UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the Fiscal Year Ended December 31, 2007




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 ofIncorporation
      or Organization)
            (I.R.S.
      EmployerIdentification
      Number)





8800
      Technology Forest Place
              The
      Woodlands, Texas 77381
              (Address
      of Principal ExecutiveOffices
      and Zip Code)
            
            (281)
      863-3000
              (Registrant’s Telephone
      Number,Including
      Area Code)





Securities
registered pursuant to Section 12(b) of the Act:




Title
      of Each Class
            
            
            Name
      of Each Exchange on which RegisteredCommon
      Stock, par value $0.001 per share
            Nasdaq
      Global Market





Securities registered pursuant to
Section 12(g) of the Act:  None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933.  Yes o  No þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. Yes o No þ




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 þ No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  þ




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 definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange
Act of 1934.  (check one):  Large accelerated filer o   Accelerated
filer þ   Non-accelerated
filer o   Smaller
reporting company o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).   Yes o No  þ




The
aggregate market value of voting stock held by non-affiliates of the registrant
as of the last day of the registrant’s most recently completed second quarter
was approximately $240.4 million, based on the closing price of the common stock
on the Nasdaq Global Market on June 29, 2007 of $3.21 per
share.  For purposes of the preceding sentence only, all directors,
executive officers and beneficial owners of ten percent or more of the
registrant’s common stock are assumed to be affiliates.  As of March
5, 2008, 136,795,546 shares of common stock were outstanding.




Documents
Incorporated by Reference




Certain
sections of the registrant’s definitive proxy statement relating to the
registrant’s 2008 annual meeting of stockholders, which proxy statement will be
filed under the Securities Exchange Act of 1934 within 120 days of the end of
the registrant’s fiscal year ended December 31, 2007, are incorporated by
reference into Part III of this annual report on Form 10-K.







Lexicon
Pharmaceuticals, Inc.





Table
of Contents





ItemPART
      I1.
            
            Business
            11A.
            
            Risk
      Factors
            141B.
            
            Unresolved
      Staff Comments
            292.
            
            Properties
            293.
            
            Legal
      Proceedings
            294.
            
            Submission
      of Matters to a Vote of Security Holders
            29PART
      II5.
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            306.
            
            Selected
      Financial Data
            327.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            347A.
            
            Quantitative
      and Qualitative Disclosures About Market
      Risk
            448.
            
            Financial
      Statements and Supplementary Data
            449.
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            449A.
            
            Controls
      and Procedures
            449B.
            
            Other
      Information
            44PART
      III10.
            
            Directors,
      Executive Officers and Corporate Governance
            4511.
            
            Executive
      Compensation
            4512.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            4513.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            4514.
            
            Principal
      Accounting Fees and Services
            45PART
      IV15.
            
            Exhibits
      and Financial Statement Schedules
            46Signatures
            49




The
Lexicon name and logo, LexVision® and
OmniBank® are
registered trademarks and Genome5000TM,
e-BiologyTM and
10TO10TM are
trademarks of Lexicon Pharmaceuticals, Inc.




In this
annual report on Form 10-K, “Lexicon Pharmaceuticals,” “Lexicon,” “we,” “us” and
“our” refer to Lexicon Pharmaceuticals, Inc.





Factors
Affecting Forward Looking Statements




This
annual report on Form 10-K 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 “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 of 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 annual report on Form 10-K to conform these
statements to actual results, unless required by law.


PART
I




Item
1.           Business




Overview




Lexicon
Pharmaceuticals, Inc. is a biopharmaceutical company focused on the discovery
and development of breakthrough treatments for human disease.  We use
our proprietary gene knockout technology to knock out, or disrupt, the function
of genes in mice and then employ an integrated platform of advanced medical
technologies to systematically discover the physiological and behavioral
functions of the genes we have knocked out and assess the utility of the
proteins encoded by the corresponding human genes as potential drug
targets.  For targets that we believe have high pharmaceutical value,
we engage in programs for the discovery and development of potential small
molecule, antibody and protein drugs.  We have advanced four drug
candidates into human clinical trials, with one additional drug candidate in
preclinical development and compounds from a number of additional programs in
various stages of preclinical research.  We believe that our
systematic, target biology-driven approach to drug discovery will enable us to
substantially expand our clinical pipeline, and we are engaged in efforts that
we refer to as our 10TO10 program
with the goal of advancing ten drug candidates into human clinical trials by the
end of 2010.




We are
presently conducting a Phase 2 clinical trial of our most advanced drug
candidate, LX6171, an orally-delivered small molecule compound that we are
developing as a potential treatment for cognitive impairment associated with
disorders such as Alzheimer’s disease, schizophrenia and vascular
dementia.  We are conducting Phase 1 clinical trials of three other
drug candidates: LX1031, an orally-delivered small molecule compound that we are
developing as a potential treatment for gastrointestinal disorders such as
irritable bowel syndrome; LX1032, an orally-delivered small molecule compound
that we are developing as a potential treatment for the symptoms associated with
carcinoid syndrome; and LX2931, an orally-delivered small molecule compound that
we are developing as a potential treatment for autoimmune diseases such as
rheumatoid arthritis.  We have advanced one other drug candidate into
preclinical development in preparation for regulatory filings for the
commencement of clinical trials: LX4211, an orally-delivered small molecule
compound that we are developing as a potential treatment for Type 2
diabetes.  We have small molecule and antibody compounds from a number
of additional drug discovery programs in various stages of preclinical
research.  Through the end of 2007, we had identified and validated in
living animals, or in
vivo, more than 100 targets with promising profiles for drug discovery in
the therapeutic areas of diabetes and obesity, cardiovascular disease,
gastrointestinal disorders, psychiatric and neurological disorders, cancer,
immune system disorders and ophthalmic disease.




We are
working both independently and through strategic collaborations and alliances to
capitalize on our technology and drug target discoveries and to develop and
commercialize drug candidates emerging from our drug discovery and development
programs.  We are working with Bristol-Myers Squibb Company to
discover and develop new small molecule drugs in the neuroscience
field.  We are working with Genentech, Inc. to discover the functions
of secreted proteins and potential antibody targets identified through
Genentech’s internal drug discovery research, and to develop new biotherapeutic
drugs based on certain targets selected from the alliance.  We are
working with N.V. Organon to discover, develop and commercialize new
biotherapeutic drugs based on another group of secreted proteins and potential
antibody targets.  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.  Finally,
we have established a product development financing arrangement with Symphony
Icon, Inc. under which we have licensed to Symphony Icon our intellectual
property rights to our drug candidatesLX6171, LX1031 and
LX1032, subject to our exclusive option to reacquire all rights to those drug
candidates.




Lexicon
Pharmaceuticals, Inc. was incorporated in Delaware in July 1995, and commenced
operations in September 1995.  Our corporate headquarters are located
at 8800 Technology Forest Place, The Woodlands, Texas 77381, and our telephone
number is (281) 863-3000.




Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of
charge on our corporate website located at www.lexpharma.com as soon as
reasonably practicable after the filing of those reports with the Securities and
Exchange Commission.  Information found on our website should not be
considered part of this annual report on Form 10-K.




Our
Drug Development Pipeline




We have
initiated our 10TO10 program
with the goal of advancing ten drug candidates into human clinical trials by the
end of 2010.  To date, we have initiated clinical trials for four drug
candidates, with one additional drug candidate in preclinical development and
compounds from a number of additional programs in various stages of preclinical
research:




Drug
      Program
              Potential
      Indication
              Stage
      of DevelopmentPreclinical
                Research
              Preclinical
                Development
              IND
              Phase
      1
              Phase
      2
              Phase
      3LX6171
              Cognitive
      DisordersLX1031
              Irritable
      Bowel SyndromeLX1032
              Carcinoid
      SyndromeLX2931
              Rheumatoid
      ArthritisLX4211
              Type
      2 Diabetes




LX6171 is
an orally-delivered small molecule compound that we are developing for the
potential treatment of disorders characterized by cognitive impairment, such as
Alzheimer’s disease, schizophrenia or vascular dementia.  We initiated
a Phase 2 clinical trial of LX6171 in November 2007. The initial stage of the
trial assessed the bioavailability of a new oral-suspension formulation in
healthy elderly participants. The second stage of the trial will evaluate
safety, tolerability and cognitive effects in elderly volunteers with
age-associated memory impairment. LX6171 was internally generated by our
medicinal chemists as a selective and potent inhibitor of a membrane protein
expressed exclusively in the central nervous system.  In our
Genome5000 program, our scientists discovered that mice lacking this protein
perform better in tests of learning and memory compared to normal
mice.  In Phase 1 clinical trials, LX6171 was well tolerated at all
dose levels studied.  In preclinical studies, mice given LX6171
performed better in tests of learning and memory than untreated
mice.




LX1031 is
an orally-delivered small molecule compound that we are developing for the
potential treatment of irritable bowel syndrome and other gastrointestinal
disorders.  We have completed a Phase 1a single ascending-dose study
and an initial Phase 1b multiple ascending-dose study of LX1031, and are
conducting an additional Phase 1b dose escalation study to explore additional
dosing parameters.  We designed LX1031 to reduce the serotonin
available for receptor activation in the gastrointestinal tract without
achieving significant systemic exposure or affecting serotonin levels in the
brain.  LX1031 was internally generated by our medicinal chemists as
an inhibitor of tryptophan hydroxylase, or TPH, the rate-limiting enzyme for
serotonin production found in enterochromaffin, or EC, cells of the
gastrointestinal tract.  In our Genome5000 program, our scientists
found that mice lacking the non-neuronal form of this enzyme, TPH1, have
virtually no serotonin in the gastrointestinal tract, but maintain normal levels
of serotonin in the brain.  In preclinical studies, LX1031
demonstrated a dose-dependent reduction of serotonin levels in the
gastrointestinal tract of multiple species without affecting brain serotonin
levels.




LX1032 is
an orally-delivered small molecule compound that we are developing for the
potential treatment of the symptoms associated with carcinoid
syndrome.  We filed an investigational new drug, or IND, application
for LX1032 in December 2007 and initiated a Phase 1 clinical trial in February
2008.  LX1032 was internally generated by our medicinal chemists as an
inhibitor of TPH, the same target as LX1031, but LX1032 is chemically distinct
and, unlike LX1031, was specifically designed to achieve enhanced systemic
exposure to address disorders such as carcinoid syndrome that require systemic
regulation of serotonin levels. In preclinical studies, LX1032 was able to
reduce peripheral serotonin levels in several different species without
affecting serotonin levels in the brain.




LX2931 is
an orally-delivered small molecule compound that we are developing for the
potential treatment of autoimmune diseases such as rheumatoid
arthritis.  We filed an IND application for LX2931 in November 2007
and initiated a Phase 1 clinical trial in December 2007.  LX2931 was
internally generated by our medicinal chemists to target sphingosine-1-phosphate
lyase, or S1P lyase, an enzyme in the sphingosine-1-phosphate (S1P) pathway
associated with the body’s inflammatory response. In our Genome5000 program, our
scientists discovered that mice lacking this enzyme have increased retention of
immune cells in the thymus and spleen with a corresponding reduction in the
deployment of T-cells and B-cells into the circulating blood.  In
preclinical studies, LX2931 produced a consistent reduction in circulating
lymphocyte counts in multiple species, and reduced joint inflammation and
prevented arthritic destruction of joints in mouse and rat models of
arthritis.




LX4211 is
an orally-delivered small molecule compound that we are developing for the
potential treatment of Type 2 diabetes.  We have commenced formal
preclinical development for LX4211 in preparation for the expected filing of an
IND application in 2008.  LX4211 was internally generated by our
medicinal chemists to target sodium-glucose cotransporter type 2, or SGLT2, a
transporter responsible for most of the glucose reabsorption performed by the
kidney. In our Genome5000 program, our scientists discovered that mice lacking
SGLT2 have improved glucose tolerance and increased urinary glucose
excretion.  In preclinical studies, animals treated with LX4211
demonstrated increased urinary glucose excretion and decreased blood HbA1c
levels, a marker of average blood sugar levels, with urinary glucose excretion
returning to baseline after treatment was discontinued.





We have
advanced a number of additional drug discovery programs into various stages of
preclinical research in preparation for formal preclinical development
studies.  Finally, through the end of 2007, we had identified and
validated in vivo more
than 100 targets with promising profiles for drug discovery in the therapeutic
areas of diabetes and obesity, cardiovascular disease, gastrointestinal
disorders, psychiatric and neurological disorders, cancer, immune system
disorders and ophthalmic disease.




Our
Drug Discovery Process




Our drug
discovery and development process begins with our Genome5000 program, in which
we are using our gene knockout and evaluative technologies to discover the
physiological and behavioral functions of 5,000 human genes through analysis of
the corresponding mouse knockout models. The study of the effects of knocking
out genes in mice has historically proven to be a powerful tool for
understanding human genes because of the close similarity of gene function and
physiology between mice and humans, with approximately 99% of all human genes
having a counterpart in the mouse genome.  Our Genome5000 efforts are
focused on the discovery of the functions in mammalian physiology of proteins
encoded by gene families that we consider to be pharmaceutically
important.  We have already completed our physiology- and
behavior-based analysis of more than 85% of these 5,000 genes.




We use
our patented gene trapping and gene targeting technologies to generate knockout
mice – mice whose DNA has been modified to disrupt, or knock out, the function
of the altered gene – by altering the DNA of genes in a special variety of mouse
cells, called embryonic stem cells, which can be cloned and used to generate
mice with the altered gene.  We then study the physiology and behavior
of the knockout mice using a comprehensive battery of advanced medical
technologies, each of which has been adapted specifically for the analysis of
mouse physiology.  This systematic use of these evaluative
technologies allows us to discover, in vivo, the physiological
and behavioral functions of the genes we have knocked out and assess the
prospective pharmaceutical utility of the potential drug targets encoded by the
corresponding human genes.




We then
engage in programs for the discovery of potential small molecule, antibody and
protein drugs for those in
vivo-validated drug targets that we consider to have high pharmaceutical
value.  We have established extensive internal small molecule drug
discovery capabilities, in which we use our own sophisticated libraries of
drug-like chemical compounds in high-throughput screening assays to identify
“hits,” or chemical compounds demonstrating activity, against these
targets.  We then employ medicinal chemistry efforts to optimize the
potency and selectivity of these hits and to identify lead compounds for
potential development.  We have also established substantial internal
antibody and protein drug discovery capabilities, in which we use protein
expansion and antibody technologies to generate and optimize molecules with
appropriate characteristics for development.  We have established
extensive internal capabilities to characterize the absorption, distribution,
metabolism and excretion of our potential drug candidates and otherwise evaluate
their safety in mammalian models in preparation for preclinical and clinical
development.  In all of our drug discovery programs, we use the same
physiological analysis technology platform that we use in the discovery of gene
function to analyze the in
vivo activity and safety profiles of drug candidates in mice as part of
our preclinical research efforts.




Once we
identify a potential drug candidate, we initiate formal preclinical development
studies in preparation for regulatory filings for the commencement of human
clinical trials.  We have established internal expertise in each of
the critical areas of preclinical and clinical development, including clinical
trial design, study implementation and oversight, and regulatory affairs, with
demonstrated experience by members of our clinical development team in the
successful implementation of Phase 1, 2 and 3 clinical trials and regulatory
approval for the commercialization of therapeutic products.




We
believe that our systematic, biology-driven approach and the technology platform
that makes it possible provide us with substantial advantages over alternative
approaches to drug target discovery.  In particular, we believe that
the comprehensive nature of our approach allows us to uncover potential drug
targets within the context of mammalian physiology that might be missed by more
narrowly focused efforts.  We also believe our approach is more likely
to reveal those side effects that may be a direct result of inhibiting or
otherwise modulating the drug target and may limit the utility of potential
therapeutics directed at the drug target.  We believe these advantages
will contribute to better target selection and, therefore, to a greater
likelihood of success for our drug discovery and development
efforts.




Our
Technology




The core
elements of our technology platform include our patented technologies for the
generation of knockout mice, our integrated platform of advanced medical
technologies for the systematic and comprehensive biological analysis of in vivo behavior and
physiology, and our industrialized approach to medicinal chemistry and the
generation of high-quality, drug-like compound libraries.




Gene
Knockout Technologies




Gene
Targeting.  Our gene targeting technology, which is covered by
nine issued patents that we have licensed, enables us to generate
highly-specific alterations in targeted genes.  The technology
replaces DNA of a gene in a mouse embryonic stem cell through a process known as
homologous recombination to disrupt the function of the targeted gene,
permitting the generation of knockout mice.  By using this technology
in combination with one or more additional technologies, we are able to generate
alterations that selectively disrupt, or conditionally regulate, the function of
the targeted gene for the analysis of the gene’s function in selected tissues,
at selected stages in the animal’s development or at selected times in the
animal’s life.  We can also use this technology to replace the
targeted gene with its corresponding human gene for use for preclinical research
in our drug programs.




Gene Trapping.  Our
gene trapping technology, which is covered by ten issued patents that we own, is
a high-throughput method of generating knockout mouse clones that we
invented.  The technology uses genetically engineered retroviruses
that infect mouse embryonic stem cells in vitro, integrate into the
chromosome of the cell and disrupt the function of the gene into which it
integrates, permitting the generation of knockout mice.  This process
also allows us to identify and catalogue each embryonic stem cell clone by DNA
sequence from the trapped gene and to select embryonic stem cell clones by DNA
sequence for the generation of knockout mice.  We have used our gene
trapping technology in an automated process to create our OmniBank library of
more than 270,000 frozen gene knockout embryonic stem cell clones, each
identified by DNA sequence in a relational database.  We estimate that
our OmniBank library currently contains embryonic stem cell clones representing
more than half of all genes in the mammalian genome and believe that our library
and a similar library that we recently completed for the Texas Institute for
Genomic Medicine are the largest of their kind.




Physiological
Analysis Technologies




We employ
an integrated platform of advanced analytical technologies to rapidly and
systematically discover the physiological and behavioral effects resulting from
loss of gene function in the knockout mice we have generated using our gene
trapping and gene targeting technologies and catalogue those effects in our
comprehensive and relational LexVision database.  These analyses
include many of the most sophisticated diagnostic technologies and tests
currently available, many of which might be found in a major medical
center.  Each of these technologies has been adapted specifically for
the analysis of mouse physiology.  This state-of-the-art technology
platform enables us to assess the consequences of loss of gene function in a
living mammal across a wide variety of parameters relevant to human
disease.




We employ
portions of the same physiological analysis technology platform that we use in
the discovery of gene function to analyze the in vivo efficacy and safety
profiles of drug candidates in mice.  We believe that this approach
will allow us, at an early stage, to identify and optimize drug candidates for
further preclinical and clinical development that demonstrate in vivo efficacy and to
distinguish side effects caused by a specific compound from the target-related
side effects that we defined using the same comprehensive series of
tests.




Medicinal
Chemistry Technology




We use
solution-phase chemistry to generate diverse libraries of optically pure
compounds that are targeted against the same pharmaceutically-relevant gene
families that we address in our Genome5000 program.  These libraries
are built using highly robust and scalable organic reactions that allow us to
generate compound collections of great diversity and to specially tailor the
compound collections to address various therapeutic target families. We design
these libraries by analyzing the chemical structures of drugs that have been
proven safe and effective against human disease and using that knowledge in the
design of scaffolds and chemical building blocks for the generation of large
numbers of new drug-like compounds.  When we identify a hit against
one of our in
vivo-validated targets, we can rapidly reassemble these building blocks
to create hundreds or thousands of variations around the structure of the
initial compound, enabling us to accelerate our medicinal chemistry
efforts.  We have supplemented our internally-generated compound
libraries with collections of compounds acquired from third
parties.




Our
medicinal chemistry operations are housed in a state-of-the-art 76,000 square
foot facility in Hopewell, New Jersey.  Our lead optimization
chemistry groups are organized around specific discovery targets and work
closely with their pharmaceutical biology counterparts in our facilities in The
Woodlands, Texas.  The medicinal chemists optimize lead compounds in
order to select clinical candidates with the desired absorption, distribution,
metabolism, excretion and physicochemical characteristics.  We have
the capability to profile our compounds using the same battery of in vivo assays that we use to
characterize our drug targets.  This provides us with valuable
detailed information relevant to the selection of the highest quality compounds
for preclinical and clinical development.




Our
Commercialization Strategy




We are
working both independently and through strategic collaborations and alliances
with leading pharmaceutical and biotechnology companies, research institutes and
academic institutions to capitalize on our technology and commercialize our drug
programs.  Consistent with this approach, we intend to develop and
commercialize certain of our drug programs internally and retain exclusive
rights to the benefits of such programs and to collaborate with third parties
with respect to the development and commercialization of our other drug
programs.




Our
collaboration and alliance strategy involves alliances to discover and develop
therapeutics based on our drug target discoveries, particularly when the
alliance enables us to obtain access to technology and expertise that we do not
possess internally or is complementary to our own.  These strategic
collaborations, as well as our licenses with pharmaceutical and biotechnology
companies, research institutes and academic institutions, enable us to generate
near-term cash and revenues in exchange for access to some of our technologies
and discoveries for use by these third parties in their own drug discovery
efforts.  These collaborations and licenses also offer us the
potential, in many cases, to receive milestone payments and royalties on
products that our collaborators and licensees develop using our
technology.




Drug
Discovery and Development Alliances




Bristol-Myers Squibb
Company.  We established a drug discovery alliance with
Bristol-Myers Squibb in December 2003 to discover, develop and commercialize
small molecule drugs in the neuroscience field.  We initiated the
alliance with a number of neuroscience drug discovery programs at various stages
of development and are continuing to use our gene knockout technology to
identify additional drug targets with promise in the neuroscience
field.  For those targets that are selected for the alliance, we and
Bristol-Myers Squibb are working together, on an exclusive basis, to identify,
characterize and carry out the preclinical development of small molecule drugs,
and share equally both in the costs and in the work attributable to those
efforts.  As drugs resulting from the alliance enter clinical trials,
Bristol-Myers Squibb will have the first option to assume full responsibility
for clinical development and commercialization.




We
received an upfront payment under the agreement and received research funding
during the initial three years of the agreement.  Bristol-Myers Squibb
extended the target discovery term of the alliance in May 2006 for an additional
two years in exchange for its payment to us of additional research
funding.  We will also receive clinical and regulatory milestone
payments for each drug target for which Bristol-Myers Squibb develops a drug
under the alliance and royalties on sales of drugs commercialized by
Bristol-Myers Squibb.  The target discovery portion of the alliance
has a term of five years, as extended.




Genentech, Inc.  We
established a drug discovery alliance with Genentech in December 2002 to
discover novel therapeutic proteins and antibody targets.  We and
Genentech expanded the alliance in November 2005 for the advanced research,
development and commercialization of new biotherapeutic drugs.  Under
the original alliance agreement, we used our target validation technologies to
discover the functions of secreted proteins and potential antibody targets
identified through Genentech’s internal drug discovery research.  In
the expanded alliance, we are conducting additional, advanced research on a
broad subset of those proteins and targets.  We may develop and
commercialize biotherapeutic drugs for up to six of these targets, with
Genentech having exclusive rights to develop and commercialize biotherapeutic
drugs for the other targets.  Genentech retains an option on the
potential development and commercialization of the biotherapeutic drugs that we
develop from the alliance under a cost and profit sharing arrangement, while we
have certain conditional rights to co-promote drugs on a worldwide
basis.  We retain certain other rights to discoveries made in the
alliance, including non-exclusive rights, along with Genentech, for the
development and commercialization of small molecule drugs addressing the targets
included in the alliance.




We
received upfront payments in connection with both the initiation of the original
collaboration and its expansion and are entitled to receive performance payments
for our work in the collaboration as it is completed.  We are also
entitled to receive milestone payments and royalties on sales of therapeutic
proteins and antibodies for which Genentech obtains exclusive
rights.  Genentech is entitled to receive milestone payments and
royalties on sales of therapeutic proteins and antibodies for which we obtain
exclusive rights.  The agreement, as extended, has an expected
collaboration term of six years.




N.V. Organon.We
established a drug discovery alliance with Organon in May 2005 to discover,
develop and commercialize novel biotherapeutic drugs.  In the
collaboration, we are creating and analyzing knockout mice for up to 300 genes
selected by the parties that encode secreted proteins or potential antibody
targets, including two of our preexisting drug discovery programs.  We
and Organon are jointly selecting targets for further research and development
and will equally share costs and responsibility for research, preclinical and
clinical activities.  We and Organon will jointly determine the manner
in which collaboration products will be commercialized and will equally benefit
from product revenue.  If fewer than five development candidates are
designated under the collaboration, our share of costs and product revenue will
be proportionally reduced.  We will receive a milestone payment for
each development candidate in excess of five.  Either party may
decline to participate in further research or development efforts with respect
to a collaboration product, in which case such party will receive royalty
payments on sales of such collaboration product rather than sharing in
revenue.  Organon will have principal responsibility for manufacturing
biotherapeutic products resulting from the collaboration for use in clinical
trials and for worldwide sales.  Organon, formerly a subsidiary of
Akzo Nobel N.V., was acquired by Schering-Plough Corporation in November
2007.




We
received an upfront payment under the agreement and are entitled to receive
committed research funding during the first two years of the
agreement.  The target discovery portion of the alliance has an
expected term of four years.




Product
Development Collaboration with Symphony Icon, Inc.




In June
2007, we entered into a series of related agreements providing for the financing
of the clinical development of LX6171, 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 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,
beginning on June 15, 2008 and ending on June 15, 2011 (subject to an earlier
exercise right in limited circumstances) at an exercise price of (a) $72
million, if the purchase option is exercised on or after June 15, 2008 and
before June 15, 2009, (b) $81 million, if the purchase option is exercised
on or after the June 15, 2009 and before the June 15, 2010 and (c) $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.




We and
Symphony Icon are developing the programs in accordance with a specified
development plan and related development budget.  We are the party
primarily responsible for the development of the programs. Our development
activities are supervised by Symphony Icon’s development committee, which is
comprised of an equal number of representatives from us and Symphony Icon. The
development committee reports to Symphony Icon’s board of directors, which is
currently comprised of five members, including one member we designated, two
members designated by Holdings, and two independent directors whom we and
Holdings selected mutually.




Upon the
recommendation of Symphony Icon’s development committee, 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.




Other
Commercial Collaborations




Takeda Pharmaceutical Company
Limited.  We established an alliance with Takeda in July 2004
to discover new drugs for the treatment of high blood pressure.  In
the collaboration, we used our gene knockout technology to identify drug targets
that control blood pressure. Takeda is responsible for the screening, medicinal
chemistry, preclinical and clinical development and commercialization of drugs
directed against targets selected for the alliance, and bears all related
costs.  We received an upfront payment under the agreement and are
entitled to receive research milestone payments for each target selected for
therapeutic development.  In addition, we are entitled to receive
clinical development and product launch milestone payments for each product
commercialized from the collaboration.  We will also earn royalties on
sales of drugs commercialized by Takeda.  The target discovery portion
of the alliance, which ended in 2007, had a term of three years.




Taconic Farms, Inc.We
established a collaboration with Taconic Farms, Inc. in November 2005 for the
marketing, distribution and licensing of certain lines of our knockout
mice.  Taconic is an industry leader in the breeding, housing, quality
control and global marketing and distribution of rodent models for medical
research and drug discovery.    Under the terms of the
collaboration, we are presently making available more than 2,500 distinct lines
of knockout mice for use by pharmaceutical and biotechnology companies and other
researchers.  Taconic provides breeding services and licenses for
these lines and distributes knockout mice to customers.  We receive
license fees and royalties from payments received by Taconic from customers
obtaining access to such knockout mice.




Target Validation
Collaborations.We have established target validation
collaboration agreements with a number of leading pharmaceutical and
biotechnology companies.  Under these collaboration agreements, we
generate and, in some cases, analyze knockout mice for genes requested by the
collaborator.  In addition, we grant non-exclusive licenses to the
collaborator for use of the knockout mice in its internal drug discovery
programs and, if applicable, analysis data that we generate under the
agreement.  Some of these agreements also provide for non-exclusive
access to our OmniBank database.  We receive fees for knockout mice
under these agreements.  In some cases, these agreements also provide
for annual minimum commitments and the potential for royalties on products that
our collaborators discover or develop using our technology.




LexVision
Collaborations.The collaboration periods have terminated
under each of our LexVision collaborations, pursuant to which our LexVision
collaborators obtained non-exclusive access to our LexVision database of in vivo-validated drug
targets for the discovery of small molecule compounds.  We remain
entitled to receive milestone payments and royalties on products those LexVision
collaborators develop using our technology.




Academic,
Non-Profit and Government Arrangements




Texas Institute for Genomic
Medicine.  In July 2005, we received an award from the Texas
Enterprise Fund for the creation of a knockout mouse embryonic stem cell library
containing 350,000 cell lines using our proprietary gene trapping technology,
which we completed in 2007.  We created the library for the Texas
Institute for Genomic Medicine, or TIGM, a newly formed non-profit institute
whose founding members are Texas A&M University, the Texas A&M
University System Health Science Center and us.  TIGM researchers may
also access specific cells from our current OmniBank library of 270,000 mouse
embryonic stem cell lines and have certain rights to utilize our gene targeting
technologies.  In addition, we equipped TIGM with the bioinformatics
software required for the management and analysis of data relating to the
library.  The Texas Enterprise Fund also made an award to the Texas
A&M University System for the creation of facilities and infrastructure to
house the library.




