Jason Ray – Manager, Corporate Communications and IR Arthur Sands – President and CEO Philip Brown – SVP, Clinical Development Jim Tessmer – VP, Finance and Accounting

Chad Mather [ph]

Good morning, ladies and gentlemen and thank you for holding. Welcome to the Lexicon Pharmaceuticals Second Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon's request. At this time, I would like to introduce your host for today's call, Jason Ray, Manager of Corporate Communications and Investor Relations. Please go ahead, Mr. Ray.

Good morning and welcome to the Lexicon Pharmaceuticals second quarter 2009 earnings conference call. I'm Jason Ray, and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown, Senior Vice President of Clinical Development; and Jim Tessmer, Vice President of Finance and Accounting. 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 and then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, who will discuss our key accomplishments for the second quarter. Dr. Brown will then discuss the status of our drug development programs and Mr. Tessmer will review our financial results for the second quarter and discuss our financial guidance for 2009. We will then open the call to your questions. If you would like to view the slides for today's call, please access Lexicon website at www.lexpharma.com. You will see a link on the home page 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 research and development of LX1031, LX1032, LX2931, LX4211 and LX7101. This call may also contain forward-looking statements relating to Lexicon's future operating results, financing arrangements, cash and investments, discovery and development of products, strategic alliances and intellectual property. 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 preclinical studies of our drug candidates, our dependence upon strategic alliances and ability to enter into additional collaborations 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 Dr. Sands.

Thank you, Jason and welcome everyone this morning to our call. I'd like to start out with just a word of reiterating that Lexicon is doing well on its mission on implementing a strategy to develop a whole portfolio of novel drug candidates and these of course are candidates that we've discovered through our novel technology, gene knockout technology. I think it's important to acknowledge that upfront again, especially given some of the recent news in biotechnology where we've seen several of our peer companies do announce quite encouraging clinical results based on drugs with novel mechanisms and I think it's in that light of course we would like to see our own pipeline advancing. We'll focus – I'll hit some highlights here before we get started on slide number 4, for the second quarter. We had a very active second quarter in progressing our clinical pipeline and so, I think most of the news is centered on that. Most notably, we have advanced LX1032, our small molecule compound for carcinoid syndrome in the Phase II, having initiated the Phase II clinical trial. And very importantly, we recently gained Orphan designation for that drug in Europe and Dr. Brown will be explaining some of the attributes of that designation. LX1031 for irritable bowel syndrome, is on track, continues to be on track to complete the Phase II clinical trial by year-end. We are encouraged by the enrollment status there. And then the third point, we are actively preparing to initiate a Phase II trial for LX2931 in patients with rheumatoid arthritis. And so, as you can imagine, this is quite a bit of work on the part of our clinical team to move these two programs forward into Phase II over the last quarter. We have also completed dosing of the Phase I trial in LX4211 for diabetes and we've been very active on the presentation front the past quarter, having presented our Phase I clinical data for both LX1031 and LX1032 at a major gastroenterology meeting, the DDW meeting, Digestive Disease Week meeting in Chicago where we had two oral presentations on these drug candidates, which were well received. And then in Europe, we presented LX2931 at the EULAR meeting, the European League Against Rheumatism. So these reflect, I think, increasing awareness of Lexicon's drug programs now in the medical community and we are starting to gain these opportunities at the significant medical conferences. So we are happy about that. As we look at our pipeline overall, then you can see we've moved a significant part of the rights with LX1032 now in Phase II and indicated on there that it not only has Fast Track status with the FDA, but as well as gained Orphan status in Europe. And the other program I think I'll mention, which we won't be covering today, is LX7101 for glaucoma. That's our small molecule that lowers intraocular pressure. That program continues to be in preclinical development, we are actively engaging now, getting ready for the IND enabling studies. Some of those studies have taken a little bit longer than we anticipated based on the need to establish a formulation that is adequate as in eye drops. We think we are there, but we will be giving you more updates on that program as we progress. So with that, I'd like to turn the call over for the update on our clinical programs to Dr. Phil Brown. Phil?

