Lexicon Pharmaceuticals Inc (LXRX) 2005 Q3 法說會逐字稿

Please stand by. Thank you for holding. Welcome to the Lexicon Genetics Third Quarter 2005 Conference Call. (Operator Instructions). At this time, I would now like to introduce your host for today's call, Carole Schaefer, Vice President of Finance and Communications. Please go ahead, Miss Shaffer.

Good morning and welcome to the Lexicon Genetics third quarter 2005 conference call. I'm Carole Schaefer, 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, our Executive Vice President of Corporate Development and Chief Financial Officer.

We expect that 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 the 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 accomplishments during the third quarter. Miss Gregory will then review our financial results for the third quarter 2005 and discuss our financial guidance for the fourth quarter and full year 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, discovering 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 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 that we have filed with the Securities and Exchange Commission.

I will now turn the call over to Dr. Sands.

Thank you, Carole, and good morning, everyone. During the third quarter, Lexicon made significant progress in the pre-clinical development of several drug discovery programs by demonstrating proof of concept in animal models, using our lead compounds. These programs are at the stages of lead optimization and formal pre-clinical development in preparation for IND filings.

LG617, for cognitive disorders, is our most advanced, small molecule drug discovery program. Our first clinical candidate in this program, LX-6171, is orally bioavailable and demonstrates favorable pharmacokinetics in animal models. LX-6171 has entered formal pre-clinical development and is currently undergoing safety studies required by the FDA for IND filing. We expect that the standard timeline of 9 to 12 months to complete formal IND enabling pre-clinical studies, will apply to this and our other lead programs.

Assuming satisfactory results from our pre-clinical work with LX-6171, we expect to initiate a Phase I trial in normal, healthy volunteers, primarily to obtain information as to how well the drug is absorbed and tolerated. We believe our agent may have utility in a spectrum of medical indications in which cognitive function is compromised. Based on results for Phase I studies, we will then assess the most appropriate indication for Phase II trials. Potential indications include Alzheimer's disease, Schizophrenia, Fragile X Syndrome, Attention Deficit Disorder and other conditions involving cognizant impairment.

During the past quarter, we disclosed for the first time, two other small molecule programs in lead optimization. These are LG727 in metabolism and LG267 in immunology and oncology. LG727 is an enzyme, that when knocked out, results in leanness and resistance to diet-induced obesity. We are currently performing pharmacologic testing and lead optimization in this program and have achieved enzyme inhibition in vivo with molecules from our lead series. We believe that blocking LG727 may have utility in the treatment of obesity, Type II diabetes and related metabolic diseases. LG267 is a kinase, that when knocked out, results in decreased immune cell activation and significantly reduced numbers of lymphocytes in the peripheral blood. Our lead compound in the LG267 program is orally bioavailable and has demonstrated potent inhibition of this kinase in vitro and in cell-based assays. Pharmacological testing of compounds from our lead series is now under way and lead optimization continues.

Small molecule drugs that block diskinases may have utility in the treatment of autoimmune diseases, transplantation and potentially, certain lymphomas and leukemias.

The programs I've highlighted are from Lexicon's internal drug discovery pipeline. They are just three of many programs that Lexicon has progressed into lead optimization or beyond. Half of our lead programs are being developed with partners. Lexicon's drug discovery programs derived from more than 70 knockout-validated drug targets identified from the Genome5000 program.

We have now completed the analysis of approximately 2,750 genes and have initiated more than 90% of the 5,000 genes included in this program. We remain on track to fully analyze the function of 1,000 genes this year.

To partially fund our pipeline of drug discovery programs and to keep multiple programs moving in parallel, we look for opportunities to monetize our technology assets. We've concluded two agreements, based on such opportunities, during this quarter -- a $35-million award from the Texas Enterprise Fund and a $4.9-million contract with the National Institutes of Health. These initiatives utilize existing technology and resources from our genomic engine, thereby enabling us to maximize the financial assets and personnel dedicated to our drug discovery program.

