UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
  (Mark
One)
  þ
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
  For
the Quarterly Period Ended June 30, 2009
  or
  q
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For
the Transition Period from _____________ to _____________
  Commission
File Number:  000-30111
  Lexicon
Pharmaceuticals, Inc.
 (Exact
Name of Registrant as Specified in its Charter)
  Delaware
              76-0474169(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              (I.R.S.
      Employer
                Identification
      Number)
 
 8800
Technology Forest Place
 The
Woodlands, Texas 77381
 (Address
of Principal Executive Offices and Zip Code)
 
 (281)
863-3000
 (Registrant’s
Telephone Number, Including Area Code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
  Yes
                    ü
                    
                    No
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
  Yes
                
                
                No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
accelerated filer    Accelerated
filer ü
Non-accelerated filer    Smaller
reporting company
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes
                
                
                No
                ü
  As of
August 4, 2009, 137,330,254 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.







Lexicon
Pharmaceuticals, Inc.
  Table of Contents
  PageFactors
      Affecting Forward-Looking StatementsPart I – Financial Information
              3Item
      1.
              Financial Statements
              3Consolidated Balance Sheets – June 30,
      2009 (unaudited) and December 31, 2008
              3Consolidated Statements of Operations
      (unaudited) – Three and Six Months Ended June 30, 2009 and
      2008
              4Consolidated Statements of Stockholders’
      Equity (unaudited) – Six Months Ended June 30, 2009 and
      2008
              5Consolidated Statements of Cash Flows
      (unaudited) – Six Months Ended June 30, 2009 and 2008
              6Notes to Consolidated Financial Statements
      (unaudited)
              7Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              18Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              27Item
      4.
              Controls and Procedures
              27Part II – Other Information
              28Item
      1A.
              Risk Factors
              28Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              30Item
      6.
              Exhibits
              31Signatures
              
              32
 
 The
Lexicon name and logo, LexVision® and
OmniBank® are
registered trademarks and Genome5000TM,
e-BiologyTM and
10TO10TM are
trademarks of Lexicon Pharmaceuticals, Inc.
  ——————
 
 Factors
Affecting Forward Looking Statements
  This
quarterly report on Form 10-Q contains forward-looking
statements.  These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including “anticipate,” “believe,” “can,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should”
or “will” or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under
“Part II, Item 1A. – Risk Factors,” that may cause our or our industry’s
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking
statements.
  Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are not under any duty to update any of the forward-looking
statements after the date of this quarterly report on Form 10-Q to conform these
statements to actual results, unless required by law.
  2
 Table of Contents
 Part I – Financial Information
  Item
      1.
              FinancialStatements
  Lexicon
Pharmaceuticals, Inc.
  ConsolidatedBalance Sheets
 (In
thousands, except par value)
  As
      of June 30,
                                    
                                    
                                    As
      of December 31,2009
                                    
                                    
                                    2008Assets
                                    
                                    (unaudited)Current
      assets:Cash and cash
      equivalents
                                    
                                    $
                                    49,166
                                    
                                    
                                    $
                                    85,873Short-term investments,
      including restricted investments of $430
                                    
                                    
                                    30,504
                                    
                                    
                                    
                                    629Short-term investments held by
      Symphony Icon, Inc.
                                    
                                    
                                    7,735
                                    
                                    
                                    
                                    16,610Accounts receivable, net of
      allowances of $35
                                    
                                    
                                    530
                                    
                                    
                                    
                                    568Prepaid expenses and other
      current assets
                                    
                                    
                                    8,017
                                    
                                    
                                    
                                    5,487Total current
      assets
                                    
                                    
                                    95,952
                                    
                                    
                                    
                                    109,167Long-term
      investments
                                    
                                    
                                    56,409
                                    
                                    
                                    
                                    55,686Property
      and equipment, net of accumulated depreciation and amortization of $73,271
      and $71,102, respectively
                                    
                                    
                                    61,526
                                    
                                    
                                    
                                    65,087Goodwill
                                    
                                    
                                    25,798
                                    
                                    
                                    
                                    25,798Other
      assets
                                    
                                    
                                    4,648
                                    
                                    
                                    
                                    5,770Total assets
                                    
                                    $
                                    244,333
                                    
                                    
                                    $
                                    261,508Liabilities
      and EquityCurrent
      liabilities:Accounts
    payable
                                    
                                    $
                                    3,210
                                    
                                    
                                    $
                                    7,926Accrued
      liabilities
                                    
                                    
                                    6,863
                                    
                                    
                                    
                                    6,615Current portion of deferred
      revenue
                                    
                                    
                                    1,274
                                    
                                    
                                    
                                    5,672Current portion of long-term
      debt
                                    
                                    
                                    1,004
                                    
                                    
                                    
                                    963Total current
      liabilities
                                    
                                    
                                    12,351
                                    
                                    
                                    
                                    21,176Deferred
      revenue, net of current portion
                                    
                                    
                                    14,212
                                    
                                    
                                    
                                    14,212Long-term
      debt
                                    
                                    
                                    65,970
                                    
                                    
                                    
                                    29,529Other
      long-term liabilities
                                    
                                    
                                    690
                                    
                                    
                                    
                                    764Total
    liabilities
                                    
                                    
                                    93,223
                                    
                                    
                                    
                                    65,681Commitments
      and contingenciesEquity:Lexicon Pharmaceuticals, Inc.
      stockholders’ equity:Preferred stock, $.01 par
      value; 5,000 shares authorized; no shares issued and
      outstanding
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Common stock, $.001 par value;
      300,000 shares authorized; 137,331 and 136,797 shares issued and
      outstanding, respectively
                                    
                                    
                                    137
                                    
                                    
                                    
                                    137Additional paid-in
      capital
                                    
                                    
                                    676,001
                                    
                                    
                                    
                                    672,838Accumulated
      deficit
                                    
                                    
                                    (529,028
                                    )
                                    
                                    
                                    (487,395
                                    )Accumulated other
      comprehensive loss
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    —Total Lexicon Pharmaceuticals,
      Inc. stockholders’ equity
                                    
                                    
                                    147,109
                                    
                                    
                                    
                                    185,580Noncontrolling interest in
      Symphony Icon, Inc.
                                    
                                    
                                    4,001
                                    
                                    
                                    
                                    10,247Total equity
                                    
                                    
                                    151,110
                                    
                                    
                                    
                                    195,827Total liabilities and
      equity
                                    
                                    $
                                    244,333
                                    
                                    
                                    $
                                    261,508
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  ConsolidatedStatements of Operations
 (In
thousands, except per share amounts)
 (Unaudited)
  
 Three
      Months Ended June 30,
                                      
                                      
                                      Six
      Months Ended June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Revenues:Collaborative
      research
                                      
                                      $
                                      2,787
                                      
                                      
                                      $
                                      7,953
                                      
                                      
                                      $
                                      6,392
                                      
                                      
                                      $
                                      15,587Subscription and license
      fees
                                      
                                      
                                      202
                                      
                                      
                                      
                                      1,613
                                      
                                      
                                      
                                      765
                                      
                                      
                                      
                                      2,872Total
      revenues
                                      
                                      
                                      2,989
                                      
                                      
                                      
                                      9,566
                                      
                                      
                                      
                                      7,157
                                      
                                      
                                      
                                      18,459Operating
      expenses:Research
      and development, including stock-based compensation of $766, $950, $1,595,
      and $2,077, respectively
                                      
                                      
                                      20,220
                                      
                                      
                                      
                                      30,075
                                      
                                      
                                      
                                      43,084
                                      
                                      
                                      
                                      57,524General
      and administrative, including stock-based compensation of $590, $633,
      $1,203, and $1,285, respectively
                                      
                                      
                                      5,551
                                      
                                      
                                      
                                      5,877
                                      
                                      
                                      
                                      10,425
                                      
                                      
                                      
                                      11,759Total operating
      expenses
                                      
                                      
                                      25,771
                                      
                                      
                                      
                                      35,952
                                      
                                      
                                      
                                      53,509
                                      
                                      
                                      
                                      69,283Loss
      from operations
                                      
                                      
                                      (22,782
                                      )
                                      
                                      
                                      (26,386
                                      )
                                      
                                      
                                      (46,352
                                      )
                                      
                                      
                                      (50,824
                                      )Gain
      on long-term investments, net
                                      
                                      
                                      306
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      823
                                      
                                      
                                      
                                      —Interest
      income
                                      
                                      
                                      239
                                      
                                      
                                      
                                      1,418
                                      
                                      
                                      
                                      566
                                      
                                      
                                      
                                      4,199Interest
      expense
                                      
                                      
                                      (729
                                      )
                                      
                                      
                                      (675
                                      )
                                      
                                      
                                      (1,395
                                      )
                                      
                                      
                                      (1,345
                                      )Other
      expense, net
                                      
                                      
                                      (576
                                      )
                                      
                                      
                                      (539
                                      )
                                      
                                      
                                      (1,521
                                      )
                                      
                                      
                                      (1,086
                                      )Consolidated
      net loss
                                      
                                      
                                      (23,542
                                      )
                                      
                                      
                                      (26,182
                                      )
                                      
                                      
                                      (47,879
                                      )
                                      
                                      
                                      (49,056
                                      )Less:
      Net loss attributable to noncontrolling interest in Symphony Icon,
      Inc.
                                      
                                      
                                      3,469
                                      
                                      
                                      
                                      6,148
                                      
                                      
                                      
                                      6,246
                                      
                                      
                                      
                                      11,072Net
      loss attributable to Lexicon Pharmaceuticals, Inc.
                                      
                                      $
                                      (20,073
                                      )
                                      
                                      $
                                      (20,034
                                      )
                                      
                                      $
                                      (41,633
                                      )
                                      
                                      $
                                      (37,984
                                      )Net
      loss attributable to Lexicon Pharmaceuticals, Inc. per common share, basic
      and diluted
                                      
                                      $
                                      (0.15
                                      )
                                      
                                      $
                                      (0.15
                                      )
                                      
                                      $
                                      (0.30
                                      )
                                      
                                      $
                                      (0.28
                                      )Shares
      used in computing net loss attributable to Lexicon Pharmaceuticals, Inc.
      per common share, basic and diluted
                                      
                                      
                                      137,331
                                      
                                      
                                      
                                      136,796
                                      
                                      
                                      
                                      137,203
                                      
                                      
                                      
                                      136,795
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  ConsolidatedStatements of Stockholders’
Equity
 (In
thousands)
 (Unaudited)
 
 
 Lexicon
      Pharmaceuticals, Inc. StockholdersAdditional
      Paid-In Capital
                                    
                                    
                                    Accumulated
      Deficit
                                    
                                    
                                    Accumulated
      Other Comprehensive Loss
                                    
                                    
                                    Total
                                    
                                    
                                    Noncontrolling
      Interest
                                    
                                    
                                    Total
      EquityCommon
      StockShares
                                    
                                    
                                    Par
      ValueBalance
      at December 31, 2007
                                    
                                    
                                    136,796
                                    
                                    
                                    $
                                    137
                                    
                                    
                                    $
                                    666,702
                                    
                                    
                                    $
                                    (410,535
                                    )
                                    
