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March 13, 2009

TO OUR STOCKHOLDERS:

 

I am pleased to invite you to attend the 2009 annual meeting of stockholders of Lexicon Pharmaceuticals, Inc. to be held on Thursday, April 23, 2009 at 1:30 p.m., local time, at The Marriott Woodlands Waterway Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas.

 

Your vote is important, regardless of the number of shares that you hold.  Whether or not you plan to attend the annual meeting, I hope you will vote as soon as possible, either electronically on the Internet, by telephone or by signing and returning the enclosed proxy card.  Your proxy will not be used if you are present at the annual meeting and prefer to vote in person or if you revoke your proxy.

 

Thank you for your ongoing support of and continued interest in Lexicon Pharmaceuticals.  We look forward to seeing you at the annual meeting.

 

 

	Sincerely,
	/s/ Arthur T. Sands
	Arthur T. Sands, M.D., Ph.D.
	President and Chief Executive Officer

 

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LEXICON PHARMACEUTICALS, INC.

8800 Technology Forest Place

The Woodlands, Texas 77381

(281) 863-3000

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD APRIL 23, 2009

 

TO OUR STOCKHOLDERS:

 

The annual meeting of stockholders of Lexicon Pharmaceuticals, Inc. will be held on Thursday, April 23, 2009 at 1:30 p.m., local time, at The Marriott Woodlands Waterway Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas, to:

 

·

elect three Class III directors;

 

·

approve our Equity Incentive Plan, amending and restating our existing 2000 Equity Incentive Plan;

 

·

approve our Non-Employee Directors’ Stock Option Plan, amending and restating our existing 2000 Non-Employee Directors’ Stock Option Plan;

 

·

ratify and approve the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2009; and

 

·

act on any other business that properly comes before the annual meeting.

 

You are entitled to vote at the annual meeting only if you are the record owner of shares of our common stock at the close of business on February 23, 2009.

 

It is important that your shares be represented at the annual meeting whether or not you plan to attend. Please cast your vote electronically on the Internet, by telephone or by signing and returning the enclosed proxy card as promptly as possible.  If you are present at the annual meeting, and wish to do so, you may revoke the proxy and vote in person.

 

	By order of the board of directors,
	/s/ Jeffrey L. Wade
	Jeffrey L. Wade
	Secretary

 

The Woodlands, Texas

March 13, 2009

 

 

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LEXICON PHARMACEUTICALS, INC.

8800 Technology Forest Place

The Woodlands, Texas 77381

(281) 863-3000

 

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held April 23, 2009

 

GENERAL INFORMATION

 

Purpose of this Proxy Statement

 

We have prepared this proxy statement to solicit proxies on behalf of our board of directors for use at our 2009 annual meeting of stockholders and any adjournment or postponement of such meeting.

 

Notice of Internet Availability of Proxy Materials

 

As permitted by rules adopted by the Securities and Exchange Commission, we are providing access to our proxy materials over the Internet.  Accordingly, on or about March 13, 2009, we are mailing to our stockholders a notice containing instructions on how to access our proxy materials, including our proxy statement and annual report, and vote electronically over the Internet.  The notice also provides instructions on how stockholders may request a paper copy of our proxy materials free of charge.  Our proxy materials may be accessed by stockholders at any time after the date of mailing of the notice.

 

Time and Place of Annual Meeting

 

The annual meeting will be held on Thursday, April 23, 2009 at 1:30 p.m., local time, at The Marriott Woodlands Waterway Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas.

 

Matters to Be Considered at the Annual Meeting

 

At the annual meeting, our stockholders will be asked to consider and act upon the following matters:

 

·

the election of three Class III directors;

 

·

a proposal to approve our Equity Incentive Plan, amending and restating our existing 2000 Equity Compensation Plan;

 

·

a proposal to approve our Non-Employee Directors’ Stock Option Plan, amending and restating our existing 2000 Non-Employee Directors’ Stock Option Plan; and

 

·

a proposal to ratify and approve the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2009.

 

Our board of directors does not intend to bring any other matters before the annual meeting and has not been informed that any other matters are to be presented by others.  Our bylaws contain several requirements that must be satisfied in order for any of our stockholders to bring a proposal before one of our annual meetings, including a requirement of delivering proper advance notice to us.  Stockholders are advised to review our bylaws if they intend to present a proposal at any of our annual meetings.

 

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Record Date for Determining Entitlement to Vote

 

You are entitled to vote at the annual meeting if you were the record owner of shares of our common stock as of the close of business on February 23, 2009, the record date for the annual meeting established by our board of directors.

 

How to Vote Your Shares

 

You may vote in person at the annual meeting or by proxy.  To ensure that your shares are represented at the annual meeting, we recommend you vote by proxy even if you plan to attend the annual meeting in person.  Even if you vote by proxy, if you wish, you can revoke your proxy and vote in person at the annual meeting.  If you want to vote at the annual meeting but your shares are held by an intermediary, such as a broker or bank, you will need to obtain from the intermediary either proof of your ownership of such shares as of February 23, 2009 or a proxy from such intermediary authorizing you to vote your shares at the meeting.

 

You may receive more than one proxy depending on how you hold your shares.  If you hold your shares through an intermediary, such as a broker or bank, you may receive materials from them asking you how you want your shares to be voted at the annual meeting.

 

Voting by Proxy

 

By Internet or Telephone.  You may vote electronically on the Internet or by telephone by following the instructions contained on the notice of Internet availability of our proxy materials.  If you hold your shares through an intermediary, such as a broker or bank, please follow the voting instructions contained on the voting card used by the intermediary.

 

By Mail.  If you request a paper copy of our proxy materials, you may vote by mail by completing, dating and signing the proxy card provided and mailing it in the pre-addressed envelope enclosed with the paper copy of our proxy materials.

 

Quorum

 

We must have a quorum to conduct any business at the annual meeting. This means that at least a majority of our outstanding shares eligible to vote at the annual meeting must be represented at the annual meeting, either in person or by proxy.  Abstentions are counted for purposes of determining whether a quorum is present.  In addition, shares of our common stock held by intermediaries that are voted for at least one matter at the annual meeting will be counted as being present for purposes of determining a quorum for all matters, even if the beneficial owner’s discretion has been withheld for voting on some or all other matters (commonly referred to as a “broker non-vote”).

 

Outstanding Shares

 

On the record date, we had 137,330,254 shares of our common stock outstanding.  If you were the record owner of shares of our common stock on the record date, you will be entitled to one vote for each share of stock that you own on each matter that is called to vote at the annual meeting.

 

Vote Needed to Approve Proposals

 

Our Class III directors will be elected by a plurality vote.  As a result, if a quorum is present at the annual meeting, the three persons receiving the greatest number of votes will be elected to serve as our Class III directors. Withholding authority to vote for a director nominee will not affect the outcome of the election of directors.

 

The approval of our Equity Incentive Plan and Non-Employee Directors’ Stock Option Plan and the ratification and approval of the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2009 will require the affirmative vote of a majority of the votes cast with respect to such matters.  Any other business that may properly come before the annual meeting for a vote will require the affirmative vote of a majority of the votes cast with respect to such matter unless a greater vote is required by law or our charter or bylaws.  On any such matter, any abstention from voting or broker non-vote will not count as a vote for or against these proposals and will not be considered in calculating the number of votes necessary for their approval.

 

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How Your Proxy Will Be Voted

 

Giving us your proxy means that you are authorizing us to vote your shares at the annual meeting in the manner you direct. You may vote for our nominees for election as Class III directors or withhold your vote for any one or more of those nominees.  You may vote for or against the proposals to approve our Equity Incentive Plan and Non-Employee Directors’ Stock Option Plan and ratify and approve the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2009 or abstain from voting on those proposals.

