Lexicon Pharmaceuticals Inc (LXRX) 2008 Q4 法說會逐字稿

Welcome to the Lexicon Pharmaceuticals fourth quarter year end 2008 conference call. (Operator Instructions).

At this time I would like to introduce your host for today's call, Jason Ray, Manager of Corporate Communication and Investor Relation.

Good morning and welcome to the Lexicon Pharmaceuticals fourth quarter and year end 2008 conference call. I'm Jason Ray and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown, Vice President of Clinical Development and Jim Tessmer, Lexicon's Vice President of Finance and Accounting.

We expect that you have seen a copy of our earnings press release which was distributed this morning. During this call, we will review information provided in the release and then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, who will discuss our key accomplishments for 2008. Dr. Brown will then discuss the status of our drug development programs and Mr. Tessmer will review our financial results for the fourth quarter and full year 2008 and discuss our financial guidance for 2009. We will then open the call to your questions. If you would like to view slides for today's call, please access the Lexicon website at www.Lexpharma.com. You will see a link on the home page for today's webcast.

Before we begin, we will be making forward-looking statements, including statements relating to Lexicon's research and development of LX 1031, LX 1032, LX 2931, LX 4211 and LX 7101. This call may also contain forward-looking statements relating to Lexicon's 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 the timing and results of clinical trials and preclinical studies of our drug candidates, our dependence upon strategic alliances and ability to enter into additional collaboration and license agreements, the success and productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third party and the requirements of substantial funding to conduct our drug discovery 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 phone to Dr. Sands.

Thank you, Jason. As we begin this year end call review and update on our pipeline, I think it's always important to revisit Lexicon's mission and strategy which has remained at the fore of our whole approach to drug discovery consistently through 2008 and as we go into 2009. Our mission remains the same, to discover breakthrough treatment for human disease and our strategy remains the same, which is to operate a novel mechanisms of action so that we are able to develop the new therapeutics that will bring new opportunities to patients. We believe in investing in our R&D engine, which is so productive and then to move these discoveries rapidly to human proof of concept in the clinic.

Our commercialization strategy has also remained on track, which is to move our pipeline forward seeking commercializations through partnerships for a portion of our pipeline, but also keeping a portion of our pipeline for Lexicon as we develop it through to commercialization ourselves. We believe in balancing our portfolio based on -- and rebalancing it based on clinical data, the ongoing investment that's required to move these programs forward and what we see as the near term and long term commercial opportunities for each of our products in the pipeline.

In 2008 we achieved a lot. And as we review these programs today, I think it's important to note that now two of them have advanced to the stage of Phase 2 clinical development, LX 1031 and LX 1032. 1031 is in the Phase 2 trial for IBS and LX 1032 is proceeding into Phase 2 in Carcinoid Syndrome and Dr. Phil Brown will be updating the status of those two programs. In addition in 2008, LX 2931 completed Phase 1 studies in the normal healthy volunteer portion of the Phase 1 program for this novel immune modulatory agent which we are developing directed towards rheumatoid arthritis.

We see -- we also saw LX 6171 complete its Phase 2 A trial in age associate memory impairment. In that program we did reach a no-go decision on future development. Again, I think an important point about having a pipeline strategy, that is we can make the judgment calls about programs that we think are not going to be viable for Lexicon going forward commercially, but move forward on those that offer the best opportunity for success and focus our investment there.

In addition in 2008, we file an an IND for new compound LX 4211 for diabetes which is directed against the SGLT2 target for Type 2 Diabetes and we recently initiated the Phase 1 clinical trial for that program in normal healthy volunteers. Also last year, we selected a new clinical candidate for glaucoma, LX 7101. And that program is progressing through preclinical development. We won't have time on this call to talk about our advancements in our discovery pipeline, but I can assure you we have several new very exciting discoveries advancing through preclinical research as well, all coming from our very productive research engine. So 2008 was a very busy year and I think one filled with significant accomplishments for the Company as we move these programs forward.

