Lexicon Pharmaceuticals Inc (LXRX) 2003 Q3 法說會逐字稿

Thank you for holding. Welcome to the Lexicon Genetics third 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'd now like to introduce your host for today's call, Julie Kim, Manager of Corporate Communications. Please go ahead, ma'am.

Good afternoon. Welcome to the Lexicon Genetics third quarter 2003 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 the 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 third quarter. Ms. Gregory will then review our financial results for the third quarter and discuss our financial guidance for the fourth quarter. Dr. Sands will then open the call to your questions.

Before I turn the call over to Dr. Sands, I would like to say that 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 efforts; our ability to obtain patent protection for our discoveries; commercial limitations imposed by patents owned or controlled by third parties; our dependence upon collaborators 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 we face, please see the reports we've filed with the Securities and Exchange Commission. I would now like to turn the call over to Dr. Sands.

Thank you, Julie, and good afternoon everyone. I would like to start the call by reviewing some of the key events and developments of the third quarter which demonstrate Lexicon's progress. We announced the completion of one quarter of Lexicon's Genome 5000 Program; that is 25 percent of the program for the discovery of new drug targets from the human genome. The initial analysis of the physiologic functions of more than 1250 gene knockouts has yielded more than 20 drug discovery programs for Lexicon in major areas of medical needs, including Alzheimer's disease, diabetes, obesity, cancer, inflammation and heart disease.

This achievement represents a significant milestone in our program to discover the medical applications of the largest number of new pharmaceutical targets from the human genome. We expect to complete the analysis of the remaining druggable genes within the next four years. The harvest from the first 25 percent of genes we have analyzed has been rich and these targets are moving forward in our drug discovery process, which has already yielded several lead series and key programs. During the third quarter, we completed a successful public offering of approximately 10.2 million shares of common stock at $5.25 per share. Net proceeds from the offering were just over $50 million, reinforcing our strong financial position and our ability to negotiate strategic alliances with pharmaceutical partners.

In summary, we have made significant strides during what was a very strong and busy quarter. Now I'd like to turn over the call to Julia Gregory to review our third quarter financial results and our guidance for the remainder of 2003.

Thank you, Arthur. We ended the third quarter of 2003 in strong financial position. I would like to summarize the third quarter with you and discuss our guidance for the fourth quarter.

Lexicon's revenues for the three months ended September 30, 2003 increased 51 percent to 12.1 million from 8 million for the corresponding period of 2002. The increase was attributed primarily to a technology license fee from a sublicense granted during the quarter. The 12.1 million in revenues for the quarter represents the second-highest quarterly revenue total in our corporate history. Total operating expenses increased 6 percent to 27 million for the three months ended September 30, 2003, as compared to 25.5 million for the corresponding period in 2002. Total operating expenses included non-cash stock-based compensation expense of 2.5 million and 2.6 million in the three months ended September 30, 2003 and 2002, respectively. The increase was attributed entirely to research and development, reflecting the expansion of the Company's drug discovery programs. General and administrative expenses were flat period over period. We continue to closely monitor our operating expenses throughout the Company and are pleased with the less than 1 percent increase in operating expenses over the second quarter of 2003.

Net loss for the three months ended September 30, 2003 narrowed to 14.6 million, or 24 cents per share from a net loss of 16.8 million, or 32 cents per share in the corresponding period of 2002. Excluding non-cash stock-based compensation charges, net loss for the three months ended September 30, 2003 was 12 million, or a 20 cents per share compared to a net loss of 14.2 million, or 27 cents per share for the corresponding period in 2002. The net loss of 20 cents per share, excluding on cash and stock-base compensation charges, was a 6-cent improvement over the First Call average estimate of 26 cents per share.