 

If you vote by proxy and do not withhold authority to vote for the election of our nominees for election as Class III directors, all of your shares will be voted for the election of those nominees.  If you withhold authority to vote for one or more of our nominees for election as Class III directors, none of your shares will be voted for those nominees.

 

If any of our nominees for election as Class III directors become unavailable for any reason before the election, we may reduce the number of directors serving on our board of directors, or our board of directors may designate substitute nominees, as necessary.  We have no reason to believe that any of our nominees for election as Class III directors will be unavailable.  If our board of directors designates any substitute nominees, the persons receiving your proxy will vote your shares for such substitute(s) if they are instructed to do so by our board of directors or, in the absence of any such instructions, in accordance with their own best judgment.

 

If you vote by proxy but do not specify how you want your shares voted, your shares will be voted in favor of our nominees for election as Class III directors and in favor of the approval of our Equity Incentive Plan and our Non-Employee Directors’ Stock Option Plan and the ratification and approval of the appointment of Ernst & Young LLP as our independent auditors for the year ending December 31, 2009.

 

If you vote by proxy and any additional business properly comes before the annual meeting, the persons receiving your proxy will vote your shares on those matters as instructed by our board of directors or, in the absence of any such instructions, in accordance with their own best judgment.  As of the date of this proxy statement, we are not aware of any other matter to be raised at the annual meeting.

 

How to Revoke Your Proxy

 

You may revoke your proxy at any time before your shares are voted by providing our corporate secretary with either a new proxy with a later date or a written notice of your desire to revoke your proxy at the following address:

 

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attention: Corporate Secretary

 

You may also revoke your proxy at any time prior to your shares having been voted by attending the annual meeting in person and notifying the inspector of election of your desire to revoke your proxy.  Your proxy will not automatically be revoked merely because you attend the annual meeting.

 

Inspector of Election

 

Broadridge Financial Solutions, Inc. will count votes and provide a representative who will serve as an inspector of election for the annual meeting.

 

List of Stockholders Entitled to Vote

 

A list of our stockholders entitled to vote at the annual meeting will be available for inspection at the annual meeting.  The stockholder list will also be available for inspection for ten days prior to the annual meeting at our corporate offices located at 8800 Technology Forest Place, The Woodlands, Texas.  Any inspection of this list at our offices will need to be conducted during ordinary business hours.  If you wish to conduct an inspection of the stockholder list, we request that you please contact our corporate secretary before coming to our offices.

 

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Solicitation of Proxies and Expenses

 

We are asking for your proxy on behalf of our board of directors.  We will bear the entire cost of preparing, printing and soliciting proxies.  We will send notices of Internet availability of proxy materials and, if requested, paper copies of our proxy materials to all of our stockholders of record as of the record date and to all intermediaries, such as brokers and banks, that held any of our shares on that date on behalf of others.  These intermediaries will then forward the notices and, if requested, paper copies of our proxy materials to the beneficial owners of our shares, and we will reimburse them for their reasonable out-of-pocket expenses for forwarding such materials.  Our directors, officers and employees may solicit proxies by mail, in person or by telephone or other electronic communication.  Our directors, officers and employees will not receive additional compensation for their solicitation efforts, but they will be reimbursed for any out-of-pocket expenses they incur.

 

Householding

 

As permitted by rules adopted by the Securities and Exchange Commission, we are delivering a single notice of Internet availability of proxy materials, annual report and proxy statement, as applicable, to any household at which two or more stockholders reside if we believe the stockholders are members of the same family, unless otherwise instructed by one or more of the stockholders.  We will promptly deliver separate copies of these documents upon the written or oral request of any stockholder at a shared address to which a single copy of the documents were delivered.

 

If your household received a single set of any of these documents, but you would prefer to receive your own copy, or if you share an address with another stockholder and together both of you would like to receive only a single set of these documents, please follow these instructions:

 

·

If your shares are registered in your own name, please contact our transfer agent, BNY Mellon Shareowner Services, and inform them of your request by calling them at (800) 635-9270 or writing them at 480 Washington Boulevard., Jersey City, New Jersey 07310.

 

·

If an intermediary, such as a broker or bank, holds your shares, please contact Broadridge and inform them of your request by calling them at (800) 542-1061 or writing them at Householding Department, 51 Mercedes Way, Edgewood, New York 11717.  Be sure to include your name, the name of your brokerage firm and your account number.

 

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PROPOSAL NUMBER 1:

ELECTION OF DIRECTORS

 

Our board of directors, which currently has ten members, is divided or “classified” into three classes.  Directors in each class are elected to hold office for a term ending on the date of the third annual meeting following the annual meeting at which they were elected.  The current term of our Class III directors will expire at this annual meeting.  The current terms of our Class I and Class II directors will expire at our 2010 and 2011 annual meetings of stockholders, respectively.

 

The board of directors has nominated and urges you to vote for the election of the individuals identified below, who have been nominated to serve as Class III directors until our 2012 annual meeting of stockholders or until their successors are duly elected and qualified.  Each of these individuals is a member of our present board of directors.  Your signed proxy will be voted for the nominees named below unless you specifically indicate on the proxy that you are withholding your vote.

 

Nominees for Class III Directors

 

The following individuals are nominated for election as Class III directors:

 

Name	Age	Position with the Company	Year First Became a Director
Arthur T. Sands, M.D., Ph.D.	47	President and Chief Executive Officer and Director (Class III)	1995
Philippe J. Amouyal	50	Director (Class III)	2007
Frank P. Palantoni	51	Director (Class III)	2004

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 Lexicon, 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.

 

Philippe J. Amouyal has been a director since August 2007 and is a managing director of The Invus Group, LLC, a position he has held since 1999.  Previously, Mr. Amouyal was a vice president and director of The Boston Consulting Group, Inc. in Boston, Massachusetts, where he coordinated the global technology and electronics practice through most of the 1990s.  Mr. Amouyal is a director of Weight Watchers International, Inc., as well as a number of private companies in which Invus has invested. He holds an M.S. in engineering and a DEA in management from Ecole Centrale de Paris and was a research fellow at the Center for Policy Alternatives of the Massachusetts Institute of Technology.  Mr. Amouyal is a designee of Invus, L.P. pursuant to our stockholders’ agreement with Invus described under the heading “Transactions with Related Persons — Arrangements with Invus.”

 

Frank P. Palantoni has been a director since November 2004. Mr. Palantoni served as chief executive officer of Prestige Brands Holding, Inc. from April to June 2006 and as a director from January to June 2006.  From 1998 to 2004, Mr. Palantoni held a variety of senior management positions with Novartis AG, most recently as president and chief executive officer, worldwide of its Gerber Products Company, Novartis Infant and Baby Division. Mr. Palantoni also served as president and chief executive officer for North American operations of Novartis Consumer Health Division from 2000 to 2001. Prior to joining Novartis, he held a series of senior management positions with The Danone Group. He holds a B.S. from Tufts University and an M.B.A. from Columbia University.

 

The Board of Directors recommends that stockholders vote “FOR” the foregoing nominees for election as Class III directors.

 

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Current and Continuing Directors

 

The current directors of the Company are identified below:

 

Name	Age	Position with the Company
Arthur T. Sands, M.D., Ph.D.	47	President and Chief Executive Officer and Director (Class III)
Samuel L. Barker, Ph.D. (1)	66	Chairman of the Board of Directors (Class II)
Philippe J. Amouyal (2)	50	Director (Class III)
Raymond Debbane (3)	54	Director (Class I)
Robert J. Lefkowitz, M.D. (3)	65	Director (Class I)
Alan S. Nies, M.D. (2)	71	Director (Class I)
Frank P. Palantoni (1) (2)	51	Director (Class III)
Christopher J. Sobecki	50	Director (Class II)
Judith L. Swain, M.D. (3)	60	Director (Class II)
Kathleen M. Wiltsey (1)	53	Director (Class II)

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(1)

Member of the Audit Committee

(2)

Member of the Compensation Committee

(3)

Member of the Corporate Governance Committee

Information regarding the business experience of Dr. Sands, Mr. Amouyal and Mr. Palantoni is set forth above under the heading  “— Nominees for Class III Directors.”

