Lexicon Pharmaceuticals Inc (LXRX) 2005 Q4 法說會逐字稿

Thank you everyone for holding and welcome to this Lexicon Genetics fourth quarter and year end 2005 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, Bobbie Faulkner, manager of Investor Relations. Please go ahead Ms. Faulkner.

Good morning and welcome to the Lexicon Genetics fourth quarter and year end 2005 conference call. I'm Bobbie Faulkner, Manager of Investor Relations at Lexicon, and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer, Julia Gregory, Executive Vice President of Corporate Development and Chief Financial Officer, and Carole Schaefer, Vice President of Finance and Business Development.

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, then use the remainder of our time to answer your questions. The call will begin with Dr. Sands who will discuss our key accomplishments for 2005. Ms. Gregory will then review our financial results for the fourth quarter and full year 2005 and discuss our financial guidance for 2006. We will then open the call to your questions.

Before we begin, I would like to state that we will be making forward-looking statements, including statements about our growth and future operating results, discovery and development of products, strategic alliances and intellectual property. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements, including uncertainties related to our ability to enter into additional collaborations, alliances and license agreements, the success and productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, commercial limitations imposed by patents owned or controlled by third parties, our dependence upon strategic alliances as we 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 a 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.

Good morning, everyone. We really had an excellent year in 2005 and I'm happy to share the highlights of that with you this morning. During the year, Lexicon entered into several noteworthy partnerships and made significant progress in preclinical development of our lead drug discovery programs.

We currently have two programs in formal preclinical development in preparation for regulatory filings. LG 617 for cognitive disorders, and LG 103 for irritable bowel syndrome. We also have several exciting programs advancing behind these, having built a pipeline of promising compounds and bio therapeutics agents. From this pipeline we expect a steady flow of R&D filings over the long term.

The LG 617 target was discovered in our Genome 5000 program and small molecule compounds that block the target were created by our internal medicinal chemistry group. Our lead compound, L X 6171 has reliably reproduced the behavioral effects of enhanced learning and memory consistent with the original knockout phenotype. LX 6171 has good PK profile -- has a good PK profile following oral administration, is bioavailable in multiple species and effectively penetrates the blood brain barrier. We have now completed multiple safety and toxicology studies for this compound and are highly encouraged by the results obtained to date. We expect to complete the formal preclinical studies of LX 6171 by midyear.

Assuming continued good results from our preclinical work, we plan to initiate a Phase I trial in normal healthy volunteers to obtain information as to how well the drug is absorbed and tolerated. Our Phase I trial will also include a cognitive assessment in an attempt to obtain an early signal of the potential effects of the drug. As we progress in clinical development, there are multiple cognitive disorders that may be relevant indications for LX 6171, ranging from those representing large unmet medical needs such as Alzheimer's disease to orphan indications like fragile X syndrome.

Our next preclinical program, LG 103 for irritable bowel syndrome, was also discovered in the Genome 5000, and our medicinal chemists developed small molecule compounds that effectively block target activity in vivo. Our lead compound, LX 1031, is a potent, selective, orally bioavailable agent that has reliably reproduced a significant reduction in a relevant gastrointestinal biomarker in a dose-dependent fashion.

Interestingly, we see effective local exposure to the gastrointestinal track after dosing without significant systemic exposure, indicating the potential for an excellent safety profile for LX 1031. Irritable bowel syndrome will likely be the primary focus of our initial development efforts with LX 1031. The compound may also have clinical utility in other gastrointestinal disorders, such as inflammatory bowel disease, including Crohn's disease and ulcerative colitis. We anticipate completing formal preclinical studies for LX 1031 by the end of this year.

LG 617 and LG 103 are two of the more than 90 knockout validated targets identified thus far in Lexicon's Genome 5000 program. We have now completed the analysis of approximately 3,000 genes or 60% of the 5,000 drugable genes included in this program. We expect to fully analyze the function of an additional 1,000 genes this year.

Now let me turn to a discussion of our business development achievements in 2005. During the last year, we entered into two new strategic alliances with Genentech and Organon that position us to more rapidly and effectively advance our drug discoveries. We also entered into several new agreements that either give us access to key technologies, or allow to us monetize our existing genetic assets. These included an award from a Texas Enterprise Fund, collaborations with XOMA and Takeda, and a contract with the National Institute of Health. Both our strategic alliances and our technology agreements provide significate -- provide a significant funding to Lexicon in 2005.

Our most recent business achievement was the expansion of our drug discovery alliance with Genentech. In our initial collaboration, we conducted the phenotypic analysis of approximately 500 potential protein and antibody targets. The success of the initial collaboration created the opportunity to expand our work with Genentech. Under the expanded alliance we are performing advanced research on a broad subset of the 500 targets from the initial alliance.

