Mar 6, 2008
Executives
Bobbie Faulkner - Manager of Investor and Public Relations Arthur Sands - President and CEO Phil Brown - SVP of Clinical Development Julia Gregory - EVP and CFO
Analysts
Sharon Seiler - Punk, Ziegel & Company Edward Tenthoff - Piper Jaffray Jason Kantor - RBC Capital Markets Dave - Morgan Stanley
Operator
Welcome to the Lexicon Pharmaceuticals Fourth Quarter 2007 and Year-end 2007 Conference Call. At this time, all participants are in a listen-only mode.
There will be a question-and-answer session to follow. Please be advised that this call is being taped at Lexicon’s request.
At this time, I would like to introduce your host for today’s call, Bobbie Faulkner, Manager of Investor and Public Relations. Please go ahead Ms.
Faulkner.
Bobbie Faulkner
Good afternoon and welcome to the Lexicon Pharmaceuticals Fourth Quarter 2007 and year-end 2007 conference call. I am Bobbie Faulkner and with me today are Dr.
Arthur Sands, Lexicon's President and Chief Executive Officer; Dr. Philip Brown, Lexicon's Senior Vice President of Clinical Development; and Julia Gregory, Lexicon's Executive Vice President and Chief Financial Officer.
We expect you have seen a copy of our earnings press release that was distributed this afternoon. During this call, we will review the information provided in the release, then use the remainder of our time to answer your questions.
The call will begin with Dr. Sands, who will discuss our key accomplishments for 2007.
Dr. Brown will then discuss the status of our drug development program, and Ms.
Gregory will review our financial results for the fourth quarter and full year of 2007, and discuss our financial guidance for 2008. We will then open the call to your questions.
For those who wish to view the slides to which we will refer, please access the Lexicon website at www.lexpharma.com. You will see a link on the homepage under today’s webcast.
Before we begin, I would like to state that we will be making forward-looking statements, including statements relating to, without limitation, Lexicon's research and development of LX6171, LX1031, LX1032, LX2931, and LX4211. This call will also contain forward-looking statements relating to Lexicon's growth and future operating results, financing arrangements, cash and investments, discovery and development of products, strategic alliances and intellectual property.
Various risks may cause Lexicon's actual results to differ materially from those expressed or implied in such forward-looking statements, including uncertainties related to our ability to enter into additional collaborations, alliances and license agreements, the success and productivity of our drug discovery efforts, the timing and results of preclinical studies and clinical trials of our drug candidates, our ability to obtain patent protection for our discoveries, limitations imposed by patents owned or controlled by third parties, our dependence upon strategic alliances and the requirements of substantial funding to conduct our research and development 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 will now turn the call over to Dr. Sands.
Arthur Sands
Thank you very much Bobbie and I would like to thank everyone for joining us this afternoon. 2007 was truly a defining year for Lexicon and we're happy to be reviewing it with you today.
I'd like to start off with just a few items by way of Lexicon's overall strategy and the advancement of our pipeline. So, for those of you who can see the slides, the first slide pictures are 10TO10 pipeline.
And that of course is a program that we launched only at the beginning of 2007, and we already have several drug candidates that have proceeded in that program into human clinical trials. Now, during this call, Dr.
Brown will review just five of these most advanced programs in the 10TO10 program. But let me just give you a few highlights.
LX6171 for cognitive disorders is our most advanced program which moved into Phase 2 clinical studies in 2007 and is proceeding. LX1031 for irritable bowel syndrome is on track to complete the Phase 1 studies by mid-year.
At the end of the year, we filed two new INDs for two new drug candidates. The first, LX1032 for carcinoid syndrome, which is in Phase 1 studies currently, and the second, LX2931 for rheumatoid arthritis, which is also now in Phase 1 studies.
In addition, in 2007, we selected a new drug candidate for diabetes, LX4211, and that candidate is currently in IND-enabling studies. If we turn to the next slide which is entitled, Building The Next Generation Pharmaceutical Company, I would like to hit some of the high points of our strategy, as we implement the 10TO10 program, and we bring forward these drug development programs.
