Lexicon Pharmaceuticals Inc (LXRX) 2007 Q2 法說會逐字稿

Thank you for holding. Welcome to the Lexicon Pharmaceuticals second quarter 2007 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 taking place live and will not be replayed.

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

Good afternoon and welcome to the Lexicon Pharmaceuticals second quarter 2007 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, Dr. Philip Brown, Vice President of Clinical Development, and Julia Gregory, Executive Vice President and Chief Financial Officer.

We expect that you have seen a copy of our earnings press release that was distributed this afternoon. 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 initiatives to build Lexicon into a major biopharmaceutical company, including the strategic implications of the recent financing transactions. Dr. Brown will then discuss the status of our joint development programs, and Ms. Gregory will review our financial results for the second quarter of 2007, discuss our financial guidance and more details of the recent financings. 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 relating to, without limitation, all statements regarding the agreement with Invus to invest in Lexicon and Lexicon's research and development of LX6171, LX1031, LX1032 and ANGPTL4 antibodies. This call will also contain forward-looking statements relating to Lexicon's 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 relating 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 posed 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.

Thank you, Bobbie, and welcome, everyone. Thank you for joining us this afternoon. We have a significant amount of information to cover because of course we had a very busy quarter, and I think we accomplished quite a bit. As Bobbie indicated, I will start out with a bit of an overview and I'd like to hit some of the highlights with regard to the strategic implications of the major agreements that we signed this past quarter. And then of course Phil will delve into the clinical update. I'm sure you also have seen our announcement with regard to the advancement of our LX6171 program completion of Phase 1 trials and our intention to move forward in Phase 2, so I think we'll spend some time on that, as well as our IBS program LX1031, and some mention of the broader pipeline.

And then of course Julia will go into greater detail on the financials.

So all these activities this quarter are part of a much bigger initiative at the Company, something we've outlined really at the beginning of the year, captured in our 10TO10 program that is a program dedicated to moving ten new drug candidates into clinical trials through 2010. And that really is descriptive of the breadth and the depth of Lexicon's drug pipeline. We have -- our pipeline has several unique aspects. Of course the novelty and the discovery history of the pipeline is where -- is from where its power really derives, and that's the Genome5000 program, where we made all of these discoveries of mechanisms and translated them now into compounds moving into the clinic.

Another unique aspect of Lexicon's growing pipeline is the fact that it does contain both small molecules and antibody therapeutics as part of the overall pipeline approach -- the portfolio approach that we take. And we had a significant publication this past quarter on one of our antibody programs. I'll just mention that briefly.

This pipeline that the Company has attracted long-term financing to the Company recently, both in terms of our established corporate collaborations, but also these new transactions, so let me turn to discuss some of those now. And I'll start with the Symphony transaction, which is a $60 million product development collaboration that brought capital to bear on our lead programs and some to Lexicon for general corporate purposes.

This is an agreement with Symphony Capital Partners and as co-investors, which we signed on June 15th. Symphony Capital is a private equity firm. For those of you not familiar with it, they manage some $315 million in capital and it's dedicated specifically to investments in clinical development. And the amount of diligence, by the way, that this firm has done in choosing these investments is quite significant, and I certainly believe that we see that as a very significant vote of confidence in the three programs we've included under this alliance -- LX6171 for cognitive disorders, LX1031 for IBS, and LX1032 for other gastrointestinal disorders, specifically carcinoid syndrome.

So the structure of this is going to be covered in detail by Julia, but I'd just like to comment on the lever of governance and expertise that the collaboration also brings, because having witnessed now one of the first joint development committee meetings between Lexicon and Symphony, and also having the privilege of serving on the board of this new entity, Symphony Icon, I can see taking shape what we knew would be a significant advantage for the clinical development of our programs.

The development committee is spearheaded by our head of clinical development, Phil Brown, and he maintains -- and Lexicon maintains operational control over the programs. But it's a 50/50 committee though between Symphony and including RRD International, which is a global regulatory group that provides very significant preclinical and clinical support. They have an experience base of having contributed to more than a hundred FDA-approved products and different indications over time. And again, this is very apparent to me the benefits I can see accruing to our programs already.

