Good morning. My name is Julianne, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lexicon Pharmaceuticals Third Quarter 2020 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Chas Schultz. You may begin.

Thank you, Julianne. Good morning and welcome to the Lexicon Pharmaceuticals third quarter 2020 financial results and clinical update conference call. Joining me today are Lonnel Coats, Lexicon's President and Chief Executive Officer; Dr. Praveen Tyle, Lexicon's Executive Vice President of Research and Development; and Jeff Wade, Lexicon's Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. Earlier today Lexicon issued a press release, announcing our financial results for the third quarter of 2020, 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 is available on 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 call, of our time to answer your questions. Before we begin, let me remind you that we will be making forward-looking statements, including the statements relating to the safety, efficacy and the therapeutic and commercial potential of LX9211, sotagliflozin and our other potential drug candidates. These statements may include characterizations of the expected timing and results of clinical trials of LX9211, sotagliflozin and other drug candidates; and the regulatory status and market opportunity for those programs. This call may also contain forward-looking statements relating to our growth and future operating results, discovery and development of our drug candidates, strategic alliances and intellectual property, as well as other matters that are not historical facts or information. Various risks may cause our actual results to differ materially from those expressed or implied in such forward-looking statements. These risks include uncertainties related to the timing and results of clinical trials and preclinical studies of LX9211, sotagliflozin and 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 research 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 Lonnel Coats.

Thank you, Chas. Good morning everyone and thank you for joining us on the call. We welcome the opportunity to discuss a pivotal quarter for Lexicon in which we shifted our focus to LX9211 and our other scientific assets and research and development. During the third quarter, we completed the sale of XERMELO and related assets to TerSera Therapeutics. This sale allowed us to strengthen our balance sheet by repaying our $150 million term loan in full. We also exchanged $75.8 million in principal amount of our convertible notes for cash and common stock and have retired more than 90% of our outstanding debt in total. We are in a very good position to focus our time and efforts on the advancement of LX9211, which is a program we have been excited about for a number of years. Praveen will share more about this program and the potential we see for it to become a new treatment option, the millions of people suffering from neuropathic pain. Starting in the fourth quarter, Lexicon will be operating as a much more streamlined and focused company. We expect our cash burn to be dramatically lower moving forward into 2021. And we will be laser focused on advancing LX9211 through to Phase 2 clinical trials in diabetic peripheral neuropathic pain and post-herpetic neuralgia. Jeff will delve into the financials more deeply, including our outlook on expected spend moving forward. I feel confident that with the de-levering of our balance sheet and a substantial reduction in our expected spend, we are in a much better position to advance our science and increase the opportunity from values to flow through to our stakeholders. On Slide 4, I'd like to take a quick moment and remind everyone that sotagliflozin remains an important asset in our science and…

Thank you, Lonnel. LX9211 is a potent, orally delivered, selective small molecule inhibitor of AP2-associated kinase, which I’ll reference as AAK1, which is a pathway we believe may have utility in reducing neuropathic pain while avoiding the addictive downsides of the opioid pathways. LX9211 was discovered by scientists working within our drug discovery alliance with Bristol-Myers Squibb. And we now wholly-owned all rights to LX9211 as well as any additional compounds acting through AAK1 pathway that we may develop. As you can see on this chart, we have already initiated a Phase 2 proof-of-concept study in diabetic peripheral neuropathy pain. And we plan to initiate an additional Phase 2 proof-of-concept study in post-herpetic neuralgia by the end of this year. We expect that both of these Phase 2 studies will readout by the end of next year. Neuropathic pain affects a large portion of the population within a worldwide market of approximately $6.4 billion in estimated sales expected for 2020. The worldwide market is expected to grow at over 13% a year to $13.2 billion by 2026. There is estimated to be a prevalence of approximately 12 million people worldwide suffering from DPNP and 600,000 people suffering from PHN in 2026. Despite neuropathic pain, affecting millions of people, there remains a high level of unmet need for those suffering from that condition. The current approved therapies are limited by a lack of efficacy compounded by disruptive side effects. As a result, many people turn to opioids to experience some level of relief, which of course carry their own risks of potential abuse and addiction. We feel that LX9211 towards inhibition of AAK1 independent from the opioid pathway has the potential to overcome many of the shortcomings of current therapies and could become a welcome new innovation for those suffering from…