National Institutes of
Health.  In October 2005, we entered into a three-year contract
to provide selected knockout mouse lines and related phenotypic data to the
United States National Institutes of Health, or NIH.  Under the
contract, NIH may select lines of knockout mice and related phenotypic data from
among lines that we have elected to make available.  These materials
are related to genes that we have already knocked out and
analyzed.  NIH will make materials acquired from us under the contract
available to researchers at academic and other non-profit research institutions,
and we retain the sole right to provide these materials to commercial
entities.  We are entitled to receive staged payments from NIH
following delivery and acceptance of materials under the contract.




The Wellcome
Trust.  In November 2006, we entered into a contract to provide
selected knockout mouse lines and related phenotypic data to the National
Research Center for Environment and Health GmbH, or GSF, under terms
substantially similar to those under which knockout mouse lines and related
phenotypic data are available to NIH.  Under the contract, the
Wellcome Trust Limited, in its capacity as trustee of The Wellcome Trust, will
work with GSF to select lines of knockout mice and related phenotypic data from
among lines that we have elected to make available and has separately agreed to
provide a grant to GSF to obtain such knockout mice and phenotypic
data.  These materials are related to genes that we have already
knocked out and analyzed.  GSF will make materials acquired from us
under the contract available to researchers at academic and other non-profit
research institutions, and we retain the sole right to provide these materials
to commercial entities.  We are entitled to receive staged payments
from GSF following delivery and acceptance of materials under the
contract.




e-Biology Collaboration
Program.  We permit researchers at academic and non-profit
research institutions to acquire OmniBank knockout mice or embryonic
stem cells on a non-exclusive basis in our e-Biology collaboration
program.  We receive fees for knockout mice or embryonic stem cells
provided to collaborators in this program and, with participating institutions,
rights to license inventions or to receive royalties on products discovered
using our materials. In all cases we retain rights to use the same OmniBank
knockout mice in our own gene function research and with commercial
collaborators. We have entered into more than 250 agreements under our e-Biology
collaboration program with researchers at leading institutions throughout the
world.




Technology
Licenses




We have
granted non-exclusive, internal research-use sublicenses under certain of our
gene targeting patent rights to a total of 15 leading pharmaceutical and
biotechnology companies.  Many of these agreements extend for the life
of the patents.  Others have terms of one to three years, in some
cases with provisions for subsequent renewals.  We typically receive
up-front license fees and, in some cases, receive additional license fees or
milestone payments on products that the sublicensee discovers or develops using
our technology.




Our
Executive Officers




Our
executive officers and their ages and positions are listed below.




Name
            Age
            Position with the
CompanyArthur
      T. Sands, M.D., Ph.D.
            46
            President
      and Chief Executive Officer and DirectorJulia
      P. Gregory
            55
            Executive
      Vice President and Chief Financial OfficerTamar
      D. Howson
            59
            Executive
      Vice President of Business DevelopmentAlan
      J. Main, Ph.D.
            54
            Executive
      Vice President of Pharmaceutical ResearchJeffrey
      L. Wade, J.D.
            43
            Executive
      Vice President and General CounselBrian
      P. Zambrowicz, Ph.D.
            45
            Executive
      Vice President and Chief Scientific OfficerPhilip
      M. Brown, M.D., J.D.
            46
            Senior
      Vice President of Clinical DevelopmentLance
      K. Ishimoto, Ph.D., J.D.
            48
            Senior
      Vice President of Intellectual PropertyJames
      R. Piggott, Ph.D.
            53
            Senior
      Vice President of Pharmaceutical
Biology





Arthur T. Sands, M.D., Ph.D.
co-founded our company and has been our president and chief executive officer
and a director since September 1995. At Lexicon, Dr. Sands pioneered the
development of large-scale gene knockout technology for use in drug
discovery.  Before founding our company, Dr. Sands served as an
American Cancer Society postdoctoral fellow in the Department of Human and
Molecular Genetics at Baylor College of Medicine.  Dr. Sands is a
member of the board of directors of the Texas Institute for Genomic
Medicine.  He received his B.A. in economics and political science
from Yale University and his M.D. and Ph.D. from Baylor College of
Medicine.




Julia P. Gregory has been our
executive vice president and chief financial officer since February
2000.  From 1998 to February 2000, Ms. Gregory served as the
head of investment banking for Punk, Ziegel & Company, a specialty
investment banking firm focusing on technology and healthcare and, from 1996 to
February 2000, as the head of the firm’s life sciences
practice.  From 1980 to 1996, Ms. Gregory was an investment
banker, primarily with Dillon, Read & Co., Inc., where she represented
life sciences companies beginning in 1986.  Ms. Gregory is a
member of the board of directors of the Estee Lauder Foundation’s Institute
for the Study of Aging, Inc., The Global Alliance for TB Drug Discovery and
Development, St. Luke’s Community Medical Center and a member of
the International Council for George Washington University’s Elliott School
of International Affairs.  She received her B.A. in international
affairs from George Washington University and her M.B.A. from the Wharton School
of the University of Pennsylvania.




Tamar D. Howson has been our
executive vice president of business development since April 2007. From 2001 to
2007, Ms. Howson served as senior vice president of corporate and business
development and member of the executive committee of Bristol-Myers Squibb
Company.  In 2000 and 2001, she served as an independent business
consultant and adviser to companies both in the United States and
Europe.  From 1991 to 2000, Ms. Howson was senior vice president and
director of business development at SmithKline Beecham.  She also
managed SR One Ltd., the venture capital fund of SmithKline
Beecham.  Before joining SmithKline Beecham, Ms. Howson served as vice
president, venture investments at Johnson Associates, a venture capital firm,
and earlier as director, worldwide business development and licensing for Squibb
Corporation.  She received her B.S. from the Technion in Israel, her
M.S. from the City College of New York and her M.B.A. in finance and
international business from Columbia University.




Alan J. Main, Ph.D. has been
our executive vice president of pharmaceutical research since February 2007 and
served as our senior vice president, Lexicon Pharmaceuticals from July 2001
until February 2007.  Dr. Main was president and chief executive
officer of Coelacanth Corporation, a leader in using proprietary chemistry
technologies to rapidly discover new chemical entities for drug development,
from January 2000 until our acquisition of Coelacanth in
July 2001.  Dr. Main was formerly senior vice president,
U.S. Research at Novartis Pharmaceuticals Corporation, where he worked for
20 years before joining Coelacanth.  Dr. Main holds a B.S.
from the University of Aberdeen, Scotland and a Ph.D. in organic chemistry from
the University of Liverpool, England and completed postdoctoral studies at the
Woodward Research Institute.




Jeffrey L. Wade, J.D. has
been our executive vice president and general counsel since February 2000
and was our senior vice president and chief financial officer from
January 1999 to February 2000.  From 1988 through
December 1998, Mr. Wade was a corporate securities and finance
attorney with the law firm of Andrews & Kurth L.L.P., for the last
two years as a partner, where he represented companies in the biotechnology,
information technology and energy industries.  Mr. Wade is a
member of the boards of directors of the Texas Healthcare and Bioscience
Institute, the Texas Institute for Genomic Medicine and the Texas Life Science
Center for Innovation and Commercialization.  He received his B.A. and
J.D. from the University of Texas.




Brian P. Zambrowicz, Ph.D.
co-founded our company and has been our executive vice president and chief
scientific officer since February 2007.  Dr. Zambrowicz served as our
executive vice president of research from August 2002 until February 2007,
senior vice president of genomics from February 2000 to August 2002,
vice president of research from January 1998 to February 2000 and
senior scientist from April 1996 to January 1998.  From 1993
to April 1996, Dr. Zambrowicz served as a National Institutes of
Health postdoctoral fellow at the Fred Hutchinson Cancer Center in Seattle,
Washington, where he studied gene trapping and gene targeting
technology.  Dr. Zambrowicz is a member of the board of directors
of the Texas Institute for Genomic Medicine.  He received his B.S. in
biochemistry from the University of Wisconsin.  He received his Ph.D.
from the University of Washington, where he studied tissue-specific gene
regulation using transgenic mice.




Philip M. Brown, M.D., J.D.
has been our senior vice president of clinical development since February 2008
and was our vice president of clinical development from April 2003 to
February 2008.  Dr. Brown served as vice president of clinical
development for Encysive Pharmaceuticals Inc. (formerly Texas Biotechnology
Corporation), a biopharmaceutical company, from June 2000 until
April 2003, and was senior medical director within the organization from
December 1998 until June 2000. From July 1994 to
December 1998, Dr. Brown served as associate vice president of medical
affairs for Pharmaceutical Research Associates, a clinical research
organization. He has conducted numerous clinical trials as an investigator in a
variety of therapeutic areas, as well as managed programs from IND through NDA
and product commercialization. He is a fellow of the American College of Legal
Medicine and serves as an adjunct faculty member at the Massachusetts General
Hospital, Institute of Health Professions in Boston. He received his B.A. from
Hendrix College, his M.D. from Texas Tech University School of Medicine, and his
J.D. from the University of Texas.




Lance K. Ishimoto, J.D.,
Ph.D. has been our senior vice president of intellectual property since
February 2004.  Dr. Ishimoto served as our vice president of
intellectual property from July 1998 to February 2004.  From 1994
to July 1998, Dr. Ishimoto was a biotechnology patent attorney at the
Palo Alto, California office of the law firm of Pennie &
Edmonds LLP.  Dr. Ishimoto received his B.A. and Ph.D. from
the University of California at Los Angeles, where he studied molecular
mechanisms of virus assembly and the regulation of virus
ultrastructure.  After receiving his Ph.D., Dr. Ishimoto served
as a National Institutes of Health postdoctoral fellow at the University of
Washington School of Medicine.  He received his J.D. from Stanford
University.




James R. Piggott, Ph.D. has
been our senior vice president of pharmaceutical biology since
January 2000.  From 1990 through October 1999,
Dr. Piggott worked for ZymoGenetics, Inc., a subsidiary of Novo
Nordisk, a company focused on the discovery, development and commercialization
of therapeutic proteins for the treatment of human disease, most recently as
senior vice president-research biology from 1997 to October
1999.  Dr. Piggott’s pharmaceutical research experience also
includes service at the Smith Kline & French Laboratories Ltd.
unit of SmithKline Beecham plc and the G.D. Searle & Co. unit
of Monsanto Company.  Dr. Piggott received his B.A. and Ph.D.
from Trinity College, Dublin.




Patents
and Proprietary Rights




We will
be able to protect our proprietary rights from unauthorized use by third parties
only to the extent that those rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets. Accordingly, patents and
other proprietary rights are an essential element of our business. We seek
patent protection for genes, proteins, drug targets, compounds and drug
candidates that we discover. Specifically, we seek patent protection
for:




·
            chemical
      compounds, antibodies and other potential therapeutic agents and their use
      in treating human diseases and
conditions;




·
            the
      sequences of genes that we believe to be novel, the proteins they encode
      and their predicted utility as a drug target or therapeutic
      protein;




·
            the
      utility of genes and the drug targets or proteins they encode based on our
      discoveries of their biological functions using knockout
    mice;




·
            drug
      discovery assays for our in vivo-validated
      targets; and




·
            various
      enabling technologies in the fields of mutagenesis, embryonic stem cell
      manipulation and transgenic or knockout
mice.




We own or
have exclusive rights to ten issued United States patents that are directed to
our gene trapping technology, 99 issued United States patents that are directed
to full-length sequences of potential drug targets identified in our gene
discovery programs, and five issued United States patents that are directed to
specific knockout mice and discoveries of the functions of genes made using
knockout mice. We have licenses under 94 additional United States patents, and
corresponding foreign patents and patent applications, directed to gene
targeting, gene trapping, genetic manipulation of mouse embryonic stem cells,
chemical intermediates, cell lines and proteins. These include patents to which
we hold exclusive rights in certain fields, including a total of nine United
States patents directed to the use of gene targeting technologies known as
positive-negative selection and isogenic DNA targeting.




We have
filed or have exclusive rights to more than 730 pending patent applications in
the United States Patent and Trademark Office, the European Patent Office, the
national patent offices of other foreign countries or under the Patent
Cooperation Treaty, directed to chemical compounds, antibodies and other
potential therapeutic agents and their use in treating human diseases and
conditions, our gene trapping technology, the DNA sequences of genes, the uses
of specific drug targets, drug discovery assays, and other products and
processes.  Patents typically have a term of no longer than
20 years from the date of filing.




As noted
above, we hold rights to a number of these patents and patent applications under
license agreements with third parties.  In particular, we license our
principal gene targeting technologies from GenPharm International,
Inc.  Many of these licenses are nonexclusive, although some are
exclusive in specified fields.  Most of the licenses, including those
licensed from GenPharm, have terms that extend for the life of the licensed
patents.  In the case of our license from GenPharm, the license
generally is exclusive in specified fields, subject to specific rights held by
third parties, and we are permitted to grant sublicenses.




All of
our employees, consultants and advisors are required to execute a proprietary
information agreement upon the commencement of employment or consultation. In
general, the agreement provides that all inventions conceived by the employee or
consultant, and all confidential information developed or made known to the
individual during the term of the agreement, shall be our exclusive property and
shall be kept confidential, with disclosure to third parties allowed only in
specified circumstances. We cannot assure you, however, that these agreements
will provide useful protection of our proprietary information in the event of
unauthorized use or disclosure of such information.




Competition




The
biotechnology and pharmaceutical industries are highly competitive and
characterized by rapid technological change. We face significant competition in
each of the aspects of our business from other pharmaceutical and biotechnology
companies.  In addition, a large number of universities and other
not-for-profit institutions, many of which are funded by the U.S. and foreign
governments, are also conducting research to discover genes and their functions
and to identify potential therapeutic products. Many of our competitors have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than we do. As a result,
our competitors may succeed in developing products earlier than we do, obtaining
approvals from the FDA or other regulatory agencies for those products more
rapidly than we do, or developing products that are more effective than those we
propose to develop. Similarly, our collaborators face similar competition from
other competitors who may succeed in developing products more quickly, or
developing products that are more effective, than those developed by our
collaborators. Any products that we may develop or discover are likely to be in
highly competitive markets.




We
believe that our ability to successfully compete will depend on, among other
things:




·
            the
      efficacy, safety and reliability of our drug
  candidates;




·
            our
      ability, and the ability of our collaborators, to complete preclinical
      testing and clinical development and obtain regulatory approvals for our
      drug candidates;




·
            the
      timing and scope of regulatory approvals for our drug
      candidates;




·
            our
      ability, and the ability of our collaborators, to obtain product
      acceptance by physicians and other health care providers and reimbursement
      for product use in approved
indications;




·
            our
      ability, and the ability of our collaborators, to manufacture and sell
      commercial quantities of our
products;




·
            the
      skills of our employees and our ability to recruit and retain skilled
      employees;




·
            protection
      of our intellectual property; and




·
            the
      availability of substantial capital resources to fund development and
      commercialization activities.




Government
Regulation




Regulation
of Pharmaceutical Products




The
development, manufacture and sale of any drug or biologic products developed by
us or our collaborators will be subject to extensive regulation by United States
and foreign governmental authorities, including federal, state and local
authorities.  In the United States, new drugs are subject to
regulation under the Federal Food, Drug and Cosmetic Act and the regulations
promulgated thereunder, or the FDC Act, and biologic products are subject to
regulation both under certain provisions of the FDC Act and under the Public
Health Services Act and the regulations promulgated thereunder, or the PHS
Act.  The FDA regulates, among other things, the development,
preclinical and clinical testing, manufacture, safety, efficacy, record keeping,
reporting, labeling, storage, approval, advertising, promotion, sale,
distribution and export of drugs and biologics.




The
standard process required by the FDA before a drug candidate may be marketed in
the United States includes:




·
            preclinical
      laboratory and animal tests performed under the FDA’s current Good
      Laboratory Practices regulations;




·
            submission
      to the FDA of an Investigational New Drug application, or IND, which must
      become effective before human clinical trials may
  commence;




·
            adequate
      and well-controlled human clinical trials to establish the safety and
      efficacy of the drug candidate for its intended
  use;




·
            for
      drug candidates regulated as drugs, submission of a New Drug Application,
      or NDA, and, for drug candidates regulated as biologics, submission of a
      Biologic License Application, or BLA, with the FDA;
  and




·
            FDA
      approval of the NDA or BLA prior to any commercial sale or shipment of the
      product.




This
process for the testing and approval of drug candidates requires substantial
time, effort and financial resources.  Preclinical development of a
drug candidate can take from one to several years to complete, with no guarantee
that an IND based on those studies will become effective to even permit clinical
testing to begin.  Before commencing the first clinical trial with a
drug candidate in the United States, we must submit an IND to the FDA. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30-day time period, raises concerns or questions about the
conduct of the clinical trial. In such a case, the IND sponsor and the FDA must
resolve any outstanding concerns before the clinical trial may begin. Our
submission of an IND may not result in FDA authorization to commence a clinical
trial. A separate submission to the existing IND must be made for each
successive clinical trial conducted during product development, and the FDA must
grant permission for each clinical trial to start and continue. Further, an
independent institutional review board for each medical center proposing to
participate in the clinical trial must review and approve the plan for any
clinical trial before it commences at that center. Regulatory authorities or an
institutional review board or the sponsor may suspend a clinical trial at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk.




For
purposes of NDA or BLA approval, human clinical trials are typically conducted
in three sequential phases that may overlap.




·
            Phase
      1 clinical trials are conducted in a limited number of healthy human
      volunteers or, in some cases, patients to evaluate the safety, dosage
      tolerance, absorption, metabolism, distribution and excretion of the drug
      candidate;




·
            Phase
      2 clinical trials are conducted in groups of patients afflicted with a
      specified disease or condition to obtain preliminary data regarding
      efficacy as well as to further evaluate safety and optimize dosing of the
      drug candidate; and




·
            Phase
      3 clinical trials are conducted in larger patient populations at multiple
      clinical trial sites to obtain statistically significant evidence of the
      efficacy of the drug candidate for its intended use and to further test
      for safety in an expanded patient
population.




In
addition, the FDA may require, or companies may pursue, additional clinical
trials after a product is approved. These so-called Phase 4 studies may be made
a condition to be satisfied after a drug receives approval.




Completion
of the clinical trials necessary for an NDA or BLA submission typically takes
many years, with the actual time required varying substantially based on, among
other things, the nature and complexity of the drug candidate and of the disease
or condition. Success in earlier-stage clinical trials does not ensure success
in later-stage clinical trials.  Furthermore, data obtained from
clinical activities is not always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent proceeding with further
clinical trials, filing or acceptance of an NDA or BLA, or obtaining marketing
approval.




After
completion of clinical trials, FDA approval of an NDA or BLA must be obtained
before a new drug or biologic product may be marketed in the United States. An
NDA or BLA, depending on the submission, must contain, among other things,
information on chemistry, manufacturing controls and potency and purity,
non-clinical pharmacology and toxicology, human pharmacokinetics and
bioavailability and clinical data.  There can be no assurance that the
FDA will accept an NDA or BLA for filing and, even if filed, that approval will
be granted.  Among other things, the FDA reviews an NDA to determine
whether a product is safe and effective for its intended use and a BLA to
determine whether a product is safe, pure and potent and the facility in which
it is manufactured, processed, packed, or held meets standards designed to
assure the product’s continued safety, purity and potency.  The FDA
may deny approval of an NDA or BLA if the applicable regulatory criteria are not
satisfied, or it may require additional clinical data or an additional pivotal
Phase 3 clinical trial. Even if such data are submitted, the FDA may ultimately
decide that the NDA or BLA does not satisfy the criteria for approval. Once
issued, the FDA may withdraw product approval if ongoing regulatory standards
are not met or if safety problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products which have been commercialized, and the FDA has the
power to prevent or limit further marketing of a product based on the results of
these post-marketing programs.  Limited indications for use or other
conditions could also be placed on any approvals that could restrict the
commercial applications of a product or impose costly procedures in connection
with the commercialization or use of the product.




In
addition to obtaining FDA approval for each product, each drug or biologic
manufacturing establishment must be inspected and approved by the
FDA.  All manufacturing establishments are subject to inspections by
the FDA and by other federal, state and local agencies and must comply with
current Good Manufacturing Practices requirements.  Non-compliance
with these requirements can result in, among other things, total or partial
suspension of production, failure of the government to grant approval for
marketing and withdrawal, suspension or revocation of marketing
approvals.




Once the
FDA approves a product, a manufacturer must provide certain updated safety and
efficacy information.  Product changes as well as certain changes in a
manufacturing process or facility would necessitate additional FDA review and
approval.  Other post-approval changes may also necessitate further
FDA review and approval.  Additionally, a manufacturer must meet other
requirements including those related to adverse event reporting and record
keeping.




The FDA
closely regulates the marketing and promotion of drugs. A company can make only
those claims relating to safety and efficacy that are approved by the FDA.
Failure to comply with these requirements can result in adverse publicity,
warning letters, corrective advertising and potential civil and criminal
penalties.




Violations
of the FDC Act, the PHS Act or regulatory requirements may result in agency
enforcement action, including voluntary or mandatory recall, license suspension
or revocation, product seizure, fines, injunctions and civil or criminal
penalties.




In
addition to regulatory approvals that must be obtained in the United States, a
drug or biologic product is also subject to regulatory approval in other
countries in which it is marketed.  The conduct of clinical trials of
drugs and biologic products in countries other than the United States is
likewise subject to regulatory oversight in such countries.  The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country.  No
action can be taken to market any drug or biologic product in a country until
the regulatory authorities in that country have approved an appropriate
application.  FDA approval does not assure approval by other
regulatory authorities.  The current approval process varies from
country to country, and the time spent in gaining approval varies from that
required for FDA approval.  In some countries, the sale price of a
drug or biologic product must also be approved.  The pricing review
period often begins after marketing approval is granted.  Even if a
foreign regulatory authority approves a drug or biologic product, it may not
approve satisfactory prices for the product.




Other
Regulations




In
addition to the foregoing, our business is and will be subject to regulation
under various state and federal environmental laws, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act.  These and other laws govern our use, handling
and disposal of various biological, chemical and radioactive substances used in
and wastes generated by our operations.  We believe that we are in
material compliance with applicable environmental laws and that our continued
compliance with these laws will not have a material adverse effect on our
business.  We cannot predict, however, whether new regulatory
restrictions will be imposed by state or federal regulators and agencies or
whether existing laws and regulations will adversely affect us in the
future.




Research
and Development Expenses




In 2007,
2006 and 2005, respectively, we incurred expenses of $104.3 million,
$106.7 million and $93.6 million in company-sponsored as well as
collaborative research and development activities, including $5.2 million,
$4.4 million and ($21,000) of stock-based compensation expense in 2007,
2006 and 2005, respectively.




Employees
and Consultants




We
believe that our success will be based on, among other things, achieving and
retaining scientific and technological superiority and identifying and retaining
capable management.  We have assembled a highly qualified team of
scientists as well as executives with extensive experience in the biotechnology
industry.




As of
February 29, 2008, we employed 550 persons, of whom 143 hold M.D., Ph.D. or
D.V.M. degrees and another 87 hold other advanced degrees.  We believe
that our relationship with our employees is good.




Item
1A.  Risk Factors




The
following risks and uncertainties are important factors that could cause actual
results or events to differ materially from those indicated by forward-looking
statements.  The factors described below are not the only ones we face
and additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations.




Risks
Related to Our Need for Additional Financing and Our Financial
Results




We
will need additional capital in the future and, if it is unavailable, we will be
forced to significantly curtail or cease operations.  If it is not
available on reasonable terms we will be forced to obtain funds by entering into
financing agreements on unattractive terms.




As of
December 31, 2007, we had $221.7 million of cash, cash equivalents and
short-term investments (net of restricted cash and investments) and
$36.7 million in investments held by Symphony Icon.  We
anticipate that our existing capital resources and the cash and revenues we
expect to derive from drug discovery and development alliances, collaborations
for the development and, in some cases, analysis of the physiological effects of
genes altered in knockout mice, government grants and contracts and technology
licenses will enable us to fund our currently planned operations for at least
the next 12 months.  Our currently planned operations for that time
period consist of the continuation of our small molecule and antibody drug
discovery and preclinical research efforts, the completion of our ongoing
clinical trials, and the initiation and conduct of additional clinical
trials.  However, we caution you that we may generate less cash and
revenues or incur expenses more rapidly than we currently
anticipate.




Although
difficult to accurately predict, the amount of our future capital requirements
will be substantial and will depend on many factors, including:




·
            our
      ability to obtain additional funds from alliances, collaborations,
      government grants and contracts and technology
  licenses;




·
            the
      amount and timing of payments under such
  agreements;




·
            the
      level and timing of our research and development
    expenditures;




·
            the
      timing and progress of the clinical development of our drug candidates
      LX6171, LX1031 and LX1032, and our election whether to exercise our
      exclusive option to acquire all of the equity of Symphony Icon, thereby
      allowing us to reacquire the
programs;




·
            future
      results from clinical trials of our drug
  candidates;




·
            the
      cost and timing of regulatory approvals of drug candidates that we
      successfully develop;




·
            market
      acceptance of products that we successfully develop and commercially
      launch;




·
            the
      effect of competing programs and products, and of technological and market
      developments;




·
            the
      filing, maintenance, prosecution, defense and enforcement of patent claims
      and other intellectual property rights;
and




·
            the
      cost and timing of establishing or contracting for sales, marketing and
      distribution capabilities.




Our
capital requirements will increase substantially as we advance our drug
candidates into and through clinical development.  Our capital
requirements will also be affected by any expenditures we make in connection
with license agreements and acquisitions of and investments in complementary
products and technologies.  For all of these reasons, our future
capital requirements cannot easily be quantified.




If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds to continue our currently planned
operations.  If we raise additional capital by issuing equity
securities, our then-existing stockholders will experience dilution and the
terms of any new equity securities may have preferences over our common
stock.  We cannot be certain that additional financing, whether debt
or equity, will be available in amounts or on terms acceptable to us, if at
all.  We may be unable to raise sufficient additional capital on
reasonable terms; if so, we will be forced to significantly curtail or cease
operations or obtain funds by entering into financing agreements on unattractive
terms.




In June
2007, we entered into a securities purchase agreement with Invus, L.P., under
which Invus made an initial investment of $205.4 million to purchase 50,824,986
shares of our common stock in August 2007 and has the right to require us to
initiate up to two pro rata rights offerings to our stockholders, which would
provide all stockholders with non-transferable rights to acquire shares of our
common stock, in an aggregate amount of up to $344.5 million, less the
proceeds of any “qualified offerings” that we may complete in the interim
involving the sale of our common stock at prices above $4.50 per
share.  Invus may exercise its right to require us to conduct the
first rights offering by giving us notice within a period of 90 days beginning
on November 28, 2009 (which we refer to as the first rights offering
trigger date), although we and Invus may agree to change the first rights
offering trigger date to as early as August 28, 2009 with the approval of the
members of our board of directors who are not affiliated with
Invus.  Invus may exercise its right to require us to conduct the
second rights offering by giving us notice within a period of 90 days beginning
on the date that is 12 months after Invus’ exercise of its right to require
us to conduct the first rights offering or, if Invus does not exercise its right
to require us to conduct the first rights offering, within a period of 90 days
beginning on the first anniversary of the first rights offering trigger
date.  The initial investment and subsequent rights offerings,
combined with any qualified offerings, were designed to achieve up to
$550 million in proceeds to us.  Invus would participate in each
rights offering for up to its pro rata portion of the offering, and would commit
to purchase the entire portion of the offering not subscribed for by other
stockholders.  Under the securities purchase agreement, until the
later of the completion of the second rights offering or the expiration of the
90-day period following the second rights offering trigger date, we have agreed
not to issue any of our common stock for a per share price of less than $4.50
without the prior written consent of Invus, except pursuant to an employee or
director stock option, incentive compensation or similar plan or to persons
involved in the pharmaceutical industry in connection with simultaneous
strategic transactions involving such persons in the ordinary
course.  If we are not able to issue common stock at prices equal to
or greater than $4.50 per share, due to market conditions or otherwise, this
obligation will limit our ability to raise capital by issuing additional equity
securities without the consent of Invus.  In the event Invus declines
to grant such consent and, in addition, elects not to exercise its right to
require us to initiate the first rights offering, or elects to limit the size of
the first rights offering, our ability during this period to satisfy our future
capital requirements by issuing equity securities will be limited if we are
unable to do so by issuing common stock at prices equal to or greater than $4.50
per share.




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
incurred net losses since our inception, including net losses of $58.8 million
for the year ended December 31, 2007, $54.3 million for the year ended
December 31, 2006 and $36.3 million for the year ended
December 31, 2005.  As of December 31, 2007, we had an
accumulated deficit of $410.5 million.  We are unsure when we
will become profitable, if ever.  The size of our net losses will
depend, in part, on the rate of growth, if any, in our revenues and on the level
of our expenses.




