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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission File No. 0-14710
XOMA LTD.
(Exact name of registrant as specified in its charter)
Bermuda 52-2154066
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2910 Seventh Street, Berkeley, California 94710
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 644-1170
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
U.S. $.0005 par value
Preference Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common equity held by nonaffiliates of
the registrant, as of February 28, 2002: $564,884,667
Number of Common Shares outstanding as of February 28, 2002: 70,259,287
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 2002 Annual
General Meeting of Shareholders are incorporated by reference into Part III of
this Report.
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PART I
Item 1. Business
General
XOMA Ltd. ("XOMA" or the "Company") is a biopharmaceutical company that
develops and manufactures recombinant antibodies and other protein products to
treat cancer, immunological and inflammatory disorders, and infectious diseases.
The Company's current product development programs include:
o Xanelim(TM), also known as Efalizumab, is a humanized anti-CD11a monoclonal
antibody product being developed in collaboration with Genentech, Inc.
("Genentech") to treat psoriasis, rheumatoid arthritis and organ transplant
rejection. Data from two pivotal Phase III studies of Xanelim(TM)in nearly
1,100 moderate-to-severe plaque psoriasis patients were presented in June
and July of 2001. Both trials met all primary and secondary endpoints. In
October of 2001, XOMA and Genentech announced plans to complete an
additional pharmacokinetics study for inclusion in the potential Biologics
License Application submission to the FDA. Pending favorable results from
this study, a Biologics License Application filing for Xanelim(TM)in
patients with moderate-to-severe plaque psoriasis is planned for summer
2002. At the American Academy of Determatology meeting held in February of
2002, encouraging data were presented, providing further evidence of the
product's safety and efficacy. XOMA has also initiated and completed
enrollment in a Phase I/II study of Efalizumab (anti-CD11a) to prevent
graft rejection in kidney transplant recipients. Plans for further
development are under review with Genentech. In January of 2002, XOMA and
Genentech announced plans to conduct a Phase II clinical study of
Efalizumab in patients suffering from rheumatoid arthritis.
o NEUPREX(R), also known as rBPI21, is a genetically-engineered fragment of
human bactericidal/permeability-increasing protein ("BPI"). XOMA completed
a Phase III efficacy clinical trial in 1999, testing NEUPREX(R) in severe
pediatric meningococcemia, but the data from the trial were determined not
to be sufficient to file for regulatory approval. Further development of
this product is continuing under a license agreement with a division of
Baxter Healthcare Corporation ("Baxter"), and a Phase II study testing
NEUPREX(R) in Crohn's disease is continuing to enroll patients. XOMA is
providing the product for testing, and Baxter in conducting the study and
funding all NEUPREX(R) development costs.
o ING-1 is a Human Engineered(TM)recombinant monoclonal antibody that binds
with high affinity to an antigen expressed on epithelial cell cancers
(breast, colorectal, prostate and others) that is designed to destroy
cancer cells by recruiting the patient's own immune system. Enrollment has
been completed in a Phase I study in advanced adenocarcinoma patients. The
ING-1 monoclonal antibody incorporates XOMA's patented Human
Engineering(TM) technology, designed to reduce immunogenicity. Additional
Phase I/II studies are in progress or in planning to further evaluate the
safety, immunogenicity, pharmocodynamics and pharmacokinetics of ING-1 in
cancer patients, and to document any observed anti-tumor activity. Further
testing will be determined by the results of these studies.
o ONYX-015, also known as CI-1042, developed by Onyx Pharmaceuticals, Inc.
("Onyx"), is a therapeutic tumor-selective, modified adenovirus genetically
engineered to destroy cancer cells. Under a strategic process development
and manufacturing alliance with Onyx, XOMA is scaling up production to
commercial volume and will manufacture ONYX-015. The product is currently
in a Phase III clinical trial for recurrent head and neck cancer and in
Phase I and II clinical trials for a number of additional cancer
indications.
o CAB2 and MLN01, two of Millennium Pharmaceuticals, Inc.'s biotherapeutic
agents, are being developed for certain vascular inflammation indications
pursuant to a collaboration agreement with Millen-
-2-
nium that was announced in November of 2001. Current plans call for process
development work and preclinical testing in 2002.
o BPI-derived anti-angiogenic compounds with potential application for
treating retinal disorders are being developed by XOMA. Results of in vitro
and in vivo studies conducted by the Joslin Diabetes Center at Harvard
University ("Joslin") showed that compounds derived from BPI inhibit
abnormal growth of blood vessels in the retina while sparing key retinal
cells. Joslin is conducting further research in collaboration with XOMA.
The following table contains information regarding the products we
currently have in development, including indications, FDA regulatory status and
names of our collaborators, if any:
- ------------------------- --------------------------- -------------------------- --------------- ------------------
Program Description Indication Status* Collaborator
- ------------------------- --------------------------- -------------------------- --------------- ------------------
Xanelim(TM) humanized anti-CD11a moderate-to-severe Phase III Genentech
monoclonal antibody plaque psoriasis
-------------------------- --------------- ------------------
kidney transplant
rejection Phase I/II Genentech
-------------------------- --------------- ------------------
rheumatoid arthritis
Phase II Genentech
- ------------------------- --------------------------- -------------------------- --------------- ------------------
ONYX-015 genetically modified head and neck cancer Phase III Onyx
adenovirus
- ------------------------- --------------------------- -------------------------- --------------- ------------------
ING-1 Human adenocarcinomas Phase I None
Engineered(TM)
antibody
- ------------------------- --------------------------- -------------------------- --------------- ------------------
rBPI21 IV formulation severe pediatric Phase III Baxter
(NEUPREX(R)) meningococcemia
-------------------------- --------------- ------------------
Crohn's disease Phase II Baxter
- ------------------------- --------------------------- -------------------------- --------------- ------------------
CAB2 recombinant fusion cardiopulmonary bypass Preclinical Millennium
protein complement surgeries
inhibitor
- ------------------------- --------------------------- -------------------------- --------------- ------------------
MLN01 humanized monoclonal vascular inflammation Preclinical Millennium
antibody indications
- ------------------------- --------------------------- -------------------------- --------------- ------------------
Other BPI-Derived anti-angiogenic retinal disorders Preclinical Joslin
Compounds
--------------- ------------------
--------------------------- --------------------------
antibacterial gram-negative and Research None
gram-positive infections
- ------------------------- --------------------------- -------------------------- --------------- ------------------
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- ------------------------- --------------------------- -------------------------- --------------- ------------------
Program Description Indication Status* Collaborator
- ------------------------- --------------------------- -------------------------- --------------- ------------------
Lipopoly- diagnostic assay systemic infections Marketed in Diagnostics
saccharide Binding Europe Products
Protein (LBP) Corporation
--------------- ------------------
In testing Biosite
- ------------------------- --------------------------- -------------------------- --------------- ------------------
* Research: in vitro studies; Preclinical: in vivo studies
In 1998, XOMA completed a shareholder-approved corporate reorganization,
changing its legal domicile from Delaware to Bermuda and its name to XOMA Ltd.
When referring to a time or period before December 31, 1998, or when the context
so requires, the terms "Company" and "XOMA" refer to XOMA Corporation, a
Delaware corporation and the predecessor of XOMA Ltd.
Development Programs and Technologies
The following describes XOMA's more significant product development
programs and technologies:
Antibody Programs
Xanelim(TM)
In September of 1996, XOMA and Genentech announced that an investigational
new drug application (IND) had been filed with the FDA for clinical testing of
Xanelim(TM) (Efalizumab) in patients with moderate-to-severe psoriasis. XOMA
completed a Phase II efficacy study in Canada in psoriasis patients in late
1998, subsequently received a $2 million milestone payment from Genentech, and
agreed with Genentech to continue collaborative development of the product in
psoriasis through Phase III and to expand the program to include all additional
indications for the product.
In June and July of 2001, data from two pivotal Phase III studies in nearly
1,100 moderate-to-severe plaque psoriasis patients were presented. Both trials
met all primary and secondary endpoints. In October of 2001, XOMA and Genentech
announced plans to complete an additional pharmacokinetics study for inclusion
in the potential biologics license application submission to the FDA. Pending
favorable results of the ongoing pharmacokinetic study, a Biologics License
Application filing for Xanelim(TM) in patients with moderate-to-severe plaque
psoriasis is anticipated in the summer 2002.
In August of 1999, XOMA announced the expansion of the collaboration with
Genentech to include organ transplant rejection. A clinical trial in kidney
transplant rejection was initiated in March of 2000, and enrollment was
completed in November of 2000. XOMA and Genentech are currently evaluating the
results of this study and potential designs for follow-on studies.
In January of 2002, XOMA and Genentech announced plans to conduct a Phase
II clinical study of Efalizumab in patients suffering from rheumatoid arthritis.
The randomized, placebo controlled, double-blinded study plans to enroll more
than 300 patients at multiple centers. The study will evaluate the efficacy and
safety of Efalizumab, a recombinant, humanized monoclonal antibody designed to
selectively inhibit immune system T cells.
-4-
ING-1
ING-1 is a Human Engineered(TM) recombinant monoclonal antibody that binds
with high affinity to an antigen expressed on epithelial cell cancers (breast,
colorectal, prostate and others) that is designed to destroy cancer cells by
recruiting the patient's own immune system. Extensive studies have found high
levels of Ep-CAM expressed on the majority of breast, lung, prostate, pancreas,
and ovarian adenocarcinoma cells. In August of 2000, the Company filed an IND
for testing this Human Engineered(TM) antibody in a variety of cancers. In
October of 2000, XOMA initiated a Phase I safety, pharmacokinetics and
immunogenicity clinical study in patients with advanced adenocarcinomas; in
August of 2001, enrollment was completed. The Company has initiated a second
Phase I study in this patient population and is currently planning to initiate a
third to evaluate the safety, immunogenicity, pharmacodynamics and
pharmacokinetics and to document any observed anti-tumor activity.
CAB2 and MLN01
Under an agreement announced in November of 2001, XOMA is developing two of
Millennium's biotherapeutic agents, CAB2 and MLN01, for certain vascular
inflammation indications. CAB2 is a recombinant fusion protein that inhibits
complement activation and MLN01 is a humanized monoclonal antibody that inhibits
inflammatory responses by blocking the attachment of Beta 2 integrins to their
adhesion molecules. Under the terms of the agreement, XOMA will be responsible
for development activities and related costs through the completion of Phase II
trials. XOMA will make future payments to Millennium upon achievement of certain
clinical milestones. After successful completion of Phase II, Millennium will
have the right to commercialize the products and XOMA will have the option to
choose between further participation in the development program and eventual
profit sharing, or alternatively being entitled to future royalty and milestone
payments.
Genimune(TM)
Based on early data from preclinical studies, XOMA has decided not to move
the Genimune(TM) molecule into clinical studies at this time, but to devote its
resources to developing other products in its pipeline.
Proprietary Technologies
XOMA has a number of proprietary technologies relating to recombinant
antibodies, including bacterial cell expression systems for the production of
recombinant antibodies, the Human Engineering(TM) method, and the targeted
gelonin fusion technology. Various licenses and sublicenses have been entered
into in some of these areas. XOMA has used these technologies in developing some
of its own products and may choose to develop some of these products further on
its own. Discussions are ongoing with other entities that have expressed
interest in these technologies. No assurance can be given that any agreement or
agreements will be reached as a result of the ongoing discussions.
Bacterial Cell Expression Systems
XOMA has granted over 25 licenses to biotechnology and pharmaceutical
companies worldwide to use its patented and proprietary technologies relating to
bacterial expression of recombinant pharmaceutical products. Bacterial antibody
expression is an enabling technology for the discovery and selection, as well as
the development and manufacture, of recombinant protein pharmaceuticals,
including diagnostic and therapeutic antibodies for commercial purposes.
Bacterial antibody expression is also a key technology used in multiple systems
for high-throughput screening of antibody domains. Expression of antibodies by
phage display technology, for example, depends upon the expression and secretion
of antibody domains from bacteria as properly folded, functional proteins.
-5-
XOMA scientists were the first to demonstrate the secretion of antibody
domains directly from bacterial cells as fully functional, properly folded
molecules. XOMA has received nine U.S. patents to date relating to aspects of
its bacterial cell expression system, including a family of six patents that
broadly cover the secretion of functional immunoglobulins from bacteria,
including antibody fragments such as Fab and single-chain antibodies.
Corresponding foreign patents have also been granted. Access to XOMA's patent
estate is necessary for the practice of antibody phage display and other
antibody screening applications.
On February 25, 2002, XOMA and MorphoSys AG announced that they have
entered into cross-licensing agreements for antibody-related technologies. Under
the agreements, MorphoSys and its partners receive a license to use the XOMA
antibody expression technology for developing antibody products using
MorphoSys's phage display-based HuCAL(R) antibody library. MorphoSys also
receives a license for the production of antibodies under the XOMA patents. XOMA
will receive license payments from MorphoSys in addition to a license to use the
MorphoSys HuCAL(R) GOLD antibody library for its target discovery and research
programs.
The agreements also provide for a release of MorphoSys and its
collaborators from any past activities using MorphoSys technology to the extent
they also used XOMA's antibody expression technology, and allows MorphoSys to
use the XOMA technology in combination with its own technology in any future
collaborations. XOMA will receive the right to use the HuCAL(R) GOLD antibody
library for target research and discovery purposes for five years, with an
option to develop antibodies into therapeutics. Should any therapeutic
antibodies be identified and developed by XOMA using the MorphoSys HuCAL(R) GOLD
library, the contract provides for future license, milestone and royalty
payments be made by XOMA to MorphoSys.
Human Engineering(TM) Method for Antibodies
XOMA has developed a patented technology for reducing the immunogenicity of
antibodies. This Human Engineering(TM) (HE) technology represents a novel
alternative to the complementarity-determining region (CDR) grafting based
humanization methods in widespread use today. The Company has used the HE
technology in the development of ING-1 and other proprietary molecules and plans
to make the technology available for outlicensing.
Gelonin Fusion Proteins
Fusion proteins are made up of a targeting component that delivers the
protein to a particular cell type and a cytotoxic component that kills the
targeted cell. They can potentially be used to treat autoimmune diseases and
cancer. XOMA has a number of patents relating to its gelonin fusion technology
and covering a variety of targeting moieties, including antibodies, hormones,
lymphokines and growth factors.