Thank you, Praveen. To begin, I will discuss key aspects of our third quarter financials. More financial details can be found in the press release that we issued earlier today and then our upcoming 10-Q SEC filing. As indicated in our press release, we had net product revenues of $6.5 million for the third quarter, reflecting product sales prior to the completion of the sale of XERMELO and related assets to TerSera Therapeutics on September 8, 2020. This compares to net product revenues of $8.4 million from the prior year quarter, which represented a full three months of product sales. The prior year quarter also reflected the collaborative revenues of $260 million from the termination of the alliance with Sanofi and recognition of the remaining amount of $23.5 million allocated to performance obligations from the initial agreement with Sanofi. Research and development expenses for the third quarter increased to $40.1 million from $26.7 million for the corresponding period in 2019, primarily due to increases in the external clinical development costs relating to sotagliflozin subsequent to the termination of the Sanofi alliance. Selling, general and administrative expenses for the third quarter decreased to $12 million from $13.9 million for the corresponding period in 2019. Our R&D and G&A expenses for the quarter included severance expenses associated with personnel changes relating to the sale of XERMELO and refocusing of our operations around our research and development stage assets. Finally, we recognized a gain of $132.8 million during the quarter from the sale of XERMELO and related assets to TerSera. In total, we had net income for the third quarter of $82.6 million or $0.71 per diluted share, as compared to a net income of $226.1 million or $1.95 per diluted share in the corresponding period in 2019. Our net income for the…

Thank you, Jeff. So let me summarize, I think for us as a company we're pretty excited about LX9211, it's been a compound that I've been excited about from the time I started here and we negotiated the wholly-owned rights from our alliance with BMS, our discovery alliance with BMS. To have this compound, we've now cleared away to focus on this compound and accelerate it through development. I truly believe it will be a game changer for us, should we be successful, and therefore we have now put ourselves in a position to focus on it. For the remainder of 2020, we expect to initiate the Phase 2 studies in post-herpetic neuralgia, as well as DPNP, and as noted before we expect the report the Phase 2 study results with both of these studies by the end of next year. And then once again I will remind everybody on November 16 at 8:00 PM Eastern time, we expect the presentation of the data from sotagliflozin SOLOIST and SCORED Phase 3 studies at the American Heart Association Scientific Sessions. With that, I will stop there and turn the call over to the operator for Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Yigal Nochomovitz from Citigroup. Your line is open, please ask your question.

Hi great. Thanks very much for taking the question. I think you Praveen, you mentioned the placebo effect with some of the neuropathic pain trials. I'm wondering if you could just go into a little bit more detail please in terms of the specific steps that you're taking both for the diabetic peripheral neuropathy neuropathic pain study, as well as the post-herpetic neuralgia study? Big steps you're taking in order to mitigate the placebo response in both those studies. Thanks.

Thanks, Yigal for your question, a very relevant question, actually we took a little bit of time in order to figure out how we wanted to design this protocol in order to mitigate this placebo effect and we looked at the other studies which have been done in the area, why they have failed and all that. So what we are basically – we have done is, we are mitigated by making sure that we are having a large number of patients in each of the randomization cohorts. So we have a 1-1-1 randomization. And like I mentioned, for DPNP we have 300 patients. So we will have approximately a 100 patients per arm. We also have a very good amount of efficacy period. So most of those other studies have failed because they have not studied the efficacy for up to six weeks and we are going to study up to six weeks with that placebo effect in mind. We've also trained our investigators to look for this placebo effect, and we are making sure that these patients will be enrolled are filling out their diary on a daily basis to ensure compliance. And if they have a high placebo effect, we are evaluating whether they should be in the study or not in the study. So we are basically taking care of placebo effect on multiple levels, for – and that is all for diabetic peripheral neuropathy pain Yigal. For PHN, it's a more homogeneous disease. And the practice of treating PHN is widely accepted worldwide, so we are a little less concerned about the placebo effect of PHN.

