Welcome to the Lexicon Pharmaceuticals Fourth Quarter and Full Year 2018 Financial Results and Business Update Conference Call. [Operator Instructions]. As a reminder, this call is being recorded today, March 13, 2019. I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Thanks, Maria. Good morning, and welcome to the Lexicon Pharmaceuticals Fourth Quarter and Full Year 2018 Financial Results and Business Update Conference Call. Joining me on today's call are Lonnel Coats, Lexicon's President and Chief Executive Officer; Alex Santini, Executive Vice President and Chief Commercial Officer; Dr. Pablo Lapuerta, Executive Vice President and Chief Medical Officer; Dr. Praveen Tyle, Executive Vice President of Research and Development; and Jeff Wade, Executive Vice President of Corporate and Administrative Affairs and Chief Financial Officer. After our formal remarks, we will open the call up for Q&A. Earlier today, Lexicon issued a press release announcing our financial results for the fourth quarter and full year 2018, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call along with a slide presentation will be accessible in the Investor Relations section of our website. During this call, will be 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 our other drug candidates. These statements may include characterizations of the commercial performance of XERMELO; the expected timing and outcome of regulatory review of applications for approval of sotagliflozin; the expected timing and results of clinical trials of sotagliflozin, telotristat ethyl and our other drug candidates; and the market opportunity for those programs. This call may also contain forward-looking statements relating to Lexicon's growth and future operating results, discovery and development of other drug candidates, strategic alliances and intellectual property as well as other matters that are not historical fact or information. Various risks may cause Lexicon's actual results to differ materially from these expressed or implied in such forward-looking statements. These risks include uncertainties related to the success of our commercialization efforts for XERMELO; the regulatory review of applications for the approval of sotagliflozin; the timing and results of clinical trials and preclinical studies of sotagliflozin, telotristat ethyl and our other drug candidates; our dependence upon strategic alliances and other third-party relationship; our ability to obtain patent protection for our discoveries; limitations imposed by patents owned or controlled by third party; and requirements of substantial funding to conduct our research, development and commercialization 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 would now like to turn the call over to our President and CEO, Lonnel Coats.

Thank you, Kim. Good morning, everyone, and thanks for joining us on the call. 2018 was marked by some meaningful milestones for Lexicon. We saw continued growth in XERMELO net sales, made significant progress towards advancing sotagliflozin to market, further developed our pipeline, while effectively managing our resources and spending. I will now elaborate on some of these key achievements. I'll then turn the call over to Alex, Pablo and Jeff for updates on our XERMELO business, pipeline developments and financial results, respectively. Starting with XERMELO, we achieved U.S. net sales of $7.3 million in the fourth quarter of 2018 and $25 million for the full year of 2018. We saw a continued growth in our patient and prescriber base in the fourth quarter of 2018, and we expect continued growth in 2019. Our collaborator Ipsen continues to launch XERMELO outside the U.S. with more countries expected to come online this year. Our other project last year was to work with Sanofi to submit the regulatory filings for sotagliflozin in type 1 diabetes in the U.S. and in Europe, which was accomplished. The FDA set a PDUFA date of March 22, 2019, and an advisory committee meeting was held in January 2019, which Pablo will talk more about shortly. In Europe, I'm pleased to announce that sotagliflozin recently received a positive CHMP opinion in type 1 diabetes, which represents a significant step forward for the European type 1 diabetes community. We look forward to the expected adoption of a CHMP positive opinion by the European Commission and an EU approval in the second quarter. In type 2 diabetes, in 2018, Sanofi continued to enroll patients in 11 Phase III studies to support global regulatory filings, completing enrollment in the nine core studies designed to support an initial approval, and also…

