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 September 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
October 27, 2009, 175,704,880 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.









Table of Contents




Lexicon
Pharmaceuticals, Inc.
  Table of Contents
  PageFactors Affecting Forward-Looking
      StatementsPart I – Financial Information
              3Item
      1.
              Financial Statements
              3Consolidated Balance Sheets – September 30, 2009
      (unaudited) and December 31, 2008
              3Consolidated Statements of Operations
      (unaudited) – Three and Nine Months Ended September 30, 2009 and
      2008
              4Consolidated Statements of Stockholders’ Equity
      (unaudited) – Nine Months Ended September 30, 2009 and
      2008
              5Consolidated Statements of Cash Flows (unaudited) –
      Nine Months Ended September 30, 2009 and 2008
              6Notes to Consolidated Financial Statements
      (unaudited)
              7Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              17Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              26Item
      4.
              Controls and Procedures
              26Part II – Other Information
              28Item
      1.
              Legal Proceedings
              28Item
      1A.
              Risk Factors
              28Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              31Item
      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.
  ——————
 
 FactorsAffecting 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
 PartI  –  Financial Information
  Item1.        Financial
Statements
  Lexicon
Pharmaceuticals, Inc.
  ConsolidatedBalance Sheets
 (In
thousands, except par value)
  As
      of September 30,
                                                                          
                                                                          
                                                                          As
      of December 31,2009
                                                                          
                                                                          
                                                                          2008Assets
                                                                          
                                                                          (unaudited)Current
      assets:Cash and cash
      equivalents
                                                                          
                                                                          $
                                                                          62,736
                                                                          
                                                                          
                                                                          $
                                                                          85,873Short-term investments,
      including restricted investments of $430
                                                                          
                                                                          
                                                                          56,727
                                                                          
                                                                          
                                                                          
                                                                          629Short-term investments held by
      Symphony Icon, Inc.
                                                                          
                                                                          
                                                                          5,683
                                                                          
                                                                          
                                                                          
                                                                          16,610Accounts receivable, net of
      allowances of $35
                                                                          
                                                                          
                                                                          1,347
                                                                          
                                                                          
                                                                          
                                                                          568Prepaid expenses and other
      current assets
                                                                          
                                                                          
                                                                          7,217
                                                                          
                                                                          
                                                                          
                                                                          5,487Total current
      assets
                                                                          
                                                                          
                                                                          133,710
                                                                          
                                                                          
                                                                          
                                                                          109,167Long-term
      investments
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          55,686Property
      and equipment, net of accumulated depreciation and amortization of $74,510
      and $71,102, respectively
                                                                          
                                                                          
                                                                          60,090
                                                                          
                                                                          
                                                                          
                                                                          65,087Goodwill
                                                                          
                                                                          
                                                                          25,798
                                                                          
                                                                          
                                                                          
                                                                          25,798Other
      assets
                                                                          
                                                                          
                                                                          4,086
                                                                          
                                                                          
                                                                          
                                                                          5,770Total assets
                                                                          
                                                                          $
                                                                          223,684
                                                                          
                                                                          
                                                                          $
                                                                          261,508Liabilities
      and EquityCurrent
      liabilities:Accounts
    payable
                                                                          
                                                                          $
                                                                          3,413
                                                                          
                                                                          
                                                                          $
                                                                          7,926Accrued
      liabilities
                                                                          
                                                                          
                                                                          6,812
                                                                          
                                                                          
                                                                          
                                                                          6,615Current portion of deferred
      revenue
                                                                          
                                                                          
                                                                          1,081
                                                                          
                                                                          
                                                                          
                                                                          5,672Current portion of long-term
      debt
                                                                          
                                                                          
                                                                          38,860
                                                                          
                                                                          
                                                                          
                                                                          963Total current
      liabilities
                                                                          
                                                                          
                                                                          50,166
                                                                          
                                                                          
                                                                          
                                                                          21,176Deferred
      revenue, net of current portion
                                                                          
                                                                          
                                                                          14,212
                                                                          
                                                                          
                                                                          
                                                                          14,212Long-term
      debt
                                                                          
                                                                          
                                                                          28,754
                                                                          
                                                                          
                                                                          
                                                                          29,529Other
      long-term liabilities
                                                                          
                                                                          
                                                                          653
                                                                          
                                                                          
                                                                          
                                                                          764Total
    liabilities
                                                                          
                                                                          
                                                                          93,785
                                                                          
                                                                          
                                                                          
                                                                          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;
      900,000 and 300,000 shares authorized, respectively; 137,452 and 136,797
      shares issued, respectively
                                                                          
                                                                          
                                                                          137
                                                                          
                                                                          
                                                                          
                                                                          137Additional paid-in
      capital
                                                                          
                                                                          
                                                                          677,546
                                                                          
                                                                          
                                                                          
                                                                          672,838Accumulated
      deficit
                                                                          
                                                                          
                                                                          (548,170
                                                                          )
                                                                          
                                                                          
                                                                          (487,395
                                                                          )Accumulated other
      comprehensive loss
                                                                          
                                                                          
                                                                          (1
                                                                          )
                                                                          
                                                                          
                                                                          —Treasury stock at cost, 80 and
      no shares, respectively
                                                                          
                                                                          
                                                                          (88
                                                                          )
                                                                          
                                                                          
                                                                          —Total Lexicon Pharmaceuticals,
      Inc. stockholders’ equity
                                                                          
                                                                          
                                                                          129,424
                                                                          
                                                                          
                                                                          
                                                                          185,580Noncontrolling interest in
      Symphony Icon, Inc.
                                                                          
                                                                          
                                                                          475
                                                                          
                                                                          
                                                                          
                                                                          10,247Total equity
                                                                          
                                                                          
                                                                          129,899
                                                                          
                                                                          
                                                                          
                                                                          195,827Total liabilities and
      equity
                                                                          
                                                                          $
                                                                          223,684
                                                                          
                                                                          
                                                                          $
                                                                          261,508
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  Consolidated
Statements of Operations
 (In
thousands, except per share amounts)
 (Unaudited)
  
