Chas Schultz - Senior Director, Finance and Communications Lonnel Coats - President & CEO Jeff Wade - EVP, Corporate and Administrative Affairs & CFO Pablo Lapuerta - EVP & Chief Medical Officer

Phil Nadeau - Cowen and Company Esther Pang - Needham & Company Stephen Willey - Stifel Nicolaus Jessica Fye - JPMorgan Liana Moussatos - Wedbush Securities

Good morning, my name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Lexicon Pharmaceuticals First Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Chas Schultz. Please go ahead, sir.

Thank you, Nicole. Good morning and welcome to the Lexicon Pharmaceuticals first quarter 2016 conference call. I'm 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; and Jeff Wade, Lexicon's Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. We expect that you've seen a copy of our earnings press release that was distributed this morning. During this call, we will review the information provided in the release, provide an update on our clinical programs and then use the remainder of our call 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 begin, I would like to state that we will be making forward-looking statements, including statements relating to Lexicon's clinical development of telotristat etiprate and sotagliflozin. 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 can include 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 collaboration and license agreements; 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 drug development and commercialization activity. 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. Coates.

Thank you, Chas and good morning. As always, we're making this presentation on behalf of all the hard-working men and women at Lexicon who are working diligently to advance our science to patients. In the first quarter, we continued to execute on our overall strategy to unlock value for our stakeholders. Mainly, we have been focused on preparing our first NDA for telotristat etiprate for carcinoid syndrome and advancing our relationship with our new partner, Sanofi. But to ground you, I want to take you to the next slide which speaks to the catalyst that we created in 2015 to create value for Lexicon stakeholders. We had two successful Phase 3 studies for telotristat etiprate in carcinoid syndrome. We signed a worldwide collaboration with Sanofi that unlocks the full potential of sotagliflozin in both type 1 and type 2 diabetes. Our enrollment in the Phase 3 studies of sotagliflozin in type 1 diabetes has been robust and we ended the year with over $500 million in cash and investments. That takes us to 2016 which speaks to our first quarter. Our first goal simply was to work hard at filing our first NDA which would be for telotristat etiprate in carcinoid syndrome. I'm pleased to say that we achieved this goal and we filed our first NDA on March 29. This holds the potential -- should we have the accelerated approval which we believe we will receive -- to be in the position to have our first commercial approval by the fourth quarter and be in-market by end of year. Secondly, we have expanded our clinical trials for sotagliflozin to include type 2 diabetes and we will be in a position certainly to start that work by the end of the year. Our first Phase 3 top-line data for sotagliflozin type 1 diabetes is expected in the second half of 2016 and I'm very pleased to say we're very much on target to achieve that outcome. We remain well-capitalized to fund our clinical trials and potentially even expand telotristat etiprate to other indications which we will speak about more in the future. If you go to the next slide, where we did a press release that talked about Lexicon submitting its first NDA for telotristat etiprate for carcinoid syndrome -- what's important to note here is that the FDA has a 60-day filing review period to determine whether the NDA is complete and acceptable for filing. And the fact is that Lexicon has requested a priority review by the FDA as part of the NDA filing. Based on our conversations with the agency in the first 30 days, our confidence remains very high that we believe we have every chance of receiving a priority review by the agency for this important new innovation. Next slide, I want to once again remind everybody of the value that was created with the Sanofi collaboration. This collaboration significantly unlocks the potential for sotagliflozin. I will remind you that Lexicon retains development responsibility for type 1 diabetes. We have the option to co-promote and have the lead role in the U.S. for type 1 commercialization. Sanofi, on the other hand, has responsibility for type 2 development and worldwide commercialization. We have the potential to receive $1.7 billion in upfront milestone payments. And we have already received the first $300 million upfront payment with development and regulatory milestones up to $430 million, sales milestones or sale milestone payments up to $990 million. The royalties on the net sales of sotagliflozin are tiered. Escalating royalties, based on territory and indication, range from low-double-digit percentages to 40% of net sales. This is a very important collaboration. And in the time in which we have been working with Sanofi, our confidence grows significantly with the potential of this asset. Lexicon is quickly moving toward commercialization which is exciting. We've now filed the NDA as planned and on schedule. Our U.S. commercial preparations are underway. You recently hired the last executive for our commercial group. We have hired our head of sales. Our Ipsen collaboration is established in Europe and other markets outside the U.S. and Japan; and Ipsen today is now preparing the MAA for Europe for telotristat etiprate. As for sotagliflozin, the first quarter, we've had all of our trials online at the same time. This is good news because we're moving with great speed and great execution. Our Phase 3 program which includes three Phase 3 studies and we have two Phase 2 studies, one JDRF study, as well as a dose-ranging study, all who are online for the first time in the first quarter and progressing extremely well. Our enrollment in our first pivotal Phase 3 clinical trial for the U.S. specifically, has completed. Screening in our second pivotal Phase 3 clinical trial is also complete. Our Phase 3 studies are expected to begin in 2016 for the type 2 diabetes program which Sanofi is leading the way on that. Last but not least, the collaboration with Sanofi has been well established and they are on their way to setting forth the worldwide commercialization strategy for this asset. And again, Lexicon will retain the responsibility for the type 1 development and also have the option to co-promote and lead the U.S. commercialization plan. With that, I leave you with the fact that we're in a strong financial position as we close out last year with $521 million in cash and investments. And while we have had a very robust quarter, we believe that is very good news because we're making great advancements on all of our programs for type 1 and also the NDA submission for telotristat etiprate. With that, I will 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 2016 first quarter of $12.5 million, an increase from $1.8 million in the prior-year period. The increase was primarily due to revenues recognized from our collaboration and license agreement with Sanofi. Our research and development expenses for the 2016 first quarter increased 77%, to $37 million from $20.9 million in the prior-year period, primarily due to increases in external, clinical and non-clinical research and development costs. This was driven principally by the fact that all the Phase 3 trials in type 1 diabetes were fully up and running in the quarter. In connection with our acquisition of Symphony Icon, we made an initial estimate of the fair value of our liability for the base and contingent payments. Changes in this liability, based on the development of the programs and the time until such payments 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 $1 million in the first quarter and $1.8 million in the prior-year period. Our G&A expenses for the 2016 first quarter were $8.4 million, an increase of 47% from $5.7 million in the prior-year period. The increase was primarily due to increased costs and preparation for commercialization of telotristat etiprate. Our net loss for the 2016 first quarter was $34.9 million or $0.34 per share, compared to a net loss of $28.1 million or $0.27 per share in the prior-year period. For the 2016 first quarter, our net loss included non-cash, stock-based compensation expense of $1.8 million compared to $2 million in the corresponding period in 2015. In May, 2015, we completed a 1-for-7 reverse stock split. All references to common shares and per-share data for all periods presented in this earnings call have been adjusted to give effect to this reverse stock split. Finally, as of March 31, 2016, we had $477.1 million in cash and investments, as compared to $521.4 million as of December 31, 2015. On the next slide, I will cover our forward-looking financial guidance for 2016. At this point, we're not changing the guidance we gave on our last call; although I will say that we're pleased with our management of expenses to date and that that will continue to be an area of focus. We continue to expect contractual revenues from existing agreements in 2016 to be in the range of $65 million to $80 million. Our revenues expectations incorporate milestone achievements for telotristat etiprate in carcinoid syndrome; progress in the type 1 diabetes development program for sotagliflozin that we're leading under the Sanofi alliance; and progress in the type 2 diabetes program the Sanofi is leading under the alliance; and our associated funding participation in those efforts. We continue to expect that our operating expenses in 2016 will be in the range of $225 million to $250 million. Non-cash expenses are expected to be approximately $11 million of this total, including $6 million in stock-based compensation, $4 million in the increase in fair value of Symphony Icon purchase liability and $1 million in depreciation and amortization. We do expect operating expenses to increase quarter over quarter, due to clinical development costs. So, that's something to keep in mind. We continue to expect our 2016 net cash used in operations to be in the range of $205 million to $230 million. I will now turn the call back to Lonnel.

