Lexicon Pharmaceuticals, Inc. (LXRX) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to your Lexicon Pharmaceuticals’ third-quarter financial results conference call. [Operator Instructions] Thank you. I will now turn the call over to Chas Schultz to begin.

Thank you, Lori. Good morning and welcome to the Lexicon Pharmaceuticals’ third-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 Chief Commercial Officer. We expect that you have seen a copy of our Sanofi collaboration and our Q3, 2015 earnings press releases that were distributed this morning. During this call we will review the information provided in those releases, 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’s 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 telotristate etiprate and sotagliflozin. These statements may include characterization 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 pre-clinical studies of our drug candidates, our dependence upon strategic alliances and ability to enter into additional collaboration and license agreements, our ability to attain 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 development and commercialization activities. For a list and descriptions of the risk and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission. I will now turn the call over to Mr. Coats.

Thank you, Chas, and good morning. And as always, I’ll start this call off with thanking the extraordinary men and women here at Lexicon who tirelessly work every day to advance Lexicon’s science into the medicine cabinets of patients. Today we will focus on the collaboration that we have just announced with Sanofi and we’ll also disclose our Q3 results. So let me start by actually going right to the sotagliflozin slide to remind all of those who may not know the Lexicon story. Sotagliflozin is a first-in-class dual SCOT1 and SGLT2 inhibitor for diabetes. The uniqueness here is the SGLT1 inhibition, which involves the GI tract and the associated effects on postprandial glucose. So, quite an extraordinary compound that’s different and unique from other SGLT2s. Next slide I’m going to take you right into talking about this deal with Sanofi. First and foremost, from the time in which I got here, the objective always was to find a means and a strategy that unlocks the full potential of sotagliflozin for patients living with diabetes. We felt the best way to do that with the resources that Lexicon had which was to pursue type 1 diabetes that we felt we can do on our own and essentially control our own pathway. With that being said, I will give you a quick update and tell you that we have done a great job thus far of enrolling our first Phase 3 trial, Study 309 that’s done here in the United States, and that trial essentially is progressing ahead of schedule. Relative to this deal today, what it allows us to do is move from this basis of going after type 1 alone and expand the opportunity to type 2 with the lead being taken by Sanofi. They will be responsible for clinical development and commercialization of the type 2 diabetes program worldwide and that is expected to commence, the Phase 3 trials that is, is expected to commence in 2016. This is a wonderful partnership with Sanofi, given their rich history of innovation in diabetes and their strong worldwide reach make for a strong collaboration that essentially truly achieves the objective that we always set, which was to unlock the full potential of sotagliflozin for patients living with the diabetes. As we go into the collaboration details, we have been able to because I think our strategy of pursuing Phase 3 alone in type 1 allowed us to achieve a substantial upfront and a substantial milestone. The upfront payment will be $300 million. We will have rights up to $430 million in development and regulatory milestones, and up to $990 million in sales milestones. The royalties will be tiered and escalating based on territory and indication, starting with the low double-digit percentages to 40% of net sales of sotagliflozin. With that being said, the higher band of royalties is for the net sales in type I diabetes in the United States, given the level of investments we have made in type I and the leadership role that Lexicon will have in type I. Lexicon retains an exclusive option to co-promote in the commercialization of sotagliflozin for the treatment of type I diabetes in the US. It is very important to us that this continues our strategy to have impact on this drug in the marketplace in the United States. Sanofi is solely responsible for type I outside the United States and certainly responsible for type 2 worldwide. Lexicon will contribute a portion of the funding for type 2 diabetes, development costs over the next three years up to an aggregate of $100 million. We felt it very important that we continue to take a leadership role along with Sanofi in how the type 2 program is built out as well and is reflected in the financial commitments that we will make. This in total defines the collaboration. I will simply say we are remarkably pleased with how this turned out and we are remarkably pleased that we are going from having the opportunity with this technology, sotagliflozin, of impacting 1 million or so patients in type I that essentially unlocks the potential to be able to have the impact today, in this collaboration with Sanofi, of impacting the lives of hundreds of millions of patients. So it’s quite a remarkable deal. We are very happy with it. And with that, I’m going to turn the call over to Jeff to go over the Q3 results. Jeff?

