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.

Yigal Nochomovitz - Citigroup Jessica Fye - JP Morgan Chris Shibutani - Cowen Group, Inc Stephen Willey - Stifel Nicolaus.

Good morning. Thank you for standing by, and welcome to the Lexicon Pharmaceuticals Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] I would now like to hand the floor to Chas Schultz. Thank you, Mr. Schultz. The floor is yours..

Thank you, Latanya. Good morning, and welcome to the Lexicon Pharmaceuticals second 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; 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. 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 time to answer your questions. If you'd 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 include 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 risk includes 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, 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 activities.

For a list and a description of the risk 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. Coats..

Thank you, Chas, and good morning, and thank you to all of you for joining us this morning on this call. As always, I will start off this call by thanking the extraordinary men and women here at Lexicon for their tireless dedication to advancing Lexicon's science to patients.

Let me start off by saying, also, I'm very pleased to say that we've had a very productive first half of 2016, and our focus on execution continues to pay off.

If you look at telotristat etiprate and the science that we have around that, we have been very successful in being able to submit our first NDA in the first quarter, and we're very pleased that that NDA was accepted by the FDA and we were granted a priority review with a PDUFA date of November 30.

I'm also pleased to say that our partner, Ipsen, that we work very closely with, our partner outside the United States and Japan, to file the EMA – file with the EMA, telotristat etiprate, and that filing, too, has been accepted. As with sotagliflozin for type 1 diabetes, both our pivotal Phase 3 trials are fully enrolled.

As I take you to the next slide, let me just focus on what are the most critical things for us as we step forward. As already mentioned, telotristat etiprate for carcinoid syndrome, we have our PDUFA date of November 30.

We're very, very confident at this stage that we should be successful in achieving that date, and therefore all of our commercial preparations are underway.

We're now layering in the rest of our commercial organization, so there is a ramp-up in our organization right now to be commercially ready, both on the commercial side as well as the medical side.

As for Ipsen and our collaboration with them, that is going extremely well and they, too, certainly are working very hard to get ready inside of Europe for telotristat etiprate. As for sotagliflozin, I'm very, very proud of where we are.

Because of the extraordinary execution of our people, we're in a position now to announce top line results for our first Phase 3 clinical trial for type 1 diabetes. We'll be in a position to announce results in September. Our top line results for the second Phase 3 clinical trial for type 1 diabetes will be expected in December.

We're also cognizant of the fact that the JDRF study has enrolled and we'll be in a position certainly to announce results on the JDRF's trial in Q4 of 2016.

As for our type 2 program and our collaboration with Sanofi, I couldn't be more pleased at where we are, and the Phase 3 studies are fully expected to begin in Q4 and the work around establishing the development protocols and worldwide commercialization efforts are now well underway with Sanofi.

We will end the quarter in a very strong financial position with $429.4 million in cash and investments at the end of Q2, as we continue to be responsible with the shareholders' money.

And as we are ramping up, we continue to do it in a very disciplined way to ensure we have every opportunity to be successful in commercializing telotristat etiprate as we bring to conclusion our sotagliflozin type 1 program. With that, I'll have Jeff Wade, our CFO, walk you through the financials.

Jeff?.

Thank you, Lonnel. I will provide a brief financial update. As indicated in our press release today, we had revenues for the 2016 second quarter of $20.1 million, an increase from $0.4 million in the prior-year period. The increase was primarily due to revenues recognized from our collaboration and license agreement with Sanofi.

Our revenues of $32.6 million for the first half of 2016 increased from $2.2 million in the prior-year period. Our research and development expenses for the 2016 second quarter increased 132% to $48.2 million from $20.8 million in the prior-year period, primarily due to increases in external clinical and non-clinical research and development costs.

Our R&D expenses of $85.2 million for the first half of 2016 reflected a 105% increase from $41.6 million for the prior-year period. 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 $0.5 million in the second quarter and $1.4 million in the six months ended June 30, 2016.