We derive
substantially all of our revenues from drug discovery and development alliances,
collaborations for the development and, in some cases, analysis of the
physiological effects of genes altered in knockout mice, government grants and
contracts and technology licenses, and will continue to do so for the
foreseeable future.  Our future revenues from alliances,
collaborations and government grants and contracts are uncertain because our
existing agreements have fixed terms or relate to specific projects of limited
duration.  Our future revenues from technology licenses are uncertain
because they 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, granting agencies 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.  Given the
early-stage nature of our operations, we do not currently derive any revenues
from sales of pharmaceutical products.




A large
portion of our expenses is fixed, including expenses related to facilities,
equipment and personnel.  In addition, we expect to spend significant
amounts to enhance our core technologies and fund our research and development
activities, including the conduct of clinical trials and the advancement of
additional potential therapeutics into clinical development.  As a
result, we expect that our operating expenses will continue to increase
significantly as our drug programs progress into and through human clinical
trials and, consequently, we will need to generate significant additional
revenues to achieve profitability.  Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.




We
have licensed the intellectual property, including commercialization rights, to
our drug candidates LX6171, 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.




Our
option to purchase all of the equity of Symphony Icon, thereby allowing us to
reacquire these drug candidates, is exercisable by us at any time, in our sole
discretion, beginning on June 15, 2008 and ending on June 15, 2011 (subject
to an earlier exercise right in limited circumstances) at an exercise price of
(a) $72 million, if the purchase option is exercised on or after June 15,
2008 and before June 15, 2009, (b) $81 million, if the purchase option is
exercised on or after the June 15, 2009 and before the June 15, 2010 and (c) $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.




If we
elect to exercise the purchase option, we will be required to make a substantial
cash payment or to make a lesser but still substantial cash payment and issue a
substantial number of shares of our common stock, which may in turn require us
to enter into a financing arrangement or license arrangement with one or more
third parties. The amount of any such cash payment would reduce our capital
resources. Payment in shares of our common stock could result in dilution to our
stockholders at that time. Other financing or licensing alternatives may be
expensive or impossible to obtain. If we do not exercise the purchase option
prior to its expiration, our rights to purchase all of the equity in Symphony
Icon and to reacquire LX6171, LX1031 and LX1032 will terminate. We may not have
the financial resources to exercise the option, which may result in our loss of
these rights. Additionally, we may not have sufficient clinical data in order to
determine whether we should exercise the option.




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.




Our
operating results and, in particular, our ability to generate additional
revenues are dependent on many factors, including:




·
            our
      ability to establish new collaborations and alliances, government grants
      and contracts, and technology licenses, and the timing of such
      arrangements;




·
            the
      expiration or other termination of collaborations and alliances, which may
      not be renewed or replaced;




·
            the
      success rate of our discovery and development efforts leading to
      opportunities for new collaborations, alliances and licenses, as well as
      milestone payments and royalties;




·
            the
      timing and willingness of our collaborators to commercialize
      pharmaceutical products that would result in milestone payments and
      royalties; and




·
            general
      and industry-specific economic conditions, which may affect our and our
      collaborators’ research and development
  expenditures.




Because
of these and other factors, including the risks and uncertainties described in
this section, our operating results have fluctuated in the past and are likely
to do so in the future.  Due to the likelihood of fluctuations in our
revenues and expenses, 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.




Our
business strategy of using our technology platform and, specifically, the
discovery of the functions of genes using knockout mice to select promising drug
targets and developing and commercializing drug candidates based on our target
discoveries, in significant part through collaborations and alliances, is
unproven.  Our success will depend upon our ability to successfully
generate, select and develop drug candidates for targets we consider to have
pharmaceutical value, whether on our own or through collaborations, and to
select an appropriate commercialization strategy for each potential therapeutic
we choose to pursue.




We have
not proven our ability to develop or commercialize drug candidates based on our
drug target discoveries.  The generation and selection of potential
drug candidates for a target is a difficult, expensive and time-consuming
process that is subject to substantial technical and scientific challenges and
uncertainties, without any assurance of ever identifying a drug candidate
warranting clinical testing.  The process involves the optimization of
a wide variety of variables, including among many other things potency against
the target, selectivity for the intended target relative to other proteins,
absorption, metabolism, distribution and excretion characteristics, activity in
animal models of disease and the results of other preclinical research, and
feasibility and cost of manufacture, each of which may affect one or more of the
others in ways that conflict with the desired profile.




Furthermore,
we do not know that any pharmaceutical products based on our drug target
discoveries can be successfully developed or commercialized.  Our
strategy is focused principally on the discovery and development of drug
candidates for targets that have not been clinically validated in humans by
drugs or drug candidates generated by others.  As a result, the drug
candidates we develop are subject to uncertainties as to the effects of
modulating the human drug target as well as to those relating to the
characteristics and activity of the particular compound.




In
addition, we may experience unforeseen technical complications in the processes
we use to identify potential drug targets or discover and develop potential drug
candidates.  These complications could materially delay or limit the
use of our resources, substantially increase the anticipated cost of conducting
our drug target or drug candidate discovery efforts or prevent us from
implementing our processes at appropriate quality and throughput
levels.




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.




In order
to obtain regulatory approvals for the commercial sale of any products that we
may develop, we will be required to complete extensive clinical trials in humans
to demonstrate the safety and efficacy of our drug candidates.  We or
our collaborators may not be able to obtain authority from the United States
Food and Drug Administration, or FDA, or other equivalent foreign regulatory
agencies to initiate or complete any clinical trials.  In addition, we
have limited internal resources for making regulatory filings and dealing with
regulatory authorities.




Clinical
trials are inherently risky and the results from preclinical testing of a drug
candidate that is under development may not be predictive of results that will
be obtained in human clinical trials.  In addition, the results of
early human clinical trials may not be predictive of results that will be
obtained in larger-scale, advanced stage clinical trials.  A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after achieving positive results in earlier
trials. Negative or inconclusive results from a preclinical study or a clinical
trial could cause us, one of our collaborators or the FDA to terminate a
preclinical study or clinical trial or require that we repeat
it.  Furthermore, we, one of our collaborators or a regulatory agency
with jurisdiction over the trials may suspend clinical trials at any time if the
subjects or patients participating in such trials are being exposed to
unacceptable health risks or for other reasons.




Any
preclinical or clinical test may fail to produce results satisfactory to the FDA
or foreign regulatory authorities.  Preclinical and clinical data can
be interpreted in different ways, which could delay, limit or prevent regulatory
approval.  The FDA or institutional review boards at the medical
institutions and healthcare facilities where we sponsor clinical trials may
suspend any trial indefinitely if they find deficiencies in the conduct of these
trials. Clinical trials must be conducted in accordance with the FDA’s current
Good Clinical Practices. The FDA and these institutional review boards have
authority to oversee our clinical trials, and the FDA may require large numbers
of test subjects. In addition, we must manufacture, or contract for the
manufacture of, the drug candidates that we use in our clinical trials under the
FDA’s current Good Manufacturing Practices.




The rate
of completion of clinical trials is dependent, in part, upon the rate of
enrollment of patients.  Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study, the nature of the
study, the existence of competitive clinical trials and the availability of
alternative treatments.  Delays in planned patient enrollment may
result in increased costs and prolonged clinical development, which in turn
could allow our competitors to bring products to market before we do and impair
our ability to commercialize our products or potential products.




We or our
collaborators may not be able to successfully complete any clinical trial of a
potential product within any specified time period.  In some cases, we
or our collaborators may not be able to complete the trial at all. Moreover,
clinical trials may not show our potential products to be both safe and
effective.  Thus, the FDA and other regulatory authorities may not
approve any products that we develop for any indication or may limit the
approved indications or impose other conditions.




Risks
Related to Our Relationships with Third Parties




Disagreements
with Symphony Icon regarding the development of our drug candidates LX6171,
LX1031 or LX1032 could negatively affect or delay their
development.




While we
are the party primarily responsible for development of our drug candidates
LX6171, LX1031 and LX1032 in accordance with a specified development plan and
related development budget, our development activities are supervised by
Symphony Icon’s development committee, which is comprised of an equal number of
representatives from us and Symphony Icon. Any disagreements between us and
Symphony Icon regarding a development decision may cause delays in the
development and commercialization of those drug candidates or lead to
development decisions that do not reflect our interests. Any such delays or
development decisions not in our interest could negatively affect the value of
LX6171, LX1031 or LX1032.




We
are dependent in many ways upon our collaborations with major pharmaceutical
companies.  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.




We have
derived a substantial majority of our revenues to date from collaborative drug
discovery and development alliances with a limited number of major
pharmaceutical companies.  Revenues from our drug discovery and
development alliances depend upon continuation of the collaborations, the
achievement of milestones and payment of royalties we earn from any future
products developed under the collaborations.  If our relationship
terminates with any of our collaborators, our reputation in the business and
scientific community may suffer and revenues will be negatively impacted to the
extent such losses are not offset by additional collaboration
agreements.  If we are unable to achieve milestones or our
collaborators are unable to successfully develop products from which royalties
are payable, we will not earn the revenues contemplated by those drug discovery
and development alliances.  In addition, some of our alliances are
exclusive and preclude us from entering into additional collaborative
arrangements with other parties in the field of exclusivity.




We have
limited or no control over the resources that any collaborator may devote to the
development and commercialization of products under our
alliances.  Any of our present or future collaborators may not perform
their obligations as expected.  These collaborators may breach or
terminate their agreements with us or otherwise fail to conduct product
discovery, development or commercialization activities successfully or in a
timely manner.  Further, our collaborators may elect not to develop
pharmaceutical products arising out of our collaborative arrangements or may not
devote sufficient resources to the development, approval, manufacture, marketing
or sale of these products.  If any of these events occurs, we may not
be able to develop or commercialize potential pharmaceutical
products.




Conflicts
with our collaborators could jeopardize the success of our collaborative
agreements and harm our product development efforts.




We may
pursue opportunities in specific disease and therapeutic modality fields that
could result in conflicts with our collaborators, if any of our collaborators
takes the position that our internal activities overlap with those activities
that are exclusive to our collaboration.  Moreover, disagreements
could arise with our collaborators over rights to our intellectual property or
our rights to share in any of the future revenues of compounds or therapeutic
approaches developed by our collaborators.  Any conflict with or among
our collaborators could result in the termination of our collaborative
agreements, delay collaborative research or development activities, impair our
ability to renew or obtain future collaborative agreements or lead to costly and
time consuming litigation.  Conflicts with our collaborators could
also have a negative impact on our relationship with existing collaborators,
materially impairing our business and revenues.  Some of our
collaborators are also potential competitors or may become competitors in the
future.  Our collaborators could develop competing products, preclude
us from entering into collaborations with their competitors or terminate their
agreements with us prematurely.  Any of these events could 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
currently do not have the manufacturing capabilities or experience necessary to
produce materials for preclinical studies, clinical trials or commercial sales
and intend in the future to continue to rely on collaborators and third-party
contractors to produce such materials.  We will rely on selected
manufacturers to deliver materials on a timely basis and to comply with
applicable regulatory requirements, including the current Good Manufacturing
Practices of the FDA, which relate to manufacturing and quality control
activities.  These manufacturers may not be able to produce material
on a timely basis or manufacture material at the quality level or in the
quantity required to meet our development timelines and applicable regulatory
requirements.  In addition, there are a limited number of
manufacturers that operate under the FDA’s current Good Manufacturing Practices
and that are capable of producing such materials, and we may experience
difficulty finding manufacturers with adequate capacity for our
needs.  If we are unable to contract for the production of sufficient
quantity and quality of materials on acceptable terms, our product development
and commercialization efforts may be delayed.  Moreover, noncompliance
with the FDA’s current Good Manufacturing Practices can result in, among other
things, fines, injunctions, civil and criminal penalties, product recalls or
seizures, suspension of production, failure to obtain marketing approval and
withdrawal, suspension or revocation of marketing approvals.




We
rely on third parties to carry out drug development activities.




We rely
on clinical research organizations and other third party contractors to carry
out many of our drug development activities, including the performance of
preclinical laboratory and animal tests under the FDA’s current Good Laboratory
Practices regulations and the conduct of clinical trials of our drug candidates
in accordance with protocols we establish.  If these third parties do
not successfully carry out their contractual duties or regulatory obligations or
meet expected deadlines, our drug development activities may be delayed,
suspended or terminated.  Such a failure by these third parties could
significantly impair our ability to develop and commercialize the affected drug
candidates.




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.




Our drug
candidates, as well as the activities associated with their research,
development and commercialization, are subject to extensive regulation by the
FDA and other regulatory agencies in the United States and by comparable
authorities in other countries. Failure to obtain regulatory approval for a drug
candidate would prevent us from commercializing that drug candidate. We have not
received regulatory approval to market any of our drug candidates in any
jurisdiction and have only limited experience in preparing and filing the
applications necessary to gain regulatory approvals. The process of obtaining
regulatory approvals is expensive, and often takes many years, if approval is
obtained at all, and can vary substantially based upon the type, complexity and
novelty of the drug candidates involved. Before a new drug application can be
filed with the FDA, the drug candidate must undergo extensive clinical trials,
which can take many years and may require substantial expenditures. Any clinical
trial may fail to produce results satisfactory to the FDA. For example, the FDA
could determine that the design of a clinical trial is inadequate to produce
reliable results. The regulatory process also requires preclinical testing, and
data obtained from preclinical and clinical activities are susceptible to
varying interpretations, which could delay, limit or prevent regulatory
approval. In addition, delays or rejections may be encountered based upon
changes in regulatory policy for product approval during the period of product
development and regulatory agency review. Changes in regulatory approval policy,
regulations or statutes or the process for regulatory review during the
development or approval periods of our drug candidates may cause delays in the
approval or rejection of an application. Even if the FDA or a comparable
authority in another country approves a drug candidate, the approval may impose
significant restrictions on the indicated uses, conditions for use, labeling,
advertising, promotion, marketing and/or production of such product and may
impose ongoing requirements for post-approval studies, including additional
research and development and clinical trials. These agencies also may impose
various civil or criminal sanctions for failure to comply with regulatory
requirements, including withdrawal of product approval.




If
our potential products receive regulatory approval, we or our collaborators will
remain subject to extensive and rigorous ongoing regulation.




If we or
our collaborators obtain initial regulatory approvals from the FDA or foreign
regulatory authorities for any products that we may develop, we or our
collaborators will be subject to extensive and rigorous ongoing domestic and
foreign government regulation of, among other things, the research, development,
testing, manufacture, labeling, promotion, advertising, distribution and
marketing of our products and drug candidates.  The failure to comply
with these requirements or the identification of safety problems during
commercial marketing could lead to the need for product marketing restrictions,
product withdrawal or recall or other voluntary or regulatory action, which
could delay further marketing until the product is brought into
compliance.  The failure to comply with these requirements may also
subject us or our collaborators to stringent penalties.




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.




Our
ability to commercialize any products that we may develop will be highly
dependent upon the extent to which these products gain market acceptance among
physicians, patients, health care payors, such as Medicare and Medicaid, private
health insurers, including managed care organizations and group purchasing
organizations, and the medical community. If these products do not achieve an
adequate level of acceptance, we may not generate adequate product revenues, if
at all, and we may not become profitable. The degree of market acceptance of our
drug candidates, if approved for commercial sale, will depend upon a number of
factors, including:




·
            the
      effectiveness, or perceived effectiveness, of our products in comparison
      to competing products;




·
            the
      existence of any significant side effects, as well as their severity in
      comparison to any competing
products;




·
            potential
      advantages over alternative
treatments;




·
            the
      ability to offer our products for sale at competitive
    prices;




·
            relative
      convenience and ease of
administration;




·
            the
      strength of marketing and distribution support;
  and




·
            sufficient
      third-party coverage or
reimbursement.




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.




We have
no experience as a company in the sales, marketing and distribution of
pharmaceutical products and do not currently have a sales and marketing
organization. Developing a sales and marketing force would be expensive and
time-consuming, could delay any product launch, and we may never be able to
develop this capacity. To the extent that we enter into arrangements with third
parties to provide sales, marketing and distribution services, our product
revenues are likely to be lower than if we market and sell any products that we
develop ourselves. If we are unable to establish adequate sales, marketing and
distribution capabilities, independently or with others, we may not be able to
generate product revenues.




If
we are unable to obtain adequate coverage and reimbursement from third-party
payors for any products that we may develop, our revenues and prospects for
profitability will suffer.




Our
ability to commercialize any products that we may develop will be highly
dependent on the extent to which coverage and reimbursement for our products
will be available from third-party payors, including governmental payors, such
as Medicare and Medicaid, and private health insurers, including managed care
organizations and group purchasing organizations. Many patients will not be
capable of paying themselves for some or all of the products that we may develop
and will rely on third-party payors to pay for, or subsidize, their medical
needs. If third-party payors do not provide coverage or reimbursement for any
products that we may develop, our revenues and prospects for profitability will
suffer. In addition, even if third-party payors provide some coverage or
reimbursement for our products, the availability of such coverage or
reimbursement for prescription drugs under private health insurance and managed
care plans often varies based on the type of contract or plan
purchased.




A primary
trend in the United States health care industry is toward cost containment. In
December 2003, President Bush signed into law legislation creating a
prescription drug benefit program for Medicare recipients. The new prescription
drug program may have the effect of reducing the prices that we are able to
charge for products we develop and sell through plans under the program. The new
prescription drug program may also cause third-party payors other than the
federal government, including the states under the Medicaid program, to
discontinue coverage for products we develop or to lower the price that they
will pay.




Proponents
of drug reimportation may attempt to pass legislation, which would allow direct
reimportation under certain circumstances. If legislation or regulations were
passed allowing the reimportation of drugs, it could decrease the price we
receive for any products that we may develop, thereby negatively affecting our
revenues and prospects for profitability.




In
addition, in some foreign countries, particularly the countries in the European
Union, the pricing of prescription pharmaceuticals is subject to governmental
control. In these countries, price negotiations with governmental authorities
can take six to 12 months or longer after the receipt of regulatory marketing
approval for a product. To obtain reimbursement and/or pricing approval in some
countries, we may be required to conduct a clinical trial that compares the cost
effectiveness of our drug candidates or products to other available therapies.
The conduct of such a clinical trial could be expensive and result in delays in
the commercialization of our drug candidates. Third-party payors are challenging
the prices charged for medical products and services, and many third-party
payors limit reimbursement for newly approved health care products. In
particular, third-party payors may limit the indications for which they will
reimburse patients who use any products that we may develop. Cost-control
initiatives could decrease the price we might establish for products that we may
develop, which would result in lower product revenues to us.




Our
competitors may develop products and technologies that make our products and
technologies obsolete.




The
biotechnology industry is highly fragmented and is characterized by rapid
technological change. We face, and will continue to face, intense competition
from biotechnology and pharmaceutical companies, as well as academic research
institutions, clinical reference laboratories and government agencies that are
pursuing research activities similar to ours.  In addition,
significant delays in the development of our drug candidates could allow our
competitors to bring products to market before us, which would impair our
ability to commercialize our drug candidates.  Our future success will
depend upon our ability to maintain a competitive position with respect to
technological advances.  Any products that are developed through our
technologies will compete in highly competitive markets.  Further, our
competitors may be more effective at using their technologies to develop
commercial products.  Many of the organizations competing with us have
greater capital resources, larger research and development staff and facilities,
more experience in obtaining regulatory approvals and more extensive product
manufacturing and marketing capabilities.  As a result, our
competitors may be able to more easily develop technologies and products that
would render our technologies and products, and those of our collaborators,
obsolete and noncompetitive.  In addition, there may be drug
candidates of which we are not aware at an earlier stage of development that may
compete with our drug candidates.




We
may not be able to manufacture our drug candidates in commercial quantities,
which would prevent us from commercializing our drug candidates.




To date,
our drug candidates have been manufactured in small quantities for preclinical
and clinical trials. If any of these drug candidates are approved by the FDA or
other regulatory agencies for commercial sale, we will need to manufacture them
in larger quantities. We may not be able to successfully increase the
manufacturing capacity, whether in collaboration with third-party manufacturers
or on our own, for any of our drug candidates in a timely or economic manner, or
at all. Significant scale-up of manufacturing may require additional validation
studies, which the FDA must review and approve. If we are unable to successfully
increase the manufacturing capacity for a drug candidate, the regulatory
approval or commercial launch of that drug candidate may be delayed or there may
be a shortage in supply. Our drug candidates require precise, high-quality
manufacturing. The failure to achieve and maintain these high manufacturing
standards, including the incidence of manufacturing errors, could result in
patient injury or death, product recalls or withdrawals, delays or failures in
product testing or delivery, cost overruns or other problems that could
seriously hurt our business.




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.




Our
success will depend in part upon our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our intellectual property rights from
unauthorized use by third parties only to the extent that our technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. We will continue to apply for patents covering our technologies and
products as and when we deem appropriate. Pending patent applications do not
provide protection against competitors because they are not enforceable until
they issue as patents.  Further, the disclosures contained in our
current and future patent applications may not be sufficient to meet statutory
requirements for patentability.  Once issued, patents still may not
provide commercially meaningful protection. Our existing patents and any future
patents we obtain may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design
around our patents. If anyone infringes upon our or our collaborators’ patent
rights, enforcing these rights may be difficult, costly and time-consuming and,
as a result, it may not be cost-effective or otherwise expedient to pursue
litigation to enforce those patent rights. In addition, our patents may be
challenged or invalidated or may fail to provide us with any competitive
advantages, if, for example, others were the first to invent or to file patent
applications for these inventions.




Because
patent applications can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued patents that cover
the production, manufacture, commercialization or use of our technologies, drug
targets or drug candidates.   If any such patents are issued to
other entities, we will be unable to obtain patent protection for the same or
similar discoveries that we make.  Moreover, we may be blocked from
using or developing some of our existing or proposed technologies and products,
or may be required to obtain a license that may not be available on reasonable
terms, if at all.  Further, others may discover uses for our
technologies or products other than those covered in our issued or pending
patents, and these other uses may be separately patentable.  Even if
we have a patent claim on a particular technology or product, the holder of a
patent covering the use of that technology or product could exclude us from
selling a product that is based on the same use of that product.




The laws
of some foreign countries do not protect intellectual property rights to the
same extent as the laws of the United States, and many companies have
encountered significant problems in protecting and defending such rights in
foreign jurisdictions. Many countries, including certain countries in Europe,
have compulsory licensing laws under which a patent owner may be compelled to
grant licenses to third parties (for example, the patent owner has failed to
“work” the invention in that country or the third party has patented
improvements). In addition, many countries limit the enforceability of patents
against government agencies or government contractors. In these countries, the
patent owner may have limited remedies, which could materially diminish the
value of the patent. Compulsory licensing of life-saving drugs is also becoming
increasingly popular in developing countries either through direct legislation
or international initiatives. Such compulsory licenses could be extended to
include some of our drug candidates, which could limit our potential revenue
opportunities. Moreover, the legal systems of certain countries, particularly
certain developing countries, do not favor the aggressive enforcement of patent
and other intellectual property protection, which makes it difficult to stop
infringement.




We rely
on trade secret protection for our confidential and proprietary information. We
have taken security measures to protect our proprietary information and trade
secrets, but these measures may not provide adequate protection. While we seek
to protect our proprietary information by entering into confidentiality
agreements with employees, collaborators and consultants, we cannot assure you
that our proprietary information will not be disclosed, or that we can
meaningfully protect our trade secrets. In addition, our competitors may
independently develop substantially equivalent proprietary information or may
otherwise gain access to our trade secrets.




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.  We may not
prevail in any such litigation or other dispute or be able to obtain required
licenses.




Our
discovery and development efforts as well as our potential products and those of
our collaborators may give rise to claims that they infringe the patents of
others.  We are aware that other companies and institutions have
conducted research on many of the same targets that we have identified and have
filed patent applications potentially covering many of the genes and encoded
drug targets that are the focus of our drug discovery programs.  In
some cases, patents have issued from these applications.  In addition,
many companies and institutions have well-established patent portfolios directed
to common techniques, methods and means of developing, producing and
manufacturing pharmaceutical products.  Other companies or
institutions could bring legal actions against us or our collaborators for
damages or to stop us or our collaborators from engaging in certain discovery or
development activities or from manufacturing and marketing any resulting
therapeutic products.  If any of these actions are successful, in
addition to our potential liability for damages, these entities would likely
require us or our collaborators to obtain a license in order to continue
engaging in the infringing activities or to manufacture or market the resulting
therapeutic products or may force us to terminate such activities or
manufacturing and marketing efforts.




We may
need to pursue litigation against others to enforce our patents and intellectual
property rights and may be the subject of litigation brought by third parties to
enforce their patent and intellectual property rights.  In addition,
we may become involved in litigation based on intellectual property
indemnification undertakings that we have given to certain of our
collaborators.  Patent litigation is expensive and requires
substantial amounts of management attention.  The eventual outcome of
any such litigation is uncertain and involves substantial risks.




We
believe that there will continue to be significant litigation in our industry
regarding patent and other intellectual property rights.  We have
expended and many of our competitors have expended and are continuing to expend
significant amounts of time, money and management resources on intellectual
property litigation.  If we become involved in future intellectual
property litigation, it could consume a substantial portion of our resources and
could negatively affect our results of operations.




We
use intellectual property that we license from third parties.  If we
do not comply with these licenses, we could lose our rights under
them.




We rely,
in part, on licenses to use certain technologies that are important to our
business, such as certain gene targeting technology licensed from GenPharm
International, Inc. We do not own the patents that underlie these
licenses.  Most of these licenses, however, including those licensed
from GenPharm, have terms that extend for the life of the licensed
patents.  Our rights to use these technologies and practice the
inventions claimed in the licensed patents are subject to our abiding by the
terms of those licenses and the licensors not terminating them.  We
are currently in compliance with all requirements of these
licenses.  In many cases, we do not control the filing, prosecution or
maintenance of the patent rights to which we hold licenses and rely upon our
licensors to prosecute infringement of those rights.  The scope of our
rights under our licenses may be subject to dispute by our licensors or third
parties.




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.  As a result, our international competitors could be granted
foreign patent protection with respect to our discoveries.




We have
decided not to pursue patent protection with respect to some of our inventions
outside the United States, both because we do not believe it is cost-effective
and because of confidentiality concerns.  Accordingly, our
international competitors could develop, and receive foreign patent protection
for, genes or gene sequences, uses of those genes or gene sequences, gene
products and drug targets, assays for identifying potential therapeutic
products, potential therapeutic products and methods of treatment for which we
are seeking United States patent protection.  In addition, most of our
gene trapping patents and our licensed gene targeting patents cover only the
United States and do not apply to discovery activities conducted outside of the
United States or, in some circumstances, to importing into the United States
products developed using this technology.




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.




Many of
our employees and independent contractors were previously employed at
universities, other biotechnology or pharmaceutical companies, including our
competitors or potential competitors. We may be subject to claims that these
employees, independent contractors or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of their former
employers. Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation could result in
substantial costs and divert management’s attention. If we fail in defending
such claims, in addition to paying money claims, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel
and/or their work product could hamper or prevent our ability to commercialize
certain drug candidates, which could severely harm our business.




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.




We are
highly dependent upon the principal members of our management and scientific
staff, the loss of whose services might adversely impact the achievement of our
objectives and the continuation of existing collaborations. Also, we do not
currently have sufficient clinical development personnel to fully execute our
business plan. Recruiting and retaining qualified clinical and scientific
personnel will be critical to support activities related to advancing our
clinical and preclinical development programs, and supporting our collaborative
arrangements and our internal proprietary research and development efforts.
Competition is intense for experienced clinical personnel, and we may be unable
to retain or recruit clinical personnel with the expertise or experience
necessary to allow us to pursue collaborations, develop our products and core
technologies or expand our operations to the extent otherwise possible. Further,
all of our employees are employed “at will” and, therefore, may leave our
employment at any time.




Our
collaborations with outside scientists may be subject to restriction and
change.




We work
with scientific and clinical advisors and collaborators at academic and other
institutions that assist us in our research and development efforts. These
advisors and collaborators are not our employees and may have other commitments
that limit their availability to us. Although these advisors and collaborators
generally agree not to do competing work, if a conflict of interest between
their work for us and their work for another entity arises, we may lose their
services. In such a circumstance, we may lose work performed by them, and our
development efforts with respect to the matters on which they were working maybe
significantly delayed or otherwise adversely affected. In addition, although our
advisors and collaborators sign agreements not to disclose our confidential
information, it is possible that valuable proprietary knowledge may become
publicly known through them.




Difficulties
we may encounter managing our growth may divert resources and limit our ability
to successfully expand our operations.




We have
experienced a period of rapid and substantial growth in the complexity of our
operations that has placed, and our anticipated growth in the future will
continue to place, a strain on our research, development, administrative and
operational infrastructure. As our operations expand, we will need to continue
to manage multiple locations and additional relationships with various
collaborative partners, suppliers and other third parties. Our ability to manage
our operations and growth effectively requires us to continue to improve our
reporting systems and procedures as well as our operational, financial and
management controls. We may not be able to successfully implement improvements
to our management information and control systems in an efficient or timely
manner to meet future requirements.




