Lexicon Pharmaceuticals, Inc. (LXRX) Q2 2014 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’ Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Chas Schultz. Please go ahead.

Thank you, Stephanie. Good morning and welcome to the Lexicon Pharmaceuticals second quarter 2014 conference call. I am Chas Schultz and with me today are Lonnel Coats, 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; Jeff Wade, Lexicon’s Executive Vice President of Corporate Development and Chief Financial Officer; and John Northcott, Lexicon's Vice President of Commercial Strategy and Operations. We expect that you have seen a copy of our earnings press release that was distributed this morning. During this call, we will review this information provided in the release, provide an update on our clinical programs and then use the remainder of our time to answer your questions. If you would like to view the slides for today’s call, please access the Lexicon website at www.lexpharma.com. You will see a link on the home page for today’s webcast. Before we began, I would like to state that we will be making forward-looking statements including statements relating to Lexicon's clinical development of LX4211 and telotristat etiprate also referred to as LX1032. These statements may include characterizations of the results of and projected timing of clinical trials of such compounds and the potential therapeutic and commercial potential of such compounds. 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, these risks include uncertainties relating 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 license agreements, the success and productivity of our drug discovery efforts, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third-parties and the requirements of substantial funding to conduct our drug discovery and development activities. For a list and a description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission. I will now turn the call over to Mr. Coats.

Thank you, Chas, and thank you everyone for joining us on today's call. I know we have a lot of our investors and analysts on this call and I am looking forward to meeting with most of you over the next few months. Let me start off by first saying that it is a very exciting time at Lexicon. I joined Lexicon because of the extraordinary science of this company which has led to the hope and promise of two lead compounds. Telotristat etiprate and LX4211. It is my belief that there are significant values in both of these programs and I am absolutely committed to use every day forward to unlock such value for the benefit of all of Lexicon's stakeholder. While I anticipate, there will be challenges, I am confident we can use the collective strength of Lexicon's talent to overcome them. So let me move forward by sharing with you our agenda today. We will begin with the progress of Telotristat etiprate. Let me first give my commentary which is, I am very pleased to report that we have made very good progress in recruiting for this program for carcinoid syndrome. We have enrolled more than 70% of the patients needed for the trial and believe we can complete our enrollment by early 2015. This will be an enormous accomplishment for Lexicon, given the rare population and the difficult history that I know we all understand and recruiting in circumstances like this. This indeed speaks to Lexicon's ability to execute. Next, we would turn our attention to LX4211. We will give you a recap of our Type 1 study results and our recently announced JDRF collaboration. It is my belief that LX4211 has the potential to be a class-defining compound to the likes of a Lipitor. That…

Thank you very much, Lonnel. I am Pablo Lapuerta, Chief Medical Officer at Lexicon, and on Slide 3 I would like to review with you, telotristat etiprate, our peripherally acting serotonin and synthesis inhibitor. Telotristat etiprate inhibits the production of serotonin and that’s important because serotonin is a mediator of gastrointestinal motility, pain and inflammation. It is especially important in patients with Carcinoid Syndrome. Their metastatic tumor leads to the production of large amounts of serotonin associated with diarrhea, flushing, pain, and valvular disease. Telotristat etiprate for the treatment of Carcinoid Syndrome has therefore received fast track and orphan drug designation from the FDA and is has also received orphan drug designation from the European Medicines Agency. The paradigm in which we are developing telotristat etiprate is on Slide 4. Most Carcinoid Syndrome patients are not adequately controlled on the standard of care, that's octreotide, a somatostatin analog. The drug is very effective and yet in our interview of the physicians they believed that the majority of patients, approximately 79% are eventually not adequately controlled. This lack of control occurs in a timeframe of approximately 36 months. There is no new therapeutic options for these patients. We will be evaluating whether telotristat etiprate can help them. On Slide 5, we have made significant progress towards completion of enrollment of our Phase 3 program. Specifically, our pivotal Phase 3 study, TELESTAR, has enrolled over 70% of the patients needed. We are on target to complete enrollment sometime in late 2014 or in early 2015. As you may know, TELESTAR, is a single pivotal study for this program. It's randomized, placebo controlled and double-blinded. It will have approximately 120 patients who are on a background of a somatostatin analog therapy but who are not adequately controlled in terms of their symptoms. They…

