Lexicon Pharmaceuticals Inc (LXRX) 2004 Q4 法說會逐字稿

Thank you for holding. Welcome to the Lexicon Genetics fourth quarter and year-end 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 communications. Please go ahead, Ms. Schafer.

Good morning and welcome to the Lexicon Genetics fourth quarter and year end 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 Corporate Development and Chief Financial Officer. We expect that each of you has 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 corporate development accomplishments during 2004. Ms. Gregory will then review our financial results for the fourth quarter and full year 2004 and discuss our financial guidance for 2005. We 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 in 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 are 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 description of the risks and uncertainties that we face please see the reports we have filed with the Securities and Exchange Commission. I will now turn the call over to Dr. Sands.

Thank you Carol and good morning everyone. As Carol stated I'll begin with a brief review of Lexicon's 2004 scientific and business progress and then we will turn to a discussion of our financial results. During the past year our drug discovery pipeline continued to grow and mature. We have now completed the analysis of more than 2,000 genes in our Genome 5000 program and have harvested more than 60 drug discovery programs. Over half of the genes included in this program are potentially amenable to small molecule drug development and 50 percent have potential as antibody targets or therapeutic proteins. We are moving our most advanced drug discoveries into pre-clinical development and are continuing to fuel our pipeline with novel potent drug targets from the human genome. We recently described two clinical candidates. LX-1521 for cancer and LX-5431 for thrombocytopenia [ph].

LX-1521 is a novel small molecule compound with potential for treating solid tumors. It works by blocking the cell cycle prior to cell division, resulting in cancer cell death through apoptosis. LX-1521 has demonstrated anti-tumor activity comparable to Taxol [ph] controls when administered in certain mouse models of human cancer. Importantly, it exhibited a desirable safety profile at doses that were effective at blocking tumor growth. The compound has exhibited a broad spectrum of activity inhibiting the growth invitro [ph] of more than 20 human tumor cell lines derived from multiple types of cancer including breast, prostate, lung, colon, ovarian, renal and pancreatic cancer cell lines. LX-1521 was created in Lexicon's medicinal chemistry program as a potent inhibitor of the LG-152 kinase [ph]. The function of this kinase was discovered by Lexicon when knockout mice lacking the LG-152 gene exhibited a decreased rate of cell proliferation. Lexicon expects to file an IND for LX-1521 by the end the year and commence phase one clinical trials shortly thereafter.

Our second clinical candidate is LX-5431 a novel recombinant human protein with potential for treating thrombocytopenia [ph]. Thrombocytopenia is a disorder characterized by a reduction of platelets in the blood that can lead to severe bleeding. This disorder can result from chemotherapy, leukemia, autoimmune disease and other conditions. Lexicon demonstrated that LX-5431 can stimulate the production of platelet forming cells called megakariocytes [ph]. The function of the secreted protein as a growth factor required for platelet production was discovered when mice lacking the LG-543 gene showed a decrease in platelet numbers. During 2005 we expect to develop scale up methodologies to produce LX-5431 in quantities required for pre-clinical and early clinical development. These development programs are owned entirely by Lexicon and represent just 2 of more than 60 programs discovered in the Genome 5000 to date. I would now like to turn to a discussion of our external alliances.

We achieved two performance milestones in 2004 with Genentech. In our Genentech alliance we are discovering the functions of 500 potential therapeutic proteins and antibody targets identified through Genentech's internal drug discovery of research. The first of these milestones was achieved in September and related to the production of gene knockouts in mouse embryonic stem cell lines for the second half of the proteins included in the alliance. The second milestone was achieved in December for the identification of the physiologic functions of 250 of these proteins. We expect to complete the identification of the functions of the remaining proteins by the end of 2005. Our most recent collaboration with the Takeda Pharmaceutical Company was formed in July 2004 to develop drugs to treat high blood pressure. In this collaboration we are providing Takeda with drug targets from our Genome5000 program that regulate blood pressure. Takeda may select these targets from small molecule drug discovery and development. In exchange Lexicon receives an upfront payment from Takeda and will receive milestone payments and royalties on drugs they develop. Takeda is responsible for all the activities and costs related to the discovery, development and commercialization of these drugs.

Our neuro science drug discovery collaboration with Bristol Meyers Squib is now one year old. Our teams are well integrated and have made significant progress in several programs. As a further indication of the breadth of our drug discovery engine we were awarded a one year bio defense grant from the United States Army for the discovery of novel drug targets that could provide resistance to Reicen [ph] poisoning. We are using our proprietary gene knockout technology to identify genes that when blocked may confer resistance to the toxic effects of Reicen exposure.