Security
breaches may disrupt our operations and harm our operating results.




Our
network security and data recovery measures may not be adequate to protect
against computer viruses, break-ins, and similar disruptions from unauthorized
tampering with our computer systems. The misappropriation, theft, sabotage or
any other type of security breach with respect to any of our proprietary and
confidential information that is electronically stored, including research or
clinical data, could have a material adverse impact on our business, operating
results and financial condition. Additionally, any break-in or trespass of our
facilities that results in the misappropriation, theft, sabotage or any other
type of security breach with respect to our proprietary and confidential
information, including research or clinical data, or that results in damage to
our research and development equipment and assets could have a material adverse
impact on our business, operating results and financial condition.




Any
contamination among our knockout mouse population could negatively affect the
reliability of our scientific research or cause us to incur significant remedial
costs.




Our
generation and analysis of knockout mice are conducted in a specific
pathogen-free environment.  Any contamination of our knockout mouse
population could distort or compromise the quality of our research and
negatively impact the reliability of our scientific
discoveries.  Although we have expended substantial resources in order
to secure our facilities from such risk, in the event such a contamination were
to occur, our drug discovery efforts could be significantly harmed or delayed
and our reputation within the scientific community could be
eroded.  In addition, we may incur significant remedial costs relating
to the elimination of any pathogens present in our facilities.




Because
all of our target validation operations are located at a single facility, the
occurrence of a disaster could significantly disrupt our business.




Our
OmniBank mouse clone library and its backup are stored in liquid nitrogen
freezers located at our facility in The Woodlands, Texas, and our knockout mouse
research operations are carried out entirely at the same
facility.  While we have developed redundant and emergency backup
systems to protect these resources and the facilities in which they are stored,
they may be insufficient in the event of a severe fire, flood, hurricane,
tornado, mechanical failure or similar disaster.  If such a disaster
significantly damages or destroys the facility in which these resources are
maintained, our business could be disrupted until we could regenerate the
affected resources.  Our business interruption insurance may not be
sufficient to compensate us in the event of a major interruption due to such a
disaster.




Risks
Related to Environmental and Product Liability




We
use hazardous chemicals and radioactive and biological materials in our
business. Any claims relating to improper handling, storage or disposal of these
materials could be time consuming and costly.




Our
research and development processes involve the controlled use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may face
liability for any injury or contamination that results from our use or the use
by third parties of these materials, and such liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.




In
addition, our collaborators may use hazardous materials in connection with our
collaborative efforts. In the event of a lawsuit or investigation, we could be
held responsible for any injury caused to persons or property by exposure to, or
release of, these hazardous materials used by these parties. Further, we may be
required to indemnify our collaborators against all damages and other
liabilities arising out of our development activities or products produced in
connection with these collaborations.




We
may be sued for product liability.




We or our
collaborators may be held liable if any product that we or our collaborators
develop, or any product that is made with the use or incorporation of any of our
technologies, causes injury or is found otherwise unsuitable during product
testing, manufacturing, marketing or sale.  Although we currently have
and intend to maintain product liability insurance, this insurance may become
prohibitively expensive or may not fully cover our potential
liabilities.  Our inability to obtain sufficient insurance coverage at
an acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our collaborators.  If we are sued for any injury caused by our
or our collaborators’ products, our liability could exceed our total
assets.




Risks
Related to Our Common Stock




Our
stock price may be extremely volatile.




The
trading price of our common stock has been highly volatile, and we believe the
trading price of our common stock will remain highly volatile and may fluctuate
substantially due to factors such as the following:




·
            adverse
      results or delays in clinical
trials;




·
            announcement
      of FDA approval or non-approval, or delays in the FDA review process, of
      our or our collaborators’ product candidates or those of our competitors
      or actions taken by regulatory agencies with respect to our, our
      collaborators’ or our competitors’ clinical
  trials;




·
            the
      announcement of new products by us or our
  competitors;




·
            quarterly
      variations in our or our competitors’ results of
    operations;




·
            conflicts
      or litigation with our
collaborators;




·
            litigation,
      including intellectual property infringement and product liability
      lawsuits, involving us;




·
            failure
      to achieve operating results projected by securities
    analysts;




·
            changes
      in earnings estimates or recommendations by securities
      analysts;




·
            financing
      transactions;




·
            developments
      in the biotechnology or pharmaceutical
industry;




·
            sales
      of large blocks of our common stock or sales of our common stock by our
      executive officers, directors and significant
  stockholders;




·
            departures
      of key personnel or board members;




·
            developments
      concerning current or future
collaborations;




·
            FDA
      or international regulatory
actions;




·
            third-party
      reimbursement policies;




·
            acquisitions
      of other companies or technologies;




·
            disposition
      of any of our subsidiaries, technologies or compounds;
  and


·
              general
      market conditions and other factors, including factors unrelated to our
      operating performance or the operatingperformance of our
      competitors.


These
factors, as well as general economic, political and market conditions, may
materially adversely affect the market price of our common stock.




In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs and
divert management’s attention and resources, which could have a material and
adverse effect on our business.




We
may engage in future acquisitions, which may be expensive and time consuming and
from which we may not realize anticipated benefits.




We may
acquire additional businesses, technologies and products if we determine that
these businesses, technologies and products complement our existing technology
or otherwise serve our strategic goals.  If we do undertake any
transactions of this sort, the process of integrating an acquired business,
technology or product may result in operating difficulties and expenditures and
may not be achieved in a timely and non-disruptive manner, if at all, and may
absorb significant management attention that would otherwise be available for
ongoing development of our business.  If we fail to integrate acquired
businesses, technologies or products effectively or if key employees of an
acquired business leave, the anticipated benefits of the acquisition would be
jeopardized.  Moreover, we may never realize the anticipated benefits
of any acquisition, such as increased revenues and earnings or enhanced business
synergies.  Future acquisitions could result in potentially dilutive
issuances of our equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to intangible assets, which could
materially impair our results of operations and financial
condition.




Future
sales of our common stock may depress our stock price.




If our
stockholders sell substantial amounts of our common stock (including shares
issued upon the exercise of options and warrants) in the public market, the
market price of our common stock could fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. For example, following an acquisition,
a significant number of shares of our common stock held by new stockholders may
become freely tradable or holders of registration rights could cause us to
register their shares for resale. Sales of these shares of common stock held by
existing stockholders could cause the market price of our common stock to
decline.




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.




Under the
stockholders’ agreement we entered into in connection with Invus’ $205.4 million
initial investment in our common stock, Invus currently has the right to
designate three members of our board of directors, pursuant to which Invus has
designated Raymond Debbane, president and chief executive officer of The Invus
Group, LLC, an affiliate of Invus, and Philippe J. Amouyal and Christopher J.
Sobecki, each of whom are managing directors of The Invus Group,
LLC.  From and after August 28, 2008, Invus will have the right
to designate the greater of three members or 30% (or the percentage of all the
outstanding shares of our common stock owned by Invus and its affiliates, if
less than 30%) of all members of our board of directors, rounded up to the
nearest whole number of directors.  In the event that the number of
shares of our common stock owned by Invus and its affiliates ever exceeds 50% of
the total number of shares of our common stock then outstanding (not counting
for such purpose any shares acquired by Invus from third parties in excess of
40% (or, if higher, its then pro rata amount) of the total number of outstanding
shares of common stock, as permitted by the standstill provisions of the
stockholders’ agreement), from and after that time, Invus will have the right to
designate a number of directors equal to the percentage of all the outstanding
shares of our common stock owned by Invus and its affiliates (not counting for
such purpose any shares acquired by Invus from third parties in excess of 40%
(or, if higher, its then pro rata amount) of the total number of outstanding
shares of common stock, as permitted by the standstill provisions of the
stockholders’ agreement), rounded up to the nearest whole number of
directors.  The directors appointed by Invus have proportionate
representation on the compensation committee and corporate governance committee
of our board of directors.




Invus’
rights with respect to the designation of members of our board of directors and
its compensation and corporate governance committees will terminate if the
percentage of all the outstanding shares of our common stock owned by Invus and
its affiliates falls below ten percent.  Invus will also have the
right to terminate these provisions at any time following the date on which the
percentage of all the outstanding shares of our common stock owned by Invus and
its affiliates exceeds 50% (not counting for such purpose any shares acquired by
Invus and its affiliates from third parties in excess of 40% (or, if higher, its
then pro rata amount) of the total number of outstanding shares of our common
stock, as permitted by the standstill provisions of the stockholders’
agreement).




Invus has
preemptive rights under the stockholders’ agreement to participate in future
equity issuances by us (including any qualified offering), subject to certain
exceptions, so as to maintain its then-current percentage ownership of our
capital stock.  Subject to certain limitations, Invus will be required
to exercise its preemptive rights in advance with respect to certain marketed
offerings, in which case it will be obligated to buy its pro rata share of the
number of shares being offered in such marketed offering, including any
overallotment (or such lesser amount specified in its exercise of such rights),
so long as the sale of the shares were priced within a range
within ten percent above or below the market price on the date we notified Invus
of the offering and we met certain other conditions.




The
provisions of the stockholders’ agreement relating to preemptive rights will
terminate on the earlier to occur of August 28, 2017 and the date on which the
percentage of all the outstanding shares of our common stock owned by Invus and
its affiliates falls below ten percent.




Invus is
subject to standstill provisions restricting its ability to purchase or
otherwise acquire additional shares of common stock from third parties to an
amount that would result in its ownership of our common stock not exceeding 49%
of the total number of shares outstanding.  These standstill
provisions will not apply to the acquisitions of securities by way of stock
splits, stock dividends, reclassifications, recapitalizations, or other
distributions by us, acquisitions contemplated by the securities purchase
agreement and the stockholders’ agreement, including in the rights offerings and
upon Invus’ exercise of preemptive rights under the stockholders’
agreement.




Except
for acquisitions pursuant to the provisions described above, and subject to
certain exceptions, Invus has agreed that it will not, and will cause its
affiliates not to, without the approval of our unaffiliated board, directly or
indirectly:




·
            solicit
      proxies to vote any of our voting securities or any voting securities of
      our subsidiaries;




·
            submit
      to our board of directors a written proposal for any merger,
      recapitalization, reorganization, business combination or other
      extraordinary transaction involving an acquisition of us or any of our
      subsidiaries or any of our or our subsidiaries’ securities or assets by
      Invus and its affiliates;




·
            enter
      into discussions, negotiations, arrangements or understandings with any
      third party with respect to any of the foregoing;
  or




·
            request
      us or any of our representatives, directly or indirectly, to amend or
      waive any of these standstill
provisions.




The
standstill provisions of the stockholders’ agreement will terminate on the
earliest to occur of (a) August 28, 2017, (b) the date on which the percentage
of all the outstanding shares of our common stock owned by Invus and its
affiliates falls below ten percent, (c) the date on which the percentage of all
of the outstanding shares of our common stock owned by Invus and its affiliates
exceeds 50% (not counting for such purpose any shares acquired by Invus from
third parties in excess of 40% (or, if higher, its then pro rata amount) of the
total number of outstanding shares of common stock, as permitted by the
standstill provisions of the stockholders’ agreement), (d) the date on which any
third party makes a public proposal to acquire (by purchase, exchange, merger or
otherwise) assets or business constituting 50% or more of our revenues, net
income or assets or 50% of any class of our equity securities our board of
directors recommends or approves, or proposes to recommend or approve, any such
transaction or (e) the date on which any third party acquires beneficial
ownership (by purchase, exchange, merger or otherwise) of assets or business
constituting 20% or more of our revenues, net income or assets or 20% of any
class of our equity securities or our board of directors recommends or approves,
or proposes to recommend or approve, any such transaction.




Subject
to certain exceptions, Invus has agreed that neither it nor its affiliates will
sell any shares of common stock to third parties that are not affiliated with
Invus if, to Invus’ knowledge, such transfer would result in any such third
party (or any person or group including such third party) owning more than 14.9%
of the total number of outstanding shares of our common stock.




The
provisions of the stockholders’ agreement relating to sales to third parties
will terminate on the earliest to occur of (a) August 28, 2017,
(b) the date on which the percentage of all the outstanding shares of our
common stock owned by Invus and its affiliates falls below ten percent, and
(c) the date on which the percentage of all the outstanding shares of our
common stock owned by Invus and its affiliates exceeds 50% (not counting for
such purpose any shares acquired by Invus and its affiliates from third parties
in excess of 40% (or, if higher, its then pro rata amount) of the total number
of outstanding shares of our common stock, as permitted by the standstill
provisions of the stockholders’ agreement).




In any
election of persons to serve on our board of directors, Invus will be obligated
to vote all of the shares of common stock held by it and its affiliates in favor
of the directors nominated by our board of directors, as long as we have
complied with our obligation with respect to the designation of members of our
board of directors described above and the individuals designated by Invus for
election to our board of directors have been nominated, and, if applicable, are
serving on our board of directors.  With respect to all other matters
submitted to a vote of the holders of our common stock, Invus will be obligated
to vote any shares that it acquired from third parties in excess of 40% (or, if
higher, its then pro rata amount) of the total number of outstanding shares of
common stock, as permitted by the standstill provisions of the stockholders’
agreement, in the same proportion as all the votes cast by other holders of our
common stock, unless Invus and we (acting with the approval of the unaffiliated
board) agree otherwise.  Invus may vote all other shares of our common
stock held by it in its sole discretion.




The
provisions of the stockholders’ agreement relating to voting will terminate on
the earliest to occur of (a) August 28, 2017, (b) the date on which
the percentage of all the outstanding shares of our common stock held by Invus
and its affiliates falls below ten percent, (c) the date on which the
percentage of all outstanding shares of our common stock owned by Invus and its
affiliates exceeds 50% (not counting for such purpose any shares acquired by
Invus from third parties in excess of 40% (or, if higher, its then pro rata
amount) of the total number of outstanding shares of our common stock, as
permitted by the provisions of the stockholders’ agreement), and (d) the
termination of the standstill provisions in accordance with the stockholders’
agreement.




Invus is
entitled to certain minority protections, including consent rights over (a) the
creation or issuance of any new class or series of shares of our capital stock
(or securities convertible into or exercisable for shares of our capital stock)
having rights, preferences or privileges senior to or on parity with our common
stock, (b) any amendment to our certificate of incorporation or bylaws, or
amendment to the certificate of incorporation or bylaws of any of our
subsidiaries, in a manner adversely affecting Invus’ rights under the securities
purchase agreement and the related agreements, (c) the repurchase, retirement,
redemption or other acquisition of our or our subsidiaries’ capital stock (or
securities convertible into or exercisable for shares of our or our
subsidiaries’ capital stock), (d) any increase in the size of our board of
directors to more than 12 members and (e) the adoption or proposed adoption of
any stockholders’ rights plan, “poison pill” or other similar plan or agreement,
unless Invus is exempt from the provisions of such plan or
agreement.




The
provisions of the stockholders’ agreement relating to minority protections will
terminate on the earlier to occur of August 28, 2017 and the date on which Invus
and its affiliates hold less than 15% of the total number of outstanding shares
of our common stock.




Item
1B.   Unresolved Staff
Comments




None.




Item
2.        Properties




We
currently own approximately 300,000 square feet of space for our corporate
offices and laboratories in buildings located in The Woodlands, Texas, a suburb
of Houston, Texas, and lease approximately 76,000 square feet of space for
offices and laboratories near Princeton, New Jersey.




Our
facilities in The Woodlands, Texas include two state-of-the art animal
facilities totaling approximately 100,000 square feet.  These
facilities, completed in 1999 and 2002, respectively, were custom designed for
the generation and analysis of knockout mice and are accredited by AAALAC
International (Association for Assessment and Accreditation of Laboratory Animal
Care).  These facilities enable us to maintain in-house control over
our entire in vivo
validation process, from the generation of embryonic stem cell clones through
the completion of in
vivo analysis, in a specific pathogen free environment.  We
believe these facilities, which are among the largest and most sophisticated of
their kind in the world, provide us with significant strategic and operational
advantages relative to our competitors.  Because of the size and
sophistication of our facilities, it would require the investment of significant
resources over an extended period of time for any competitor to develop
facilities with the scale, efficiency and productivity with respect to the
analysis of the functionality of genes that our facilities provide.




In April
2004, we purchased our facilities in The Woodlands, Texas from the lessor under
our previous synthetic lease agreement.  In connection with such
purchase, we repaid the $54.8 million funded under the synthetic lease with
proceeds from a $34.0 million third-party mortgage financing and $20.8 million
in cash.  The mortgage loan has a ten-year term with a 20-year
amortization and bears interest at a fixed rate of 8.23%.  As a result
of the refinancing, all restrictions on the cash and investments that had
secured the obligations under the synthetic lease were eliminated.




In May
2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc. entered into a
lease for a 76,000 square-foot facility 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.




We
believe that our facilities are well-maintained, in good operating condition and
acceptable for our current operations.




Item
3.        Legal
Proceedings




None.




Item
4.        Submission of Matters to a Vote of
Security Holders




None.












PART
II




Item
      5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities




Our
common stock is quoted on The Nasdaq Global Market under the symbol
“LXRX.”  The following table sets forth, for the periods indicated,
the high and low sales prices for our common stock as reported on The Nasdaq
Global Market.




High
            
            
            Low2006First
      Quarter
            
            $
            5.83
            
            
            $
            3.60Second
      Quarter
            
            $
            5.85
            
            
            $
            4.01Third
      Quarter
            
            $
            4.52
            
            
            $
            3.65Fourth
      Quarter
            
            $
            4.40
            
            
            $
            3.402007First
      Quarter
            
            $
            4.40
            
            
            $
            3.10Second
      Quarter
            
            $
            3.87
            
            
            $
            2.91Third
      Quarter
            
            $
            3.69
            
            
            $
            3.04Fourth
      Quarter
            
            $
            4.03
            
            
            $
            2.80





As of
February 29, 2008, there were approximately 235 holders of record of our common
stock.




We have
never paid cash dividends on our common stock. We anticipate that we will retain
all of our future earnings, if any, for use in the expansion and operation of
our business and do not anticipate paying cash dividends in the foreseeable
future.




Equity
Compensation Plan Information




The
following table presents aggregate summary information as of December 31, 2007
regarding the common stock that may be issued upon exercise of options, warrants
and rights under all of our existing equity compensation plans, including our
2000 Equity Incentive Plan, 2000 Non-Employee Directors’ Stock Option Plan and
Coelacanth Corporation 1999 Stock Option Plan.




(a)
            
            
            (b)
            
            
            (c)Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted
      average exercise price per share of outstanding options, warrants and
      rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation planapproved
      by security holders (1)
            
            
            16,277,866
            
            
            $
            5.6640
            
            
            
            1,132,705
            (3)(4)(5)Equity
      compensation plans notapproved
      by security holders (2)
            
            
            72,763
            
            
            
            2.2958
            
            
            
            —Total
            
            
            16,350,629
            
            
            $
            5.6490
            
            
            
            1,132,705







(1)
            Consists
      of shares of our common stock issuable upon the exercise of options
      granted under our 2000 Equity Incentive Plan and 2000 Non-Employee
      Directors’ Stock Option Plan or remaining available for issuance under
      those plans.




(2)
            Consists
      of shares of our common stock issuable upon the exercise of options
      granted under the Coelacanth Corporation 1999 Stock Option Plan, which we
      assumed in connection with our July 2001 acquisition of Coelacanth
      Corporation, but does not include warrants to purchase 16,483 shares of
      common stock at a weighted average exercise price of $11.93 per share,
      which we also assumed in connection with our acquisition of
      Coelacanth.




(3)
            Includes
      1,001,537 shares available for future issuance under our 2000 Equity
      Incentive Plan, some or all of which may be awarded as stock
      bonuses.




(4)
            Our
      2000 Equity Incentive Plan provides that on each January 1, the number of
      shares available for issuance under the plan will be automatically
      increased by the greater of (i) five percent of our outstanding shares on
      a fully-diluted basis or (ii) the number of shares that could be issued
      under awards granted under the plan during the prior year.  Our
      board of directors may provide for a lesser increase in the number of
      shares available for issuance under the
plan.




(5)
            Our
      2000 Non-Employee Directors’ Stock Option Plan provides that on the day
      following each annual meeting of stockholders, the number of shares
      available for issuance under the plan will be automatically increased by
      the greater of (i) 0.3% of our outstanding shares on a fully-diluted basis
      or (ii) the number of shares that could be issued under options granted
      under the plan during the prior year.  Our board of directors
      may provide for a lesser increase in the number of shares available for
      issuance under the plan.







Performance
Graph




The
following performance graph compares the performance of our common stock to the
Nasdaq Composite Index and the Nasdaq Biotechnology Index for the period
beginning December 31, 2002 and ending December 31, 2007. The graph assumes that
the value of the investment in our common stock and each index was $100 at
December 31, 2002, and that all dividends were reinvested.












December
      31,2002
            
            2003
            
            2004
            
            2005
            
            2006
            
            
            2007Lexicon
      Pharmaceuticals, Inc.
            
            
            100
            
            
            
            125
            
            
            
            164
            
            
            
            77
            
            
            
            76
            
            
            
            64Nasdaq
      Composite Index
            
            
            100
            
            
            
            150
            
            
            
            163
            
            
            
            165
            
            
            
            181
            
            
            
            199Nasdaq
      Biotechnology Index
            
            
            100
            
            
            
            146
            
            
            
            155
            
            
            
            159
            
            
            
            161
            
            
            
            168





The
foregoing stock price performance comparisons shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liabilities of that section, nor shall it be deemed incorporated
by reference by any general statement incorporating by reference this annual
report on Form 10-K into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that we specifically
incorporate such comparisons by reference.










Item
6.                      Selected Financial
Data




The
statement of operations data for the years ended December 31, 2007, 2006
and 2005 and the balance sheet data as of December 31, 2007 and 2006 have
been derived from our audited financial statements included elsewhere in this
annual report on Form 10-K.  The statements of operations data
for the years ended December 31, 2004 and 2003, and the balance sheet data as of
December 31, 2005, 2004 and 2003 have been derived from our audited financial
statements not included in this annual report on Form 10-K.  Our
historical results are not necessarily indicative of results to be expected for
any future period.  The data presented below has been derived from
financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States and should be read with our
financial statements, including the notes, and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this annual report on Form 10-K.




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Statements
      of Operations Data:
            
            (in
      thousands, except per share data)Revenues
            
            $
            50,118
            
            
            $
            72,798
            
            
            $
            75,680
            
            
            $
            61,740
            
            
            $
            42,838Operating
      expenses:Research and development, including stock-based
      compensation of $5,150in
      2007, $4,394 in 2006, ($21) in 2005,$426 in
      2004 and $5,048 in 2003
            
            
            104,332
            
            
            
            106,695
            
            
            
            93,625
            
            
            
            90,586
            
            
            
            82,198General and administrative, including stock-based
      compensation of $2,776in
      2007, $2,636 in 2006, $0 in 2005,$412
      in 2004 and $5,067 in 2003
            
            
            20,740
            
            
            
            21,334
            
            
            
            18,174
            
            
            
            18,608
            
            
            
            23,233Total
      operating expenses
            
            
            125,072
            
            
            
            128,029
            
            
            
            111,799
            
            
            
            109,194
            
            
            
            105,431Loss
      from operations
            
            
            (74,954
            )
            
            
            (55,231
            )
            
            
            (36,119
            )
            
            
            (47,454
            )
            
            
            (62,593
            )Interest
      and other income, net
            
            
            3,721
            
            
            
            801
            
            
            
            (77
            )
            
            
            282
            
            
            
            1,471Loss
      before noncontrolling interest in Symphony Icon, Inc.
            
            
            (71,233
            )
            
            
            (54,430
            )
            
            
            (36,196
            )
            
            
            (47,172
            )
            
            
            (61,122
            )Loss
      attributable to noncontrolling interest in Symphony Icon,
    Inc.
            
            
            12,439
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Loss
      before taxes and cumulative effect of a change inaccounting
      principle
            
            
            (58,794
            )
            
            
            (54,430
            )
            
            
            (36,196
            )
            
            
            (47,172
            )
            
            
            (61,122
            )Income
      tax provision
            
            
            —
            
            
            
            119
            
            
            
            (119
            )
            
            
            —
            
            
            
            ―Loss
      before cumulative effect of a change inaccounting
      principle
            
            
            (58,794
            )
            
            
            (54,311
            )
            
            
            (36,315
            )
            
            
            (47,172
            )
            
            
            (61,122
            )Cumulative effect of a change in accounting
      principle (1)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,076
            )Net
      loss
            
            $
            (58,794
            )
            
            $
            (54,311
            )
            
            $
            (36,315
            )
            
            $
            (47,172
            )
            
            $
            (64,198
            )Net
      loss per common share basic and diluted:Loss before cumulative effect of a change in
      accounting principle
            
            $
            (0.59
            )
            
            $
            (0.81
            )
            
            $
            (0.57
            )
            
            $
            (0.74
            )
            
            $
            (1.08
            )Cumulative effect of a change in accounting
      principle
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (0.05
            )Net
      loss per common share, basic and diluted
            
            $
            (0.59
            )
            
            $
            (0.81
            )
            
            $
            (0.57
            )
            
            $
            (0.74
            )
            
            $
            (1.13
            )Shares used in computing net loss per commonshare,
      basic and diluted
            
            
            99,798
            
            
            
            66,876
            
            
            
            63,962
            
            
            
            63,327
            
            
            
            56,820





As
      of December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
      Sheet Data:
            
            (in
      thousands)Cash,
      cash equivalents and investments, including restrictedcash
      and investments of $430 in 2007, $430 in 2006,$430
      in 2005, $430 in 2004 and $57,514 in 2003
            
            $
            222,109
            
            
            $
            79,999
            
            
            $
            99,695
            
            
            $
            87,558
            
            
            $
            161,001Short-term
      investments held by Symphony Icon, Inc.
            
            
            36,666
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Working
      capital
            
            
            229,303
            
            
            
            39,586
            
            
            
            48,584
            
            
            
            60,038
            
            
            
            139,739Total
      assets
            
            
            369,296
            
            
            
            190,266
            
            
            
            218,714
            
            
            
            211,980
            
            
            
            284,199Long-term
      debt, net of current portion
            
            
            30,493
            
            
            
            31,372
            
            
            
            32,189
            
            
            
            32,940
            
            
            
            56,344Accumulated
      deficit
            
            
            (410,535
            )
            
            
            (351,741
            )
            
            
            (297,430
            )
            
            
            (261,115
            )
            
            
            (213,943
            )Stockholders’
      equity
            
            
            256,300
            
            
            
            85,501
            
            
            
            85,802
            
            
            
            121,594
            
            
            
            166,216





(1)Upon
adoption of Financial Accounting Standards Board Interpretation No. 46,
“Consolidation of Variable Interest Entities – An Interpretation of ARB
No. 51,” or FIN 46, we consolidated the assets of the variable
interest entity, which were comprised of property and improvements funded under
a synthetic lease.  These assets had a carrying value of
$54.8 million, net of accumulated depreciation of $3.1 million on
December 31, 2003.  We also consolidated the variable interest
entity’s debt of $52.3 million and noncontrolling interests of
$2.5 million, which amounts are included in long-term debt and other
long-term liabilities, respectively.  Additionally, we recorded a
cumulative effect of a change in accounting principle equal to the accumulated
depreciation of $3.1 million for the period from the date the buildings
were placed in service under the synthetic lease through December 31, 2003.
In April 2004, we purchased the facilities subject to the synthetic lease,
repaying the amounts funded under the synthetic lease with proceeds from a
mortgage financing and cash.








Item
7.           Management’s Discussion and Analysis
of Financial Condition and Results of Operations




The
following discussion and analysis should be read with “Selected Financial Data”
and our financial statements and notes included elsewhere in this annual report
on Form 10-K.




Overview




We are a
biopharmaceutical company focused on the discovery and development of
breakthrough treatments for human disease.  We use our proprietary
gene knockout technology to knock out, or disrupt, the function of genes in mice
and then employ an integrated platform of advanced medical technologies to
systematically discover the physiological and behavioral functions of the genes
we have knocked out and assess the utility of the proteins encoded by the
corresponding human genes as potential drug targets.  For targets that
we believe have high pharmaceutical value, we engage in programs for the
discovery and development of potential small molecule, antibody and protein
drugs.  We have advanced four drug candidates into human clinical
trials, with one additional drug candidate in preclinical development and
compounds from a number of additional programs in various stages of preclinical
research.  We believe that our systematic, target biology-driven
approach to drug discovery will enable us to substantially expand our clinical
pipeline, and we are engaged in efforts that we refer to as our 10TO10 program
with the goal of advancing ten drug candidates into human clinical trials by the
end of 2010.




