Welcome to the Lexicon Pharmaceuticals Second Quarter 2020 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 question-and-answer session. As a reminder, this call is being recorded today, July 30, 2020. I will now turn the call over to Dr. Kimberly Lee, Head of Investor Relations and Corporate Strategy. Please go ahead.

Thank you, Crystal. Good morning and welcome to the Lexicon Pharmaceuticals second quarter 2020 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 formal remarks, we will open the call up for Q&A. Earlier today, Lexicon issued a series of press releases, one announcing our financial results for the second quarter 2020; a second press release announcing our agreement to sell XERMELO and associated assets to TerSera for up to $224 million in upfront and milestone payments, plus mid-teens royalties on net sales in biliary tract cancer; and a final press release announcing our realignment around research and development assets, with a focus on our Phase 2 LX9211 neuropathic pain program, each of which is available on our website at www.lexpharma.com and in the case of the financial results and asset sale press releases through our SEC filings. A webcast of this call, along with the slide presentation, will be accessible in the Investor Relations section of our website. During this call we will review the information provided in the releases, 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 LX9211, XERMELO, sotagliflozin and our other drug candidates. These statements may include characterizations of the commercial performance of XERMELO; the expected timing and results of clinical trials of telotristat ethyl, sotagliflozin, LX9211 and our other drug candidates; and the regulatory status and market opportunity for those programs. This call may also contain forward-looking statements relating to our growth and future operating results, discovery and development of our drug candidates, strategic alliances and intellectual property, as well as other matters that are not historical facts or information. Various risks may cause our actual results to differ materially from those expressed or implied in such forward-looking statements. These risks include uncertainties related to our ability to complete the sale of XERMELO; the timing and results of clinical trials and preclinical studies of LX9211 and our 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 and 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 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 and good morning to everyone, and thanks for joining us on the call today. Today’s presentation will be made on behalf of all the extraordinary men and women here at Lexicon who work tirelessly every day to advance our science and to enhance patients. So let me jump in and talk about our second quarter. We made very good progress on XERMELO, business and our pipeline while effectively managing our resources and spending. I will elaborate on some of the key achievements and will then turn the call over to Jeff and Praveen for updates on our financial results and pipeline developments respectively. Starting with XERMELO, we achieved U.S. net sales of $9 million in the second quarter of 2020. That’s up 21% from the corresponding period in 2019. Earlier this morning, we announced that we entered into an agreement with TerSera Therapeutics for the sale of XERMELO and related assets. TerSera will pay Lexicon approximately $159 million in cash at closing, which includes a $155-million upfront payment and approximately $4 million for existing inventory. Lexicon may receive additional development, regulatory and sales milestone payments of up to an aggregate of $65 million for the development and commercialization of telotristat ethyl in patients with biliary tract cancer. Additionally, Lexicon will be eligible to receive mid-teens royalties on net sales of XERMELO in biliary tract cancer. As part of the transaction, TerSera has agreed to assume the currently ongoing TELE-ABC Phase 2 clinical study of XERMELO in biliary tract cancer patients and offer employment to at least 20 Lexicon employees currently dedicated to XERMELO. The transaction is expected to close in the third quarter of 2020, subject to the satisfaction or waiver of customary closing conditions. This transaction allows us to realign our business around our research and development assets with a significant focus on our LX9211 program, which Praveen will highlight shortly, as well as on other early stage candidates. This sale also allows us to officially use our resources, and importantly, significantly reduce our debt, including the full repayment of our $150-million secured-term loan. Jeff will talk more about this later. We ended the second quarter with approximately $202 million in cash and short-term investments, and we continue to prudently manage our balance sheet. With that, I’ll now turn the call over to Jeff.

