Lexicon Pharmaceuticals, Inc. (LXRX) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Lexicon Pharmaceuticals’ Earnings Conference Call. (Operator Instructions) Thank you. I would now like to turn the conference over to Chas Schultz. Please go ahead sir.

Good morning, and welcome to the Lexicon Pharmaceuticals fourth quarter and year end 2013 conference call. I am Chas Schultz and with me today are Dr. Arthur Sands, Lexicon’s President and Chief Executive Officer; Dr. Pablo Lapuerta, Lexicon’s Executive Vice President and Chief Medical Officer; Dr. Brian Zambrowicz, Lexicon’s Executive Vice President and Chief Scientific Officer; and Jeff Wade, Lexicon’s Executive Vice President of Corporate Development and Chief Financial Officer. 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, provide an update on our clinical programs and then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, followed by Dr. Lapuerta, who will provide an update of our clinical programs; and by Jeff Wade, who will review our financial results for the fourth quarter and full year 2013 and discuss our financial guidance. 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 homepage 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 clinical development of LX4211, telotristat etiprate also referred to as LX1032 and LX1033, including characterizations of the results of and projected timing of clinical trials of such compounds and the potential therapeutic and commercial potential of such drug candidates. This call may also contain forward-looking statements relating to Lexicon’s growth and future operating results, discovery and development of products, 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, including uncertainties related to the timing and results of clinical trials and pre-clinical studies of our drug candidates, our dependence upon strategic alliances and ability to enter into additional collaboration and licensing agreements, the success and productivity of our drug discovery efforts, our ability to obtain patent protection from 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 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.

Thank you, Chas. And I would like to welcome everyone to the call. We will spend today this morning briefly reviewing our two lead programs, LX4211 for diabetes and then telotristat etiprate for carcinoid syndrome giving an update on their clinical progress. Looking at the first slide as a reminder, LX4211 is a unique first-in-class dual inhibitor of SGLT1 and SGLT2. And as we will discuss, because of this unique mechanism of action, we have spent considerable time elucidating the clinical impact of this and preparing this compound for Phase 3 and Type 2 diabetes. And I think we are now at that stage of being Phase 3 ready in Type 2 diabetes. In addition, the dual mechanism has opened the door for Type 1 diabetes and we are eagerly awaiting the results of that proof-of-concept study, which we now believe will be early April to have those results. So, on the next slide, the landscape, the competitive landscape for these SGLT2, SGLT compounds more broadly speaking is pictured here. As you can see and as we know most of the companies have focused on SGLT2 highly selective compounds and our advantage and clinical differentiation derives from being a dual inhibitor of both SGLT1 and SGLT2. And as will describe the Phase 3 ready status of LX4211 makes it a very attractive asset at this stage. On the next slide, the strategy going forward is to take full advantage of our dual mechanism of action and make sure that is leads to clinical differentiation and opens up of certain medical marketplaces for us that other compounds have not – where other compounds have not been successful. Specifically not only of course the broad Type 2 indication in combination with many potential items, but specifically those diabetic patients that suffer from…

Thank you, Arthur. I would like to talk a little bit about our work in the renal impairment with LX4211. Renal impairment in Type 2 diabetes is an area of high unmet need for two reasons. One is that it’s very common, but another it that so many medications in this area are contraindicated for one safety issue or another. And this is an area where LX4211 has potential. The SGLT1 inhibition that it offers in the gastrointestinal track could provide benefit, whereas other drugs have failed in this area. We see this as a good opportunity for LX4211 position in it – positioning it in an area of unmet medical need, differentiating against relatively selected SGLT2 inhibitors and giving as a perspective on how important clinically that SGLT1 effect of LX4211 may be. On Slide 6, we have recently concluded our study of LX4211 in patients with renal impairment. The study was successful and met its primary endpoints LX4211 significantly improved glycemic control in subjects with Type 2 diabetes and renal impairment. The postprandial glucose reductions were robust and the benefits were clear and those with the most advanced renal impairments with no evidence of any kind of any waning of effect. We also saw GLP-1 elevations and this is part of the signature of SGLT1 inhibition in the gastrointestinal tract. We see a strong postprandial glucose reduction and significant elevations in GLP-1, which we believe are beneficial. And as we have seen the final data, we confirm that these benefits were obtained with low urinary glucose excretion highlighting that this is a good study of clinically relevant SGLT1 effect. We have also – we see the safety and pharmacokinetic data, they support our selection of LX4211 400 milligrams as dose of study in Phase 3. So we believe…

