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XOMA > SEC Filings for XOMA > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for XOMA CORP


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

We are a leader in the discovery and development of innovative antibody-based therapeutics. Our lead drug candidate is gevokizumab (formerly XOMA 052), a humanized monoclonal allosteric modulating antibody designed to inhibit the pro-inflammatory cytokine interleukin-1 beta ("IL-1 beta"), which is believed to be a primary trigger of pathologic inflammation in multiple diseases. We have entered into a license and collaboration agreement with Les Laboratoires Servier ("Servier") to jointly develop and commercialize gevokizumab in multiple indications. In collaboration with our partner, Servier, we have launched the global Phase 3 gevokizumab clinical development program for active and controlled non-infectious ("NIU") and Behçet's uveitis. We are screening and enrolling patients in these three separate studies. We anticipate that Servier will launch a Phase 2 proof-of-concept study for gevokizumab in a cardiovascular disease indication during 2012. Separately, we have launched a Phase 2 proof-of-concept program for gevokizumab to evaluate additional indications, including a clinical trial in moderate-to-severe inflammatory acne, which began enrolling patients in December 2011, and a clinical trial in erosive osteoarthritis ("EOA") of the hand, which was opened for enrollment in June 2012. We anticipate initiating a proof-of-concept study evaluating gevokizumab in a third indication in the fourth quarter of 2012.

Our proprietary preclinical pipeline includes classes of antibodies that activate or sensitize the insulin receptor in vivo, named XMet, and represent potential new therapeutic approaches to the treatment of diabetes and several diseases that have insulin involvement and that we believe may be orphan drug opportunities. We have developed these and other antibodies using some or all of our ADAPT™ antibody discovery and development platform, our ModulX™ technologies for generating allosterically modulating antibodies, and our OptimX™ technologies for optimizing biophysical properties of antibodies, including affinity, immunogenicity, stability and manufacturability.

Our biodefense initiatives include XOMA 3AB, a biodefense anti-botulism product candidate comprising a combination of three antibodies, which is directed against stereotype A was developed through funding from the National Institute of Allergy and Infectious Diseases ("NIAID") of the U.S. National Institutes of Health ("NIH"). Enrollment and dosing of all cohorts has been completed in a Phase 1 clinical trial sponsored by NIAID. In January 2012, we announced we will complete NIAID biodefense contracts currently in place but will not actively pursue future contracts. Should the government choose to acquire XOMA 3AB or other biodefense products in the future, we expect to be able to provide these antibodies through an outside manufacturer.

We also have developed antibody product candidates with premier pharmaceutical companies including Novartis AG ("Novartis") and Takeda Pharmaceutical Company Limited ("Takeda"). Two antibodies developed with Novartis, LFA102 and HCD122 (lucatumumab), are in Phase 1 and/or Phase 2 clinical development by Novartis for the potential treatment of breast or prostate cancer and hematological malignancies, respectively.


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In January 2012, we announced we had acquired certain U.S. rights to a portfolio of antihypertensive products from Servier. The portfolio includes ACEON® (perindopril erbumine), a currently marketed angiotensin converting enzyme ("ACE") inhibitor, and three fixed-dose combination ("FDC") product candidates where perindopril is combined with another active ingredient(s). The last to expire proprietary form of perindopril in each FDC product candidate provides patent protection until April 2023. We assumed commercialization activities for ACEON in January 2012. In late February 2012, we initiated enrollment in a Phase 3 trial for perindopril arginine and amlodipine besylate, the first FDC product candidate ("FDC1"). If this trial generates positive results, we expect it to be the only efficacy trial needed to complement the existing body of clinical data to support the submission of a New Drug Application to the FDA seeking marketing approval for FDC1. Partial funding for the Phase 3 trial was to be provided by Servier; the balance of study expenses, consisting primarily of costs generated by our contract research organization, we expect to pay over time from the profits generated by our ACEON sales.

Significant Developments in the First Nine Months of 2012

Gevokizumab

? In June 2012, we initiated enrollment in a global Phase 3 study investigating the ability of gevokizumab to reduce the signs and symptoms, including vitreous haze, in patients with NIU involving the intermediate and/or posterior segment of the eye. The study is titled A randomisEd, double-masked, placebo-controlled studY of the safety and Efficacy of GevokizUmAb in the tReatment of subjects with active non-infectious intermeDiate, posterior or pan-uveitis (EYEGUARD™-A). We intend to enroll patients with active non-infectious intermediate, posterior, or pan-uveitis with a vitreous haze score equal to or greater than 2+ on the Standardization of Uveitis Nomenclature / National Eye Institute scale in at least one eye. They will be randomized to receive either one of two monthly doses of gevokizumab or placebo. The study's primary endpoint is the proportion of patients demonstrating a significant reduction in vitreous haze score on Day 56.