                                    $
                                    (4
                                    )
                                    
                                    $
                                    256,300
                                    
                                    
                                    $
                                    30,271
                                    
                                    
                                    $
                                    286,571Stock-based
      compensation
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,362
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,362
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,362Net
      loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (37,984
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (37,984
                                    )
                                    
                                    
                                    (11,072
                                    )
                                    
                                    
                                    (49,056
                                    )Unrealized
      loss on investments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (3,221
                                    )
                                    
                                    
                                    (3,221
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (3,221
                                    )Comprehensive
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (41,205
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (52,277
                                    )Balance
      at June 30, 2008
                                    
                                    
                                    136,796
                                    
                                    
                                    $
                                    137
                                    
                                    
                                    $
                                    670,064
                                    
                                    
                                    $
                                    (448,519
                                    )
                                    
                                    $
                                    (3,225
                                    )
                                    
                                    $
                                    218,457
                                    
                                    
                                    $
                                    19,199
                                    
                                    
                                    $
                                    237,656Balance
      at December 31, 2008
                                    
                                    
                                    136,797
                                    
                                    
                                    $
                                    137
                                    
                                    
                                    $
                                    672,838
                                    
                                    
                                    $
                                    (487,395
                                    )
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    185,580
                                    
                                    
                                    $
                                    10,247
                                    
                                    
                                    $
                                    195,827Stock-based
      compensation
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,163
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,163
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,163Grant
      of restricted stock
                                    
                                    
                                    534
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Net
      loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (41,633
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (41,633
                                    )
                                    
                                    
                                    (6,246
                                    )
                                    
                                    
                                    (47,879
                                    )Unrealized
      loss on investments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1
                                    )Comprehensive
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (41,634
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (47,880
                                    )Balance
      at June 30, 2009
                                    
                                    
                                    137,331
                                    
                                    
                                    $
                                    137
                                    
                                    
                                    $
                                    676,001
                                    
                                    
                                    $
                                    (529,028
                                    )
                                    
                                    $
                                    (1
                                    )
                                    
                                    $
                                    147,109
                                    
                                    
                                    $
                                    4,001
                                    
                                    
                                    $
                                    151,110
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 5
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  ConsolidatedStatements of Cash Flows
 (In
thousands)
 (Unaudited)
 Six
      Months Ended June 30,2009
                            
                            
                            2008Cash
      flows from operating activities:Consolidated net
      loss
                            
                            $
                            (47,879
                            )
                            
                            $
                            (49,056
                            )Adjustments to reconcile
      consolidated net loss to net cash used in operating
      activities:Depreciation
                            
                            
                            3,317
                            
                            
                            
                            4,128Impairment of fixed
      assets
                            
                            
                            445
                            
                            
                            
                            —Amortization of Symphony Icon,
      Inc. purchase option
                            
                            
                            1,071
                            
                            
                            
                            1,071Stock-based
      compensation
                            
                            
                            2,798
                            
                            
                            
                            3,362Gain on long-term
      investments
                            
                            
                            (725
                            )
                            
                            
                            —Gain on ARS
Rights
                            
                            
                            (98
                            )
                            
                            
                            —Loss on disposal of property and
      equipment
                            
                            
                            4
                            
                            
                            
                            —Changes in operating assets and
      liabilities:Decrease in accounts
      receivable
                            
                            
                            38
                            
                            
                            
                            1,091Increase in prepaid expenses
      and other current assets
                            
                            
                            (2,530
                            )
                            
                            
                            (4,209
                            )Decrease in other
      assets
                            
                            
                            51
                            
                            
                            
                            54Decrease in accounts payable
      and other liabilities
                            
                            
                            (4,177
                            )
                            
                            
                            (23
                            )Decrease in deferred
      revenue
                            
                            
                            (4,398
                            )
                            
                            
                            (9,621
                            )Net cash used in operating
      activities
                            
                            
                            (52,083
                            )
                            
                            
                            (53,203
                            )Cash
      flows from investing activities:Purchases of property and
      equipment
                            
                            
                            (242
                            )
                            
                            
                            (1,403
                            )Proceeds from disposal of
      property and equipment
                            
                            
                            37
                            
                            
                            
                            —Maturities of investments held
      by Symphony Icon, Inc.
                            
                            
                            8,875
                            
                            
                            
                            9,784Purchases
      of investments
                            
                            
                            (59,955
                            )
                            
                            
                            (39,847
                            )Maturities of
      investments
                            
                            
                            30,179
                            
                            
                            
                            171,811Net cash provided by (used in)
      investing activities
                            
                            
                            (21,106
                            )
                            
                            
                            140,345Cash
      flows from financing activities:Proceeds from debt
      borrowings
                            
                            
                            37,392
                            
                            
                            
                            —Repayment of debt
      borrowings
                            
                            
                            (910
                            )
                            
                            
                            (431
                            )Net cash provided by (used in)
      financing activities
                            
                            
                            36,482
                            
                            
                            
                            (431
                            )Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            (36,707
                            )
                            
                            
                            86,711Cash
      and cash equivalents at beginning of period
                            
                            
                            85,873
                            
                            
                            
                            22,938Cash
      and cash equivalents at end of period
                            
                            $
                            49,166
                            
                            
                            $
                            109,649Supplemental
      disclosure of cash flow information:Cash paid for
      interest
                            
                            $
                            1,267
                            
                            
                            $
                            1,311Supplemental
      disclosure of non-cash investing and financing activities:Unrealized loss on
      investments
                            
                            $
                            (1
                            )
                            
                            $
                            (3,221
                            )
  The
accompanying notes are an integral part of these consolidated financial
statements.
  6
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  Notesto Consolidated Financial Statements
 (Unaudited)
  1.      Basis
of Presentation
  The
accompanying unaudited consolidated financial statements of Lexicon
Pharmaceuticals, Inc. (“Lexicon” or the “Company”) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
  In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 2009 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2009.
  The
accompanying consolidated financial statements include the accounts of Lexicon
and its wholly-owned subsidiaries, as well as one variable interest entity,
Symphony Icon, Inc. (“Symphony Icon”), for which the Company is the primary
beneficiary as defined by the Financial Accounting Standards Board (“FASB”)
Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest
Entities” (“FIN 46R”).  Intercompany transactions and balances
are eliminated in consolidation.
  Certain
amounts in the prior year’s financial statements have been reclassified to
conform to the current year presentation.  These include the
reclassification of $274,000 and $627,000 of patent-related legal costs from
research and development expense to general and administrative expense on the
consolidated statements of operations for the three and six months ended
June 30, 2008, respectively.
  For
further information, refer to the financial statements and footnotes thereto
included in Lexicon’s annual report on Form 10-K for the year ended December 31,
2008, as filed with the SEC.
  2.      Net
Loss Per Share
  Net loss
per share is computed using the weighted average number of shares of common
stock outstanding during the applicable period. Shares associated with stock
options and warrants are not included because they are
antidilutive.  There are no differences between basic and diluted net
loss per share for all periods presented.
  3.      Stock-Based
Compensation
  Under the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123
(Revised), “Share-Based Payment,” the Company recorded $1.4 million and
$1.6 million of stock-based compensation expense for the three months ended
June 30, 2009 and 2008, respectively, and $2.8 million and
$3.4 million of stock-based compensation expense for the six months ended
June 30, 2009 and 2008, respectively.  The Company utilized the
Black-Scholes valuation model for estimating the fair value of the stock
compensation granted, with the following weighted-average assumptions for
options granted in the six months ended June 30, 2009 and
2008:
  7
 Table of Contents
  Expected
      Volatility
              
              
              Risk-free
      Interest Rate
              
              
              Expected
      Term
              
              
              Estimated
      Forfeitures
              
              
              Dividend
                RateJune
      30, 2009:Employees
              
              
              78
              %
              
              
              1.9
              %
              
              
              5
              
              
              
              24
              %
              
              
              0
              %Officers
      and non-employee directors
              
              
              77
              %
              
              
              2.7
              %
              
              
              8
              
              
              
              6
              %
              
              
              0
              %June
      30, 2008:Employees
              
              
              66
              %
              
              
              2.9
              %
              
              
              6
              
              
              
              21
              %
              
              
              0
              %Officers
      and non-employee directors
              
              
              66
              %
              
              
              3.8
              %
              
              
              9
              
              
              
              4
              %
              
              
              0
              %
 
 The
following is a summary of option activity under Lexicon’s stock option plans for
the six months ended June 30, 2009:
  Options
                          
                          
                          Weighted
      Average Exercise Price(in
      thousands)Outstanding
      at December 31, 2008
                          
                          
                          16,898
                          
                          
                          $
                          5.13Granted
                          
                          
                          4,811
                          
                          
                          
                          1.44Expired
                          
                          
                          (1,518
                          )
                          
                          
                          6.63Forfeited
                          
                          
                          (542
                          )
                          
                          
                          2.64Outstanding
      at June 30, 2009
                          
                          
                          19,649
                          
                          
                          
                          4.18Exercisable
      at June 30, 2009
                          
                          
                          11,554
                          
                          
                          $
                          5.73
 
 During
the six months ended June 30, 2009, Lexicon granted its officers restricted
stock bonus awards under the 2000 Equity Incentive Plan in lieu of cash bonus
awards.  The shares subject to the awards vest in two installments
over the one-year period following the date of grant.  The following
is a summary of restricted stock activity under Lexicon’s stock option plans for
the six months ended June 30, 2009:
  Shares
                        
                        
                        Weighted
      Average Grant Date
                          Fair
      Value(in
      thousands)Outstanding
      at December 31, 2008
                        
                        
                        —
                        
                        
                        $
                        —Granted
                        
                        
                        534
                        
                        
                        