Great. Thanks very much, Arthur. Well, as Arthur just outlined, we are continuing to make very good progress against the development pipeline. And I'll like to start today with LX1032. This is our oral inhibitor of tryptophan hydroxylase that reduces serotonin production. It's positioned for use in carcinoid syndrome and by background – by way of background, to remind you, carcinoid syndrome is a situation which results from metastasis of serotonin secreting tumors that results in high levels of serotonin and causes severe diarrhea, abdominal cramping, as well as a variety of other symptoms in these patients. It's a very exciting compound because it's been specifically designed to gain high levels of systemic exposure without causing the blood brain barrier. So we believe that we can reduce serotonin being produced by these tumors without impacting brain serotonin level and thereby influence in a positive fashion the symptoms that these patients experience. As Arthur mentioned, we were pleased to have the opportunity to present our Phase I data at the recent Digestive Disease Weekly meeting and an oral presentation. And we've initiated the Phase II study in the U.S. at three centers and continuing to evaluate additional centers to get up to our targeted number of five centers in the U.S. By way of study design, the double-blind, placebo-controlled randomized study in patients with symptomatic carcinoid syndrome who are refractory to the current standard of care, which is octreotide. Octreotide is an injectable somatostatin analog. We believe that an oral agent in the setting offers significant advantages to these patients who no longer receive benefit from that therapy in terms of symptom management. The study design is a serial-dose escalation, which will then be followed by a cohort expansion once the optimal dose is identified. So it will be a 28-day treatment period at each dose level. The primary endpoints are evaluating the symptomatic response over time versus baseline, specifically looking at the number of daily bowel movements that these patients experience, as well as the safety and tolerability of 1032. We are anticipating up to 28 patients may ultimately be enrolled in the study. Now, as Arthur mentioned, we have also recently received Orphan designation from the European Medicines Agency or the EMEA. This is a significant positive for the program that offers both near-term benefit in terms of regulatory assistance and scientific assistance with clinical study design, reduced fee structure associated with these types of activities, but it also has long-term implications for the program in terms of marketing exclusivity and – similar to a Fast Track designation in the U.S. with a slightly less rigorous review cycle associated with marketing the applications once we get to that stage. This is a first drug candidate which Lexicon has obtained Orphan Drug status for and I think it offers significant opportunity for us with the program as we continue to expand the study itself, not only in the U.S. but also begin to envision how we might bring the European Union in with global development program. Now, shifting gears to LX1031, this is also an inhibitor, tryptophan hydroxylase, that has been designed to not achieve high degrees of systemic exposure. So it works almost exclusively in the cells in the GI tract that are responsible for producing serotonin. As a result, we've targeted this compound towards irritable bowel syndrome and again, we were very pleased to have the opportunity to present data at the recent Digestive Disease Weekly conference, summarizing our Phase I data. We are in the process of a Phase II study. The study design for this program is 150 patients with either diarrhea-predominant IBS or mixed IBS. It's a three-arm randomized, double-blind, placebo-controlled study, which is evaluating two dose levels of LX1031 over a four-week treatment period. Endpoints include a variety of objective assessments of bowel function, bloating, pain, urgency, as well as looking at a global assessment which has been the standard regulatory hurdle for compounds in the IBS sector. The enrollment is on track and we are still anticipating the trial to complete such that we have top line data by year-end. LX2931 is our inhibitor of sphingosine-1-phosphate lyase. This target has shown to – has been shown to reduce inflammatory responses in multiple-animal models most importantly and models of rheumatoid arthritis, which include both adjuvant-induced and collagen-induced arthritis in mouse and rat. For that reason, we've elected to pursue RA as the primary indication. We believe that the compound offers a variety of therapeutic approaches as we gain additional information with the compound on the clinic. We recently presented data on this compound at the European League Against Rheumatism or EULAR annual meeting, which is a large European meeting associated with rheumatic disease and we've also recently completed a drug-drug interaction study in patients on stable-dose methotrexate. That's an important first step before we move into the Phase IIa study that Arthur mentioned. The Phase IIa study that we are in the process of initiating is a double-blind, randomized, placebo-controlled study, which will evaluate LX2931 in patients with rheumatoid arthritis in combination with methotrexate. The protocol is expected to enroll up to 120 patients, it's obviously a multi-center trial and this will be conducted both in the U.S. as well as Eastern Europe. Three dose levels will be evaluated, 70, 110, and 150 milligrams, all given once daily. The assessment period will be 12 weeks and the primary efficacy endpoints include the ACR20 at week 12 and then we have multiple secondary endpoints that are very standard in this setting which include all of the ACR criteria, the ACR20, 50, and 70 as well as individual components of the ACR, as well as the disease activities for 28 – or DAS28, which will be evaluated at weeks four, eight, and 12. LX4211 is our oral small molecule inhibitor of SGLT2 or sodium-glucose cotransporter 2, which is a receptor that's responsible for regulating glucose excretion. By inhibiting this receptor, the patient excretes glucose in the urine and we believe offer significant advantages in the armamentarium of drugs that are devoted towards type 2 diabetes. As Arthur mentioned, we've recently completed dosing in our Phase I study. This is a very standard study design in normal healthy volunteers. We have elected and did elect to combine both the single ascending dose and the multiple ascending dose components into a single protocol, which resulted in some efficiencies to the overall timeframe. As mentioned, we've just completed dosing in the multiple dose escalation period and we are anticipating top line results being available this quarter on the program. I'll now turn the call over to Jim Tessmer, our Vice President of Finance and Accounting.

