Lexicon Pharmaceuticals Inc (LXRX) 2011 Q2 法說會逐字稿

Welcome to the Lexicon Pharmaceuticals' second quarter 2011 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 being taped at Lexicon's request. At this time, I would like to introduce your host for today's call, Wade Walke, Senior Director of Communications and Investor Relations. Please go ahead,, Dr. Walke.

Good morning, and welcome to Lexicon Pharmaceuticals' second quarter 2011 conference call. I am Wade Walke, and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer, Dr. Brian Zambrowicz, Lexicon's Executive Vice President and Chief Scientific Officer, Pablo Lapuerta, Lexicon's Senior Vice President of Clinical Development and Chief Medical Officer, and Jeff Wade, Lexicon's Executive Vice President of Corporate Development and Chief Financial Officer. We expect that you have seen a copy of our earnings press release that was distributed last night, along with a copy of our press release this morning announcing the top line results from our US phase 2 study of LX1032 in carcinoid syndrome patients. During this call, we will review the information provided in these releases, provide an update on our LX1032 and LX 1033 clinical programs, 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 the second quarter. Dr Zambrowicz will then give an update on our LX1033 program. Dr. Lapuerta will then review the recent 1032 phase 2 data, and Mr. Wade will review our financial results for the second quarter and discuss our financial guidance for 2011. We will then open the call to your questions. If you would like to view the 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, I would like to state that we will be making forward-looking statements, including statements relating to Lexicon's research and development of LX1031, LX 1032, LX1033, LX 2931, and LX4211, and the potential therapeutic and commercial potential of those drug candidates.

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 pre-clinical studies on our drug candidates, our dependence upon strategic alliance and ability to enter into additional collaboration and license agreements, the success of productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third parties, and a requirement 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 filed with the Securities and Exchange Commission. I will now turn the call over to Dr. Sands.

Thank you, Wade, and good morning, everyone. It's an exciting time. It is our first opportunity here on this call to discuss data from 2 recently completed studies from an entirely new class of agents, the serotonin synthesis inhibitors, or SSI's, as we call them. This class of agents are active in the gastrointestinal track and have, we believe, some important medical applications, which we'll be discussing today. Before we dive into those agents, though, I'd like to take a look at the entire pipeline slide, and note 2 advancements on the slide, which is LX1033, with its successful completion of its phase 1 program, now advancing to phase 2, and LX1032, with its successful completion of the phase 2 program. Again, most of the presentation will be centered on these serotonin programs, and we look forward to discussing the data with you. I would like to mention, before we go into those 2 programs, though, the clinical milestones and goals we've achieved so far in our other 2 clinical programs, most notably LX4211 for type 2 diabetes.

We've successfully launched the phase 2B study last quarter. We've now screened over 100 patients, and I'm happy to report that enrollment is on track for that important study. In addition, LX2931, we are currently planning the dose escalation phase of that development program in rheumatoid arthritis patients, and that should take place this quarter. So those 2 programs continue to advance, and now let's turn to the discussion today on tryptophan hydroxylase, the serotonin synthesis inhibitors. Just by way of background on slide number 6, I'd like to remind everyone of where this program started, and it, of course, it all started with knockout mice, where we deleted the tryptophan hydroxylase gene, which is encoding the rate limiting enzyme that produces serotonin. Serotonin is a neurotransmitter with multiple signalling functions in the central nervous system and in the periphery. We observed through the knockouts that this was a safe target, and that the knockout mice had phenotypes consistent with gastrointestinal applications.

We move forward, then, with TPH as a drug target, and developed 2 classes of compounds from our chemistry team, and so I'd like you to think about each of these classes as distinct, because they are, of course, different chemical entries and they act differently. LX1031 and LX1033, which we're developing for IVS, are locally acting compounds that inhibit TPH, primarily in the epithelial lining of the gastrointestinal tract, whereas, by comparison, LX1032 is a compound that is systemically bio-available. It enters the bloodstream, but importantly does not cross the blood-brain barrier, therefore affecting serotonin production in the periphery. So again, this is a description, then, of locally acting compounds LX1031 and 1033, and then the periphery acting compound LX1032. So with that, I'll now turn the call over to Brian Zambrowicz to discuss the locally acting serotonin synthesis inhibitor. Brian?

Thank you, Arthur. I'm going to begin with some of our experience with LX1031, because it will give us some perspective for the 1033 data. LX1031, as Arthur already mentioned, is our first in class locally acting serotonin synthesis inhibitor. It's able to inhibit serotonin synthesis within the lumen and the gastrointestinal tract because the enterochromaffin cells, which make 95% of the body's serotonin, sit at the lumen. LX1031 was designed, and does produce, very low systemic exposure. What little compound gets into systemic exposure cannot cross the blood-brain barrier. On the next slide, in our phase 1B study with LX1031, we were very eager to look at the effect on the biomarker urinary 5-HIAA, This biomarker is a breakdown product of serotonin, and gives some idea of the total amount of serotonin that's being synthesized by the body. This is a 24-hour collection of urine and measurement, and it is a challenging measure, because of that, even in one done in a sequestered setting like this study. We ran this study in healthy volunteers.

