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Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX)

Morgan Stanley Global Healthcare Conference Call

September 10, 2013, 09:10 am ET

Executives

Jeff Wade - EVP & CFO

Brian Zambrowicz - EVP & Chief Scientific Officer

Analysts

Dave Friedman - Morgan Stanley

Dave Friedman - Morgan Stanley

All right, thanks everyone for joining us. Dave Friedman, Biotech Analyst, joined with the team from Lexicon Pharmaceuticals up here on the far side, Jeff Wade, Chief Financial Officer and on the near side, Brian Zambrowicz, Chief Scientific Officer. We’re up for this to be interactive, so if you have any questions, want to talk, raise your hand, we’ll get you a microphone and we’ll go from there.

So thanks folks for joining us and I think if we can just start, if you could give just a couple of minute overview of the company and you guys have had a long migration over time from genomics, so where you are now and so if you can just sort of give people a couple of highlights about your most recent activities and what you’re excited about?

Jeff Wade

So Lexicon, we were found in 1995 as you mentioned we were a genomics company to begin with and based on platform technology of medical and the goal with these medical is to understand gene function and to identify novel targets for drug discovery and we did that and then in 2000 we went public and with the resources from that public offering we bought a chemistry component in 2001 and that allowed us to begin doing drug discoveries against the targets we’ve been identifying and now we have several compounds in clinical development all continuing to be based on the initial strategy.

And so those three lead programs are telotristat etiprate which is a small molecule inhibitor of tryptophan hydroxylase, the rate-limiting enzyme and so it’s currently in Phase III clinical study in carcinoid syndrome and it’s expected to read out next year. And additionally it’s in proof-of-concept study that’s just completed for ulcerative colitis and we anticipate a read out of that clinical study near the end of this quarter.

We also have LX4211; it’s a dual inhibitor of SGLT1 and SGLT2 to glucose transporters one that primarily functions in the kidney, the other in of GI and that program is in development for both Type 1 and Type 2 diabetes. We anticipate the results of two clinical studies yet this year, first end of this quarter we’ll have results from first study and a small group of patient with renal impairment. We think that’s particular group that can benefit and will differentiate us from selective SGLT2 inhibitors, and then the results of the 30 patients study in Type 1 diabetes near end of the year. We are currently planning Phase III for both Type 1 and Type 2 diabetes and anticipate initiating that with a partner around year-end or the next year.

And finally LX1033; it’s another tryptophan hydroxylase inhibitor, different than telotristat; it’s a locally acting compound in the gastrointestinal tract for irritable bowel syndromes, IBS-d. And we just completed a 360-patients dose ranging study and we anticipate the results of that study some time early fourth quarter.

Question-and-Answer Session

Dave Friedman - Morgan Stanley

So may be and we can just actually start with some financial questions. So just the first is, how do you guys think about the sort of strategic financial moves that you make in terms of how you are allocating capital, how you are picking programs and sort of what is a program need to show in order to get sort of full investment?

Jeff Wade

So, we approach this in a couple of different ways, so in some of the programs where we can see a path to funding the program through on our own and it’s a program that we might be able to commercialize on, we’re committed to make the investments through Phase III and to be able to commercialize that products and that’s what we have done with what’s (inaudible) it’s an orphan indication in carcinoid syndrome; it is a Phase III program that we can fund and we have the funding already to be able to complete that program. And that it’s reasonable for us to be able to commercialize. And so we've made that kind of full funding decision.

There are other programs such as Type 2 diabetes for example where the level of funding is very significant. Frankly, in the Type 2 diabetes indication and this maybe a little bit different than Type 1. But in Type 2 diabetes indication, in terms of commercialization having a partner is really something that we will need to do. And so our strategy with that it’s been to identify a partner and to have a partner help us run that program to completion and to be our commercialization partner.

And the last one that we have been talking about is LX1033; it’s an IBS-d. We expect that that will require a pretty significant commercialization effort as well. And in terms of the cost of development it's kind of in between those other two. It's something that our initial plan is that we would go and get a commercialization partner to go with us through the Phase III program and that's our current strategy and so you know that would help us fund the program, but also help us position it well with the partner going forward. So that’s kind of the way that we looked at allocating resources.

