Lexicon Pharmaceuticals, Inc. (LXRX) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, my name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lexicon Pharmaceuticals First Quarter 2015 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Chas Schultz, Senior Director, Finance and Communications. Please go ahead, sir.

Thank you, Stephanie. Good afternoon, and welcome to the Lexicon Pharmaceuticals First Quarter 2015 Conference Call. I'm Chas Schultz, and with me today are Lonnel Coats, Lexicon's President and Chief Executive Officer; Dr. Pablo Lapuerta, Lexicon's Executive Vice President and Chief Medical Officer; Jeff Wade, Lexicon's Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer; and John Northcott, Lexicon's Vice President of Marketing, Commercial Strategy and Operations. We expect that you have seen a copy of our earnings press release that was distributed this afternoon. During this call, we will review the information provided in the release, provide an update on our clinical programs and then use the remainder of our time to answer your questions. If you would like to view the slides for today's call, please access the Lexicon website at www.lexpharma.com. You will see a link on the homepage 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 potentials of such compounds. This call may also contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of products, strategic alliances, and intellectual property, as well as other matters that are not historical facts or information. Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements. These risks include uncertainties related to the timing and results of clinical trials and preclinical studies of our drug candidates, our dependence upon strategic alliances and ability to enter into additional collaboration and license agreements, our ability to obtain patent protection from 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 thank you, everyone, for joining us on today's call. I will remind everyone that our objective in creating stakeholder value is deeply rooted in advancing our 2 late-stage assets. One is telotristat etiprate for carcinoid syndrome and sotagliflozin for type 1 diabetes. We believe very strongly that each of these assets by themselves will create great value for our stakeholders. If both of these assets should be successful, then we think we'd create even greater value. It's also strategically important to us that we maintain and prepare ourselves for the U.S. market for the carcinoid program, telotristat etiprate, which we'll speak a little to that this afternoon. With that being said, let's talk a little bit about how we're executing to our plan. One is that we've completed the enrollment in our pivotal Phase III clinical trial of telotristat etiprate. We have commenced enrollment in our phase -- pivotal Phase III clinical trial of sotagliflozin. We have commenced screening in our Phase II clinical trial of sotagliflozin in young adults with our partner, JDRF. We've expanded our collaboration with Ipsen to include rights for the commercialization of telotristat etiprate in Canada, and we've advanced a development candidate into IND-enabling studies for neuropathic pain with our partner, BMS. If I could remind you that telotristat etiprate, our Phase III program is progressing toward completion. The Phase III program is designed to satisfy requirements for approval both in the United States and in Europe. The Phase III randomized, placebo-controlled, double-blind study has 135 patients on somatostatin analog therapy, and the treatment period is 12 weeks followed by a 36-week open-label extension. The primary endpoint is change from baseline in the number of daily bowel movements. Again, we're very pleased to say enrollment has completed, and this program is indeed advancing. Going back again to our strategy of partnering outside the United States. We expanded our agreements with Ipsen in Canada, and we believe this will best position us to continue to accelerate our preparation here in the United States for introduction of telotristat etiprate upon success in leveraging the relationship with Ipsen and their knowledge in this overall carcinoid market. We're very confident that Lexicon can indeed introduce and commercialize telotristat etiprate on our own. As you look at Slide 7 here, it is clear to us where the business is, and it's clear to us exactly how we can go after this business with a manageable-sized sales force with low to mid-size investment and, I believe, a significant return on that investment. Now if I move to sotagliflozin. Lexicon has advanced sotagliflozin into Phase III for type 1 diabetes. To remind everybody, we have 2 pivotal trials: 750 patients in each study, 2 doses at 200 milligrams and 400 milligrams once daily and placebo. The primary endpoint is reduction of A1c versus placebo on optimized insulin with the additional objectives of reduced variability in blood glucose levels, lower insulin needs, weight loss and patient-reported outcomes. We have an additional exposure study, about 1,400 subjects with type 1 diabetes at 400 milligrams once daily versus placebo, and the primary outcome -- or primary endpoint is glycemic control. We feel very strongly and confidently about this endpoint. Next, I'd like to report to you our collaboration with JDRF for type 1 diabetes is now underway. To remind you, the collaboration involves JDRF funding to support a Phase II clinical trial to evaluate the efficacy and safety of sotagliflozin in a younger population with type 1 diabetes. The design is a Phase II randomized, placebo-controlled, double-blind study up to 84 individuals with type 1 diabetes younger than 30 years of age with A1c levels greater than 9. And the treatment period is 12 weeks looking for the primary endpoint to be a reduction in A1c at 12 weeks of once-daily 400-milligram sotagliflozin versus placebo as an adjunct to insulin treatment. Again, we feel pretty confident about this study as it is now underway. The things that you should continue to focus on with us as we continue to execute throughout 2015 is that in quarter 3 of 2015, we will have the Phase III top line data for telotristat etiprate in carcinoid syndrome. In Q1 of 2016, we have the potential to file our first NDA for telotristat etiprate in carcinoid syndrome. Also, in Q1 of 2016, we should have a call-out of the JDRF study relative to the high unmet need area for type 1 diabetic population. In Q3 -- in Q4 2016, upon success of FDA approval, Lexicon will have its first commercial launch, which will be telotristat etiprate for carcinoid syndrome. In Q4 2016, we will have the Phase III top line data for sotagliflozin in type 1 diabetes. So all in total, Lexicon stays remarkably focused on executing our plan and ensuring that we stay on target, on time, on schedule to continue to create shareholder value as we move forward throughout the rest of this year. I'm going to stop there and turn it over to Jeff Wade, our Chief Financial Officer.