Okay, got it. Thank you. And then just one question for Jeff. I mean, you extinguished almost all of the debt over 90%, any particular reason you just didn't go and just extinguished all of it, you have a small amount left on the balance sheet.

Yes. Well in that – as of early October, we have less than $12 million outstanding. So it’s an agreed upon exchange, so we had to get to an agreement and we did what we thought was optimal. Our goal was to reduce the debt so that it wouldn't be an obstacle going forward. And we think that the level that it is now we've achieved that objective.

Okay, great. Thanks. And then just one more question on sotagliflozin. Can you spend a little more time just talking about some of the details in terms of the plan to seek approval in the U.S., are you going to conduct new studies? Are there other analyses of the existing studies that you can do to help the FDA better understand and put the DKA risk in perspective? And what is the strategy now in terms of trying to seek approval in the U.S. for type 1 diabetes?

Yigal, thank you for the question. I think we watch very carefully, what the other players were going to do. That's in the space, and I think as we can clearly see, particularly given the COVID-19 struck most have moved away from type 1 and have chosen not to go forward. For us we feel very passionate about – the drug has shown extremely good benefit. There is no question, the benefit has not questioned about the drug. In type 1, we still need to be able to get clear guidance from the FDA on what's the best way to go forward in terms of managing risk of DKA. It is the position of the company, we think we have done that, and we think we need to have more dialogue about it in different ways in different forums. And it'll become much more transparent, I think as we go forward into fourth quarter going into next year, exactly how we're going to approach the agency. But right now, I think we need more clarity from the agency on how best we go forward and being able to manage that risk in a very organized way. To date, we have not gotten that clarity from the FDA, and I believe they owe it to the patient population as we owe it to the patient population to continue this dialogue. So we have not given up on it, we took a break just because I think COVID-19 caused all of us to reprioritize things, but we certainly have not given up on it and we will approach it again. And we'll keep you posted as we have those – have dialogue with the agency.

Right. Okay. Thank you very much.

You bet.

Thank you. Your next question comes from the line of Kevin Kedra from G.Research. Your line is open.

Hi, thanks for taking the questions. Maybe to piggyback on that last one. You talked about how some of the competitors have moved away from the type 1 indication. Yet they're still out there, they're on the mark with type 2, and there's obviously a lot of experience out there with their drugs. Are you concerned at all that if you do the work to get the FDA aligned on a pathway to type 1 that basically you guys are going to be doing the legwork for the entire class, and there's still an opportunity once you guys put in the work for others to just kind of quickly piggyback off your pathway and quickly bring their products to market as well, based on the data that they have.

Yes. It’s a great question and certainly it's a possibility. But I think the way we have one try to appropriately time this, and two, we are in a unique position where we have done most of the work and we have – I think the greatest amount of data to be able to have an approved indication versus, when I say the others have not moved forward. In the absence of an approved indication, it will be very difficult, particularly given you will be managing a safety risk. So I think if we would be successful, then we move in this direction and we do get an indication, we would have done the work that would be necessary to have an approved product, where you have clear mandates around how to manage that product in a safe way. Unless the other companies choose to pivot at this point and do the same work, I do not see them coming on the same pathway as we are. So I do think it's a unique opportunity for us given our position versus theirs. So I will leave it at that.

All right, great. As far as the new discovery pipeline, you guys have obviously shifted to being more of a discovery company at this point. Should we expect to see any potential new compounds move into the clinic or an IND stage in 2021 or should we really be thinking about 2021 being just 9211 and maybe any movement on type 1 in for sotagliflozin?

