Lexicon Pharmaceuticals Inc (LXRX) 2017 Q3 法說會逐字稿

Welcome to the Lexicon Pharmaceuticals Third Quarter 2017 Financial Results and Business Update Conference Call. (Operator Instructions) As a reminder, this call is being recorded today, November 8, 2017.

I would now like to turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Good morning, and welcome to the Lexicon Pharmaceuticals Third 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. Pablo Lapuerta, Executive Vice President and Chief Medical Officer; Dr. Praveen Tyle, Executive Vice President of Research and Development; and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer.

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

Earlier today, Lexicon issued a press release announcing our financial results for the third quarter 2017, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call, along with a 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 related to the safety and efficacy and the therapeutic and commercial potential of XERMELO, sotagliflozin and other drug candidates.

These statements may include characterizations of the results of clinical trials of XERMELO, sotagliflozin and other drug candidates and the market opportunity for those programs.

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 sotagliflozin and 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 research, development and commercialization activities. For a list and a description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission.

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

Thank you, Kim. Good morning, everyone, and thanks for joining us on the call today. We've made considerable progress since our last quarterly update and have had a very busy, yet productive, third quarter with strong operational performance across all aspects of our business, including the achievement of several important milestones.

I'm excited to share these developments with you, starting with a brief summary of recent key events. I'll then turn the call over to Alex, Pablo and Jeff for updates on ongoing XERMELO launch, our pipeline developments and our third quarter financials.

As you may recall, our strategic initiatives for this year include driving growth in our XERMELO franchise while, in parallel, making significant progress towards advancing sotagliflozin to market and furthering our innovative pipeline, all of which are near-term priorities for Lexicon.

Our third quarter results were outstanding and a strong indicator that our constant focus on operational excellence and innovation has us well positioned to achieve our 2017 objectives in continuing to support our long-term outlook.

I am pleased with the progress of XERMELO launch, as we achieved net XERMELO sales of $5.3 million in the third quarter. This 45% quarter-over-quarter growth reflects healthy demand and access. And we continue to see an increase in new prescribers and enrollments that Alex will highlight shortly.

We're continuing our broad efforts to maximize the impact of XERMELO by educating physicians and patients on the appropriate use of the drug. On the reimbursement front, we're continuing to receive very positive responses from payers, which Alex will go into some detail later.

In Europe, XERMELO received marketing approval in September, earning Lexicon $5.1 million in milestones. And our collaborator, Ipsen, launched the drug in the U.K. and Germany in October, with further milestone payments including one already recorded in our fourth quarter to come.

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 September European Association for the Study of Diabetes, or better known as EASD, a meeting where we highlighted additional positive efficacy and safety data from all 3 of our Phase III sotagliflozin studies: inTandem1, inTandem2 and inTandem3. Each of these studies delivered a growing body of evidence substantiating and differentiating the effectiveness and safety of sotagliflozin in patients with type 1 diabetes.

We also announced positive continuous glucose monitoring or CGM data pooled from inTandem1 and inTandem2 that has significant implications for the clinical management of glycemic control in patients with type 1 diabetes.

Notably, in conjunction with our presentation at EASD, the New England Journal of Medicine published the inTandem3 results. And we're extremely proud to have these results published in such a prestigious journal, which will raise much-needed awareness of type 1 diabetes in the medical community.

We and our collaborator Sanofi now have all the data needed to file type 1 diabetes or seek regulatory approval in the U.S. and Europe in the first half of 2018, and we're working diligently with Sanofi on the most comprehensive filing package, which includes the largest body of evidence in type 1 diabetes. We're excited to potentially provide a first and best-in-class therapy for patients with type 1 diabetes.

This is a significant multibillion dollar market, and sotagliflozin will be well positioned to address the entire market and not just part of the market, as will likely be the case with the rest of our competitors, if they are approved in type 1 diabetes. Alex will speak more about this later.

In type 2 diabetes, Sanofi has initiated 7 Phase III studies, including 2 that are enrolling over 1,000 renal impaired patients and a cardiovascular and renal outcomes trial that is enrolling 10,500 patients with type 2 diabetes and moderate renal impairment or a cardiovascular risk. Based on competitive data and our own data to date, we believe sotagliflozin could be differentiated from other SGLT2 inhibitors based on the ability to reach type 2 patients who have either Stage 3 or Stage 4 chronic kidney disease, who comprise between 15% and 18% and 1% and 2%, respectively, of the type 2 population. We expect Sanofi to begin additional Phase III studies by the end of the year.

In addition to the regulatory activity for sotagliflozin, we're actively exploring life cycle management opportunities for XERMELO. We have a very strong rationale for XERMELO's potential beyond carcinoid syndrome diarrhea, based on preclinical and other data demonstrating the role of serotonin and fibrosis and of serotonin and tryptophan hydroxylase in cancer. As such, we're excited to explore the use of telotristat ethyl in fibrotic disease and solid tumors, with relevance not only to these potential indications, but also to carcinoid syndrome, which itself a condition that is characterized by fibrosis and is caused by neuroendocrine tumor. Pablo will tell you more about our exciting life cycle management plans for XERMELO.

