Lexicon Pharmaceuticals' (LXRX) CEO Lonnel Coats on Q2 2017 Results - Earnings Call Transcript

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About: Lexicon Pharmaceuticals, Inc. (LXRX)
by: SA Transcripts

Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) Q2 2017 Results Earnings Conference Call August 1, 2017 8:00 AM ET

Executives

Kimberly Lee – Head, IR and Corporate Strategy

Lonnel Coats - President and Chief Executive Officer

Praveen Tyle - EVP, R&D

Jeff Wade - EVP, Corporate and Administrative Affairs and Chief Financial Officer

Alex Santini - EVP and Chief Commercial Officer

Analysts

Liana Moussatos - Wedbush Securities

Jessica Fye - JPMorgan

Chris Shibutani - Cowen & Company

Yigal Nochomovitz - Citigroup

Stephen Willey - Stifel

Alan Carr - Needham & Company

David Maris - Wells Fargo

Operator

Welcome to Lexicon Pharmaceuticals Second Quarter 2017 Financial Results and Business Update Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks, we will hold a brief question-and-answer session. As a reminder, this cal is being recorded today August 1st, 2017.

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

Kimberly Lee

Thanks, Arty. Good morning, and welcome to the Lexicon Pharmaceuticals second quarter 2017 financial results and business update conference call. Joining me on today’s call are Lonnel Coats, Lexicon’s President and Chief Executive Officer; Alex Santini, Executive Vice President and Chief Commercial Officer; Praveen Tyle, Executive Vice President, R&D, and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. After our formal remarks, we will open up the call for Q&A.

Earlier today Lexicon issued a press release announcing our financial results for the second quarter 2017, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call along with 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 relating to the safety and efficacy and the therapeutic and commercial potential of XERMELO. These statements may include characterizations of the results of clinical trials of XERMELO and the market opportunities for XERMELO. This call may also contain forward-looking statements relating to Lexicon’s growth and future operating results, discovery and development of other drug candidates, strategic alliances and intellectual property, as well as other matters that are not historical facts or information.

Various risks may cause Lexicon’s actual results to differ materially from those expressed or implied in such forward-looking statements. These risk include uncertainties related to the success of our commercialization efforts for XERMELO, the timing and results of clinical trials and preclinical studies of our other drug candidates, our dependence upon strategic alliances and other third-party relationships, our ability to obtain patent protections for our discoveries, limitations imposed by patents owned or controlled by third parties, and the requirements of substantial funding to conduct our drug development and commercialization activities. For a list and a description of the risk 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.

Lonnel Coats

Thank you, Kim. Good morning, everyone and thanks for joining us this morning. Second quarter was full of noble achievements across all areas of the business, which were aligned with our goal of ultimately helping as many patients as possible. I am excited to discuss our strong second quarter results, as well as our expectations for continued growth this year and beyond.

Notably, we are driving growth in our XERMELO franchise, while in parallel making great strides toward advancing sotagliflozin to market and furthering our innovative pipeline which are near-term priorities for us.

We have a strong first half and our continued focus on execution will become increasingly more important for the remainder of this year. Based on what we've achieved so far, we're well on our way to reaching our goals.

I'm pleased with the progress we're making with the launch of XERMELO, as we achieve net XERMELO sales of $3.6 million in the first full quarter of launch. These results reflect consistent solid execution of our growth strategy. We continue to see an increase in new prescribers in patients and as we gather additional data points on launch dynamics we're seeing indicators that reflect healthy demand and access. Alex Santini, our Chief Commercial Officer will provide more granularity on these dynamics shortly.

On the reimbursement front, we continue to receive positive responses from payers. Soon after launch XERMELO was incorporated into the NCCN and treatment algorithms, which speaks to the clinical value of XERMELO and we expect this inclusion to enhance use and drive penetration in the near term.

In Europe, XERMELO recently received a positive CHMP decision and we and our collaborator Ipsen look forward to a potential approval in the third quarter. Our other priority this year is to ready our sotagliflozin program for regulatory filing in Type 1 diabetes. We had a very successful presence at the American Diabetes Association meeting in June, where we highlight additional positive efficacy and safety data from the inTandem1 and inTandem2 study.

Around the same time, we also announced positive top line inTandem3 data, which provided differentiating data on the effectiveness of sotagliflozin on lowering A1C to 7% or below with no severe hypoglycemic effects or diabetic ketoacidosis events.

We now have the majority of our data which we and our collaborator Sanofi need to file for Type 1 diabetes regulatory approval globally and we will have the largest body of data in Type 1 diabetes and most comprehensive filing package.

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

Sanofi will fund 60% of the commercialization costs relating to co-promotion activities under the collaboration. As many as you know - as many of you know there is no other drug beside insulin that have been approved or this indication and we are excited to potentially to provide a first in class therapy to patients with Type 1 diabetes.

I'm very proud of the extraordinary men and women here at Lexicon for successfully navigating three Phase III sotagliflozin studies to this development process for Type 1 diabetes. I'm also proud to be passing the baton from here to our wonderfully capable colleagues at Sanofi, as they are responsible for regulatory filing.

