Welcome to Lexicon Pharmaceuticals Third Quarter 2017 Financial Results and Business Update Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks, we will hold a brief question-and-answer session. As a reminder, this cal is being recorded today November 08, 2017. I would now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Good morning, and welcome to the Lexicon Pharmaceuticals third quarter 2017 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 up the call up for Q&A. Earlier today Lexicon issued a press release announcing our financial results for the third quarter 2017, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast after this call along with a slide presentation will be accessible in the Investor Relations section of our website. During this call, we will review the information provided in the release, provide an update on our clinical programs, and then use the remainder of our time to answer your questions. Before we begin, let me remind you that we will be making forward-looking statements, including statements relating to the safety and efficacy and the therapeutic and commercial potential of XERMELO, sotagliflozin and other drug candidates. These statements may include characterizations of the results of clinical trials of XERMELO, sotagliflozin and other drug candidates and market opportunities 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 risk include uncertainties related to the success of our commercialization efforts for XERMELO, the timing and results of clinical trials and preclinical studies of sotagliflozin and other drug candidates, our dependence upon strategic alliances and other third-party relationships, our ability to obtain patent protections for our discoveries, limitations imposed by patents owned or controlled by third parties, and the requirements of substantial funding to conduct our research, development and commercialization activities. For a list and a description of the 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 our President and CEO, Lonnel Coats.

Thank you, Kim. Good morning, everyone and thanks for joining us on the call today. We've made considerable progress since our last quarterly update and have had a very busy yet productive third quarter with strong operational performance across all aspects of our business, including the achievement of several important milestones. I'm excited to share these developments with you starting with a brief summary of recent key events. I’ll then turn the call over to Alex, Pablo and Jeff for updates on ongoing XERMELO launch, our pipeline development and our third quarter financials. As you may recall, our strategic initiatives for this year include driving growth in our XERMELO franchise, while in parallel making significant progress towards advancing sotagliflozin to market and furthering our innovative pipeline all of which are near-term priorities for Lexicon. Our third quarter results were outstanding and strong indicator that our constant focus on operation excellence and innovation has us well positioned to achieve our 2017 objectives and continue to support our long-term outlook. I'm pleased with the progress of XERMELO launch, as we achieved net XERMELO sales of $5.3 million in the third quarter. This 45% quarter-over-quarter growth reflects healthy demand and access and we continue to see an increase in new prescribers and enrollments that Alex will highlight shortly. We’re continuing our broad efforts to maximize the impact to XERMELO by educating physicians and patients on the appropriate use of the drug. On a reimbursement front, we continue to receive very positive responses from pears, which Alex will go into some detail later. In Europe, XERMELO received marketing approval in September earning Lexicon’s $5.1 million of milestones and our collaborator Ipsen launched the drug in the U.K. and Germany - and Germany in October, with further milestone payments, including one already recorded in our…

Thanks, Lonnel. Good morning everyone. We are pleased with the progress of the XERMELO launch and the achievement of $5.3 million in XERMELO U.S. net sales in the third quarter, which represents growth of approximately 45% quarter-over-quarter. The success of the launch underlying this revenue growth is the profound impact our drug is having on patients and their families. Demand trends are robust in terms of both volume of units shipped and new patient starts. Second, the breadth of the demand as measured by growth in prescribers is encouraging. Demand for XERMELO increased in the third quarter relative to the previous quarter. During the same time period, we saw an increase in new patient starts. Through September 30, there has been 685 patients with paid XERMELO prescriptions, up from 443 patients the last quarter, which represents a 55% increase. We are also pleased with the trends that demonstrated the breadth of this demand, as we also saw a 43% percent increase in the prescriber base. We're activating a broader prescriber base at a higher rate across all decile’s and are seeing continued growth from leading hospitals and academic institutions. But we are particularly pleased with the growth in the lower volume prescribers, as we continue to deploy tactics and resources to drive growth in these practices. Of the prescribing physicians, the majority indicate that XERMELO is meeting or exceeding their expectations, which are encouraging trends that confirm feedback from market research that XERMELO is being well received, not only by KOLs, but also by the community. As physicians gain more experience using XERMELO, we anticipate continued adoption. Our sales force continues to drive awareness of the disease and its burden impact, to emphasize the drug differentiated clinical proposition, to amplify and activate the patient voice and to ensure that patients…

