Welcome to the Lexicon Pharmaceuticals Third Quarter 2019 Financial Results and Business Update. [Operator Instructions] As a reminder, this call is being recorded today, November 7, 2019. I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead, Ms. Lee..

Thank you, Carmen. Good morning and welcome to the Lexicon Pharmaceuticals third 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 third quarter of 2019, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call, along with the slide presentation, will be accessible in our 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 the 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, Zynquista 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 Zynquista; the current status of the transition of responsibility from Sanofi for ongoing clinical studies and other activities related to Zynquista; the current status of our strategic alliance discussions with respect to Zynquista; the expected timing and results of clinical trials of sotagliflozin, telotristat ethyl and our other drug candidate; 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 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 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 description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission. I would 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 this morning. The third quarter was an eventful one for us that included good execution across various aspects of our business. We made significant progress on XERMELO business, achieving $8.4 million in net U.S. sales, up 33% from the corresponding period in 2018.

XERMELO remains on track for 20% or greater year-over-year growth in U.S. net sales.

Another key third quarter highlight includes achievement of encouraging preliminary top line results for the first 3 Phase 3 sotagliflozin studies in type 2 diabetes, including statistically significant reductions in A1c compared to placebo in patients on metformin and in the overall population of patients with stage 3 chronic kidney disease, or CKD.

We continue to believe that the totality of the data points to a very compelling overall profile of sotagliflozin in a CKD 3 and CKD 4 population, and that the SGLT1 component of sotagliflozin mechanism offers opportunity for differentiation in patients with kidney disease.

The sotagliflozin type 2 clinical development program is very robust with 6 remaining core Phase 3 glycemic control studies, shown on Slide 3, that are nearly completed.

In addition, there are 2 ongoing outcome studies, SCORED and SOLOIST that are examining cardiovascular and renal outcomes in a population with renal impairment and outcomes in patients with type 2 diabetes and heart failure, respectively.

The SCORED study has reached its target of 10,500 randomized patients, all with stage 3 and stage 4 chronic kidney disease. The SOLOIST study continues to enroll patients with acute decompensated heart failure.

Evidence continue to build that SGLT inhibitors may become the treatment of choice for patients with type 2 diabetes, given the strong A1c, metabolic, cardiovascular and renal benefits observed in the class and supported by the recent approval of another SGLT2 inhibitor for reduction of risk of hospitalization for heart failure in adults with type 2 diabetes and established cardiovascular disease.

We believe this approval bodes well for the SGLT drug class. At the end of the third quarter, we and Sanofi agreed to terminating our sotagliflozin alliance. As part of that arrangement, Sanofi paid us $208 million upfront and is obligated to pay an additional $52 million within 12 months of the termination date.

We expect these funds to cover the completion of the core Phase 3 clinical trials in type 2 diabetes and the anticipated regulatory submissions in type 2 diabetes in the U.S. and in Europe in the first half of 2020.

The funds from Sanofi will not be sufficient to take 2 outcome studies to full completion for which will require funding from a partnership, which we are actively pursuing.

We are working closely with Sanofi in the transition responsibility for ongoing clinical studies and other activities and have been working diligently to complete the core Phase 3 studies in type 2 diabetes. We expect that these core studies should read out by year-end or into early next year, given slight delay due to the transition.

In type 1 diabetes, we filed a formal dispute resolution request with respect to the complete response letter previously issued by the FDA’s metabolic/endocrine division and are engaged in a dispute resolution process.

We believe that our discussions with the FDA office of new drugs have been constructive and seeking a path forward, and we will provide an update when we receive a decision, which is expected later this year. Type 1 diabetes remains a priority for us.

Before we touch on our cash position, we ended the third quarter with approximately $296 million in cash and short-term investments, which includes the upfront payments of $208 million from Sanofi. We will continue to prudently manage our cash and expect that our working capital will be sufficient to sustain our operations in 2021.

With that, I will turn the call over to Jeff who will provide financial highlights..