LBP Assay Program
In August of 1998, the Company announced that it had granted to Diagnostics
Products Corporation ("DPC") a worldwide license to its patented technology that
uses lipopolysaccharide binding protein ("LBP") as a biochemical marker of
systemic exposure to gram-negative bacteria and endotoxin. XOMA is receiving
royalties on LBP-related products sold worldwide by DPC. In April of 2000, DPC
announced the European introduction of an automated laboratory diagnostic test
for early diagnosis and prognosis of systemic gram-negative infections developed
with the LBP technology. XOMA has been informed that DPC plans to use data from
its European users to apply for licensure by the FDA.
In the first quarter of 1997, XOMA granted to Biosite Incorporated
("Biosite"), of San Diego, California, an exclusive U.S. license to make, use
and sell certain non-automated, point-of-care diagnostic and prognos-
-6-
tic products for measuring LBP to detect bacterial endotoxin exposure in
patients with endotoxemia or sepsis. XOMA has been informed that Biosite is
conducting studies of a point-of-care diagnostic using LBP.
There can be no assurance that either licensee will receive necessary
approvals or make any significant sales.
XOMA and Biosite are involved in litigation over matters unrelated to LBP.
Information concerning XOMA's legal proceedings is set forth in Item 3 of Part I
of this Form 10-K.
BPI Product Platform
The Company is developing novel therapeutic products from recombinant
bactericidal/permeability-increasing protein ("rBPI"). rBPI is a genetically
engineered version of a human host-defense protein found in white blood cells.
rBPI kills gram-negative bacteria and enhances the activity of antibiotics, in
many cases reversing bacterial resistance to the antibiotic. rBPI also binds to
and neutralizes endotoxins, molecular components of the cell walls of
gram-negative bacteria that can trigger severe complications in infected
patients. Furthermore, rBPI inhibits angiogenesis (growth of new blood vessels)
and binds to and neutralizes heparin, a carbohydrate molecule involved in blood
vessel formation. Angiogenesis is an essential component of inflammation and
solid tumor growth as well as diseases such as retinopathies.
BPI was discovered in 1978 at New York University ("NYU") School of
Medicine by Peter Elsbach, M.D., and Jerrold Weiss, Ph.D. XOMA has collaborated
with Drs. Elsbach and Weiss since 1991 to apply and extend BPI-related research
to the commercial development of pharmaceutical products.
XOMA has used the BPI molecule as a platform for developing a number of
pharmaceutical products. XOMA scientists developed a recombinant modified
fragment of the BPI molecule, called rBPI21, which is potent and stable and can
be manufactured at commercially viable yields. This modified fragment is the
basis for the Company's NEUPREX(R) and topical anti-infective ophthalmic
formulations. XOMA is also developing smaller compounds derived from BPI into
additional therapeutic products, such as anti-angiogenic compounds.
NEUPREX(R)
In December of 1992, XOMA submitted an IND to begin human testing of our
NEUPREX(R) product, a genetically-engineered fragment of a human protein (BPI).
In March of 1993, the Company began Phase I human safety and pharmacokinetic
testing under the IND. Beginning in 1995, the Company initiated several clinical
efficacy studies evaluating NEUPREX(R) as a treatment for primary infections and
complications of infectious diseases, trauma and surgery. The indications tested
so far include:
Meningococcemia is a deadly systemic bacterial infection that usually
afflicts children. XOMA conducted a Phase I/II pilot study in 1995-96 and a
Phase III trial in 1997-99. The Phase III trial enrolled nearly 400 severe
pediatric meningococcemia patients in the United Kingdom and United States.
Although analysis revealed a clinical benefit in mortality and morbidities, the
data were not deemed sufficient by the FDA to support the filing of a BLA. XOMA
and Baxter are evaluating ways to provide additional data to support the use of
the drug in this indication. Trial results were published in the September 16,
2000 issue of The Lancet.
Other indications: Phase I, Phase II and Phase III trials were conducted in
1995 through 1999 in partial hepatectomy, severe intra-abdominal infections,
hemorrhage due to trauma and cystic fibrosis patients. XOMA and Baxter are
evaluating additional indications for clinical testing.
-7-
In January of 2000, Baxter's Hyland Immuno division acquired the worldwide
rights to XOMA's NEUPREX(R) product for development in antibacterial and
anti-endotoxin indications. XOMA received an initial payment of $10.0 million
and may receive additional milestone payments and royalties if the product is
successfully commercialized.
In July of 2001, Baxter initiated a Phase II study testing NEUPREX(R) in
patients with Crohn's disease, a systemic inflammatory condition associated with
endotoxemia that primarily affects the gastrointestinal tract. The start of the
study triggered a development milestone payment of $1.5 million, which will be
recognized as revenue over the duration of the study. XOMA is providing the
product for testing, and Baxter is conducting the study and funding all
NEUPREX(R) development costs. There can be no assurance that any past or future
clinical trials will yield data that will result in regulatory approval of the
NEUPREX(R) product. Retinal Disease Program
BPI-derived anti-angiogenic compounds with potential application for
treating retinal disorders are being developed by XOMA. In April of 2001,
researchers from Joslin presented data from in vitro and in vivo studies at the
Association for Research in Vision and Ophthalmology (ARVO) meeting. BPI-derived
compounds suppressed retinal neovascularization without negative effects on
pericytes and retinal pigmented epithelial cells necessary to the healthy
functioning of the retina. Joslin is conducting further research on these
compounds in collaboration with XOMA for their utility in retinal diseases. No
assurance can be given regarding the timing or likelihood of future development
or licensing arrangements.
Mycoprex(TM)
The Company's scientists discovered that certain compounds derived from BPI
display potent fungicidal activity. Further research demonstrated that many of
these compounds kill strains of Candida, the most common fungus to cause
systemic illness, and also show activity against other strains of fungi,
including those resistant to currently available drugs. In November of 2001, the
Company announced that, based on further preclinical testing and market
assessment of its Mycoprex(TM) program, it had decided to discontinue its plans
for developing a product for systemic fungal infections.
Process Development and Manufacturing
In January of 2001, Onyx and XOMA entered into a strategic process
development and manufacturing arrangement under which XOMA will scale up
production to commercial volume and manufacture Onyx's ONYX-015 (also known as
CI-1042). ONYX-015 is a therapeutic tumor-selective, modified adenovirus
genetically engineered to replicate in and kill cancer cells that have abnormal
p53 pathway function, while sparing normal cells that have functioning p53.
Derangements in the p53 protein pathway are the most common genetic
abnormalities in human cancer. ONYX-015 is currently in a Phase III clinical
trial for head and neck cancer and in Phase I and II clinical trials for a
number of additional cancer indications.
XOMA is currently producing the rBPI21 and ING-1 products and has produced
Xanelim(TM) for clinical trial and other testing needs at its Berkeley
manufacturing facilities, pursuant to a drug manufacturing license obtained from
the State of California. The Company's manufacturing capability is based on
recombinant DNA technology, with production of therapeutic products from either
mammalian or microbial cells. XOMA has two 500-liter and two 2,750-liter
fermentation trains with associated isolation and purification systems in place.
The Company does its own formulation for final sterile filling and finishing by
third parties, and has the capacity to do its own small-scale filling.
-8-
In mid 2001, XOMA completed its previously announced plans to consolidate
its Santa Monica technical development and pilot plant functions into its
Berkeley facilities. Key people and equipment were moved to the Berkeley
facility to enhance the Company's development and manufacturing capabilities.
Other Products and Technologies
In December of 1999, Connetics Corporation and XOMA assigned certain T cell
receptor ("TCR") intellectual property to The Immune Response Corporation
("IRC") in exchange for cash, IRC common stock and future royalties. IRC owns
additional TCR-related intellectual property and is developing pharmaceutical
products using this technology for the treatment of autoimmune diseases. In
February of 2002, IRC announced that an interim analysis of its Phase I/II
clinical study of a TCR based vaccine against multiple sclerosis confirmed that
the primary endpoint had been met.
Additionally, XOMA continues to seek opportunities to realize value from
products and technologies outside its core research efforts, including
osteoinductive proteins for bone repair and Thaumatin, a non-carcinogenic
protein for low-calorie flavor enhancement. Discussions are ongoing with various
entities that have expressed interest in these products and technologies. No
assurance can be given that any agreement or agreements will be reached as a
result of the ongoing discussions.
Development and Marketing Arrangements
The Company's strategy with respect to its proprietary products is to enter
into arrangements with established pharmaceutical company partners in order to
facilitate and finance development and marketing. Assuming timely regulatory
approval, which cannot be assured, the successful commercialization of XOMA's
products will depend to a large extent upon the marketing capabilities of its
collaboration partners. In addition to developing its own products, the Company
also seeks to leverage its manufacturing and development capabilities by
entering into agreements to collaborate on development of its partners'
products.
Genentech
On April 22, 1996, XOMA and Genentech entered into an agreement whereby
XOMA agreed to co-develop Genentech's humanized monoclonal antibody product
Xanelim(TM). In April of 1999, the companies extended and expanded the
agreement. XOMA will receive 25% of U.S. operating profits from Xanelim(TM) in
all indications, and a royalty on sales outside the United States. Genentech
will continue to finance XOMA's share of development costs via convertible
subordinated loans, due at the earlier of 2005 or first product approval, which
may be repaid using company equity.
The initial focus of the collaboration agreement is to develop Xanelim(TM)
to treat psoriasis and prevent or decrease the rejection of organ transplants.
XOMA completed a Phase II efficacy study in Canada in psoriasis patients in late
1998, subsequently received a $2 million milestone payment from Genentech, and
agreed with Genentech to continue collaborative development of the product in
psoriasis through Phase III and to expand the program to include all indications
for the product. XOMA has an option to co-promote the product in the United
States.
Either party may terminate the agreement upon a breach of a material
obligation by the other party. Upon termination by either party, XOMA will be
paid a royalty on all worldwide sales or have a percentage of its development
costs reimbursed by Genentech. Whether the royalty will be paid, and at what
rate, or the costs reimbursed will depend on which party terminates the
agreement and at what point in the approval process such termination occurs.
-9-
Baxter
On January 25, 2000, XOMA entered into license and supply agreements with
the Hyland Immuno division of Baxter for NEUPREX(R) for treatment of
meningococcemia and substantially all future antibacterial and anti-endotoxin
human clinical indications. The agreements provide for initial and other
payments of up to $35 million for meningococcemia. Under the terms of the
agreements, XOMA has received initial and milestone payments totalling $11.5
million. Additional payments will be made upon the achievement of development
milestones for future indications. Baxter will pay all future clinical
development costs as well as royalties appropriate for a late-stage product.
XOMA will receive royalties from future rBPI sales and will supply initial
product needs from its Berkeley manufacturing facility.
Either party may terminate the agreement upon the occurrence of voluntary
or involuntary liquidation of the other party or upon a material breach by the
other party. Termination of the agreement by Baxter terminates all rights
thereunder (subject to the survival of certain customary provisions) but shall
not relieve the parties of any obligation accruing prior to such expiration or
termination nor shall it deny Baxter of its rights to make, have made, use,
sell, offer to sell, import and/or export any product licensed under the
agreement in a particular clinical indication to the extent Baxter has then made
all required payments under the agreement for any such clinical indication for
such product; provided that Baxter then undertakes to continue making payments
under the agreement if, as and when sales of such product in such indication
occur. The license granted pursuant to the agreement expires upon the expiration
of the relevant patents.
Onyx
On January 29, 2001, the Company entered into a strategic process
development and manufacturing agreement with Onyx. The initial term is five
years, with options to extend for additional periods. Under the terms of the
agreement, Onyx will pay to XOMA an initial payment, payments for development
work and material produced, and payments upon achieving key milestones. XOMA's
objectives are to increase the fermentation volume to commercial scale, to
improve the purification process, to seek FDA licensure of its manufacturing
facility for ONYX-015, and to produce material for use in clinical testing and
for commercial sale upon approval. While dependent on the pace and outcome of
clinical trials, regulatory approval, sales volume and other factors, the
financial scope of the agreement during the initial term is projected to exceed
$35 million. Certain payments under this agreement are pending clinical outcome.
If Onyx has not materially breached its obligations under the agreement,
Onyx may terminate the agreement without penalty upon at least 90 days' prior
written notice if XOMA has not met certain performance targets. XOMA may
terminate the agreement at will upon the earlier of either 48 months' prior
written notice or the issuance of regulatory approval by the FDA.
XOMA has been informed that Onyx recently reacquired rights from its
collaboration partner, Warner-Lambert, to advance the product in head and neck
cancer and to further develop indications where local or regional administration
of ONYX-15 would be feasible.
Millennium
On November 26, 2001, XOMA and Millennium announced an agreement in which
they would collaborate to develop two of Millennium's biotherapeutic agents:
CAB2 and MLN01, for certain vascular inflammation indications. Under the terms
of the agreement, XOMA will be responsible for development activities and
related costs through the completion of Phase II trials. XOMA will make future
payments to Millennium upon achievement of certain clinical milestones. After
successful completion of Phase II, Millennium will have the right to
commercialize the products and XOMA will have the option to choose between
further participation in the de-
-10-
velopment program and eventual profit sharing, or alternatively being entitled
to future royalty and milestone payments. Under an investment agreement,
Millennium committed to purchase, at XOMA's option, up to $50 million worth of
XOMA common shares over the next three years, through a combination of
convertible debt and equity at then prevailing market prices.
Either party has the right to terminate upon the breach of a material
obligation by the other party. Under certain circumstances, if XOMA fails to
reach certain diligence milestones, Millennium shall have the right to terminate
the agreement. In addition, any material breach by XOMA under the investment
agreements, including with respect to Millennium's registration rights, will
give Millennium the right to terminate. The agreement shall remain in effect
until terminated.
BPI-related Ophthalmics
In April of 2001, XOMA entered into a research collaboration with Joslin to
explore applications of BPI-derived molecules in retinopathic diseases of the
eye. In that same month, researchers from Joslin presented data from in vitro
and in vivo studies at the Association for Research in Vision and Ophthalmology
(ARVO) meeting. Additional research is now underway to explore mechanisms of
action and other aspects of rBPI in retinal disease.