 Three
      Months Ended September 30,
                                                                                                                              
                                                                                                                              
                                                                                                                              Nine
      Months Ended September 30,2009
                                                                                                                              
                                                                                                                              
                                                                                                                              2008
                                                                                                                              
                                                                                                                              
                                                                                                                              2009
                                                                                                                              
                                                                                                                              
                                                                                                                              2008Revenues:Collaborative
      research
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,650
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              7,202
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              8,042
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              22,789Subscription and license
      fees
                                                                                                                              
                                                                                                                              
                                                                                                                              481
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              310
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,246
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,182Total
      revenues
                                                                                                                              
                                                                                                                              
                                                                                                                              2,131
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,512
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              9,288
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              25,971Operating
      expenses:Research
      and development, including stock-based compensation of $733, $836, $2,328,
      and $2,913, respectively
                                                                                                                              
                                                                                                                              
                                                                                                                              19,320
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              27,344
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              62,404
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              84,868General
      and administrative, including stock-based compensation of $547, $583,
      $1,750, and $1,868, respectively
                                                                                                                              
                                                                                                                              
                                                                                                                              4,568
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              4,990
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              14,993
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              16,749Total operating
      expenses
                                                                                                                              
                                                                                                                              
                                                                                                                              23,888
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              32,334
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              77,397
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              101,617Loss
      from operations
                                                                                                                              
                                                                                                                              
                                                                                                                              (21,757
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (24,822
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (68,109
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (75,646
                                                                                                                              )Gain
      (loss) on investments, net
                                                                                                                              
                                                                                                                              
                                                                                                                              185
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (3,322
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              1,008
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (3,322
                                                                                                                              )Interest
      income
                                                                                                                              
                                                                                                                              
                                                                                                                              103
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              956
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              669
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              5,155Interest
      expense
                                                                                                                              
                                                                                                                              
                                                                                                                              (785
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (675
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (2,180
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (2,020
                                                                                                                              )Other
      expense, net
                                                                                                                              
                                                                                                                              
                                                                                                                              (516
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (535
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (2,037
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (1,621
                                                                                                                              )Consolidated
      net loss before taxes
                                                                                                                              
                                                                                                                              
                                                                                                                              (22,770
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (28,398
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (70,649
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (77,454
                                                                                                                              )Income
      tax benefit
                                                                                                                              
                                                                                                                              
                                                                                                                              102
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              102
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —Consolidated
      net loss
                                                                                                                              
                                                                                                                              
                                                                                                                              (22,668
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (23,398
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (70,547
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (77,454
                                                                                                                              )Less:
      Net loss attributable to noncontrolling interest in Symphony Icon,
      Inc.
                                                                                                                              
                                                                                                                              
                                                                                                                              3,526
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              4,939
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              9,772
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              16,011Net
      loss attributable to Lexicon Pharmaceuticals, Inc.
                                                                                                                              
                                                                                                                              $
                                                                                                                              (19,142
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (23,459
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (60,775
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (61,443
                                                                                                                              )Net
      loss attributable to Lexicon Pharmaceuticals, Inc. per common share, basic
      and diluted
                                                                                                                              
                                                                                                                              $
                                                                                                                              (0.14
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (0.17
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (0.44
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              (0.45
                                                                                                                              )Shares
      used in computing net loss attributable to Lexicon Pharmaceuticals, Inc.
      per common share, basic and diluted
                                                                                                                              
                                                                                                                              
                                                                                                                              137,313
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              136,796
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              137,240
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              136,796
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
  4
 Table of Contents
 Lexicon
Pharmaceuticals, Inc.
  Consolidated
Statements of Stockholders’ Equity
 (In
thousands)
 (Unaudited)
 
 
 Lexicon
      Pharmaceuticals, Inc. StockholdersAdditional
      Paid-In
                                                                                                                                                            Capital
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          Accumulated
      Deficit
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          Accumulated
      Other Comprehensive Loss
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          Treasury
      Stock
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          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
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,781
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,781
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,781Exercise
      of common stock options
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          1
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          1
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          1Net
      loss
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (61,443
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (61,443
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (16,011
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (77,454
                                                                                                                                                          )Unrealized
      loss on investments
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          42
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          42
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          42Comprehensive
      loss
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (61,401
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (77,412
                                                                                                                                                          )Balance
      at September 30, 2008
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          136,796
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          137
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          671,484
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (471,978
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          38
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          199,681
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          14,260
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          213,941Balance
      at December 31, 2008
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          136,797
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          137
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          672,838
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (487,395
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          185,580
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          10,247
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          195,827Stock-based
      compensation
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,443
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,443
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,443Grant
      of restricted stock
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          534
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —Exercise
      of common stock options
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          121
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          265
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          265
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          265Repurchase
      of common stock
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (88
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (88
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (88
                                                                                                                                                          )Net
      loss
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (60,775
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (60,775
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (9,772
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (70,547
                                                                                                                                                          )Unrealized
      loss on investments
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (1
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (1
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          —
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (1
                                                                                                                                                          )Comprehensive
      loss
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (60,776
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (70,548
                                                                                                                                                          )Balance
      at September 30, 2009
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          137,452
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          137
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          677,546
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (548,170
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (1
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (88
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          129,424
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          475
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          129,899
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
 5
 Table of Contents
  Lexicon
Pharmaceuticals, Inc.
  Consolidated
Statements of CashFlows
 (In
thousands)
 (Unaudited)
  Nine
      Months Ended September 30,2009
                                                              
                                                              
                                                              2008Cash
      flows from operating activities:Consolidated net
      loss
                                                              
                                                              $
                                                              (70,547
                                                              )
                                                              
                                                              $
                                                              (77,454
                                                              )Adjustments to reconcile
      consolidated net loss to net cash used in operating
      activities:Depreciation
                                                              
                                                              
                                                              4,760
                                                              
                                                              
                                                              
                                                              6,057Impairment of fixed
      assets
                                                              
                                                              
                                                              445
                                                              
                                                              
                                                              
