Welcome to the Lexicon Pharmaceuticals Third Quarter 2018 Financial Results and Business Update Conference Call. [Operator Instructions]. As a reminder, this call is being recorded today, November 1, 2018. I'll now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Thank you, Maria. Good morning, and welcome to the Lexicon Pharmaceuticals Third Quarter 2018 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; Dr. Pablo Lapuerta, Executive Vice President and Chief Medical Officer; Dr. Praveen Tyle, Executive Vice President of Research and Development; and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. After our formal remarks, we will open the call up for Q&A. Earlier today, Lexicon issued a press release announcing our financial results for the third quarter 2018, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call, along with the 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, sotagliflozin and other drug candidates. These statements may include characterizations of the commercial performance of XERMELO, the expected timing and outcome of regulatory review of applications for approval of sotagliflozin, the expected timing and results of clinical trials of sotagliflozin, XERMELO and our other drug candidates and the market opportunity for those programs. This call may also contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of our 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 risks include uncertainties related to the success of our commercialization efforts for XERMELO, the regulatory review of applications for the approval of sotagliflozin; the timing and results of clinical trials and preclinical studies of sotagliflozin, XERMELO and other drug candidates; our dependence upon strategic alliances and other third-party relationship; our ability to obtain patent protection for our discoveries; limitations imposed by patents owned or controlled by third party; and the requirements of the substantial funding to conduct our research, development and commercialization activities. For a list and a description of the risks and uncertainties that we face, please see the reports that we have filed with the Securities and Exchange Commission. I'd now like to turn the call over to our President and CEO, Lonnel Coats.

Thank you, Kim. Good morning, everyone, and thanks for joining us on today's call. I will share with you some recent key events and conclude with a business update. I'll then turn the call over to Dr. Pablo Lapuerta, our Chief Medical Officer, for updates on our sotagliflozin programs, and to Jeff Wade, our Chief Financial Officer, for an update on our financial results. We had a productive third quarter as we and our collaborator, Sanofi, worked diligently to prepare for a potential FDA advisory committee meeting. As a reminder, sotagliflozin has an expected PDUFA date of March 22, 2019. In parallel, we continue to highlight clinical data for sotagliflozin with 4 poster presentations and 1 oral presentation at the European Association for the Study of Diabetes or better known as EASD, at their annual meeting. Coming out of EASD, we were pleased by the feedback from key opinion leaders and endocrinologists that SGLT inhibitors have a place in type 1 diabetes treatment landscape that the benefits are significant to patients and that the risk of diabetic ketoacidosis, while serious, can be managed. On the XERMELO front, we achieved U.S. XERMELO net sales of $6.3 million in third quarter of 2018, up 19% over the prior year quarter and 5% from the second quarter of 2018. We saw a continued increase in our patient base, and we saw 1/4 of XERMELO dispenses coming from the patient assistance program or free drug. We anticipate that the dynamics from the patient assistance program will persist through the remainder of this year and will follow us into next year. Total paid prescriptions, or TRx, for the third quarter was 1,227 up from 1,171 in the second quarter. Patient demand grew 6% quarter-over-quarter and 47% year-over-year as measured by total units, which includes patient…

Thanks, Ronald. We recently attended the EASD meeting. What really stood out to us was the excitement around potential use of SGLT inhibitors in type 1 diabetes. There was consistent feedback from leading physicians that SGLT inhibitors have a place in type 1 diabetes that the benefits are significant and that the risk of DKA can be managed. We believe this feedback points to our readiness of the market for innovation. It is important to note that DKA is primarily an issue of patients not having enough insulin, and we believe that with monitoring and appropriate care instructions, this risk can be managed and mitigated. We look forward to publication of consensus guidelines in early 2019 for the management of DKA risk when using SGLT inhibitors. The data presented at EASD and the feedback we received, further increase our confidence that sotagliflozin's SGLT1 mechanism distinguishes the drug's efficacy and safety profile in type 1 diabetes. Overall, we have the largest ever development program for an oral agent in type 1 diabetes, and we believe it supports approval. The program includes 3 successful launch studies with robust efficacy. The incremental risk that DKA can be managed and 52-week safety data include a lower incidence of severe hypoglycemia on sotagliflozin than placebo. These safety results are supported by published safety data showing lower rates of hypoglycemia with glucose values less than or equal to 55 on sotagliflozin compared to placebo. Overall, we are excited about the prospects of sotagliflozin, and we and Sanofi continue to work closely with the regulatory agencies. We fully anticipate there will be an FDA advisory committee meeting likely early next year, and we look forward to providing you updates. On Slide 6, we can see the scope of the program in type 2 diabetes. Sanofi is making…

