Lexicon Pharmaceuticals Inc (LXRX) 2004 Q3 法說會逐字稿

Welcome to the Lexicon Genetics third 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, Carol Schafer, Vice President of Finance and Communication. Please go ahead Ms. Schafer.

Good afternoon and welcome to the Lexicon Genetics third quarter 2004 conference call. I'm Carol Schafer, Vice President of Finance and Communications at Lexicon, and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer, and Julia Gregory, Executive Vice President of 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 afternoon. During this call we'll review the information provided in the release and then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, who'll discuss our key accomplishments during the quarter. Ms. Gregory will then review our financial results for the third quarter and discuss our financial guidance for the fourth quarter and the 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, alliances, and license agreements, 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 strategic alliances, as we're developing commercialized products and services based on our work, and the requirements of substantial funding to conduct Research and Development, and to expand commercialization activities. For a list and a description of the risks and uncertainties that we face, please see the reports we've filed with the Securities and Exchange Commission. I'll now turn the call over to Dr. Sands.

Thank you Carol, and good afternoon everyone. The third quarter was very productive for Lexicon. During the quarter, we entered into a collaboration with Takeda to deliver -- to develop drugs to treat high blood pressure. We also achieved the second performance milestone under our drug discovery alliance with Genentech, and further enhanced our intellectual property estate with the issuance of another patent on our gene trapping technology. In addition, we highlighted some of the advancements in our biotherapeutics program, and discussed how we're using knockout technology for the development of antibody drugs and secretive proteins.

I'd like to begin with a brief review of Lexicon-Takeda hypertension alliance. High blood pressure affects approximately 1 in 4 adult Americans, and it is a major risk factor for stroke, heart attack, heart failure, and kidney failure. Despite the availability of several classes of drugs to treat hypertension, existing therapies do not adequately control high blood pressure for many people. As a result, there is a significant potential market for hypertension therapies with new mechanisms of action. Our alliance with Takeda works as follows. As you know in our Genome5000 program, Lexicon is analyzing 5000 pharmaceutically relevant genes, the prime real estate of the Genome.

Drug targets that are found to regulate blood pressure through novel mechanisms may be selected by Takeda for drug discovery and development. For the selected targets, Takeda will have exclusivity for small molecule drug development in the field of hypertension. Lexicon initiated the alliance with the presentation of one lead hypertension target to Takeda for selection. Takeda has now selected that target and is taking it forward for high throughput screening. Takeda is responsible for all the activities and costs related to preclinical research, drug development, and worldwide commercialization of new hypertension drugs resulting from the alliance. Under the terms of the agreement Lexicon received an initial payment of $12 million. Lexicon will receive research and clinical development milestone payments of up to $34.5 million for each target developed. Lexicon will also earn royalties on worldwide sales of drugs commercialized by Takeda. Takeda is a recognized leader in the field of hypertension making them a strong partner to accelerate the development of novel drugs in this disease indication.

During the third quarter of 2004, we also announced the achievement of the second performance milestone under our drug discovery alliance with Genentech. Lexicon and Genentech established this alliance in December 2002 to discover the functions of approximately 500 potential therapeutic proteins and antibody targets identified through Genentech's internal drug discovery research. The milestone payment is related to Lexicon's production of gene knockouts in mouse embryonic stem cell lines for all the proteins in the alliance. We've completed the generation of knockout mice and identified the physiologic functions of many of these proteins. We're enthusiastic about our progress in this alliance, and have already made some promising discoveries.

At an investor conference in September, we highlighted advances in our internal biotherapeutics program. Within this biotherapeutics program, we've prioritized more than 1000 genes that encode potential antibody targets or therapeutic proteins. While some of these genes are included in our alliance with Genentech, more than 500 genes are part of Lexicon's internal biotherapeutics drug discovery pipeline. We expect to complete the phenotypic analysis of knockout mice for all of these genes within the next 3 years.

Our proprietary gene knockout technology and henotypic analysis provides a significant advantage in the development of biotherapeutics. For example, immunizing knockout mice may enable of the generation of novel antibodies and facilitate proof-of-concept studies early in the antibody development process. Gene knockouts may also be used to determine the physiologic functions of proteins that may themselves be therapeutic. We have already utilized our knockout technology and phenotypic screen to identify several promising antibody and therapeutic protein targets and have advanced these targets within our internal drug discovery program.

We enhanced our intellectual property estate during the quarter with the issuance of our 7th US patent related to our gene trapping technology. It covered cells that have been genetically engineered using Lexicon's third generation gene trapping constructs. The pattern also covers the cells of knockout mice and other model organisms containing genetics modifications that were made using our technology. We continue to make progress towards identifying clinical candidates for several of our lead small molecule drug development program. We also have several proof-of-principle studies underway for our biotherapeutic program. We look forward to keeping you informed of our progress. And now, I would like to turn the call over to Julia Gregory to review our third quarter financial results and our financial guidance.