As a complement to reporting loss and net loss per common share and in accordance with generally accepted a caring principles, Lexicon provides net loss and net loss per common share results excluding non-cash stock-based compensation. A reconciliation of these to GAAP is included in the selected financial data set forth 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 the year. We plan to report only the GAAP measures beginning in 2004 as we will have completed 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 to the net loss in net loss per share exclusively on a GAAP basis.

As of September 30, 2003, Lexicon had approximately 133.6 million in cash and investments, including restricted cash and investments compared to 95.6 million as of June 30, 2003, and 122.3 million as of December 31, 2002. Restricted cash and investments were 57.5 million on September 30, 2003, and 57.7 million on both June 30, 2003 and September 31, 2002.

Now let me turn to our guidance for the fourth quarter. First, I would like to begin with the accounting changes we will likely see in the fourth quarter as they impact the presentation of our financial results. FASB interpretation number 46, or FIN-46, is the accounting change that I previously discussed on our second quarter conference call this year. The accounting change relates to our synthetic lease which we used to finance the expansion of our facilities in The Woodlands, Texas. FIN-46 was originally scheduled to become effective in the third quarter, but the FASB recently chose to delay its effective date to December 31, 2003. Under FIN-46, Lexicon will be required to consolidate our synthetic lease into our financial statements if it remains in place at the end of the fourth quarter. In that event, our statement of operations for the fourth quarter will reflect a non-cash charge of approximately 3.1 million for depreciation through December 31, 2003 as a cumulative effect of an accounting change and our balance sheet will reflect additional property and equipment approximated at 54.8 million funded under the synthetic lease, less accumulated depreciation. A similar amount will be reflected as a liability.

We believe the economic benefits of the synthetic lease over the last few years have been substantial, principally because of the favorable lease expense associated with its structure. In light of the present low-interest rate environment, however, we have been looking at alternative structures that would allow us to refinance our synthetic lease and unrestrict a substantial amount of the cash collateral. We have taken our time with the process in order to achieve the best financing structure for the Company. If we complete our refinancing before year-end, we will not incur the 3.1 million non-cash charge for accumulated depreciation that would be required if the synthetic lease remain in effect.

Now I would like to turn to our financial expectations for the fourth quarter. We begin the quarter with over $29 million in revenues for the first nine months of 2003 and are well-positioned to achieve our eighth consecutive year of revenue growth. Our revenues for the fourth quarter of 2003 are expected to be in-line with our third quarter revenues and range from 11-13 million. Operating expenses for the fourth quarter are projected to be approximately 28 million, including non-cash stock-based compensation expense of 2.5 million. We are projecting our net loss for the fourth quarter to range from 19 million to 20 million, or 30 cents to 31 cents per share, based on weighted average shares outstanding of approximately 62.8 million shares for the quarter. The projected net loss includes the non-cash charge for the cumulative effect of an accounting change related to the consolidation of our synthetic lease of 3.1 million and the non-cash stock-based compensation of 2.5 million. If we refinance the synthetic lease, we project a net loss for the quarter ranging from 16 million to 17 million. We expect to end 2003 with cash and investments including restricted cash of between 125, million and 130 million.

We're in negotiations with a number of parties on the corporate development side for therapeutic area alliance or products focus collaborations. The successful conclusion of one of these collaborations continues to be our goal for the end of 2003. I should point out that I believe that we are in the fortunate position that, even if we do not conclude our negotiations by the end of 2003, we will be able to achieve our 2003 guidance of 40-42 million in revenues for the year. If we conclude our negotiations by the end of the year, our actual results should be better than what we have guided.

In general, 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'm pleased with our strong financial performance for the third quarter of this year and with the success of our capital-raising efforts. Now I'd like to return the call to Arthur to take your questions.

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

(Operator Instructions). Edward Tenthoff, U.S. Bancorp Piper Jaffray.