Development in these areas will support the full value proposition for XERMELO in our view. We continue to make meaningful progress on our internal pipeline with LX2761 and SGLT1 inhibitor for diabetes that is in Phase 1 development; and with LX9211, a novel compound for neuropathic pain that is also in Phase I.

On the financial side, we experienced strong third quarter P&L performance from both the revenue and expense perspective coupled with our cash and investments on hand.

With that, I'll turn the call over to Alex, who will discuss our commercial performance. Alex?

Thanks, Lonnel. Good morning, everyone. We are pleased with the progress of the XERMELO launch and the achievement of $5.3 million in XERMELO U.S. net sales in the third quarter, which represents growth of approximately 45% quarter-over-quarter.

The success of the launch underlying this revenue growth is the profound impact our drug is having on patients and their families. Demand trends are robust in terms of both volume of units shipped and new patient starts. Second, the breadth of the demand, as measured by growth in prescribers, is encouraging. Demand for XERMELO increased in the third quarter relative to the previous quarter. During the same time period, we saw an increase in new patient starts. Through September 30, there have been 685 patients with paid XERMELO prescriptions, up from 443 patients the last quarter, which represents a 55% increase. We're also pleased with the trends that demonstrated the breadth of this demand, as we also saw a 43% increase in the prescriber base. We're activating a broader prescriber base at a higher rate across all deciles and are seeing continued growth from leading hospitals and academic institutions. But we are particularly pleased with the growth in the lower-volume prescribers as we continue to deploy tactics and resources to drive growth in these practices.

Of the prescribing physicians, the majority indicate that XERMELO was meeting or exceeding their expectations, which are encouraging trends that confirm feedback from market research that XERMELO was being well received not only by KOLs, but also by the community. As physicians gain more experience using XERMELO, we anticipate continued adoption.

Our sales force continues to drive awareness of the disease and its burden impact to emphasize the drug-differentiated clinical proposition, to amplify and activate the patient voice and to ensure that patients and healthcare providers gain access to XERMELO. We're seeing success in bringing the negative impact of carcinoid syndrome diarrhea to the forefront for oncologists, but there is still an underappreciation of the burden of disease by these physicians. We have achieved some success in appropriately setting patient expectations, but still have more work to do, addressing a challenge that we identified in which some patients' expectations for the drug have been out of range as they hear of success stories from super-responders, who experienced efficacy in the first few days after taking drug.

In our clinical program, we saw a good number of patients who responded within 1 to 3 weeks of initiating therapy, but many additional patients responded across the balance of the double-blind, placebo-controlled, 12-week treatment period. We are addressing the underlying issues with the disease, and that is something that happens over time.

Our team continues to work on shifting key attitudes about the disease in physicians' and patients' minds. And as we've mentioned previously, we expect this will take time. Our experienced team has generated a very competitive share of voice as we work to ensure that patients with carcinoid syndrome diarrhea have the opportunity to benefit from XERMELO. We have great data and a broad label and are off to a good start. That said, we fully recognize that there remains significant opportunity to increase demand. There remain a large number of oncologists who have yet to prescribe XERMELO and many others who are just getting started, underscoring opportunity for future growth.

Taken together, these data depict solid fundamentals and momentum of the XERMELO business. We continue to gain knowledge on what is and isn't working for this launch, which helps inform the tactics we take. Based on what we see so far, we expect continued, solid quarter-over-quarter growth in the fourth quarter, generally consistent with what we have seen to date, with accelerating growth in 2018 due to favorable coverage decisions and the Medicare dynamics. We have achieved very good access and reimbursement for XERMELO. Payers have almost universally been reimbursing for XERMELO. And since launch, plans that have made coverage decisions have placed XERMELO in a favorable formulary position. Incorporation of XERMELO into NCCN treatment algorithms has enhanced used and driven penetration.

As it pertains to payer access for XERMELO, plans that account for approximately 71% of lives have formally reviewed XERMELO and approved coverage. Most of the remaining plans are adjudicating claims and may or may not formally review the product, given the ultra-orphan status. Roughly, 99% of all claims submitted by our specialty pharmacies have been favorably adjudicated by payers.

Payer mix continues to be evenly distributed between commercial and Medicare, which together account for a very high percentage of the business, with Medicaid and other government collectively accounting for a very small percentage. We continue to maintain a $0 co-pay program to assist commercial patients with access.

Turning to Europe. XERMELO was approved in September for the treatment of adult patients with carcinoid syndrome diarrhea, seen here on Slide 6. Our collaborator, Ipsen, launched the drug in the U.K. and in Germany in October, with private market and free pricing, respectively. Ipsen is marketing XERMELO with its Somatuline sales force. We are still early in the European launch, and we look forward to keeping you updated. As with many other European product launches, we anticipate that the trajectory of the XERMELO launch in Europe will be a gradual one, as it may take up to a year and sometimes longer for reimbursement discussions depending on the country. We anticipate other European countries and pricing approvals to come online throughout 2018.

We believe there is a great opportunity for future growth. On Slide 7, you see that there are approximately 14,000 patients in the U.S. affected by carcinoid syndrome diarrhea. Upon diagnosis, the majority of these patients go on somatostatin analog or SSA therapy. But unfortunately, over time, many patients start to see their symptoms return. The work we've done with physicians indicate that only about 40% to 45% of their patients are not well controlled, which is interesting, because when we speak to patients, about 80% of them say they are not well controlled.