Thank you, Lonnel. This morning, I will discuss key aspects of our third quarter 2019 financials. More financial details can be found in our 10-Q, which will be filed shortly. Now please refer to Slide 5 of our presentation.

As indicated in our press release today, third quarter 2019 revenues totaled $294.4 million, up from $7 million from the prior year quarter, primarily due to an increase of collaborative revenues of $260 million from the termination of the alliance with Sanofi.

Selling, general and administrative expenses for the third quarter of 2019 decreased to $13.9 million from $15.6 million for the same period of 2018, due to lower marketing costs.

We recognized an impairment loss of $28.6 million in the third quarter relating to an indefinite lived intangible assets associated with Lexicon’s 2010 acquisition of Symphony Icon, due to the decision to terminate research and development activities related to a program for irritable bowel syndrome that was among the assets acquired.

An income tax benefit of $6 million for the 3 months ended September 30, 2019, was recognized in connection with the impairment loss, which resulted in a decrease in the deferred tax liability and created an income tax benefit.

Net income for the third quarter of 2019 was $226.1 million or $1.95 per diluted share as compared to a net loss of $27.4 million or a loss of $0.26 per share in the corresponding prior year period. For the third quarter of 2019 and 2018, net loss included non-cash stock-based compensation expense of $3.6 million and $2.9 million, respectively.

We ended the third quarter of 2019 with $296.3 million in cash and short-term investments as compared to $160.1 million as of December 31, 2018. The cash position as at September 30, 2019, included proceeds of $208 million in connection with the termination of the alliance with Sanofi.

We expect that our working capital will be sufficient to fund our operations in 2021. We will continue to prudently manage our expenses and seek further opportunities to extend our cash runway, including pursuing partnership with sotagliflozin. Turning to our financial guidance, for 2019, we continued to expect U.S.

XERMELO net sales growth in the range of 20% or greater year-over-year. We are now expecting operating expenses to be in the range of $200 million to $220 million, up from our prior guidance of $100 million to $120 million.

Operating expenses included the R&D expenses, which we now expect to be in the range $120 million to $130 million, up from $50 million to $60 million.

The operating expense difference in the year also includes the $28.6 million non-cash impairment loss that we recorded in the third quarter relating to the indefinite lived intangible assets associated with Lexicon’s 2010 acquisition of Symphony Icon.

The increased R&D guidance includes the cost for 9 core Phase 3 studies and third-party expenses for the outcome studies in type 2 diabetes in each case, from and after September 10, 2019. As we have discussed, the core Phase 3 studies are nearing completion.

And the cost associated with those studies will be winding down as we prepare for an NDA filing that we expect to be in position to make in the first half of 2020.

To provide some perspective on the cost of the outcome studies, we estimate that the annual run rate for expenses associated with this quarter in SOLOIST study combined is on the order of $100 million or so. As for SG&A expenses this year, we are reiterating our guidance of $50 million to $60 million.

Non-cash expenses are expected to be approximately $48 million of our total operating expenses, up from $19 million. This includes $14 million in stock-based compensation and $5 million in depreciation and amortization. The revised non-cash expense guidance also includes the impairment expense of $28.6 million that we recorded in the third quarter.

I will now turn the call back to Lonnel..

Thank you, Jeff. I think at this point we will turn the call over to the operator to start the Q&A..

Thank you. [Operator Instructions] Your first question will come from Yigal Nochomovitz with Citi..

Hi, this is Samantha on for Yigal. Thanks very much for taking our questions.

First, could you share any additional details on the formal dispute request? What is the nature of the dispute and can you walk us through the timeline on how these disputes are handled?.

All great questions. We filed the dispute in September. It was granted we had our meeting in October. The FDA, the office of new drugs that’s who you dispute it to, they had a couple of questions. We have responded to those questions.

And now the clock starts by which they will take all of our recommendations under consideration, and we hope to hear back from them very soon..

Are you in a position to just give broad outlines on what those recommendations are?.

