Discovering Breakthrough Treatments for Human Disease Lexicon Genetics | 2006 Annual Report | 2006 Discovering Breakthrough Treatments for Human Disease Lexicon Genetics | 2006 Annual Report 8800 Technology Forest Place The Woodlands, Texas 77381-1160 www.lexicon-genetics.com Drug Development Activity Executive Officers Corporate Information Arthur T. Sands, M.D., Ph.D. Brian P. Zambrowicz, Ph.D. 8800 Technology Forest Place President and Chief Executive Officer Executive Vice President and The Woodlands, Texas 77381-1160 Lead Preclinical Preclinical Phase 1 Chief Scientific Officer Drug Discovery Programs Optimization Research Drug Development Programs Development Clinical Trials 281-863-3000 Julia P. Gregory Fax: 281-863-8088 LG421 LX6171 Executive Vice President, Lance K. Ishimoto, J.D., Ph.D. Toll Free: 800-578-1972 Diabetes Alzheimer’s/Cognition Corporate Development and Senior Vice President, www.lexicon-genetics.com Chief Financial Officer Intellectual Property LG843 LX1031 Dyslipidemia (Genentech alliance) Irritable Bowel Syndrome Mellon Investor Services LLC Alan J. Main, Ph.D. James R. Piggott, Ph.D. 480 Washington Boulevard LG106 LX1032 Executive Vice President, Senior Vice President, Jersey City, NJ 07310-1900 Immunology (Organon alliance) Gastrointestinal Disorders Pharmaceutical Research Pharmaceutical Biology 800-635-9270 LG985 LX2931 Foreign Shareholders: 201-680-6578 Metabolic Syndrome Rheumatoid Arthritis Jeffrey L. Wade, J.D. Philip M. Brown, M.D., J.D. www.melloninvestor.com/isd Executive Vice President and Vice President, General Counsel Clinical Development Our 2006 annual report on Form 10-K is available, without charge, upon request by contacting our Corporate Communications Department at 281-863-3000. Board of Directors Our annual meeting of shareholders will be LX6171 LX1031 LX1032 LX2931 held at 1:30 p.m. CDT on April 25, 2007 at The Woodlands Waterway Marriott Hotel and Convention Center, Samuel L. Barker, Ph.D., Chairman Frank P. Palantoni 1601 Lake Robbins Drive, Founder & Principal, Clearview Former President and Chief The Woodlands, Texas 77380. Projects, Inc.; Former President, Operating Officer, Prestige Brands A New Small A New Small A New Small A New Small U.S. Pharmaceutical Group, Holdings, Inc.; Former Global This annual report to shareholders Molecule for Molecule for Molecule for Molecule for Bristol-Myers Squibb Company President and Chief Executive Officer, contains forward-looking statements, Alzheimer’s Disease, Irritable Bowel Gastrointestinal Disorders, Rheumatoid Arthritis and Gerber Products Company including statements relating to Lexicon’s Vascular Dementia Syndrome Carcinoid Syndrome and Autoimmune Disease Robert J. Lefkowitz, M.D. regulatory filings, clinical and preclinical and Schizophrenia a Pulmonary Hypertension Investigator, Howard Hughes Clayton S. Rose development programs and the potential Medical Institute and James B. Former Head, Global Investment Banking, therapeutic and commercial potential of Duke Professor of Medicine J.P. Morgan & Co. Incorporated Current Status Current Status Current Status Current Status the drug candidates in those programs. and Professor of Biochemistry, Phase 1 clinical trials Phase 1 clinical trials IND-enabling studies IND-enabling studies These statements involve risks, uncertain- Arthur T. Sands, M.D., Ph.D. Duke University Medical Center ties and other important factors that may President and Chief Executive Officer, cause the actual results of Lexicon to Barry Mills, J.D., Ph.D. Lexicon Genetics Incorporated Mechanism Mechanism Mechanism Mechanism be materially different from any future President, Bowdoin College; Target that enhances Target that regulates Target that regulates Target that regulates lympho- results expressed or implied by such Former Deputy Presiding Partner, Kathleen M. Wiltsey cognition in animal models gastrointestinal serotonin peripheral serotonin activity cyte migration and immune forward-looking statements. Information Debevoise & Plimpton LLP Former Vice President, Amgen Inc. activity in animal models in animal models response in animal models identifying such risks, uncertainties and other important factors is contained in Alan S. Nies, M.D. the sections entitled “Factors Affecting Chairman, Lexicon Genetics Medical Major Market Major Market Major Market Major Market Forward-Looking Statements” and “Risk Advisory Board; Former Senior Vice 4.5 million Americans suffer IBS affects 10–20% of IBS affects 10–20% of Rheumatoid arthritis affects Factors” in our annual report on Form President, Merck & Co., Inc. from Alzheimer’s disease the U.S. adult population the U.S. adult population 2.1 million Americans 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission and included