We are confident in their ability to file sotagliflozin to regulators around the globe, starting with their intent to file in the United States and in Europe in the first half of 2018. We know patients are waiting and we will do all we can to file as early as possible during this timeframe, potentially as early as the first quarter of 2018.

As we make this transition, we Lexicon will not be providing further commentary in the regulatory process to the end - prior to the NDA or MAA submissions, as this now will be Sanofi’s responsibility.

On slide three, you can see that we expect 2017 to be a event rich year for the sotagliflozin program, with additional efficacy data from secondary end points coming out this quarter with inTandem2. We expect these results to support what we saw in inTandem1 regarding the effects of the drug on body weight and blood pressure in hypertensive type 1 patients. In addition, we anticipate getting cool results from both studies on time and range, as measured by continuous glucose monitoring this quarter.

Lastly, we will have a significant presence at the upcoming European Association for the Study of Diabetes better known as EASD in September, where we’d expect to have several oral and poster presentations for sotagliflozin. As we near the end of the type 1 program, we and our collaborator Sanofi are eager to continue advancing sotagliflozin in the Phase III program in the type 2 setting.

Lastly, there's a lot more value we hope to create from our early stage pipeline, LX2761, which targets SGLT1 is in Phase I development for Type 2 diabetes, we then expect it in the second half of this year. On another compound under development, LX9211 is a novel compound for neuropathic pain that will enter the clinic very shortly.

With that, I'm now going to turn the call over to Alex Santini, to discuss the commercial business. Alex?

Alex Santini

Thanks, Lonnel. Good morning, everyone. I'm very excited to provide you with an update on our commercial performance. We continue to be confident in our ability to execute a successful XERMELO launch, as evidenced by our achievement of net XERMELO sales of $3.6 million in the first quarter of our launch.

Although we are still in the early stages of the launch, XERMELO is off to a very promising start and making a real difference to the lives of patients. We are seeing encouraging trends emerge regarding the commercial prospects for XERMELO. And I am optimistic that these trends will carry on throughout the year.

We recently held our XERMELO launch meeting, where patients shared their very positive experiences and inspiring stories and where we revealed a new patient campaign. We continue to hear commentary from patients about how impactful this drug is on their lives, whether it's the reduced episodes of diarrhea or the convenience of an oral therapy or other efficacy and safety aspects of the drug.

The fact that these patients are getting their lives back and no longer having to schedule their days around debilitating and painful bouts of diarrhea is a testament to the effectiveness of the drug. I must say that our sales force is extremely fired up to pound the pavement. So we look forward to continuing this momentum.

As a reminder, our strategic imperatives for XERMELO include, driving awareness of the disease and its burden impact, driving rapid adoption by establishing a differentiated clinical proposition, amplifying and activating the patient voice and ensuring that patients and healthcare providers gain access to XERMELO.

We are seeing success in bringing the negative impact of carcinoid syndrome diarrhea symptoms to the forefront for oncologist. Aided awareness are strong with more than 80% of oncologists being aware of XERMELO.

Notably the intent to prescribe is high with 8 out of 10 oncologists who are aware of XERMELO intending to prescribe the drug in the future. Of the physicians who are prescribing the majority indicate that XERMELO is meeting – excuse me, or exceeding their expectations.

We are definitely seeing the impact that the sales force is having on trial and usage, as well as shifting key attitudes about the disease. To give you a sense of how well our team is executing against these objectives. We are seeing positive trends in our prescriber base. As shown on slide five, we have targeted nearly 270 of the top tier prescribers of which many are with 95% have been detailed. We are activating a broader prescriber base at a higher rate across all their sites.

Now all 20 of the high volume centers that prescribe SSA therapy have written XERMELO scripts and approximately one third of all enrolments are being generated by the top prescribers. Importantly, we are seeing significant growth in enrolment counts in the low decile and non-target groups.

I'm very pleased with the strong foundation we have in place and the favourable feedback we are hearing from individual stakeholders about XERMELO and we plan to maintain sharp focus on the ongoing commercialization of XERMELO.

Through June 30th there have been 443 patients with pain XERMELO prescriptions and we are extremely pleased with that result, as it is in line with our expectations. The majority of patients continue to stay on drug they did in the clinical trial.

What has been surprising to us is that expectations for the efficacy of the drug have been very high, giving some remarkable experiences from some patients, which in essence is a double edged sword in that not all patients will see positive effects of XERMELO as quickly as a few days.

So we are learning to set realistic and reasonable expectations for patient’s, caregivers and healthcare providers that involve educating them to stay on drugs for at least 12 weeks because not all patients will see such rapid results.

We have an opportunity to activate the voice of the patient and the caregiver, leveraging patient feedback and the benefits of our product to create a stronger call to action for patients and caregivers to demand and requests XERMELO. And we see the physicians who treat carcinoid syndrome diarrhea their feedback is that approximately 40% to 45% of their patients are not as we control by SSA therapy.