Thank you, Lonnel. To begin, I will discuss key aspects of our second quarter 2020 financials. More financial details can be found in our Form 10-Q, which was filed yesterday evening. Now please refer to Slide 5 of our presentation. As indicated in our press release today, revenues for the second quarter decreased to $9.2 million from $9.7 million for the corresponding period in 2019. This was primarily due to an absence in this year’s quarter of bulk tablet sales of XERMELO to Ipsen and a decrease in collaborative revenues, partially offset by an increase in U.S. net product sales. Net product revenues for the second quarter of 2020 were $9 million from net sales of XERMELO in the U.S., up 21% over the prior year quarter. Cost of sales related to sales of XERMELO for the second quarter of 2020 was $0.7 million, compared to $1.3 million in the prior year quarter. Research and development expenses for the second quarter increased to $57.3 million from $12.6 million for the corresponding period in 2019, primarily due to increases in external clinical development costs relating to sotagliflozin subsequent to the termination of the Sanofi alliance. Selling, general and administrative expenses for the second quarter were $14.1 million, compared to $14.3 million for the same period in 2019. Net loss for the second quarter was $69.1 million, or $0.65 per share, as compared to a net loss of $23 million, or $0.22 per share, in the corresponding period in 2019. For the second quarter of 2020, net loss included non-cash stock-based compensation expenses of $4.3 million. For the second quarter of 2019, net loss included non-cash stock-based compensation expense of $3.8 million. We ended the second quarter of 2020 with $201.9 million in cash and short-term investments, as compared to $271.7 million…

Thanks, Jeff. This has been a very exciting journey for us, discovering LX9211’s potential in preclinical models and now bringing it to the clinic. As shown on this slide, we studied LX9211 in multiple models, including streptozotocin-induced DPNP models in rats and a varicella zoster rat model of postherpetic neuralgia. As you can see, mechanical allodynia, which is a measure of pain, saw the greatest reduction at one milligram and three milligrams per kilogram of LX9211, reducing pain up to 65% in diabetic animals. Reduction in neuropathic pain behavior was also seen after a single dose and after seven daily doses of LX9211 following a viral infection in the varicella zoster rat model. Moving on to Slide 14, we also have compelling preclinical data in rodents that suggests the potential of LX9211 to avoid dose-limiting side effects such as motor impairment seen with standard of care like gabapentin and pregabalin. Slide 15 shows our mechanistic work in preclinical models, which has drug’s unique properties associated with its mechanism. We have identified that LX9211 acts at the spinal dorsal horn, as demonstrated by efficacy in neuropathic pain models via intrathecal delivery. In nerves of injured rats, there was a reduction in spontaneous firing of the spinal dorsal horn neurons with AAK1-inhibitor treatment. Non-CNS-penetrant inhibitors did not show efficacy in these neuropathic pain models. We also saw that LX9211’s mechanism was independent of the opioid pathway and we believe the mechanism may involve alpha-2 adrenoceptor pathways, but AAK1 inhibitors are not agonists or modulators of these adrenoceptors. In summary, preclinical data demonstrated LX9211’s ability to penetrate the CNS well, reduce pain behavior in models of neuropathic pain and have a mechanism of action that is independent of opioid pathway, which we all can agree is an extremely important trait. On Slide 16,…

Praveen, thank you and Jeff, thank you. I would just conclude by saying we are extremely excited about this compound, always have been. I think a few years ago at JPMorgan I was asked what am I most excited about that we are working on at Lexicon. I signaled to people, keep an eye on our AAK1 target and here we are today. We have gotten through Phase 1, our confidence has grown in Phase 2, and now we are going to build our efforts around this compound and what can come from it, because I truly believe this is one of those compounds that you can ultimately build a franchise around with multiple indications within the neuropathic pain space. So we will look forward to sharing more information with you as we seek getting through Phase 2 as Praveen has laid out and then start our work in our second planned study for postherpetic neuralgia. With that being said, I also want to take this opportunity and just really thank the extraordinary commercial team, medical team and our field team who have supported XERMELO and got it to a place where it was remarkably successful in the marketplace and put it in the position where a company like TerSera, that has a portfolio of oncology assets, that will find a very good home that could be well supported relative to the patient support that we’ve created in the marketplace and the value that I believe that they can add as we go forward. With that, the milestones I think you can look forward to is the closing of the TerSera transaction, which we believe will conclude in Q3, and as we’ve already mentioned here, the dosing of the first patient in the Phase 2 program for DPNP will be a Q3 opportunity. And then we will initiate our Phase 2 study in post-herpetic neuralgia in Q4. With that, I will say thank you and turn the call over to the operator to start Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Stephen Willey with Stifel.