Thanks, Lonnel. Good morning, everyone. For the full year 2018, we achieved U.S. XERMELO net sales of $25 million, up 66% over the prior year. Total U.S. net sales for XERMELO in the fourth quarter of 2018 were $7.3 million, up 33% over the prior year quarter and 16% from the third quarter of 2018. As Lonnel spoke to earlier, we saw a continued increase in our patient and prescriber base. Total paid subscriptions for the fourth quarter was 1,386, up approximately 13% quarter-over-quarter and 65% compared to the prior year quarter. There were 144 new paid patient starts in the fourth quarter. The overall discontinuation rate remains in line with our expectations. We continue to see increased number of patient restarts after drug discontinuation, and we anticipate this trend to continue. The compliance rate remains around 80%. We continue to achieve very good access and reimbursement for XERMELO. The payer mix is increasingly weighted toward commercial payers followed by Medicare, which together account for a very high percentage of the business. Medicaid and other government payers, collectively, account for a very small percentage. Outside the U.S., Ipsen continues to obtain approvals for XERMELO in other territories. In 2018, XERMELO received national reimbursement approval in Scotland, Denmark, Sweden, Greece, Luxembourg, Northern Ireland, Wales, Germany, Belgium and the Netherlands. We expect other European countries and pricing approvals to come online throughout this year, but continue to anticipate that the trajectory of the XERMELO launch in Europe will be a gradual one. In 2019, we expect total U.S. XERMELO net sales to grow in the range of 20% or greater year-over-year. We will continue to activate a broader prescriber base. Our experienced team continues to work to ensure that patients with carcinoid syndrome diarrhea have the opportunity to benefit from XERMELO. There remains significant opportunity to increase demand. I will now the call over to Pablo, who will provide a pipeline update.

Thanks, Alex. Let's start with our most advanced program, sotagliflozin in type 1 diabetes. I'm pleased to announce that on February 28, the EMA Committee for Medicinal Products for Human Use adopted a positive opinion recommending regulatory approval of sotagliflozin for use as an adjunct to insulin therapy to improve glycemic control. It is for adults with type 1 diabetes and a body mass index of at least 27 who have failed to achieve adequate glycemic control despite optimal insulin therapy. We are very pleased with this result. This positive opinion is a testament to our and Sanofi's dedication to this community. We look forward to the adoption of this CHMP positive opinion by the European Commission and the EU approval next quarter. In the U.S., we and Sanofi met with the FDA advisory committee on January 17 to discuss the new drug application or NDA for sotagliflozin in type 1 diabetes. The committee voted 8 to 8 on the question of whether the overall benefits outweigh the risks and support approval of sotagliflozin as an adjunct to insulin to improve glycemic control in adults with type 1 diabetes. We at Sanofi are working closely with the FDA, as they complete their review of the NDA. We will not provide more detail on this matter given the stage of the regulatory process. We continue to expect a regulatory decision in the U.S. by March 22. In type 2 diabetes, Sanofi is running a robust Phase III clinical development program centered on the opportunity for differentiation in patients with renal impairment. Diabetic patients with moderate to severe chronic kidney disease remain a significant [indiscernible] that comprises between 16% and 20% of the type 2 population. Since the declining renal function is a hallmark of type 2 diabetes, demonstrating benefits in this…

Thank you, Pablo. This morning, I will discuss key aspects of our fourth quarter and full year 2018 financials. And we'll introduce our financial guidance for 2019. More financial details can be found in our 10-K, which will be filed shortly. Now please refer to Slide 13 of our presentation. As indicated in our press release today, fourth quarter 2018 revenues totaled $17.1 million, down from $34 million for the prior year period, primarily due to lower revenues recognized under collaboration and license agreements. Full year 2018 revenues decreased to $63.2 million from $91.7 million, primarily due to timing of revenues recognized from clinical-trial activities under our alliance with Sanofi and reduced milestone payments from Ipsen, Partially offset by an increase in net product revenue. Net product revenues for full year 2018 included $25 million from net sales of XERMELO in the U.S. and $1.6 million from the sale of bulk tablets to Ipsen. Cost of sales related to sales of XERMELO was $0.6 million and $0.5 million, respectively, for the fourth quarter of 2018 and 2017. Full year 2018 and 2017 cost of sales was $2.5 million and $1.9 million, respectively. Research and development expenses for the fourth quarter of 2018 decreased to $12.3 million from $46.3 million for the corresponding period in 2017, primarily due to decreases in our external clinical development costs related to sotagliflozin. Full year 2018 R&D expenses decreased to $100.2 million from $152.2 million, primarily due to lower external clinical development costs related to sotagliflozin and professional and consulting fees. During the financial close for fiscal year 2018, we determined that we had overaccrued $19 million of clinical development costs related to sotagliflozin in our R&D expenses over the last several years. The 2017 R&D expenses set forth in today's press release have been…

