Welcome to the Lexicon Pharmaceuticals Fourth Quarter and Full Year 2019 Financial Results and Business Update Conference Call. At this time, all participants are in listen-only mode. Following management’s prepared remarks, we will hold a brief question-and-answer session. As a reminder, this call is being recorded today, March 12, 2020. I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Thank you. Good morning and welcome to the Lexicon Pharmaceuticals fourth quarter and full year 2019 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 for Q&A. Earlier today, Lexicon issued a press release announcing our financial results for the fourth quarter and full year 2019, which is available on our website at www.lexpharma.com and through our SEC filings. A webcast of this call, along with the slide presentation, will be accessible in our 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, Zynquista, LX9211 and our other drug candidates. These statements may include characterization of the commercial performance of XERMELO, expected timing and results of clinical trials of sotagliflozin, telotristat ethyl, LX9211 and our other drug candidates, and a regulatory status and 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 facts or information. Various risks may also 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 success of our commercialization efforts for XERMELO; the timing and results of clinical trials and preclinical studies of sotagliflozin, telotristat ethyl, LX9211 and our other drug candidates; our dependence upon strategic alliances and other third-party relationships; our ability to obtain patent protection for our discoveries; limitations imposed by patents owned or controlled by third parties; and the requirements of substantial funding to conduct our research, development and commercialization activities. For a list and description of the risks and uncertainties that we face, please see the reports we have filed with the Securities and Exchange Commission. With that, I'll now turn the call over to our President and CEO, Lonnel Coats.

Thank you, Kim, and good morning to everyone, and thanks for joining us on the call. 2019 was marked by some meaningful milestones as well as some challenges for Lexicon. Let me start XERMELO. XERMELO achieved U.S. net sales of $8.5 million in the fourth quarter of 2019 and $31 million for the full year of 2019. In 2020, we expect U.S. XERMELO net sales percentage growth in the high single digits in the first quarter and in the mid teens for the full year. We are also being very thoughtful about the lifecycle management of XERMELO, also known as the telotristat ethyl, and we're very excited about the development of telotristat ethyl and biliary tract cancer. Dr. Lapuerta will be speaking about the broad program for telotristat ethyl in a little bit. In type 1 diabetes, as you all know, Zynquista, which is sotagliflozin, was approved by the European authorities last year. In the meantime, we've been working diligently to find a path forward for sotagliflozin in the U.S., after receiving a complete response letter or a CRL, regarding our application for regulatory approval. Toward the end of last year, we engaged in formal dispute resolution proceedings with FDA's Office of New Drugs, which ultimately denied the appeal of the previously issue CRL. We subsequently appealed the decision to the FDA Center for Drug Evaluation and Research, also known as CDER. And just last night, we received the response from CDER confirming the Office of New Drugs previous appeal decision regarding CRL. We are evaluating the feedback they provided in their response, and we will provide an update on our plans for our next steps with type 1 diabetes by our first quarter earnings call. We have reported preliminary top line results for the first four Phase 3 clinical…

Thanks, Lonnel. Our confidence grows for telotristat ethyl. Gastrointestinal benefits, as seen on slide 6 here are documented in our product, XERMELO’s labeling. We also see opportunities to study the potential effects of telotristat on tumor growth in fibrosis. Early preclinical and clinical explorations are underway. The next slide summarizes our clinical development program in patients with biliary tract cancer. The conduct of this open label Phase 2 study has been supported by preclinical evidence, and safety to-date has been satisfactory. We continue to anticipate data for our initial efficacy cohort will come in the fourth quarter of 2020. And at the ASCO gastrointestinal conference this year, we presented TELEACE with real world data on XERMELO in patients with carcinoid syndrome and neuroendocrine tumors. This was a retrospective chart review of 200 patients, who are on standard background therapies and received telotristat ethyl for an average of 12 months in U.S. clinical practice. Radiology reports indicated a mean tumor size reduction of 0.59 centimeters after initiation of telotristat. The P value was 0.006. In addition, there are numerous investigator initiated studies of telotristat ethyl that should help inform further development of the drug. Results from one of them were disclosed in the fourth quarter of 2019 at the North American Neuroendocrine Tumor Society Conference. In that study, telotristat ethyl was studied in mice with valvular disease induced by hypertension. Telotristat reduced the progression of valvular disease, impacting several markers of valvular fibrosis. Turning to sotagliflozin. In the fourth quarter of 2019, we published results for the study on its mechanism of action. Sotagliflozin led to a significant delay in radiolabeled glucose uptake, after a standardized meal. Here, sotagliflozin, canagliflozin or placebo, were given in the morning. This meal was administered about 5 hours later. And you can see a higher…