First of all, we benefit from the discovery engine that has given us a very broad and diverse clinical pipeline as you can see touching several therapeutic areas. And this program and all of these drugs have resulted from our internal target discovery engine, the Genome5000 program, in which we have identified already over a 100 gene knockout-validated targets.
Each of the compounds under development that we will be discussing today was also developed by our own internal medicinal chemistry laboratories in the case of our small molecule pipeline and our biotherapeutics discovery groups in the case of our antibody pipeline. In 2007, in addition to advancing this pipeline, we've raised a significant amount of capital through two strategic financings, so a total of $265 million dedicated to our drug development and drug discovery engine.
And that was $205 million through our Invus investment and $60 million through our Symphony Capital financing focused on our three lead programs. In addition in 2007 we redirected resources from some of our early stage genetics research engine towards the development engine, and we've expanded our high performing clinical development team, and we'll be detailing some of the key recruits we've made in other areas.
Our strategy to build the next generation pharmaceutical company is focused on the developments for breakthrough treatments for human disease. As you know our strategy encompasses, addressing mechanisms and those drug targets which are not currently addressed by products on the market today.
All other mechanisms of action that we're advancing through clinical development again we've identified using our powerful gene knockout technology. Within our business strategy, we seek to reduce risk of drug discovery and development by having a very deep and broad portfolio.
This we believe increases the likelihood of our eventual success in moving these drugs towards commercialization. In addition to our internal programs, we've also formed very strong alliances that accelerate the development and commercialization of certain other drugs candidates, which are also a product of our discovery engine.
And here I am referring to our neuroscience alliance with Bristol-Myers Squibb, our Genentech alliance, and our Organon for antibody therapeutics. Overall we’ve made truly great progress in 2007 on several fronts.
And now to give you greater detail on the clinical front, I'd like to turn the call over to Phil Brown to review the drug development programs.
Phil Brown
Hey thanks very much Arthur. Before I actually start giving you an update on the clinical programs, I'd like to just touch on some key additions that we've made to the clinical staff recently.
First Dr. Joel Fryman, who is a Board Certified Internist, joined us after extensive experience with the FDA.
He has 12 years experience with the FDA, serving in both a role of an Epidemiology branch chief, as well as a medical reviewer in the Neuropharm division. He is a critical hire for us, as he will serve to establish drug safety as a service within Lexicon, as well as oversee the LX6171 program.
We’ve also added another physician, Dr. Chris Pappas, and Dr.
Papas is a Board Certified Hepatologist and Gastroenterologists. He has extensive experience in liver transplant and antiviral therapy.
In addition to his extensive clinical experience, he has drug development expertise coming to us from having developed an antiviral therapy in Hepatitis C. So, he'll add significant depth to our development team and be specifically responsible for the 103 and the 293 programs.
So now I'd like to discuss our lead development programs. LX6171 is our program directed towards cognitive disorders.
This target is a membrane protein that's associated with glutamatergic pathways and expressed exclusively in the CNS at presynaptic terminals. The target of 6171 was of course identified through the Genome5000 program, and the small molecule that inhibits this gene target was developed by our medicinal chemistry division.
We are currently engaged in Phase 2 activities, as Arthur mentioned. We've successfully completed the initial PK assessment in elderly subjects with our new suspension formulation, and we've initiated dosing in February of this year in subjects with age associated memory impairment.
The study design of this particular program is two dose levels, over a four week exposure period, and subjects are randomized in a double-blind period, double-blind randomized fashion. Overall, the study is expected to enroll 120 subjects.
We are evaluating safety, pharmacokinetics, tolerability of the compound, and of course effects on cognition as well. The solid oral dose form is under active development at present, and we will be presenting a poster at the American Academy of Neurology next month in Chicago on this particular program.
LX1031 is our program directed towards irritable bowel syndrome. The target of 1031 is tryptophan hydroxylase, which is the rate-limiting enzyme in the synthesis of serotonin.
TPH was identified again through the Genome5000 program, when the small molecule inhibitor, LX1031 was discovered and developed by our medicinal chemistry team. The serotonin pathways in the gastrointestinal tract have been associated with the symptoms of IBS and as well as the treatment.
1031 is an interesting compound and that it's locally acting. We don’t get high degrees of systemic exposure to the compound which speaks to the safety of the compound.