Now in 2009 is all about focus. And we are concentrating our attention today and I think every quarter, we will be focusing on the advancement of these five programs which are in either clinical development or advancing in preclinical development. LX 1031, LX 1032, LX 2931, LX 4211 and LX 7101, all pictured here advancing through the phases of development. There has been interesting developments on each of these programs and I think we are all eager to hear Dr. Philip Brown update us on the programs. At the end of the call after Q&A, I will then return to discuss our goals for 2009. So, with that introduction, Dr. Brown.

Thanks very much, Arthur. As Arthur indicated we had a very busy and productive 2008 and I would like to briefly bring you up to speed with the status of each of our leading programs, these four programs that we have in clinical development at present.

Let me start with LX 1031. As I think everybody is probably familiar, this is our program and compound that we were directing towards irritable bowel syndrome. It's a primarily locally acting small molecule that inhibits tryptophan hydroxylase which is the rate-limiting enzyme associated with the production of serotonin. We have confirmed the pharmacologic activity of 1031 by reproducible effects in reductions in urinary 5HIAA ,which is the primary metabolite of serotonin. This reduction in urinary 5HIAA illustrates the reduced production of 5-HT or serotonin in the periphery. Importantly each of these doses that have been studied today have been extremely well tolerated, which bodes well for exploration in indications such as irritable bowel syndrome.

We have initiated the proof of concept study towards the end of 2008 in patients with nonconstipating IBS. The study is designed to evaluate two dose levels of LX 1031 over a four week treatment period and we are evaluating and following a number of symptoms that are commonly experienced by IBS patients to determine the effectiveness of the drug in this particular disease state.

Shifting gears to LX 1032, this compound is directed toward the same target as 1031, but importantly, it was specifically designed by our chemists to gain additional or greater systemic exposure, which allows us to target conditions where systemic serotonin levels are elevated, which is a significant observation in carcinoid syndrome and is a diagnostic factor in the setting of carcinoid syndrome. Carcinoid syndrome results from metastasis of serotonin secreting tumors which give rise to severe diarrhea, abdominal cramping and a variety of other symptoms. We completed our initial Phase 1 assessments of 1032 last year in healthy volunteers and in these studies we observed significant reductions in both peripheral serotonin, as well as the urinary metabolite of serotonin 5HIAA.

We are excited that these data have been recently accepted for presentation at an upcoming European Eeuroendocrine Tumor Society conference in March. This is called ENETS as an acronym and is a prominent meeting in the setting of neuroendocrine tumors and we are pleased to have the opportunity to position the program with this medical community now.

We are initiating, as Arthur mentioned, a Phase 2A Proof of concept study at present of patients with carcinoid syndrome who remain symptomatic despite existing therapies. This study will involve a run-in period, in which we establish the baseline symptomatology, followed by a four week treatment period. The goal of this study, of course, is to continue to understand and evaluate the safety and tolerability of 1032, particularly in a patient population. But equally important, this will be our first opportunity to evaluate the effects of the compound on the symptoms that are experienced by these patients.

LX 2931 is an orally delivered small molecule inhibitor of S1P lyase. This compound we were developing in the setting of rheumatoid arthritis but it has the opportunity to have an effect in a variety of inflammatory conditions outside of the setting of rheumatoid arthritis, we believe. In Phase 1 studies, we have observed a dose dependent reduction in circulating lymphocytes with a maximum pharmocodynamic response occurring at about 125 milligrams. Now these data are very important for us, as they provided an important confirmation that indicate that 2931 is working appropriately through the mechanism of action that we define in it our animal preclinical pharmacology models of information. At the end of last year, we conducted a seven day evaluation of a solid dose form of LX 2931 which behaved pharmacokinetically very similar to the solution that had been used in the initial first-in-man and very early Phase 1 studies. This is an important step for the program as we intend to use a solid oral dose form going forward into the next stages of development. As Arthur mentioned, we are currently conducting a drug-drug interaction study with - utilizing the solid dose form of LX 2931 in patients that have rheumatoid arthritis who are on a stable dose of Methotrexate. This is an important step, as we gain experience with the drug from a potential pharmacokinetic profiling that will allow us to identify the appropriate dose levels to study in a Proof of Concept study in patients with rheumatoid arthritis.