Thank you, Phil. We issued a press release this morning detailing our second quarter 2009 financial results, which you may find on our website if you have not already reviewed it. Lexicon's revenues for the three months ended June 30th, 2009 were $3 million, a decrease of 69% from $9.6 million for the corresponding period in 2008. The decrease was primarily attributable to reduced revenues under alliances with Bristol-Myers Squibb and N.V. Organon due to our progressing completing the target discovery portion of the alliances and the completion in 2008 of the target discovery portion of our alliance with Genentech, Inc. For the six months ended June 30th, 2009, revenues decreased 61% to $7.2 million from $18.5 million for the corresponding period in 2008. Research and development expenses for the 2009 second quarter were $20.2 million, a decrease of 33% from $30.1 million for the corresponding period in 2008. The decrease was primarily attributable to lower salary and benefit costs due to reductions in personnel, as well as lower external preclinical research and development expenses. For the six months ended June 30th, 2009, research and development expenses decreased 25% to $43.1 million from $57.5 million for the corresponding period in 2008. General and administrative expenses for the 2009 second quarter were $5.6 million, a decrease of 6% from $5.9 million for the corresponding period in 2008. The decrease was primarily attributable to lower salary and benefit costs due to reductions in personnel. For the six months ended June 30th, 2009, general and administrative expenses decreased 11% to $10.4 million from $11.8 million for the corresponding period in 2008. Lexicon's net loss for the three months ended June 30th, 2009 was $20.1 million or $0.15 per share compared to a net loss of $20 million or $0.15 per share in the corresponding period in 2008. Net loss for the six months ended June 30th, 2009 was $41.6 million or $0.30 per share compared to a net loss of $38 million or $0.28 per share for the corresponding period in 2008. For the three and six months ended June 30th, 2009, net loss included non-cash, stock-based compensation expense of $1.4 million and $2.8 million, respectively. For the three and six months ended June 30th, 2008, net loss included non-cash, stock-based compensation expense of $1.6 million and $3.4 million, respectively. Let me turn to our cash and investments. As of June 30th, 2009, Lexicon had $106.9 million in cash and investments net of obligations under the credit line secured by its auction rate securities as compared to $158.8 million as of December 31st, 2008. Earlier this year, we entered into a credit line agreement with UBS Bank USA that provides, as of June 30th, 2009, up to $37 million in the form of a line of credit. This agreement provides up to 75% of the market value of our auction rate securities in the form of a revolving line of credit. As of June 30th, 2009, we have borrowed $37 million under this credit line. We believe that the working capital available for Lexicon will be sufficient to meet our cash requirements for at least the next 12 months. This estimate excludes any funds held in auction rate securities themselves and any new potential corporate alliances. Now, let's turn to our forward-looking financial guidance for 2009. Our contractual revenues from existing agreements for 2009, primarily attributable to our collaborations with Organon and Bristol-Myers Squibb, are now projected to be in a range of $9 million to $11 million, an increase from our previous guidance of $6 million to $8 million. As we have previously made you aware, while we are in conversations with pharmaceutical companies to enter into potential alliances or collaborations, we have not included forecasted revenues from such financial arrangements in our guidance. We will update you if we enter into such alliances or agreements. We believe our protective pipeline will provide Lexicon with attractive opportunities for future alliances. Operating expenses for 2009 are now projected to be in a range of $105 million to $110 million, a decrease from our previous guidance of $110 million to $115 million. The decrease in spending from 2008 is a result of our reorganizations implemented in 2008 and early 2009, which reduced personnel costs and related expenditures, as well as lower preclinical research and development costs. Non-cash expenses will be approximately $11 million of this total, including $5 million in stock-based compensation and $6 million in depreciation and amortization expense. Taking into account cash received under existing contractual relationships only, we expect our 2009 net cash use in operations to be in the range of $93 million to $98 million, down from our previous guidance of $99 million to $104 million and our 2009 capital expenditures to be less than $1 million. Thank you. And now, I'll turn the call back to Arthur.