Of direct strategic benefit to Lexicon, we have the right to develop and commercialize biotherapeutic drugs for up to six of these targets. We have already selected two of our targets. LG 842 and LG 843 for metabolic disease and have antibody development programs well underway. Genentech has the option to participate in the development and commercialization of products addressing our six targets under a cost and profit sharing arrangement. For products that are jointly developed, Lexicon has certain conditional worldwide co-promotion rights.

Financial consideration to Lexicon for our work in the expanded alliance includes $25 million comprised of an up-front payment, a performance milestone payment and research funding. We have already received the up-front and milestone payments. We are also entitled to receive development of regulatory milestone payments and royalties on products developed by Genentech that address alliance targets.

In summary this year we are positioning our internal drug discovery programs to enter human clinical trials. And are advancing our partner programs as well. Our entire organization is focused on this goal. I will now turn over the call to Julia Gregory to review our year-end financial results and update you on our guidance for 2006.

Thank you, Arthur. Lexicon achieved solid revenue growth and healthy net cash inflows in 2005. And ended the year in a strong financial position. I would like to review Lexicon's 2005 fourth quarter and full-year performance with you and discuss our guidance for the full year and first quarter of 2006.

Lexicon's revenues for the three months ended December 31, 2005 increased 30% to 33.9 million from 26 million for the corresponding period in 2004. The increase was primarily attributable to the receipt of two performance milestone payments from Genentech, totaling $20 million, revenue recognized under our alliance with Organon and our award from the Texas Enterprise Fund also contributed to the increase in revenue. Revenue in the fourth quarter of 2004 included performance milestone payments from Genentech and Takeda. For the year ended December 31, 2005 revenues increased 23% to 75.7 million from 61.7 million in 2004. This is slightly above the high end of our full year 2005 revenue guidance of 70 to 75 million. Collaborative research was responsible for 92% of Lexicon's revenues in 2005 as compared to 81% in 2004.

Research and development expenses for the three months ended December 31, 2005, increased 3% to 23.9 million from 23.1 million for the corresponding period in 2004. This modest increase was primarily related to supplies and personnel required to fulfill Lexicon's obligations under its award from the Texas Enterprise Fund and external research costs associated with the preclinical development of Lexicon's lead programs. For the year ended December 31, 2005, research and development expenses increased by 3% to 93.6 million from 90.6 million in 2004.

General and administrative expenses for the three months ended December 31, 2005, were 4.3 million, substantially unchanged from the corresponding period in 2004. They declined 2% to 18.2 million for the full year as compared to 2004. Our full year 2005 operating expenses totaled 111.8 million, a 2% increase from 109.2 million in 2004. This is 11 million below the midpoint of our original full year 2005 expense guidance, demonstrating our expense control discipline during the year.

For three months ended December 31, 2005, Lexicon had net income of 5.9 million, or $0.09 per share compared to a net loss of half a million dollars, or a penny per share for the corresponding period in 2004. This quarterly swing to net income from a net loss position is principally the result of the one-time Genentech performance milestone payments received in the fourth quarter of 2005. Net loss for the year ended December 31, 2005, decreased to 36.3 million, or $0.57 per share, from a net loss of 47.2 million, or $0.74 per share in 2004.

As of December 31, 2005, Lexicon had 99.7 million in cash and investments, including restricted cash and investments, as compared to 90.2 million as of September 30th, 2005, and 87.6 million as of December 31, 2004. Strategic collaborations and technology contracts and licenses brought in more than 120 million in cash to Lexicon last year, exceeding the amount needed to fund our 2005 operations and capital expenditures.

Now let's turn to a discussion of our financial outlook for 2006. We estimate that our annual revenues for 2006 will increase to approximately 78 to 82 million, which is a 6% increase over 2005 revenues at the midpoint of the projected range. We start 2006 with 63 million in contractually committed revenues. We expect to generate the remaining 15 to 19 million in revenues from new drug discovery collaborations, government initiatives, and technology license agreements. However, we cannot guarantee the signing of any of those contracts or predict their timing, and we expect our revenue to fluctuate from period to period as it has historically.

Total operating expenses should increase approximately 32% over 2005, and range from 145 to 151 million, including stock-based compensation expense. Our total operating expenses reflect projected research and development expenses for 2006 of 124 to 128 million as we complete IND-enabling studies and commence clinical development activities for our two lead programs and continue to invest in the advancement of our drug discovery pipeline. General and administrative expenses in 2006 should range from 21 to 23 million. Our projections for operating expenses in 2006 include approximately 7 to 9 million of noncash charges related to stock-based compensation that we are now required to expense in accordance with FAS 123R. Approximately 75% of these noncash charges will be research and development expenses, and 25% will be general and administrative expenses.