? In June 2012, we initiated a Phase 2 proof-of-concept study to evaluate the efficacy and safety of gevokizumab for the treatment of active inflammatory, EOA of the hand. Approximately 90 patients will be randomized to receive gevokizumab or placebo. The study is designed and powered to detect a significant improvement from baseline versus placebo in the mean Australian/Canadian Hand Osteoarthritis Index pain score in the target hand at three months.

? In August 2012, we and Servier entered into an agreement with Boehringer Ingelheim to transfer our technology and process for the commercial manufacture of gevokizumab. Upon completion of the transfer and the establishment of biological comparability, we expect Boehringer Ingelheim to produce gevokizumab at its facility in Biberach, Germany, for our commercial use and use in Phase 3 clinical trials. We and Servier retain all rights to the development and commercialization of gevokizumab.

? In August 2012, we obtained FDA orphan drug status for gevokizumab in the treatment of non-infectious intermediate, posterior, or pan-uveitis, or chronic non-infectious anterior uveitis.

? In September 2012, we announced that Servier has received authorization to initiate the Servier-sponsored Behçet's uveitis Phase 3 clinical trial in several European countries. The study is titled A randomisEd, double-masked, placebo-controlled studY of the Efficacy of GevokizUmAb in the tReatment of patients with Behçet's Disease uveitis (EYEGUARD™-B). The objective of this study is to evaluate the efficacy of gevokizumab as compared to placebo on top of current standard of care (immunosuppressive therapy and oral corticosteroids) in reducing the risk of Behçet's disease uveitis exacerbations and to assess the safety of gevokizumab.

Perindopril Franchise

? On January 17, 2012, we announced that we had acquired certain U.S. rights to a portfolio of antihypertensive products from Servier. The portfolio includes ACEON, a currently marketed ACE inhibitor, and three FDC product candidates where a proprietary form of perindopril (perindopril arginine) is combined with other active ingredient(s). We assumed commercialization activities for ACEON in January 2012 following the license transfer from Servier's previous licensee and began shipping XOMA-labeled ACEON to pharmaceutical wholesalers in the second quarter of 2012.


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? In February 2012, we initiated enrollment in a Phase 3 trial for FDC1. We expect the trial to enroll approximately 816 patients with hypertension to determine the safety and efficacy of FDC1 versus either perindopril or amlodipine alone. Based on regulatory interaction to date, if the trial generates positive results, we expect it to be the only efficacy trial needed to complement the existing body of clinical data to support the submission of a New Drug Application to the FDA seeking marketing approval for FDC1. Partial funding for the PATH trial was provided by Servier; the balance of study expenses, consisting primarily of costs generated by our contract research organization, we expect to pay over time from the profits generated by our ACEON sales.

Streamlining and Restructuring Charges

· On January 5, 2012, we implemented a streamlining of operations, which resulted in a restructuring designed to sharpen our focus on value-creating opportunities led by gevokizumab and our unique antibody discovery and development capabilities. The restructuring plan included a reduction of our personnel by 84 positions, or 34%, of which 52 were eliminated immediately and the remainder eliminated as of April 6, 2012. These staff reductions resulted primarily from our decisions to utilize a contract manufacturing organization for Phase 3 and commercial antibody production and to eliminate internal research functions that are non-differentiating or that can be obtained cost effectively by contract service providers. As a result, we expect to reduce ongoing internal spending by approximately $14 million in 2012 compared to the 2011 level. In connection with the streamlining of operations, we incurred restructuring charges in the first nine months of 2012 of $2.0 million related to severance, other termination benefits and outplacement services, $2.2 million related to the impairment and accelerated depreciation of various assets and leasehold improvements, and $0.7 million related to moving and other facility charges.

Management Change

? On January 4, 2012, the Company's Board of Directors appointed John Varian, a current Board member and the then interim Chief Executive Officer, as Chief Executive Officer. W. Denman Van Ness continues to serve as Chairman of the Board.

? Effective August 31, 2012, the Company's Board of Directors accepted the retirement of Christopher J. Margolin as Vice President, General Counsel and Secretary. Mr. Margolin's retirement comes as a result of our determination to restructure our legal services function and outsource much of that function to outside legal counsel, in lieu of an internal general counsel. Going forward, our legal function will be managed by Fred Kurland, our Vice President, Finance and Chief Financial Officer and Secretary, with the assistance of outside legal counsel.

Financings

? In the first quarter of 2012, we sold 2,285,375 shares of common stock through McNicoll, Lewis & Vlak LLC (now known as MLV & Co. LLC, "MLV"), under our At Market Issuance Sales Agreement dated February 4, 2011 (the "2011 ATM Agreement"), for aggregate gross proceeds of $3.3 million.

? In March 2012, we completed an underwritten public offering of 29,669,154 shares of our common stock, and accompanying warrants to purchase a total of 14,834,577 shares of our common stock, for gross proceeds of $39.2 million.