Other
The Company is seeking development and marketing partners for additional
products. No assurance can be given regarding the timing or likelihood of future
collaborative arrangements or of product licensure.
From time to time, the Company reviews development opportunities with other
biotechnology companies with a view toward providing product development
services to them.
Competition
The biotechnology and pharmaceutical industries are subject to continuous
and substantial technological change. Competition in the areas of recombinant
DNA-based and antibody-based technologies is intense and expected to increase as
new technologies emerge and established biotechnology firms and large chemical
and pharmaceutical companies continue to advance in the field. A number of these
large pharmaceutical and chemical companies have enhanced their capabilities by
entering into arrangements with or acquiring biotechnology companies or entering
into business combinations with other large pharmaceutical companies. Many of
these companies have significantly greater financial resources, larger research
and development and marketing staffs and larger production facilities than those
of XOMA. Moreover, certain of these companies have extensive experience in
undertaking preclinical testing and human clinical trials. These factors may
enable other companies to develop products and processes competitive with or
superior to those of the Company. In addition, a significant amount of research
in biotechnology is being carried out in universities and other non-profit
research organizations. These entities are becoming increasingly interested in
the commercial value of their work and may become more aggressive in seeking
patent protection and licensing arrangements. There can be no assurance that
developments by others will not render the Company's products or technologies
obsolete or uncompetitive.
Without limiting the foregoing, we are aware that:
o Biogen Inc. has announced that its Amevive(R) product achieved positive
results in two Phase III clinical trials in patients with moderate to
severe plaque psoriasis and that the FDA and the EMEA have officially
accepted Biogen's filings for approval of Amevive(R) in psoriasis;
-11-
o Centocor Inc., a unit of Johnson & Johnson, has tested its rheumatoid
arthritis and Crohn's disease drug in psoriasis, and it has been announced
that the drug has shown clinical benefit;
o it has been announced that Immunex Corp. (which is in the process of being
acquired by Amgen Inc.) has tested its rheumatoid arthritis and psoriatic
arthritis drug in psoriasis with positive results;
o MedImmune, Inc. is testing its anti-T cell monoclonal antibody in
psoriasis; and
o other companies, including Medarex, Inc., are developing monoclonal
antibody or other products for treatment of inflammatory skin disorders.
Currently, there are several companies with marketed biologics that are
approved for treating patients with rheumatoid arthritis:
o Immunex Corp. markets Enbrel,
o Amgen Inc. recently gained FDA approval for Kineret and
o Centocor Inc. is approved to market Remicade to rheumatoid arthritis
patients.
In addition to approved products, a number of companies are developing drugs
with a biologic mechanism of action for the treatment of rheumatoid arthritis.
These companies include Cambridge Antibody Technology Group plc, Biogen Inc.,
Celltech Group plc and others.
A number of companies are developing monoclonal antibodies targeting
cancers, which may prove more effective than ONYX-015 or the ING-1 antibody.
It is possible that one or more other companies may be developing one or
more products based on the same human protein as our NEUPREX(R) product, and
these product(s) may prove to be more effective than NEUPREX(R) or receive
regulatory approval prior to NEUPREX(R) or any BPI-derived ophthalmic product
developed by XOMA.
Regulatory
XOMA's products are subject to comprehensive preclinical and clinical
testing requirements and to approval processes by the FDA and similar
authorities in other countries. The Company's products are primarily regulated
on a product-by-product basis under the U.S. Food, Drug and Cosmetic Act and
Section 351(a) of the Public Health Service Act. Most of the Company's human
therapeutic products are or will be classified as biologic products and would be
subject to regulation by CBER. Approval of a biologic for commercialization
requires licensure of the product and the manufacturing facilities.
The FDA regulatory process is carried out in several phases. Prior to
beginning clinical testing of a proposed new biologic product, an IND is filed
with the FDA. This document contains scientific information on the proposed
product, including results of testing of the product in animal and laboratory
models. Also included is information on manufacture of the product and studies
on toxicity in animals, and a clinical protocol outlining the initial
investigation in humans.
The initial stage of clinical testing, Phase I, ordinarily encompasses
safety, pharmacokinetics and pharmacodynamic evaluations. Phase II testing
encompasses investigation in specific disease states designed to provide
preliminary efficacy data and additional information on safety. Phase III
studies are designed to further es-
-12-
tablish clinical safety and efficacy and to provide information allowing proper
labeling of the product following approval. Phase III studies are most commonly
multi-center, randomized, placebo-controlled trials in which rigorous
statistical methodology is applied to clinical results. Other designs may also
be appropriate in specific circumstances.
Following completion of clinical trials, a BLA is submitted to the FDA to
request marketing approval. Internal FDA committees are formed which evaluate
the application, including scientific background information, animal and
laboratory efficacy studies, toxicology, manufacturing facility and clinical
data. During the review process, a dialogue between the FDA and the applicant is
established in which FDA questions are raised and additional information is
submitted. During the final stages of the approval process, the FDA generally
requests presentation of clinical or other data before an FDA advisory
committee, at which point, some or all of such data may become available. Also,
during the later stages of review, the FDA conducts an inspection of the
manufacturing facility to establish that the product is made in conformity with
good manufacturing practice (GMP). If all outstanding issues are satisfactorily
resolved and labeling established, the FDA issues a license for the product and
for the manufacturing facility, thereby authorizing commercial distribution.
The FDA has substantial discretion in both the product approval process and
the manufacturing approval process, and it is not possible to predict at what
point, or whether, the FDA will be satisfied with the Company's submissions or
whether the FDA will raise questions which may delay or preclude product
approval or manufacturing facility approval. As additional clinical data is
accumulated, it will be submitted to the FDA and may have a material impact on
the FDA product approval process. Given that regulatory review is an interactive
and continuous process, the Company has adopted a policy of limiting
announcements and comments upon the specific details of the ongoing regulatory
review of its products, subject to its obligations under the securities laws,
until definitive action is taken. There can be no assurance that any of the
products under development by the Company will be developed successfully, obtain
the requisite regulatory approval or be successfully manufactured or marketed.
In Europe, most of the Company's human therapeutic products are or will be
classified as biologic and would be subject to a single European registration
through a centralized procedure. The assessment of the Marketing Authorization
Application is carried out by a rapporteur and co-rapporteur appointed by the
Committee for Proprietary Medicinal Products (CPMP), which is the expert
scientific committee of the European Medicines Evaluation Agency (EMEA).
The rapporteur and co-rapporteur are drawn from the CPMP membership
representing member states of the European Union. They liaise with the applicant
on behalf of the CPMP in an effort to provide answers to queries raised by the
CPMP. Their assessment report(s) is circulated to and considered by the full
CPMP membership, leading to the production ultimately of a CPMP opinion which is
transmitted to the applicant and Commission. The final decision on an
application is issued by the Commission. When a positive decision is reached, a
Marketing Authorization, or "MA," will be issued. Once approval is granted, the
product can be marketed under the single European MA in all member states of the
European Union. Consistent with the single MA, the labeling for Europe is
identical throughout all member states except that all labeling must be
translated into the local language of the country of intended importation and in
relation to the content of the so called "blue box" on the outer packaging in
which locally required information may be inserted. There can be no assurance
that any of the products under development by the Company will be developed
successfully, obtain the requisite regulatory approval or be successfully
manufactured or marketed.
Patents and Trade Secrets
As a result of its ongoing activities, the Company holds and is in the
process of applying for a number of patents in the United States and abroad to
protect its products and important processes. The Company also has
-13-
obtained or has the right to obtain exclusive licenses to certain patents and
applications filed by others. However, the patent position of biotechnology
companies generally is highly uncertain and no consistent policy regarding the
breadth of allowed claims has emerged from the actions of the U.S. Patent and
Trademark Office (the "Patent Office") with respect to biotechnology patents.
Accordingly, no assurance can be given that the Company's patents will afford
protection against competitors with similar technologies, or that others will
not obtain patents claiming aspects similar to those covered by the Company's
patent applications.
During the period from September of 1994 to December of 2001, the Patent
Office issued 59 patents to the Company related to its BPI-related products,
including novel compositions, their manufacture, formulation, assay and use. The
Company has more than 20 pending patent applications worldwide related to its
BPI-related products. Numerous foreign patents have been granted which, along
with additional pending foreign patent applications, correspond to the patents
issued and allowed in the U.S.
The Company is the exclusive licensee of BPI-related patents and
applications owned by NYU. These include seven issued U.S. patents directed to
novel BPI-related protein and DNA compositions, as well as their production and
uses. U.S. Patent Nos. 5,198,541 and 5,641,874, issued to NYU, relate to the
recombinant production of BPI. The Company believes that these patents have
substantial value because they cover certain production methodologies that allow
production of commercial-scale quantities of BPI for human use. In addition, the
European Patent Office granted to NYU, EP 375724, with claims to N-terminal BPI
fragments and their use, alone or in conjunction with antibiotics, for the
treatment of conditions associated with bacterial infections.
Between 1992 and 2001, eight patents related to BPI were issued to Incyte
Genomics, Inc. ("Incyte") by the Patent Office directed to endotoxin-associated
uses of BPI, uses of BPI with polymannuronic acid, and LBP-BPI proteins.
Effective as of July of 1998, XOMA is the exclusive licensee of BPI-related
patents and applications owned by Incyte, including these seven U.S. patents,
one granted European patent and pending applications worldwide.
From January of 1996 to December of 2001, XOMA was issued nine patents
directed to its LBP-related assays and products, including diagnostic and
prognostic methods for measuring LBP levels in humans. XOMA has also acquired
from Johnson & Johnson an exclusive sublicense to their LBP-related portfolio,
including five U.S. patents issued to the discoverers of LBP, Drs. Richard
Ulevitch and Peter Tobias, at the Scripps Research Institute in San Diego.
During the period from July of 1991 to December of 2001, the Patent Office
issued nine patents to the Company related to its bacterial expression
technology, including claims to novel promoter sequences, secretion signal
sequences, compositions and methods for expression and secretion of recombinant
proteins from bacteria, including immunoglobulin gene products. U.S. Patent No.
5,028,530, issued to the Company, is directed to expression vehicles containing
an AraB promoter, host cells and processes for regulated expression of
recombinant proteins. U.S. Patent Nos. 5,576,195 and 5,846,818 are related to
DNA encoding a pectate lyase signal sequence, recombinant vectors, host cells
and methods for production and externalization of recombinant proteins. U.S.
Patent Nos. 5,595,898, 5,698,435 and 5,618,920 address secretable immunoglobulin
chains, DNA encoding the chains and methods for their recombinant production.
U.S. Patent Nos. 5,693,493, 5,698,417 and 6,204,023 relate to methods for
recombinant production/secretion of functional immunoglobulin molecules.
Numerous foreign patents have been granted which, along with additional pending
foreign patent applications, correspond to the patents issued and allowed in the
U.S.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, the Company may require
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. There can be no
assurance that such licenses, if required, will be available on acceptable
terms.
-14-
Research and License Agreements
XOMA has contracted with a number of academic and institutional
collaborators to conduct research and development activities. Under these
agreements the Company generally funds either the research and development or
evaluation of products, technologies or both, will own or obtain exclusive
licenses to products or technologies developed, and may pay royalties on sales
of products covered by certain licenses. The rates and durations of such royalty
payments vary by product and institution, and range generally for periods from
five years to indefinite duration. Aggregate expenses of the Company under all
of its research agreements totaled $0.0 million, $0.1 million and $0.1 million
in 2001, 2000 and 1999, respectively. The Company has entered into certain
license agreements with respect to the following products:
On August 6, 1990, XOMA entered into a research collaboration and license
agreement with NYU whereby XOMA obtained an exclusive license to patent rights
for DNA materials and genetic engineering methods for the production of BPI and
fragments thereof. BPI is part of the body's natural defense system against
infection and XOMA is investigating the use of products based on BPI for various
indications. XOMA has obtained an exclusive, worldwide license for the
development, manufacture, sale and use of BPI products for all therapeutic and
diagnostic uses, and it has paid a license fee and will make milestone payments
and pay royalties to NYU on the sale of such products. The license becomes fully
paid upon the later of the expiration of the relevant patents or fifteen years
after the first commercial sale, subject to NYU's right to terminate for certain
events of default.
Each party has the right to terminate the agreement upon a material breach
by the other party of its performance of its obligations under the agreement,
subject to customary cure periods. Upon termination of the agreement prior to
the expiration of the relevant patents, all rights in and to NYU's intellectual
property revert to NYU.
On July 9, 1998, XOMA entered into a license agreement with Incyte whereby
XOMA obtained an exclusive (even as to Incyte), freely sublicenseable, worldwide
license to all of Incyte's patent rights relating to BPI. XOMA will pay Incyte a
royalty on sales of BPI products covered by the license, up to a maximum of
$11.5 million, and made a $1.5 million advance royalty payment, one-half in cash
and one-half in XOMA common shares. XOMA also issued warrants to Incyte to
purchase 250,000 XOMA common shares at $6.00 per share. Due to offsets against
other royalties, XOMA may not ultimately incur increased total BPI royalty
payments as a result of this license.
The agreement expires on July 9, 2008 unless, on or prior to such date, the
license granted therein becomes fully paid up in accordance with its terms.
Incyte has the right to terminate the agreement (subject to a customary cure
period) upon a breach by XOMA of any of its material obligations under the
agreement.
International Operations
The Company believes that, because the pharmaceutical industry is global in
nature, international activities will be a significant part of the Company's
future business activities and that, when and if it is able to generate income,
a substantial portion of that income will be derived from product sales and
other activities outside the United States.
A number of risks are inherent in international operations. Foreign
regulatory agencies often establish standards different from those in the United
States, and an inability to obtain foreign regulatory approvals on a timely
basis could have an adverse effect on the Company's international business and
its financial condition and results of operations. International operations may
be limited or disrupted by the imposition of government controls, export license
requirements, political or economic instability, trade restrictions, changes in
tariffs, restric-
-15-
tions on repatriating profits, taxation, or difficulties in staffing and
managing international operations. In addition, the Company's business,
financial condition and results of operations may be adversely affected by
fluctuations in currency exchange rates. There can be no assurance that the
Company will be able to successfully operate in any foreign market.