                        1.45Nonvested
      at June 30, 2009
                        
                        
                        534
                        
                        
                        $
                        1.45
 
 4.      Recent
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute.  Accordingly, this statement does not require any new fair
value measurements.  More specifically, SFAS No. 157 emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy, which ranks the quality and reliability of
the information used to determine fair values.  SFAS No. 157 was
effective January 1, 2008 for financial assets and liabilities and January 1,
2009 for non-financial assets and liabilities.  The adoption of SFAS
No. 157 did not have an effect on the Company’s financial position or results of
operations.
  In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations,”
which replaces SFAS No. 141, “Business Combinations,” and requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This statement also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the non-controlling interest
in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes
various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this statement. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of SFAS No. 141(R) did not have an effect on the Company’s financial
position or results of operations.
 8
 Table of Contents
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company’s adoption of SFAS
No. 160 on January 1, 2009 did not materially affect its financial position
or results of operations, other than reclassifying the noncontrolling interest
in Symphony Icon to equity for all periods presented.
  In
December 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.
07-01, “Accounting for Collaborative Arrangements,” which provides guidance on
how the parties to a collaborative agreement should account for costs incurred
and revenue generated on sales to third parties, how sharing payments pursuant
to a collaboration agreement should be presented in the income statement and
certain related disclosure requirements.  The adoption of EITF No.
07-01 did not have an effect on the Company's financial position or results of
operations, other than requiring additional disclosures.  Most of the
required disclosures were included in the Company's annual report on Form 10-K
for the year ended December 31, 2008.  See note 12, “Collaboration and
License Agreements,” for additional required disclosures.
  In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which provides guidance
to establish general standards of accounting for, and disclosures of, events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  The statement also requires
disclosure of the date through which subsequent events have been evaluated, as
well as whether that date is the date the financial statements were issued or
the date the financial statements were available to be issued.  SFAS
No. 165 is effective for interim or fiscal periods ending after June 15,
2009.  The Company has evaluated subsequent events through August 6,
2009, which is the date the financial statements were issued.  The
Company's adoption of SFAS No. 165 on June 30, 2009 did not have an effect on
its financial position or results of operations.
  9
 Table of Contents
 5.      Cash
and Cash Equivalents and Investments
  The fair
value of cash and cash equivalents and investments held at June 30, 2009
and December 31, 2008 are as follows:
  As
      of June 30, 2009Amortized
      Cost
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Gross
      Unrealized Gains
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Gross
      Unrealized Losses
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Estimated
      Fair Value(In
      thousands)Cash
      and cash equivalents
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  49,166
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  49,166Securities
      maturing within one year:Certificates
      of deposit
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  509
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  509U.S.
      treasury securities
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  29,996
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (1
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  29,995Total short-term
      investments
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  30,505
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  (1
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  30,504Securities
      maturing after one year through five years:ARS
      Rights
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  12,158
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  12,158Securities
      maturing after ten years:Auction
      rate securities
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  56,900
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (12,649
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  44,251Total long-term
      investments
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  56,900
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  12,158
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  (12,649
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  56,409Short-term
      investments held by Symphony Icon, Inc.:Cash
      and cash equivalents
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  7,735
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  7,735Total short-term investments
      held by Symphony Icon, Inc.
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  7,735
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  —
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  7,735Total
      cash and cash equivalents and investments
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  144,306
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  12,158
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  (12,650
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  143,814
 
 
 As
      of December 31, 2008Amortized
      Cost
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Gross
      Unrealized Gains
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Gross
      Unrealized Losses
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Estimated
      Fair Value(In
      thousands)Cash
      and cash equivalents
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        85,873
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        85,873Securities
      maturing within one year:Certificates of
      deposit
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        629
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        629Total short-term
      investments
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        629
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        629Securities
      maturing after one year through five years:ARS Rights
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        12,060
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        12,060Securities
      maturing after ten years:Auction rate
      securities
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        57,000
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (13,374
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        43,626Total long-term
      investments
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        57,000
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        12,060
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        (13,374
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        55,686Short-term
      investments held by Symphony Icon, Inc.:Cash and cash
      equivalents
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        16,610
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        16,610Total short-term investments
      held by Symphony Icon, Inc.
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        16,610
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        16,610Total
      cash and cash equivalents and investments
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        160,112
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        12,060
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        (13,374
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        158,798
 
 There
were no realized gains or losses for the three and six months ended
June 30, 2009, respectively. There were $87,000 and $118,000 of realized
gains for the three and six months ended June 30, 2008,
respectively.  The cost of securities sold is based on the specific
identification method.
  At June
30, 2009, Lexicon held $56.9 million (par value), with an estimated fair value
of $44.3 million, of investments with an auction interest rate reset
feature, known as auction rate securities.  These notes are issued by
various state agencies for the purpose of financing student
loans.  The securities have historically traded at par and are
redeemable at par plus accrued interest at the option of the issuer. Interest is
typically paid at the end of each auction period or
semiannually.  Until February 2008, the market for Lexicon’s auction
rate securities was highly liquid. Starting in February 2008, a substantial
number of auctions “failed,” meaning that there was not enough demand to sell
all of the securities that holders desired to sell at auction. The immediate
effect of a failed auction is that such holders cannot sell the securities at
auction and the interest rate on the security generally resets to a maximum
interest rate. In the case of funds invested by Lexicon in auction rate
securities which are the subject of a failed auction, Lexicon may not be able to
access the funds without a loss of principal, unless a future auction on these
investments is successful or the issuer redeems the security.  Lexicon
has classified its entire auction rate security investment balance as long-term
investments on its consolidated balance sheets because of the Company’s
inability to determine when its investments in auction rate securities will be
sold.  Lexicon has also modified its current investment strategy to
reallocate its investments more into U.S. treasury securities and U.S.
treasury-backed money market investments.
 10
 Table of Contents
  At June
30, 2009, observable auction rate securities market information was not
available to determine the fair value of Lexicon’s investments. Lexicon has
estimated the fair value of these securities at $44.3 million as of June
30, 2009 using models of the expected future cash flows related to the
securities and taking into account assumptions about the cash flows of the
underlying student loans, as well as secondary market trading
data.  The assumptions used in preparing the discounted cash flow
model include estimates of interest rates, timing and amount of cash flows,
liquidity premiums and expected holding periods of the auction rate securities,
based on data available as of June 30, 2009.  The underlying
assumptions are volatile and are subject to change as market conditions
change.
  In
November 2008, Lexicon accepted an offer from UBS AG, the investment bank that
sold Lexicon the auction rate securities, providing Lexicon with rights related
to its auction rate securities (“ARS Rights”).  The ARS Rights permit
Lexicon to require UBS to purchase its $56.9 million (par value) of auction rate
securities at par value during the period from June 30, 2010 through July 2,
2012.  Conversely, UBS has the right, in its discretion, to purchase
or sell the securities at any time by paying Lexicon the par value of such
securities.  Management expects to exercise the ARS Rights and sell
Lexicon’s auction rate securities back to UBS on June 30, 2010, the earliest
date allowable under the ARS Rights.  Lexicon is also eligible to
borrow from UBS Bank USA, an affiliate of UBS, at no net cost up to 75% of the
market value of the securities, as determined by UBS Bank USA, which loans would
become payable upon the purchase or sale of the securities by UBS (see note
8).
  The
enforceability of the ARS Rights results in a separate asset that will be
measured at its fair value.  Lexicon elected to measure the ARS Rights
under the fair value option of SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115.”  As a result of accepting the ARS Rights, Lexicon
elected in 2008 to classify the ARS Rights and reclassify its investments in
auction rate securities as trading securities, as defined by SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.”  As a result, Lexicon will assess the fair value of these
two individual assets and record changes each period until the ARS Rights are
exercised and the auction rate securities are redeemed.  During the
three months ended June 30, 2009, Lexicon recorded a gain of $766,000 to
reflect the increase in fair value of the auction rate securities, and recorded
a loss of $460,000 to reflect the decline in fair value of the ARS Rights, which
are reflected in gain on long-term investments, net, in the accompanying
consolidated statement of operations.  During the six months ended
June 30, 2009, Lexicon recorded a gain of $725,000 to reflect the increase
in fair value of the auction rate securities, and recorded a gain of $98,000 to
reflect the increase in fair value of the ARS Rights, which are reflected in
gain on long-term investments, net, in the accompanying consolidated statement
of operations.  Lexicon expects that subsequent changes in the value
of the ARS Rights will largely offset the subsequent fair value movements of the
auction rate securities, subject to the continued expected performance by the
investment bank of its obligations under the agreement.
  11
 Table of Contents
 Excluding
auction rate securities and the ARS Rights, at June 30, 2009, Lexicon had
approximately $87.4 million in cash and cash equivalents and short-term
investments, including $7.7 million in investments held by Symphony
Icon.  Management believes that the working capital available to
Lexicon excluding the funds held in auction rate securities will be sufficient
to meet its cash requirements for at least the next 12 months.
  6.      Fair
Value Measurements
  The
Company uses various inputs in determining the fair value of its investments and
measures these assets on a recurring basis.  Financial assets recorded
at fair value in the consolidated balance sheets are categorized by the level of
objectivity associated with the inputs used to measure their fair
value.  SFAS No. 157 defines the following levels directly related to
the amount of subjectivity associated with the inputs to fair valuation of these
financial assets:
  ·
              Level
      1 – quoted prices in active markets for identical
    investments
  ·
              Level
      2 – other significant observable inputs (including quoted prices for
      similar investments, market corroborated inputs,
  etc.)
  ·
              Level
      3 – significant unobservable inputs (including the Company’s own
      assumptions in determining the fair value of
  investments)
  The
inputs or methodology used for valuing securities are not necessarily an
indication of the credit risk associated with investing in those
securities.  The following table provides the fair value measurements
of applicable Company financial assets that are measured at fair value on a
recurring basis according to the fair value levels defined by SFAS No. 157 as of
June 30, 2009 and December 31, 2008.
  Financial Assets at Fair
      Value as of June
      30, 2009Level
      1
              
              Level
      2
              
              Level
      3
              
              
              Total(in
      thousands)Cash
      and cash equivalents
              
              $
              49,166
              
              
              $
              —
              
              
              $
              —
              
              
              $
              49,166Short-term
      investments
              
              
              30,504
              
              
              
              —
              
              
              
              —
              
              
              
              30,504Short-term
      investments held by  Symphony Icon, Inc.
              
              
              7,735
              
              
              
              —
              
              
              
              —
              
              
              
              7,735Long-term
      investments
              
              
              —
              
              
              
              —
              
              
              
              56,409
              
              
              
              56,409Total
      cash and cash equivalents and investments
              
              $
              87,405
              
              
              $
              —
              
              
              $
              56,409
              
              
              $
              143,814
 
 Financial Assets at Fair
      Value as of
      December 31, 2008Level
      1
              
              Level
      2
              
              Level
      3
              
              
              Total(in
      thousands)Cash
      and cash equivalents
              
              $
              85,873
              
              
              $
              —
              
              
              $
              —
              
              
              $
              85,873Short-term
      investments
              
              
              629
              
              
              
              —
              
              
              
              —
              
              
              
              629Short-term
      investments held by  Symphony Icon, Inc.
              