? In September 2012, we entered into an amendment to our existing loan agreement with General Electric Capital Corporation ("GECC") providing for an additional term loan of $4.6 million, increasing the aggregate loan obligation to $12.5 million. The loan obligation accrues interest at a fixed rate of 10.9% and the loan amendment provides for a six month interest-only repayment period. The loan obligation will be repaid over a 27-month period commencing on April 1, 2013. The loan obligation matures on June 15, 2015, at which time the remaining principal amount of $3.1 million, plus accrued interest and a final payment fee equal to 7% of the loan obligation will be due.

? In connection with the September 2012 loan amendment, we issued to GECC unregistered stock purchase warrants, which entitle GECC to purchase up to an aggregate of 39,346 unregistered shares of XOMA common stock at an exercise price of $3.54 per share. These warrants are immediately exercisable and have a five year term.

Results of Operations

Revenues

Total revenues for the three and nine months ended September 30, 2012 and 2011,
were as follows (in thousands):


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                               Three Months Ended September 30,                   Nine Months Ended September 30,
                                                           Increase                                          Increase
                           2012             2011          (Decrease)          2012             2011         (Decrease)
License and
collaborative fees      $    1,127       $     4,859     $      (3,732 )   $     4,665       $  16,725     $     (12,060 )
Contract and other           5,905            11,370            (5,465 )        20,930          31,624           (10,694 )
Product sales                  219                 -               219             795               -               795
Total revenues          $    7,251       $    16,229     $      (8,978 )   $    26,390       $  48,349     $     (21,959 )

License and Collaborative Fees

License and collaborative fee revenue includes fees and milestone payments related to the out-licensing of our products and technologies. The decreases in license and collaborative fee revenue for the three and nine months ended September 30, 2012, as compared to the same periods in 2011, was primarily due to $3.9 million and $14.9 million in revenue recognized in the three and nine months ended September 30, 2011, respectively, related to the collaboration and license agreement with Servier to jointly develop and commercialize gevokizumab in multiple indications. These decreases were partially offset by increases in other licensing fees of $0.2 million and $2.8 million in the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011. The generation of future revenue related to license fees and other collaborative arrangements is dependent on our ability to attract new licensees to our antibody technologies and new collaboration partners. We expect our revenues from license and collaborative fees in last quarter of 2012 to decrease compared to the same period in 2011.

Contract and Other Revenue

Contract and other revenues include agreements where we provide contracted
research and development services to our contract and collaboration partners,
including Servier and NIAID. The following table shows the activity in contract
and other revenue for the three and nine months ended September 30, 2012 and
2011 (in thousands):

                        Three Months Ended September 30,                   Nine Months Ended September 30,
                                                    Increase                                          Increase
                    2012             2011          (Decrease)          2012             2011         (Decrease)
Servier          $    3,461       $     5,916     $      (2,455 )   $    10,715       $  12,590     $      (1,875 )
NIAID                 2,074             5,069            (2,995 )         9,106          17,321            (8,215 )
Other                   370               385               (15 )         1,109           1,713              (604 )
Total contract
and other        $    5,905       $    11,370     $      (5,465 )   $    20,930       $  31,624     $     (10,694 )

The decreases for the three and nine months ended September 30, 2012, as compared to the same periods in 2011, was primarily due to decreased activity under NIAID Contract No. HHSN272200800028C ("NIAID 3"). These decreases of $3.8 million and $12.1 million in NIAID 3 contract revenue for the three and nine months ended September 30, 2012, respectively, are partially offset by the recognition of $2.0 million in revenue in the first quarter of 2012 related to an adjustment to previously reported revenue from NIAID resulting from an audit by NIAID's contracting office. This revenue, which was previously deferred, was recognized upon the completion of negotiations with and approval by the NIH in March 2012. Also partially offsetting the decreases in NIAID revenue was activity under Contract No. HHSN272201100031C ("NIAID 4") of $0.8 million and $1.8 million in the three and nine months ended September 30, 2012, respectively. The NIAID 4 contract was executed in October 2011.

In addition, a reduction in CMC activity under the collaboration with Servier contributed to the decrease in contract and other revenue for the three and nine months ended September 30, 2012, as compared to the same periods in 2011, partially offset by the recognition of partial funding received from Servier for the FDC1 Phase 3 trial and an increase in gevokizumab clinical development activity under the collaboration with Servier.

Based on expected levels of revenue generating activities related to contract and other revenue, we expect a decrease in contract and other revenue in the last quarter of 2012 compared to the same period in 2011.