Thank you, Jeff. We entered 2019 with a well-defined strategy to position the company for future growth and to build long-term sustainable value for shareholders. Our main priorities remain centered around driving long-term value through continued execution on the XERMELO commercialization and making sotagliflozin available as quickly as possible to patients with type 1 diabetes. XERMELO remains a significant franchise for us, and we're extremely excited to clinically explore the use of telotristat ethyl in an additional therapeutic indication where the role of serotonin inhibition has shown preclinical promise. In parallel, we and Sanofi continue to work with the FDA as it completes its review of the NDA filing. In Europe, we look forward to the European Commission's regulatory decision for sotagliflozin in type 1 diabetes next quarter. In type 2 diabetes, we anticipate completion of the core Phase III studies for sotagliflozin this year followed by regulatory filings in Europe and in the U.S. in early 2020. Lastly, we continue to advance our early-stage pipeline product candidates in areas we believe will create long-term value for the company. Underlining each of our development programs is a clear mission to create novel, life-changing therapies fueled by innovative science, talent and our core expertise so that we can make meaningful difference in patients' lives. With that, I will now ask the operator to begin our Q&A session. Please note, that we will not have any further comment on type 1 diabetes regulatory matters, but we'll be happy to address other questions.

[Operator Instructions]. Our first question comes from the line of Liana Moussatos of Wedbush.

You've mentioned milestones from type 2 diabetes, Phase III trial data. Does the first Phase III data in Q2 trigger milestone? Or do we have to wait for subsequent trials to read out? And can you talk about cash runway? And for sotagliflozin, when does the composition of matter IP expire?

Of course, great questions, Liana. Jeff, I'll turn this over to you.

Okay. So we haven't specified which studies the milestones are tied to, but we are looking forward to data that's coming in the relatively tight time frame, starting in second quarter going through the third and fourth quarter. And we believe our cash runway is - actually, we believe - maybe I should approach this indifferently. We believe that we're quite well capitalized for the business that's ahead of us, both in terms of what we have cash on hand in terms of the fact that our R&D spend is - will be declining quite significantly in next year and also because of the fact that we have a number milestones tied together. So we feel like we are well capitalized for the business that's ahead of us in pretty much in any scenario and that, that allows us to continue to execute against our strategy, both in terms of the potential launch of sotagliflozin in type 1 diabetes, in terms of continued execution on XERMELO and in terms of continued investment in our early-stage pipeline.

The patent?

Oh, the patent, sorry. Patent term [indiscernible] late 2020s before patent term extension. We do expect to have patent term extension that will take it out beyond that into the 2030s.

Our next question comes from the line of Yigal Nochomovitz of Citi.

This is Samantha on for Yigal. So one of the discussions that came out of the outcome meeting was the potential need for a DKA monitoring study either [indiscernible] approval or potentially post-marketing. I'm curious have you any thoughts to that and what the trial would look like in just broadly or even in terms of enrollment requirements, endpoint, duration. Any details you could provide there for your thoughts would be great.

That's a great question. No, we can't provide any detail as we already stated we're actively engaged in the discussions with the regulatory agency. So we're going to abstain from answering any questions around that.

Understandable. Thought I'd ask, all the same. So since the CHMP issued a positive opinion, is your impression that after speaking with some European physicians that they are less concerned about the DKA risk than some other U.S. colleagues?

Well, I'll give Dr. Lapuerta an opportunity to answer that question.

DKA is the same condition in the U.S. and Europe and is viewed the same way.

Okay. And then can you maybe just give a little bit more detail about what the cadence of the data releases we should expect for the T2D trials. Is Sanofi going to give these by press release? Or are they going to be released in - together, multiple trials at the same time? Or is the first time I'm going to see this data potentially at a medical meeting?

I'll turn it over to Jeff.

We expect to announce the level of results that will be required for us to announce from a materiality point of view, but we do expect and we are intending to try to preserve the ability to publish at medical meetings, and so a lot of the details will probably be published at medical meetings. But we will be able to see as we get through the clinical trials have we succeeded on those clinical trials as we go along.