 

Samuel L. Barker, Ph.D. has been a director since March 2000 and became chairman of our board of directors in March 2005. In March 2001, Dr. Barker co-founded Clearview Projects, Inc., a provider of partnering and transaction services to biopharmaceutical companies, and served as its president and chief executive officer from July 2003 until November 2004. Dr. Barker served in a series of leadership positions at Bristol-Myers Squibb Company until his retirement in 1999. His positions at Bristol-Myers Squibb included service as executive vice president, Worldwide Franchise Management and Strategy during 1998; president, United States Pharmaceuticals from 1992 to 1997; and president, Bristol-Myers Squibb Intercontinental Commercial Operations from 1990 to 1992.  Prior to 1990, Dr. Barker held executive positions in research and development, manufacturing, finance, business development and sales and marketing at Squibb Pharmaceuticals.  Dr. Barker currently serves as a director of AtheroGenics, Inc. and Cadence Pharmaceuticals, Inc.  Dr. Barker received his B.S. from Henderson State College, his M.S. from the University of Arkansas and his Ph.D. from Purdue University.

 

Raymond Debbane has been a director since August 2007.  Mr. Debbane is president and chief executive officer of The Invus Group, LLC, which he founded in New York in 1985 as the exclusive investment advisor of Benelux-based Artal Group S.A.  In 1999, Artal became the controlling shareholder of Weight Watchers International, Inc., for which Mr. Debbane serves as chairman of the board of directors.  He also serves as chairman or director of a number of private companies in which Invus and Artal Group S.A. have invested.  Before founding The Invus Group, Mr. Debbane was a manager in the Paris office of The Boston Consulting Group, Inc., where he did consulting work for a number of major European and international companies.  Mr. Debbane holds an M.B.A. from Stanford University, an M.S. in food science and technology from the University of California at Davis, and a B.S in agricultural sciences and agricultural engineering from American University of Beirut.  Mr. Debbane is a designee of Invus, L.P. pursuant to our stockholders’ agreement with Invus described under the heading “Transactions with Related Persons — Arrangements with Invus.”

 

Robert J. Lefkowitz, M.D. has been a director since February 2001 and a consultant to our company since March 2003.  Dr. Lefkowitz is the James B. Duke Professor of Medicine, professor of biochemistry and a Howard Hughes Medical Institute investigator at Duke University Medical Center, where he has served on the faculty since 1973. He is a member of the National Academy of Sciences. Dr. Lefkowitz received his B.A. from Columbia University and his M.D. from Columbia University College of Physicians and Surgeons.

 

Alan S. Nies, M.D. has been a director since November 2003 and chairman of our medical advisory board since March 2003.  From 1992 through September 2002, Dr. Nies served in a series of senior management positions at Merck & Co. Inc., most recently as senior vice president, clinical sciences from 1999 to 2002. Prior to joining Merck, Dr. Nies spent fifteen years as professor of medicine and pharmacology and head of the Division of Clinical Pharmacology at the University of Colorado Health Sciences Center.  Dr. Nies holds a B.S. from Stanford University and an M.D. from Harvard Medical School.

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Christopher J. Sobecki has been a director since August 2007 and is a managing director of The Invus Group, LLC, which he joined in 1989.  Mr. Sobecki is currently a director of Weight Watchers International, Inc. and NitroMed, Inc., as well as a number of private companies in which Invus has invested. He holds a B.S. in industrial engineering from Purdue University and an M.B.A. from Harvard University.  Mr. Sobecki is a designee of Invus, L.P. pursuant to our stockholders’ agreement with Invus described under the heading “Transactions with Related Persons — Arrangements with Invus.”

 

Judith L. Swain, M.D. has been a director since September 2007.  Dr. Swain is the executive director of the Singapore Institute for Clinical Sciences within A*STAR, and the Lien Chow Professor of Medicine at the National University of Singapore.  From 2005 to 2006, she was the dean for translational medicine at the University of California, San Diego, where she continues to maintain an appointment as an adjunct professor of medicine.  Dr. Swain served as chair of the Department of Medicine at Stanford University from 1997 to 2005, and previously served on the medical faculties of the University of Pennsylvania and Duke University.  Dr. Swain is currently a director of the Burroughs Wellcome Fund, a member of the Academic Research Council in Singapore and on the Scientific Advisory Board of the Doris Duke Charitable Foundation.  She has served in a number of national and international leadership roles and as a director or member of the scientific advisory boards for a number of biomedical technology companies and is co-founder of Synecor, LLC.  Dr. Swain received her B.S. from the University of California, Los Angeles and her M.D. from the University of California, San Diego.

 

Kathleen M. Wiltsey has been a director since February 2007. From 1984 through 1998, Ms. Wiltsey served in a series of senior marketing and business development positions at Amgen Inc., including as co-product development team leader and marketing director for EPOGEN ® and as vice president with responsibility for Amgen’s product licensing function. From May to October 2006, Ms. Wiltsey served the X Prize Foundation as executive director for the development and launch of the Archon X PRIZE for Genomics, a global technology competition to dramatically reduce the cost of sequencing human genomes and accelerate personalized medicine. Ms. Wiltsey has served in a variety of business and corporate development advisory roles for numerous biotechnology companies and is currently a director of Sequenom, Inc. and past president of the board of The Associates of the California Institute of Technology. She holds a B.S. from the Colorado School of Mines and an M.B.A. from Harvard University.

 

 

PROPOSAL NUMBER 2:

APPROVAL OF EQUITY INCENTIVE PLAN

 

We use stock option awards as a part of our overall compensation program in order to align the long-term interests of our employees with those of our stockholders.  These awards are made principally under our 2000 Equity Incentive Plan, the purpose of which is to secure and retain the services of employees, directors and consultants, and to provide them with incentives to exert maximum efforts for the company’s success, by giving them the opportunity through the granting of stock awards to benefit from increases in the value of our common stock.

 

The 2000 Equity Incentive Plan will terminate in accordance with its terms on February 2, 2010.  As a result, we are asking that stockholders ratify and approve an amendment and restatement of the 2000 Equity Incentive Plan that, among other things, (1) extends the term of the plan until the day before the tenth (10th) anniversary of the date the amended and restated plan is adopted by our board of directors or approved by our stockholders, whichever is earlier, (2) eliminates the “evergreen share reserve” provisions of the existing plan under which the number of reserved shares increases on an annual basis in accordance with a pre-set formula (subject to the ability of our board of directors to provide for lesser increases and a current overall cap of 30,000,000 shares), and instead reserves a fixed number of 35,000,000 shares, (3) expands the types of potential awards under the plan to include phantom stock awards and stock appreciation rights, with the objective of providing our board of directors greater flexibility, if desired, in its choice of future equity incentive awards, and (4) renames the plan the Equity Incentive Plan.

 

The terms of the Equity Incentive Plan are summarized below and the complete text of the plan is set forth in Appendix A to this proxy statement.

 

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The Board of Directors recommends that stockholders vote “FOR” approval of the Equity Incentive Plan, amending and restating the existing 2000 Equity Incentive Plan.

 

Administration of the Plan

 

The Equity Incentive Plan is administered by our board of directors, or a committee appointed by the board, which determines recipients and types of options and other awards to be granted, including number of shares under the option or other award and when options may be exercised.  The compensation committee of the board of directors presently administers the plan.

