Chas Schultz - Senior Director of Finance & Communications Lonnel Coats - President & CEO Jeff Wade - EVP, Corporate and Administrative Affairs & CFO Pablo Lapuerta - EVP & Chief Medical Officer John Northcott - VP of Marketing, Commercial Strategy and Operations.

Thomas Wei - Jefferies Alan Carr - Needham & Company Jessica Fye - JPMorgan Colin Bristow - Bank of America Merrill Lynch.

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Lexicon Pharmaceuticals Fourth Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the call over to Chas Schultz, Senior Director of Finance and Communications.

Please go ahead, sir..

Thank you, Stephanie. Good morning and welcome to the Lexicon Pharmaceuticals fourth quarter and year-end 2014 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; Jeff Wade, Lexicon's Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer; and John Northcott, Lexicon's Vice President of Marketing, Commercial Strategy and Operations.

We expect that you have seen a copy of our earnings press release that was distributed this morning. During this call, we will review 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.

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, or LX1032 and sotagliflozin, or LX4211.

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 contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of products, strategic alliances and intellectual property, as well as other matters that are not historical facts or information.

Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements.

These risks include uncertainties 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, 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 Securities and Exchange Commission. I will now turn the call over to Mr. Coats..

Thank you, Chas and thank you to everyone for joining us this morning. It's an exciting time of year at Lexicon, as always. This is my eight month being here and we will be making this presentation today on behalf of all of the extraordinary men and women at Lexicon who are working very hard every day to increase shareholder and stakeholder value.

Today let me go over the agenda, we'll talk about our programs and give you an update on the status of those programs. We'll also go over our fourth quarter 2014 financial performance. And then we'll open the floor up for questions and answers. So let me start, with the first slide here, to remind everybody of our focused strategy for creating value.

From the time I've come through the door, the objective has been quite simple. And that's to look forward to ways in which we can unlock value for Lexicon's stakeholders by translating our science into real commercial value.

I'm pleased to say that we're making great progress on both telotristat etiprate for carcinoid syndrome and sotagliflozin for type 1 diabetes.

I also will remind you that each of these programs, by themselves, will create significant corporate value for Lexicon's stakeholders and, should we be successful with both of these programs, then this will be a real game changer for all of Lexicon's stakeholders. What's important to us is that we maintain the U.S.

rights to both of these assets, while we leverage the strength of other companies and partnerships outside of the United States for both of these assets. Let me jump right into an update around the first asset which is telotristat etiprate. I'm very pleased to say to you that enrollment will be complete, as promised, this month, March.

So stay tuned and we will inform the entire public once we have completed enrollment which we believe will be any day now. Our Phase 3 program is designed to satisfy requirements of both the U.S. regulators, as well as the European regulators, as we move forward in our collaboration with Ipsen.

Just to remind you of the design of the TELESTAR program, the Phase 3 program, it is a randomized placebo-controlled double-blind study with approximately 130 or so patients. The double-blind treatment period will be 12 weeks and open label extension will be a follow-up period of 36 weeks.

And the primary endpoint is to change from baseline in the number of daily bowel movements which is the most significant issue that impacts a patient living with carcinoid syndrome. I also will tell you as part of our strategy which is to hold onto the U.S.

opportunity, if you go to the next slide, what you'll see here is a map of where all the businesses we can map out against octreotide use today.

And what it tells us very clearly is that Lexicon can make a modest investment in fielding a sales force that can go after this opportunity without significant investment, given the business is fairly well concentrated throughout the United States. Next slide.

The second part of this is, again, to leverage the strength of partnerships outside the United States. And as I remind you all, we have an agreement now for telotristat etiprate with Ipsen.

Ipsen is a strong leader in the carcinoid marketplace outside the United States; and we believe that, as a result of this partnership, it would put us in the strongest position to launch in the United States and certainly coordinate our efforts with them on the medical and scientific platform for carcinoid syndrome.

Also to remind you that Lexicon has the right to potentially receive up to $145 million up front in milestone payments during the course of the collaboration, of which we've already received $23 million and we're also in a position to receive royalties in the low 20s% to mid-30% range, inclusive of supply. So this is a very strong agreement.

And if you're going to rely on loyalties, you need a very strong partner to ensure that you maximize the opportunity on returns and we think Ipsen is a very strong partner.

So this is a clear example of us being prepared to launch in the United States and having partnership to launch outside the United States with our first asset, telotristat etiprate. As you go to the next slide, I want to give you an update on the collaboration with JDRF.

As you know, once we had our Phase 2 data public, the JDRF approached us to do some work with an at-risk population which we have agreed. I am pleased to say that the work around enrolling patients into this late Phase 2 trial is now underway.

