Welcome to the Lexicon Pharmaceuticals fourth quarter and year end 2008 conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon's request. At this time, I would like to introduce your host for today's call, Jason Ray, Manager of Corporate Communication and Investor Relations. Please go ahead Mr. Ray.

Good morning and welcome to the Lexicon Pharmaceuticals fourth quarter and year end 2008 conference call. I'm Jason Ray and with me today are Dr. Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown Lexicon’s Senior Vice President of Clinical Development; and Jim Tessmer, Lexicon's Vice President of Finance and Accounting. We’re 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 and then use the remainder of our time to answer your questions. The call will begin with Dr. Sands, who will discuss our key accomplishments for 2008. Dr. Brown will then discuss the status of our drug development programs and Mr. Tessmer, will review our financial results for the fourth quarter and full year 2008 and discuss our financial guidance for 2009. We will then open the call to 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 began I would like to state that we will be making forward-looking statements, including statements relating to Lexicon's research and development of LX1031, LX1032, LX2931, LX4211 and LX7101. This call may also contain forward-looking statements relating to Lexicon's future operating results, financing arrangements, cash and investments, discovery and development of products, strategic alliances and intellectual property. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements, including 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 the Securities and Exchange Commission. I will now turn the call over to Dr. Sands.

Thank you, Jason. As we begin this year end call, review and update on our pipeline, I think it's always important to revisit Lexicon's mission and strategy which has remained at the fore of our whole approach to drug discovery, consistently through 2008 and as we go into 2009. Our mission remains the same to discover break through treatment for human disease and our strategy also remains the same, which is to operate on normal mechanisms of actions, so that we are able to develop these new therapeutics that will bring new opportunities to patients. We believe in investing in our R&D engine which has been so productive and then to move these discoveries rapidly to human proof of concept in the clinic. Our commercialization strategy has also remained on track which is to move our pipeline forward, seeking commercialization through partnerships for a portion of our pipeline, but also keeping a portion of our pipeline for Lexicon as we develop it through to commercialization ourselves. We believe in balancing our portfolio and rebalancing it based on clinical data, the ongoing investment that’s required to move these programs forward and what we see as the near term and long term commercial opportunities for each of our products in the pipeline. In 2008 we achieved a lot and as we review these programs today, I think it's important to note that now two of them have advanced to the stage of Phase II clinical development, LX1031 and LX1032. 1031 is in the Phase III trail for IBS and LX1032 is proceeding into Phase II in carcinoid syndrome and Dr. Phil Brown will be again updating you on the status of those two programs. In addition in 2008, LX2931 completed Phase I studies in the normal healthy volunteer portion of the Phase…

Thanks very much Arthur. As Arthur indicated, we had a busy and productive 2008 and I’d like to briefly bring you up to speed with the status of each of our leading programs, these four programs that we have in clinical development at present. So, let me start with LX1031. As I think everybody is quite familiar, this is our program and compound that we were directing toward irritable bowel syndrome. It’s a primarily locally acting small molecule that inhibits tryptophan hydroxylase, which is the rate-limiting enzyme associated with the production of serotonin. We have confirmed the pharmacologic activity of 1031 in man by a reproducible effect in reductions in urinary 5-HIAA, which is the primary metabolite of serotonin and this reduction in urinary 5-HIAA illustrates the reduced production of 5-HIAA or serotonin in the periphery. Importantly, each of these doses that have been studied today have been extremely well tolerated, which bodes well for exploration in indications such as irritable bowel syndrome. We have initiated the proof of concept study towards the end of 2008 in patients with non-constipating IBS, to study a design to evaluate two dose levels of LX1031 over a four week treatment period and we’re evaluating and following a number of symptoms that are commonly experienced by IBS patients to determine the effectiveness of the drug in this particular disease state. Now, shifting gears to LX1032, this compound is directed toward the same target as 1031, but importantly it was specifically designed by our chemist to gain additional or greater systemic exposure, which allows us to target conditions where systemic serotonin levels are elevated, which is a significant observation in carcinoid syndrome and is a diagnostic factor in the setting of carcinoid syndrome. Carcinoid syndrome results for metaphases of serotonin secreting tumors, which give rise…