Thanks, Alex. This morning I'm going to highlight the significant progress we’ve made this quarter on our pipeline. Let's start with our most advanced program, sotagliflozin in Type 1 diabetes. As shown on Slide 9, we have completed the largest Phase III program for an oral anti-diabetic agent in the broadest range of Type 1 patient ever conducted. This gives us the most comprehensive efficacy and safety database available. We completed two pivotal trials inTandem1 and nTandem2 which were identical studies in terms of the primary endpoint looking at a change in A1C on a background of optimized insulin. This is a very important distinction, involving the objective of showing the benefit of sotagliflozin over and above what could be achieved by insulin alone. In patients who are using insulin to best effect. Both studies inTandem1 and nTandem2 achieved a primary endpoint with meaningful A1C reductions on all doses study at 24 weeks on top of optimized insulin. At 52 weeks, sotagliflozin treated patients continue to show reductions with A1C on top of optimized insulin. Our final Phase III study inTandem3 examined the proportion of patients with A1C less than 7% at week 24 and no episode of severe hypoglycemia or DKA after randomization. That's a unique design with a composite net benefit endpoint. Notably, in inTandem3 insulin was not optimized prior to randomization. That's a pragmatic design that we believe better reflects real world experience and we saw that drug treated patients again demonstrated statistically significant reductions of A1C compared to placebo. Feedback from though leaders in this space indicate that there remain challenges associated with managing glucose level with insulin alone, as patients make tradeoff between effectively managing blood glucose, while trying to avoid complications such as severe hypoglycemia and weight gain. Our data have shown across three…

Sure, Pablo. Turning to slides 20 and 21. There are approximately 1.7 million people with Type 1 diabetes and about 1.6 million adults with the disease, a population that has grown approximately 3.5% per year over the last five years. About three quarters of the population has an A1Cc greater than the ADA target of 7%. We believe we will be able to target the entire Type 1 population. Why is this? Because we took all comers in our study, so we had efficacy and safety data for the entire population. perhaps seeking not to jeopardize their existing Type 2 diabetes franchise, AstraZeneca ran the DEPICT 1 study with dapagliflozin that excluded the patients at the greatest risk for severe hypoglycemia by only randomizing patients with A1Cs after insulin titration between 7.5 milligrams per decilitre and 10.5 milligrams per decilitre. By doing so they eliminated about 43% of the entire market for which they have no safety or efficacy data. The way we designed our studies allow sotagliflozin to be used across the entire patient population. Given our confidence in the contribution of sotagliflozin SGLT1 mechanism to reducing post-prandial glucose and glucose variability we included patients after a run in with A1C as low as 5.6% and as high as 15.4%. We also including patients with eGFR of less than 60, down to 45 based on the GLT1 component, while DIPICT 1 eliminated patients with and eGFR of 60 or less. In fact, a little over 5% of the participants in our study had an eGFR of between 45 and 60. Lastly, we included patients who were over 75 years of age, of course, people with Type 1 diabetes are living longer and will need the benefits of compounds like this. So when we examine the inclusion criteria about three…

