Lexicon Pharmaceuticals Inc (LXRX) 2017 Q2 法說會逐字稿

Welcome to Lexicon Pharmaceuticals Second Quarter 2017 Financial Results and Business Update Conference Call. (Operator Instructions) As a reminder, this call is being recorded today, August 1, 2017. I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Thanks, Dorothy. Good morning, and welcome to the Lexicon Pharmaceuticals Second Quarter 2017 Financial Results and Business Update Conference Call. Joining me on today's call are Lonnel Coats, Lexicon's President and Chief Executive Officer; Alex Santini, Executive Vice President and Chief Commercial Officer; Dr. Praveen Tyle, Executive Vice President of R&D; and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer.

After our formal remarks, we will open up the call for Q&A.

Earlier today, Lexicon issued a press release announcing our financial results for the second quarter 2017, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call, along with the slide presentation will be accessible in the Investor Relations section of our website. During this call, we will review the information provided in the release, provide an update on our clinical programs and then use the remainder of our time to answer your questions.

Before we begin, let me remind you that we will be making forward-looking statements, including statements relating to the safety and efficacy and the therapeutic and commercial potential of XERMELO. These statements may include characterizations of the results of clinical trials of XERMELO and the market opportunity for XERMELO. This call may also contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of other drug candidates, strategic alliances and intellectual property as well as other matters that are not historical facts or information. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements. These risks include uncertainties related to the success of our commercialization efforts for XERMELO; the timing and results of clinical trials and preclinical studies of our other drug candidates; our dependence upon strategic alliances and other third-party relationships; our ability to obtain patent protection for our discoveries; limitations imposed by patents owned or controlled by third parties; and the requirements of substantial funding to conduct our drug development and commercialization activities. For a list and a description of the risks and uncertainties that we face, please see the reports that we have filed with the Securities and Exchange Commission.

I will now turn the call over to our President and CEO, Lonnel Coats.

Thank you, Kim. Good morning, everyone, and thanks for joining us this morning. Second quarter was full of notable achievements across all areas of the business, which were aligned with our goal of ultimately helping as many patients as possible. I'm excited to discuss our strong second quarter results as well as our expectations for continued growth this year and beyond. Notably, we're driving growth in our XERMELO franchise while, in parallel, making great strides towards advancing sotagliflozin to market and furthering our innovative pipeline which are near-term priorities for us. We've got a strong first half and our continued focus on execution will become increasingly more important for the remainder of this year. Based on what we've achieved so far, we are well on our way to reaching our goals.

I am pleased with the progress we're making with the launch of XERMELO as we achieved net XERMELO sales of $3.6 million in the first full quarter of launch. These results reflect consistent, solid execution of our growth strategy. We continue to see an increase in new prescribers and patients and as we gather additional data points on launch dynamics, we're seeing indicators that reflect healthy demand and access. Alex Santini, our Chief Commercial Officer, will provide more granularity on these dynamics shortly. On the reimbursement front, we continue to receive positive responses from payers. Soon after launch, XERMELO was incorporated into the NCCN treatment algorithms which speaks to the clinical value of XERMELO and we expect this inclusion to enhance use and drive penetration in the near term. In Europe, XERMELO recently received a positive CHMP decision and we and our collaborator, Ipsen, look forward to a potential approval in the third quarter. Our other priority this year is to ready our sotagliflozin program for regulatory filing in type 1 diabetes. We had a very successful presence at the American Diabetes Association meeting in June where we highlighted additional positive efficacy and safety data from the inTandem1 and inTandem2 studies. Around the same time, we also announced positive top line inTandem3 data which provide differentiating data on the effectiveness of sotagliflozin on lowering A1c to 7% or below with no severe hypoglycemic effects or diabetic ketoacidosis events. We now have the majority of our data with -- we and our collaborators Sanofi need to file for type 1 diabetes regulatory approval globally. And we will have the largest body of data in type 1 diabetes and most comprehensive filing package.

Recent feedback from FDA and EMA was encouraging and supports our and Sanofi's intent to file for approval. With that backdrop, we've elected to exercise our co-promotion option under our collaboration agreement with Sanofi and we, Lexicon, will have a significant role in the commercialization of sotagliflozin for the treatment of type 1 diabetes in The United States should it be approved.

Sanofi will fund 60% of the commercialization cost relating to co-promotion activity under the collaboration. As many of you know, there is no other drug besides insulin that has been approved for this indication and we are excited to potentially provide -- to provide a first-in-class therapy for patients with type 1 diabetes. I'm very proud of the extraordinary men and women here at Lexicon for successfully navigating 3 Phase III sotagliflozin studies through this development process with type 1 diabetes. I'm also proud to be passing this baton from here to our wonderfully capable colleagues at Sanofi as they are responsible for regulatory filing. We are confident in their ability to file sotagliflozin with regulators around the globe, starting with their intent to file in the United States and in Europe in the first half of 2018. We know patients are waiting and we will do all we can to file as early as possible during this timeframe, potentially as early as the first quarter of 2018. As we make this transition, we, Lexicon, will not be providing further commentary in the regulatory process to the end -- prior to the NDA or MAA submissions as this now will be Sanofi's responsibility.