Thank you, Jeff. As Jeff just went over the first quarter of financials, we have had a very productive first quarter. We have been able to complete our NDA in a significant way; we have high confidence that it's a high-quality NDA; and I think we outdid ourselves in hitting our timeline. So we're very pleased of that result. We're also pleased in the fact that, as Jeff mentioned, the first quarter of 2016 is the first quarter in which we have had all of our studies online for type 1 diabetes. This is good news because we're moving, I think, with great speed and deliberation to ensure that we have every opportunity to make known by the end of this year, the outcome of our type 1 program. So, we're very much on target to be able to reach those timelines and that catalyst. As for getting ready for commercialization, once we certainly hear back from the agency after the 60 day period which you can expect, going forward, is that we will go fully into operationalizing our commercial plan of adding in the rest of our structure to get ready for commercialization. And as I've already noted, based on the conversations the first 30 days with the agency, our confidence is fairly high that our request for a priority review could or should, be met. With that being said, I will stop there and open the lineup for questions.

[Operator Instructions]. Your first question comes from the line of Phil Nadeau.

First, just a clarification on the Ipsen comments that you made, I think the guidance before was Ipsen was going to file during Q2 in Europe. Is that still on track? I know you said that there were working on the filing; I'm just curious when it could be submitted.

Yes, that's still the case.

Okay. And then second, on the initiation of the Phase 2 program in type 2 diabetes by Sanofi, what's their latest thinking and your latest thinking on the structure of that Phase 2 program? How many studies, in which patient populations?