Thanks, Alex. As we are excited to advance sotagliflozin in Type 2 diabetes. As you can see on Slide 25 to date, Sanofi has initiated seven Phase III studies in the Type 2 setting targeting over 13,500. One of them recently posted on clinicaltrials.gov is a cardiovascular outcomes study with 10.500 patients. We anticipate more of the Phase III program to come on line by year end. To conclude the discussion on sotagliflozin, we are pleased with the totality of the sotagliflozin data package for Type 1 diabetes. We and Sanofi look forward to bringing this drug to market. In Type 2 diabetes, we are enthusiastic about sotagliflozin’s potential to make a difference in patient’s lives and we’re excited to advance the program with Sanofi. Turning to the rest of our pipeline. There's opportunity to explore telotristat for its potential outside of carcinoid syndrome diarrhea and to expand its footprint and other indications. Telotristat is a very important franchise for us and we are actively pursuing a lifecycle management of the drug. Based on preclinical work, we had robust scientific rationale for telotristat’s such potential beyond carcinoid syndrome diarrhea. On Slide 26, we have seen that the mechanism of action at serotonin in reduction luckily affects fibrotic process. Serotonin reduction suppresses fibrosis and stimulates the parasite regeneration. We appreciate the dimension of this therapy and did some preclinical work in liver disease that suggested potential application in NASH, nonalcoholic steatohepatitis. We continue to do additional preclinical work on other fibrotic diseases. In addition, we know that inhibition of tryptophan hydroxylase and reduction of serotonin synthesis has implications for cancer cell growth. So we are excited to explore the use of telotristat ethyl and neuroendocrine tumor and carcinoma. Stay tuned for updates. Throughout next year, we will share with you our…

Thank you, Pablo. This morning I will discuss key aspects of our third quarter 2017 financials and provide an update on our 2017 financial guidance. More financial details can be found in our Form 10-Q which will be filed later today. Now please refer to Slide 30 of our presentation. As indicated in our press release today, third quarter of 2017 revenues totalled $26.9 million, a decrease from $27.7 million in the prior year period, primarily due to lower revenues recognized from the collaboration and license agreement with Sanofi, associated with the performance of our obligations related to Type 1 diabetes development activities. Net product revenues for the three months ended September 30 2017 included $5.3 million from the sale of XERMELO in the U.S. and $0.5 million from the sale of both tablets of telotristat ethyl to Ipsen. We also earned a $5.1 million milestone from Ipsen for approval of the XERMELO in Europe that was recorded as revenue from collaborative agreements. Cost of sales related to sales of XERMELO was $0.6 million for the third quarter of 2017, which included $0.4 million, a finite-lived intangible asset amortization. We began capitalizing inventory during the first quarter, as we expected to recover related costs through the commercialization of the product. The pre-commercialization inventory of XERMELO is expected to be sold over approximately the next two years. As a result, cost of sales for XERMELO for next two years will reflect a lower average cost – per unit cost of materials than would otherwise be expected. Research and development expenses for the third quarter of 2017 totaled $39.1 million, down 26% from $52.5 million in the prior year period, primarily due to decreases in external clinical development costs relating to sotagliflozin. Although expenses for the Type 1 program will be winding…

Thank you, Jeff. And thank you to the team. Overall we’re off to a great start in the second half of the year. Our main priorities for the second half of 2017 remain centered around driving long-term value through a continued execution on the XERMELO launch and prepare for a global regulatory filing of sotagliflozin in Type 1 diabetes. And while our team is focused intently on delivering on our near term objectives, we continue to invest to grow our business for the long-term. We’re extremely excited to expand telotristat ethyl reach to several interesting indications, including fibrosis and cancer, given established link between serotonin and the context of carcinoid syndrome to fibrosis and tumor growth. Our robust preclinical work to date exploring the effect of serotonin reductions on the fibrotic process leads us to NASH and other fibrotic indications, as well as the effects of inhibition of tryptophan hydroxylase and the reduction of serotonin synthesis on tumor growth and diseases like neuroendocrine tumors and cholangiocarcinoma, validates advancement at telotristat ethyl in these indications. We have already established this clinical benefits in carcinoid syndrome diarrhea and we are eager to do the same in fibrotic disease and oncology. You'll hear more about these exciting programs at our planned R&D day next year at the end of the first quarter. You will also hear more about our continued progress on LX2761 and LX9211 and updating you on our progress overall. Lastly, we remain in a solid financial position to pursue our mission of bringing innovative therapies that offer opportunities for change in standard-of-care to patients with unmet medical needs. I’ll be remiss if I didn't make the statement to all of our stakeholders and shareholders that our current share price we have no intention of coming out to dilute our shareholders at the current levels. With that being said, I'll stop there and open the floor for Q&A.

Operator, we’re ready to take questions and answers.

Thank you. [Operator Instructions] Our first question comes from Jessica Fye with JPMorgan.