However, when we survey patients, more than 80% of them indicate that they are not well controlled. So there is a disconnect between how physicians view, how patients are doing compared to how patients actually feel, as XERMELO is the first ever oral therapy, and the first new class of therapy to be approved in this indication in nearly 30 years. We expect it will take time to change in grain [ph] treatment added, but are pleased so far with our progress.

Recently XERMELO was included as a recommended treatment option in the latest National Comprehensive Cancer Network, NCCN clinical practice guidelines in oncology for neuroendocrine tumors, which we believe to help change treatment habits.

The speed at which the drug was placed in the guidelines, nine weeks post-filing speaks to the importance of this drug and the unmet need. This inclusion will help assist patients their caregivers and healthcare providers in making informed decisions, while treating their neuroendocrine tumors and will possibly drive further use of XERMELO in the near term.

We have been getting good traction with physicians with the NCCN guidelines in hand. Not only do the NCCN guidelines help physicians in their treatment decisions, but they also provide payers with better guideposts on the reimbursement side.

To date, we have had a very positive formulary position. The majority of payers have a raise in reimbursing for XERMELO even though a decision may not have been rendered. Since launch 29 plans have made a formulary decision and 28 or 29 plans that cover two thirds of the short lives have placed XERMELO in a favourable formulary position.

We continue to make solid progress on this front and expect to receive decisions from all payers within the first six months of launch. As for the payer mix, we continue to have a balanced mix of Medicare and commercial patients. We are ensuring access to XERMELO through our LexCares program, which is a patient centered platform that helps to appropriately remove adherence hurdles.

LexCares program is seamlessly integrated processes for accessing and dispensing XERMELO, coordinating the insurance benefits and the financial assistance option, assisting healthcare providers with process support and providing ongoing nursing support for patients. All physicians and patients are using our system and it's been extremely effective. While we are off to a great start, we have more to do. We look forward to updating you on our progress.

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

Praveen Tyle

Thank you, Alex. This morning I'm going to highlight the significant progress we have made this quarter advancing our sotagliflozin program, which is nearing completion for our novel, oral, anti-diabetic agent in Type 1 diabetes.

When we speak to though leaders in the diabetes space, the consensus is that there are challenges associated with managing glucose levels with insulin alone, as patients make trade-off between effectively managing their blood glucose, while trying to avoid complications, such as severe hypoglycaemia and weight gain. As our data has shown so far, across three Phase III studies we see sort of a close and far reaching effects through blood glucose control without these complications.

Moving to slide seven, we are completing two pivotal trials inTandem1 and in inTandem2, which are identical studies in terms of primary endpoint, looking at change in A1C with a background of optimized insulin, as well as another Phase III study inTandem3 which is examining the proportion of patients with A1C less than 7% at 824 and no episodes of severe hyperglycemia and no episode of DKA after randomization. All three studies have already achieved their primary endpoint with meaningful reductions in A1C at all dozes studied at 24-weeks.

As shown an slide eight, in pivotal studies sotagliflozin treated patients continue to show reductions of A1C on top of optimize insulin, which is a very important distinction. Notably, when insulin was not optimized prior to randomisation, which was a design of inTandem3 and drug related patients also demonstrated meaningful reduction of A1C compared to placebo. While we only announced our plan data from inTandem3, we intend to publish the full data effect in a major peer review journal in the near future.

We are frequently asked how sotagliflozin will be differentiated from other SGLT2 inhibitors in Type 1 diabetes. We believe that gastrointestinal SGLT1 inhibitions may contribute to both efficacy and safety results. In terms of efficacy, SGLT1 inhibition results in a reduction in hypoglycemia after meals.

This reduction ion meal time glucose is important in controlling A1C. It also has implications for safety, as a more predictable and stable glucose response in Type 1 diabetes may lead to a lower risk of hypoglycemia. SGLT1 inhibition by sotagliflozin appears to moderate urinary glucose excretion as well and it leads to a natural meal time GLT1 elevation. These are features that may help limit their incidence of diabetic ketoacidosis, DKA.

Secondary endpoint data from inTandem1 and data from inTandem3 speak to this differentiation and helps characterize the overall favourable benefit risk profile. In both studies sotagliflozin increased the proportion of patients who achieved A1C control without an episode of severe hypoglycemia or episode of DKA.

In addition, sotagliflozin reduced body weight and had favourable effects on systolic blood pressure. This was seen in the pivotal inTandem1 study, as seen on slide nine and details will be presented at the upcoming EASD meeting in Lisbon.

Patients taking sotagliflozin experienced immune reduction from baseline and body weight after 24-weeks of treatment of 1.6 kilograms for the 200 milligrams dose and 2.7 kilograms for the 400 milligram dose compared to a mean body weight gain of 0.8 kilograms for patients on placebo. Statistically significant at 0.001 level for both doses, sustained affects on body weight were also seen at 52 weeks.

In addition, systolic blood pressure in the subset of Type 1 diabetic patients with baseline hypertension or greater than or equal to 130 millimetre of mercury was reduced by 9.9 millimetre of mercury and a 11 millimetre of mercury at these 12 when treated with 200 milligrams and 400 milligrams of sotagliflozin respectively, compared to a reduction of 4.4 milligram of mercury on placebo, P value of 0.017 and P value of 0.003 for 200 milligram and 400 milligram doses respectively.

