Lexicon Pharmaceuticals Inc (LXRX) 2007 Q4 法說會逐字稿

Welcome to the Lexicon Pharmaceuticals fourth-quarter 2007 and year-end 2007 conference call. At this time, all participants in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon's request. At this time, I would like to introduce your host for today's call, Bobby Faulkner, manager of investor and public relations. Please go ahead, Ms. Faulkner.

Good afternoon, and welcome to the Lexicon Pharmaceuticals fourth-quarter 2007 and year-end 2007 conference call. I'm Bobbie Faulkner and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown, Lexicon's Senior Vice President of clinical development; and Julia Gregory, Lexicon's Executive Vice President and Chief Financial Officer. We expect 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 key accomplishment for 2007, Dr. Brown will then discuss the status of our drug development program and Ms. Gregory will review our financial results for the fourth-quarter and full-year 2007 and discuss our financial guidance for 2008. We will then open the call to your questions. For those who wish to view the slides to which we'll refer, please access the Lexicon website at www.lexpharma.com. You will see a link under today's webcast.

Before we begin I would like to state that we will be making forward-looking statements, including statements relating to, without limitation, Lexicon's research and development of LX6171, LX1031, LX1032, LX2931, and LX4211. This call will also contain forward-looking statements relating to Lexicon's growth and future operating results, financing arrangements, cash and investments, 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 our 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 turn the call over to Dr. Sands.

Thank you very much, Bobbie, and I;d like to thank everyone for joining us this afternoon. 2007 was truly a defining year for Lexicon and we're happy to be reviewing it with you today. I'd like to start out with just a few items by way of Lexicon's overall strategy and our -- the advancement of our pipeline. So, the those of you of you who can see the slides, the first slide pictures our 10TO10 pipeline, and that, of course, is a program that we launched only at the beginning of 2007 and we already have several drug candidates that have proceeded in that program into human clinical trials. Now, during this call, Dr. Brown will review just five of these most advanced programs in the 10TO10 program, but as -- let me just give you a few highlights. LX6171 for cognitive disorders, is our most advanced program, which moved into Phase 2 clinical studies in 2007 and is proceeding. LX1031 for irritable bowel syndrome is on track to complete the Phase 1studies by mid year. At the end of the year, we filed two new INDs for two new drug candidates. The first, LX1032 for carcinoid syndrome, which is in Phase 1 studies currently. And the second, LX2931 for rheumatoid arthritis, which is also now in Phase 1 studies. In addition, in 2007 we selected a new drug candidate for diabetes, LX4211, and that candidate is currently in IND-enabling studies.

If we turned to the next slide which is entitled "Building a next generation pharmaceutical company," I'd like to hit some of the high points of our strategy as we implement the 10TO10 program and we begin forward these drug development programs. First of all, we benefit from a discovery engine that has given us a very broad and diverse clinical pipeline, as you can see, touching several therapeutic areas. And this program and all of these drugs have resulted from our internal target discovery engine, the Genome 5000 program, in which we have identified already over 100 gene knockout validated targets. Each of the compounds under development that we'll be discussing today were also developed by our own internal medicinal chemistry laboratories, in the case of our small molecule pipeline, and our biotherapeutics discovery groups in the case of our antibody pipeline.

In 2007, in addition to advancing the pipeline, we raised a significant amount of capital through two strategic financings; it's a total of $265 million dedicated to our drug development and drug discovery engine. And that was $205 million through our Invus investment and $60 million through our Symphony Capital financing focused on our three lead programs. In addition, in 2007, we redirected resources from of some our early stage genetics research engine toward the development engine and we've expanded our high-performing clinical development team and we'll be detailing some of the key recruits we've made in that area.

Our strategy to build the next generation pharmaceutical company is focused on the developments for break-through treatments for human disease. As you know, our strategy encompasses addressing new mechanisms and those drug targets which are not currently addressed by products on the market today. All of the mechanisms of action that we are advancing through clinical development again, we've identified using our powerful gene knockout technology. A word on our business strategy. We seek to reduce risk of drug discovery and development by having a very deep and broad portfolio. This, we believe, increases the likelihood of our eventual success and moving the drugs toward commercialization. In addition to our internal programs, we have also formed very strong alliances that accelerate the development and commercialization of certain other drug candidates, which are also a product of our discovery engine, and here I'm referring to our neuroscience alliance with Bristol-Myers Squibb, our Genentech alliance, and our Organon alliance for antibody therapeutics. Overall, we've made truly great progress in 2007 on several fronts.

