Lexicon Pharmaceuticals Inc (LXRX) 2004 Q1 法說會逐字稿

Welcome to the Lexicon Genetics First Quarter 2004 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, Manager of Corporate Communications. Please go ahead Ms. Kim.

Good morning and welcome to the Lexicon Genetics first quarter 2004 conference call. I am Julie Kim Manager of Corporate Communication and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer and Julia Gregory, Executive Vice President, Corporate Development and Chief Financial Officer. We expect that each of you have seen a copy 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 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 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 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 and good morning everyone. I would like to start the call by providing an update on our Genome 5000 program and our most advanced drug discovery program. As you know in the Genome 5000, we are conducting an extensive physiological and behavioral analysis of the drugable genome. We have completed the [inaudible] analysis of more than one third of the 5000 pharmaceutically relevant genes that we have selected for valuation in this program. We continue to make gene function discoveries that supply Lexicon with novel mechanisms of action for the development of new drugs.

We have already harvested more than 40 enviable validated drug discovery programs and are achieving a consistently high rate of productivity from our unique drug discovery engine. We expect to fully analyze an additional 900 genes in 2004 and we are on track to attain our goal of 25-30 new drug discovery programs this year. We have several small molecule drug discovery programs at the stage of the lead optimization and preclinical research, including LG653 for obesity and diabetes, LG617 for Alzheimer disease and cognation, and LG152 for solid tumors. Our medicinal chemistry team has engineered lead series for each of these programs. We are currently in the process of testing compounds for efficacy in animal model. We also have several antibody programs that are well advanced and could quickly move towards clinical developments. We expect to identify clinical candidates for two of our lead programs in 2004, with the objective of filing IND’s in 2005. Our drug discovery alliance with Bristol-Myers Squibb is already accelerating in the progress of our neuroscience program. Our joint research and financial plans are in place and screening work is beginning on several of our novel neuroscience targets. Likewise, we continue to make significant progress in our genome [cycline]. Knockout programs for all of the 500 secreted proteins in this alliance are under way and physiological and behavioral analysis is complete for many of these targets. We are very enthusiastic about the novel targets that have been identified today under this alliance.

In February, we announced the issuance of another gene targeting patent, further fortifying our intellectual property position in the areas of gene targeting and gene knockout. With this patent issuance, Lexicon now holds right under 14 U.S. patents covering key aspects of our gene targeting and gene trapping technologies. We currently have 12 major sub-licensees of our gene targeting technology, within the Bio-pharmaceutical industry.

In summary I would like to count genome knockout program and our physiology based approach in understanding gene function and enabling us to find new ways to treat major hemo diseases. Our lead drug discovery programs all of which represents novel drug targets, are advancing in development. We look forward to updating you in the future on our scientific achievements, our alliances, and our drug discoveries.

I would now like to turn the call over to Julia Gregory, our Executive Vice President and Chief Financial Officer to review our first quarter financial results and our financial guidance.

Thank you Arthur. I’d like to summarize the first quarter and discuss our guidance for the second quarter and full year of 2004. Lexicon’s revenues for the three months ended March 31, 2004 increased 46% to 11.8m from 8.1m for the corresponding period in 2003. This increase was primarily attributable to our neuroscience drug development alliance with Bristol-Myers Squibb, which we entered into in December 2003. 70% of our revenues in the first quarter were 8.3m, was the result of collaborative research efforts. Please note that our revenues have historically fluctuated from period to period and will likely fluctuate substantially in the future based upon the timings, in terms of collaboration, and license agreements, and the achievement of research milestone and other revenue triggering events.

Research and development expenses for the three months ended March 31, 2004, increased 13% to 22.4m from 19.8m for the corresponding period in 2003. This increase was primarily related to the advancement of our drug discovery program. Research and development expenses for the first quarters of March 31, 2004 and 2003, included $400,000 and 1.3m, respectively of non-cash, stock based compensation expense, primarily relating to option grants made prior to Lexicon's April 2000 initial public offering.

General and administrative expenses for three months ended March 31, 2004, decreased 13% to 5m from 5.8m for the corresponding period in 2003. As a result of the decreased amount of stock based compensation expense. General and administrative expenses for three months ended March 31, 2004 and 2003, included non-cash stock based compensation expense of 400,000 and 1.3m, respectively.

Net loss for the three months ended March 31, 2004, narrowed to 15.5m from a net loss of 17.1m in the corresponding period of 2003. Net loss per share for the three months ended March 31, 2004, was 25 cents compared to 33 cents for the corresponding period in 2003. Cash and investments at March 31, 2004, were 145.4m as compared to 161m as of December 31, 2003. Restricted cash and investments represented 57.5m of these amounts on both dates. The restricted cash was primarily related to the synthetic lease on our headquarters and research facility in Woodlands, Texas.