Thank you, Pablo. I will provide a brief financial update. As indicated in our press release today, we had revenues for the 2013 fourth quarter of $1.4 million, an increase of 547% from the $0.2 million in the prior year period. The increase was primarily due to revenues recognized from a collaboration with a non-profit institute supporting the Phase 2 development of LX4211 and Type 1 diabetes. For the year, revenues increased to 104% to $2.2 million from $1.1 million in 2012. Our research and development expenses for the 2013 fourth quarter decreased to 3% to $20.3 million from $21 million in the prior year period. For the year, our R&D expenses increased 9% to $89.7 million from $82.6 million in 2012. In connection with our acquisition of Symphony Icon, we made an initial estimate of the fair value of our liability for the base and contingent payments. Changes in this liability based on the development of the programs and the time until such payments were expected to be made are recorded in our consolidated statements of operations. The associated decrease in fair value of Symphony Icon purchase liability was $5.3 million in the fourth quarter and $2.2 million for the year end. The decrease was primarily attributable to a reduction in the liability associated with Lexicon’s LX1033 development program in diarrhea predominant irritable bowel syndrome. Our general and administrative expenses for the 2013 fourth quarter were $3.4 million, a decrease of 13% from $3.9 million in the prior year period. For the year, our G&A expenses increased slightly to $17.1 million from $17 million in 2012. Our net loss for the 2013 fourth quarter was $17.4 million, or $0.03 per share compared to the net loss of $24.9 million, or $0.05 per share in the prior year period. Our…

Thank you, Jeff. We can open the call for questions. Is the operator on the line? We can open the call for questions.

(Operator Instructions) Your first question comes from Cory Kasimov with JPMorgan.

Hi there. It’s actually Matt Lowe in for Cory today. Just to start with I just want to confirm the QT study and the multiple ascending dose study up to 800 milligrams. Are they new studies that you just completed or just done and how do they feed into the partnership discussions? And I guess just to end like what gives you confidence, so the deal is in the work, so obviously it’s been around 18 months now, I think since the Phase 2 data came out. I am just wondering if there is anything you can tell us as to why you remain confident that a deal can still happen? Thank you.

Okay. So Matt, first off, our new studies, they are very recently completed studies. They are of course part of the required package if you will to proceed in the Phase 3. So I do think that in some ways those studies have been gating for progression of the program. So we are very pleased with the results. With respect to the second part of your question perhaps I could turn over to Jeff Wade, who is directly handling these discussions.

Sure. So we have been making good progress. Obviously, taking risk out of the program is helpful in progressing those discussions and these having completed these studies with favorable results helps us tick off the box for a couple of additional things that needed to be done before we went into Phase 3. We are still engaged in active discussions and those discussions are going well and we feel confident that they are progressing towards a conclusion.

And then I think the only thing I’d add to that is that being the first move on new mechanism of action forward into a potentially very major Phase 3 program is a high bar and it has required significant amount of data to demonstrate not only the unique dual mechanism is operating as we predicted, but also to forecast the medical markets that that could open up. And so that’s been part of the whole process. And again, it is a high bar to be the first mover with the dual mechanism. Thank you.

Okay, thank you.

Your next question comes from the line of Colin Bristow with Bank of America.

Hi, this is Colin with Bank of America. Thanks for taking the questions. On 4211, as in line with the QT steady and the fact that this is a novel mechanism as we think about the later stages of the regulatory process, can you talk about any additional scrutiny you see 4211 phasing and given the SGLT1 is expressed in other tissues such as the heart and what steps you have or will need to take to address this additional scrutiny? Also on Novartis’ LIK066, can you comment on how you see this compound stacking up versus 4211 and any early indications or differentiations between the two? Thanks a lot.

Okay. So, there is two parts of that. I think the first part on the regulatory aspects of those dual mechanism, Pablo, would you care to comment on that first. And I think the second part will turn to Brian for the comments regarding the Novartis compound. Pablo?