So, they haven't announced exactly what that program looks like. But I will say that it is a broad and aggressive program, one that's designed to win in type 2 diabetes. And they're expecting to start that in the fourth quarter, as we mentioned. Among the key elements that we looked at and that they've looked at, in terms of what the benefits of sotagliflozin are, are around the ability to benefit patients with the declining renal function as a result of the SGLT1 mechanism and that can being a distinguishing characteristic; and the opportunity to show benefit in cardiovascular disease. And so, the program is a broad program in type 2 diabetes. But it's also one that is intended to bring out those differentiating characteristics of sotagliflozin that we think will help benefit patients and that will distinguish the drug from compounds that are in the selective SGLT2 class.

Phil, to Jeff's point, we've been very pleased with Sanofi's approach. I think that Lexicon's approach in type 1 and the speed in which we're moving in type 1 and the level of enthusiasm that the drug has received has allowed us to, in some cases, beat our own timelines for enrollment. I think they're taking as aggressive approach in type 2 which leads us to believing that we have every opportunity to have a winning strategy in both type 1 and type 2.

And one last question on telotristat, do you have any expectation for an FDA panel for telotristat? Has it been indicated to you in any way or have you made any assumptions around that?

No, Phil, you have to always prepare with that being the possibility. But in our assessment for this drug, the mechanism, the safety, the efficacy that we have submitted that came out of these trials -- we do not believe that is a highly likely scenario, but is certainly their right to choose to do that. And in our conversations, we have not received any indication that that's the direction they are leading.

Your next question comes from the line of Alan Carr.

This is Esther, on for Alan. Could you remind us how involved Ipsen will be in the U.S. for telotristat? And then on sotagliflozin, what are the gating events to starting of the Phase 3 program?

So, from as far as Ipsen in the U.S., they're not involved in the U.S. at commercialization. I mean, we do have a global structure that oversees the entire program, so there's some discussion at governance committees. But in terms of the U.S., we're commercializing that on our own. We're leading that effort. We're conducting that effort. And Ipsen is not involved in that. Their rights are in Europe, in Canada, in Latin America and basically other countries outside of the U.S. and Europe. In terms of the Phase 3 program for type 2 diabetes, you know they are the key gating issues really are just the execution of the studies, putting them in place; making sure that we've got our the supply in place; and getting the protocols finished and ready to go and sites up and running. So it takes a while to get a full Phase 3 program up and running and those are the primary gating factors.

Yes, I would just add one thing to Jeff's point is -- in all of our discussions with Sanofi, I think they are playing to win and the schedule was fairly aggressive. And so we're taking the time to make sure strategically all the components that will allow us to move once we start, are in place. And so we're pretty confident once we get going in the fourth quarter, we'll be in a position that we can make up a lot of ground.

[Operator Instructions]. Your next question comes from the line of Stephen Willey.

I was just curious, have you guys talked about how you're actually defining a DKA event within the type 1 studies, the Phase 3s?

We have an adjudication process for DKA events, so we have a special case report form we send the information to an adjudication committee. They review it in a blinded fashion. And then make a determination whether an adverse event was DKA, some other type of metabolic acidosis or neither. The adjudication process is going well.

Okay, because you are allowing patients to essentially kind of conduct their own ketone testing, correct?

Yes, we're providing for monitoring of beta-hydroxybutyrate in our clinical studies, consistent with the standard of care.

Okay, so this has not been kind of a patient flagged reporting -- if a patient flags this, then it gets sent to a centralized committee and then adjudicated for the purposes of whether or not it counts as an AE.

Exactly. We have a careful and meticulous process.

Okay. And then, maybe just one on telotristat. Lonnel, I think you kind of teased us a couple of times with respect to mentioning other indications. Just kind of wondering if from a timing perspective, if that if that's something that we could hear about this year. And is that kind of a decision whereby you guys are weighing a few opportunities and trying to make a decision or is that still kind of a work in progress? Thanks.

It is a definite work in progress. But I think as were learning more about the role of TPH and other things, we're now doing our work, being meticulous about it and diligent about it and trying to figure out where else can we win. And that work is ongoing. So I will fully believe that we will have the opportunity, before the end of this year, to be able to articulate to the community what the other opportunities may be for this drug. But I think we're feeling pretty confident that there may be some other opportunities that we can pursue. It's very unique, because we have to pursue opportunities that allow us to maintain the price point that we enter into the market. So that by itself creates some level of challenge. But we think there may be one or two roads that would give us that opportunity. And when we're ready, we certainly will communicate it and I think it will be this year that we do so.

Your next question comes from the line of Jessica Fye.