We dosed for 2 weeks, and what you can see, if you focus on the bottom line in this graph in purple, is that with the highest dose, of 1,000 milligrams given 4 times daily, we achieved maximal effect on the biomarker reduction, which was about a 45% reduction in urinary 5-HIAA, and you can also see that this reduction was achieved by the fifth day of dosing, which was our first time point where we measured after beginning of LX1031 dosing. On the next slide, we moved, based on that data, into our phase 2A study with LX1031, and this graph on the top is a measure of our primary enzyme, which was the adequate relief of IBS pain and discomfort, and what we observed was that we had, in the brown relative to placebo in green, we had an improvement at week 1 already in adequate relief of symptoms, and that was sustained and improved over the 4 weeks of dosing, and then it fell off. It was a 17% on average reduction in adequate relief relative to placebo with significance at week 1, and also significance over the 4-week dosing period, as measured by AUC relative to placebo.

Perhaps 1 of the more interesting parts of the study is shown in the bottom part, and that's the biomarker affect. We did, as part of the study, do run a sub-study where about 50% of the patients agreed to collect urinary 5-HIAA, and we did the measures at the times 0, which was before dosing began. We measured again at 4 weeks of dosing, and then at the 2-week follow-up period. What you can see is that we had a maximal reduction in the biomarker with a high dose group, about 35%, though in blue, the low dose group did not achieve 15% reduction, and there really was not a reduction in the biomarker in the placebo arm, and what was very interesting was that when we looked at the reduction of those patients who had the greatest reduction in the biomarker at 4 weeks, there was a statistically significant correlation between that and achievement of adequate release at week 4, and because of that correlation, then, we were very interested in exploring the biomarker correlation with clinical benefit further, and so what we did is an ad hoc analysis, which is also indicated on the bottom of this graph.

What we did is we took the high dose group and we broke them into biomarker responders and non-responders, and we chose as the cutoff 15% reduction, or greater, in the biomarker, and the reason we chose that 15% was because the low dose group did not, on average, achieve a 15% reduction, and they also did not exhibit clinical benefit, and then based on that cut in the data, if you move forward, next slide please, we then looked at the data, what we have here in brown and green is the total population again. High dose in brown and placebo in green, and then in blue and orange are the high dose biomarker responders and the high dose biomarker non-responders, respectively, and what we observed in the high dose biomarker responders was a very impressive 73% response, as far as adequately relief of IBS pain and discomfort, and this was compared to roughly 10% response in the high dose biomarker non responders. I should say that in this sub-study, 63%, approximately, of those in the high dose group were biomarker responders. So this was a pretty healthy chunk of that group.

We were very encouraged by this because it suggested to us that the biomarker may allow us to identify high responders as we move forward in clinical development to maximize the benefits observed over placebo, and it may also provide a paradigm for treating patients, ultimately in the future with a serotonin synthesis inhibitor. If you go onto the next slide, we then looked at the biomarker responders and non-responders with respect to stool consistency. We had already achieved a statistically significant improvement in stool consistency, in the brown high dose total population relative to placebo group in green. That was statistically significant at weeks 1, 2 and 4, but you can see, again, that the high dose biomarker responders in blue achieved an even greater improvement in stool consistency than the biomarker non-responders in orange and finally on the next slide.

When we looked across all primary and secondary end points of the study, what we observed is that the biomarkers responders in blue achieved the greater benefit than the biomarker non-responders in orange, across all measures, with the exception of frequency. So if you go to the next slide, what we believe we achieved with LX1031 was proof of concept for the mechanism's action, an inhibition of serotonin synthesis for IBS, and we observed that LX1031 was safe and well tolerated. It demonstrated improvements in IBS symptoms, and importantly these symptoms improvements correlated with the 5-HIAA biomarker reduction, and we believe this is, really the first time that an objective biomarker measure has been used and correlated with clinical benefits in this patient population. This work has been published recently. In fact, in this month's Gastroenterology, and I believe especially this biomarker correlation was very well received. 1 of the challenges with LX1031 was that it did require high doses, 1 gram, given 4 times daily, and so this was challenging.

We wanted to achieve a better dosing regimen, and so we did some reformulation work, but it was technically challenging. The other challenging thing to date has been the urinary biomarker. As I mentioned again, this is a 24-hour collection, and it's logistically very challenging, especially in an outpatient or clinical setting. So LX1033 is our follow-on compound, and we chose to move it forward aggressively, because it was significantly more potent that LX1031 in both in vitro and in vivo measures. So we followed the IND for LX1033 in December of 2010, and we did an accelerated phase 1 program where we had overlapping phase 1A and 1B programs, and, of course, we were extremely interested in looking at urinary biomarker affect in the phase 1B study to see if we could achieve a level of biomarker reduction, the same as we'd observed with LX1031 at 1 gram 4 times daily. We were also, for the first time, wanting to explore another biomarker measure, which is plasma 5-HIAA, hoping to identify a more viable biomarker for moving forward.

