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XOMA > SEC Filings for XOMA > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for XOMA CORP


8-May-2013

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, 2012.

Overview

We are a leader in the discovery and development of innovative antibody-based therapeutics. Our lead drug candidate, gevokizumab (formerly XOMA 052), is a potent humanized monoclonal antibody with unique allosteric modulating properties. Gevokizumab binds to the 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 develop and commercialize gevokizumab in multiple indications. In collaboration with Servier, we have launched the global Phase 3 gevokizumab clinical development program for active and controlled non-infectious uveitis ("NIU") involving the intermediate and/or posterior segment of the eye, and Behçet's uveitis. XOMA is conducting both of the NIU studies, and Servier is sponsoring the study in Behçet's uveitis. The study sites are screening and enrolling patients in these distinct studies.

Separately, we launched a Phase 2 proof-of-concept program for gevokizumab to evaluate additional indications for further development, including a clinical trial in moderate-to-severe inflammatory acne, for which we reported encouraging preliminary top-line results in January 2013; a clinical trial in erosive osteoarthritis of the hand, which was opened for enrollment in June 2012; and a clinical trial in scleritis that is being conducted by the National Eye Institute ("NEI"), a part of the U.S. National Institutes of Health ("NIH"). Servier is expected to institute its own proof-of-concept program for gevokizumab in indications different from ours. In November 2012, Servier began a Phase 2 study to determine gevokizumab's potential to decrease plaque inflammation in patients with atherosclerosis.

Our proprietary preclinical pipeline includes classes of antibodies that activate, sensitize or deactivate the insulin receptor in vivo, which we have named XMet. This portfolio of antibodies represents potential new therapeutic approaches to the treatment of diabetes and several diseases that have insulin involvement, which 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.


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Our biodefense initiatives include XOMA 3AB, a biodefense anti-botulism product candidate comprised of a combination of three antibodies. XOMA 3AB is directed against botulinum toxin serotype A and has been developed through funding from the National Institute of Allergy and Infectious Diseases ("NIAID"), a part of the NIH. All volunteers have been enrolled and dosed with XOMA 3AB 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 produce 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.

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 November 2012, we announced the 837-patient Phase 3 trial for the FDC of perindopril arginine and amlodipine besylate ("FDC1") met its primary endpoint. Partial funding for the trial was provided by Servier. We expect to pay the balance of study expenses, consisting primarily of costs generated by our contract research organization, from the profits generated by our ACEON sales. We are working to identify a third-party organization that could sublicense this FDC and move it forward toward commercialization in the U.S. market.

Significant Developments in the First Quarter of 2013

Gevokizumab

· In January 2013, we announced encouraging preliminary top-line data from an interim analysis of our Phase 2 proof-of-concept study to evaluate the safety and efficacy of gevokizumab for the treatment of moderate-to-severe inflammatory acne. Preliminary data from the 125-patient trial demonstrated clear activity according to the Investigator's Global Assessment ("IGA") parameter. Gevokizumab was well-tolerated in this trial, with no significant differences in adverse events between gevokizumab and placebo and no serious drug-related adverse events were reported.

Management Addition

· On March 18, 2013, the Company announced Tom Klein has joined the Company as Vice President, Chief Commercial Officer, a newly created position reporting to John Varian, Chief Executive Officer.

Results of Operations

Revenues

Total revenues for the three months ended March 31, 2013 and 2012, were as
follows (in thousands):

                                             Three Months Ended March 31,
                                    2013             2012         Increase (Decrease)
License and collaborative fees   $      399       $    1,014     $                (615 )
Contract and other                    8,796            8,844                       (48 )
Product sales                           258                7                       251
Total revenues                   $    9,453       $    9,865     $                (412 )


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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 decrease in license and collaborative fee revenue for the three months ended March 31, 2013, as compared to the same period of 2012, was due primarily a $0.6 million decrease in licensing fees. 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 a slight decrease in license and collaboration fee revenue in 2013 compared to 2012 levels.

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 months ended March 31, 2013 and 2012 (in
thousands):

                                 Three Months Ended March 31,
                                                          Increase
                              2013           2012        (Decrease)
Servier                    $    7,027       $ 3,649     $      3,378
NIAID                           1,695         4,837           (3,142 )
Other                              74           358             (284 )
Total contract and other   $    8,796       $ 8,844     $        (48 )

The increase in revenue from Servier is due primarily to an increase in reimbursable clinical development activity under our agreements with Servier. The increase in clinical development activity is partially offset by a decrease in NIAID revenue due primarily to decreased activity under NIAID Contract No. HHSN272200800028C ("NIAID 3") and the recognition of $2.0 million in revenue during 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.

