Lexicon Pharmaceuticals Inc (LXRX) 2006 Q4 法說會逐字稿

-- the development program. 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, the timing and results of preclinical studies and clinical trials of LX6171, LX1031, LX1032, LX2931, 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 list and a description of the risks and uncertainties that we face, please see the reports we have filed the Securities and Exchange Commission. I will now turn the call over to Dr. Sands.

Thank you, Bobby. Good morning, everyone. This call proceed in the following manner. I'll start out by walking through our key accomplishments in 2006 and hit a few highlights of how we are launching 2007. Then Julia will bring you up to date with regard to our financials and then at end, Philip Brown will go through an update with regard to our ongoing clinical trial programs.

Let me start out. It was a big year for us in 2006. I think one of the most significant strategic accomplishments was, of course, the launch and then the completion of our Phase Ia trial for LX6171, which is our compound for the treatment of cognitive impairments associated with disorders such as Alzheimer's disease, schizophrenia, and vascular dementia. That certainly was an important milestone for us. Next, we filed an IND for our second drug candidate, LX1031, for irritable bowel syndrome. That occurred towards the end of the year in 2006 and, of course, we launched our Phase I program this year, January 2007. That is an excellent program in gastrointestinal disorders.

Also, we commenced preclinical development for LX1032, getting ready for an IND filing towards the end of this year, 2007, and you probably will recall that LX1032 is an agent that operates on the same target as 1031, but has different pharmacokinetic properties that allows us to actually reach the target within the peripheral system and not only in the GI tract, but actually is absorbed into the periphery. Again for all these programs, Phil will be giving you more of a detailed update.

Importantly, we initiated preclinical development for yet another drug candidate, LX2931. That is in preparation for an IND filing, which we anticipate to be in the fall of this year, 2007. That drug will address autoimmune diseases, such as rheumatoid arthritis. Also, as we look back over the year, we now can see our way clear to the completion of the Genome5000, and from that program, already we have harvested more than 100 drug targets. It has been highly successful program. It has been the source of all these drug discovery programs I have discussed and has really been the way that we have brought these agents forward. That has been very successful. I will address a little bit more our next major program in a minute, our 10to10 program.

Just to highlights for you a few accomplishments on the business front, our partners, Bristol-Myers Squibb, extended the research term of our neuroscience drug discovery and development alliance for an additional two years, and we will receive an additional $20 million in funding in that alliance. We also received a $5 million performance milestone payment from Takeda under that alliance, which is focused in the hypertension. Also, we completed two major installations of the OmniBank II library of knockout mouse embryonic stem cell clones, which we are creating under our agreements with the state of Texas for the Texas Institute for Genomic Medicine, and that library currently contains more than 200,000 clones. And we have been delivering earlier on those installments.

In addition, we were awarded two grants totaling $4.5 million to identify targets that maybe relevant to the prevention and treatment of spinal muscular atrophy. That was an award from the United States Army. We also were awarded funding under DARPA for the identification of targets that may play a role in enhancing sleep. That is a very interesting program that not only, of course, has import for the Defense Department, but I think could have application, clear applications in the medical market, the broader commercial medical market with regard to sleep.

So those have been some of the key accomplishments in 2006. I think I would also like to address the loss of our next major initiative, which I am sure you have seen the press release on that. That is the 10to10 program, and that is our program that feeds directly on the productivity of the Genome5000. But is a program in which the Company is focused on the goal of advancing 10 drug candidates into human clinical trials through 2010. So this is a major effort, and I think it reflects the overall productivity of our Genome5000 and our drug discovery efforts. These programs will result from our internal drug discovery efforts, but also from our collaborations, as we see those programs progressing as well.

In addition to that, we have proposed to change the name of the Company to Lexicon Pharmaceuticals, which reflects this realignment of our workforce and our focus fully into pharmaceutical discovery and development. That, of course, will be subject to shareholder approval coming up here in April.

We did also realign our workforce through this process, which comprised of an 18% reduction in our workforce and a refashioning of our workforce more towards drug discovery and development personnel. So we see a reduction in the areas of the fundamental genetics as we proceed down the scheduled completion of the Genome5000. And we see then a focused scale-up over the year and into next year in our clinical development group and our preclinical development group, again all reflecting the productivity of our drug discovery operations. And will facilitate us as we go into the clinic.

Now I do want to just reflect for a minute on the earlier-stage pipeline, since Phil will be talking about those programs in clinical development. We look forward this year to looking for new clinical candidates which will be a subject for future INDs in 2008 and beyond. We have a very interesting program in metabolic syndrome, LG 985, which I know we have described before, but it results in the reduction in triglycerides, cholesterol, and obesity. So we see it as a broad application in metabolic syndrome.