Awards under the Plan

 

The Equity Incentive Plan permits the following types of awards:

 

·

incentive stock options;

·

nonstatutory stock options;

·

stock bonus awards;

·

restricted stock awards;

·

phantom stock awards; and

·

stock appreciation rights.

Stock options and other awards granted under the plan are evidenced by agreements that specify the terms and conditions under which they are granted.  All stock options and other awards granted under the plan are subject to the terms and conditions contained in the applicable agreement and the plan.

 

Eligibility

 

Awards other than incentive stock options may be granted to employees, directors and consultants.  Incentive stock options may be granted only to employees.  As of March 2, 2009, approximately 400 persons were eligible to participate in the plan, including approximately 347 employees, nine non-employee directors and 44 consultants.

 

Shares Subject to the Plan

 

The total number of shares of common stock that may be issued pursuant to stock awards under the Equity Incentive Plan shall not exceed in the aggregate 35,000,000 shares.  No more than 3,500,000 shares may be issued pursuant to awards other than stock options and stock appreciation rights.

 

If any award expires, lapses, or is terminated or forfeited for any reason, the shares subject to that award will continue to be available for the grant of awards under the plan, provided that shares that are not delivered to the holder of an award because (1) the right to receive such shares is surrendered in a “net exercise” of an option or (2) such shares are withheld in satisfaction of the withholding of taxes incurred in connection with the exercise of an option or stock appreciation right or the issuance of shares under a stock bonus award, restricted stock award or phantom stock award, the surrendered or withheld shares will not be available for subsequent issuance under the plan.  Common stock issued as or on the exercise of awards under the plan may be either authorized and unissued shares or reacquired shares.

 

As of March 2, 2009, there were outstanding under the plan (1) options to purchase a total of 20,009,507 shares of our common stock, (2) stock bonus awards for 534,100 shares subject to continuing vesting requirements, (3) restricted stock awards for 17,973 shares, (4) no phantom stock awards and (5) no stock appreciation rights.  On a pro forma basis to reflect the increase in the number of shares reserved for issuance under the Equity Incentive Plan, 10,248,791 shares remained available for issuance of new options or awards under the plan at that date. Since the founding of our company in 1995, a total of 4,741,702 shares of our common stock have been issued under the plan and its predecessors upon the exercise or grant of options and other awards.

 

Stock Options

 

The stock options granted under the Equity Incentive Plan are evidenced by agreements that specify the number of shares of our common stock which may be purchased at a certain specified price and contain other terms and conditions, such as vesting and termination provisions.  All stock options granted under the plan are subject to the terms and conditions contained in the applicable stock option agreement and the plan.

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Expiration and Termination

 

The term of each stock option is stated in the applicable stock option agreement.  In no event, however, may a stock option be exercised more than ten years after the date the option is granted.  In the case of an incentive stock option granted to a 10% stockholder, the maximum term is five years from the date the option is granted.

 

Option Exercise Price

 

The exercise price of stock options awarded under the Equity Incentive Plan is determined by the plan administrator at the time the stock option is awarded.  Stock options must have an exercise price that is no less than 100% of the fair market value of our common stock on the date of grant.

 

The fair market value of a share of common stock on a particular date is equal to the previous day’s closing sales price (or the closing bid price, if no sales were reported) of the common stock if the common stock is listed on any established stock exchange or traded on the Nasdaq Stock Market.  If there is no regular public trading market for the common stock, the fair market value of the common stock is determined by the board of directors.

 

Consideration for Exercise of Options

 

The consideration to be paid for shares to be issued upon exercise of a stock option, including the method of payment, shall be determined by the administrator (and, in the case of an incentive stock option, shall be determined at the time of grant) and may consist entirely of (1) cash or (2), at the discretion of the board of directors, (a) by delivery of other common stock, (b) according to a deferred payment or other similar arrangement, (c) by means of a “net exercise” of the option, or (d) in any other form of legal consideration acceptable to the board.

 

Stock Bonus Awards and Restricted Stock Awards

 

The terms and provisions of stock bonus awards and restricted stock awards shall be as set forth in the grant instrument.  A stock bonus may be awarded in consideration for past services actually rendered to the company.  The purchase price for a restricted stock award shall be as the administrator shall determine, but not less than 85% of the fair market value on the date the award is granted or the date the purchase is consummated.  Shares awarded under a stock bonus or restricted stock award may, but need not be subject to a repurchase or forfeiture right on behalf of the company in accordance with a vesting schedule in the event the participant’s employment is terminated.

 

Phantom Stock Awards and Stock Appreciation Rights

 

The terms and provisions of phantom stock awards and stock appreciation rights shall be as set forth in the grant instrument.  The price of a common stock equivalent used as the basis from which appreciation is determined for purposes of a stock appreciation right shall be as the administrator shall determine, but not less than 100% of the fair market value on the date the stock appreciation right is granted.  Phantom stock awards and the exercise value of a stock appreciation right may be paid in shares of common stock, cash, a combination of common stock and cash, or other consideration, as determined by the administrator and set forth in the grant instrument.

 

Other Provisions

 

Limits on Transfer of Awards

 

In general, plan participants may not sell, pledge, assign, transfer or otherwise dispose of any stock options or other awards other than by will or the laws of descent or distribution and the plan participant alone may exercise his stock options or other awards during his lifetime.  Awards other than incentive stock options may be transferred only if permitted under the agreement that evidences the terms of the award.

 

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Adjustments on Changes in Capital Structure or on Change of Control

 

If we effect a stock split, reverse stock split, stock dividend, redemption, combination, reclassification or other similar change affecting our capital stock, adjustments reflecting the change will be made in (1) the aggregate number of shares of common stock authorized for issuance under the plan; (2) the number of shares underlying each outstanding award; and (3) if applicable, the price per share of each award.

 

If a change in control transaction shall occur, the surviving or acquiring corporation shall assume all awards or provide a substitute similar award.  If the surviving or acquiring corporation fails to so provide such assumption or substitution, then awards held by those participants whose employment has not been terminated will be accelerated in full and the awards will subsequently terminate if not exercised.  Any other awards outstanding under the plan will terminate if not exercised (if applicable) prior to the event.

 

Amendment or Termination of the Plan

 

The board may at any time amend, alter, suspend or discontinue the Equity Incentive Plan but no amendment, alteration, suspension or discontinuation which would impair your rights under any previous grant may be made without the consent of the participant.

 

Term of the Plan

 

No stock options or other awards may be granted under the Equity Incentive Plan after the day before the tenth (10th) anniversary of the date the plan is adopted by our board of directors or approved by our stockholders, whichever is earlier.

 

United States Federal Income Tax Consequences

 

The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Equity Incentive Plan based on current federal income tax laws.  This summary is not intended to be exhaustive and does not describe state or local tax consequences.  Additional or different federal tax consequences to the employee, director or consultant or to our company may result depending on considerations other than those described below.

 

Nonstatutory Stock Options

 

In general, optionholders will not recognize any taxable income at the time they are granted nonstatutory stock options.  When an optionholder exercises a nonstatutory stock option, he or she will recognize ordinary income measured by the excess of the then fair market value of the shares over the exercise price and we will be entitled to a deduction for a corresponding amount.  Different rules apply to options that have a “readily ascertainable fair market value,” as that phrase is defined in regulations promulgated under Section 83 of the Internal Revenue Code of 1986.

 

When an optionholder sells or otherwise disposes of shares that were acquired by exercising nonstatutory stock options, any amount that the optionholder receives in excess of the sum of (1) the exercise price of the shares as of the date of exercise and (2) the amount includable in income with respect to such option, if any, such sum being the optionholder’s “basis” in the shares, will, in general, be treated as a long-term or short-term capital gain, depending on the holding period of the shares.  We are not entitled to any tax deduction in connection with an optionholder’s sale or disposition of the shares.  If an optionholder receives less than his or her basis in the shares, the loss will, in general, be treated as a long-term or short-term capital loss, depending on the holding period of the shares.