We completed our initial human studies last year and today, we've had 79 exposures in normal healthy volunteers. These, to-date, the compound has been extremely well tolerated.
Single doses from 250 mg up to 2,000 mg and then we followed that study with a 14 day multiple dose tolerance study again starting at a 250 mg daily dose and escalating again up to a 2000 mg daily dose which was given in a divided fashion, 500 mgs four times daily. Adverse events were infrequent and low at all dose levels and the compounds behaving in a very predictable fashion pharmacokinetically again meaning we're not getting high degrees of systemic exposure and this we believe is contributing to the overall safety profile of the compound.
We're preparing for an additional dose ranging study with this compound in order to determine the maximum tolerated dose. And the study design under consideration at present is a 14 day dosing period starting with a 250 mg dose given over four times daily up to a 1000 mg dose given four times daily, again, safety tolerability being the primary basis for this study as well as assessing the pharmacokinetics of the compound.
We're anticipating completing this study in mid-year. LX1032 is our compound directed towards carcinoid syndrome, carcinoid syndrome results from metastasis of serotonin secreting tumors primarily to the liver and this results in severe diarrhea, abdominal cramping and other GI symptomatology.
LX1032 is an oral small molecule antagonist that reduces tryptophan hydroxylase that reduces serotonin production peripheral to the central nervous system. The target of 1032 again was identified through the Genome5000 program and the compound LX1032 was developed by our medicinal chemistry team.
LX1032 has distinct properties from LX1031 in that it was specifically designed in order to give us adequate systemic exposure in order to influence these tumor cells that are secreting massive amounts of serotonin. We initiated dosing in normal healthy volunteers in February of this year and this is a very standard study design, single ascending dose tolerance study in a double-blind, randomized fashion in normal volunteers, primarily the goal is to evaluate the safety, tolerability and the PK of the compound.
We're anticipating completing this study mid-year and pending the results from this study we're currently planning on moving the compound into patients with metastatic carcinoid tumors that are experiencing GI symptoms as a basis for our multiple dose tolerance study. LX2931 is a new drug candidate that we brought for autoimmune indications such as rheumatoid arthritis.
The target of LX2931 is S1P lyase, which in an enzyme responsible for the breakdown of an important immune system signaling molecule called sphingosine 1-phosphate. LX2931 increases lymphoy S1P levels which cause lymphocytes to migrate from the peripheral circulation back to the lymphocyte organ and this regulates -- does regulating the overall inflammatory response that patients were experiencing.
The target of 2931 was identified through the Genome5000 program and our small molecule inhibitor was again developed by the medicinal chemistry team at Lexicon. Dosing with this compound was initiated in normal volunteers in December of last year.
The standard study design double-blind randomized placebo controlled, single ascending dose tolerance study in normal volunteers, primary goal again being safety tolerability and pharmacokinetics but in addition to that we are able to evaluate lymphocyte's specifically T and B cells as markers of a pharmacodynamic effect of the compound. We are anticipating completing this study in mid-year and pending results from this study we’re currently planning to conduct our multiple dose tolerance study in normal healthy volunteers.
As Arthur mentioned we are actively pursuing LX4211, which is a new drug candidate for diabetes. The target of LX4211 was selected from the Genome5000 program and the small molecule inhibitor again developed by the medicinal chemistry team of Lexicon.
The target of 4211 is the renal sodium-glucose transporter 2 or SGLT2, which is important regulating glucose excretion. We have noted reduced blood glucose in a number of pre-clinical models of Type 2 diabetes and are actively engaged in IND-enabling activities at present, and anticipation of regulator filing by the end of this year.
So in summary, 2007 was a very productive year for us. We have initiated Phase II studies for LX6171 in age-associated memory impairment.
We are poised to initiate an additional Phase Ib study with LX1031. We have initiated Phase I trials with dosing for both 2931, our compound directed source autoimmune condition such as rheumatoid arthritis and for LX1032 our compound directed towards Carcinoid Syndrome.
In addition, we are advancing LX4211 into formal pre-clinical development, in anticipation of a regulatory filing. We are aggressively expanding the clinical development team to support the number of programs including the two key physician hires that I have outlined for you at the start of this presentation.
