Lexicon Pharmaceuticals Inc (LXRX) 2003 Q4 法說會逐字稿

Welcome to the Lexicon Genetics fourth quarter and year end 2003 conference call.[OPERATOR INSTRUCTIONS] I would now like to introduce your host for this call, Miss Julie Kim, Manager of Corporate Communications. Please go ahead Miss Kim.

Good morning and welcome to the Lexicon Genetics fourth quarter and year end 2003 conference call. I'm Julie Kim, Manager Corporate Communications and with me today are Dr. Arthur Sands, President and Chief Executive Officer of Lexicon; and Julia Gregory, Executive Vice President, Corporate Development 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 will review the information provided in the release, then use the remainder of our time to answer your questions. The call will begin with Dr. Sands who will discuss our key scientific and business development accomplishments during 2003. Miss Gregory will then review our financial results and discuss our financial guidance for 2004. 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 additional collaborations and alliances, the success and productivity of drug discovery efforts, our ability to obtain patent protection for our discoveries, commercial limitation imposed by patents owned or controlled by third parties, our dependence upon strategic alliances as we are developing commercialized products and services based on our work, and the requirements of substantial funding to connect research and development and to expand commercialization activities. For a list and description of risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission. I will now turn the all over to Dr. Sands.

Thank you, Julie. Good morning, everyone. Over the past year Lexicon has fortified its leadership position in drug discovery through the achievement of several key milestones. In December 2003 Lexicon entered into a major strategic alliance with Bristol-Myers Squibb to discover, develop and commercialize drugs in the field of neuroscience. The alliance combines the strength of both organizations. Our powerful physiology-driven approach to discovering function of human genes and the additional chemistry expertise, with Bristol-Myers Squibb's leadership position, and clinical drug development and commercialization.

The alliance is designed to accelerate the discovery of drugs to address significant neurological and psychiatric diseases such as depression, anxieties, schizophrenia, pain and Alzheimers disease, all of which affect millions of people worldwide. Lexicon has initially contributed 13 drug discovery programs from its current neuroscience pipeline to the alliance. In addition the alliance will have exclusive access to future neuroscience discovery from Lexicon's Genome 5000 Program for drug development.

We believe the financial terms of the collaboration are strong validation of Lexicon's drug discovery platform. During the initial three-year term of the alliance, Lexicon will receive $66 million and committed funding from Bristol-Myers Squibb. Lexicon will also receive up to $76 million in clinical and regulatory milestone payments for each drug developed and up to double-digit royalties on sales of drugs commercialized by Bristol-Myers Squibb. We believe at least four drugs will be commercialized under the alliance, resulting in a value of over $450 million to Lexicon before any royalties.

During 2003 Lexicon also made significant progress under its alliance with Genentech for drug discovery in the area of secreted protein. We entered into this important alliance in December of 2002 and we realized the first performance-based milestone payment in the fourth quarter of 2003. We are enthusiastic about the increasing value of the Genentech alliance as we apply our patented Gene knockout technologies to 500 proteins with potential for discovery of antibody drug and therapeutic proteins.

Lexicon's Genome 5000 Program continues to be highly productive as a unique discovery engine focused on the human drugable genome. To date we have completed the physiological and behavioral analysis of more than 1500 genes, greater than 30% of this program. By the end of this year we expect to have completed the in vivo analysis of 2300 genes or nearly 50% of the pharmaceutically relevant genome. The Genome 5000 program has yielded 40 in vivo validated drug discovery programs to date. This is an increase of 26 programs over year-end 2002, which highlights the productivity of our drug discovery platform. Our drug programs are in six therapeutic areas: diabetes and obesity, cardiovascular disease, psychiatric and neurological disorders, cancer, immune system disorders and ophthalmic disease.

Our ophthalmology program was announced as therapeutic area in 2003 as we were uncovering many of the key switches that control the health and development of the eye. Our most advanced drug development programs currently include LG 617 for Alzheimer's disease and cognition, LG 653 and LG 314 for obesity and diabetes, and LG 152 for solid tumors. We expect to identify clinical candidates for two of our lead program in 2004 with the objective of filing I&Ds in 2005.

In December of 2003 we announced the issuance of new U.S. patent thereby broadening our patent estate in the areas of gene targeting by homologous recombination. Last week we announced the issuance of yet another gene targeting patent. Together Lexicon holds rights under eight issued U.S. patents covering key aspects of gene targeting technology. As a validation of our intellectual property position and the importance of gene knockout to the biotechnology and pharmaceutical communities, we now have 12 major sub-licensees of our technology for certain internal uses of gene targeting. In 2003 we granted new sub-licenses to Aventis and AstraZeneca.