The value of our intellectual property portfolio continues to be recognized by the pharmaceutical and biotechnology industries. At the end of 2004 we granted a sublicense to this technology to Johnson and Johnson Pharmaceutical research and development and we renewed a sublicense for Rouche [ph] Palo Alto. These sublicenses provide non-exclusive rights under patents controlled by Lexicon to generate and use knockout mice in internal drug discovery. All of this partnering activity has had a positive impact on our revenue. I will now turn the call over to Julia Gregory to review our year-end financial results and update on our guidance for 2005.

Thank you Arthur. Lexicon ended 2004 in a healthy financial position characterized by strong revenue growth and narrowing losses. I would like to review Lexicon's 2004 fourth quarter and full year performance with you and discuss our guidance for the full year and first quarter of 2005. Lexicon's revenues for the three months ended December 31, 2004 increased 90 percent to 26 million from 13.7 million for the corresponding period in 2003. The increase was primarily attributable to the completion of the third performance milestone under our alliance with Genentech and revenue recognized under our neuroscience alliance with Bristol Meyers Squib. Other contributors to revenues in the quarter included our hypertension alliance with Takeda, the rights and bio-defense grant and the sublicense agreements with Johnson and Johnson and Rouche.

For the year ended December 31, 2004 revenues increased 44 percent to 61.7 million and from 42.8 million in 2003. This is above our 2004 guidance of 59 to 61 million. Collaborative research increased to 81 percent of Lexicon's revenues in 2004 as compared to 50 percent in 2003. This is indicative of the shift in revenue mix that we have been predicting. Research and development expenses for the three months ended December 31, 2004 increased 14 percent to 23.1 million from 20.3 million for the corresponding period in 2003. The increase primarily reflects the incurrence of costs related to the advancement of our lead drug discovery program towards pre-clinical development. For the year ended December 31, 2004 research and development expenses increased 10 percent to 90.6 million from 82.2 million in 2003. Research and development expenses included non-cash and stock-based compensation expense of $426,000 and 5 million for the years ended December 31, 2004 and 2003 respectively. General and administrative expenses for the three months ended December 31, 2004 decreased 24 percent to 4.3 million to 5.7 million for the corresponding period in 2003. For the year ended December 31, 2004 general and administrative expenses decreased 20 percent to 18.6 million from 23.2 million in 2003. These decreases were primarily attributable to the absence of any material amount of non-cash stock-based compensation expense in 2004 as compared to $1.2 million and 5.1 million for the three months in the year ended December 31, 2003. Lexicon's net loss for the three months ended December 31, 2004 decreased to $541,000 from a net loss of $14.9 million in the corresponding period of 2003. Net loss per share for the three months ended December 31, 2004 was 1 cent as compared to a net loss of 24 cents per share for the corresponding period in 2003. This compares quite favorably to our 2004 financial guidance where we projected a net loss for the quarter of $6 million to $8 million or a loss per share of 10 cents to 13 cents. For the year ended December 31, 2004 net loss decreased by 27 percent to 47.2 million from a net loss of 64.2 million in 2003. Net loss per share for the year ended December 31, 2004 was 74 cents compared to $1.13 for 2003. As of December 31, 2004 Lexicon has cash and investments of 87.6 million as compared to 97.7 million as of September 30, 2004 and 161 million as of December 31, 2003. The 2004 cash numbers reflect the use of 20.8 million in connection with the refinancing of the synthetic lease of our headquarters and research facility in the Lewoodlands [ph], TX in April of 2004. This transaction eliminated the restrictions on our cash and investment so virtually all of our cash in investments as of December 31, 2004 were unrestricted.

Now let's turn our forward-looking guidance for Lexicon's financial outlook in 2005. We estimate that are annual revenues will increase to approximately 70 to 75 million, which is a 17 percent increase over 2004 revenues at the mid-point of the projected range. We start 2005 with 48 million in contractually committed revenues. We expect the generate the remaining 22 to 27 million in revenues from new drug discovery collaborations, additional technology license agreements, government initiatives and other contracts. However, we cannot guarantee the signing of any of those contracts or predict their timing and this may cause our revenues to fluctuate from period to period as they have historically.