And now to give you greater detail on the clinical front, I'd like to turn the call over to Phil Brown to review the drug development program.

Great, thanks very much, Arthur. Before I actually start giving you an update on the clinical programs, I'd like to just touch on some key additions that we've made to the clinical staff recently. First, [Dr. Joel Fryman], who is a board-certified internist, joined us after an extensive experience with the FDA. He has a 12-year experience with the FDA, serving in both a role of an epidemiology branch chief as well as a medical reviewer in the neuropharm division. He's a critical hire for us, as he will serve to establish drug safety as a service within Lexicon, as well as oversee the LX6171 program.

We've also added another physician, Dr. Chris Pappas. Dr. Pappas is a board-certified hepatologist and gastroenterologist. He has extensive experience in liver transplant and antiviral therapy. In addition to his extensive clinical experience, he has drug development expertise, coming to us from having developed an antiviral therapy in hepatitis C. So, he'll add significant depth to our development team and be specifically responsible for the 103 and the 293 programs.

So, now I'd like to discuss our lead development programs. LX6171 is our program directed toward cognitive disorders. This target is a membrane protein that's associated with the glutamatergic pathways and expressed exclusively the CNS and at presynaptic terminals. The target of 6171 was, of course, identified through the Genome 5000 program and the small molecule that inhibits this gene target was developed by our medicinal chemistry division. We were currently engaged in Phase 2 activities as Arthur mentioned. We successfully completed the initial PK assessment in elderly subjects with our new suspension formulation, and we've initiated dosing in February of this year in subjects with age-associated memory impairment. The study design of this particular study -- program is two dose levels over a four-week exposure period and subjects are randomized in a double-blind period -- double-blind randomized fashion. Overall, the study is expected to enroll 120 subjects. We're evaluating safety, pharmacokinetics, tolerability of the compound and, of course, effects on cognition as well. The solid oral dose form is under active development at present and we will be presenting a poster at the American Academy of Neurology next month in Chicago on this particular program.

LX1031 is our program directed toward irritable bowel syndrome. The target of 1031 is tryptophan hydroxylase, which is the rate-limiting enzyme in the synthesis of serotonin. TPH was identified again through the Genome 5000 program and the small molecule inhibitor LX1031 was discover and developed by our medicinal chemistry team. The serotonin pathways in the gastrointestinal tract have been associated with the symptoms of IBS and as well as the treatment. 1031 is an interesting compound in that it's locally acting. We don't get high degrees of systemic exposure to the compound, which speaks to the safety of the compound.

We completed our initial human studies last year and to date, we've had 79 exposures in normal healthy volunteers. These -- to date, the compound has been extremely well tolerated. Single doses from 250 milligrams up to 2,000 milligrams, and then we followed that study with a 14-day multiple-dose tolerance study, again starting at a 250 milligram daily dose and escalating again up to a 2,000 milligram daily dose, which was given in a divided fashion, 500 milligrams four times daily. Adverse events were infrequent and low at all dose levels and the compound's behaving in a very predictable fashion, pharmacokinetically, again meaning we're not getting high degrees of systemic exposure, and this we believe's contributing to the overall safety profile of the compound.

We are preparing for an additional dose ranging study with this compound in order to determine the maximum tolerated dose and the study design under consideration at present is a 14-day dosing period starting with a 250 milligram dose given over four times daily up to a 1,000 milligram dose given four times daily. Again, safety and tolerability being the primary basis as well as assessing the pharmacokinetics of the compound. We're anticipating completing this study in mid year.

LX1032 is our compound directed toward carcinoid syndrome. Carcinoid syndrome results from metastasis of serotonin secreting tumors, primarily to the liver, and this results in severe diarrhea, abdominal cramping and other GI sintomatology LX1032 is an oral small molecule antagonist that reduces tryptophan hydroxylase that reduces serotonin production, peripheral to the central nervous system. The target of 1032 again was identified through the Genome 5000 program and the compound LX1032 was developed by our medicinal chemistry team.