Thank you, Pablo. This morning, I will discuss key aspects of our third quarter financials. More financial details can be found in our 10-Q, which will be filed shortly. Now please refer to Slide 10 of our presentation. As we indicated in our press release today, revenues for the third quarter of 2018 decreased to $6.9 million from $26.9 million for the corresponding period in 2017 primarily due to lower revenues recognized from the collaboration and license agreement with Sanofi, partially offset by an increase in net product revenues. Net product revenues for the 3 months ended September 30, 2018 included $6.3 million from net sales of XERMELO in the U.S., up 19% from the prior year quarter and 5% from the second quarter of 2018. Cost of sales related to sales of XERMELO for each of the 3 months ended September 30, 2018 and 2017 was $0.6 million. Research and development expenses for the third quarter decreased to $13.8 million from $39.1 million for the corresponding period in 2017 primarily due to lower external clinical development costs relating to sotagliflozin. Selling, general and administrative expenses for the third quarter of 2018 decreased to $15.6 million from $16.7 million for the corresponding period in 2017 primarily due to decreased marketing costs. Net loss for the third quarter of 2018 was $27.5 million or $0.26 per share compared to a net loss of $30.7 million or $0.29 per share in the corresponding period in 2017. For the 3 months ended September 30, 2018 and 2017, net loss included noncash stock-based compensation expense of $2.9 million and $2.6 million, respectively. We ended the quarter with $187.3 million in cash and investments, and we foresee that our current cash position together with expected revenues will be sufficient to fund operations through the potential…

[Operator Instructions]. Our first question comes from the line of Yigal Nochomovitz of Citigroup.

Pablo, you mentioned that the guidelines for SGLT2 inhibitors in type 1. Could you give us a little bit more color on what you'd like to see go into those guidelines as well as what you would like to not be in those guidelines, that'd be very helpful?

All right. Well, what we were expecting is a consensus document that will be published in early 2019, that will talk about how to manage and mitigate DKA risk with SGLT inhibition in type 1 diabetes. And we think the principles of this will include ketone monitoring and ensuring adequate insulin levels in patients with type 1 diabetes. But we already have kind of a glimpse of some of the topics of discussions here relates to a publication, what's called a STICH protocol by Satish Garg in a recent article, STICH is S-T-I-C-H, and it has to do with how to manage ketosis when ketosis develops. And the ST is for stop the SGLT inhibitor for the day when a patient develops ketosis; the I is make sure that patients get insulin, even if their glucose is normal if ketosis is present; the C is ensure adequate carbohydrates meaning that in order to give insulin, you need to give carbohydrates as well to ensure that you can resolve the ketosis; and the H is for maintaining hydration. So I think it'll elaborate on the STICH protocol, and it'll talk about the management and -- of -- the monitoring of ketones and ensuring that patients are in adequate insulin. There is only one cause of DKA and that's insulin deficiency.

And, the basket...

And it means that -- sorry.

Yigal, if I can add to that. One of the other things, I think, that would be critically important -- by the way, this is Lonnel. I think it's important to highlight that the patients were best suited for SGLT are patients who are willing to be firmly engaged in the management of their disease. To Pablo's point, it requires them to make sure they're managing insulin properly, and that they're willing to monitor the ketones because the key is to manage to make sure that they're monitoring the ketones, particularly not feeling healthy. So if a patient is willing to do that, then they are not a good candidate for sotagliflozin or any other SGLT.