Our primary focus is on advancing our novel drug candidates into human clinical trials, and ultimately, to the market. We believe that our broad pipeline will enable us to select those compounds for clinical development that offer the greatest potential to benefit patients, while creating a strong market opportunity. We remain committed to multiple IND filings in the next two years.

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

Thank you, Arthur. In the third quarter 2005, Lexicon demonstrated continued revenue growth and expense control. I would like to review our financial results with you and discuss our guidance for the fourth quarter and full year of 2005.

Lexicon's revenue for the three months ended September 30, 2005, increased 7% to $14 million from $13.1 million, for the corresponding period in 2004. This is at the top end of our revenue guidance for the quarter of $12 to $14 million and is our strongest ever third quarter revenue conformance. Collaborative research revenue increased 18% from the prior year quarter, primarily as a result of revenue recognized under our biotherapeutics alliance with Organon and our award from the Texas Enterprise Fund.

It is noteworthy to consider that the third quarter of 2004 contained a one-time performance milestone payment from our antibody and therapeutic protein alliance with Genentech. If you exclude that payment, recurring revenue from collaborative research actually grew at a rate of almost 60%, compared to the prior year quarter. The increase in revenue in the third quarter of 2005 was partially offset by a decline in subscription license fees related to our termination in December 2004 of the last remaining LexVision(ph) database subscription.

Research and development expenses for the third quarter 2005 increased 4% to $23.3 million from $22.5 million for the corresponding period in 2004. This slight increase reflects modest hiring in support of the expansion and advancement of our drug discovery programs and external research costs related to pre-clinical activities for our lead programs. General and administrative expenses for the three months ended September 30, 2005 increased 2% to $4.7 million from $4.6 million for the corresponding period in 2004.

Lexicon's net loss decreased for the seventh consecutive quarter-over-quarter period. Net loss decreased to $14.1 million for the three months ended September 30, 2005, from a net loss of $14.4 million in the corresponding period of 2004. Net loss per share for the three months ended September 30, 2005 was $0.22, which compares favorably to both our net loss of $0.23 for the corresponding period in 2004 and to our guidance of a net loss of $0.27 to $0.30 per share for the 2005 third quarter. It also reflects the emphasis we continue to place on expense control.

Our cash and investments at September 30, 2005 were $90.2 million. This is an increase over our cash and investments at the end of 2004 of $87.6 million and compares favorably to our cash and investments balance of $72.8 million as of June 30, 2005. Cash and investments for September 30, 2005 includes $35 million received from the Texas Enterprise Fund in August.

Now, let's turn to our forward-looking financial guidance for fourth quarter and year end 2005. Revenue for the fourth quarter 2005 should be in the range of $28 to $33 million, in line with our full-year revenue guidance of $70 to $75 million. Projected fourth quarter revenue is primarily the result of the anticipated receipt of a performance milestone under our Genentech alliance and revenues from our alliances with Bristol-Myers Squibb and Organon. It also includes approximately $1 million from our initial $4.9 million NIH contract for knockout mouse lines and related (inaudible) data.

Our revenue projection for the fourth quarter also anticipates generating revenue from the successful conclusion of ongoing collaboration in government contract discussions. However, it cannot guarantee the signing of any future contracts or predict their timing.

Operating expenses for the fourth quarter are projected to range from $29 million to $32 million. We are thereby lowering our full year 2005 operating expense guidance to $113 million to $116 million from our previous guidance of $120 million to $125 million. Our new full-year guidance reflects projected research and development expenses for 2005 of $95 million to $97 million and general and administrative expenses of $18 million to $19 million.

As a result of our operating expense controls, we are also able to improve our bottom line projections. We are projecting our net loss for the fourth quarter to range from $2 million to $4 million, or a loss of $0.03 to $0.06 per share. We expect our net loss for the full year 2005 to range from $44 million to $46 million, or a loss of $0.69 to $0.72 per share. This compares favorably to our previous 2005 net loss of $49 million to $52 million, or a loss of $0.77 to $0.82 per share.

