Lexicon 2Q17 – Goal to submit SGLT-1/2 dual inhibitor sotagliflozin for type 1 diabetes to FDA and EMA in 1Q18; More on phase 3 inTandem trials, with CGM data expected 3Q17 – August 1, 2017

Lexicon provided its 2Q17 update this morning in a call led by CEO Mr. Lonnel Coats. Below, we include our top six highlights from the call, followed by a transcript of select Q&A.

Top Six Highlights

1. Lexicon has elected to exercise its co-promotion option with Sanofi for the commercialization of sotagliflozin, following regulatory approvals. If/when sotagliflozin is FDA-approved, Lexicon will play a significant role in bringing sotagliflozin for type 1 diabetes to market in the US. CEO Mr. Lonnel Coats shared that Lexicon will cover 40% of promotion costs, and that management is excited about bringing to market a first-in-class treatment – potentially the first-ever non-insulin type 1 diabetes therapy.

2. An NDA (New Drug Application) filing for sotagliflozin is expected in 1H18 and as early as 1Q18. Following a meeting with the FDA at the end of 2Q17, during which Lexicon presented primary endpoint efficacy and safety data and discussed plans with Sanofi and the agency for an early 2018 filing, management expressed confidence in the eventual approval of sotagliflozin for type 1 diabetes. Management referred to a similar meeting with the EMA, and shared plans to also file sotagliflozin in the EU in early 2018.

3. In 3Q17, management expects to have pooled CGM data on time-in-range for the CGM sub-studies within inTandem1 and inTandem2, and also anticipates inTandem2 secondary endpoints on weight and blood pressure in patients with hypertension. At ADA 2017, full results from inTandem1 and inTandem2 were presented, following topline data released in September 2016 and December 2016, respectively. Positive topline data from inTandem3, a larger (n=1,402) trial with no insulin optimization prior to randomization, was reported in June.

4. Lexicon’s press release noted that several phase 3 trials of sotagliflozin in type 2 diabetes are slated to begin in 2H17, led by Sanofi with some financial support from Lexicon. Based on Sanofi’s 2Q17 update yesterday, we expect the next new trial in type 2 may investigate the agent as an add-on to basal insulin therapy. The type 2 program currently includes trials of sotagliflozin as monotherapy (expected to complete January 2019), as an add-on to metformin (expected to complete March 2019), and as an add-on to sulfonylureas (expected to complete May 2019).

5. Lexicon management gave a brief update on two early-stage pipeline candidates. Phase 1 studies for oral SGLT-1 inhibitor candidate LX2761 are underway with data read outs anticipated in 2H17. Neuropathic pain candidate LX9211, which has a novel therapeutic target, completed IND-enabling studies last year, and a phase 1 trial is slated to start in 2H17. This follows previous timing of LX9211 entering phase 1 by end 0f 2017.

6. On the financial front, Lexicon’s R&D spending in 2Q17 totaled $27 million, down 39% sequentially from $44 million in 1Q17 and down 44% YOY from $48 million in 2Q16. This smaller R&D budget was largely attributed to decreases in external clinical development costs for sotagliflozin. In Q&A, management shared that the company expects to incur a large proportion – up to $100 million – of agreed upon R&D expenses for sotagliflozin in type 2 diabetes as the Sanofi-executed phase 3 program continues. Smaller costs for the type 2 diabetes program were incurred in 2016 and are expected in 2018. As of June 30, 2017, Lexicon had $231 million in cash and investments, down from $260 million at the end of 1Q17.

Top Six Highlights

1. Lexicon to Cover 40% of Sotagliflozin Promotion Costs in US

Lexicon has elected to exercise its co-promotion option with Sanofi for the commercialization of sotagliflozin, following regulatory approvals. If/when sotagliflozin is FDA-approved, Lexicon will play a significant role in bringing sotagliflozin for type 1 diabetes to market in the US. CEO Mr. Lonnel Coats shared that Lexicon will cover 40% of promotion costs, and that management is excited about bringing to market a first-in-class treatment – potentially the first-ever non-insulin type 1 diabetes therapy. Lexicon retained the exclusive option to co-promote sotagliflozin for type 1 diabetes in the US when the agent was licensed to Sanofi in November 2015. Sanofi will be responsible for all ex-US commercialization of the product for type 1 diabetes, and for all development/global commercialization of sotagliflozin for type 2 diabetes. In Lexicon’s 3Q15 update, management stated a clear intention to participate in the US commercialization option: “The best way to ensure that you commercialize a product well is to participate in it, particularly if you have royalties at risk.” It is our understanding that this decision to co-promote will not affect payments or royalties that Sanofi is contracted to pay to Lexicon.

