Lexicon Pharmaceuticals Inc (LXRX) 2005 Q2 法說會逐字稿

Welcome to the Lexicon Genetics Second Quarter 2005 Conference Call. [OPERATOR INSTRUCTIONS]. At this time I would now like to introduce your host for today's call, Carol Schaper (ph), Vice President of Finance and Communications. Please go ahead Ms Shaper.

Good morning, and welcome to the Lexicon Genetics second quarter 2005 conference call. I am Carol Schaper, Vice president of Finance and Communications at Lexicon. And with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer. Dr. Brian Zambrowicz, Lexicon's Executive Vice President of Research, and Julia Gregory, our Executive Vice President of Corporate Development and our 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'll review the information provided in our release and 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 cooperate development accomplishments during the second quarter. Dr. Zambrowicz will discuss our recent announcement related to our work in the Texas Enterprise Fund, and Ms Gregory will then review our financial results for the second quarter 2005, and discuss our financial guidance for the third quarter and full year 2005. We will then open the call up 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 that are 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 effort, our ability to obtain patent protection for our discoveries, commercial limitations imposed by patents or under control 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 report 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 will begin with a brief review of Lexicon's progress in the second quarter of 2005. During the past quarter, we entered into two alliances to accelerate the development of our biotherapeutics program. The first is a broad alliance with Organon for the development and commercialization of novel antibody and secretive proteins. The second alliance is with XOMA that provides us with access to key antibody technologies. Organon is a global pharmaceutical Company comprising the human health care business of (indiscernible). Organon has more than 15,000 employees, had 2 billion Euros in revenue in 2004, and sells pharmaceutical products into over 100 countries. It also owns (indiscernible), the world's fourth largest contract manufacturer of active biopharmaceutical ingredients.

Organon's substantial clinical manufacturing and commercialization experience make them an excellent collaborator for us. The Lexicon-Organon biotherapeutic collaboration is focused on 300 genes that include potential protein candidates for antibody or therapeutic protein development. Lexicon will knock out and analyze the function of each of the 300 selected genes and will conduct advance research on promising drug targets. As high quality targets with potential medical application are identified, they will proceed into product development. Lexicon and Organon will work together on protein and antibody development, pre-clinical, clinical and commercialization activity. Given Organon's biologics manufacturing capability, it will have primary responsibility for manufacturing collaboration products for clinical development and commercialization. Lexicon and Organoan are sharing equally in the activities and costs associated with the discovery and development of collaboration product. With this 50/50 ownership structure both parties' interest are aligned for success. Our relationship with Organon began as a target validation agreement in 1999. Like our other key alliances, we have developed significant mutual respect over time and our early work led to a more substantial, strategic relationship. We believe the combination of Lexicon's powerful drug discovery engine with Organon's drug development expertise will result in a pipeline of novel biotherapitics drugs.

In the second quarter, we also announced an antibody technology alliance with XOMA. This alliance is designed to apply XOMA's broad range of antibody generation technologies, process development and manufacturing expertise to certain of our validated antibody targets. We are already working together on one target and will submit at least two other targets with the collaboration. We share the responsibility and cost for research, pre-clinical, clinical and commercialization activities for the antibody. The alliance is structured with both cost and profits allocated 65% to Lexicon and 35% to XOMA. Now, let me briefly discuss our drug development programs and our drug discovery pipelines.

We have reached a significant milestone in our Genome 5000 program. Having completed the analysis of more than 2500 genes or 50% of all (indiscernible) genes. Furthermore, we are on track to further analyze the function of 1000 genes this year. We now have more than 70 drug discovery programs resulting from the Genome 5000, and we are enthusiastic about the quality and novelty of this drug discovery pipeline. Regarding our LG152 program as you know, we have been evaluating LX-1521 and back up compounds in preclinical research and development. Based on our preclinical testing in rodent and non-rodent species, we have decided not to pursue further development of LX-1521 as a potential anti-cancer target agent. LX-1521 did not exhibit the characteristics we thought were needed to compete effectively in the crowded cancer market place. Therefore, we do not anticipate filing an IND for LX-1521 for cancer. However, we are working on other compounds within the LG152 program, which we continue to believe has significant potential. We have the advantage of working on multiple targets and compounds simultaneously, only moving those compounds into the clinic that we believe have a high probability of success. Our work suggests that we have opportunities that are more promising than LX-1521, and we are actively pursuing those opportunities. In general, we are pleased with the rate at which our programs are progressing, and we will keep you informed of key development and milestones as they occur.