Notably, the outcome on every secondary endpoint favoured sotagliflozin over placebo with results for the 400 milligrams dose having achieved statistical significance for all six secondary endpoints, including improved scores on their diabetes treatment satisfaction scale and a reduction in distress on the diabetes distress scale.

The patients perspective in Type 1 diabetes is extremely important and it was encouraging to see significantly better patient reported outcomes with sotagliflozin and placebo. Later this quarter, we will report on the secondary endpoints from inTandem2 and on continuous glucose monitoring data pulled from the inTandem1 and inTandem2 studies. The main safety runs to construct [ph] severe hypoglycemia and DKA.

On slide 10, you can see that the incidence of severe hypoglycemia was higher in the placebo arm compared to the sotagliflozin arms with no discontinuation in that regard. From inTandem3, we note that the ability to improve target glucose levels without increasing severe hypoglycemia at risk is a first for any adjunctive glucose lowering therapy evaluated to date for people living with Type 1 diabetes.

Regarding DKA, this event occurs more often in the drug arms versus the placebo or arm. The risk at 24 were in the order of 1% to 3% and we recently reported that the risk at 52 weeks in inTandem1 study stayed in the range of 3% to 4%. Importantly, there was a very low rate of discontinuation due to DKA in the drug arms and most patients who experience DKA resumed treatment with the study drug.

Also of note, a yearly risk of 5% to 8% has been reported in studies of actual practice. We believe that careful monitoring can help patients achieve better glycemic control, while managing the risk of DKA.

Based on the totality of data in nearly 3000 patients across 3 safety studies, we believe that the benefit risk profile favours the use of sotagliflozin in patients with Type 1 diabetes. As such, we will be supporting Sanofi in their efforts to file for global regulatory approval in Type 1 diabetes.

As the Type 1 program wraps up, we and Sanofi are excited to advance sotagliflozin in Type 2 diabetes. As you can see on slide 11, Type 2 diabetes represents a major and growing health problem that affects hundreds of millions of people worldwide. This disease contributes to renal impairment and we know that approximately 40% of patients with Type 2 diabetes have chronic kidney disease. This is an important fact given sotagliflozin for SGLT1 mechanism of action.

At the recent American Diabetes Association meeting J&J presented detailed cardiovascular outcomes for CBO data from the CANVAS program, which evaluated a selective SGLT2 inhibitor canagliflozin in at risk patients with Type 2 diabetes. Essentially canagliflozin replicated the cardiovascular benefits previously observed in Eli Lily [ph] empagliflozin CVOT data, including statistical superiority on the primary efficacy endpoint and improvement in renal outcomes.

Notably CANVAS and EMPA-REG data were consistent with CVD real data demonstrating that SGLT2 inhibit mediated a reduction in hospitalization for heart failure or death. Empagliflozin now carries an efficacy claim for improved CVOT outcome on its label. We believe these data indicate that cardio renal protective benefits are likely, SGLT2 inhibitor mediated plus effects.

So we are looking forward to advancing sotagliflozin in the Types 2 setting. As a reminder, Sanofi p is executing the Phase III program. So please look for updates from them.

To wrap up. We are pleased with the totality of the sotagliflozin data package for Type 1 diabetes to date and we and Sanofi look forward to bringing this drug to the market.

In Type 2 diabetes, we are excited about sotagliflozin potential to make a difference in patients lives and we are excited to advance the program with Sanofi.

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

Jeff Wade

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

Now please refer to slide number 13 of our presentation. As indicated in our press release today, second quarter 2017 revenues totalled $12.1 dollars, a decrease from $20.1 million in the prior year period, primarily due to lower revenues recognized from the collaboration and license agreement with Sanofi associated with the performance of our obligations relating to Type 1 diabetes development activities and shared funding of Type 2 diabetes developing.

Net product revenues for the three months ended June 30th 2017 included $3.6 million from the sale of XERMELO in the U.S. and $0.3 million dollars from the sale of both tablets of telotristat ethyl to Ipsen.

Cost of sales related to sales of XERMELO was $0.5 million for the second quarter of 2017, which included $0.4 million a 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 pre-commercialization inventory of XERMELO is expected to be sold over approximately the next two years. As a result, cost of sales for XERMELO for next two years will reflect a lower average unit cost of materials than would otherwise be expected.

We continue to manage and prioritize our operating expenses. Research and development expenses for the second quarter of 2017 totalled $26.9 million, down 44% from $48.2 million in the prior year period, primarily due to decreases in external clinical development costs relating to sotagliflozin.

R&D expenses in the second quarter of 2017 were lower quarter-over-quarter due to lower expenses associated with the Phase 3 sotagliflozin studies. Although expenses for the Type 1 diabetes program will be winding down, we anticipate that R&D expenditures will be higher for the third and fourth quarters of 2017 compared to the second quarter, as Sanofi ramps up the sotagliflozin Type 2 diabetes program and we contribute to our portion, which is capped at $100 million.