2. Target 1Q18 for Sotagliflozin US Submission, Similar Timeline in EU

An NDA (New Drug Application) filing for sotagliflozin is expected in 1H18 and as early as 1Q18. Lexicon and Sanofi met with the FDA near the end of 2Q17 to present primary endpoint efficacy and safety data and to discuss plans with the agency for an early 2018 filing, working to ensure that all major pieces required for an FDA submission were in place. Unfortunately, CGM and inTandem3 data were not available in time for the meeting. Nevertheless, management expressed confidence in the eventual approval of sotagliflozin for type 1 diabetes, also referring to a similar meeting with the EMA, and sharing plans to file sotagliflozin in the EU in early 2018 as well (Sanofi will be responsible for all commercialization ex-US). Interestingly, prior to the start of phase 3 trials for sotagliflozin, the FDA conveyed a preference for a joint type 1/type 2 diabetes program and submission. Instead, Lexicon moved forward with a dedicated type 1 diabetes program before partnering with Sanofi, putting the type 2 diabetes program significantly behind type 1. It’s unclear if the FDA maintains its original view – based on Lexicon management’s confident tone, we don’t anticipate this will be a roadblock to approval.

3. inTandem CGM Data (!) Expected in 3Q17

In 3Q17, management expects to have pooled CGM data on time-in-range for the CGM sub-studies within inTandem1 and inTandem2, and also anticipates inTandem2 secondary endpoints on weight and blood pressure in patients with hypertension. We’re particularly excited to see time-in-range results from CGM. We saw data from the JDRF-sponsored phase 2 study (n=97 patients with type 1 age 18-30) at ADA 2017, showing a one-third increase in time-in-range (blood glucose between 70-180 mg/dl) for patients on sotagliflozin vs. placebo. The 12-week trial didn’t meet statistical significance for its primary endpoint of A1c reduction, but we still see distinct value to these CGM findings (especially as leaders in the field push for more consideration of outcomes beyond A1c, since people with diabetes care about more than this three-month average). Moreover, Lexicon management has stated in the past that time-in-range results may help distinguish sotagliflozin from current SGLT-2 inhibitors on the market, so this CGM data could potentially play into the company’s commercial strategy around sotagliflozin. Presumably, the JDRF trial results bode well for the CGM sub-studies of inTandem 1 and inTandem2 – but we’ll have to wait and see. Also in 3Q17, management expects to have inTandem2 secondary endpoint data on weight and blood pressure in patients with hypertension. We look forward to seeing how sotagliflozin’s impact on body weight compares to available SGLT-2 inhibitors. We’ll also be curious to note how the blood pressure-lowering effects seen in phase 2 trials play out in a larger phase 3 study population. Additionally, some new incremental data on sotagliflozin will be presented at EASD 2017 in Lisbon.