Overall, we are projecting our net loss for 2006, including stock-based compensation expense, to range from 67 to 70 million, or $1.03 to $1.08 per share based on weighted average shares outstanding of 64.8 million. Our projections for net loss in 2006 include a loss of approximately $0.11 to $0.14 per share related to noncash stock-based compensation charges.

Capital expenditures are projected to be approximately $5 to $7 million for 2006 as compared to $11.3 million in 2005. This lower projected level of capital expenditures reflects the fact that we have completed the buildout of our chemistry capability in New Jersey, and we have already incurred most of the start-up costs associated with the creation of the OmniBank II library for the Texas Institute for Genomic Medicine. We expect that cash used in operations and for capital expenditures in 2006 will total approximately 28 to 31 million.

Now let's review our guidance for the first quarter of 2006. Revenue for the first quarter 2006 should be in the range of 13 to 15 million. This is primarily the result of revenue recognized under our alliances with Bristol-Myers Squibb, Organon and Genentech and our award from the Texas Enterprise Fund.

Operating expenses for the first quarter, including stock-based compensation expense, are projected to range from 32 to 35 million. This reflects, among other things, the cost of the formal preclinical development currently underway for LX 6171 and LX 1031.

Stock-based compensation expense is expected to be approximately 2 million in the quarter. We are projecting our net loss for the first quarter, including stock-based compensation expense, to range from 18 to 20 million, or $0.28 to $0.31 per share. Our projections for net loss in the first quarter include a loss of approximately $0.03 per share related to noncash stock-based compensation charges. I should note that our quarterly operating results have fluctuated in the past and are like 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 full year 2005. We're optimistic about our ability to enter into additional strategic alliances and technology collaborations and contracts in 2006 to advance our drug discovery programs and provide funding for our operations.

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

Thank you, Ms. Gregory. [OPERATOR INSTRUCTIONS]

And we will take our first question from Edward Tenthoff with Piper Jaffray.

Great. Thank you very much. And, congrats on what I think was a very, very productive 2005, even if it's not necessarily being reflected at this point in the stock price.

Thanks, Ed. We appreciate that.

Quick question for you. Sorry, Julie, you always go so fast, but I missed the 1Q net loss guidance.

So our net loss guidance for first quarter 2006 is projected to be $18 to $20 million, at $0.28 to $0.31 per share.

Great. I'm sorry, $0.28 to $0.31, right?

Per share, right.

Okay, great. And then, Arthur, what else really at this point has to be done for 6171 in terms of preclinical development and IND-enabling studies?

We're into -- we're into the second species tox testing. We require two species, and so that's what we're into now. And we are going forward with a four-week testing time period, so -- and then after that we get all the reports together and, of course, and then the final report. So there's a time period for that, too.

And you mentioned the potential in the Phase I to look at some cognitive measures. Can you be a little bit more specific on that?

Well, I can tell that we are going to include the standardized cognitive tests. And there's several different suites to choose from. I won't go into which ones exactly but they are highly standardized and we're working with a group that has experience in the use of these in addition to or simultaneously measuring the PK profile, which, of course, is the primary -- primary goal of the Phase I.

Great, thank you very much.

Thanks.

With RBC Capital Markets, Jason Kantor has our next question.

Hey, guys, it's [Michael] for Jason. Just in regards to the Genentech partnership on 842, 843, I guess, have you actually gone into preclinical testing with those and where, exactly, are you there, and do you think INDs could potentially be filed in 2007?

Yes, so, what we're -- we're at the stage now of optimizing our antibodies to these targets, and so there's an optimization and a humanization phase that we're in. And so, pending the completion of that, we then enter the preclinical testing, and the appropriate animal models, and then pending successful outcome of that we'd anticipate IND filing. So, at this stage I don't think we've forecast when that would be, but we are at the optimization stage with the antibodies.

Great. Also, on the finance side, regarding the Bristol and Organon R&D funding, does that -- is that part of the stuff that fluctuates each quarter outside of the fixed revenue and the new deals?

No, I think the -- no, it doesn't. We have, as I said we have 63 million in contractual revenue as we begin the year, so that's clearly in those numbers, and we have a pretty good feel for what the funding is on a quarter to quarter basis.

But it is reimbursed as work is done, or is that -- it's pretty much fixed each quarter?

Well for -- it's pretty much fixed each quarter. And it gets recognized, for Organon specifically, as work is done.