Well, I won’t get into that, but I will say we are pursuing a pathway that does not include a new study..

Okay.

And can you provide any additional examples of other companies or drugs that have filed a formal dispute that we could use as a reference?.

I would say that your best answer – answer to your question is wait for a short while and the most relevant answer will be known relative to our dispute..

Got it. Thanks very much for taking the questions..

And your next question comes from the line of Stephen Willey with Stifel..

Hey, good morning. Thanks for taking the questions. I guess just a follow-up on the dispute. So the resolution that was filed was with CDER.

Is that correct?.

No, that was filed with the Office of New Drugs, Dr. Peter Stein. So it gets involved to your question, Steve..

Okay.

And I think that there is a mechanism by which if the Office of New Drugs doesn’t agree with your stance that there is an opportunity to take this to an even higher level within the agency, is that correct?.

That is correct..

And can you – so the meeting was in October and I guess, the clock is now ticking.

What is the timeline with respect to when the agency needs to come back to you with an answer?.

So generally, Steve, if you – if they have questions, you get those questions turn around pretty quickly. Well, at least we get turn around pretty quickly. They have 30 days after you have resubmitted your questions to come back to you. We’re now within that window..

Okay. And then just with respect to, I guess, your ongoing partnership discussions.

Are those active conversations that you’re having right now with potential strategics?.

They are active conversations. We have had active conversations from the start of the – I will just say from the start of the end of the termination of alliance with Sanofi. So we have had quite a bit of interest and we are batting that process now..

Okay. And maybe if you could just kind of comment a little bit on, I guess, what would maybe be perceived to be obstacles for strategic at this point.

I guess the uncertainty around type 1 not yet having data from the outcome studies, and then I think there’s also actually an ANDA that’s been filed against DAPA, which I think we’ll probably have some more clarity on at some point next year.

So if you could maybe just kind of talk about each of those things and how each of those variables may represent an obstacle to your ability to get a deal done in a timely manner?.

So let me see if I can answer those slightly different, Steve. First of all, I have every confidence of AZ prevailing in their case. That’s number one. Number two is from a perspective of what’s uniquely here and available to us is we’re going to get an answer to type 1 very soon. And I think we’ve had a very good conversation with the agency.

At the end of the day, I can’t give a great deal of certainty as to what their answer is going to be. But I will tell you they have been markedly productive conversations with Office of New Drugs. So I am hoping that we would have an answer to a pathway to type 1 very soon.

The second one is we have pretty much completed the core Phase 3 program for the type 2 studies. Right now, what we are doing, as you recall, we said we’re going to reanalyze all the data came into us from Sanofi. We are in the process of doing that.

Once we have that in hand, which I would tell you that will be here shortly within the next month or so, that gives us the opportunity to see the weight of the evidence that I think that will allow a potential partner to understand better about the pathway for Zynquista.

And the third one I would say to you is that the new data that certainly has come from AZ on heart failure has given a lot of interested people on our SOLOIST trial which is also enrolled for heart failure, but with a unique caveat to it and looking at decompensated patients.

And so those 3 things, all of them are within the time line of the next month or so that allows us to advance our conversation a little bit more experience. So we’re going to have the answers to them. And as a result of that, I think it will give us what level of energy we will have around getting a deal done..

Alright. Thanks a lot for taking my questions..

You bet..

Your next question is from the line of Jessica Fye with JPMorgan..

Hey, guys. Good morning. Just following up on one of the prior questions about the status of your efforts to find a new commercial partner for sotagliflozin, it sounds like that process is underway.

Can you give us a framework for when we can expect to hear an update?.

For us, I would simply say that, that it’s hard to ever give an update because you are relying on another party and their time line to some degree, but what I will say is the information in hand about sotagliflozin will be known by the end of this year. And that will determine the lift and the timing of when I think will get partnership done.

To the point I made to Steve, we’ll know the answer to type 1. We are going to know the answer to the overall profile of sotagliflozin for type 2. We are going to get a good answer to when our reanalysis of the CKD 4 data, which we promise you we’re going to do, we will have that completed.