• At ADA 2017, full results from inTandem1 and inTandem2 were presented, following topline data released in September 2016 and December 2016, respectively. inTandem1 showed that an impressive 44% of participants randomized to 400 mg sotagliflozin achieved A1c <7% with no DKA or severe hypoglycemia. Positive topline data from inTandem3, a larger (n=1,402) trial with no insulin optimization prior to randomization, was reported in June – these results are particularly important, as they reveal that sotagliflozin’s glycemic benefits are maintained without insulin optimization (this was an element of trial design for both inTandem1 and inTandem2), in conditions that better mimic real-world diabetes care. We’re also been pleased by the inclusion of patient-reported outcomes in the inTandem clinical program. In inTandem1, the 400 mg dose of sotagliflozin was associated with significant benefit for all seven secondary endpoints, including body weight, blood pressure, net benefit, bolus insulin use, fasting plasma glucose, Diabetes Treatment Satisfaction Questionnaire Status score, and Diabetes Distress Screening Scale score. In fact, outcomes beyond A1c were continually emphasized throughout Lexicon’s 2Q17 call, and the company seems committed to understanding how sotagliflozin might improve the patient experience apart from lowering A1c. Management acknowledged safety concerns surrounding the use of SGLT-1 and SGLT-2 inhibitors in patients with type 1 diabetes, namely DKA risk (and euglycemic DKA risk, in particular, when the absence of severe hyperglycemia makes it difficult to identify and treat the complication). We recently heard the esteemed Dr. John Buse speak on this topic at Keystone 2017: In the past, DKA risk has hindered the development of SGLT-2 inhibitors for a type 1 diabetes indication, and the dual inhibitor strategy is meant to mitigate this risk. Lexicon management underscored the need for strong education and proactive ketone monitoring for type 1 patients starting on an SGLT-2 inhibitor or an SGLT-1/2 dual inhibitor, and we’d love to see Lexicon/Sanofi lead an effort to spread awareness of this risk management tactic among patients/providers. Importantly, despite the higher rates of DKA in sotagliflozin arms vs. placebo arms of inTandem clinical trials, there was a “very low rate of discontinuation” from these studies, and management emphasized that most patients who experienced DKA opted to resume treatment. Management explained that SGLT-1 inhibition, which targets the gut (in contrast to SGLT-2 inhibition, which targets the kidneys) will provide meaningful results by preventing spikes in postprandial blood glucose, leading to natural mealtime GLP-1 activation and moderating urinary glucose excretion, all of which may help prevent DKA.

• Both Lilly/BI and AZ have ongoing phase 3 programs for their SGLT-2 inhibitor products in type 1 diabetes. Lilly/BI’s EASE-2 and EASE-3 trials for Jardiance (empagliflozin) are expected to complete in October 2017 and September 2017, respectively. AZ’s DEPICT 1 and DEPICT 2 for Farxiga (dapagliflozin) are scheduled to complete in August 2017 and April 2018, respectively – in very exciting news, AZ management shared on the company’s 2Q17 earnings call that 24-week results from DEPICT 1 will be presented at EASD 2017 (the first phase 3 read out for an SGLT-2 inhibitor in type 1). We’re incredibly eager to see the data, and we are so hopeful that dapagliflozin (and eventually empagliflozin) demonstrates clinically-meaningful efficacy alongside a manageable safety/tolerability profile among participants with type 1 diabetes. That said, it’s important to recognize the multiple investment opportunities for SGLT-2 inhibitor products (type 2 diabetes, type 1 diabetes, chronic heart failure, chronic kidney disease, etc.) There’s a distinct possibility that a type 1 indication may take the backburner for a heart failure indication, given that both Lilly/BI and AZ have also initiated studies of their SGLT-2 agents in people with chronic heart failure. This all goes to show that sotagliflozin is filling an unmet need for adjunct therapy in type 1 diabetes, and we’re so happy to note unwavering commitment and enthusiasm from Lexicon management.

4. New Studies for Sotagliflozin in Type 2 Planned for 2H17

Lexicon’s press release noted that several remaining phase 3 trials of sotagliflozin in type 2 diabetes are slated to begin in 2H17, and the company’s presentation slides mentioned that enrollment is ongoing for already-initiated phase 3 studies. The sotagliflozin in type 2 diabetes program is led by Sanofi with some financial support from Lexicon. Based on Sanofi’s 2Q17 update yesterday, we expect the next new trial in type 2 may investigate the agent as an add-on to basal insulin therapy. Previously, Sanofi management has described how the phase 3 program is designed to demonstrate a potential benefit for sotagliflozin in three specific use cases: (i) as a monotherapy; (ii) as an add-on to oral diabetes medications; and (iii) as an add-on to basal insulin. Currently listed on ClinicalTrials.gov are studies of sotagliflozin as monotherapy (expected to complete January 2019), as an add-on to metformin (expected to complete March 2019), and as an add-on to sulfonylureas (expected to complete May 2019). Moreover, the type 2 development program will attempt to differentiate sotagliflozin in two key ways: (i) greater A1c- and blood pressure-lowering efficacy vs. Lilly/BI’s SGLT-2 inhibitor Jardiance (which is indicated for the reduction of CV death), and (ii) efficacy in renal-impaired patients. As such, the extensive phase 3 program makes sense. Even more ambitiously, Sanofi management implied in 4Q16 that the company intends to conduct a pre-approval CVOT for sotagliflozin designed to demonstrate superiority.

