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Executives

Jason Ray - Manager, Corporate Communications and IR

Dr. Arthur Sands - President and CEO

Dr. Philip Brown - SVP, Clinical Development

Jim Tessmer - VP, Finance and Accounting

Analysts

Chad Messer - Piper Jaffray

Lexicon Pharmaceuticals, Inc. (LXRX) Q1 2009 Earnings Call April 28, 2009 11:00 AM ET

Operator

Welcome to the Lexicon Pharmaceuticals first quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon's request.

At this time, I would like to introduce your host for today's call, Jason Ray, Manager of Corporate Communications and Investor Relations. Please go ahead, Mr. Ray.

Jason Ray

Good morning and welcome to the Lexicon Pharmaceuticals first quarter 2009 earnings conference call. I am Jason Ray and with me today are; Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown Lexicon’s Senior Vice President of Clinical Development; and Jim Tessmer, Lexicon's Vice President of Finance and Accounting.

We expect that you have seen a copy of our earnings press release that was distributed this morning. During this call we will review the information provided in the release and then use the remainder of our time to answer your questions.

The call will begin with Dr. Sands, who will discuss our key accomplishments for the quarter. Dr. Brown will then discuss the status of our drug development programs and Mr. Tessmer, will review our financial results for the first quarter and discuss our financial guidance for 2009. We will then open the call to your questions.

If you would like to view the slides for today's call, please access the Lexicon website at www.lexpharma.com. You will see a link on the home page for today's webcast.

Before we begin, I would like to state that we will be making forward-looking statements, including statements relating to Lexicon's research and development of LX1031, LX1032, LX2931, LX4211 and LX7101. This call may also contain forward-looking statements relating to Lexicon's future operating results, financing arrangements, cash and investments, discovery and development of products, strategic alliances and intellectual property.

Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements, including uncertainties related to the timing and results of clinical trials and preclinical studies of our drug candidates, are dependence upon strategic alliances and ability to enter into additional collaboration and license agreements, the success and productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third parties and the requirements of substantial funding to conduct our drug discovery and development activities. For a list and a description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission.

I will now turn the call over to Dr. Sands.

Dr. Arthur Sands

Thank you, Jason and good morning everyone, welcome. I think we have had a very solid first quarter and we are looking forward to providing you an update not only on the financial results, but especially on our clinical results. Part of our mission and strategies its moving our entire portfolio forward and this is now are grown to four compounds and clinical development and a whole number of compounds and preclinical development and research.

We continue our process and we are on track, continue to invest in our innovative R&D system. Our gene knockout-validated targets and we continue to be very active on the business development front, seeking to commercialize our drug pipeline both independently and through perspective partnerships in the pharmaceutical industry.

If I turn to our pipeline, slide. You will note that there has been an advancement of LX2931 now to having completed the Phase 1 clinical trial portion of its development paradigm and Dr. Phil Brown will be giving you detailed update on our latest results from our drug-drug interaction study what methotrexate and rheumatoid arthritis patients, which was the final portion of the Phase 1 package required before we could move into Phase 2. So, we will spend some time on that.

As well, LX1032 has been in the process to initiate the Phase 2 trial and we will provide you an update on the initiation of that trial and LX1031 is contained to progress in its Phase 2 studies and irritable bowel syndrome. The latest addition to our clinical stage programs is LX4211, which is currently in the midst of these single ascending-dose studies, our First-In-Man studies in Phase 1.

So, we are very pleased with again the solid progress we have achieved in this first quarter and our preclinical pipeline is also continued its advancement, most notably LX7101, topical administration of our drug candidate for glaucoma continued to progress.

So, with that brief introduction, I will turn it over to Dr. Brown to bring us up-to-date on the pipeline. Phil?

Dr. Philip Brown

Great, thanks very much Arthur. I would like to start today with an update on the 2931 program. This of course is our oral small molecule inhibitor, sphingosine 1-phosphate lyase or S1P lyase.

As Arthur mentioned, we recently completed our drug-drug interaction study of LX2931, in combination with methotrexate. This was a study conducted in patients, who have stable rheumatoid arthritis, who are being managed with methotrexate therapy. We integrated a dose of 120 milligrams of LX2931 on top of their stable methotrexate therapy for a period of 14 days to evaluate the pharmacokinetics of both methotrexate on 2931 and vice-versa on 2931 on the kinetics on methotrexate.

Importantly we have seen no evidence of any drug-drug interaction between either of this compound, as it was predicted from our preclinical experience, but the compound continues to behave in a very predictable fashion. It was well tolerated over the 14 day exposure period and again the lack of any drug-drug interaction is an important next step for the compound to position it for further exploration in rheumatoid arthritis.