On Slide 3, you can see that we expect 2017 to be an event-rich year for the sotagliflozin program, with additional efficacy data from secondary endpoints coming out this quarter for inTandem2. We expect these results to support what we saw in inTandem1 regarding the effects of the drug on body weight and blood pressure in hypertensive type I patients. In addition, we anticipate getting pooled results from both studies on time and range as measured by continuous glucose monitoring this quarter. Lastly, we will have a significant presence at the upcoming European Association for the Study of Diabetes, better known as EASD, in September, where we expect to have several oral and poster presentations for sotagliflozin. As we near the end of the type I program, we and our collaborator Sanofi are eager to continue advancing sotagliflozin in the Phase III program in the type 2 set. Lastly, there is a lot more value we hope to create from our earliest stage pipeline. LX2761, which targets SGLT1, is in Phase 1 development for type 2 diabetes with data expected in the second half of this year. Another compound under development, LX9211, is a novel compound for neuropathic pain that will enter the clinic very shortly. With that, I'm now going to turn the call over to Alex Santini to discuss the commercial business. Alex?

Thanks, Lonnel. Good morning, everyone. I'm very excited to provide you with an update on our commercial performance. We continue to be confident in our ability to execute a successful XERMELO launch as evidenced by our achievement of net XERMELO sales of $3.6 million in the first quarter of our launch. Although we're still in the early stages of the launch, XERMELO is off to a very promising start and making a real difference to the lives of patients. We're seeing encouraging trends emerge regarding the commercial prospects for XERMELO and I am optimistic that these trends will carry on throughout the year. We recently held our XERMELO launch meeting where patients shared their very positive experiences and inspiring stories and where we revealed a new patient campaign. We continue to hear commentary from patients about how impactful the drug is on their lives, whether it's the reduced episodes of diarrhea or the convenience of an oral therapy or other efficacy and safety aspects of the drug. The fact that these patients are getting their lives back and no longer having to schedule their days around the debilitating and painful bouts of diarrhea is a testament to the effectiveness of the drug. I must say that our sales force is extremely fired up to pound the pavement. So we look forward to continuing this momentum. As a reminder, our strategic imperatives for XERMELO include driving awareness of the disease and its burden impact, driving rapid adoption by establishing a differentiated clinical proposition, amplifying and activating the patient voice, and ensuring that patients and healthcare providers gain access to XERMELO. We're seeing success in bringing the negative impact of carcinoid syndrome diarrhea symptoms to the forefront for oncologists. Aided awareness is strong with more than 80% of oncologists being aware of XERMELO. Notably, the intent to prescribe is high, with 8 out of 10 oncologists, who are aware of XERMELO intending to prescribe the drug in the future. Of the physicians who are prescribing, the majority indicate that XERMELO is meeting or exceeding their expectations. We're definitely seeing the impact that the sales force is having on trial and usage as well as in shifting key attitudes about the disease. To give you a sense of how well our team is executing against its objectives, we're seeing positive trends in our prescriber base. As shown on Slide 5, we have targeted nearly 270 of the top-tier prescribers, of which nearly 95% have been detailed. We're activating a broader prescriber base at a higher rate across all deciles. Now, all 20 of the high-volume centers that prescribe SSA therapy have written XERMELO scripts and approximately 1/3 of all enrollments are being generated by the top prescribers. Importantly, we're seeing significant growth in enrollment counts from the low decile and nontarget groups. I'm very pleased with the strong foundation we have in place and the favorable feedback we're hearing from individual stakeholders about XERMELO and we plan to maintain sharp focus on the ongoing commercialization of XERMELO.

Through June 30, there have been 443 patients with paid XERMELO prescriptions and we are extremely pleased with that result, as it is in line with our expectations. The majority of patients continue to stay on the drug as they did in the clinical trial. What has been [surprising] to us is that expectations for the efficacy of the drug have been very high, giving some remarkable experiences from some patients, which in essence is a double-edged sword, in that not only all patients will see positive effects of XERMELO as quickly as a few days. So we're wanting to set realistic and reasonable expectations for patients, caregivers and healthcare providers that involve educating them to stay on drug for at least 12 weeks, because not all patients will see such rapid results.

We have an opportunity to activate the voice of the patient and the caregiver, leveraging patient feedback and the benefits of our product to create a stronger call to action for patients and caregivers to demand and request XERMELO. When we speak to physicians who treat carcinoid syndrome diarrhea, their feedback is that approximately 40% to 45% of their patients are not adequately controlled by SSA therapy. However, when we survey patients, more than 80% of them indicate that they are not well controlled. So there is a disconnect between how physicians view how patients are doing, compared to how patients actually feel. As XERMELO is the first-ever oral therapy and the first new class of therapy to be approved in this indication in nearly 30 years, we expect it will take time to change ingrained treatment habit but are pleased so far with our progress. Recently, XERMELO was included as a recommended treatment option in the latest National Comprehensive Cancer Network, NCCN, Clinical Practice Guidelines in Oncology for neuroendocrine tumors, which we believe could help change treatment habit. The speed at which the drug was placed in the guidelines, 9 weeks post filing, speaks to the importance of the drug and the unmet need. This inclusion will help assist patients, their caregivers and healthcare providers in making informed decisions while treating their neuroendocrine tumors and will possibly drive further use of XERMELO in the near term. We have been getting good traction with physicians with the NCCN guidelines in hand. Not only do the NCCN guidelines help physicians in their treatment decisions, but they also provide payers with better guidepost on the reimbursement side. To date, we have had a very positive formulary position. The majority of payers have already been reimbursing for XERMELO even though a decision may not have been rendered. Since launch, 29 plans have made a formulary decision and 28 of 29 plans that cover 2/3 of insured lives have placed XERMELO in a favorable formulary position. We continue to make solid progress on this front and expect to receive decisions from all payers within the first 6 months of launch.

