2003. Although it is difficult to predict since it is science, how fast and if they will make that time frame but judging from the current rates of progress I think it is very possible.

There is a fourth program that I would say is at the hit stage and that we are moving to find lead molecules it is LG293, this is an immune target an immunology target, very unique enzyme. It has proven to be I think a little bit more resistant to lead optimization, but continues to provide us with a tractable path forward from a medicinal chemistry standpoint. So that actually is a fourth program I would like to see get to the lead stage.

On the preclinical side, do you have additional infrastructure you need to bring in? I know you made some recent hires and I guess any comments on the personnel side would be useful.

That is a very good question because preclinical research really has two phases as you know. One is the earlier discoveries phase of it, which we are well situated here at Lexicon to handle with our current staffing. Additional guidance from our new vice president of Preclinical is going to be very, very helpful in this regard. But since we have all of the pharmacology capabilities associated with target validation to turn on the actual, to turn towards the lead compounds, we are well set up already to run our compounds through the same (indiscernible) screen and testing that we test our targets on. So that part which is a very critical first and mammal portion of preclinical research is already well-established here, the infrastructure is here and we have got what we need.

The second part and the part where Dr. Heydorn will be playing a key role is in the more external contract research side where the selective lead molecules will go out for external research and very standardized preclinical research paradigms which all small molecules would have to go through in their development as appropriate for future medical indications. That is an outsource portion, we have already anticipated that in terms of our budgetary needs and what is required. So I think we are in an excellent position to just ramp our programs up into the preclinical.

You have been very forthcoming in sharing some of the mouse knockout physiology data with the investment community, as you take these optimized leads back in and recapitulate the (indiscernible) type, will you be as forthcoming in sharing the data going forward?

Yes, we intend to be. I'm sure you are aware that will be a major scientific milestone, and it is very exciting because it is reflective of the fact that then we will have compounds that operate by the newly discovered mechanism of action they are designed to operate by and it will service as confirmation again that we have a system in place to do this repeatedly. We will be as forthcoming with that information, of course, as you know we are very careful and conservative scientists. We have to see multiple repetitions of this. We are dealing with and I think quite expert at interpreting changes in physiology. There are so many variables in the physiological processes that you want to see that happen repeatedly and you want to see it of course be something that then you can share with a broader audience. So we will be very careful but we will be very forthcoming with those results.

Thank you.

Bob Hoskins with Merrill Lynch.

I'm sorry I had to go away briefly so if you answered this question I apologize. Due to the fact that you have raised some capital recently clearly gives you more flexibility in terms of your dealings with potential partners. I am just wondering whether the timing on any partnership deals may have changed because of the additional capital, or any expectations on timing of any other partnership or licensing deals? Thank you.

No, I don't see any change in our timing. And as I made it fairly clear recently, we have several major opportunities for therapeutic area alliances. The additional capital we have raised does put us in a stronger negotiating position. In fact it could accelerate things but that may be wishful thinking because these are always slow and difficult negotiations. But we do feel very confidence that we are in a stronger position, we can form these alliances in the appropriate manner, and they will enable us in our drug discovery process. Because as you know we have five major therapeutic area categories; within those five there are actually more medical indications which could be further stratifications for alliances. It is in our best interest and Lexicon's best interest and the best interest of our shareholders to find key alliance partners that can accelerate us to the clinic because we have such a broad platform. I do not see any material change based on the capital financing, in fact, I think it is going to give us stronger leverage it is one of the rationales for bringing in additional capital at this time so that we can form the best alliance for Lexicon.

Thanks very much.

Matt Geller with CIBC World Markets.

Refining Bob's question a little bit, can you talk a little bit about what your plans are in terms of moving ahead with LG653 for obesity and diabetes? And also LG152 for cancer? On a larger scale, in terms of developing things for (indiscernible) and performing partnerships, how do you see that laying out at this point? Are their certain areas you want to do partnerships on, what kind of areas do you want to maintain internally?

Good question, thank you. Let me answer that with the second part of your question first. In terms of the areas that I see rolling out in terms of partnerships, I would say that the most advanced areas and the largest markets are clearly going to be some of the most attractive to partners and we are very active on those fronts. They include metabolism which includes diabetes and obesity, it does it is a very productive area for us in terms of discovery. We have found several very intriguing and powerful targets in this area safe and effective. The programs have moved forward in lead optimization, so the most advanced programs clearly Lexicon has the most leverage there, can get the best (indiscernible) form the best alliance.