At this point, I would like to turn the call over to Dr. Zambrowicz to discuss our recent award from the Texas Enterprise Fund that was announced after the end of the second quarter.

As many of you saw in July 16, we announced that we have received an award from the Texas Enterprise Fund for $35 million. In exchange for this funding, we are creating a new version of our OmniBank Library for the Texas Institute for Genomic Medicine. This is a newly formed non-profit institute designed to foster collaborations between Texas' Academic, Medical and Commercial Organization. We and Texas A&M are it's co-founding members. Our role is to supply the institute with its core assets, a library containing 350,000 knockout mouse embryonic stem cell lines. Texas A&M is responsible for the day-to-day operations of the institute and its operational funding. And Texas A&M will build and maintain facilities to house the library. We will use our proprietary gene trapping technology to create the library. We expect to be able to create the library within the next three years, primarily using existing genomic infrastructure. Creation of the library will not involve any of the personnel or other resources that are devoted to our drug development activity. Under the $35 million award, we will also be supplying the institute with bioinformatics software to manage and analyze the library. This software has already been developed by Lexicon. In addition, we are providing the institute with certain rights under our gene-targeting patent. We believe that this is a very positive development for Lexicon for several reasons. First, it demonstrates our ability to realize value from our genomic assets without compromising our drug development efforts. We are providing ES cell lines to the institute not to be associated (indiscernible) data. We are currently initiating the last of the projects in our Genome 5000 program, providing us with a substantial head start in determining the function of druggable targets. Second, we believe the institute will facilitate scientific discoveries on the 15,000 to 20,000 genes not included in our Genome 5000 program. This could elucidate pathways and provide other information helpful to our drug development initiatives. Third, we believe working with a non-profit institute will help to better position us to participate in the NIHS knock-out mouse project and finally we expect the institute to leave with a creation of a more robust biotechnology industry in Texas. That will help us to continue to attract top talent and key resources over time. In summary, this awards from Texas enterprise fund demonstrates once again our ability to maximize the value of our diverse asset base. At the same time it provides a rich and unique resource to researchers worldwide.

I will now turn the call over to Julia Gregory, to review our second quarter financial results and provide guidance for the third quarter and full-year 2005.

Thank you Brian. In the second quarter 2005 Lexicons top and bottom line performance relative to our financial guidance was very strong. I would like to review our financial results with you and discuss our guidance for the third quarter and full-year 2005. Lexicon's revenue for the three months ended June 30, 2005 increased 29% to $13.9 million from $10.8 million for the corresponding period in 2004. This compares favorably to our guidance of 9 to $11 million of revenue for the quarter and marks the strongest second quarter revenue performance in the ten-year history of the Company. The increase was primarily attributable to revenue recognizes under our new collaboration with Orgonan and revenue related to our alliance with Dakota that was initiated in July 2004. We terminated the remaining subscriptions to our Lexicon and database in 2004. So that decreased in technology in licenses fees partially offset our growth in collaborative research revenue.

Research and Development expenses for the second quarter 2005 increased 5% to $23.7 million from $22.6 million for the course-running period in 2004. The increase reflects the hiring of additional personnel to support the expansion and advancement of our drug discovery programs and the cost of external research related to pre-clinical and scale of activities for our lead program. This is partially offset by the elimination of expenses associated with the subscriptions to insight LifeSeq Gold database. General and administrative expenses for the three months ended June 30, 2005 increased 2% to $4.8 million from $4.6 million for the corresponding period in 2004. Lexicons net loss decreased to $14.8 million for the three months ended June 30, 2005 from a net loss of $16.8 million in the corresponding period in 2004. Net loss per share for the three months ending June 30, 2005 was $0.23, which compares favorably to a net loss of $0.26 for the corresponding period in 2004 and to our guidance of a net loss $0.30 to $0.33 for the 2005 second quarter. Cash and investments at June 30, 2005 were $72.8 million compared to $70.7 million as of March 31, 2005 and $87.6 million as of December 31, 2004. Cash and investments for June 30, 2005 does not include the $35 million in cash from our Texas enterprise fund award, those funds are expected in August.