As you can see, the wholesale acquisition cost for SSA therapies is between $5,800 and $6,900 per month and the pricing CAGR over the last 2 years has been around 12%. So this is definitely a growing market.

We fully recognize that there is a meaningful opportunity to increase demand of XERMELO, and we're motivated to bring the benefit of XERMELO to every eligible patient as we continue to build on the positive moment of our launch.

I will now turn the call over to Pablo, who will provide a pipeline update.

Thanks, Alex. This morning, I'm going to highlight the significant progress we've made this quarter on our pipeline.

Let's start with our most advanced program, sotagliflozin type 1 diabetes. As shown on Slide 9, we've completed the largest Phase III program for an oral antidiabetic agent in the broadest range of type 1 patients ever conducted. This gives us the most comprehensive efficacy and safety database available. We completed 2 pivotal trials, inTandem1 and inTandem2, which were identical studies in terms of the primary endpoint looking at a change in A1c on a background of optimized insulin.

This is a very important distinction. In solving the objective of showing the benefit of sotagliflozin over and above what could be achieved by insulin alone in patients who are using insulin to the best effect.

Both studies, inTandem2 and inTandem2, achieved the primary endpoint of meaningful A1c reductions on all doses studied at 24 weeks on top of optimized insulin. At 52 weeks, sotagliflozin-treated patients continues to show reductions of A1c on top of optimized insulin. Our final Phase III study, inTandem3, examines the proportion of patients with A1c less than 7% at week 24 and no episode of severe hypoglycemia or DKA after randomization. That's a unique design with a composite net benefit endpoint.

Notably, in inTandem3, insulin was not optimized prior to randomization. That's a pragmatic design that we believe better reflects real-world experience. And we saw that drug-treated patients again demonstrated statistically significant reductions of A1c compared to placebo.

Feedback from 5 leaders in this space indicate that there remain challenges associated with managing glucose level with insulin alone, as patients make trade-offs between effectively managing blood glucose while trying to avoid complications such as severe hypoglycemia and weight gain. Our data have shown across 3 Phase III studies far-reaching effects of sotagliflozin with net glucose control provided while reducing weight and reducing the incidence of hypoglycemia.

When we look across all Phase III studies, we have a comprehensive and complete program that was well designed to assess the risks and benefits of sotagliflozin across the full range of patients with type 1 diabetes. This was in studies that spanned the spectrum from highly rigorous to more pragmatic and perhaps more representative of real-world experience. These elements distinguish our program in very important ways from those may be following us. The reason we designed those studies in this way was that we were confident in how SGLT1 inhibition in the gastrointestinal tract would contribute to the balance of efficacy and safety in type 1 diabetes.

We believe that gastrointestinal SGLT1 inhibition contributed to both efficacy and safety results in our studies. In terms of efficacy, the SGLT1 inhibition resulted in a reduction in hyperglycemia after meals. This reduction in the mealtime glucose is important in controlling A1c and it has implications to safety, as a more predictable and stable glucose response in type 1 diabetes may lower the risk of hypoglycemia. SGLT1 inhibition in the gastrointestinal tract with sotagliflozin appears to moderate urinary glucose excretion as well, and it leads to a natural mealtime GLP-1 elevation. These features may have favorable implications for managing ketosis-related risks.

The main safety events to consider are severe hypoglycemia and DKA. The incidence of severe hypoglycemia was higher in the placebo arm compared to the sotagliflozin arms in inTandem 1 and inTandem2 at 52 weeks. In inTandem3, we know that the ability to improve target glucose levels while significantly reducing documented hypoglycemic episodes is a first for any adjunctive glucose-lowering therapy for people living with type 1 diabetes.

Now let's talk about DKA, an adverse event that has become known as a challenge for the entire class of compounds. All SGLT2s have the warning of DKA. That said, at EASD, we saw DEPICT-1 data from AstraZeneca validating that incremental DKA can be managed over placebo with the proper care instructions. AstraZeneca's care instructions were very similar to our care instructions. Even DEPICT-1's rate of DKA looked similar to our rate from inTandem3.

When we look at the placebo-adjusted proportion of patients experiencing a DKA event disclosed in the manuscripts that AstraZeneca published in their subjournal of Lancet, you'll see that 1.7% above placebo had DKA at a low dose, while 2.5% more than placebo had DKA at the high dose. Across our inTandem studies, we saw less than 1% placebo-adjusted incremental incidence of DKA on the low dose and approximately 2% on the high-dose. In short, both these programs have managed DKA very well with proper care instructions.

So we have compiled the biggest safety and efficacy database for an oral antidiabetic agent for type 1 patients, and the results from our pragmatically designed inTandem3 Phase III trial was validated by publication in the prestigious New England Journal of Medicine.

Let's talk about what was published. On Slide 13, the primary endpoint in all secondary measures achieved statistical significance. On the net benefit endpoint, nearly double the number of patients on sotagliflozin achieved it. This was statistically significant. On body weight, patients on placebo unfortunately gained weight, but patients on sotagliflozin had a 2.2 kilogram reduction in body weight, once again, highly statistically significant. Blood pressure was, even again, highly statistically significant.