Thank you, Phil. We issued a press release this morning detailing our fourth quarter and 2008 year end financial results, which you may find on our website if you have not already reviewed it. Lexicon’s revenues for the three months ended December 31, 2008 were $6.4 million, a decrease of 54% from $13.8 million for the corresponding period in 2007. The decreases resulted primarily from the completion in 2007 of the project funded by Lexicon’s award from the Texas enterprise fund, reduced revenues under Lexicon’s alliance with N.V. Organon and reduced revenues under Lexicon’s neuroscience alliance with Bristol-Myers Squibb resulting from extending the estimated performance period under the agreement to June 30, 2009. For the year ended December 31, 2008, revenues decreased 36% to $32.3 million from $50.1 million in 2007. These anticipated decreases reflect our continued transition from drug discovery alliances to drug development activities. Research and development expenses for 2008 fourth quarter were $22.8 million, a decrease of 15% from $26.9 million for the corresponding period in 2007. The decrease was due primarily to lower research expenses as a result of the company reallocating resources from genetics research efforts to drug development. For the year, research and development expenses increased 4% to $108.6 million from $104.3 million in 2007. External development expenses increased by 58% in 2008 versus 2007 reflecting the change in the composition of our research and development expenses as we continue to advance our drug candidates in human clinical trials. General and administrative expenses for the 2008 fourth quarter were $4.5 million, a decrease of 17% from $5.3 million for the corresponding period in 2007. The decrease was due primarily to lower salary and benefit costs, as well as lower stock-based compensation expense. For the year, general and administrative expenses decreased 2% to $20.3 million…

Thank you, Jim and we will now open the call up for questions.

(Operator Instructions) Your first questions come from Jason Cantor from RBC Capital Markets.

Great, thanks for taking the question and thanks for update on the pipeline. Could you add to the discussion on the pipeline products what you’ve seen in terms of dose limiting toxicities for the various drugs in your Phase 1 programs and early Phase 2 work?

Sure, I’ll take a stab at that Jason. So, I’ll try to just go through in order as we present it. So, 1031 as we’ve mentioned, this has been extremely well tolerated at all of the dose levels we’ve explored, which is one reason we’re continuing to pursue IBS. We believe that’s an important factor in consideration for an indication such as IBS. So we’ve really not observed or determined to a dose limiting toxicity with that compound. 1032, as we got into the highest dose levels being studied at a single dose, we saw increasing evidence of GI events, which included nausea and vomiting, which would be I think expected relative to the mechanism of action. We in the multi-dose elected to divide the doses out at a lower level that was well tolerated and we were able to successfully take up to the highest dose level we explored in multi-dose, which was 1,500 milligrams given us 500 milligrams three times daily, over a two week period of time. Again we saw some evidence of self-limited GI events that we were able to dose through without any evidence of a dose limiting tolerability emerged in that program. In LX2931, at dose levels of 175 to 250 milligrams, we have had two events of acute abdominal pain that resembles a biliary colic like type of symptomatology. These are dose levels as I mentioned we believe to be well beyond where we see a maximal pharmacodynamic effect of the compound. So, although we probed that and it's an important observation in the program, the dose levels where we believe the compound will have pharmacologic activity in patients is well below those dose levels and I should mention we’ve not seen any evidence of a dose limiting toxicity in the dose levels where we see reproducible pharmacology in animals, as well as how that correlates to a human dosing that we’re going to explore in patients. In 4211, as indicated just having recently initiated our Phase 1 study in January, that trial is ongoing at present and I don't have data on that fact. I will say the trial is ongoing and going as planned as present.

Terrific, thanks.

Thank you Jason.

Your next question comes from Sapna Srivastava with Morgan Stanley.

Hi, it's Dave calling in for Sapna. Just a question about your guys cash position and fundraising. Given the Invus deal, it seems like you have to raise funds only at share prices above $4.50 without their prior approval and they have the rights offerings, but it sounds like those can't happen until later this year. So, give that you suggested you about 12 months of cash, it seem like you’re going to need to raise money at some point this year. I was wondering what your plans were and if you could share any discussions you had with invest regarding their thoughts on this and any information you can provide about how you are going to raise some more cash?