Hey, guys. Good morning. Thanks for taking my question. I have a couple. First on sotagliflozin, with the Phase 3, Type 1 program complete, can you walk through the factors that might push the filing either earlier or later in the first half of next year? Second, when can we expect to hear Sanofi talking about sotagliflozin more? It doesn't necessarily seem like they're talking up or setting particularly high expectations for it. And lastly, on XERMELO, can you confirm whether there were any inventory changes in the quarter or if the $5 million of U.S. sales was all demand? Thank you.

So Jessica, first of all thanks for the questions. Sanofi I believe in our discussions you'll hear more dialogue from Sanofi as we go forward. I certainly don't want to speak on her behalf, but I would say their engagement has been quite remarkable. And you can see their commitment I mean, at this point with how quickly they are now putting up these trials and starting to do the work around it. As for Type 1, it's been our responsibility to advance to the compound to the stage where we get it ready for regulatory filing. They have been integrated into that process and now I think they're fairly in control of the process from here, from both the filings in the U.S., as well as globally and they're fairly well positioned now to do all the work around Type 2. So I expect - you'll hear more from Sanofi as we move forward. In terms of the regulatory process, you know, Jessica we've had the meetings that were necessary for us to have. I will say that we have also had our pre-NDA meeting with the FDA and will say characterized that meeting as a very, very good meeting and I think inspire all of our confidence in our program and our opportunities to file it in the United States. Sanofi is leading that effort, along with Lexicon as well. So the stand up process - now because this is a very large program, is now do all the work that we do in terms of going out and ordering sites and making sure we have all of the CMC work is completed and done and getting all the modules completed. So it's all hands on deck at Lexicon, as well as Sanofi now coming and providing resources as well. So we're going to stick with the first half, but certainly our intent is to do everything we can to make that the earliest part of the first half. In terms of the third question, in terms of if there's any change in inventory, I’ll turn over to Jeff.

Yeah. So our guess is, as I think we've discussed before, we’re distributing through a couple of specialty pharmacies. Contractually they keep between 14 and 21 days of inventory and that is consistent, is been consistent from quarter-to-quarter as we've gone forward and remained consistent at the end of the third quarter.

Great. Thank you.

Our next question comes from Stephen Willey with Stifel.

Yeah. Thanks for taking the questions. Just a couple on telotristat and then one on sotagliflozin. So just wondering if there's anything that you can say at this point regarding gross to net or is that just I guess too early in the launch to provide any kind of characterization of that at this point? And then given some of the comments around I guess, patient expectations and maybe even persistency. Just curious if the Phase III data showed a correlation between symptomatic improvement and baseline, 5-HIAA levels and I guess whether or not you can assay 5-HIAA levels at baseline to be maybe better frame expectations of patients prior to initiating therapy?

So Stephen, the first part of your question on gross to net, I would turn it to Jeff. I don't think it's too early, I think we're starting to get some pretty good idea of where we may see the future. I think we have - what we've guided to previously is we're still on target with that and I'll let Jeff give more color to that. In terms your second question, I’ll ask Dr. Lapuerta to comment on the study design and what we would expect that the market looks. Jeff?

So we have said previously that we expected to get down to gross in that sort of in the 15% range and that we remain on target for getting to that range. Obviously it changes a little bit over time, but that was what our expectation was when we get to more of a steady state.

Dr. Lapuerta, do you want to speak to the second part of Stephen's question?

Yeah, that was about symptomatic improvement and whether or not it was linked to 5-HIAA and whether or not you could measure 5-HIAA to identify really the best opportunity for helping patients. And what we had in the telotristat study as we stratified by fibrotic [ph] and analyze that and we saw great symptomatic improvement in patients with normal 5-HIAA and patients with high 5-HIAA. We did a lot of analysis to see if there was a subgroup of patients that we could identify based on a biomarker or other characteristics who responded and from all these analysis really the best way to identify a responder is to prescribe telotristat set up over 12 weeks and to see how the patient does. So we feel that really are all subgroups and women, young, old and [indiscernible] above label dose, at label dose regardless of the coumadin [ph] therapies, regardless of 5-HIAA we saw evidence of efficacy.