The other major area where we are very advanced in terms of our discovery power is neuroscience and that is why I was speaking about LG617 recently. It is an area that has been very productive to the knockdown technology and finding new targets in depression, in cognition and anxiety and also in pain. Very clear, clear (indiscernible) target and a difficult area to get into unless you have all of the (indiscernible) physiology working for you, I would say that is another area that I would say is most advanced in terms of partnership discussions.

Then would come cancer, cancer is a major area as you know in biotechnology historically has been very successfully, I would say advanced with molecular biology approaches. And LG152 is the lead program there. But those would be how I would see them now, but that of course can change. I do think that the individual programs you named LG653 for obesity continues to be one of the most intriguing and powerful programs we have, and LG152 for cancer again is the lead program. But more globally it is pretty clear that the most productive business model for us going forward will be the drug discovery business model. It will be forming major exclusive alliances in these therapeutic categories that allow us to bring the power of covering the entire drugable genome via knockout technology and physiology, bring that power to bear into these partnerships and that is a very high-value proposition. I think clearly in the near future that is the attainable and key business model for Lexicon.

Thanks a lot, Arthur.

Derik De Bruin of UBS.

Can you give me, remind me how many technology licenses you have for your knockout IP and what are your expectations for your license going forward? I guess what I'm trying to find out if you saturated the market for these.

We have 12 technology sublicenses right now, and we are still in negotiations with additional parties for those licenses. We think that that will continue behind the scenes but I do not see it as a huge market going forward. We have a very targeted market, but they are very important licenses both for us obviously and the pharmaceutical partners that take those licenses.

Remind me what the average terms are on these.

They range, really we have never discussed the total revenue amount for each individual one, but they are significant numbers at this point in time, and they can be found in our subscription license category. As you know that also includes our LexVision subscription revenue. But those revenues for the three months ending June were 4.3 million. We continue to do well in that category.

Looking at LexVision now that you are competitor in the mouse knockout unit type data base has gone bankrupt what are your expectations for LexVision? And I guess also following up on that is there any impact from inside shift (ph) in its priorities?

Yes, I would say that the impact is that we can clearly pursue a greater degree of exclusivity in the drug discovery arrangements that we are working on, and I think that is an advantage. I would say that the non-exclusive business model has never been a real highly prioritizes way forward for us. It has served us well as a stepping stone through our target validation business and the LexVision model and it has helped us build relationships with large pharmaceutical companies. But Lexicon has been really very focused for quite some time on the vertical integration of our operations and our business models and is going all the way after the drugs against our novel targets. Of course we pretty well evidenced that with our buildup in the area small molecule development and our large therapeutic protein alliance with Genentech, which is exclusive in nature for 500 secretive proteins and our antibody license, so that is clearly our direction.

I think exclusivity does bring higher value and that is why we are pursuing that model. I think being the leader in the field by far and away enhances the kinds of exclusive collaborations one can form from a value standpoint clearly, so that is a big advantage. With regard to Insight, (ph) they have moved with us in the direction of drug discovery very nicely. In terms of the overall strategic priorities of the two companies they are in alignment, and that has been -- their change in that direction has been a real advantage in our relationship. I continue to see that as a very excellent relationship and I applaud their efforts and their move in that direction.

Julia, the cash usage in the quarter, the cash burn was?

I have been guiding for really the end of the year as you know.

Right.

To have cash at the end of the year to be 125 to 130. You saw where we stood on our cash position for the end of the quarter at 95.6.

Okay. Thanks a lot, guys.

(CALLER INSTRUCTIONS) Edward Tenthoff of U.S. record Piper Jaffray.

Congratulations on the quarter and also completing the recent transaction. Julia, first for you my fingers weren't fast enough -- what was the 3Q EPS guidance that you had provided?

On the EPS?

Yes, net loss.

The guidance for our net loss, let me just make sure -- 3Q net loss on a full, including is 34 to 35 cents loss.

That is great.

Including the deferred comps, including it, not excluding it.

Does that then also include the FIN 46 non-cash charge for (inaudible).

That's right. I am including that charge.

Excellent, thank you. Arthur, maybe you can update us really you had just mentioned the Genentech alliance, how are things proceeding there? What is your general sense of working with those guys?