I would like to summarize the third quarter financial results and discuss our guidance for the fourth quarter and the implications for the full-year of 2004. Lexicon's revenues for the 3-months ended September 30, 2004, increased 8 percent to $13.1 million from $12.1 million for the corresponding period in 2003. The increase was primarily attributable to revenue from our ongoing drug discovery and development alliances. This includes revenue from our neuroscience alliance with Bristol-Myers Squibb, the completion of the second performance milestone under our Genentech alliance, and the commencement of our hypertension alliance with Takeda. Revenue from technology license fees declined during the period. For the 9-months ended September 30, 2004, revenues increased 23 percent to $35.7 million from $29.1 million for the corresponding period of 2003. Research and Development expenses for the 3-months ended September 30, 2004, increased 6 percent to $22.5 million from $21.2 million for the corresponding period in 2003. The increase primarily reflects higher personnel, laboratory supply, and contract research costs related to the continued advancement of our drug discovery programs. For the 9-months ended September 30, 2004, Research and Development expenses increased 9 percent to $67.5 million from $61.9 million for the corresponding period in 2003.

General and Administrative expenses for the 3-months ended September 30, 2004, decreased 21 percent to $4.6 million from $5.8 million for the corresponding period in 2003. The decrease was primarily attributable to the absence of any stock-based compensation expense in the 2004 period. For the 9-months ended September 30, 2004, General and Administrative expenses decreased 19 percent to $14.2 million from $17.5 million. Lexicon's net loss for the 3-months ended September 30, 2004, decreased to $14.4 million or 23 cents per share from a net loss of $14.6 million or 24 cents per share in the corresponding period in 2003. The loss of 23 cents per share compares favorably to the average analyst estimate for the quarter of a loss of 25 cents per share. Net loss for the 9-months ended September 30, 2004, decreased to $46.6 million or 74 cents per share from a net loss of $49.3 million or 90 cents per share in the corresponding period in 2003.

At September 30, 2004, Lexicon had cash and investments of $97.7 million compared to $104.3 million as of June 30, 2004. Virtually, all of our cash and investments are unrestricted. Pursuant to our Takeda alliance, we received a $12 million cash payment in August 2004. This is being recognized as revenues over the 3-year term of the alliance. We also received a milestone payment from Genentech during the third-quarter of a similar size to the milestone recognized in 2003.

As compared to the 2003 third quarter, we reduced our cash used in operations and capital expenditures to $6.6 million from $12.3 million as a result of payments from our drug discovery collaborations.

Let's turn now to our forward-looking guidance for the remainder of 2004. We expect revenues for the fourth-quarter of 2004 in a range of about 23 to $25 million. Of this amount, approximately $11 million are revenues which are contractually committed. We expect revenue from new agreements to be in the range of 12 to $14 million. We have clear visibility to multiple opportunities to achieve this revenue goal for the quarter and remain comfortable with our original guidance of 59 to 61 million revenues for the full year. In that regard, we are in active discussions with a number of different companies regarding new alliances and license agreements. We continue to be very optimistic about signing new collaborations and license agreements during the remainder of 2004 that would enable us to achieve our revenue goal. However, we cannot guarantee the signing of those contracts, or their timing.

Operating expenses for the fourth quarter are projected to be approximately 29 to 31 million. This will put our operating expenses for the full year at the low end of our original estimates of 113 to 118 million, and reflects expense management and careful financial controls at Lexicon. We are projecting our net loss for the fourth quarter to range from 6 to 8 million or 10 cents to 13 cents per share based on average shares outstanding of 63.4 million. As a result we expect our net loss per share to be 84 cents to 87 cents for the full year, which is also at the low end of our original guidance of 84 cents to 89 cents per share.

Our full year net loss per share projection is based on weighted average shares outstanding of 63.3 million. We continue to expect that cash used in operations and for capital expenditures in 2004 will be approximately 40 million and we expect to end 2004 with cash and investments of approximately 100 million. Our expectations for year-end cash and investments, like our revenue expectations, reflect anticipated new collaboration and license agreements and are subject to the completion and timing of those agreements.

Overall the third quarter was an active one for Lexicon and our financial performance was strong. As compared to the prior year, our revenues increased, our losses narrowed, and we used less cash in operations and capital expenditures. Thank you and now Arthur and I'll answer any questions you may have.

(OPERATOR INSTRUCTIONS) Matthew Geller, CIBC

Can you talk about your most important proprietary development programs, how they’re proceeding and where do you see them going in the future?