And to remind you, there will be 84 individuals, type 1 diabetic patients, that are younger than 30 years of age with a A1C greater than 9 and the treatment period will be for 12 weeks. So this study is now commencing and underway. Next, to remind you, we have now started and we're underway on our Phase 3 program for sotagliflozin for type 1 diabetes.

There are two pivotal trials. Each has 750 patients with two doses, 200 mg and 400 mg once daily of sotagliflozin and placebo. And the primary endpoint is reduction of A1C versus placebo and optimized insulin.

And there are additional objectives we certainly will be looking for in this, such as reduced variability in glucose, lower insulin, weight loss and patient reported outcomes. Second, we're also doing additional studies to ensure that we meet the safety exposure requirements by the regulators.

There will be a 1,400 subject study on 400 mg once daily dose of sotagliflozin versus placebo. And the endpoint we're looking at again is glycemic control and we feel we're very comfortable that we should have success with this program, as well.

So to wrap up here, I will simply say the Phase 3 program is now on its way and enrollment will start shortly here and we will certainly update you as we go forward. Let me turn the floor over to Jeff to walk you through the financial results of our fourth quarter..

Thank you, Lyle. I will provide a brief financial update. As indicated in our press release today, we had revenues for the 2014 fourth quarter of $21.5 million, an increase from $1.4 million in the prior year period. The increase was primarily due to revenues recognized from our license and collaboration agreement with Ipsen Pharma.

For the year, revenues increased to $22.9 million from $2.2 million in 2013. Our research and development expenses for the 2014 fourth quarter decreased 1%, to $20 million, from $20.3 million in the prior year period. For the year, our R&D expenses decreased to $89.3 million from $89.7 million in 2013.

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 those payments are expected to be made, are recorded in our consolidated statements of operations.

The fair value of Symphony Icon purchase liability increased by $0.9 million in the fourth quarter and increased by $1.4 million for the year. Our general and administrative expenses for the 2014 fourth quarter were $4 million, an increase of 17% from $3.4 million in the prior-year period.

For the year, our G&A expenses increased 13%, to $19.4 million, from $17.1 million in 2013. The increase for the year was primarily due to higher severance costs associated with our restructuring in early 2014 to focus our resources on our late-stage drug development programs.

In September of 2014, we determined that our buildings and land should be classified as assets held for sale. We recognized a non-cash impairment loss on our buildings of $13.1 million in the year as a result of writing down the buildings to the estimated net selling price.

We're working towards the sale of these facilities which will allow us to right size our facilities footprint to fit our current more focused operations. Our net loss for the 2014 fourth quarter was $2.9 million, less than $0.01 per share, compared to a net loss of $17.4 million, or $0.03 per share in the prior-year period.

Our net loss for the year was $100.3 million, or $0.19 per share, compared to a net loss of $104.1 million, or $0.20 per share in 2013. For the three months and year ended December 31, 2014, our net loss included non-cash stock-based compensation expense of $1.5 million and $7.1 million, respectively.

For the three months and year ended December 31, 2013, net loss included non-cash stock-based compensation expense of $1.7 million and $7.4 million, respectively. Finally, as of December 31, 2014, we had $339.3 million in cash and investments, as compared to $57.9 million as of September 30, 2014 and $129.1 million as of December 31, 2013.

Now let's turn to our forward-looking financial guidance for 2015. We expect contractual revenues from existing agreements in 2015 of approximately $2 million. We expect that our operating expenses in 2015 will be in the range of $130 million to $140 million.

Non-cash expenses are expected to be approximately $11 million of this total, including $7 million in stock-based compensation, $3 million in an increase in fair value of Symphony Icon purchase liability and $1 million in depreciation and amortization.

These operating expenses include R&D expenses expected to be in the range between $100 million and $180 million and selling, general and administrative expenses expected to be in a range between $30 million and $32 million.

The expected increase in SG&A expenses in 2015 over 2014 is attributable to an increased in planned commercial readiness expenditures.

We will be incurring commercial readiness expenses across the full year, but most of the increase in expenses will be gated upon positive top-line data from the pivotal Phase 3 trial of telotristat etiprate in carcinoid syndrome. Top-line data from that trial is expected in the third quarter.

Taking into account cash received under existing contractual relationships only, we expect our 2015 net cash used in operations to be in the range of $150 million to $160 million.

These net cash used expectations reflect a substantial ramp-up in prepaid expenses associated with the full scale launch of Phase 3 clinical trials for sotagliflozin in type 1 diabetes which will be reflected in future period expense as the trials enroll and move towards completion.