Thank you, Lonnel. I will provide a brief financial update. As indicated in our press release today, we have revenues for the 2015 first quarter of $1.8 million, an increase from $0.3 million in the prior year period. The increase was primarily due to revenues recognized from our license and collaboration agreement with Ipsen. Our research and development expenses for the 2015 first quarter decreased 13% to $20.9 million from $24 million in the prior year period. The decrease was primarily due to reductions in personnel costs as a result of our restructuring in 2014 partially offset by increases in external clinical research and development costs. 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 $1.8 million in the first quarter and $1.1 million for the prior year period. Our general and administrative expenses for the 2015 first quarter were $5.7 million, consistent with the prior year period. Our net loss for the 2015 first quarter was $28.1 million or $0.04 per share compared to a net loss of $30.8 million or $0.06 per share in the prior year period. For the 2015 first quarter, our net loss included noncash, stock-based compensation expense of $2 million compared to $2.3 million in the corresponding period in 2014. Finally, as of March 31, 2015, we had $315.1 million in cash and investments as compared to $339.3 million as of December 31, 2014. On next slide, I will update our forward-looking guidance for 2015. Due to the expansion of the Ipsen agreement to include Canada, we now expect contractual revenues from existing agreements in 2015 to be around $3 million. We continue to expect that our operating expenses in 2015 will be in the range of $130 million to $140 million. Noncash expenses are expected to be approximately $12 million of this total, including $7 million in stock-based compensation, $4 million in increase in fair value of Symphony Icon purchase liability and $1 million in depreciation and amortization. Taking into account cash proceeds under existing contractual relationships only, we expect our 2015 net cash used in operations to be in the range of $150 million to $160 million. I should note that these operating expense and net cash use expectations reflect the cost of full-scale Phase III clinical trials for sotagliflozin in type 1 diabetes. Today, we also announced that Lexicon will be enacting a 1-for-7 reverse stock split effective at 5 p.m. Eastern time on May 20, 2015, and our common stock will commence trading on a split-adjusted basis as of the opening of trading on May 21, 2015. We made the decision to seek shareholder authorization for it and ultimately to proceed with this reverse split primarily to respond to requests by both current and prospective investors that we clear away obstacles to their investment in Lexicon. At our recent annual meeting, our stockholders voiced strong support for this measure with 98.6% of the shares at the meeting voting in favor and 94.8% of our total shares outstanding voting. The reverse split will reduce the number of shares outstanding from approximately 725.1 million shares to approximately 103.6 million shares. There will be no fractional shares issued as a result of the reverse split. And in lieu of the fractional shares, we will make cash payments equal to the fraction multiplied by the closing price of the common stock as reported on May 19, 2015. For a period of 20 trading days following the reverse split, our stock symbol is expected to be attended by NASDAQ with a letter D, after which it will return to our normal stock symbol as LXRX. I will now turn the call back to Lonnel.