And Stephen, overall let me kind of address the expectations point that Alex talked about, I'll give you a real case that we were dealing with. It’s quite amazing actually. There was a patient that was put on XERMELO who was having in the neighbourhood of 10 to 12 bowel movements a day. That patient within the first month or so of their course of therapy went down to five bowel movement a day. And they want to come off the drug because they thought it wasn't working, because they assumed it would be zero. So that's the kind of stuff that we have to - the amazing impact it had in reducing the bowel movement, the expectation of the patient was still greater than what he was actually experiencing. So we have to make sure physicians set the proper expectations, patients coming in have the proper expectations, so you don't end up with a discontinuation where you have remarkable success. And that's just what we have to do over time and as Alex has laid it out, we've made very good progress. And I think as we got into the second part of this quarter, we made remarkably good progress. And I think did much better than the first part of the quarter. So we're very pleased where we're at. But more work needs to be done.

Understood. And then just on sotagliflozin, I guess, specifically with respect to the cardiovascular outcome study that is now posted to clin trials. Just a couple of quick questions. So one of the primary efficacy endpoints is obviously cardiovascular death or hospitalization due to heart failure and we know that - that is now labeled claim - I know it's at least a majority and I'm not sure if it's on the label yet. But just kind of curious I guess as to just given those two drugs have labeled indications for preventing heart failure. I'm just kind of curious as to how the context of a placebo arm in the study kind of logistically works?

Dr. Lapuerta, do you want to take that question?

Yeah, the main thing about this study is, it's being done in patients with renal impairment and that's a patient population where you don't have robust evidence of efficacy with SGLT2 inhibitors. So we believe by targeting that patient population it's ethical to randomize to placebo.

Got it. And then also just noticed that the dosing schedule I guess talks about starting with the one sotagliflozin tablet which I'm assuming is 200 megs and then allows for a titration over the course of the first six months. Just curious as to why that dosing scheme was selected? Thanks.

In some patients ones will have heart failure at a baseline that we wanted to make sure that sotagliflozin was tolerated well. It's something that you've seen with antihypertensive agents that they have been used with slightly lower doses in heart failure. And so I think that's - it's a very reasonable step it would be a good measure for patients to start with a low dose and titrate up.

All right. Thanks for taking questions.

Thank you, Stephen.

Our next question comes from Alan Carr with Needham & Company.

Hi. Thanks for taking my questions. A couple of them around XERMELO. You seem to be pretty excited about growth for the drug in 2018. I wonder if you could talk about a rationale for thinking that it might accelerate a bit more? Then also can you go over the milestones that you’re expecting from Ipsen and clarify for me which countries it's available and everything already? Thanks.

Yeah, Alan. It’s a great, question. I think in the course of the year any time you launch a new drug all payers prior authorized the drug, that creates a barrier. It's not a - one of the major barriers that it can create, but it does create a barrier and it creates a delay by which patients can start and that type of thing. So as you get to the end - as we got to the end of this year, we had favorable coverage decisions as Alex has already explained. We have very good coverage decisions now, coverage decisions, very different from them just reimbursing because you have to go through that long process of prior authorization. As you get into next year because of the coverage decision and the favorable decision has been made, your will have that barrier coming into next year, so that allows us to move much faster, move patients through the process much faster. You know, the second one is as you get to the end of the year, we launched in February, March timeframe when patients hit the donut hole and when your drug comes into that donut hole, you may be coming in a little bit later, which also can slow down your trajectory. Now as we have a reset coming into the New Year, we have the opportunity to capture those patients much earlier in the process and not be affected as much by the donut hole. So these dynamics will pay very favorably to the XERMELO’s benefit as we get into the next - the New Year in the first quarter. As for second part, I’ll turn it over Jeff.

Yeah. So we do have milestone payments that will - are still ahead of us in terms of the Ipsen arrangement. As you may recall, the overall milestone payments were over $30 million for development regulatory milestones and we perceive some of that including the $5.1 million we received this quarter. There are additional milestones that are to come and those - we haven't specified the amounts of each one of those, but they will start to come as that drug becomes available and this is in these various countries. There are two countries so far that the drug is been spread, Germany and the United Kingdom and there will be additional ones following after that. And basically that milestone payments are tied to major markets in Europe.