Great. Thank you, Pablo. This is John Northcott speaking, Vice President of Marketing, Commercial Strategy and Operations at Lexicon Pharmaceuticals. It is a pleasure to be a part of today's call. At Lexicon, as we advance our pipeline products into late stage clinical development, we conduct commercial opportunities assessments to better understand the commercial viability of our products within their respective therapeutic categories. Specifically, we seek to establish what the unmet medical needs are and what expectations key stakeholders, namely physicians, payers and patients have for a new product in a particular disease in order to support its future utilization once approved. And, hopefully, supported in becoming an important part of the future standard of care. Upon the positive results of our Phase 2 trial in Type 1 diabetes, we worked with IMS Health care to assess the Type 1 diabetes marketplace in order to better understand the clinical and commercial opportunity that exists for LX4211, specifically in Type 1 diabetes. And I look forward to sharing some of those results with you during today's call. So to start here on Slide 17. Slide on your screen. A number of the key findings from our assessment are outlined. First, the size of the opportunity, the level of unmet medical need and the great opportunity that exists for LX4211 in Type 1 diabetes. Bullet number one describes the size of the patient population. More than 1 million adults in America have Type 1 diabetes. This is often referenced as 5% to 10% of the overall diabetes market. However, as a distinct and standalone disease with its own unique needs and challenges, it affects many patients and their families. The American Diabetes Association has set a target for HbA1c levels in adult patients with Type 1 diabetes, which is less than or…

Thank you, John. Earlier I had mentioned that we held interactions with the FDA, EMA and two European national agencies. We supported a Phase 3 program for Type 1 diabetes that consists of two pivotal Phase 3 studies. The two studies are very similar. They both have the same primary objective, demonstrating the reduction of hemoglobin A1c versus placebo in Type 1 diabetes patients whose insulin has been optimized. LX4211 has the profile to potentially improve A1c without increasing severe hypoglycemia or increasing the incidence of diabetic ketoacidosis. Additional objectives for both studies will be to reduce the variability and blood glucose levels to examine insulin needs, patient reported outcomes and weight loss. These two pivotal Phase 3 studies will be the same whether or not we have a standalone Type 1 program or a joint Type 1-Type 2 clinical development program. If we do a standalone program, however, we would anticipate a third Phase 3 study to expand our safety numbers. We are moving forward with the plans and our regulatory interactions. With that, I would like to turn over the call to Lonnel Coats.

Thank you, Pablo. So let me try to be clear on what we have just talked about. Number one, on telotristat etiprate, we are moving forward with our carcinoid syndrome program and we are very pleased that we are enrolling. We are 70% through our enrolment. We are feeling fairly confident that we can complete our enrollment of this program in late 2014 or early 2015. And therefore our commercial preparations have begun and are underway. For LX4211 for diabetes, we have been ready and are continuing to get ready for Type 2 program because it is Lexicon's preference to have a full program for Type 1 and Type 2. So should we have a partner, we will be ready to move immediately into the Type 2 program. However, it is also important to say we must unlock the value and potential of LX4211 by ensuring we are prepared to move into Type 1 diabetes and therefore the planning has now started for LX4211 for Type 1 diabetes. With that being said, let me turn the call over to Jeff.

Thank you, Lonnel. I will provide a brief financial update. As indicated in our press release today, we had revenues for the 2014 second quarter of $0.7 million, an increase from $0.2 million in the prior year period. The increase was primarily due to revenues recognized from our collaboration with a non-profit research institute supporting the Phase 2 development of LX4211 in Type 1 diabetes and increased revenues from functional genomics activities. Our revenues of $1 million in the first half of 2014 reflect the 66% increase from $0.6 million for the prior year period. Our research and development expenses for the 2014 second quarter decreased 11% to $21.2 million from $23.7 million in the prior year period. The decrease was primarily attributable to decreases in personal cost as a result of the restructuring announced in January 2014 and decreases in lab supply cost as we focused our resources on late-stage drug development. Our R&D expenses of $45.1 million for the first half of 2014 reflect the 3% increase from $44.0 million in the prior year period. In connection with our acquisition of Symphony Icon, we made an initial estimate of the fair value of our liability for base and contingent payments. Changes in this liability based on the development of the programs and the time until the payments are expected to be made, are recorded in our consolidated statements of operations. The associated increase in fair value of Symphony Icon purchase liability was $0.4 million in the second quarter and $1.6 million for the six-months ended June 30, 2014. Our general and administrative expenses for the 2014 second quarter were $5.2 million, an increase of 10% from $4.7 million in the prior year period. The increase was primarily due to severance costs as a result of the restructuring announced…

Well, thank you, Jeff. And let me say thank you to all the analysts and investors who joined us today. It is a remarkably exciting time here at Lexicon. And we are now prepared to turn it back over to the operator to start to take your questions.