              
              16,610
              
              
              
              —
              
              
              
              —
              
              
              
              16,610Long-term
      investments
              
              
              —
              
              
              
              —
              
              
              
              55,686
              
              
              
              55,686Total
      cash and cash equivalents and investments
              
              $
              103,112
              
              
              $
              —
              
              
              $
              55,686
              
              
              $
              158,798
 
 The table
presented below summarizes the change in consolidated balance sheet carrying
value associated with Level 3 financial assets for the six months ended
June 30, 2009.
  Long-term
      Investments(in
      thousands)Balance
      at December 31, 2008
                                  
                                  $
                                  55,686Unrealized
      gains included in earnings as gain on long-term investments,
      net
                                  
                                  
                                  823Net
      sales and settlements
                                  
                                  
                                  (100
                                  )Balance
      at June 30, 2009
                                  
                                  $
                                  56,409
  
 12
 Table of Contents
 The
Company also has assets that under certain conditions are subject to measurement
at fair value on a non-recurring basis.  These assets include goodwill
associated with the acquisition of Coelacanth Corporation in
2001.  For these assets, measurement at fair value in periods
subsequent to their initial recognition is applicable if one or more is
determined to be impaired.
  7.      Goodwill
  On July
12, 2001, Lexicon completed the acquisition of Coelacanth Corporation in a
merger. Coelacanth, now Lexicon Pharmaceuticals (New Jersey), Inc., forms the
core of the Company’s division responsible for small molecule compound
discovery.  The results of Lexicon Pharmaceuticals (New Jersey), Inc.
are included in the Company’s results of operations for the periods subsequent
to the acquisition.
  Goodwill
associated with the acquisition of $25.8 million, which represents the excess of
the $36.0 million purchase price over the fair value of the underlying net
identifiable assets, was assigned to the consolidated entity,
Lexicon.  In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” the goodwill balance is not subject to amortization, but is
tested at least annually for impairment at the reporting unit level, which is
the Company’s single operating segment.  During 2008, the Company
performed an impairment test of goodwill on its annual impairment assessment
date.  This test did not result in an impairment of
goodwill.
  During
the six months ended June 30, 2009, given the current global economic
downturn and decrease in the price of the Company’s common stock as listed on
the Nasdaq Global Market on such date, the Company performed an impairment test
of goodwill and determined that the goodwill balance is not
impaired.  However, if in the future the Company’s common stock price
decreases further, the Company will reassess the carrying value of goodwill and
may record an impairment charge at that time.
  To
perform an impairment test, the Company uses the market capitalization approach
to measure fair value of the reporting unit. Under this approach, fair value is
calculated as the average closing price of Lexicon’s common stock on the Nasdaq
Global Market for the 30 days preceding the date that the impairment test is
performed, multiplied by the number of outstanding shares on that
date.  A control premium, which is representative of premiums paid in
the marketplace to acquire a controlling interest in a company, is then added to
the market capitalization to determine the fair value of the reporting
unit.  The inputs used to calculate fair value are classified as Level
3 under SFAS No. 157 due to the subjectivity in the determination of the control
premium.  The average closing price of Lexicon's common stock is a
Level 1 input; however the control premium is a Level 3 input as the control
premium is determined using transactions within the Company's industry in the
market.  If the fair value exceeds the carrying value, no further
action is required and no impairment loss is recognized.  There was no
impairment of goodwill in the six months ended June 30, 2009.
  8.      Debt
Obligations
  In April
2004, Lexicon obtained a $34.0 million mortgage on its facilities in The
Woodlands, Texas.  The mortgage loan has a ten-year term with a
20-year amortization and bears interest at a fixed rate of 8.23%.  The
fair value of Lexicon’s mortgage loan approximates its carrying
value.  The fair value of Lexicon’s mortgage loan is estimated using
discounted cash flow analysis, based on the Company’s current incremental
borrowing rate.
  In
January 2009, Lexicon entered into a credit line agreement with UBS Bank USA
that provides, as of June 30, 2009, up to an aggregate amount of $37.0
million in the form of an uncommitted, demand, revolving line of
credit.  Lexicon entered into the credit line in connection with its
acceptance of an offer from UBS AG, the investment bank that sold Lexicon its
auction rate securities, providing Lexicon with rights to require UBS to
purchase its $56.9 million (par value) of auction rate securities at par value
during the period from June 30, 2010 through July 2, 2012.  The credit
line is secured only by these auction rate securities and advances under the
credit line are made on a “no net cost” basis, meaning that the interest paid by
Lexicon on advances will not exceed the interest or dividends paid to Lexicon by
the issuer of the auction rate securities.  The interest rate paid on
the line of credit is less than the Company’s estimated current incremental
borrowing rate.  As of June 30, 2009, Lexicon had $37.0 million
outstanding under this credit line.
 13
 Table of Contents
  9.      Arrangements
with Symphony Icon, Inc.
  On June
15, 2007, Lexicon entered into a series of related agreements providing for the
financing of the clinical development of certain of our drug candidates,
including LX1031 and LX1032, along with any other pharmaceutical compositions
modulating the same targets as those drug candidates (the
“Programs”).  The agreements include a Novated and Restated Technology
License Agreement pursuant to which the Company licensed to Symphony Icon, a
wholly-owned subsidiary of Symphony Icon Holdings LLC (“Holdings”), the
Company’s intellectual property rights related to the
Programs.  Holdings contributed $45 million to Symphony Icon in order
to fund the clinical development of the Programs.
  Under a
Share Purchase Agreement, dated June 15, 2007, between the Company and Holdings,
the Company issued and sold to Holdings 7,650,622 shares of its common stock on
June 15, 2007 in exchange for $15 million and the Purchase Option (as defined
below).
  Under a
Purchase Option Agreement, dated June 15, 2007, among the Company, Symphony Icon
and Holdings, the Company received from Holdings an exclusive purchase option
(the “Purchase Option”) that gives the Company the right to acquire all of the
equity of Symphony Icon, thereby allowing the Company to reacquire all of the
Programs.  The Purchase Option is exercisable by the Company at any
time, in its sole discretion, until June 15, 2011 at an exercise price of (i)
$81 million, if the Purchase Option is exercised before June 15, 2010 and (ii)
$90 million, if the Purchase Option is exercised on or after June 15, 2010 and
before June 15, 2011.  The Purchase Option exercise price may be paid
in cash or a combination of cash and common stock, at the Company’s sole
discretion, provided that the common stock portion may not exceed 40% of the
Purchase Option exercise price.  Lexicon has calculated the value of
the Purchase Option as the difference between the fair value of the common stock
issued to Holdings of $23.6 million (calculated at the time of issuance) and the
$15.0 million in cash received from Holdings for the issuance of the common
stock.  Lexicon has recorded the value of the Purchase Option as an
asset, and is amortizing this asset over the four-year option
period.  The unamortized balance of $4.2 million and $5.3 million is
recorded in other assets in the accompanying consolidated balance sheets as of
June 30, 2009 and December 31, 2008, respectively, and the amortization
expense of $535,000 and $1,070,000 is recorded in other expense, net in the
accompanying consolidated statements of operations for the three and six months
ended June 30, 2009 and 2008, respectively.
  Under an
Amended and Restated Research and Development Agreement, dated June 15, 2007,
among the Company, Symphony Icon and Holdings (the “R&D Agreement”),
Symphony Icon and the Company are developing the Programs in accordance with a
specified development plan and related development budget.  The
R&D Agreement provides that the Company will continue to be primarily
responsible for the development of the Programs.  The Company’s
development activities are supervised by Symphony Icon’s Development Committee,
which is comprised of an equal number of representatives from the Company and
Symphony Icon.  The Development Committee reports to Symphony Icon’s
Board of Directors, which is currently comprised of five members, including one
member designated by the Company and two independent directors.
  Under a
Research Cost Sharing, Payment and Extension Agreement, dated June 15, 2007,
among the Company, Symphony Icon and Holdings, upon the recommendation of the
Development Committee, Symphony Icon’s Board of Directors may require the
Company to pay Symphony Icon up to $15 million for Symphony Icon’s use in the
development of the Programs in accordance with the specified development plan
and related development budget.  The Development Committee’s right to
recommend that Symphony Icon’s Board of Directors submit such funding
requirement to the Company will terminate on the one-year anniversary of the
expiration of the Purchase Option, subject to limited exceptions.  In
June 2009, Symphony Icon’s Board of Directors requested the Company to pay
Symphony Icon $1.5 million under this agreement, and management expects
that additional funding will be needed in the future.
 14
 Table of Contents
  In
accordance with FIN 46R, Lexicon has determined that Symphony Icon is a variable
interest entity for which it is the primary beneficiary.  This
determination was based on Holdings’ lack of controlling rights with respect to
Symphony Icon’s activities and the limitation on the amount of expected residual
returns Holdings may expect from Symphony Icon if Lexicon exercises its Purchase
Option.  Lexicon has determined it is a variable interest holder of
Symphony Icon due to its contribution of the intellectual property relating to
the Programs and its issuance of shares of its common stock in exchange for the
Purchase Option, which Lexicon intends to exercise if the development of the
Programs is successful.  Lexicon has determined that it is a primary
beneficiary as a result of certain factors, including its primary responsibility
for the development of the Programs and its contribution of the intellectual
property relating to the Programs.  As a result, Lexicon has included
the financial condition and results of operations of Symphony Icon in its
consolidated financial statements.  Symphony Icon’s cash and cash
equivalents have been recorded on Lexicon’s consolidated financial statements as
short-term investments held by Symphony Icon.  The noncontrolling
interest in Symphony Icon on Lexicon’s consolidated balance sheet initially
reflected the $45 million proceeds contributed into Symphony Icon less
$2.3 million of structuring and legal fees.  As the collaboration
progresses, this line item will be reduced by Symphony Icon’s losses, which were
$6.2 million and $11.1 million in the six months ended June 30,
2009 and 2008, respectively. The reductions to the noncontrolling interest in
Symphony Icon will be reflected in Lexicon’s consolidated statements of
operations using a similar caption and will reduce the amount of Lexicon’s
reported net loss.  Through June 30, 2009, Lexicon has not
charged any license fees and has not recorded any revenue from Symphony Icon,
and does not expect to do so based on the current agreements with Symphony Icon
and Holdings.
  10.           Commitments
and Contingencies
  Operating Lease
Obligations:  A Lexicon subsidiary leases laboratory and office
space in Hopewell, New Jersey under an agreement which expires in June
2013.  The lease provides for two five-year renewal options at 95% of
the fair market rent and includes escalating lease payments.  Rent
expense is recognized on a straight-line basis over the original lease
term.  Lexicon is the guarantor of the obligations of its subsidiary
under this lease.  The maximum potential amount of future payments the
Company could be required to make under this agreement is $10.2
million.  The Company is required to maintain restricted investments
to collateralize a standby letter of credit for this lease.  The
Company had $0.4 million in restricted investments as collateral as of
June 30, 2009 and December 31, 2008.
  Legal
Proceedings:  On October 20, 2008, Lexicon received
correspondence from counsel to the University of Utah Research Foundation
(“UURF”) alleging that Lexicon was in breach of certain obligations purported to
exist under its license agreement with GenPharm International, Inc., under which
Lexicon obtained a sublicense under certain patents exclusively licensed from
UURF by GenPharm, and related letter agreements between Lexicon and UURF
governing the payment of royalties.  The correspondence alleged that
Lexicon breached the relevant agreements by, among other things, purportedly
failing to pay all required royalties and ignoring obligations that UURF
contends are expressed or implied in the relevant agreements. On December 16,
2008, Lexicon filed a complaint against UURF in the District Court of Montgomery
County, Texas seeking a declaration that Lexicon is in full compliance with its
license and royalty obligations.  On January 26, 2009, UURF filed a
notice seeking to remove the case to the United States District Court for the
Southern District of Texas.  UURF filed an answer and counterclaims on
February 2, 2009 asserting breach of contract claims consistent with the claims
made by UURF in its October 2008 correspondence and patent infringement which it
claims has occurred since approximately December 17, 2008.  On
February 23, 2009, Lexicon filed an answer to UURF’s counterclaims.
 15
 Table of Contents
  Lexicon
believes that it has materially complied with all of its obligations under the
relevant agreements, including those relating to royalty payments due to UURF,
and that UURF’s claims are inconsistent with the express provisions of the
relevant agreements.  Lexicon accordingly believes UURF’s claims are
without merit.  While the litigation of these matters is at a very
early stage, Lexicon intends to vigorously pursue its complaint against UURF and
dispute UURF’s counterclaims.
  Lexicon
is from time to time party to other claims and legal proceedings that it
believes will not have, individually or in the aggregate, a material adverse
effect on its results of operations, financial condition or
liquidity.
  11.           Comprehensive
Loss
  Comprehensive
loss consists of:
  Three
      Months Ended June 30,2009
                                  
