Lexicon Pharmaceuticals Inc (LXRX) 2006 Q2 法說會逐字稿

Thank you for holding. And welcome to the Lexicon Genetics Second Quarter 2006 conference call. [OPERATOR INSTRUCTIONS]

At this time, I would now like to introduce your host for today’s call, Bobbie Faulkner, Manager of Investor Relations. Please go ahead, Miss Faulkner.

Good morning. And welcome to the Lexicon Genetics Second Quarter 2006 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 Dr. Philip Brown, Vice President of Clinical Development.

We expect that you have 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 accomplishments during the second quarter of 2006. Miss Gregory will then review our financial results for the second quarter of 2006 and discuss our financial guidance for the third quarter and full year. 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 abilities to enter into additional collaborations, alliances and license to grants, the success and productivity of drug discovery efforts, the timing and results of preclinical studies and clinical trials of LX6171 and other potential drug candidates, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third parties, our dependence upon strategic alliances and the requirements of substantial funding to conduct our research and development 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. During the second quarter, we continued to advance our drug discovery pipeline towards human clinical trial. In June, we submitted a clinical trial authorization filing to the United Kingdom Medicines and Healthcare Products Regulatory Agency or the MHRA to initiate Phase 1 clinical trials for LX6171.

We are happy to report that we have received clearance from the MHRA and we are preparing to begin our Phase 1 studies shortly.

LX6171 is an orally bioavailable small molecule compound with potential to treat cognitive disorders such as Alzheimer’s disease, schizophrenia and vascular dementia. We plan to conduct our Phase I studies of LX6171 in normal healthy volunteers to measure how well the drug is absorbed and tolerated. Our Phase 1 trials will also include a cognitive assessment to gain experience with this test and potentially obtain an early signal of the affects of the drug.

Phase 1 is designed as a randomized, double-blind, single ascending dose study followed by a randomized, double-blind multiple ascending dose study. LX6171 will be dosed orally once a day. The studies are expected to take approximately one year to complete.

LX6171 is the result of our internal target discovery in medicinal chemistry efforts. We discovered the target of LX6171 using our gene knock-out technology. The target is a membrane protein that is expressed exclusively in the central nervous system. Its activities associated with synaptic vesicles and presynaptic membranes. In our comprehensive phenotypic screens, we found that mice lacking this protein displayed improved performance in tests of learning and memory, even as they aged. Using our compound, we were able to recapitulate this phenotype in preclinical studies in which healthy and aged mice doved with LX6171 demonstrated improved learning and memory.

Our next regulatory filing is expected to be an IND for LX1031 filed by the end of the year. We are developing LX1031 for irritable bowel syndrome. LX1031 is a potent and selective oral agent that works locally in the gastrointestinal tract with little systemic exposure. The program is associated with a biomarker that we believe will help us assess drug action in preclinical and clinical studies.

Preclinical work is well underway and all GLP safety and toxicology studies necessary for the IND filing are ongoing. We’ve had a pre-IND meeting for LX1031 with the FDA and are proceeding as planned.

We also have at least 2 other promising programs that we believe will begin formal preclinical development this year. These programs are wholly owned by Lexicon and our products of our internal discovery platform. This platform includes established capabilities and target validation and small molecule and biotherapeutic drug discovery. As our drug discovery programs advance, the depth of our pipeline of compounds and biotherapeutic agents will become increasingly apparent.

In addition to our internal pipeline, drug discovery programs continue to progress with our strategic alliances. Importantly, during this quarter, we announced that Bristol-Myers Squibb has extended its neuroscience drug discovery and development alliance with us. As a result of the extension we will work together on target discovery research for 2 more years and Bristol-Myers Squibb will provide us with an additional $20 million in funding over that period.

As you will recall, for each drug developed and commercialized by Bristol-Myers Squibb from the alliance, we will receive clinical and regulatory milestone payments and will earn royalties on net sales.

I believe this extension, coupled with the expansion in December of our Genentech alliance demonstrates the value that we are creating with our strategic collaborators.