Selling general and administrative expenses for the second quarter of 2017 were $18.5 million, which represented a 120% increase from $8.4 million in the prior year period, due primarily to increased costs associated with the commercial launch of XERMELO.

The revenue and expense profile resulted in a net loss for the second quarter of 2017 of $35.1 million or $0.33 per share compared to a net loss of $38.1 million or $0.37 per share in the prior year period.

For the three months ended June 30th of 2017 and 2016, our net loss included non-cash stock based compensation expense of $2.4 million and $2.0 million respectively. From a balance sheet perspective, we exited the second quarter with $231.2 million in cash and investments compared to $346.5 million as of December 31 of 2016. We foresee that our current cash position, together with expected revenues will be sufficient to fund operations at least through 2018.

Based on our second quarter financial results, we are revising our financial guidance for 2017. We continue to expect contractual revenues from existing collaboration and license agreements in 2017 to be in the range of $65 million to $75 million.

Our revenue guidance excludes revenues from sales of XERMELO due to the early nature of the XERMELO launch. We are lowering the upper range of operating expense guidance by $5 million to $238 million to $255 million from $230 million to $260 million. This guidance includes the co-promotion opt in for sotagliflozin in type 1 diabetes.

Non-cash expenses are expected to be approximately $12 million of which $8 million is stock based compensation, $2 million is the increase in fair value of Symphony Icon purchase liability recorded in the first quarter and $2 million is depreciation and amortization.

We are lowering the upper end of our R&D expense guidance by $5 million to $160 million to $175 million from $160 million to $180 million. We are maintaining our SG&A expense guidance of $70 million to $80 million dollars.

Last but not least, we are reducing the top end of our 2017 guidance on net cash used in operations by $5 million to $210 million to $220 million from $210 to $225 million.

I will now turn the call back to Lonnel.

Lonnel Coats

Thank you, Jeff and the team. We've had a great first half of year and we're very excited though as momentum for the rest of the year. Our main priority to the second half of 2017 are centered around driving long-term value, to continue execution on the XERMELO launch, preparing for global regulatory filing for sotagliflozin in the Type 1 diabetes and advancing our earlier stage pipeline. We very much look forward to updating you on the progress as it happens.

With that, I’ll ask the operator to begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes on the line of Liana Moussatos with Wedbush Securities.

Liana Moussatos

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

Lonnel Coats

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

Jeff Wade

The deferred revenues from – I am going to answer the second one first. The deferred revenue for XERMELO are minimal because the way that we structured this we're using the sell-in method. So when we sell to the SPs we’re recognizing revenues. So really the net sales really do represent sales to - into the distribution channel and they also represent sales to the marketplace because the specialty pharmacies maintain a minimal amount of inventory between two and three weeks of inventory.

So that’s to answer the second question. The first question there is no opt-in payment either way from us to Sanofi or vice versa associated with the access of our co-promotion option. Just to remind you and in terms of the co-promotion option, we have the ability to co-promote in the US and have a leadership role in the marketing and sales of XERMELO in the Type 1 diabetes setting, in collaboration with Sanofi and that co-promotion effort which is focused on specialists is something that we fund 40% out and Sanofi fund 60% out.

So there will be a cost incurred with that. They tend to be closer to launch, although we have included that in terms of our planning from the very beginning since our intention was always to exercise this option.

Lonnel Coats

Just as for as clarification. We all have XERMELO on the brain So Jeff, let’s say sotagliflozin.

Jeff Wade

Yes, sorry, sotagliflozin.

Operator

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

Jessica Fye

Hey, good morning. Thanks for taking my question. A, could you talk about the kind of filing going forward, but I'm curious about the FDA meeting you had in June on sotagliflozin and kind of what the key questions you took to the FDA were and feedback you got on that?

Also just curious if there was any discussion at all about - around ruling out CV risk like for Type 2 drugs or is that really just a moot point, particularly with the outcomes data for the class.

And then secondly, I know you always plan to opt-in. But is there a specific window within which you had to exercise the option. And if so what was the window, I am just trying to think about how the opt-in decision may or may not have been linked to the FDA feedback versus just the overall data package you've generated for sotagliflozin thus far?

Lonnel Coats

Jessica, thank you for the questions. Let me first say, the meeting with the FDA, as well as EMEA quite well. In fact, that we're talking about filing the drug, I think is an indication of the fact that when wouldn’t do that if we had to go through a process of CV trials.

So I think the meeting went very well. I think for us we got a clarification as to what we need to do to put into our package and get ready for the next stage, which would be certainly getting ready for the pre-NDA meeting and things of that nature that Sanofi will need to do.

I think all of us walked away fairly confident from our discussions both with FDA, as well as EMEA that we have a drug that’s file-able which is why we are now talking about filing the drug.

As to the window for opting in for sotagliflozin, yes there is a window and we're in it. The window is really based on what we think we will have of an approved product in market and count your way back to get just off ready. We're now in that window and we have opted in relative to being in that window.