Okay. Then the timing is interesting on the publication of these guidelines because seems like it could coincide closely with the expected AdCom. Do you expect to have the guidelines issued before the AdCom? Or that's just -- you don't know yet?

I don't know yet. That really depends on the journal they submit to and how fast the journal can reply.

I know there was a commitment to give these guidance out as soon as possible. We appreciate the leadership of ATTD to do that. And you're right, it's just a matter of coincidence that we'll probably have AdCom around the same time. But I also believe that will be important because as guidelines come out, standards gets set, it becomes clear and clear that there are reasonable ways in which diabetic ketoacidosis can be managed and certainly that will be useful for any ad panel.

Okay. And then, Jeff, on the milestones, you said the $430 million in aggregate. Can you give any more granularity on how that might breakout for following year, for example, for 2019?

Yes. So I can provide some information about what's -- what we've publicly disclosed around those milestones. And that there are $220 million in regulatory milestones that are tied 2 first commercial sale after regulatory approval in type 1 diabetes and in type 2 diabetes. Those are weighted in some parts to type 2 diabetes, but there are substantial milestones associated with type 1 diabetes. And those milestones are attributed to U.S. and European approvals. So they're entirely to those areas where we've already filed for approval. In terms of the development milestones, there are $110 million of development milestones that are linked to Phase III study results in type 2 diabetes. And as Pablo mentioned, we expect to have results from the type 2 diabetes program over the course of next year. There is also a $100 million that relate to success in either of the 2 outcome studies, that would be something that would be further out. So in terms of what's on the horizon in the relatively near term, it's type 1 diabetes approval milestones and watch milestones, the outcomes of the type 2 diabetes programs and those studies being reading out in the course of next year. And then the filing, once we file for approval and we get approval in type 2 diabetes, that will be another set of milestones associated with that.

Our next question comes from the line of Stephen Willey of Stifel.

I think, Pablo, you mentioned that we should start to see some of the Phase III type 2 data begin to materialize in the first half of next year. Are you able to speak as to which of those trials are kind of teed up to readout first?

Well, we -- I think, we -- what we just stated -- this is Jeff. We just direct you to the ClinicalTrials.gov where it talks about what primary results end points are, but they will be reading out starting first half next year and running through the end of the year. It's going to be a pretty steady set of the outcomes from these studies. So some of the -- I mean, the latest one to readout is the CKD 4 study, but the other ones will -- I'll readout spaced out over the course of the year.

Yes. What I will say, if I could add is, we're very proud of Sanofi. They have done a phenomenal job in the type 2 program. They normally stayed on schedule and in some cases, they're working very diligently to stay ahead. And so we're very proud. And so to Jeff's point, we certainly can't speak to their milestones that they're working on, but I will say, you can get hints from what they have posted and will continue to post on ClinicalTrials.gov. We fully anticipate success and therefore, we fully anticipate we have a very good year for milestones next year.

Understood. And then Jeff, I guess, when I just look at the revised guidance, it still implies, I guess, a little bit of a step-up in terms of OpEx, at least, sequentially in 4Q. So can you maybe just kind of speak to where that's coming from? And I guess, in conjunction with that, can you maybe just talk about how you think about the pace of the SG&A build that will be required to help participate in the co-promote on the type 1 side?

Yes. Sure. So we've been -- sort of quarter-over-quarter, we've been investing more and more in the sotagliflozin launch preparations. So we've been doing that over the course of this year and that's going to ramp up a little bit in the fourth quarter as well. So we've been making investments both -- it's -- some of it's SG&A and some of it's in R&D in terms of support of the sotagliflozin launch preparations. That will continue to increase at the beginning -- as we go into next year, and we get ready for the actual launch. Obviously, we don't have the big field force in place, that's going to be something that's really a next year expense, but we've -- in terms of marketing and medical, we've been making investments this year. There will be some continued increase over time. But we've already been making pretty sizable investments over the course of this year as well. So that's not going to be a -- it will be growing, but it won't be a huge difference in terms of what our investment is going to be.