And so we’re going to have a pretty good idea of the uniqueness of sotagliflozin that allow us to yield a greater benefit in any discussion with the partnership. We have to be careful that we don’t move too fast to getting partnership in a partnership.

We have to get a partnership relative to the strength that what we believe the value of the asset is going to be.

That requires us to be a little bit more patient, let the data mature, make the argument that we need to make, get the answer, but I think we hope that we will get in the near-term here on type 1, then I think that’s the best chance for us to negotiate a more appropriate partnership..

Okay.

And just kind of building on that type 1 comment, so when you hear back from the FDA, will you communicate clearly to the Street if the new trial will or will not be required?.

Yes. Jessica, one of the wonderful things about having the asset back is we get to communicate. How we feel we need to communicate. And from my perspective, just communicating to you now that we went through a dispute resolution, it’s transparency that we would like to get back to.

And so when we get an answer to that question it’s going to be, in my opinion, we have to make a decision, yes or no and we will be very clear about that once we get the answer..

And when you say yes or no, is that you have to make a decision that in the hypothetical scenario where a new study is required, you decide if you will pursue that or not?.

That’s correct. Our view of the world is there’s plenty of data. Our trial was the largest trial in type 1. There is plenty of data in that trial to make some decisions. And that’s the very nature of our dispute and therefore there is other things that we can do. As you know, the issue always has been around being able to manage the DKA rate.

I do think there is things we can do, which we have now made an argument for that can continue to go further in reducing the risk of diabetic ketoacidosis, and we’ve been very, very clear about that. But relative to the benefit of this drug, it is well-known at this point..

Got it.

So if they don’t require a new trial, can you talk us through what the next steps and time lines would be? And then if they do kind of what the potential next steps and time lines would be?.

So I would say that if they agreed to the position that we have taken it would require us to do – to be very clear, it would require us to do a resubmission.

And we will resubmit under the provisions that they give us, and then they will give us a period of time by which they would decide if this is a type 1 or type 2 and the time line then will be established from there. Should they agree, it would put us on the path to be in market sometime in the mid part of next year..

Okay. And maybe just the last one, I think I missed the cash runway comment, I think it was at the very end of your prepared remarks.

When did you say the current cash would take you to, is it into 2021?.

Yes, it will take us into 2021..

Okay, thank you..

You bet..

Your next question is from the line of Alan Carr with Needham..

Hi, thanks for taking my questions.

Maybe give us an update on XERMELO and your label expansion plans there and an update on the rest of the pipeline or have you slowed that a little bit in order to focus on sotagliflozin?.

Alan, thanks for asking about XERMELO because I think it’s I have said this before, I think XERMELO is a phenomenal drug. And I’m very proud of the commercial team.

They have really gotten – they are starting to get some very good lift off for XERMELO which, as Jeff has already reported, we had a very strong third quarter, and I think we’re off to a very strong fourth quarter. So I’m very proud of XERMELO. What we are doing now is we are continuing to invest in the biliary tract cancer program. I will let Dr.

Lapuerta speak to where we are on that. And the second part of that is the inbound interest and studying XERMELO for the biofibrotic process that TPH1 can be an important factor for carcinoid heart disease. We’re getting a lot of inbound interest now that we have shifted budget over to funding so that we learn more about it in most efficient way.

So I will turn it over to Dr. Lapuerta to talk to you a little about those investments..

You asked me to speak to the BTC study and where we are with that and we have enrolled an initial safety cohort. The protocol specifies that the first 6 patients will have a formal evaluation of their safety, and we’re at the point of providing that in the next couple of weeks. And so we expect some data this year.

And then we proceed to a second cohort that we expect to complete enrollment in 2020. So things are progressing well. And our initial safety experience has been reassuring..

Excellent. The other product we have Alan that you spoke to as the other parts of our portfolio that we didn’t slow down. We certainly did slow down 9211. So I will turn it over to Dr. Tyle..