Dave Friedman - Morgan Stanley

And you guys have a majority sort of owner in this group. How does that impact the business at all strategically, financially, positively or negatively?

Jeff Wade

Well, I think it's been a very significant positive for the company. We have an anchor investor who is committed with the company long-term, has invested the initial investment and made such good investments in the company to maintain their interest and has a long-term outlook and is committed to seeing the strategy that we have embarked upon through to completion. So I think that that’s been a very significant benefit to us and it's been – we've been able to weather the ups and down of the financial markets well because of the fact that we did have that anchor investor. And so in terms of the alignment of interest and a common strategy, that’s been very important for us to have that anchor investor.

Dave Friedman - Morgan Stanley

And then I guess the last sort of question is from like income statement perspective, you guys have a relatively high share count compared to other companies your size. Is that an issue at all? Is there a value in sort of doing a reverse split and having less shares outstanding, does it not impact you until you’re trying to sort of put a better EPS numbers or how does the share count, I mean is that an issue at all or is it just sort of is what it is?

Jeff Wade

Of course had a lot of conversation, but at this point, we don’t think it really is an issue; that is something that we’ll think about at some point.

Dave Friedman - Morgan Stanley

So if we can jump into the commercial – sorry the development programs. So starting with telotristat etiprate, may be if you can give any update on the Phase III trials and if you can just describe, the sort of the Phase III program and the goals of what you’re trying to see on (inaudible)?

Brian Zambrowicz

Yes. So the Phase III program is a single registrational study and its approximately 105 patients. There will be patients who are not adequately controlled by somatostatin at, so these carcinoid syndrome is a result of the tumor that typically initiates in small bowel, it contains cells that produce very large amounts of serotonin and when it metastasize to deliver that serotonin when its dumped causes severe GI side-effects, it causes pain, discomfort diarrhea, it causes flushing and other symptoms.

And so we’re going into this population that’s not adequately controlled and it’s an efficacy endpoint of four weeks – 12 weeks, sorry and the primary efficacy measure is bowel movement frequency. And then there is another, a number of secondary measures including the 5-HIAA reduction and effects on pain, flushing and patient reported outcomes.

And it’s a study we feel pretty confident about because we ran a Phase II that was equivalent in length adhering the same doses and going into the same patient population and we had strong effects on our outcome measures at 12 weeks and so we were very pleased when we met with FDA we agreed to set 12 week efficacy endpoint was appropriate. So we’re in the early stages; we have been continuing to initiate sites and as I mentioned our goal remains to complete the study next year.

Dave Friedman - Morgan Stanley

And in terms of the population size, what is the market opportunity and how do you expect to address it outside of the U.S. is that going to include a partner or an expansion of the business?

Brian Zambrowicz

So I think the two largest markets for (inaudible) the U.S. and Europe and those are the two key markets. It’s orphan indication so the sales effort is relatively modest and we in terms of the market opportunity in the U.S. there are approximately 10,000 patients with carcinoid syndrome, those patients who have carcinoid syndrome developed and their symptoms are not adequately controlled by metastatin therapy for more maybe 18 to 24 months and the symptoms breakthrough. So it’s a significant opportunity, patients with carcinoid syndrome live for a long time after they are diagnosed. So we think that there’s market opportunity in majority of the carcinoid patient population. And it is something that we believe that we could commercialize in U.S. and then we are also looking at the data from the ulcerative colitis study and after we get those data, we will be thinking about what’s the optimal way to commercialize this product in U.S. market places, but we are again committed to commercializing these products.

Dave Friedman - Morgan Stanley

And what the sort of scientific underpinning of why this drug would work in ulcerative colitis?

Brian Zambrowicz

That comes largely from preclinical data, so there’s then both genetic and pharmacology studies in rodent model of ulcerative colitis Crohn’s disease type models. And so there is two economic labs and our internal labs at Lexicon have all shown in animals that have a knock out of the target of our drug, which is TTH1 tryptophan hydroxylase 1 that those animals are resistant to those models of ulcerative colitis for instance.