As for the payer mix, we continue to have a balanced mix of Medicare and commercial patients. We're ensuring access to XERMELO through our LEXCARES program, which is a patient-centric platform that helps to appropriately remove inherent hurdles. LEXCARES seamlessly integrates processes for accessing and dispensing XERMELO, coordinating the insurance benefit and the financial assistance option, assisting health care providers with process support and providing ongoing nursing support for patients. All physicians and patients are using our system and it has been extremely effective.

While we are off to a great start, we have more to do. We look forward to updating you on our progress. I will now turn the call over to Dr. Tyle who will provide a pipeline update.

Thank you, Alex. This morning, I'm going to highlight the significant progress we've made this quarter advancing our sotagliflozin program, which is nearing completion for our novel oral antidiabetic agent in type 1 diabetes. When we speak to thought leaders in the diabetes space, the consensus is that there are challenges associated with managing glucose levels with insulin alone as patients make trade-off between effectively managing their blood glucose while trying to avoid complications such as severe hypoglycemia and weight gain. As our data has shown so far across 3 Phase III studies, we see, sotagliflozin's far-reaching effects through blood glucose control without these complications. Moving to Slide 7. We're competing 2 pivotal trials, inTandem1 and inTandem2, which are identical studies in terms of primary endpoint looking at change in A1c with a background of optimized insulin, as well as another Phase III study, inTandem3, which is examining the proportion of patients with A1c less than 7% at week 24 and no episodes of severe hypoglycemia and no episode of DKA after randomization. All 3 studies have already achieved their primary endpoint with meaningful reductions in A1c at all doses studied at 24 weeks. As shown in Slide 8, in pivotal studies sotagliflozin-treated patients continue to show reductions of A1c on top of optimized insulin, which is a very important distinction. Notably, when insulin was not optimized prior to randomization, which was the design of inTandem3, drug-related patients also demonstrated meaningful reductions of A1c compared to placebo. While we only announced top line data from inTandem3, we intend to publish the full data set in a major peer-reviewed journal in the near future. We're frequently asked how sotagliflozin will be differentiated from other SGLT2 inhibitors in type 1 diabetes. We believe that gastrointestinal SGLT1 inhibition may contribute to both efficacy and safety results. In terms of efficacy, SGLT1 inhibition results in a reduction in hypoglycemia -- hyperglycemia after meals. This reduction in mealtime glucose is important in controlling A1c. It also has implications for safety as a more predictable and stable glucose response in type 1 diabetes may lead to a lower risk of hypoglycemia. SGLT1 inhibition by sotagliflozin appears to moderate urinary glucose excretion as well and it leads to a natural mealtime GLP-1 elevation. These are features that may help limit the incidence of diabetic ketoacidosis, DKA. Secondary endpoint data from inTandem1 and data from inTandem3 speak to this differentiation and help characterize the overall favorable benefit risk profile. In both studies sotagliflozin increased the proportion of patients who achieved A1c control without an episode of severe hypoglycemia or episode of DKA. In addition, sotagliflozin reduced body weight and had favorable effects on systolic blood pressure. This was seen in the pivotal inTandem1 study, as seen on Slide 9, and details will be presented at the upcoming EASD meeting in Lisbon. Patients taking sotagliflozin experienced a mean reduction from baseline in body weight after 24 weeks of treatment of 1.6-kilogram for the 200-milligram dose and 2.7-kilogram for the 400-milligram dose, compared to a mean body weight gain of 0.8 kilograms for patients on placebo, statistically significant at 0.001 level for both doses. Sustained effects on body weight were also seen at 52 weeks. In addition, systolic blood pressure in the subset of type 1 diabetic patients with baseline hypertension of greater than or equal to 130-millimeter of mercury was reduced by 9.9 millimeters of mercury and 11-millimeter of mercury at week-12 when treated with 200-milligram and 400-milligram of sotagliflozin, respectively. Compared to a reduction of 4.4-millimeter of mercury on placebo, p-value of 0.017 and p-value of 0.003 for 200-milligram and 400-milligram doses respectively. Notably, the outcome on every secondary endpoint favored sotagliflozin over placebo, with results for the 400-milligram dose having achieved statistical significance for all 6 secondary endpoints, including improved scores on the Diabetes Treatment Satisfaction Scale and a reduction in distress on the Diabetes Distress Scale. The patient's perspective in type 1 diabetes is extremely important and it was encouraging to see significantly better patient reported outcomes with sotagliflozin than placebo.