                                                              —Amortization of Symphony Icon,
      Inc. purchase option
                                                              
                                                              
                                                              1,606
                                                              
                                                              
                                                              
                                                              1,606Stock-based
      compensation
                                                              
                                                              
                                                              4,078
                                                              
                                                              
                                                              
                                                              4,781(Gain) loss on
      investments
                                                              
                                                              
                                                              (2,396
                                                              )
                                                              
                                                              
                                                              3,322Loss on ARS
Rights
                                                              
                                                              
                                                              1,388
                                                              
                                                              
                                                              
                                                              —Gain on disposal of property and
      equipment
                                                              
                                                              
                                                              (15
                                                              )
                                                              
                                                              
                                                              —Changes in operating assets and
      liabilities:(Increase) decrease in
      accounts receivable
                                                              
                                                              
                                                              (779
                                                              )
                                                              
                                                              
                                                              993Increase in prepaid expenses
      and other current assets
                                                              
                                                              
                                                              (1,730
                                                              )
                                                              
                                                              
                                                              (2,957
                                                              )Decrease in other
      assets
                                                              
                                                              
                                                              78
                                                              
                                                              
                                                              
                                                              55Increase (decrease) in
      accounts payable and other liabilities
                                                              
                                                              
                                                              (4,062
                                                              )
                                                              
                                                              
                                                              961Decrease in deferred
      revenue
                                                              
                                                              
                                                              (4,591
                                                              )
                                                              
                                                              
                                                              (13,274
                                                              )Net cash used in operating
      activities
                                                              
                                                              
                                                              (71,765
                                                              )
                                                              
                                                              
                                                              (75,910
                                                              )Cash
      flows from investing activities:Purchases of property and
      equipment
                                                              
                                                              
                                                              (303
                                                              )
                                                              
                                                              
                                                              (1,672
                                                              )Proceeds from disposal of
      property and equipment
                                                              
                                                              
                                                              110
                                                              
                                                              
                                                              
                                                              —Purchases of investments held
      by Symphony Icon, Inc.
                                                              
                                                              
                                                              (1,500
                                                              )
                                                              
                                                              
                                                              —Maturities of investments held
      by Symphony Icon, Inc.
                                                              
                                                              
                                                              12,427
                                                              
                                                              
                                                              
                                                              15,519Purchases
      of investments
                                                              
                                                              
                                                              (59,955
                                                              )
                                                              
                                                              
                                                              (39,847
                                                              )Maturities of
      investments
                                                              
                                                              
                                                              60,550
                                                              
                                                              
                                                              
                                                              179,830Net cash provided by investing
      activities
                                                              
                                                              
                                                              11,329
                                                              
                                                              
                                                              
                                                              153,830Cash
      flows from financing activities:Proceeds from exercise of
      stock options
                                                              
                                                              
                                                              265
                                                              
                                                              
                                                              
                                                              1Repurchase of common
      stock
                                                              
                                                              
                                                              (88
                                                              )
                                                              
                                                              
                                                              —Proceeds from debt
      borrowings
                                                              
                                                              
                                                              38,592
                                                              
                                                              
                                                              
                                                              —Repayment of debt
      borrowings
                                                              
                                                              
                                                              (1,470
                                                              )
                                                              
                                                              
                                                              (650
                                                              )Net cash provided by (used in)
      financing activities
                                                              
                                                              
                                                              37,299
                                                              
                                                              
                                                              
                                                              (649
                                                              )Net
      increase (decrease) in cash and cash equivalents
                                                              
                                                              
                                                              (23,137
                                                              )
                                                              
                                                              
                                                              77,271Cash
      and cash equivalents at beginning of period
                                                              
                                                              
                                                              85,873
                                                              
                                                              
                                                              
                                                              22,938Cash
      and cash equivalents at end of period
                                                              
                                                              $
                                                              62,736
                                                              
                                                              
                                                              $
                                                              100,209Supplemental
      disclosure of cash flow information:Cash paid for
      interest
                                                              
                                                              $
                                                              1,897
                                                              
                                                              
                                                              $
                                                              1,962Supplemental
      disclosure of non-cash investing and financing activities:Unrealized gain (loss) on
      investments
                                                              
                                                              $
                                                              (1
                                                              )
                                                              
                                                              $
                                                              42
 
 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 nine-month period ended September 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 and therefore has consolidated the financial condition and results
of operations of Symphony Icon.  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 $298,000 and $925,000 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 nine months ended
September 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.
  In
October 2009, Lexicon completed the public offering and sale of 38,333,332
shares of its common stock (see note 12).  Net loss per share would
have decreased if this offering would have been completed prior to
September 30, 2009 as the weighted average number of shares would have
increased.
  3.        Stock-Based
Compensation
  The
Company recorded $1.3 million and $1.4 million of stock-based
compensation expense for the three months ended September 30, 2009 and
2008, respectively, and $4.1 million and $4.8 million of stock-based
compensation expense for the nine months ended September 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 nine months
ended September 30, 2009 and 2008:
  7
 Table of Contents
  Expected
      Volatility
                        
                        
                        Risk-free
      Interest Rate
                        
                        
                        Expected
      Term
                        
                        
                        Estimated
      Forfeitures
                        
                        
                        Dividend
                          RateSeptember
      30, 2009:Employees
                        
                        
                        78
                        %
                        
                        
                        1.9
                        %
                        
                        
                        5
                        
                        
                        
                        24
                        %
                        
                        
                        0
                        %Officers
      and non-employee directors
                        
                        
                        77
                        %
                        
                        
                        2.7
                        %
                        
                        
                        8
                        
                        
                        
                        7
                        %
                        
                        
                        0
                        %September
      30, 2008:Employees
                        
                        
                        66
                        %
                        
                        
                        2.9
                        %
                        
                        
                        6
                        
                        
                        
                        22
                        %
                        
                        
                        0
                        %Officers
      and non-employee directors
                        
                        
                        66
                        %
                        
                        
                        3.8
                        %
                        
                        
                        9
                        
                        
                        
                        6
                        %
                        
                        
                        0
                        %
 
 The
following is a summary of option activity under Lexicon’s stock option plans for
the nine months ended September 30, 2009:
  Options
                      