Our next program LX4211 is an oral small molecule drug candidate that targets sodium glucose transporter 2 or SGLT2, which regulates glucose excretion in the kidney. This particular compound and target has been explored in the setting of Type 2 Diabetes. As Arthur mentioned, we filed the IND for this program with the FDA at the end of last year and initiated our first in-human trials with 4211 in January of this year. This trial, which is a combined multi-single ascending dose tolerance and a multiple ascending dose tolerance study, is currently ongoing and I look forward to being able to update you on the status of each of these programs as we continue to progress them through the clinic. I will turn the call over to Jim Tessmer, Vice President of Finance and Accounting.

Thank you, Phil. We issued a press release this morning detailing our fourth quarter and 2008 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, 2008, were $6.4 million, a decrease of 54% from $13.8 million for the corresponding period in 2007. The decrease resulted primarily from the completion in 2007 of the project funded by Lexicon's award from the Texas Enterprise Fund, reduced revenues under Lexicon's alliance with N.V. Organon and reduced revenues under Lexicon's neuroscience alliance with Bristol-Myers Squibb, resulting from extending the estimated performance period under the agreement to June 30, 2009.

For the year ended December 31, 2008, revenues decreased 36% to $32.3 million, from $50.1 million in 2007. These anticipated decreases reflect our continued transition from drug discovery alliances to drug development activities. Research and development expenses for 2008 fourth quarter were $22.8 million, a decrease of 15% from $26.9 million for the corresponding period in 2007. The decrease was due primarily to lower research expenses, as result of the Company reallocating resources from genetics research efforts to drug development. For the year, research and development expenses increased 4% to $108.6 million from $104.3 million in 2007.

External development expenses increased by 58% in 2008 versus 2007, reflecting the change in the composition of our research and development expenses, as we continue to advance our drug candidates in human clinical trials.

General administrative expenses for the 2008 fourth quarter were $4.5 million, a decrease of 17% from $5.3 million for the corresponding period in 2007. The decrease was due primarily to lower salary and benefit costs, as well as lower stock base compensation expense. For the year, general administrative expenses decreased 2% to $20.3 million from $20.7 million in 2007.

Lexicon's net loss for the three months ended December 31,2008, was $15.4 million or $0.11 per share compared to a net loss of $12.2 million or $0.09 per share in the corresponding period 2007. Net loss for 2008 was $76.9 million or $0.56 per share, compared to a net loss of $58.8 million or $0.59 per share in 2007. For the three months ended December 31, 2008, net loss included non-cash stock base compensation expense of $1.7 million compared to $3.1 million in the corresponding period in 2007. For the year ended December 31, 2008, net loss included non-cash stock base compensation expense of $6.5 million compared to $7.9 million in 2007. Net loss for the fourth quarter of 2008 included a net gain and long term investments of $2 million and net the loss for the year ended December 31, 2008 included a net loss on long term investments of $1.3 million., which represents the change in fair value of student loan auction rate securities and related rights held by Lexicon.

Let me turn to our cash and investments. As of December 31, 2008, Lexicon added $158.8 million in cash and investments, including $16.6 million in cash and investments held by Symphony Icon, as compared to $177.3 million as of September 30, 2008 and $258.8 million as of December 31, 2007. We have made some significant progress recently with our investment position in auction rate securities. During the fourth quarter of 2008, we entered into a settlement agreement with UBS AG, the investment bank that sold us the auction rate securities, that provides us with rights to require UBS to purchase our auction rate securities at par value, $57 million, beginning in June 2010. Also as part of this settlement, we entered into a $35.9 million credit line agreement in January 2009 with UBS Bank USA. This agreement provides up to 75% of the market value of our auction rate securities in the form of revolving line of credit. The credit line is secured only by the auction rate securities and advances under the credit line will be made on a no net cost basis. Any of the interest paid by us on advances will not exceed the interest paid to us by the issuer of the auction rate securities. We believe that the working capital available to Lexicon, including the UBS credit line, will be sufficient to meet our cash requirements for at least the next 12 months. This estimate excludes any funds held in auction rate securities themselves and any new potential corporate alliances.