Later this quarter, we will report on the secondary endpoints from inTandem2 and on continuous glucose monitoring data pooled from the inTandem1 and inTandem2 studies. The main safety events to consider are severe hypoglycemia and DKA. On Slide 10, you can see that the incidence of severe hypoglycemia was higher in the placebo arm compared to the sotagliflozin arms with no discontinuations in the drug arm. From inTandem3, we note that the ability to improve target glucose levels without increasing severe hypoglycemia risk is a first for any adjunctive glucose lowering therapy evaluated to date for people living with type 1 diabetes. Regarding DKA, this event occurs more often in the drug arm versus the placebo arm. The risk at 24 weeks were in the order of 1% to 3% and we recently reported that the risk at 52 weeks inTandem1 study stayed in the range of 3% to 4%. Importantly, there was a very low rate of discontinuation due to DKA in the drug arms and most patients who experienced DKA resumed treatment with the study drug. Also of note, a yearly risk of 5% to 8% has been reported in studies of actual practice. We believe that careful monitoring can help patients achieve better glycemic control while managing the risk of DKA. Based on the totality of data in nearly 3,000 patients across 3 Phase III studies, we believe that the benefit risk profile favors use of sotagliflozin in patients with type 1 diabetes. As such, we will be supporting Sanofi in their efforts to file for global regulatory approval in type 1 diabetes. As the type 1 program wraps up, we and Sanofi are excited to advance sotagliflozin in type 2 diabetes. As you can see on Slide 11, type 2 diabetes represents a major and growing health problem that affects hundreds of millions of people worldwide. This disease contributes to renal impairment and we know that approximately 40% of patients with type 2 diabetes have chronic kidney disease. This is an important fact given sotagliflozin's SGLT1 mechanism of action. At the recent American Diabetes Association meeting, J&J presented detailed cardiovascular outcomes, or CVOT data, from the CANVAS program, which evaluated a selective SGLT2 inhibitor, canagliflozin, in at-risk patients with type 2 diabetes. Essentially, canagliflozin replicated the cardiovascular benefits previously observed in the Eli Lilly's empagliflozin CVOT data, including statistical superiority on the primary efficacy endpoint and improvement in renal outcomes. Notably, CANVAS and EMPA-REG data were consistent with CVD-REAL data, demonstrating SGLT2 inhibitor-mediated reduction in hospitalization for heart failure or death.

Empagliflozin now carries an efficacy claim for improved CVOT outcome on its label. We believe these data indicate that cardiorenal protective benefits are likely SGLT2 inhibitors-mediated class effects. So we're looking forward to advancing sotagliflozin in the type 2 setting. As a reminder, Sanofi is executing the Phase III program. So please look for updates from them.

To wrap up, we're pleased with the totality of the sotagliflozin data package for type 1 diabetes to date and we and Sanofi look forward to bringing this drug to the market. In type 2 diabetes, we're excited about sotagliflozin potential to make a difference in patients' lives and we're excited to advance the program with Sanofi. Now I would like to turn the call over to Jeff Wade, who will provide financial highlights.

Thank you, Praveen. This morning I will discuss key aspects of our second quarter 2017 financials and will review our 2017 guidance. More financial details can be found in our 10-Q which will be filed later today. Now please refer to Slide 13 of our presentation.

As indicated in our press release today, second quarter 2017 revenues totaled $12.1 million, a decrease from $20.1 million in the prior year period, primarily due to lower revenues recognized from the collaboration and license agreement with Sanofi, associated with the performance of our obligations relating to type 1 diabetes development activities and shared funding of type 2 diabetes development. Net product revenues for the 3 months ended June 30, 2017, included $3.6 million from the sale of XERMELO in the U.S. and $0.3 million from the sale of bulk tablets of telotristat ethyl to Ipsen. Cost of sales related to sales of XERMELO was $0.5 million for the second quarter of 2017, which included $0.4 million of finite-life to intangible asset amortization. We began capitalizing inventory during the first quarter as we expected the recovery related costs through the commercialization of the product. The pre-commercialization inventory of XERMELO is expected to be sold over approximately the next 2 years. As a result, cost of sales for XERMELO for next 2 years will reflect a lower average unit cost of materials than would otherwise be expected. We continue to manage and prioritize our operating expenses. Research and development expenses for the second quarter of 2017 totaled $26.9 million, down 44%, from $48.2 million in the prior year period, primarily due to decreases in external clinical development costs relating to sotagliflozin. R&D expenses in the second quarter of 2017 were lower quarter-over-quarter due to lower expenses associated with the Phase III sotagliflozin studies. Although expenses for the type 1 diabetes program will be winding down, we anticipate that R&D expenditures will be higher for the third and fourth quarters of 2017 compared to the second quarter as Sanofi ramps up the sotagliflozin, type 2 diabetes programs and we contribute our portion, which is capped at $100 million. Selling, general and administrative expenses for the second quarter of 2017 were $18.5 million, which represented a 120% increase from $8.4 million in the prior year period, due primarily to increased costs associated with the commercial launch of XERMELO. The revenue and expense profile resulted in a net loss for the second quarter of 2017 of $35.1 million or $0.33 per share, compared to a net loss of $38.1 million or $0.37 per share in the prior year period. For the 3 months ended June 30, 2017 and 2016, our net loss included noncash stock-based compensation expense of $2.4 million and $2.0 million, respectively. From a balance sheet perspective, we exited the second quarter with $231.2 million in cash and investments compared to $346.5 million as of December 31, 2016. We foresee that our current cash position together with expected revenues will be sufficient to fund operations at least through 2018.