Our 2005 net loss is calculated based on weighted average shares outstanding of approximately 64 million shares. 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 are also reducing our estimates related to cash used in operations and for capital expenditures in 2005 to $10 million to $15 million from $15 million to $20 million. We expect to have generated approximately $100 million in cash in 2005, related to our currently existing collaborations and contracts. These cash end flows are non-diluted from an equity standpoint. We expect that our current cash and investments, coupled with anticipated revenue, will be sufficient to fund our operations through approximately the next two years.

Overall, I am pleased with our strong third-quarter financial results and our continued ability to generate substantial revenue in cash from our drug discovery programs and our technology assets. Thank you, and now, we will answer any questions you may have.

Thank you. (Operator Instructions). We'll take our first question from Sharon Tyler (ph) from Puntz, Eagle and Company (ph).

Good morning. If you can just repeat your guidance for net loss for the fourth quarter. I didn't hear that, and could you tell us of what proportion of the revenue is of the fourth quarter are committed revenues, and could you give us some color as to the type of contract or the type of work you are discussing with the government?

Okay, let me do that. So, Sharon, you would like me to repeat the guidance for the fourth quarter?

Just the net loss guidance.

Okay. Let me give that to you. So the (off mic). Okay, net loss for the fourth quarter is going to range from $2 to $4 million and that's on a share basis. That's a net loss of $0.03 to $0.06 per share.

Okay. Thank you.

In terms -- also, let me give you a little bit of color on the fourth quarter in terms of our signing another major collaboration, and what you're interested in knowing there is the committed revenue for the quarter. Is that correct?

Yes.

So, our revenue guidance, as you know, is $70 to $75 million for 2005, and revenue for the first nine months, as you know, was approximately $42 million. Our committed revenue in the fourth quarter and the anticipated Genentech performance milestone is approximately $20 million. So that leaves you with $8 to $13 million in forecasted revenue from new collaborations and government contracts.

Okay, and then, can you give us a sense of what kind of contract or what type of work you're discussing with the government?

Well, we continue to talk to the government on multiple fronts. We're very active in the infectious disease area, as well. We are also primarily discussing, at the current time, expansion of current contracts that we have. I think that the rise in contract is a very good example where we are looking at disease resistance, and there are opportunities along those lines, as well as other lines.

Okay, and if I may have a follow up. Is it primarily biodefense-type contracts, then, or others as well?

Well, Sharon, if I could step in -- we have primarily NIH discussions ongoing, however, we are also very active in biodefense. We have multiple lines of discussions with government sources of funding that mesh with our base technology. So it's hard for us to specify any one of those in terms of the advancements, rapidly, but they're all ongoing. Our technology touches many operations that the government's very interested in, and we simply try to take advantage of all of those that we can.

Okay, thanks. I'll get back in the queue.

Thanks, Sharon.

Next, we'll go to Karen Buchovitch (ph) with JP Morgan.

Hello. Thanks for the update on several of your programs. Could you also give us a quick update on the 1521 for cancer and 5431 on the thrombocide-leukemia program?

Yes, Karen. I can do that for you. First of all, on the 152 or 1521, the 152 target continues to be a very active area of investigation for us. We're very, very excited by the target. If you recall, that's a kinase -- we discovered a potential new indication in addition to the oncology indications, that are in the area of ophthalmology, and we hope to be talking more about that later.

The setback that we had in that program was for one compound in the program, which was compound 1521, which was the first compound we were moving through the pre-clinical development, in which we discovered that it has had a significant off-target activity. And so, as you know, about half the compounds in pre-clinical development won't proceed through for one reason or another usually related to toxicity which is what the case as this. So we have other lead compounds we're pursuing in that program, and as I said, I hope to update you on those as they progress. We remain very excited about that target and the potential for new and medical indications.