Yes, with the dual mechanism of action, we do not anticipate any additional safety hurdles or any unique safety hurdles. And the reason is because the systemic absorption of LX4211 is not sufficient for meaningful SGLT1 inhibition in the heart or other tissues. LX4211 still has relative selectivity for SGLT2 over SGLT1. And so it has systemic exposure that’s sufficient for renal SGLT2 inhibition but not renal SGLT1 inhibition or inhibition of SGLT1 in other tissues. And our discussions with regulatory agencies have progressed well. We will have a program that’s large like other Type 2 programs. It will have the cardiovascular outcome study like other Type 2 programs. And we have a systematic adjudication of events. And in our discussions with regulatory authorities the key attention is really been to the types of events that have been seen in mechanical flows and (indiscernible) programs.

Okay. And then second part of your question was regarding Novartis. Brian you want to talk about that?

One more thing may be on the first part is that, I think it’s very important as Pablo mentioned that we don’t achieve systemic levels of 4211 to inhibit SGLT1, but it’s important to note that many targeted drugs are stress broadly that doesn’t mean that those types of expressions are meaningful just further affirm patients with complete loss of function of SGLT1 are reporting to have no cardiovascular disease and long-term cogs using tremendous multiples of exposure of 4211 relative to what we are achieving in the clinic we see no cardiovascular effects and most importantly and most recently in our third study we saw no effects of LX4211. With that we brought up the dual inhibitor LIK066 from Novartis. We know that has completed Phase 1 and although they’ve registered for Phase 2, with clinical trials start quite some time ago. I think it’s notable that they have not initiated that study yet. I think the big challenge with any two inhibitor there is two huge challenges, one is that it’s very difficult in two targets to get the right – hit the right point in dose response curves with an agent for both targets not hitting one or the other two hard or too little. I think we have been very fortunate in hitting those points in the dose response curve very effectively in 4211, particularly challenging we can tell you based on our experience and our studies with multiple agents is being able to sustain the inhibition of SGLT in gastrointestinal tract overtime and throughout the day in which we clearly demonstrated. That would be a huge challenge with other agents. We feel very confident that we will remain first and best in class as a dual inhibitor of SGLT1 and SGLT2.

Great, thank you.

Thanks.

Your next question comes from the line of Thomas Wei with Jefferies.

Hi, thanks. Just in terms of the partnership in contingency plans if you don’t line up a partnership how are you thinking about that scenario? Would you just do Type 1 on your own, would you run some critical Type 2 studies in that Type 1 program in parallel, I would love to get a sense of that? And then also just in the preparation work here, when exactly would you be ready to actually start enrolling Phase 3 trials in Type 2 and then the same question in Type 1 partnership notwithstanding?

Jeff, would you like to lead off on that?

Sure. So I think there are different possibilities here that we could consider a percentage. Again, we expect that we should be able to do a partnership and so that’s our baseline expectation. Clearly there are options in Type 1 development like that might be positive – that might be more doable from a cost perspective than the full scale Type 2 diabetes programs. And so we do have things we start about in terms of different approaches that we could take. Again, our expectation is partnership this likely is in most probable way for. In terms of timing where we basically done the work to be ready to launch very quickly, there is a gap between the time that you pull the trigger for full-scale activities and the time that you enroll the first patient. But we’ve minimized that gap as much as we could and would still be able to start in the second half of this year with enrollment based on what we’ve done so far.

And then…

For both Type 1 and Type 2 it’s conceivable that start in the second half.

And just a question on the Type 1 data in April, a reminder of what you want to see out of that on the primary endpoint to consider that a good outcome and I have forgotten a little bit here, how aggressively those patients in that trial are being treated with their basal-bolus regimen and how aggressive they treat to target regimen are they on?

Okay. So it’s – that’s a 28-day study and so in that time period the most sensitive and I think important indicator is the use of insulin and that is the primary endpoint. And the most proximal piece of insulin dosing, most proximal to our mechanism is the bolus insulin dosing that’s the mealtime insulin dosing. So that’s going to the focal point of and is the primary endpoint of the study. And then looking at the other aspects of insulin use which include the basal insulin use and total insulin use. So the second part of your question the patients are basically instructed to treat the target as you would expect in a study of this kind with attention to safety that is not to over-treat themselves so as to avoid hypoglycemia because we do know that this agent when administered with insulin will lead to a – we think significant reduction and the need for insulin. So with certain safety advisory sort of topics that we’ve given the patients it is basically treat the target that would be their standard approach before the treatment period started. So there is a baseline period and then we go to the treatment period and the patients and the physicians have to make adjustment calls about the insulin dose adjustments based on their blood sugar ratings.