Yes, that's a great question. I think we have an opportunity to move another asset into IND-enabling studies in 2021. So I would say, stay tuned that work is being done, but 2021 really will be about two compounds for us. One, sotagliflozin, I think you'll clearly see we're not abandoning that. I think it's an opportunity to accelerate some of the work that we're doing there, but it's a low cost effort at this time. And secondly, and most importantly, it's really to spend as much of our time as we can to accelerate 9211 because as I've said, I've always believe that it has the greatest potential to transform the company. And we need to know that sooner than later. So that's where most of our efforts will be placed in 2021. But we will continue to advance our discovery engine and look at ways in which we can put products into the clinic beyond 2021, particularly going into 2022.

Great. And let me squeeze one last one in, Jeff, you give us some color on how to think about Q4 spending. Should we think of those as baseline levels to work with going into 2021? Are they still – obviously, you guys are going to be ramping up two Phase 2 studies, but other than that, are there other moving parts within the Q4 numbers. We should think about when we started looking into 2021.

I would just say that the 2021 fourth quarter R&D spend is still going to be higher than it will be in, I mean, sorry, 2020 fourth quarter R&D spend will still be higher than it will be in 2021, because we're still winding down some of the activities in the sotagliflozin type 2 diabetes and outcome studies in this quarter. And that will be largely, almost entirely complete by the end of this quarter. So we will have some lower R&D spend next year compared to this year.

Great. Thanks.

Thank you. [Operator Instructions] Next question from Stephen Willey from Stifel. Your line is open.

Good morning, guys. Thanks for taking the question. I was maybe just wondering if you could speak a little bit to the amount of wiggle room that you've kind of provided into the year-end 2021 Phase 2 data guidance for both of the Phase 2s with respect to just the patient enrollment. I know that this was a trial. I think the DPN trial was kind of slowed a little bit due to COVID. And I would imagine that's an – those are both indications, which are probably a bit more sensitive to patient visits than perhaps some others. So maybe just talk a little bit about your confidence in the guidelines you provided with respect to anticipated pace of patient enrollment and how you think that may be impacted just over the coming months?

Yes, Steve, I appreciate the question. Yes, I think we made it clear that we did slow down on enrollment in our efforts when COVID-19 hit in March. Otherwise the program I think would be much further along and we are having to think through what that's going to look like, should we have another challenge around COVID-19. So there's a little bit of wiggle room in there, but not a whole lot. Our objective is to put all of our resources and efforts into getting this enrollment up to speed and in a position where we can overcome any challenge or risks of COVID-19. So that's kind of built in at this point. With that being said, it's anybody's game with COVID-19 and what may happen in the near-term future.

Understood, I know that these are blinded trials, but would there be an opportunity for you guys to maybe structure in some kind of interim analysis for whatever reason, we're approaching the end of next year and you don't yet have the amount of patient data to formally close the trial?

I'll simply say that we're giving thoughts to all the ways in which we can provide information around this program as we're confident about it earlier than later. So I would categorize it that way.

Okay. Thanks for taking the question.

Yes.

Thank you. [Operator Instructions] There are no further question at this time, please continue.

Well, let me thank everyone for joining us this morning. I think it's been a remarkable third quarter where we have moved back to our roots of being a very strong scientific company in discovery as well as development. And it's important to note that we still have extremely high confidence in sotagliflozin, particularly for type 1 diabetes. More news will come forward on a SOLOIST and SCORED program on November 16 at 8:00 PM at the American Heart Association. I would encourage you to chime into that program to hear those data be called out. For LX9211, our confidence is very high around this program. I thought Dr. Tyle did a very good job of outlining why our confidence is high and what we've seen pre-clinically and what's been supportive in Phase 1 trials. The way we have designed the Phase 2 trials, I think gives us every shot of being successful in 9211 because this is a remarkably unmet need area. I will continue to push forward with the FDA strategically. And I think we come there transparent how we intend to do that as a quarter progresses and we go into the New Year to ensure that patients have an opportunity to sotagliflozin for type 1 diabetes. With that being said, I appreciate everyone dialing in and joining us. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.