Then over the development committee is a board, and on the board are additional experts, which Lexicon and Symphony have selected very carefully to represent the areas of medicine where we see our programs of course impacting. Steve Ferris and Doug Drossman are the two experts that will join us at the board level. Steven Ferris is executive director of NYU's Silberstein Aging and Dementia Research Center. He's a noted expert in the field, a neuropsychologist and psychopharmacologist by training. And he's been studying aging and Alzheimer's disease for more than 25 years and has participated in the development of many novel agents in that area. So we're very pleased that he joins us on the board at Symphony Icon.

Doug Drossman is professor of medicine and psychiatry at the University of North Carolina School of Medicine, Division of Gastroenterology and Hepatology, and co-director of the UNC Center for Functional GI and Motility Disorders. He's a well-noted expert in this field and established a program in research over 25 years ago, published more than 400 books and articles in the area relating to GI disorders.

So again, this level of expertise at the board level gives us great confidence going forward under this new alliance, and we have no doubt it's going to not only benefit our programs in terms of their depth and expertise, but also I think accelerate them as they move through development.

So let me now turn to the strategic impact of the Invus financing for Lexicon. We entered into a series of agreements, under which the Invus Group will invest, pending Lexicon shareholder approval in August, $205 million in 2007, with the potential for up to an additional $345 million over the next four years. This brings to Lexicon a very substantial anchor investor with strategic expertise -- a self-described deep-pocketed investor with a proven track record of building very successful companies. Invus is a 22-year-old private equity investment firm with a track record of managing in excess of $4 billion of capital in a broad range of industries, including several biotech investments, but also firms outside of biotech -- Keebler Food Company and Weight Watchers International, just to name two.

The impact of this -- an investment of this magnitude of course is quite significant for Lexicon in its stage of development because it's intended to and will really enable us to fund our entire pipeline going forward under the 10TO10 program under a five-year plan that we've outlined. Now, this five-year plan also accounts for additional pharmaceutical partnerships being formed as part of our funding vehicle, but the power of the Invus transaction of course allows us to optimize and balance our corporate partnering strategy with our desire for our internal pipeline to progress under our own steam. And it certainly gives us that ability.

It removes short-term financing pressure, which, all too often, I think can come to play a role in biotech and should not in the area of drug development, and it establishes a very shareholder-inclusive financial framework to allow shareholders to participate at the subsequent stages of the financings. And Julia will describe that mechanism in some detail.

As I mentioned, Invus will be an anchor investor, has a long-term strategy mindset, and as such, we're looking forward to welcoming three new board members to the Lexicon board of directors.

So if we then move on from those two very important transactions to clinical development, I think here again, the Company has made significant strides in this quarter, as we did release this morning the completion of the Phase Ib clinical trial for 6171 -- lead us to believe that we're in a great position to move forward on this program. This is an oral drug candidate for the treatment of cognitive disorders. We saw very encouraging results with regard to safety and tolerability, which of course is what Phase I is designed to tell us. And Phil will go into greater detail on that.

Also simultaneously LX1031 has been advancing towards the end of its Phase I trial and we can give you a brief update on that, although the dosing is still ongoing there.

And then I think another important note this quarter was the publication of the first report on the identity of one of our targets, angiopoietin-like 4 protein, which is a potential new drug target for cardiovascular diseases. And we published that in the proceedings in the National Academy of Sciences peer review journal in which we detailed the mechanism by which this protein affects triglyceride levels in a profound manner, and also outlined the development of an antibody that imitates or mimics the knockout response -- the superior blood lipid profile. We anticipate more publications coming through the year, and we think it's going to be part of the greater trend for Lexicon as we roll out these exciting programs.

So with that, I will now turn over the call to Phil Brown to review in more detail the drug development programs. Phil?

Great. Thank you very much, Arthur. Well, as Arthur has mentioned, as we announced earlier today, we've completed the multidose tolerance study with 6171 in normal volunteers, and we're pleased with the results. This trial with 6171 was conducted in young volunteers, aged 128 to 50 years of age, as well as including a cohort of elderly volunteers, which were aged 65 to 80. The compound continues to perform very well, behaving in a consistent and predictable manner, as we anticipated from our preclinical studies, as well as our single-dose human study that was completed last fall. 6171 has shown to be very well tolerated at all dose levels over seven days of repeat dosing, and there's no evidence of dose-limiting toxicities that have emerged from the study.

Again, consistent with the single-dose study, the most commonly occurring adverse events continue to be gastrointestinal system related, which we believe is attributable, at least in part, to the vehicle that's been utilized in these very early studies. We're working to initiate Phase II studies with an anticipated regulatory filing in the fourth quarter of this year, and we believe we'll be able to commence testing in the first quarter of next year in Phase II.