LX1032 has distinct properties from LX1031 in that it was specifically designed in order to give us adequate systemic exposure in order to influence these tumor cells that are secreting massive amounts of serotonin. We initiated dosing in normal healthy volunteers in February of this year and this is a very standard study design, a single ascending dose tolerance study in a double-blind randomized fashion, and again in normal volunteers. The primary goal is to evaluate the safety, tolerability and PK of the compound. We're anticipating completing this study mid year, and pending the results from this study, we're currently planning on moving the compound into patients with metastatic carcinoid tumors that are experiencing G.I. symptoms as a basis for our multiple-dose tolerance study.

LX2931 is a new drug candidate that we brought forward for autoimmune indications, such as rheumatoid arthritis. The target of LX2931 is S1P lyase, which is an enzyme responsible for the breakdown of an important immune system signaling molecule called sphingosine 1-phosphate. LX 2931 increases lymphoid S1P levels which causes lymphacites to migrate from the peripheral circulation back to the lymphoid organ and this regulates -- thus regulating the overall inflammatory response that patients are experiencing. The target of 2931 was identified through the Genome 5000 program and our small molecule inhibitor was again developed by the medicinal chemistry team at Lexicon. Dosing with this compound was initiated in normal volunteers in December of last year. The standard study designed double-blind randomized placebo controlled single ascending dose tolerance study in normal volunteers, primary goal again being safety, tolerability and pharmacokinetics. But in addition to that, we're able to evaluate lymphocytes, particularly T and B cells, as markers of pharmacodynamic effect of the compound. We're anticipating completing this study in mid year, and pending results from this study, we're currently planning to conduct our multiple dose tolerance study in normal, healthy volunteers.

As Arthur mentioned, we are actively pursuing LX4211, which is a new drug candidate for diabetes. The target of LX4211 was selected from the Genome 5000 program and the small molecule inhibitor was again developed by the medicinal chemistry team at Lexicon. The target of 4211 is the renal sodium glucose transporter 2, or SGLT2, which is important in regulating glucose excretion. We've noted reduced blood glucose in a number of free clinical models of type 2 diabetes and are actively engaged in IND-enabling activities at present and anticipation of a regulatory filing by the end of this year.

So, in summary, 2007 was a very productive year for us. We've initiated phase 2 studies for LX6171 in age associated memory impairment. We're poised to initiate an additional Phase 1b study with LX1031. We've initiated Phase 1 trials with dosing for both 2931, our compound directed toward autoimmune conditions, such as rheumatoid arthritis, and for LX1032, our compound directed toward carcinoid syndrome. In addition, we're advancing LX4211 into formal preclinical preclinical development in anticipation of a regulatory filing. We're aggressively expanding the clinical development team to support these -- the number of programs, including the two key position hires that I've outlined for you at the start of this presentation. I remain very enthusiastic about the pipeline and the number of activities we have going on.

I'll now turn the call over to Julia.

Thank you, Phil. We achieved several financial goals in 2007. We effectively managed our operating expenses through cost control measures. Overall, total operating expenses decreased 2% to $125 million from $128 million. As you recall, at the beginning of 2007, I had announced that it was our goal to contain total operating costs in 2007 and to fund the growth of our clinical development in 2007 from the reloca -- reallocation of resources from genetics resource. With development expenses doubling and total operating expenses decreasing, you can see we achieved this goal. Secondly, we built a strong financial foundation for the Company, ending the year with $258.8 million in cash and investments, including $36.7 million from Symphony Icon, our product development collaboration with Symphony Capital Partners and its co-investors. Third, we structured a multiple-year strategic investment plan with Invus and possible future financings with Lexicon stockholders, including Invus.

We issued a press release this afternoon detailing our fourth quarter and 2007 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, 2007, were $13.8 million, a decrease of 14% from $16.1 million for the corresponding period in 2006. The decrease was primarily attributable to reduced revenue under Lexicon's neuroscience alliance with Bristol-Myers Squibb resulting from the conclusion of the revenue recognition period for the up-front payment Lexicon received under the alliance and the biotherapeutics alliance with [ND Ordinon], offset in part by increased revenue recognized for the completion of the knockout (inaudible) embryonic stem cell library for the Texas Institute for Genetic Medicine. For the year ended December 31, 2007, revenues decreased 31% to $50.1 million from $72.8 million in 2006, reflecting our transition from drug discovery alliances to drug development activities.