Yes, good morning. Thanks for taking the questions. Can you maybe just confirm that the intended repayment of the term loan is a byproduct of a covenant trip related to the transfer of XERMELO? And then I believe the term loan also has kind of the usual make-whole and prepayment premiums, can you disclose what those are?

Jeff, I will turn that one over to you.

Yes, so we are and part of the reason for doing the transaction was to reduce our debt. And so our intention is to use the proceeds to fully repay the term loan and that was part of the intent of the transaction. So this is more of an intent to pay down the loan rather than having to pay down pay off the loan because of the transaction. We do have there will be a modest prepayment penalty and associated with this repayment, but we expect the proceeds of the deal to cover the full repayment of the loan, including the prepayment penalty associated with it.

Okay. And then just on 9211, can you maybe just give us a broad estimate of the costs associated with the two trials that you are planning to initiate, when we might see some initial data emerge out of these trials, and then some color around the intellectual property of the asset? I know that this was part of the 2009 I think collaboration with Bristol so any commentary on those fronts would be helpful?

Jeff, I’ll turn it over to you.

Sure. Yes, sure. So these studies are they are the first study is a relatively large study. It’s a 300-patient study. The cost of this study is going to be a little north of $10 million from an external perspective, and we have the second study will be a little bit less because it’s going to be a smaller study. We in terms of the duration, our expectation is to be able to get results back late next year. And in terms of the intellectual property, we actually we discovered, and we are the first to publish on this target. We have we spent a lot of time before we made any disclosure or publication of the target working on additional chemistry and working on the target. We have a number of different compounds for which we have that we have covered in terms of patents. And this is a highly novel target, a highly novel chemistry around which we have good strong patent protection. As I mentioned, we have a couple of different chemotypes for which we have development candidates.

Okay. So, as you do you think of composition of matter extending into the 2030s, or is this kind of a pre-2030 composition and then there is going to be some dependency upon either a term extension or some method patents?

It’s going to be the extension actually, I don’t remember the exact term. It will last into the with patent term extension it should last into the late 2030s, but it’s a I mean, that should mean that we are kind of early 2030s in terms of patent duration.

Okay. I will hop back in the queue. Thanks for taking the questions.

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

Hi, Thanks for taking my questions. I guess, can you go a little bit into where you think more of the outflows and the inflows with the cash are? I know you had an 8-K on your building recently, but I mean, can you comment on that? And then also, so the focus, obviously, is 9211 now. You have a, from your platform, your knockout platform way back when, my recollection is that you had a number of targets to work with. Will this is Lexicon essentially a 9211 company for the rest of 2020 and 2021, or do you expect to be making some announcements around what’s behind it, what’s next at Lexicon? Thanks.

Jeff, I will give you the first part of that question in terms of the 8-K.

In terms of the so we will have some costs associated with this. I think that our guidance that we are providing is going to be relatively close to where we end up, but we will provide some updates when we get closer to ending the or basically closing the transaction. So, I in terms of the cost of the of XERMELO, obviously, TerSera is going to assume, basically, the cost of that business going forward, and we are going to not have the revenues associated with that going forward, but our R&D spend is coming down significantly as a result of winding down the sotagliflozin program, and most of our R&D expenses in the near term are going to be focused on LX9211. I will let Lonnel talk about some of the other assets, because there are other assets that we have and that we will continue to work on.

Yes, so let me start with to be very clear about something. We are not giving up on type one, so you can fully expect us to go back at it again, probably going into our fourth quarter, reengaging the FDA on the type one program. And it fits very nicely into what we are talking about here, which is diabetic neuropathic pain and the associated issues, so it does fit very nicely if it would be successful. At this point, it’s a low-cost risk for us to approach the agency, and should we be successful, there’s a significant amount of upside should we be successful. So we are not giving up on type one, and we can make that note. The second one is that we have a whole line of products that are what we call a 103x project that we are looking in the areas of fibrosis and NASH that we will have much more to say about that in the coming year. Then thirdly, we have some early stage work that we are doing in the med-chem space, also in the metabolic area, where we think we have a very interesting and novel approach should we be successful with the med-chem. So, there is a lot more we have to say going forward now that we are rolling back into a significant portfolio of R&D assets that we have not funded historically as we chased the diabetes marketplace and used our cash there. But this really gives us an opportunity, again, to open up that portfolio and start to fund it, and start to put more shots on goal as a result of having the opportunity to have the cash and place it appropriately in terms of its allocation, so much more to say. So yes, 9211 will be the primary focus for us going into next year, but it will not be the only focus, and we will have a lot more to say going into next year about the other assets.