                      
                      Weighted
      Average Exercise Price(in
      thousands)Outstanding
      at December 31, 2008
                      
                      
                      16,898
                      
                      
                      $
                      5.13Granted
                      
                      
                      4,852
                      
                      
                      
                      1.44Exercised
                      
                      
                      (121
                      )
                      
                      
                      2.18Expired
                      
                      
                      (2,199
                      )
                      
                      
                      6.11Forfeited
                      
                      
                      (903
                      )
                      
                      
                      2.48Outstanding
      at September 30, 2009
                      
                      
                      18,527
                      
                      
                      
                      4.20Exercisable
      at September 30, 2009
                      
                      
                      11,212
                      
                      
                      $
                      5.70
 
 During
the nine months ended September 30, 2009, Lexicon granted its officers
restricted stock bonus awards under the 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 nine months ended September 30,
2009:
  Shares
                      
                      
                      Weighted
      Average Grant Date
                        Fair
      Value(in
      thousands)Outstanding
      at December 31, 2008
                      
                      
                      —
                      
                      
                      $
                      —Granted
                      
                      
                      534
                      
                      
                      
                      1.45Vested
                      
                      
                      (267
                      )
                      
                      
                      1.45Forfeited
                      
                      
                      (12
                      )
                      
                      
                      1.45Nonvested
      at September 30, 2009
                      
                      
                      255
                      
                      
                      $
                      1.45
 
 4.        Recent
Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued a new
accounting pronouncement regarding fair value measurements (formerly Statement
of Financial Standards (“SFAS”) No. 157, “Fair Value
Measurements”).  The pronouncement, found under FASB Accounting
Standards Codification (“ASC”) Topic 820, defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  This
pronouncement 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 pronouncement does not require any new
fair value measurements.  More specifically, this pronouncement
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.  This
pronouncement was effective January 1, 2008 for financial assets and liabilities
and January 1, 2009 for non-financial assets and
liabilities.  The adoption of this pronouncement 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 a new accounting pronouncement regarding business
combinations (formerly SFAS No. 141(Revised), “Business Combinations”), which
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
pronouncement, found under FASB ASC Topic 805, 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. This pronouncement 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
pronouncement. This pronouncement 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 this
pronouncement did not have an effect on the Company’s financial position or
results of operations.
  In
December 2007, the FASB issued a new pronouncement regarding noncontrolling
interests (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements”) to improve the relevance, comparability, and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements. This pronouncement, found under FASB ASC
Topic 810, 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
pronouncement 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 pronouncement 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
pronouncement 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 this pronouncement 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 a new pronouncement regarding collaborative
arrangements (formerly Emerging Issues Task Force 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 this pronouncement,
found under FASB ASC Topic 808, 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 11, “Collaboration and License Agreements,” for
additional required disclosures.
  In May
2009, the FASB issued a new accounting pronouncement regarding subsequent events
(formerly 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 pronouncement, found under FASB ASC
Topic 855, 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.  This pronouncement is effective for interim or fiscal periods
ending after June 15, 2009.  The Company has evaluated subsequent
events through October 30, 2009, which is the date the financial statements
were issued.  The Company's adoption of this pronouncement did not
have an effect on its financial position or results of operations.
 9
 Table of Contents
  In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” which changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated.  The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities
that most significantly impacts the entity’s economic
performance.  This pronouncement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after November 15,
2009.  The Company is currently evaluating the effect, if any, of this
statement on its financial condition and results of operations.
  5.        Cash
and Cash Equivalents and Investments
  The fair
value of cash and cash equivalents and investments held at September 30,
2009 and December 31, 2008 are as follows:
  As
      of September 30, 2009Amortized
      Cost
                                                              
                                                              
                                                              Gross
      Unrealized Gains
                                                              
                                                              
                                                              Gross
      Unrealized Losses
                                                              
                                                              
                                                              Estimated
      Fair Value(In
      thousands)Cash
      and cash equivalents
                                                              
                                                              $
                                                              62,737
                                                              
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              $
                                                              (1
                                                              )
                                                              
                                                              $
                                                              62,736Securities
      maturing within one year:Certificates
      of deposit
                                                              
                                                              
                                                              508
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              508ARS
      Rights
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              10,672
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              10,672Securities
      maturing after ten years:Auction
      rate securities
                                                              
                                                              
                                                              56,525
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              (10,978
                                                              )
                                                              
                                                              
                                                              45,547Total short-term
      investments
                                                              
                                                              $
                                                              57,033
                                                              
                                                              
                                                              $
                                                              10,672
                                                              
                                                              
                                                              $
                                                              (10,978
                                                              )
                                                              
                                                              $
                                                              56,727Short-term
      investments held by Symphony Icon, Inc.:Cash
      and cash equivalents
                                                              
                                                              
                                                              5,683
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              5,683Total short-term investments
      held by Symphony Icon, Inc.
                                                              
                                                              $
                                                              5,683
                                                              
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              $
                                                              5,683Total
      cash and cash equivalents and investments
                                                              
                                                              $
                                                              125,453
                                                              
                                                              
                                                              $
                                                              10,672
                                                              
                                                              
                                                              $
                                                              (10,979
                                                              )
                                                              