We have a new program evolving rapidly in the area of diabetes, specifically glucose control, LG481. I think that could move to the four very rapidly. We hope to be identifying a clinical candidate for that this year and then moving that into preclinical development. Then we have two programs, antibody programs that are progressing nicely with our two alliance partners, Genentech -- this is LG 843 for dyslipidemia, an antibody that reduces triglycerides and cholesterol, and we are looking for effects in atherosclerosis there as well. Then in the immunology, our Organon alliance. LG 106, which is an autoimmune target progressing as well. So I'm only going to just mention those four, but there's many more in the pipeline that will be fueling our 10to10 program over the coming months and years.

So I would just like to finish with our anticipated milestones for 2007. We look forward to completion of the Phase Ib trials for LX6171, and that should occur in the first half of this year. We also have been planning, and have, in fact, accomplished, the initiation of our Phase I trials for 1031, that is the IBS drug. So those are ongoing. We plan to complete the IND-enabling studies for LX2931, as I mentioned earlier. Get that filed in the second half, as well as for LX1032, which would be later in the second half. There will be more clinical candidates coming through, that's another milestone and goal for 2007. And of course the formation of additional collaborations and alliances, which is an ever-present goal and we see that progressing well.

So I'll turn the call over to Julia now.

Thank you, Arthur. We issued a press release this morning detailing our fourth quarter and 2006 year-end financial results, which you may find on our website if you have not already reviewed it. Lexicon's revenues for the three months ended December 31, 2006 decreased 53% to the $16.1 dollars from $33.9 million for the corresponding period in 2005, due primarily to $20 million in payments received from Genentech for Lexicon's achievement of two performance milestones during the fourth quarter of 2005. One for work completed under the initial alliance and the second relating to a milestone achieved under the expanded alliance.

Excluding these performance milestone payments, revenue for the 2006 fourth quarter increased 16% from the corresponding period in 2005. The increase was attributable primarily to increased revenue recognized under Lexicon's alliance with Organon. For the year ended December 31, 2006, revenues decreased 4% to $72.8 million from $75.7 million in 2005, in line with the revenue guidance provided on our October 2006 earnings call if we did not close a new collaboration before the end of the year.

Research and development expenses for the 2006 fourth quarter increased 7% to $25.6 million from $23.9 million for the corresponding period in 2005, primarily due to three items -- non-cash stock-based compensation expense of $1 million resulting from Lexicon's adoption of FAS 123(R) on January 1, 2006; increased preclinical and clinical external research costs related to Lexicon's drug development programs; and increased personnel costs. For the year, research and development expenses increased 14% to $106.7 million from $93.6 million in 2005, and included $4.4 million in non-cash stock-based compensation expense.

General and administrative expenses for the 2006 fourth quarter increased 17% to $5.1 million from $4.3 million for the corresponding period in 2005, and increased 17% as well for the full-year 2006 to $21.3 million from $18.2 million. Most of the increase was attributable to non-cash stock-based compensation expense, $625,000 for the quarter and $2.6 million for the year. Lexicon's net loss for the 2006 fourth quarter was $13.8 million, or $0.19 per share, compared to net income of $5.9 million, or $0.09 per share, in the corresponding period in 2005. Lexicon had net income in the 2005 period principally because of the two performance milestone payments received from Genentech.

Net loss for the year ended December 31, 2006 was $54.3 million, or $0.81 per share, compared to a net loss of $36.3 million, or $0.57 per share, in 2005. Net loss included non-cash stock-based compensation expense of $1.6 million, or $0.02 per share, for the quarter and $7 million, or $0.11 per share, for the full-year 2006. As of December 31, 2006, we had cash and investments of $80 million, as compared to $53 million as of September 30, 2006 and $99.7 million as of December 31, 2005. In October 2006, Lexicon raised $37.5 million in net proceeds through the sale of 10.5 million shares of common stock and a registered direct offering to institutions.

Now, let's turn to our forward-looking financial guidance for 2007. We estimate that our annual revenues for 2007 will increase to approximately $75 million to $78 million. We start 2007 with $38 million in contractually-committed revenues and expect to generate the remaining $37 million to $40 million in revenues from new collaborations. We expect these collaborations to include alliances for the development of one or more of our advanced drug candidates, as well as a target-based and drug discovery alliance. However, we cannot predict the timing of any of those contracts or guarantee their signing, and we expect our revenue to fluctuate from period to period, as it has historically.