 

Incentive Stock Options

 

Optionholders will not be taxed on the grant or exercise of an incentive stock option that qualifies under Section 422 of the Internal Revenue Code, unless an alternative minimum tax liability is triggered.  When an optionholder sells or otherwise makes a taxable disposition of shares that he or she acquired by exercising an incentive stock option, the optionholder will recognize a capital gain on the excess of the amount realized on disposition over the exercise price of the incentive stock option, provided that the optionholder has not disposed of the shares until at least two years after the date the option was granted and one year after the date the optionholder exercised the option.  Failure to comply with these holding requirements will result in ordinary income treatment for the gain.  Unless the optionholder disposes of shares received on exercise of the incentive stock option before meeting the applicable holding period requirements, we will not be entitled to a deduction with respect to the grant or exercise of the incentive stock option.

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In the event an optionholder makes a “disposition” of the shares received on exercise of an incentive stock option before meeting the two-year or one-year holding period requirements, the gain on the disposition, to the extent of the lesser of (1) the excess of the fair market value of the shares on the date of exercise over the exercise price or (2) the excess of the amount realized on disposition over the exercise price, will be treated as ordinary income to the optionholder, and we will generally be entitled to a corresponding deduction.  The balance of the gain, if any, realized on such a disposition will be treated as long-term or short-term capital gain, depending on the holding period of the shares.  To the extent that an optionholder is entitled to capital gains treatment, we will not be entitled to a corresponding deduction for such gain.  If the amount realized at the time of the disposition is less than the exercise price, the optionholder will not be required to treat any amount as ordinary income, provided the disposition is of a type that would give rise to a recognizable loss.  In such event, the loss will be treated as a long-term or short-term capital loss depending on the holding period of the shares.

 

Stock Bonus Awards

 

In general, if an individual receives a stock bonus award, he or she will be taxed on the fair market value of the shares on the date the shares are issued.  We will be generally entitled to a deduction for a corresponding amount.  When a stock bonus award is subject to forfeiture restrictions, an individual will not recognize any taxable income at the time he or she is granted the award, but upon the lapse of the restrictions applicable to such award, that person will recognize ordinary income equal to the fair market value of the shares on the date the restrictions on the award lapsed, and we will be entitled to a deduction for a corresponding amount.  If, upon a taxable disposition of the shares, the stockholder receives more or less than his or her basis in the shares, the gain or loss will be a long-term or short-term capital gain or loss, depending on the holding period of the shares, measured from the date that the receipt of the shares was taxable to the stockholder.

 

Restricted Stock Awards

 

In general, an individual will not recognize any taxable income at the time he or she is granted an award of restricted stock, but upon the lapse of the restrictions applicable to such award, that person will recognize ordinary income equal to the fair market value of the shares on the date the restrictions on the award lapsed less the purchase price for such shares, and we will be entitled to a deduction for a corresponding amount.  If the stockholder sells or otherwise disposes of such shares in a taxable disposition, the sale or disposition will be subject to the same treatment described above for a taxable disposition of shares acquired upon an exercise of a nonstatutory stock option.

 

Phantom Stock Awards

 

In general, an individual will not recognize any taxable income at the time he or she is granted an award of phantom stock.  Upon settlement of a phantom stock award, the individual will recognize ordinary income equal to the fair market value of the cash or shares actually received by the individual.  We will be generally entitled to a deduction for the corresponding amount.

 

Stock Appreciation Rights

 

In general, an individual will not recognize any taxable income at the time he or she is granted stock appreciation rights.  Upon exercise of a stock appreciation right, the individual will recognize ordinary income equal to the fair market value of the cash or shares received by the individual upon exercise.  We will be generally entitled to a deduction for the corresponding amount.

 

The foregoing summary does not constitute a definitive statement of the federal income tax effects of awards granted under the Plan.

 

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PROPOSAL NUMBER 3:

APPROVAL OF NON-EMPLOYEE DIRECTORS’ STOCK OPTION PLAN

 

We use stock option awards as a part of our overall compensation program in order to align the long-term interests of the non-employee members of our board of directors with those of our stockholders.  These awards are made under our 2000 Non-Employee Directors’ Stock Option Plan, the purpose of which is to secure and retain the services of non-employee directors, and to provide them with incentives to exert maximum efforts for the company’s success by giving them the opportunity through the granting of nonstatutory stock options to benefit from increases in the value of our common stock.

 

The 2000 Non-Employee Directors’ Stock Option Plan will terminate in accordance with its terms on February 2, 2010.  As a result, we are asking that stockholders approve an amendment and restatement of the 2000 Non-Employee Directors’ Stock Option Plan that, among other things, (a) extends the term of the plan until the day before the tenth (10th) anniversary of the date the amended and restated plan is adopted by our board of directors or approved by our stockholders, whichever is earlier, (b) eliminates the “evergreen share reserve” provisions of the existing plan under which the number of reserved shares increases on an annual basis in accordance with a pre-set formula (subject to the ability of our board of directors to provide for lesser increases), and instead reserves a fixed number of 1,200,000 shares , (c) increases the number of shares underlying the annual option grant to the non-employee chairman of our board of directors from 10,000 shares to 20,000 shares (bringing within the Non-Employee Directors’ Stock Option Plan our historical practice, previously effected by making grants of options for the additional 10,000 shares to the non-employee chairman of our board of directors under our 2000 Equity Incentive Plan), and (d) renames the plan the Non-Employee Directors’ Stock Option Plan.

 

The terms of the Non-Employee Directors’ Stock Option Plan are summarized below and the complete text of the plan is set forth in Appendix B to this proxy statement.

 

The Board of Directors recommends that stockholders vote “FOR” approval of the Non-Employee Directors’ Stock Option Plan, amending and restating the existing 2000 Non-Employee Directors’ Stock Option Plan.

 

Administration of the Plan

 

The plan is administered by our board of directors, which oversees the grant of options under the plan and determines the provisions of each option granted, to the extent not specified in the plan.

 

Awards under the Plan

 

The plan only permits the award of nonstatutory stock options.  Stock options granted under the plan are evidenced by agreements that specify the terms and conditions under which they are granted.  All stock options granted under the plan are subject to the terms and conditions contained in the applicable agreement and the plan.

 

Eligibility

 

Stock options are granted to non-employee directors under the plan.  Upon the date of his or her initial election or appointment to the board of directors, each non-employee director is granted an option to purchase 30,000 shares of our common stock.  Further, on the day following each annual meeting of stockholders, each person who is then a non-employee director and has been a non-employee director for at least six months is granted an option to purchase 10,000 shares of our common stock (or 20,000 shares, in the case of the non-employee chairman of our board of directors).  Nine of the ten members of our board of directors are currently eligible to participate in the plan.

 

Shares Subject to the Plan

 

The total number of shares of common stock that may be issued pursuant to stock awards under the Non-Employee Directors’ Stock Option Plan shall not exceed in the aggregate 1,200,000 shares.

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If any stock option expires, lapses, or is terminated or forfeited for any reason, the shares subject to that stock option will continue to be available for the grant of stock options under the plan.  Common stock issued on the exercise of stock options under the plan may be either authorized and unissued shares or reacquired shares.

 

As of March 2, 2009, there were options outstanding under the plan to purchase a total of 504,000 shares of our common stock.  On a pro forma basis to reflect the increase in the number of shares reserved for issuance under the Non-Employee Directors’ Stock Option Plan, 696,000 shares remained available for issuance of new options or awards under the plan at that date.  To date, no shares have been issued upon the exercise of options granted under the plan.