The following slides clearly depict the separation of the curves and maintenance at the separations over time. The A1c was significantly reduced early on and then (inaudible). Body weight separated between curves at every visit with no plateau reach at week 24. The systolic blood pressure reductions were robust.

Beyond the favorable A1c results from our 3 Phase III studies, we received favorable feedback on an additional feature of sotagliflozin that is very important to clinicians and patients. That is the ability to increase time and glucose range at the range of 70 to 180 milligrams per deciliter and the ability to decrease glucose variability with type 1 diabetes. continuous glucose monitoring that CGM data from inTandem1 and 2 demonstrated that patients on 200 milligrams experienced an additional 1.3 hours per day in the target glucose range. Even more impressive was the fact that patients on the 400-milligram dose experienced an additional 2.8 hours per day in target range. People with type 1 diabetes would tell you that these data are critical, because they want to be able to stay in the range more often throughout the course of the day with less intervention on their part trying to manage their condition.

As you can see, on Slide 18, our program is complete. We believe the benefit-risk profile of sotagliflozin is favorable. We have demonstrated additional A1c efficacy on top of optimized insulin, a benefit which we might expect to see from the SGLT2 mechanism on its own, but to which SGLT1 mechanism also contributes. Importantly, we've seen lower postprandial glucose, less severe hypoglycemia and optimized insulin and a lower incidence of documented hypoglycemia in our program. That's consistent with the SGLT1 mechanism.

Lastly, DKA is indeed an issue with any SGLT2 inhibitor, and it will require appropriate management. We're confident DKA can be managed, and we believe the DEPICT-1 data only validates this. What remains is for us and Sanofi to file for approval in the U.S. and in Europe and to value the market for that time.

Alex, do you want to talk about the market opportunity in type 1 and type 2 diabetes?

Sure, Pablo. Turning to Slides 20 and 21. There are approximately 1.7 million people with type 1 diabetes and about 1.6 million adults with the disease, a population that has grown approximately 3.5% per year over the last 5 years.

About 3/4 of the population has an A1c greater than the ADA target of 7%. We believe we will be able to target the entire type 1 population. Why is this? Because we took all comers in our study. So we had efficacy and safety data for the entire population. Perhaps seeking not to jeopardize their existing type 2 diabetes franchise, AstraZeneca ran the DEPICT-1 study with dapagliflozin that excluded the patients at the greatest risk of severe hypoglycemia by only randomizing patients with A1cs after insulin titration of between 7.5 milligram per deciliter and 10.5 milligrams per deciliter. By doing so, they eliminated about 43% of the entire market for which they have no safety or efficacy data.

The way we designed our studies allows sotagliflozin to be used across the entire patient population. Given our confidence in the contribution of sotagliflozin's SGLT1 mechanism to reducing postprandial glucose and glucose variability, we included patients after running with A1cs as low as 5.6% and as high as 15.4%. We also included patients with eGFR of less than 60, down to 45, based on the SGLT1 component, while DEPICT-1 eliminated patients with an eGFR of 60 or less. In fact, a little over 5% of the participants in our study had an eGFR between 45 and 60.

Lastly, we included patients who are over 75 years of age, because people with type 1 diabetes are living longer and will need the benefits of compounds like this.

So when we examined the inclusion criteria of our 3 Phase III studies, we included the broadest group of patients that will provide us with the greatest access.

Current WAC pricing for the SGLT2 class is around $14.35 per day, having experienced a 12% CAGR over the past 2 years. Given the size of the market and the fact that sotagliflozin has the potential to address the entire market, you can see that this is a significant market opportunity for us.

In the same manner, we view the type 2 market as a meaningful opportunity, given the epidemiology data. 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, CKD, and that between 15% and 18% and 1% to 2% have Stage 3 or Stage 4 CKD, respectively.

These are important facts, given sotagliflozin's SGLT1 mechanism of action and the fact that most of the marketed oral antidiabetic agents are contraindicated or not approved for or have declining efficacy in people with Stage 3 or 4 chronic kidney disease and type 2 diabetes. We believe this will be differentiating sotagliflozin from other SGLT2 inhibitors.

So in summary, sotagliflozin has the potential to address the entire type 1 market and will be differentiated in the type 2 market based on its SGLT1 mechanism, which we believe will, among other things, enable patients the benefits with late-stage chronic kidney disease.

Now I'll turn it back to you, Pablo.

Thanks, Alex. As (technical difficulty) hope you're excited to advance sotagliflozin in type 2 diabetes.

As you can see on Slide 25 to date, Sanofi has initiated 7 Phase III studies in the type 2 setting targeting over 13,500 patients. One of them recently posted on ClinicalTrials.gov with a cardiovascular outcomes study with 10,500 patients. We anticipate more of the Phase III program to come online by year-end.

To conclude the discussion on sotagliflozin, we are pleased with the totality of the sotagliflozin data package for type 1 diabetes. We and Sanofi look forward to bringing this drug to market.