Yes, Steve -- to Jeff's point, there is a -- we'll make -- continue to make investments than we have made in the third quarter, we'll continue to make them. We'll be -- all the heads of the positions that need to have in place that is happening as we speak, where the sales, marketing, medical payers whoever, we -- all the heads of those functions will be online by end of this year. And then as we get into next year, it becomes plug-and-play, and the rest of the infrastructure starts to gets layered in certainly after the completion of the AdCom, we start layering in the rest of the organization in the first quarter.

Got it. And then just lastly, I know, we were anticipating, I guess, the 2761 data before the end of this year. Can you just remind us what will be the next steps there? Is that data going to be, I guess, representative of some proof of principle, whereby, you then kind of provide a formal show to Sanofi? I know they have Right Of First Refusal? Or is there another kind of Phase IIa step that needs to take place here before that gets put out to bid?

It's a great question, Steve. I think the principles that we wanted to show with this compound that it was -- it was a locally acting compound. I think we'll be able to speak to that when we do call it out, and that it does have the ability to be able to have an effect on A1c, it has the ability certainly to reduce any of the urinary glucose excretion that we will see with SGLT2. So all the characteristics that we have -- we were hoping to see, I think, we'll be able to call out at end of the year. In terms of the development pathway, to your point, I would expect, once we have that data in hand, I think, the alliance will look at where sotagliflozin is and its development because I think the way to think about 2761 is more of a life cycle management play. And then, I think, determinations will be made thereafter on how we want to play that going forward.

And do you think the value of that compound, I guess, is any -- is somehow negatively impacted by this likely label extension we're going to see by the SGLT2 inhibitors into this chronic kidney disease patient population?

Well, I think, it's one of the things we're going to have to wait and see. I think that's why once we have a proof of principle of the concept of it being locally acting, what optionality we have thereafter will be one that we'll have to wait and see how everything else calls out.

[Operator Instructions]. Our next question comes from the line of Alan Carr of Needham & Company.

Maybe a follow-up on Steve's a little bit there. Can you talk some more about the extending your role in a co-promotion for sotagliflozin in type 1 diabetes in relation to Sanofi? And then also, with your biliary tract cancer program, can you talk -- it looks like you're starting that soon. Can you talk about your expectations for -- I mean, the time lines in 2019 starting to see date and that sort of thing from that program?

Yes. I'll let Dr. Lapuerta speak to the biliary tract cancer program, which I'll tell you is getting more and more exciting here at Lexicon, that's for damn sure, but I'll like him speak to the biliary tract cancer. In terms of the relationship of what we're doing and Sanofi doing, we'll be launching sotagliflozin for type 1 diabetes together. It's very important that we do that. Sanofi has a very good infrastructure, particularly in area of medical, where we would be able to get out early as always called medical de marines, they've set the groundwork of understanding where the view is around the disease state. And so they're going to play a very strong role in doing that. And then Lexicon along with Sanofi will mirror up in the marketplace to make sure we can get out to as many of our key targets as soon as possible and as often as possible because the goal certainly is to the build a market, to build a reputation, and even more important, given that we have a responsibility to ensure that all physicians have an understanding of the risk of diabetic ketoacidosis, it'll be important to have a very strong presence. So it will require both Sanofi and Lexicon to be a market -- together. So as time passes, that will shift where more of the responsibility of type 1 will be Lexicon responsibility and Sanofi takes on the primary responsibility of launching the type 2 indication as we get into 2020, 2021, and Lexicon will maintain the primary responsibility for type 1.

What are your ways thinking on the size of this commercial organization at Lexicon, and will it be stable? Or do you expect it to grow over time in for sota?