I will now turn the call over the Julia Gregory to review our second quarter financial results and provide guidance for the third quarter and full year 2006.

Thank you, Arthur. The continued expansion of our collaboration activity is evidenced by our 12th consecutive quarter of revenue growth when compared to the prior year quarter. Lexicon’s revenues for the three months ended June 30, 2006, increased 16% to $16.2 million from $13.9 million for the corresponding period in 2005. This is above the high end of our revenue guidance of $13 to $15 million for the second quarter. The increase in revenue was primarily attributable to revenue recognized under our awards from the Texas Enterprise Fund, our contract with the National Institutes of Health and our expanded biotherapeutics alliance with Genentech.

For the 6 months ended June 30, 2006, revenues increased 33% to $37.1 million from $27.8 million for the first half of 2005.

Research and development expenses for the 3 months ended June 30, 2006, increased 16% to $27.4 million from $23.7 million for the corresponding period in 2005. This was primarily due to increase in personnel, lab supply and external research costs, as well as non-cash stock-based compensation expense of $1.1 million resulting from our adoption of SFAS 123R at the beginning of the year.

For the first half of 2006, research and development expenses increased 17% to $54.1 million from $46.4 million for the corresponding period in 2005. These 2006 R&D expenses include $2.3 million in non-cash stock-based compensation.

General and administrative expenses for the 3 months ended June 30, 2006, increased 19% to $5.7 million from $4.8 million for the second quarter of 2005. 72% of this increase is due to non-cash stock-based compensation expense of $0.7 million under SFAS 123R. For the first half of 2006, general and administrative expenses increased 19% to $11 million, including $1.4 million in non-cash stock-based compensation from $9.2 million for the corresponding period of 2005.

Lexicon’s net loss for the 3 months ended June 30, 2006 increased to $16.9 million from a net loss of $14.8 million in the corresponding period in 2005. Net loss per share for the 3 months ended June 30, 2006 was $0.26 as compared to $0.23 for the 2005 period. For the 3 months ended June 30, 2006 net loss included non-cash stock-based compensation expense of $1.8 million or $0.03 a share. Net loss for the 6 months ended June 30, 2006 decreased to $27.7 million or $0.43 per share from a net loss of $28.1 million or $0.44 per share in the 2005 period.

For the 6 months ended June 30, 2006, net loss included non-cash stock-based compensation expense of $3.6 million or $0.06 per share.

As of June 30, 2006, we had cash and investments of $65.3 million as compared to $87 million as of March 31, 2006. During the second quarter, we received an 18 month equity financing commitment for up to $75 million from Azimuth Opportunity Ltd. This is a common stock equity line that we can access at our sole discretion. It provides us with flexibility in managing our cash needs as we advance our lead programs into human clinical trials.

Now let’s turn to our forward-looking financial guidance for the third quarter and remainder of 2006.

Revenue for the third quarter 2006 should be in the range of $17 to $19 million. Projected third quarter revenue primarily consists of revenue recognized under our alliances with Bristol-Myers Squibb and Organon and our contracts with the National Institutes of Health and the Texas Enterprise Fund.

Operating expenses for the third quarter are projected to range from $33 to $35 million. This includes non-cash stock-based compensation expense of approximately $1.8 million in the quarter. We are projecting our net loss for the third quarter to range from $16 to $18 million.

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.

Our full year 2006 revenue guidance has not changed. We continue to expect 2006 revenues of $78 to $82 million, of which $9 to $13 million is expected to come from new collaborations, alliances and sublicense agreements. We are actively involved in discussions with multiple pharmaceutical and biotechnology companies regarding new potential collaborations and alliances, although the timing of any new agreement is difficult to predict.

For the full year 2006, we are lowering our operating expense guidance to $135 to $140 million from $145 to $151 million. Our projected operating expenses include $7 to $8 million of non-cash stock-based compensation expense. We are beginning to see clinical development costs comprise an increasing percentage of our expenses and are witnessing a reduction of expenses associated with the Genome5000 program as it nears completion. We expect to see these trends continue during the near and mid-term.