I remain very enthusiastic about the pipeline and the number of activities we have going on. I'll now turn the call over to Julia.
Julia Gregory
Thank you, Phil. We achieved several financial goals in 2007.
We effectively managed our operating expenses through cost control measures. Overall total operating expenses decreased 2% to $125 million from $128 million.
As you recall at the beginning of 2007, I had announced that it was our goal to contain total operating costs in 2007 and fund the growth of our clinical development in 2007 from reallocation of resources from genetics resources. With development expenses doubling and total operating expenses decreasing you can see we achieved this goal.
Secondly, we built a strong financial foundation for the company ending the year with $258.8 million in cash and investments including $36.7 million from Symphony Icon, our product development collaboration with Symphony Capital Partners and its co-investors. Third, we structured a multiple year strategic investment plan with Invus and possible future financings with Lexicon stockholders, including Invus.
We issued a press release this afternoon detailing our fourth quarter and 2007 year-end financial results, which you many find on our website if you have not already reviewed it. Lexicon’s revenues for the three months ended December 31, 2007 were $13.8 million, a decrease of 14% from $16.1 million for the corresponding period in 2006.
The decrease is primarily attributable to reduced revenue under Lexicon’s neuroscience alliance with Bristol-Myers Squibb resulting from the conclusion of the revenue recognition period for the upfront payment Lexicon received under the alliance and the biotherapeutics alliance with N.V. Organon offset in part by increased revenue recognized for the completion of the knockout mouse, embryonic stem cell library for the Texas Institute for Genomic Medicine.
For the year ended December 31, 2007 revenues decreased 31% to $50.1 million from $72.8 million in 2006, reflecting our transition from drug discovery alliances to drug development activities. Research and development expenses for the 2007 fourth quarter were $26.9 million, an increase of 5% from $25.6 million for the corresponding period in 2006.
Higher external preclinical and clinical costs related to the advancement of Lexicon's drug development programs were largely offset by decreased research expenses as a result of the company's early 2007 realignment, reallocating resources from genetics research efforts to drug development. For the year, research and development expenses decreased 2%, to $104.3 million from $106.7 million in 2006.
External development expenses more than doubled in 2007 over 2006, reflecting the change in composition of our research and development expenses as we continue to expand our preclinical and clinical team and advance our drug candidates in human clinical trials. General and administrative expenses for the 2007 fourth quarter were $5.3 million, an increase of 6% from $5.1 million for the corresponding period in 2006.
For the year, general and administrative expenses decreased 3%, to $20.7 million from $21.3 million for the corresponding period in 2006. Lexicon's net loss for the three months ended December 31, 2007 was $12.2 million, or $0.09 per share, compared to a net loss of $13.8 million, or $0.19 per share in the corresponding period in 2006.
Net loss for 2007 was $58.8 million, or $0.59 per share, compared to a net loss of $54.3 million, or $0.81 per share, in 2006. The net loss for the three months and year ended December 31, 2007 included a benefit of $4.3 million and $12.4 million, respectively, attributable to the loss from non-controlling interest in Symphony Icon, resulting from Lexicon’s financial consolidation of Symphony Icon.
For the three months and year-ended December 31, 2007, net loss included non-cash, stock-based compensation expense of $3.1 million and $7.9 million, respectively. Let me turn to our cash and investments.
As of December 31, 2007, Lexicon had $258.8 million in cash and investments, including $36.7 million in cash and investments held by Symphony Icon, as compared to $273.9 million as of September 30, 2007 and $80 million as of December 31, 2006. As this has been a matter of interest within the biotechnology and pharmaceutical industries, I wanted to briefly address our cash and investments in light of recent issues with auction rate securities.
Like many companies in our industry, we have historically maintained a portion of our investments in auction rate securities. In our case, it is a minority of our cash and investments such that, we would have more than a year of liquidity without having to tap into any of our investments in auction rate securities.
As of December 31, 2007, we had auction rate securities totaling $78 million. Our auction rate securities consist of bonds issued by municipal authorities established by state and local government.