Our general and administrative expenses for the 2016 second quarter were $8.4 million, an increase of 33% from $6.3 million in the prior-year period. The increase was primarily due to increased costs in preparation for commercialization of telotristat etiprate.

Our G&A expenses of $16.8 million for the first half of 2016 reflected a 40% increase from $12 million in the prior-year period. Our net loss for the 2016 second quarter was $38.1 million, or $0.37 per share, compared to a net loss of $28.1 million, or $0.27 per share, in the prior-year period.

Our net loss for the first half of 2016 was $73 million, or $0.70 per share, compared to a net loss of $56.2 million, or $0.54 per share, for the corresponding period in 2015. For the three and six months ended June 30, 2016, our net loss included non-cash stock-based compensation expense of $2 million and $3.8 million respectively.

For the three and six months ended June 30, 2015, net loss included $1.8 million and $3.7 million respectively. Finally, as of June 30, 2016 we had $429.4 million in cash and investments as compared to $477.1 million as of March 31, 2016, and $521.4 million as of December 31, 2015.

On the next slide, I will update our forward-looking financial guidance for 2016. We expect contractual revenues from existing arrangements in 2016 to now be in the range of $70 million to $80 million.

Our revenue expectations incorporate milestone achievement for telotristat etiprate in carcinoid syndrome, progress in the type 1 diabetes development program for sotagliflozin that we are leading under the Sanofi alliance, and progress in the type 2 diabetes program that Sanofi is leading under the alliance, and our associated funding participation in those efforts.

We now expect that our operating expenses in 2016 will be in the range of $225 million to $240 million.

Non-cash expenses are expected to be approximately $12 million of this total, including $7 million in stock-based compensation, $3 million in increase in fair value of Symphony Icon purchase liability, and $2 million in depreciation and amortization.

We now expect our 2016 net cash used in operations to be in the range of $205 million to $220 million. I will now turn the call back to Lonnel..

Thank you, Jeff. As I stated in the start, I'm very pleased with where we are. The company continues to execute very well on our plans. Telotristat etiprate is in a very strong position. We remain very, very confident of moving this drug toward market, both here in the United States as well as working with our partner Ipsen to advance it in Europe.

And for sotagliflozin, we are now in a position with very good recruitment and enrollment that we will be able to announce top line results a little bit sooner than what was originally expected. So, I'm very pleased with the execution of the Company at this point.

And certainly, we'll open the floor up at this moment for any further questions from the floor..

[Operator Instructions] And your first question comes from the line of Yigal Nochomovitz with Citigroup..

Hi guys. Thanks for taking the questions. On the timing of the type 1 studies, can you say at this point whether you expect the JDRF study to read out before the second type 1 trial, I think you said second type 1 in December and JDRF in Q4? Thanks..

Great question. And yes, we expect the JDRF study will read out prior to the second Phase 3 trial..

Okay, and can you talk a bit more about the dose-ranging study that you're doing with sotagliflozin in terms of where you're starting and where you're going with that dose escalation?.

Very good question. I'll turn it over to our Chief Medical Officer, Dr. Lapuerta..

I believe we used the same doses that were used in type 2 diabetes. And so, we had a dose as low as 75 milligrams once a day, and a dose as high as 400 milligrams once a day..

All right, got it. And then moving on to telotristat, can you provide any commentary on the dialog with the FDA, heading into the PDUFA, and then, secondly, can you comment on the magnitude of the transfer price that may slightly reduce the royalty you're getting from Ipsen? Thanks..

Let me take the question around the conversation with the agency, and then I'll take your second question and turn it over to Jeff. I'll just simply say we've had very robust conversations with the agency. We are very pleased with those conversations, and our confidence remains fairly high.

Therefore, we have continued to make the investments in moving toward commercialization here in the United States. I won't get in too any specifics. I will simply just say that those conversations are robust. When you are under a priority review, everything is condensed, and everybody's working very hard under that condensed schedule.