Congratulations on the quarter. Just two quick questions if you would. How do you see Q4 revenues breaking out between the license fees and also the collaborative R&D? Will that be similar to the third quarter as well? And also, if we could get into a little bit more detail on the status of your negotiations for the therapeutic area alliance or the drug partnership -- what are the kind of key hurdles, what are the timing factors, is it you deciding who, is it you guys convincing other parties? Give us a little more color on where that stands, if you would.

Let me answer the revenue question. I think the $11-$13 million revenue guidance number for Q4, that would probably be very similar to Q3. So I think that is in line, and I would like to turn it over -- the discussion on the collaborations to Arthur to answer.

Thank you for your question. With regard to the therapeutic area alliance, first, I will say that we are in active negotiations on multiple fronts. As you know, our system allows us to cover basically the five major medical therapeutic areas. And of course, we can't predict when these negotiations will result in agreements, but we can assure you that we are and have continued to pursue only those alliances that we believe will be beneficial to our shareholders. To give you a little bit more color on the nature of these alliances, they are strategic in nature. As you know, Lexicon is moving on to toward closure of the entire druggable genome and deriving the physiologic functions from those genes. This necessarily sets up a strategic decision for companies who are in negotiation with us, because they see the significance of that opportunity. So that gives you some idea, I think, as much as I can probably give you, that these are the kinds of negotiations that require companies to sometimes I would say even re-examination their strategies of drug discovery and their strategies behind their pipeline on a per-therapeutic area basis. So they are significant.

Great. Thank you very much.

Meirav Chovav, UBS Warburg.

Hi, it's Derrick DeBruin. A couple of questions. So how much was the tech (ph) licensing fee you took in the quarter?

Let me answer that. So just to review so everyone knows what we're talking about here. Lexicon holds the key patents for gene knockout technologies that cover the most efficient ways to actually knock out genes. The technology patent portfolio for gene targeting that covers specifically positive/negative selection, which is a very efficient methodology and the use of isogenic DNA in gene targeting, in gene targeting.

So to review, Lexicon currently has 10 sublicense fees, and they are in alphabetical order -- Amgen, Aventis, Biogen, Cephalon, Genentech, GlaxoSmithKline, Merck and Millennium Pharmaceuticals, Pfizer and Roche Bioscience. So these agreements typically are multiyear, and in some cases, they include provisions for subsequent annual renewals and Lexicon typically receives upfront license fees, and in some cases, additional license fees or milestone payments on products. So we -- and we have never nor do we license our gene trapping technology, which is the high throughput technology. So I just want to give you that background so that everyone understands this. I think the power of this license, this patent portfolio and how we are seeing, continue to see its expanded use within the pharmaceutical and biopharmaceutical, biotechnology industries, and we see that expansion being quite significant. So on this particular agreement, we did not disclose the details of this agreement because it was the result of a modification of a current sublicense that we have. And I think that is probably about all we can disclose on that.

Okay, but do you get recurring fees every quarter from your different sub licensees?

That's right, we do. But not all of them, Derrick. There are some that are onetime fees, there are some that are recurring fees, there are some that go over a multiyear span for many years, but a finite period of time. So it has certainly been a very nice line item for us as we forward our activities on drug discovery.

Okay. And just given that one of your chief competitors in the mouse knockout field went bankrupt this summer, have you seen any interest in -- increased interest in the Lex Vision (ph) database?

What I'd like to say is -- by the way, regarding the license fees, too, we had sent a notice of termination to DeltaGen with regard to the sublicense that they held. So have we noticed an increase? I would say we have been I would say busier than we have ever been before in the realm of not only technology access and Lex Vision being perhaps one form of that and sublicenses being another form. But I would say more importantly, the endgame, which is the drug discovery alliances and the implications for, again, the strategic issues, once Lexicon now as you rightly point out, clearly the largest -- with the largest capability to cover the druggable genome, and within a matter of only a few more years having already done 25 percent of it. So I would say we are witnessing a significant, very significant activity and the recognition of the strategic implications of this technology, especially as implemented by Lexicon.