as part of this annual report to shareholders. Corporate Profile Lexicon is a biopharmaceutical company focused on the discovery and development of Selecting the Best Targets breakthrough treatments for human disease. Lexicon currently has clinical programs for the Best Therapeutics underway for areas of major unmet medical need including irritable bowel syndrome and cognitive disorders. The company has used its proprietary gene knockout technology to discover more than 100 promising drug targets and create an extensive pipeline of clinical and At Lexicon, new drugs start with preclinical programs in the therapeutic areas of diabetes and obesity, cardiovascular disease, the discovery of a novel drug target psychiatric and neurological disorders, cancer, immune system disorders and ophthalmic and advance through internal disease. To advance the development and commercialization of its programs, Lexicon is assay development, screening, working both independently and through collaborators which include Bristol-Myers Squibb drug discovery and pharmacology. Company, Genentech, Inc., N.V. Organon and Takeda Pharmaceutical Company Limited. We then move these drug candidates Lexicon’s common stock is traded on the Nasdaq Global Market under the symbol LEXG. into clinical development. Financial Highlights Year ended December 31, in thousands, except per share data 2006 2005 2004 Revenues $ 72,798 $ 75,680 $ 61,740 Research and development expenses(1) 106,695 93,625 90,586 Loss from operations(2) 55,231 36,119 47,454 Interest and other income (expense), net 801 (77) 282 Net loss(2) 54,311 36,315 47,172 Net loss per share 0.81 0.57 0.74 Weighted average shares outstanding 66,876 63,962 63,327 Capital expenditures 3,579 11,281 11,811 Year ended December 31, in thousands 2006 2005 2004 Cash, cash equivalents and investments $ 79,999 $ 99,695 $ 87,558 Stockholders’ equity 85,501 85,802 121,594 (1) Includes non-cash, stock-based compensation of $4,394, ($21) and $426 in 2006, 2005 and 2004, respectively. (2) Includes non-cash, stock-based compensation of $7,030, ($21) and $838 in 2006, 2005 and 2004, respectively. About the cover: The image on the cover depicts the localization of cells that produce serotonin which appear as dark spots in a section of the small intestine in a normal mouse. Serotonin is an important regulator of gastrointestinal function and is believed to play a role in irritable bowel syndrome. 2006 Annual Report | To Our Shareholders, Two thousand six was a year of significant drug discovery and development progress at Lexicon, marked by the initiation of our first human clinical trials. This important milestone was accompanied by many other clinical development, scientific and business accomplishments: 0 TO0: Advancing Drug Discovery Programs • We launched our 10to10 initiative – Lexicon’s strategic directive to move ten drug candidates into Clinical Development into human clinical trials by the end of 2010; Our drug discovery system has been so • We completed our first Phase 1 clinical trial of LX6171, a drug candidate for the treatment productive that we plan to move ten drug of cognitive impairment associated with disorders such as Alzheimer’s disease, schizophrenia candidates into human clinical trials and vascular dementia. In this trial, LX6171 was well tolerated at all dose levels studied; through 2010. We refer to this initiative as our 10to10 Program, and we have • We filed an investigational new drug (IND) application with the U.S. Food and Drug aligned our resources to achieve that goal. Administration (FDA) for LX1031, a drug candidate for the treatment of irritable bowel syndrome (IBS). We initiated a Phase 1 clinical trial of this compound in January 2007; • We commenced preclinical development of LX1032, a drug candidate with potential utility in a range of gastrointestinal (GI) disorders and other indications such as pulmonary arterial hypertension and carcinoid syndrome. We plan to file an IND for LX1032 in 2007; LX67 for Cognitive Disorders LX6171 is our oral drug candidate for the nervous system. In an initial Phase 1 trial, treatment of cognitive impairment associated LX6171 was well tolerated at all dose levels with disorders such as Alzheimer’s disease, studied. In preclinical studies, LX6171 schizophrenia and vascular dementia. demonstrated improved learning and These disorders affect millions of people memory in healthy and aged animal models. worldwide, and their prevalence is increasing The candidate has entered initial human as the population ages. LX6171 was clinical studies and, in a Phase 1a study, was generated by our medicinal chemists as a shown to be well tolerated at all dose levels selective and potent inhibitor of a target studied. We have since initiated