So our phase 1 clinical program consisted of a single ascending dose setting, which was done in normal, healthy volunteers. It was single, it was a randomized double-blind placebo-controlled study in healthy volunteers. There were 40 healthy volunteers in the phase 1A, and we explored single doses from 250 up to 3,000 milligrams. In the phase 1B study, it was a multiple ascending dose study. Again, randomized placebo controlled in healthy volunteers, and not only were we interested in the safety and tolerability, but in the 1B we were especially interested in the biomarker affects, both urine and plasma 5-HIAA, and we dosed over 14 days, the same as when we did our LX1031 phase 1B study, and we explored doses including 250, 500, and 750 milligrams, each given 3 times daily, or 1,000 milligrams given twice a day. LX1033 exhibited a very favorable safety profile. Single doses, up to 3,000 milligrams and multiple doses up to 750 milligrams given 3 times daily, were well tolerated. In phase 1A, what we did observe at 3,000 milligrams were 5 out of 6 of the subjects had mild diarrhea. It did resolve within 24 hours. We were actually encouraged by this data, because we believed it was consistent with the pharmacology of inhibiting serotonin dramatically and suddenly. We have observed similar affects with our most potent serotonin synthesis inhibitor, LX1032 in single ascending dose studies when we got to high doses, and we believe it's indicative of what happens when you suddenly push the serotonin signalling access. It's also corresponds with what we see with other agents that suddenly adjust the serotonin signaling access.

For example, serotonin SSRIs, which are given for depression, the most common side effects when they are first initiated, or when they are suddenly stopped, are GI side effects, which include nausea and diarrhea. In the phase 1B study, we did have 1 subject in the 250 milligram TID group that discontinued, due to a fourfold elevation in the liver enzyme ALT. However, there were abdominal ultrasounds that revealed gallstones and fatty infiltration of the liver, which could explain those, the elevation. There was 1 discontinuation that was not treatment related due to a family emergency, and 1 serious adverse event in the placebo group that happened after the end of the study. If we move on, then, as I mentioned, we were very eager to look at the urinary 5-HIAA measures, and we were eager to see if we could achieve a 45% reduction, as we had observed with the 4 times 1 gram dosing of LX1031, and so we were encouraged that both at 500 milligram TID dose in brown and the 1,000 milligram BID dose in light blue, we achieved a roughly 45% reduction in the biomarker.

You can also see that we had less than maximal effect with the 250 milligram TID dose, and you can also see that there was, as we've said, this is a challenging measure, that there was some noise in the data, and you can see that especially in the placebo group in green, as well as the 750 milligram TID dose in purple, especially for that dose between day 6 and day 14, where the measurements are really bouncing around. You would not expect 750 TID to perform worse than 500 milligrams TID, and I think this does speak to some of the challenge of this biomarker. However, again, we were highly encouraged that we were able to achieve this 45% reduction. You go to the next slide. This is now the plasma 5-HIAA measure. This is a 1- time morning fasting plasma measure, and we were very encouraged to see that we got very nice, and cleaner measures, with the plasma.

You can see that the 250 milligram TID dose, again, gave a less than maximal effect, but the 3 higher doses all achieved similar maximal reductions in the biomarker. And here I would just point out that the 750 milligram TID dose performed as well as the 500 milligram TID dose, and clearly there's less noise in the data. You can see that especially when looking at the placebo and 750 milligram TID dosing, and so we think this is a really viable and promising new biomarker for moving forward in clinical development, and ultimately for patient treatment. On the next slide, then, to summarize the LX1033 phase 1 results, we believe that the results provide clear paths forward in the IBS indication. LX1033 produced reduction in the urine 5-HIAA biomarker that were similar to those observed with LX1031, and were associated with improvement in IBS symptoms in our LX1031 phase 2A clinical trial.

Importantly, these biomarker reductions were achieved at TID and BID doses, rather than QID doses, and they were achieved at one-third to one-half the daily doses that were required for our clinical benefit with LX1031. Additionally, LX1033 is clearly also a locally acting agent. In fact, it produces even less systemic exposure than LX1031, and we believe that bodes well for its safety. It was well tolerated in all doses tested, and we have both capsule and tablet formulations developed. Importantly, there was a very good correlation between the fasting plasma measure of urinary, of the 5-HIAA biomarker and the 24-hour urine 5-HIAA measure. This, as I have mention, is a single fasting blood draw in the morning, and based on the data we've seen, this plasma measure is more reliably collected and demonstrates less variability, and so we do anticipate moving LX1033 forward into a phase 2 study in IBS-D around year-end. With that, I'm going to turn it over to Dr. Pablo Lapuerta to report on LX1032 results.

Thank you, Brian, I'm pleased to present top line results of telotristat etiprate from our phase 2 study of carcinoid syndrome. Whereas LX1033 is locally acting, LX1032 is peripherally acting. Telotristat etiprate is an inhibitor of serotonin synthesis that is absorbed into the peripheral circulation. This is ideal for treatment of a tumor that secretes serotonin, carcino-tumors. It has fast track status granted by the FDA for carcinoid syndrome, and orphan designation from the European Medicine's Agency for the treatment of carcinoid tumors. Next slide. As a reminder carcinoid syndrome reflects the existence of carcinoid tumors that secrete serotonin. These are neuro-endocrine tumors. They arise, usually, from the gastrointestinal tracts, although they can arise from other sites as well,. The excess secretion of serotonin causes diarrhea and other symptoms in patients with carcinoid syndrome. There are about 100,000 patients with carcinoid tumors, about 10,000 patients with carcinoid syndrome in the United States.