We expect our current capital resources will be sufficient to deplete the series of milestones we have laid out over the next two years, including top-line data in both our Phase 3 programs and the potential commercial launch of telotristat etiprate in carcinoid syndrome and to take us into 2017. I will now turn the call back to Lonnel..

Thank you, Jeff. Once again, let me say the best way to unlock value for our stakeholders is to continue to advance our late stage pipeline toward the market. And let me summarize.

Telotristat etiprate for carcinoid syndrome, the Phase 3 study TELESTAR enrollment will complete this month, March; and any day now, we will inform the market of when that actually takes place. Our commercial preparations are underway for the U.S., as Jeff has talked about the forward-looking statement.

You will see that there is a substantial investments being made for success and we're now in position to begin hiring of all the critical positions to staff up and get ready for the U.S. market.

Our collaboration with Ipsen has been established and the commercialization of telotristat etiprate in Europe is now ongoing and starting up, as well as other markets outside the U.S. and Canada. We feel very confident that Ipsen, in this collaboration, will be very much ready to go upon regulatory success.

As for sotagliflozin for diabetes, we're full head on into Phase 3 now for type 1 diabetes and the launch of our Phase 3 program is making substantial progress and we will certainly inform the public as we get our first patient in, screened and begin our randomization process. So we feel pretty good about where we're with sotagliflozin.

Let me take you to my final slides here which is where all the accountability for myself and this team and our focus is on hitting these events in these timelines. In Q3 of this year, we should have our Phase 3 top-line data for telotristat etiprate in carcinoid syndrome.

Upon having successful data, we should then be in a position to file our NDA in the first quarter of 2016. Also in that same quarter, we should have the JDRF study data for sotagliflozin in the high unmet need for type 1 patients. That should be calling out in the first quarter.

In quarters three and four of 2016, we should have the potential approval and commercial launch of Lexicon's first product in the United States which will be telotristat etiprate for carcinoid syndrome. And in the fourth quarter of 2016, we then will have the Phase 3 top-line data for sotagliflozin in type 1 diabetes.

These are the events and the catalysts that will shape and determine how well we execute over the next year to year and a half and we feel pretty confident with the folks in management today, we should be able to achieve our top-lines as we move forward and create value for our stakeholders.

And on that note, I'll stop there and turn it over for questions and answers..

[Operator Instructions]. Your first question comes from the line of Thomas Wei with Jefferies..

Just a couple of questions. Wanted to circle back on a reminder of what the FDA told you about cardiovascular analyses for sotagliflozin and what the Phase 3 protocols contain in regard to CD event adjudication, in the event that the FDA does ask you for a [indiscernible] analysis..

So we're progressing with a program in type 1 diabetes. We did have a discussion with the FDA previously about an integrated program in type 2 and type 1 diabetes. The areas of safety in type 1 diabetes are obviously a little bit different and they're more focused on things like hypoglycemia.

But we're looking to evaluate how cardiovascular safety of this is part of the program in type 1 diabetes and so we will be looking at that as part of the safety analysis for the type 1 program. But our expectation is that we will not have to do a cardiovascular outcome study, given that the guidance related to that is in type 2 diabetes..

Thomas, this is Lionel. I feel pretty confident that we're in a very good position to move forward without having to do any cardiovascular outcome trial. There is certainly no guidance by the FDA and no statute that enforces that.

The key is to stay focused on type 1 diabetes which is where we're and be able to answer all the other questions that they have for us, in terms of being able to show the balance of safety and efficacy as these studies roll forward.

And we have structured these studies to achieve that, particularly when you look at the 1400 patient trial, to make sure we have plenty of safety exposure that we can share with the FDA in comparison to the efficacy data that's being run by the two pivotal studies..

Could you just confirm, though, that the CD events in that Phase 3 trial are not being adjudicated, and would it be very hard to do that retrospectively, if asked to do that in the end?.

Pablo, did you hear that question from Thomas?.

Yes. Cardiovascular events in the type 1 diabetes program are being prospectively adjudicated, according to a specific charter..

And then just on telotristat, I could use a reminder of what you think the minimum threshold is for a clinically meaningful benefit on the number of daily bowel movements and what you're expecting to see in the placebo arm. Thanks..

So our expectation is that something in the range of 25% to 30% is clearly clinically meaningful. And that's really what we've powered our studies to be able to see. As you probably remember, in Phase 2, we saw around a 40% reduction at week 11 and 12 compared to baseline.

So we feel like the study is quite well powered and expect it to show clinically meaningful results..

Your next question comes from the line of Alan Carr with Needham & Company..