It has been excellent working with them and we are off to a very fast start. Things are proceeding very, very well. We have essentially launched all of the programs that were originally earmarked under that approaching 500 programs, 500 of their top priority candidates secreted proteins. That is in fact the largest single launch of a knockout effort on a single gene family. So it is a very, very powerful start to this relationship. I can tell you that I anticipate productivity in that gene category to be just as high as we have seen in the small molecule target category. A gene is a gene and when it comes to knockout technology, as you know we have always been able to select really medically valuable targets at a rate of about 2 to 3 percent of every gene we look at.

If you look at 500 candidate secretive proteins you can anticipate I think, that the same productivity rate would apply 10 to 15 very interesting candidate secretive proteins will come out of that. Some of them, it might be more, but some of them probably would be when you look at the antibody potential because some can be antibody targets as well so you can approach the target several different ways. It is a very productive relationship already. The two companies I would say are of like-mind and culture. The scientific underpinnings of Genentech are of course profound and actually historical for the field. I believe the same of Lexicon in terms of our scientific underpinnings and power. So I think it is a very good relationship and I see it growing in nature, too.

Fantastic. Could you remind me they primarily focus on the protein and antibody development and then do you guys retain some rights to small molecule development on these potential targets?

Yes, we retain a non-exclusive right on small molecule developments. These are as you pointed out, primarily directed at therapeutic proteins and antibody targets primarily but some of these unique genes can be approached in different ways. Especially if they are receptors, so we wanted to keep that option open for Lexicon.

Excellent, keep it up.

Patrick (indiscernible) Peterson, he is with Med Partners.

Thanks for taking my question. A quick question on one statement you made, you said selective molecules would go to outsourcing. Can I interpret that with your overall strategic picture, that while you were sort of partner for therapeutic areas or molecules within therapeutic areas, the ones that you plan on retaining to yourself you will have clinical developments done by Quintile (ph) or something like that?

Yes, let me clarify a little bit. What I meant to say was when I was speaking of the preclinical phases that are very standard experiments and tests that those would likely be outsourced and those are, of course that is the standard practice and would be very fast for us. The initial phase of preclinical discovery we would handle internally which is I think plays to our strength in our knowledge base in physiology in the first and mammal type studies. Going forward with regard to clinical trials, we do have the capabilities to build up our own clinical trial management team here, and that is why we have been very active in recruiting and at many levels, people that have done that. But I would not rule out using contract research organizations also in clinical trial that can be a very effective way forward. And in fact the leadership we have in Lexicon has significant experience in managing such collaborations. They all have to be managed very closely, and so you want to have internally people that have number one, done it themselves directly and also then number two, managed clinical trials indirectly through contract research organizations. In fact, Dr. Philip Brown was as part of his career history included being a physician within contract research organization facilities. He is in fact knows the ins and outs of both sides of internal management and external.

With respect to your lead molecules, they have obviously gone through sort of what you just described as the outsourcing step and what I'm trying to gauge is how close are to an IND?

I will be very, very specific. Those molecules are still internal at Lexicon at the internal phase of the preclinical research. So they are proceeding -- we are proceeding into our first and mammal studies with these molecules. And it is a very exciting time and to reflect on an earlier answer to David Witzke's question, when we feel we have achieved proof of concept that is in-vivo efficacy through a first and mammal study internally, we will announce that. And at that time I would expect to be able to better forecast and chart the external preclinical activities and then the pathway to the IND.

Okay. Can you just reiterate what was your guidance with respect to timings of IND and potential partnerships?

We have at this juncture not yet forecasted IND filings and I think we have made very clear that we feel that when the time is right and we have better visibility on that, we will make those predictions. But with regard to the partnerships we have said that it is our goal and our intention to form a major therapeutic area alliance within 2003 so that would be within this fiscal year, calendar year.

We look forward to that. Having said that, it is impossible to guarantee such (inaudible) because they are long-term and we're talking about major partnerships. But I still feel very good about that goal, very good.

Thanks a lot for taking my question and congratulations on a good quarter.

It looks like there are no further questions. I am going to turn the conference back over to our speakers for any concluding or further comments.

Thank you very much for participating in our second-quarter conference call. This concludes the update and we look forward to talking to you again. Bye-bye.

That does conclude today's Lexicon Genetics program. Thank you everyone for joining us.

(CONFERENCE CALL CONCLUDED)