So those 30 – in that $30 million or so giving that up amongst a series of countries over the course of the rest of this year and into ‘18 is that the right way to think about it or is it a subset of 30 that’s allocated to these country launches?

There will be some that - we are going to get at least one mile some payment in the fourth quarter.

Okay.

And then there will be some that will roll out in 2018 as well.

All right. Thanks very much. I appreciate you taking my questions.

Thank you, Alan.

Our next question comes from Yigal Nochomovitz with Citigroup.

Thanks for taking the question. I just wanted to drill down Alex into the market dynamics a little bit more on XERMELO in the U.S. quarter-over-quarter. I think you mentioned that there was 55% unit growth quarter-over-quarter. No change in inventory, obviously assume no change in price. Obviously no currency change. But then the dollar performance quarter-on-quarter was only up 43%, so the implication that the incremental growth can net in the third quarter was slightly lower than in the second quarter?

Yeah. I’ll turn that one to Jeff.

So the gross to net has meaningfully changed between second and third quarter. We’ve continue to have good unit growth and we’ve continue to have good revenue growth as well, as we've gone forward. There has been some mix in the payer population. So there's some difference…

Yeah, what we reported was in the previous dialogue we basically said that there was a 55% increase in the number of prescriptions from 443 to 685 patients. So we increased our patient base quite dramatically from quarter-over-quarter.

You got the differences, what I spoke to before in the previous quarter and where we've made some progress is we had - we were experiencing this phenomenon where patients would discontinue because the expectations were not aligned. That's what we needed to fix. So you had patients coming into the funnel, but you had patients coming out. And so we got it close off the funnel, so you get the full benefit of patients coming in. That's where the difference is.

Got it. All right. Thank you. That's very helpful. And then Pablo, you mentioned you had a nice slide with the Sanofi’s Phase 3 programs and Type 2. Do we know what the additional ones are that they have yet to unveil?

I think they should probably do the unveiling.

Okay. All right. Fair enough. And then are you think considering, Jeff, are you considering giving any guidance in the U.S. for XERMELO for 2018 or is that still premature?

When we get to 2018, when we talk about year end results for 2017 we'll provide some information that will be helpful in terms of guidance for 2018. The other thing is that we will also - in 2018 we will not be blocking IMS data further because that's not going to be you know, from a competitive standpoint it won't be - there won't be reason to do it anymore. So there will be that additional information that will be available as well.

Okay. Thank you very much.

Thank you, Yigal.

[Operator Instructions] With no further questions. I'll hand it back over to Lonnel Coats for any additional or closing remarks.

Well, thank you. You know, for many of our stakeholders they've been asking us about what's next for XERMELO, some have had come – the inbound interest on what we should be doing with XERMELO, what I’ve promised many of our stakeholders we won't say much about it until we have confidence and comfort after we've done the work around what's next for XERMELO. And it's quite exciting, our preclinical work I think is quite robust and our confidence in developing XERMELO further is fairly high. We have started our conversations with our partner Ipsen on how we can go forward and be global in what we do with XERMELO. We also - as we think about lifecycle management toward XERMELO, we have the U.S. rights that remain with us, as well as the rights in Japan. These new indications that we will start to pursue we have opportunities for us to unlock value of this asset also in the Japanese market. So it's really an exciting opportunity for XERMELO. It is a critical asset to us and the mechanism of this drug that we've now done additional work on gives us great confidence and encouragement about the future of this compound. And a lot of this got really supported by what we see the super responders that the in-bound stuff that was coming into us was - has been quite remarkable. And so we feel very confident about the direction of XERMELO. What we want to do is to make sure that we complete a lot of the work that we're doing and then have an R&D day at the end of first quarter, because I think all of you know that our primary goal right now is to get the sotagliflozin Type 1 program into the hands of…

Ladies and gentlemen, that will - conclude Lexicon Pharmaceuticals third quarter financial results. You may now disconnect your lines and have a wonderful day.