But we feel very confident that we will be commercial-ready to launch at the point in time the PDUFA date would occur..

So, Yigal, to answer your second question, I believe you're referring to the fact that the royalty rate that we're receiving from Ipsen is inclusive of supply cost, and the supply cost as a percentage of sales will also depend on what the ultimate pricing is.

But because it is a small-molecule drug, we do expect single-digit cost of sales as part of that supply cost, but that will be inclusive. We'll be paid a gross amount, and then that supply cost will be part of what we're covering as part of that transfer..

Yes. To Jeff's point, in having the oral solid dose product, that's the beauty of it. We certainly expect supply cost to be fairly low..

Got it.

And the final question, just on – can you comment around extension data for TELESTAR?.

I'll turn that question over to Dr. Lapuerta..

I'd say, so far, the safety profile that we see in the extension data is consistent with what we see that's been presented in the short-term double-blind portion of TELESTAR.

There was a presentation of some of the extension data at the European Neuroendocrine Tumor Society earlier this year, and it showed that bowel movement frequency reductions were maintained throughout the extension period. There were reductions in urinary 5HIAA throughout the extension period.

And the safety of telotristat etiprate throughout the extension period supported its proposed indication for treatment of carcinoid syndrome..

Thank you very much..

Thank you. Your next question comes from the line of Jessica Fye of JP Morgan..

Hi, there. Good morning. Thanks for taking my questions. Just two, first one on telotristat.

I think consensus sales for next year on that product are in the $40 million to $45 million range, can you comment on whether that's a range that you're comfortable with for your first year on the market? And the second question is just, as we think about any potentials for DKA to crop up in the type 1 studies, I guess based on the kind of FDA comments that obviously there are approved SGLT2s on the market that have had some DKA what do you think of as an acceptable rate in the context of the A1C benefit? Thanks..

Two good questions, Jessica. I'll take the first one and then turn the second one over to Dr. Lapuerta. In terms of the first question, the guidance, the only guidance we've really given on sales for telotristat etiprate is our peak sales. And we stand by the guidance that we believe peak sales will be north of $350 million.

We're confident in the ramp-up, but certainly, we haven't given any guidance to what that's going to look like in the first year. I think as we come closer, then certainly we'll speak a little bit more specific; but at this moment the only guidance we've given is that peak sales of $350 million, which we remain remarkably confident in.

Relative to DKA and sotagliflozin, I'll turn it over to Dr. Lapuerta..

Well, DKA is common in type 1 diabetes, so you asked about it, whether or not it would crop up. We certainly expect to see it in any type 1 diabetes program.

It's been seen in all type 1 diabetes programs, but in terms of whether or not it crops up, one of the things that we've done is, we've worked with the data monitoring committee in order to regularly and closely review our safety, and the data monitoring committee has not asked us to change our clinical development program.

That doesn't mean that we have any specific information other than that on DKA. We remain blinded to our results. We do believe that some therapies have increased risk of DKA. One of the therapies that have an increased risk of DKA, but is very acceptable to patients, is the use of pumps. Pumps malfunction, insulin pumps.

And so, we do think that there's a window, and that there is an acceptable range, that you can have some DKA but still have a proposition that's very favorable to patients.

And I think one of the most important propositions that we're looking to is to see whether or not we can improve time and range, which for patients would mean ultimately a lower risk of hypoglycemia, and that's a big issue to patients..

I guess, maybe one more specifically to the extent that you see it in both arms, but a little bit higher in the active arm.

What would you consider to be an acceptable range?.

Well, I'd rather not comment on a range, because I think it depends on the context. And that's one of the things I encourage you to look at, is not just the DKA but take the DKA into context with other events like A1C reduction and incidence of severe hypoglycemia and mild to moderate hypoglycemia. All of these come together.

And I think, because of that, it's difficult to provide an exact range for one event when there are three others that need to be taken into account..

Okay. Thank you..