Now let's turn to our forward looking financial guidance for 2009. Our contractual revenues from existing agreements for 2009 should be in the range of $6 million to $8 million, consisting primarily of contractual revenues from our alliances with Organon and Bristol-Myers Squibb, as research portions of these alliances are completed in 2009. As we previously made you aware, while we were in conversations with pharmaceutical companies to enter into potential alliances or collaborations, we have not included forecasted revenue from such potential arrangements in our guidance. We will update you as we enter into such alliances or agreements. We believe our productive pipeline will provide Lexicon with attractive opportunities for future alliances.

Operating expenses for 2009 are projected to range from $110 million to $115 million. The decrease in spending from 2008 is result of our reorganizations implemented in 2008 and early 2009, which reduced personnel costs and related expenditures. These reorganizations were designed to focus our resources on our most advanced drug discovery and development programs. Non-cash expenses will be approximately $11 million of this total, including $5 million in stock base compensation and $6 million in depreciation and amortization. Taking into account cash received under existing contractual relationships only, we expect our 2009 net cash used in operations to be in the range of $99 million to $104 million and our 2009 capital expenditures to be approximately $1 million. Thank you and now I will turn the call back to Arthur.

Thank you, Jim. And we will now open the call up for questions.

(Operator Instructions). Your first question comes from Jason Cantor from RBC Capital Markets.

Thank you for taking the question and thank you for the update on the pipeline. Could you add to the discussion on the pipeline products what you've seen in terms of dose limiting toxicities for the various drugs in your Phase 1 programs and early Phase 2 work?

Sure, I will take a stab at that. So I will just try to go through in order as we present it.

1031 as we mentioned, this has extremely well tolerated at all of the dose levels we've explored which is one reason we are continuing to pursue IBS. We believe that's an important factor in consideration for an indication such as IBS. We have really not observed or determined a dose limiting toxicity with that compound. 1032, as we got into the highest dose levels being studied at a single dose we saw increasing evidence of GI events which included nausea and vomiting which would be, I think, expected relative to the mechanism of action. We, in the multi-dose, elected to divide the doses out at a lower level that was well tolerated and we have -- we were able to successfully take up to the highest dose level we explored in multi-dose which was 1500 milligrams given as 500 milligrams three times daily over a two week period of time. Again, we saw some evidence of self-limited GI events that we were able to dose through without any evidence of a dose limiting tolerability to emerge in that program.

In LX 2931, at dose levels of 175 milligrams to 250 milligrams, we have had two events of acute abdominal pain that resembles a biliary colic-like type of symptomatology. These are dose levels that we believe to be well beyond where we see a maximal pharmacodynamic effect of the compound. So although we probed that and it's an important observation in the program, dose levels we believe the compound will have pharmacologic activity in patients is well below those dose levels. And I should mention we have not seen any evidence of a dose limiting toxicity in the dose levels where we see reproducible pharmacology in animals as well as those -- and how that correlates to our human dosing that we are going to explore in patients. And 4211, we are as indicated, just having recently initiated our Phase 1 study in January, that trial is ongoing at present and I don't have an update on that fact. I will say the trial is ongoing and going as planned as present.

Terrific. Thanks.

Thank you, Jason.

Our next question comes from Sapna Srivastava with Morgan Stanley.

It's Dave calling in for Sapna. Just a question about your guy's cash position and fundraising. Given the Invus deal, it seems like you have to raise funds only at share prices above $4.50 without their prior approval and they have the rights offerings but it sounds like those can't happen until later this year. So given that you suggested you have about 12 months of cash, it seem like you will need to raise money at some point this year. I was wondering what your plans were and if you could share any discussions you had with Invus regarding their thoughts on this and any information you can provide about how you are going to raise some more cash.