Net Product Sales

We assumed product sales of ACEON in the first quarter of 2012. Net product sales, cost of sales, and product gross margin for the three and nine months ended September 30, 2012 were as follows (in thousands):


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                            Three Months Ended September 30,                           Nine Months Ended September 30,
                                                            Increase                                                   Increase
                    2012                2011               (Decrease)          2012                2011               (Decrease)
Net product
sales (1)                219                   -                    219             795                   -                    795
Cost of sales
(2)                       28                   -                     28             110                   -                    110
Product gross
margin                    87 %                                                       86 %

(1) Product sales are recorded net of allowances and accruals for prompt pay discounts, volume rebates and product returns.
(2) Cost of sales includes raw materials, third-party manufacturing and production costs, and royalties payable to Servier for ACEON® sales.

Research and Development Expenses

Biopharmaceutical development includes a series of steps, including in vitro and in vivo preclinical testing, and Phase 1, 2 and 3 clinical studies in humans. Each of these steps is typically more expensive than the previous step, but actual timing and the cost to us depends on the product being tested, the nature of the potential disease indication and the terms of any collaborative or development arrangements with other companies or entities. After successful conclusion of all of these steps, regulatory filings for approval to market the products must be completed, including approval of manufacturing processes and facilities for the product. Our research and development expenses currently include costs of personnel, supplies, facilities and equipment, consultants, third-party costs and other expenses related to preclinical and clinical testing.

Research and development expenses were $18.4 million and $52.6 million for the three and nine months ended September 30, 2012, respectively, as compared with $15.9 million and $51.5 million for the same periods in 2011. The increases of $2.5 million and $1.1 million for the three and nine months ended September 30, 2012, as compared to the same periods in 2011, was primarily due to increases in clinical trial costs, partially offset by decreases in salaries and related personnel costs.

Salaries and related personnel costs are a significant component of research and development expenses. We recorded $6.8 million and $19.8 million in research and development salaries and employee-related expenses for the three and nine months ended September 30, 2012, respectively, as compared with $7.9 million and $25.5 million for the same periods in 2011. The decrease of $1.1 million for the three months ended September 30, 2012, as compared to the same period in 2011, was primarily due to a decrease in salaries and benefits of $2.0 million resulting from decreased headcount in manufacturing as result of the 2012 streamlining of operations, partially offset by a $0.8 million increase in stock-based compensation. The decrease of $5.7 million for the nine months ended September 30, 2012, as compared to the same period in 2011, was primarily due to a decrease in salaries and benefits of $5.1 million resulting from decreased headcount in manufacturing as result of the 2012 streamlining of operations, and a $0.4 million decrease in stock-based compensation.

Our research and development activities can be divided into earlier stage programs and later stage programs. Earlier stage programs include molecular biology, process development, pilot-scale production and preclinical testing. Also included in earlier stage programs are costs related to excess manufacturing capacity, which we expect will decrease in the last quarter of 2012 compared to the same period of 2011 due to our streamlining objectives to utilize a contract manufacturing organization and the sublease of our leased facilities, which housed our large scale manufacturing operations and associated quality functions. Later stage programs include clinical testing, regulatory affairs and manufacturing clinical supplies. The costs associated with these programs approximate the following (in thousands):

                                      Three Months Ended September 30,           Nine Months Ended September 30,
                                         2012                  2011                2012                  2011
Earlier stage programs (1)          $         8,941       $         7,957     $        27,010       $        30,291
Later stage programs (1)                      9,441                 7,894              25,583                21,188
Total                               $        18,381       $        15,851     $        52,592       $        51,479

(1) Certain research and development segment reclassifications have been made to previously reported amounts to conform to the current year's presentation.

Our research and development activities can also be divided into those related to our internal projects and those projects related to collaborative and contract arrangements. The costs related to internal projects versus collaborative and contract arrangements approximate the following (in thousands):


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                                                Three Months Ended September 30,           Nine Months Ended September 30,
                                                   2012                  2011                2012                  2011
Internal projects (1)                         $         8,413       $         5,599     $        23,810       $        20,278
Collaborative and contract arrangements (1)             9,968                10,252              28,782                31,201
Total                                         $        18,381       $        15,851     $        52,592       $        51,479

(1) Certain research and development segment reclassifications have been made to previously reported amounts to conform to the current year's presentation.

For the three and nine months ended September 30, 2012, the program upon which we incurred the largest amount of expense (gevokizumab) accounted for more than 40% but less than 50% of our total research and development expenses, a second development program (NIAID) accounted for more than 20% but less than 30% of our total research and development expenses, and a third development program (XMet) accounted for more than 10% but less than 20% of our total research and development expenses. All remaining development programs accounted for less than 10% of our total research and development expenses for the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2011, the programs upon which we incurred the largest amount of expenses (gevokizumab and NIAID) accounted for more than 30% but less than 40%, and a third development program (XMET) accounted for more than 10% but less than 20% of our total research and development expenses. All remaining development programs accounted for less than 10% of our total research and development . . .

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