Yes. To Dr. Lapuerta's point, the most significant issue for a type 1 patient is severe hypoglycemia. And so, to his point, if you're controlling that risk factor along with lowering A1C, those are the two most critical things you would look at for a type 1 patient..

Got it. Thank you..

Thank you. Your next question comes from the line of Alan Carr of Needham and Company..

Hi, thanks for taking my questions.

Wonder if you can comment a bit about the upcoming Phase – results from the upcoming Phase 3 trials in terms of powering assumptions, and what sort of expectations you have in terms of an A1C decrease? And then, also, looking at telotristat, can you guys go over what you've been doing with respect to prepping that market and payer discussions and that sort of thing? Thanks..

Well, Alan, I'll just tell you, we have a very high expectation in terms of what we expect to see – with patients with type 1 diabetes. I won't get into anything specific with that.

But I would say the data – that we're not that far off from sharing with you the outcome of that, and then we will talk more specifically about what those outcomes look like in a very short period of time here..

Can you comment on powering assumptions, or no?.

Sure. We can talk about powering assumptions..

Yes. The studies were powered to show a difference that was really, the design of the studies was designed for safety, primarily, in terms of the size of the studies. The powering was – because of that, the powering is sufficient to detect a smaller outcome than what we expect to see in the studies..

And Alan, your second question, can you repeat it again? I'm sorry..

In terms of getting ready for launch telotristat, payer discussions, that sort of thing?.

Yes. This is really an exciting time for us. We have – as you all know, we've had for some time now the top layer of our commercial organization. We're now layering in the payer group.

We're also layering in and expanding our medical group, and expanding our medical science liaison positions to begin the conversations on the reactive basis that physicians are now calling us with, about telotristat etiprate, and we are now filling in our district groups for our sales organization.

So, we will in a short period of time here, quite frankly, we will have all the pieces pretty much assembled and ready to go. We have a very experienced group that's coming to us from a very diverse group of companies.

Most will have had quite a bit of experience in the area of oncology and will know where the NCCN centers are around the country, and the important pathways that we have to be a part of. Payer discussions have been ongoing and have been quite robust.

And we're feeling pretty confident that, as we get our label, our last round of pricing work will support what we have always started with and stated that we'll be able to price telotristat etiprate either at parity or premium to market, depending certainly on what the final label will be.

So, we believe based on that payer research, we're pretty confident that that assumption will hold..

Great. Thanks for taking my questions..

Thank you. Your next question comes from the line of Chris Shibutani with Cowen..

On the potential registrations strategy for sotagliflozin, can you comment about what you're thinking you're going to be able to do, and what you would like to do in terms of the type 1 versus type 2 timelines?.

Yes, Chris, great question. The guidance we've given and we'll stick with that is, once we have tandem 1 and tandem 2 complete on terms of the Phase 3 program, on the type 1 program, we certainly will work with Sanofi and have discussions – further discussions with the agency. And from that, the filing strategy will be communicated.

We think it's best to get our data, get it put together, and then have a conversation with the agency about what is the right pathway for regulatory approval. From a Lexicon point of view, we've always been confident that we should have the ability to advance this compound for type 1 in advance of type 2, and we certainly hope our data supports that.

And if it does, we certainly will have that conversation with the regulators, along with our partner, Sanofi..

And then, previously, I think you've commented about the pace of enrollment that you experienced for the Phase 3, if I'm not mistaken, one of the trials had a slightly slower pace of enrollment, can you describe what factors were contributing to that?.

We – the US trial, which will be the first one that we call out in September that trial enrolled remarkably well, and I'm very, very proud of the team. We pretty much shot past some of the competitors who were out there, to be in a position to call that out in September.

The second trial was more focused in Europe, and any time you go to Europe, certainly the pace in the start, because you're going from country to country with all your recruiting efforts, you could have some challenges there.

But what I'm very, very proud of is, again, the team was able to find ways in which we can work with our study PIs and with our operations group, and we've brought that study back into fold, and we're now in a position that both trials will be called out in sequence in the next few months..