As might be expected in the current market environments, many of the recent auctions of these securities have not been successful. Although, we have had several auctions succeed, and we have been notified that several of our bonds will be called and redeemed, a trend we expect to continue.
As of February 29, 2008, reduced by successful sales our auction rate securities balance was approximately $71 million. An additional $4.6 million have been called through redemption in March, $2 million of which were redeemed yesterday; another $2.5 million was sold today as these auctions cleared successfully.
These sales have reduced our total auction rate securities portfolio to approximately $67 million. Given our ability to satisfy our funding needs for more than a year without the need for these investments, we can wait as the market works through what appears to be at least for the securities in our portfolio short-term liquidity issue.
Now let’s turn to our forward financial guidance for 2008. Our contractual revenues from existing agreements for 2008 should be in the range of $29 million to $31 million, consisting primarily of contractual revenues from our alliances with Bristol-Myers Squibb, Organon and Genentech.
This range is slightly below our early January guidance of $32 million to $34 million for timing reasons. We completed our obligations under the awards from the Texas enterprise funds earlier than anticipated, resulting in a $2.7 million shift of revenues from 2008 to 2007.
As I had previously made you aware, while we are in conversation with potential pharmaceutical companies to enter into alliances or collaborations, we do not plan to include forecasted revenues from such arrangements into our guidance on a going-forward basis. Instead, we will update you as we enter into such alliances or agreements.
We believe our productive pipeline will provide Lexicon with attractive opportunities for alliances. Operating expenses for 2008 are projected to range from $145 million to $155 million.
The increase in spending is almost exclusively the result of a significant increase in external pre-clinical and clinical cost related to our drug development programs as we move multiple drug programs forward in human clinical trial. Non-cash expenses will be approximately $14 million of this total, including $6 million in stock-based compensation and $8 million in depreciation and amortization.
We will continue to manage our non-clinical expenses for cost cutting opportunities. Taking into account cash received under existing contractual relationships only, we expect our 2008 net cash used in operations to be in the range of $109 million to $119 million and our 2008 capital expenditures to be approximately $3 million to $4 million.
Thank you very much and now I'll turn the call back to Arthur.
Arthur Sands
Thanks Julia, as you may be formulating your questions; I'd like to just make a few summary comments. 2008 as we look forward promises to be a very exciting year for Lexicon.
The LX6171 studies as you heard the Phase 2 studies are ongoing in age-associated memory impairment and that trial is expected to conclude by year-end. LX1031 for IBS is scheduled to complete the multi dose Phase 1 studies in healthy volunteers in mid-year.
LX1032 for carcinoid syndrome is on track to complete the initial Phase 1 studies in healthy volunteers mid-year also with the potential to go into carcinoid syndrome patients later in the year. And LX2931 for rheumatoid arthritis in autoimmune conditions is on track to complete its initial Phase 1 studies in mid-year as well.
And in addition to all of that LX4211 for diabetes is currently proceeding through IND-enabling studies. So, now I will take any questions that you may have.
Operator
(Operator Instructions). And our first question comes from Sharon Seiler with Punk, Ziegel & Company.
Sharon Seiler - Punk, Ziegel & Company
Its Sharon Seiler, how are you? Two questions, one is what do you think will be the next IND after the diabetes compound?
And the second more strategic question, which is -- I know you've discussed in the past that probably proof of concept would be the ideal point to partner the programs that you are bringing forward yourself. But it seems to me that you must have more targets than you could hope to develop on your own.
What is the strategy for monetizing some of these other assets that you don't plan to take forward yourself?
Arthur Sands
Well, thanks Sharon, good question. The next IND after the diabetes compound, I'll tell you there are several contenders for that slot.
At this stage, I can't make a prediction as to which one it will be, but I can tell you that our glaucoma program LG710, which is on our 10to10 pipeline slide, continues to proceed and is quite promising. You may recall that the novel mechanism that blocks the outflow of aqueous humor from the eyes.
So it would be a new way to treat glaucoma and we're of course going after a locally acting agent there. So I'd say that that is definitely a contender.
Behind that we have several metabolism programs that are also proceeding. We have our advancing antibody programs which were, I'd say, put somewhere in a similar time zone and those are LG843, LG842.