We are currently planning the Phase 2A proof-of-concept study in rheumatoid arthritis. The current plans and vision is to be a double-blind, randomized, placebo-controlled study in which we would evaluate three doses of 2931 in combination with methotrexate.

We have recently completed our three-month toxicology studies that will allow us to go for a 12-week exposure period in this proof-of-concept study and important duration to give drug adequate opportunity to show evidence of effect. We are in the planning stage of this program at present and look forward to bring you forward in the second half of this year.

Importantly, we have also recently had our Phase 1 data accepted for presentation at the EULAR meeting. This is a European League Against Rheumatism. It’s the major meeting in Europe for rheumatoid diseases. We are very pleased to have this, had our data accepted for presentation at this meeting, which will be done in the June timeframe in Copenhagen.

Now shifting gears to the 1031 program. This is our small molecule inhibitor of tryptophan hydroxylase that we are exploring in the setting of irritable bowel syndrome. Just to refresh you with the study design that we are currently in the midst of, this is a 150-patient study, three arms randomized. So, 2 dose levels of LX1031 in patients with either diarrhea, predominant IBS or midst IBS symptomatology.

We are evaluating a number of standardized endpoints looking at both objective evidence of a fact as well as subjective evidence including a global assessment that’s been used in regulatory filings to-date and for our agent. These data are Phase I data from the 1031 program have been accepted for an oral presentation at the Digestive Disease Weak or DDW annual meeting, which will occur in Chicago next month. This is a very important meeting for a variety of gastrointestinal disorders. So, we are very pleased to have the opportunity to present the 1031 data at that meeting. Trial is on track and progressing well and we are look forward to updating you as it continuous to evolve.

Our LX1032 program was of course the compound directed towards the same target tryptophan hydroxylase, but was specifically designed to gain much higher degrees of systemic exposure related to 1031 and as a result, we are positioning this compound in the setting of carcinoid syndrome.

The study design that we are implementing at present is a double-blind, randomized, placebo-controlled study in patients with symptomatic carcinoid syndrome that have become refractory to the standard therapy, which is a somatostatin analog called octreotide type.

The study design embraces two parts a serial dose escalation Phase, that identifies an optimal dose in which point, we will expand into part two of the protocol a larger cohort to confirmed any signals that are observed in the dose escalation phase of the protocol.

It's a 28-day treatment period at each dose level and then the cohort expansion will also be a 28-day treatment period. In which we will be evaluating both the safety and tolerability of 1032, but importantly, we had the opportunity to evaluate the symptomatic response in patients with a number of endpoints, primarily sound movements is the primary evaluation of the compound.

This study is being conducted at a number of major academic centers here in US. We have had a delay of one quarter, in implementing this protocol due to procedural issues that are associated with starting a protocol in major academic centers.

We are on track to initiate in the very near timeframe and I am pleased with, to the fact we are getting ready to get this up and running. These data, the Phase 1 data from this program have also been accepted for an oral presentation at the DDW meeting. So, it's going to be a good meeting for us, and it's nice to have the opportunity to discuss and describe both LX1031 and LX1032 at separate presentations at that meeting. Again that will occur in Chicago, next month.

LX4211 is our small molecule inhibitor as SGLT2. This is the target, which influences glucose reabsorption in the kidney and as a result of blocking it, you excrete more glucose in the urine and it's an emerging pathway that we believe will have significant utility in the armamentarium utilized to treat and manage symptoms of diabetes.

As Arthur mentioned, we are in the midst of our Phase 1 study, which is ongoing at present. This is a single protocol, which evaluates both single as well as multiple ascending-dose tolerance components. We are in the process of completing the single ascending-dose component of the protocol and into the process of initiating the multiple ascending-dose components.

So, the program remains on track, is progressing nicely and in this protocol we are having opportunities not only evaluate the pharmacokinetics safety and tolerability, as this true of every Phase 1 study, but importantly be able to evaluate urinary glucose levels as they biomarker of drug effect. So, as Arthur mentioned each of our programs is progressing nicely and continuing to perform as expected and we look forward to continuing to update you, as they move forward there are next steps of development.

And with that, I'll now hand the call over to Jim Tessmer, our Vice President of Finance and Accounting.

James Tessmer

Thank you, Bill. We issued a press release this morning detailing our first quarter 2009 financial results. You may find in our website, if you have not already viewed it.

Lexicon's revenues for the three months ended Mach 31, 2009 were $4.2 million decreased 53% from $8.9 million for the corresponding period in 2008. The decrease was primarily attributable to reduced revenues under our alliance with Bristol-Myers Squibb, reduced revenue under our alliance with N.V. Organon due to our progressing completing the target discovery portion of the alliance and the completion in 2008 of the target discovery portion of our alliance with Genentech Inc.