Research and development expenses for the 2007 fourth quarter were $26.9 million, an increase of 5% from $25.6 million for the corresponding period in 2006. Higher external preclinical and clinical cost related to the advancement of Lexicon's drug development program were largely offset by decreased research expenses as a result of the Company's early 2007 realignment reallocating resources from genetics research efforts to drug development. For the year, research and development expenses decreased 2% to $104.3 million from $106.7 million in 2006. External development expenses more than doubled in 2007 over 2006, reflecting the change in composition of our research and development expenses as we continue to expand our preclinical and clinical teams and advance our drug candidates in human clinical trials. General and administrative expenses for the 2007 fourth quarter were $5.3 million, an increase of 6% from $5.1 million for the corresponding period in 2006. For the year, general and administrative expenses decreased 3% to $20.7 million from $21.3 million for the corresponding period in 2006.

Lexicon's net loss for the three months ended December 31, 2007, was $12.2 million, or $0.09 per share, compared to a net loss of $13.8 million, or $0.19 per share and the corresponding period in 2006. Net loss for 2007 was $58.8 million, or $0.59 per share, compared to a net loss of $54.3 million, or $0.81 per share in 2006. The net loss for the three-months and year-ended December 31, 2007, included a benefit of $4.3 million and $12.4 million respectively attributable to the loss from noncontrolling interest in Symphony Icon resulting from Lexicon's financial consolidation of Symphony Icon. For the three-months and year-ended December 31, 2007, net loss included noncash stock-based compensation expense of $3.1 million and $7.9 million respectively.

Let me turn to our cash and investments. As of December 31, 2007, Lexicon had $258.8 million in cash and investments, including $36.7 million in cash and investments held by Symphony Icon, as compared to $273.9 million as of September 30, 2007 and $80 million as of December 31, 2006. As this has been a matter of interest within the biotechnology and pharmaceutical industries, I wanted to briefly address our cash and investments in light of recent issues with auction rate securities. Like many companies in our industry, we have historically maintained a portion of our investments in auction rate securities. In our case, it is a minority of our cash and investments, such that we would have more than a year of liquidity without having to tap into any of our investments in auction rate securities. As of December 31, 2007, we had auction rate securities totaling $78 million. Our auction rate securities consist of bonds issued by municipal authorities established by state and local governments.

As might be expected in the current market environment, many of the recent auctions of these securities have not been successful, although we have had several auctions succeed and we have been notified that several of our bonds will be called and redeemed, a trend we expect to continue. As of February 29, 2008, reduced by successful sales, our auction rate securities balance was approximately $71 million. An additional $4.6 million have been called for redemption in March, $2 million of which were redeemed yesterday. Another $2.5 million were sold today as these auctions cleared successfully. These sales have reduced our total auction rate securities portfolio to approximately $67 million. Given our ability to satisfy our funding needs for more than a year without the need for these investments, we can wait as the market works through what appears to be, at least for the securities in our portfolio, short-term liquidity issues.

Now, let's turn to our forward-looking forward-looking financial guidance for 2008. Our contractual revenues from existing agreements for 2008 should be in the range of $29 million to $31 million, consisting primarily of contractual revenues from our alliances with Bristol-Myers Squibb, Organon and Genentech. This range is slightly below our early January guidance of $32 million to $34 million for timing reasons. We completed our obligations under the award from the Texas Enterprise Fund earlier than anticipated, resulting in a $2.7 million shift of revenues from 2008 to 2007. As I have previously made you aware, while we're in conversations with potential pharmaceutical companies to enter into alliances or collaborations, we do not plan to include forecasted revenue from such arrangements in our guidance on a going-forward basis. Instead, we'll update you as we enter into such alliances or agreements. We believe our productive pipeline will provide Lexicon with attractive opportunities for alliances.

Operating expenses for 2008 are projected to range from $145 million to $155 million. The increase in spending is almost exclusively the result of a significant increase in external preclinical and clinical costs related to our drug development programs, as we move multiple drug programs forward in human clinical trials. Noncash expenses will be approximately $14 million of this total, including $6 million in stock-based compensation and $8 million in depreciation and amortization. We will continue to manage our nonclinical expenses for cost cutting opportunities. Taking into account cash received under existing contractual relationships only, we expect our 2008 net cash used in operation to be in the range of $109 million to $119 million and OUR 2008 capital expenditures to be approximately $3 million to $4 million.

Thank you very much and now I'll turn the call back to Arthur.