We are
working both independently and through strategic collaborations and alliances to
capitalize on our technology and drug target discoveries and to develop and
commercialize drug candidates emerging from our drug discovery and development
programs.  We have established alliances with Bristol-Myers Squibb
Company to discover and develop novel small molecule drugs in the neuroscience
field; with Genentech, Inc. for the discovery of therapeutic proteins and
antibody targets and the development of antibody and protein drugs based on
those targets; and with N.V. Organon for the discovery of another group of
therapeutic proteins and antibody targets and the development and
commercialization of antibody and protein drugs based on those
targets.  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.  Finally, we have
established a product development financing collaboration with Symphony Icon,
Inc. under which we have licensed to Symphony Icon our intellectual property
rights to our drug candidatesLX6171, LX1031 and
LX1032, subject to our exclusive option to reacquire all rights to those drug
candidates. We are consolidating the financial condition and results of
operations of Symphony Icon in accordance with Financial Accounting Standards
Board, or FASB, Interpretation No. 46, as described under the heading
“Critical Accounting Policies.”




We derive
substantially all of our revenues from drug discovery and development alliances,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice,
academic, non-profit and government arrangements, 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
collaborations, alliances and technology licenses, expirations of our
collaborations and alliances, the success rate of our discovery and development
efforts leading to opportunities for new collaborations, alliances 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,
alliances and academic, non-profit and government arrangements are uncertain
because our existing agreements have fixed terms or relate to specific projects
of limited duration. Our future revenues from technology licenses are uncertain
because they depend, in large 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, granting
agencies 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.




Since our
inception, we have incurred significant losses and, as of December 31, 2007, we
had an accumulated deficit of $410.5 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, legal expenses resulting from intellectual property
prosecution 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 and our ongoing target validation
research efforts, we expect to incur increasing research and development and
general and administrative costs. As a result, we will need to generate
significantly higher revenues to achieve profitability.




Critical
Accounting Policies




Revenue
Recognition




We
recognize revenues when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the price is fixed or determinable,
and collectibility is reasonably assured.  Payments received in
advance under these arrangements are recorded as deferred revenue until
earned.




Upfront
fees under our drug discovery and development alliances are recognized as
revenue on a straight-line basis over the estimated period of service, generally
the contractual research term, as this period is our best estimate of the period
over which the services will be rendered, to the extent they are
non-refundable.  We have determined that the level of effort we
perform to meet our obligations is fairly constant throughout the estimated
periods of service.  As a result, we have determined that it is
appropriate to recognize revenue from such agreements on a straight-line basis,
as we believe this reflects how the research is provided during the initial
period of the agreement.  When it becomes probable that a collaborator
will extend the research period, we adjust the revenue recognition method as
necessary based on the level of effort required under the agreement for the
extension period.




Research
funding under these alliances is recognized as services are performed to the
extent they are non-refundable, either on a straight-line basis over the
estimated service period, generally the contractual research term; or as
contract research costs are incurred.  Milestone-based fees are
recognized upon completion of specified milestones according to contract
terms.  Payments received under target validation collaborations and
government grants and contracts are recognized as revenue as we perform our
obligations related to such research to the extent such fees are
non-refundable.  Non-refundable technology license fees are recognized
as revenue upon the grant of the license, when performance is complete and there
is no continuing involvement.




Revenues
recognized from multiple element contracts are allocated to each element of the
arrangement based on the relative fair value of the elements.  An
element of a contract can be accounted for separately if the delivered elements
have standalone value to the collaborator and the fair value of any undelivered
elements is determinable through objective and reliable evidence.  If
an element is considered to have standalone value but the fair value of any of
the undelivered items cannot be determined, all elements of the arrangement are
recognized as revenue over the period of performance for such undelivered items
or services.




A change
in our revenue recognition policy or changes in the terms of contracts under
which we recognize revenues could have an impact on the amount and timing of our
recognition of revenues.




Research
and Development Expenses




Research
and development expenses consist of costs incurred for Company-sponsored as well
as collaborative research and development activities. These costs include direct
and research-related overhead expenses and are expensed as incurred. Patent
costs and technology license fees for technologies that are utilized in research
and development and have no alternative future use are expensed when
incurred.




We are
presently conducting a Phase 2 clinical trial of our most advanced drug
candidate, LX6171, an orally-delivered small molecule compound that we are
developing as a potential treatment for cognitive impairment associated with
disorders such as Alzheimer’s disease, schizophrenia and vascular
dementia.  We are conducting Phase 1 clinical trials of three other
drug candidates: LX1031, an orally-delivered small molecule compound that we are
developing as a potential treatment for gastrointestinal disorders such as
irritable bowel syndrome; LX1032, an orally-delivered small molecule compound
that we are developing as a potential treatment for the symptoms associated with
carcinoid syndrome; and LX2931, an orally-delivered small molecule compound that
we are developing as a potential treatment for autoimmune diseases such as
rheumatoid arthritis.  We have advanced one other drug candidate into
preclinical development in preparation for regulatory filings for the
commencement of clinical trials: LX4211, an orally-delivered small molecule
compound that we are developing as a potential treatment for Type 2
diabetes.  We have small molecule and antibody compounds from a number
of additional drug discovery programs in various stages of preclinical
research.  The drug development process takes many years to
complete.  The cost and length of time varies due to many factors,
including the type, complexity and intended use of the drug
candidate.  We estimate that drug development activities are typically
completed over the following periods:




Phase
            
            Estimated
      Completion PeriodPreclinical
      development
            
            1-2
      yearsPhase
      1 clinical trials
            
            1-2
      yearsPhase
      2 clinical trials
            
            1-2
      yearsPhase
      3 clinical trials
            
            2-4
      years





We expect
research and development costs to increase in the future as our drug programs
advance in preclinical development and clinical trials.  Due to the
variability in the length of time necessary for drug development, the
uncertainties related to the cost of these activities and ultimate ability to
obtain governmental approval for commercialization, accurate and meaningful
estimates of the ultimate costs to bring our potential drug candidates to market
are not available.




We record
accrued liabilities related to unbilled expenses for which service providers
have not yet billed us related to products or services that we have received,
specifically related to ongoing preclinical studies and clinical trials. These
costs primarily relate to third-party clinical management costs, laboratory and
analysis costs, toxicology studies and investigator grants. We have multiple
drugs in concurrent preclinical studies and clinical trials at several clinical
sites throughout the world. In order to ensure that we have adequately provided
for ongoing preclinical and clinical development costs during the period in
which we incur such costs, we maintain an accrual to cover these expenses. We
update our estimate for this accrual on a monthly basis. The assessment of these
costs is a subjective process that requires judgment. Upon settlement, these
costs may differ materially from the amounts accrued in our consolidated
financial statements.




We record
our research and development costs by type or category, rather than by
project.  Significant categories of costs include personnel,
facilities and equipment costs, laboratory supplies and third-party and other
services.  In addition, a significant portion of our research and
development expenses is not tracked by project as it benefits multiple
projects.  Consequently, fully-loaded research and development cost
summaries by project are not available.




Consolidation
of Variable Interest Entity




We
consolidate the financial condition and results of operations of Symphony Icon
in accordance with FASB Interpretation No. 46 (revised 2003),
“Consolidation of Variable Interest Entities,” or FIN 46R.  While
Symphony Icon is defined under FIN46R to be a variable interest entity for which
we are the primary beneficiary, Symphony Icon is wholly-owned by the
noncontrolling interest holders.  Therefore, we reduce the amount of
our reported net loss in our consolidated statements of operations by the loss
attributed to the noncontrolling interest and we also reduce the noncontrolling
interest holders’ ownership interest in the consolidated balance sheets by
Symphony Icon’s losses.




Stock-based
Compensation Expense




On
January 1, 2006, we adopted Statement of Financial Accounting Standards, or
SFAS, No. 123 (Revised), “Share-Based Payment,” or SFAS No.
123(R).  This statement requires companies to recognize compensation
expense in the statements of operations for share-based payments, including
stock options issued to employees, based on their fair values on the date of the
grant, with the compensation expense recognized over the period in which an
employee is required to provide service in exchange for the stock
award.  We adopted this statement using the modified prospective
transition method, which applies the compensation expense recognition provisions
to new awards and to any awards modified, repurchased or canceled after the
January 1, 2006 adoption date.  Additionally, for any unvested awards
outstanding at the adoption date, we recognize compensation expense over the
remaining vesting period.  Stock-based compensation expense is
recognized on a straight-line basis.  We had stock-based compensation
expense under SFAS No. 123(R) of $7.9 million for the year ended December 31,
2007, or $0.08 per share.  Stock-based compensation expense under SFAS
No. 123(R) has no impact on cash flows from operating activities or financing
activities.  As of December 31, 2007, stock-based compensation cost
for all outstanding unvested options was $10.1 million, which is expected to be
recognized over a weighted-average vesting period of 1.3 years.




Prior to
the adoption of SFAS No. 123(R), our stock-based compensation plans were
accounted for under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, and
Related Interpretations,” APB No. 25.  Under the intrinsic value
method described in APB No. 25, no compensation expense was recorded because the
exercise price of the employee stock options equaled the market price of the
underlying stock on the date of grant.




We record
expense for options issued to non-employee consultants at fair value and
re-measure the fair value at each reporting date.  We reversed
stock-based compensation expense of $21,000 during the year ended December 31,
2005, which was primarily related to option grants made prior to our April 2000
initial public offering.




The fair
value of stock options is estimated at the date of grant using the Black-Scholes
option-pricing model.  For purposes of determining the fair value of
stock options granted subsequent to the adoption of SFAS No. 123(R), we
segregated our options into two homogeneous groups, based on exercise and
post-vesting employment termination behaviors, resulting in a change in the
assumptions used for expected option lives and forfeitures.  Expected
volatility is based on the historical volatility in our stock
price.  The following weighted-average assumptions were used for
options granted in the years ended December 31, 2007, 2006 and 2005,
respectively:




Expected
      Volatility
            
            
            Risk-free
      Interest Rate
            
            
            Expected
      Term
            
            
            Estimated
      Forfeitures
            
            
            Dividend
              RateDecember
      31, 2007:Employees
            
            
            66%
            
            
            
            4.5%
            
            
            
            6
            
            
            
            21%
            
            
            
            0%Officers and non-employee
      directors
            
            
            67%
            
            
            
            4.6%
            
            
            
            9
            
            
            
            4%
            
            
            
            0%December
      31, 2006:Employees
            
            
            69%
            
            
            
            4.6%
            
            
            
            7
            
            
            
            18%
            
            
            
            0%Officers and non-employee
      directors
            
            
            69%
            
            
            
            4.7%
            
            
            
            9
            
            
            
            3%
            
            
            
            0%December
      31, 2005:Employees, officers and
      non-employee directors
            
            
            72%
            
            
            
            4.2%
            
            
            
            7
            
            
            
            3%
            
            
            
            0%


Goodwill
Impairment




Goodwill
is not amortized, but is tested at least annually for impairment at the
reporting unit level.  We have determined that the reporting unit is
the single operating segment disclosed in our current financial
statements.  Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value.  The first step in
the impairment process is to determine the fair value of the reporting unit and
then compare it to the carrying value, including goodwill.  We
determined that the market capitalization approach is the most appropriate
method of measuring fair value of the reporting unit.  Under this
approach, fair value is calculated as the average closing price of our common
stock for the 30 days preceding the date that the annual impairment test is
performed, multiplied by the number of outstanding shares on that
date.  A control premium, which is representative of premiums paid in
the marketplace to acquire a controlling interest in a company, is then added to
the market capitalization to determine the fair value of the reporting
unit.  If the fair value exceeds the carrying value, no further action
is required and no impairment loss is recognized.  Additional
impairment assessments may be performed on an interim basis if we encounter
events or changes in circumstances that would indicate that, more likely than
not, the carrying value of goodwill has been impaired.  There was no
impairment of goodwill in 2007.




Recent
Accounting Pronouncements




On
January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” or
FIN 48.  FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements.  FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. There was no effect on
our consolidated financial position, results of operations or cash flows as a
result of adopting FIN 48.  As of January 1, 2007 and December 31,
2007, we did not have any unrecognized tax benefits.




We
are primarily subject to U.S. federal and New Jersey and Texas state income
taxes. The tax years 1995 to current remain open to examination by U.S. federal
authorities and 2004 to current remain open to examination by state
authorities.  Our policy is to recognize interest and penalties
related to income tax matters in income tax expense. As of December 31,
2007, we had no accruals for interest or penalties related to income tax
matters.




At
December 31, 2007, we had both federal and state net operating loss
carryforwards of approximately $334.4 million and $94.5 million,
respectively.  The federal and state net operating loss carryforwards
begin to expire in 2011.  We have research and development credit
carryforwards of approximately $21.3 million expiring beginning in 2011.
Utilization of the net operating loss and research and development credit
carryforwards may be subject to a significant annual limitation due to ownership
changes that have occurred previously or could occur in the future provided by
Section 382 of the Internal Revenue Code.  We are currently conducting
a Section 382 study and, until that study is completed and any limitation
known, no amounts are being presented as an uncertain tax position under FIN 48.
We have established a full valuation allowance for our net operating loss and
research and development credit carryforwards.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute.  Accordingly, this statement does not require any new fair
value measurements.  SFAS No. 157 is effective January 1, 2008 for
financial assets and liabilities and January 1, 2009 for non-financial
assets and liabilities.  We are currently evaluating the effect, if
any, of this statement on our financial condition and results of
operations.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value.  SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities.  SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value.  SFAS No. 159 does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in SFAS No. 157 and SFAS
No. 107, “Disclosures about Fair Value of Financial
Instruments”.  SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  We
will adopt SFAS No. 159 on January 1, 2008, and we do not anticipate
adoption to materially impact our financial position or results of
operations.




In
December 2007, the FASB issued SFAS No. 141(Revised), “Business
Combinations,” or SFAS No. 141(R), which replaces SFAS No. 141, “Business
Combinations,” and requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This statement also requires the acquirer in a business combination
achieved in stages to recognize the identifiable assets and liabilities, as well
as the noncontrolling interest in the acquiree, at the full amounts of their
fair values. SFAS No. 141(R) makes various other amendments to
authoritative literature intended to provide additional guidance or to confirm
the guidance in that literature to that provided in this statement. This
statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.  We expect to
adopt this statement on January 1, 2009.  SFAS No. 141(R)’s
impact on accounting for business combinations is dependent upon acquisitions at
that time.




In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any noncontrolling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are currently evaluating
the effect, if any, of this statement on our financial condition and results of
operations.




Results
of Operations – Comparison of Years Ended December 31, 2007, 2006 and
2005




Revenues




Total
revenues and dollar and percentage changes as compared to the prior year are as
follows (dollar amounts are presented in millions):




Year
      Ended December 31,2007
            
            2006
            
            2005Total
      revenues
            
            $
            50.1
            
            
            $
            72.8
            
            
            $
            75.7Dollar
      decrease
            
            $
            (22.7
            )
            
            $
            (2.9
            )Percentage
      decrease
            
            
            (31%
            )
            
            
            (4%
            )





Years
Ended December 31, 2007 and 2006




·
            Collaborative research
      – Revenue from collaborative research decreased 30% in 2007 to
      $48.1 million, primarily due to decreased revenue under our alliance
      with Bristol-Myers Squibb resulting from the conclusion of the revenue
      recognition period for the upfront payment we received under the
      alliance.  Additionally, the prior year included the achievement
      of a performance milestone under our Takeda
  alliance.




·
            Subscription and license
      fees – Revenue from subscriptions and license fees decreased 54% in
      2007 to $2.0 million primarily due to lower royalties received under
      a technology license agreement with
Deltagen.




Years
Ended December 31, 2006 and 2005




·
            Collaborative research
      – Revenue from collaborative research decreased 2% in 2006 to
      $68.4 million, primarily as a result of the achievement of two
      performance milestone payments under our Genentech alliance in
      2005.  This decrease was offset in part by a milestone achieved
      under our Takeda alliance, as well as increased revenues from our contract
      with The National Institutes of Health, our award from the Texas
      Enterprise Fund and our alliance with
Organon.




·
            Subscription and license
      fees – Revenue from subscriptions and license fees decreased 28% in
      2006 to $4.4 million primarily due to lower technology license fees
      from Deltagen.




In 2007,
Organon, Bristol-Myers Squibb and the Texas Enterprise Fund represented 27%, 23%
and 22% of revenues, respectively.  In 2006, Bristol-Myers Squibb,
Organon and Takeda represented 35%, 21% and 12% of revenues,
respectively.  In 2005, Bristol-Myers Squibb, Genentech and Organon
represented 34%, 30% and 16% of revenues, respectively.




Research
and Development Expenses




Research
and development expenses and dollar and percentage changes as compared to the
prior year are as follows (dollar amounts are presented in
millions):




Year
      Ended December 31,2007
            
            2006
            
            2005Total
      research and development expense
            
            $
            104.3
            
            
            $
            106.7
            
            
            $
            93.6Dollar
      increase (decrease)
            
            $
            (2.4
            )
            
            $
            13.1Percentage
      increase (decrease)
            
            
            (2%
            )
            
            
            14%





Research
and development expenses consist primarily of salaries and other
personnel-related expenses, facility and equipment costs, laboratory supplies,
third-party and other services and stock-based compensation
expenses.




Years
Ended December 31, 2007 and 2006




·
            Personnel – Personnel
      costs decreased 13% to $44.4 million, primarily due to lower salary and
      benefit costs as a result of a reduction in our personnel in January 2007
      as a result of our strategic realignment reallocating resources from
      genetics research efforts to drug development, offset in part by severance
      payments resulting from such reduction in personnel.  Salaries,
      bonuses, employee benefits, payroll taxes, recruiting and relocation costs
      are included in personnel costs.




·
            Facilities and
      equipment – Facilities and equipment costs decreased 5% to
      $20.1 million, primarily due to a decrease in depreciation
      expense.




·
            Laboratory supplies –
      Laboratory supplies expense decreased 23% to $11.4 million, primarily
      due to a reduction in our personnel in January
  2007.




·
            Third-party and other
      services – Third-party and other services increased 87% to
      $18.4 million, primarily due to an increase in external preclinical
      and clinical research and development costs.  Third-party and
      other services include third-party research, technology licenses, legal
      and patent fees and subscriptions to third-party
  databases.




·
            Stock-based
      compensation – Stock-based compensation expense increased 17% to
      $5.1 million.




·
            Other – Other costs
      decreased by 7% to
$4.8 million.




Years
Ended December 31, 2006 and 2005




·
            Personnel –Personnel
      costs increased 11% in 2006 to $51.3 million, primarily due to
      increased personnel for the expansion of our drug discovery programs and
      to support the research performed in connection with our award from the
      Texas Enterprise Fund, merit-based pay increases and increased medical
      claims costs for employees.




·
            Facilities and equipment –Facilities and equipment costs increased 1% in 2006 to
      $21.2 million.




·
            Laboratory supplies –Laboratory supplies expense increased 9% in 2006 to
      $14.8 million, primarily due to research performed in connection with
      our award from the Texas Enterprise
Fund.




·
            Third-party and other services
      –Third-party and other services increased 36% in 2006 to
      $9.9 million, primarily due an increase in external preclinical and
      clinical research and development
costs.




·
            Stock-based compensation
      – Stock-based compensation expense increased $4.4 million, as
      a result of our adoption of SFAS No. 123(R), “Share Based Payment,”
      on January 1, 2006.




·
            Other –Other costs
      decreased 8% in 2006 to
$5.1 million.




General
and Administrative Expenses




General
and administrative expenses and dollar and percentage changes as compared to the
prior year are as follows (dollar amounts are presented in
millions):




Year
      Ended December 31,2007
            
            2006
            
            2005Total
      general and administrative expense
            
            $
            20.7
            
            
            $
            21.3
            
            
            $
            18.2Dollar
      increase (decrease)
            
            $
            (0.6
            )
            
            $
            3.1Percentage
      increase (decrease)
            
            
            (3%
            )
            
            
            17%





General
and administrative expenses consist primarily of personnel costs to support our
research activities, facility and equipment costs, professional fees such as
legal fees, and stock-based compensation expenses.




Years
Ended December 31, 2007 and 2006




·
            Personnel – Personnel
      costs decreased 10% to $10.6 million, primarily due to lower salary and
      benefit costs as a result of a reduction in our personnel in January 2007,
      offset in part by severance payments resulting from such reduction in
      personnel.  Salaries, bonuses, employee benefits, payroll taxes,
      recruiting and relocation costs are included in personnel
      costs.




·
            Facilities and
      equipment – Facilities and equipment costs decreased 18% to $2.5
      million, primarily due to a decrease in depreciation
    expense.




·
            Professional fees –
      Professional fees increased 55% to $2.5 million, primarily due to
      increased professional, consulting and litigation
  costs.




·
            Stock-based
      compensation – Stock-based compensation expense increased 5% to
      $2.8 million.




·
            Other – Other costs
      increased 3% to $2.3 million.




Years
Ended December 31, 2006 and 2005




·
            Personnel – Personnel
      costs increased 9% in 2006 to $11.8 million, primarily due to
      merit-based pay increases and increased medical claims costs for
      employees.




·
            Facilities and
      equipment – Facilities and equipment costs were $3.1 million
      in 2006, consistent with the prior
year.




·
            Professional fees –
      Professional fees decreased 15% in 2006 to $1.6 million primarily due
      to decreased consulting costs.




·
            Stock-based
      compensation – Stock-based compensation expense increased
      $2.6 million as a result of our adoption of SFAS No. 123(R),
      “Share Based Payment,” on January 1,
2006.




·
            Other –Other costs
      decreased 7% to $2.2 million.




Interest
Income, Interest Expense and Other Income (Expense), Net




Interest Income.Interest income increased
99% in 2007 to $7.3 million from $3.7 million in 2006 due primarily to
higher average cash balances.  Interest income increased 38% in 2006
from $2.6 million in 2005, primarily due to higher interest
rates.




Interest Expense.Interest expense
decreased 15% in 2007 to $2.8 million from $3.3 million in 2006 and
2005.




Other Income (Expense),
Net.  Other expense, net was $0.8 million in 2007 compared
to other income, net of $0.4 million in 2006.  The change was
primarily due to the amortization of the asset related to the option to purchase
the equity of Symphony Icon.  We have recorded the value of the
purchase option as an asset, and we are amortizing this asset over the four-year
option period (see Note 9, Arrangements with Symphony Icon, Inc., of the
Notes to Consolidated Financial Statements, for more
information).  Other income, net decreased 28% in 2006 from
$0.6 million in 2005.




Noncontrolling
Interest in Symphony Icon, Inc.




For the
years ended December 31, 2007, 2006 and 2005, the losses attributed to the
noncontrolling interest holders of Symphony Icon were $12.4 million, none
and none, respectively.




Net
Loss and Net Loss per Common Share




Net Loss and Net Loss per Common
Share.  Net loss increased to $58.8 million in 2007 from
$54.3 million in 2006 and increased from $36.3 million in
2005.  Net loss per common share decreased to $0.59 in 2007 from $0.81
in 2006 and increased from $0.57 in 2005.




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
alliance, target validation, database subscription, and 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 December 31, 2007, we had received
net proceeds of $550.0 million from issuances of common and preferred
stock, including $203.2 million from the initial public offering of our
common stock in April 2000, $50.1 million from our July 2003 common stock
offering, $37.5 million from our October 2006 common stock offering and $198.0
million from our August 2007 sale of common stock to Invus, L.P.  In
addition, from our inception through December 31, 2007, we received
$423.7 million in cash payments from drug discovery and development
alliances, target validation collaborations, database subscription and
technology license fees, sales of compound libraries and reagents and government
grants and contracts, of which $391.7 million had been recognized as
revenues through December 31, 2007.




As of
December 31, 2007, we had $222.1 million in cash, cash equivalents and
short-term investments, including $78.0 million of auction rate securities
as discussed below in Disclosure about Market Risk, and $36.7 million in
investments held by Symphony Icon.  We had $80.0 million in cash,
cash equivalents and short-term investments as of December 31,
2006.  We used cash of $74.3 million in operations in
2007.  This consisted primarily of the net loss for the year of
$58.8 million, a $23.8 million decrease in deferred revenue and a
$12.4 million loss attributable to noncontrolling interest, partially
offset by non-cash charges of $9.3 million related to depreciation expense,
$7.9 million related to stock-based compensation expense, a net decrease in
other operating assets net of liabilities of $2.4 million and
$1.2 million related to the non-cash amortization of the Symphony Icon
purchase option.  Investing activities used cash of
$188.0 million in the year ended December 31, 2007, primarily due to
the purchases of short-term investments of $260.7 million, purchases of
investments held by Symphony Icon of $45.0 million and purchases of
property and equipment of $1.9 million, partially offset by maturities of
short-term investments of $111.4 million and maturities of investments held
by Symphony Icon of $8.3 million.  Financing activities provided
cash of $255.0 million in the year ended December 31, 2007, due
primarily to $198.0 million in proceeds from the issuance of common stock
to Invus, L.P., net of fees, $42.7 million in proceeds from the purchase of
noncontrolling interest by preferred shareholders of Symphony Icon and
$14.2 million in proceeds from the issuance of common stock to Symphony
Icon Holdings LLC, net of fees, as well as proceeds of $0.9 million from
stock option exercises.  This was partially offset by
$0.8 million in principal repayments on our mortgage loan.




In June
2007, we entered into a securities purchase agreement with Invus, L.P, pursuant
to which Invus purchased 50,824,986 shares of our common stock for approximately
$205.4 million in August 2007.  This purchase resulted in Invus’
ownership of 40% of the post-transaction outstanding shares of our common
stock.  Pursuant to the securities purchase agreement, Invus, at its
option, also has the right to require us to initiate up to two pro rata rights
offerings to our stockholders, which would provide all stockholders with
non-transferable rights to acquire shares of our common stock, in an aggregate
amount of up to $344.5 million, less the proceeds of any “qualified
offerings” that we may complete in the interim involving the sale of our common
stock at prices above $4.50 per share.  Invus may exercise its right
to require us to conduct the first rights offering by giving us notice within a
period of 90 days beginning on November 28, 2009 (which we refer to as the
first rights offering trigger date), although we and Invus may agree to change
the first rights offering trigger date to as early as August 28, 2009 with the
approval of the members of our board of directors who are not affiliated with
Invus.  Invus may exercise its right to require us to conduct the
second rights offering by giving us notice within a period of 90 days beginning
on the date that is 12 months after Invus’ exercise of its right to require
us to conduct the first rights offering or, if Invus does not exercise its right
to require us to conduct the first rights offering, within a period of 90 days
beginning on the first anniversary of the first rights offering trigger
date.  The initial investment and subsequent rights offerings,
combined with any qualified offerings, were designed to achieve up to
$550 million in proceeds to us.  Invus would participate in each
rights offering for up to its pro rata portion of the offering, and would commit
to purchase the entire portion of the offering not subscribed for by other
stockholders.




In
connection with the securities purchase agreement, we entered into a
stockholders’ agreement with Invus under which Invus (a) has specified rights
with respect to designation of directors and participation in future equity
issuances by us, (b) is subject to certain standstill restrictions, as well as
restrictions on transfer and the voting of the shares of common stock held by it
and its affiliates, and (c), as long as Invus holds at least 15% of the total
number of outstanding shares of our common stock, is entitled to certain
minority protections.




In June
2007, we entered into a series of related agreements providing for the financing
of the clinical development of LX6171, 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, beginning on June 15, 2008 and ending on June 15, 2011
(subject to an earlier exercise right in limited circumstances) at an exercise
price of (a) $72 million, if the purchase option is exercised on or after
June 15, 2008 and before June 15, 2009, (b) $81 million, if the purchase option
is exercised on or after the June 15, 2009 and before June 15, 2010 and (c) $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.




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. signed a
ten-year lease for a 76,000 square-foot facility 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.




Including
the lease and debt obligations described above, we had incurred the following
contractual obligations as of December 31, 2007:




Payments
      due by period (in millions)Contractual
      Obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsDebt
            
            $
            31.4
            
            
            $
            0.9
            
            
            $
            2.0
            
            
            $
            2.4
            
            
            $
            26.1Interest
      payment obligations
            
            
            14.9
            
            
            
            2.6
            
            
            
            4.9
            
            
            
            4.6
            
            
            
            2.8Operating
      leases
            
            
            13.8
            
            
            
            2.4
            
            
            
            5.0
            
            
            
            5.1
            
            
            
            1.3Total
            
            $
            60.1
            
            
            $
            5.9
            
            
            $
            11.9
            
            
            $
            12.1
            
            
            $
            30.2





Our
future capital requirements will be substantial and will depend on many factors,
including our ability to obtain alliance, collaboration 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 alliances, target
validation collaborations, government grants and contracts, 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. government agency debt
obligations, investment grade commercial paper, corporate debt securities 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.




As of
December 31, 2007, $78.0 million of our short-term investments were invested in
municipal note investments with an auction reset feature, known as auction rate
securities.  These notes are issued by various state and local
municipal entities for the purpose of financing student loans, public projects
and other activities.  While all of the auctions involving all of the
securities were successful during January 2008, auctions for $34.7 million
of these securities were not successful during February 2008, resulting in our
continuing to hold these securities and the issuers paying interest at higher
reset rates.  Through February 29, 2008, we had reduced our total
investments in auction rate securities to $71.4 million from sales at successful
auctions and maturities.  We have received notices for redemption of
$4.6 million of auction rate securities for March 2008.