Then there are several after that, but I think the two I named are definitely ones to keep your eyes on. With regard to your strategic question on partnering, we are -- really coming up on several potential POC's or proof of concepts with our compounds and I do think that those are the preferred sort of partnerships at this stage for the company's development and have the highest value.
Several of our programs demonstrates or can demonstrate proof of concept may do so, at least pharmacodynamically through some of the biomarkers that they modulate, and so in so far as those biomarkers read on disease mechanism we think that we'll have those opportunities. With respect to the other targets, we really would prefer to advance those targets now into drug development before considering target-based partnerships.
However, we do continue to have interest for such partnerships and I think it is rational for us to consider, perhaps other mechanisms of addressing other moieties that might address certain targets in our portfolio, where we are not addressing them with either small molecular antibodies, so these might be things that include RNAi or other kinds of external protein therapeutics that we could look at. But any target based deal we would do, would be very directed and proximal to drug discovery and development.
And again I think that’s where the highest value is.
Sharon Seiler -- Punk, Ziegel & Company
Okay. Thanks, and with respect to the second IND, would you anticipate that that will also be filed sometime this year?
Arthur Sands
It's hard to predict, and I also did mention that we have some interesting backup molecules that have different properties for some of our targets that are already in development and those could proceed. So I think at this point, I'd refrain from making a prediction of the timing of the second IND, but I feel very confident about the earlier stage pipelines that will give us those IND's when they come.
Sharon Seiler -- Punk, Ziegel & Company
Okay, thank you.
Arthur Sands
Thanks.
Operator
Moving on, we'll hear from Edward Tenthoff with Piper Jaffray.
Edward Tenthoff - Piper Jaffray
Great, thank you very much. Two questions, firstly, the ongoing 6171 trial, Phase 2, when should we be getting data from that -- cognitive data from that study?
Arthur Sands
Phil do you want to go ahead and talk about 6171?
Phil Brown
Sure, thanks Ed.
Edward Tenthoff - Piper Jaffray
Hey Phil.
Phil Brown
Hi, I appreciate the question. We're just in active accrual of this study at present and it's difficult to predict exact timing of that because we'll wait to see how the accrual goes but I would anticipate having those datas by the end of the year.
Edward Tenthoff - Piper Jaffray
Okay, great, and maybe a quick housekeeping one for Julia. What do you classify as the long-term debt currently?
Julia Gregory
That's our -- the long-term debt that we currently have is our mortgage on our building.
Edward Tenthoff - Piper Jaffray
And what's that amount sorry?
Julia Gregory
About $31 million – that’s total -- 31.
Edward Tenthoff - Piper Jaffray
Great, thank you.
Arthur Sands
Thanks Ted.
Operator
We have three more questions in the queue at this time. Moving on we'll hear from Jason Kantor, RBC Capital Markets.
Jason Kantor - RBC Capital Markets
Thank you. Could you tell us what exactly you're going to be presenting in terms of data at this AAN meeting coming up?
Arthur Sands
Phil, you will be at that meeting, I believe, go ahead.
Phil Brown
Right, thanks, Jason. I am very pleased with the acceptance to the fast tracks because it is the first time we will be able to describe the -- we are anticipating describing the target of 6171 as well as be able to review in much greater details some of the data that we have accrued to-date, both in humans as well as the pharmacologic rationale for this compound.
Jason Kantor - RBC Capital Markets
Okay. And in terms of these, on the Phase 1 trials in healthy volunteers, which of these studies do you think could provide the best view on potential efficacy because these are all in healthy volunteers but there are some biomarkers that you would be looking at.
Arthur Sands
Yeah. I will answer that, Jason.
I think that both, as you mentioned, both LX1031 and 1032 have biomarkers associated with them and that specifically would be urinary 5-HIAA, which is a metabolite of serotonin and of course serotonin itself can also be measured but, that has been taken as being an important biomarker for the mechanism. So I think mechanistically, that could be an important marker for us as it has been in all of our pre-clinical research.
Now, with regard to 2931, that biomarker is -- that we are utilizing at lymphocyte counts so it's very straightforward, preferable lymphocytes and that has been again directly related to modification of disease models in animals. So, that biomarker may be considered by some more proximal to the disease relevance that we are ultimately going after in terms of autoimmune disease.