Thank you, Pablo. This morning I will discuss key aspects of our fourth quarter and full year 2019 financials. More financial details can be found in our Form 10-K, which will be filed shortly. Now, please refer to slide 14 of our presentation. As indicated in our press release today, revenues for the fourth quarter decreased to $8.7 million from $17.1 million for the corresponding period in 2018, primarily due to lower revenues recognized under collaboration and license agreements. Full-year 2019 revenues increased to $322.1 million from $63.2 million, primarily due to collaboration revenues recognized from amount received in connection with the termination of the alliance with Sanofi and recognition of the remaining amounts allocated to the performance obligations from the initial Sanofi collaboration agreement for development activities relating to sotagliflozin, as well as an increase from net product revenue. Net product revenues for full-year 2019 included $31 million and $1.3 million, respectively, from net sales of XERMELO in the U.S. and the sale of bulk tablets to Lexicon’s collaborator, Ipsen. Cost of sales related to sales of XERMELO was $0.7 million and $0.6 million, respectively, for the fourth quarter of 2019 and 2018. Full-year 2019 and 2018 cost of sales was $3.2 million and $2.5 million, respectively. Research and development expenses for the fourth quarter increased to $40.6 million from $12.3 million for the corresponding period in 2018, primarily due to increases in external clinical development costs related to sotagliflozin subsequent to Lexicon regaining the rights and responsibilities for development and commercialization of sotagliflozin pursuant to the termination of the Sanofi alliance. Full-year 2019 R&D expenses decreased to $91.9 million from $100.2 million, due to decreases in professional and consulting activities and lower external clinical development costs. Selling, general and administrative expenses for the fourth quarter were $14.6 million…

[Operator Instructions] Your first question comes from the line of Yigal Nochomovitz from Citi.

Hi. This is Samantha on for Yigal. Thanks very much for taking our questions. I wondered if you could sort of set expectations for data releases that we'll see in regards to type 2 diabetes in the first half, and you noted that we'll get top line disclosures in the first half and then we'll get Phase 3 presentations at ADA. Can you discuss what expectations or what these top-line disclosures will include and what additional data we’ll see at ADA?

Well, we expect to provide top line data that would be generally consistent with what we've done previously, which is whether we met the primary endpoint and indications relating the overall safety profile. And at ADA, we are making submissions to publish some of the data that came out towards the end of last year, those studies, and hope to have those presented in detail at ADA this year, and also subsequently at EASD. And we’ll continue to work towards publishing the full data from the program as we go forward.

And then, could you also confirm -- I think, your prior disclosure was for type 2 diabetes you would be filing in the first half of 2020. Is that still something we should expect, or has that been satisfied for now?

So, a decision about filing really requires a partner for us. And so, it would be part of something that is involved in the partnership discussions. We wouldn't be in a position to file in the first half at this point, given the time that it's taken to get to a partnership, but would still be able to file in 2020.

Got it. And then, just lastly, is there any read-through from the FDA’s position on type 1 diabetes that we should be considering for type 2, or are they just completely separate indications at this point from the FDA's perspective?

They're totally separate indications from the FDA's perspective. The concern relating to Type 1 diabetes isn't really -- or has always been the inherent PK at risk that is involved in Type 1 diabetes that’s part of the disease and which we saw an imbalance in our clinical studies, and how that can be addressed and what's the appropriate way to address that best. And that’s not an issue in type 2 diabetes.

Your next question comes from the line of Kambiz Yazdi with Wedbush Securities.

Good morning. This is Kambiz for Liana. What are the growth drivers for XERMELO and carcinoid diarrhea?

What was the question, again? I'm sorry.

Sorry. Can you hear me?

Yes. Say, it again.

What are the growth drivers for XERMELO and carcinoid diarrhea?

Let me turn it over to Alex.

Yes. The main growth factor for our XERMELO brand is activating new patients on to drug and then holding on to them with good persistency and adherence over time. So, those are the 2 main drivers of our overall growth potential.

Your next question comes from the line of Jessica Fye from JP Morgan.

Hi. This is Daniel for Jessica. Thanks for taking our question. Besides partnership, is there anything that will be a gating factor for filing SOTA in type 2 diabetes in the U.S.?