We are also improving our 2006 net loss guidance to $57 to $60 million from our original guidance of $67 to $70 million. We continue to expect cash used in operations and for capital expenditures in 2006 to total approximately $28 to $31 million.

Overall, I am pleased with our business performance for the first half of 2006 and believe the balance of the year will be equally strong.

Thank you. And now we will answer any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS]

We’ll go first to Sharon Seiler of Punk & Ziegel & Co.

Good morning. A couple of questions about your clinical and preclinical developments. Can you give us some sense of what are the gating factors for starting the Phase 1 clinical trial of LX6171 and what are the gating factors for the filing of the IND later this year? And then can you tell us -- Can you give us some information about the compounds that you expect to enter formal preclinical development by year end?

Okay. Sharon, yes. I’ll start with the first part of your question by turning that over to Dr. Phil Brown, our Vice President of Clinical Development. And then I’ll handle the second part. Go ahead, Phil.

So I think we’re -- the gating factors relating to 6171 are minimal at this point. We are merely waiting for our slot in the clinic to open up. And all of the hurdles have been overcome that will allow us to start that particular trial. So we’re well on the way to initiating that particular series of studies that Arthur outlined. With regard to 1031, as Arthur mentioned, we are in the midst of completing our GLP tox studies, or the IND enabling studies. All those have been initiated that would allow us to start. We have met with the FDA. And we anticipate that regulatory filing to occur as projected by the end of this year.

Okay.

Okay. Then I think the second part of your question, Sharon, was on the additional programs. I was referring to our programs in our immunology group that -- particularly LX267 or LG267 and LG293. And these are programs we’ve discussed before, the basic science of those programs. They are unique in that -- they both have very unique affects on the lymphocytes, the white blood cell population. So we see those proceeding very well. And we anticipate during the fall to be describing more in terms of the preclinical data that excites us about those programs and how they’re going to be marching forward.

Okay. Thanks. And I’ll follow-up if I can on 6171, do you anticipate releasing any data at some -- interim data while the trial is ongoing or will we see no data until it’s completed?

I think we haven’t determined what data may emerge from those that would be of excitement. This is a very classical Phase 1 study in which we’re really probing for the pharmacokinetics of safety and tolerability of the compound. So I wouldn’t anticipate anything earth-shattering to come out of these initial studies. They’re merely poised to allow us to move into the more definitive studies which I think would yield much more interesting information.

Okay. Thanks. I’ll jump back in the queue.

Thanks, Sharon.

We’ll go next to Jason Kantor of RBC Capital Markets.

Hi. The Phase 1 study that you talked about is two parts, the single dose and the multi-dose. Will we get to see those first and then the multi-dose data. What measurements -- What exact measurements are you measuring for CNS function that could provide some inclination that this is working? And then, on the financial side, Julia, you mentioned you have this equity line of credit. How low are you guys comfortable going in terms of cash balance before you would either use that or find some other means to finance the company?

So I’ll start with the clinical questions. We, as we stated, are integrating a cognitive assessment battery actually, a series of assessments, into these initial Phase 1 trials. And there’s two purposes in that. First, to begin to gain experience with this instrument because we anticipate utilizing it as we move into more definitive proof of concept studies in patients, i.e., Phase 2A.

We also would anticipate gaining, if possible, and I think it would be an interesting signal if you were to see anything positive emerge from these very early studies, which are really designed to probe the safety and tolerability of the compound. It is important to note that most of the existing therapeutics that are approved for use as cognitive enhancers actually would show a negative affect in most normal volunteers. So, I’ve stated before that a lack of any affect is not necessarily a negative in this particular situation.

So, it’s really a chance for us to begin to probe what the affects of this agent might be. And, of course, this will be coupled with any clinical signs or symptoms associated with CNS functions such as drowsiness or dizziness or headaches, those types of things that may not be assessed in early animal studies. So, clearly those would be dose rendering tolerabilities, such a study is also designed to assess for.