5. Early-Stage Pipeline Updates: First Phase 1 Readout Expected in 2H17

Lexicon management gave a brief update on two early-stage pipeline candidates. Phase 1 studies for oral SGLT-1 inhibitor candidate LX2761 are underway with data read outs anticipated in 2H17. Sanofi currently holds the right to first negotiation for future development of LX2761, and Lexicon management has expressed enthusiasm in the past about adding this candidate to the existing partnership between the two companies. Neuropathic pain candidate LX9211 completed IND-enabling studies last year, and a phase 1 trial is slated to start in 2H17. This follows previous timing of LX9211 entering phase 1 by end 0f 2017. LX9211 is an oral AAK1 kinase inhibitor with the potential to treat diabetic neuropathy (and other forms of neuropathic pain). Since November 2016, Lexicon has held the exclusive research, development, and commercialization rights to LX9211. The agent was discovered in collaboration with BMS. The latter company declined to move forward with the candidate, reverting the rights back to Lexicon in exchange for developmental and regulatory milestone payments. Considering the challenges to phase 2 and phase 3 diabetic neuropathy trials – long duration of data collection, high monetary cost – it seems likely that Lexicon will eventually seek a new clinical development partner for LX9211. All else aside, it’s great to see Lexicon tackling diabetic neuropathy, a condition that is likely more common than we think.

6. R&D Spending Down 44% YOY as Sotagliflozin Development Costs Fall-off

On the financial front, Lexicon’s R&D spending in 2Q17 totaled $27 million, down 39% sequentially from $44 million in 1Q17 and down 44% YOY from $48 million in 2Q16. This smaller R&D budget was largely attributed to decreases in external clinical development costs for sotagliflozin. In Q&A, management shared that the company expects to incur a large proportion – up to $100 million – of agreed upon R&D expenses for sotagliflozin in type 2 diabetes as the Sanofi-executed phase 3 program continues. Lower costs for the type 2 diabetes program were incurred in 2016 and are expected in 2018. As of June 30, 2017, Lexicon had $231 million in cash and investments, down from $260 million at the end of 1Q17.

Select Questions and Answers

Q: Was there a cash outflow for the sotagliflozin opt-in?

A: There is no opt-in payment either way, from us to Sanofi or vice versa, associated with the access of our co-promotion option. Just to remind you, we have the ability to co-promote in the US and have a leadership role in the marketing and sales of sotagliflozin in the type 1 diabetes setting, in collaboration with Sanofi. That co-promotion effort, which is focused on specialists, is something that we fund 40% of and Sanofi funds 60% of. So there will be a cost incurred with that. They tend to be closer to launch, although we have included that in terms of our planning from the very beginning since our intention was always to exercise this option.

Q: Just from a timing of the filing standpoint, what's the last piece of clinical data you want to have before you put the filing in, or before Sanofi does? Is it the 52-week follow up from inTandem3? Is this kind of what we're waiting for?

A: That would be the completion. The CGM data and any other data we call out from there is really gravy, if you will, but we have most of everything we need to file the compound. We'll have 52-week data for inTandem2 here soon, and that will complete everything needed for both our companies to get ready for the submission.

Q: We get a lot of questions from investors trying to understand time in range and putting that data point, that you'll have, in context. Can you help us with what we should think about with that data from a regulatory standpoint, as well as ultimately from a commercial standpoint? Can you help us understand what would be clinically meaningful, but recognizing that regulators may have kind of a different threshold range? That would be helpful.

A: The time in range is an emerging issue from a regulatory perspective. I think that there is becoming a greater appreciation of its importance, but it’s not something that we were encouraged to have as one of the primary endpoints in our study, because it's not a validated, FDA-accepted endpoint. We felt that it is important to incorporate it in our study though because it is very important to people with type 1 diabetes. What we’ve seen consistently across the studies that we've conducted in type 1 diabetes is that there is an improvement in time in range. I think from a patient perspective, having more time in range – if it's an hour or two hours or three hours – is something that's quite meaningful. We’ve seen results like that in our studies where we've seen pretty significant increases in time in range. It’s not really a regulatory endpoint, but it is something that I think commercially, and for patients, is very important. I think we think that it is very important to have that benefit for patients. We’re able to call out for practicing physicians how well this drug behaves relative to secondary measures that are important to patients. Things like weight reduction, blood pressure, or hypertensive things – these are very important measures for patients. Therefore, we took the opportunity to put it into our trial and we emphasized it because we are very confident that sotagliflozin can perform well on these measures, and it has. We don't expect anything different than that.