(Operator Instructions) Your first quarter comes from the line of Cory Kasimov with JPMorgan.

My question is on the partnership progress for 4211 for Type 2 diabetes. So it's been over two years now since the Phase 2b data was first announced, and there's obviously been a lot of positive regulatory validation for the SGLT-2 pathway over that intervening period. You guys have been talking about making progress on the partnership front for some time now, going well into, way back into 2013. At what point do you need to turn the page to plan b and at what point do investors need to just look beyond the partnership and focus on Type 1?

We are continuing those partnership discussions and having a partnership around a full diabetes program is one of our priorities, but it's not, timing is not something that's totally within our control. Those partnership opportunities are continuing. But it is one of, to answer your question, it is one of the things that we feel like we have to do to move forward in Type 1 diabetes and we're planning on doing that whether we have a partnership in place or not. And we feel very confident in the value of LX4211 in that indication and that this is something that we need to proceed with, partnership or no partnership.

Right. Just to be clear though, I am not really concerned about moving forward with Type 1 and I understand and realize the opportunity there and the company can handle that on its own. It's just going on roughly a year now, you guys have been talking about making very good progress on the partnership front and that you are close to a deal and that you expect to have something in place and it's still kind of the same message on every quarterly conference call. So at what point do we start to forget about that your partnership is just not realistic or are you still as confident as you have been?

May I chose to answer. This is Lonnel. And I have been here -- this is my fourth week -- and I have been involved in this process and I will simply say this. We should never give up on the opportunity to develop this compound for Type 2 diabetes. Company's come in, company's go out, but at the end of the day we know this compound has activity. We know there is extraordinary value that can by yielded for patients in the marketplace. Therefore, we will use all of our efforts and energies to ensure that we find a way to advance this compound for Type 2 diabetes as well and more than likely that would be another partnership. My confidence is growing every day as we have these discussions, that the question will be less about if in the future, it will be more about when. And so the problem or challenge here is that we shouldn’t wait for the partnership. We have a compound that has value. We know it has value for Type 1 diabetes and we need to start that work. Secondarily to that, I do believe eventually a partner will come on board because I believe the opportunity is so great and the number of opportunities that remain to participate in the Type 2 diabetes marketplace are few and far between. So my confidence just being here in a month, will simply say to you, we will ask you to continue to be patient. But ultimately we are not going to give up the hope about this compound for Type 2 diabetes.

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

I guess a follow on from Cory's question on partnership discussions. Just what is it that gives you confidence that the prior gating factors to finding a partner will be resolved going forward? Because surely as time passes by the attractiveness of this asset and your bargaining power diminishes. And then a couple on the Type 1 program. What was the feedback from the FDA regarding CV requirements for approval in Type 1? Sorry if I missed this. And can you just clarify what you meant when you said the agency would prefer to see a program in Type 1 and Type 2 diabetes? Are you saying you've not yet had confirmation that Phase 3 program in type 1 would be sufficient for approval? Thanks.

Let me, if I can, take the second part of your question. I will ask Pablo to go back to the first part of your question which is dealing with the agency. So what gives me the confidence on it? One is that this is a marketplace, Type 2 diabetes as a marketplace for unfortunate reasons will continue to grow. All you have to do is look at the growth rate in the obesity marketplace which is feeding the Type 2 diabetes marketplace. And therefore the number of assets with a mechanism such as what we have, which is a different data position, are few and far between for many players who have assets in this marketplace that will lose exclusivity in the near term. And therefore, I have every confidence that there are few opportunities such as the one that exists for LX4211, that we will consummate a partnership. Now we have made some tweaks to how we are approaching the situation but nonetheless I believe those tweaks will yield value for the company eventually in the future. That’s my belief. As for your first part of your question about the communication with FDA, there's two pieces to that question. One is, what is the FDA's preference. The FDA's preference is our preference. The preference is to develop this compound in both Type 1 and Type so you have the proper population exposure across the entire diabetes scope. With that being the case, that does not preclude us from moving forward with the Type 1 program for regulatory filing. That is my opinion and I will turn it over to Pablo if we wants to add something to that.

Yes, there were a couple of specifics that you mentioned in your question. One is, do we have confirmation that a Type 1 standalone program is possible? We believe that our meetings with the FDA and other agencies were sufficient to ensure that from a regulatory standpoint the Type 1 standalone program achieves it. Also you asked about whether or not for that Type 1 standalone program, the cardiovascular outcome study, is required? We do not believe that at this time cardiovascular outcome study is required for approval for LX4211 exclusively in Type 1 diabetes.