 

Stock Options

 

The stock options granted under the plan are evidenced by agreements that specify the number of shares of our common stock which may be purchased at a certain specified price and contain other terms and conditions, such as vesting and termination provisions.  All stock options granted under the plan are subject to the terms and conditions contained in the applicable stock option agreement and the plan.

 

Vesting and Exercisability

 

Stock options granted under the plan “vest,” or become exercisable, as follows:

 

·

Initial grants of options to purchase 30,000 shares of our common stock provide for vesting of 1/60th of the shares subject to the option each month after grant for five years after the date of grant.

 

·

Annual grants of options to purchase 10,000 shares of our common stock (or 20,000 shares, in the case of the non-employee chairman of our board of directors) provide for vesting of 1/12th of the shares subject to the option each month after grant for twelve months after the date of the grant.

 

Expiration and Termination

 

Stock options granted under the plan have a term of ten years from the date of grant, subject to earlier termination upon the occurrence of certain events.  In no event, however, may a stock option be exercised more than ten years after the date the option is granted.

 

Option Exercise Price

 

Stock options awarded under the plan have an exercise price of 100% of the fair market value of our common stock on the date of grant.  The fair market value of a share of common stock on a particular date is equal to the previous day’s closing sales price (or the closing bid price, if no sales were reported) of the common stock if the common stock is listed on any established stock exchange or traded on the Nasdaq Stock Market.  If there is no regular public trading market for the common stock, the fair market value of the common stock is determined by our board of directors.

 

Consideration for Exercise of Options

 

The consideration to be paid for shares to be issued upon exercise of a stock option, including the method of payment, may be paid, to the extent permitted by law, in any combination of (1) cash, (2) delivery of other shares of our common stock, or (3) by “net exercise” of the stock option.

 

Other Provisions

 

Limits on Transfer of Stock Options

 

In general, non-employee directors may not sell, pledge, assign, transfer or otherwise dispose of any stock options other than (i) by will or the laws of descent or distribution, (ii) in certain circumstances, by instrument to an inter vivos or testamentary trust and (iii) by gift to a member of such non-employee director’s immediate family.

 

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Adjustments on Changes in Capital Structure or on Change of Control

 

If we effect a stock split, reverse stock split, stock dividend, redemption, combination, reclassification or other similar change affecting our capital stock, adjustments reflecting the change will be made in (1) the aggregate number of shares of common stock authorized for issuance under the plan; (2) the number of shares underlying each outstanding stock option; and (3) the exercise price per share subject to each outstanding stock option.

 

If a change in control transaction shall occur, the surviving or acquiring corporation shall assume all stock options or provide or substitute similar stock options.  If the surviving or acquiring corporation refuses to so provide such assumption or substitution, then the vesting of stock options granted under the plan will be accelerated in full and the stock options will subsequently terminate if not exercised.

 

If a change in control transaction shall occur and the surviving or acquiring corporation assumes the stock options granted under the plan, but any non-employee director is not elected or appointed to the board of directors of the surviving or acquiring corporation, then the vesting of that non-employee director’s stock options shall be accelerated by 18 months.

 

Amendment or Termination of the Plan

 

The board of directors may at any time amend, alter, suspend or discontinue the plan but no amendment, alteration, suspension or discontinuation which would impair the rights of a non-employee director under any previous grant may be made without such non-employee director’s consent.

 

Term of the Plan

 

No stock options may be granted under the plan after the day before the tenth (10th) anniversary of the date the plan is adopted by the board of directors or approved by our stockholders, whichever is earlier.

 

United States Federal Income Tax Consequences

 

The following is a brief summary of certain of the federal income tax consequences of certain transactions under the plan based on current federal income tax laws.  This summary is not intended to be exhaustive and does not describe state or local tax consequences.  Additional or different federal tax consequences to the non-employee director or to us may result depending on considerations other than those described below.

 

In general, optionholders will not recognize any taxable income at the time they are granted a nonstatutory stock option.  When an optionholder exercises a nonstatutory stock option, he or she will recognize ordinary income measured by the excess of the then fair market value of the shares over the exercise price and we will be entitled to a deduction for a corresponding amount.  Different rules apply to options that have a “readily ascertainable fair market value,” as that phrase is defined in regulations promulgated under Section 83 of the Internal Revenue Code of 1986.

 

When an optionholder sells or otherwise disposes of shares that were acquired by exercising a nonstatutory stock option, any amount the optionholder receives in excess of the sum of (1) the exercise price of the shares as of the date of exercise and (2) the amount includable in income with respect to such option, if any, such sum being the optionholder’s “basis” in the shares, will, in general, be treated as a long term or short term capital gain, depending on the holding period of the shares.  We are not entitled to any tax deduction in connection with an optionholder’s sale or disposition of the shares.  If an optionholder receives less than his or her basis in the shares, the loss will, in general, be treated as a long term or short term capital loss, depending on the holding period of the shares.

 

The foregoing summary does not constitute a definitive statement of the federal income tax effects of stock options granted under the plan.

 

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PROPOSAL NUMBER 4:

RATIFICATION AND APPROVAL OF INDEPENDENT AUDITORS

 

The board of directors has appointed the firm of Ernst & Young LLP as our independent auditors to make an examination of our accounts for the fiscal year ending December 31, 2009, subject to ratification by our stockholders.  Representatives of Ernst & Young LLP, are expected to be present at the annual meeting, will have an opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

 

The Board of Directors recommends that stockholders vote “FOR” ratification and approval of the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2009.

 

Compensation of Independent Auditors

 

The following table presents the estimated aggregate fees billed and to be billed by Ernst & Young LLP for services performed during our last two fiscal years.

 

				Years Ended December 31,
				2008				2007
	Audit fees(1)			$	336,500			$	446,000
	Audit-related fees(2)				24,000				22,000
	Tax fees				—				—
	All other fees				—				—
				$	360,500			$	468,000

 

(1)

“Audit fees” include professional services rendered for (i) the audit of our internal control over financial reporting, as required by the Sarbanes-Oxley Act of 2002, for the fiscal years ended December 31, 2007 and 2008, (ii) the audit of our annual financial statements for the fiscal years ended December 31, 2007 and 2008, (iii) the reviews of the financial statements included in our quarterly reports on Form 10-Q for such years and (iv) the issuance of consents and other matters relating to registration statements filed by us.

 

(2)

“Audit-related fees” include assurance or related services reasonably related to our audit for the fiscal years ended December 31, 2007 and 2008.  These fees related to the audit of the financial statements of our 401(k) plan and consultation concerning financial accounting and reporting standards.

 

The audit committee reviewed and approved all the fees described above.  As part of its duties, the audit committee has determined that the provision by Ernst & Young LLP of the non-audit services described above is compatible with maintaining the auditors’ independence.

 

Audit Committee Pre-Approval Policies and Procedures

 

The audit committee has adopted policies and procedures requiring the pre-approval of all audit and non-audit services rendered by our independent auditors, either as part of the audit committee’s approval of the scope of the engagement of the independent auditors or on a case-by-case basis before the independent auditors are engaged to provide each service.  The audit committee’s pre-approval authority may be delegated to one or more of its members, but any pre-approval decision must be reported to the full audit committee at its next regularly scheduled meeting.

 

Audit Committee Report

 

The role of the audit committee is to assist the board of directors in its oversight of our financial reporting process.  The audit committee reviews our internal accounting procedures and consults with, and reviews the services provided by, our independent auditors.

 

The management of our company is responsible for the preparation, presentation and integrity of our financial statements, our accounting and financial reporting principles and internal controls and procedures designed to assure compliance with the accounting standards and applicable laws and regulations.  Our independent auditors are responsible for auditing our financial statements and expressing an opinion as to their conformity with generally accepted accounting principles.