Based on expected levels of revenue generating activity related to our Servier and NIAID contracts, we expect contract and other revenue in 2013 to be comparable to 2012 levels.

Net Product Sales

Net product sales, cost of sales, and product gross margin for the three months
ended March 31, 2013 were as follows (in thousands):

                               Three Months Ended March 31,
                                                        Increase
                          2013           2012          (Decrease)
Net product sales (1)         258             7                251
Cost of sales (2)              46             -                 46
Product gross margin           82 %          93 %

(1) Product sales are recorded net of 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.


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Research and development expenses were $16.6 million for the three months ended March 31, 2013, compared with $15.8 million for the same period of 2012. The increase of $0.8 million for the three months ended March 31, 2013, as compared to the same period in 2012, was due primarily to a $0.6 million increase in stock-based compensation costs. Also contributing to the increase was an increase in external manufacturing costs largely offset by a decrease in internal facility costs due to the 2012 streamlining of operations.

Salaries and related personnel costs are a significant component of research and development expenses. We recorded $7.6 million in research and development salaries and employee-related expenses for the three months ended March 31, 2013, as compared with $7.0 million for the same period of 2012. The increase of $0.6 million was due primarily to a $0.6 million increase 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, of which we expect to further decrease in 2013 due to our streamlining objective to utilize a contract manufacturing organization, which was implemented in 2012. 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 March 31,
                                           2013                 2012
             Earlier stage programs   $        9,217       $        8,333
             Later stage programs              7,373                7,438
             Total                    $       16,590       $       15,771

Our research and development activities also can 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):

                                                 Three Months Ended March 31,
                                                   2013                 2012
    Internal projects                         $        9,825       $        6,682
    Collaborative and contract arrangements            6,765                9,089
    Total                                     $       16,590       $       15,771

For the three months ended March 31, 2013, the gevokizumab program, for which we incurred the largest amount of expense, accounted for more than 40% but less than 50% of our total research and development expenses. A second development program, XMet, accounted for more than 20% but less than 30% of our total research and development expenses and a third development program, NIAID, 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 months ended March 31, 2013. For the three months ended March 31, 2012, the gevokizumab program, for which we incurred the largest amount of expense, 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 months ended March 31, 2012.

We expect our research and development spending in 2013 will increase due primarily to our ongoing global Phase 3 clinical program for gevokizumab for the NIU indications, under our license and collaboration agreement with Servier, and our ongoing Phase 2 proof-of-concept program.

Future research and development spending also may be impacted by potential new licensing or collaboration arrangements, as well as the termination of existing agreements. Beyond this, the scope and magnitude of future research and development expenses are difficult to predict at this time.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses include salaries and related personnel costs, facilities costs and professional fees. Selling, general and administrative expenses were $4.1 million for the three months ended March 31, 2013, compared with $4.7 million for the same period of 2012. The $0.6 million decrease for the first quarter of 2013, as compared to the same period of 2012, was due primarily to a $0.9 million decrease in professional services cost, partially offset by a $0.3 million increase in stock-based compensation.

Streamlining and Restructuring Charges

In January 2012, we implemented a streamlining of operations, which resulted in a restructuring plan designed to sharpen our focus on value-creating opportunities led by gevokizumab and its unique antibody discovery and development capabilities. The restructuring plan included a reduction of XOMA's 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 decision 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.

In connection with the streamlining of operations, we incurred restructuring charges in the first quarter of 2012 of $2.1 million related to severance, other termination benefits and outplacement services and $1.7 million related to the impairment and accelerated depreciation of various assets and leasehold improvements. We do not expect to incur additional significant restructuring charges during 2013 related to these streamlining activities.

Other Income (Expense)

Interest Expense

Interest expense and amortization of debt issuance costs and discounts are shown
below the three months ended March 31, 2013 and 2012 (in thousands):

                                 Three Months Ended March 31,
                                                           Increase
                            2013             2012         (Decrease)
Interest expense
GECC term loan           $      545       $      417     $        128
Servier loan                    525              516                9
Novartis note                    91               99               (8 )
Other                            11               10                1
Total interest expense   $    1,172       $    1,042     $        130

The increase of $0.1 million in interest expense in 2013 as compared to 2012 was due primarily to an increase in interest expense under the GECC term loan, amended in September 2012.