                                                              $
                                                              125,146
 
 
 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
 
 10
 Table of Contents
 There
were no realized gains or losses for the three and nine months ended
September 30, 2009, respectively. There were $5,000 and $123,000 of
realized gains for the three and nine months ended September 30, 2008,
respectively.  The cost of securities sold is based on the specific
identification method.
  At
September 30, 2009, Lexicon held $56.5 million (par value), with an
estimated fair value of $45.5 million, of 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.  Prior to September 30, 2009, Lexicon had
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; however, as of September 30, 2009, Lexicon classified its auction
rate security investment as short-term investments as management expects to
exercise its right to redeem these securities on June 30, 2010 under its
agreement with UBS AG as discussed below.  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.
  At
September 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 $45.5 million as of
September 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 September 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 $56.5 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 7).
  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 a fair value option, which permits entities to choose, at certain election
dates, to measure eligible items at fair value.  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 from
available-for-sale 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 September 30, 2009,
Lexicon recorded a gain of $1.7 million to reflect the increase in fair
value of the auction rate securities, and recorded a loss of $1.5 million
to reflect the decline in fair value of the ARS Rights, which are reflected in
gain on investments, net, in the accompanying consolidated statement of
operations.  During the nine months ended September 30, 2009,
Lexicon recorded a gain of $2.4 million to reflect the increase in fair
value of the auction rate securities, and recorded a loss of $1.4 million
to reflect the decline in fair value of the ARS Rights, which are reflected in
gain on investments, net, in the accompanying consolidated statement of
operations.  During the three and nine months ended September 30,
2008, Lexicon recorded a loss of $3.3 million to reflect the decline in
fair value of the auction rate securities, which is reflected in loss on
investments in the accompanying consolidated statements 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 September 30, 2009, Lexicon
had approximately $68.9 million in cash and cash equivalents and short-term
investments, including $5.7 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.  The following levels are 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 described above as of
September 30, 2009 and December 31, 2008.
  Financial Assets at Fair
      Value as of
      September 30, 2009Level
      1
                                          
                                          Level
      2
                                          
                                          Level
      3
                                          
                                          
                                          Total(in
      thousands)Cash
      and cash equivalents
                                          
                                          $
                                          62,736
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          62,736Short-term
      investments
                                          
                                          
                                          508
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          56,219
                                          
                                          
                                          
                                          56,727Short-term
      investments held by  Symphony Icon, Inc.
                                          
                                          
                                          5,683
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          5,683Total cash and cash equivalents
      and investments
                                          
                                          $
                                          68,927
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          56,219
                                          
                                          
                                          $
                                          125,146
 
 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
  
 12
 Table of Contents
 The table
presented below summarizes the change in consolidated balance sheet carrying
value associated with Level 3 financial assets for the nine months ended
September 30, 2009.
  Short-term
      Investments
                                                                                                                              
                                                                                                                              
                                                                                                                              Long-term
      Investments
                                                                                                                              
                                                                                                                              
                                                                                                                              Total(in
      thousands)Balance
      at December 31, 2008
                                                                                                                              
                                                                                                                              $
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              55,686
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              55,686Unrealized
      gains included in earnings as gain on investments, net
                                                                                                                              
                                                                                                                              
                                                                                                                              185
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              823
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,008Net
      sales and settlements
                                                                                                                              
                                                                                                                              
                                                                                                                              (375
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (100
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (475
                                                                                                                              )Reclassification
      from long-term to short-term investments
                                                                                                                              
                                                                                                                              
                                                                                                                              56,409
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (56,409
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              —Balance
      at September 30, 2009
                                                                                                                              
                                                                                                                              $
                                                                                                                              56,219
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              56,219
 
 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.         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 September 30, 2009, up to an aggregate amount of $37.8
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 $56.5 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 September 30, 2009, Lexicon
had $37.8 million outstanding under this credit line.
  8.        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 $3.7 million and
$5.3 million is recorded in other assets in the accompanying consolidated
balance sheets as of September 30, 2009 and December 31, 2008,
respectively, and the amortization expense of $535,000 and $1.6 million is
recorded in other expense, net in the accompanying consolidated statements of
operations for the three and nine months ended September 30, 2009 and 2008,
respectively.
 13
 Table of Contents
  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.  Through September 2009, Symphony Icon’s Board of
Directors has requested the Company to pay Symphony Icon $4.3 million under
this agreement, $1.5 million of which has been paid through
September 30, 2009, and management expects that additional funding will be
needed in the future.
  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
$9.8 million and $16.0 million in the nine months ended
September 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 September 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.
 14
 Table of Contents
  9.        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
$9.6 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 September 30, 2009 and December 31, 2008.
  Legal
Proceedings:  In September 2009, Lexicon entered into a
settlement agreement with the University of Utah Research Foundation (“UURF”)
relating to its litigation with UURF with respect to Lexicon’s alleged 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 settlement agreement provides, among other things,
that Lexicon will make a payment to UURF in exchange for the satisfaction in
full of all present and future royalty obligations with respect to materials
made by Lexicon using the technology claimed by the licensed patents, resulting
in Lexicon's license rights becoming fully paid-up with respect to such
materials, and, subject to such rights and sublicenses previously granted by
Lexicon, will grant to UURF an exclusive sublicense, with rights to grant future
sublicenses, to its rights under the licensed patents. The settlement agreement
includes a full mutual release of all claims relating to Lexicon’s license
agreement with GenPharm and the related letter agreements between Lexicon and
UURF.  Lexicon paid the agreed upon amount, which management considers
immaterial, to UURF in September 2009.
  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.
  10.        Comprehensive
Loss
  Comprehensive
loss consists of:
  Three
      Months Ended September 30,2009
                                  
                                  2008(in
      thousands)Net
      loss attributable to Lexicon Pharmaceuticals, Inc.
                                  
                                  $
                                  (19,142
                                  )
                                  
                                  $
                                  (23,459
                                  )Unrealized
      gain on short-term investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  23Net
      recognized loss on investments included in earnings
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,322Unrealized
      loss on long-term investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (82
                                  )Net
      comprehensive loss attributable to Lexicon Pharmaceuticals,
      Inc.
                                  
                                  $
                                  (19,142
                                  )
                                  
                                  $
                                  (20,196
                                  )
 
 15
 Table of Contents
 Nine
      Months Ended September 30,2009
                              
                              
                              2008(in
      thousands)Net
      loss attributable to Lexicon Pharmaceuticals, Inc.
                              
                              $
                              (60,775
                              )
                              
                              $
                              (61,443
                              )Unrealized
      gain (loss) on short-term investments
                              
                              
                              (1
                              )
                              
                              
                              42Net
      comprehensive loss attributable to Lexicon Pharmaceuticals,
      Inc.
                              