Next slide. To review, the telotristat etiprate phase 2 study design, it had an initial treatment phase for 28 days that had 4 different doses, 4 cohorts, and 4 patients per cohort. After the 150, 250, 350 and 500 milligram doses were evaluated, the 500 milligram TID dose was selected for further study in an expansion cohort that had 7 more patients, 6 on telotristat etiprate, 1 on placebo, at 500 milligrams, also for 28 days. We will be reviewing the results for this 28-day study. There are some patients that have continued into an extension phase. At the interest of patients and physicians, we put this together in an open-label long-term extension. We put it in place after 1 of the cohorts had completed, so we were only able to invite 19 patients into that open-label long-term extension. All 19 accepted, and are continue to be treated. For the 28-day analysis, we looked at the reduction in bowel movements, but also at reductions in serotonin synthesis and reports of adequate release by patients. Next slide. The patient population was one with biopsy-proven metastic carcinoid tumors. They were refractory to ongoing maximum octreotide therapy. This is a cohort of patients that's extremely difficult to treat. They had exhausted all other treatment options. They continue on the octreotide, and they continue on the anti-diarrheals that are available to them, but they need more, and on top of that, telotristat is added, or a placebo is added.

This patient population had a mean of 6 bowel movements per day with a range between 4 and 10, and had a broad age range. Next slide. Telotristat etiprate showed favorable safety over the 28-day study period, with adverse events generally balanced between the dosing groups. There was one serious adverse event in the study. That serious adverse event was potentially related to study drug. It was in a patient who had nausea and vomiting. The patient had experienced such episodes in the past but this 1 seemed more severe. She was hospitalized briefly for IV fluid for the nausea and vomiting to settle down. The physician felt it could be related to telotristat etriprate, and the patient later withdrew consent. There were no deaths during the study.

Next slide. The analysis of efficacy focused on the identification of patients responding to treatment with several cut points. There was a cut point for complete biochemical response, and that cut point was chosen to select a large degree of reduction in urinary 5-HIAA that could not a be achieved with placebo alone. Similarly, there was a clinical response threshold that was chosen for analysis, and that was a 30% reduction in bowel movements for at least 2-weeks during the 4-week treatment period, with a feeling that would be relevant to patients, but also would be of a magnitude that could not be observed on placebo alone. We also evaluated reports of adequate relief. So the construct here was that we wanted to see that telotristat etiprate was reducing bowel movement frequency, that it was doing it in association with the reduction of serotonin synthesis, and that the degree of reduction in bowel movement frequency was noticeable by patients and they are reporting adequate relief. We also examined the distribution of change in bowel movement frequency, comparing telotristat etiprate to placebo across the entire range of observed bowel movement changes in the study.

Slide 28 has our top line efficacy data. Telotristat etiprate demonstrated positive response in all the measures. On biochemical response, there were 9 responses on telotristat etiprate versus 0 on placebo. Having at least a 30% reduction for at least 2 of the 4 weeks there were 5 responders on telotristat etiprate versus 0 on placebo. Reporting adequate relief at week 4, there were 6 responders on telotristat etiprate and 0 on placebo. We also saw internal consistency in the data. People reporting adequate relief were people who were having the reduction in bowel movement frequency.

Next slide. Telotristate etiprate showed superior cumulative response. Here the Y axis is the percent of patients above a cut point and the X axis is a range of cut points. So at the far left what you have is cut points of such large reductions in bowel movements that no patient achieved them on either telotristat or placebo. On the far right, you have increases in bowel movement frequency worsening that was of such a degree that all patients on telotristat or placebo did better than present with that type of worsening. So let me review some of the key cutoff points. Where with on the previous slide was at least 30% reduction for 2 weeks. That was 5 patients on telotristat versus 0 on placebo. If you look at least 20% reduction for 2 weeks, you have more patients on telotristat but still no patients on placebo. If you look at, at least no increase in bowel movement for 2 weeks you have almost 80% of patients on telotristat, but only 20% of patients on placebo.

What this shows, across a range of cutoff measures, is that telotristat patients were consistently getting reductions in bowel movement frequency, whereas placebo patients were having increases in bowel movement frequency. This provides a perspective on the mean data shown on the next slide. Placebo patients have a net increase in bowel movement frequency, whereas telotristat patients at all doses had mean reductions in bowel movement frequency. The difference from placebo, in terms of change in bowel movement frequency, ranged from 1.6 to 2.9 bowel movements per day. That's on a daily horizon, 1.6 to 2.9. Projecting out to 1 month of treatment, that is in a ballpark of 50 to 100 bowel movements, on the order of 1 month. So we feel those are clinically relevant. They are consistent with what we are seeing in our European open-label study.