Thank you, Lonnel. I will provide a brief financial update. Since all these results will be as of the September 30, 2015, they will not reflect any impact of the Sanofi collaboration that Lonnel just spoke about. As indicated in our earnings press release today, we had revenues for the 2015 third quarter of $600,000, an increase from $400,000 in the prior-year period. Our revenues of $2.7 million for the nine months ended September 30, 2015 increased from $1.4 million in the prior-year period. Our research and development expenses for the 2013 third quarter decreased 4% to $23.1 million from $24.1 million in the prior-year period. For the nine months ended September 30, 2015, our R&D expenses decreased 7% to $64.7 million from $69.2 million in the prior-year period. In connection with our acquisition of Symphony Icon, we made an initial estimate of the fair value of our liability for the base and contingent payments. Changes in this liability based on the development of the program and the time until the 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 $3.4 million in the third quarter and their liability increased by $5.1 million in the nine months ended September 30, 2015. Our general and administrative expenses for the 2015 third quarter were $5.4 million, an increase of 17% from the $4.6 million in the prior-year period. The increase was primarily due to increased costs in preparation for commercialization of telotristate etiprate. Our G&A expenses of $17.4 million for the nine months ended September 30, 2015 reflected a 13% increase from $15.4 million for the prior-year period. In September 2014, we determined that our buildings and land should be classified as assets held for sale. We recognized non-cash impairment losses on our buildings of $2.3 million in the third quarter of 2015 and $13.1 million in the prior-year period, as a result of writing down the buildings to the estimated net selling price. Our net loss for the 2015 third quarter was $35.3 million or $0.34 per share compared to a net loss of $40.5 million or $0.55 per share in the prior-year period. Our net loss for the nine months ended September 30, 2015 was $91.4 million or $0.88 per share compared to a net loss of $97.4 million or $1.32 per share for the corresponding period in 2014. For the three and nine months ended September 30, 2015, our net loss included non-cash, stock-based compensation expense of $1.7 million and $5.4 million respectively. For the three and nine months ended September 30, 2014, net loss included $1.5 million and $5.6 million respectively. In May 2015, we completed a one-for-seven reverse stock split. All references to common shares and per share data for all periods presented in this earnings call have been adjusted to give effect to this reversed stock split. Finally as of September 30, 2015, we had $256.4 million in cash and investments as compared to $282.5 million as of June 30, 2015 and $339.3 million as of December 31, 2014. On the next slide, I will update our forward-looking guidance for 2015. As we have just entered into a collaboration with Sanofi, I will only be providing guidance for the remainder of 2015 without the impact of the collaboration. We will provide additional guidance for 2016 at the beginning of the year. We expect contractual revenues from existing arrangements in 2015 excluding the Sanofi collaboration 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. Non-cash expenses are expected to be approximately $16 million of this total, including $7 million in stock-based compensation, $6 million in increased and fair value of Symphony Icon purchase liability, $2 million impairment loss on buildings and $1 million in depreciation and amortization. We continue to manage our cash responsibly and now expect our 2015 net cash used in operations to be in the range of $130 million to $140 million, which is a decrease from last quarter’s guidance of $140 million to $150 million. This figure does not account for the $300 million upfront payment that we are expected to receive from Sanofi. I should note that these operating expenses and net cash use expectations continue to include the cost of commercialization ramp-up and expeditious filing of the NDA for telotristate etiprate as will the full-scale Phase 3 clinical trials for sotagliflozin in type 1 diabetes. We do not expect to incur any significant additional expenses around sotagliflozin and type 2 diabetes in the remainder of this year. I will now turn the call back to Lonnel.

Thank you, Jeff. I appreciate that very much. At this point in time I think we will open the line up for Q&A.

[Operator Instructions] Your first question come from the line of Jessica Fye of JPMorgan.

Hey guys. Good morning. Thanks for taking my questions. A couple on the deal I guess. First, I think you outlined $430 million of near-term development and regulatory milestones. Can you help us think about the breakdown there? Which ones are development versus regulatory and maybe the relative size of the type 1 versus type 2 milestones?

Hi. Jessica. This is Lonnel. Thank you. Very good question. Jeff, you want to take that?

Sure. These are all confidential and so they’re not something that we’re expecting in the very near term, but they will be over the course of the development of the program as we hit these various milestones.

Okay. Got it. And then maybe on the plans to start type 2, I guess when in 2016 would that begin? I imagine it’s not January 1, given you’re just signing the deal, but how should we think about the timelines and path to approval there? And are you now expecting that you’re moving into type 2 that you’ll need a type 2 outcome study and I imagine you want to produce that kind of data for this asset?