Alan, 9211, we are at the tail end of finishing Phase 1 program. We will complete that in the next 2 to 3 weeks. So by the end of this year, we should expect Phase 1 to be completed. And Lexicon is preparing now to start Phase 2 program. We have written the protocol for the first Phase 2 study, and we have identified the CRO.

And we are hoping to enroll the first patient early next year..

Great. Thanks for taking my questions..

You bet..

[Operator Instructions] Your next question is from the line of Kevin Kedra with G. Research..

Hi, thanks for taking my questions. Maybe first on the type 1, it’s clearly a class effect related to DKA is the issue as you noted which would mean that the conversations that you are having with the FDA seem would likely be going along with some of your peers who also have SGLT2.

So as you approach this, do you have a sense that the FDA is looking at this with you as kind of a conversation with Lexicon or more of a conversation with the industry and how the entire group of peers can put together a program to address the DKA issue?.

Yes, Kevin, you make a very good point. Listen, all of the – at this point in time, there is a known increased risk of diabetic ketoacidosis for the class.

And the best way to manage this is not to make it class available, but allow each of the unique parties to take on a campaign of educational awareness and help patients best understand how to utilize these compounds where you get the extraordinary benefits to come from.

And it’s so extraordinary about this class of compound, every data set that comes out, wherever area we tend to go, tend to come up quite remarkable relative to the benefits to patients, relative to managing risk.

I think the opportunity to have a label that gives you the opportunity to put a pathway forward in a firm way that engages both physicians as well as patients on how best to use these compounds in a way that allows them to get the benefit and reduce the chance of risk.

We think that’s the most responsible way to go forward versus not making them available and leaving them out there – leaving physicians out in the marketplace essentially to make calls and decisions are owned in the absence of a label and a pathway forward. So that’s the argument we have made.

I would assume, to your point, Kevin, others may have made a similar argument..

Great. Thanks for that clarity.

And then I jumped on a little late, so I don’t know if this came up early in the call, but the remaining Phase 3 studies for sotagliflozin in type 2, any sense on the of how we see those coming out? Will we see multiple studies reported out at once like we saw with the last batch with 3 studies coming out or will we see these kind of as you guys work through the data?.

We have 6 remaining studies in the core program, I believe and the team can correct me on that. I think what we’re doing is trying to reanalyze all of it based on Lexicon’s method of analysis. And therefore, most likely you’re going to see these get stacked in order for us to get them out.

You’ll probably see some get communicated out toward the end of the year and then the rest will get called out at the beginning of next year. So again, for us, it’s important for us to validate this work ourselves we are taking time to do that, it’s best to get it right.

And most likely, you are going to see more of the stacking of the reporting than sequence of reporting..

Great. Thanks..

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

Well, thank you. I appreciate everybody joining us this morning. It’s been quite eventful third quarter. We are very pleased with the growth of XERMELO and very proud of the commercial team and the adjustments they’ve made this year to get XERMELO in a place where it’s growing very nicely.

I’m also pleased with the investments we’re making in XERMELO for biliary tract cancer, that’s also proceeding very nicely. I’m absolutely remarked by the number of inbound interest is coming on that compound right now relative to development opportunities.

And then for Zynquista, while we would have preferred to certainly have seen the alliance all the way through, however, things happen, you make adjustment to it. I assure your management will make the necessary adjustments in getting Zynquista back. It’s exciting to our employees and our stakeholders to have this asset back.

And therefore, it gives us the opportunity to put our own aggressive feel to what we think we can do, which I think is very noted in the fact that we have just outlined to you that we have appealed the decision of the FDA.

And we’re going to continue to be aggressive in how we pursue this program as we have strong confidence and belief, not only will this program have the legs for the future to be successful, but we also believe it will be highly differentiated at the conclusion of our program.

With that being said, thank you for calling in this morning, and I look forward to talking to you the next time..

Thank you for joining today’s conference call. You may now disconnect..