I think, as we get a better sense of the opportunity in type 1, and as the type 2 indication comes on online and Sanofi takes the leadership role there, we'll have to make some decisions on what's the right size for Lexicon to take on the sole role or a primary role in the type 1 community. So there could be some opportunity where they'll be greater expansion, but I don't see it to be a substantial expansion.

Okay. And with respect to -- I'm sorry, to come back to biliary tract cancer, Pablo, you can comment on that?

Yes, this is Pablo. We're excited about the program. It's ready to start this year. We have sites lined up, and we have enthusiasm among investigators. It's -- the thing to keep in mind in terms of timing and understanding results is that it's an open label Phase II study. And being open label, we'll be able to provide some interim data, and so we should be able to provide that as early as late 2019 with the first cohort of patients where we'll be looking particularly at the safety of telotristat when administered in combination with gemcitabine and cisplatin in cholangiocarcinoma.

Our next question comes from the line of Chris Shibutani of Cowen.

This is Pam Barendt on for Chris. Can you talk specifically about how you're thinking about the competitive landscape? And how you might address that during your presentation at a potential AdCom meeting in early 2019?

The potential landscape at the AdCom, so I think we don't really expect to address the competitive landscape at the AdCom because AdCom will really be about our data. In terms of just sort of talking about the competitive landscape overall, we're the first to file in the U.S. among the SGLT inhibitors. We don't really know what the status of others or other than they're behind us, and it's not clear whether they filed yet or not. So we do expect to have the -- us to be the first to launch in the U.S. And in Europe, it's a little bit less clear as to whether it will be first or second, but we're sort of in the same general time period as dapagliflozin's filing. Overall, we feel like the sotagliflozin has the best profile. Overall, the safety and efficacy profile for type 1 diabetes. But we do believe that there's potential for a competition from SGLT2 inhibitors. In fact SGLT2 inhibitors are being used off-label at a reasonably significant rate right now because of the value that patients see in them, even though they're not approved. And so we do believe that we'll have a strong competitive position. And importantly, we think we'll be the first -- we have the opportunity to be the first to be approved in the U.S.

To Jeff's point, we certainly will hope that -- I know this will sound a little crazy, but we hope there will be competition in the marketplace in type 1 diabetes, it's important to have it. I think the SGLT compounds provide an extraordinary benefit for patients and the more competitors you have out there, the greater chance you have uptake, you have awareness. And the more you have players out there, more people talk about the appropriate use. And there's an opportunity to address diabetic ketoacidosis, where not only you have the opportunity to bring the rate down when patients are on drug, but it brings such an awareness to it, you may be able to bring that rate down all together. So my hope is that there will be competition. But right now, we know that, we're first up, and we're happy to take the leadership role.

Very helpful. One more from me. Is there any key data that you submitted to the FDA that hasn't been presented in large part in any of your publications or presentations to date? Or has pretty much everything been presented previously?

That's a great question. There's always data that you're going to be presenting to the regulatory agency that they request or ask for that's not in the public domain. I would say, you'll get an opportunity to see that firsthand at the advisory committee.

I think we can say, the publications of Phase III data are all out there, and they're very extensive. I'd encourage people to review not just the main publications, but supplementary appendices that really have lots of data.

[Operator Instructions]. I'm showing no further questions at this time. I would like to turn the floor back over to Mr. Coats for any additional or closing remarks.

So let me first say thanks to everyone for joining us this morning. Our main priorities remain unchanged and include driving the long-term value through continued execution on the XERMELO launch, advancing our clinical developments of XERMELO in oncology, obtain the regulatory approval for sotagliflozin in type 1 diabetes, working with Sanofi partner, our collaborator, and developing a supportive evidence that would differentiate sotagliflozin in type 2 diabetes and advancing our pipeline while practicing good financial discipline. I look forward to updating you on our progress. And thanks again for joining the call today.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.