Jessica Fye

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

Lonnel Coats

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

Jessica Fye

Okay. Got it. Thank you.

Lonnel Coats

You bet.

Operator

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

Chris Shibutani

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

Lonnel Coats

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

Jeff Wade

So I think the time and range is an emerging issue from a regulatory perspective. I think it's - I think that there is becoming a greater appreciation of it's importance, but it’s not something that we were encouraged to have as one of the primary endpoints in our study, because it’s not a - it's not a validated endpoint, FDA accepted endpoint.

We felt that is important to incorporate in our study though because it is very important to people with Type 1 diabetes. And so I think that what we've seen consistently across the studies that we've conducted in Type 1 diabetes is that there is an improvement in time and range. And I think that you know, from a patient perspective having more time and range if it's an hour or two hours or three hours is something that's quite meaningful. And we've seen results like that in our studies where we've seen you know, pretty significant increases in time and range.

It is something I think that is - that will contribute to the overall you know, sort of risk benefit with the way that people look at risk benefit of the drug and will probably help from regulatory perspective even though it’s not really a regulatory endpoint, but it is something I think commercially and it's something that for patients is something that's very important. And I think we think that it is very important to have that benefit for patients.

Lonnel Coats

Yes, Chris I think to add to Jeff’s point, what we're trying to do in this program, which I will remind everyone is the largest program conducted for oral agent in Type 1 diabetes. We put endpoints in, or secondary measures in from a patient perspective, we've done what we need to do from a regulatory standpoint to be ready and that’s A1C and we’ve successfully done that three times now.

But the rest of these benefits is to do exactly to your point is to be able to call out for a practicing physician how well do this drug behave relative to secondary measures that are important to patients. Things like weight reduction, things like blood pressure or hypertensive, things like to Jeff’s point a timing range. These are very important measures for patients.

And therefore we took the opportunity to put it into our trial and we emphasized it or highlighted because we are very confident that sotagliflozin can perform well on these measures and it has performed well on these measures. We don't expect anything different than that. As we finish up the last call out in the program.

Chris Shibutani

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

Lonnel Coats

Chris, we're four months in. You know, we're pleased with where we are. We have a lot of work to do. As Alex has said, I think is way too early to adjust any thinking around peak sales. But at this moment I think for the quarter we're very pleased where we are.

Chris Shibutani

Great. Congrats on the launch update. Thank you.

Lonnel Coats

Thank you.

Operator

Our next question comes from my line of Yigal Nochomovitz from Citigroup.

Yigal Nochomovitz

Hi, guys. Thanks for taking the question. Just to go back on the co-promote for a second. Could just clarify if the decision for the opt-in is in anyway connected to the switch to have Sanofi do the filing in Type-1, are those - were those two decisions sort of separate or not? Thank you.

Lonnel Coats

So I’ll turn it over to Jeff.

Jeff Wade

Sanofi is always been responsible for regulatory filings. That was the original contract. We are - because we've conducted the Type 1 development program, we're heavily involved in doing that. But ultimately they will be the holder of the NDA and the MAA.

The co-promotion is really a separate and altogether separate decision and it relates to our ability to participate in the commercial launch of the product in Type 1 diabetes and then the ongoing commercialization of the product in Type 1 diabetes. And that was - there was a framework in the agreement and we've exercised our option under that framework.

Lonnel Coats

Yes, to emphasize what Jeff has said, is Sanofi as you go through agreement we announced in 2015 you know, they have the worldwide exclusive rights to this compound and therefore they've always had responsibility for the NDA, as well as MAA. We have now gotten to a point where we're concluding the Phase III program for Type 1 diabetes and as you do that you get the feedback that you need and you determine when the timeframe will be viewed to file it, then its our obligation to turn over the package to them and start to work with them on filing.

You also can without getting into specificity figure out once you have a filing date in mind you'll have a launch date in mind, that is what triggers when you will - you have provisions for opt-in.

Yigal Nochomovitz

Okay. Got it. Thanks Lonnel. And then just on Type 2. Obviously you can contribute up to a hundred million. Can you give any commentary on what percent of that would be expected to be deployed in the second half of the year for this year?

Lonnel Coats

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

Yigal Nochomovitz

Okay. And I don't know if you can comment on this, so Sanofi handling but, what do you expect that all of their Phase 3s for Type 2 will be up and running by the end of this year? I know there are several posted, but there is more on the way.

Lonnel Coats

Yes, they are at. We'll be ramping up additional studies over the balance of this year.

Yigal Nochomovitz

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

Jeff Wade

Yigal, you follow always. We are making assumptions about price appreciation in our model.

Yigal Nochomovitz

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

Lonnel Coats

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

Alex Santini

Yes, we did pick up on that yesterday. ESI posted their 2018 formulary where a single is non-preferred and preferred position. We'll see what the impact of that is going to be in the real world setting. In the past, you know, ESIs had some very significant impact when they place these preferred formulary into the marketplace and as Lonnel just indicated, we benefited in that, we're not a necessary therapy. So whether it's some [indiscernible] in that preferred position we’re the alternative option when more is required.