The Company was incorporated in Delaware in 1981 and became a Bermuda
company effective December 31, 1998.
Employees
As of December 31, 2001, XOMA employed 193 full-time employees at its
Berkeley, California facilities. The Company's employees are engaged in
clinical, manufacturing, quality assurance and control, research and product
development activities, and in executive, finance and administrative positions.
The Company considers its employee relations to be excellent.
Item 2. Properties
XOMA's development and manufacturing facilities are located in Berkeley,
California. The Company leases 107,600 square feet of space including
approximately 35,000 square feet of research and development laboratories,
48,000 square feet of production and production support facilities and 24,600
square feet of office space. Separately, a 16,500 square foot technology
development facility is owned by XOMA.
As of December 31, 2001, the future minimum lease commitments for leased
facilities are as follows (in thousands):
2002 $ 2,527
2003 2,665
2004 2,691
2005 2,715
2006 2,743
Thereafter 3,714
--------
Total $ 17,055
--------
Total rental expense for the research and development facilities was
approximately $2.4 million for 2001.
The principal executive offices of XOMA are located at 2910 Seventh Street,
Berkeley, California 94710 U.S.A. (telephone 510-644-1170).
Item 3. Legal Proceedings
On or about June 8, 2001, an action was commenced against the Company and
certain of its affiliates styled Biosite Diagnostics Inc. v. XOMA Ltd., et al.,
No. C-01-2251 (PJH)(N.D. Cal.) (the "Biosite Action"). The action sought
declarations that Biosite was not infringing certain XOMA patents and that
certain licenses continued in effect despite XOMA's notice of termination
thereof. The action sought an injunction against the Company and such affiliates
maintaining the license agreements in effect. On June 13, 2001, the court denied
Biosite's motion for a temporary restraining order. On or about July 5, 2001,
the Company, XOMA Ireland Limited and XOMA Technology Ltd. brought an action
against Biosite in the same court. The action, styled XOMA Ltd., et al. v.
Biosite Inc., No. C-01-2580 (PJH) (N.D. Cal.) (the "XOMA Action"), seeks
injunctive relief, compensatory and punitive damages for fraud and
misrepresentation, breach of contract, patent infringement,
-16-
misappropriation and unfair business practices. On September 24, 2001, the court
denied Biosite's motion in its action for a preliminary injunction and granted
the Company's motion to dismiss the Biosite Action. On that same day, the court
granted a portion of Biosite's motion to dismiss the XOMA Action relating to the
fraud allegations with leave to replead. On October 31, 2001, the plaintiffs in
the XOMA Action filed their amended complaint asserting the same claims for
relief. On November 7, 2001, Biosite answered the amended complaint denying the
substantive allegations. On that same day, Biosite filed counterclaims seeking
the same relief as the original Biosite Action and adding claims for breach of
contract, breach of covenant of good faith and fair dealing, intentional
interference with contracts and with prospective economic advantage, unfair
business practices and violation of the Lanham Act. Biosite seeks damages in an
unspecified amount, prejudgment interest, injunctive relief, punitive damages
and attorneys' fees. On November 30, 2001, the Company answered the
counterclaims denying the substantive allegations therein. On December 3, 2001,
the court denied Biosite's motion to bifurcate the case such that Biosite's
license validity claims would be tried first. On January 7, 2002, the court
denied Biosite's motion to sever the patent issues from the license issues and
to address the license issues first. In February of 2002, Biosite announced that
it has begun implementing an antibody expression technology intended to allow it
to operate its business without using XOMA's patents and that it is launching a
licensing program. On or about March 5, 2002, Biosite filed an amended answer to
add additional defenses that certain of the patents at issue are invalid, that
certain alleged inequitable conduct on the part of the XOMA entities renders
certain of the patents unenforceable and that alleged patent misuse renders the
patents at issue unenforceable. Discovery has commenced as to all claims,
defenses and counterclaims and is continuing.
On November 15, 2001, a purported securities class action complaint was
filed in the United States District Court for the Northern District of
California against the Company and certain of its officers in an action
captioned Tingle v. XOMA Ltd., et al., No. C-01-4256 (CW) (N.D. Calif.). On
November 29, 2001 and December 20, 2001, respectively, two similar purported
class action complaints, captioned Scala v. XOMA Ltd., et al., No. C-01-4610
(WHA) (N.D. Calif.) and Malmut v. XOMA Ltd., et al., No. C-01-5006 (MJJ) (N.D.
Calif.), were filed in that same federal district court. (The three lawsuits are
referred to collectively hereinafter as the "Class Action Lawsuits.") The
complaints in the Class Action Lawsuits purported to assert claims, under
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b)
(and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934, arising out of XOMA's joint development with Genentech of XanelimTM.
(Genentech and certain of its officers were also named as defendants in the
Class Action Lawsuits.) The Class Action Lawsuits alleged that XOMA and
Genentech made material misrepresentations and omissions concerning the
anticipated timetable for the filing of a Biologics License Application ("BLA")
with the Food and Drug Administration in connection with their development of
XanelimTM. The complaints in the Class Action Lawsuits sought unspecified money
damages, costs and expenses. After further investigating the issues, plaintiffs'
counsel filed with the Court on March 11, 2002, a Stipulation and Proposed Order
of Voluntary Dismissal in all three actions. On March 13, 2002, the Court
entered an Order dismissing each of the lawsuits without prejudice. No
consideration was exchanged, and neither plaintiffs nor their counsel received
any compensation or reimbursement of expenses.
In January of 2002, a complaint was filed in the California Superior Court
in San Diego County against XOMA, Genentech and certain unidentified "John Doe"
defendants, which tracks many of the allegations that had been made in the Class
Action Lawsuits, purporting to assert claims pursuant to the California Unfair
Competition Act seeking injunctive relief and other equitable remedies in
connection with the defendants' alleged misrepresentations and omissions
concerning the anticipated timetable for the filing of the XanelimTM BLA. On
March 14, 2002, XOMA filed a demurrer and a motion to strike the complaint.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-17-
Officers
The officers of the Company are as follows:
Name Age Title
John L. Castello 65 Chairman of the Board, President and
Chief Executive Officer
Patrick J. Scannon, M.D., Ph.D. 54 Chief Scientific and Medical Officer, Senior Vice
President and Director
Clarence L. Dellio 56 Senior Vice President, Operations
Marc D. Better, Ph.D. 46 Vice President, Technical Development and Santa
Monica Operations
Daniel P. Cafaro 45 Vice President, Regulatory Affairs
Ronald H. Carlson, Ph.D. 49 Vice President, Quality
Stephen F. Carroll, Ph.D. 50 Vice President, Scientific and Product Development
Peter B. Davis 55 Vice President, Finance and Chief Financial
Officer
Marvin R. Garovoy, M.D. 58 Vice President, Clinical and Medical Affairs
Christopher J. Margolin 55 Vice President, General Counsel and Secretary
Charles C. Wells 51 Vice President, Human Resources
Officers serve at the discretion of the Board of Directors. There is no
family relationship among any of the officers or directors.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common shares trade on the Nasdaq National Market under the
symbol "XOMA". The following table sets forth the quarterly range of high and
low reported sale prices of the Company's common shares on the Nasdaq National
Market for the periods indicated.
Price Range
-----------
High Low
---- ---
2000:
- ----
First Quarter $16.00 $2.75
Second Quarter 10.13 3.13
Third Quarter 14.75 4.00
Fourth Quarter 15.25 7.75
2001:
- ----
First Quarter $13.88 $6.03
Second Quarter 17.75 5.31
Third Quarter 17.09 6.74
Fourth Quarter 10.50 6.40
On February 28, 2002, there were approximately 3,184 record holders of
XOMA's common shares.
-18-
The Company has not paid dividends on its common shares. The Company
currently intends to retain any earnings for use in the development and
expansion of its business. The Company, therefore, does not anticipate paying
cash dividends on its common shares in the foreseeable future (see Note 4 to the
Consolidated Financial Statements, "SHARE CAPITAL").
Item 6. Selected Financial Data
The following table contains selected financial information including
statement of operations and balance sheet data of XOMA for the years 1997
through 2001. The selected financial information has been derived from the
audited Consolidated Financial Statements of XOMA. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Item 8 of this report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 below. The data set forth below is not necessarily indicative
of the results of future operations.
Year Ended December 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Statement of Operations Data
Total revenues (1) $ 17,279 $ 6,659 $ 2,361 $ 6,345 $ 18,383
Total operating costs and
expenses (2) 44,610 36,075 47,534 54,184 35,552
Other income (expense), net (709) 4 (606) 636 1,404
Net loss $ (28,040) $ (29,412) $ (45,779) $ (47,203) $ (15,765)
Net loss per common share $ (0.41) $ (0.45) $ (0.87) $ (1.16) $ (0.44)
December 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data
Cash (3) $ 67,320 $ 35,043 $ 18,539 $ 28,287 $ 55,146
Total assets 86,107 45,212 28,312 37,304 64,776
Long-term debt 50,980 39,488 34,724 26,513 24,773
Redeemable convertible
preference shares -- -- -- 6,440 --
Accumulated deficit (507,629) (479,589) (450,177) (404,343) (354,526)
Shareholders' equity (net
capital deficiency) $ 13,619 $ (8,590) $ (16,846) $ (6,190) $ 31,240
(1) In 2001, includes $9.8 million from Baxter and $6.8 million from Onyx for
license fees, contract revenue and products sales. In 2000, includes $6.5
million of license fees and contract revenue from Baxter. In 1999, includes
non-refundable license fee and milestone payment from Allergan Sales, Inc.
and proceeds from the assignment of intellectual property rights to IRC. In
1998, includes a $2.0 million milestone payment from Genentech and $4.3
million in license fees. In 1997, includes $17.0 million from the
assignment of patent and royalty rights to Pharmaceutical Partners LLC.
(2) In 1998, includes non-recurring costs of $2.4 million to acquire rights to
Incyte's BPI-related patents and $2.5 million of costs related to the
change in domicile.
(3) Includes cash, cash equivalents, short-term investments and interest
receivable.
-19-
Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000.
Statement of Operations
----------------------------------------------------------------------------------
(In thousands, except per share amounts)
2001 March 31 June 30 September 30 December 31 Total
---- -------- ------- ------------ ----------- -----
Total revenues $ 2,856 $ 5,212 $ 3,285 $ 5,926 $ 17,279
Total operating costs and
expenses 10,080 11,560 10,164 12,806 44,610
Other income (expense), net (351) (300) 60 (118) (709)
----------- ----------- ----------- ----------- ------------
Net loss $ (7,575) $ (6,648) $ (6,819) $ (6,998) $ (28,040)
=========== =========== =========== =========== ============
Net loss per common share $ (0.11) $ (0.10) $ (0.10) $ (0.10) $ (0.41)
=========== =========== =========== =========== ============
Statement of Operations
----------------------------------------------------------------------------------
(In thousands, except per share amounts)
2000 March 31 June 30 September 30 December 31 Total
---- -------- ------- ------------ ----------- -----
Total revenues $ 2,572 $ 2,283 $ 851 $ 953 $ 6,659
Total operating costs and
expenses 8,720 8,979 8,182 10,194 36,075
Other income (expense), net (136) 370 (67) (163) 4
----------- ----------- ----------- ----------- ------------
Net loss $ (6,284) $ (6,326) $ (7,398) $ (9,404) $ (29,412)
=========== =========== =========== =========== ============
Net loss per common share $ (0.10) $ (0.10) $ (0.11) $ (0.14) $ (0.45)
=========== =========== =========== =========== ============
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
XOMA is a biopharmaceutical company that develops and manufactures
recombinant antibodies and other protein products to treat cancer, immunological
and inflammatory disorders, and infectious diseases.
The Company and Genentech are developing the Xanelim(TM) humanized
monoclonal antibody product in collaboration. Data from two pivotal Phase III
studies in which nearly 1,100 moderate-to-severe plaque psoriasis patients were
presented in June and July of 2001. Both trials met all primary and secondary
endpoints. In October of 2001, XOMA and Genentech announced plans to complete an
additional pharmacokinetics study for inclusion in the potential biologics
license application submission to the FDA. XOMA has also initiated and completed
enrollment in a Phase I/II study of Xanelim(TM) in kidney transplant recipients.
In January of 2002, XOMA announced plans to conduct a Phase II clinical study of
Xanelim(TM) in patients suffering from rheumatoid arthritis. Genentech will
continue to finance XOMA's share of development costs via long-term convertible
subordinated notes.
Additional antibody products being developed by the Company include ING-1,
which is in Phase I testing in adenocarcinomas.
The Company is developing novel therapeutic products from recombinant
bactericidal/permeability-increasing protein, a human host-defense protein. The
first BPI-derived product, NEUPREX(R), has completed a
-20-
Phase III trial in meningococcemia and has been in clinical trials in four
additional indications. Further development of this product is continuing under
license and supply agreements with Baxter.
In January of 2001, the Company entered into a strategic process
development and manufacturing agreement with Onyx. XOMA's objectives are to
increase the fermentation volume to commercial scale, to improve the
purification process, to seek FDA licensure of its manufacturing facility for
ONYX-015, and to produce material for use in clinical testing and for commercial
sale upon approval. While dependent on the pace and outcome of clinical trials,
regulatory approval, sales volume and other factors, the financial scope of the
agreement during the initial term is projected to exceed $35 million. Certain
payments under this agreement are pending clinical outcome.
In November of 2001, XOMA and Millennium announced an agreement to
collaborate to develop two of Millennium's biotherapeutic agents: CAB2 and
MLN01, for certain vascular inflammation indications. Under the terms of the
agreement, XOMA will be responsible for development activities and related costs
through the completion of Phase II trials. XOMA will make future payments to
Millennium upon achievement of certain clinical milestones. After successful
completion of Phase II, Millennium will have the right to commercialize the
products and XOMA will have the option to choose between further participation
in the development program and eventual profit sharing, or alternatively being
entitled to future royalty and milestone payments.