I am pleased to announced, we recently completed the refinancing of our campus in the Woodlands. We replaced the 54.8m synthetic lease with a $34m conventional mortgage and we paid the remainder of the lease. The mortgage has a ten year term, with a 20 year amortization and bears a fixed interest rate of 8.23%. As a result of refinancing, Lexicon's long term debts and other long term liabilities decreased by 21.4m. And its cash decreased by approximately 22.4m. Most importantly Lexicon's unrestricted cash balance increased by 34.5m. This transaction enables us to control our state-of-the-art facility, which is a critical component of Lexicon's strategic advantage for drug discovery. It also significantly improves our financial flexibility. We have eliminated all restrictions on the cash that had secured Lexicon's obligations under the synthetic lease. Based on our current expectations, we have sufficient financial resources to fund our operations for the next three years. This is an increase of approximately one year of funding as a result of the synthetic lease refinancing. Lastly, this type of financing allows us to take advantage of the current favorable interest rate environment.

Now lets turn to our forward-looking guidance for the second quarter and the remainder of 2004. Our revenues for the second quarter of 2004 are expected to be slightly below last quarter due to revenue recognition timing factors. Revenue should range from to $10-11m dollar. Operating expenses for the second quarter are projected to be approximately $28-30m dollar. The amount of the non-cash stock based compensation expense in the reminder of 2004 is expected to be immaterial and less then $25,000 dollars per quarter. We are projecting our net loss for the second quarter to range $19-20m dollars or 30-32 cents per share based on average shares outstanding of $63.3m. 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.

We confirm our original income statement guidance for 2004. We continue to expect to achieve revenues of $59-$61m dollars and a net loss per share of 84-89 cents for the full year. Our net loss per share projections is based on weighted shares outstanding of $63.3m. We expect that cash used in operation and for capital expenditures in 2004 will be approximately $40m as previously stated. Now having refinanced our synthetic lease we expect to end 2004 with cash and investments of slightly over $100m. Our business strategy anticipates forming additional exclusive alliances for therapeutic area, disease indications, or selected drug programs. 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 continues to be strong and very active at this time. Overall, I am very pleased with our financial and business performance for the first quarter. Thank you and now, I would like to turn the call back to you Arthur.

Thank you, Julia. Lexicon is in a leadership position in drug discovery and we are aggressively moving our forward programs towards the clinic. We have significant business and scientific momentum. Thank you very much for your time this morning. We are now happy to take any questions you may have.

If you would like to ask a question at this time. Simply press “*” and then the number “1” on your touchtone phone. Your questions will be answered in the order received. If you are in the question queue and no longer wish to ask your question simply press “*” and then “9”. Again to ask a question please press “*” and then “1”. Your first question comes from Derik De Bruin with UBS.

Hi, good morning. Couple of quick questions, could you talk about the antibody program that you mentioned and how are you finding things they are moving this quarter just independent of our alliance with Abgenix?

Thank you, Derik. As you know, we have a major alliance with Abgenix in the area of antibody development and our initial programs that are lead programs in bio therapeutic and antibodies are with Abgenix and we are also moving forward with programs with Genentech, although that's a very different kind of an alliance. In addition to those we do have antibody programs that are outside the Abgenix alliance and the Genentech alliance. The ones that are internal and outside those alliances intend be at an earlier stage, within course those alliances came on first.

Okay and just looking at some of the programs you have ongoing now, do you have any of these of which you think are more likely being partnered out [inaudible]

In terms of the therapeutic areas Derik?

Yeah, I mean, yeah I guess so in terms of the 40 somewhat programs you are working on right now in therapeutic areas? Yeah?

Yeah. Our strategy there has been to prioritize for partnerships in those areas that may tend to offer greater challenges in the clinic, and that is of course because certain types of medical indications especially, if look at nerve science for example, tend to be requiring large patient populations and really require a very great depth of clinical expertise in very highly specialized areas and so that has been our strategy. I think if you look at our remaining 5 therapeutic areas that are un-partnered, if you look at indications within cardiology for example those tend to be large clinical trials with significant risks although of course, great payoff potential and then if you look at metabolism that is also an area that is very large with regard to patient population and patient base and that might also be an area that would be in those categories but that’s just to give you our thinking it's not say that those would be the first, but that's our thinking.

Great, thank you very much.

Thank you.

Your next question is from Matt Geller with CIBC World Markets.

Hi, Arthur, how are you?

Good.

Good. Can you talk about some of the more advanced programs and in terms of progress towards going into the clinic with them?