One final question, this is more of a theoretical question. So you have knocked out 1250 druggable genes. So what in your opinion -- what's the most surprising thing you have seen out of this?

I would like answer that a couple of ways. First, the actual discoveries, as I have said previously in talks, I find the discoveries that we have in diabetes and obesity to be really truly surprising -- LG653. The fact that you can -- a single-enzyme target, you can create a lean phenotype to tackle obesity, see no on-target side effects whatsoever, and in fact, witness the fact that it actually encourages more consumption of food, even creating this favorable (indiscernible). I still find that amazing. And that I would also put a fast follow-on to that would be the LG617 where single a protein expressed from the brain that, when knocked out, results in increased cognizant abilities, we have never seen any gene -- there is no gene like that even reported anywhere in the literature. And that was a complete surprise and really quite intriguing. And we have we have lead molecules in both of those programs.

So I would say the speed at which we can move has also been surprising to me, and I am very encouraged by that. From a sort of strategic perspective and dealing with all of our partners, multiple partnerships, what has been very surprising to me is, as you know, we often have partners that come with their hypothesis as to what they think a gene does, and this is usually based on some sort of gene expression data, chip (ph) data or proteomic data, and how often that is completely wrong. What I mean by awesome, I mean like 90 percent of the time. So in terms of it does not translate to the hypothesized physiologic functions and ultimate medical utility that is being pursued by major corporations. So I think people are -- that is very surprising to me, although we have lived with that knowledge now for quite some time, and I think people have to take a long look at some of these other molecular-based technologies -- biochemical and in vitro based technology -- and ask themselves if they are really looking at physiology or if they're looking at phenomenology.

Great. Thanks a lot.

Sharon Seiler, Punk, Ziegel & Co.

Good afternoon. Actually, I was going to ask about your partnership discussions, and I guess you've said about as much on that as you're going to say to us.

I think so, Sharon. Thank you, though. Go ahead, ask another question.

I'm out of them for the moment -- thank you.

Patrick Schniggelsberg Peterson (ph), Mehta (ph) Partners.

Thank you for taking the question. Going forward, what are sort of the key milestones that we should look for? We're still on for obviously a number of INDs. Has any timing on those changed, or could you just walk me through what you believe are the key milestone I should look for?

Yes. And in fact, we did receive an online question too regarding timeframe for INDs. At this juncture at the end of 2003 here, we are not prepared to make specific statements about predicting IND filings. I think others who have analyzed the Company have made some predictions, but we still continue to believe that it is best for us, because we have multiple horses in the race, multiple targets and programs, that to wait into 2004 to make when we can make a better prediction about those events. And I think that is important for everyone because we have witnessed I think many, many predictions in this arena that have not really been productive via companies. So we have never done that. But I think into 2004, we will have a better feel for that time line, and then we will feel more comfortable making realistic predictions. I will say that we have our entire clinical leadership in place as a company. And I before specified that leadership chairman of our medical advisory board, Alan Neese (ph), was former head of all clinical trials at Merck, our vice president of clinical development, Phil Brown. We have our vice president of preclinical development, Bill Hadorn (ph), and we have also the whole runway from -- through (indiscernible) and preclinical development, all in-house running. So we're in a great position there.

So a couple of follow-up questions. Are you -- since you have the team in place, are you beginning to look for contract manufacturers who start making the first preclinical material batches for small molecular drugs or antibodies or anything like that?

Yes. We are evaluating all of those opportunities, as you rightly indicated. That is a necessary step, and especially in the area of protein therapeutics, and we have a number of antibody programs that are progressing nicely. So, yes, we're looking at those. And with the people we have brought in place, they have significant experience in having done all of those things quite successfully in the past.