But just back on that earlier question I understand the mealtime insulin measurement to the primary endpoint, but there were – there was a whole range of different outcomes looking at insulin use from the early pioneer cohort. What do you think across these number of patients, what should we be looking for in terms of I mean actual like numerical reduction in insulin use? What would you consider as success?

Well in terms of bolus insulin use I think based on what we’ve seen in the pioneer group anywhere from a 30% to 60% reduction for these individuals I mean that may not mean out of around 30% or 25% reduction, that would be a meaningful reduction clinically we believe in bolus insulin use. The basal we think that there is 10% or 15% that may be something to look for, but we’re really – those are just approximations at this point. So it is a proof-of-concept study Thomas and it will tell us what those reductions are.

Great. Thanks. That’s very helpful.

Thank you.

Your next question comes from the line of Liana Moussatos with Wedbush Securities.

Thank you for taking my questions. Is LX-2761 still active in development and could just repeat the Q4 stock-based compensation expense in the 2014 guidance?

(indiscernible).

Sure. Alex 2761 continues per estimates on the enabling studies with an opportunity for initiating clinical studies probably in the second half this year sometime.

And then Jeff.

So the stock-based compensation in Q4 and for the full year for 2013 was $1.7 million in the fourth quarter and $7.4 million for the year. I think that was what you had asked about. And then on the financial guidance expectations we’re expecting contractual revenues of about $0.5 million in 2014, operating expenses in the range of $105 million to $110 million of which non-cash would be about $13 million of the total, $6 million of which would be stock-based comp, $4 million Symphony Icon purchase liability increase and $3 million in depreciation and amortization. And cash used in operations in the range of $87 to $92 million. So hope we’ve captured what you’re asking in your question.

Thank you very much.

Thank you.

Your next question comes from the line of Phil Nadeau with Cowen and Company.

Good morning. Thanks for taking my question. First one question on the dose trial. Can you give us some more information about what you found at the end of milligram dose? Was there any increase in side-effects at that dose in a non-linear pharmacokinetics and or it was only a 10 day study. So I’m not sure what efficacy measures you took but any signs of additional efficacy?

Okay. Pablo, would you like to address the 800 milligram dose the safety event?

Yes. The pharmacokinetics were linear so that the overall exposure to patients at the 800 milligram dose was approximately the whole that of the 100 milligram dose. The 800 milligram dose is well tolerated in the sense that there were no discontinuation to do that verse events and the serious adverse events. There seem to be a slight increase in the gastrointestinal adverse events, but it was slight and with the small sample size, that’s not conclusive.

Okay. And did you have any again over 10 days of measure, but what you can measure, but did you have any efficacy measures in the trial?

No, this was an healthy volunteer and we do not do detailed assessment of glucose profile.

Okay, great. My second question is on the TELECAST study. Can you remind us how that fix into your regulatory plan for telotristat?

Pablo.

The main – yes the main way that it helps us is in providing additional safety data. The – even though this is an orphan drug and we don’t need to have the safety database of drugs for other areas. That it is helpful to us we believe to have more exposure to telotristat etiprate and the TELECAST trial is one way of achieving that. It was not requested by regulatory authorities, it was our belief that this was a way to help patients who are interested in receiving the drug and for us to learn more about it, safety and support of an approval package.

Okay. Will that be completed at the time of the file?

No, we will have safety data that will contribute to the filing but there may still be patients who are ongoing in the study.

Okay. And then last question is just on expenses, long-term expenses. As you’ve disclosed Lexicon has gone through a bit of a transition this year. How should we think about modeling expenses after 2014? Is there a – do you anticipate a further decline in expenses or will there be kind of re-growth following this (indiscernible)?

Well I think you’ll see us shift in a way that the mix of our expenses. So in 2014 we’re right in the heart of the telotristat etiprate Phase 3 development program, that will start to wind down in 2015. So that will also end-up having some additional expenses relating to launch preparations assuming that the Phase 3 data want NDA filing as we’re hoping will be cash. And then the other element involved in this is the diabetes program. And again we’re not modeling expenses associated with that because of the expectation that, that will be within a partnership but that – if that – if there were expenses associated with that, they could – they can vary from the outline that we presented here.