Well, we're very pleased to say Lexicon is indeed advancing our late-stage pipeline towards the market. We look at telotristat etiprate, the Phase III TELESTAR enrollment is complete. The commercial preparations are underway in the U.S. The collaboration with Ipsen has now been expanded and established in the U.S. The commercialization of telotristat etiprate in Europe is also ongoing. As for sotagliflozin, we're now in Phase III, and we are now in Phase II with the JDRF study. And both are progressing well. So we are very pleased to report that we are indeed advancing Lexicon and our assets toward market. With that, I want to thank everyone for joining us today, and we will stop here and take questions.

[Operator Instructions] Your first question comes from the line of Jessica Fye with JPMorgan. Jessica M. Fye - JP Morgan Chase & Co, Research Division: I guess, first, on the neuropathic pain asset you've identified with Bristol, can you talk about the time lines there? How long are you expecting for the IND-enabling studies? And when could this actually move into Phase I? And then also, just on the decision to partner Canada with Ipsen, was this something that was initiated by them or by you?

Well, let me start with Ipsen, and then I'll turn it over to Jeff. Is that okay? We've been in discussion with Ipsen for quite some time, and it had always been their desire to have rights in Canada. And we felt, given the advancement of our relationship with them and the capabilities that we've witnessed, that it was most appropriate to execute this arrangement with them and feel very confident about it. With that being said, I'll turn the BMS question over to Jeff.

So we've selected a candidate -- a development candidate, and that development candidate is being moved into IND-enabling studies. That usually takes between 12 to 18 months or so. But we haven't outlined -- this is obviously a partnership, and we haven't outlined specific time lines for that program as of yet. Jessica M. Fye - JP Morgan Chase & Co, Research Division: Okay, great. And maybe one more, if I can. Just are there any comments on the enrollment progress for the Phase II JDRF study?

Just that, that study has commenced enrollment and that we're pleased with how things are going so far, and the same with the Phase III study as well. That's been enrolling quite well.

And to your point, Jessica, we expect to hit our time lines as been outlined.

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

This is Esther sitting in for Alan. So could you remind us what the powering assumptions for the Phase III trial for telotristat are?

Very good question. I'll let Dr. Pablo Lapuerta answer that question.

In our Phase III program for TELESTAR, the primary endpoint is the reduction in bowel movement frequency averaged over the course of the 12 weeks of the study. And the specific reduction in frequency that we're powered for is on the order of 1 bowel movement per day from the baseline that we expect to remain somewhere between approximately 5 and 6. However, the powering is done in order to give us the best chance to show robust efficacy. So our expectation is based on Phase II experience, where we showed reductions in bowel movement frequency of the order of 40% in our open-label study and on the order of 25% in our short-term placebo-controlled study. So we powered for a robust program [ph]. So our expectation is that Phase III results should look like Phase II.

Okay. So what would a clinically meaningful change look like?

A clinically meaningful change for an individual with this condition would be a reduction in bowel movement frequency of approximately 25% to 30%. So that would be a reduction from, say, 6 bowel movements a day to 4.5 or 4. For a mean change -- in a clinical trial, the mean change may be a little bit less because there are some responders on telotristat etiprate, there are some responders on placebo. So we suggest that when the results come out, you look for both the mean change in the population overall but also the proportion of patients with at least a 30% reduction in bowel movement frequency from baseline to week 12 on the 2 different treatment groups.

Okay. And could you remind us where these clinical sites are? I'm not sure if you...

We have 84 sites in North America, Europe and Australia.

And sorry, one more. What kind of endpoints will you disclose in 3Q?

We'll let Jeff Wade answer that.