Shifting gears to LX1031, our program directed towards irritable bowel syndrome and other gastrointestinal disorders, as Arthur mentioned, this multiple-dose tolerance study in normal volunteers is continuing at present. This is a double-blind, ascending, multiple-dose tolerance study over 14 days of exposure directed towards assessing the safety, tolerability, and the pharmacokinetics of the compound. We are tracking the biomarkers, both in urine and blood, that have guided us in the preclinical pharmacology as part of this study. This study is on track to complete in the late third quarter and we anticipate being able to move this program into proof of concept Phase II development in patients with diarrhea-predominant irritable bowel syndrome early next year.

Importantly, we've received acceptances to present this program at two major conferences. The first will occur as an oral presentation at the American Chemical Society in Boston next month, and initial clinical results will be presented at the upcoming American College of Gastroenterology meeting in Philadelphia in October.

We have additional development activities ongoing of course. These include two anticipated regulatory filings with new candidates -- LX1032 and LX2931. As we now have multiple development candidates entering the clinic, we are implementing a general plan to parallel process discreet indications based on a high level of unmet medical need, along with major medical indications. This includes niche indications, which may provide us with a more rapid development timeline, as well as larger indications, which we have focused on to date. In that regard, we're anticipating focusing initial development efforts for LX1032 in the area of carcinoid syndrome. This is a debilitating disorder with very limited therapeutic alternatives.

In addition, with LX2931, we are initially focusing our efforts on rheumatoid arthritis, but are continuing to evaluate additional development approaches in more discreet indications that we think will add significant value to the program, as well as a meaningful impact to medical care.

In summary, our programs are on track. We're very enthusiastic about progressing to the next phases of clinical development. I'd now like to turn the call over to Julia to review our second quarter financial results.

Thank you, Phil. We issued a press release this afternoon detailing our second quarter 2007 financial results, which you may find on our website if you have not already reviewed it. I am pleased that our revenues were above the top end of our revenue guidance and that operating expenses were below the lower end of our expense guidance in the second quarter of this year.

Lexicon's revenues for the three months ended June 30th, 2007, were $12.6 million, a decrease of 22% from $16.2 million for the corresponding period in 2006. The decrease was primarily attributable to lower revenue recognized under Lexicon's neuroscience alliance with Bristol-Myers Squibb resulting from the conclusion of the revenue recognition period for the up-front payment. As you know, BMS renewed the neuroscience research collaboration with Lexicon for $20 million over a two-year period, which includes this year and next year.

For the six months ended June 30th, 2007, revenues decreased 30% to $26.1 million from $37.1 million for the corresponding period in 2006. The prior year included a performance milestone under our Takeda alliance, which concluded at the end of July.

Research and development expenses for the 2007 quarter decreased 7% to $25.6 million from $27.4 million for the corresponding period in 2006, primarily due to lower personnel and lab supply costs as a result of work force reductions associated with our January realignment. As we are nearing the scheduled completion of the Genome5000, we reallocated resources from our genetics research efforts to drug development. This second quarter decrease in research and development expenses was offset in part by higher external preclinical and clinical costs related to the advancement of Lexicon's drug development programs, consistent with our 10TO10 strategic initiative. For the six months ended June 30th, 2007, research and development expenses decreased 2% to $52.9 million from $54.1 million for the corresponding period in 2006.

General and administrative expenses for the 2007 second quarter decreased 12% to $5 million from $5.7 million for the corresponding period in 2006, primarily due to the Company's operational realignment. For the six months ended June 30th, 2007, general and administrative expenses decreased 6% to $10.3 million from $11 million for the corresponding period in 2006.

Lexicon's net loss for the three months ended June 30th, 2007, was $13.6 million, or $0.17 per share, compared to a net loss of $16.9 million, or $0.26 per share for the corresponding period in 2006. Net loss for the six months ended June 30th, 2007, was $32.5 million, or $0.41 per share, compared to a net loss of $27.7 million, or $0.43 per share for the corresponding period in 2006. The net loss for the three and six months ended June 30, 2007 included a benefit of $4.3 million, attributable to the loss from non-controlling interest in Symphony Icon resulting from Lexicon's consolidation of Symphony Icon under Financial Accounting Standards Board Interpretation Number 46, or FIN 46. For the three and six months ended June 30th, 2007, net loss included noncash stock-based compensation expense of $1.7 million and $3.2 million respectively.