So, we currently do not have plans to enter the market to raise cash; however, as you point out with the invest agreement we have certain options to do so with them as a back stop and that was part of the whole design to make sure as we’re going into to that, I think rather soft public markets that Lexicon had such an important backstop opportunity. So, the way that agreement works is Invus has the option to trigger a rights offering during a defined period of time, which is basically in the fall of this year and this is all of course been previously disclosed information, which allows the company to work with Invus then to proceed with a rights offering whereby Invus would be the standby underwriter. They have an opportunity or option to maintain their 40% position in the company and if they trigger the rights offering, they are obligated to pick up that position in the offering and then also through oversubscription process the other share holders have the option to maintain their pro rata of share as well. That offering can take place at any agreed upon price as predefined with certain limits, which would be at a premium to the current market price of the company. If we are trading below a threshold price of $4.50 of share, which as you point out we currently are. So, the pricing mechanism could work under that circumstance, well, actually it would work under the rights offering circumstance, Invus would define a price that was between our then current market price and $4.50 a share, i.e., the fact will be at some premium to the current price. So that's the way it would work if the current market conditions persist as we see them. If things change at above $4.50 of share, the company is able to do other kinds of offerings without Invus, although invest does have an opportunity to continue to participate for their pro rate portion, always being able then to anchor any offering we would do if they so chose. That's I think another important opportunity for the company. So, that's how that deal works through 2009. I think that should be considered in context with our ongoing business development activities of course, which we’re very active on that front as well and we see that as another opportunity for the company.

Is there any sort of ongoing discussion about whether they plan to trigger the rights offering?

We really haven’t embarked on that discussion yet. It’s just the beginning of the year. I think that we predefine these calendar zones for a reason and we are going to stick by that agreement.

And then just sort of one last question; if they decide not to trigger a rights offering, is there any mechanism to offer shares below 4.50?

Yes. Then that becomes a board decision with Invus to proceed along a different path.

Okay great thank you.

(Operator Instructions) Your next question comes from Edward Tenthoff - Piper Jaffray

Great. Thank you very much. A couple of quick questions just to make sure I heard correctly. The $2 million gain in the quarter was that due to an ARS write up or…?

Yes, that’s really based on two things. The write down of the auction rate securities, the estimated fair value, offset by the gain related to the rights offering that we obtained as part of the UBS settlement.

So, when should we get the Phase 2, '01 or 1031 IBS data? Is that something that we can expect this year or do think that might slip into 2010?

Yes, I think it’s difficult to predict. As you are I’m sure familiar, the actual accrual of trials and we are anticipating making progress on each of our programs throughout this year. I’m hopeful that we’ll have results towards the end of ‘09 or the early part of ‘10. So it’s difficult to really predict more specifically than that at this point, the timing of these event.

I know it’s early on, but how is enrollment going, because we have heard that it’s been competitive for some RA studies or I’m sorry forget that; with 1032, is that kind of the same sort of timeframe plate this year early next year or do you think that could go faster.

Yes each of our trials, we have the opportunity to I think advance each of our programs into Phase 2 through the ‘09 timeframe. So, I think we’ll make headway on each of the programs. So, the opportunity exists at all programs in Phase 2 in the ‘09 time frame. With regards specifically to the timing of the 1032 and the 1031, I feel good about where they are. They are on track as we projected and if we can maintain the ongoing efforts and in initiating the carcinoid study and continuing the accrual in the 1031 IBS, I think the again later in ‘09 and into early ‘10 are reasonable timeframes to consider about.

What should we be looking at for the severance charge in the first quarter? Has that been determined yet roughly?

Yes that’s roughly $1.2 million.

Okay and then lastly just refresh me, the symphony deal runs through when and what kind of timeframe would you have to make kind of go-no decision on repurchasing 1031 and or 1032 which I think are the two active molecules in that agreement.