Based on
the current market conditions, it is likely that auctions related to more of
these securities will be unsuccessful in the near term.  Unsuccessful
auctions will result in our holding securities beyond their next scheduled
auction reset dates and limiting the short-term liquidity of these
investments.  If the credit rating of the security issuers
deteriorates, we may be required to adjust the carrying value of these
investments through an impairment charge.  Excluding auction rate
securities, at February 29, 2008, we had approximately $168.6 million in cash
and cash equivalents and short-term investments, including $34.2 million in
investments held by Symphony Icon.  We believe that the working
capital available to us other than that 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
7A. Quantitative and Qualitative
Disclosures About Market Risk




See
“Disclosure about Market Risk” under “Item 7. Management’s Discussion and
Analysisof
Financial Condition and Results of Operations” for quantitative and qualitative
disclosures about market risk.




Item
8.             Financial Statements and
Supplementary Data




The
financial statements required by this Item are incorporated under Item 15 in
Part IV of this report.




Item
9.             Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure




None.




Item
9A.   Controls and
Procedures




Our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are sufficiently effective to ensure that the
information required to be disclosed by us in the reports we file under the
Securities Exchange Act is gathered, analyzed and disclosed with adequate
timeliness, accuracy and completeness, based on an evaluation of such controls
and procedures as of the end of the period covered by this report.




Subsequent
to our evaluation, there were no significant changes in internal controls or
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.




Management
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act).




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007.  In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.




Based on
such assessment using those criteria, management believes that, as of December
31, 2007, our internal control over financial reporting is
effective.




Our
independent auditors have issued an audit report on our assessment of our
internal control over financial reporting which appears on page F-2 and is
incorporated under Item 15 in Part IV of this report.




Item
9B.  Other
Information




None.










PART
III




Item
10.             Directors, Executive Officers and
Corporate Governance




The
information required by this Item is hereby incorporated by reference from (a)
the information appearing under the captions “Election of Directors,” “Stock
Ownership of Certain Beneficial Owners and Management,” “Corporate Governance”
and “Executive and Director Compensation” in our definitive proxy statement
which involves the election of directors and is to be filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 within
120 days of the end of our fiscal year on December 31, 2007 and (b) the
information appearing under Item 1 in Part Iof this
report.




Item
11.   Executive
Compensation




The
information required by this Item is hereby incorporated by reference from the
information appearing under the captions “Corporate Governance” and “Executive
and Director Compensation” in our definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on
December 31, 2007. Notwithstanding the foregoing, in accordance with the
instructions to Item 407(e)(5) of Regulation S-K, the information contained in
our proxy statement under the sub-heading “Compensation Committee Report” shall
not be deemed to be filed as part of or incorporated by reference into this
annual report on Form 10-K.




Item
12.             Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters




The
information required by this Item is hereby incorporated by reference from (a)
the information appearing under the caption “Stock Ownership of Certain
Beneficial Owners and Management” in our definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
our fiscal year on December 31, 2007 and (b) the information appearing under
Item 5 in Part II of this report.




Item
13.             Certain Relationships and Related
Transactions, and Director Independence




The
information required by this Item is hereby incorporated by reference from the
information appearing under the captions “Corporate Governance” and
“Transactions with Related Persons” in our definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
our fiscal year on December 31, 2007.




Item
14.              Principal Accounting Fees and
Services




The
information required by this Item as to the fees we pay our principal accountant
is hereby incorporated by reference from the information appearing under the
caption “Ratification and Approval of Independent Auditors” in our definitive
proxy statement which involves the election of directors and is to be filed with
the Commission pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of our fiscal year on December 31, 2007.










PART
IV




Item
15.              Exhibits and Financial Statement
Schedules




(a)
            Documents filed
      as a part of this report:




1.  Consolidated
Financial Statements




PageReport
      of Independent Registered Public Accounting Firm
            F-1Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations
            F-4Consolidated
      Statements of Stockholders’ Equity
            F-5Consolidated
      Statements of Cash Flows
            F-6Notes
      to Consolidated Financial Statements
            F-7




2.  Financial
Statement Schedules




All other
financial statement schedules are omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.




3.  Exhibits




Exhibit No.
            
            Description3.1
            —
            Restated
      Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s
      Registration Statement on Form S-1 (Registration No. 333-96469) and
      incorporated by reference herein).*3.2
            —
            First
      Certificate of Amendment to Restated Certificate of
      Incorporation*3.3
            —
            Second
      Certificate of Amendment to Restated Certificate of
      Incorporation3.4
            —
            Amended
      and Restated Bylaws (filed as Exhibit 3.1 to the Company’s Current Report
      on Form 8-K dated October 24, 2007 and incorporated by reference
      herein).4.1
            —
            Securities
      Purchase Agreement, dated June 17, 2007, with Invus, L.P. (filed as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17,
      2007 and incorporated by reference herein).4.2
            —
            Registration
      Rights Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit
      10.3 to the Company’s Current Report on Form 8-K dated June 17, 2007 and
      incorporated by reference herein).4.3
            —
            Stockholders’
      Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.4 to
      the Company’s Current Report on Form 8-K dated June 17, 2007 and
      incorporated by reference herein).10.1
            —
            Restated
      Employment Agreement with Arthur T. Sands, M.D., Ph.D. (filed as Exhibit
      10.1 to the Company’s Annual Report on Form 10-K for the period ended
      December 31, 2005 and incorporated by reference
herein).10.2
            —
            Employment
      Agreement with Jeffrey L. Wade, J.D. (filed as Exhibit 10.3 to the
      Company’s Registration Statement on Form S-1 (Registration No. 333-96469)
      and incorporated by reference herein).10.3
            —
            Employment
      Agreement with Brian P. Zambrowicz, Ph.D. (filed as Exhibit 10.4 to the
      Company’s Registration Statement on Form S-1 (Registration No. 333-96469)
      and incorporated by reference herein).10.4
            —
            Employment
      Agreement with Julia P. Gregory (filed as Exhibit 10.5 to the Company’s
      Registration Statement on Form S-1 (Registration No. 333-96469) and
      incorporated by reference herein).10.5
            —
            Employment
      Agreement with Alan Main, Ph.D. (filed as Exhibit 10.1 to the Company’s
      Quarterly Report on Form 10-Q for the period ended September 30, 2001 and
      incorporated by reference herein).10.6
            —
            Consulting
      Agreement with Alan S. Nies, M.D. dated February 19, 2003, as amended
      (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
      the period ended March 31, 2004 and incorporated by reference
      herein).10.7
            —
            Consulting
      Agreement with Robert J. Lefkowitz, M.D. dated March 31, 2003 (filed as
      Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period
      ended March 31, 2003 and incorporated by reference
      herein).10.8
            —
            Form
      of Indemnification Agreement with Officers and Directors (filed as Exhibit
      10.7 to the Company’s Registration Statement on Form S-1 (Registration No.
      333-96469) and incorporated by reference herein).10.9
            —
            Summary
      of Non-Employee Director Compensation (filed as Exhibit 10.11 to the
      Company’s Annual Report on Form 10-K for the period ended December 31,
      2005 and incorporated by reference herein).10.10
            —
            Summary
      of 2008 Named Executive Officer Cash Compensation (filed as Exhibit 10.1
      to the Company’s Current Report on Form 8-K dated February 7, 2008 and
      incorporated by reference herein).10.11
            —
            2000
      Equity Incentive Plan (filed as Exhibit 10.10 to the Company’s Annual
      Report on Form 10-K for the period ended December 31, 2004 and
      incorporated by reference herein).10.12
            —
            2000
      Non-Employee Directors’ Stock Option Plan (filed as Exhibit 10.14 to the
      Company’s Annual Report on Form 10-K for the period ended December 31,
      2005 and incorporated by reference herein).10.13
            —
            Coelacanth
      Corporation 1999 Stock Option Plan (filed as Exhibit 99.1 to the Company’s
      Registration Statement on Form S-8 (Registration No. 333-66380) and
      incorporated by reference herein).10.14
            —
            Form
      of Stock Option Agreement with Officers under the 2000 Equity Incentive
      Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
      dated February 7, 2008 and incorporated by reference
    herein).10.15
            —
            Form
      of Stock Option Agreement with Chairman of Board of Directors under the
      2000 Equity Incentive Plan (filed as Exhibit 10.17 to the Company’s Annual
      Report on Form 10-K for the period ended December 31, 2005 and
      incorporated by reference herein).10.16
            —
            Form
      of Stock Option Agreement with Directors under the 2000 Non-Employee
      Directors’ Stock Option Plan (filed as Exhibit 10.3 to the Company’s
      Quarterly Report on Form 10-Q for the period ended September 30, 2004 and
      incorporated by reference herein).†10.17
            —
            Collaboration
      and License Agreement, dated December 17, 2003, with Bristol-Myers
      Squibb Company (filed as Exhibit 10.15 to the amendment to the Company’s
      Annual Report on Form 10-K/A for the period ended December 31, 2003, as
      filed on July 16, 2004, and incorporated by reference
    herein).†10.18
            —
            First
      Amendment, dated May 30, 2006, to Collaboration and License Agreement,
      dated December 17, 2003, with Bristol-Myers Squibb Company (filed as
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period
      ended June 30, 2006, and incorporated by reference
  herein).†10.19
            —
            Collaboration
      and License Agreement, dated May 16, 2005, with N.V. Organon and (only
      with respect to Section 9.4 thereof) Intervet Inc. (filed as Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the period ended June
      30, 2005 and incorporated by reference herein).†10.20
            —
            Second
      Amended and Restated Collaboration and License Agreement, dated November
      30, 2005, with Genentech, Inc. (filed as Exhibit 10.22 to the Company’s
      Annual Report on Form 10-K for the period ended December 31, 2005 and
      incorporated by reference herein).10.21
            —
            Economic
      Development Agreement dated July 15, 2005, with the State of Texas and the
      Texas A&M University System (filed as Exhibit 10.1 to the Company’s
      Quarterly Report on Form 10-Q for the period ended September 30, 2005 and
      incorporated by reference herein).†10.22
            —
            Collaboration
      and License Agreement, dated July 15, 2005, with the Texas A&M
      University System and the Texas Institute for Genomic Medicine (filed as
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
      period ended September 30, 2005 and incorporated by reference
      herein).†10.23
            
            Novated
      and Restated Technology License Agreement, dated June 15, 2007, with
      Symphony Icon Holdings LLC and Symphony Icon, Inc. (filed as Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the period ended June
      30, 2007 and incorporated by reference herein).†10.24
            
            Amended
      and Restated Research and Development Agreement, dated June 15, 2007, with
      Symphony Icon Holdings LLC and Symphony Icon, Inc. (filed as Exhibit 10.2
      to the Company’s Quarterly Report on Form 10-Q for the period ended June
      30, 2007 and incorporated by reference herein).†10.25
            
            Purchase
      Option Agreement, dated June 15, 2007, with Symphony Icon Holdings LLC and
      Symphony Icon, Inc. (filed as Exhibit 10.3 to the Company’s Quarterly
      Report on Form 10-Q for the period ended June 30, 2007 and incorporated by
      reference herein).†10.26
            
            Research
      Cost Sharing, Payment and Extension Agreement, dated June 15, 2007, with
      Symphony Icon Holdings LLC and Symphony Icon, Inc. (filed as Exhibit 10.4
      to the Company’s Quarterly Report on Form 10-Q for the period ended June
      30, 2007 and incorporated by reference herein).10.27
            —
            Loan
      and Security Agreement, dated April 21, 2004, between Lex-Gen Woodlands,
      L.P. and iStar Financial Inc. (filed as Exhibit 10.18 to the Company’s
      Annual Report on Form 10-K for the period ended December 31, 2004 and
      incorporated by reference herein).10.28
            —
            Lease
      Agreement, dated May 23, 2002, between Lexicon Pharmaceuticals (New
      Jersey), Inc. and Townsend Property Trust Limited Partnership (filed as
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
      period ended June 30, 2002 and incorporated by reference
      herein).21.1
            —
            Subsidiaries
      (filed as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2004 and incorporated by reference
      herein).*23.1
            —
            Consent
      of Independent Registered Public Accounting Firm*24.1
            —
            Power
      of Attorney (contained in signature page)*31.1
            —
            Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
            —
            Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*32.1
            —
            Certification
      of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


_____________________


*
            Filed
herewith.


†
            Confidential
      treatment has been requested for a portion of this exhibit.  The
      confidential portions of this exhibit have been omitted and filed
      separately with the Securities and Exchange
  Commission.














Signatures




Pursuant
to the requirements of Section 13 or 15(d) 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:  March
      10, 2008
            By:
            /s/
      Arthur T. SandsArthur
      T. Sands, M.D., Ph.D.President
      and Chief Executive OfficerDate:  March
      10, 2008
            By:
            /s/
      Julia P. GregoryJulia
      P. GregoryExecutive
      Vice President and Chief Financial
Officer





Power
of Attorney




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Julia P. Gregory and Jeffrey L. Wade, or either of
them, each with the power of substitution, his or her attorney-in-fact, to sign
any amendments to this Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, here ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
            Title
            Date/s/
      Arthur T. Sands
            
            President
      and Chief Executive Officer(Principal
      Executive Officer)
            March
      10, 2008Arthur
      T. Sands, M.D., Ph.D./s/
      Julia P. Gregory
            
            Executive
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)
            March
      10, 2008Julia
      P. Gregory/s/
      Samuel L. Barker
            
            Chairman
      of the Board of Directors
            March
      10, 2008Samuel
      L. Barker, Ph.D./s/
      Philippe J. Amouyal
            
            Director
            March
      10, 2008Philippe
      J. Amouyal/s/
      Raymond Debbane
            
            Director
            March
      10, 2008Raymond
      Debbane/s/
      Robert J. Lefkowitz
            
            Director
            March
      10, 2008Robert
      J. Lefkowitz, M.D./s/
      Alan S. Nies
            
            Director
            March
      10, 2008Alan
      S. Nies, M.D./s/
      Frank P. Palantoni
            
            Director
            March
      10, 2008Frank
      P. Palantoni/s/
      Christopher J. Sobecki
            
            Director
            March
      10, 2008Christopher
      J. Sobecki/s/
      Judith L. Swain
            
            Director
            March
      10, 2008Judith
      L. Swain, M.D./s/
      Kathleen M. Wiltsey
            
            Director
            March
      10, 2008Kathleen
      M. Wiltsey














Report
of Independent


Registered
Public Accounting Firm










The Board
of Directors and Stockholders


of
Lexicon Pharmaceuticals, Inc.:




We have
audited the accompanying consolidated balance sheets of Lexicon Pharmaceuticals,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2007.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lexicon
Pharmaceuticals, Inc. and subsidiaries at December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.




As
discussed in Note 2 to the consolidated financial statements, in 2006 Lexicon
Pharmaceuticals, Inc. and subsidiaries changed its method of accounting for
stock-based compensation in accordance with guidance provided in the Statement
of Financial Standards No. 123(R), “Share-Based Payment.”




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Lexicon Pharmaceuticals, Inc.’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
6, 2008 expressed an unqualified opinion thereon.







/s/ Ernst
& Young LLP





Houston,
Texas


March 6,
2008











Report
of Independent


Registered
Public Accounting Firm







The Board
of Directors and Stockholders


of
Lexicon Pharmaceuticals, Inc.:





We have
audited Lexicon Pharmaceuticals, Inc.’s  internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Lexicon
Pharmaceuticals, Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




In our
opinion, Lexicon Pharmaceuticals, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Lexicon
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2007 and
our report dated March 6, 2008 expressed an unqualified opinion
thereon.







/s/ Ernst
& Young LLP








Houston,
Texas


March 6,
2008











Lexicon
Pharmaceuticals, Inc.




Consolidated
Balance Sheets


(In
thousands, except par value)







As
      of December 31,2007
            
            
            2006AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            22,938
            
            
            $
            30,226Short-term
      investments, including restricted investments of $430
            
            
            199,171
            
            
            
            49,773Short-term
      investments held by Symphony Icon, Inc.
            
            
            36,666
            
            
            
            —Accounts
      receivable, net of allowances of $35
            
            
            1,763
            
            
            
            1,186Prepaid
      expenses and other current assets
            
            
            4,112
            
            
            
            4,367Total current
      assets
            
            
            264,650
            
            
            
            85,552Property
      and equipment, net of accumulated depreciation and amortization of $65,004
      and $56,905, respectively
            
            
            70,829
            
            
            
            78,192Goodwill
            
            
            25,798
            
            
            
            25,798Other
      assets
            
            
            8,019
            
            
            
            724Total
      assets
            
            $
            369,296
            
            
            $
            190,266Liabilities,
      Noncontrolling Interest and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            7,344
            
            
            $
            6,513Accrued
      liabilities
            
            
            9,093
            
            
            
            7,325Current
      portion of deferred revenue
            
            
            18,030
            
            
            
            31,312Current
      portion of long-term debt
            
            
            880
            
            
            
            816Total current
      liabilities
            
            
            35,347
            
            
            
            45,966Deferred
      revenue, net of current portion
            
            
            16,126
            
            
            
            26,688Long-term
      debt
            
            
            30,493
            
            
            
            31,372Other
      long-term liabilities
            
            
            759
            
            
            
            739Total
      liabilities
            
            
            82,725
            
            
            
            104,765Noncontrolling
      interest in Symphony Icon, Inc.
            
            
            30,271
            
            
            
            —Commitments
      and contingenciesStockholders’
      equity:Preferred stock, $.01
      par value; 5,000 shares authorized; noshares
      issued and outstanding
            
            
            —
            
            
            
            —Common stock, $.001
      par value; 300,000 and 120,000 shares authorized, respectively;
      136,795 and 77,804 shares issued and outstanding,
    respectively
            
            
            137
            
            
            
            78Additional paid-in
      capital
            
            
            666,702
            
            
            
            437,180Accumulated
      deficit
            
            
            (410,535
            )
            
            
            (351,741
            )Accumulated other
      comprehensive loss
            
            
            (4
            )
            
            
            (16
            )Total stockholders’
      equity
            
            
            256,300
            
            
            
            85,501Total liabilities and
      stockholders’ equity
            
            $
            369,296
            
            
            $
            190,266





The
accompanying notes are an integral part of these consolidated financial
statements.











Lexicon
Pharmaceuticals, Inc.




Consolidated
Statements of Operations


(In
thousands, except per share amounts)










Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Revenues:Collaborative
      research
            
            $
            48,080
            
            
            $
            68,373
            
            
            $
            69,567Subscription and license
      fees
            
            
            2,038
            
            
            
            4,425
            
            
            
            6,113Total revenues
            
            
            50,118
            
            
            
            72,798
            
            
            
            75,680Operating
      expenses:Research and development, including stock-based
      compensation
      of $5,150, $4,394 and $(21),
    respectively
            
            
            104,332
            
            
            
            106,695
            
            
            
            93,625General and administrative, including stock-based
      compensation
      of $2,776, $2,636 and $0, respectively
            
            
            20,740
            
            
            
            21,334
            
            
            
            18,174Total operating
    expenses
            
            
            125,072
            
            
            
            128,029
            
            
            
            111,799Loss
      from operations
            
            
            (74,954
            )
            
            
            (55,231
            )
            
            
            (36,119
            )Interest
      income
            
            
            7,286
            
            
            
            3,653
            
            
            
            2,645Interest
      expense
            
            
            (2,771
            )
            
            
            (3,253
            )
            
            
            (3,280
            )Other
      (expense) income, net
            
            
            (794
            )
            
            
            401
            
            
            
            558Loss
      before noncontrolling interest in Symphony Icon, Inc.
            
            
            (71,233
            )
            
            
            (54,430
            )
            
            
            (36,196
            )Loss
      attributable to noncontrolling interest in Symphony Icon,
    Inc.
            
            
            12,439
            
            
            
            —
            
            
            
            —Loss
      before taxes
            
            
            (58,794
            )
            
            
            (54,430
            )
            
            
            (36,196
            )Income
      tax provision
            
            
            —
            
            
            
            119
            
            
            
            (119
            )Net
      loss
            
            $
            (58,794
            )
            
            $
            (54,311
            )
            
            $
            (36,315
            )Net
      loss per common share, basic and diluted
            
            $
            (0.59
            )
            
            $
            (0.81
            )
            
            $
            (0.57
            )Shares
      used in computing net loss per common share, basic and
      diluted
            
            
            99,798
            
            
            
            66,876
            
            
            
            63,962








The
accompanying notes are an integral part of these consolidated financial
statements.



















Lexicon
Pharmaceuticals, Inc.




Consolidated
Statements of Stockholders’ Equity


(In
thousands)






Common
      StockShares
              
              
              Par
      Value
              
              
              Additional
      Paid-In Capital
              
              
              Deferred
      Stock Compensation
              
              
              Accumulated
      Deficit
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Total
      Stockholders' EquityBalance
      at December 31, 2004
              
              
              63,491
              
              
              $
              63
              
              
              $
              382,666
              
              
              $
              (20
              )
              
              $
              (261,115
              )
              
              $
              —
              
              
              $
              121,594Deferred
      stock compensation, net ofreversals
              
              
              —
              
              
              
              —
              
              
              
              (39
              )
              
              
              39
              
              
              
              —
              
              
              
              —
              
              
              
              —Amortization
      of deferred stock compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (21
              )
              
              
              —
              
              
              
              —
              
              
              
              (21
              )Exercise
      of common stock options
              
              
              1,063
              
              
              
              1
              
              
              
              595
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              596Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (36,315
              )
              
              
              —
              
              
              
              (36,315
              )Unrealized
      loss on investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (52
              )
              
              
              (52
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (36,367
              )Balance
      at December 31, 2005
              
              
              64,554
              
              
              
              64
              
              
              
              383,222
              
              
              
              (2
              )
              
              
              (297,430
              )
              
              
              (52
              )
              
              
              85,802Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              7,030
              
              
              
              2
              
              
              
              —
              
              
              
              —
              
              
              
              7,032Direct
      placement of common stock, net of offering costs
              
              
              11,582
              
              
              
              12
              
              
              
              41,084
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              41,096Common
      stock issued for note repayment
              
              
              1,512
              
              
              
              2
              
              
              
              5,489
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,491Exercise
      of common stock options
              
              
              156
              
              
              
              —
              
              
              
              355
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              355Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (54,311
              )
              
              
              —
              
              
              
              (54,311
              )Unrealized
      gain on investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              36
              
              
              
              36Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (54,275
              )Balance
      at December 31, 2006
              
              
              77,804
              
              
              
              78
              
              
              
              437,180
              
              
              
              —
              
              
              
              (351,741
              )
              
              
              (16
              )
              
              
              85,501Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              7,926
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              7,926Issuance
      of common stock to Invus, L.P., net of fees
              
              
              50,825
              
              
              
              51
              
              
              
              197,911
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              197,962Issuance
      of common stock to Symphony Holdings, LLC, net of fees
              
              
              7,651
              
              
              
              8
              
              
              
              22,793
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              22,801Issuance
      of common stock
              
              
              516
              
              
              
              —
              
              
              
              892
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              892Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (58,794
              )
              
              
              —
              
              
              
              (58,794
              )Unrealized
      gain on investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12
              
              
              
              12Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (58,782
              )Balance
      at December 31, 2007
              
              
              136,796
              
              
              $
              137
              
              
              $
              666,702
              
              
              $
              —
              
              
              $
              (410,535
              )
              
              $
              (4
              )
              
              $
              256,300


The
accompanying notes are an integral part of these consolidated financial
statements.











Lexicon
Pharmaceuticals, Inc.




Consolidated
Statements of Cash Flows


(In
thousands)







Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      loss
            
            $
            (58,794
            )
            
            $
            (54,311
            )
            
            $
            (36,315
            )Adjustments to
      reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
            
            
            9,262
            
            
            
            10,561
            
            
            
            10,456Amortization of
      intangible assets, other than goodwill
            
            
            —
            
            
            
            640
            
            
            
            1,200Amortization of
      Symphony Icon purchase option
            
            
            1,160
            
            
            
            —
            
            
            
            —Loss attributable to
      noncontrolling interest
            
            
            (12,439
            )
            
            
            —
            
            
            
            —Stock-based
      compensation
            
            
            7,926
            
            
            
            7,030
            
            
            
            (21
            )Loss on disposal of
      property and equipment
            
            
            —
            
            
            
            35
            
            
            
            10Changes in operating
      assets and liabilities:(Increase) decrease
      in receivables
            
            
            (577
            )
            
            
            1,423
            
            
            
            3,789(Increase) decrease
      in prepaid expenses and other current assets
            
            
            255
            
            
            
            (623
            )
            
            
            1,049Decrease in other
      assets
            
            
            109
            
            
            
            240
            
            
            
            57Increase (decrease)
      in accounts payable and other liabilities
            
            
            2,619
            
            
            
            1,678
            
            
            
            (773
            )Increase (decrease)
      in deferred revenue
            
            
            (23,844
            )
            
            
            (23,582
            )
            
            
            43,990Net cash provided by
      (used in) operating activities
            
            
            (74,323
            )
            
            
            (56,909
            )
            
            
            23,442Cash
      flows from investing activities:Purchases of property
      and equipment
            
            
            (1,900
            )
            
            
            (3,579
            )
            
            
            (11,281
            )Proceeds from
      disposal of property and equipment
            
            
            1
            
            
            
            56
            
            
            
            123Purchases of
      investments held by Symphony Icon, Inc.
            
            
            (44,991
            )
            
            
            —
            
            
            
            —Maturities of
      investments held by Symphony Icon, Inc.
            
            
            8,325
            
            
            
            —
            
            
            
            —Purchase of
      short-term investments
            
            
            (260,739
            )
            
            
            (67,688
            )
            
            
            (175,235
            )Sale of short-term
      investments
            
            
            111,353
            
            
            
            95,676
            
            
            
            170,404Net cash provided by
      (used in) investing activities
            
            
            (187,951
            )
            
            
            24,465
            
            
            
            (15,989
            )Cash
      flows from financing activities:Proceeds from
      issuance of common stock to Invus, L.P., net of
fees
            
            
            197,962
            
            
            
            —
            
            
            
            —Proceeds from
      issuance of common stock to Symphony Holdings, LLC, net
      of fees
            
            
            14,237
            
            
            
            —
            
            
            
            —Proceeds from
      issuance of common stock
            
            
            892
            
            
            
            41,451
            
            
            
            596Repayment of debt
      borrowings
            
            
            (815
            )
            
            
            (751
            )
            
            
            (691
            )Proceeds from
      purchase of noncontrolling interest by preferred shareholdersof
      Symphony Icon, Inc.
            
            
            42,710
            
            
            
            —
            
            
            
            —Net cash provided by
      (used in) financing activities
            
            
            254,986
            
            
            
            40,700
            
            
            
            (95
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (7,288
            )
            
            
            8,256
            
            
            
            7,358Cash
      and cash equivalents at beginning of year
            
            
            30,226
            
            
            
            21,970
            
            
            
            14,612Cash
      and cash equivalents at end of year
            
            $
            22,938
            
            
            $
            30,226
            
            
            $
            21,970Supplemental
      disclosure of cash flow information:Cash paid for
      interest
            
            $
            2,665
            
            
            $
            2,725
            
            
            $
            2,783Supplemental
      disclosure of noncash investing and financing activities:Common stock issued
      for purchase option in conjunction with SymphonyIcon
      financing
            
            $
            8,564
            
            
            $
            —
            
            
            $
            —Unrealized gain
      (loss) on investments
            
            $
            12
            
            
            $
            36
            
            
            $
            (52
            )Deferred stock
      compensation, net of reversals
            
            $
            —
            
            
            $
            2
            
            
            $
            39Retirement of
      property and equipment
            
            $
            1,164
            
            
            $
            1,673
            
            
            $
            4,554Issuance of common
      stock to repay note and accrued interest
            
            $
            —
            
            
            $
            5,491
            
            
            $
            —




The
accompanying notes are an integral part of these consolidated financial
statements.














Lexicon
Pharmaceuticals, Inc.




Notes
to Consolidated Financial Statements




December
31, 2007




1.  Organization
and Operations




Lexicon
Pharmaceuticals, Inc. (“Lexicon” or the “Company”) is a Delaware corporation
incorporated on July 7, 1995. Lexicon was organized to discover the functions
and pharmaceutical utility of genes and use those gene function discoveries in
the discovery and development of pharmaceutical products for the treatment of
human disease.




Lexicon
has financed its operations from inception primarily through sales of common and
preferred stock, payments received under collaboration and alliance agreements,
database subscription agreements, government grants and contracts, technology
licenses, and financing obtained under debt and lease arrangements. The
Company’s future success is dependent upon many factors, including, but not
limited to, its ability to discover and develop pharmaceutical products for the
treatment of human disease, discover additional promising candidates for drug
discovery and development using its gene knockout technology, establish
additional collaboration and license agreements, achieve milestones under such
agreements, obtain and enforce patents and other proprietary rights in its
discoveries, comply with federal and state regulations, and maintain sufficient
capital to fund its activities.  As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of the
Company’s future success.