As of June 30th, 2007, we had $95.2 million in cash and investments, including $45 million in cash and investments held by Symphony Icon as compared to $59.5 million as of March 31st, 2007. As previously described in Lexicon's announcement regarding the collaboration with Symphony Capital Partners, the $60 million transaction provided $45 million to Symphony Icon, a newly created entity, and $15 million to Lexicon for general corporate purposes. Under the agreement, Lexicon licensed the intellectual property of LX6171, LX1031, and LX1032 to Symphony Icon while Lexicon maintains operational control of those programs at all times.

We have the ability, but not the obligation, to repurchase the programs by exercising the purchase option at scaling prices of $72 million to $90 million in the period from June 2009 through June 2011. The purchase option exercise price may be paid in cash or a combination of cash and common stock at Lexicon's sole discretion, provided that the common stock portion may not exceed 40% of the purchase option exercise price.

Under a share purchase agreement between Lexicon and Symphony Icon Holdings, LLC, the parent company of Symphony Icon, Lexicon issued and sold to holdings 7.7 million shares of its common stock at $3.14 per share in exchange for $15 million and the exclusive purchase option.

Let me now turn to the Invus investment. Invus has agreed to invest, pending stockholder approval, $205 million in 2007 with the potential of up to an additional $345 million over the next four years. The $205 million is in two pieces -- $51 million at $3.09 a share, a price that was determined by the ten-day volume-weighted average as of June 14th, and then a second piece, $154 million at $4.50 per share, which represents a very substantial 46% premium to the June 15th closing price of $3.08. This second piece should increase Invus's ownership to 40%.

The financing framework established under the Invus agreement is intended to enable broad shareholder participation. Within 27 months after closing Invus's initial investment, Lexicon may issue common stock to the general market above the $4.50 per share price that has been established. We have chosen the 27-month time period carefully to coincide with what we anticipate to be important value-creating results from our clinical trials, focused on human proof of concept in Phase II. If we raise funds during this period, Invus will have the ability to participate based on their pro rata ownership position in the Company.

At 27 months after closing, Invus can trigger a rights offering of up to $172.5 million, minus any funds already raised by Lexicon above $4.50 in previous offerings. A rights offering allows the current shareholders to purchase counter shares according to their pro rata ownership position. The shareholders will have oversubscription rights as well. Invus would be required to purchase any stock that the current shareholders have not purchased.

Invus has the same option to trigger the second rights offering 12 months after the first rights offering for the balance of up to $345 million that has not been yet raised. For example, if $172.5 million were raised in the first rights offering, another $172.5 million would be offered in the second rights offering, less any amounts raised above $4.50 per share. The combined financings are designed to provide access to a potential $550 million over this four-year period to match our anticipated funding requirements for our 10TO10 strategic development initiative.

Lexicon filed a proxy statement and other documents with the Securities and Exchange Commission related to the approval of the Invus transaction. A definitive proxy statement was mailed on July 24th to stockholders of record on July 19th, and a stockholders' meeting to vote on the transaction will be held on August 23rd, 2007, in The Woodlands, Texas. Stockholders are urged to carefully read the proxy statement because it will contain important information regarding Lexicon and the Invus transaction. We believe the Invus transaction provides a positive mechanism by which all shareholders can participate in supporting our exciting pipeline.

Now let's turn to our forward-looking financial guidance. Revenues for the third quarter 2007 should be in the range of $10 million to $12 million. Projected third quarter revenue primarily consists 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 third quarter are projected to range from $31 million to $33 million. This reflects, among other things, the external preclinical and clinical costs related to our drug development programs and stock-based compensation expense of approximately $1.7 million in the quarter We are projecting our net loss before the loss attributable to non-controlling interest in Symphony Icon for the third quarter, including stock-based compensation expense, to range from $20 million to $22 million.

Upon shareholders' approval of the Invus transaction and the increase in authorized shares, we estimate that our cash and investments will increase by $198 million for the third quarter, which is net of fees and expenses.

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.

Since the Invus transaction is pending, I will be updating year-end guidance after the shareholder votes. Thank you very much and now we will answer any questions you may have.

(OPERATOR INSTRUCTIONS) We'll take our first question from Ted Tenthoff from Piper Jaffray.