And just a follow-up on that last point. When will we get, or when do you have that next discussion around that potential CV requirement? Thanks.

We are not currently planning a specific meeting on cardiovascular outcome studies in this area. We shared with the agency and others, our plans for the Type 2 program, so we do feel that we have a general understanding of what is required for Type 2 diabetes. We did mention in our program that if we do a standalone in addition to little studies, we will do a third study to enhance our safety exposure. So the opportunity for other regulatory interactions will be at the time that we finalize those plans.

Your next question comes from the line of Alan Carr with Needham & Company. Alan Carr - Needham & Company: Wondering if you can tell us a bit more about scope and size and cost of the two, if you go the standalone route in Type 1 diabetes and give a sense of the scale of the cost to that. And then the second one is for Lonnel. Since you've come on board, I'm kind of curious about what your thoughts are with respect to strategy and operations at Lexicon and what might change.

So I will punt the first of your question over to Jeff, and then I will take the second question after his answer.

So, Alan, we are continuing to work on developing the plan and we will be able to provide a little bit color once we have those plans more fully developed. And obviously a standalone program will end up being more expensive than - or within that be more expensive than a program's that’s part of an integrated program for, as far as the Type 1 diabetes studies are concerned. In general, just from the order of magnitude perspective, the expectation would be that the cost of that Phase 3 program in Type 1 diabetes against a standalone program would be more than $100 million and it would end up being less than that threshold if we are able to do it as part of an integrated program.

So let me take the second part of your question. First of all, it's definitely a remarkable four weeks, I feel like I have been here forever, but it's been quite exciting to take a look at the clinical program and the science behind it. I am absolutely impressed by the rigor and the effort that has been put into advancing these programs. I think what's needed now is, to your point is, we have to make a strategic decision and understand the development work while wait for no one. And therefore we have to continue to advance these programs with what's in our control. So for telotristat, I am very pleased to see in a population that is, for a rare disease, we have been able to get 70% of the way thus far and based on what we know now, we think we can complete the enrollment of this program by early 2015. I think that’s quite impressive relative to execution. I think what we need to continue to do is continue to become operationally savvy in our overall clinical development efforts and we are making those progresses every day. And then last but not least, we have to start beginning to bring on the commercial capabilities that will allow Lexicon to participate in its own asses in the marketplace. So those are things that we are working on right now but I would simply tell you, the science is good, the development is progressing and I think we have every right to be bullish at this moment.

(Operator Instructions) Your next question comes from the line of Phil Nadeau with Cowen and Company.

I guess I'm still a little uncertain what it is the FDA would object to in a Type 1 diabetes pivotal program on your own, as you mentioned. And you'd said in a response to a previous question that you would prefer it, and it sounds like they prefer it so that they get exposure of the drug in both Type 1 and Type 2 diabetics. But what is specifically their concern? Is it that if 4211 is approved as a Type 1 product it would maybe be used off label on Type 2 patients and therefore there's some risk? So what is their concern and what can you do to make the FDA feel better about a Type 1 program on its own?

Yes, I think that’s an excellent question that I don’t mind answering myself. You are spot on. That’s the question. It's not a question of whether the drug will work in Type 1 versus Type 2. If you do a full blow diabetes program then the characterization of the drug will go across both. However, my feeling and sense is, that’s less of review question and more of a labeling question relative to the indication that we are seeking for Type 1 diabetes. When we -- because I do believe ultimately we will end up in full development program across both Type 1 and Type 2 and we will achieve what the FDA ultimately want. But in the absence of having that at this moment if we proceed alone with Type 1, I think there is a clear regulatory pathway for us to do so.

And would it be possible to -- you mentioned doing a third Phase 2 study to increase the size of the database. Would a potential strategy be to -- would it be to do a safety trial in which you have both Type 1 and type 2 diabetic patients? So not maybe something where you look at HbA1c but something where you simply look at hypoglycemia rates to give you some comfort that the agent is actually safe in Type 2 diabetics, if it's used there.

I think that’s an interesting perspective and I will turn it over to Pablo.

I think you are correct that we are thinking that a third trial would really be for safety purposes, to expand the size of our safety database. But in terms of the specifics of who is enrolled and the endpoints, that’s something that we will be determining in the weeks ahead.

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

So with that I would like again thank all of those who chose to join and also want to thank you for your continued interest in Lexicon. Thank you very much.

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