A clarification, Lonnel you mentioned discussions with the FDA around Type 1 diabetes but what’s the status in Europe and what do you plan to do there with I mean, you have approval over there?

Yes. So that remains on hold because that’s not where we want to deploy our capital at this moment, but we continue to shift down from this conversation that we just concluded on the sale of XERMELO and restart the conversation as COVID starts to become less and less of an issue for us to have conversations in Europe about rights of a product that’s approved for type one diabetes there. So this is a good opportunity to restart those conversations. As I said before, we were in a good place to have those conversations before; COVID-19 hit, and those conversations pretty much dried up, and we had to make different choices. But I do think we do have the opportunity now to start to reengage about Europe as an asset, so stay tuned on that one as well.

If you make progress in the U.S. with the FDA, is that something you would commercialize over here or is that something you would partner also the U.S. rights?

No, I think we would commercialize – no, it’s a great question, Alan. We would commercialize it here. It’s the type one marketplace does not require significant commercial deployment. It’s more of a specialty focus market. You don’t have to have an army of commercial support to do so. It’s a very untapped market in terms of going beyond insulin, so it is a place that we can invest quite nicely that really sets us up for success with LX9211 that will be specifically within the diabetes space for neuropathic pain.

Okay, great. Thanks for taking my questions.

You bet.

Your next question comes from the line of Liana Moussatos with Wedbush.

Yes, hi, good morning. Thanks for taking our questions. This is [indiscernible] for Liana. A couple to start, actually could you guys clarify, regarding the TerSera transaction and XERMELO sale, there is no more or how you guys are going to monetize the carcinoid syndrome diarrhea? Is that kind of is that completely sold off?

Yes.

Okay, good. I know you mentioned that in Alan’s question; I just wanted to clarify. Okay, so moving to the biliary tract could you so you guys are responsible for Phase 2 development, how is the decision to move to Phase 3 made?

That decision is now would be – that decision will be TerSera’s decision.

Okay. So at that point, they are going to be press releasing that? Nothing to do with you guys, or?

No, at the close of this deal, all those decisions would be TerSera’s decisions.

Okay, alright. Fantastic. And then just moving back, or moving over to LX9211, you guys are going to read out some data at the beginning of the year, I believe, for the neuropathic pain indication; have you guys discussed powering, or what do you guys consider to be a clinically meaningful effect? What are you looking for? Thanks.

I am not sure if we are going to have data to call out at the beginning of next year, but Jeff, I will let you take that.

So we are expecting to have data in LX9211 toward the end of next year. We are looking at a pain scale and looking at improvement in the pain scale. It’s relatively well powered because it’s a large study. It’s a 300-patient study, roughly, with three arms, placebo and two doses. So, we did feel like it was important to do a substantially sized study given the indication.

Okay, alright. Thanks. And then just last one on partnership talks with in Type 2 ongoing still a focus? Thanks.

No, we are not having any ongoing conversations in type two. We are winding that program down and that if someone certainly has an interest, it will be ready for filing here in the United States and around the world, but Lexicon is not actively engaged in conversations around sota. Our activity will be actively focused on LX9211 and all the relative resources it takes to bring that one forward. However, in Europe, as I said before, in the type one space, you have an approved product, there is well I think we can have an opportunity to have active discussions as we get on the other side of the COVID-19 situation in Europe. So that’s what I would look more forward to. With that being said, this is very fluid, and so interested parties come in and out of the process, and should that happen, we will certainly let you know.

Okay, thanks. Thanks for taking the question.

[Operator Instructions] Your next question is from the line of Yigal Nochomovitz with Citi.