In summary, Lexicon is progressing on all fronts. Our Genome wide knockout capability enable to us to model drug action in vivo before we develop clinical compounds, thereby accelerating the drug discovery process. We continue to add superb scientists to our organization to move our program forward rapidly. We believe that our powerful drug discovery platform, world-class alliances and strong financial condition position Lexicon for continued success. 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 2004.

Thank you, Arthur. In 2003 Lexicon met or exceeded all of our financial objectives and we ended the year in strong financial condition. I would like to review the fourth quarter and full year performance with you and discuss our guidance for the full year and first quarter of 2004.

Lexicon revenues for the three months ended December 31, 2003, increased 35% to $13.7 million from $10.1 million for the corresponding period in 2002. This increase was primarily attributable to the achievement of the first performance milestone under our collaboration with Genentech. 55% of our revenues in the three months ended December 31, 2003, or 7.6 million, were the result of collaborative research efforts. Lexicon revenues grew on year-over-year basis for the eighth consecutive year. For the year ended December 31, 2003, total revenues increased by 22% to 42.8 million from 35.2 million in 2002. This increase was primarily the result of increased collaborative research activity and new sublicense agreements. Please note that our revenues have historically fluctuated from period to period and will likely fluctuate substantially in the future based upon the timing and composition of collaborations and license agreements.

Research and Development expenses for the three months ended December 31, 2003, increased 6% to 20.3 million from 19.2 million for the corresponding period in 2002. Research and Development expenses for the three months ended December 31, 2003 and 2002 included 1.2 million and 1.3 million respectively, of non-cash stock-based compensation expense primarily relating to option grants made prior to the company's April 2000 initial public offering.

For the year ended December 31, 2003, Research and Development expenses increased 10% to 82.2 million from 74.9 million in 2002. The increase primarily reflects the expansion of the company's drug discovery program. Research and Development expenses for the year ended December 31, 2003 and 2002, included non-cash stock-based compensation expense of 5 million and 5.2 million respectively.

General and administrative expenses for the three months ended December 31, 2003, increased 4% to 5.7 million from 5.5 million for the corresponding period in 2002. General and administrative expenses for the year ended December 31, 2003, were 23.2 million, unchanged from 2002. General and administrative expenses for the three months ended December 31, 2003 and 2002, included non-cash stock-based compensation expense of 1.2 million and 1.3 million respectively and 5.1 million for each of the years ended December 31, 2003 and 2002.

Net loss for the three months ended December 31, 2003, increased to 14.9 million from net loss of 13.9 million in the corresponding period of 2002. For the year ended December 31, 2003 the net loss increased to 64.2 million-compared to a net loss of 59.7 million in 2002. Net loss per share for the three months and year ended December 31, 2003, was 24 cents and $1.13 respectively compared to 26 cents and $1.14 respectively for the corresponding periods in 2002. The 2003 per share amount reflect the issuance of 10.2 million shares of common stock during the company's secondary offering in July of 2003.

Net loss includes non-cash stock-based compensation expense of 2.5 million and 2.6 million for three months ended December 31, 2003 and 2002 respectively and 10.1 million and 10.3 million for the years ended December 31, 2003 and 2002 respectively. The 2003 net loss amounts also include a 3.1 million one-time non-cash cumulative effect of accounting change related to the company's synthetic lease and this relates to accumulated depreciation.

Our 2003 results beat the first call mean estimate for the three months ended December 31, 2003, to reconcile the first Call estimate to our GAAP reported net loss per share you must add back the non-cash stock-based compensation charges and the non-cash charge for the cumulative effect of accounting change. Therefore when you adjust for GAAP reporting, the first Call estimate would have been 30 cents per share. For the fourth quarter our GAAP net loss per share was 24 cents. For your information, we will report net loss and net loss per share exclusively on a GAAP basis going forward.

We ended 2003 with a stronger cash and investment position than year-end 2002. Cash and investment at year-end 2003 were 161 million, an increase of 37.9 million over the 123.1 million as of December 31, 2002. The increase in cash and investments from September 30, 2003, cash level of 123.1 million was primarily attributable to receipt of $36 million payment related to Lexicon's neuroscience alliance with Bristol-Myers Squibb. I'd like to run through our calculation of cash burn at this point.