I wonder if you can go over what sort of gating - what other requirements you might have besides completing the Phase 3 trial for the telotristat NDA submission and then what steps are needed with respect to Ipsen for getting ready for Europe? Thank you..

So the development program that we've outlined is intended to provide all of the data that we would need for approval. We've done, in addition to the Phase 3 program, we've done Phase 1 studies that would allow us to file for approval.

So we're expecting to have the complete package ready to go and complete as soon as the pivotal studies are completed..

I'm just wondering whether or not there's CMC done any other preclinical studies or carc studies, all those are all done for telotristat..

We're doing - a carcinogenocity study will be something that will be ongoing and will be submitted post approval and that's part of the discussions that we've had with the agency. But the additional studies that we've done have been completed..

Okay.

And then with respect to Ipsen, can you give us an update on timelines for MAA submission and that sort of thing?.

The expectation is that we've been working together with Ipsen to be prepared and to prepare the NDA filing in parallel with the MAA filing. There might be a little bit of a timing gap between the two, but it shouldn't be much. The plan is to provide - is to be able to file them in very close proximity to one another..

And Alan, as you know, our objective for the NDA is to file it first quarter of 2016. And we should stay on track with that to make sure we can file the MAA as well sometime in that same time range or a little bit thereafter..

Thank you. Your next question comes from the line of Jessica Fye with JPMorgan..

Thinking about the commercial opportunity for telotristat when it appears there's an existing group of patients who are not adequately controlled, can you help us think about the launch ramp for this product? And then secondly, is there any update on the potential for a reverse stock split? Thanks..

Let me turn it over to John Northcott, Head of Commercial, to talk about the ramp-up for telotristat etiprate and then we'll come back and Jeff will give his extraordinary answer around the stock split question. John, you take it from there..

Great. So as you indicated, there is a tremendous number of patients currently in the U.S. with not [indiscernible] carcinoid syndrome, approximately 6000 of these patients.

And we've been speaking, engaging with patients and nurses and physicians and market researchers to really characterize the unmet medical need and it's quite a dramatic impact on their quality of life suffering with carcinoid syndrome. So we anticipate having the opportunity to be able to support these patients quite quickly post launch.

And it's not only because of the product's tremendous opportunity for these patients, but we're also putting the work in now to prepare for our distribution and market access, so the patients have the ability to have access to these patients with providers quickly post launch..

So Jessica, to answer your second question, you probably saw that we filed a preliminary proxy statement for our upcoming annual meeting a couple of weeks ago.

And as part of that proxy statement, we're including a request for our shareholders to approve authorization for the Board to enact a reverse split, in the range of between 6-for-1 and 10-for-1. And that's something that will be voted up at the annual meeting and so that we would be in a position to do a reverse split post that approval..

If the Board so sees fit and we still choose to do so. But that option would be available to us, if we get the approval from the Board..

Your next question comes from Steve Wiley with Stifel..

This is Justin on for Steve. I was wondering if you could share some details on what's giving you confidence in your type 1 diabetes time lines, whether or not you're using maybe the same sites or same CRO? And then also, I was wondering what the bottleneck factor is here.

Will it be the safety data or can you file on the type 2 primary endpoints from the two 150 patient studies? And one other question I had was, what are your expectations for SGLT2 drugs in development for type 1 diabetes? I've seen, just looking at the landscape briefly that some programs have been suspended, some I don't know the status.

So I was hoping that you could share some details on that. Thank you..

Okay. So our expectation is that we will - so we expect top-line data at 24 weeks as primary efficacy endpoint. But we do have the 28-week extension in the two pivotal studies and we're expecting to complete those studies before we file for approval in type 1 diabetes.

And to answer your question about some of the competitive studies, there's one single Phase 3 study that's being conducted for dapagliflozin in type 1 diabetes. There has been some exploration of some of the selective SLGT2 inhibitors in type 1 diabetes in Phase 2. It's not entirely clear what they will do and whether they will progress.

Our view is that the profile of the selective SGLT2 inhibitor would be very different and not nearly as attractive as the profile would be for sotagliflozin, in large part because the SGLT1 mechanism and the post prandial effects and the GLB1 [ph] effects and some of the other effects that are associated with SGLT1 inhibition have demonstrated, so far, as much more attractive profile and one that's much more tied in to the areas of need in type 1 diabetes.

So we do think that there is likely to be some competition, at least in the clinical trial space which is that it's something that is different - the profile of those agents would be different in character, not just in degree, from sotagliflozin. I think there might have been one other question that I may not have addressed.

Could you remind me what the other question was?.

I think you got all of them. I just asked what the bottleneck factor was. I asked you if you were using the same sites or same CRO and if that gave you confidence in your time lines..