Total operating expenses should increase approximately 18 percent over 2004 and range from 125 million to 131 million. This reflects projected research and development expenses for 2005 of 104 to 108 million as we prepare our lead programs for IND filings and continue to invest in the expansion and advancement of our drug discovery program. General and administrative expenses in 2005 should increase to 21 to 23 million. Our projection for research and development and general administrative expenses in 2005 reflect approximately $5 million of non-cash charges related to stock based compensation. In accordance with FASB123R we will be required to expense these charges after July 1st of this year. Overall, we are projecting our net loss for 2005 to range from 56 to 59 million or 88 cents to 93 cents per share based on weighted average shares outstanding of 63.6 million. Capital expenditures are projected to be approximately 9 to 11 million for 2005 as compared to 11.8 million of 2004. We expect that cash used in operations and for capital expenditures in 2005 will be approximately $25 million to $30 million.

Now let's review our guidance for the first quarter of 2005. Revenues for the first quarter 2005 should be in the range of 9 to 10 million. These revenues are primarily the result of our alliances with Bristol Meyers Squib, Takeda and Genentech. Operating expenses for the first quarter are projected to range from 30 to 32 million. This reflects among other things the costs of the IND enabling studies under way for LX-1521 and the cost associated with early scale-ups of protein production for LX-5431. We are projecting our net loss for the first quarter to range from 20 to 22 million or 32 cents to 34 cents per share. 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. Overall, I am very pleased with our financial and business performance for the fourth quarter and the year 2004 and particularly pleased with the continued execution of our business strategy and our ability to generate revenues from our drug discovery program. Thank you and now Arthur and I will answer any questions you may have.

++ q-and-a

[operator instructions] Annabel Samimy with UBS.

Hi, thanks for taking my call. Quickly, can you talk a little bit about your key areas of focus outside of just cancer for your proprietary drug development given the diversity of your pre-clinical pipeline? And, what is more likely to be partnerable or one that you would see collaborations for versus the others, and also, if you could provide an update on some of the other programs in development?

Yes, thank you for your question Annabel. So as you know we have 5 therapeutic areas that are unpartnered. Our neuroscience area is partnered with BMS, so we are also very interested in the area of immunology. That is an area that has been highly productive for us. We have some 16 programs, drug discovery programs in immunology. It does relate in some ways to our oncology area of interest and so I think those two I think are strategically very important to us for internal development. It's not to say that we wouldn't consider partnership for programs in that area, but we feel that we are able to move forward our own programs very efficiently there. Hence, our lead program is in cancer and, of course, our therapeutic protein program is in hematology, which is relates to the hematophotic [ph] system.

The other areas that I think are perhaps more intriguing for partnership include the metabolism area with diabetes and obesity. I think there because some of the parameters we look at as we consider partnership include the scale of the clinical trials required. Some of the likely issues regarding safety and efficacy that one would face in the area of metabolism and also the broad marketing requirements and sales forces that can be required for such large products and all those things taken together argue for finding partners to help augment our capabilities and, of course, we would enable the partner with novel programs. So, I think other areas of interest include optomology. That is an area that's been a growing area of discovery for us. It's not one we've had a lot of opportunity to discuss and I think in the future we'll be talking more about those programs. Our area of Cardiology other than hypertension which is partnered with Takeda also we have several programs there that we have not had an opportunity to highlight before publicly. I think that in the near future we'll be giving future updates on our obesity program and our metabolism program. We've been spending a lot of time focusing on our lead programs as we prepare them for IND filing, but I do think we'll take more time in the future to highlight some of the development programs that are coming. Our goal as you know for 2005, is to have 4 more clinical candidates, development programs, coming forward which would form the-- they would be the coming behind our two clinical candidates which we already announced. So you see the breadth of the pipeline coming. So that gives you kind of a review.

OK, If I may ask one more quick question. This is probably for Julia. Can we expect the same revenue progression that we saw in prior years, lower earlier in the year and probably more back ended? And should we expect the same split in terms of collaborative revenues and licensing in terms of 80 and 20 or does it fluctuate throughout the year?

So let me address the quarterly revenue, because as you know that we in general or historically have had more back-ended revenue growth. So historically our third and fourth quarters have had larger revenues than our first and our second quarters and so I think you should continue to see that. As I said, we are starting the year with 48 million in committed revenues and those are not necessarily spread evenly over the year. They are also slightly back ended as well and we are guiding as you heard 75 to 75 million in revenues. Was there something else you wanted that you asked there too?

Yes, it was the split between the collaborative R & D and licensing. If we should still assume 80-20 for that?

Yes, I've been guiding to that type of split for a while so I think you should expect to see that type of split continuing. Most of our activity which has been very robust in the corporate partnering side this year and continuing from last year and I predict ongoing will be the primary source of our revenue.

Okay great, thank you very much.