We currently have -- do not have plans to enter the market to raise cash. However, as you point out with the Invus agreement we do have certain options to do so with them as a backstop. And that was part of the whole design to make sure as we going into, I think, rather soft public markets that Lexicon had such important backstop opportunities.

The way that agreement works is Invus has the option to trigger a rights offering during a defined period of time which is basically in the fall of this year. And this is all, of course, been previously disclosed information which allows the Company to work with Invus then to proceed with a rights offering whereby Invus would be the standby underwriter for the offering, if you will. They have an opportunity or option to maintain their 40% position in the Company. And if they trigger the rights to offering, they are obligated to take up that position in the offering and then also, through oversubscription process, the other share holders have the option to maintain their pro rata share as well. That offering can take place at any agreed upon price as predefined with certain limits which would then be at a premium to the current market price of the Company, if we were trading below threshold price of $4.50 a share, which as you point out, we currently are. So the pricing mechanism could work under that circumstance -- actually, it would work under the rights offering circumstances, Invus would define a price that was between our then current market price and $4.50 a share, i.e. it would by de facto be at some premium to the then current price.

So that's the way it would work under if the current market conditions persist as we see them. If things change at or at above $4.50 a share, the Company is able to do other kinds of offerings without Invus. Although Invus does have an opportunity to continue to participate for their pro rate of portion, always being able then to anchor any offering we would do if they so chose. That's I think another important opportunity for the Ccompany. So that's how that deal works for 2009. I think that should be considered in context with our ongoing business development activities, of course, which we're very active on that front as well. And we see that as another opportunity for the Company.

Okay, have you -- is there any sort of ongoing discussion about whether they plan to trigger the rights offering?

We really haven't embarked on that discussion yet. It's the beginning of the year. I think we predefined these calendar zones for a reason. And we are going to stick by that agreement.

And then just one last question. If they decide not to trigger a rights offering, is there any mechanism to offer shares below $4.50?

Yes. Then that becomes a board decision with Invus to proceed along a different path.

Okay, great. Thank you.

(Operator Instructions). Your next question comes from Edward Tenthoff with Piper Jaffray.

Great. Thank you very much. Couple quick questions just to make sure I heard correctly. The $2 million gain in the quarter, was that due to an ARS writeup or?

Yes, that's really based on two things. The write down of the auction rate securities, the value, estimated fair value, offset by the gain related to the rights offering that we obtained as part of the UBS settlement.

When, Phil -- when should we get the Phase 2, '01 or 1031 IBS data? Is that something we can expect this year? Or do you think that will slip into 2010?

Yes, Ted, I think it's difficult to predict. As I'm sure you're familiar, the actual accrual of trials and we are anticipating making progress on each of our programs throughout this year. I'm hopeful that we will have results toward the end of '09 or early part of '10. It's really difficult to predict more specifically than that at this point how --the timing of these events.

I know it's early on but how is enrollment going? We have heard that it has been pretty competitive for some RA studies or for -- with 1032, is that kind of the same sort of time frame, late this year early next year? Or do you think that could go faster?

Well, I think -- yes, each of our trials, we have the opportunity I think, to advance each of our programs into Phase 2 through the '09 time frame. I think we will make headway on each of the programs. So the opportunity existed to have four programs in Phase 2 in the '09 time frame. With regards specifically to the timing of the 1032 and the 1031, I feel good about where they are. They are on track as we projected. And if we can maintain the ongoing efforts and in initiating the carcinoid study and continuing the accrual on the 1031study in IBS, I think, again, late '09 and into early '10 are reasonable time frames to consider at present.

What should we be looking at for the severance charge in the first quarter? Has that been determined yet?

Yes. That's roughly $1.2 million.

And then lastly just refresh me, the Symphony deal runs through when and what kind of time frame would you have to make a go, no-go decision on repurchasing 1031 and/or 1032 which I think, are the two active molecules in that agreement?

The deal run through 2011. There is a schedule involved to -- for us to exercise our exclusive option to take those in, which is a yearly opportunity to do so. So it would be at the end of that time frame which I believe is mid 2011. Is that right, Jim?