Yes, great question, Jessica. For sure, going into type 2 requires us to do the cardiovascular work. No question about that. We have always had a Phase 3-ready program for type 2. Always. It’s been ready-set-go for quite some time. Now once we get past the HSR review period, which we hope will be concluded by end of year, we will sit down with Sanofi and start to work on our timelines. I think it’s both of our goals to take the work that we have already put together and get it into the clinic as soon as possible. So we are not in the position to give that guidance until we clear that regulatory hurdle and sit down with our partner and put together the timelines, but I would assure you we are in a position to move fairly quickly right into Phase 3.

Okay. Maybe putting aside the date that you start those Phase 3 studies, can you just remind us how you’re thinking about the Phase 3 timeline if you’ve got the plan already sort of in place [indiscernible], Just in years. We don’t need a specific date, you know what I mean?

Yes, Jessica, you’re tough on me this morning. I would love to tell you that but given we’re now moving into a partnership, I would rather have that conversation with them and then give some guidance after we’ve sat down and mapped that all out together.

Okay. Got it. Thank you. Much appreciated.

Your next question comes from the line of Phil Nadeau of Cowen and Company.

Good morning. Thanks for taking my questions. And congratulations on the deal. Great work. First on the royalties, you mentioned that there were two, it sounds like there were two bans, one in the low double-digits and one that goes up to 40%. Could you talk a little bit more about that? Am I fair to interpret what you said as viz one in the low double-digits for type 2 diabetes and one maybe in the 30% to 40% range for type 1 diabetes or are the royalties structured differently?

So Phil, I’lI start off and I’ll turn it over to Jeff. We have made substantial investments in the type 1 program. We have the program pretty much on track, as we have outlined earlier. In fact, we’re moving quite nicely toward our plans. And therefore this deal reflects that in the royalty structure. The way to think about it is the high end of the royalties and bans that we’ve given you guidance on here will be coming as a result of the type 1 program on a type 1 program, where they will do a lot of the work on type 2 in terms of the Phase 3 work, then that is where we will expect royalties in the low- to mid-range double-digits. So that reflects the investment that they’re making and the return that we would expect from that investment. With that being stated, Jeff, if there’s anything you want to add to that, please feel free to do so.

Sure. I would just say, Phil, we’re talking about royalties that are different by territory and indication. So their royalties are different ex-US than they are in the US. Obviously, the US has a different market dynamics than some other countries. And they are tiered escalating royalties among those indications. So it’s just that the highest tier of royalties are associated with the type 1 indication where we’re making the investment in the clinical and we’re also planning to participate in commercialization.

Okay. And just thinking at it as we build out the model, would it be fair to assume that the US royalties are somewhat higher than ex-US?

That would be fair.

That would be very fair.

Okay. That’s helpful. Thanks. And then second, just an accounting question on the upfront payment. It sounds like they will maybe be received in Q1 of next year and if so, how is that going to be accounted for? Is it going to be a one-time payment or should we amortize that over the life of the asset?

Great question.

We will end up providing some more guidance on the accounting for that when we get around to year end. It will be received sometime late this year, perhaps, or early next year is the timing of it. We expect that there will be some revenues associated with that when we receive the payment and that the balance of that will be amortized over time as we perform our obligations under the collaboration.

Okay. And then one last question for me. I appreciate that you need to probably sit down with Sanofi and hammer out all the details of the clinical trial program, but there are obviously other SGLT2s that are out there. Yours seems to be differentiated by the SGLT1 mechanism. Do you have ideas or, in your preformulated Phase 3 plan, are there studies to specifically highlight those differences in order to differentiate sotagliflozin from the other candidates?

Phil, I think that’s a great question. Listen, I would try to speak as general as I can given to your point. We are now in a partnership and we want to be aligned around what we say. But, I think the impact of sotagliflozin data was quite extraordinary data that really changed the game for this category. Now when we look at our data and I’ll will let Dr. Lapuerta speak to that in a moment. Some of the blood pressure data that we presented before is quite extraordinary and we truly believe we can create a program that essentially puts us ahead of what’s already been reported from that program. So with that being stated, Pablo why don’t you speak a little bit to that data?