Thanks, Julia. As you may be formulating your questions, I'd like to just make a few summary comments. 2008, as we look forward, promises to be a very exciting year for Lexicon. The LX6171 studies, as you heard, the Phase 2 studies are ongoing in age associative memory impairment and that trial's expected to conclude by year end. LX1031 for IBS is scheduled to complete the multidose Phase 1 studies in healthy volunteers in mid year. LX1032 for carcinoid syndrome is on track to complete the initial Phase 1 studies in healthy volunteers mid year, also, with the potential to go into carcinoid syndrome patients later in the year. And LX2931 for rheumatoid arthritis and autoimmune conditions is on track to complete its initial Phase 1 studies mid year, as well. And in addition to all of that, LX4211 for diabetes is currently proceeding through IND-enabling studies.

So, now, we'll take any questions that you may have.

(OPERATOR INSTRUCTIONS) And our first question comes from Sharon Seiler with Punk, Ziegel & Company.

It is Sharon Seiler How are you? So, two questions. One is what do you think will be the next IND after the diabetes compound? And a second more strategic question which is, I know you've discussed in the past that probably proof-of-concept would be the ideal point to partner the programs that you're bringing forward yourself. But you probably -- it seems to me you must have more targets than you could hope to develop on your own. What is the strategy for monetizing some of these other assets that you don't plan to take forward yourself?

Well, thanks, Sharon. Good questions. The next IND after the diabetes compound, I'll tell you there are several contenders for that slot. So, it at this stage, I can't make a prediction as to which one it will be. But I can tell you that our glaucoma program, LG710, which is on our 10TO10 pipeline slide, continues to proceed and look quite promising. You may recall that a novel mechanism that blocks the outflow of aqueous humor from the eye, so it could be a new way to treat glaucoma, and of course going after a locally acting agent there, so I'd say that's definitely a contender. Behind that, we have several metabolism programs that are also proceeding. We have our advancing antibody programs, which I'd say I'd put them somewhere in a similar time zone there, and those are LG843, LG842. Then there are several after that, but I think the two I named are definitely ones to keep your eyes on.

With regard to your strategic question on partnering, we're really coming up on several potential POCs, or proof-of-concepts, with our compounds, and I do think that those are the preferred partnership at this stage for the Company's development that have the highest value. Several of our programs that will demonstrate -- or can demonstrate proof-of-concept may do so, at least pharmacodynamically, through some of the biomarkers that they modulate. And so in so far as those biomarkers read on disease mechanism, we think that we'll have those opportunities.

With respect to the other targets, we really would prefer to advance those targets now into drug development before considering target-based partnerships. However, we do continue to have interest for such partnerships and I think it is rational for us to consider perhaps other mechanisms of addressing other [moietes] that might address certain targets in our portfolio, where we are not addressing them with either a small molecule or an antibody. So these might be things that include RNAI or other kinds of external protein therapeutics that we could look at. But any target-based deal we would do would be very directed and proximal to drug discovery and development, and again, I think that's where the highest value is.

Okay, thanks. With respect to the second IND, would you anticipate that that would also be filed sometime this year?

It's hard to predict, and I also didn't mention that we have some interesting back-up molecules that have different properties for some of our targets that are already in development and those could proceed. So, I think at this point, I'd refrain from making a prediction as the timing of the second IND, but I feel very confident about the earlier stage pipelines that'll give us those INDs when they come.

Okay, thank you.

Thanks.

Moving on we'll hear from Edward Tenthoff with Piper Jaffray.

Great. Thank you very much. Two questions. Firstly, the ongoing 6171 trial, the Phase 2, when should we be getting data from that cognitive data from that study?

Phil, do you want to go ahead and talk about 6171?

Sure, thanks, Ed.

Hey, Phil.

Hi, appreciate the question. Yes, we're just in active accrual of this study at present and it's difficult to predict timing -- exact timing of that because we'll wait to see how the accrual goes, but I would anticipate having the data by the end of the year.

Okay, great. And maybe a quick housekeeping one for Julia. What do you classify as the long-term debt currently?

That's our -- the long-term debt that we currently have is our mortgage on our building.

And what's that amount? Sorry,

About $31 million. That's total. $31 million.

Great, thank you.

Thanks, Ed.

I have two more questions -- excuse me, we have three more questions in the queue. At this time we'll hear from Jason Kantor with RBC Capital Markets.

Excuse me. Thank you. Could you tell us what exactly you're going to be presenting in terms of data at this ANN meeting coming up?