Likewise, if you take our compound and do the pharmacology, you see the something that there is less severe disease as a result of treating with telotristat. But the studies are very interesting that they suggest that it’s more than just an affect on the GIs and affect on immune system, and I think one of the most intriguing studies comes from the con lab in Montreal. But what they showed is that, it's actually an effect through dendritic cells and an inhibition of serotonin and dendritic cells is likely staying low to decreases in proinflammatory cytokines. So intriguing what will matter is what we got to do study on?

Dave Friedman - Morgan Stanley

And then can we if we just jump over diabetes for a second, as you have 1032 and 1033 are related. And so maybe you can just bridge these two programs and just explain the differences between programs that are ultimately explaining the same sort of core scientific mechanism.

Jeff Wade

Sure. So 1032 Telotristat, which we've been talking about is inhibitor TPH1, you get the stomach exposure when you give it orally. So it can get to the tumor and inhibit the enzyme blocked the production of serotonin. 1033 is targeted the same TPH1, the difference is that it's locally-acting, it's largely phase in the GI, there’s very little systemic exposure, but it can work effectively, because the cells that produce most of the bodies serotonin enter chromosome cells sit at the (inaudible) at the GI and so you can hit them from the (Inaudible) without getting systemic exposure and reduce serotonin production and it's pretty clear that serotonin plays a very important role in the function of the gastrointestinal system.

Two of the key functions we know serotonins involved in vitality, but it also involves in some patients of pain and discomfort and that information comes from for instance 5-HT3 receptor antagonist like [Zofran] which with this chemotherapy inaudible) environment, that’s more the sensation side of thing but also 5-HT3 receptor antagonist [45HP4] agonist demonstrating that there is also an effective serotonin on (inaudible). So by reducing serotonin fraction in the GI, we should both reduce [metality] but also reduce (inaudible) of GI discomfort.

Dave Friedman - Morgan Stanley

And so you guys have generated some Phase IIa type data in IBS-d with 1033. So if you can just review what the key takeaways were that you then brought forward in to this sort of Phase II/IIb type product?

Jeff Wade

Sure, so our proof of concept, we did with the first generation compound, LX1031, and it was the first time testing the mechanism, and we weren’t sure how much we need to lower serotonin production in order to get any clinical benefits and so we ran that study and we saw some clear clinical benefits. We saw significant improvement in stool consistency or stool form and we also saw a significant increase in global assessment of adequate relief, which was a key measure at that time in IBS study, and importantly both of those efficacy outcomes correlated with a reduction of biomarker 5HIA, which is just a breakdown product of serotonin.

So if we're really working on mechanism, any efficacy should correlate with that biomarker reduction, and basically measuring the amount of serotonin that’s being produced. That was encouraging however it requires high end frequent dosing and that’s why we move to 1033, which was ten-fold more potent roughly and what we were able to do first with 1033 is demonstrate in Phase 1 study that we could get biomarker reduction that we knew correlated with a clinical benefit with the first generation compound but with lower and less frequent dosing that allowed us to move into this large dose ranging study, which has 90 patients per arm testing three doses of 1033, and placebo and again this is the study that we’ll read out sometime early fourth quarter and what we expect to see is, we expect to see a nice improvement, in still consistency, we expected it to be correlated with the reduction in the 5HIA biomarker.

We also expect to see an improvement in feelings of, or sensations of GI pain and discomfort and we expect to see that that dual effect on both pain and stool consistency will look quite good relative to placebo, meaning before, when we did our initial proof of concept study, we didn’t have any FDA guidelines on IBS at the time, as I mentioned the primary outcome from an IBS study was the global assessment of adequate relief of patient reported outcome and since then they have given guidance on both the type of patients that would like to see enter into a study as well as the new endpoint which is they really prefer to do endpoints as improvement in stool consistency and improvement in pain in GI discomfort happening with both measures on the same day.

And we and others have gone back to our proof-of-concept data and to look how we effect that dual endpoint with the new entry criteria. And our data is encouraging, with the post [doctor] analysis, small numbers and but its encouraging and so we are pretty eager to see the data. We do believe that the dual endpoint does a pretty nice job of separating treatments from placebo effects, because what we saw when we use that dual endpoint is that there was no real reduction in that percentage of patients that were showing efficacy and clinical benefits dropped the placebo response dramatically, but we’ll see again early in the fourth quarter what the results are.

Dave Friedman - Morgan Stanley

And what is a relevant change in stool consistency for this patient population and for the drug?