Based on our second quarter financial results, we're revising our financial guidance for 2017. We continue to expect contractual revenues from existing collaboration and licensing agreements in 2017 to be in the range of $65 million to $75 million. Our revenue guidance excludes revenues from sales of XERMELO, due to the early nature of the XERMELO launch. We're lowering the upper range of operating expense guidance by $5 million to $230 million to $255 million from $230 million to $260 million. This guidance includes the copromotion opt-in for sotagliflozin and type 1 diabetes. Noncash expenses are expected to be approximately $12 million of which $8 million is stock-based compensation. $2 million is the increase in fair value of Symphony Icon purchase liability recorded in the first quarter; and $2 million is depreciation and amortization. We're lowering the upper end of our R&D expense guidance by $5 million to $160 million to $175 million from $160 million to $180 million. We're maintaining our SG&A expense guidance of $70 million to $80 million. Last, but not least, we're reducing the top end of our 2017 guidance on net cash used in operations by $5 million to $210 million to $220 million from $210 million to $225 million.

I will now turn the call back to Lonnel.

Thank you, Jeff, and the team. We've had a great first half of the year and we are very excited to build this momentum for the rest of the year. Our main priority for the second half of 2017 are centered around driving long-term values of continued execution on the XERMELO launch, preparing for global regulatory filing for sotagliflozin in type 1 diabetes and advancing our earlier-stage pipeline. We very much look forward to updating you on our progress as it happens. With that, I'll ask the operator to begin our Q&A session.

(Operator Instructions) Your first question comes from the line of Liana Moussatos with Wedbush Securities.

Two questions. Were there any -- was there a cash outflow for the sotagliflozin opt-in and are there any deferred revenues for XERMELO?

Thank you, Liana. Jeff, I'll turn those 2 questions over to you.

The deferred revenues from -- I'm going to answer the second one first. The deferred revenues for XERMELO are minimal, because the way that we've structured this we are using the sell-in method. So when we sell to the SP's, were recognizing revenues. So really the net sales really do represent sales to -- into the distribution channel. They also represent sales to the marketplace because the specialty pharmacies maintain a minimal amount of inventory, between 2 and 3 weeks' of inventory. So that's the answer to the second question. The first question, there is no opt-in payment of either way from us to Sanofi or vice-versa associated with the exercise as our co-promotion option. Just to remind you, in terms of the terms of the copromotion option, we've the ability to co-promote in the U.S., and have a leadership role in the marketing and sales of XERMELO (sic) [sotagliflozin] in the type 1 diabetes setting in collaboration with Sanofi. And that copromotion effort, which is focused on specialists, is something that we fund 40% of and Sanofi funds 60% of. So there will be cost incurred with that. They tend to be closer to launch, although we've included that in terms of our planning from the very beginning, since our intention was always to exercise this option.

Just for clarification, we all have XERMELO on the brain. So Jeff meant to say sotagliflozin.

Yes, sorry, sotagliflozin.

Your next question comes from the line of Jessica Fye with JPMorgan.

I know you can't talk about the kind of filing going forward, but I'm curious about the FDA meeting you had in June on sotagliflozin and kind of what the key questions you look to the FDA were and feedback you got on that? Also just curious if there was any discussion at all about around ruling out CV risk like for type 2 drugs or is that really just a moot point vertically with the outcomes data for the class? And then, secondly, I know you always planned to opt-in, but is there a specific window within which you had to exercise the option? And if so, what was the window? Just trying to think about how the opt-in decision may or may not have been linked to the FDA feedback versus just the overall data package you've generated for sotagliflozin thus far?

Jessica, thank you for the question. Let me first say the meeting with the FDA as well as EMA went quite well. The fact that we're talking about filing the drug I think is an indication of the fact that we wouldn't be able to do that if we had to do go through the process of CV trials. So I think the meeting went very, very well. I think for us we got clarification as to what we need to do to put into our package and get ready for the next day, which would be certainly getting ready for the pre-NDA meeting, and things of that nature that Sanofi will need to do. I think all of us walked away fairly confident from our discussions both with the FDA as well as EMA that we have a drug that is fileable, which is why we're now talking about filing the drug. As to the window for opting in for sotagliflozin, yes, there is a window, and we're in it. The window is really based on when we think we will have an approved product in market and count your way back to get yourself ready. We are now in that window and we've opted in relative to being in that window.

Okay. Great. And just from a kind of timing of the filing standpoint, what's the last piece of clinical data you want to have before you put the filing in or before Sanofi does? Is it the 52-week follow-up from inTandem3? Is this -- that kind of what we're waiting for?

Great question, Jessica. That's it. That will be the completion. The CGM data, and any other data we call out from there is really gravy, if you will. But we have most of everything we need to file the compound. We will have the 52-week data for inTandem2 here soon and that will complete everything needed for the -- for both our companies to get ready for the submission.

Your next question comes from the line of Chris Shibutani with Cowen & Company.

We get a lot of questions from investors trying to understand time and range and putting that data point that you will have in context. Can help us with what we should think about with that data from a regulatory standpoint as well as ultimately from a commercial standpoint? We kind of understand what will be seen clinically meaningful, but recognizing that regulators may have kind of a different threshold range. That would be helpful.

Thank you, Chris. Appreciate the question. I will turn it over to Jeff.