Phil, you will be at the meeting, I believe. Go ahead.

Right. Thanks, Jason. We -- I'm very pleased with the acceptance of the FAS track because it's the first time we'll be able to describe the -- we're anticipating describing the target of 6171, as well as be able to review in much greater detail some of the data that we've accrued to date, both in humans as well as the pharmacologic rational for this compound.

Okay. And in terms of these -- on the Phase 1 trials and healthy volunteers, which of these studies do you think could provide the best view on potential efficacy, because these are all in healthy volunteers but there are some biomarkers that you'll be looking at?

Yes, I'll answer that, Jason. I think that both -- as you mentioned both LX1031 and LX1032 have biomarkers associated with them, and that specifically would be urinary 5HIA, which is a metabolite of serotonin, and then, of course, serotonin itself can be measured. But that has been taken as being an important biomarker for the mechanism. So, I think mechanistically that that could be an important marker for us as it has been in all of our preclinical research.

Now, with regard to 2931, that biomarker is -- that we're utilizing are the lymphocyte counts, so it's very straight forward, (inaudible) lymphocytes, and that has been, again, directly related to a modification of disease models in animals. So, that biomarker may be considered by some more proximal to the disease relevance that we're ultimately going after in terms of autoimmune disease. So, while both of them -- certainly the biomarkers are going to provide important guides in Phase 1. I'd say LX2931, you might consider to be more of a direct read on -- since it's a cellular biomarker on a potential disease state. Does that answer your question, Jason?

Yes. I know you're not forecasting it in the actual revenue guidance, but would you anticipate signing a deal this year?

So, again, I think we're not going to be making such forecasts about new deals. What we will say and have said that we are in active discussions and as we anticipate achieving important proof-of-concepts, even at biomarker levels as we just discussed, we'd consider those to be perhaps natural time points for considering the right deal, if it's available.

Okay. And then in terms of the auction rate securities, are you -- is there any plan to write down the value of these in any way or you're just saying that you expect over time that you will get the value of those?

Well, at the current time there's no requirement for us to write down, or need for us to write down the auction rate securities. We constantly assess those. And the -- from an accounting point of view, the fair value of the securities is the determinant of whether a write-down would be required and it would have to be deemed as more than a temporary decline in value or greater than temporary decline in value of those securities. They would have to be valued by a third-party agency in order for such a write-down to be taken. And we don't anticipate to date that any write-downs would be taken and to date, we have not had any write-downs associated with any of our investments.

Thank you.

Thank you, Jason.

Moving on we'll hear from (inaudible) with Morgan Stanley.

It's actually Dave calling in for Savna. Just two questions, the first is on 6171. Does the formulation change that you did affect the permeability through the blood brain barrier at all and is there any way to measure some PK or PD at the actual site of action?

Phil, would you like to go ahead on that one?

Sure. We -- obviously the formulation -- our biggest concern is ensuring that we're getting adequate exposure to the specific circulation of the compound. So the first part of this Phase 2 study was to ensure that we had a formulation that was giving us adequate exposure, consistent with what we had observed in our initial Phase 1 study. So, I was very pleased that the formulation is providing excellent exposure to the compound in a very predictable fashion, which is mimicking, or what we had observed in our Phase 1. So, the formulation is doing its job. I don't think that it would have any effect at all on the compound's ability to cross the blood brain barrier. So, we're proceeding ahead and very pleased that the formulation providing us an avenue to do that in a very positive fashion at present.

With regard to the pharmacodynamic activity of the compound, I think that's a challenging question for us. We don't have, as you know, I think, a standard biomarker to use in this particular setting, so we're relying more on the symptomatology of the adverse event profile of the compound, or the subjective reports of patients, in addition to these more objective measurements that we've deployed, as end points in the study to evaluate cognition, as well as a variety of other domains, such as attention and vigilance and these types of measures. So, that's the purpose of this study and we'll just have to await the results before we can comment on that, I believe.

Okay. And then just a question on 1031. You're doing your additional dose ranging and you looked at daily, twice daily, four times a day. Obviously four times a day is the least convenient of those. What -- what did you see that -- was it just that you weren't getting levels at the lower frequencies or are those still an option? And is there a way to change the formulation to make it more likely that it could be a twice a day or once a day drug?

Phil, why don't you keep going on this.