In December of 1998, the shareholders of the Company (formerly XOMA
Corporation) approved a proposal to change XOMA's legal domicile from Delaware
to Bermuda. The change was made in anticipation of possible future approvals and
commercialization of NEUPREX(R) and other products, to allow XOMA to take
advantage of certain tax and other benefits not available under the prior
corporate structure. The change was effective December 31, 1998, was tax free to
the shareholders, had little or no tax cost to the Company, and did not affect
operations.
In January of 2000, the Company's shareholders approved an increase in
authorized share capital by 65,000,000 common shares to 135,000,000.
The Company incurred a net loss in each of the past three years and is
expected to continue to operate at a loss until regulatory approval and
commencement of commercial sales of its products. The timing of product
approvals is uncertain, and there can be no assurance that approvals will be
granted or that revenues from product sales will be sufficient to attain
profitability.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying notes. The items in our financial
statements requiring significant estimates and judgments include useful lives of
fixed assets for depreciation and amortization calculations, assumptions for
valuing options and warrants and estimated lives of license and collaborative
agreements related to deferred revenue. Actual results could differ materially
from these estimates.
Revenue Recognition
Revenue is recognized when the related costs are incurred and the four
basic criteria of revenue recognition are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the nature of the fee charged for products or services delivered and
the collectibility of those fees.
-21-
License and Collaborative Fees
Revenue from non-refundable, up-front license or technology access payments
under license and collaborative agreements where the Company has a continuing
obligation to perform are recognized as revenue over the period of the
continuing performance obligation.
Milestone payments under collaborative arrangements are recognized as
revenue upon achievement of the incentive milestone events, which represent the
culmination of the earnings process because the Company has no future
performance obligations related to the payment. Milestone payments that require
a continuing performance obligation on the part of the Company are recognized
over the period of the continuing performance obligation. Incentive milestone
payments are triggered either by the results of our research efforts or by
events external to the Company, such as regulatory approval to market a product
or the achievement of specified sales levels by a marketing partner. Amounts
received in advance are recorded as deferred revenue until the related milestone
is achieved.
Contract Revenue
Contract revenue for research and development involves the Company
providing research, development or manufacturing services on a best efforts
basis to collaborative partners. The Company recognizes revenue under these
arrangements as the related research and development costs are incurred.
Product Sales
The Company recognizes product revenue upon shipment when there is
persuasive evidence that an arrangement exists, delivery has occurred, the price
is fixed, and determinable and collectibility is reasonably assured. Allowances
are established for estimated uncollectible amounts, product returns, and
discounts, if any.
Change in Accounting Principle
The Company previously recognized non-refundable license fees as revenue
when received and when all significant contractual obligations of the Company
relating to the fees had been met. Effective January 1, 2000, the Company
changed its method of accounting for non-refundable initial fees to recognize
such fees over the period of continuing involvement by the Company such as the
research and development period or the manufacturing period of the agreement, as
applicable. The Company believes this accounting policy is preferable based on
guidance provided in SEC Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements. As of January 1, 2000, there was no
cumulative effect of an accounting change as a result of the adoption of SAB 101
and there was no pro forma effect of the adoption of SAB 101 in any year
presented. In connection with the license and supply and development agreement
with Baxter on January 25, 2000, the Company received $10.0 million as an
initial, nonrefundable fee. This initial fee was deferred and is being amortized
over the period of continuing involvement, which period is estimated to be 36
months.
Results of Operations
Revenues
Total revenues in 2001 were $17.3 million, compared with $6.7 million in
2000 and $2.4 million in 1999.
License fee revenues in 2001 increased to $4.8 million from $3.2 million in
2000 and $2.3 million in 1999. These revenues include "up front" and milestone
payments related to the outlicensing of XOMA's products
-22-
and technologies, and other collaborative arrangements. Certain of these
agreements involve continuing commitments by XOMA for services, and in these
cases the related licensing payments received is recorded as deferred revenue
and then recognized as revenue over the period of continuing involvement. The
following table illustrates the activity in deferred revenue for the years ended
December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
---- ---- ----
Beginning deferred revenue $ 6,942 $ -- $--
Payments received 4,225 $ 10,000 --
Revenue recognized (4,680) (3,058) --
--------- ---------- ----
Ending deferred revenue $ 6,487 $ 6,942 $--
======= ======== ===
Of the $6.5 million balance in deferred revenue at December 31, 2001, $5.0
million will be recognized as revenue in 2002 and $0.7 million in 2003. Future
amounts will also be impacted by additional consideration received, if any,
under existing or any future licensing or other collaborative arrangements.
Revenues from contract services were $10.1 million in 2001, up from $3.4
million in 2000 and $0 million in 1999. These revenues relate primarily to
service arrangements with Baxter and Onyx.
Product sales revenues, related primarily to supplying NEUPREX(TM) product
to Baxter for use in clinical and other testing, were $2.4 million in 2001
compared with $0.1 million in both 2000 and 1999.
Research and Development Expenses
In 2001, research and development expense increased to $35.9 million,
compared with $30.0 million in 2000 and $41.5 million in 1999. The $5.9 million
increase in 2001 as compared to 2000 reflected spending related to our
collaboration with Onyx, which was initiated in early 2001, an initial payment
to Millennium in November of 2001 related to a collaboration on Millennium's
CAB2 and MLN01 products, and increased spending on certain internal programs.
The $11.5 million decrease in spending in 2000 as compared to 1999 was primarily
due to lower spending on clinical trials for the NEUPREX(TM) product, partially
offset by increased expenses for Xanelim(TM) and certain internal programs.
Our research and development activities can be divided into earlier stage
programs, which include molecular biology, process development, pilot-scale
production and preclinical testing, and later stage programs, which include
clinical testing, regulatory affairs and manufacturing clinical supplies. The
costs associated with these programs approximate the following (in millions):
2001 2000 1999
---- ---- ----
Earlier stage programs $9.5 $8.4 $8.6
Later stage programs 26.4 21.6 32.9
----- ----- -----
Total $35.9 $30.0 $41.5
==== ==== ====
Our research and development activities can be divided into those related
to our internal projects and those related to collaborative arrangements. The
costs related to internal projects versus collaborative arrangements approximate
the following (in millions):
2001 2000 1999
---- ---- ----
Internal projects $22.5 $14.3 $38.2
Collaborative arrangements 13.4 15.7 3.3
----- ----- -----
Total $35.9 $30.0 $41.5
==== ==== ====
-23-
For 2000 and 2001, no single project accounted for more than 30% of our
total research and development costs for that year. For 2001, only Xanelim(TM)
accounted for more than 20% of our total research and development costs for that
year. For 2000, only Xanelim(TM) and NEUPREX(R) accounted for more than 20% of
our total research and development costs for that year. The corresponding
figures are not available for 1999 as we did not begin to account for research
and development costs by project until 2000.
The following table contains information regarding the products for which
we are incurring research and development expenses, including indications, FDA
regulatory status and names of our collaborators, if any:
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
Program Description Indication Status* Collaborator
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
Xanelim(TM) humanized anti-CD11a moderate-to-severe Phase III Genentech
monoclonal antibody psoriasis
-------------------------- ------------------- ---------------------
kidney transplant
rejection Phase I/II Genentech
-------------------------- ------------------- ---------------------
rheumatoid arthritis
Phase II Genentech
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
ONYX-015 genetically modified head and neck cancer Phase III Onyx
adenovirus
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
ING-1 Human adenocarcinomas Phase I None
Engineered(TM)
antibody
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
rBPI21 IV formulation severe pediatric Phase III Baxter
(NEUPREX(R)) meningococcemia
-------------------------- ------------------- ---------------------
Crohn's disease Phase II Baxter
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
CAB2 recombinant fusion cardiopulmonary bypass Preclinical Millennium
protein complement surgeries
inhibitor
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
MLN01 humanized monoclonal vascular inflammation Preclinical Millennium
antibody indications
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
Other BPI-Derived anti-angiogenic retinal disorders Preclinical Joslin
Compounds
--------------------------- -------------------------- ------------------- ---------------------
antibacterial gram-negative and Research None
gram-positive infections
- ------------------------- --------------------------- -------------------------- ------------------- ---------------------
* Research: in vitro studies; Preclinical: in vivo studies.
-24-
We currently anticipate that research and development spending will
increase in 2002, due primarily to increased spending on Xanelim(TM). Beyond
this, the scope and magnitude of future research and development expenses are
difficult to predict at this time. Generally speaking, biopharmaceutical
development includes a series of steps, including in vitro and in vivo
preclinical testing, and Phase I, II and III clinical studies in humans. Each of
these steps is typically more expensive than the previous step, but actual
timing and the cost to the Company depend on the product being tested, the
nature of the potential disease indication, and also on the terms of any
collaborative arrangements with other companies. 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, patent expenses, and
third party costs related to preclinical and clinical testing.
Our most advanced product is Xanelim(TM), which has completed two pivotal
Phase III trials for treating patients with moderate-to-severe psoriasis. XOMA
and its collaborative partner Genentech are preparing a filing for regulatory
approval in the United States, with an objective of completing the submission in
the summer of 2002. The time for regulatory review and potential approval of
this submission can be variable, but could normally be expected to take one year
or more from the time of filing the application. Additional testing of
Xanelim(TM) in psoriasis patients is ongoing to gather supplementary safety and
efficacy data for use by treating physicians and patients. We have also
initiated Phase II testing of Xanelim(TM) in patients suffering from rheumatoid
arthritis. If this clinical trial is successful, one or more additional trials
may be required before regulatory approval.
XOMA is working under a process development and manufacturing agreement to
support the development of Onyx's ONYX-015 product, which is in Phase III
testing in patients with head and neck cancer. The initial term of this
agreement continues through January of 2006, with options to extend for
additional periods. XOMA's spending under this agreement is billed back to Onyx
on a cost-plus basis.
The Company's NEUPREX(TM) product is in Phase II testing in patients with
Crohn's disease. This trial is being managed and funded by Baxter. Next steps
will depend on results from this trial.
The Company's ING-1 product is in Phase I testing in patients suffering
from adenocarcinomas. Additional testing will depend on results from the current
clinical trials, and potentially on future collaborative arrangements.
The Company has a number of other products at various stages of preclinical
development that may move into clinical testing in the future if warranted.
Marketing, General And Administrative Expenses
Marketing, general and administrative expenses increased from $6.1 million
in both 1999 and 2000 to $8.7 million in 2001. This increase was due primarily
to expenses related to litigation with Biosite Incorporated. Spending in 2001
also included XOMA's share of commercial development expenses related to
activities in preparation for a potential future product launch of Xanelim(TM).
We expect further increases in 2002. Absent a settlement with Biosite,
litigation expenses will continue at similar or higher levels. Commercial
development costs related to Xanelim(TM) will increase as we approach the
potential product launch.
-25-
Investment And Other Income
Investment income was $0.7 million less in 2001 than in 2000, as higher
average cash balances were more than offset by lower interest rates. Investment
income increased by $1.3 million in 2000 compared with 1999, reflecting a higher
cash investment balance.
Interest And Other Expense
Interest expense in 2001, 2000 and 1999 mainly consisted of interest on the
convertible notes due to Genentech in 2005, which compounds semi-annually and
accrues interest at a rate of LIBOR plus 1% (4.9% at December 31, 2001), and has
been increasing due to the higher convertible note balance.
Liquidity And Capital Resources
Cash, cash equivalents and short-term investments increased by $32.4
million to $67.6 million at December 31, 2001. Financing activities of $61.8
million include $43.3 million of net proceeds from an underwritten stock
offering in June of 2001 and $12.2 million net funding from Genentech and
Millennium under their respective development agreements. The Company's cash,
cash equivalents and short-term investments are expected to continue to decrease
while the Company pursues FDA licensure, except to the extent that the Company
secures additional funding.
Net cash used in operating activities was $22.4 million in 2001, compared
with $21.8 million in 2000 and $38.6 million in 1999. The increase in cash used
in operating activities in 2001 compared with 2000 reflected reduced losses and
favorable working capital movements being more than offset by a non-recurring
$10 million initial payment received from Baxter, in 2000, related to the
licensing of NEUPREX(TM). This payment is being recognized as revenue over 36
months. The decrease in cash used in operating activities in 2000 compared with
1999 reflects a lower net loss and the above referenced cash proceeds from the
Baxter transaction.
Net capital expenditures for 2001, 2000 and 1999 were $7.4 million, $1.5
million and $1.0 million respectively. The increase in 2001 reflected costs of
renovating a facility related to relocation of XOMA's technical development and
pilot plant operations from Santa Monica to Berkeley, as well as initial work on
installing a third 2750-liter fermentation line in our Berkeley manufacturing
facility.
As of December 31, 2001, future contractual obligations are as follows (in
thousands):
Capital Leases Operating Leases Convertible Notes Total
-------------- ---------------- ----------------- -----
2002 $ 872 $ 2,845 $ 5,013 $ 8,730
2003 785 2,864 -- 3,649
2004 572 2,895 -- 3,467
2005 221 2,891 50,980 54,092
2006 -- 2,901 -- 2,901
Thereafter -- 3,932 -- 3,932
-------------- ---------------- ----------------- ----------
Total $ 2,450 $ 18,328 $ 55,993 $ 76,771
============== ================ ================= ==========
The present outlook is for somewhat higher losses in 2002 than recorded in
2001, due to increased expenses on Xanelim(TM) and on the Millennium
collaboration, and the further expansion of the Company's development
infrastructure. The Company's strategy is to attempt to continue broadening its
product pipeline through additional development collaborations such as its
arrangements with Genentech, Onyx and Millennium. To support these activities
the Company is judiciously expanding its manufacturing capacity and other
development capabilities. For example, the Company relocated its technical
development and pilot plant facilities from Santa
-26-
Monica to Berkeley in 2001 to improve efficiencies. XOMA is also in the process
of installing a third 2750-liter fermentation line in its Berkeley production
facility, which is expected to be operational in the second half of 2002. The
current outlook is for these increased expenses to be partially offset by
increased revenues in 2002. Revenues from services and product sales are
estimated to be similar to 2001, and licensing revenues are estimated to be
higher in 2002.