Our net cash used in operating activities for the year ended December 31 2003 was 7.7 million. Purchase of property and equipment was 4.8 million. For total cash burn or cash burn from operations plus capital expenditures of 12.5 million. In addition our cash position was positively impacted by the net proceeds of 50.4 million from our secondary offering of common stock in July of 2003 and that calculates to a total change in cash and investments included restricted cash of $37.9 million as I indicated previously.

Our restricted cash and investment were 57.5 million at December 31, 2003, and September 30, 2003 and 57.7 million at December 31, 2002. This relates to our synthetic lease, which was used to finance expansion of our facility in the Woodlands, Texas. Please note that this lease has been brought onto our balance sheet in accordance with fast the interpretation number 46 or FIN 46, which went into effect on December 31, 2003. As a result of FIN 46, our statement of operations for the fourth quarter reflect non-cash charge for accumulated depreciation of approximately 3.1 million, which I mentioned previously and our balance sheet reflects additional property and equipment of 54.8 million less accumulated depreciation of 3.1 million. The balance sheet also reflects 52.3 million as long-term debt and 2.5 million as other long-term liabilities. We continue to review various opportunities to free restricted cash from our synthetic lease such opportunities include refinancing the buildings and land with a mortgage or entering into a conventional sale-lease-back arrangement.

Now let's turn to our forward-guidance for 2004. I am pleased to announce as we begin 2004, we begin the year with committed revenues of more than $43 million, the highest level of committed revenues going into a new year. We estimate that our annual revenue for 2004 will increase 40% to approximately $59 million to $61 million reflecting revenue from our ongoing drug discovery alliances and functional genomics collaboration and anticipation of new revenues primarily from one to two collaboration and additional technology license agreement. New collaborations could take the form of an additional therapeutic area drug discovery alliance, product focus collaboration or alliance focused on the specific disease.

Total operating expenses should increase 8% to 10% over 2003. This reflects projected Research and Development expenses for 2004 of 93 million to 96 million as we continue to invest in the expansion of advancement of our drug discovery program. General and administrative expenses in 2004 should decline to 20 to 22 million, as substantially all deferred stock-based compensation will have been expense. Capital expenditures are projected to be in the range of $10 to $12 million for 2004. This primarily reflects cost to expand capacity at Lexicon pharmaceuticals, our Medicinal Chemistry division in New Jersey. Assuming no change in our synthetic lease, we expect that cash used in operations and for capital expenditures in 2004 will be approximately $40 million. We expect unrestricted cash and investments together with projected revenues will be sufficient to take us at least at a minimum through early 2006.

Overall we are projecting our net loss for 2004 to decline from 2003 and range from 53 to 56 million or 84 cents to 89 cents per share based on weighted average shares outstanding of 62.9 million. As we told you previously, we will report net loss and net loss per share exclusively on a GAAP basis in 2004. As we will have substantially completed the amortization of the stock-based compensation resulting from options granted before our April 2000 IPO.

Now, let's review our guidance for the first quarter of 2004. Revenues for the first quarter 2004 should be in the range of 11 to 12 million. These revenues are primarily the result of our alliance with Bristol-Myers Squibb, a functional genomics collaboration and Lexicon subscription. Operating expenses for the first quarter are projected to range from 29 to 31 million including stock-based compensation expense of $850,000. There is an immaterial amount of stock-based compensation expense in the remainder of 2004. We are projecting our net loss for the first quarter to range from 16 to 17 million or 26 cents to 27 cents per share. You should note that our quarterly operating results have fluctuated in the past and are likely to do so in the future. We believe that quarter-to-quarter of our operating results are not a good indication of future performance. Overall I am very pleased with our financial and business performance for the fourth quarter and the year 2003. Thank you. Now I'd like to turn the call back to Arthur.

Thank you, Julia. Lexicon has entered 2004 in a leadership position in drug discovery with significant business and scientific momentum. Thank you very much for your time this morning. We are now happy to answer any questions you may have.

Thank you, sir. [Operator Instructions] We will take our first question from Sharon Seiler with Punk, Ziegel & Company.

Good morning, guys. I just wanted to know if you could give us perhaps more color on your expectations for future alliances? Both in terms of timing and which type do you think are most likely?

We continue to be active on the collaboration front, Sharon. Our business strategy anticipates formation of additional alliances as we have discussed. We have five therapeutic areas at this point in time that are unpartnered, cardiology, metabolism, immunology, oncology and ophthalmology. Each of these therapeutic areas represents markets of large unmet medical needs. We have been approached by potential partners, who have interest in whole therapeutic area, selected disease indication or selected drug discovery programs have approached us. So we in 2004, we anticipate entering into one additional therapeutic area alliance and we will keep you informed as these are concluding. As I said, we are actively engaged at this period in time in discussions with potential partners. So it's hard to predict that. I could predict it, but would guarantee you if I predicted it would be wrong in terms of the timing. So, we do anticipate that we will happen this year.