Jeff Wade

Well we know that from the past for instance 5-HT3 receptor antagonist like (inaudible). What it demonstrated and it was a drug that was effective and was about a 0.7 unit improvement in stool consistency which was right in the range of what we were at with our proof-of-concept study. So we would expect that stool consistency benefit in that kind of range. What we want to see (inaudible) and is about a 30% reduction and then we would be hopeful that the dual endpoint of stool consistency and pain would give out a strong separation from placebo.

Dave Friedman - Morgan Stanley

Any questions on these GI or carcinoid programs. Maybe we can move to diabetes which has been a big focus for people. So you guys moved through a good amount your Phase 2 where maybe is there and I know there is probably not much you could say, is there anything that you can say regarding the partnership discussion that have been going on and is there anything sort surprising where you’ve been sort of surprised to find upon partners caring or not caring about specific things, anything you can sort of state in that regard like that.

Jeff Wade

Don’t have a lot to add to that what we touched on before in terms of partnership and process, it continuous to go well and we continue to think that we are going to achieve our objectives there. It hasn’t really been surprising, I mean that type 2 diabetes is very competitive area, and being strongly differentiated and being able to demonstrate that mechanistically and with data is important and we think that we have done that. And we are also looking at opportunities outside the type 2 space with the type 1 diabetes, and that we think it offers some additional opportunity and add some early data there too.

So its pretty that’s been what I would have expected for something that requires that level of investment in Phase 3, which is driven largely by the requirement for cardiovascular outcomes data, which we think that we have a really great chance of demonstrating the benefit because of the profile of the drug that we have seen and data that we presented this year ADA to support that, and we think it’s a great opportunity but it’s also a very big investment.

Dave Friedman - Morgan Stanley

So in the sort of worst case scenario where a partner each can never come to an agreement for whatever reason, what do you do with the program, is there a way to move forward on our own and as sort of diabetes light fashion or is this something that really can only move forward with a partner, sort of [full stop]?

Jeff Wade

Well, I don’t think we are going to get there. So I do think that there are differences between type 2 diabetes which is a more expensive (inaudible) program than type 1. But I don't think we're going to have to cross that bridge. Okay.

Dave Friedman - Morgan Stanley

Okay. So then maybe if we can talk a little bit about, the diabetes [landscape], we have seen multiple classes of drugs varying degrees of price in generic competition. What type of niche do you think you guys could carve out overtime, where is the right spot for this drug within the landscape of diabetes treatment.

Jeff Wade

Well, I think we have a lot of potential areas where we differentiate and have an opportunity to have unique attributes. So first of all, we're the only late stage dual inhibitor of SGLT1 and SGLT2 and everyone is familiar with the SGLT2. But what's unique about our compound is that SGLT1 inhibition. And SGLT1 is the primary transporter or uptake of glucose from the diet after a meal. So those effects on SGLT1

are really what makes us look different than the SGLT2. And that's why I have already spoken about the renal impairment study is important, we know that the SGLT2 as you loose kidney function you lose your ability to benefit from SGLT2. But you will, you shouldn’t really [get] a benefit through SGLT1 for the renal impairment, population is very important for us.

We think the general population is going to be very important particularly with respect to SGLT2 as we think we have an opportunity to differentiate not only on efficacy, but also and safety. Because of the fact that the SGLT2 in addition and the GI has a balancing effect on urinary glucose excretion. Because the amount of glucose you dump in the urinary is dependent on how long you will inhibit SGLT2, but it's also dependent on the absolute blood glucose level and the amount of glucose filtered in the kidney, and since we have very dramatic reductions in post-prandial glucose study, each meal throughout the day has left glucose throughout the day to be filtered and still within the urine and that’s very clear in the low urine glucose excretion that we see in all of our study. And since most of the side effects of SGLT2 is largely attributed to their elevated during glucose excretion it does give us an opportunity to differentiate on the safety there.

In addition, now that a couple more of the DPP-4 inhibitors have read out on their cardiovascular studies and they are showing no benefit, it really leaves a huge opening for the whole SGLT class, because this is a class, because of it's effect, very strong effect on blood pressure and body weight in addition to glycemic control, I think there is a real opportunity for the class to be the first class to show a cardiovascular benefit. If that’s the case, it could become one of the key anti diabetic class.