In type 2 diabetes, we're enthusiastic about sotagliflozin's potential to make a difference in patients' lives, and we're excited to advance the program with Sanofi.

Turning to the rest of our pipeline. There is an opportunity to explore telotristat for its potential outside of carcinoid syndrome diarrhea and to expand its footprint in other indications. Telotristat is a very important franchise for us, and we are actively pursuing life cycle management of the drug. Based on preclinical work, we have robust scientific rationale for telotristat's potential beyond carcinoid syndrome diarrhea.

On Slide 26, we have seen that the mechanism of action of serotonin reduction locally affects a fibrotic process. Serotonin reduction suppresses fibrosis and stimulates hepatocyte regeneration. we appreciate the dimension of this therapy and did some preclinical work in liver disease that suggested potential application in NASH, nonalcoholic steatohepatitis. We continue to do additional preclinical work on other fibrotic diseases.

In addition, we know that inhibition of tryptophan hydroxylase and reduction of serotonin synthesis have implications for cancer cell growth. So we're excited to explore the use of telotristat ethyl in neuroendocrine tumors and cholangiocarcinoma. Stay tuned for updates. Throughout next year, we will share with you our progress and label-expansion opportunities for telotristat ethyl.

Moving to LX2761. This is an internally generated oral SGLT1 inhibitor for the treatment of diabetes. It's currently in Phase I clinical trials. In preclinical studies, LX2761 delayed and reduced intestinal glucose absorption, and it reduced postprandial glucose while increasing plasma levels of GLP-1. That's the profile of intestinal SGLT1 inhibition.

LX2761 was minimally absorbed into the systemic circulation, resulting in little to no effect on urinary glucose excretion. That indicated to us that LX2761 was restricted to the gastrointestinal tract. We are pleased to report that we have completed the Phase Ia steady in healthy volunteers and in patients with type 2 diabetes and that the data support our preclinical findings. We have initiated Phase Ib studies in patients with diabetes and believe that the ability to optimize SGLT1 activity with the absence of urinary glucose excretion and with small doses required for effect will offer opportunities for diabetes life cycle management in combination therapy with LX2761. We look forward to continued validation in the Phase Ib studies, which we'll read out in the first half of next year.

Let me go to LX9211. It's an orally administered selective inhibitor of AAK1, which is adapter-associated kinase

(technical difficulty)

on studying LX9211, it's a drug candidate for neuropathic pain. And preclinical studies demonstrated significant reductions in pain response in a series of pain models and was well tolerated at and well above efficacious doses in adults. This is a very promising compound for us, and we look forward to seeing the results of this study next year.

In short, we are committed to discovering, developing and commercializing therapies with the greatest value proposition for patients. We have made good progress this quarter, and we look forward to updating you in the future.

Now I'd like to turn the call over to Jeff, who will provide financial highlights.

Thank you, Pablo. This morning, I will discuss key aspects of our third quarter 2017 financials and provide an update on our 2017 financial guidance. More financial details can be found in our Form 10-Q, which will be filed later today.

Now please refer to Slide 30 of our presentation. As indicated in our press release today, third quarter 2017 revenues totaled $26.9 million, a decrease from $27.7 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 related to type 1 diabetes development activities.

Net product revenues for the 3 months ended September 30, 2017, included $5.3 million from the sale of XERMELO in the U.S. and $0.5 million from the sale of bulk tablets of telotristat ethyl to Ipsen. We also earned a $5.1 million milestone from Ipsen for approval of the XERMELO in Europe that was recorded as revenue from collaborative agreements.

Cost of sales related to sales of XERMELO was $0.6 million for the third quarter of 2017, which included $0.4 million of finite-lived intangible asset amortization. We began capitalizing inventory during the first quarter as we expected to recover related costs through the commercialization of the product. The precommercialization inventory of XERMELO is expected to be sold over approximately the next 2 years. As a result, the cost of sales for XERMELO for the next 2 years will reflect a lower average cost per unit cost of materials than would otherwise be expected.

Research and development expenses for the third quarter of 2017 totaled $39.1 million, down 26% from $52.5 million in the prior year period, primarily due to decreases in external clinical development costs relating to sotagliflozin. Although expenses for the type 1 program will be winding down, we anticipate that R&D expenditures will be higher in the fourth quarter of 2017 compared to the third quarter as Sanofi ramps up the sotagliflozin type 2 diabetes program and we contribute our portion, which is capped at $100 million.

Selling, general and administrative expenses for the third quarter of 2017 were $16.7 million, which represented a 36% increase from $12.3 million dollars 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 third quarter of 2017 of $30.7 million or $0.29 per share compared to a net loss of $36 million or $0.35 per share in the prior year period. For the 3 months ended September 30, 2017, and '16, our net loss included noncash stock-based compensation expense of $2.6 million and $1.9 million, respectively.

From a balance sheet perspective, we exited the third quarter with $196.8 million in cash and investments compared to $346 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.

Turning to our 2017 financial guidance. We're refining our guidance in the first 9 months of the year, and our expectation is that momentum will continue. We continue to expect contractual revenues from existing collaborative -- collaboration and license agreements in 2017 of between $65 million and $75 million.

