Lexicon Pharmaceuticals Inc (LXRX) 2006 Q3 法說會逐字稿

Thank you for holding. Welcome to the Lexicon Genetics third 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.

Good morning, and welcome to the Lexicon Genetics third 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'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 during the third quarter of 2006. Ms. Gregory will then review our financial results for the third quarter of 2006 and discuss our financial guidance for the fourth 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 express 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, the timing and results of agreements of pre-clinical studies and clinical trials of LX6171, LX1031, LX2931 and other potential drug candidates, our ability to obtain patent protection for our discoveries, limitations and codes 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 third quarter, we achieved an important milestone by entering human clinical trials with our cognition program, LX6171. LX6171 is an orally [bio-available] small molecule compound with the potential to treat Alzheimer's disease, schizophrenia, vascular dementia and other disorders characterized by cognitive impairments.

We initiated a phase 1(a) clinical trial for LX6171 in August. Phase 1 (a) was designed as a randomized, double-blind, single ascending dose study in normal healthy volunteers. We have now completed dosing in this study. And preliminary results suggest that LX6171 was well tolerated at all doses. We expect to release the initial results of the phase 1 (a) study by the end of the year and look forward to initiating phase 1 (b) trials in early 2007.

The phase 1(b) clinical trials for LX6171 is designed as a randomized double-blind multiple ascending dose study and is expected to include approximately 40 subjects. In this study, we will be evaluating daily oral dosing for seven days. The results of this study should be available in mid-2007.

LX6171 is wholly owned by Lexicon and is the result of our internal target discovery and medicinal chemistry efforts. This is also the case with LX1031 and LX2931, our next most advanced programs reflecting the productivity of our drug discovery system.

We are on track for an IND filing by the end of the year for LS1031 for irritable bowel syndrome. LX1031 is a potent and selective oral agent that works locally in the gastrointestinal tract with little systemic exposure.

We have completed IND enabling pre-clinical studies of LX1031, and we are finalizing GMP manufacturing of this compound to support early human clinical trials. In pre-clinical studies, LX1031 demonstrated a very good safety profile with no toxicity at the highest doses tested in multiple species. The planned phase 1 clinical trial of LX1031 is designed to evaluate safety and pharmacokinetics in normal healthy subjects. There is a biomarker associated with this program that we believe will help us to assess drug action in clinical studies.

We announced recently that we are initiating IND enabling studies for LX2931 for auto-immune diseases. LX2931 is a novel oral bio-available agent, small molecule compound. We believe it represents a potential new mechanism for the treatment of immune system disorders characterized by inappropriate lymphocyte activation.

In pre-clinical research, LX2031 significantly reduced the inflammatory response in mice and decreased peripherally lymphocyte counts in multiple species, including non-human primates. Assuming positive results in formal pre-clinical developments, we expect to file an IND for this program in the second half of 2007.

We also have at least one other promising compound that we believe will begin formal pre-clinical development this year. This compound is referred to as LX1032 and is being advanced as a backup compound for LX1031. LX1032 is chemically distinct from LX1031 and has a different pharmacokinetic profile, having been specifically designed to achieve systemic exposure. We believe a complimentary profile to these two compounds may allow for different therapeutic approaches to a variety of gastrointestinal disorders.

Our internal pipeline contains multiple programs beyond the four that I have highlighted this morning. In addition, drug discovery programs continue to progress with our strategic - within our strategic alliances. We are also involved in ongoing discussions related to the formation of new partnerships.

There is significant interest and potential collaboration structured around our novel targets as well as alliances related to our individual drug development program. 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 2006.

Thank you, Arthur. Lexicon's revenues for the three months ended September 30, 2006 increased 40% to $19.6 from $14 million for the corresponding period in 2005. This is above the high end of our revenue guidance of $17 million to $19 million for the third quarter.

The increase in revenue was primarily attributable to revenue recognized under our contract with the National Institutes of Health, our expanded bio-therapeutics and lines with Genentech and our grant from the United States Army for research related to spinal muscular atrophy. For the nine months ended September 30, 2006 revenues increased 36% to $56.7 million from $41.8 million for the corresponding period of 2005.

Research and development expenses for the three months ended September 30, 2006 increased 16% to $27 million from $23.3 million for the corresponding period in 2005. This was primarily due to increased personnel, external research costs related to our drug development programs and non-cash stock-based compensation expense of $1.1 million. For the nine months ended September 30, 2006 research and development expenses increased 16% to $81.1 million, including $3.4 million in non-cash stock-based compensation expense from $69.8 million for the corresponding period in 2005.

General and administrative expenses for the three months ended September 30, 2006 increased 14% to $5.3 million from $4.7 million for the corresponding period in 2005. This increase was almost entirely due to the $660,000 of non-cash stock-based compensation expense recorded in the period. For the nine months ended September 30, 2006, general and administrative expenses increased 27% to $16.3 million, including $2 million in non-cash stock-based compensation expense from $13.9 million for the corresponding period in 2005.