                              $
                              (60,776
                              )
                              
                              $
                              (61,401
                              )
 
 11.        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 for the purpose of accounting for
these arrangements.
  Lexicon
established an alliance with Bristol-Myers Squibb in December 2003 to discover,
develop and commercialize small molecule drugs in the neuroscience
field.  Lexicon did not recognize any revenue under this agreement
during the three months ended September 30, 2009.  Revenue
recognized under this agreement was $2.9 million for the three months ended
September 30, 2008 and $1.7 million and $8.1 million for the nine
months ended September 30, 2009 and 2008, respectively.
  Lexicon
established an alliance with Genentech in December 2002 to discover novel
therapeutic proteins and antibody targets.  The target discovery
portion of the alliance ended in 2008.  Lexicon did not recognize any
revenue under this agreement during the three and nine months ended
September 30, 2009.  Revenue recognized under this agreement was
$1.1 million and $3.3 million for the three and nine months ended
September 30, 2008, respectively.
  Lexicon
established an alliance with Organon in May 2005 to jointly discover, develop
and commercialize novel biotherapeutic drugs.  Revenue recognized
under this agreement was $105,000 and $2.0 million for the three months
ended September 30, 2009 and 2008, respectively, and $2.4 million and
$7.5 million for the nine months ended September 30, 2009 and 2008,
respectively.
  12.        Subsequent
Events
  In
October 2009, Lexicon completed the public offering and sale of 38,333,332
shares of its common stock at a price of $1.50 per share.  The net
proceeds from the offering were $55.2 million, after deducting underwriting
discounts of approximately $1.9 million and offering expenses of approximately
$0.4 million.  Lexicon currently intends to use the net proceeds
for research and development, but may use a portion of the net proceeds to
acquire or invest in complementary products and technologies or for general
corporate purposes.
  16
 Table of Contents
 Item2.   Management’s Discussion 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.
  17
 Table of Contents
 Since our
inception, we have incurred significant losses and, as of September 30,
2009, we had an accumulated deficit of $548.2 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 a new accounting pronouncement regarding fair
value measurements (formerly SFAS No. 157, “Fair Value
Measurements”).  The pronouncement, found under FASB Accounting
Standards Codification (“ASC”) Topic 820, defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  This
pronouncement 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 pronouncement does not require any new
fair value measurements.  More specifically, this pronouncement
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.  This
pronouncement was effective January 1, 2008 for financial assets and liabilities
and January 1, 2009 for non-financial assets and liabilities.  The
adoption of this pronouncement did not have an effect on our financial position
or results of operations.
  In
December 2007, the FASB issued a new accounting pronouncement regarding business
combinations (formerly SFAS No. 141(Revised), “Business Combinations”), which
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
pronouncement, found under FASB ASC Topic 805, 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. This pronouncement 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 pronouncement.
This pronouncement 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 this
pronouncement did not have an effect on our financial position or results of
operations.
  18
 Table of Contents
 In
December 2007, the FASB issued a new pronouncement regarding noncontrolling
interests (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements”) to improve the relevance, comparability, and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements. This pronouncement, found under FASB ASC
Topic 810, 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
pronouncement 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 pronouncement 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
pronouncement 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 this pronouncement 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.
  In
December 2007, the FASB ratified a new accounting pronouncement regarding
collaborative arrangements (formerly 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 this pronouncement, found under FASB ASC Topic 808, 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 11, “Collaboration and License Agreements,” in the accompanying footnotes
for additional required disclosures.
  In May
2009, the FASB issued a new accounting pronouncement regarding subsequent events
(formerly 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 pronouncement, found under FASB ASC
Topic 855, 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.  The pronouncement is effective for interim or fiscal periods
ending after June 15, 2009.  We evaluated subsequent events through
October 30, 2009, which is the date the financial statements were
issued.  Our adoption of this pronouncement did not have an effect on
our financial position or results of operations.
  In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” which changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated.  The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities
that most significantly impacts the entity’s economic
performance.  This pronouncement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after November 15,
2009.  We are currently evaluating the effect, if any, of this
statement on our financial condition and results of operations.
  19
 Table of Contents
 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 September 30,
                          
                          Nine
      Months Ended September 30,2009
                          
                          2008
                          
                          2009
                          
                          2008Total
      revenues
                          
                          $
                          2.1
                          
                          
                          $
                          7.5
                          
                          $
                          9.3
                          
                          
                          $
                          26.0Dollar
      decrease
                          
                          $
                          (5.4
                          )
                          
                          
                          
                          
                          $
                          (16.7
                          )Percentage
      decrease
                          
                          
                          (72
                          )%
                          
                          
                          
                          
                          
                          (64
                          )%
 
  ·
              Collaborative research
      – Revenue from collaborative research for the three months ended
      September 30, 2009 decreased 77% to $1.7 million, and for the
      nine months ended September 30, 2009 decreased 65% to
      $8.0 million, as compared to the corresponding period in 2008,
      primarily due to reduced revenues in the three and nine months ended
      September 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, partially offset by
      increases in revenue from our collaboration with
  Taconic.
  ·
              Subscription and license
      fees – Revenue from subscription and license fees for the three
      months ended September 30, 2009 increased 55% to $0.5 million,
      as compared to the corresponding period in 2008, primarily due to an
      increase in technology license fees.  Revenue from subscription
      and license fees for the nine months ended September 30, 2009
      decreased 61% to $1.2 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 September 30,
                          
                          Nine
      Months Ended September 30,2009
                          
                          2008
                          
                          2009
                          
                          2008Total
      research and development expense
                          
                          $
                          19.3
                          
                          
                          $
                          27.3
                          
                          $
                          62.4
                          
                          
                          $
                          84.9Dollar
      decrease
                          
                          $
                          (8.0
                          )
                          
                          
                          
                          
                          $
                          (22.5
                          )Percentage
      decrease
                          
                          
                          (29
                          )%
                          
                          
                          
                          
                          