So while both of them, certainly the biomarker are going to provide important guidance in Phase I, I would say LX2931, you might consider to be more of a direct read on since the cellular biomarker is a potential diseased state. Does that answer your question Jason?
Jason Kantor - RBC Capital Markets
Yeah. And I know you're not forecasting it in the actual revenue guidance, but would you anticipate signing a deal this year?
Arthur Sands
So again I think we're not going to be making such forecasts about new deals. What we'll say and have said is that we are in active discussions, and as we anticipate achieving important proofs of concept even at the biomarker level as we just discussed.
We consider those to be perhaps natural time clients for considering the right deal, if it's available.
Jason Kantor - RBC Capital Markets
Okay. And then in terms of the auction rate securities are you -- is there any plan to write down the value of these in anyway or are you just saying that you expect overtime, that you will get the value of those.
Julia Gregory
Well at the current time there is no requirement for us to write down or need for us to write down the auction rate securities, and where you constantly assess those and from an accounting point of view the fair value of the securities is a determinant of whether a write down will be required and would have to be deemed as more than a temporary decline in value or greater than temporary decline in value of those securities. They would have to be valued by a third party agency in order for such a write down to be taken.
And we don't anticipate today that any write downs would be taken and today we've not had any write downs associated with any of our investment.
Jason Kantor - RBC Capital Markets
Thank you.
Arthur Sands
Thank you, Jason.
Operator
Moving on, we'll hear from Sapna Srivastava with Morgan Stanley.
Dave - Morgan Stanley
Hi, it's actually Dave calling in for Sapna. Just two questions, the first is on 6171.
Does the formulation change that you did affect permeability through the blood brain barrier at all, and is there anyway to measure some PK or PD at the actual site of action?
Arthur Sands
Phil, go ahead on that one.
Phil Brown
Sure, obviously the formulation, our biggest concern is ensuring that we're getting adequate exposure to specific circulation of the compound. So the first part of the Phase 2 study was to ensure that we had a formulation that was giving us adequate exposure, consistent with what we had observed in our initial Phase 1 study.
So, I was very pleased that the formulation is providing excellent exposure with the compound in a very predictable fashion, which is mimicking on what we had observed in our Phase 1. So the formulation is doing its job, I don't think that it would have any effect at all on the compound's ability to cross the blood-brain barrier.
So, we're proceeding ahead and I’m very pleased with the formulations providing us an avenue to do that in a very positive fashion at present. With regard to the pharmacodynamic activity of the compound, I think that's a more challenging question for us.
We don't have as you know I think a standard biomarker to use in this particular setting, so we're relying more on the symptomatology of the adverse event profile to compound or the subjective reports of patients. In addition to these more objective measurements that we’ve deployed as end-points in the study to evaluate cognition as well as a variety of other domains, such as attention and vigilance and these types of measures.
So that's the purpose of the study, and we'll just have to wait for the results before we comment on that, I believe.
Dave - Morgan Stanley
Okay. And then just a question on 1031, you are doing your additional dose ranging and you looked at daily, twice-daily, four times a day.
Obviously four times a day is sort of the least convenient of those. What did you see that - was it just that you weren't giving levels at the lower frequencies or are those still an option, and is there a way to change the formulation to make it more likely that it could be a twice a day or once a day drug?
Arthur Sands
Phil, why don’t you keep going on this?
Phil Brown
Sure. So the reason we were to four times a day, as I am sure you are aware of the real purpose of Phase 1 is not only to understand pharmacokinetics of the compound but ideally to probe up to a maximum tolerated dose, which helps guide as you move into patient-based studies.
The interesting thing about the 1031 is, because we don't drive high degrees of systemic exposure, we have a very safe compound. So we have no evidence of intolerability even at these excesses of very high doses that we've been giving with the compound.
We were to a four times a day basis of dosing based on the pharmacokinetics of the compound. So what I wanted to do is to drive exposure as high as I could in order to probe for intolerability.
And as we've described that at 500 milligrams QID, we were seeing a very well tolerated compound at those dose levels. And as you may recall, at that dose levels also we're able to see about 30% reduction in urinary 5-HIAA over a 14 day period of time, 30% relative to baseline and those subjects randomized to the compound.