Great. Thank you very much and thanks for taking time on the call to go through all of these details and accomplishments. My question actually just had to do real quickly with the Symphony transaction. Julia, you had said the $95 million includes $45 million from Symphony Icon. It also includes the $15 million. I assume that went to Lexicon for the full $60 million?

That's correct.

And how exactly should I think about that 7.7 million shares that went to Symphony? Was that kind of split between the two or was that just -- was the 7.7 million in equity the 60 million minus the equity piece equal to what they put in in cash? Is that the way to think of it?

I guess there are two ways to think about it. One is a business way and another way is an accounting way. From a business way, what happens is Symphony Icon Holdings, the parent company of Symphony Icon, is the recipient of the shares, and we receive $24 million for those shares. $15 million went directly to Lexicon for general corporate purposes and the other nine was contributing into Symphony Icon for the program. Lexicon intends to fund those programs even beyond the Symphony Icon funding, so we thought that was a good way to continue the funding of the program.

So that's our business structure. And Symphony's IRR, Ted, is calculated based on that net amount, which is a -- the 36 or so.

36 or so?

The 36 million.

Okay, good. That's really helpful. Thanks.

Okay.

(OPERATOR INSTRUCTIONS) We do have a question from [Grant Zane] from Sachs Investment.

Hi. Congratulations on the quarter. The question is related to the candidate LX6171. You just finished the Phase Ib and the Phase Ia trial and you mentioned you will start the Phase II trial in Europe. My question is what is your plan for the candidate in the U.S.?

We're electing to keep the program in the European Union, just based on efficiencies at present, and familiarity that the sites and the institutions we're working with have had with our cognitive battery that we've integrated into the trials. If and when the trial results show positivity at the end of proof of concept, we would anticipate migrating the program back in under an IND in the U.S.

So the first one (inaudible) was conducted In Europe or the U.S.?

The Phase I studies were conducted in Europe.

Okay, so (inaudible) proof of concept (inaudible)?

That's correct. We're just allowing the program to remain under the European regulatory authorities from an efficiency standpoint.

Okay, good. Thank you.

Next question will come from William Sargent with Banc of America Securities.

Yes, thank you very much for taking my question. Just get a quick update on the Phase IIa. Do you have any guidance as to -- I know you want to look for some potential trends within the Phase IIa to select lead programs for the IIb trials. About how many patients and how many sites are you thinking about for the Phase IIa?

Thanks for the question, Will. We're still evaluating how many centers and how we're going to conduct the study operationally. We're anticipating that 30 to 40 patients per a cohort would be utilized, and we're still evaluating the number of dose levels we wish to explore at the proof of concept level, so we're in the active final planning stages around this program at present.

And was there any signal? I know you were looking over a 14-day period for any signal in some of the standard cognitive batteries in the Phase Ib. Is there anything of note from that study?

So it was a -- first off, it was a seven-day period of dosing rather than 14, and there were no signals on the initial data from the CDR battery that we've analyzed. We will do a formal PK/PD analysis, and I continue to remain enthusiastic about the program on the basis that we are achieving significant blood levels of compound and we are not seeing a decline in cognitive function over this relatively discreet time period of exposure. So from a safety standpoint, we continue to go forward.

Excellent. Thank you.

(OPERATOR INSTRUCTIONS) It appears there are no further questions at this time. I'll turn things back over to our speakers for any further or concluding comments they may have.

Well, thank you. I'd just like to wind up by saying clearly we have a very broad and exciting pipeline of new drug candidates under development. Our two lead programs are on track; we're very pleased with that. They're on track for the initiation of Phase II studies here as we move forward, and we have to more drug candidate poised to enter into clinical testing, which Phil mentioned -- LX1032 and LX2931.

We have secured substantial financing with an established drug development investment firm, Symphony Capital, which is supporting our lead programs under development, and we have aligned with what we believe is really a landmark financing strategy with the Invus Group to support Lexicon's broad drug discovery pipeline and allow us to execute our strategy to build a major biopharmaceutical company.

We're very enthusiastic about the future and we encourage all investors to participate by voting in support of the Invus transaction, and we look forward to the shareholder meeting to be held on August 23rd. So that concludes our update for the second quarter. Thank you for your participation and goodbye.

This will conclude this Lexicon Pharmaceuticals conference call. We do thank you for your participation. Enjoy the rest of your day.