So then, onto the second one, LG543, which is the human protein we refer to as LX-5431, that program is proceeding. As we said earlier we're at the stage of creating potent and stable protein off of that gene. So there are multiple forms of the protein that are made. We know this now. We've been doing a significant amount of cell biology and cellular localization in tissue to track this protein. We know a lot more about it than we did about nine months ago when we announced it. And we believe that we're on track to getting this protein stabilized and produced in vitro.

Now, we're going to continue to work on it and keep you posted on that. But it's -- that's the story of making the protein in a stable form to get it to a target tissue to do the job. The phenotype, as you may recall -- and I'll just remind everyone -- is a very potent reduction in platelets growth and formation and megacariocytes (ph) growth. And so this protein is a cytokine of some type but that we are working up. So that's the update on that. We're going to actually provide a broader update on the whole biologics pipeline a little later on in the year. We hope to be spending some time on that at our investor and analysts day on December 1st.

Thank you. If I can just ask one more question? An update on the Takeda target discovery for hypertension? Are you actively working on that or are there targets in Takeda's hand?

Yes. We're actually working on that. That's a very interesting -- I'm glad you brought that up. That alliance has progressed very well. There have been a total of 3 targets under consideration within that alliance. The first target, LG-105 had a low blood pressure phenotype and as it turns out as we've investigated that target further, with Takeda we found an additional indication for the target which was an area of atherosclerosis and cardiovascular disease, more broadly. This led us to conclusion that low blood pressure phenotype may actually be secondary to the other phenotype related to atherosclerosis and the cardiovascular system.

So we know now from Takeda that for hypertension this is no longer a target for them. However, for atherosclerosis, we are going to be pursuing that at Lexicon as a target for Lexicon. So that LG-105 I think is an example of as we learn more and more about the cell biology and physiology related to these targets, we may often find additional indications. In this case, there's one that's rather dramatic that came up. So we're pursuing it for that indication.

Takeda is not pursuing it for hypertension. They still have two other targets that they're currently considering. As you know, the way that alliance works, they have 15 months during which they are evaluating these targets and studying them both biochemically and phenotypically. So it's an alliance that is proeeding and we're very excited about the LG-105 story actually coming into Lexicon's camp. We look forward to conducting a high-throughput screening on that in the near future.

Are the two targets mainly in Takeda's hands or are you actively working on them?

No. We work on them together during the 15-month period. Lexicon's role there is in the phenotypic side of the equation -- further phenotypic characterizations, what we call Level 2 analysis and some cell biological analysis. What Takeda does during that period is evaluate it from the standpoint of conducting a high-throughput screen and screening its compound library against it. And as you may recall, Takeda's responsible then for all the chemistry dedicated to the target downstream as well as the development -- clinical development. So our role during this period is more on the biologics side. And that's what we've been conducting.

Thank you very much for the update.

Thank you, Karen.

Next we'll go to Edward Tenthoff with Piper Jaffray.

Great. Good morning. Can you hear me okay?

Yes.

Hey, Arthur. Hi, Julia, how are you?

Hi, Ted.

Just starting out, congrats again on continuing to effectively finance the company in a non-dilutive manner here.

Thank you.

If you could, just please remind me how the Texas Enterprise Funds and now the NIH funds will be recognized? And then also at this juncture, you guys have done a very, very good job on the business development front in terms of partnering assets and monetizing assets. What is on the horizon for the collaborative funds or is it just at this point kind of time to buckle down and focus on getting drugs into the clinic?

Well, let me take your first question which is on revenue recognition for the Texas Enterprise Fund. The fund is a -- it's $35 million received by us -- that funds that award. The -- of the 35 million, 20 million is amortized over the period that we produced the library and that's approximately three years. And the remainder of the fund is about $14.4 million -- will be recognized. It's booked as deferred revenue and it will be recognized over time as we satisfy our jobs obligation.