Based on current spending levels, currently anticipated revenues, and debt
financing provided by Genentech for XOMA's share of Xanelim(TM) development
costs, the Company estimates it has sufficient cash resources to meet its
operating needs through at least the middle of 2004. Any significant revenue
shortfalls, or increases in planned spending on internal programs could shorten
this period. Any change in spending on Xanelim(TM) should have no impact on
liquidity due to the Company's financing arrangement with Genentech. Additional
licensing arrangements or collaborations, or favorable market conditions
supporting taking advantage of financing commitments from Millennium under the
collaborative agreement between the companies, or otherwise entering into new
equity or other financing arrangements, could extend this period. Genentech and
XOMA have announced a target of the summer of 2002 for submitting a request for
marketing approval of Xanelim(TM) for the treatment of moderate-to-severe
psoriasis to the FDA. The timeliness of this submission and subsequent review by
the FDA may have a material impact on the Company's cash flow, and its ability
to raise new funding on acceptable terms. Progress or setbacks by potentially
competing products may also affect XOMA's ability to raise new funding on
acceptable terms. For a further discussion of the risks related to our business
and their effects on our cash flow and ability to raise new funding on
acceptable terms, see "Forward-Looking Statements And Cautionary Factors That
May Affect Future Results" included in this Item 7 below.
In January of 2001, the Company entered into a strategic process
development and manufacturing agreement with Onyx under which the Company will
scale-up production to commercial volume and manufacture Onyx's ONYX-015
product. The initial term of the agreement is five years, with options to extend
for additional periods. Terms of the agreement include an initial payment,
payments for development work and product produced, and payments upon achieving
key milestones. XOMA's objectives are to increase the fermentation volume to
commercial scale, to improve the purification process, to seek FDA licensure of
its manufacturing facility for ONYX-015, and to produce material for use in
clinical testing and for commercial sale upon approval. While dependent on the
pace and outcome of clinical trials, regulatory approval, sales volume and other
factors, the financial scope of the agreement during the initial term is
projected to exceed $35 million. Certain payments under this agreement are
pending clinical and regulatory outcomes, and other contingencies, and no
assurance can be given that any of the clinical trials will yield data that
warrants pursuing continued development of this product.
In November of 2001, XOMA entered into a collaboration with Millennium for
the development of Millennium's CAB2 and MLNM01 products. XOMA will perform
certain process development activities and will be responsible for product
development of the two products through Phase II testing. Millennium has
committed to provide up to $50 million of convertible debt and equity financing
to XOMA over the first three years of the collaboration. Upon the successful
conclusion of Phase II testing, Millennium has the right to complete clinical
testing and regulatory filings, and to commercialize the product. XOMA will have
the option at that time to participate in further development costs and share in
future U.S. profits, or alternatively, to receive development milestone payments
and a royalty on sales. In 2002, XOMA will be performing process development and
preclinical testing on these products. If supported by the data, our target is
to file an investigational new drug application to begin human clinical testing
in 2003.
Although operations are influenced by general economic conditions, the
Company does not believe that inflation had a material impact on financial
results for the periods presented. The Company believes that it is not dependent
on materials or other resources that would be significantly impacted by
inflation or changing economic conditions in the foreseeable future.
-27-
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. Specifically,
SFAS 141 requires that an intangible asset may be separately recognized only if
such an asset meets the contractual-legal criterion or the separability
criterion. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The application
of SFAS 141 is expected to have no material impact on the Company's financial
position or results of operations.
In July of 2001, the FASB issued Statements of Financial Accounting
Standards No. 142, or SFAS 142, "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. For intangible assets with indefinite useful lives, the
impairment review will involve a comparison of fair value to carrying value,
with any excess of carrying value over fair value being recorded as an
impairment loss. For goodwill, the impairment test shall be a two-step process,
consisting of a comparison of the fair value of a reporting unit with its
carrying amount, including the goodwill allocated to each reporting unit. If the
carrying amount is in excess of the fair value, the implied fair value of the
reporting unit goodwill is compared to the carrying amount of the reporting unit
goodwill. Any excess of the carrying value of the reporting unit goodwill over
the implied fair value of the reporting unit goodwill will be recorded as an
impairment loss. Separable intangible assets that are deemed to have a finite
life will continue to be amortized over their useful lives (but with no maximum
life). Intangible assets with finite useful lives will continue to be reviewed
for impairment in accordance with Statements of Financial Accounting Standards
No. 121, or SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS
142 apply to goodwill and intangible assets acquired after June 30, 2001. The
adoption of SFAS 142 on January 1, 2002 is expected to have no material impact
on the Company's financial position or results of operations.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is in the process of assessing the
effect of adopting SFAS 143, which will be effective for the Company's fiscal
year ending December 31, 2002.
In October of 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
However, SFAS 144 retains the fundamental provisions of SFAS 121 for: 1)
recognition and measurement of the impairment of long-lived assets to be held
and used; and 2) measurement of long-lived assets to be disposed of by sale.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS 144 to have a material effect on
its financial position or results of operations.
Forward-Looking Statements And Cautionary Factors That May Affect Future Results
Certain statements contained herein related to the estimated size of the
Company's loss for 2002, the sufficiency of its cash resources, existing and
potential collaborative and licensing relationships and current plans for
product development including the progress of clinical trials and timing of
clinical trials and regulatory filings, or that otherwise relate to future
periods are "forward-looking" information, as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such statements are based on
the Company's current beliefs as
-28-
to the outcome and timing of future events, and actual results may differ
materially from those projected or implied in the forward-looking statements.
Further, certain forward-looking statements are based upon assumptions of future
events that may not prove accurate. The forward-looking statements involve risks
and uncertainties including, but not limited to, size and timing of
expenditures, unanticipated expenditures, availability of funds, changes in the
status of existing collaborative relationships, availability of additional
collaboration opportunities, timing of results of pending or future clinical
trials, market demand for products, the ability of collaborators and other
partners to meet their obligations, actions by the FDA and future actions by the
Patent Office, as well as more general risks and uncertainties related to
regulatory approvals, product efficacy and development, the Company's financing
needs and opportunities, the legal standards applicable to biotechnology
patents, scale-up and marketing capabilities, intellectual property protection,
competition, international operations and share price volatility. These risks
are described in more detail in the remainder of this section.
None Of Our Pharmaceutical Products Have Received Regulatory Approval; If
Our Products Do Not Receive Regulatory Approval, Neither We Nor Our Third Party
Collaborators Will Be Able To Manufacture And Market Them
Even our most developed pharmaceutical product has yet to complete final
clinical testing. We will be unable to manufacture and market our products
without required regulatory approvals in the United States and other countries.
The United States government and governments of other countries extensively
regulate many aspects of our products, including:
o testing
o manufacturing
o promotion and marketing and
o exporting.
In the United States, the Food and Drug Administration regulates
pharmaceutical products under the Federal Food, Drug, and Cosmetic Act and other
laws, including, in the case of biologics, the Public Health Service Act. At the
present time, we believe that our products will be regulated by the FDA as
biologics. State regulations may also affect our proposed products.
The FDA has substantial discretion in both the product approval process and
manufacturing facility approval process and, as a result of this discretion and
uncertainties about outcomes of testing, we cannot predict at what point, or
whether, the FDA will be satisfied with our submissions or whether the FDA will
raise questions which may be material and delay or preclude product approval or
manufacturing facility approval. As we accumulate additional clinical data, we
will submit it to the FDA, which may have a material impact on the FDA product
approval process.
Our potential products will require significant additional research and
development, extensive preclinical studies and clinical trials and regulatory
approval prior to any commercial sales. This process is lengthy, often taking a
number of years, and expensive. As clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory
approvals, the length of time necessary to complete clinical trials and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly. As a result, it is uncertain whether:
o our future filings will be delayed
-29-
o our studies will be successful
o we will be able to provided necessary additional data
o our future results will justify further development or
o we will ultimately achieve regulatory approval for any of these
products.
For example,
o in 1996, we and Genentech began developing Xanelim(TM), which is also
called Efalizumab, in patients with moderate to severe psoriasis. In
October of 2001, we and Genentech announced that the FDA required an
additional pharmacokinetics study to be included in the potential
biologics license application submission to the FDA, and that this
would delay the estimated filing date to the summer of 2002. Because
this additional study has not been completed and we do not know the
results, we do not know whether this study will be successful or
whether this filing will be made on schedule. We are also conducting a
Phase I/II study of Xanelim(TM)in kidney transplant recipients.
Because no final decisions have been made, we do not know whether
there will be follow-on studies, and if there are such follow-on
studies we do not know whether any such studies will be sufficient for
regulatory approval. We have also announced plans to initiate testing
of Xanelim(TM)in patients suffering from rheumatoid arthritis. We do
not know whether any such testing will demonstrate product safety and
efficacy in this patient population or result in regulatory approval.
o in December of 1992, we began human testing of our NEUPREX(R)product,
a genetically-engineered fragment of a particular human protein, and
have licensed certain worldwide rights to Baxter. In April of 2000,
members of the FDA and representatives of XOMA and Baxter discussed
results from the Phase III trial that tested NEUPREX(R)in pediatric
patients with a potentially deadly bacterial infection principally of
children called meningococcemia, and senior representatives of the FDA
indicated that the data presented were not sufficient to support the
filing of an application for marketing approval at that time. Because
we have not generated any additional data or completed any further
analysis, we do not know whether we will be able to supply such
additional data. If we conduct an additional trial to provide the
requested additional data, we will not know whether the results will
be adequate for approval until the trial has been completed and the
resulting data reviewed by the FDA. In September of 1999, we
discontinued patient enrollment in our Phase III clinical trial
testing NEUPREX(R)in trauma patients with severe blood loss because an
independent data safety monitoring board told us that interim results
from the trial did not support continuing the trial. Baxter has
initiated a Phase II study with NEUPREX(R)in Crohn's disease patients.
Because this study has not been completed and we do not know the
results, we do not know whether the results will support product
approval or justify further development.
Given that regulatory review is an interactive and continuous process, we
maintain a policy of limiting announcements and comments upon the specific
details of the ongoing regulatory review of our products, subject to our
obligations under the securities laws, until definitive action is taken.
-30-
Because All Of Our Products Are Still In Development, We Will Require
Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
Your Rights
If adequate funds are not available, we may have to dilute or otherwise
adversely affect the rights of existing shareholders, curtail or cease
operations or, in extreme circumstances, file for bankruptcy protection. We have
spent, and we expect to continue to spend, substantial funds in connection with:
o research and development relating to our products and production
technologies
o expansion of our production capabilities
o extensive human clinical trials and
o protection of our intellectual property.
Based on current spending levels and third party funding, we believe that we
have enough cash to meet our currently anticipated needs for operating expenses,
working capital, equipment acquisitions and current research projects through
approximately the middle of 2004. However, to the extent we experience changes
in the timing or size of expenditures or unanticipated expenditures, or if our
collaborators do not meet their obligations to us, these funds may not be
adequate for this period. As a result, we do not know whether:
o operations will generate meaningful funds
o additional agreements for product development funding can be reached
o strategic alliances can be negotiated or
o adequate additional financing will be available for us to finance our
own development on acceptable terms, if at all.
Cash balances and operating cash flow are influenced primarily by the timing and
level of payments by our licensees and development partners, as well as by our
operating costs.
Because All Of Our Products Are Still In Development, We Have Sustained Losses
In The Past And We Expect To Sustain Losses In The Future
We have experienced significant losses and, as of December 31, 2001, we had
an accumulated deficit of approximately U.S.$507.6 million.
For the year ended December 31, 2001, we had a net loss of approximately
U.S.$28.0 million, or U.S.$0.41 per common share (basic and diluted). We expect
to incur additional losses in the future. Our ability to make profits is
dependent in large part on obtaining regulatory approval for our products and
entering into agreements for product development and commercialization, both of
which are uncertain. Our ability to fund our ongoing operations is dependent on
the foregoing factors and on our ability to secure additional funds. Because all
of our products are still in development, we do not know whether we will ever
make a profit or whether cash flow from future operations will be sufficient to
meet our needs.
-31-
If Third Party Collaborators Do Not Successfully Develop and Market Our
Products, We May Not Be Able To Do So On Our Own
Our financial resources and our marketing experience and expertise are
limited. Consequently, we depend to a large extent upon securing the financial
resources and marketing capabilities of third parties with whom we collaborate.
o In April of 1996, XOMA and Genentech entered into an agreement whereby
XOMA agreed to co-develop Genentech's humanized monoclonal antibody
product Xanelim(TM). In April of 1999, the companies extended and
expanded the agreement.
o In January of 2000, we licensed the worldwide rights to all
pharmaceutical compositions containing a particular human protein for
treatment of meningococcemia and additional potential future human
clinical indications to Baxter.
o In January of 2001, we entered into a strategic process development
and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
which we are scaling up production to commercial volume and will
manufacture one of Onyx's cancer products.
o In November of 2001, we entered into a collaboration with Millennium
Pharmaceuticals, Inc. to develop two of Millennium's products for
certain vascular inflammation indications.
Because our collaborators are independent third parties, they may be subject to
different risks than we are and have significant discretion in determining the
efforts and resources they will apply, we do not know whether Genentech, Baxter,
Onyx or Millennium will successfully develop or market any of the products we
are collaborating on.
Even when we have a collaboration relationship, other circumstances may
prevent it from resulting in successful development of marketable products. For
example, in June of 1999, we licensed certain genetically-engineered fragments
of a particular human protein to Allergan Inc. to treat bacterial ophthalmic
infections. In May of 2000, following successful product testing at Allergan, we
expanded the collaboration. In November of 2000, Allergan advised us that for
internal economic reasons they planned to discontinue development of ophthalmic
anti-infective products derived from this protein.
Although we continue to evaluate additional strategic alliances and
potential partnerships, we do not know whether or when any such alliances or
partnerships will be entered into.
If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
Market Demand
Because we have never commercially introduced any pharmaceutical products
and none of our products have received regulatory approval, we do not know
whether the capacity of our existing manufacturing facilities can be increased
to produce sufficient quantities of our products to meet market demand. Also, if
we need additional manufacturing facilities to meet market demand, we cannot
predict that we will successfully obtain those facilities because we do not know
whether they will be available on acceptable terms. In addition, any
manufacturing facilities acquired or used to meet market demand must meet the
FDA's quality assurance guidelines.