Hi. This is Samantha on for Yigal. Thanks very much for taking the questions. Congratulations on all the updates. First on LX9211, I just wanted to clarify the data that we are looking at, potentially, at the end of 2021, will that be consist of all 300 patients, or is that more of an interim look?

Dr. Tyle?

Samantha, Praveen Tyle here. It will be the final results for the Phase 2 DPNP study, which I talked about.

Got it. And then in the additional study in postherpetic pain, that one’s comment smaller; should we expect some more timeline by the year-end of 2021 for that study as well?

We are actually, like Lonnel was mentioning, we are going to start that study toward the end of this year. We are in discussions with a clinical research organization, a contract clinical research organization, to figure out what sites we are going to use and what is the enrollment rate. So, I think in the next quarterly investor call we should be able to tell you the timelines for completion of that study. But if I was to just guess, it will be very similar timeline as diabetic peripheral neuropathy pain study. So toward the end of next year, I would advise, okay.

Okay, that’s helpful. And then I just wanted to maybe get a little bit more background on how diabetics are treated when they develop DPN. In your Slides you have 60% to 70% of diabetics develop DPN. What’s the typical treatment plan there? If they present with pain, are physicians inclined to treat them, or is there a threshold for mild disease that maybe goes untreated given opioids? And how do you think that your drug would be deployed? Would it be across mild, moderate, severe, or do you think it could potentially be used mostly in the more severe cases?

So, I would just say that the mild patients are often not treated, and it is more moderate to severe patients that are treated. Part of that is to do with the nature of the treatments and part of it is because the mild patients can function better without treatment and basically tolerate the pain perhaps better than the treatment itself. Frequently, you see gabapentin and pregabalin being used. I mean, Lyrica, until its patent expired, was a very substantial drug, and it was anchored in neuropathic pain. And the challenge with those drugs is with gabapentin and pregabalin is both efficacy and not necessarily working for everyone, and then also having dose-limiting tolerability. For patients for whom those don’t work, some people are put on opioids, but obviously people are reluctant to use opioids appropriately reluctant to use opioids to treat a chronic condition like diabetic peripheral neuropathic pain. And so it’s a very challenging area. But I would say, for now, most of the treatment is in moderate to severe patients, less in the mild patient population.

And is it known what percentage of patients fall into that mild category?

It’s probably roughly a third of the patients are falling in that category. It changes over time.

Okay, got it. And just last one from me, with the TerSera deal and payment of the term loan, looking at your cash runway, is it fair to say that it’s sufficient to take you through Phase 2 development, or is that not true?

Yes, it is fair to say that we said that would be able to get the cash runway that we have should be able to get us to the Phase 2 results. We had said it’s a previously that the operating expenses that we could fund our operating expenses through the end of 2021, which is the timetable we are talking about here. This transaction is going to extend that runway, so we should be able to get through Phase 2 results in neuropathic pain with our current financial resources.

Great. Thanks very much for taking the questions.

Yes, I also want to add that it will get us through the we will manage our cash and get through the Phase 2 for LX9211, but also, we will have cash that we will be able to invest in the programs I talked about, 103x and bringing a candidate forward in terms of filing an IND and the work that we are doing around med-chem on another program for metabolism. So we are projected out, to Jeff’s point we can achieve all of the above and extend out through beyond 2021.

Thank you. That’s very helpful color.

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

Well, again, I want to thank everyone for joining us this morning on this call. I hope we have been able to articulate how we are thinking about the future as we restructure our company to start to take advantage of the pipeline that we have and advance our compounds from the clinic to patients. I am very pleased that XERMELO has found a very strong home in a company that has oncology experience that could invest in it as part of its overall portfolio and ensure that patients have an opportunity to experience XERMELO as we have set it up in a very successful way. I also want to thank all of the extraordinary people who have made XERMELO possible here at Lexicon. It’s bittersweet, certainly, when something like this happens, but at the end of the day it’s the right thing to do to ensure that XERMELO receives the kind of attention and investment that’s required for it to grow. And I just wanted to take the opportunity publicly and thank them for all of their tremendous efforts. We look forward to engaging with you to talk more about LX9211 and the rest of Lexicon’s pipeline in future calls. Thank you.

And this concludes today’s conference call. You may now disconnect.