Okay. Two quick questions, one is regarding the lease. We have talked about financing or restructuring that lease quite some time at this point. And I guess what I'm trying to figure out -- obviously, interest rates are low and it is probably fair to say that we are not -- or generally the markets are not expecting those interest rates to change dramatically over the next, let's say, six months. Is it then also fair to conclude for me that it continues to be not a trivial (ph) environment to renegotiate or reorganize such a lease, and hence, we should probably assume that that will not take place for the foreseeable future, meaning next 6-9 months?

I should say that I am actively reviewing proposals. And I have the one that I like the best, I will then take that proposal and refinance the lease. In terms of timing, we are doing this expeditiously. However, I want to make sure that we have the very best financial structure for our shareholders. So I am taking my time.

One more quick question on your timeframe of closing the deal. One thing that I am trying to understand is, obviously, we are sitting here all reasonably or fairly convinced that you guys have really good technology. Obviously, it has not necessarily been that trivial to convince the potential buyers to buy into that. You know that somewhat of a change that companies are rethinking from a strategic point of view that pipelines and how to build them. Can you comment a bit on that? Is that -- we talked previously that it is not easy to convince the big pharmas to -- how good your stuff is always. Has something changed? Has there been a fundamental change? I would assume these pharmas have gone through this reorganization, re-evaluation of their pipeline on an almost 24-hour basis.

Let me say, yes. I sense a change, which I think we witnessed with an acceleration of our discussions with multiple parties. And I think that I put it in two categories. The first is the strategic issues that they face with regard to both early-stage and late-stage pipeline issues. I think traditionally or in the recent past, people have been more concerned or quite a bit concerned with later-stage product and licensing opportunity. And what we have witnessed is now a significant attention to early-stage pipeline and the whole drug discovery process as it relates to the pipeline, the total pipeline. And I think that as you look at the early stage opportunities, which again I think have been somewhat neglect or ignored so far now, it turns out that there are not that many people out there doing truly credible breakthrough discoveries and bringing those new targets forward, those two potential blockbusters forward. There is a real gap there. Lexicon, I believe, is a leader in that area. Of course, that has been our whole focus. So I am happy about that, of course.

Then on the technology perspective, I think the second I'd make to answer your question is that there has been a period of a fair amount of technology noise that is still persistent, and that has caused some people to experiment in many, many different ways, mainly molecularly-based experimentation. Again, I refer to chips, proteomics, SRNA, in vitro-based approaches, and that has caused some pause. But now, we're witnessing an industry that has real experience with all of these things. And I think that they're coming back to the realization that physiology and medical outcomes is really what you want to have the guiding light in your drug discovery. So I am very, very optimistic about those realizations scientifically occurring. So I cite those two things.

Not to put you on the spot, and obviously, you don't have to answer that. Can you put a probability on a deal closing this year?

I won't do that. (MULTIPLE SPEAKERS) I will emphasize that we're talking to multiple parties, that we continue to be optimistic, but it has to be this strategic vision that guides it and the strategic value.

Thank you so much.

(Operator Instructions).

I would like to say while we're waiting, if there are any more questions, we do have another online question which has come through, which is -- are we looking at SRNAI (ph) as a potential methodology of validating drug targets?

And I did mention in my last answer as well. But RNAI (ph), or inhibitory RNAs, are certainly very interesting. We have explored at a theoretical level these technologies. People always bring us what they think are the latest, greatest ways to beat the knockout, which is essentially the gold standard. And our opinion on it is that in vitro, it is a powerful tool to use in cell culture. We believe that in vivo, there are significant limitations to the technology, very significant, that make it highly, in our opinion, highly unlikely to be any kind of replacement for the standard knockout technology. There are a lot of scientific reasons for that. I'm obviously not going to go into them on this call. But it is interesting technology. But in vivo always being the key for us, there is nothing like a reliable genetic alteration of the chromosomes that is tractable and yields physiologic outcomes very nicely.

(Operator Instructions). We have no further questions. You may continue.

Alright. Well, I'd like to thank you all for participating in this conference call, and we look forward to speaking with you again next quarter. Bye.