OK. Thank you.

Our next question today will come from Edward Tenthoff representing Piper Jaffray.

Hi, how are you. Can you hear me OK?

Yes.

Great. First question, I think one thing that we'll be looking for in 2004 as you begin to selectively candidate and advance preclinical pipeline will be additional data releases. Do you have a schedule for anything along those lines? I realize at a top three preclinical and animal work either in terms of press releases or even taking advantage of some of the scientific meetings coming out?

Well, thanks, Ted. We don't -- do not have disclosed specific schedule for these kind of events. These are ongoing scientific programs, but I do think that in 2004 as we reproduce the physiologic result with compound that would be worthy of us disclosing that. That would be a major event in our preclinical research and as you know that would take us full circle in our process, which is reconfiguration of phenotype with a compound whether would be small molecule compound or an antibody compound. I think that we would anticipate additional scientific publications as we have done in the past. However, the timing of that of course is very difficult to predict because it is subjected to peer review and that entire publication process. We're very careful about our publication process with regard to timing of our intellectual property filing as you can imagine. So we will announce the material scientific advancement of our programs and I think that 2004 will be a very exciting year for us.

Great. Maybe even just to bear down a bit more in details on 617, where are you guys there and is that very exciting compound for you guys?

Yes, LG 617 just a recap is a program incognition and Alzheimers Disease and that is a very unique protein expressed only in the brain. We have highly potent inhibitors, which are bio-valuable and do penetrate the blood brain barrier. They're also orally bio-valuable. So we are proceeding with testing in animals with this, these initial compounds. So they're at the lead optimization phase and proceeding nicely. It is of course probably one of the most challenging areas cognition but also one of the areas I think with greatest potential given though there is essentially no real therapy for this indication that is highly effective today. The therapies out there right now for Alzheimers Disease are very, very limited efficacy and side effects are significant. So thus far we are with that program. It is one of our most exciting programs and it is really a tremendous discovery.

Great. Thank you very much. Keep it up. Looking forward to a good year.

Thank you, Ted.

[Operator Instructions] Our next question comes from Derik De Bruin with UBS.

Hi, good morning. I got cut off if I reiterate something just bear with me. So just looking at the numbers for the fourth quarter it looks like the milestone payment was $2.5 million?

We haven't disclosed that number. I would say you are low.

OK. And you mentioned you had couple of knockout technology patents. I mean, what else is pending out there? I guess have you started to -- where in the process of patent filings and issuance are you with respect to some of the genes that you discovered and function validated using knockout?

Right. Thanks, Derik. So the first of all that gene technology patents I referred to, is an expansion of that patent portfolio. All based on the fundamental discoveries and observations of the initial inventors of gene targeting technology. This includes Dr. Mario Capecchi and his laboratory originally and Anton Burns. So, there is a number of related inventions as these were initially disclosed, that are now being published as issued U.S. patents. So, this is a very important broadening of that patent portfolio and as evidenced by our finding of additional sublicenses I think it speaks to strength and comprehensive nature of our patent portfolio for genes targeting in general. It is interesting to point out most people are sometimes surprised that gene targeting by homologous accommodation was so well patented. But in fact that is the case as these were early filings and now matured to issue U.S. patents. So that covers the gene-targeting patent portfolio. On the gene-trapping patent portfolio we also have several issued U.S. patents covering the Genome margin traffic technologies, which cover most efficient way to knock out genes on a genome basis. That has been also been strong. That patent portfolio we do not license that. That is for Lexicon internal genome discovery use and that has been, as you know one of our major strategic advantages in the field. So the second part of your question is about the actual genes and programs patented based on what we observe using gene targeting. And we already have several issued patents on human genes and their function. Based on observations that we have made in knockout and I think one of the most interesting recent examples of that was disclosed last year in scientific publication on the gene that we discovered that controls hypertension. It is major hypertension gene. When that gene is block in-- knockout, they have low blood pressure, thus way to treat hypertension by blocking the gene product. In humans when that gene is overexpressed as you might predict, that is human disease gene causing hypertension. So Lexicon discovered -- made that gene discovery and gene function discovery and hope that patent. Indeed we have published in proceedings with in National Academy of Sciences. That is one example. There are many others like that and that becomes the beginning of our patent portfolio, which covers the human gene, the utility and then compounds that are used as therapeutics to treat a particular disease. So it's part of a whole patent strategy that is utility based, which has longevity and has great power in the field.