-32-
Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products
Even if we receive regulatory approval for our products and we or our third
party collaborators successfully manufacture them, our products may not be
accepted in the marketplace. For example, physicians and/or patients may not
accept a product for a particular indication because it has been biologically
derived (and not discovered and developed by more traditional means) if no
biologically-derived products are currently in widespread use in that
indication, as is currently the case with psoriasis. Consequently, we do not
know if physicians or patients will adopt or use our products for their approved
indications.
If Our Patent Protection For Our Principal Products and Processes Is Not
Enforceable, We Will Not Realize Our Profit Potential
Because of the length of time and the expense associated with bringing new
products to the marketplace, we hold and are in the process of applying for a
number of patents in the United States and abroad to protect our products and
important processes and also have obtained or have the right to obtain exclusive
licenses to certain patents and applications filed by others. However, the
patent position of biotechnology companies generally is highly uncertain and
involves complex legal and factual questions, and no consistent policy regarding
the breadth of allowed claims has emerged from the actions of the U.S. Patent
and Trademark Office with respect to biotechnology patents. Legal considerations
surrounding the validity of biotechnology patents continue to be in transition,
and historical legal standards surrounding questions of validity may not
continue to be applied, and current defenses as to issued biotechnology patents
may not in fact be considered substantial in the future. These factors have
contributed to uncertainty as to:
o the degree and range of protection any patents will afford against
competitors with similar technologies
o if and when patents will issue
o whether or not others will obtain patents claiming aspects similar to those
covered by our patent applications or
o the extent to which we will be successful in avoiding infringement of any
patents granted to others.
The Patent Office has issued 59 patents to us related to our products based
on human bactericidal permeability-increasing protein, which we call BPI,
including novel compositions, their manufacture, formulation, assay and use. In
addition, we are the exclusive licensee of BPI-related patents and applications
owned by New York University and Incyte Pharmaceuticals Inc. The Patent Office
has also issued and/or allowed nine patents to us related to our bacterial
expression technology.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, we may require licenses from
others in order to develop and commercialize certain potential products
incorporating our technology or we may become involved in litigation to
determine the proprietary rights of others. These licenses, if required, may not
be available on acceptable terms, and any such litigation may be costly and may
have other adverse effects on our business, such as inhibiting our ability to
compete in the market place and absorbing significant management time.
Due to the uncertainties regarding biotechnology patents, we also have
relied and will continue to rely upon trade secrets, know-how and continuing
technological advancement to develop and maintain our competi-
-33-
tive position. All of our employees have signed confidentiality agreements under
which they have agreed not to use or disclose any of our proprietary
information. Research and development contracts and relationships between us and
our scientific consultants and potential customers provide access to aspects of
our know-how that are protected generally under confidentiality agreements.
These confidentiality agreements may not be honored or may not be enforced by a
court. To the extent proprietary information is divulged to competitors or to
the public generally, such disclosure may adversely effect our ability to
develop or commercialize our products by giving others a competitive advantage
or by undermining our patent position.
Protecting Our Intellectual Property Can Be Costly And Exposes Us To Risks Of
Counterclaims Against Us
We may be required to engage in litigation or other proceedings to protect
our intellectual property. For example, we are currently engaged in litigation
with Biosite Incorporated regarding certain license agreements and patents
relating to our expression technology. Our amended complaint seeks unspecified
monetary damages, injunctive and other relief for infringement of our expression
technology patents, fraud and misrepresentation, breach of contract,
misappropriation and unfair business practices. Biosite has made counterclaims
for unspecified damages for breach of contract, breach of covenant of good faith
and fair dealing, intentional interference with contracts and with prospective
economic advantage, unfair business practices, violation of the Lanham Act and
injunctive and declaratory relief. Biosite has also asserted, among other
defenses, that the patents at issue are invalid. In February of 2002, Biosite
announced that it has begun implementing an antibody expression technology
intended to allow it to operate its business without using our patents and that
it is launching a licensing program.
The cost to us of this and other patent litigation, even if resolved in our
favor, could be substantial. Such litigation could also divert management's
attention and resources. In addition, if this or other patent litigation is
resolved against us, our patents may be declared invalid, and we could be held
liable for significant damages. In addition, if the litigation included a claim
of infringement by us of another party's patent that was resolved against us, we
or our collaborators may be enjoined from developing, manufacturing, selling or
importing products, processes or services without a license from the other
party.
Other Companies May Render Some Or All Of Our Products Noncompetitive Or
Obsolete
Developments by others may render our products or technologies obsolete or
uncompetitive. Technologies developed and utilized by the biotechnology and
pharmaceutical industries are continuously and substantially changing.
Competition in the areas of genetically-engineered DNA-based and antibody-based
technologies is intense and expected to increase in the future as a number of
established biotechnology firms and large chemical and pharmaceutical companies
advance in these fields. Many of these competitors may be able to develop
products and processes competitive with or superior to our own for many reasons,
including that they may have:
o significantly greater financial resources
o larger research and development and marketing staffs
o larger production facilities
o entered into arrangements with, or acquired, biotechnology companies to
enhance their capabilities or
o extensive experience in preclinical testing and human clinical trials.
-34-
These factors may enable others to develop products and processes
competitive with or superior to our own. In addition, a significant amount of
research in biotechnology is being carried out in universities and other
non-profit research organizations. These entities are becoming increasingly
interested in the commercial value of their work and may become more aggressive
in seeking patent protection and licensing arrangements.
Without limiting the foregoing, we are aware that:
o Biogen Inc. has announced that its Amevive(R) product achieved positive
results in two Phase III clinical trials in patients with moderate to
severe plaque psoriasis and that the FDA and the EMEA have officially
accepted Biogen's filings for approval of Amevive(R) in psoriasis;
o Centocor Inc., a unit of Johnson & Johnson, has tested its rheumatoid
arthritis and Crohn's disease drug in psoriasis, and it has been announced
that the drug has shown clinical benefit,
o it has been announced that Immunex Corp. (which is in the process of being
acquired by Amgen Inc.) has tested its rheumatoid arthritis and psoriatic
arthritis drug in psoriasis with positive results;
o MedImmune, Inc. is testing its anti-T cell monoclonal antibody in
psoriasis; and
o other companies, including Medarex, Inc., are developing monoclonal
antibody or other products for treatment of inflammatory skin disorders.
Currently, there are several companies with marketed biologics that are
approved for treating patients with rheumatoid arthritis:
o Immunex Corp. markets Enbrel,
o Amgen Inc. recently gained FDA approval for Kineret and
o Centocor Inc. is approved to market Remicade to rheumatoid arthritis
patients.
In addition to approved products, a number of companies are developing drugs
with a biologic mechanism of action for the treatment of rheumatoid arthritis.
These companies include Cambridge Antibody Technology Group plc, Biogen Inc.,
Celltech Group plc and others.
A number of companies are developing monoclonal antibodies targeting
cancers, which may prove more effective than ONYX-015 or the ING-1 antibody.
It is possible that one or more other companies may be developing one or
more products based on the same human protein as our NEUPREX(R) product, and
these product(s) may prove to be more effective than NEUPREX(R) or receive
regulatory approval prior to NEUPREX(R) or any BPI-derived ophthalmic product
developed by XOMA.
We Have Been Sued Under the California Unfair Competition Act
A complaint was filed in January of 2002 in the California Superior Court
in San Diego County purporting to assert claims against us and Genentech under
the California Unfair Competition Act, alleging that false and misleading
statements were made concerning the anticipated timetable for the filing of a
biologics license application with the FDA in connection with our development of
Xanelim(TM). The complaint seeks injunctive relief, costs and expenses. Although
we feel that this suit is without merit and intend to vigorously contest it,
this
-35-
matter could be determined in favor of the plaintiffs and result in consequences
materially adverse to us, such as restrictions on our ability to do business in
California. Even if we prevail in this matter, such litigation could result in
substantial costs and divert management's attention and resources.
If We Do Business Internationally, We Will Be Subject To Additional Political,
Economic and Regulatory Uncertainties
We may not be able to successfully operate in any foreign market. We
believe that, because the pharmaceutical industry is global in nature,
international activities will be a significant part of our future business
activities and that, when and if we are able to generate income, a substantial
portion of that income will be derived from product sales and other activities
outside the United States. Foreign regulatory agencies often establish standards
different from those in the United States, and an inability to obtain foreign
regulatory approvals on a timely basis could put us at a competitive
disadvantage or make it uneconomical to proceed with a product's development.
International operations may be limited or disrupted by:
o imposition of government controls
o export license requirements
o political or economic instability
o trade restrictions
o changes in tariffs
o restrictions on repatriating profits
o taxation and
o difficulties in staffing and managing international operations.
Also, our financial results could be significantly affected by factors such
as fluctuations in currency exchange rates or weak economic conditions in the
foreign markets in which we or our collaborators seek to operate.
Because We Are A Relatively Small Biopharmaceutical Company With Limited
Resources, We May Not Be Able To Attract And Retain Qualified Personnel, And The
Loss Of Key Personnel Could Delay Or Prevent Achieving Our Objectives
Our success in developing marketable products and achieving a competitive
position will depend, in part, on our ability to attract and retain qualified
scientific and management personnel, particularly in areas requiring specific
technical, scientific or medical expertise. There is intense competition for
such personnel. Our research, product development and business efforts would be
adversely affected by the loss of one or more of key members of our scientific
or management staff, particularly our executive officers: John L. Castello, our
Chairman of the Board, President and Chief Executive Officer; Patrick J.
Scannon, M.D., Ph.D., our Chief Scientific and Medical Officer and Senior Vice
President; Clarence L. Dellio, our Senior Vice President, Operations; Peter B.
Davis, our Vice President, Finance and Chief Financial Officer; and Christopher
J. Margolin, our Vice President, General Counsel and Secretary. We have
employment agreements with Mr. Castello, Dr. Scannon and Mr. Davis. We currently
have no key person insurance on any of our employees.
-36-
Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
Product Liability Claims
The testing and marketing of medical products entails an inherent risk of
allegations of product liability. We believe that we currently have adequate
levels of insurance for our clinical trials; however, in the event of one or
more large, unforeseen awards, such levels may not provide adequate coverage. We
will seek to obtain additional insurance, if needed, if and when our products
are commercialized; however, because we do not know when this will occur, we do
not know whether adequate insurance coverage will be available or be available
at acceptable costs. A significant product liability claim for which we were not
covered by insurance would have to be paid from cash or other assets. To the
extent we have sufficient insurance coverage, such a claim would result in
higher subsequent insurance rates.
If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
Against Us Because We Are A Foreign Entity
We are a Bermuda company. All or a substantial portion of our assets may be
located outside the United States. As a result, it may be difficult for
shareholders and others to enforce in United States courts judgments obtained
against us. We have irrevocably agreed that we may be served with process with
respect to actions based on offers and sales of securities made hereby in the
United States by serving Christopher J. Margolin, c/o XOMA Ltd., 2910 Seventh
Street, Berkeley, California 94710, our United States agent appointed for that
purpose. We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
that there is doubt as to whether Bermuda courts would enforce judgments of
United States courts obtained in (a) actions against XOMA or our directors and
officers that are predicated upon the civil liability provisions of the U.S.
securities laws or (b) original actions brought in Bermuda against XOMA or such
persons predicated upon the U.S. securities laws. There is no treaty in effect
between the United States and Bermuda providing for such enforcement, and there
are grounds upon which Bermuda courts may not enforce judgments of United States
courts. Certain remedies available under the United States federal securities
laws may not be allowed in Bermuda courts as contrary to that nation's policy.
Our Shareholder Rights Agreement Or Bye-laws May Prevent Transactions That Could
Be Beneficial To Our Shareholders And May Insulate Our Management From Removal
Our shareholder rights agreement could make it considerably more difficult
or costly for a person or group to acquire control of XOMA in a transaction that
our board of directors opposes.
Our bye-laws:
o require certain procedures to be followed and time periods to be met for
any shareholder to propose matters to be considered at annual meetings of
shareholders, including nominating directors for election at those
meetings;
o authorize our board of directors to issue up to 1,000,000 preference shares
without shareholder approval and to set the rights, preferences and other
designations, including voting rights, of those shares as the board of
directors may determine; and
o contain provisions, similar to those contained in the Delaware General
Corporation Law, that may make business combinations with interested
shareholders more difficult.
-37-
These provisions of our shareholders rights agreement and our bye-laws,
alone or in combination with each other, may discourage transactions involving
actual or potential changes of control, including transactions that otherwise
could involve payment of a premium over prevailing market prices to holders of
common shares, could limit the ability of shareholders to approve transactions
that they may deem to be in their best interests and could make it considerably
more difficult for a potential acquiror to replace management.
Because We Have No History Of Profitability And Because The Biotechnology Sector
Has Been Characterized By Highly Volatile Stock Prices, Announcements We Make
And General Market Conditions For Biotechnology Stocks Could Result In A Sudden
Change In The Value Of Our Common Shares
As a biopharmaceutical company, we have experienced significant volatility
in our common shares. Fluctuations in our operating results and general market
conditions for biotechnology stocks could have a significant impact on the
volatility of our common share price. From December 31, 2000 through February
28, 2002, our share price has ranged from a low of U.S.$5.31 to a high of
U.S.$17.75. On December 31, 2001 the last reported sale price of the common
shares as reported on the Nasdaq National Market was U.S.$9.85 per share.
Factors contributing to such volatility include:
o results of preclinical studies and clinical trials,
o information relating to the safety or efficacy of our products,
o developments regarding regulatory filings,
o announcements of new collaborations,
o failure to enter into collaborations,
o developments in existing collaborations,
o our funding requirements and the terms of our financing arrangements,
o announcements of technological innovations or new indications for our
therapeutic products,
o government regulations,
o developments in patent or other proprietary rights,
o the number of shares outstanding,
o the number of shares trading on an average trading day,
o announcements regarding other participants in the biotechnology and
pharmaceutical industries, and
o market speculation regarding any of the foregoing.