                                  2008(in
      thousands)Net
      loss attributable to Lexicon Pharmaceuticals, Inc.
                                  
                                  $
                                  (20,073
                                  )
                                  
                                  $
                                  (20,034
                                  )Unrealized
      gain (loss) on short-term investments
                                  
                                  
                                  4
                                  
                                  
                                  
                                  (190
                                  )Unrealized
      loss on long-term investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (703
                                  )Net
      comprehensive loss attributable to Lexicon Pharmaceuticals,
      Inc.
                                  
                                  $
                                  (20,069
                                  )
                                  
                                  $
                                  (20,927
                                  )
 Six
      Months Ended June 30,2009
                          
                          
                          2008(in
      thousands)Net
      loss
                          
                          $
                          (41,633
                          )
                          
                          $
                          (37,984
                          )Unrealized
      gain (loss) on short-term investments
                          
                          
                          (1
                          )
                          
                          
                          19Unrealized
      loss on long-term investments
                          
                          
                          —
                          
                          
                          
                          (3,240
                          )Net
      comprehensive loss attributable to Lexicon Pharmaceuticals,
      Inc.
                          
                          $
                          (41,634
                          )
                          
                          $
                          (41,205
                          )
 
 12.           Collaboration
and License Agreements
  Lexicon
has derived substantially all of its revenues from drug discovery and
development collaborations, target validation collaborations for the development
and, in some cases, analysis of the physiological effects of genes altered in
knockout mice, government grants and contracts, technology licenses,
subscriptions to its databases and compound library sales.  Revenues
generated from third parties under collaborative arrangements are recorded on a
gross basis on the consolidated statements of operations as Lexicon is the
principal participant for these transactions as defined by EITF No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent.”
  Lexicon
established an alliance with Bristol-Myers Squibb in December 2003 to discover,
develop and commercialize small molecule drugs in the neuroscience
field.  Revenue recognized under this agreement was $0.8 million
and $2.8 million for the three months ended June 30, 2009 and 2008,
respectively, and $1.7 million and $5.3 million for the six months
ended June 30, 2009 and 2008, respectively.
  Lexicon
established an alliance with Genentech in December 2002 to discover novel
therapeutic proteins and antibody targets.  Lexicon did not recognize
any revenue under this agreement during the three and six months ended
June 30, 2009.  Revenue recognized under this agreement was
$1.1 million and $2.2 million for the three and six months ended
June 30, 2008, respectively.
 16
 Table of Contents
  Lexicon
established an alliance with Organon in May 2005 to jointly discover, develop
and commercialize novel biotherapeutic drugs.  Revenue recognized
under this agreement was $0.8 million and $2.6 million for the three
months ended June 30, 2009 and 2008, respectively, and $2.3 million
and $5.4 million for the six months ended June 30, 2009 and 2008,
respectively.
  13.           Subsequent
Events
  Following
the approval of Lexicon’s stockholders at a special meeting of stockholders held
on July 15, 2009, Lexicon filed an amendment to its certificate of
incorporation increasing the number of authorized shares of Lexicon’s common
stock from 300 million to 900 million.
  17
 Table of Contents
  Item
      2.
              Management’sDiscussion and Analysis of Financial Condition
      and Results of Operations
  Overview
  We
are a biopharmaceutical company focused on the discovery and development of
breakthrough treatments for human disease.  We have used our
proprietary gene knockout technology and an integrated platform of advanced
medical technologies to identify and validate, in vivo, more than 100 targets
with promising profiles for drug discovery.  For targets that we
believe have high pharmaceutical value, we engage in programs for the discovery
and development of potential new drugs, focusing in the core therapeutic areas
of immunology, metabolism, cardiology and ophthalmology.  Human
clinical trials are currently underway for four of our drug candidates, with one
additional drug candidate in preclinical development and compounds from a number
of additional programs in various stages of preclinical research.
  We are
working both independently and through strategic collaborations and alliances to
capitalize on our technology, drug target discoveries and drug discovery and
development programs.  Consistent with this approach, we seek to
retain exclusive rights to the benefits of certain of our small molecule drug
programs by developing and commercializing drug candidates from such programs
internally and to collaborate with third parties with respect to the discovery,
development and commercialization of small molecule and biotherapeutics drug
candidates for other targets, particularly when the collaboration provides us
with access to expertise and resources that we do not possess internally or are
complementary to our own.  We have established drug discovery and
development collaborations with a number of leading pharmaceutical and
biotechnology companies which have enabled us to generate near-term cash while
offering us the potential to retain economic participation in products our
collaborators develop through the collaboration.  In addition, we have
established collaborations and license agreements with other leading
pharmaceutical and biotechnology companies, research institutes and academic
institutions under which we receive fees and, in some cases, are eligible to
receive milestone and royalty payments, in return for granting access to some of
our technologies and discoveries for use in the other organization’s own drug
discovery efforts.
  We derive
substantially all of our revenues from drug discovery and development
collaborations and other collaborations and technology licenses.  To
date, we have generated a substantial portion of our revenues from a limited
number of sources.
  Our
operating results and, in particular, our ability to generate additional
revenues are dependent on many factors, including our success in establishing
new collaborations and technology licenses, expirations of our existing
collaborations and alliances, the success rate of our discovery and development
efforts leading to opportunities for new collaborations and licenses, as well as
milestone payments and royalties, the timing and willingness of collaborators to
commercialize products which may result in royalties, and general and
industry-specific economic conditions which may affect research and development
expenditures.  Our future revenues from collaborations and technology
licenses are uncertain because our existing agreements have fixed terms or
relate to specific projects of limited duration and we depend, in part, on
securing new agreements.  Our ability to secure future
revenue-generating agreements will depend upon our ability to address the needs
of our potential future collaborators and licensees, and to negotiate agreements
that we believe are in our long-term best interests.  We may determine
that our interests are better served by retaining rights to our discoveries and
advancing our therapeutic programs to a later stage, which could limit our
near-term revenues.  Because of these and other factors, our operating
results have fluctuated in the past and are likely to do so in the future, and
we do not believe that period-to-period comparisons of our operating results are
a good indication of our future performance.
  18
 Table of Contents
 Since our
inception, we have incurred significant losses and, as of June 30, 2009, we
had an accumulated deficit of $529.0 million. Our losses have resulted
principally from costs incurred in research and development, general and
administrative costs associated with our operations, and non-cash stock-based
compensation expenses associated with stock options granted to employees and
consultants.  Research and development expenses consist primarily of
salaries and related personnel costs, external research costs related to our
preclinical and clinical efforts, material costs, facility costs, depreciation
on property and equipment and other expenses related to our drug discovery and
development programs, the development and analysis of knockout mice and our
other target validation research efforts, and the development of compound
libraries. General and administrative expenses consist primarily of salaries and
related expenses for executive and administrative personnel, professional fees
and other corporate expenses including information technology, facilities costs
and general legal activities.  In connection with the expansion of our
drug discovery and development programs, we expect to continue to incur
significant research and development costs. As a result, we will need to
generate significantly higher revenues to achieve profitability.
  Critical
Accounting Policies
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make judgments, estimates and assumptions
in the preparation of our consolidated financial statements and accompanying
notes.  Actual results could differ from those
estimates.  We believe there have been no significant changes in our
critical accounting policies as discussed in our Annual Report on Form 10-K
for the year ended December 31, 2008.
  Recent
Accounting Pronouncements
  In
September 2006, the FASB issued Statement of Financial Accounting Standards, or
SFAS, No. 157, “Fair Value Measurements.”  The statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute.  Accordingly, this statement does not
require any new fair value measurements.  More specifically, SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy, which ranks
the quality and reliability of the information used to determine fair
value.  SFAS No. 157 was effective January 1, 2008 for financial
assets and liabilities and January 1, 2009 for non-financial assets and
liabilities.  The adoption of SFAS No. 157 did not have an effect on
our financial position or results of operations.
  In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations,”
which replaces SFAS No. 141, “Business Combinations,” and requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This statement also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes
various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this statement. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Our adoption of SFAS No. 141(R) on January 1, 2009 did not have
an effect on our financial position or results of operations.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any noncontrolling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008.  Our adoption of SFAS
No. 160 on January 1, 2009 did not materially affect our financial position or
results of operations, other than reclassifying the noncontrolling interest in
Symphony Icon to equity for all periods presented.
 19
 Table of Contents
  In
December 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.
07-01, “Accounting for Collaborative Arrangements,” which provides guidance on
how the parties to a collaborative agreement should account for costs incurred
and revenue generated on sales to third parties, how sharing payments pursuant
to a collaboration agreement should be presented in the income statement and
certain related disclosure requirements.  The adoption of EITF No.
07-01 did not have an effect on our financial position or results of operations,
other than requiring additional disclosures.  Most of the required
disclosures were included in our annual report on Form 10-K for the year ended
December 31, 2008.  See note 12, “Collaboration and License
Agreements,” in the accompanying footnotes for additional required
disclosures.
  In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which provides guidance
to establish general standards of accounting for, and disclosures of, events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  The statement also requires
disclosure of the date through which subsequent events have been evaluated, as
well as whether that date is the date the financial statements were issued or
the date the financial statements were available to be issued.  SFAS
No. 165 is effective for interim or fiscal periods ending after June 15,
2009.  We evaluated subsequent events through August 6, 2009,
which is the date the financial statements were issued.  Our adoption
of SFAS No. 165 on June 30, 2009 did not have an effect on our financial
position or results of operations.
  Results
of Operations
  Revenues
  Total
revenues and dollar and percentage changes as compared to the corresponding
period in the prior year are as follows (dollar amounts are presented in
millions):
  Three
      Months Ended June 30,
                      