Our next question comes from the line of Jessica Fye of JPMorgan.

I was hoping we could talk a little bit about the commercial preparations you've got underway in anticipation of the launch of sotagliflozin in the U.S. How much of this is going to be triggered by an eventual approval versus stuff you're getting underway now? And I was also just hoping you could help me understand the co-promote a little bit better. Like does the $25 million delta in your SG&A guidance, with and without sotagliflozin launching, reflect 40% of the commercialization cost for type 1? Because the filings talk about having a significant role, but $25 million doesn't seem like all that much in the scheme of big pharma launches. So any kind of help you could or color you could provide there would be great.

It's a great question, Jessica. I'll turn it over to Jeff.

So I guess, what I would say, Jess, is we have been making investments in preparation for commercialization. There will obviously be more expenses associated with the launch, but we have been - over the course of 2018 and the first quarter 2019, we've been making investments to be prepared. So I will - I'm somewhat limited in what I can say in terms of the details of the co-promotion arrangement. I would say that the focus of our co-promotion arrangement is on specialists in type 1 diabetes. And so it is somewhat circumscribed as to what we are participating in, but we have continued to make investments. And the delta that you see there is what the incremental investment would be - that we would expect over the course of this year associated with the launch. That's our financial obligation associated with that.

And just we've been making - to Jeff's point, we made quite a bit of an investment this - in 2018. We've built quite a good infrastructure for ourselves to have the capability to launch into the type 1 community with specialists. We certainly have no intent from a Lexicon point of view to go beyond specialists. And then the second thing I would say is our collaborator Sanofi has been well positioned on how it is ready to launch the compound upon approval. So we are pretty much in a position of readiness, and what you see in the expenses is to just point - is to incremental cost to launch into market at the point of approval.

Okay. So have you been making key hires, like MSLs and, at least, sales reps in the kind of numbers that you would need to target specialists ahead of time?

Yes, so we have the core - at Lexicon, for our side, we already have the core. We have the management leadership locked and ready, and it's all a matter of timing now to bring in the next layer to support that core. On the Sanofi side, I think it's more of an allocation. They're already in diabetes. And so it's a matter of tweaking how they're going to allocate their sales force upon approval. So we can be efficiently and quickly deployed into market upon approval.

Okay. Got it. And then, actually, just on that point, how quickly following an approval do you think this product could be in a pharmacy as kind of ready to go?

That's a great question. And it's something we've been working with Sanofi on. All that's going to depend on label and what may come out of the discussions with the agency will determine how quickly we'll be able to get into market. But our intent always is to get in as quickly as possible. Lexicon has its standards, and Sanofi its standards, but I think, ultimately, both of our objectives is to get in as quickly as possible. So I can't give you a time line because our partners have not expressed that publicly, but the objective is to get in as soon as possible.

Okay. Great. And then just one on type 2. I think in prepared remarks, you gave a range for the proportion of type 2 diabetics that have CKD in the, I think, it was like mid- to high teens, up to 20%. What proportion of type 2 patients have Stage 3 or Stage 4 CKD?

Jeff, I think we've disclosed that before.

Yes, it's basically 1% to 2%, in the Stage 4 and the balance of that is stage 4 chronic kidney disease.

Yes.

[Operator Instructions]. Our next question comes from the line of Alan Carr of Needham.

Well, can you comment a bit on your thoughts on the CHMP decision in the BMI of 27?

Thanks, Alan. I'll turn that question over to Dr. Lapuerta.

Well, the patients with a BMI greater than 27, they have a greater cardiovascular risk. They tend to be on higher insulin doses. They tend to a little bit older. And the benefit risk profile is considered generally a bit more favorable in this population because the weight loss is more important to them since they're already overweight. And to just push insulin doses even more in this population would only exacerbate the weight gain, which is a cardiovascular risk factor in this population. So that's the - that's really the kind of the clinical appreciation for the BMI greater than or equal to 27 being a consideration in the CHMP opinion.

Our next question comes from the line of Stephen Willey of Stifel.

Maybe just a follow-up on that question. I know - I think it was inTandem2 that median BMI in the patient population was, I believe, about 28, but just curious as to kind of what proportion of the type 1 population in Europe you believe this BMI greater than 27 captures.