Sure. So, the reason we went to four times a day is, as I'm sure you're aware, the real purpose of Phase 1 is not only to understand the pharmacokinetics of the compound, but ideally to probe up to a maximum tolerated dose which helps guide you as you move into patient-based studies. The interesting thing about 1031 is because we don't drive high degrees of systemic exposure, we have a very safe compound, so we have no evidence of intolerability, even at these excessive, very high doses that we've been giving with the compound. We went to a four times a day basis of dosing based on the pharmacokinetics of the compound, so what I wanted to do was drive exposure as high as I could in order to probe for intolerability. And as we've described, at 500 milligrams QID, we were seeing a very well-tolerated compound at those dose levels.

We -- as you may recall, we, at that dose level, also were able to see about a 30% reduction in urinary 5HIA over a 14-day, 30% relative to base line in those subjects randomized to the compound. So, I believe that's a very important finding on a biomarker, and the goal at this stage is to really push the dosing in order to fully explore the limits of tolerability of the compound. This will allow us to take the maximum dose forward, the maximum tolerated dose forward in the proof-of-concept study in irritable bowel syndrome. With regard to the formulation aspect, clearly this is very early stage of development. We are hoping to and anticipating a much more sophisticated formulation evolving for this particular compound as we move it forward.

And if I could add one thing to that, Dave, I'd say that predicting at this stage what frequency will be ideal for treating the condition of IBS I think is premature. I will say that my own thinking of this stage of the game, though, is that this is clearly a locally acting G.I. drug and it may, in fact, be beneficial to administer this at mealtime. And we've seen some evidence of enhanced exposure occurring because of meal -- because of food -- a food effect and it is logical to assume, since symtomology might be related to food that that might be an ideal time to administer and have dosing, but we don't know that at this time.

Okay. And so when you -- when you -- you're going to drive this to 1,000 QID, are you going to then take that total dose and resplit it among different variations in your next trial or are you just going to keep going with your max at four times a day for now?

Phil?

I think -- my view on this at present is that we -- if we can dose escalate up to 1,000 QID, that's probably as high as we would want to go. As -- how we deploy this into a proof-of-concept study I think has yet to be determined because we don't have the results. We're interested in the biomarker effect. We're interested in the tolerability and we may or may not have -- elect to go in at this QID dose regimen versus a TID or even BID dose regimen as we move into IBS. That's a little bit premature for me to be able to answer that until we get the results of this next study.

Okay, thanks a lot.

Thank you.

Either one of you have a question or comment? We do have two more questions in the queue. We now have a follow up from Sharon Seiler from Punk, Ziegel.

Yes, with respect to the data that you're presenting at the neurology conference, is this going to be a -- you may have said this -- is it going to be a poster or an oral presentation and do you anticipate having some investor event as you did when the data were presented at the gastroenterology conference?

That's going to be a poster, Sharon, and at this time, we don't anticipate having an event associated with it.

Okay. Thank you.

We do have one more question in the queue. This is a follow up from Jason Kantor with RBC.

Hi, thanks for taking the follow up. This is just a minor model question, but what was the other expense that you had, I think it was about $700,000.

Julia?

The other expense item that we have in this -- is about $760,000 for the three-year period is a net effect. It is including some stock option on [cashed off] option expense in that line item, Jason.

That's noncash stock-option expense that couldn't be put under research or G&A?

That's right, that's right.

Wow, why would it go there?

Let me explain that a little bit, Jason, It's a very small number as a net number, but let me explain that. In some of the -- in November of 2007, we changed our software system for calculating forfeitures of stock options and in so doing had to catch up a minor amount of stock-option expense, and so it went into that category.

Got you.

Management, do you have anything further?

That's it, thank you.

At this time, we have no further questions in the queue. Mr. Sands, I'll turn it back over to you for any additional or closing remarks.

Well, I'd like to thank everyone for participating. We're definitely hitting on all cylinders and we're looking forward to a very exciting 2008. Our development team is performing at a very high level and supporting our growing clinical pipeline. We're very pleased with having completed a landmark financing in 2007 that supports -- further supports our discovery and development efforts and there's no question in our minds, as we're watching the results flow forward, we've established a very highly productive drug discovery engine and it's fueled by our unique insights into the human genome and the discoveries, we plan to translate them into future treatments for human disease. So, thank you all very much.

That does conclude today's call. Thank you for joining us and have a great day.