No. The reason it’s a gating decision is that Lexicon is in no position to commercialize type 2 on its own. So, we need to make sure that we carry all these conversations to their full conclusion relative to type 2. It's a fairly sizable and competitive market, and we will need a partner to be able to commercialize it. So, that is the gating decision. In terms of the data and the quality of the data and the quality of the clinical program, I think Dr. Lapuerta has been consistently clear. We have a very strong program. And one of the requirements are to file we're in a very good position to file for type 2. But I think the overall value of this program goes beyond type 2, which I think Dr. Lapuerta has talked to earlier. And that's how we are designing the program to have a unique position in heart failure as well as have a unique position with the drug for chronic kidney disease that goes beyond what the current class offers. That's where the real opportunity is. And I think that's where most of the conversation is focused within the partnership discussions.

And then, in terms of partnerships, can you talk about the strategies that you're considering?

Strategies we're considering in terms of partnership?

For SOTA in type I or…?

Yes. So, we always intend to -- Lexicon will participate in type 1 under any partnership arrangement because we believe that there's a lot of value we can create relative to both the continued development as well as the commercial development for type 1. As for type 2 heart failure as well as chronic kidney disease, it definitely requires a partner that will have a global footprint or has a global footprint in order for us to realize the value in competitive markets. And so, our strategy is to find a global partner with a footprint to allow us to seek uniqueness in all of the indications accordingly.

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

So, I guess, SOLOIST and SCORED are both large multinational trials, and they're obviously enrolling in a variety of different countries that are presumably becoming a lot more restrictive with respect to patient hospital visits, et cetera, et cetera. So, is there any impact at all that you can quantify maybe just as a result of some of all this coronavirus mayhem? And I guess, how confident are you in some of the previously stated timelines for the completion of those trials? And do you think that some of this kind of new complexity somehow changes the cadence of partnering discussions?

Steve, I don't think it changes the cadence of the partnership discussions, but I do think that anybody who has a program in development that’s global, will be at risk with the latest information that’s coming from the coronavirus and all the actions that are being taken globally to try to contain it. So, without a doubt, I do believe it will have impact on everybody's timelines, if you have programs globally. To your point, patients need to go into institutions, they need to be able to go in and receive their medicines or so forth and so on. With that I think all of the partners we have in terms of CROs and so forth, are going to other measures to make sure there's access. And how well they're able to do that we'll have to see, because I don't think anybody expected what we're seeing right now. And everybody's trying to make the appropriate adjustments. So, to try to give you some quantifiable way would not be appropriate because we just don't know until we engage in and see how this thing continues to progress. It's also why we are being a little bit more conservative even around the XERMELO estimates. A lot of our business is inside of academic institutions and hospitals that are now starting to close the doors and shut out reps. So, this is very -- we’re in our early days now, so it's best for us to be a little bit more conservative than aggressive in all of our forecasts.

Okay. That’s helpful. And maybe just lastly for clarification purposes, I was aware of the updated FDA guidance that was published last week. But, I guess, how does that directly impact, I guess, your filing timelines or your regulatory process? I know that you mentioned that you have enough CV events within the current trials, I guess, to file. But, are timelines -- or is the ease with which you can pursue registration, somehow improved by the updated guidance?

The updated guidance is not going to directly improve registration, I think for anybody because it expands the time in which we have to do the work and it focuses on specialty populations. Our message here is that regardless of the guidance, whether it's 2008 that they apply to SOTA or they try to apply the 2020 guidance, we will be ready in a position, particularly any discussions, we have with partners to be able to file the program. So nothing is going to prevent us from being able to file the program and we're in pretty good shape with all of our data to do so.

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

With respect to the partnership efforts around sotagliflozin, what's the strategy, if the discussions progressed longer than you'd like? What happens next? And what would Lexicon strategy be at that point? What would the company look like?

Yes. Alan, that’s a great question. And I'm going to answer that question for you in our first quarter earnings call. One of the things I promised is that we will not engage in this process forever. Because we have -- we're very blessed in many ways. We talked about 9211, we talked about expanding this the XERMELO program for BTC. There's things that we still haven't talked about that can create value for Lexicon. And so, we can't drag this on too long where we began to not focus on the rest of our portfolio. So, I believe by the time we meet again for our earnings call, you'll have clarity of that question.

And then, can you talk a bit more about the 4911, the trial design -- I'm sorry 9211. Talk about the 9211 trial design, what do you expect to learn from this first cohort later this year?