Okay, then, I guess lastly, the Bristol target validation agreements which were previously LexVision, are you guys still booking revenue for that?

We are.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] We will now hear from Sharon Seiler with Punk, Ziegel & Company.

Good morning, congratulations. I had a question about the IBS program. Will there be measures -- I assume this will be in healthy volunteers, and I'd like you to confirm that. And I guess, can you give us a sense of whether you will be able to measure the appropriate biomarker in that Phase I trial as well? And then a second question is beyond the two programs that we're looking to move into the clinic this year, what would you highlight as the sort of next in queue?

Right. Okay. Thanks, Sharon. So first, the program, LG 103, we would anticipate beginning in normal healthy volunteers for Phase I, and that would be a very standard Phase I approach there. We would also anticipate being able to measure this biomarker, so that -- but that has to be developed appropriately. We do think, though, that it should be fairly straightforward based on the animal work we see, but that would be the goal, to be able to monitor the biomarker along with the PK profile in Phase I, that would be the goal.

Then, to your next question regarding next programs in the queue, there are several. I mean, I think I've highlighted some of them before, but the ones I'll bring up today would be LG 267, which is an exciting program directly affecting growth of lymphocytes, so blocking this target, this enzyme target, reduces lymphocyte levels, both T and B cells, by 90%. So we believe that's a very effective target, a very clean target, by the way, we know the phenotype, for autoimmune disease and potentially for lymphoma leukemias. And this is a novel kinase target. So that one is moving along very well; we have -- we are well into lead optimization there.

I am very hopeful about a biotherapeutic clinical candidate this year, very excited about the two Genentech picks that brought in to Lexicon, LG 842 and 843. I think those are moving forward extremely well. And then, another small molecule target that I would mention is a new obesity target which we have spoken about before, but it is LG 727, and this is a lean phenotype target, it's an enzyme target, and we are in lead optimization there as well. So those are just three of -- there are several more that are coming behind that, so you can see that the pipeline is very robust and it's -- it's moving forward.

Okay. And I guess on the same -- in the same vein do you think will you be able to tell us about any progress in the relationships you have with Bristol-Myers or Takeda or Organon?

Yes, yes, and yes, I think we should during the year. I mean it's -- seriously, though, like with Bristol-Myers Squibb, the lead program there, LG 317, we have mentioned before in schizophrenia, where Lexicon has made terrific progress on the chemistry of that one, and this is the novel dopamine regulator in the brain, this is very excited both in terms of activating this and then blocking it, because dopamine you'll push either way to affect neuropsychiatric disease, whether it be on the one hand schizophrenia, which, of course, is a top priority for Bristol-Myers Squibb, they have tremendous expertise there, or by augmenting the dopaminergic pathways, Parkinson's disease. So we're very interested in LG 317 and that partnership.

The Takeda relationship is progressing. As you know, that's a very focused relationship in hypertension and with an eye to cardiovascular disease. That relationship, I see that moving forward aggressively as well. And then Organon, the latest one, which is now just above eight months old or so, a very new alliance, but we're already plowing through the first set of the 300 genes, including that alliance, which should be hitting during this year, so I would expect some significant progress as we move into that set of genes.

Okay. Thank you.

Thanks.

[OPERATOR INSTRUCTIONS] We do have a question from Karen Buchkovich with JPMorgan.

Hello. In addition to your committed funding of about 63 million for 2006, are you anticipating any milestones?

Yes, we should have milestones during the year, Karen.

Do you want to give us any indications of how much or from whom?

Well, at this point, I think the 63 million in committed funding is our best guidance, and we will let you know as we are progressing through the year how -- as we hit those milestones.

Okay. This 63 does not include milestones, is that correct?

Well, it does in some cases and not in other cases. So, I think those that we think are milestones that are really more on a time factor basis, that -- it's included there. But those milestones that are more at risk we don't include.

Okay. And can you just review the effect of the Texas Enterprise Fund on revenues or cost in the upcoming year? You mentioned that you've nearly completed the OmniBank.

That's correct. So in terms of --

No, what we said, Karen, was we completed the scale-up in personnel for the OmniBank II project. But the OmniBank II project is a two-and-a-half-year project to build.

Oh, okay.

Yes.

Thank you for the clarification.

Right. There was an initial scale-up to accomplish the initiation of the library production.

Okay. Thank you.

Sure.

Right.

[OPERATOR INSTRUCTIONS] It appears that we have no further questions. I would like to turn the conference back over to Dr. Sands for any closing or additional comments.

Well, this concludes our updates for fourth quarter and the year end 2005. Thank you very much for your participation, and goodbye.