Next slide. We have a small European open-label study that has a different design. Here, rather than different cohorts and rather than having a placebo group we take patients and we progress them through different doses. They get titrated up over time to a maximum of 500 milligrams. All patients reach 500 milligrams. The open-label assessment looks at reduction in the number of bowel movements from baseline, reductions in 5-HIAA, and global assessment of the relief of symptoms. And patients can continue beyond the study time frame shown here, and in the interest of patients and physicians, we also have extended access with this study. The next slide shows the preliminary results that we are seeing in this European open-label study. We have 6 patients that have results between 4 and 16 weeks of follow-up. The short-term results were similar to the US study. 2 out of 6 patients had sustained reductions of at least 30% in bowel movements, so about a third of patients. With the longer term treatment, we've seen 5 out of 6 patients experience such reductions, and of those 6 patients that have gone up to 16 weeks of follow-up, 3 have shown repeat assessments where they've had at least 50% reduction in bowel movements from baseline. Next slide. Our overall summary of the telotristat etiprate, top line data is that the telotristat etiprate was well tolerated at all doses and displayed a favorable safety profile.

We believe these results achieved a proof of concept for our phase 2 study, because clinical responses, biochemical responses, and patient reported adequate relief were detected only on treatment. We were seeing reductions in bowel movement frequency. They were seen in the setting of inhibition of serotonin synthesis, and they were of a magnitude that patient reported benefit, and all eligible patients elected to continue treatment of extension protocols. We also see consistency between the US and European results, where in Europe 5 of 6 patients have responded with longer term treatments, out to 16 weeks of therapy. So overall, these program results support further clinical development. We will be planning to review these results with the Food and Drug Administration, and we will be completing enrollment of the European study. So I will now turn the call over to Jeff.

Thank you, Pablo. I will provide a brief financial update. As indicated in our press release today, we had second quarter revenues of $0.6 million, a decrease of 55% from $1.2 million for the prior year period. The decrease was primarily attributable to reduced revenues under our alliance with Taconic Farms. Our revenues of $1.2 million for the first half of 2011 reflect a 60% decrease from $2.9 million for the prior year period, Our research and development expenses for the 2011 second quarter were $20.1 million, a slight decrease from $20.2 million in the prior year period. Our R&D expenses, at $44.1 million for the first half of 2011, reflected a 7% increase from $41.3 million for the prior year period. In connection with our acquisition of Symphony Icon, we made an initial estimate of the fair value of our liability for the base and contingent payments, and changes in that liability based on the development of the programs and the time until the payments are expected to be made, are recorded in our consolidated statements of operations. The associated increase in fair value of Symphony Icon purchase liability was $1.8 million in the second quarter, and $2.9 million for the first 6 months of 2011.

Our general and administrative expenses for the 2011 second quarter were $4.5 million, a decrease of 11% from $5.1 million in the prior year period. The decrease was primarily attributable to decreased salary and benefit expense and consulting fees. Our G&A expenses at $9.3 million for the first half of 2011 reflected a 12% decrease from $10.6 million for the prior year period. Our net loss for the 2011 second quarter was $26.6 million, or $0.08 per share, compared to a net loss of $25.2 million, or $0.07 per share in the prior year period. Our net loss for the first half of 2011 was $56.3 million, or $0.17 per share, compared to a net loss of $51.3 million, or $0.19 per share, for the corresponding period of 2010. For the 3- and 6-months ended June 30, 2011, our net loss included non-cash stock based compensation expense of $1.5 million and $2.9 million respectively. For the 3- and 6-months ended June 30, 2010, net loss included non-cash stock based compensation expense of $1.3 million and $2.6 million, respectively.

Let me now turn to our cash and investments. As of June 30, 2011, we had $164.8 million in cash and investments, as compared to $188.9 million as of March 31, 2011 and $211.1 million as of December 31, 2010. Now let's turn to our forward-looking guidance for 2011. We expect contractual revenues from existing agreements in 2011 of between $1.5 million and $2 million. Consistent with our past practice, while we are in conversations with pharmaceutical companies about potential collaborations and alliances, we're not including forecasted revenues from those potential arrangements in our guidance. That said, we believe our productive pipeline will provide us with attractive opportunities for future alliances.

We continue to expect operating expenses in 2011 to be in the range of $110 million to $120 million. Non-cash expenses are expected to comprise approximately $18 million of this total, including $7 million in increase in fair value of Symphony Icon purchase liability, $5 million in stock based compensation, and $6 million in depreciation and amortization. Our operating expense expectations for 2011 take into account recent headcount and cost reduction measures in research, administration, and overhead areas, as we continue to devote a greater proportion of our R&D and overall spending toward development stage programs. Taking into account cash received under existing contractual relationships only, we expect our 2011 net cash use and operations to be in the range of $92 million to $97 million. I will now turn the call back to Arthur.

Thank you, Jeff. We can now take questions and -- from the callers.

(Operator Instructions)

Your first question comes from the line of Liana Moussatos with Wedbush Securities.

Thank you for taking my question. When do you think that the end of phase 2 meeting would be for the carcinoid trial, and would you be able to start a phase 3 by year-end, or is that more likely in 2012, and how long would a phase 3 trial take?

Pablo, would you like to answer that question from Liana?

Yes. We believe that for an interaction with the Food and Drug Administration we will need at least 3 to 4 months, and for interaction with, I'm sorry, interaction with the European Medicines Agency, we're interested in that as well, and an initiation of phase 3 would have to be in 2012, and right now I think we're looking at around the middle to second half of 2012.

And how long do you think the phase 3 would take?