                          (26
                          )%
 
 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 September 30, 2009 decreased 19% to
      $7.1 million, and for the nine months ended September 30, 2009
      decreased 22% to $25.7 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
      September 30, 2009 decreased 23% to $3.7 million, and for the
      nine months ended September 30, 2009 decreased 18% to
      $11.5 million, as compared to the corresponding period in 2008,
      primarily due to decreases in depreciation expense and utilities
      expense.
  20
 Table of Contents
  ·
              Laboratory supplies –Laboratory supplies expense for the three months ended
      September 30, 2009 decreased 19% to $1.6 million, and for the
      nine months ended September 30, 2009 decreased 28% to
      $4.8 million, as compared to the corresponding period in 2008,
      primarily as a result of reductions in our genetics
    research.
  ·
              Third-party and other services
      –Third-party and other services for the three months ended
      September 30, 2009 decreased 47% to $5.2 million, and for the
      nine months ended September 30, 2009 decreased 38% to
      $15.2 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
      September 30, 2009 decreased 12% to $0.7 million, and for the
      nine months ended September 30, 2009 decreased 20% to
      $2.3 million, as compared to the corresponding period in
      2008.
  ·
              Other –Other costs for
      the three months ended September 30, 2009 decreased 11% to
      $1.0 million, and for the nine months ended September 30, 2009
      decreased 25% to $2.8 million, as compared to the corresponding
      period in 2008.
  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 September 30,
                          
                          Nine
      Months Ended September 30,2009
                          
                          2008
                          
                          2009
                          
                          2008Total
      general and administrative expense
                          
                          $
                          4.6
                          
                          
                          $
                          5.0
                          
                          $
                          15.0
                          
                          
                          $
                          16.7Dollar
      decrease
                          
                          $
                          (0.4
                          )
                          
                          
                          
                          
                          $
                          (1.8
                          )Percentage
      decrease
                          
                          
                          (8
                          )%
                          
                          
                          
                          
                          