Our revenue guidance excludes net revenues from sales of XERMELO, but as Alex mentioned earlier, we expected continued solid quarter-over-quarter growth in the fourth quarter, generally consistent with what we've seen to date, with accelerating growth in 2018 due to favorable coverage in Medicare dynamics.

We are narrowing our operating expense guidance to $230 million to $240 million from $230 million to $255 million. Our guidance on noncash expenses are now approximately $15 million, of which $9 million is stock-based compensation, $2 million is the increase in fair value of Symphony Icon purchase liability recorded in the first quarter and $4 million in depreciation and amortization. We are narrowing our R&D expense guidance to $160 million to $170 million from $160 million to $175 million and lowering our SG&A expense guidance to $65 million to $75 million from $70 million to $80 million.

Lastly, we expect net cash used in operations to be in the range of $200 million to $210 million, down from our previous guidance of $210 million to $220 million.

I will now turn the call back to Lonnel.

Thank you, Jeff, and thank you to the team. Overall, we're off to a great start in the second half of the year.

Our main priorities for the second half of 2017 remain centered around driving long-term value through a continued execution on the XERMELO launch and preparing for a global regulatory filing of sotagliflozin in type 1 diabetes.

Now while our team is focused intently on delivering on our near-term objectives, we continue to invest to grow our business for the long term. We're extremely excited to expand telotristat ethyl's reach to several interesting indications, including fibrosis and cancer, given established link between serotonin and a context of carcinoid syndrome to fibrosis and tumor growth.

Our robust preclinical work to date exploring the effect of serotonin reduction on the fibrotic process leads us to NASH and other fibrotic indications as well as the effects of inhibition of tryptophan hydroxylase and the reduction of serotonin synthesis on tumor growth in diseases like neuroendocrine tumors and cholangiocarcinoma validates advancement of telotristat ethyl in these indications.

We've already established these clinical benefits in carcinoid syndrome diarrhea, and we're eager to do the same in fibrotic disease in oncology. You'll hear more about these exciting programs at our planned R&D Day next year at the end of the first quarter. You will also hear more about our continued progress on LX2761 and LX9211 and updating you on our progress overall.

Lastly, we remain in a solid financial position to pursue our mission of bringing innovative therapies that offer opportunities for change in standard of care to patients with unmet medical needs. I'll be remiss if I didn't make the statement to all of our stakeholders and shareholders that at our current share price, we have no intention of coming out to dilute our shareholders at the current levels.

With that being said, I'll stop there and open the floor for Q&A.

Operator, we're ready for questions and answers.

(Operator Instructions) Our first question comes from Jessica Fye with JPMorgan.

I have a couple, first on sotagliflozin. With the Phase III type 1 program complete, can you walk through the factors that may push the filing either earlier or later in the first half of next year? Second, when should we expect to hear Sanofi talking about sotagliflozin more? It doesn't necessarily seem like they're talking it up or setting particularly high expectation for it? And lastly on XERMELO, can you confirm whether there were any inventory changes in the quarter or of the $5 million or U.S. sales was all demand?

So Jessica, first of all, thanks for the questions. Sanofi, I believe, in our discussions, you'll hear more dialogue from Sanofi as we go forward. I certainly don't want to speak on their behalf, but I will say their engagement has been quite remarkable, and you can see their commitment at this point with how quickly they're now putting up these trials and starting to do the work around it. As for type 1, it's been our responsibility to advance to the compound to the stage where we get it ready for regulatory filing. They've been integrated into that process. And now I think they're fairly in control of the process from here from both the filing in the U.S. as well as globally. And they're fairly well positioned now to do all the work around type 2. So I expect you'll hear more from Sanofi as we move forward. In terms of the regulatory process, Jessica, we've had the meetings that were necessary for us to have. I will say that we've also had our pre-NDA meeting with the FDA. And we'll say -- characterize that meeting as a very, very good meeting and I think inspired all of our confidence in our program and our opportunities to file in the United States. Sanofi is leading that effort along with Lexicon as well. So the standard process now, because this is a very large program, it's now doing all the work that we do in terms of going out and auditing sites and making sure we have all the CMC work is completed and done and getting all the modules completed. So it's all hands on deck at Lexicon as well as Sanofi now coming and providing resources as well. So we're going to stick with the first half, but certainly, our intent is to do everything we can to make that the earliest part of the first half. In terms of the third question, in terms of if there is any change in inventory, I'll turn it over to Jeff.

Yes, so our guess is -- as I think we've discussed before, our -- we're distributing through a couple of specialty pharmacies. Contractually, they keep between 14 and 21 days of inventory. And that is consistent -- this has been consistent from quarter-to-quarter as we've gone forward and remained consistent at the end of the third quarter.

Our next question comes from Stephen Willey with Stifel.

Just a couple on telotristat and then one sotagliflozin. So just want to get if there's anything that you can say at this point regarding gross to net? Or is that just, I guess, too early in the launch to provide any kind of characterization of that at this point? And then given some of the comments around, I guess, patient expectations, maybe even persistency, just curious if the Phase III data showed a correlation between symptomatic improvement in baseline 5-HIAA levels, and I guess, whether or not you can pass 5-HIAA levels at baseline to maybe better frame expectations of patients prior to initiating therapy?