Great, and then lastly, when there is top line readouts, can we expect two things, number one, subgroup analysis at all of renaly impaired patients; and number two, any data, top line, on weight loss? Thank you..

So, Chris, the data that we expect is really going to be top line data on the primary efficacy endpoint and safety. So, that's all we're really going to be in a position to provide when we initially provide that data. The more detail, we'll be able to provide when we publish the results after the completion of the study..

And when might that be?.

Well, the study will be – it would be some time next year. Starting next year would be the time that we would be able to publish the studies. Overall, they're 52-week studies, so they will complete in 2017.

The primary efficacy endpoint is at 24 weeks, and that's -- that efficacy endpoint and the safety associated with that endpoint is what we'll be reporting at the end of this year..

Great. That's helpful. Thank you..

Thank you. [Operator Instructions] And we do have a question from the line of Stephen Willey with Stifel..

Hi, good morning. Thanks for taking the question.

Forgive me if this has already been mentioned, but can you confirm that, I guess, just in respect to the pre-commercialization work you've done on the manufacturing side, that you guys will be ready to put product into the channel shortly after FDA approval?.

Yes, Stephen. We're working very hard on all the facets, and you brought up manufacturing. Certainly we're working hard there too because, to your point, you could be commercially ready for everything else, but you've got to be ready to put product in market.

So, we've given ourselves a big challenge, and that is to be in a position to be ready in advance of the PDUFA date. And so, if we're able to achieve our challenge when we get the PDUFA date, we'll be less than a few weeks before we're able to put product in market.

So, that will be something that would be a major achievement if we're able to pull it off. And right now I'm pretty confident that we will be able to pull it off, short of something happening that I don't know of..

Okay. And then, I know there's been some prior mention, I guess, over the course of the last year or so, regarding the potential pursuit of additional opportunities on the development side for telotristat. I'm just wondering if there's been any further thought to that..

Yes. We now have the great Dr. Praveen Tyle, not to put any pressure on him. But we're now going through a whole assessment of all of our assets, and what do we want to put in the clinic, and in what order we want to put it in the clinic, to try to unleash more the value of Lexicon. So, I'll let him speak to that briefly..

So, Steve, Praveen here. We're evaluating what life cycle management opportunities do we have with telotristat itself; and in addition to that, we're looking at the series of compounds in the same family to see if there are other opportunities with different indications with a novel molecule. So, stay tuned..

Stephen, one of the things I will add is, one of the challenges when you have an orphan drug like this, and if we're – I think we will be able to price it the way we think we will be able to price it, within the category – finding additional indications because of the price we'll be able to establish, that becomes one of the challenges.

So, we have to continue to work through that and make sure that whatever we do next will support the price that we will come into market with for carcinoid syndrome..

Understood, and when you talk about kind of Praveen's work in terms of prioritizing some of the internal assets, is it safe to assume that the selective SGLT1 is somewhere near the top of that list?.

Yes.

You're looking at my list, is it, Steve?.

Yes, you're correct, Steve. That's one of our important compounds that we think will be of big value to us, and Praveen's studying how best we will approach that. And we'll have something to say about, when we put it in the clinic here very soon..

All right, guys. Thanks for taking the questions..

Thank you. At this time, there are no further questions. I will return the floor for closing remarks..

Well, thank you. I will close by again stating what I have stated earlier. We are executing very, very well. It's a remarkably exciting time here at Lexicon. We take nothing for granted. We work every day to remove barriers and reduce time to getting our innovations to patients. And I think, over the last year or so, you've watched us do that.

I have every hope and faith and confidence that as we get into the next quarter, we'll be in a position certainly to have moved into – closer to revenue generation for the company, which will be a remarkable milestone for Lexicon.

So, we look forward to the next conference call with you, and in the meantime, if you have questions, please feel free to contact us..

Thank you for your participation in today's Lexicon Pharmaceuticals second quarter 2016 financial results conference call. You may now disconnect..