We recognized early on that a key differentiating feature was the gastrointestinal SGLT1 inhibition and we saw a potential there in terms of enhancing now just glucose control, but also blood pressure reduction with a mechanism that was independent of the kidney. And as a result in Phase 2, we were very pleased with our dedicated study in renal impairment showing highly significant reductions in postprandial glucose, even in patients with the most advanced renal impairment in an area with a glomerular filtration rate of less than 45, where selective SGLT2 inhibitors are not improved. And in that same study in that same area, we saw a very large systolic blood pressure reduction of over 10 millimeters of mercury in just seven days. Similarly in Phase 2 we paid special attention to blood pressure in our 202 study in type 2 diabetics on top of the metformin and in that study, we were encouraged to see a very significant 14 millimeter systolic blood pressure reduction among those who were hypertensive. This was achieved with modest urinary glucose excretion and suggested that SGLT1 inhibition could have a significant role in blood pressure regulation. So when you look forward to Phase 3, we see opportunities in better defining the blood pressure changes seen with sotagliflozin. We believe that sotagliflozin is a cardiovascular drug and we are excited that there is a cardiovascular outcomes program in Phase 3. And also renal impairment will be a very important area of differentiation.

So, to the point that Pablo just outlined for you with the structured deal that we outlined today, you don’t get a deal like that if you don’t think you can win. So we believe we have a Phase 3 program where we can win and essentially we essentially can be differentiated in the marketplace and certainly with the info data that was presented we think we can take a very strong leadership role in that space in the front line.

That’s very helpful. Thanks for taking my questions and congratulations again on the deal.

Thank you.

Your next question comes from the line Liana Moussatos of Wedbush Securities

Again congratulations. This is awesome. I have a few questions. Should we assume that now that you have a partner in developing for type 2, that approval of both type 1 and type 2 would occur at the same time? And is Lexicon going to continue paying for the type 1 expenses? And will Sanofi book type 1 sales in the US or, you mentioned a co-promote, are they booking all sales? And then the $100 million that you’re going to pay over three years for type 2, how is that going to be expensed?

Okay, so I’ll let Jeff handle the $100 million expense question. Yes, Sanofi will book all sales, type 1 and type 2. Again, we haven’t sat down and had the kind of discussion that we want to have around the full program. And we’ll do that after we clear the regulatory hurdles. But I will simply tell you we are moving quite nicely and quite appropriately with our enrollment of our Phase 3 trials with type 1 and I believe for all of us we wouldn’t want to slow that down. So more than likely, we should be in market with a type 1 asset prior to having the type 2 label. Now with that being said, a lot of work has to be done to map that all out, to make sure that, that will be the case. So I fully expect that type 1 will probably come first and type 2 would be somewhat behind type 1. So, that’s what I can give you at this moment, without having to sit down and work that all through with our partners. And lastly, what I’m very, very proud about is just to your point, will we continue to take the leadership role? The answer is yes. We will continue to spend on the Phase 3 programs. They are well on their way. That’s already been planned in our budget and we will continue to be responsible 100% for executing those Phase 3 programs and paying for them. And that’s reflected in the point that was made earlier in the deal structure of what royalties we should receive on the type 1 program on a high end of the royalty structure here in the United States. So with that being said, we continue to lead on the type 1 and we will work with Sanofi on a type 2 program and look at are there ways in which we can accelerate or is there a better opportunity to integrate these programs to ensure that we have a regulatory success. But as of now, we fully expect to keep going with type 1 and possibly be in market prior to type 2.

Okay. And the $100 million that you’re going to pay for type 2 over three years?

We’re paying a portion of the type 2 development expenses over time. So we’re sharing in those costs with Sanofi and there’s a cap of $100 million in terms of what we’re contributing, and that sharing is over the first three years of the type 1 diabetes program. So it will be incurred over that time as the expenses are incurred by our partner and as we’re sharing in those expenses.

Will that be in your R&D line or how should we think about that?

Probably, yes.

Okay. Thank you.

Thank you, Liana.

[Operator Instructions] Your next questions come from the line of Alan Carr of Needham.

Hi, thanks for taking my questions. And congratulations on the deal. You talked about more about co-promotion here. It sounds like you have an option there. What’s your bias towards that is whether or not you would exercise it and then what would your role be then and I guess what would the caps be in terms of SG&A expense for that? Thanks.

So I’ll let, Alan, first of all, thank you for the question. I’ll let our Chief Commercial Officer speak to the commercialization in type 1 and then I’ll let Jeff take the second part of your question. John?

Yes, great. Good morning. So Lexicon will continue as planned with our strategy. Lexicon will continue to take the lead in developing sotagliflozin in type 1 and we definitely intend to participate in the commercialization of sotagliflozin in type 1 diabetes in the US market, as previously communicated. However, what’s great about this new partnership with Sanofi is you have the opportunity to leverage their considerable resource and expertise in both the type 1 and type 2 diabetes marketplace. And Jeff do you want to speak a little about the SG&A?