We don't have exact numbers, and it's difficult to get exact numbers because most of the epidemiology studies really report BMI greater than 30 and not BMI greater than 27. There are a few that are reporting BMI greater than 25, but if you look at how weight is changing over time, you look at trends in Europe, perhaps some of the best data are really from inTandem2. InTandem2 is such a broad - with such a broad collection of sites and countries that its demographics really reflect well what's happening with type 1 diabetes in Europe. And in inTandem2, they would be somewhere around 40% or so of the population.

Okay. Just going back to the cadence of type 2 data disclosures. I know - I think it was mentioned and I know it's in clinical trials and a number of these studies are going to complete during the first half of this year. I guess, you talked about, perhaps, Sanofi's preference for disclosure at a medical meeting. I believe in their most recent earnings presentation, they were referencing a 4Q '19 type 2 data disclosure, which I guess is kind of past the European diabetes meeting, which is in late September. So just kind of wondering if you can kind of help us triangulate what Sanofi might be guiding to here just with respect to data disclosure.

I can't really comment on what they - happened to their data disclosure. [Indiscernible] the EASD is like right at the cusp of the end of the third quarter and beginning of fourth quarter. I do expect that some of the data, the medical meetings will probably be - some of them will probably end up being next year in terms of the details. The expectation from our perspective - and I would say that for the most part that the clinical trials will be in the second half of the year rather than in the second quarter, just in terms of timing. But for the most part, we're going to - we'll be able to provide some color as to whether we have achieved the endpoint and - but not a heaped amount of detail in terms of the results unless it's something that's - that we need to disclose from materiality perspective.

Understood. Can you maybe just provide a little bit of color around what this Phase Ib trial for 9211 will look like, just in terms of patient size, duration of treatment, et cetera?

Sure, I'll turn that over to Dr. Tyle.

Steve, Praveen here. Steve, Phase 1b trial is going to be multiple ascending dose, and it will basically have several dose cohorts in parallel to what we did in Phase Ia with single ascending dose. We will monitor these patients over a period of 4 to 6 weeks, and we will basically study a significant amount of PK and report by the end of this year the results.

Got it. Just curious, I guess, in the list of milestones for '19, there was no mention of the selective SGLT1, 2761. Is there any update to provide there with respect to the state of that compound?

Yes, Steve, as we - I think we stated on one of the other calls that one of the things we are looking to get results on is one of the trials where there is sotagliflozin on DPP-4 with a background of metformin versus Jardiance on the background of a DPP-4. And depending on what that outcome looks like, it gives us greater information as to how, perhaps, we want to advance 2761 into the clinic based on that data. So once we have that, then we'll make more critical datas on how we're going to advance 2761 because we see it more as an opportunity for - to be in line extension or life-cycle management opportunity for the franchise.

Got it. And then just one last quick question, sorry. If - can you just remind us if any of the outstanding debt, either the term loan or the convertible, have any kind of covenants with respect to minimal cash requirements?

There are no covenants with respect to cash requirements.

At this time, there appears to be no further questions. I will now turn the call back over to Mr. Coats for his closing remarks.

Well, thank you. One of the things that I generally want to say, based on the questions that are asked, I think Sanofi has done a - from my perspective, they have done a fantastic job at developing sotagliflozin, thus far, for type 2 diabetes. I think the speed by which they have operated to enroll patients and start moving these trials to completion has been quite remarkable. So to Jeff's point, our confidence about how things are going to call out this year is high because of how well they have executed. So that's just a general comment I wanted to make. Overall, I would say we entered into 2019 with a well-defined strategy to position the company for future growth and to build long-term sustainable value for our shareholders. And as I said before, our priorities remain centered around driving long-term value through continued execution of the XERMELO commercialization and making sotagliflozin available as quickly as possible for patients with type 1 diabetes. Those things are at the core of what we will continue to do in 2019. It's also important to say that we're very proud that we may have the potential to have a second compound in the market, which really is a testament to the ability of this company to discover and to develop innovative therapies that allow us to build on the opportunity to grow our company and to provide substantial long-term value for our shareholders. I want to thank our employees for doing such an incredible job of putting us in this position, and look forward to future communications with all of you. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect, and have a wonderful day.