We also of course have a unique synergy with DPP-4 inhibitors because of the fact that by inhibiting SGLT1, we trigger the elevated release of GLT1 after meal and since DPP-4 inhibitors prevent its inactivation, there is a unique synergy in elevating Glip 1 levels after meal and we’ve demonstrated that in a small study in type 2 diabetics and finally the type 1 opportunity is very, very important for us and there are no oral agent to type 1 diabetes. In fact the only agent to speak of is insulin and it's again because of our SGLT1 effect, what we saw was dramatic effect on postprandial glucose in (inaudible) in type 2 diabetics and it’s helping subject.

Looking again quite different than SGLT2 and because of that we went into type 1 thinking that they would require much less meal time insulin, and they deal to control their, we deal to better control the blood glucose levels after meals with less hypoglycemia, and that’s in fact, we only saw three patients that we saw and in fact that’s ADA we saw two (inaudible) in type 1, again we look dramatically different, they had virtually no effect on meal time insulin requirements, where we dramatically reduced meal time insulin through SGLT1. So we have a lot of opportunity and we just have to navigate forward from here wisely.

Dave Friedman - Morgan Stanley

And in terms of other companies that have looked at SGLT1, the progress overall has been relatively slow, so what do you attribute that too? What is concerning others that is not concerning you, is there something about the glu-mechanism that changes the potential risk profile of the drug, and have so you sort of reconcile the differences?

Jeff Wade

Well, first of all our safety to date has been very, very good, and we’ve had basically and addition of the SGLT1 mechanism with no apparent added (inaudible) just for from a safety standpoint. Now as far as the dual mechanism that other people have worked on SGLT1, the best example on the longest, I think what we have seen work on that has come from GSK they’ve worked on selective SGLT1 inhibitors. You will find a couple of papers on selective SGLT1 inhibitor but they ran into a key problem and that’s duration in addition duration of action of the drug. It had SGLT2 inhibitors and SGLT1 inhibitor also on that same genotype and all of them have shown the same problem.

This genotype has very short duration of action it falls off once it’s [climbs] pretty readily. So they went into phase one with a selective SGLT1 inhibitor in 2009 it’s never move forward beyond that they did present their data at ADA not this past year but the year before and they only had about two hours of in addition of SGLT1. So there was no way they could move forward, it would have required probably multiple dosing even at breakfast much lee to having of course at lunch and dinner.

More recently we’ve seen that Novartis has moved the dual inhibitor into Phase 2 in dose ranging study, they have moved out along pretty aggressively, I think it puts forward the concept that dual addition actually quite useful. I think we have attract a lot of attention to the space of SGLT1 in addition and we know others are working on SGLT1 now. I think we have eliminated a lot of the concern people about that you create significant GI side effects of you [inhibit] SGLT1, we just haven’t seen that.

But I would that the challenge with dual inhibition is very difficult when you are hitting two targets to hit them both appropriately on the dose response curve so you can maximize the benefit without getting the negative effects of too much or too little inhibition, and I believe that will be a major challenge that people are following on. So I remain pretty confident that we are not only first-in-class for dual inhibition, but we will remain best in class because there are some very unique attributes to 4211 it will be very difficult to follow on for others.

Dave Friedman - Morgan Stanley

How similar is the SGLT1 to 2 in terms of target, are they very different such that you need the completely sort of bifunctional molecule or is there similarity?

Jeff Wade

Yeah, the protiens are highly similar. So obviously its possible for the selectivity for either SGLT1 or SGLT2. We’ve seen selected compound, but you have an ability to hit those to the same molecule above of dual functional molecule because of their similarity. But again hitting a right on the dose responses for both, I think the major challenge.

Dave Friedman - Morgan Stanley

Then I guess just a last question, what the patent (inaudible) on 4211.

Jeff Wade

Without taking in to account the patent term extension is late 20-20s, so we expect to have a long duration of (inaudible) line for this product.

Dave Friedman - Morgan Stanley

Great, and I think that is our time. So thanks everyone for joining us. And thank you both for joining us here.

Brian Zambrowicz

Thank you.

Jeff Wade

Thank you.

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