Jason Kantor with W. R. Hambrecht.

Yes, thanks. Actually it's Michael McGee [ph] for Jason. We had just a couple quick finance questions. You guys fell pretty well short of the expense guidance in Q4. Was there something that maybe was shifted into Q1 or was it just a lot of cost efficiencies? Can we think about the same kind of run rate going into the first quarter [indiscernible] split? And then what was in that other income about a $million in the fourth quarter?

So I like to say we came under our expense guidance, nicely under our expense guidance and that's because we have the ability to manage our expenses pretty well and we have systems and controls in place to constantly focus on operating efficiencies ands ways that we can capture our operating efficiencies. So I think that we create our budgets for the year as we always do and then we do expect to come along that line, that guidance, but if we can continue to improve upon our expenses we will do so so I was pleased that that could happen. In the other income line you've asked the question of why do we have that number for the year and that number is basically-- you're talking about fourth quarter, correct?

Correct.

JG?: Right and that number relates to a settlement of an insurance claim that we had and where we were awarded the additional funds.

Okay, thanks.

Sharon Tyler [ph] with Punk, Ziegel & Company [ph].

Good morning. I was wondering if you could first give us some more detailed guidance about when you would expect the two clinical candidates to enter the clinic, particularly the protein which I understand will really be in the process development this year? Then can you perhaps comment on some of the other programs that you've discussed in the past as being the most advanced?

Thank you, Sharon, for your question. So as I've stated we expect to file a 9D for the small molecule cancer compound, anti-cancer compound LX-1521 by year-end and we would then look to commencing a phase one clinical trial shortly after that. The protein, LX-5431, generally as with most therapeutic proteins takes significantly more effort in the scale of methodology and production methodology that's selective and that's very important for the activity of the protein of course and the safety of the protein. So that will then push us into 2006 for an anticipated IND [ph] filing for that protein. As you know though, the great thing about therapeutic proteins is once moving forward into the clinic they do tend I'd say on average to be safer drugs. They tend to have less side effects than small molecules compounds given the exquisite specificity of dealing with one of the body's own proteins. So in that regard proteins then can move fairly rapidly through clinical development. I think then we would be able to move more rapidly with that program. So that's our time line for those two programs. With regard to other lead programs that we've highlighted in the past, LG-653 for obesity continues to be our lead program in the area of obesity. We have additional targets that we've discovered as well. The development of compounds for LG-653 I think requires more time and I think that that largely relates to the high need for a very high safety profile for these compounds. As we've seen with any small molecule compound that is to be chronically administered for a non-immediately life-threatening condition such as we've seen with Vioxx etcetera that I think compounds now are going to have to meet a very, very high standard and we're very cognizant of the safety issues with any such compound. So we're studying those very closely. They're moving forward. I believe our metabolism program is going to yield several opportunities for additional obesity programs to come along but I hope to be highlighting 653 again in the near future for you.

Then in the area of neuroscience and cognition that program LG-617 is also moving along. The pharmacological studies with our compounds there also face I think a little bit higher hurdle given that we are measuring cognition and currently looking at studying effects on cognition on animal models which has its own set of challenges. So I think together those programs are a bit more challenging than moving forward with our cancer program and therapeutic protein program and that's why they came to the fore.

Okay, thank you.

Boudnas Nirvastava [ph] with Morgan Stanley.

Hi, thanks. It's actually Jason Chang [ph] calling on her behalf. It's two quick questions. First, in terms of the partnerships that you may be seeing in the next year or so are they going to product or therapeutic area based and in terms of what areas they may be in? And second, are you going to be presenting any data in the medical use in the coming year or so?

Let me answer the partnership question first. Of course we do anticipate entering into additional collaborations this year and they could take the form of either a therapeutic alliance, an alliance for selected programs or disease indication as well as an alliance for a specific gene class so I think we have opportunities on all of those fronts and can't specify exactly which one will be the ones that land. Having said that we are in negotiations right now on several different fronts. We're not predicting the number of collaborations that we're going to be entering into but I really would like you to focus on our revenue guidance to guide you to our productivity in the collaboration front.

And could you repeat the second part of your question please?

Sure. It's are you expecting to present at any medical meetings in the coming year, so on the two leading products or anything that you may have in pre-clinical development or such?

Yes, I'd say that we're very active on the scientific and medical meeting front. I can't specify today which meetings we would be anticipating but I will say that we will be going towards presenting pre-clinical data on LX-1521 as we explore more animal models and genograph [ph] data. Of course, then we would look forward to it by the end of the year disclosing more in terms of our clinical development pathway for that program after our IND filing.

