Welcome to the Lexicon Pharmaceuticals First Quarter 2019 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a brief question-and-answer session. As a reminder, this call is being recorded today, May 1, 2019.

I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead..

Thank you, Dorothy. Good morning. And welcome to the Lexicon Pharmaceuticals first quarter 2019 financial results and business update conference call. Joining me on today's call are Lonnel Coats, Lexicon's President and Chief Executive Officer; Alex Santini, Executive Vice President and Chief Commercial Officer; Dr.

Pablo Lapuerta, Executive Vice President and Chief Medical Officer; Dr. Praveen Tyle, Executive Vice President of Research and Development; and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. After our formal remarks, we will open the call up for Q&A.

Earlier today, Lexicon issued a press release announcing our financial results for the first quarter 2019, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call along with a slide presentation will be accessible in the Investor Relations section of our website.

During this call, we will review the information provided in the release, provide an update on our clinical programs and then use the remainder of our time to answer your questions.

Before we begin, let me remind you that we will be making forward-looking statements, including statements relating to the safety and efficacy and the therapeutic and commercial potential of XERMELO, sotagliflozin and our other drug candidates.

These statements may include characterizations of the commercial performance of XERMELO; the expected timing and outcome of regulatory review of applications for approval of sotagliflozin; expected timing and results of clinical trials of sotagliflozin, telotristat ethyl and our other drug candidates; and the market opportunity for those programs.

This call may also contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of other drug candidates, strategic alliances and intellectual property, as well as other matters that are not historical fact 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 success of our commercialization efforts for XERMELO; the regulatory review of applications for the approval of sotagliflozin; the timing and results of clinical trials and preclinical studies of sotagliflozin, telotristat ethyl and our other drug candidates; our dependence upon strategic alliances and other third-party relationships; 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 research, development and commercialization 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'd now like to turn the call over to our President and CEO, Lonnel Coats..

Thank you, Kim. Good morning, everyone, and thanks for joining us on the call today. In the first quarter, we made progress on our XERMELO business and our pipeline, while effectively managing our resources and spending.

I'll elaborate on some of the key achievements and will then turn the call over to Pablo and Jeff for updates on our pipeline developments and financial results respectively. Starting with XERMELO, we achieved US net sales of $6.7 million in the first quarter of 2019, up 24% from the corresponding period in 2018.

We remain on track to see 20% or greater growth in the US net sales year-over-year per our guidance. Outside the US, our collaborator, Ipsen, expects more countries to come online this year.

We're pleased with the recent approval of sotagliflozin in Type I diabetes in Europe, which represents the second product originating from our own laboratories to be approved in a major region in a span of only 26 months.

Turning to sotagliflozin and Type I diabetes in the US, we and our collaborator, Sanofi, are following up with the FDA after receiving a complete response letter in March. In Type II diabetes, the first of the Phase III studies is expected to readout this quarter, with results from the remainder of the core studies expected throughout this year.

We're eligible to receive meaningful milestone payments from Sanofi associated with positive results from certain Phase III studies in Type II diabetes this year. Sanofi remains on track to submit regulatory filings for Type II diabetes in the US and in Europe in the first half of 2020.

We continue to make disciplined investments in R&D, including clinically exploring telotristat ethyl's therapeutic utility and biliary tract cancer and advancing LX9211, our product candidate in neuropathic pain. We ended the quarter with approximately $133 million in cash and short-term investments.

We have prudently managed our cash and remain well-capitalized to execute on our business growth. We have concluded the major Phase III investments in Type I diabetes and are nearing some substantial potential milestones for sotagliflozin in Type II diabetes.

For the remainder of this year, we will continue to execute on our growth strategy to position the company for the future value generation for long-term sustainability for our shareholders. With that, I'll turn the call over to Pablo to discuss our pipeline. .

Thanks, Lonnel. Let's start with our most advanced program, sotagliflozin in Type 1 diabetes. Last week, we announced that the European Commission approved sotagliflozin for use as an adjunct insulin therapy to improve glycemic control.