OK. And I guess could you talk a little bit about some of your headcount addition plans at Lexicon Pharmaceuticals? You have so many programs going on, do you have medicinal chemistry muscles and enough manpower to drive all your programs?

Well, that's an excellent question. And our strategy is to continue to grow that division as we've done successfully. We have not disclosed the headcount numbers, our growth plans. But, I would just point out that Lexicon in total now is over 600 individuals and we do disclose total numbers, which is approximately 80 individuals at Medicinal Chemistry operation in New Jersey and we plan to grow that operation. So we haven't told disclosed exact numbers on the growth, but it is an aggressive growth campaign. But the real point is, do we have enough medicinal chemistry to deploy against all these targets that we are discovering? And the answer there is we rely also on partnership model to bring additional chemistry expertise. Because it is true the discoveries are so tremendous they require tremendous chemistry application and the Bristol-Myers Squibb alliance is perfect example of that where our targets will be screened by both compound library collections, of both companies, which are very substantial and then we will launch jointly medicinal chemistry efforts, but it really is a mechanism by which Lexicon can expand its medicinal chemistry power through partnership. I think that is very important model to continue for us. Our productivity on target discovery is so high.

I think the Bristol-Myers Squibb collaboration is a very unique collaboration in that instance that we do work hand and glove with each other and our medicinal chemistry teams and their medicinal chemistry teams are on the program. I think that is true leverage for our partnership capability.

Great. That's helpful. I guess one final question then would be looking at some of the expected upcoming milestones. What can investors really use to measure your performance going into 2004?

Well, that's a good question. Let me point those out specifically. We intend to identify two clinical candidates, which will be from our internal drug discovery programs and we would be announcing those as they occur. This covers both small molecule and our antibody programs. In addition to that another important metric will be further advancement into lead optimization for four programs, which is our goal for the year. Another major milestone is for us to harvest additional 25 to 30 new drug discovery programs from the Genome 5000 Program, which is running of course through 2004, as well. And those are new targets, new programs that we will selectively announce and showcase certain ones. But we will keep you up to date on that number. I think the last major metric to follow is the completion of an additional 900 projects under the Genome 5000 Program, which brings the total then to 2300 genes knocked out and fully analyzed physiologically. That is a very important metric of our operations here. Of course that fuels Bristol-Myers Squibb alliance that also fuels our Genentech alliance. Then, of course, there are ongoing financial metrics.

Right and clearly the therapeutic alliances that I mentioned earlier in our discussions that we plan to enter into whether it's a therapeutic area alliance or a focused collaboration for a specific program or an area of disease. So I think you should anticipate activity in that area this year.

Great. Thanks a lot.

Thank you, Derik.

[OPERATOR INSTRUCTIONS] We occur to have a follow-up question with Edward Tenthoff with Piper Jaffray.

Hi, guys. Julia, one quick follow-up and I'm not sure how much you will be able to say about this, but looking at that restricted cash and synthetically from the facility what kind of options are you guys exploring with interest rate where they are these days?

Thanks for the question, Ted. I really enjoy talking to the real estate community about the different opportunities that we have for our facility here.

Should you talk to my mortgage broker.

We continue to have different proposals to finance this facility. I think that given the fact we have 300,000 square feet and almost 16 acres here and my cost at this point is less than a million dollars, I'm waiting for the very best financing offer for this building. We've looked at several different proposals and we have analyzed them thoroughly and decided against them. We're currently entertaining proposals right now and we're evaluating them. My comments on it will either take the form of a mortgage or sale-leaseback remains the same. The goal clearly is to get the most beneficial financial arrangement for property that we can. And I think there are very attractive offers out there for us today. I think that our plan is to move forward while the interest rate market is attractive. Interest rates are low. That is our goal. We're working in that regard.

Great. Thank you.

Our final question today will come from Charles Leavey with Smith Barney.

Julie, where is cash invested currently?

We have three different cash managers with whom we have allocated cash amounts. Bank of America is the institution for the restricted cash for the synthetic lease. They in fact were the organization that structured our synthetic lease and the restricted cashes being held with them. And cash an obviously interest bearing accounts, but very high grades.

Thank you.

And at this point I show no further questions in the queue. I would like to return our conference to Mr. Arthur Sands for his concluding remarks.

Thank you for participating today. We look forward to updating you in the future. Goodbye.