So some of it will depend on the eventual sample size, and so that, because that affects recruitment time. So it's hard to predict, but I would say on the order of 2 years.

Okay, and what are the remaining 2011 milestones, not just for carcinoid syndrome, but overall?

Yes. So remaining in 2011, this quarter we want to initiate our LX 2931 de-escalation study, and then in the fourth quarter we'll be busy to initiate the IBS study for LX1033.

Okay. Thank you very much.

Our next question comes from the line of Cory Kazimov with JPMorgan.

Hello there. It's actually Matt Low in for Cory today. Some of my questions were actually just answered, but I guess a couple of them which are leftover. Just maybe, would there be any benefit of conducting an additional phase 2 study before phase 3, maybe if you could just talk about that dynamic, and then maybe in terms of the market opportunity in carcinoid syndrome, I guess what percentage of, of maybe this 10,000 patients in the US with carcinoid syndrome kind of fall into the refractory bucket. Thanks?

Yes. Could you clarify, I'm sorry, the first part of your question, was that with respect to 1033, an additional phase 2 study or 1032?

Yes, just maybe just the thoughts behind going straight into phase 3 versus perhaps doing an additional phase 2 study, why you feel an additional phase 2 study is not necessary at all?

Okay. So with our initial interactions with the FDA with respect to this program, we had indications that the results of this, on this order would be considered clinically meaningful and sufficient to go forward into registrational trial. In addition, the trial sizes that are required in this indication are relatively small. So we anticipate a phase 3 program in the order of 100 to 150 patients, and we just completed approximately, well we've completed 23 patients in the US and then more in Europe, so we had quite a significant, I think, sampling to go forward with phase 3 for this indication, and I don't think we would gain significantly more information with regard to designing the trial and plan the trial. In addition, I think we've explored a very good dose range that is appropriate for phase 3. Now, in phase 3, there may be certain other things to explore in carcinoid syndrome, which might include carcinoid heart disease, which has been shown to be directly related to a high level of serotonin production, but that's something that we could explore perhaps as part of our phase 3 program. It might be a sub-sector of the population. So that's why we believe we can go forward here into phase 3 directly.

And I can address the market opportunity question. So there is a certain population of individuals who have carcinoid syndrome who don't respond to octreotide, and so that is perhaps 15% of the overall population, but over time even those who do respond to octreotide therapy begin to lose that response as the tumor overcomes the ability of octreotide to control symptoms, and there are probably around 60% or so of the overall population is not obtaining adequate relief from octreotide. So we think a pretty significant majority of the overall carcinoid population is potentially a candidate for this therapy.

And they have no alternatives at that point.

Okay. That's great. Thank you very much.

Our next question comes from the line of Alan Carr with Needham & Company.

Hi, thanks for taking my question. I wondered if you could comment on dose response for the 1032 trial, and then also what the FDA's thoughts are on endpoints for phase 3?

Well, Brian, if you would like to respond to that.

Yes. It turns out there was no dose response observed for octreotide in the same patient population in its phase 3 clinical trial, and that might not be so unexpected given the hetrogeny of the patient population, both with respect to tumor burden as well as the amount of serotonin that's being pumped up by these tumors.

Pablo, did you have anything to add?

I think the US and European studies kind of compliment each other. Whereas there's no clear dose response in the US study, it's a small study with as few as 3 patients per treatment group, So I don't think that's really a study where you could expect that much of a dose response. The important thing there was the dose response in terms of safety, and it seems that the highest dose is well tolerated. So the European study has given good results with a tritration regimen. So that's something that we can discuss with regulatory authorities. Whether we could start with a dose, a lower dose, because lower doses have given some patients relief, and then titrate up to a higher dose, if needed.

And regarding endpoints that the FDA is interested for this indication for phase 3? Would they be the same?

Yes. It seems that they, this is a population that needs a reduction in bowel movement frequency, and reductions in bowel movement frequency on the order of 30% are clinically relevant, and we feel that, that they would be good endpoints for phase 3.

How about the role of 5-HIAA as a biomarker? You highlighted that for 1033 and 1031. What's the role going to be in 1032, do you think?

Brian, do you want to address that?

Yes. What we've seen is that roughly half the patients have very elevated 5-HIAA and about half the patients have a relatively normal range. They've been small studies at this point, like Pablo said, but we have seen patients in both populations, both low beginning 5-HIAA and elevated 5-HIAA, that respond to LX 1032.

Okay. Thanks very much.

Thank you.

Your next question comes from the line of Nicolas Bishop with Cowen and Company.

Hi, good afternoon. I had 1 question initially about the efficacy of LX 1032, and that is, to what extent does the time requirement in the 30% reduction efficacy endpoint play a role here? What I mean, is, did you see patients who showed signs of efficacy but it wasn't sustained for 2 weeks and they failed for that reason?

Pablo, would you like to address that?