It is for adults with Type I diabetes and a body mass index of at least 27 who have failed to achieve adequate glycemic control despite optimal insulin therapy. We are very pleased that European patients will now have a new treatment option to manage their disease.

In Type II diabetes, evidence continues to build that SGLT inhibitor should become treatment of choice for patients with Type II diabetes based on benefits on A1C, weight loss and blood pressure. There is also building evidence for renal protection and improvements in cardiovascular outcomes.

Recently, the CREDENCE study with canagliflozin showed that SGLT inhibition can reduce the risk of end-stage renal disease and cardiovascular events, including hospitalization for heart failure in patients with Type II diabetes and chronic kidney disease.

Sanofi is running a robust Phase III clinical development program centered on the opportunity for differentiation in patients with renal impairment.

Since declining renal function is a hallmark of Type II diabetes, demonstrating benefits in this patient population with renal impairment can make sotagliflozin an attractive option for all Type II diabetes patients. We report the topline results from the first of several Phase III studies for sotagliflozin in Type II diabetes this quarter.

Sanofi remains on track to submit regulatory filings for Type II diabetes in the US and in Europe in the first half of 2020. As for the rest of our pipeline, we continue to explore telotristat ethyl's therapeutic utility in other areas such as biliary tract cancer.

In the first quarter, we dosed the first patient in a Phase II study of telotristat and gemcitabine plus cisplatin in treatment-naïve patients with cholangiocarcinoma. We expect completion of patient enrollment of the initial safety cohort later this year. Our approach to study tumor control has been supported by recent publications.

These include an article in January in The Oncologist presenting very positive long-term survival of patients receiving telotristat ethyl across five clinical [indiscernible]. The Oncologist also published an independent case report in March describing five years of stable disease in one of these patients.

Last, but not least, we are very excited about our LX9211 program in neuropathic pain. Recent Phase Ia data were consistent with the drug's preclinical profile and showed a favorable pharmacokinetic profile that supports once-daily dosing. In the first quarter, we initiated a Phase Ib study for LX9211 in healthy volunteers.

We anticipate topline data in the second half of this year, followed by initiation of Phase II development in neuropathic pain indications. We are committed to discovering developing and commercializing therapies with the greatest value proposition for patients. We have made good progress and we look forward to updating you in the future.

Now, I'd like to turn the call over to Jeff who will provide financial highlights..

Thank you, Pablo. This morning, I will discuss key aspects of our 2019 first quarter financials. More financial details can be found in our 10-Q which will be filed shortly.

As indicated in our press release today, first quarter 2019 revenues totaled $9.2 million, down from $25.4 million from the prior-year period, primarily due to lower revenue recognized from our collaboration and license agreement with Sanofi, partially offset by a milestone payment from Ipsen for first commercial sale in Canada and an increase in net product revenues.

Net product revenues for the first quarter of 2019 consisted of $6.7 million from net sales of XERMELO in the United States. Cost of sales related to sales of XERMELO was $0.6 million and $0.5 million respectively for the first quarter of 2019 and 2018.

Research and development expenses for the first quarter of 2019 decreased to $12 million from $47.7 million for the corresponding period in 2018, primarily due to lower external clinical development costs related to sotagliflozin.

Selling, general and administrative expenses for the first quarter of 2019 were $14.1 million compared to $14.9 million for the same period in 2018, primarily due to decreased marketing costs, partially offset by higher salaries and benefits relating to increased headcount.

Net loss for the first quarter of 2019 was $21.8 million or $0.21 per share compared to a net loss of $41.8 million or $0.40 per share in the corresponding prior-year period. For the first quarter of 2019 and 2018, net loss included non-cash stock-based compensation expense of $3.4 million and $3.1 million respectively.

We ended the first quarter with $133.1 million in cash and short-term investments as compared to $160.1 million as of December 31, 2018.