2.  Summary
of Significant Accounting Policies




Basis of Presentation:The
accompanying consolidated financial statements include the accounts of Lexicon
and its wholly-owned subsidiaries, as well as one variable interest entity,
Symphony Icon, Inc. (“Symphony Icon”), for which the Company is the primary
beneficiary as defined by the Financial Accounting Standards Board (“FASB”)
Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest
Entities” (“FIN 46R”).  Intercompany transactions and balances
are eliminated in consolidation.




Use of Estimates:The
preparation of financial statements in conformity with U. S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.




Cash, Cash Equivalents and
Short-term Investments:Lexicon considers all highly-liquid investments
with original maturities of three months or less to be cash equivalents.
Short-term investments consist of certificates of deposit, U.S. government
agency debt obligations, corporate debt securities and auction rate
securities.  Short-term investments are classified as
available-for-sale securities and are carried at fair value, based on quoted
market prices of the securities.  The Company views its
available-for-sale securities as available for use in current operations
regardless of the stated maturity date of the security.  Unrealized
gains and losses on such securities are reported as a separate component of
stockholders’ equity.  Net realized gains and losses, interest and
dividends are included in interest income.  The cost of securities
sold is based on the specific identification method.




Restricted Cash and
Investments:  Lexicon is required to maintain restricted cash
or investments to collateralize standby letters of credit for the lease on its
office and laboratory facilities in Hopewell, New Jersey (see
Note 10).  As of December 31, 2007 and 2006, restricted cash
and investments were $0.4 million.




Accounts
Receivable:  Lexicon records trade accounts receivable in the
normal course of business related to the sale of products or
services.   The allowance for doubtful accounts takes into
consideration such factors as historical write-offs, the economic climate and
other factors that could affect collectibility.  Write-offs are
evaluated on a case by case basis.




Concentration of Credit Risk:Lexicon’s cash equivalents, short-term investments and accounts
receivable represent potential concentrations of credit risk. The Company
minimizes potential concentrations of risk in cash equivalents and short-term
investments by placing investments in high-quality financial instruments. The
Company’s accounts receivable are unsecured and are concentrated in
pharmaceutical and biotechnology companies located in the United States, Europe
and Japan.  The Company has not experienced any significant credit
losses to date.  In 2007, customers in the United States, Europe and
Japan represented 66%, 29% and 5% of revenue, respectively.  In 2006,
customers in the United States, Europe and Japan represented 66%, 21% and 13% of
revenue, respectively.  In 2005, customers in the United States,
Europe and Japan represented 78%, 16% and 6% of revenue, respectively. At
December 31, 2007, management believes that the Company has no significant
concentrations of credit risk.




Segment Information and Significant
Customers:Lexicon operates in one business segment, which primarily
focuses on the discovery of the functions and pharmaceutical utility of genes
and the use of those gene function discoveries in the discovery and development
of pharmaceutical products for the treatment of human disease. Substantially all
of the Company’s revenues have been derived from drug discovery alliances,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice,
technology licenses, subscriptions to its databases, government grants and
contracts and compound library sales.  In 2007, N.V. Organon,
Bristol-Myers Squibb Company and the Texas Enterprise Fund represented 27%, 23%
and 22% of revenues, respectively.   In 2006, Bristol-Myers
Squibb, Organon and Takeda Pharmaceutical Company Limited represented 35%, 21%
and 12% of revenues, respectively.  In 2005, Bristol-Myers Squibb,
Genentech, Inc. and Organon represented 34%, 30% and 16% of revenues,
respectively.




Property and Equipment:Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful life of the assets which ranges
from three to 40 years.  Maintenance, repairs and minor replacements
are charged to expense as incurred.  Leasehold improvements are
amortized over the shorter of the estimated useful life or the remaining lease
term.  Significant renewals and betterments are
capitalized.




Impairment of Long-Lived
Assets:  Under Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable.  Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition.  In the event that such cash flows are not
expected to be sufficient to recover the carrying amount of the assets, the
assets are written down to their estimated fair values.




Goodwill
Impairment:  Under SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill is not amortized, but is tested at least annually
for impairment at the reporting unit level.  Impairment is the
condition that exists when the carrying amount of goodwill exceeds its implied
fair value.  The first step in the impairment process is to determine
the fair value of the reporting unit and then compare it to the carrying value,
including goodwill.  If the fair value exceeds the carrying value, no
further action is required and no impairment loss is
recognized.  Additional impairment assessments may be performed on an
interim basis if the Company encounters events or changes in circumstances that
would indicate that, more likely than not, the carrying value of goodwill has
been impaired.  There was no impairment of goodwill in 2007, 2006 or
2005.




Revenue Recognition:Revenues
are recognized under Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition,” when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured.  Payments received in advance
under these arrangements are recorded as deferred revenue until
earned.  Revenues are earned from drug discovery alliances, target
validation collaborations, database subscriptions, technology licenses, and
government grants and contracts.




Upfront
fees under drug discovery alliances are recognized as revenue on a straight-line
basis over the estimated period of service, generally the contractual research
term, as this period is Lexicon’s best estimate of the period over which the
services will be rendered, to the extent they are
non-refundable.  Lexicon has determined that the level of effort it
performs to meet its obligations is fairly constant throughout the estimated
periods of service.  As a result, Lexicon has determined that it is
appropriate to recognize revenue from such agreements on a straight-line basis,
as management believes this reflects how the research is provided during the
initial period of the agreement.  When it becomes probable that a
collaborator will extend the research period, Lexicon adjusts the revenue
recognition method as necessary based on the level of effort required under the
agreement for the extension period.




Research
funding under these alliances is recognized as services are performed to the
extent they are non-refundable, either on a straight-line basis over the
estimated service period, generally the contractual research term, or as
contract research costs are incurred.  Milestone-based fees are
recognized upon completion of specified milestones according to contract
terms.  Payments received under target validation collaborations and
government grants and contracts are recognized as revenue as Lexicon performs
its obligations related to such research to the extent such fees are
non-refundable.  Non-refundable technology license fees are recognized
as revenue upon the grant of the license when performance is complete and there
is no continuing involvement.




The
Company analyzes its multiple element arrangements to determine whether the
elements can be separated and accounted for individually as separate units of
accounting in accordance with Emerging Issues Task Force (“EITF”)
No. 00-21, “Revenue Arrangements with Multiple Deliverables.” An element of
a contract can be accounted for separately if the delivered elements have
standalone value to the collaborator and the fair value of any undelivered
elements is determinable through objective and reliable evidence. If an element
is considered to have standalone value but the fair value of any of the
undelivered items cannot be determined, all elements of the arrangement are
recognized as revenue over the period of performance for such undelivered items
or services.




Research and Development Expenses:Research and development expenses consist of costs incurred for
company-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses and are
expensed as incurred. Patent costs and technology license fees for technologies
that are utilized in research and development and have no alternative future use
are expensed when incurred.




Stock-Based Compensation: On
January 1, 2006, Lexicon adopted SFAS No. 123 (Revised), “Share-Based
Payment” (“SFAS No. 123(R)”).  This statement requires companies to
recognize compensation expense in the statement of operations for share-based
payments, including stock options issued to employees, based on their fair
values on the date of the grant, with the compensation expense recognized over
the period in which an employee is required to provide service in exchange for
the stock award.  The Company adopted this statement using the
modified prospective transition method, which applies the compensation expense
recognition provisions to new awards and to any awards modified, repurchased or
canceled after the January 1, 2006 adoption date.  Additionally, for
any unvested awards outstanding at the adoption date, the Company will recognize
compensation expense over the remaining vesting period.  Stock-based
compensation expense is recognized on a straight-line basis.  The
adoption of SFAS No. 123(R) resulted in stock-based compensation expense of
$7.9 million and $7.0 million for the years ended December 31,
2007 and 2006, respectively, or $0.08 and $0.11 per share,
respectively.  There is no impact on cash flows from operating
activities or financing activities.  As of December 31, 2007,
stock-based compensation cost for all outstanding unvested options was
$10.1 million, which is expected to be recognized over a weighted-average
period of 1.3 years.




Prior to
the adoption of SFAS No. 123(R), Lexicon’s stock-based compensation plans were
accounted for under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, and
Related Interpretations” (“APB No. 25”).  Under the intrinsic value
method described in APB No. 25, no compensation expense was recorded because the
exercise price of the employee stock options equaled the market price of the
underlying stock on the date of grant.




Lexicon
records expenses for options issued to non-employee consultants at fair value
and re-measures the fair value of unvested options at each reporting
date.  Lexicon reversed stock-based compensation expense of $21,000
during the year ended December 31, 2005, which was primarily related to
option grants made prior to Lexicon’s April 2000 initial public
offering.  The following table illustrates the effect on net loss and
net loss per share if the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock Based Compensation,” had been applied to all outstanding
and unvested awards in each period:




Year
      Ended December 31, 2005(in
      thousands)Net
      loss, as reported
            
            $
            (36,315
            )Add:  Stock-based
      compensation expense included in reported net loss
            
            
            (21
            )Deduct:  Total
      stock-based compensation expense determined under
      fair value based method for all awards
            
            
            (11,496
            )Pro
      forma net loss
            
            $
            (47,832
            )Net
      loss per common share, basic and dilutedAs
      reported
            
            $
            (0.57
            )Pro
      forma
            
            $
            (0.75
            )





The fair
value of stock options is estimated at the date of grant using the Black-Scholes
method.  The Black-Scholes option-pricing model requires the input of
subjective assumptions.  Because the Company’s employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.  For purposes of determining the fair value of stock
options granted subsequent to the adoption of SFAS No. 123(R), the Company
segregated its options into two homogeneous groups, based on exercise and
post-vesting employment termination behaviors, resulting in a change in the
assumptions used for expected option lives and forfeitures.  Expected
volatility is based on the historical volatility in the Company’s stock
price.  The following weighted-average assumptions were used for
options granted in the years ended December 31, 2007, 2006 and 2005,
respectively:




Expected
      Volatility
            
            Risk-free
      Interest Rate
            
            Expected
      Term
            
            
            Estimated
      Forfeitures
            
            Dividend
              RateDecember
      31, 2007:Employees
            
            
            66
            %
            
            
            4.5
            
            
            
            6
            
            
            
            21
            %
            
            
            0
            %Officers and
      non-employee directors
            
            
            67
            %
            
            
            4.6
            
            
            
            9
            
            
            
            4
            %
            
            
            0
            %December
      31, 2006:Employees
            
            
            69
            %
            
            
            4.6
            %
            
            
            7
            
            
            
            18
            %
            
            
            0
            %Officers and
      non-employee directors
            
            
            69
            %
            
            
            4.7
            %
            
            
            9
            
            
            
            3
            %
            
            
            0
            %December
      31, 2005:Employees, officers
      and non-employee directors
            
            
            72
            %
            
            
            4.2
            %
            
            
            7
            
            
            
            3
            %
            
            
            0
            %


Net Loss per Common Share:Net loss per common share is computed using the weighted average number
of shares of common stock outstanding. Shares associated with stock options and
warrants are not included because they are antidilutive.




Comprehensive
Loss:Comprehensive loss is comprised of net loss and
unrealized gains and losses on available-for-sale
securities.  Comprehensive loss is reflected in the consolidated
statements of stockholders’ equity.  There were $12,000 of unrealized
gains in the year ended December 31, 2007, $36,000 of unrealized gains in
the year ended December 31, 2006 and $52,000 of unrealized losses in the
year ended December 31, 2005.




3.  Recent
Accounting Pronouncements




On
January 1, 2007, Lexicon adopted FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”
(“FIN 48”).  FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements.  FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. There was no effect on
the Company’s consolidated financial position, results of operations or cash
flows as a result of adopting FIN 48.  As of January 1, 2007 and
December 31, 2007, the Company did not have any unrecognized tax
benefits.




The
Company is primarily subject to U.S. federal and New Jersey and Texas state
income taxes.  The tax years 1995 to current remain open to
examination by U.S. federal authorities and 2004 to current remain open to
examination by state authorities.  The Company’s policy is to
recognize interest and penalties related to income tax matters in income tax
expense.  As of January 1, 2007 and December 31, 2007, the
Company had no accruals for interest or penalties related to income tax
matters.




At
December 31, 2007, the Company had both federal and state net operating loss
(“NOL”) carryforwards of approximately $334.4 million and
$94.5 million, respectively.  The federal and state NOL
carryforwards begin to expire in 2011.  The Company has research and
development (“R&D”) credit carryforwards of approximately $21.3 million
expiring beginning in 2011. Utilization of the NOL and R&D credit
carryforwards may be subject to a significant annual limitation due to ownership
changes that have occurred previously or could occur in the future provided by
Section 382 of the Internal Revenue Code.  The Company is
currently conducting a Section 382 study and, until that study is completed
and any limitation known, no amounts are being presented as an uncertain tax
position under FIN 48. The Company has established a full valuation
allowance for its NOL and R&D credit carryforwards.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute.  Accordingly, this statement does not require any new fair
value measurements.  SFAS No. 157 is effective January 1,
2008 for financial assets and liabilities and January 1, 2009 for
non-financial assets and liabilities.  The Company is currently
evaluating the effect, if any, of this statement on its financial condition and
results of operations.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities.  SFAS No. 159 does not affect
any existing accounting literature that requires certain assets and liabilities
to be carried at fair value.  SFAS No. 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS
No. 157 and SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments.”  SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  The
Company will adopt SFAS No. 159 on January 1, 2008 and does not anticipate
adoption to materially impact its financial position or results of
operations.




In
December 2007, the FASB issued SFAS No. 141(Revised), “Business
Combinations”(“SFAS No. 141(R)”),
which replaces SFAS No. 141, “Business Combinations,” and requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This statement also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the non-controlling interest
in the acquiree, at the full amounts of their fair values. SFAS No. 141(R)
makes various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this statement. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company expects to adopt this statement on January 1, 2009.  SFAS
No. 141(R)’s impact on accounting for business combinations is dependent
upon acquisitions at that time.




In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company is currently
evaluating the effect, if any, of this statement on its financial condition and
results of operations.




4.  Cash
and Cash Equivalents and Investments




The fair
value of cash and cash equivalents and investments held at December 31,
2007 and 2006 are as follows:




As
      of December 31, 2007Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Estimated
      Fair Value(In
      thousands)Cash
      and cash equivalents
            
            $
            22,950
            
            
            $
            —
            
            
            $
            (12
            )
            
            $
            22,938Securities
      maturing within one year:Certificates of
      deposit
            
            
            6,312
            
            
            
            —
            
            
            
            (3
            )
            
            
            6,309Corporate debt
      securities
            
            
            41,162
            
            
            
            12
            
            
            
            (51
            )
            
            
            41,123Commercial
      papers
            
            
            71,214
            
            
            
            47
            
            
            
            —
            
            
            
            71,261U.S. government
      agencies securities
            
            
            2,500
            
            
            
            3
            
            
            
            —
            
            
            
            2,503Total securities
      maturing within one year
            
            
            121,188
            
            
            
            62
            
            
            
            (54
            )
            
            
            121,196Securities
      maturing after ten years:Auction rate
      securities
            
            
            77,975
            
            
            
            —
            
            
            
            —
            
            
            
            77,975Total
      available-for-sale investments
            
            $
            199,163
            
            
            $
            62
            
            
            $
            (54
            )
            
            $
            199,171Short-term
      investments held by Symphony Icon, Inc.:Cash and cash
      equivalents
            
            
            36,666
            
            
            
            —
            
            
            
            —
            
            
            
            36,666Total
      short-term investments held by Symphony Icon, Inc.
            
            $
            36,666
            
            
            $
            —
            
            
            $
            —
            
            
            $
            36,666Total
      cash and cash equivalents and investments
            
            $
            258,779
            
            
            $
            62
            
            
            $
            (66
            )
            
            $
            258,775





As
      of December 31, 2006Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Estimated
      Fair Value(In
      thousands)Cash
      and cash equivalents
            
            $
            30,239
            
            
            $
            —
            
            
            $
            (13
            )
            
            $
            30,226Securities
      maturing within one year:Certificates of
      deposit
            
            
            6,193
            
            
            
            1
            
            
            
            (1
            )
            
            
            6,193Corporate debt
      securities
            
            
            5,008
            
            
            
            —
            
            
            
            (3
            )
            
            
            5,005Total securities
      maturing within one year
            
            
            11,201
            
            
            
            1
            
            
            
            (4
            )
            
            
            11,198Securities
      maturing after ten years:Auction rate
      securities
            
            
            38,575
            
            
            
            —
            
            
            
            —
            
            
            
            38,575Total
      available-for-sale investments
            
            $
            49,776
            
            
            $
            1
            
            
            $
            (4
            )
            
            $
            49,773Total
      cash and cash equivalents and investments
            
            $
            80,015
            
            
            $
            1
            
            
            $
            (17
            )
            
            $
            79,999





There
were no realized gains or losses for the years ended December 31, 2007,
2006 and 2005.




As of
December 31, 2007, $78.0 million of Lexicon's short-term investments were
invested in municipal note investments with an auction reset feature, known as
auction rate securities.  These notes are issued by various state and
local municipal entities for the purpose of financing student loans, public
projects and other activities.  While all of the auctions involving
all of the securities were successful during January 2008, auctions for
$34.7 million of these securities were not successful during February 2008,
resulting in Lexicon continuing to hold these securities and the issuers paying
interest at higher reset rates.  Through February 29, 2008, Lexicon
had reduced its total investments in auction rate securities to
$71.4 million from sales at successful auctions and maturities, and had
received notices for redemption of $4.6 million of auction rate securities
for March 2008.




Based on
current market conditions, it is likely that auctions related to more of these
securities will be unsuccessful in the near term.  Unsuccessful
auctions will result in Lexicon holding securities beyond their next scheduled
auction reset dates and limiting the short-term liquidity of these
investments.  If the credit rating of the security issuers
deteriorates, Lexicon may be required to adjust the carrying value of these
investments through an impairment charge.  Excluding auction rate
securities, at February 29, 2008, Lexicon had approximately $168.6 million
in cash and cash equivalents and short-term investments, including
$34.2 million in investments held by Symphony Icon.  Management
believes that the working capital available to Lexicon other than that held in
auction rate securities will be sufficient to meet its cash requirements for at
least the next 12 months.




5.  Property
and Equipment




Property
and equipment at December 31, 2007 and 2006 are as follows:




Estimated
                  Useful
      Lives
                
                
                As
      of December 31,In
      Years
                
                
                2007
                
                
                2006(In
      thousands)Computers
      and software
                
                
                3-5
                
                
                $
                12,166
                
                
                $
                12,259Furniture
      and fixtures
                
                
                5-7
                
                
                
                7,594
                
                
                
                7,593Laboratory
      equipment
                
                
                3-7
                
                
                
                39,427
                
                
                
                38,642Leasehold
      improvements
                
                
                7-10
                
                
                
                9,740
                
                
                
                9,740Buildings
                
                
                15-40
                
                
                
                63,342
                
                
                
                63,299Land
                
                
                —
                
                
                
                3,564
                
                
                
                3,564Total
      property and equipment
                
                
                
                
                
                
                135,833
                
                
                
                135,097Less:
      Accumulated depreciation and amortization
                
                
                
                
                
                
                (65,004
                )
                
                
                (56,905
                )Net
      property and equipment
                
                
                
                
                
                $
                70,829
                
                
                $
                78,192




6.  Income
Taxes




Lexicon
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized differently in the financial
statements and tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of liabilities and assets using enacted tax rates
and laws in effect in the years in which the differences are expected to
reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided.




The
components of Lexicon’s deferred tax assets (liabilities) at December 31, 2007
and 2006 are as follows:




As
      of December 31,2007
            
            
            2006(In
      thousands)Deferred
      tax assets:Net operating loss
      carryforwards
            
            $
            121,473
            
            
            $
            93,601Research and
      development tax credits
            
            
            21,291
            
            
            
            14,449Stock-based
      compensation
            
            
            7,855
            
            
            
            6,880Deferred
      revenue
            
            
            13,478
            
            
            
            15,505Other
            
            
            699
            
            
            
            875Total deferred tax
      assets
            
            
            164,796
            
            
            
            131,310Deferred
      tax liabilities:Property and
      equipment
            
            
            (165
            )
            
            
            (929
            )Other
            
            
            (394
            )
            
            
            (380
            )Total deferred tax
      liabilities
            
            
            (559
            )
            
            
            (1,309
            )Less:
      valuation allowance
            
            
            (164,237
            )
            
            
            (130,001
            )Net deferred tax
      assets
            
            $
            —
            
            
            $
            —





At
December 31, 2007, Lexicon had both federal and state NOL carryforwards of
approximately $334.4 million and $94.5 million,
respectively.  The federal and state NOL carryforwards begin to expire
in 2011.  The Company has R&D tax credit carryforwards of
approximately $21.3 million expiring beginning in
2011.  Utilization of the NOL and R&D credit carryforwards may be
subject to a significant annual limitation due to ownership changes that have
occurred previously or could occur in the future provided by Section 382 of
the Internal Revenue Code.  The Company is currently conducting a
Section 382 study and, until that study is completed and any limitation known,
no amounts are being presented as an uncertain tax position under FIN 48.
Based on the federal tax law limits and the Company’s cumulative loss position,
Lexicon concluded it was appropriate to establish a full valuation allowance for
its net deferred tax assets until an appropriate level of profitability is
sustained.  During the year ended December 31, 2007, the
valuation allowance increased $34.2 million, primarily due to the Company’s
current year net loss.  Lexicon recorded a $119,000 income tax
provision representing alternative minimum tax payable based on estimated
taxable income for the year ended December 31, 2005.  This amount was
subsequently reversed in 2006.




7.  Goodwill
and Other Intangible Assets




On July
12, 2001, Lexicon completed the acquisition of Coelacanth Corporation in a
merger. Coelacanth, now Lexicon Pharmaceuticals (New Jersey), Inc., forms the
core of the Company’s division responsible for small molecule compound
discovery.  The results of Lexicon Pharmaceuticals (New Jersey), Inc.
are included in the Company’s results of operations for the period subsequent to
the acquisition.




Goodwill
associated with the acquisition of $25.8 million, which represents the
excess of the $36.0 million purchase price over the fair value of the
underlying net identifiable assets, was assigned to the consolidated entity,
Lexicon.  There was no change in the carrying amount of goodwill for
the year ended December 31, 2007.  In accordance with SFAS
No. 142, the goodwill balance is not subject to amortization, but is tested
at least annually for impairment at the reporting unit level, which is the
Company’s single operating segment.  The Company performed an
impairment test of goodwill on its annual impairment assessment
date.  This test did not result in an impairment of
goodwill.




Other
intangible assets represented Coelacanth’s technology platform, which consists
of its proprietary ClickChemTM
reactions, novel building blocks and compound sets, automated production
systems, high-throughput ADMET (Absorption, Distribution, Metabolism, Excretion
and Toxicity) capabilities, and its know-how and trade secrets.  The
Company amortized other intangible assets on a straight-line basis over an
estimated life of five years.




The
amortization expense for the years ended December 31, 2006 and 2005 was
$0.6 million and $1.2 million, respectively.  Other
intangible assets are now fully amortized.




8.  Debt
Obligations




Genentech Loan:  On
December 31, 2002, Lexicon borrowed $4.0 million under an unsecured note
agreement with Genentech, Inc.  The proceeds of the loan were to be
used to fund research efforts under the alliance agreement with Genentech
discussed in Note 15.  On November 30, 2005, the note agreement was
amended to extend the maturity date of the loan by one year to December 31,
2006.  No other terms of the note agreement were
changed.  The note permitted the Company to repay the note, at any
time, at its option, in cash, in shares of common stock valued at the
then-current market price, or in a combination of cash and shares, subject to
certain limitations.  The note accrued interest at an annual rate of
8%, compounded quarterly.  On December 31, 2006, the Company repaid in
full the principal and accrued interest outstanding under the note by issuing to
Genentech 1,511,670 shares of common stock.




Mortgage Loan:In April 2004,
Lexicon purchased its existing laboratory and office buildings and animal
facilities in The Woodlands, Texas with proceeds from a $34.0 million
third-party mortgage financing and $20.8 million in cash.  The
mortgage loan has a ten-year term with a 20-year amortization and bears interest
at a fixed rate of 8.23%.  The buildings and land that serve as
collateral for the mortgage loan are included in property and equipment at
$63.3 million and $3.6 million, respectively, before accumulated
depreciation.




The
following table includes the aggregate future principal payments of the
Company’s long-term debt as of December 31, 2007:




For
      the Year Ending December 31(In
      thousands)2008
            
            $
            8802009
            
            
            9632010
            
            
            1,0472011
            
            
            1,1382012
            
            
            1,230Thereafter
            
            
            26,11531,373Less
      current portion
            
            
            (880
            )Total long-term
      debt
            
            $
            30,493





The fair
value of Lexicon’s debt financial instruments approximates their carrying
value.  The fair value of Lexicon’s long-term debt is estimated using
discounted cash flow analysis, based on the Company’s estimated current
incremental borrowing rate.




9.  Arrangements
with Symphony Icon, Inc.




On June
15, 2007, Lexicon entered into a series of related agreements providing for the
financing of the clinical development of LX6171, 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 has 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, beginning on June 15, 2008 and ending on
June 15, 2011 (subject to an earlier exercise right in limited
circumstances) at an exercise price of (i) $72 million, if the Purchase Option
is exercised on or after June 15, 2008 and before June 15, 2009, (ii)
$81 million, if the Purchase Option is exercised on or after June 15,
2009 and before June 15, 2010 and (iii) $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 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 $7.4 million is
recorded in other assets in the accompanying consolidated balance sheet as of
December 31, 2007, and the amortization expense of $1.2 million is
recorded in other expense, net in the accompanying consolidated statement of
operations for the year ended December 31, 2007.




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 will report to Symphony
Icon’s Board of Directors, which is currently comprised of five members,
including one member designated by the Company and two independent
directors.




Under a
Research Cost Sharing, Payment and Extension Agreement, dated June 15, 2007,
among the Company, Symphony Icon and Holdings, upon the recommendation of the
Development Committee, Symphony Icon’s Board of Directors may require the
Company to pay Symphony Icon up to $15 million for Symphony Icon’s use in
the development of the Programs in accordance with the specified development
plan and related development budget.  The Development Committee’s
right to recommend that Symphony Icon’s Board of Directors submit such funding
requirement to the Company will terminate on the one-year anniversary of the
expiration of the Purchase Option, subject to limited exceptions.




In
accordance with FIN 46R, Lexicon has determined that Symphony Icon is a variable
interest entity for which it is the primary beneficiary.  This
determination was based on Holdings’ lack of controlling rights with respect to
Symphony Icon’s activities and the limitation on the amount of expected residual
returns Holdings may expect from Symphony Icon if Lexicon exercises its Purchase
Option.  Lexicon has determined it is a variable interest holder of
Symphony Icon due to its contribution of the intellectual property relating to
the Programs and its issuance of shares of its common stock in exchange for the
Purchase Option, which Lexicon intends to exercise if the development of the
Programs is successful.  Lexicon has determined that it is a primary
beneficiary as a result of certain factors, including its primary responsibility
for the development of the Programs and its contribution of the intellectual
property relating to the Programs.  As a result, Lexicon has included
the financial condition and results of operations of Symphony Icon in its
consolidated financial statements.  Symphony Icon’s cash and cash
equivalents have been recorded on Lexicon’s consolidated financial statements as
short-term investments held by Symphony Icon.  The noncontrolling
interest in Symphony Icon on Lexicon’s consolidated balance sheet initially
reflected the $45 million proceeds contributed into Symphony Icon less
$2.3 million of structuring and legal fees.  As the collaboration
progresses, this line item will be reduced by Symphony Icon’s losses, which were
$12.4 million in the year ended December 31, 2007, until the balance
becomes zero. 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 December 31, 2007, Lexicon has not charged any
license fees and has not recorded any revenue from Symphony Icon, and does not
expect to do so based on the current agreements with Symphony Icon and
Holdings.




10.  Commitments
and Contingencies




Operating Lease
Obligations:  A Lexicon subsidiary leases laboratory and office
space in Hopewell, New Jersey under an agreement that 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 obligation of its subsidiary
under this lease.  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 December 31, 2007
and  2006.  Additionally, Lexicon leases certain equipment
under operating leases.




Rent
expense for all operating leases was approximately $2.5 million,
$2.4 million and $2.4 million for the years ended December 31, 2007,
2006 and 2005, respectively.  The following table includes
non-cancelable, escalating future lease payments for the facility in New
Jersey:




For
      the Year Ending December 31(In
      thousands)2008
            
            $
            2,4252009
            
            
            2,4752010
            
            
            2,4752011
            
            
            2,5512012
            
            
            2,605Thereafter
            
            
            1,302Total
            
            $
            13,833





Employment Agreements:Lexicon has entered into employment agreements with certain of its
corporate officers. Under the agreements, each officer receives a base salary,
subject to adjustment, with an annual discretionary bonus based upon specific
objectives to be determined by the compensation committee. The employment
agreements are at-will and contain non-competition agreements. The agreements
also provide for a termination clause, which requires either a six or 12-month
payment based on the officer’s salary, in the event of termination.




11.  Agreements
with Invus, L.P.




On June
17, 2007, Lexicon entered into a series of agreements with Invus, L.P. (“Invus”)
under which Invus made an investment in the Company’s common stock and has
certain other rights described below.