So I think time and range is an emerging issue from a regulatory perspective. I think it's -- I think that there is becoming a greater appreciation of its importance, but it's not something that we were encouraged to have as one of the primary endpoints in our study because it's not a validated endpoint, FDA-accepted endpoint. We felt that it's important to incorporate in our study though because it is very important to people with type 1 diabetes. And so I think that what we've seen consistently across the studies that we have conducted in type 1 diabetes is there is an improvement in time and range. And I think that from a patient's perspective, having more time and range, if it's an hour, or 2 hour or 3 hours, is something that's quite meaningful. And we've seen results like that in our studies, where we've seen pretty significant increases in time and range. It is something I think that is -- that will contribute to the overall sort of risk-benefit with a way that people look at risk-benefit of the drug, and will probably help from regulatory perspective, even though it's not really a regulatory endpoint. But it is something, I think, commercially and then something that for patients is something that's very important. And I think -- we think that it is very important to have that benefit for patients.

Yes, Chris, I think to add to Jeff's point, what we've tried to do in this program, which I'll remind everyone is the largest program conducted for oral agent in type 1 diabetes. We put endpoints in or secondary measures in from a patient perspective. We've done what we need to do from a regulatory standpoint already. And that's A1c and we've successfully done that 3 times now. But the rest of these benefits, as to exactly to your point, is to be able to call out for a practicing physician how well does this drug behave relative to secondary measures that are important to patients. Things like weight reduction, things like blood pressure for hypertensive, things like, to Jeff's point, time and range. These are very important measures for patients. And therefore we took the opportunity to put it into our trial and we've emphasized and highlighted it, because we're very confident that sotagliflozin can perform well on these measures. And it has performed well on these measures. We're not expecting anything different than that as we finish up the last call out on the program.

Great. And I apologize if I missed this. But for the XERMELO, are you confident in your peak sales commentary that you've had previously? Are there any changes to that?

No, Chris. We are 4 months in. We are pleased with where we are. We have a lot of work to do, as Alex has said. I think it's way too early to adjust any thinking around peak sales. But at this moment I think for the quarter we're very pleased with where we are.

Your next question comes from the line of Yigal Nochomovitz with Citigroup.

Just to go back on the co-promo for a second. Can you just clarify if the decision for the opt-in is in any way connected to the switch to have Sanofi do the filing in type 1. Are those -- were those 2 decisions sort of separate or not.

Sanofi has always been responsible for regulatory filings. That was the original construct. We're -- because we've conducted the type I development program, we are heavily involved in doing that. But ultimately they will be the holder of the NDA and the MAA. The copromotion is really a separate -- an altogether separate decision. And it relates to our ability to participate in the commercial launch of the product in type 1 diabetes and then the ongoing commercialization of the product in type 1 diabetes. And that was -- there was a framework in the agreement and we've exercised our option under that framework.

Yes, to emphasize what Jeff has said is, Sanofi, as you go through the agreement we announced in 2015, they have the worldwide exclusive rights to this compound. And therefore they've always had the responsibility for the NDA as well as the MAA. We have now gotten to a point where we are concluding the Phase III program for type 1 diabetes. And as you do that, you get the feedback that you need and you determine when the time frame will be for you to file it. Then it's our obligation to turn over the package to them and start to work with them on filing. You also can, without getting into specificity, figure out once you have a filing date in mind, you will have a launch date in mind. That is what triggers when you will -- you have the provisions for opt-in.

Okay, got it. And then just on Slide 2, obviously you can contribute up to $100 million. Can you give any commentary on what percent of that would -- could be expected to be deployed in the second half of the year -- this year?

So I will say that in our R&D expense guidance for the year, it is incorporated in all of that type 2 expenses. We will have -- what we've said is that -- and we incurred some of that cost last year in 2016. We will incur the largest part of that cost during this year. We have already incurred a pretty good amount of it in the first and second quarter. It's going to be a little bit heavier in the third and fourth quarter. And then we will carry over some additional cost in 2018. But with the bulk of that cost, the largest part of that cost, we expect to incur within 2017 and it is included within our 2017 R&D expense guidance.

Okay. And I don't know if you can comment on this because it's Sanofi handling, but do you expect that all of their Phase III for type 2 will be up and running by the end of this year. I know there's several posted but there is more on the way?

Yes. They will be ramping up additional studies over the balance of this year.

Okay. And then just on XERMELO quickly, on the peak sales, I think you said 350 on some prior calls. Just to clarify, is that based on current price or you're making some assumptions about price growth when you say $350 million peak?

You are spot on as always. We are making assumptions about price appreciation in our model.

Okay, great. And then just one detail, which I don't know if you guys caught, but yesterday Express released the formulary exclusion. It was interesting to see that they had actually favored the Ipsen product and not the other SSAs. I'm just curious if you guys noticed that and whether that -- how if, or if at all that impacts your thinking with regard to the market?

Yes, I'll let Alex speak to it, but I would say regardless of whether they choose -- which SSA they choose, XERMELO works for either SSA, but Alex?

Yes. We did pick up on that yesterday. ESI posted their 2018 formulary where sandostatin is now nonpreferred and somatuline is a preferred position. We'll see what the impact of that is going to be in the real-world setting. In the past ESI has had some very significant impact when they placed these preferred formularies into the marketplace. And as Lonnel just indicated, we benefit, in that we're not an SSA therapy. So whether its somatuline or sando that's in that preferred position, we're the alternative option when more is required.

Yes. As you know, one of the first decisions -- formulary decisions actually came from Express Scripts of covering XERMELO. That was very early in the process.

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

Maybe one for Alex. I guess it's perhaps probably little bit too early to speak to refill rates at this point regarding XERMELO. But just maybe wondering just given the comments you made regarding the need to educate patients to stay on drug for at least 12 weeks. What proportion of patients that you might be seeing on the 2 weeks starter who may be choosing to discontinue therapy for reasons that are unrelated to reimbursement?