                      Six
      Months Ended June 30,2009
                      
                      2008
                      
                      2009
                      
                      2008Total
      revenues
                      
                      $
                      3.0
                      
                      
                      $
                      9.6
                      
                      $
                      7.2
                      
                      
                      $
                      18.5Dollar
      decrease
                      
                      $
                      (6.6
                      )
                      
                      
                      
                      
                      $
                      (11.3
                      )Percentage
      decrease
                      
                      
                      (69
                      )%
                      
                      
                      
                      
                      
                      (61
                      )%
 
 20
 Table of Contents
  ·
              Collaborative research
      – Revenue from collaborative research for the three months ended
      June 30, 2009 decreased 65% to $2.8 million, and for the six
      months ended June 30, 2009 decreased 59% to $6.4 million, as
      compared to the corresponding period in 2008, primarily due to reduced
      revenues in the three and six months ended June 30, 2009 under our
      alliances with Bristol-Myers Squibb and N.V. Organon due to our progress
      towards completing the target discovery portion of the alliances, and the
      completion in 2008 of the target discovery portion of our alliance with
      Genentech.
  ·
              Subscription and license
      fees – Revenue from subscriptions and license fees for the three
      months ended June 30, 2009 decreased 87% to $0.2 million, and
      for the six months ended June 30, 2009 decreased 73% to
      $0.8 million, as compared to corresponding period in 2008, primarily
      due to a decrease in technology license
fees.
  Research
and Development Expenses
  Research
and development expenses and dollar and percentage changes as compared to the
corresponding period in the prior year are as follows (dollar amounts are
presented in millions):
  Three
      Months Ended June 30,
                      
                      Six
      Months Ended June 30,2009
                      
                      2008
                      
                      2009
                      
                      2008Total
      research and development expense
                      
                      $
                      20.2
                      
                      
                      $
                      30.1
                      
                      $
                      43.1
                      
                      
                      $
                      57.5Dollar
      decrease
                      
                      $
                      (9.9
                      )
                      
                      
                      
                      
                      $
                      (14.4
                      )Percentage
      decrease
                      
                      
                      (33
                      )%
                      
                      
                      
                      
                      
                      (25
                      )%
 
 Research
and development expenses consist primarily of salaries and other
personnel-related expenses, facility and equipment costs, laboratory supplies,
third-party and other services principally related to preclinical and clinical
development activities, and stock-based compensation expenses.
  ·
              Personnel –Personnel
      costs for the three months ended June 30, 2009 decreased 35% to
      $8.0 million, and for the six months ended June 30, 2009
      decreased 23% to $18.6 million, as compared to the corresponding
      period in 2008, primarily due to reductions in our personnel in
      May 2008 and January 2009.  Salaries, bonuses, employee
      benefits, payroll taxes, recruiting and relocation costs are included in
      personnel costs.
  ·
              Facilities and equipment –Facilities and equipment costs for the three months ended
      June 30, 2009 decreased 20% to $3.7 million, and for the six
      months ended June 30, 2009 decreased 16% to $7.9 million, as
      compared to the corresponding period in 2008, primarily due to decreases
      in depreciation expense and utilities
expense.
  ·
              Laboratory supplies –Laboratory supplies expense for the three months ended
      June 30, 2009 decreased 27% to $1.6 million, and for the six
      months ended June 30, 2009 decreased 32% to $3.2 million, as
      compared to the corresponding period in 2008, primarily as a result of
      reductions in our personnel in May 2008 and January
  2009.
  ·
              Third-party and other services
      –Third-party and other services for the three months ended
      June 30, 2009 decreased 38% to $5.3 million, and for the six
      months ended June 30, 2009 decreased 31% to $10.1 million, as
      compared to the corresponding period in 2008, primarily due to a decrease
      in external preclinical research and development
  costs.
  ·
              Stock-based compensation
      – Stock-based compensation expense for the three months ended
      June 30, 2009 decreased 19% to $0.8 million, and for the six
      months ended June 30, 2009 decreased 23% to $1.6 million, as
      compared to the corresponding period in
2008.
  ·
              Other –Other costs for
      the three months ended June 30, 2009 decreased 35% to
      $0.9 million, and for the six months ended June 30, 2009
      decreased 32% to $1.7 million, as compared to the corresponding
      period in 2008.
   21
 Table of Contents
 General
and Administrative Expenses
  General
and administrative expenses and dollar and percentage changes as compared to the
corresponding period in the prior year are as follows (dollar amounts are
presented in millions):
  Three
      Months Ended June 30,
                      
                      Six
      Months Ended June 30,2009
                      
                      2008
                      
                      2009
                      
                      2008Total
      general and administrative expense
                      
                      $
                      5.6
                      
                      
                      $
                      5.9
                      
                      $
                      10.4
                      
                      
                      $
                      11.8Dollar
      decrease
                      
                      $
                      (0.3
                      )
                      
                      
                      
                      
                      $
                      (1.3
                      )Percentage
      decrease
                      
                      
                      (6
                      )%
                      
                      
                      
                      
                      