So Stephen, the first part of your question on gross to net, I would turn it to Jeff. I don't think it's too early. I think we're starting to get some pretty good idea of where we may see the future. And I think we've -- what we've guided to previously is we're still on target with that. And I'll let Jeff give more color to that. In terms of your second question, I'll ask Dr. Lapuerta to comment on the study design and what we would expect that a market looks. Jeff?

So we've said previously that we expected to get down to a gross to net sort of in the 15% range and that we remain on target for getting to that range. Obviously, it changes a little bit over time, but that was what our expectation was when we get to more of a steady state.

Dr. Lapuerta, you want to speak to the second part of Stephen's question?

Yes, that was about symptomatic improvement and whether or not it was linked to 5-HIAA and whether or not you could NASH to 5-HIAA to identify really the best opportunity for helping patients. And what we have in the TELESTAR study as we stratify (inaudible) we could analyze that. And we saw a great symptomatic improvement in patients with normal 5-HIAA and patients with high 5-HIAA. We did a lot of analysis to see if there is a subgroup of patients that we could identify based on a biomarker or other characteristics, who responded. And from all these analyses, really the best way to identify a responder is to prescribe telotristat ethyl for 12 weeks and to see how the patient does. So we feel that really all subgroups, men, women, young, old, on octreotide, lanreotide, above-label dose, half-label dose, regardless of concomitant therapies, regardless of 5-HIAA, we saw evidence of efficacy.

And Stephen, overall, let me kind of address the expectation, a point that Alex talked about. I'll give you a real case of we -- that we were dealing with. It's quite amazing actually. There was a patient that was put on XERMELO, who was having in the neighborhood of 10 to 12 bowel movements a day. That patient, within the first month or so of the course of therapy, went down to 5 bowel movements a day. And they want to come off the drug, because they thought it wasn't working, because they assumed it would be 0. So that's the kind of stuff that we have to -- the amazing impact it had in reducing the bowel movement. The expectation of the patient was still greater than what he was actually experiencing. So we have to make sure physicians set the proper expectation, patients coming in have the proper expectation, so you don't end up with a discontinuation where you have remarkable success. And that's just work we have to do over time. And as Alex has laid it out, we've made very good progress. And I think as we got into the second part of this quarter, we made remarkably good progress and I think did much better than the first part of the quarter. So we're very pleased with where we're at, but more work needs to be done.

Understood. And then just on sotagliflozin, I guess, specifically with respect to the cardiovascular outcome study that is now posted on ClinicalTrials. Just a couple of quick questions. So one of the primary efficacy endpoints is, obviously, cardiovascular death or hospitalization due to heart failure. And we know that, that is now a labeled claim on -- I know it's at least on the Jardiance label, I'm not sure if it's on the Invokana label yet. But just kind of curious, I guess, as to just given those 2 drugs have labeled indications for preventing heart failure, I'm just kind of curious as to how the context of the placebo arm in the study kind of logistically works?

Dr. Lapuerta, you want to take that question?

Yes. The main thing about the study is it's being done in patients with renal impairment. And that's a patient population where you don't have robust evidence of efficacy with SGLT2 inhibitors. So we believe, by targeting that patient population, it's ethical to randomize to placebo.

Got it. And then also just noticed that the dosing schedule, I guess, talks about starting with one sotagliflozin tablet, which I'm assuming is 200 mgs and then allows for a titration over the course of the first 6 months. Just curious as to why that dosing scheme was selected?

See, some patients will have heart failure at baseline, that we wanted to make sure that sotagliflozin was tolerated well. It's something that you've seen with antihypertensive agents that they have been used with slightly lower doses in heart failure. And so I think that's -- it's a very reasonable step and would be a good measure for patients to start with the low dose and titrate up.

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

A couple of them around XERMELO. You seem to be pretty excited about growth for the drug in 2018. Wonder if you could talk about rationale for thinking it might accelerate a bit more. And then also, can you go over the milestones that you're expecting from Ipsen and clarify for me which country is it available and over there already?

Yes, Alan, it's a great question. I think in the course of the year, anytime you launch a new drug, the -- all payers prioritize the drug. That creates a barrier. It's not one of the major barriers they can create, but it does create a barrier. And it creates adelay by which patients can start and that type of thing. So as you get to end of -- as we got to the end of this year, we had a favorable coverage decision. As Alex has already explained, we have very good coverage decisions now. Coverage decision is very different from them just reimbursing, because you have to go through that long process of prior authorization. As you get into next year, because of the coverage decision and the favorable decision has been made, you won't have that barrier coming into next year. So that allows us to move much faster, move patients through the process much faster. The second one is, as you get to the end of the year, we launch in February, March time frame when patients hit the donut hole and when your drug comes into that donut hole, you may be coming in a little bit later, which also can slow down your trajectory. Now as you have a reset coming into the new year, we have the opportunity to capture those patients much earlier in the process and not be affected as much by the donut hole. So these dynamics will pay -- play very favorably to XERMELO's benefit as we get into the next -- the new year in the first quarter. As for second part, I'll turn it over to Jeff. Jeff?