Yes. So we think, yes, we do believe that requiring that you see a reduction in bowel movements so quickly from initiation of therapy, and for half of your assessments, because we required 2 weeks out of 4 therapies, is a high hurdle, and that's 1 of the things that we try to communicate on the slide that had the cumulative distribution of responses with telotristate etiprate versus placebo. There were several patient who, with telotristate etiprate, that were getting at least 20% reduction for 2 weeks, but not on placebo. The difference between placebo is even greater. If you look at patients who at least had some reduction with telotristate etiprate, and that was almost 80% of patients with telotristate etiprate having some reduction in bowel movement versus only 20% on placebo. So as we look across the data, across the types of reductions that patients had, we saw a clear separation between telotristate etiprate and placebo, and the European experience suggests that as therapy evolves over time, that we may have some additional responders.

Okay. Thanks, and then you mentioned a couple times that your interactions with the FDA has suggested that a 30% reduction in bowel movements would be considered clinically meaningful. Given that you've seen potentially some benefit with longer treatment in the EU trial, and that it seems that this drug is to be positioned as potentially a chronic treatment,, how do you think about treatment duration in the phase 3, and how long do you think you need to sustain that level of benefit for it to be considered clinically relevant?

We had that discussion at our pre-IND meeting with the FDA as well. We discussed both 4 and 6 months as potential endpoints. I think that they were probably leaning more toward the 6-month endpoint to show sustainability of affect,, but I think that will be part of our discussions when we meet with them next.

And I'm sure those discussions will incorporate a view toward establishing safety as well.

Right. Okay. Just 2 other quick ones, if I could. 1 is on LX 1032, could you remind us when you plan to initiate the alternative colitis trial, then the second 1 is just to be clear, is the reformulation of LX 1031 not being moved forward at this point, you're focusing on 1033 in IBD, thanks.

This IBD study for 1032 is right in the end Q3, early Q4 time frame, and the second question was?

Is the reformulation effort of 1031 for IBS still ongoing or is that being--

We're not reformulating any more. Our goal is to do a phase 2 study based on the promising results we've seen with biomarker, and we think we can build off of the Phase 2A study with 1031, move 1033 into a phase 2 study that can project us into a phase 3 study for the program.

Okay, but you're only moving forward with 1033, though; is that right?

Correct. All our formulation work, it proved to be pretty technically difficult, and when we tested those formulations in animal experiments, we didn't achieve the effects we had hoped for. Those were clearly achieved with 1033.

Okay. Thanks very much.

Your next question comes from the line of Stephen Willey with Stifel Nicolaus.

Yes, Thanks for taking my question. I was wondering if you can provide some color around the disconnect in those patients who achieve biochemical responses but then were not responders clinically, nor from a symptomatic perspective as well, and if you could maybe just talk about the baseline serotonin levels of those patients, and if they were, for some reason, abnormally high, and maybe just cutting them by 50% didn't get you down to a biological point where you start to see efficacy?

Pablo could you comment on that?

Yes. As we look at the data carefully, 1 by 1, that we do see that biochemical response and clinical response are related, and I think what you see here with the slightly different numbers, is that we presented the data according to these clinically relevant cutoffs, but if you look at the continuity of the data, you see a closer response. Some for example, you may have had a patient with a biochemical response that was very nice, and the patient didn't quite have a 30% reduction in bowel movements, but maybe had a 20% reduction in bowel movements. So I think as we look at the overall data, we do see an association between the inhibition of serotonin synthesis, the reduction of bowel movements, and the adequate relief assistance of symptoms. We see some internal consistency in the data that support of the proof of concepts. There are, within that, we do appreciate some variability, and as Brian said earlier, there are some patients with a low baseline 5-HIAA who still responded to therapy and had a good reduction in bowel movement, and there were some patients with very high baseline 5-HIAA that still had responses with a good reduction in bowel movements and a good reduction in serotonin synthesis.

I know with the R&D data you showed some chromogranin A data as well. Was there any kind of correlation that you saw in the US data there as well?

Yes, we have looked at the chromogranin A data, and there's no real conclusions that we could draw from it, except that I would say that patients weren't worsening in chromogranin A, but we really had too few assessments to draw conclusions.

Okay.

And in particular, there were patients responding across doses with or without elevated chromogranin A at baseline.

And then I know you mentioned that there was 1 serious AE that may have drug-related, due to hospitalization for nausea, vomiting. Did you mention the incidence of grade 1, 2, nausea and vomiting within the trial?

No, I didn't mention the incidents. Overall, the gastrointestinal adverse event were well balanced between drugs. The, for example, diarrhea was logically the most commonly reported gastrointestinal adverse event, and it's similar between placebo and telotristate, maybe slightly lower on telotristate. In terms of vomiting, we haven't looked at it by grading assessment but I believe we had a few cases of nausea, not vomiting, with telotristate.

Okay.

Perhaps a few more than placebo, but roughly a picture of overall balance, and maybe there have been some nausea with telotristate. The overall profile is 1 of a good tolerability.

And then just 1 quick question on diabetes. Obviously the SGLT2 has got a lot of attention last month, and I know it's a bit an open-ended question, but just wondering kind of where your thoughts are, post the dapo panel, and just kind of wondering if you took anything out of that panel that either surprising to you, or kind of caught you off guard, or what?

Pablo, would you like to comment?