Now lets turn to our forward-looking financial guidance for the third quarter and the remainder of the year. Revenue for the third quarter 2005 should be in the range 12 to $14 million. This revenue is primarily the result of our alliances with customer expected in Orgonan. We will begin recognizing revenue related to our award from the Texas enterprise funds in the third quarter. We will recognize the revenue approximately $20 million of this award over the three years it will take to create a library. The balance of the award will be treated as deferred revenue for the ten-year job creation period related to the institute for genomic medicine. As our portion of the job obligation diminishes, either because of jobs created or funding offsets, we will recognize the related revenue and reduce the associated deferred revenue liability.

Operating expenses for the third quarter projected to range from 30 to $32 million. We are projecting our net loss for the third quarter to range from 17 to $19 million or $0.27 to $0.30 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 or not a good indication of our future performance. We confirm our original revenue guidance for the full-year 2005 of 70 to $75 million. Our 2005 revenue we see today and our contractually committed revenue for the balance of the year is slightly more than $65 million. We anticipate generating the remaining revenue from new drug discovery collaborations and other contracts. There could be upside to our 2005 revenue guidance based on the successful conclusion and on ongoing collaboration in contract discussion. However, we cannot guarantee the signing of any future contracts or predicted timing. They are also confirming our full-year 2005 operating expenses to range from $120 million to $125 million. This reflects projected research and development expenses, for 2005, were 100 to 103 million and general and administrative expenses of 22 million. Overall we are projecting our net loss for 2005 to range from 49 to 52 million or $0.77 to $0.82 per share. And our net loss is calculated based on weighted average shares outstanding of 63.9 million.

At this time I'd like to positively revise our expectations for our cash position at year-end 2005. We expect to receive 35 million in cash related to our Texas Enterprise Fund awards in August 2005, as I previously stated. This funding combined with 33 million in cash scheduled to be received from Organon this year, provides us with $68 million in non-diluted cash inflows from new deals in 2005. As such, we expect cash used in operations and for capital expenditures to range from 15 to 20 million in 2005. This compares favorably to our original expectations and we would use 25 to 30 million in cash for such purposes in 2005.

If we successfully conclude ongoing coloration and contract discussions, there could also be upside to our 2005 cash guidance. We expect that our current cash and investments coupled with anticipated revenue would be sufficient to fund our operations for at least the next two years. Overall I am pleased with our strong second quarter financial results and our corporate development successes. I am particularly pleased with our continued ability to generate substantial revenue in cash from our drug discovery programs and technology and intellectual property assets.

Thank you, and now we'll answer any questions you may have.

[OPERATOR INSTRUCTIONS] Jason Kantor, RBC Capital Markets.

This is Mike (ph) for Jason Kantor. Just a couple of questions. Can you talk about I guess the timing of an IND for 5431 given the disappointment with 1521, and talk about what exactly went wrong with 1521, and I guess we will start there, with 521, sorry?

So, let me start out with that. So, with LX-1521. So, our pre-clinical testing as I stated as it was in pre-clinical research in both relevant (ph) and non-relevant species really just indicated that it didn't exhibit the characteristics that we felt were needed to compete very effectively in what is a very crowded cancer marketplace. So, I think that really sums it up for 1521. Now, we do continue to be very enthusiastic about the LG152 program and there are multiple other compounds we are exploring in that program. So, I think what we have decided to do in terms of future statements about forecast of our pre-clinical or eventually clinical milestones is that we are going to keep people apprised of them as they occur rather than attempt to forecast what can be very difficult to do given the biologic mechanisms that we are exploring here.

How far back are other candidates and then maybe are you taking away guidance for 543 or are you still think you can IND there in 2006?

Well, what I can say generally is that we are very confident about our pipeline, we have multiple programs moving forward, and we have multiple compounds in each programs. Our goal is of course to have back-up compounds on the small molecule side for each target we pursue. On the biologic side these are more unique, and it is not the nature of therapeutic proteins to necessarily have backups because the protein is the protein. So, what I will tell you is that we have a pipeline that is in place, we are confident about moving those programs forward. And we are going keep you apprised as we reach those milestones. One thing, one other component I can add about those the LX-1521 experience is that, we have done actually all the works that would be necessary or would have been necessary to file an IND LX-1521 by the end of the year. And we would have done so if we thought it was the right thing to do ultimately was going to be a competitive drug in the cancer marketplace, and so, with the decision and a choice we made based on that analysis.