Other Expense

Other expense primarily consisted of unrealized and realized (losses) gains. The following table shows the activity in other expense for the three months ended March 31, 2013 and 2012 (in thousands):


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                                                     Three Months Ended March 31,
                                                                              Increase
                                                2013            2012         (Decrease)
Other income (expense)
Unrealized foreign exchange gain (loss) (1)   $     515       $    (402 )   $        917
Unrealized loss on foreign exchange options        (189 )          (276 )             87
Other                                               123              14              109
Total other income (expense)                  $     449       $    (664 )   $      1,113

(1) Unrealized foreign exchange gain (loss) for the three months ended March 31, 2013 and 2012 primarily relates to the re-measurement of the €15 million Servier loan.

Revaluation of Contingent Warrant Liabilities

In March 2012, in connection with an underwritten offering, we issued five-year warrants to purchase 14,834,577 shares of XOMA's common stock at an exercise price of $1.76 per share. These warrants contain provisions that are contingent on the remote occurrence of a change in control, which would conditionally obligate us to repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Option Pricing Model (the "Black-Scholes Model") on the date of such change in control. We believe the likelihood of a change in control prior to the expiration of the warrants is remote; however, due to these provisions, we are required to account for the warrants issued in March 2012 as a liability at fair value. In addition, the estimated liability related to the warrants is required to be revalued at each reporting period until the earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders' equity, or expiration of the warrants. At December 31, 2012, the fair value of the warrant liability was estimated to be $15.0 million using the Black-Scholes Model. We revalued the warrant liability at March 31, 2013 using the Black-Scholes Model and recorded the $12.8 million increase in the fair value as a loss in the revaluation of contingent warrant liabilities line of our condensed consolidated statements of comprehensive loss. As of March 31, 2013, 14,265,970 of these warrants were outstanding and had a fair value of $27.8 million. This increase in liability is due primarily to the increase in the market value of our common stock at March 31, 2013 compared to December 31, 2012.

In February 2010, in connection with an underwritten offering, we issued five-year warrants to purchase 1,260,000 shares of XOMA's common stock at an exercise price of $10.50 per share. In June 2009, we issued warrants to certain institutional investors as part of a registered direct offering. These warrants represent the right to acquire an aggregate of up to 347,826 shares of XOMA's common stock over a five year period beginning December 11, 2009, at an exercise price of $19.50 per share. These warrants contain provisions that are contingent on the remote occurrence of a change in control, which would conditionally obligate us to repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Model on the date of such change in control. We believe the likelihood of a change in control prior to the expiration of the warrants is remote; however, due to these provisions, we are required to account for the warrants issued in February 2010 and June 2009 as liabilities at fair value. As of March 31, 2013, all of these warrants were outstanding and had an aggregate fair value of approximately $33,000.

The following table provides a summary of the changes in fair value of contingent warrant liabilities for the three months ended March 31, 2013 (in thousands):

                                                                     March 31,
   Contingent warrant liabilities                                      2013
   Balance at December 31, 2012                                     $    15,001
   Net increase in fair value of contingent warrant liabilities
   upon revaluation                                                      12,840
   Balance at March 31, 2013                                        $    27,841

Income Taxes

We did not recognize any income tax expense for the three months ended March 31, 2013 and 2012.

Accounting Standards Codification Topic 740, Income Taxes ("ASC 740") provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and carry-back potential, we have determined that total deferred tax assets should be fully offset by a valuation allowance.


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We do not expect the unrecognized tax benefits to change significantly over the next twelve months. We will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 31, 2013, we have not accrued interest or penalties related to uncertain tax positions.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents, our working
capital and our cash flow activities as of the end of, and for each of, the
periods presented (in thousands):

                                                       March 31, 2013       December 31, 2012       Change
Cash and cash equivalents                             $         50,379     $            45,345     $   5,034
Short-term investments                                $         19,996     $            39,987     $ (19,991 )
Working Capital                                       $         60,600     $            72,004     $ (11,404 )

                                                            Three Months Ended March 31,
                                                            2013                  2012              Change

Net cash used in operating activities                 $        (14,528 )   $           (11,675 )   $  (2,853 )
Net cash provided by (used in) investing activities             19,502                    (548 )      20,050
. . .
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