                      (11
                      )%
 
 General
and administrative expenses consist primarily of personnel costs to support our
research and development activities, facility and equipment costs, professional
fees such as legal fees, and stock-based compensation expenses.
  ·
              Personnel – Personnel
      costs for the three months ended June 30, 2009 decreased 27% to
      $2.4 million, and for the six months ended June 30, 2009
      decreased 20% to $4.9 million, as compared to the corresponding
      period in 2008, primarily due to reductions in our personnel in May 2008
      and January 2009.  Salaries, bonuses, employee benefits, payroll
      taxes, recruiting and relocation costs are included in personnel
      costs.
  ·
              Facilities and
      equipment – Facilities and equipment costs for the three months
      ended June 30, 2009 increased 11% to $0.7 million, and for the
      six months ended June 30, 2009 increased 11% to $1.4 million, as
      compared to the corresponding period in 2008, primarily due to increased
      property taxes.
  ·
              Professional fees –
      Professional fees for the three months ended June 30, 2009 increased
      61% to $1.4 million, and for the six months ended June 30, 2009
      increased 4% to $2.2 million, as compared to the corresponding period
      in 2008, primarily due to increased legal
  expense.
  ·
              Stock-based
      compensation – Stock-based compensation expense for the three
      months ended June 30, 2009 was $0.6 million, consistent with the
      corresponding period in 2008.  Stock-based compensation expense
      for the six months ended June 30, 2009 decreased 6% to
      $1.2 million as compared to the corresponding period in
      2008.
  ·
              Other –Other costs for
      the three months ended June 30, 2009 decreased 4% to
      $0.4 million, and for the six months ended June 30, 2009
      decreased 25% to $0.8 million, as compared to the corresponding period in
      2008.
  Gain
on Long-Term Investments, Net, Interest Income, Interest Expense and Other
Expense, Net
  Gain on Long-Term Investments,
Net.  Gain on long-term investments, net was $306,000 and
$823,000 for the three and six months ended June 30, 2009, representing the
net increase in the fair value of our student loan auction rate securities and
the rights obtained from UBS AG, the investment bank that sold us our auction
rate securities.
  Interest
Income.  Interest income for the three months ended
June 30, 2009 decreased 83% to $0.2 million, and for the six months
ended June 30, 2009 decreased 87% to $0.6 million, as compared to the
corresponding period in 2008, due to lower yields on our investments as well as
lower cash and investment balances.
  Interest
Expense.  Interest expense for the three months ended
June 30, 2009 was $0.7 million, consistent with the corresponding
period in 2008.  Interest expense for the six months ended
June 30, 2009 increased 4% to $1.4 million as compared to the
corresponding period in 2008.
  22
 Table of Contents
 Other Expense,
Net.  Other expense, net for the three months ended
June 30, 2009 increased 7% to $0.6 million, as compared to the
comparable period for the prior year.  Other expense, net for the six
months ended June 30, 2009 increased 40% to $1.5 million as compared
to the corresponding period in 2008, primarily due to an impairment of surplus
equipment as a result of our restructuring in January 2009.
  Noncontrolling
Interest in Symphony Icon, Inc.
  The loss
attributable to the noncontrolling interest holders of Symphony Icon for the
three months ended June 30, 2009 decreased 44% to $3.5 million, and
for the six months ended June 30, 2009 decreased 44% to $6.2 million,
as compared to the corresponding period in 2008, due to the timing of
expenditures related to clinical development of the drug candidates licensed to
Symphony Icon.
  Net
Loss Attributable to Lexicon Pharmaceuticals, Inc. and Net Loss Attributable to
Lexicon Pharmaceuticals, Inc. per Common Share
  Net loss
attributable to Lexicon Pharmaceuticals, Inc. decreased to $20.1 million in
the three months ended June 30, 2009 from $20.0 million in the
corresponding period in 2008.  Net loss attributable to Lexicon
Pharmaceuticals, Inc. per common share was $0.15 in the three months ended
June 30, 2009, consistent with the corresponding period in
2008.  Net loss attributable to Lexicon Pharmaceuticals, Inc.
increased to $41.6 million in the six months ended June 30, 2009 from
$38.0 million in the corresponding period in 2008.  Net loss
attributable to Lexicon Pharmaceuticals, Inc. per common share increased to
$0.30 in the six months ended June 30, 2009 from $0.28 in the corresponding
period in 2008.
  Our
quarterly operating results have fluctuated in the past and are likely to do so
in the future, and we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future
performance.
  Liquidity
and Capital Resources
  We have
financed our operations from inception primarily through sales of common and
preferred stock, contract and milestone payments to us under our drug discovery
and development collaborations, target validation, database subscription and
technology license agreements, government grants and contracts, and financing
obtained under debt and lease arrangements.  We have also financed
certain of our research and development activities under our agreements with
Symphony Icon, Inc.  From our inception through June 30, 2009, we
had received net proceeds of $550.0 million from issuances of common and
preferred stock, including $203.2 million of net proceeds from the initial
public offering of our common stock in April 2000, $50.1 million from our July
2003 common stock offering, $37.5 million from our October 2006 common stock
offering and $198.0 million from our August 2007 sale of common stock to Invus,
L.P.  In addition, from our inception through June 30, 2009, we
received $445.8 million in cash payments from drug discovery and
development collaborations, target validation, database subscription and
technology license agreements, sales of compound libraries and reagents, and
government grants and contracts, of which $431.1 million had been
recognized as revenues through June 30, 2009.
  As of
June 30, 2009, we had $136.1 million in cash, cash equivalents and
investments, including $56.4 million in auction rate securities and related
rights as discussed below under “Disclosure about Market Risk,” and
$7.7 million in investments held by Symphony Icon.  As of
December 31, 2008, we had $142.2 million in cash, cash equivalents and
investments, including $55.7 million of auction rate securities and related
rights, and $16.6 million in investments held by Symphony Icon.  We
used cash of $52.1 million in operations in the six months ended
June 30, 2009. This consisted primarily of the consolidated net loss for
the period of $47.9 million, a net decrease in other operating liabilities
net of assets of $6.6 million, a $4.4 million decrease in deferred
revenue, and a gain on long-term investments and auction rate security rights of
$0.8 million, partially offset by non-cash charges of $3.3 million
related to depreciation expense, $2.8 million related to stock-based
compensation expense and $1.1 million related to the amortization of the
Symphony Icon purchase option.  Investing activities used cash of
$21.1 million in the six months ended June 30, 2009, primarily due to
purchases of investments of $60.0 million, partially offset by maturities
of investments of $39.1 million.  Financing activities provided
cash of $36.5 million due to proceeds from debt borrowings of
$37.4 million, partially offset by repayment of debt borrowings of
$0.9 million.
 23
 Table of Contents
  In
January 2009, we entered into a credit line agreement with UBS Bank USA that
provides, as of June 30, 2009, up to an aggregate amount of $37.0 million
in the form of an uncommitted, demand, revolving line of credit.  We
entered into the credit line in connection with our acceptance of an offer from
UBS AG, the investment bank that sold us our auction rate securities, providing
us with rights to require UBS to purchase our $56.9 million (par value) of
auction rate securities at par value during the period from June 30, 2010
through July 2, 2012.  The credit line is secured only by these
auction rate securities and advances under the credit line will be made on a “no
net cost” basis, meaning that the interest paid by us on advances will not
exceed the interest or dividends paid to us by the issuer of the auction rate
securities.  As of June 30, 2009, we had $37.0 million
outstanding under this credit line.
  In June
2007, we entered into a securities purchase agreement with Invus, L.P, pursuant
to which Invus purchased 50,824,986 shares of our common stock for approximately
$205.4 million in August 2007.  This purchase resulted in Invus’
ownership of 40% of the post-transaction outstanding shares of our common
stock.  Pursuant to the securities purchase agreement, Invus, at its
option, also has the right to require us to initiate up to two pro rata rights
offerings to our stockholders, which would provide all stockholders with
non-transferable rights to acquire shares of our common stock, in an aggregate
amount of up to $344.5 million, less the proceeds of any “qualified offerings”
that we may complete in the interim involving the sale of our common stock at
prices above $4.50 per share.  Invus may exercise its right to require
us to conduct the first rights offering by giving us notice within a period of
90 days beginning on November 28, 2009 (which we refer to as the first rights
offering trigger date), although we and Invus may agree to change the first
rights offering trigger date to as early as August 28, 2009 with the approval of
the members of our board of directors who are not affiliated with
Invus.  Invus may exercise its right to require us to conduct the
second rights offering by giving us notice within a period of 90 days beginning
on the date that is 12 months after Invus’ exercise of its right to require us
to conduct the first rights offering or, if Invus does not exercise its right to
require us to conduct the first rights offering, within a period of 90 days
beginning on the first anniversary of the first rights offering trigger
date.  The initial investment and subsequent rights offerings,
combined with any qualified offerings, were designed to achieve up to $550
million in proceeds to us.  Invus would participate in each rights
offering for up to its pro rata portion of the offering, and would commit to
purchase the entire portion of the offering not subscribed for by other
stockholders.
  In
connection with the securities purchase agreement, we entered into a
stockholders’ agreement with Invus under which Invus (a) has specified rights
with respect to designation of directors and participation in future equity
issuances by us, (b) is subject to certain standstill restrictions, as well as
restrictions on transfer and the voting of the shares of common stock held by it
and its affiliates, and (c), as long as Invus holds at least 15% of the
total number of outstanding shares of our common stock, is entitled to certain
minority protections.
  In June
2007, we entered into a series of related agreements providing for the financing
of the clinical development of certain of our drug candidates, including LX1031
and LX1032, along with any other pharmaceutical compositions modulating the same
targets as those drug candidates.  Under the financing arrangement, we
licensed to Symphony Icon, a wholly-owned subsidiary of Symphony Icon Holdings
LLC, our intellectual property rights related to the programs and Holdings
contributed $45 million to Symphony Icon in order to fund the clinical
development of the programs.  We also entered into a share purchase
agreement with Holdings under which we issued and sold to Holdings 7,650,622
shares of our common stock in exchange for $15 million and an exclusive
option to acquire all of the equity of Symphony Icon, thereby allowing us to
reacquire the programs.  The purchase option is exercisable by us at
any time, in our sole discretion, until June 15, 2011 at an exercise price of
(a) $81 million, if the purchase option is exercised before June 15,
2010 and (b) $90 million, if the purchase option is exercised on or after
June 15, 2010 and before June 15, 2011.  The purchase option exercise
price may be paid in cash or a combination of cash and common stock, at our sole
discretion, provided that the common stock portion may not exceed 40% of the
purchase option exercise price.
 24
 Table of Contents
  Upon the
recommendation of Symphony Icon’s development committee, which is comprised of
an equal number of representatives from us and Symphony Icon, Symphony Icon’s
board of directors may require us to pay Symphony Icon up to $15 million for
Symphony Icon’s use in the development of the programs in accordance with the
specified development plan and related development budget.  The
development committee’s right to recommend that Symphony Icon’s board of
directors submit such funding requirement to us will terminate on the one-year
anniversary of the expiration of the purchase option, subject to limited
exceptions.  In June 2009, Symphony Icon’s board of directors
requested us to pay Symphony Icon $1.5 million under this agreement, and we
expect that additional funding will be needed in the future.
  In April
2004, we obtained a $34.0 million mortgage on our facilities in The Woodlands,
Texas.  The mortgage loan has a ten-year term with a 20 year
amortization and bears interest at a fixed rate of 8.23%.  In May
2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc. leased a 76,000
square-foot laboratory and office space in Hopewell, New Jersey.  The
term of the lease extends until June 30, 2013.  The lease
provides for an escalating yearly base rent payment of $1.3 million in the first
year, $2.1 million in years two and three, $2.2 million in years four to
six, $2.3 million in years seven to nine and $2.4 million in years ten and
eleven.  We are the guarantor of the obligations of our subsidiary
under the lease.
  Our
future capital requirements will be substantial and will depend on many factors,
including our ability to obtain drug discovery and development collaborations
and other collaborations and technology license agreements, the amount and
timing of payments under such agreements, the level and timing of our research
and development expenditures, market acceptance of our products, the resources
we devote to developing and supporting our products and other
factors.  Our capital requirements will also be affected by any
expenditures we make in connection with license agreements and acquisitions of
and investments in complementary technologies and businesses.  We
expect to devote substantial capital resources to continue our research and
development efforts, to expand our support and product development activities,
and for other general corporate activities. We believe that our current
unrestricted cash and investment balances and cash and revenues we expect to
derive from drug discovery and development collaborations and other
collaborations and technology licenses will be sufficient to fund our operations
for at least the next 12 months. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we will need to sell additional equity or debt securities or obtain additional
credit arrangements. Additional financing may not be available on terms
acceptable to us or at all. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders.
  Disclosure
about Market Risk
  We are
exposed to limited market and credit risk on our cash equivalents which have
maturities of three months or less at the time of purchase.  We
maintain a short-term investment portfolio which consists of U.S. Treasury
bills, money market accounts, corporate debt securities and certificates of
deposit that mature three to 12 months from the time of purchase and a long-term
investment portfolio which consists of auction rate securities that mature
greater than 12 months from the time of purchase, which we believe are subject
to limited market and credit risk, other than as discussed below.  We
currently do not hedge interest rate exposure or hold any derivative financial
instruments in our investment portfolio.
 25
 Table of Contents
  At
June 30, 2009, we held $56.9 million (par value), with an estimated
fair value of $44.3 million, of investments with an auction interest rate
reset feature, known as auction rate securities.  These notes are
issued by various state agencies for the purpose of financing student
loans.  The securities have historically traded at par and are
redeemable at par plus accrued interest at the option of the
issuer.  Interest is typically paid at the end of each auction period
or semiannually.  Until February 2008, the market for our auction rate
securities was highly liquid.  Starting in February 2008, a
substantial number of auctions “failed,” meaning that there was not enough
demand to sell all of the securities that holders desired to sell at
auction.  The immediate effect of a failed auction is that such
holders cannot sell the securities at auction and the interest rate on the
security generally resets to a maximum interest rate.  In the case of
funds invested by us in auction rate securities which are the subject of a
failed auction, we may not be able to access the funds without a loss of
principal, unless a future auction on these investments is successful or the
issuer redeems the security.  As of June 30, 2009, we classified
the entire auction rate security investment balance as long-term investments on
our consolidated balance sheet because of our inability to determine when our
investments in auction rate securities would be sold.  We have also
modified our current investment strategy to reallocate our investments more into
U.S. treasury securities and U.S. treasury-backed money market
investments.
  At
June 30, 2009, observable auction rate securities market information was
not available to determine the fair value of our investments. We have estimated
the fair value of these securities at $44.3 million as of June 30,
2009 using models of the expected future cash flows related to the securities
and taking into account assumptions about the cash flows of the underlying
student loans, as well as secondary market data.  The assumptions used
in preparing the discounted cash flow model include estimates of interest rates,
timing and amount of cash flows, liquidity premiums and expected holding periods
of the auction rate securities, based on data available as of June 30,
2009.  The underlying sources of these assumptions are volatile and
the assumptions are subject to change as those sources and market conditions
change.
  In
November 2008, we accepted an offer from UBS AG, the investment bank that sold
us our auction rate securities, providing us with rights related to our auction
rate securities.  The rights permit us to require UBS to purchase our
$56.9 million (par value) of auction rate securities at par value during the
period from June 30, 2010 through July 2, 2012.  Conversely, UBS has
the right, in its discretion, to purchase or sell the securities at any time by
paying us the par value of such securities.  We expect to exercise the
rights and sell our auction rate securities back to UBS on June 30, 2010, the
earliest date allowable under the rights.  We are also eligible to
borrow from UBS Bank USA, an affiliate of UBS, at no net cost up to 75% of the
market value of the securities, as determined by UBS Bank USA, which loans would
become payable upon the purchase or sale of the securities by UBS.
  The
enforceability of the rights results in a separate asset that will be measured
at its fair value.  We elected to measure the rights under the fair
value option of SFAS No. 159.  As a result of accepting the rights, we
elected in 2008 to classify the rights and reclassify our investments in auction
rate securities as trading securities, as defined by SFAS No. 115.  As
a result, we will assess the fair value of these two individual assets and
record changes each period until the rights are exercised and the auction rate
securities are redeemed.  During the six months ended June 30,
2009, we recorded a gain of $0.7 million to reflect the increase in fair
value of the auction rate securities, and recorded a gain of $0.1 million
to reflect the increase in fair value of the rights, which are reflected in gain
on long-term investments, net, in the accompanying consolidated statement of
operations.  We expect that subsequent changes in the value of the
rights will largely offset the subsequent fair value movements of the auction
rate securities, subject to the continued expected performance by the investment
bank of its obligations under the agreement.
 26
 Table of Contents
  Excluding
auction rate securities and the related rights, at June 30, 2009, we had
approximately $87.4 million in cash and cash equivalents and short-term
investments, including $7.7 million in investments held by Symphony
Icon.  We believe that the working capital available to us excluding
the funds held in auction rate securities will be sufficient to meet our cash
requirements for at least the next 12 months.
  We have
operated primarily in the United States and substantially all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
  Item
      3.
              Quantitativeand Qualitative Disclosures about Market
      Risk
  See
“Disclosure about Market Risk” under “Item 2. Management’s Discussion and
Analysisof
Financial Condition and Results of Operations” for quantitative and qualitative
disclosures about market risk.
  Item
      4.
              Controlsand
Procedures
  Our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are sufficiently effective
to ensure that the information required to be disclosed by us in the reports we
file under the Securities Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation of such
controls and procedures as of the end of the period covered by this
report.
  Subsequent
to our evaluation, there were no significant changes in internal controls or
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
  27
 Table of Contents
  Part II
              Other
      Information
  Item
1A.                     Risk
Factors
  The
following risks and uncertainties are important factors that could cause actual
results or events to differ materially from those indicated by forward-looking
statements.  The factors described below are not the only ones we face
and additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations.
  Risks
Related to Our Need for Additional Financing and Our Financial
Results
  ·
              we
      will need additional capital in the future; if it is unavailable, we will
      be forced to significantly curtail or cease operations and, if it is not
      available on reasonable terms, we will be forced to obtain funds by
      entering into financing agreements on unattractive
  terms
  ·
              we
      have a history of net losses, and we expect to continue to incur net
      losses and may not achieve or maintain
  profitability
  ·
              we
      have licensed the intellectual property, including commercialization
      rights, to our drug candidates LX1031 and LX1032 to Symphony Icon and will
      not receive any future royalties or revenues with respect to these drug
      candidates unless we exercise our option to purchase Symphony
      Icon
  ·
              at
      June 30, 2009, we held $56.9 million (par value), with an
      estimated fair value of $44.3 million, of auction rate securities for
      which auctions have failed and, as a result, we may not be able to access
      at least the portion of these funds for which alternative funding is not
      available through our credit line with UBS Bank USA without a loss of
      principal
  ·
              our
      operating results have been and likely will continue to fluctuate, and we
      believe that period-to-period comparisons of our operating results are not
      a good indication of our future
performance
  Risks
Related to Discovery and Development of Our Drug Candidates
  ·
              we
      are an early-stage company, and have not proven our ability to
      successfully develop and commercialize drug candidates based on our drug
      target discoveries
  ·
              clinical
      testing of our drug candidates in humans is an inherently risky and
      time-consuming process that may fail to demonstrate safety and efficacy,
      which could result in the delay, limitation or prevention of regulatory
      approval
  Risks
Related to Our Relationships with Third Parties
  ·
              multiple
      or alternative approaches may provide advantages or benefits in the
      development of certain drug candidates and disagreements with Symphony
      Icon regarding the development of our drug candidates LX1031 or LX1032
      could negatively affect or delay their
  development
  ·
              we
      are dependent in many ways upon our collaborations with major
      pharmaceutical companies, and if we are unable to achieve milestones under
      those collaborations or if our collaborators’ efforts fail to yield
      pharmaceutical products on a timely basis, our opportunities to generate
      revenues and earn royalties will be
reduced
  ·
              conflicts
      with our collaborators could jeopardize the success of our collaborative
      agreements and harm our product development
  efforts
  28
 Table of Contents
  ·
              we
      lack the capability to manufacture materials for preclinical studies,
      clinical trials or commercial sales and rely on third parties to
      manufacture our drug candidates, which may harm or delay our product
      development and commercialization
efforts
  ·
              we
      rely on third parties to carry out drug development
    activities
  Risks
Related to Regulatory Approval of Our Drug Candidates
  ·
              our
      drug candidates are subject to a lengthy and uncertain regulatory process
      that may not result in the necessary regulatory approvals, which could
      adversely affect our ability to commercialize
  products
  ·
              if
      our potential products receive regulatory approval, we or our
      collaborators will remain subject to extensive and rigorous ongoing
      regulation
  Risks
Related to Commercialization of Products
  ·
              the
      commercial success of any products that we may develop will depend upon
      the degree of market acceptance of our products among physicians,
      patients, health care payors, private health insurers and the medical
      community
  ·
              if
      we are unable to establish sales and marketing capabilities or enter into
      agreements with third parties to market and sell our drug candidates, we
      may be unable to generate product
revenues
  ·
              if
      we are unable to obtain adequate coverage and reimbursement from
      third-party payors for any products that we may develop, our revenues and
      prospects for profitability will
suffer
  ·
              our
      competitors may develop products and technologies that make our products
      and technologies obsolete
  ·
              we
      may not be able to manufacture our drug candidates in commercial
      quantities, which would prevent us from commercializing our drug
      candidates
  Risks
Related to Our Intellectual Property
  ·
              if
      we are unable to adequately protect our intellectual property, third
      parties may be able to use our technology, which could adversely affect
      our ability to compete in the
market
  ·
              we
      may be involved in patent litigation and other disputes regarding
      intellectual property rights and may require licenses from third parties
      for our discovery and development and planned commercialization
      activities, and we may not prevail in any such litigation or other dispute
      or be able to obtain required
licenses
  ·
              we
      use intellectual property that we license from third parties, and if we do
      not comply with these licenses, we could lose our rights under
      them
  ·
              we
      have not sought patent protection outside of the United States for some of
      our inventions, and some of our licensed patents only provide coverage in
      the United States, and as a result, our international competitors could be
      granted foreign patent protection with respect to our
      discoveries
  ·
              we
      may be subject to damages resulting from claims that we, our employees or
      independent contractors have wrongfully used or disclosed alleged trade
      secrets of their former employers
  29
 Table of Contents
 Risks
Related to Employees, Growth and Facilities Operations
  ·
              the
      loss of key personnel or the inability to attract and retain additional
      personnel could impair our ability to expand our
  operations
  ·
              our
      collaborations with outside scientists may be subject to restriction and
      change
  ·
              security
      breaches may disrupt our operations and harm our operating
      results
  ·
              because
      most of our operations are located at a single facility, the occurrence of
      a disaster could significantly disrupt our
  business
  Risks
Related to Environmental and Product Liability
  ·
              we
      use hazardous chemicals and radioactive and biological materials in our
      business, and any claims relating to improper handling, storage or
      disposal of these materials could be time consuming and
    costly
  ·
              we
      may be sued for product liability
  Risks
Related to Our Common Stock
  ·
              our
      stock price may be extremely
volatile
  ·
              we
      may engage in future acquisitions, which may be expensive and time
      consuming and from which we may not realize anticipated
      benefits
  ·
              future
      sales of our common stock may depress our stock
  price
  ·
              Invus’
      ownership of our common stock and its other rights under the stockholders’
      agreement we entered into in connection with Invus’ $205.4 million initial
      investment in our common stock provide Invus with substantial influence
      over matters requiring stockholder approval, including the election of
      directors and approval of significant corporate transactions, as well as
      other corporate matters
  For
additional discussion of the risks and uncertainties that affect our business,
see “Item 1A. Risk Factors” included in our annual report on Form 10-K for
the year ended December 31, 2008, as filed with the Securities and Exchange
Commission.
  Item
4.                     Submission
of Matters to a Vote of Security Holders
  Our
annual meeting of stockholders was held on April 23, 2009 to consider and vote
on the following proposals:
  (1)
              The
      following individuals were nominated and elected as Class III directors,
      with the following numbers of shares voted for and withheld for such
      directors:
  Name of Director
                          For
                          WithheldArthur
      T. Sands, M.D., Ph.D.
                          112,548,724
                          9,872,524Philippe
      J. Amouyal
                          105,645,663
                          16,775,585Frank
      P. Palantoni
                          117,372,212
                          5,049,036
  30
 Table of Contents
 