Lexicon's net loss for the three months ended September 30, 2006 decreased to $12.8 million from our net loss of $14.1 million in the corresponding period in 2005. This is significantly better than our net loss guidance of $16 million to $18 million for the third quarter of 2006. Net loss per share for the three months ended September 30, 2006 was $0.20 as compared to $0.22 for the corresponding period in 2005.

For the three months ended September 30, 2006, net loss included non-cash stock-based compensation expense of $1.8 million or $0.03 per share. Net loss for the nine months ended September 30, 2006 decreased to $40.5 million or $0.63 per share, an improvement from a net loss of $42.2 million or $0.66 per share in the 2005 period.

For the nine months ended September 30, 2006, net loss included non-cash stock-based compensation expense of $5.4 million or $0.08 per share. As of September 30, 2006, we had cash and investments of $53 million as compared to $65.3 million as of June 30, 2006.

Subsequent to the end of the third quarter, we completed an equity financing to enhance our resources dedicated to the advancement of our lead drug development program. We sold 10.6 million shares of our common stock with net proceeds to us of $37.5 million. On a proforma basis for the financing, we had approximately $90 million in cash and investments at the end of September.

Now let's turn to our forward-looking financial guidance for the fourth quarter and remainder of 2006. We are actively involved in discussions with multiple pharmaceutical and biotechnology companies regarding new collaborations, alliances and sub-license agreements. We are discussing target-based collaborations, therapeutic area alliances and collaborations related to specific drug development programs. And we are confident that we will be able to enter into new strategic collaborations in the near-term.

Our committed revenue from existing agreements for the fourth quarter of 2006 is in the range of $15 to $16 million primarily consisting of revenue recognized under our alliances with Bristol-Myers Squibb and Organon and our contract with the Texas Enterprise Fund. Considering only this committed revenue, our full-year 2006 revenue would be in the range of $72 million to $73 million. We expect additional revenue for the quarter and year from new agreements.

The amount of the additional revenue will be dependent on, among other things, which of our ongoing negotiations is completed by the end of the year. While we are continuing to work towards our full year revenue target of $78 million to $82 million as a goal, what we will actually end up realizing in revenue will not be clear until later in the year. Our primary focus will be on achieving the best overall deal structure and terms for the company and our stockholders.

Operating expenses for the fourth quarter are projected to range from $32 million to $34 million. This includes non-cash stock-based compensation expense of approximately $1.8 million in the quarter. For the full year 2006, we are again lowering our operating expense guidance, this time to $130 million to $133 million from $135 million to $140 million. Our projected operating expenses include $7 million to $8 million non-cash stock-based compensation expense.

We are projecting our net loss for the fourth quarter to range from $16 million to $18 million and continue to expect our 2006 net loss to range from $57 million to $60 million. Please 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.

If we combine our $37.5 million equity financing with projected cash used in operations and for capital expenditures in 2006 and exclude cash from any new collaborations, we would end the year with at least $70 million in cash and investments. However, we expect that additional cash will come from the signing of agreements currently in negotiations.

As a result of our drug discovery and development progress and existing and anticipated partnerships, I believe we will end the year in a very positive position. Thank you. And now we will answer any questions you may have.

Thank you very much.

[Operator Instructions]

Okay, our first question comes from Sharon Seiler with Punk, Ziegel & Company.

Okay, two questions, if I may. Can you give us some idea of when we might actually see some of the pre-clinical data for these programs presented at scientific meetings? And I think there has been considerable discussion this morning about Merck's acquisition of Serono. Could you just give us maybe a quick compare and contrast of how you view Serono versus Lexicon?

Okay, thank you, Sharon. So to your first part of your question, in our lead programs we anticipate over the next six to 12 months to be participating in scientific meetings regarding the programs and also to be publishing some of the scientific results related to the pre-clinical research findings as well as the targets, which, as you know, will be a first for us. given our whole strategy of working on very novel programs. So I think it'll be a very important next six to 12 months as we roll out these programs to the scientific and then also medical communities. Something to look forward to.

On your second point, it is very interesting, exciting. I think in the past we've gotten questions about [R&AI] versus knock-out technology as a general strategy for target identification. And certainly, at the surface look very similar to one another, and they do share similar strategies in knocking down or knocking out targets as a matter of a way of validating them. Our approach, as you know, works very well [en-vivo] in whole animal systems and hence the whole strategy. And I think I would say it's been, of course, the fruit of our programs that we discussed this morning. So we have done very well there.

The approaches differ in that our strategy has been to then pursue small molecules to those targets or antibodies to those targets rather than use a nucleic acid-based [moity] as a therapeutic itself, which is, of course, what R&AI strategies do. And so, there we differ. And I think that Lexicon's approach is to then have a, I think, a very broad medical application, given that we have both small molecule and antibodies to pursue these targets by. So I think I'll leave it there, if that helps.