Yes. So it's still very early in the launch. We are seeing the majority for our patients staying on the drug. And consistent with our clinical trial usage. And for those that are discontinuing, as Lonnel had indicated, the perception of gaining an immediate response within a few days is something that we need to educate around. So there is a lot of social media about how well patients are doing and patients are seeing that and their expectation is that they should see immediate results. And we are educating ACPs, patients, advocacy groups to let them know that it is important that many patients will see immediate responses but also other patients may see responses over a 12-week period of time. So it's important to stay for the duration of the therapy consistent with our clinical trial program. And we think with proper education we will reset the expectations in terms of what would be a proper course of treatment.

Understood. And maybe just for Jeff, just so that I understand the dynamics of the co-promote. I guess you talked about the share of commercialization cost being 40-60 between yourself and Sanofi. Is this a 50-50 profit share now that you have exercised the co-promote or are you still tied to a royalty rate?

No, it's -- we will still -- our compensation is the royalty. And we will continue to get paid royalties as basically the way that we get compensated for this. But as you mentioned, and as I have mentioned previously, our participation in that -- some of the cost of that has been covered by Sanofi.

And the cost of goods also net out of your royalty rate, is that correct?

No. This is straight royalty. It is not at cost and profit share in any way, really. I mean it's -- we are bearing some of the cost of the commercial effort. But it's really focused on the cost of the co-promotion effort itself and doesn't encompass things beyond that such as cost of sales.

Yes, Stephen, for us it's very important because as we certainly have disclosed the top end of our royalty rate in the U.S. for type 1 diabetes is 40%. So that's well known. To ensure we get to that 40%, we need to get there quickly. And the best way to ensure we get there quickly is to participate in the process. And I think it's [very in] agreement that Sanofi pays 60% of our participation in that process.

Got it. And then just a final question on type 2. I guess I'm just kind of curious, I don't know how much you can speak to this if not. But this will be kind of unique, I guess, in terms of cardiovascular outcome studies in the sense that this will be the first trial that becomes initiated after you had a number of drugs show a cardiovascular benefit both from the SGLT2 class and most recently liraglutide. So I'm just kind of curious I guess how you incorporate those positive data points into the design of a CVOT study?

Great question, Stephen, and you probably answered it, and that it's the --that's Sanofi to answer the Phase III program in type 2. But I would say just pay close attention to what they keep putting up on ClinicalTrials.gov. I do believe Sanofi is investing to win. This will be a very important program to them and we expect them to speak more about what they're doing as we get more into the second half. So as I promised them, I will allow them to take the lead on all communications around that.

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

Wondering if you can talk a bit more about the OpEx here, the reason why your guidance is coming down. And then also with respect to XERMELO, this traction with the lower deciles is something that you spoke about after the first quarter sales. Wonder if you can talk about that a bit more?

Sure. So I can talk about the operating expense question. So, as you know, we're winding up the clinical studies. The [NY] portion of the clinical trials is done. And so we -- as we incur expenses over the cost of the program, a lot of that is already winding down in the type 1 diabetes program. We will have some additional expenses as we get the final clinical study reports and as we get ready for filing. But this quarter was a relatively low quarter for purposes of the type 1 development expense. And we're still ramping up on the type 2 side. So the type 2 expenses are more in the second half than they were in the first half. So this quarter is a little bit low. The first quarter is a little bit high on the R&D expense side, this one's a little bit lower, will be -- the last 2 quarters will be, as you can tell from our annual expense guidance are going to be a bit higher than the second quarter was. But that's all as we expected and it just relates to how these very large trials which are a big part of our R&D expenses are running through over the course of the year. And as you might expect, our R&D expenses are going to be quite a bit lower next year because of the fact that we will have completed -- fully completed this 3,000-patient type 1 diabetes program.

So I was just wondering what drove your guidance down. Something was lesser than you thought?

It's -- we've just ended up -- some of it is cost -- a little bit of cost savings and some of it's a little bit of cost moving from 2017 into 2018.

Yes, I think we have a better handle, we are now 2 quarters in, we have a better handle on all of our spending relative to the launch. We have our -- handle on our spending for our sales force. We have a handle -- better handle on what's the R&D expenses are going to be. Instead of waiting to the end of the year, we felt it was better to go ahead and give the proper guidance and the range. And so we're pleased with the lead efforts that management has made to keep our expenses in check.

And then with respect to this penetration, these lower deciles, why do you think that's happening? It looks like it's a consistent -- it's carrying forward.

So good morning, Alan. This is Alex. So we have been successful in getting in front of our physicians and expanding the prescriber base. We referenced that we've detailed 95% of the top 270 prescribers and we made a great progress at all different levels. We're doing in-person promotion and tele-detailing, which has been successful in activating those lower deciles as well. So I guess, surprisingly we're getting some really good uptake in the lower decile clinicians also. And we may have mentioned in our prior calls, many of these physicians have significantly fewer patients but nevertheless are aware of XERMELO and gaining access to it.

Yes, one of the things we deployed, to add on to what Alex just said, is this tele-detailing of force is actually very, very productive. And they reach out to physicians and they gain interest. Then we get material out to them. And if we need to get a rep deployed out, we will get a rep deployed out. And that's actually leading to a return. Probably one of our biggest returns at the moment is really the cost of pulling in that 1 patient here, 1 patient there. Because every patient counts when you are in the orphan drug market. So we have resources deployed there and at this moment it's probably one of the biggest returns we are getting.