 (2)
              The
      following additional matters were considered and approved, with the
      following numbers of shares voted for, voted against and abstaining with
      respect to such matters:
  Matter
                    For
                    Against
                    Abstain
                    BrokerNon-VotesApproval
      of our Equity Incentive Plan, amending and restating our existing 2000
      Equity Incentive Plan
                    95,497,454
                    7,018,866
                    17,175
                    19,887,753Approval
      of our Non-Employee Directors’ Stock Option Plan, amending and restating
      our existing 2000 Non-Employee Directors’ Stock Option
Plan
                    100,246,514
                    2,268,368
                    18,612
                    19,887,753Ratification
      and approval of the appointment of Ernst & Young LLP as our
      independent auditors for the fiscal year ending December 31,
      2009
                    121,727,493
                    336,195
                    357,559
                    —
 
 A special
meeting of stockholders was held on July 15, 2009 to consider and vote on the
following proposal, which was considered and approved, with the following
numbers of shares voting for, voting against and abstaining with respect to the
proposal:
  Matter
                      For
                      Against
                      AbstainApproval
      of an amendment to our certificate of incorporation increasing the number
      of authorized shares of our common stock from 300,000,000 to
      900,000,000
                      112,222,606
                      8,984,744
                      93,313
 
 There
were no broker non-votes with respect to the proposal.
 
 Item
6.                               Exhibits
  Exhibit No.
                        
                        Description3.1
                        
                        —
                        Third
      Certificate of Amendment to Restated Certificate of
      Incorporation31.1
                        
                        —
                        Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                        
                        —
                        Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                        
                        —
                        Certification
      of Principal Executive and Principal Financial Officers Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002
   31
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 Signatures
  
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  
 Lexicon
      Pharmaceuticals, Inc.Date:  August
      6, 2009
              By:
              /s/
      Arthur T. SandsArthur
      T. Sands, M.D., Ph.D.President
      and Chief Executive Officer
 
 Date:  August
      6, 2009
              By:
              /s/
      Ajay BansalAjay
      BansalExecutive
      Vice President, Corporate Development and Chief Financial
      Officer
 
 
 32
 Table of Contents
 Index
to Exhibits
   Exhibit No.
                          
                          Description3.1
                          
                          —
                          Third
      Certificate of Amendment to Restated Certificate of
      Incorporation31.1
                          
                          —
                          Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                          
                          —
                          Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                          
                          —
                          Certification
      of Principal Executive and Principal Financial Officers Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002