Lonnel Coats

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

Yigal Nochomovitz

All right. Great. Thank you very much.

Lonnel Coats

You’re welcome.

Operator

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

Stephen Willey

Yes, good morning. Thanks for taking the questions. Maybe one for Alex, I guess it's perhaps probably a little bit too early to speak to refill rates at this point, regarding XERMELO. But just maybe wondering you know, just given the comments you made regarding the need to educate patients to stay on drug for at least 12 weeks, what composition of patients that you might be seeing on the two week starter who may be choosing to discontinue therapy for reasons that are unrelated to reimbursement?

Alex Santini

Yes. So it’s still very early in the launch. I mean, we are seeing the majority of our patients staying on the drug and consistent with our clinical trial usage. And for those that are discontinuing now, as Lonnel had indicated, you know, the perception gaining an immediate response you know, within a few days is something that we need to educate around.

So you know there's a lot of social media about how well patients are doing and patients are seeing that and their expectation is that that they could see immediate results. So we're educating ACP patients, efficacy groups to let them know that it is important that many patients will see immediate responses, but also other patients may see responses over a 12 week period of time.

So it's important to stay for the duration of the therapy adjusting with our clinical trial. We think with proper education will we set the expectations in terms of you know, what would be a proper course of treatment.

Stephen Willey

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

Jeff Wade

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

Stephen Willey

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

Jeff Wade

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

Lonnel Coats

You know, Stephen, for us it’s very important because as we certainly have disclosed the top end of our royalty rate in U.S. for Type 1 diabetes is 40%. So that's well now. To ensure we get to that 40$ and we need to get there quickly. And the best way to show, we get there quickly with the participating process. And I think it's a very good increment that Sanofi pay 60% of our participation in that process.

Jeff Wade

Got it. And then just the final question on Type-2. I guess, I'm just kind of curious, I don't know how much you can speak to this, but you know, this will be kind of unique I guess in terms of cardiovascular outcome studies in the sense that this will be the first trial that becomes initiated after you've had a number of drugs showing cardiovascular benefits, both from this SGLT2 class and most recently [indiscernible]. So I'm just kind of curious I guess how you incorporate those positive data points into the design of a CVOT study.

Lonnel Coats

Great question, Stephen. And as part of our answer and that, it’s a satisfying [ph] answer to Phase 3 program in Type 2, but I would tell you just pay close attention to what they've been putting up on close trials. I do believe Sanofi is investing to win. This will be a very important program to them and we would expect them to speak more about what they're doing as we get more into the second half. So as I promised him I will allow them take a lead on communications throughout that.

Stephen Willey

All right. Thanks for taking the questions.

Operator

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

Alan Carr

Thanks for taking my questions. I wonder if you could talk a bit more about the OpEx here the reason why your price is coming down and then also with respect to XERMELO, any attraction with the lower deciles is something that you spoke about after the first quarter sales, perhaps if you could talk about that a bit more? Thanks.

Jeff Wade

Sure. So I can talk about the operating expense question. So you know, as you know, we're winding up the clinical studies, the in life portion of the clinical trials is done. And so we - as we incur expenses over the cost of the program a lot of that is already winding down in the Type 1 diabetes program.

We will have some additional expenses as we get the final clinical study reports, and as we get ready for filing. But this quarter was a relatively low quarter for purposes of the Type 1 development expense. And we're still ramping up on the Type 2 side, so the Type 2 expenses are more in the second half than they were in the first half.

So this quarter is a little bit low, as the first quarter is a little bit high on the R&D expense side. This one is a little bit lower. We'll beat that - last two quarters will be as you can tell from our annual expense guidance are going to be a bit higher than the second quarter was. But that's all as we expected. And it just relates to how these very large trials which are a big part of our R&D expenses are running through over there over the course of the year.

And as you might expect our R&D expenses are going to be quite a bit lower next year because of the fact that we will have completed - fully completed this 3000 patient Type 1 diabetes program.

Alan Carr

Okay. So I was just wondering what drove your guidance down, something in regards better than you thought…

Jeff Wade

We've just ended up. Some of it is you know, costs - a little bit of cost savings and some of it's a little bit of cost maybe from 2017 and into 2018.

Lonnel Coats

Yes. I think we have a better handle. We’re now two quarters in. We have a better handle on all of our spending relative to the launch. We have hand on our [indiscernible] our sales force. We have handle - a better handle on what R&D expenses are going to be, instead of waiting to the end of the year, we felt it was better to go ahead and get the proper guidance in the range. So we’re very pleased with the data efforts that management has made to keep our expenses in check.

Alan Carr

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

Alex Santini

Good morning, Alan. This is Alex. So we have been successful in getting in front of our position and expanding the prescriber base. We referenced that we did have 95% of the top 270 prescribers and we’ve made great progress at all different levels.

We are doing in-person promotions and hell of detailing which has been successful in activating those lower deciles as well. So you know, I guess surprisingly we're getting some really good uptake in the lower deciles clinician also and we may mentioned in our prior call, many of these physicians have significantly fewer patients, but nevertheless, our awareness are mellow and gaining access to it.