The deal runs through 2011 and there is a schedule involved for us to exercise our exclusive option to take those in, which there’s a yearly opportunity to do so. So, it would be at the end of that timeframe which I believe is mid-2011. Is that right Jim?

That's right.

And with respect to those two programs, those are the key programs that of course we are keeping our eye on. We have had outside third party interest in 6171 and other indications from an academic standpoint and that has become something of an interesting pathway in the area of schizophrenia. So, that also could evolve in another direction.

Thank you.

Thank you.

(Operator Instructions)Your next question is from Jason Kantor - RBC Capital Markets

Hi, thanks for the follow-up. I know you didn’t exclusively put any partnering deals in your guidance and I know that part of the Invus transaction was to be able to retain these assets longer. I’m wondering if the current capital markets have changed your view at all on partnering and when you think the optimal time to partner some of these various programs might be.

Yes, thanks Jason. Our view of the optimal time of partnering remains the same, even in spite of these difficult markets, which is around human proof of concept for each program and as I think historically been a major value inflection point for any drug development program and that could take place either in Phase 1 with appropriate biomarker data that could supply a surrogate marker for human proof of concept, but more typically in Phase 2a as the initial findings in patients are witnessed. So, that’s the time frame that we look at for partnership and that was the model that we built going into the Invus arrangement again that has not changed. So, with those timeframes in mind, I think what’s interesting if you look at our pipeline is that as Phil mentioned we have four programs that are in that sort of time zone in 2009 and Phase 2 results interesting biomarker results coming towards the end of the year and then early ‘10. So that’s four programs, each a different chemical entity, each in different indications giving us a lot of variety and lot of opportunity on the partnership front and so we are very busy as you can imagine because we are talking about very different indications with different parties who are interested. So, I’m very optimistic on our partnership model. As I said before, generally speaking we see partnering the larger indications where the expenses are higher and the strength and the bandwidth of a pharmaceutical partner will be extremely advantages and of course we know that and large pharma’s pipelines continue to suffer and therefore we think we are going into a very good spot there in the industry.

Thank you.

Thank you, Jason.

At this time there are no further questions. I will now turn the conference back over to Dr. Sands.

Well, thank you everyone. I’d like to just wind up on the 2009 goals, which is a very important of course view to the future and let me review those goals with you now. So, in 2009 we plan to have five drug candidates in development as we’ve talked about, four in clinical development and one in preclinical development, our new compound for glaucoma. Our full focus and attention there for our corporate goals I think are critical. First with 1032, our goal is to complete the dose escalation portion of the Phase 2a trial in carcinoid syndrome and to monitor those results towards the end of the year to make decisions about the next steps in that program. For 1031 and IBS, our corporate goal is to complete enrollment of the Phase 2a trial. To do so as expeditiously as possible and again to obtain our proof of concept data as that trial is completed. The third goal is to complete our drug-drug interaction study for our new RA drug, LX2931 and this of course is a study that is ongoing at present and takes place in rheumatoid patients. It’s actually our first in-patient trial with this compound and so we are very interested in those results and then contingent upon those results, we’d like to initiate our Phase 2 trial in rheumatoid arthritis. So, that’s going to be a very busy time for the program here around mid year. The fourth goal is to complete the Phase 1 trial of LX4211 our new Type 2 diabetes drug and then commence a 2a trial in diabetic patients contingent upon of course successful Phase 1 results, so again a very important transition zone for that program, potentially going to Phase 2. So, that’s where we see our four Phase 2 opportunities, two already on track for that and then two at a very I’d say critical Phase 1 to 2 transition zone this year. Then the last point on the preclinical pipeline is to conduct our IND enabling studies on LX7101 for glaucoma which is an I drop formulation, a topical formulation, a very new and different application for us and we’re looking forward to those results allowing us to go forward in IND enabling studies. In addition, we have many non-public goals which involve the development of our drug discovery pipeline and moving those new discoveries forward into preclinical development. So, as you can see we’ve outlined on ambitious year for 2009 and I think several key milestones can be achieved as we move forward into Phase 2. So with that, I’d like to thank everyone for participating and good afternoon or good morning.

This concludes today’s conference call. You may now disconnect.