Okay, just to follow-up, if I may, on the data, are there any meetings that you've targeted for data presentations.

We haven't disclosed those at this time. We do work through the year on the meetings. As you know, it's not easy always to predict the timing of publications or submissions of abstracts of these. So it's a little difficult for us to do that now. I think just broadly stated again, over the next six to 12 months it's our intention. And then when we lock in a certain meeting, we generally will release a pre-announcement that we will be presenting, I think, at those meetings. But it's too early for me to specify those now.

Okay, thanks very much.

Thanks.

And our next question comes from Jason Kantor with RBC Capital Markets.

Hi. Thanks. A couple of questions here. The phase 1(a) data for 6171 by year-end - what is the, what is the likely form? How would you release that? And what kind of information might we get from that?

I think I'll turn that over to Phil Brown, our Vice President of Clinical. Phil, do you want to go ahead?

So again, this is a very standard and classical approach to drug development, phase 1 and normals. And I think the types of data that we would be able to share would be standard safety and pharmacokinetic profile of the compound and subjects. And as you know, this is going to position us for our phase 2 program where we really test for proof of concept of the agent.

And will you put out a press release? Or is there some place by year-end, some confidence that you would have that at?

Well, it depends on the timing of getting the top line results. But we do have our investor analyst day in early December. And it may be that we'll have results by then. That might be a target date, but we can't guarantee that until we get the results back.

Okay. Two other questions. Julia, listened to your wording very carefully. And you said that you expected new strategic collaborations, plural, in the near-term. Do you, do you expect that you'll be able to do more than one of these collaborations by year-end?

Well, I would - I'd like to say that we have tremendous amount of momentum in our negotiations with multiple partners and new pharmaceutical companies and biotechnology companies as well, which I'm very excited about. My goal, I think as I mentioned in our - in the conference call, is to get the best deal. And I really want to focus on the term structure of the deal more than anything else. And so, that's my focus. I can't guarantee anything other than we are working very hard with exciting opportunity.

I'd just, I'd just like to add to that, Jason, that it has been a real uptick in activity, I'd say, with regard to our business development opportunities, given our compounds now because it's allowed people to clearly see the application, obviously, because they're looking at a more classic display of scientific data rather than just the earlier disclosures of target function and target biology. Now we're actually showing sort of the more classic package. And we've just seen a tremendous uptick in activity.

And my final question - often people think of antibodies as the faster way to go from target to drug. And I'm just wondering, first, where are the antibodies coming out of your pipeline, and, two, does this imply that your technology is somehow better at elucidating inter-cellular targets rather than cell surface targets.

So the technology is good at both equally. A target is a target. A gene is a gene to the gene knock-out technology. On that point they're equivalent. I think that the timing of the antibody programs are somewhat behind our small molecule because we brought online, frankly, that capability at the company about a year to two years after we acquired our small molecule capability. So I think that's really the main issue there.

I do think that our lead programs with Genentech are moving forward. And we should have more information on those in the next 12 months. Now, those are the programs that Lexicon's leading the charge on using our system. And then our alliance with Organon has identified new targets in that area as well.

So as far as which is faster overall, I think of the discovery phases, they're very similar. Probably in the development phases, antibodies probably can go faster because they do tend to have more straightforward path, especially with regard to safety, at least that's been the history so far.

Thank you.

Sure.

At this point we have one more question in queue.

[Operator Instructions]

Now we will hear from David Friedman with Morgan Stanley.

Hi, this is Dave Friedman calling for Sapna Srivastava. I missed the very beginning of the call, so I hope you didn't mention this. But I wondering just in regards to going forward where you're heading with these multiple partnerships, do you see yourself narrowing your focus at all to one specific organ system or disease area. Or do you see it still as a broad slate of option?

Yes, David, I'll take that. I think we have - I think through time we will focus as our programs evolve in the clinic and the ones become apparent that perhaps move the most readily and where Lexicon is a smaller biotech can commercialize them themselves. So there are some areas where this has been classically true.

Immunology is one of those areas. And we have a number of very exciting programs. Our LX2931 being the latest addition to our portfolio in development. So I think we all find here at Lexicon that area very intriguing.

We do have fixed therapeutic areas. And in some of the areas that may require a broader clinical development plan or commercialization capability, those areas will probably be more tuned to partner. And I think you've seen us do that with - in the case of neuro science, for science, with BMS.

So that's the general strategy. It's still a little early for us to say definitively, though, where we will end up focusing our internal development and commercialization efforts.

Great, thank you.

Thanks.

And there are no further questions in queue at this time. I'll turn the call back over to Dr. Sands for any additional or closing remarks.

Well, thank you, everyone, for participating. And we look forward to updating you next quarter. Goodbye.

Once again, this does conclude today's conference call. Thank you for your participation. And have a great day.