Okay.

So that's the Texas Enterprise Fund. On the NIH side, the award was $4.9 million as you know, for the mouse knockout lines and related phenotypic data and that will be approximately -- $1 million of that will be recognized this year, Ted. And that -- once we ship the materials to them, they have a period then to accept the materials and move forward with them. And that's -- that will occur partially this year and the remainder will occur next year.

And then, Ted, on -- if I could take the second part -- lead off on the second part of your question. So we have a whole team of people who are focused and as you said buckled down totally dedicated to getting our drugs into the clinic. That's really the primary focus of the clinical development team and the pre-clinical development team. And so that's what we see as I think -- will be one of the major stories for the next year as these drugs move forward. We have then another team of people that is -- whose job is to focus on building up of our alliances and new alliances. That -- the new alliance group, the corporate development group is of course under Julia and she can perhaps comment on what we see and the tone of that market in 2006. But before I turn it back to her, I'll just say that job 1 is getting these drugs into the clinic and the alliances are another mechanism of furthering additional programs. So Julia, do you want to comment on --?

Well, I would love to comment on the corporate development landscape. I always continue to think I have one of the best jobs at Lexicon in terms of working with the pharmaceutical community but also you should realize, Ted, as you do -- our highest priority is to enter into alliances that accelerate the development and commercialization of our drug discovery. And those discoveries for me are a lot of fun to talk about and a lot of fun to work with with our pharmaceutical partners. The landscape at this time is a very embracing one for us. There -- we have many opportunities along the different therapeutics area lines that we have, so we have opportunities to do different types of alliances. So I look forward to 2006 as being another strong year for us.

Great. Thank you.

Thanks, Ted.

Next we'll go to Sapna Srivastava with Morgan Stanley.

Hey, how you doing. It's actually Jason calling on Sapna's behalf. Just two quick questions. First regarding the government contracts that you may potentially sign in the fourth quarter, I mean, can you describe a little bit more about the nature of how these contracts may be structured? Are they similar to the NIH programs that you announced last quarter? And secondly, in terms of the therapeutic areas that the company's been focusing on. I know there -- previously you mentioned there are six main areas. Do you find your efforts right now are more focused on certain particular areas than others even though you have multiple programs that are ongoing at the same time?

The government contracts possibilities -- I think I gave you a good example of them -- our Ricin program that we currently have for disease resistance. I think what we should see there in terms of expansion is an alliance like that or expansion of the current alliances we have. Those are more typical of things that we might see I think for the fourth quarter. On the collaborations front, the corporate collaborations front -- we have with all of our therapeutic areas, many opportunities. So I see a very robust or very productive immunology area for us -- therapeutic area. There are opportunities there. The opportunities of metabolism continue. We have a very strong portfolio of programs in the metabolism area as well. People are also interested in our oncology programs. So the design for us is again our ability to accelerate the development and commercialization of our drug discovery. So that's our focus. And there's not -- I don't think there's one particular area that is more active than the other, they're all active at this point.

Thank you.

Thanks, Jason.

Next we'll go to George Fulop with Needham and Co.

Thank you. Appreciate your taking the question. I wanted to ask you to help me understand how you select among the various neurologic opportunities -- neurologic disorders -- how you differentiate and select the most likely to succeed, the time to market, the difficulty or the need? And perhaps all of the above?

Yes, sure, George. What we've chosen to do with LX-6171 in making those decisions is to as rapidly as possible get into man -- get into human clinical trials and then start to take readings from the early subjects that are in those trials. Because dealing with an area like cognition, as you can imagine, there are many potential medical indications and there's nothing like assessing directly in subjects where the most likely, most successful first application will be. So our goal is to get into human clinical trials as rapidly as possible.