Lonnel Coats

One of the things we deploy and to add on to Alex, just say that this kind of detailing force is actually very, very productive and they reach out to physicians and they gain interest, then we get material to and if we need to get a rep deployed out we will get a rep deployed out and that’s actually relating to a return.

Probably one of our biggest returns at the moment is really the cost of pulling it out that one patient here, one patient there because every patient counts when you're in a orphan drug market. So we have our resources deployed there and at this moment that's probably one of the biggest returns we're getting.

Alan Carr

All right. Thanks very much.

Operator

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

David Maris

Good morning, Lonnel and team. A couple of questions. So first congrats on the first four quarter of XERMELO. Are you doing any educational G-I specialists on the carcinoid syndrome, since they may also be the first line of seeing patients symptomatically? And if not do you think that over time that XERMELO would benefit from this?

Second on the dealer that you mentioned you’re going to be presenting in September. I just missed it. Is this new dealer or has it already been press released. And then lastly, on the business development front, you have a really good foundation, is now the time to be looking at other assets and if so what would fit that. Or are you more focused on look we're executing a launch with give that a pause and do that maybe in 2018, 2019? Thank you.

Lonnel Coats

So let me start off with your last question first. Right now our focus is really, really on executing well on the launch of XERMELO, because I think you awfully want to do business development you have to be execute well and gear the running [ph] of synergies to any value proposition.

So right now that’s our focus, is executing well both and getting the Phase III program done and handed over to Sanofi for regulatory filing, participating with them certainly on the Type 2 program, and then certainly executing XERMELO. But we also have some early stage work we're focused on with LX9211 for neuropathic pain and advancing that, along with LX2761 advancing that through clinic which is also program in diabetic. So at this moment our real focus is on the execution of what we have in hand.

With that being said, you know, these markets particularly in the net market is one which we keep a very close eye on and we'll stay very optimistic as we go forward. As for the first question David, which I got to go back to in my mind. Yes…

David Maris

It was FDI [ph] specialist…

Lonnel Coats

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

Jeff Wade

I'm trying to remember what that means…

David Maris

It was on the upcoming dealer?

Jeff Wade

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

David Maris

Great. Thank you very much.

Lonnel Coats

Thank you, David.

Operator

Your next question comes from the line of Kelly [indiscernible].

Unidentified Analyst

Good morning. Thank you so much for all of the work that you’re doing on the SGLT1-2. I was wondering if you could talk a little bit of that from a commercial perspective once this is hopefully out, how you can be working with doctors and other healthcare providers to supplement the way that they work with patients right now is therapy on lowering our blood glucose numbers.

And it's a completely different thing to also think about lowering cardiovascular risk and even the trial results won't be immediately available. I don't think that is a shift and I'm thinking, but obviously have to be careful because this is for a Type 1 - those results won't be ready for a while?

Lonnel Coats

Yes, Kelly I think that's a very good question. We have a lot of work to do to get ready commercially. Its one of the reasons we opted in with our partner Sanofi because now we have probably stated [indiscernible] between the two companies. Our intent to file both an EU in the US in the first half of next year. We then start getting ready for all of our commercial preparation that also includes our medical teams will come together and start to work on how we began to engage with key opinion leaders of the community, how do we tell the story, how do we educate them properly on the use of adding in an oral into the marketplace. All of that work is going to be forthcoming.

You know, one of the most important things for us is you know, we've included the patient voice into this process. And so how do we activate patients voice as we go out into the community with KOL s to get them to see is A1C is important, but it's also the other measures I talked about earlier [indiscernible] is also important for physicians to consider when they're going to be prescribing all anti diabetic agent. So we have a lot of work to do with our partners. I absolutely agree with you, we have to transform some of the thinking early on in the process. And I have every confidence between the two companies will be able to do that in short order. So thank you very much for your question.

Unidentified Analyst

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

Lonnel Coats

Thank you, Kelly.

Operator

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

Lonnel Coats

I just want to thanks everyone for joining us this morning. As I said, this was a remarkably great first half for Lexicon. We're executing very well. We're coming to the conclusion of our phase, our large Phase III program. Is been a honour and pleasure for Lexicon to lead the way for the first anti diabetic agent and its category. Now we work very closely with our partners to get ready for filing. We couldn’t be more fortunate to have Sanofi as our partner and we have every confidence that to hand off from here we’ll go extremely well. As we learn form them everyday and learn form each other in getting ready for really shifting, changing the way to exercise in a Type 1 setting. So pretty awesome there.

XERMELO very proud of where it is at this moment. We have lot of work to do, it’s too early and therefore we have a very committed team to execute – that’s executing very well. Lot more work to do from educating physicians and patients and the right expectation to continue to have growth. Also the opportunity to stand our base. Our prescribers I think is adequately in front of us and last by not least, we always look very careful how best to manage our shareholders money, to be responsible in what we do and I think we’ve done a very well to date and we’ll continue to do in the second half. On that note, I thank everybody for joining us this morning.

Operator

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