Lexicon
entered into a Securities Purchase Agreement (the “Securities Purchase
Agreement”) with Invus under which the Company issued and sold to Invus
50,824,986 shares in an initial investment (the “Initial Investment”) and
permitted Invus to require, subject to specific conditions, that the Company
conduct certain rights offerings (the “Rights Offerings”).  In
connection with the Securities Purchase Agreement, Lexicon also entered into a
Warrant Agreement with Invus under which the Company issued to Invus warrants
(the “Warrants”) to purchase 16,498,353 shares of its common stock at an
exercise price of $3.0915 per share.  The Warrant Agreement provided
that, to the extent not previously exercised, the Warrants would terminate
concurrently with the closing of the Initial Investment.




Initial
Investment:  In the Initial Investment, which closed on August
28, 2007, Invus purchased 50,824,986 shares of Lexicon’s common stock for a
total of approximately $205.4 million, resulting in net proceeds of
$198.0 million after deducting fees and expenses of approximately
$7.5 million.  Simultaneously with the closing of the Initial
Investment, all Warrants issued under the Warrant Agreement terminated
unexercised according to their terms.  This purchase resulted in
Invus’ ownership of 40% of the post-transaction outstanding shares of Lexicon’s
common stock.




Rights
Offerings:  For a period of 90 days following November 28,
2009 (the “First Rights Offering Trigger Date”), Invus will have the right to
require Lexicon to make a pro rata offering of non-transferable rights to
acquire common stock to all of its stockholders (the “First Rights Offering”) in
an aggregate amount to be designated by Invus not to exceed $172.3 million,
minus the aggregate net proceeds received in all Qualified Offerings (as defined
below), if any, completed prior to the First Rights Offering Trigger
Date.  The price per share of the First Rights Offering would be
designated by Invus in a range between $4.50 and a then-current average market
price of the Company’s common stock.  The First Rights Offering
Trigger Date could be changed to as early as August 28, 2009 with the
approval of the members of the Company’s board of directors who are not
affiliated with Invus (the “Unaffiliated Board”).  All stockholders
would have oversubscription rights with respect to the First Rights Offering,
and Invus would be required to purchase the entire portion of the First Rights
Offering that is not subscribed for by other stockholders.




For a
period of 90 days following the date (the “Second Rights Offering Trigger Date”)
which is 12 months after (a) Invus’ exercise of its right to require us to
conduct the First Rights Offering or (b) if Invus does not exercise its
right to require Lexicon to conduct the First Rights Offering, the First Rights
Offering Trigger Date, Invus would have the right to require the Company to make
a pro rata offering of non-transferable rights to acquire common stock to all of
its stockholders (the “Second Rights Offering” and, together with the First
Rights Offering, the “Rights Offerings”) in an aggregate amount to be designated
by Invus not to exceed an amount equal to $344.5 million, minus the amount of
the First Rights Offering, minus the aggregate net proceeds received in all
Qualified Offerings, if any, completed prior to the Second Rights Offering
Trigger Date.  The price per share of the Second Rights Offering would
be designated by Invus in a range between $4.50 and a then-current average
market price of the Company’s common stock.  All stockholders would
have oversubscription rights with respect to the Second Rights Offering, and
Invus would be required to purchase the entire portion of the Second Rights
Offering that is not subscribed for by other stockholders.  Lexicon
has determined that the First Rights Offering and the Second Rights Offering
should be treated as equity instruments in accordance with EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock,” and accordingly has not recorded a liability
for the future settlement of any rights offerings.




A
“Qualified Offering” consists of a bona fide financing transaction comprised of
Lexicon’s issuance of shares of its common stock at a price greater than $4.50
per share, which transaction is not entered into in connection with the
Company’s entry into any other transaction (including, a collaboration or
license for the discovery, development or commercialization of pharmaceutical
products) involving the purchaser of such common stock.  Until the
later of the completion of the Second Rights Offering or the expiration of the
90-day period following the Second Rights Offering Trigger Date, Lexicon will
not, without Invus’ prior consent, issue any shares of its common stock at a
price below $4.50 per share, subject to certain exceptions.




In
connection with the Securities Purchase Agreement, Lexicon entered into a
Stockholders’ Agreement with Invus under which Invus (a) has specified rights
with respect to designation of directors and to participate in future equity
issuances by the Company, (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 the Company’s common stock, is
entitled to certain minority protections.




12.  Other
Capital Stock Agreements




Common Stock: In September 2006,
Lexicon issued and sold 1,000,000 shares of its common stock to Azimuth
Opportunity Ltd. under its June 2006 equity line agreement with Azimuth at a
purchase price of approximately $3.67 per share.  After deducting
offering expenses, Lexicon received net proceeds from the sale of approximately
$3.6 million.




In
October 2006, Lexicon completed the registered direct offering and sale of
10,582,011 shares of its common stock to selected institutional investors at a
price of $3.78 per share, resulting in net proceeds of $37.5 million, after
deducting placement agent fees of $2.4 million and offering expenses of
$0.1 million.




13.  Stock
Options and Warrants




Stock
Option Plans




2000 Equity Incentive
Plan:  In September 1995, Lexicon adopted the 1995 Stock Option
Plan, which was subsequently amended and restated in February 2000 as the 2000
Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive Plan
will terminate in 2010 unless the Board of Directors terminates it sooner. The
Equity Incentive Plan provides that it will be administered by the Board of
Directors, or a committee appointed by the Board of Directors, which determines
recipients and types of options to be granted, including number of shares under
the option and the exercisability of the shares.  The Equity Incentive
Plan is presently administered by the Compensation Committee of the Board of
Directors.




The
Equity Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options to employees, directors and consultants
of the Company. The plan also permits the grant of stock bonuses and restricted
stock purchase awards. Incentive stock options have an exercise price of 100% or
more of the fair market value of our common stock on the date of grant.
Nonstatutory stock options may have an exercise price as low as 85% of fair
market value on the date of grant. The purchase price of other stock awards may
not be less than 85% of fair market value. However, the plan administrator may
award bonuses in consideration of past services without a purchase payment.
Shares may be subject to a repurchase option in the discretion of the plan
administrator.  Most options granted under the Equity Incentive Plan
become vested and exercisable over a period of four years; however some have
been granted with different vesting schedules.  Options granted under
the Equity Incentive Plan have a term of ten years from the date of
grant.




The Board
of Directors initially authorized and reserved an aggregate of 11,250,000 shares
of common stock for issuance under the Equity Incentive Plan. On January 1 of
each year for ten years, beginning in 2001, the number of shares reserved for
issuance under the Equity Incentive Plan automatically will be increased by the
greater of:




·
            5%
      of Lexicon’s outstanding shares on a fully-diluted basis;
    or




·
            that
      number of shares that could be issued under awards granted under the
      Equity Incentive Plan during the prior 12-month
  period;




provided
that the Board of Directors may provide for a lesser increase in the number of
shares reserved under the Equity Incentive Plan for any year.  The
total number of shares reserved in the aggregate may not exceed 30,000,000
shares over the ten-year period.




As of
December 31, 2007, an aggregate of 21,000,000 shares of common stock had been
reserved for issuance, options to purchase 15,809,034 shares were outstanding,
and 4,189,429 shares had been issued upon the exercise of stock options issued
under the Equity Incentive Plan.




2000 Non-Employee Directors’ Stock
Option Plan:  In February 2000, Lexicon adopted the 2000
Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) to provide for
the automatic grant of options to purchase shares of common stock to
non-employee directors of the Company. Under the Directors’ Plan, non-employee
directors first elected after the closing of the Company’s initial public
offering receive an initial option to purchase 30,000 shares of common
stock.  In addition, on the day following each of the Company’s annual
meetings of stockholders, beginning with the annual meeting in 2001, each
non-employee director who has been a director for at least six months was
automatically granted an option to purchase 6,000 shares of common
stock.  Beginning with the annual meeting in 2005, the annual grant
was increased to an option to purchase 10,000 shares of common
stock.  Initial option grants become vested and exercisable over a
period of five years and annual option grants become vested over a period of
12 months from the date of grant.  Options granted under the
Directors’ Plan have an exercise price equal to the fair market value of the
Company’s common stock on the date of grant and term of ten years from the date
of grant.




The Board
of Directors initially authorized and reserved a total of 600,000 shares of its
common stock for issuance under the Directors’ Plan. On the day following each
annual meeting of Lexicon’s stockholders, for 10 years, starting in 2001, the
share reserve will automatically be increased by a number of shares equal to the
greater of:




·
            0.3%
      of the Company’s outstanding shares on a fully-diluted basis;
      or




·
            that
      number of shares that could be issued under options granted under the
      Directors’ Plan during the prior 12-month
  period;




provided
that the Board of Directors may provide for a lesser increase in the number of
shares reserved under the Directors’ Plan for any year.




As of
December 31, 2007, an aggregate of 600,000 shares of common stock had been
reserved for issuance, options to purchase 468,832 shares were outstanding, and
no options had been exercised under the Directors’ Plan.




Coelacanth Corporation 1999 Stock
Option Plan:  Lexicon assumed the Coelacanth Corporation 1999
Stock Option Plan (the “Coelacanth Plan”) and the outstanding stock options
under the plan in connection with our July 2001 acquisition of Coelacanth
Corporation.  The Company will not grant any further options under the
plan.  As outstanding options under the plan expire or terminate, the
number of shares authorized for issuance under the plan will be correspondingly
reduced.




The
purpose of the plan was to provide an opportunity for employees, directors and
consultants of Coelacanth to acquire a proprietary interest, or otherwise
increase their proprietary interest, in Coelacanth as an incentive to continue
their employment or service.  Both incentive and nonstatutory options
are outstanding under the plan.  Most outstanding options vest over
time and expire ten years from the date of grant.  The exercise price
of options awarded under the plan was determined by the plan administrator at
the time of grant.  In general, incentive stock options have an
exercise price of 100% or more of the fair market value of Coelacanth common
stock on the date of grant and nonstatutory stock options have an exercise price
as low as 85% of fair market value on the date of grant.




As of
December 31, 2007, an aggregate of 122,649 shares of common stock had been
reserved for issuance, options to purchase 72,763 shares of common stock were
outstanding, options to purchase 22,577 shares of common stock had been
canceled, and 27,309 shares of common stock had been issued upon the exercise of
stock options issued under the Coelacanth Plan.




Stock Option
Activity:  The following is a summary of option activity under
Lexicon’s stock option plans:




2007
            
            
            2006
            
            
            2005(In
      thousands, except exercise price data)
            
            Options
            
            
            Weighted
      Average Exercise Price
            
            
            Options
            
            
            Weighted
      Average Exercise Price
            
            
            Options
            
            
            Weighted
      Average Exercise PriceOutstanding
      at beginning of year
            
            
            15,815
            
            
            $
            5.99
            
            
            
            13,802
            
            
            $
            6.36
            
            
            
            13,299
            
            
            $
            6.20Granted
            
            
            2,952
            
            
            
            3.85
            
            
            
            2,651
            
            
            
            4.07
            
            
            
            2,104
            
            
            
            5.55Exercised
            
            
            (516
            )
            
            
            1.80
            
            
            
            (156
            )
            
            
            2.30
            
            
            
            (1,063
            )
            
            
            0.56Canceled
            
            
            (1,900
            )
            
            
            6.73
            
            
            
            (482
            )
            
            
            7.14
            
            
            
            (538
            )
            
            
            10.79Outstanding
      at end of year
            
            
            16,351
            
            
            
            5.65
            
            
            
            15,815
            
            
            
            5.99
            
            
            
            13,802
            
            
            
            6.36Exercisable
      at end of year
            
            
            11,946
            
            
            $
            6.21
            
            
            
            11,675
            
            
            $
            6.40
            
            
            
            10,312
            
            
            $
            6.50





The
weighted average estimated grant date fair value of options granted during the
years ended December 31, 2007, 2006 and 2005 were $2.71, $2.99 and $3.93,
respectively.  The total intrinsic value of options exercised during
the years ended December 31, 2007, 2006 and 2005 were $982,000, $343,000
and $4,503,000, respectively.  The weighted average remaining
contractual term of options outstanding and exercisable was 5.2 and 3.9 years,
respectively, as of December 31, 2007.  At December 31, 2007, the
aggregate intrinsic value of the outstanding options and the exercisable options
was $2,849,000 and $2,847,000, respectively.




The
following is a summary of the nonvested options as of December 31, 2007,
and changes during the year then ended, under Lexicon’s stock option
plans:




2007Options
            
            
            Weighted
      Average Grant Date Fair ValueNonvested
      at beginning of year
            
            
            4,140
            
            
            $
            3.59Granted
            
            
            2,952
            
            
            
            2.71Vested
            
            
            (1,924
            )
            
            
            3.75Canceled
            
            
            (763
            )
            
            
            3.39Nonvested
      at end of year
            
            
            4,405
            
            
            $
            2.96





Warrants




In
connection with the acquisition of Coelacanth in July 2001, Lexicon assumed
Coelacanth’s outstanding warrants to purchase 25,169 shares of common
stock.  The warrants expire on March 31, 2009.  The
fair value of the warrants was included in the total purchase price for the
acquisition.  As of December 31, 2007, warrants to purchase
16,483 shares of common stock, with an exercise price of $11.93 per share,
remained outstanding.




Aggregate
Shares Reserved for Issuance




As of
December 31, 2007, an aggregate of 16,367,112 shares of common stock were
reserved for issuance upon exercise of outstanding stock options and warrants
and 1,132,705 additional shares were available for future grants under Lexicon’s
stock option plans.




14.  Benefit
Plans




Lexicon
has established an Annual Profit Sharing Incentive Plan (the “Profit Sharing
Plan”). The purpose of the Profit Sharing Plan is to provide for the payment of
incentive compensation out of the profits of the Company to certain of its
employees. Participants in the Profit Sharing Plan are entitled to an annual
cash bonus equal to their proportionate share (based on salary) of 15 percent of
the Company’s annual pretax income, if any.




Lexicon
maintains a defined-contribution savings plan under Section 401(k) of the
Internal Revenue Code.  The plan covers substantially all full-time
employees.  Participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution
limit.  Beginning in 2000, the Company was required to match employee
contributions according to a specified formula.  The matching
contributions totaled $862,000, $907,000 and $821,000, in the years ended
December 31, 2007, 2006 and 2005, respectively.  Company
contributions are vested based on the employee’s years of service, with full
vesting after four years of service.




15.  Collaboration
and License Agreements




Lexicon
has derived substantially all of its revenues from drug discovery and
development alliances, 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.




Drug
Discovery and Development Alliances




Lexicon
has entered into the following alliances for the discovery and development of
therapeutics based on its in
vivo drug target discovery efforts:




Bristol-Myers Squibb Company:
Lexicon established an alliance with Bristol-Myers Squibb in December 2003 to
discover, develop and commercialize small molecule drugs in the neuroscience
field.  Lexicon initiated the alliance with a number of drug discovery
programs at various stages of development and is continuing to use its gene
knockout technology to identify additional drug targets with promise in the
neuroscience field.  For those targets that are selected for the
alliance, Lexicon and Bristol-Myers Squibb are working together, on an exclusive
basis, to identify, characterize and carry out the preclinical development of
small molecule drugs, and will share equally both in the costs and in the work
attributable to those efforts.  As drugs resulting from the
collaboration enter clinical trials, Bristol-Myers Squibb will have the first
option to assume full responsibility for clinical development and
commercialization.




Lexicon
received an upfront payment of $36.0 million and research funding of $30.0
million in the initial three years of the agreement, or the target function
discovery term.  This funding was in consideration for access to
Lexicon’s technology and infrastructure and for Lexicon’s production and
specified phenotypic analysis of knockout mice in support of the target function
discovery portion of the alliance.  Bristol-Myers Squibb extended the
target discovery term of the alliance in May 2006 for an additional two years in
exchange for $20.0 million in additional research funding over the two year
extension, which commenced in January 2007.  This additional funding
is in consideration for additional research and phenotypic analysis of knockout
mice which supplements the phenotypic analysis conducted in the initial target
function discovery term.  Lexicon will also receive clinical and
regulatory milestone payments for each drug target for which Bristol-Myers
Squibb develops a drug under the alliance.  Lexicon will earn
royalties on sales of drugs commercialized by Bristol-Myers
Squibb.  The party with responsibility for the clinical development
and commercialization of drugs resulting from the alliance will bear the costs
of those efforts.  The original upfront payment of $36.0 million
and research funding of $30.0 million was recognized over the initial
estimated period of service of three years.  The additional research
funding of $20.0 million is being recognized over the two additional years
subject to the extension, beginning in January 2007.




The
upfront payment of $36.0 million was not related to a deliverable with
standalone value at inception, and Lexicon accounted for the entire agreement
with Bristol-Myers Squibb as a single unit of accounting.  Milestone
payments received are in consideration for additional
performance.  Therefore, Lexicon recognizes revenue from such
milestone payments upon achievement of the milestones.




Revenue
recognized under this agreement was $10.0 million, $21.8 million and
$21.8 million for the years ended December 31, 2007, 2006 and 2005,
respectively.




Genentech,
Inc.  Lexicon established an alliance with Genentech in
December 2002 to discover novel therapeutic proteins and antibody
targets.  Under the original alliance agreement, Lexicon used its
target validation technologies to discover the functions of secreted proteins
and potential antibody targets identified through Genentech’s internal drug
discovery research.  Lexicon received an upfront payment of $9.0
million and funding under a $4.0 million loan in 2002.  The terms of
the loan are discussed in Note 8.  In addition, Lexicon received
$24.0 million in performance payments for its work in the collaboration as
it was completed.  The original upfront payment of $9.0 million
was recognized over the initial estimated period of service of three years,
which was subsequently extended to three and one-half years.




In
November 2005, Lexicon and Genentech negotiated a new agreement expanding the
alliance to include additional research, as well as the development and
commercialization of new biotherapeutic drugs.  Lexicon will receive a
total of $25.0 million in upfront and milestone payments and research funding
for the three-year advanced research portion of the expanded
alliance.  In the expanded alliance, Lexicon is conducting advanced
research on a broad subset of targets validated in the original collaboration
using Lexicon’s proprietary gene knockout technology.  The upfront
payment under the new agreement is being recognized over the estimated period of
service of three years.




Lexicon
may develop and commercialize drugs for up to six of the targets included in the
alliance.  Genentech retains an option on the potential development
and commercialization of these drugs under a cost and profit sharing
arrangement, with Lexicon having certain conditional rights to co-promote drugs
on a worldwide basis.  Genentech is entitled to receive milestone
payments in the event of regulatory approval and royalties on net sales of
products commercialized by Lexicon outside of a cost and profit sharing
arrangement.  Lexicon will receive payments from Genentech upon
achievement of milestones related to the development and regulatory approval of
certain drugs resulting from the alliance that are developed and commercialized
by Genentech.  Lexicon is also entitled to receive royalties on net
sales of these products, provided they are not included in a cost and profit
sharing arrangement.  Lexicon retains non-exclusive rights for the
development and commercialization of small molecule drugs addressing the targets
included in the alliance.




The
upfront payment was not related to a deliverable with standalone value at
inception and Lexicon accounted for the entire agreement with Genentech as a
single unit of accounting.  Milestone payments received are in
consideration for additional performance.  Therefore, Lexicon
recognizes revenue from such milestone payments upon achievement of the
milestones.  During the year ended December 31, 2005, Lexicon
received nonrefundable milestone payments for performing specified phenotypic
analysis and for the delivery of data from specified phenotypic
analyses.




Revenue
recognized under this agreement was $4.3 million, $5.0 million and $22.6
million for the years ended December 31, 2007, 2006 and 2005,
respectively.




N.V.
Organon.  Lexicon established an alliance with Organon in May
2005 to jointly discover, develop and commercialize novel biotherapeutic
drugs.  In the alliance, Lexicon is creating and analyzing knockout
mice for up to 300 genes selected by the parties that encode secreted proteins
or potential antibody targets, including two of Lexicon’s existing drug
discovery programs.  The parties are jointly selecting targets for
further research and development and will equally share costs and responsibility
for research, preclinical and clinical activities.  The parties will
jointly determine the manner in which alliance products will be commercialized
and will equally benefit from product revenue.  If fewer than five
development candidates are designated under the alliance, Lexicon’s share of
costs and product revenue will be proportionally reduced.  Lexicon
will receive a milestone payment for each development candidate in excess of
five.  Either party may decline to participate in further research or
development efforts with respect to an alliance product, in which case such
party will receive royalty payments on sales of such alliance product rather
than sharing in revenue.  Organon will have principal responsibility
for manufacturing biotherapeutic products resulting from the alliance for use in
clinical trials and for worldwide sales.  Organon, formerly a
subsidiary of Akzo Nobel N.V., was acquired by Schering-Plough Corporation in
November 2007.




Lexicon
received an upfront payment of $22.5 million from Organon in exchange for access
to Lexicon’s drug target discovery capabilities and the exclusive right to
co-develop biotherapeutic drugs for the 300 genes selected for the
alliance.  Organon will also provide Lexicon with annual research
funding totaling up to $50.0 million for its 50% share of the alliance’s costs
during this same period.




The
upfront payment of $22.5 million was not related to a deliverable with
standalone value at inception, and Lexicon accounted for the entire agreement
with Organon as a sincle unit of accounting.  Revenue from the upfront
payment is recognized on a straight-line basis over the four-year period that
Lexicon expects to perform its obligations under the target function discovery
portion of the alliance.  Revenue from the research funding fees is
recognized as Lexicon performs its obligations under the target function
discovery portion of the alliance, reflecting the gross amount billed to Organon
on the basis of shared costs during the period.  Milestone payments
received are in consideration for additional performance.  Therefore,
Lexicon recognizes revenue from such milestone payments upon achievement of the
milestones.




Revenue
recognized under this agreement was $13.5 million, $15.5 million and
$11.8 million for the years ended December 31, 2007, 2006 and 2005,
respectively.




Other Collaborations and
Arrangements




Lexicon
has entered into the following other collaborationsand
arrangements:




Bristol-Myers Squibb
Company.  Lexicon entered into a drug target validation
agreement with Bristol-Myers Squibb in December 2004.  Under this
agreement, Lexicon developed mice and phenotypic data for certain genes
previously requested by Bristol-Myers Squibb under its LexVision agreement, but
that Lexicon was not required to deliver thereunder, and certain additional
genes requested by Bristol-Myers Squibb.  The collaboration term under
the agreement expires after the final phenotypic data set has been delivered by
Lexicon.  The Company received payments totaling $5.0 million
under the agreement.  Revenue recognized under this agreement was
$0.2 million, $1.4 million and $3.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively.




Lexicon
also entered into separate drug target validation agreements with Bristol-Myers
Squibb in January 2006, October 2006 and November 2007, under which Lexicon
will develop mice and phenotypic data for certain additional genes requested by
Bristol-Myers Squibb under those agreements.  The collaboration term
under each of these agreements will expire after the final phenotypic data set
has been delivered by Lexicon under that agreement.  The Company
received payments totaling $4.0 million under these agreements through
December 31, 2007.  Revenue recognized under these agreements was
$1.5 million and $1.4 million for the years ended December 31,
2007 and 2006, respectively.




Genentech,
Inc.  Lexicon entered into a drug target validation agreement
with Genentech, Inc. in February 2007.  Under this agreement, Lexicon
developed mice with mutations requested by Genentech.  The
collaboration term under the agreement expires after the final delivery of the
selected mice has been performed by Lexicon.  The Company received
payments totaling $0.9 million under the agreement through December 31,
2007.  Revenue recognized under this agreement was $0.9 million
for the year ended December 31, 2007.




Takeda Pharmaceutical Company
Limited.  Lexicon established an alliance with Takeda in July
2004 to discover new drugs for the treatment of high blood
pressure.  In the collaboration, Lexicon used its gene knockout
technology to identify drug targets that control blood
pressure.  Takeda is responsible for the screening, medicinal
chemistry, preclinical and clinical development and commercialization of drugs
directed against targets selected for the alliance, and bears all related
costs.  Lexicon received an upfront payment of $12.0 million from
Takeda for the initial, three-year term of the agreement. This payment was in
consideration for access to Lexicon’s technology and infrastructure during the
target discovery portion of the alliance.  Takeda will make research
milestone payments to Lexicon for each target selected for therapeutic
development.  In addition, Takeda will make clinical development and
product launch milestone payments to Lexicon for each product commercialized
from the collaboration.  Lexicon will also earn royalties on sales of
drugs commercialized by Takeda.  The target discovery portion of the
alliance, which ended in 2007, had a term of three years.




The
upfront payment of $12.0 million was not related to a deliverable with
standalone value at inception, and Lexicon accounted for the entire agreement
with Takeda as a single unit of accounting.  Revenue was recognized
from the upfront payment on a straight-line basis over the three-year period
Lexicon expected to perform its obligations under the
agreement.  Milestone payments received are in consideration for
additional performance.  Therefore, Lexicon recognizes revenue from
such milestone payments upon achievement of the milestones.




Revenue
recognized under this agreement was $2.3 million, $9.0 million and
$4.0 million for the years ended December 31, 2007, 2006 and 2005,
respectively.




Texas Institute for Genomic
Medicine.   In July 2005, Lexicon was awarded
$35.0 million from the Texas Enterprise Fund for the creation of a knockout
mouse embryonic stem cell library containing 350,000 cell lines using Lexicon’s
proprietary gene trapping technology, which Lexicon completed in
2007.  Lexicon created the library for the Texas Institute for Genomic
Medicine (“TIGM”), a newly formed non-profit institute whose founding members
are Texas A&M University, the Texas A&M University System Health Science
Center and Lexicon.  TIGM researchers may also access specific cells
from Lexicon’s current gene trap library of 270,000 mouse embryonic stem cell
lines and have certain rights to utilize Lexicon’s patented gene targeting
technologies.  In addition, Lexicon equipped TIGM with the
bioinformatics software required for the management and analysis of data
relating to the library.  The Texas Enterprise Fund also awarded $15.0
million to the Texas A&M University System for the creation of facilities
and infrastructure to house the library.  Revenue recognized under
this agreement was $10.6 million, $7.0 million and $3.1 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.  Lexicon recorded a change in estimate that increased
revenue and therefore decreased net loss and net loss per share by
$3.7 million and $0.04 per share, respectively, due to a reduction in the
estimated performance period of this agreement.




Under the
terms of the award, Lexicon is responsible for the creation of a specified
number of jobs beginning in 2006, reaching an aggregate of 1,616 new jobs in
Texas by December 31, 2015.  Lexicon will obtain credits based on
funding received by TIGM and certain related parties from sources other than the
State of Texas that it may offset against its potential liability for any job
creation shortfalls.  Lexicon will also obtain credits against future
jobs commitment liabilities for any surplus jobs it creates.  Subject
to these credits, if Lexicon fails to create the specified number of jobs, the
state may require Lexicon to repay $2,415 for each job Lexicon falls
short.  Lexicon’s maximum aggregate exposure for such payments, if
Lexicon fails to create any new jobs, is approximately $14.4 million, without
giving effect to any credits to which Lexicon may be
entitled.  Lexicon has recorded this obligation as deferred revenue in
the accompanying consolidated balance sheets.  The Texas A&M
University System, together with TIGM, has independent job creation obligations
and is obligated for an additional period to maintain an aggregate of 5,000
jobs, inclusive of those Lexicon creates.




16.  Selected
Quarterly Financial Data




The table
below sets forth certain unaudited statements of operations data, and net income
(loss) per common share data, for each quarter of 2007 and 2006.




(In
thousands, except per share data)





Quarter
      EndedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31(Unaudited)2007Revenues
            
            $
            13,495
            
            
            $
            12,648
            
            
            $
            10,167
            
            
            $
            13,808Loss
      from operations
            
            $
            (19,095
            )
            
            $
            (17,950
            )
            
            $
            (19,442
            )
            
            $
            (18,467
            )Net
      loss
            
            $
            (18,915
            )
            
            $
            (13,591
            )
            
            $
            (14,111
            )
            
            $
            (12,177
            )Net
      loss per common share, basic and diluted
            
            $
            (0.24
            )
            
            $
            (0.17
            )
            
            $
            (0.14
            )
            
            $
            (0.09
            )Shares
      used in computing net loss per common share
            
            
            77,938
            
            
            
            79,568
            
            
            
            104,196
            
            
            
            136,7942006Revenues
            
            $
            20,955
            
            
            $
            16,164
            
            
            $
            19,613
            
            
            $
            16,066Loss
      from operations
            
            $
            (11,020
            )
            
            $
            (16,933
            )
            
            $
            (12,706
            )
            
            $
            (14,572
            )Net
      loss
            
            $
            (10,831
            )
            
            $
            (16,902
            )
            
            $
            (12,755
            )
            
            $
            (13,823
            )Net
      loss per common share, basic and diluted
            
            $
            (0.17
            )
            
            $
            (0.26
            )
            
            $
            (0.20
            )
            
            $
            (0.19
            )Shares
      used in computing net loss per common
    share
            
            
            64,566
            
            
            
            64,627
            
            
            
            64,832
            
            
            
            73,405