So, I believe that’s a very important finding on the biomarker, and the goal at this stage is to really push the dosing in order to fully explore the limits of tolerability of the compound. This will allow us to take the maximal dose forward, the maximum tolerated dose forward in the proof-of-concept study in irritable bowel syndrome.
With regard to the formulation aspect, clearly this is very early stage of development. We are hoping to and anticipating a much more sophisticated formulation evolving for this particular compound as we move it forward.
Arthur Sands
And if I could add a one thing to that Dave, I would say that predicting at this stage what frequency will be ideal for treating the condition of IBS I think is premature. I will say that my own thinking at this stage of the game though is that, this is clearly a locally acting GI drug and it may in fact be beneficial to administer this at meal time, and we've seen some evidence of enhanced exposure occurring because of food or food effect and it is logical to assume since symptomolgy might be related to food, that that might be an ideal time to administer and have dosing, but we don’t know that at this time.
Dave - Morgan Stanley
Okay. And so when you are going to drive this to 1000 QID, are you going to take that total dose and re-split it among different variations in your next trial, or are you just going to keep going with, your sort of max at 4 times a day for now?
Arthur Sands
Phil?
Phil Brown
Well, I think -- my view on this at present is, if we can dose or escalate up to a 1000 QID, that's probably as high as we would want to go. As how we deploy this into a proof-of-concept study, I think is yet to be determined because we don't have the results.
We are interested in the biomarker effect, we are interested in the tolerability, and we may or may not elect to go in at this QID dose regimen versus a TID or BID dose regimen as we move into IBS. So that's a little bit premature for me to be able to answer that until we get the results of the next study.
Dave - Morgan Stanley
Okay, thanks a lot.
Phil Brown
Thank you.
Operator
(Operator Instructions). We do have two more questions in the queue.
We now have a follow-up from Sharon Seiler with Punk Ziegel.
Sharon Seiler - Punk, Ziegel & Company
Yes, with respect to the data that you're presenting at the Neurology Conference, is that going to be or you may ask that is this going to be a poster or on oral presentation and do you anticipate having some sort of - any gestures that you did when the data were presented at the gastroenterology Conference?
Arthur Sands
That's going to be a poster Sharon and at this time, we don't anticipate having an event associated with it.
Sharon Seiler - Punk, Ziegel & Company
Okay, thank you.
Operator
And we do have one more question in the queue. This is a follow-up from Jason Kantor with RBC.
Jason Kantor - RBC Capital Markets
Hi, thanks for taking the follow-up. It's just a minor model question.
What was the other expense that you had of about $700,000?
Arthur Sands
Julia?
Julia Gregory
The other expense item that we have in this is about $750,000 for the three-year period is a net effect, that’s including some stock options, non-cash stock option expense in that line item Jason.
Jason Kantor - RBC Capital Markets
That's non-cash, non-housing expense that couldn't be put under research or --.
Julia Gregory
That’s right. And then, let me explain that a little bit, Jason.
It's a very small number as a net number, but let me explain that. In some of the, in November of 2007, we changed our software system for calculating forfeitures of stock options.
And in so doing had the catch up on a minor amount of stock option expense and so, it went in to that category.
Jason Kantor - RBC Capital Markets
Got you.
Operator
And do you have anything further?
Jason Kantor - RBC Capital Markets
That’s it. Thank you.
Operator
At this time we have no further questions. Thank you, Mr.
Sands, I'll turn it back over to you for any additional or closing remarks.
Arthur Sands
Well, I would like to thank everyone for participating. We are definitely hitting on all cylinders and we are looking forward to a very exciting 2008.
Our development team is performing at a very high level and supporting our growing clinical pipeline. We are very pleased with having completed a landmark financing in 2007 that supports, further supports our discovery and development efforts, and there is no question in our minds as we are watching the results flow forward.
We've established a very highly productive drug discovery engine, and it's fuelled by our unique insights into the human genome and the discoveries, and we plan to translate them into future treatments for human disease. So thank you all very much.
Operator
That does conclude today's call. Thank you for joining us, and have a great day.