Okay. Thanks for taking my questions.

Thank you.

Thank you. Your next question comes from the line of Kevin Kedra with Gabelli.

Hi. (Technical Difficulty) plans and additional…

I’m sorry, Kevin we missed the first part of that, could you repeat, start repeating the question.

Oh sorry sure. Just want if you could update us on the (ambient) succession plan search for new CEO? And then secondly will those plans have any impact on sort of the timing of finding a partner for LX4211?

Yes. So the succession plan and search is ongoing and so that’s really all we can comment on there. And then the second part it really should have no impact on the timing with regard to partnership. So that is a process that’s of course been underway for quite sometime. So – thank you.

Your next question comes from the line of (indiscernible).

Yes, hi, thank you. Just with respect to the upcoming Type 1 data announcement, can you maybe just better define what’s going to be communicated from a data perspective, presumably we get the reductions in bolus and basal in total insulin utilization, but will you also be providing information just with respect to time kind of in the hypoglycemic ranges and any other secondary endpoint data that you’ll be sharing with us? And then also if you think this data will be eligible for ADA in June?

Right. Thanks for your question, Steve. You bring up some god points. So yes in addition to the insulin readout they really will only have real meaning in the context of glycemic control information. And so and that short term study it will be through our continuous glucose monitoring data, the CGM data with the patients are all on. And that will give us a picture as to their glycemic control over this – very granular picture with this time period including time that in hypoglycemic ranges which is blood sugar is below 70 by the CGM measure and then also time and hyperglycemic ranges. So we hope to see improvement in some of those parameters although with the small (indiscernible) in the short time period it is hard to predict and that’s why they’re secondary endpoints. But we should have the CGM data along with the insulin data and the top-line dataset.

And then with respect to ADA it looks like we’re just a little late on timing even for late-breaking abstract. So it’s not likely will present anything at ADA from Type 1 study, but we’ll shoot for presenting the information as soon thereafter at a conference as we’re able to.

Okay. And maybe just to follow-up on a prior question, I know the prior pioneer cohort was fairly heterogeneous I understand it was a small fairly heterogeneous just with respect to time from diagnosed system HbA1C and baseline insulin. And I’m just wondering if you can maybe characterize what is anything you know about the Type 1 population study that you’re running now with respect to what that heterogeneity may look like relative to what we saw in the pioneer cohort?

Well we don’t have that information yet in detail. But just as a reminder we were enrolling patients (indiscernible) A1c was between 7 and 9. So these are relatively well-controlled and we wanted to have for this first study patients that we could rely on in terms of compliance. So these are relatively well-controlled patients for Type 1 diabetes and basically they have to have – had the disease at least a year. And so other than that I really – we don’t have the demographics yet on the cohort…

Okay. And then I know that there was a mention of potentially being able to explore some other collaborative opportunities that were 4211 related. And just wondering if you can maybe provide a little bit of color around how you’re thinking about those opportunities? Thanks. And what those opportunities might be?

Jeff.

Yes. So right now we’re assessing how – so we’re planning on commercializing telotristat etiprate in the U.S. so that’s a strategy that we’re following and we’re making those preparations. But we’re still assessing how exactly we want to commercialize telotristat etiprate in markets outside of the U.S. And so that’s something that we’re exploring whether that’s something that we can do on our own certain markets or whether there are partnership alternatives that might be more favorable. So that principally that’s the other area that we’re exploring it upon.

I know that you guys have kind of (triggered me) talked about how you have a lot of other additional programs that are – that have been I guess seemingly shelved over the years due to bandwidth and resource issues. Are those now in the context of the restructuring hoping to monetization at all?

Well there are definitely other programs that we’re considering but the partnership and what next steps might be. So with respect to the earlier staged programs those are still things that we’re evaluating. We think that some of those programs have significant opportunities and we are thinking about partnership in about other possible next steps that we might be able to pursue with those programs.

Okay. Thanks.

Thank you.

(Operator Instructions) At this time there are no additional questions in queue.

Alright. Well I’d like to thank everyone for participating this morning. Bye-bye.

Thank you. This concludes today’s conference call. You may now disconnect.