Yes. So you know, a lot of the panel had its focus on the potential for breast or bladder cancer, and so what struck us is that there was no real mechanism for that, so it may not a class effect, if it exists. It may be a false positive in the sense that large clinical programs have shown false positive safety signals before, because you have so many thousands of patients and you do so many different analysis of so many different potential safety signals. On particular Pravastat showed that in a large study of thousands of patients, there was a significant imbalance in breast cancer. It was highly statistically significant, but in other large Pravastat studies, it didn't bear fruit. It wasn't repeated. Sandostatin also had that, again probably because Sandostatin, its clinical development had such large programs. So we also noted that the cancer expert who went through the data very carefully on the panel voted yes and supported approval. So we think that there some interesting things to learn from in that experience, and that we can build on the experience of dapo glofloxin, and it will help us design a phase 3 program, but we're pretty satisfied with what we have with LX4211, and I think many of the members of the panel thought that dapo glofloxin would eventually be approved, and that SGLT2 inhibition, in general, would eventually be an effective way to treat patients with diabetes.

One other things I would say is that the panel spent a lot of time on the issue of patients with decreasing kidney function and glomerular filtration rates, and depo glofloxin was not effective in those patients, and 1 of the things we took is that we have an opportunity. I think, with the SGLT1 mechanism to see a benefit in that group of patients.

Is that something that you're going to be looking at prospectively in the 2B?

Pablo, do you want to speak to that? I don't know if that's the right point to look at that.

Well, the phase 2B, is your question about bladder or breast cancer in phase 2B?

No it's a function of whether or not you're getting equivalent efficacy in those patients with renal dysfunction?

I'm sorry. In terms of renal dysfunction, we don't think we'll have enough patients in phase 2B, with only 300, to really do a meaningful analysis.

And then just 1 last quick question. Do you, based, I guess, around your current estimation on patient enrollment into the 2B, would you anticipate that we would get some of these pivotal phase 3 data sets out of the way, from maybe J&J and BI [installous]I prior to seeing your 2B data?

I think all indications that J&J data will likely come out, and we should see it, I would expect, perhaps at the next ADA. They are supposed to file their MDA sometime in the first half of next year, and all indications are that their study size is twice that as the BMFAE study, although the tremendous amount of data from that study, I think they'll go in well prepared with the concerns that phase had in common for [napa] and I think there's less priority to when some of the data may come out for the other agents.

Great. Thanks for the answers.

Thank you.

Your next question comes from the line of David Friedman with Morgan Stanley.

Hi, this is Sara calling in for Dave. Just a couple questions on the carcinoid data. In the 5 patients that had the 30% benefit, I know they have to have the benefit for at least 2 or more weeks, but if you could give us the average duration of benefit for those patients, and just for the 6 patients with the adequate relief of symptoms, did those patients include the 5 that had the clinical response plus 1 more, or are those separate patients? Thanks.

Pablo, do you comment on that?

In terms of the length of benefit, considering that it was only 4 weeks, the study, that's a higher hurdle to expect on at least 2 of them. I don't recall if there were many who had 3 or all 4. I would just say, of having gone over the data, in general most of those patients had relief for 2 weeks. I think it's a little bit of a high hurdle to expect it to be of a new therapy and it is such a difficult to treat population that's exhausted all of their options.

Okay.

In terms of your [ MULTIPLE SPEAKERS ]

I'm sorry?

Go ahead. Go ahead Pablo.

Yes. So the other question was about association of adequate relief and reduction of 30% in bowel movement frequency, they were closely associated, and that's part of the internal consistency that I described, and I believe that approximately 4 of the 5 people who had the reduction of 30% in bowel movement frequency reported adequate relief of symptoms, and then a couple of the others that reported adequate relief of symptoms, but that didn't meet that cut point. They still had 20% to 25% reductions in bowel movement frequency. So the data really suggests, in a nice and consistent manner, that patients who had reductions in bowel movement were noticing it and were reporting it, and that therefore this 30% cutoff was clinically relevant.

Okay.

And that was correlated really well with the European study, where the 5 patients who had response as far as bowel movements, they were also reporting adequate relief.

Okay. Great., and then, you may have already said this, but what was the exact definition of adequate relief? Was that just a subjective measure or?

Yes.

Okay.

Do you want to speak to that, Pablo?

Yes, I don't have the exact wording, but it was basically based over the past week, have you had adequate relief of your carcinoid syndrome?

Okay. Great. Thank you.

There are no further questions at this time.

All right. Well I'd like to thank everyone for participating in this call. It was a more thorough call, I think, given that we were going over results from 2 studies focused on our serotonin synthesis inhibitors. Just to summarize briefly, LX1033 has demonstrated a favorable safety profile with very potent biomarker effects in the phase 1 program, and we believe demonstrating dosing regimen that's consistent with a favorable product profile for IBS. In addition, we've shown for the first time a very consistent plasma biomarker measure, which we will be taking forward in development, and our phase 2 planning is currently underway. Next, telotristate etiprate set, established proof of concept in carcinoid syndrome. Specifically, a very challenging patient population, those refractory to currently available therapies. We're very encouraged by the results obtained today in the US study and in the European study, and we think that this compound has demonstrated its ability to affect severe gastrointestinal disease, and we are further encouraged to initiate our study in alternative colitis with this compound as well. So with that, again, I would like to thank you for your participation, and good bye.

This concludes today's conference call, you may disconnect.