                          (10
                          )%
 
 General
and administrative expenses consist primarily of personnel costs, facility and
equipment costs, professional fees such as legal fees, and stock-based
compensation expenses.
  ·
              Personnel – Personnel
      costs for the three months ended September 30, 2009 decreased 5% to
      $2.2 million, and for the nine months ended September 30, 2009
      decreased 16% to $7.1 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 September 30, 2009 increased 8% to $0.7 million, and for
      the nine months ended September 30, 2009 increased 10% to
      $2.1 million, as compared to the corresponding period in 2008,
      primarily due to increased property
taxes.
  ·
              Professional fees –
      Professional fees for the three months ended September 30, 2009
      decreased 29% to $0.7 million, and for the nine months ended
      September 30, 2009 decreased 7% to $2.9 million, as compared to
      the corresponding period in 2008, primarily due to decreased consulting
      fees.
  ·
              Stock-based
      compensation – Stock-based compensation expense for the three
      months ended September 30, 2009 decreased 6% to $0.5 million,
      and for the nine months ended September 30, 2009 decreased 6% to
      $1.8 million as compared to the corresponding period in
      2008.
  21
 Table of Contents
  ·
              Other –Other costs for
      the three months ended September 30, 2009 decreased 4% to
      $0.4 million, and for the nine months ended September 30, 2009
      decreased 19% to $1.2 million, as compared to the corresponding
      period in 2008.
  Gain
(Loss) on Investments, Net, Interest Income, Interest Expense and Other Expense,
Net
  Gain (Loss) on Investments,
Net.  Gain on investments, net was $0.2 million and
$1.0 million for the three and nine months ended September 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.  Loss on investments, net was
$3.3 million for the three and nine months ended September 30, 2008,
representing the other-than-temporary decline in fair value of our student loan
auction rate securities.
  Interest
Income.  Interest income for the three months ended
September 30, 2009 decreased 89% to $0.1 million, and for the nine
months ended September 30, 2009 decreased 87% to $0.7 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
September 30, 2009 increased 16% to $0.8 million, and for the nine
months ended September 30, 2009 increased 8% to $2.2 million, as
compared to the corresponding period in 2008, primarily due to our line of
credit with UBS Bank USA.
  Other Expense,
Net.  Other expense, net for the three months ended
September 30, 2009 was $0.5 million, consistent with the corresponding
period in 2008.  Other expense, net for the nine months ended
September 30, 2009 increased 26% to $2.0 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.
  Income
Tax Benefit
  The
income tax benefit for the three and nine months ended September 30, 2009
was $102,000.
  Noncontrolling
Interest in Symphony Icon, Inc.
  The loss
attributable to the noncontrolling interest holders of Symphony Icon for the
three months ended September 30, 2009 decreased 29% to $3.5 million,
and for the nine months ended September 30, 2009 decreased 39% to
$9.8 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 $19.1 million in
the three months ended September 30, 2009 from $23.5 million in the
corresponding period in 2008.  Net loss attributable to Lexicon
Pharmaceuticals, Inc. per common share decreased to $0.14 in the three months
ended September 30, 2009, from $0.17 in the corresponding period in
2008.  Net loss attributable to Lexicon Pharmaceuticals, Inc.
decreased to $60.8 million in the nine months ended September 30, 2009
from $61.4 million in the corresponding period in 2008.  Net loss
attributable to Lexicon Pharmaceuticals, Inc. per common share decreased to
$0.44 in the nine months ended September 30, 2009 from $0.45 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.
  22
 Table of Contents
 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 September 30,
2009, we had received net proceeds of $550.3 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.  We also received net proceeds of $55.2 million from
our October 2009 common stock offering.  In addition, from our
inception through September 30, 2009, we received $446.9 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
$433.3 million had been recognized as revenues through September 30,
2009.
  As of
September 30, 2009, we had $119.5 million in cash, cash equivalents
and investments, including $56.2 million in auction rate securities and
related rights as discussed below under “Disclosure about Market Risk,” and
$5.7 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 $71.8 million in operations in the nine months ended
September 30, 2009. This consisted primarily of the consolidated net loss
for the period of $70.5 million, a net decrease in other operating
liabilities net of assets of $6.5 million, a $4.6 million decrease in
deferred revenue, and a gain on investments and auction rate security rights of
$1.0 million, partially offset by non-cash charges of $4.8 million
related to depreciation expense, $4.1 million related to stock-based
compensation expense and $1.6 million related to the amortization of the
Symphony Icon purchase option.  Investing activities provided cash of
$11.3 million in the nine months ended September 30, 2009, primarily
due to maturities of investments of $73.0 million, partially offset by
purchases of investments of $61.5 million.  Financing activities
provided cash of $37.3 million due to proceeds from debt borrowings of
$38.6 million, partially offset by repayment of debt borrowings of
$1.5 million.
  In
January 2009, we entered into a credit line agreement with UBS Bank USA that
provides, as of September 30, 2009, up to an aggregate amount of $37.8
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
$56.5 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 September 30,
2009, we had $37.8 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
one year 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 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 one year beginning on the date that is 90 days 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 one year beginning on the first anniversary of the
first rights offering trigger date.  The one year periods in which
Invus may initiate the first or second rights offering will be extended by the
number of days during such periods that Invus is not permitted under the
securities purchase agreement to initiate a rights offering as a result of any
“blackout period” in connection with a public offering of our common
stock.  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 be required to purchase its
pro rata portion of each rights offering.
 23
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  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.
  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.  Through September 2009, Symphony Icon’s board of
directors has requested us to pay Symphony Icon $4.3 million under this
agreement, $1.5 million of which has been paid through September 30,
2009, 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.
 24
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  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 and certificates of deposit that mature three to 12
months from the time of purchase and 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.
  At
September 30, 2009, we held $56.5 million (par value), with an
estimated fair value of $45.5 million, of 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.  Prior to
September 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; however, as of September 30, 2009, we classified
our auction rate security investment as short-term investments as we expect to
exercise our right to redeem these securities on June 30, 2010 under our
agreement with UBS AG as discussed below.  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
September 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 $45.5 million as of
September 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 September 30, 2009.  The underlying sources of these
assumptions are volatile and the assumptions are subject to change as those
sources and market conditions change.
 25
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  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
$56.5 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 a fair
value option, which permits entities to choose, at certain election dates, to
measure eligible items at fair value.  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 from available-for-sale
securities.  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 nine months
ended September 30, 2009, we recorded a gain of $2.4 million to
reflect the increase in fair value of the auction rate securities, and recorded
a loss of $1.4 million to reflect the decline in fair value of the rights,
which are reflected in gain on investments, net, in the accompanying
consolidated statement of operations.  During the nine months ended
September 30, 2008, we recorded a loss of $3.3 million to reflect the
decline in fair value of the auction rate securities, which is reflected in loss
on investments 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.
  Excluding
auction rate securities and the related rights, at September 30, 2009, we
had approximately $68.9 million in cash and cash equivalents and short-term
investments, including $5.7 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.         Quantitative and
Qualitative Disclosuresabout 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.
 26
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  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
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  PartII
              Other
      Information
  Item
1.         LegalProceedings
  In
September 2009, we entered into a settlement agreement with the University of
Utah Research Foundation, or UURF, relating to our litigation with UURF with
respect to our alleged breach of certain obligations purported to exist under
our license agreement with GenPharm International, Inc., under which we obtained
a sublicense under certain patents exclusively licensed from UURF by GenPharm,
and related letter agreements between us and UURF governing the payment of
royalties.  See the information appearing under the heading entitled
“Legal Proceedings” in footnote 10 to our consolidated financial statements
included as part of our Quarterly Report on Form 10-Q for the period ended March
31, 2009.
  The
settlement agreement provides, among other things, that we will make a payment
to UURF in exchange for the satisfaction in full of all present and future
royalty obligations with respect to materials made by us using the technology
claimed by the licensed patents, resulting in our license rights becoming fully
paid-up with respect to such materials, and, subject to such rights and
sublicenses previously granted by us, will grant to UURF an exclusive
sublicense, with rights to grant future sublicenses, to our rights under the
licensed patents.  The settlement agreement includes a full mutual
release of all claims relating to our license agreement with GenPharm and the
related letter agreements between us and UURF.  We paid the agreed
upon amount, which we consider immaterial, to UURF in September
2009.
  We are
from time to time party to other claims and legal proceedings that we believe
will not have, individually or in the aggregate, a material adverse effect on
our results of operations, financial condition or liquidity.
  Item
1A.       RiskFactors
  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
  ·
              Invus,
      L.P., our largest stockholder, may decline to grant its consent which is
      required for us to conduct equity offerings at prices less than $4.50 per
      share.  In addition, we can provide no assurance that Invus will
      exercise its rights to require us to initiate up to two pro rata rights
      offerings in which it would be obligated to purchase its pro rata portion
      of the offering
  ·
              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
      September 30, 2009, we held $56.5 million (par value), with an
      estimated fair value of $45.5 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
  28
 Table of Contents
  ·
              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
  ·
              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
  29
 Table of Contents
  ·
              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
  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
  30
 Table of Contents
  ·
              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
  ·
              If
      we are unable to meet Nasdaq continued listing requirements, Nasdaq may
      take action to delist our common
stock
  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.          Submissionof Matters to a Vote of Security
Holders
  A special
meeting of stockholders was held on July 15, 2009 to consider and vote on a
proposal to approve an amendment to our certificate of incorporation increasing
the number of authorized shares of our common stock from 300 million to 900
million, which proposal was considered and approved.  See “Item 4.
Submission of Matters to a Vote of Security Holders” included as part of our
Quarterly Report on Form 10-Q for the period ended June 30, 2009.
  
 Item
6.          Exhibits
  Exhibit No.
                  
                  Description31.1
                  —
                  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
 Table of Contents
 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:  October
      30, 2009
                By:
                /s/
      Arthur T. SandsArthur
      T. Sands, M.D., Ph.D.President
      and Chief Executive Officer
 
 Date:  October
      30, 2009
                By:
                /s/
      Ajay BansalAjay
      BansalExecutive
      Vice President, Corporate Development and Chief Financial
      Officer
 
 
 32
 Table of Contents
 Index
to Exhibits
  
  Exhibit No.
                  
                  Description31.1
                  —
                  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