So we're going to disclose top line results to the primary endpoint -- results on the primary endpoint, and we'll provide indications of efficacy. And those will be the primary thing we'll release.

Your next question comes from the line of Stephen Willey with Stifel. Stephen D. Willey - Stifel, Nicolaus & Company, Incorporated, Research Division: Just wondering to what extent, if any, additional safety data from TELECAST may be a rate-limiting step in filing the NDA. And I'm presuming you can probably get the solution started on a rolling basis and then supplement this as it comes in.

So our plan right now is predicated on having the TELECAST -- as we noted today, TELECAST enrollment is scheduled to end tomorrow. And we will -- we expect to have the data in a timely fashion to keep our time lines on the NDA filing. So it is -- it's a supportive study. But we expect to have the data -- we won't have the top line data at the same time we have the top line data from the pivotal study, but we will have it in a timely manner to support the NDA filing. Stephen D. Willey - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. So should we expect another kind of top line efficacy announcement out of TELECAST between the top line TELESTAR announcement and then the eventual filing?

I think TELECAST is really a supportive study designed to bolster our safety database, so that's the primary purpose of that study. The TELESTAR is the study that is going to provide us with evidence of efficacy. And that's -- those are the top line results that I think we should be focused on. Stephen D. Willey - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then just lastly, I know that there was a lot of discussion around cardiovascular outcomes in type 2 at the FDA panels for the DPP-4s, and there was some discussion around maybe future requirements being dictated within kind of a mechanism-specific context. And I'm just kind of wondering if, in your discussions with FDA, you've gotten any kind of feedback that would suggest that SGLT1 as a mechanism would be something that would kind of require a full MACE readout or maybe just a couple of the MACE subsets?

Yes. I'll sort of give my general thought, and then I'll have Pablo to answer any follow-up. But no, we've had no such conversations with the agency. I think we're proceeding as we are relative to advice that has been given. And I think we need to show that the drug is both effective and safe against the standards that you would with any type 1 product and do not believe the requirements that are in for type 2 drugs extend themselves over to -- I mean, type 2 diabetes extends themselves over to type 1. But Pablo, I'll let you follow up anything you want to add.

We'll be learning a lot about the SGLT2 class in terms of cardiovascular outcomes as the couple of the first studies read out over the next 6 months, and I think that would really be the basis for thinking about the class and the implications. In terms of SGLT1, we believe our SGLT1 inhibition is in the gastrointestinal tract, and because of that, we've never had any concerns about cardiovascular mechanisms related to our dual mechanism of action.

[Operator Instructions] Your next question comes from the line of Cristina Ghenoiu with Cowen.

I had a quick question about telotristat. Can you remind me how variable are these bowel movements in patients? Like, once you establish a baseline for a patient like in the placebo group typically, did you see any patients kind of vary like -- from like 2, 3, to like 5, 6 going back to 2, 3 or something like that?

Dr. Lapuerta?

What we've seen in general is that this endpoint of a mean bowel movement frequency averaged over the 12 weeks of the study is very precise. It's very precise because patients are giving you assessments every single day. Now in terms of week-to-week, we haven't seen that much variability in patients, just a little bit because patients take these injections of octreotide. And so some patients in screening will have a little bit of a reduction on octreotide. And unfortunately for them, the effect wears off early. So you're asking about our screening periods. We've seen some patients who start out with, say, 3 bowel movements or 5 bowel movements per day soon after an octreotide injection, but by the end of the screening up to 6 or 7 since it's worn off.

Okay. And the other question I had, besides the BMS collaboration, are there any other collaborations that you have ongoing in that we may expect to hear news from in the coming months?

Yes. I would simply say we remain opportunistic, and we have a pretty strong library of assets. And as opportunities present themselves, we will communicate to the market if we so should choose to do a deal.

[Operator Instructions] At this time, there are no additional questions in the queue.

Again, let me close out by saying thank you to all of you who have joined the call and just close by saying again that Lexicon continues to make substantial progress, and we'll keep you informed as we make additional progress throughout the next quarter. Thank you.

This does conclude today's conference call. You may now disconnect. Speakers, if you'll hold the line.