Total operating expenses should remain relatively flat compared to 2006 and range from $128 million to $133 million, including stock-based compensation expense, as our realignment of our workforce resulted in a change of the composition of expenses and a greater percentage of total operating expenses focused on drug discovery and development. Our total operating expenses reflect projected research and development expenses for 2007 of $108 million to $113 million, as we continue clinical development activities for our two lead programs, LX6171 and LX1031, complete IND-enabling studies for LX2931 and LX1032, and continue to advance our drug discovery pipeline towards development consistent with our 10to10 initiative.

General and administrative expenses in 2007 should be relatively level with 2006 and projected to be approximately $20 million. Our projections for operating expenses in 2007 include approximately $6 million to $8 million dollars of non-cash charges related to stock-based compensation, approximately 65% of these non-cash charges will be research and development expenses and 35% will be general and administrative expenses. Overall, we are projecting or net loss for 2007, including stock-based compensation expense, to range from $55 million to $58 million, or $0.71 to $0.74 per share, based on weighted average shares outstanding of $78.2 million. Our projections for net loss in 2007 include a loss of approximately $0.08 to $0.10 per share related to non-cash stock-based compensation expenses.

Capital expenditures are projected to be approximately $3 million to $4 million for 2007, as compared to $3.6 million in 2006. We expect that cash used in operations and for capital expenditures in 2007 will total approximately $20 million to $25 million.

Now let's review our guidance for the first quarter of 2007. Revenue for the first quarter 2007 should be in the range of $10 million to $12 million. This is primarily the result of revenue recognized under our alliances with Bristol-Myers Squibb's, Organon, and Genentech, and our award from the Texas Enterprise Fund. Operating expenses for the first quarter including stock-based compensation expense are projecting to range from $33 million to $35 million. This reflects, among other things, the external preclinical and clinical costs related to our drug development programs, stock-based compensation expense of approximate $2 million in the quarter, as well as $1 million in severance costs resulting form the realignment of our workforce to focus on our drug discovery and development programs.

We are projecting our net loss for the first quarter, including stock-based compensation expense, to range from $23 million to $25 million, or $0.30 to $0.32 per share. Our projections for net loss in the first-quarter include a loss of approximate $0.02 per share related to non-cash stock-based compensation charges. 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.

I will now turn the call over to Phil Brown to review our drug development program.

Great, thanks very much, Julia. As Arthur mentioned, it was really a pivotal year for us, as we moved several of our programs into the clinic. I see that momentum continuing, certainly going forward from this point. Just to refresh your memory with LX6171, this particular target regulates learning and memory and it is expressed exclusively in the CNS and had a very interesting phenotype of increased learning and memory in a variety of assays. The compound LX6171 that was discovered by chemist in Princeton is a very potent and selective agent towards this particular gene target, and importantly, it is orally bioavailable. So we know we get very nice systemic exposure in all of our animal models, and in all of those assays, we are also getting excellent penetration into the CNS. The pharmacology effectively reproduced what we had witnessed in the knockout animals, so very interesting compound that effectively recapitulated the phenotype of interest pharmacologically.

We had an excellent safety profile with this compound and moved it into the clinic in the fall of last year. This is a very classical Phase I study design using normal healthy volunteers. It was conducted in a double-blind randomized serial ascending single-dose fashion, in which we were able to explore five dose levels of 6171. We started at a dose of 150 milligrams and were successful in escalating up to a 2000-milligram dose level. So this exhibit sort of illustrates the very nice safety profile that we had witnessed in our preclinical studies. We also integrated a food effect assessment on the pharmacokinetics of the compound in this particular study.

There were no clinically-significant changes noted at any dose level, and there were no serious adverse events. All doses were very well tolerated up to a 2000-milligram dose level. We did see increasing evidence of gastrointestinal types of events that we believe, at least in part, was related to the vehicle that was being utilized in this particular study. Importantly, we were able to achieve excellent systemic exposure with the compound and we were able to exceed the blood levels required to drive pharmacologic activity in animals. Half-life appears to support once daily dosing.

We initiated our multidose tolerance study in January of this year. This, again, is a very standard Phase I study design, double-blind randomized placebo-controlled study in a serial multiple ascending dose fashion utilizing normal, healthy volunteers. The plan in this study is to initially probe for the safety and tolerability in young, normal volunteers. Once that has been confirmed, we would then integrate a cohort of elderly volunteers to ensure that the safety tolerability and pharmacokinetic profile of the compound is consistent across age ranges. We have integrated a cognitive assessment battery, both into the Ia study and also into this study, and this trial is ongoing at present.