Yes. So we will be responsible for costs associated with our co-promotion activity. Obviously we’re going to be sharing costs with Sanofi as we go forward in that co-promotion. And the idea is that we’re going to take a leadership role in that, but we will be contributing and sharing as part of that leadership role in some of the costs associated with the commercial footprint in type 1 diabetes in the US.

So the default at this point is that you will exercise the co-promotion and -- ?

It is definitely our plan to do that. Yes.

And then, I guess can you elaborate a bit more about your -- okay, so you’re going to lead, under that arrangement, you lead the commercial effort and there’s no -- how are decisions to be made in terms of commercialization there and the spend? What would be Sanofi’s role, then, if you’re leading the commercialization? And is there any sort of limit to what you would be spending on the marketing there if you lead it?

Yes, Alan. This is Lonnel. Great question. First of all, again to John’s point, what a awesome opportunity to be working with the Sanofi. These guys are worldwide leaders in diabetes. And we certainly are not going to teach them very much, but we can learn a heck of a lot from them. So what we’ve established is a joint steering committee, a joint commercial committee, commercialization committee, by which the two Companies are going to talk about the best way to deploy this asset both in type 1 and type 2. The best way to finance and resource this asset to ensure we get the kind of return that we believe we can get. So this will be fully discussed and determined within the framework of a co-promotion and a discussion at a committee level that will take place between both parties. When we say we take the lead, it simply means that we will go out, if we go first with type 1, then Lexicon will certainly take that lead in the US in going out in type 1. But it will be under the guidance of that joint steering committee between the two Companies.

And you had mentioned before, earlier in your prepared comments, instead of royalty rates going up to 40%, is that under arrangement where Sanofi is the lead on type 1 and type 2? Or is that taking into account your exercise of an option here? How does it work if you all exercise the co-promotion option? Is that where you would book the sales then in type 1 diabetes? How does that play out?

No. I think in all circumstances they’re going to book the sales. Now my viewpoint and my experience is the best way to ensure that you commercialize a product well is to participate in it, particularly if you have royalties at risk and so we fully expect to participate in the commercialization of the type 1 program, leave type 2 to Sanofi. With that being said, again, all these decisions will be made in a joint forum between the two Companies. If I could speak to the royalty rate, that royalty rate is really going to be directly related to the investment that we have already made in type 1. It’s one of the reasons we will continue to take the lead in the development and we will pay for that development and that royalty rate is directly related to the fact that we have made the investment all the way through to type 1. And we should get the value of that relative to how well the drugs commercialize.

Okay. So under the co-promote and non-co-promote scenarios, the difference is just in the size of the royalty? That’s what changes?

Yes. If we choose to your point, great question, if we choose not to co-promote then that could have some impact on our royalty, yes.

Okay. All right.

But the point that Jeff’s made, I don’t see a scenario where we wouldn’t do it.

Okay. All right. Well thanks very much. Congratulations again.

Thank you.

[Operator Instructions] At this time there are no further questions. I will now return the call to management for any additional or closing remarks.

Well, thank you. And thank you to all who have questions or asked questions this morning and all who have invested in Lexicon. As a Management Team, we feel very proud of this deal and we do not believe that there is a better partner than Sanofi that we could have chosen. I’ve known Olivier Brandicourt, the new CEO, for quite some time and I have great faith and confidence in him and his belief in the space of diabetes. To the point that was made earlier, we know there’s almost 400 million patients around the world that lives with either type 1 or type 2 diabetes and there’s not a more attractive market place to be in, where you can have such a significant impact on improving the lives of patients. And I don’t think there’s a better partnership that we could have created or a better circumstance where we have created value for our stakeholders by being strong in our position that we could lead type 1 on our own. And I think this deal reflects the strength of our Company, the strength of what we believe in sotagliflozin and the opportunity now to go from reaching a few million patients worldwide to essentially having the opportunity to transform the lives of hundreds of millions of patients. And so we’re feeling very good about this partnership and we look forward to giving you greater guidance as we get past the regulatory clearance and begin our work with Sanofi and give you more joint guidance once that takes place. With that, I’ll say thank you and please feel free to reach out to us if you have any further questions.

Thank you for participating in the Lexicon Pharmaceuticals’ third-quarter financial results conference call. You may now disconnect.