Your next question comes from the line of David Maris with Wells Fargo.

Couple of questions. So first congrats on the first full quarter of XERMELO. Are you doing any education of GI specialists on carcinoid syndrome, since they may also be the first line of seeing patients symptomatically. And if not, do you think that over time that XERMELO would benefit from this? Second on, on the data that you mentioned you are going to be presenting in September, I just missed it, is this new data or has it already been press released? And then lastly, on the business development front. Seems like you have a really good foundation, is now the time to be looking at other assets? And if so, what would fit that or you're more focused on, look we are executing a launch, let's give that a pause and do that maybe in 2018 and 2019?

So let me start off with your last question first. Right now our focus is really, really on executing well on the launch of XERMELO because I think if you ultimately want to do business development you have to execute well and bring synergies to any value proposition. So right now that's our focus, is executing well both in getting the Phase III program done and handed over to Sanofi for regulatory filing, participating with them certainly on the type 2 program and then certainly executing XERMELO. We also have some early stage work that we're focused on with LX9211 for neuropathic pain and advancing that, along with LX2761 advancing that to clinic, which is also another program in diabetes. So at this moment our real focus is on execution of what we have in hand. With that being said, these markets, particularly in the net market is one which we keep a very close eye on and we'll stay very opportunistic as we go forward. As for the first question, David, which I got to go back to my mind...

That's on GI specialists.

So at this moment, no, we're really focused on the medical oncologists, because you have 2 things. One is you've got physicians who may initiate therapy and then you have physicians who will maintain it. Generally, it is maintained by med-oncs and that's where our focus is. But you are absolutely correct. Overtime, I believe, we'll start to move ourselves into the GI space to expand our prescriber base, which gives us an opportunity to expand XERMELO's usage much early on in the process. But that's a time-based consideration. Then question # 2, Jeff, I'll turn it over to you.

Trying of remember what's the -- oh, EASD.

It was on the upcoming data.

Yes. So we have -- we will have most of the data that will be presented. It's been discussed before at ADA. So it's inTandem2 and inTandem3 data. We will have -- we have a couple of different oral sessions and a couple of poster sessions. There will be some incremental new data at EASD. So it's going to be an important event. It's the major diabetes conference in Europe, just as ADA is in the U.S. And so stay tuned.

Your next question comes from the line of Kelly Close with Close Concerns.

I was wondering if you could talk a little bit about, from a commercial perspective, once this is hopefully out, how you can be working with doctors and other healthcare providers to supplement the way that they work with patients, which right now is therapy on lowering blood glucose numbers. And it's a completely different thing to also think about lowering cardiovascular risk. And even if the trial results won't be immediately available, I still think that's a shift in -- on thinking. But obviously, have to be careful because this is for type 1, so those results won't be ready for a while.

Yes, Kelly. I think that's a very good question. We've a lot of work to do to get ready commercially. This is one of the reasons we've opted in with our partner Sanofi because now we have publicly stated officially between the 2 companies our intent to file both in the EU and in the U.S. in the first half of next year. We then start getting ready for all of our commercial preparation that also includes our medical teams will come together and start to work on how we begin to engage with key opinion leaders in the community, how do we tell this story, how do we educate them properly on the use of adding in an oral into an insulin marketplace. All that work is going to be forthcoming. One of the most important things for us is, we've included the patient voice into this process. And so how do we activate the patient voice as we go out into the community with KOLs to get them to see A1c is important, but it's also the other measures I talked about earlier beyond A1c that's also important for physicians to consider when they're going to be prescribing an oral antidiabetic agent. So we have a lot of work to do with our partners. I absolutely agree with you. We have to transform some of the thinking early on in the process. And I have every confidence between the 2 companies we will be able to do that in short order. So thank you very much for your questions.

I'm really glad that you are focused on this, because I think patients are so used to taking a pretty dangerous drug to control glucose. And the fact that there is this class now available that can help us for free as a bonus, as it helps our glucose numbers. This is really exciting. So thank you, again.

Thank you.

There are no further questions at this time. Do you have any closing remarks?

Well I just want to thank everyone for joining us this morning. As I said, this was a remarkably great first half for Lexicon. We're executing very well. We are coming to the conclusion of our large Phase III program. It's been an honor and pleasure for Lexicon to lead the way, if you will, for the first oral antidiabetic agent in this category. Now we work very closely with our partners to get ready for filing. We couldn't be more fortunate to have Sanofi as our partner and we have every confidence that the handoff from here will go extremely well as we learn from them every day and we learn from each other and getting ready for really shifting and changing the way care takes place in the type 1 setting. So pretty awesome there. XERMELO, very proud of where it is at this moment. We have a lot of work to do. It's still early. And therefore, we have a very committed team that is executing very well. Lot more work to do from educating physicians and patients on having the right expectation to continue to have growth. Also the opportunity to expand our base of prescribers, I think, is adequately in front of us. And last, but not least, we always look very carefully to how best to manage our shareholders' money to be responsible on what we do and I think we've done that very well to date and we'll continue to do it in the second half. On that note, I thank everybody for joining us this morning.

Thank you, ladies and gentlemen. That concludes today's conference call. You may now disconnect.