Great. Well, thank you very much.

[operator instructions] Karen Bukovich [ph] with J.P. Morgan.

Can you give us a general overview of what you consider the strengths and weaknesses of your chemistry organization?

Well, that's a good question. I'd like to focus on the strengths if I could first. I'd say you know the foundation of our chemistry group really harkens back to Professor Barry Sharpless [ph] when he founded that company, the predecessor company which was Sealicant [ph], and we acquired that company in 2001. Dr. Sharpless then subsequently won the Nobel Prize in chemistry for his work and I think his thinking was really woven into the initial chemical libraries, which have formed a very strong basis for our medicinal chemistry program. We now have over 400,000 compounds in our library and our collection and again that forms a basis for finding an initial hit but we've developed our program now at Lexicon Pharmaceuticals clearly in the direction of very high end medicinal chemistry and I think one of our great strengths has been our successful recruiting and building of a substantial medicinal chemistry program in New Jersey. I think for those of you who have visited that facility you would find that to be quite impressive and I think in the future we'll probably have to arrange such visits more. We have over 100 people in our medicinal chemistry division in Princeton so it's quite a significant group. The recruiting effort I referred to has been very successful in bringing in senior medicinal chemists who have created drugs before, moved them into the clinic and these are recruiters from the large pharmaceutical companies in that region. It's part of the reason for having a facility in that part of the country. And then we've also brought in very innovative young scientists into the organization so it's a great group there.

In terms of weaknesses I'd say that like any medicinal chemistry operation the greatest weakness is you never have enough chemists and that's because of the number of chemists requited per program to bring them forward to lead so we focus on making the number of chemists we have as efficient as possible and effective as possible but certainly I think more is better and I would like to continue see that grow.

Okay my impression is that you focus on about 4 to 6 programs at a time. Am I in the right ballpark and have we hit on the 4 to 6 programs that are the focus of chemistry right now? Have we covered those today? If not, add to it.

Right, so we're really at the level of about 6 programs now at lexicon and we have really been describing historically small molecule programs for only 3 of those. As we go forward and as they develop we will be describing additional programs. What I can tell you is some of them are quite remarkable. They're operating on targets that have tremendous genotypes. We've focused in on those kinds of targets and programs where we have excellent biomarkers where we can track the effectiveness of the compounds very early in the animal pharmacology studies and I think those biomarkers will pay another dividend when we go into the clinic in humans where we can then track the biomarkers as well. So I think that the new programs some of which we will be highlighting this year you'll find to be very, very intriguing and they're going to be the basis of our future pipeline for IND filings in 2006.

Okay, I'd like Julia to comment on how Lexicon Genetics controls expenses and then also on I think the status of the Genome 5000 program I think your goal was 2,300 completed projects. You're greater than 2,000. Are you where you want to be and is that proceeding well?

Okay so let me talk a little bit about controlling operating expenses although you're getting into the real infrastructure at Lexicon. We in 2001 began a process to identify ways that we could set up systems, enterprise wide systems, to track all of our expenses and manage our scientific processes, the business processes and the financial processes in such a way to be operationally efficient and we put that program into place in January of 2002, which was our enterprise wide resource planning system connecting all of our system into our financial system. So what we're doing with that process and those programs are technically capturing all of our costs and managing our revenue in timing and flows in a very efficient manner so I think that's something that we have been ahead of the curve in the industry in implementing. We have even won awards for the system that we put in place so I'm pleased that that has set us up very nicely for Sarbanes Oxley for '04 to be in a very good position with the new regulations that are in place today to have the necessary controls over our processes.

Karen, maybe I can address the Genome 5000 portion of your question. Our goal is at the end of this year to be 60 percent complete, that is to have 3,000 out of the 5,000. We in 2004 were slightly behind our goal in the number of genes knocked out and fully analyzed but I believe now we're at our full run rate of 1,000 genes a year which is where we wanted to be so I don't think it will make a material difference in our harvesting of the drug discovery programs.

Okay and did you advance 4 programs to lead optimization and pre-clinical research in '04?

Yes, we did and we've got-- those are programs again that we'll highlight more this year. We expect those programs to give us the yield in the clinical develop candidate that we'll select this year. The goal is 4 clinical development candidates to be selected this year in addition to the 2 we already have that are moving forward.

Okay, thank you very much.

And that is all the time we have for questions today. I will now turn the call back over to our speakers for any additional or closing remarks.

Well, thank you very much for participating. Goodbye.

That does conclude today's conference. Thank you everyone for your participation.

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