Q: On to type 2, obviously you can contribute up to $100 million. Can you give any commentary on what percent of that would be expected to be deployed in the second half of the year this year?

A: In our R&D expense guidance for the year, it is incorporated in all of the type 2 expenses. We incurred some of that cost last year in 2016, and we will incur the largest part of that cost during this year. We've already incurred a pretty good amount of it in the first and second quarters. It's going to be a little bit heavier in the third and fourth quarter, and then we will carry over some additional cost into 2018. We expect to incur the bulk of that cost within 2017 and it is included within our 2017 guidance.

Q: So that I understand the dynamics of the co-promote – I guess you talked about the share of commercialization cost being 40/60 between yourself and Sanofi. Is this a 50/50 profit share now that you've exercised the co-promote? Are you still tied to a royalty rate?

A: Our compensation is the royalty and we will continue to get paid royalties as the way that we get compensated for this. But as you mentioned and as I mentioned previously, our participation in some of the cost is being covered by Sanofi.

Q: And the cost of goods is also net out of your royalty rate, is that correct?

A: No, this is straight royalty. It is not at cost and profit share in any way. We are bearing some of the cost of the commercial effort, but it's really focused on the cost of the co-promotion effort itself and doesn't encompass things beyond that such as cost of sales. It’s very important because, as we certainly have disclosed, the top end of our royalty rate in US for type 1 diabetes is 40%. To ensure we get to that 40%, we need to get there quickly. And the best way to get there quickly is by participating in the process. And I think it's a very good agreement that Sanofi pay 60% of our participation in that process.

Q: And then just the final question on type 2. This will be kind of unique in terms of cardiovascular outcome studies in the sense that this will be the first trial that becomes initiated after you've had a number of drugs showing cardiovascular benefits, both from this SGLT-2 class and most recently liraglutide. How do you incorporate those positive data points into the design of a CVOT study?

A: That’s really up to Sanofi to answer, and I would tell you to just pay close attention to what they've been putting up on clinicaltrials.gov. I do believe Sanofi is investing to win. This will be a very important program to them and we would expect them to speak more about what they're doing as we get more into the second half.

Q: On the business development front, you have a really good foundation. Is now the time to be looking at other assets and if so, what would fit that? Or are you more focused on look we're executing a launch with give that a pause and do that maybe in 2018, 2019? Thank you.

A: Right now, our focus is really, really on executing well on the launch of Xermelo, and getting the phase 3 program done and handed over to Sanofi for regulatory filing, and participating with them certainly on the type 2 program. But we also have some early stage work we're focused on with LX9211 for neuropathic pain and advancing that, along with LX2761 and advancing that through clinic. So at this moment our real focus is on the execution of what we have in hand.

Q: Good morning. Thank you so much for all of the work that you're doing on the SGLT-1/2. I was wondering if you could talk a little bit from a commercial perspective. Once this is hopefully out, how can you be working with doctors and other healthcare providers to support the way that they work with patients? Right now, the focus is on lowering our blood glucose numbers, and it's a completely different thing to also think about lowering cardiovascular risk.

A: Yes, I think that's a very good question. We have a lot of work to do to get ready commercially. It’s one of the reasons we opted in with our partner, Sanofi, because now we have publicly stated officially between the two companies our intention to file both in the US and EU in the first half of next year. We then start getting ready for all of our commercial preparation that also includes our medical teams. We’ll come together and start to work on how we begin to engage with key opinion leaders in the community, how do we tell the story, how do we educate them properly on the use of adding in an oral into the marketplace? All of that work is going to be forthcoming. One of the most important things for us is that we've included the patient voice into this process. And so how do we activate patients voice as we go out into the community with KOL’s to get them to see is A1C is important, but it's also the other measures I talked about earlier, beyond A1c, that’s also important for physicians to consider when they're going to be prescribing oral diabetic agents. We have a lot of work to do with our partners. I absolutely agree with you that we have to transform some of the thinking early on in the process. And I have every confidence that, between the two companies, we will be able to do that in short order. Thank you very much for your question.

-- by Ann Carracher, Payal Marathe, and Kelly Close