We've several small molecular programs and several lead biotherapeutic programs, and if you look at the most important programs in the small molecular arena, the lead programs continue to be LG653 in the area of obesity, which I've highlighted on numerous occasions and that continues to be on track and its development in preclininical research pathway. And then I'd say LG617, which I'm sure, you've heard me also discuss in the area of Alzheimer’s disease and cognition, a very fascinating program; that's also a small molecular program making excellent progress, both in terms of chemistry and preclinical research. If you turn to the antibody programs, we only recently started to unveil and describe more of the internal programs at Lexicon. The one that was most recent was LG169 which is a target, antibody target, that when blocked, stimulates T cell growth and development and T cell numbers, and has obvious potential applications in the area of HIV infection, AIDS and other immunocompromised states. So, if you look at these lead -- and there are other biotherapeutics lead programs by the way, which we've not really described yet publicly. So those are in the works as well. There’s at least two of those additional lead programs in the biotherapeutics area. So, the upside of all that in sum, then, we expect to identify our clinical candidates for two of these lead programs this year and with the objectives of filing INDs in 2005.

Annabel Samimy, UBS.

I have a few questions actually. The candidate that you had, I guess, given to Takeda, or that Takeda's taken, presumably, that's LG105 and did that trigger the 5.5 million milestone payment?

No -- Yes, in fact, it is 105, LG105, and that has not triggered the $5.5 million milestone payment at this time. We are anticipating if it moves forward as well as it has so far that it will occur in 2005.

At what stage does that trigger it? When it goes into clinic, or when it – what exactly -- is it the trigger?

It's a research milestone that it's triggered as a progressive beyond the initial phase and into their chemistry operations. They have in fact triggered a small payment for screening, for high throughput screening, but -- and that is included in the 5.5 million. But, we anticipate that the remainder of that research milestone will be paid next year.

And then another question, it's related to the secretive protein alliance with DNA, or Genentech rather. How many milestones you have remaining in the program and what's the next chapter after it's finished?

We have 2 more milestones in that program that relate to the delivery of phenotypic information of the genes that we have analyzed. So, as we deliver the information on the genes, and there are of approximately 500, we would trigger milestones, two different lines at two different times.

And then what's next with that?

Then, as we move forward together and the programs are chosen for commercialization, we would then have milestones and upon commercialization and royalties. We expect to achieve our next performance milestone under our Genentech alliance in the first half of 2005.

And have there been any discussions of extending the agreement at all?

We have a very good relationship with Genentech as we have had with Bristol-Myers Squibb and now we have with Takeda, we look forward to working with them on a long-term basis.

(OPERATOR INSTRUCTIONS) Jason Kantor, WR Hambrecht.

I am going to ask the same question I asked last time but a little bit different. You keep sticking with the same revenue estimates. That hurdle keeps getting higher and higher and the time gets shorter and shorter. Where is this confidence coming from? And if you in fact do sign some major deals, I mean aren't you going to run into revenue recognition issues where you are not really going to be able to get all of that into the fourth quarter?

So, clearly Jason, those are all things that I think about and very actively involved in, in terms of the accounting issues for revenues and the cash issues. As I said a little earlier on the call, we go into the quarter knowing that we will have $11 million, approximately $11 million in committed revenues. So, the difference on the revenue side is about 12 to 14 million. How do we achieve those goals and why do I feel confident about that? Well, there are multiple opportunities that we are negotiating right now, some that recognize revenue once they are concluded, and some are sizable, very sizable. I think that will give us – that gives me comfort to make these comments to you. I think that the cash position for our major therapeutic alliances would be important for our cash position but for revenue recognition the major revenue items would be in years to come, in 2005 and on. But there are other agreements, components -- examples for instance of projected revenue could include license agreements that as license agreements get recognized upon signing and I think that there are other several possible collaborations with the government that we would be able to recognize.

Jason, it's Arthur here. If I can just add one comment to the portion of your question referring to the source of the confidence, and that is the nature of our system has so many dimensions and touches so many different operations with our partners and future partners that we have many, many operations -- opportunities going simultaneously. And it has to do with again the nature of the system which can be used on of course any gene and take one into many therapeutic areas. And so I think that you will see that -- you will that manifest, not only of course in the fourth quarter but also in 2005 as our business continues to grow.

Julia when you mentioned collaboration with the government, are you referring to just getting awarded grants that may be coming due in or – would be something more complex than that?

Well we are pretty active on many fronts there and the government is interested in many levels of our technology. So biodefense is one area of strong interest, so there -- so yes there are grants that have been pursued that we believe will be available to us. Timing is always unpredictable however.

And at this time there are no further questions in the queue. Dr. Sands, I will turn the conference back over to you.

All right. Well thank you every one for joining us this afternoon. That concludes our update for the quarter and we look forward to talking with you in the future. Good bye.

And it does conclude today's conference. Have a great day.