Research and development expenses for the 2009 first quarter were $23 million, a decrease of 17% from $27.8 million for the corresponding period in 2008. The decrease was primarily attributable to lower salary and benefit costs, due to reductions in personnel offset in part by associated severance costs, as well as lower external research expenses.

General and administrative expenses for the 2009 first quarter were $4.8 million, decreased 14% from $5.5 million for the corresponding period in 2008. The decrease was due primarily to lower salary and benefit costs, due to reductions in personnel offset in part by associated severance costs.

Let's turn to net loss for the three months ended March 31, 2009 was $21.6 million, or $0.16 per share, compared to a net loss of $18 million, or $0.13 per share, in the corresponding period in 2008. For the three months ended March 31, 2009, net loss included non-cash, stock-based compensation expense of $1.4 million, compared to $1.8 million in the corresponding period in 2008.

Let me turn to our cash and investments: As of March 31, 2009, Lexicon had $145.5 million in cash and investments, including $11.8 million in cash and investments held by Symphony Icon, as compared to $158.8 million as of December 31, 2008.

During the first quarter of 2009, we entered into a $37.9 million credit line agreement with UBS Bank, USA. This agreement provides up to 35% of the market value of auction rate securities in form of revolving line of credit. The credit line is secured only by the auction rate securities and advances under the credit line will be made at no net cost basis and interest paid by us on advances will not exceed the interest paid to us by the issue of the auction rate securities.

As of March 31, 2009 we had $14.7 million outstanding under this credit line. We believe that the working capital available to Lexicon, including the UBS credit line, will be sufficient to meet our cash requirements for at least for next 12 months. This estimate excludes any funds held in auction rate securities themselves and any new potential corporate alliances.

Now let’s turn to our forward looking financial guidance for 2009. We are on track to achieve our yearend guidance. Our contractual revenues from existing agreements for 2009 should be in the range to $6 million to $8 million, consisting primarily of contractual revenues from our alliances with Organon and Bristol-Myers Squibb, as the research portions of these alliances are completed in 2009.

As we have previously made you aware, while we are in conversation with pharmaceutical companies to enter into potential alliances and collaboration, we have not included forecasted revenue from such potential arrangements in our guidance. We will update you as we enter into such alliances or agreements. We believe our productive pipeline will provide Lexicon with attractive opportunities for future alliances.

Operating expenses for 2009 should continue to be in the range of $110 million to $115 million. The decrease in spending from 2008 is a result of our reorganization implemented in 2008 and early 2009, which reduced personnel costs and related expenditures. These reorganizations were designed to focus our resources on our most advanced drug discovery and development programs.

Non-cash expenses will be approximately $11 million of this total, including $5 million in stock-based compensation and $6 million in depreciation and amortization. Taking into account, cash received under existing contractual relationships only, we expect our 2009 net cash use in operations to be in the range of $99 million to $104 million and our 2009 capital expenditures to be approximately $1 million.

Thank you and now I’ll turn the call back to Arthur.

Dr. Arthur Sands

Thank you, Jim. As you have formulating a questions, I’ll just like to say that, I think our financial results reflect the on going transformation of our company from drug discovery and those associated alliances to now, drug development and a focus on ultimately commercialization of these compounds. Also I think they reflect the streamlining of our company, that through the steps we have taken to reduce cost.

So, with that, we will now open the call to questions.

Question-And-Answer Session

Operator

(Operator Instructions)

There is a question from the line of Chad Messer with Piper Jaffray.

Chad Messer - Piper Jaffray

Hi, guys. Thanks for taking the question. Just a real quick question on guidance, at the yearend call last quarter, I believe, you said you estimated $6 million to $8 million in revenues during the year, is there been any change to that?

Jim Tessmer

No. We’re still guiding 6 to 8, and as it would be on the higher end of that?

Dr. Arthur Sands

We've not included any new deals in that forecast and so we continue to maintain a very conservative posture with regard to forecasting. Other question?

Operator

(Operator Instructions)

Dr. Arthur Sands

Well, apparently a very quite quarter, of good progress. I'll just close. I may give few comments. I think one of the things we are turned to see now is our pipeline getting greater awareness growing of our pipeline in the medical communities with especially these two conferences coming up and these important audiences for the new drug programs are, we're going to be speaking directly with the doctors and of course, associate postulation in both GI area and also in the area of rheumatology. So, I think, that's real notable advance in terms of our communication of our program.

So, with that, I would like to thank everyone for participating. We look forward to providing an update next quarter. Good bye.

Operator

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

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