Well, thank you, Jim. Just like to say clearly, we have realized significant savings by implementing strict cost controls and of course, the associate [ph] necessary workforce reductions over the last 18 months, and of course this reflects the changes in our business, emphasis from genetics into drug discovery and development, as well as adapting to a rather difficult economic environment. Well, thank you very much. We'll now open the call to questions and answers.

Certainly, sir. (Operator instructions). We'll pause for just a moment to compile the Q&A roster. Our first question is from Chad Mather [ph].

Hi guys, good morning. I was wondering on the partnering front if there was any color you can give us. You've got four programs in the clinic. Where are you seeing the most interest?

Yes. So the most interest is on the most advanced programs. Our business model is to focus on those programs that will gain pivotal concept through the Phase IIa portion of their development. And I think now that we have these programs that are on deck, that's where we are seeing this interest and we are focused in our whole model there. Now, having said that, we do continue to have significant interest as well on the early-stage pipeline and the potential for forming new drug discovery alliances based on our novel target discovery and then – which is of course, Lexicon's historical strength. So we do entertain those conversations, but I do think most of the interest is forwarding the pipeline and significantly around the new tryptophan hydroxylase inhibitors. Those two programs with that novel mechanism I think are gaining high interest. And then, LX2931 with regard to a new small molecule in RA as well. I think that our business model also envisions partnering those indications where large pharma partnerships could aid the company strategically. And so, the larger indications such as type 2 diabetes with LX4211 and RA and IBS I think would be the primary areas that we would be interested in partnership.

Thanks.

(Operator instructions). We’ll pause once more to compile the Q&A roster. (Operator instructions). There are no further questions from the phone lines at this time.

Great. Well, then we will wrap up. On slide 21, just another reflection on the pipeline. To the question that I did have, I should also mention LX7101 as an area of high interest in glaucoma, as well as our ophthalmology research pipeline. There is relatively little research going on, innovative research and new mechanisms in ophthalmology, for us another area of significant interest. And then on the next slide, this is the earlier-stage pipeline to which I referred and there we have several antibodies programs and bio-therapeutics programs where we are also active on the partnership front. So that is I think the new frontier for Lexicon to move into a new dimension and new partnerships, focused on our drug candidates and that's where we are spending a significant amount of management time. With that, I'd like to thank everyone for participating today and we look forward to giving you future updates. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's Lexicon Pharmaceuticals second quarter 2009 earnings call. This concludes today's call. You may now disconnect.