 

In the performance of its oversight function, the audit committee has reviewed and discussed the audited financial statements with management.  The committee has also discussed with our independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as currently in effect.  Finally, the committee has received the written disclosures and the letter from our independent auditors required by the applicable requirements of the Public Company Accounting Oversight Board regarding our independent auditors’ communications with the audit committee concerning independence, as currently in effect, and has discussed with our independent auditors their independence.

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Based upon the review and discussions described in this report, and subject to the limitations on the role and responsibilities of the audit committee referred to in the audit committee charter, the audit committee recommended to the board of directors that the audited financial statements be included in our annual report on Form 10-K for the year ended December 31, 2008.

 

Audit Committee

 

Samuel L. Barker, Ph.D. (Chairman)

Frank P. Palantoni

Kathleen M. Wiltsey

The foregoing audit committee report 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 proxy statement 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 this compensation committee report by reference, and shall not otherwise be deemed filed under such acts.

 

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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table presents information regarding the beneficial ownership of our common stock as of February 23, 2009 by:

 

·

each of the individuals listed in “Executive and Director Compensation — Summary Compensation Table”;

 

·

each of our directors;

 

·

each person, or group of affiliated persons, who is known by us to own beneficially five percent or more of our common stock; and

 

·

all current directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission computing the number of shares beneficially owned by a person and the percentage ownership of that person.  Shares of common stock under options held by that person that are currently exercisable or exercisable within 60 days of February 23, 2009 are considered outstanding.  These shares, however, are not considered outstanding when computing the percentage ownership of each other person.

 

Except as indicated in the footnotes to this table and pursuant to state community property laws, each stockholder named in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage of ownership is based on 137,330,254 shares of common stock outstanding on February 23, 2009.  Unless otherwise indicated in the footnotes, the address of each of the individuals named below is: c/o Lexicon Pharmaceuticals, Inc., 8800 Technology Forest Place, The Woodlands, Texas 77381.

 

		Beneficial Ownership
		Number of Shares Beneficially Owned				Shares Issuable Pursuant to Options Exercisable within 60 Days of February 23, 2009				Percentage Ownership
Invus, L.P., Invus Public Equities, L.P. and related parties (1)			55,385,146			─					40.3	%
Royce & Associates, LLC (2)			9,205,777			─					6.7	%
Arthur T. Sands, M.D., Ph.D. (3)			1,663,562				1,912,813				2.6	%
Alan J. Main, Ph.D.			44,800				681,982				*
Jeffrey L. Wade, J.D.			47,800				642,367				*
Brian P. Zambrowicz, Ph.D.			156,800				890,344				*
James F. Tessmer			25,800				98,486				*
Julia P. Gregory (4)			51,983				982,112				*
Samuel L. Barker, Ph.D. (5)			47,000				134,000				*
Philippe J. Amouyal		─					19,500				*
Raymond Debbane (6)			55,385,146				19,500				40.3	%
Robert J. Lefkowitz, M.D.		─					88,000				*
Alan S. Nies, M.D.			5,000				78,500				*
Frank P. Palantoni		─					56,500				*
Christopher J. Sobecki			1,000				19,500				*
Judith L. Swain, M.D.		─					19,500				*
Kathleen M. Wiltsey		─					22,500				*
All directors and executive officers as a group (3)(5)(6) (15 persons)			57,414,408				4,851,421				43.8	%

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* Represents beneficial ownership of less than 1 percent.

 

(1)

Based upon a Schedule 13D filed with the SEC on June 27, 2007, and amended on August 24 and August 29, 2007, and certain representations made to us by Invus, L.P.  Reflects the beneficial ownership of (a) 51,494,038 shares of our common stock by Invus, L.P., Invus Advisors, L.L.C., Ulys, L.L.C. and Raymond Debbane, each of which may be deemed to have sole voting and investment power with respect to such shares, and (b) 3,891,108 shares of our common stock by Invus Public Equities, L.P., Invus Public Equities Advisors, LLC, Ulys, L.L.C. and Mr. Debbane, each of which may be deemed to have sole voting and investment power with respect to such shares.  Such shares are subject to certain voting restrictions pursuant to our stockholders’ agreement with Invus, L.P. described under the heading “Transactions with Related Persons — Arrangements with Invus.”  The address for Invus, L.P., Invus Advisors, L.L.C., Invus Public Equities, L.P., Invus Public Equities Advisors, LLC, Ulys, L.L.C. is 750 Lexington Avenue, 30th Floor, New York, New York 10022.  The address for Mr. Debbane is c/o Ulys, L.L.C., 750 Lexington Avenue, 30th Floor, New York, New York 10022.

 

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(2)	Based upon a Schedule 13G filed with the SEC on January 26, 2009, reflecting the beneficial ownership of our common stock by Royce & Associates, LLC.  The address for Royce & Associates, LLC is 1414 Avenue of the Americas, New York, New York 10019.

 

(3)

The number of shares beneficially owned by Dr. Sands includes 60,000 shares held in the name of minor children and 817,500 shares owned by Sands Associates LP.  The general partners of Sands Associates LP are ATS Associates, L.L.C., owned by Dr. Sands, and MES Associates, L.L.C., owned by Dr. Sands’ wife.

 

(4)	Based on certain representations made to us by Ms. Gregory.  The number of shares beneficially owned by Ms. Gregory includes 4,847 shares held in trusts for the benefit of her children, of which she serves as trustee.

 

(5)	The number of shares beneficially owned by Dr. Barker includes 35,000 shares held in grantor retained annuity trusts for the benefit of his children, of which he serves as trustee.

 

(6)

Based upon a Schedule 13D filed with the SEC on June 27, 2007, and amended on August 24 and August 29, 2007, and certain representations made to us by Mr. Debbane.  Mr. Debbane disclaims beneficial ownership of these shares.  The address for Mr. Debbane is c/o Ulys, L.L.C., 750 Lexington Avenue, 30th Floor, New York, New York 10022.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership of our common stock with the Securities and Exchange Commission.  Directors, executive officers and greater than 10% stockholders are required by Securities and Exchange Commission regulations to furnish us with copies of all such forms that they file.

 

To our knowledge, based solely on our review of the copies of such reports received by us and on written representations by certain reporting persons that no reports on Form 5 were required, we believe that during the fiscal year ended December 31, 2008, all Section 16(a) filing requirements applicable to our executive officers, directors and 10% stockholders were complied with in a timely manner.

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table presents aggregate summary information as of December 31, 2008 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 plans approved by security holders (1)		16,840,404		$	5.1398		5,601,994 (3)(4)(5)
Equity compensation plans not approved by security holders (2)		57,760		2.2631			—
Total		16,898,164		$	5.1300		5,601,994

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(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 5,473,967 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.

 

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(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.

 

 

CORPORATE GOVERNANCE

 

Independence of the Board of Directors

 

After reviewing all relevant transactions and relationships involving each member of the board of directors (and his or her family), the board of directors has affirmatively determined that Samuel L. Barker, Ph.D., Philippe J. Amouyal, Raymond Debbane, Robert J. Lefkowitz, M.D., Alan S. Nies, M.D., Frank P. Palantoni, Christopher J. Sobecki, Judith L. Swain, M.D. and Kathleen M. Wiltsey, which members constitute a majority of the board of directors, are “independent” in accordance with the applicable listing standards of The Nasdaq Stock Market, Inc.

 

In making such determinations, the board of directors considered our consulting agreements with Robert J. Lefkowitz, M.D., under which Dr. Lefkowitz serves as a consultant to us on matters relating to our drug discovery and development efforts, and with Alan S. Nies, M.D., under which Dr. Nies serves as chairman of our medical advisory board.