We continue to project that our current cash position together with expected revenues will be sufficient to transition to positive cash flow on our XERMELO carcinoid syndrome diarrhea business by the end of the year based on expected growth in net sales relative to commercialization and field medical costs for the brand.

At the same time, we have concluded the major Phase III investments in sotagliflozin and are nearing some potential – major potential milestones for sotagliflozin in Type II diabetes. Overall, our financial performance positions us for future milestones and value generation, including advancement of our early-stage pipeline.

We continue to be focused on effectively managing our resources and spending to support our growth. Now, let's turn to our financial guidance for 2019. We are reiterating our previously disclosed guidance for US XERMELO net sales and for R&D expenses and are revising guidance for SG&A expenses.

We expect US XERMELO net sales growth in the range of 20% or greater year-over-year. We expect collaboration revenues to be driven almost entirely by milestone payments under our alliances with Sanofi and Ipsen. Milestone payments from Ipsen may reach the mid-single digit million range in 2019.

Under the Sanofi alliance, 2019 marks the beginning of a period of slightly more than two years in which we are eligible to receive up to $330 million in development and regulatory milestones, up to $220 million in regulatory milestone payments related to the first commercial sale following regulatory approval of sotagliflozin for Type I diabetes and Type II diabetes in the US and in Europe, and up to $110 million in development milestone payments relating to results of Phase III clinical trials in Type II diabetes.

We are revising our anticipated operating expenses to be in the range of $115 million to $135 million, which is down from $120 million to $140 million. Operating expenses, including R&D expenses, in the range of $60 million to $70 million and reduced SG&A expenses in the range of $55 million to $65 million, down from $60 million to $70 million.

Non-cash expenses are expected to be approximately $18 million of this total, including $13 million in stock-based compensation and $5 million in depreciation and amortization. We expect to provide updates to our financial guidance in subsequent calls based on regulatory interactions. I will now turn the call back to Lonnel..

Thanks, Jeff. We remain focused on driving long-term growth through continued execution on the XERMELO business and the advancement of our pipeline going forward.

XERMELO remains a significant franchise for us and we are extremely excited to clinically explore the use of telotristat ethyl in an additional therapeutic indication where the role of serotonin inhibition has shown preclinical promise. We're very pleased with the European approval of sotagliflozin.

And in the US, we and Sanofi continue to work with the FDA to better understand sotagliflozin's potential pathway to approval in the US for Type I diabetes.

In Type II diabetes, we look very much forward and anticipate results from the core Phase III studies for sotagliflozin this year, followed by regulatory filings in Europe and in the US in the first half of 2020. Lastly, we continue to advance our earlier stage product candidates in areas where we believe will create long-term growth for the company.

With that, I will now ask the operator to begin our Q&A session. Please note that we will not have any further comments on the Type I diabetes regulatory matters, but will be happy to address other questions..

[Operator Instructions]. Your first question comes from the line of Liana Moussatos with Wedbush..

Thank you for taking my questions. Do you anticipate being able to announce next steps after interactions with the FDA on Type I maybe in Q3? Just wanted to get a sense of when we would find out about that.

And then, are we still anticipating Type II data release in this quarter?.

Liana, thank you for the questions. One is that, yeah, we still anticipate data release sometime this quarter. Can't be exact on that. In terms of the interactions with the regulators, we will have to take – continue to take Sanofi's lead on that as they certainly are making the appropriate efforts.

But, certainly, when we're in a position to be able to talk more about it, we will do just that. But I cannot give you any time at which that'll take place as Sanofi are leading those discussions..

Thank you..

Your next question comes from the line of Jessica Fye - JPMorgan. .

Hey, guys. Good morning. Thanks for taking my question.

As we're thinking ahead to these Phase III studies reading out in Type II, what endpoints would you focus us and investors on to really highlight the differentiation of sotagliflozin and its SGLT1 activity?.

Jeff, you want to take that call?.