Shifting gears to LX1031, this is our program that is directed towards functional gastrointestinal disorders, and our primary focus is going to be on irritable bowel syndrome. This, as you know, is a very common disorder. It is associated with a variety of symptoms. There are motility disturbances as well as subjective aspects of the disease, abdominal pain and discomfort, that patients experience. It is estimated that 15 to 20% of population suffer from this condition, and we believe that LX1031 may influence not only the motility aspects of the disorder, but also may influence the subjective aspects, such that we could ameliorate some of these negative symptoms, the pain and the bloating and the discomfort associated with the condition.

This particular target regulates gastrointestinal serotonin activity, and I think it has been increasingly well recognized that serotonin plays a significant role in gastrointestinal function, and particular in irritable bowel syndrome. The compound LX1031, again, developed by our chemists in Princeton, is a highly-selective and potent orally-bioavailable agent. Importantly, this compound acts on a local basis within the gastrointestinal tract. We get very little systemic exposure with the compound, and this is nice because it provides us an excellent safety window in which to work.

We have been able to utilize serotonin as a biomarker through both our preclinical pharmacology studies and we believe that will continue to have great importance as we move into our human studies. In January of this year, we initiated our first advanced study, again, in a very classical fashion, utilizing normal, healthy volunteers. This is a double-blind randomized placebo-controlled single ascending dose tolerance study, with the objective of assessing for safety, tolerability, and also to ensure that we are getting minimal systemic exposure of the compound. We obviously have secondary assessments of evaluating effects of the pharmacokinetics of the compound with feeding. And we have also will evaluate blood serotonin levels. However, I believe it would be unlikely to see an impact after just a single-dose of the agent.

We have also, as Arthur mentioned, initiated IND-enabling activities for two additional programs. First LX1032, which addresses the 103 target. But this particular compound gains systemic exposure. So what that allows us to do in the clinic is to begin to consider a variety of other indications in addition to the functional gastrointestinal disorders, such as pulmonary arterial hypertension, or carcinoid syndrome, of which serotonin is known to play a significant role in some of the symptomatology that those patients experience. In addition, LX2931 has entered its IND-enabling activities. This particular program is directed towards rheumatoid arthritis and the target regulates lymphocyte migration and thereby influences the immune response occurring in a variety of autoimmune disorders, and in rheumatoid arthritis, as well. These programs are being developed internally and we anticipate regulatory filings to occur towards the end of this year.

So with that, I thank you for your attention, and we will now answer any questions you may have.

(OPERATOR INSTRUCTIONS) Ted Tenthoff, Piper Jaffray.

Quick question. Julia, you gave us a little bit more color on what to be expecting on the discovery deals. Can you give us kind of what that inflection point is for an advanced drug? Do you hope to see proof of concept data at this point, or what kind of is your goal in terms of validating those drugs before doing a partnership?

Well, we are very excited about the data on these drugs so far, Ted. So I think that the partners are attracted to our compounds, as they have been more and more attracted to earlier-stage compounds and collaborations. I think what we are doing is we are really reviewing the general opportunity that is presented to us and the value proposition. And we will put all those together before we make a final assessment of the timing to partner.

I might add something. With regard to what we would be seeking in terms of proof of concept for these in the early stages, I think with regard to 1031, as we get into, as we enter the multidose study, we are going to be looking for a reduction in serotonin and that may provide some type of, at least, biomarker proof of concept, if you will. I think in many circles in this field, people would consider that quite a significant event and a finding.

So I think that would be something we would look for and partners may look for. However, it may not be required from the partnership perspective either, to tell you the truth. With regard to cognition program, that program really, concept, proof of concept there probably would be more towards Phase IIa, which would be a little bit later, because we're going to probably require longer dose periods to measure these effects. They are obviously not as concrete biomarker-driven readouts in that program.

That makes a lot of sense, and it is really helpful. Julie, just real quickly, did you say the cash utilization would be $20 million to $25 million and does that assume any partnerships?

I did say that it would be $20 million to $25 million, and, yes, it does assume partnerships.

Great, cheers. Thanks.

Sapna Srivastava, Morgan Stanley.

This is actually Dave [Friedman] calling for Sapna. I was just wondering if you could provide any information in terms of when we might get a glimpse as to some more-detailed mechanisms of some of your lead drugs and do you see them being written up in any scientific journals during the year? Just to get some more color on how these drugs are working, what the exact targets are, etc.