Edward Tenthoff, Piper Jaffray.

One quick question for Julia, did you actually mention what you though year-end cash would actually be?

Well, what I said was that last year's year-end was 87.6 million. Right? And that our guidance would be for cash used in operations plus CapEx would be 15 to 20.

I am sorry, last year was 87.6, and now you use 15 to 20. And also, can you give us some update -- I know one of the other programs how you spend a lot of time on in the past, and I just haven't heard as much on recently was the cognition program. Could you kind of update us where that stands, and in that now your `lead program` behind LG 521.

Yeah, as we've described in the past that continues to be a very exciting program, and I would say those constitute our lead program. It is as we have shown our results with some of our lead compounds in the program they do in fact reproduce this effect of a parent enhancement of learning a memory in the animal model systems that we use, and we have shown you that data. So that is quite an important result, and there are again a number of compounds in that program, and we are pursuing them vigorously, so we are very encouraged by that, and it really does feature the whole strategy of having multiple targets, and then per target, multiple compounds behind them, because as we all know there is going to be a certain inherent attrition rate for any compound weather in any single compound in, and group in pre-clinical or clinical development. And so having a whole pipeline is really the key. The other thing I would say about 617 in our general strategy is that the normal nature of 617 is that it gives us a major advantage we believe will have a major future advantage in the market place. And that's also true with the kinds of programs we want to bring forward. We have to see a significant imbalance for each of them.

Well that's the benefit of having so many programs. Great, congratulations.

Annabel Samimy, (ph) UBS Research.

Hi, and thanks for taking my call. I had a quick question regarding the 521 program. Is it more likely that some of the backup

compounds will be what (indiscernible) as an IND in the future, are you are looking to other programs to move forward as IND at this point?

What I can say is that we are exploring backup compound, and we've decided not to make forecasts about those milestones rather inform me of the mile stones as they occur. We do have in addition to 152 actually over a 70 target programs, and each of them have compounds moving forward. So, I think that's probably about all I can say at this point about that.

Okay. On the 617, have you actually tested (ph) a compound for that program yet, and you had mentioned you invented a major advantage over what is already out there. Have you identified what this specific major advantage is with 617 versus other compounds?

Yeah, so, we have as I have shown before we have a lead compound in the 617 program, and we have other compounds in that series. So, we see dollars moving forward. The advantages of 617 are pretty clear, (indiscernible) expressed only in the brand is a novel target for cognition, is a relatively uncrowded space and therefore I think establishing a noble mechanism, and a first in class agent is highly feasible. That program continues to move forward very well and again we like to pursue the strategy of having for all of our targets when possible having a lead compound and also having very high potential backup compound for each one. And we'll have that in 6 months time.

And what specific indications are you looking at?

For 617 if the indication of cognition in general and then specifically that these indications could include Alzheimer'sor other nerve psychiatric diseases that have a cognitive impairment component.

That includes schizophrenia, something like that.

That's including schizophrenia, the other thing that I'd say is that 617 is a -- in our testing of our lead compounds has shown better effects in the preclinical models of cognition, then some of the known compounds already there that are currently used for this indication we use them as benchmark and we see a excellent performance of our compound. So in the area of cognition I think it's going to be a very exciting new mechanism to explore and see how that develops.

One more question for Julia, in terms of another license fees being pretty lumpy, but I was just curious you'd sign an exemption with Verus (ph) and you'd sign new agreement with J&J at the end of the year? Soon therapies will be providing, I don't know how the revenues work from there but still they'd provide some kind of stability in the license fee lines?

It's lumpy, you are actually right and about me. The quarters we will see over time and we'll see some -- you will see the lumpiness probably even more so as we go forward in the quarters. But there will be license fees there. We don't expect them to be a major source of revenue for us compared to our collaborative research. Our collaborative research has increased dramatically over time.

Sharon Seiler, Punk, Ziegel & Co.

I was wondering if you could perhaps provide some more color on the 152 compounds that you have decided not to go forward with in particular. When you say it doesn't embody the characteristic necessary is that because that wasn't pate important, it wasn't specific, it was not well tolerated, it wasn't available. I am just trying to get a sense of what specifically went wrong there? And I guess along with that you mentioned that 617 is now `the lead compound,` can you give us an idea or maybe suggest compounds that are next most -- the other programs that next most advanced to this point. What stages they are at?