Yeah. I think we've been highlighting that some the key areas are in the area of renal impairment where we have two dedicate studies in stage 3 chronic kidney disease, stage 4 chronic kidney disease. And we've also have a study where we're comparing directly with empagliflozin. So, I think those are key studies.

But, really, all of the results from all of the studies are important.

Our vision for this product is that we have the product that has a best-in-class profile and is one that could be used across the spectrum of people with Type II diabetes, in that we have an opportunity to see some specific differentiation based on the SGLT1 mechanism in certain of these studies.

But, overall, I think every one of these studies will have important impact on the opportunity for sotagliflozin..

Okay.

And then, if we just think about the early-stage pipeline and your asset for neuropathic pain, assuming you have positive Phase Ib data, can you talk a little bit about what a Phase II study could look like?.

Great question, Jessica. For us, we're doing everything we can to accelerate that program because I think it's one of the most exciting early-stage opportunities for us and certainly we'll be calling out data as we have more information. But I'll let Dr. Tyle speak a little bit to what we're going to get ready for proof-of-concept..

Hey, Jessica. How are you? So, Jessica, what we're doing currently is we're trying to figure out where we will go in neuropathic pain indications for our Phase IIa studies. And one of the lead indications we are thinking about, obviously, because of our interest in endocrinology and metabolic diseases is diabetic neuropathy.

So, we're also looking at other indications, but we have not finalized any other indications as of right now..

Great, thank you..

Your next question comes from the line of Yigal Nochomovitz with Citigroup..

Hi. Good morning. Thank you for taking the questions. Pablo, I think you mentioned briefly in your remarks the CREDENCE study. I'd just like to get a better understanding of how you see sotagliflozin potentially differentiated versus what the conclusions were in CREDENCE.

Obviously, in that study, they showed a renal failure and death [ph] reduction by about 30%, and that was in the stage 3 patients or lower. So, could you just comment a little bit on what you might see in your Phase III studies that could potentially either differentiate from that conclusion or support it? Thank you..

Yeah. I think we will see similar renal and hemodynamic effects. We don't have, in the Phase III studies, long-term data on renal failure. One of the key things to look at in terms of differentiation will be A1C reduction. If you look at the CREDENCE study, the A1C reduction at the end of the study was 0.1%.

Averaged over the course of the study – it declined over time – it was about 0.25%. And I think that's one of the things to look for, is to see whether in patients with renal impairment, through SGLT1, 2 inhibition in addition to the favorable renal and hemodynamics can control A1C..

And it is important to note that we do have in the long-term cardiovascular outcome study in this program, which is not part of the core program, that we'll read out before the initial approval that is ongoing is the support study, it's in a patient population that has chronic kidney disease and we're looking at cardiovascular and renal outcomes in that study..

One other important outcome to look at renal impairment studies is blood pressure reduction because I think that's part of the renal protection that's offered. And so, CREDENCE had a 2 mm blood pressure reduction in systolic blood pressure..

Okay, thank you..

Your next question comes from Stephen Willey with Stifel..

Yeah. Thanks for taking the questions. I was dropped earlier, so apologies if I'm repeating anything.

But, I guess, just with respect to the Type I path forward, which I know that you're limited with respect to what you can say, but should we anticipate the next communication regarding that process as there's either meeting on the calendar or you've had a meeting and this is what the FDA has told us.

I'm just trying to get a sense as to what we should anticipate being kind of the next communication from both yourselves and Sanofi.

And then, maybe just second to that, Jeff, should we interpret the revision in SG&A as being a lowering of confidence that there's the path forward that gets elucidated that allows 2019 commercialization [indiscernible]?.

I'll take the first and second if I can and ask Jeff to help out. So, in terms of the reduction in expenses, that had absolutely nothing to do with our confidence of sota.

If you remember, the last time we had this conversation, we showed you what our financials will look like with sota being in our financials and launching and what that – we have adjusted our numbers down further because we're continuing to look at how we operate our business and every aspect of it in the most efficient way.