Yes. So we do have milestone payments that will -- are still ahead of us in terms of the Ipsen arrangement. As you may recall, the overall milestone payments were over $30 million for development regulatory milestones. And we've received some of that, including the $5.1 million we received this quarter. There are additional milestones that are to come. And those -- we haven't specified the amounts of each one of those, but they will start to come as the drug becomes available in these various countries. There are 2 countries so far that the drug has been introduced-- Germany and the United Kingdom. And there will be additional ones following after that and basically that milestone payments are tied to major markets in Europe.

So those $30 -- that $30 million or so, getting that up amongst a series of countries over the course of -- or the rest of this year and into '18, is that the right way to think about it? Or is there a subset of $30 million that's allocated to these county launches?

There will be some that -- we are going to get at least one milestone payment in the fourth quarter. And then there will be some that will roll out in 2018 as well.

Our next question comes from Yigal Nochomovitz with Citigroup

I just wanted to drill down, Alex, into the market dynamics a little bit more on XERMELO in the U.S. quarter-over-quarter. I think you mentioned that there was 55% unit growth quarter-over-quarter, no change in inventory. Obviously, I assume no change in price. Obviously, no currency change. But then the dollar performance quarter-on-quarter was only up 43%. So the implication that the incremental gross to net in the third quarter was slightly lower than in the second quarter?

Well, I'll turn that one to Jeff.

Yes, so the gross to net hasn't -- hasn't meaningfully changed between second and third quarter. We've continued to have good unit growth, and we've continued to have good revenue growth as well as we've gone forward. There has some been mix in the payer population. So there is some different...

Yes, what we were referring was -- in the previous dialogue, we basically said that there was a 55% increase in the number of prescriptions from 443 to 685 patients. So we increased our patient base quite dramatically from quarter-over-quarter.

The -- Yigal, the differences what I spoke to before in the previous quarter and where we've made some progress is we had -- we were experiencing this phenomena where patients would discontinue, because their expectations were not aligned. That's what we needed to fix. So you had patients coming into the funnel, but you had patients coming out. And so we need to close off the funnel, so you get the full benefit of patients coming in. That's where the difference is.

Got it. All right. That's very helpful. And then, Pablo, you mentioned -- you had a nice slide with the Sanofi's Phase III programs in type 2. Do we know what the additional ones are, that they have yet to unveil?

I think they should probably do the unveiling.

Okay. All right. Fair enough. And then are you considering -- Jeff, are you considering giving any guidance in the U.S. for XERMELO for 2018? Or is that still premature?

When we get to 2018, when we talk about year-end results for 2017, we'll provide some information that will be helpful in terms of guidance for 2018. The other thing is that we will also -- in 2018, we will not be blocking IMS data further, because that's not going to be -- from a competitive standpoint, there won't be a reason to do it anymore. So there will be that additional information that will be available as well.

(Operator Instructions) With no further questions, I'll hand you back over to Lonnel Coats for any additional or closing remarks.

Well, thank you. For many of our stakeholders, they've been asking us about what's next for XERMELO. Some have had -- have come inbound interest on what we should be doing with XERMELO.

What I promise to many of stakeholders, we won't say much about it until we have confidence and comfort after we've done the work around what's next for XERMELO. And it's quite exciting. Our preclinical work, I think, is quite robust. And our confidence in developing XERMELO further is fairly high.

We have started our conversations with our partner Ipsen on how we can go forward and be global in what we do with XERMELO. We also -- as we think about life cycle management for XERMELO, we have the U.S. rights that remain with us as well as the rights in Japan. These new indications that we will start to pursue, we have opportunities for us to unlock value of this asset also in the Japanese market. So it's really an exciting opportunity for XERMELO. It is a critical asset to us. And the mechanism of this drug that we've now done additional work on gives us great confidence and encouragement about the future of this compound.

And a lot of that just got really supported by what we see the super-responders that the inbound stuff that was coming into us was -- has been quite remarkable. And so we feel very confident about the direction of XERMELO. What we want to do is make sure that we complete a lot of the work that we're doing and then have an R&D Day at the end of first quarter, because I think all of you know that our primary goal right now is to get the sotagliflozin type 1 program into the hands of the regulators. But we believe, by the end of the first quarter, we'd be in a very good position to walk you through what our findings are around XERMELO and why our confidence is fairly high about developing for other indications.

So our energy is high and our sense of urgency to continue to grow our business and invest in our business is also high. There is a tremendous commitment and optimism that comes from both our partner, Ipsen on the XERMELO side as well as Sanofi. I do believe Sanofi will have a lot more to say going forward here, as we're now on the other side of our conversations with the regulators. And I also believe they have a lot to say as they're now spending a lot of money on Phase III programs for type 2. So with that being said, I think you will see their confidence and commitment at the sotagliflozin going forward.

Lastly, I always want to thank our employees, because for a company of our size, the amount of work that they're producing and keeping us on track is quite remarkable. So I always take the opportunity to thank them for another great quarter and look forward to even better fourth quarter.

So with that, I'll stop there and look forward to speaking to many of you as we go forward. Thank you.

Ladies and gentlemen, that will.

(technical difficulty)

Lexicon Pharmaceuticals third quarter financial results. You may now disconnect your lines, and have a wonderful day.