Sure. The confidence comes from the fact that we have had the opportunity to - because we needed to raise the funding to be able to progress - we had a lot of time to really get geared up and ready to go. And so we felt like we were very well prepared.

And so as soon as we had the funding to move forward, we were able to release our team to get going full speed ahead and had a lot of good preparation for that. So we feel very good about the progress of that study of those two studies..

To Jeff's point, we have an extraordinary CRO in Covans [ph]. We have an executive leadership team that is overseeing the study between both organizations, from top to bottom.

Any bottlenecks that come, we have the right people to try to remove those bottlenecks and keep the study moving because this is a very important study to us, we believe we can move faster than anybody else, because we don't have 20 other things that can distract us. I believe we that will be first in this class and I do believe we will be best.

To the point that Jeff spoke to, the SGLT1 component of sotagliflozin is what makes the significant difference to the type 1 patient. No one else has been able to replicate the Phase 2 work, the data that came from the sotagliflozin study. No one.

And therefore, you may have seen some have dropped off and we're not sure what others are going to do as they go into their Phase 3 programs, because they do not have that SGLT1 component that will be the differentiating and defining position for sotagliflozin. And that's what gives us significant confidence.

And because we're so remarkably focused with our team and with Covans [ph] on making the advancements of this program, I don't believe anyone else will be able to beat us to market, unless something that I cannot foresee at the moment happens.

So with that being said, I think not only will we best in class, but I do believe we'll be first in class for type 1 diabetes..

And then if I could sneak one last question in.

What is the action date or when will we hear the reverse stock split vote?.

Our annual meeting is scheduled for April 23. So it would be after that time point..

[Operator Instructions]. Your next question comes from Colin Bristow with Bank of America..

I actually joined a late, so sorry if this has been asked.

But can you comment on what specifically the FDA has said or committed to regarding the necessity for CV outcomes trial for sotagliflozin? And then the second question, just as a point of curiosity, given you're a little more novel than the other SGLT2s, what's your expectation of the likelihood of having a panel convene for this asset? Thanks..

Well, let me go back to what I stated when I very first started here about the FDA's commentary. Their commentary to us is that they would've preferred the drug be characterized both type 1 and type 2, because at that time we were running both programs. However, they did note that there is a pathway for a type 1 program by itself.

And that pathway is the pathway we're now choosing, because the work that we're doing right now is extremely focused on type 1 and type 1 by itself. The only way for us to go back to type 2 is when and at such time that we would have a partnership that allow us to make that advance.

But at this moment, the drug is only specifically going after the intent to treat group of type 1 patients and the guidance there is very clear. And there is no CVOT outcome trial in the absence of some safety signal and there is no safety signal.

So therefore, we feel pretty confident, based on that guidance, that we'll be fine to keep going without a CVOT outcome trial. Your second question, I'm trying to remember, if I can is--.

If there were a panel, given you're more novel than the other SGLT2s..

Yes, I do think there is a good chance we will have an advisory panel. And I think that's a good thing, because I think we have a good story, a strong argument to make and it will be best to have that panel be part of that solution..

And likely also because we would be pioneering an oral anti-diabetic for type 1 diabetes. And so this is a new potential breakthrough, really for patients with type 1 diabetes..

And to Jeff's point, as we're out in the community with physicians and the folks who do this day to day, it is very apparent they want this. They believe the need is there and it exists and when the FDA looks into the community and creates a panel, I think that's just a better situation for us..

And just a follow-on, I believe there is some [indiscernible] data that suggests that SGLT1 is not regulated in cardiac muscle during periods of cardiac extremeness. How does that factor into the discussions you're having with the FDA and the level of confidence around CVOT in panels, et cetera? Thanks..

Well, I would say that I don't believe that's really been part of the discussion we have. There are few things worth noting. One is that the SGLT inhibition that we're seeing is SGLT inhibition in the GI tract. The potency of the compound is not really sufficient to inhibit SGLT1 at a high degree in the body.

But also, maybe more importantly, we've had knockouts of SGLT1 and they're very healthy. So even with an absence of SGLT1 in mice, they are quite healthy..

If I could add, this is Pablo Lapuerta - that the recent publications on SGLT1 cardiac presence actually suggests a benefit from SGLT1 inhibition in certain cardiac diseases including congestive heart failure. And there are humans who lack SGLT1 and have good cardiovascular [indiscernible]..

[Operator Instructions]. At this time there are no additional questions..

Well then, let me say thank you to all who joined this call this morning. We appreciate your interest in Lexicon and look forward to the next call. Thank you very much..

Thank you. This concludes today's conference. You may now disconnect. Speakers, if you'll please hold the line..