Yes, Sharon Seiler I can tell you that, you know, as you know as we put LX-1521 through the phases in preclinical research and development, we evaluate all those parameters together, the potency, the efficacy, and the safety talks profile. I can't describe each of those parameters, but they are really taken together to paint that picture as to whether or not we believe this particular compound would be competitive ultimately, and in this case the capital marketplace which is a very crowded marketplace, even at the clinical trial level it is extremely crowded. So we take all those parameters we look at this particular compound and then we look at the backups. And in this case, we have highly promising backups that we believe we'll continue to evaluate in preclinical research and that may have better attributes. So, now that approach is an approach we take for every target. Again the morning backups and then judging each compound on the (indiscernible) as to whether or not it is ultimately right for that compound that's going on demand. During the process -- again I mentioned this before, but the industry standard is about 50% of compounds. We will have a separate attrition during that preclinical phase and I think that is something that has not changed significantly in this small molecule drug involvement world over the past many years. So, I think that now to 617, your point about 617 that is our lead program. Again 617 is a novel target that then has multiple compounds that we are exploring to act on that target. We have a lead compound, which I have shown before in terms of its action and pharmaceutical object testing in learning a memory and it has reproduced very reliably the results of increasing learning a memory in animal models. So, this program I say does appear to be our lead program and we are enthusiastic about moving this forward. And in medical indication that is what crowded, I mean frankly does have less competition and that does -- I think that puts us in a better position as we get into the clinic.

Jason Kantor, RBC Capital Markets

Just a follow-up. It's Michael. Can you talk about the revenue recognition from the data center price point or is that -- should we think about that being booked evenly across quarters or is that kind of booked as work is done, and then how should we think about expenses for that? You didn't change expense guidance, is it not really meaningful, is that kind of falling more into 2006?

No, we will have some expenses in 2005 as well as we start to create the library. But, I think in terms of the revenue recognition for the enterprise fund, approximately -- of the 35 million, approximately 20 million will be recognized over the three-year period that will take to create the library, all right? And then, the rest of the approximately 15 million will be treated as deferred revenue for the ten year job creation period related to the institute so that, as we satisfy our job obligations, which we can satisfy either by actual jobs or funding offsets, which we are very enthusiastic about, then we will recognize that revenue as those instances occur. Is that helpful?

At what point do you recognize the revenue, is it as work is done or it's actually evenly spread across the amortization?

It's evenly spread across a three-year period.

And then, I guess, going back to 543, are you guys still selecting a protein production scale up methodology or what - - can you talk maybe about where you guys are with that program?

I didn't hear that question.

Could you repeat the question please?

Hi, going back to 543, are you guys still selecting a protein production scale up methodology or can you talk about where you are with that program?

Yes, we are continuing to do work on protein production methodologies for optimizing activity.

Sharon Seiler, Punk, Ziegel & Co.

Thanks. Can you just give us an idea about, besides the compounds associated with 617 and the 5431 program, what are the next two or three programs most advanced at this point and at what stage are they?

I have a little trouble hearing the front end of your question. Could you repeat that please?

You have discussed 617 and 5431. Can you give us an idea of what the next two or three most advanced programs are and what stage they are at?

Well, I think at this time, Sharon, I don't think that we are really prepared to disclose those. We have - - what I will say is we have about six to seven that are in lead optimization. There are six to seven targets that are lead optimization in the mid-term phase, and I think we have described that before -- the numbers, and so the pipeline is very broad there. And then, in the biologics programs, we have about three to four that I would characterize as being lead programs. So, what we try to do as we go forward is describe them and disclose details about them as we believe they have become - - as they had a preclinical research basically. And so, we are doing that of course for 617 where we have shown from pharmacologic results of the lead compound. We talked about 5431 and I believe as I said, with those other programs that I numbered in both small molecular and biologics, we will describe more about them in the future as they progress with the preclinical research.

At this time, there are no further questions in queue. Please continue.

All right. Well, thank you for joining us today. I think I would just like to reiterate that we've had a very successful first half, and with regard to the drug development pipeline, we have a significant advantage because we are working on many programs simultaneously. I also think one of the most significant things during this first half has been that the value of our approach in general continues to be highly endorsed by our partners and the new partnerships we've formed I think are testimony to that. So, that concludes our update for the quarter. Thanks for participating.