We think we've learned just about as much as we can from the animal models which are all favorable in terms of enhancement of learning and memory. But really then only with the initial human data will we be able to select the first indications. We feel that though the -- on the short list are things I mentioned. I mean, clearly on everyone's short list in cognition is Alzheimer's Disease, schizophrenia which has a growing opportunity with regard to the cognitive defect and then any number of related impairments that may center on the area of mental retardation or related impairments. So we've got many things we could pursue here with this agent. It's a novel mechanism and therefore I think really the field is open to us. But we'll make those determinations really based on the human data.

Thank you.

Thanks.

Next we'll go to Jason Cantor with RBC Capital Markets.

Hey guys, thanks for taking my call. Questions about your plans for filing INDs -- you mentioned that you expect multiple INDs over the next two years and you mentioned this 9 to 12 months pre-clinical testing for your lead compounds. Do you believe it's possible that you could file an IND next year? First of all. Second of all, with the multiple IND filings from proprietary programs or did that also include partnered programs? And then I guess following the setbacks you had in your previous lead, I think you made some comments that you weren't going to give this kind of forward guidance for INDs or at least you'd be reluctant to do so, so can you walk us through what your thinking is on guiding the pre-clinical development milestones.

Sure. Well, first of all, I certainly believe it's very possible we could file INDs next year. And that -- I'm very, very positive on these programs. And I think what we decided not to do though was to name definitive quarters or dates when those things would occur. Because you really do have to take the pre-clinical results in stride and adjust to what one sees as these compounds go first into these safety studies. So in order to -- they'll have the kind of confidence that we have, what we've decided to do is have a whole pipeline and move several things forward in parallel. And that's what we've done. And that's why we have our cognition program - we've talked about our programs in lymphoma and liposelipheria (ph) disorder, 267.

I hope to shortly be talking about in greater detail LG-103 for IBS -- inflammatory bowel syndrome which is also moving forward very rapidly. And with a number of programs in parallel then I think we can enjoy a very high confidence level that Lexicon will achieve its IND filings goals. Now having said that, the risk factors we are all aware of which is in general about half of any one compound can fall out during safety testing in pre-clinical development. And so that's why we want to give a very balanced perspective, share with you our pipeline, as again, we'll be doing in a greater extent on December 1st when we have much longer and then say look, it's pretty clear that even if you take half out, we're still going to be marching forward with these programs in demand. Did that get to the question?

Yes. And what do you think the likelihood of -- or the potential timing for your partners?

Oh, and by the way, all of that last part was, yes -- I'm sorry, was all focused on our internal programs where we have the greatest degree of control because of course they're managed by us and we have total visibility to their progress. I think in addition, our partnership programs will be moving forward. We hope to be describing more about those later and again I'll mention December 1st meeting. But that will depend on the willingness of our partners to share what they consider to be highly proprietary or early information on some of these programs. But if we're not able to do it December 1st we certainly hope in 2006 to be describing those programs in quite some detail. And they're moving forward as well. So we've got that whole other portfolio to look to.

Thanks.

Thanks.

(Operator Instructions). Next we'll go to a follow-up question from Sharon Tyler.

Yes, I'm -- with respect to corporate collaborations as opposed to government contracts, can you give us some sense of what you see as the gating factor for finalizing some of the opportunities that you see out there?

Well, as you know, Sharon, things take time. I just look at timing as the gating factor. We're all very busy. All companies are very busy. And it's putting pen to paper and getting things done. But I think that's - that's it. They sometimes collaborations will go very quickly and sometimes they take a lot longer. The more complicated or intricate they are they could take a little bit longer. But I just see it as a question of when it will happen in terms of timing, not if.

Okay. Thank you.

There are no further questions at this time. I'll turn things back to Mr. Sands for any closing comments.

All right. Well, I'd like to thank everyone for joining us today. As I mentioned earlier we do look forward to providing you with the further update on our lead programs at our analysts and investor luncheon on December 1st in New York City. And we certainly hope to see many of you there. Goodbye.

That does conclude today's conference call. Again, thank you all for your participation and have a great day.