Okay. And, Jason, on the financial side, the equity line of credit, which gives us a lot of flexibility in managing our cash and our cash-related needs. And as you know, we manage our business here from a cash position to approximately 18 to 24 months of cash. And we’re focused on our timeline. And in terms of our revenue generation for the year, the cash that we generated from our current collaborations or potential collaborations, I think that will help us assess how selectively we will use the line to meet those cash needs and really to advance our lead programs.

Thank you.

We’ll go next to Edward Tenthoff of Piper Jaffray. [OPERATOR INSTRUCTIONS]

Great. Thank you very much. And sincere congratulations on the clinical milestones and the progress that you’re making there. Maybe to follow-up to Jason’s question a little bit, can you just kind of walk through, Julia, what the mechanism would be for accessing that financing line?

Well, the way -- If you’re asking a process question -- Are you asking a process question?

Yes. Kind of process and timing and sort of walk us through how it actually occurs.

Well, if we determine that we would like to access the line, we notify Azimuth Opportunity Ltd. that we would like to access the line. And then we have a period of time, which you have in our documentation, a ten-day window where we would then sell stock to them and they would buy stock from us. And we will let you know that. We will keep you up to date because we will file a prospective supplement when the actual transaction occurs.

So, after it’s completed?

That’s correct.

Okay. Good. That’s helpful.

Anything further, sir?

Nope. That’s helpful. Thank you.

Thanks, Ed.

Thank you.

We’ll go next to Sapna Srivastava with Morgan Stanley.

Yes. Thank you. Most of my questions have been answered. Just maybe if you could give us quick recap on what you’re thinking about the partnership strategy? If it’s changed in any way? And what are you looking for for the rest of the remainder of the year?

Yes, Sapna. We’re sticking with our strategy as it’s established, which is seeking certain specific collaborations that may focus in therapeutic areas that we have still not partnered and developing. And so we look to potential therapeutic area collaborations. Also, within that, we could look at particular targets as being partners. And that is really where our focus has been this year, either particular targets and maybe the formation of new partnerships or groups of targets or whole therapeutic areas. And that has been our strategy, as you know, for a number of years and it’s worked quite well in the past. And I think this year is going to be another very good year for us. We’re very busy on that front.

Going forward then, I think, as our compounds develop, we’ll probably shift gears into looking at individual compound based deals as they’re in the clinic. And then as you also know, we would like to keep a very major ownership position in at least one of our drugs or multiple drugs if possible.

And I think that given the breadth of our portfolio, that’s all going to be very likely for us.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS]

We’ll go next to Jason Kantor, RBC Capital Markets, with a follow-up question.

Thanks for taking the follow-up. When will you be able to disclose more detail of the biology of the targets, specifically 6171 and 1031?

I think, Jason, the best way to think about that is as we proceed in human clinical trials, in the early stages of that, we’ll probably choose to start to talk about it in the scientific forum and the medical forum. And that will take the form of either scientific publications or abstract publications and presentations. And I think it’s all got to be hinged and will be linked to the development of our human studies. So, I can’t be more specific than that. But, obviously, we’re on the threshold of entering the clinic and we’re actively discussing how we’re going to be revealing the biology. I think it’s going to be a very exciting time for us too and for the community when they start to see these new mechanisms. But, anyway, that’s about as much info as I can give you now.

Thanks.

Thanks.

We’ll go to Sharon Seiler of Punk & Ziegel & Co. again with another follow-up.

Yes. I just wanted to ask you if you could repeat your guidance -- your revised guidance for net loss for the year?

Sure, Sharon. The net loss for the year has been lowered to $57 million to $60 million.

Okay. Thank you.

And that appears to be all the time we do have for questions. I would like to turn the conference back over to Dr. Sands for any closing remarks.

Well, I’d just like to thank everyone for participating. We look forward to talking with you next quarter. Bye, bye.

And that does conclude today’s conference. We thank you all for joining us.