That's right.

And with respect to those two programs, those are the key programs that we are keeping our eye on. We have had outside third party interest in 6171 and other indications from an academic standpoint that has become something of an interesting pathway in the area of schizophrenia. That also could evolve in another direction.

Thank you.

Thank you.

(Operator Instructions). Your next question is from Jason Kantor with RBC Capital Markets.

Hi, thanks for the follow up. I know you didn't explicitly put any partnering deals in your guidance and I know that part of the Invus transaction was to be able to retain these assets longer. I'm wondering if the current capital markets have changed your view at all on partnering and when you think the optimal time to partner some of these various programs might be?

Yeah, thanks. Our view of the optimal time of partnering remains the same even in spite of the difficult markets, which is around human proof of concept for each program. And that's I think historically been a major value inflection point for any drug development program. That could take place either in Phase 1 with appropriate biomarker data that could supply a surrogate marker for human proof of concept, but more typically in Phase 2A ,as the initial findings in patients are witnessed. That's the time frame that we look at for partnership. And that was the model that we built going into the Invus arrangement. Again, that has not changed.

With those time frames in mind, I think what is interesting if you look at our pipeline is that as Phil mentioned, we have four programs that are in that sort of time zone in 2009. And Phase 2 results, interesting biomarker results coming toward the end of the year and then early '10. So that's four programs. Each a different chemical entity. Each in different indications giving a lot of variety and opportunity on the partnership front. And so we are very busy as you can imagine, because we are talking about very different indications with different parties who are interested.

So I'm very optimistic on our partnership model. As I said before, generally speaking we see partnering the larger indications where the expenses are higher and the strength and the bandwidth of a pharmaceutical partner would be extremely advantageous. And we know that large pharma pipelines continue to suffer and therefore, we think we will be going into a very good spot there in the industry.

Thank you.

Thank you, Jason.

At this time there are no further questions. I will now turn the conference back over to Dr. Sands.

Thank you, everyone. I would just like to wind up on the 2009 goals, which is a very important of course, view to the future. And let me review those goals with you now. In 2009, we plan to have five drug candidates in development as we talked about, four in clinical development and one in preclinical development, our new compound for glaucoma. Our focus, full focus and attention there for our corporate goals I think, are critical. First with 1032, we are -- our goal is to complete the dose escalation portion of the Phase 2A trial in Carcinoid Syndrome and monitor those results towards the end of the year, to make decisions about the next steps in that program.

For 1031 and IBS, our corporate goal is to complete enrollment of the Phase 2A trial. To do so as expeditiously as possible and again, to obtain our proof of concept data as that trial is completed.

The third goal is to complete our drug-drug interaction study for our new RA drug, LX 2931. This, of course, is a study that is ongoing at present and takes place in rheumatoid patients. It's actually our first in-patient trial with this compound. And so we are very interested in those results. Then contingent upon those results we would like to initiate our Phase 2 trial in rheumatoid arthritis. That's going to be a very busy time for the program here around mid-year.

The fourth goal is to complete the Phase 1 trial of LX 4211, our new Type 2 Diabetes drug and then commence a 2A trial in diabetic patients, contingent upon successful Phase 1 results. So again, a very important transition zone for that program, potentially going to Phase 2. That's where we see our four Phase 2 opportunities, two already on track for that and then two at a very, I say critical, Phase 1 to Phase 2 transition zone this year.

And then last point on the preclinical pipeline is to conduct our IND enabling studies on LX 7101 for glaucoma which is an eyedrop formulation, topical formulation, a very new and different application for us and we are looking forward to those results, allowing us to go forward in IND enabling studies. In addition, we have many nonpublic goals which are involved. The development of our drug discovery pipeline and moving those new discoveries forward into preclinical development. So as you can see, we've outlined an ambitious year for 2009 and, I think, several key milestones can be achieved as we move forward into Phase 2. So with that, I would like to thank everyone for participating and good afternoon or good morning.

This concludes today's conference call. You may now disconnect.