Dave, we do anticipate during this year to be publishing these in a number of forums, scientific journals being one. Those tend to take a little bit longer, as they go through the review process, etc., and come into print. But then also we're looking at certain conferences where we will be presenting clinical results and also revealing target mechanism. That is all anticipated this year. The exact timing of those, of course, we cannot predict or provide for you, because that requires submission even to conferences, etc., and getting our presentations slots and so forth.

But I think this year will be a big year of revelation for Lexicon with regard to these mechanisms. And I believe that the scientific community and the medical community will find these things extremely exciting and they will make a lot of sense when you have the phenotypic data that we have. When you combine that all together, I think things will make a lot of sense for people.

Great, thank you.

Jason Kantor, RBC.

I also have a question about the alliances that you talked about for advanced drug candidates. Are you referring specifically to the four programs that you highlight here, or are any of these advanced programs, like your thrombopoiesis program or any of these other ones that you have mentioned in the past. Are any of these other ones also included in what you would consider an advanced drug candidates, or do they have to be kind of IND-enabled already?

When we're referring to those, we are referring to the four advanced candidates we have been focusing on. However, I would not exclude the fact that the other earlier-stage programs are also subject to alliance discussions and potential alliances. In fact, our earlier stage discovery pipeline continues to get -- garner a lot of interest from partners. And so I would not exclude those either, but when we talk about advanced programs, we are really speaking about those that are either in the clinic already, or in the IND-enabling studies phase.

Okay, thank you.

Sharon Seiler, Punk Ziegel & Co.

I also have a question on alliances. So I think if I heard you correctly, you said you would expect sort of broad therapeutic alliance and then one or more product-specific alliances. Can you give us some sense of which of your programs, which of the products seem to generate the most interest? Would you dare to give us some kind of timeline for when you expect the see one or more of these alliances completed?

I will take that question. We see a very high interest level in our immunology portfolio and our immunology/oncology portfolio, as it relates to lymphoproliferate disorders, and 2931, which I think is a very hot mechanism and is going to give us very early proof of concept. So I would put that very high. With regard to our 103 program, also very high interest level. The novelty here and the emerging safety profile of this agent for this particular indication I think is -- I see it as being very attractive to potential partners. So those two areas are really where we're focusing attention and where we're getting a lot of attention from the field.

With regard to the therapeutic area alliances, I would say that optomology is a very interesting area for us. It has continued -- we are doing some very unique work in optomology taking a genetic approach to understanding targets within the eye, eye-specific targets. That has garnered a tremendous amount of interest, as well.

So those would be the ones that I would highlight, but I should also mention one other area is metabolism. Our metabolism group, that also has been subject of many discussions with potential partners. And that program I could see as a multitarget sort of area, where we would probably like to preserve and are going to preserve specific target areas in metabolism and cardiovascular, because they are just such huge potential markets that is hard to imagine encompassing that entire therapeutic area under one type of alliance. So there, we're looking at more focused types of alliances.

I guess in terms of -- and I think you sort of started to answer this question, but in terms of either these sort of broader alliances or product-specific alliances, what kind of structures are you looking for? How much control, if any, do you want to retain over these programs? Would you want to hand them off to a partner, or do you want to be actively involved and, if so, to what point?

Our preference would be active involvement and, thereby, maintaining a larger ownership position throughout and, of course, a larger return, and putting forth more investment into our programs and development. So in the past, you've seen us do various cost profit-sharing alliances, which I think would also be considered here for the later stage programs. But we should not rule out more of a traditional licensing type of alliance, because those are also under discussion. So, we are going to be part owners one way or another, I think, with a number of these programs. Our goal, of course, is to ultimately have our own drugs on the market or at least be sharing in a very major portion of this highly-successful drug on the market and multiple drugs, I should say.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Karen Buchkovich, JPMorgan.

I have a quick recap question for Julia. What was the severance expense for 1Q and total stock compensation for '07?

Severance expense for the first quarter, for '07 is $1 million. Stock compensation expense should be approximately $4 million to $6 million for the entire year.

Okay, thank you.

There appear to be no further questions in the queue at this point. I would like to the conference back to our speakers for any additional closing remarks.

Can I just make a quick correction? In terms of non-cash charges related to stock-based compensation, the total should be about $6 million to $8 million. And on a per-share basis, that should be $0.08 to $0.10 per share. Sorry for the confusion. For 2007, the entire year.

Okay, I would like to thank everyone for participating and we look forward to updating you next quarter. Goodbye.

That does conclude this conference call. Thank you all for joining us and have a wonderful day.