 

Board Committees

 

Audit Committee.  Our audit committee has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 and monitors the integrity of our financial statements, reviews our internal accounting procedures and oversees the qualifications, independence and performance of our independent auditors.  The audit committee operates pursuant to a charter that was last amended and restated by the board of directors on October 26, 2005, a copy of which appears on our website at www.lexpharma.com under the caption “Investors — Corporate Governance.”

 

The current members of our audit committee are Samuel L. Barker, Ph.D. (chair), Frank P. Palantoni and Kathleen M. Wiltsey.  The board of directors, in its business judgment, has determined that Dr. Barker, Mr. Palantoni and Ms. Wiltsey are “independent” in accordance with the applicable listing standards of The Nasdaq Stock Market, Inc.  The board of directors, in its business judgment, has also determined that Samuel L. Barker, Ph.D. is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.

 

Compensation Committee.  Our compensation committee evaluates the performance of management, determines the compensation of our executive officers and reviews general policy relating to compensation and benefits of our employees.  The compensation committee also administers the issuance of stock options and other awards under our 2000 Equity Incentive Plan.  The compensation committee operates pursuant to a charter that was approved by the board of directors on February 11, 2004, a copy of which appears on our website at www.lexpharma.com under the caption “Investors — Corporate Governance.”

 

The compensation committee may delegate any of its authority to subcommittees consisting of one or more compensation committee members, with all subcommittee decisions being presented to the full compensation committee at its next scheduled meeting.  The compensation committee did not delegate any such authority with respect to 2008 compensation matters.  The compensation committee may retain compensation consultants or other advisors to assist in its evaluation of executive compensation.  Although the compensation committee has engaged consultants to advise the committee on matters relating to executive compensation in prior years, the compensation committee did not engage any consultants with respect to 2008 compensation matters.

 

The compensation committee meets in connection with most regularly scheduled meetings of the board of directors, and on at least two occasions after the commencement of each year specifically devoted to making compensation decisions regarding the year just ended.  In preparation for such decisions, our president and chief executive officer reviews the performance of executive officers other than himself and, in consultation with the compensation committee and at its direction, makes certain recommendations to the compensation committee relating to their compensation.  The compensation committee reviews such recommendations and makes changes to such recommendations as it deems appropriate.  All executive compensation determinations are made by the compensation committee in the absence of management.

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The current members of our compensation committee are Mr. Palantoni (chair), Philippe J. Amouyal and Alan S. Nies, M.D.  The board of directors, in its business judgment, has determined that Mr. Palantoni, Mr. Amouyal and Dr. Nies are “independent” in accordance with the applicable listing standards of The Nasdaq Stock Market, Inc.  In making such determinations, the board of directors considered our consulting agreement with Dr. Nies described under the heading “Corporate Governance — Independence of the Board of Directors.”

 

Corporate Governance Committee.  Our corporate governance committee identifies individuals qualified to become members of our board of directors, selects candidates or nominees for director positions to be filled by the board of directors or our stockholders and develops appropriate corporate governance principles.  The corporate governance committee operates pursuant to a charter that was approved by the board of directors on February 11, 2004, a copy of which appears on our website at www.lexpharma.com under the caption “Investors — Corporate Governance.”

 

The corporate governance committee has not established any specific minimum qualifications for membership on our board of directors.  Rather, the committee will generally consider all relevant factors, which may include independence, experience, diversity, leadership qualities and strength of character.  The corporate governance committee uses its available network of contacts when compiling a list of potential director candidates and may also engage outside consultants when appropriate.  The committee also considers potential director candidates recommended by stockholders and other parties and all potential director candidates are evaluated based on the above criteria.  Because the corporate governance committee makes no distinction in its evaluation of candidates based on whether such candidates are recommended by stockholders or other parties, no formal policy or procedure has been established for the consideration of director candidates recommended by stockholders.

 

Any stockholder wishing to propose a potential director candidate may submit a recommendation in writing within the time frame specified in our bylaws.  All such communications should be sent to 8800 Technology Forest Place, The Woodlands, Texas 77381, Attn:  Corporate Governance Committee.  Submissions should include the full name of the proposed candidate and a detailed description of the candidate’s qualifications, business experience and other relevant biographical information.

 

The current members of our corporate governance committee are Raymond Debbane (chair), Robert J. Lefkowitz, M.D. and Judith L. Swain, M.D.  The board of directors, in its business judgment, has determined that Mr. Debbane, Dr. Lefkowitz and Dr. Swain are “independent” in accordance with the applicable listing standards of The Nasdaq Stock Market, Inc.  In making such determinations, the board of directors considered our consulting agreement with Dr. Lefkowitz described under the heading “Corporate Governance — Independence of the Board of Directors.”

 

Board and Committee Meetings and Attendance in 2008

 

The board of directors met six times in 2008 and took certain additional actions by unanimous written consent.  The audit committee met seven times in 2008.  The compensation committee met six times in 2008 and took certain additional actions by unanimous written consent.  The corporate governance committee met two times in 2008.  During 2008, none of our directors attended fewer than 75 percent of the aggregate number of meetings of the board of directors and committees during the period served.

 

It is our policy to encourage the members of our board of directors to attend all annual meetings of stockholders.  Nine members of our board of directors attended our 2008 annual meeting of stockholders.

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our directors, officers and employees, the text of which appears on our website at www.lexpharma.com under the caption “Investors — Corporate Governance.”  We intend to disclose on our website the nature of any amendment to or waiver from our code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions within four business days following the date of such amendment or waiver.  In the case of any such waiver, including an implicit waiver, we also intend to disclose the name of the person to whom the waiver was granted and the date of the waiver.  To date, we have not granted any waivers under our code of business conduct and ethics.

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Corporate Governance Guidelines

 

We have adopted corporate governance guidelines, including, among other things, guidelines with respect to the structure of our board of directors, director selection and qualifications, and non-employee director compensation.  The text of our corporate governance guidelines appears on our website at www.lexpharma.com under the caption “Investors — Corporate Governance.”

 

Stockholder Communications with the Board of Directors

 

We believe that our stockholders are currently provided a reasonable means to communicate with our board of directors and individual directors.  As a result, our board of directors has not established a formal process for stockholders to send communications to the board of directors or individual directors.  However, the corporate governance committee will consider, from time to time, whether adoption of a formal process for such stockholder communications has become necessary or appropriate.  Stockholders may send communications to the board of directors or individual directors by mail at 8800 Technology Forest Place, The Woodlands, Texas 77381, Attn: Board of Directors or any individual director.

 

Compensation Committee Interlocks and Insider Participation

 

During 2008, Frank P. Palantoni, Philippe J. Amouyal and Alan S. Nies, M.D. served as members of the compensation committee of our board of directors.  Mr. Amouyal is a designee of Invus, L.P. pursuant to our stockholders’ agreement with Invus described under the heading “Transactions with Related Persons — Arrangements with Invus.”  During 2008, none of our executive officers served as a member of the board of directors or compensation committee of another entity, one of whose executive officers served as a member of our board of directors or compensation committee.

 

 

TRANSACTIONS WITH RELATED PERSONS

 

Arrangements with Invus

 

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 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.

 

Board of Directors.  Concurrently with the execution of the securities purchase agreement, we entered into a stockholders’ agreement with Invus under which Invus has 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, and pursuant to which Invus has designated Philippe J. Amouyal, Raymond Debbane and Christopher J. Sobecki.  Mr. Debbane is president and chief executive officer of The Invus Group, LLC, an affiliate of Invus, and Mr. Amouyal and Mr. Sobecki are each managing directors of The Invus Group, LLC.

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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 10%.  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).