Great question. I'll turn it over to Dr. Tyle.

So, Alan, what we are starting is a randomized double-blind placebo-controlled, parallel-group, multicenter study. All the centers are in U.S. And we are going to evaluate efficacy, safety and pharmacokinetics of 9211 in the diabetic peripheral neuropathic pain population. We are not going to have any results this year. This study is going to take approximately 18 months to enroll. So, we will probably have this Phase 2 study, proof-of-concept study finished by end of next year. We are estimating that we will enroll 282 patients. It will be all listed on clinicaltrials.gov. And we're going to study two doses of 9211 at this time.

And then, one other one, around XERMELO and biliary tract cancer, that's the one that's going to have data later this year, I guess. What do you expect to learn from this first cohort, and how much value you need building around the data from just that first cohort?

Dr. Lapuerta?

In the first cohort, we want to look at the first 20 patients that are enrolled and look at their progression-free survival at six months. So, we hope that the majority of them will have achieved six-month progression-free survival. And I think that would encourage us to move forward. Unfortunately, this is a disease that advances very rapidly. And to have a majority would be very encouraging.

What would a subsequent cohort look like, second one?

It would be -- well, they have the same patient characteristics. There is no change in the population. It's just that if we don't see encouraging results in the first cohort, we can manage our resources and focus on other programs.

Yes. This program is designed to succeed early or fail early.

Your next question comes from the line of Kevin Kedra from G. Research.

Thanks for taking the questions. I just want to get a sense, with the partnership discussions, how critical is the type 2 indication to these discussions, given how long SGLTs have been out there for type 2? I think, they've been out there for roughly a decade, be fairly late coming in versus areas like heart failure and CKD. You'd still be relatively early in the competitive landscape on that front. So, how do you kind of balance that when having discussions with partners?

Kevin, you are spot on with that question. I'll give you Lexicon's view, and of course, we're very flexible in terms of wanting to achieve as much as we can in terms of indications. But, we believe the net value where we can separate clearly from the -- not just within the class, but clearly create value across the portfolio is in heart failure, particularly the way we have designed our clinical program. We also believe that we can do it in kidney disease or chronic kidney disease. And so, those are the two we believe will give the greatest value of separation and differentiation, which is why we need a partnership to complete them, because they are large trials and they are significant in terms of creating that evidence. But, once we have that evidence, I think we have a very unique position we can come to market with SOTA. Also the interesting thing is when you break down the patient who has worsening heart failure, a huge percent of underlying that has type 2 diabetes. When you break down patients who have chronic kidney disease, a huge percent of them underlying their disease is type 2 diabetes. So, you're going to get a type 2 diabetes one way or the other. But, if we focus and are able to shift our resources and be able to accelerate the long-term studies and bring them in line with the timelines that we just expressed, you have every chance to be able to have a differentiated product that seizes opportunity where there is a growing need. So, you're absolutely correct, from our view, that is where the greatest opportunity is versus just type 2.

[Operator Instructions] You do have a follow-up question from the line of Kambiz Yazdi from Wedbush Securities.

Hi. Just one follow-up, how long do you expect cash runway are anticipated to last?

I think, as we noted that we expect the cash runway to run another year. And we're looking for ways to continue to extend that.

There are no further questions in queue. I will now turn the call over to Mr. Coats for his closing remarks.

Well, thank you everybody for joining us this morning. We have a very busy year ahead, as always, here at Lexicon. And we expect top-line data from the remaining core Phase 3 studies for sotagliflozin in type 2 diabetes. I think, as we've tried to communicate on the call, we’re greatly excited about -- really are those long-term studies, but they will require funding because we think separation will happen for this compound in a significant way, both focused on the SOLOIST program where we have a unique design for worsening heart failure, as well as the SCORED program that could lead to, as Dr. Lapuerta said, that has been verified in our communication with the FDA to a unique label for renal disease, as well as for heart failure. So, we're very excited about advancing these partnership discussions to a point where we hope that we can get something done, and get these studies done and get the product available in market. As for rest of our pipeline, we are making advances as we have outlined for LX9211, a remarkable program I think that could have even more acceleration as we begin to focus more on it. And for BTC, we look forward to calling out the data on progression-free survival by the end of this year on the first efficacy cohort that we will have completed. So, a very busy year ahead. Look forward to engaging with you as we come into our first quarter earnings call. Thank you.

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