I have two, the first one is on telotristat. It seems like there are probably a number of patients who would want to get on therapy as soon as you are approved. But are there any reimbursement or payor considerations we should be watching for at the time of launch that could affect, say, the first couple quarters of sales? And then my second question is on hierarchical 212 and how to think about the competitive landscape in type 1 relative to, say, Lilly. Are you expecting to have differentiated efficacy; and, if so, on which endpoints specifically? I think they've got some Phase 3 studies they were reading out, to like 6 to 12 months after you. So just want to kind of understand how you are thinking about the future competition there.

I'll take your first one and then I'll kick the second one over to Jeff on the diabetes program. You know, for telotristat etiprate, I think with as with any new drug that enters the market, we would expect there to be some prior authorization mechanism that would be in place. However, I do believe, based on what you have already stated, is that given the issues with patients who are facing carcinoid syndrome, there will be a number of patients who will be waiting for a therapy like this. And I do not believe initially there will be enough of a reimbursement hurdle to preclude them from having the opportunity. With that being said, we have put together a full program to reflect the opportunity to show the value of telotristat etiprate to payers. We will be engaging those payers to make sure they understand that. And where there will be prior authorizations, I think we feel pretty confident that we can handle most of those and ensure that patients will have access that were needed from the time which we entered the market with the compound. As it relates to the type 1 landscape, I'll just give my first overview comment there and turn it over to Jeff for any further commentary. Yes. Let me first say, I think Lilly is doing a very good job with its asset and they are to be commended. However, I think with the rate in which we're moving, I think because of our size and our focus and because of the compound itself, we truly believe we will be defined and differentiated on our efficacy. We also believe that sotagliflozin will be differentiated on safety. And we've taken necessary precautions and approach within our Phase 3 program. To the question that Stephen asked earlier, looking for things such as DKA and how do we make sure that patients are properly dealt with, relative to the DKA. So, we believe the way we've conducted this trial and the mechanism of this drug, we believe we can win in type 1. We also believe, depending on certainly what decision we make with our partner, Sanofi, we may have the first call-out for type 1 of any of the other SGLT2s. And I think we have the opportunity to set the pace. With that, I'll turn it over to Jeff for any further commentary.

Sure. I think we do believe that we will have a differentiated profile and a quite favorably differentiated profile, both on safety and efficacy. And it's really related to the SGLT1 mechanism. The SGLT1 mechanism is characterized by reduction in postpranial glucose uptake which is frankly one of the challenges for people who have type 1 diabetes is managing their glucose after a meal. And so the mechanism of the SGLT1 mechanism is really tied right into that. We do expect because of the interaction of the SGLT1 and SGLT2 mechanism, as well, to have less urine glucose excretion. We've observed that in trials, basically across the board, in the work that we've done. And then in type 1 patients with type 1 diabetes, when they have glucose uptake after a meal that peaks relatively high, at a high level, the chance for high urine glucose excretion is more -- we've seen more urine glucose excretion with selective SGLT2 inhibitors in that patient population than in, say, the typical type 2 diabetic patient population. So we think that's going to become a more important element. And then the other element that's also tied into the SGLT1 mechanism is that -- we basically, in the study that we've done so far and then the work that we're doing ongoing, we don't expect that the patients will need to change their basal insulin. And we think that that's an advantage from a safety perspective and potentially an advantage from the efficacy perspective and the profile of what changes you might make to the insulin regimen for these patients. So there's a number of different reasons why we think, both on efficacy and safety, we think that we'll be favorably differentiated from selective SGLT2 inhibitors.

If I can add in terms of DKA, we think the maintenance of basal insulin is very important. And in terms of DKA, one thing we've seen consistently with sotagliflozin is that its administration elevates GLT1. And GLT1 may have a protective role there.

[Operator Instructions]. Your next question comes from the line of Liana Moussatos.

It has to do with -- after you get the Phase 3 data for type 1 for sotagliflozin, what are going to be the considerations on whether you file separately for type 1 versus type 2? Or have you already made that decision?

You know, I think when we have the data, we certainly will have many conversations with our partners. But, more importantly, we'll have a conversation with the agency. And I think it's another opportunity to engage with the regulatory agency on what the requirements would be for us to file and we will take our lead from that. And we feel pretty confident we'll have some good data this fall and will be able to engage with the agency and our partners to make a decision on filing strategy at that time.

[Operator Instructions]. And I'm showing no further audio questions at this time.

Well, thank you very much for all of those who have attended. And certainly we look forward to engaging with you after the next quarter. We remain fairly confident about our strategy. We're a company that executes to our plans. And we fully intend to make quarter two as successful as quarter one and we'll do it piece by piece, but look forward to engaging you along the way, keeping you informed as we go forward. Thank you very much.

This concludes today's conference call. We thank you for your participation and ask that you please disconnect your lines.