And that's where that came from. The first part of your question, in terms of when we will communicate, I'm going to follow Sanofi's lead here, but I would say that, at this juncture, we're making every efforts to make calendars work for all parties to engage with the regulators properly.

I think Sanofi in its own guidance said it would be seeking a meeting. And there is a number of ways that you can approach this to get an immediate meeting or to certainly get one in which you're going to make much more substantial efforts to get aligned with the agency.

I think we're choosing to be a little bit more deliberate, so that we can get better alignment when we do end up having that discussion..

Okay.

And then, I'm not sure if it was mentioned, but can you say which of the first Type 2 studies you'll be reading out this quarter?.

Well, I can say that the first one that's listed as the primary completion date on clinicaltrials.gov is the metformin study. And that's how I would answer that question..

I think Jessica asked the question earlier, what you should be looking for. I think it's the CKD3, CKD4 study, the head-to-head study with empa, these are all defining moments, I think, for the compound and those are the studies you really should look for..

Understood. And I'm not sure if Pablo touched upon it, but can you maybe just talk a bit about the study that was just posted to clinicaltrials.gov, evaluating telotristat in combination with, I believe, it's frontline chemo in pancreatic cancer.

But appears to be kind of an effort to improve patient supportive care and should we anticipate this as maybe being kind of a broader effort to evaluate XERMELO in these kind of supportive care indications? Thanks..

Yeah, Steve. I'll turn it over to Pablo to answer more completely. But, yes, it is a remarkable effort that we're making here. We think it's supported by good preclinical evidence. And we're making good strides and getting that trial up and running.

And, certainly, Pablo has mentioned this earlier about some of the work that's already been published now in The Oncologist, but I'll turn over to him to speak a little bit more about.

Pablo?.

Yeah. Steve, I was talking about biliary cancer and cholangiocarcinoma. And in that study, telotristat is being used frontline with combination of gem/cis. The primary endpoint will be progression-free survival at six months and historical cohorts suggest that anything above 50% would be a very good outcome.

So, I look at it a little bit more than supportive care. I look at it as giving a perspective on whether or not progression-free survival would be strong enough to merit further research into tumor control..

Yes. I guess my question had to do with another study that was just posted. I think Emory Maria's is the sponsor and you guys are a co-sponsor. And you're looking at weight stability in patients who receive chemotherapy, pancreatic cancer..

Yeah. And that study is supportive care. That study, we were approached by Emory University and we're very pleased to support them.

They were interested in the positive weight gain data that we've published with telotristat from the TELESTAR study where we showed an incidence of weight gain that was, I believe, 5.1% on placebo and 31.5% on the high dose of telotristat, with an intermediate number on the low dose. And weight loss is very common in pancreatic cancer.

It's one of the worst features of the disease. And so, they're hoping that some patients can benefit with telotristat in terms of maintaining their weight..

Okay. Thanks for taking the questions..

[Operator Instructions]. Your next question comes from the line of Alan Carr with Needham..

[Technical Difficulty] TRX this quarter or sort of new patient starts..

So, Alan, we didn't hear your whole question. We just heard the last bit..

Sorry about that. Previously, you had provided some metrics around XERMELO in terms of scripts and compliance and things like that.

I was wondering if you would be able to provide that for 1Q 2019 such as ATRX and/or new patient starts this quarter?.

We had 104 new patient starts this year and we had 17% growth on the TRX in the first quarter..

Okay, great. And just a quick one on 9211.

Is that wholly-owned? Is that unpartnered?.

That's unpartnered and wholly-owned by Lexicon..

Great. Thanks..

There are no further questions at this time. I will now turn the call back over to Mr. Coats for his closing remarks..

Well, thank you for joining us. We will continue to focus on advancing growth for this company. And as we have certainly more to say, we'll continue to communicate out to the community. Thank you..

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line..