Well, the question of the more advanced programs in the area of small-molecule drugs, we are talking about antibodies. I would say this year we expect to choose clinical candidates for two of our lead programs. Now that may be two small molecule programs or it may be a small molecular [ant] and antibody program. I think that at this time, all I can say is that everything is on track with that. These are novel molecular entities with new methods of action and they are proceeding in preclinical research. Of course we're testing in animals right now.These compounds that we believe may be a substrate for clinical candidate’s choices. So, it’s all on track.

Great. Thanks.

Thank you.

Your next question comes from Sharon Seiler with Punk, Ziegel & Company.

Good morning. I just wanted to know, I mean, if you could give us any more insight into your ongoing discussions with potential pharmaceutical partners. I know earlier in the year, there had been a sense perhaps that some of these had spilled over from last year to the new budget year, and I guess, can you give some sense of how these are progressing and what issues potential partners may have?

Well I think they are progressing extremely well. We continue to be very active on the collaboration front. We generally wind up concluding our agreements in the second half of the year. It’s very intriguing calendar as it turns out. Having said that, I think that conversations that have spilled over from last year to this year are ongoing, and a very good point. Everything just has its own evolution and its own lifecycle. But I am very -- I am cautiously optimistic on those fronts, Sharon.

Okay, thank you.

And Sharon, I would like to add that -- I think strategically we are seeing, our partners are coming more and more towards the realization that physiology does hold the key in drug discovery and the key to genomics. And that is a very important realization, and I think it's current broad [land] of field. Of course, it has been our primary tenants since our founding. And that is applying into the acceleration of our business development progress.

Okay thanks. And actually if I could ask a second question about the synthetic lease, well, can you remind us or can you tell us what the difference in payment is now between the mortgage versus the synthetic lease you had previously.

Sure. The actual payment, which would be interest and principal, is roughly $3.5m. The synthetic lease was only an interest payment, which was considered rent expense and moved into the interest expense category in this quarter, was about $800,000 a year, but that did not repay any principal down on the lease at all. At the end of this ten year term, we will be able then to own fully own outright our facility, which we would not have under the synthetic lease. And I think that control of our state-of-the-art facility is our real engine here and the Woodlands is a paramount to us.

That I can't say has very much similarity with the commercial mortgage market, but the interest rate strikes me as high, is that not true?

No. It's not true at all, Sharon. I mean if you were to look at debt financing. If you were to go out and look at debt financing for an unrated credit, which we are, it would have been significantly higher than this, clearly is secured by the building. But it's not like your home. The commercial real estate market is very different than that. In fact we had been, as you know, we have been discussing various alternative financings for over a year now, and we had considered several opportunities thoroughly. This was -- I would say this was a very, very attractive financing, and if it were rated it would be rated I think in such a way, I don't know whether it will be doubly rated or what, but it would be a premier rating for a company of our size in the industry today. We were delighted to work with the group, we worked with iStar Financial, a leading real estate investment group which has a $4b market cap. They have been involved in over $7b of transaction. I think a straight forward conventional mortgage for a biotechnology company is unique in the marketplace today. They are very difficult to obtain. Once again I think we are on the leading edge of financial structure that is not common to biotechnology companies, because of their financial systems. We have a quality of our systems controls, as well as obviously the importance of our scientific discovery engine to be able to attract a good lender such as our friends at iStar.

Okay. Thank you.

Again to ask a question, please press "*" and then "1" on your touchtone phone. If you are in the queue and no longer wish to ask a question, please press "*" "9". Your next question will come from Jason Kantor of WR Hambrecht.

Thanks to take my question. Julia, in your guidance you said that you are expecting revenues should be slightly down in the second quarter. Should there is some revenue recognition, could you explain that in little more detail? And then for your revenue assumptions for the full year, is there -- are there partnering assumptions build into that, could you give us a sense of how much of that is stuff that's not already planned?

For the quarter, there are just some revenues that are spread out over the year, as opposed to spreading them out for the first half of the year, so we are spreading them out over the year. This is the way we are handling the revenue recognition, it's a timing issue of revenues that will be had, but they are spread out over the full course of the year, which changes the quarterly or where the quarter fall into place, which is why I always try to guide you away from quarter-to-quarter relationship, because of the way the revenues are recognized for accounting purposes. Secondly, a question about the year end revenues, what we were saying for guidance for '04 entirely 59-61, was your question what would be new revenues versus what's --

Yes how much of that is a new partnerships?

So we entered 2004 with revenues $43m, so the additional amount would be new revenues, which could take many different forms, as you know, our partnerships or some license agreements those types of forms.

Okay, thank you.

Welcome Jason.

At this time there are no further questions in queue.

Well thank you every one. That concludes our update for the quarter and thank you again for your participation. Good bye.