-38-
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to its investment portfolio. XOMA does not
use derivative financial instruments in its investment portfolio. By policy, the
Company places its investments with high quality debt security issuers, limits
the amount of credit exposure to any one issuer, limits duration by restricting
the term, and holds investments to maturity except under rare circumstances. The
Company classifies its cash equivalents or short-term investments as fixed rate
if the rate of return on an instrument remains fixed over its term. As of
December 31, 2001, all cash equivalents and short-term investments are
classified as fixed rate.
XOMA also has a long-term convertible note due to Genentech in 2005.
Interest on this note of LIBOR plus 1% is reset at the end of June and December
each year and, therefore, variable.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents at December 31, 2001:
Fair Value Average
Maturity (in thousands) Interest Rate
--------------- ----------------- ----------------
Cash equivalents, fixed rate Daily $67,320 1.9%
Other Market Risk. At December 31, 2001 the Company had a long-term
convertible note outstanding, which is convertible into common shares based on
the market price of the Company's common shares at the time of conversion. A 10%
decrease in the market price of the Company's common shares would increase the
number of shares issuable upon conversion of either security by approximately
11%. An increase in the market price of Company common shares of 10% would
decrease the shares issuable by approximately 9%. (See Note 4 to the
Consolidated Financial Statements.)
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant, related
notes, and report of independent auditors are set forth beginning on page F-1 of
this report.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
-39-
Item 10. Directors and Executive Officers of the Registrant
The section labeled "Item 1 -- Election of Directors" appearing in the
Company's proxy statement for the 2002 annual general meeting of shareholders is
incorporated herein by reference. Certain information concerning the Company's
executive officers is set forth in Part I of this Report on Form 10-K.
Item 11. Executive Compensation
The section labeled "Compensation of Executive Officers" appearing in the
Company's proxy statement for the 2002 annual general meeting of shareholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Share Ownership" appearing in the Company's proxy
statement for the 2002 annual general meeting of shareholders is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Transactions" appearing in the Company's proxy
statement for the 2002 annual general meeting of shareholders is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1) Financial Statements:
All financial statements of the registrant referred to in Item 8
of this Report on Form 10-K.
(2) Financial Statement Schedules:
All financial statements schedules have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto or is not applicable or required.
(3) Exhibits:
See "Index to Exhibits."
(b) Reports on Form 8-K:
Current report on Form 8-K dated and filed on November 27, 2001, as
amended by an amendment on Form 8-K/A dated and filed on December 13,
2001 (file no. 0-14710).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 29th day of
March, 2002.
XOMA Ltd.
By: /s/ John L. Castello
-------------------------------------
John L. Castello
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John L. Castello Chairman of the Board, President March 29, 2002
- --------------------------------------- and Chief Executive Officer
(John L. Castello)
/s/ Patrick J. Scannon Chief Scientific and Medical Officer, March 29, 2002
- --------------------------------------- Senior Vice President and Director
(Patrick J. Scannon)
/s/ Peter B. Davis Vice President, Finance and March 29, 2002
- --------------------------------------- Chief Financial Officer (Principal
(Peter B. Davis) Financial and Accounting Officer)
/s/ James G. Andress Director March 29, 2002
- ---------------------------------------
(James G. Andress)
/s/ William K. Bowes, Jr. Director March 29, 2002
- ---------------------------------------
(William K. Bowes, Jr.)
/s/ Arthur Kornberg Director March 29, 2002
- ---------------------------------------
(Arthur Kornberg)
/s/ Steven C. Mendell Director March 29, 2002
- ---------------------------------------
(Steven C. Mendell)
/s/ W. Denman Van Ness Director March 29, 2002
- ---------------------------------------
(W. Denman Van Ness)
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency). F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of XOMA Ltd.
We have audited the accompanying consolidated balance sheets of XOMA Ltd.
as of December 31, 2001 and 2000 and the related consolidated statements of
operations, shareholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of XOMA Ltd. as of
December 31, 2001 and 2000 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 8, 2002
F-2
XOMA LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par and per share amounts)
December 31,
ASSETS 2001 2000
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 67,320 $ 35,043
Short-term investments 320 172
Related party receivables 418 237
Receivables 1,662 1,008
Inventory 1,299 --
Prepaid expenses and other 249 162
------------- -------------
Total current assets 71,268 36,622
Property and equipment, net 14,645 8,421
Deposits and other 194 169
------------- -------------
Total Assets $ 86,107 $ 45,212
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
CURRENT LIABILITIES:
Accounts payable $ 3,520 $ 2,515
Accrued liabilities 4,422 4,311
Capital lease obligations--current 673 185
Deferred revenue--current 5,017 3,333
Convertible subordinated note--current 5,013 --
------------- -------------
Total current liabilities 18,645 10,344
Capital lease obligations--long-term 1,393 361
Deferred revenue--long-term 1,470 3,609
Convertible subordinated notes-long-term 50,980 39,488
------------- -------------
Total Liabilities 72,488 53,802
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Net Capital Deficiency):
Preference shares, $.05 par value, 1,000,000 shares authorized, no
shares issued and outstanding -- --
Common shares, $.0005 par value, 135,000,000 shares authorized, and
70,184,693 and 66,107,946 shares outstanding at December 31, 2001
and 2000, respectively 35 33
Paid-in capital 521,163 471,066
Accumulated comprehensive income (loss) 50 (100)
Accumulated deficit (507,629) (479,589)
------------- -------------
Total Shareholders' Equity (Net Capital Deficiency) 13,619 (8,590)
------------- -------------
$ 86,107 $ 45,212
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
XOMA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31,
---------------------------------------------------
2001 2000 1999
-------------- -------------- -----------------
REVENUES:
License and collaborative fees $ 4,821 $ 3,194 $ 2,281
Contract revenue 10,078 3,400 --
Product sales 2,380 65 80
-------------- -------------- -----------------
Total revenues 17,279 6,659 2,361
-------------- -------------- -----------------
OPERATING COSTS AND EXPENSES:
Research and development 35,929 30,006 41,454
Marketing, general and administrative 8,681 6,069 6,080
-------------- -------------- -----------------
Total operating costs and expenses 44,610 36,075 47,534
-------------- -------------- -----------------
Loss from operations (27,331) (29,416) (45,173)
OTHER INCOME (EXPENSE):
Investment and other income 1,959 2,684 1,159
Interest and other expense (2,668) (2,680) (1,765)
-------------- -------------- -----------------
Net loss (28,040) (29,412) (45,779)
Preference share dividends -- -- (55)
-------------- -------------- -----------------
Net loss available to common shareholders $(28,040) $(29,412) $(45,834)
============== ============== =================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $(0.41) $(0.45) $(0.87)
============== ============== =================
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
COMMON SHARE 68,159 64,719 52,705
============== ============== =================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
XOMA LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(In thousands)
Shareholders' Equity (Net Capital Deficiency)
------------------------------------------------------
Preference Shares Common Shares Paid-In
Shares Amount Shares Amount Capital
------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 1998 644 $ 6,440 47,029 $ 24 $ 398,129
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 195 -- 661
Sale of common shares -- -- 8,613 4 27,827
Conversion of Series C redeemable convertible (644) (6,440) 2,394 1 6,439
preference shares
Unrealized gain (loss) on investments -- -- -- -- (1)
Dividends on preference shares -- -- 93 -- 247
Net loss and comprehensive loss -- -- -- -- --
------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 1999 -- -- 58,324 29 433,302
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 1,053 1 4,570
Exercise of warrants -- -- 204 -- 1,192
Sale of common shares -- -- 6,145 3 28,967
Conversion of redeemable debentures into common shares -- -- 382 -- 3,035
Comprehensive loss:
Unrealized gain (loss) on investments -- -- -- -- --
Net loss -- -- -- -- --
------- --------- --------- --------- ----------
Comprehensive loss -- -- -- -- --
------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 2000 -- -- 66,108 33 471,066
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 324 -- 1,541
Exercise of warrants -- -- 652 -- 3,808
Sale of common shares -- -- 3,000 2 43,256
Conversion of redeemable debentures into common shares -- -- 100 -- 1,492
Comprehensive loss:
Unrealized gain (loss) on investments -- -- -- -- --
Net loss and comprehensive loss -- -- -- -- --
------- --------- --------- --------- ----------
Comprehensive loss -- -- -- -- --
------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 2001 -- $-- 70,184 $ 35 $ 521,163
======= ========= ========= ========= ==========
Shareholders' Equity (Net Capital Deficiency)
---------------------------------------------------
Accumulated Total Shareholders'
Comprehensive Accumulated Equity (Net Capital
Income (Loss) Deficit Deficiency)
-------------- ----------- -------------------
BALANCE, DECEMBER 31, 1998 $-- $(404,343) $(6,190)
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 661
Sale of common shares -- -- 27,831
Conversion of Series C redeemable convertible -- -- 6,440
preference shares
Unrealized gain (loss) on investments -- -- (1)
Dividends on preference shares -- (55) 192
Net loss and comprehensive loss -- (45,779) (45,779)
-------------- ----------- -------------------
BALANCE, DECEMBER 31, 1999 -- (450,177) (16,846)
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 4,571
Exercise of warrants -- -- 1,192
Sale of common shares -- -- 28,970
Conversion of redeemable debentures into common shares -- -- 3,035
Comprehensive loss:
Unrealized gain (loss) on investments (100) -- (100)
Net loss -- (29,412) (29,412)
-------------- ----------- -------------------
Comprehensive loss -- -- (29,512)
-------------- ----------- -------------------
BALANCE, DECEMBER 31, 2000 (100) (479,589) (8,590)
Exercise of share options, contributions to 401(k)
and incentive plans -- -- 1,541
Exercise of warrants -- -- 3,808
Sale of common shares -- -- 43,258
Conversion of redeemable debentures into common shares -- -- 1,492
Comprehensive loss:
Unrealized gain (loss) on investments 150 -- 150
Net loss -- (28,040) (28,040)
-------------- ----------- -------------------
Comprehensive loss -- -- (27,890)
-------------- ----------- -------------------
BALANCE, DECEMBER 31, 2001 $ 50 $(507,629) $ 13,619
============== =========== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
XOMA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
----------------------------------------
2001 2000 1999
--------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(28,040) $(29,412) $(45,779)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,254 1,189 1,233
Common shares contributed to 401(k) and
management incentive plans 477 421 391
Increase (decrease) in convertible notes to
(from) a collaborative partner for cost allocations 3,364 (700) (4,500)
Accrued interest on convertible subordinated notes 2,456 2,679 1,711
Receipt of stock in exchange for technology license -- -- (500)
Common shares received from a vendor (231) --
Gain on investments (20) (278) --
(Gain) loss on disposal/ retirement of property and equipment (97) 2 2
Changes in assets and liabilities:
- ---------------------------------
Related party and other receivables (835) (868) (487)
Inventory (1,299) -- --
Prepaid expenses and other (87) 517 (20)
Deposits and other assets (25) (45) 7
Accounts payable 1,005 (1,400) 400
Accrued liabilities 111 (2,208) (29)
Deferred revenue (455) 6,942 --
--------- ------------ -----------
Net cash used in operating activities (22,422) (23,161) (47,571)
--------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 253 506 59,738
Purchase of short-term investments -- -- (43,309)
Purchase of property and equipment, net of sale proceeds (7,381) (1,519) (991)
--------- ------------ -----------
Net cash (used in) provided by investing activities (7,128) (1,013) 15,438
--------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback transactions 1,828 546 --
Principal payments under capital lease obligations (308) -- (286)
Proceeds from issuance of convertible note 12,177 5,820 11,000
Proceeds from issuance of common or
convertible preference shares and warrants 48,130 34,312 28,101
--------- ------------ -----------
Net cash provided by financing activities 61,827 40,678 38,815
--------- ------------ -----------
Net increase in cash and cash equivalents 32,277 16,504 6,682
Cash and cash equivalents at beginning of year 35,043 18,539 11,857
--------- ------------ -----------
Cash and cash equivalents at end of year $ 67,320 $ 35,043 $ 18,539
========= ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
XOMA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a
biopharmaceutical company that develops and manufactures products to treat
cancer, immunologic and inflammatory disorders, and infectious diseases. The
Company's products are presently in various stages of development and all are
subject to regulatory approval before the Company or its collaborators can
commercially introduce any products. There can be no assurance that any of the
products under development by the Company will be developed successfully, obtain
the requisite regulatory approval or be successfully manufactured or marketed.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from those
estimates.
Concentration of Risk
Cash, cash equivalents, short term investments and accounts receivable are
financial instruments, which potentially subject the Company to concentrations
of credit risk. The Company maintains and invests excess cash in money market
funds and repurchase agreements which bear minimal risk. The Company has not
experienced any significant credit losses and does not generally require
collateral on receivables. In 2001, two customers represented 57% and 39% of
total revenues and as of December 31, 2001 billed and unbilled receivables
totaled $476,000 and $1,181,000 for these customers, respectively. In 2000, one
customer represented 97% of total revenues and the related receivable balance as
of December 31, 2000 was $1,008,000.
Reclassifications
Certain reclassifications have been made to conform the prior years to the
2001 presentation.
Revenue Recognition
Revenue is recognized when the related costs are incurred and the four
basic criteria of revenue recognition are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the nature of the fee charged for products or services delivered and
the collectibility of those fees.
F-7
License and Collaborative Fees
Revenue from non-refundable, up-front license or technology access payments
under license and collaborative agreements where the Company has a continuing
obligation to perform are recognized as revenue over the period of the
continuing performance obligation.
Milestone payments under collaborative arrangements are recognized as
revenue upon achievement of the incentive milestone events, which represent the
culmination of the earnings process because the Company has no future
performance obligations related to the payment. Milestone payments that require
a continuing performance obligation on the part of the Company are recognized
over the period of the continuing performance obligation. Incentive milestone
payments are triggered either by the results of our research efforts or by
events external to the Company, such as regulatory approval to market a product
or the achievement of specified sales levels by a marketing partner. Amounts
received in advance are recorded as deferred revenue until the related milestone
is achieved.
Contract Revenue
Contract revenue for research and development involves the Company
providing research, development or manufacturing services on a best efforts
basis to collaborative partners. The Company recognizes revenue under these
arrangements as the related research and development costs are incurred.
Product Sales
The Company recognizes product revenue upon shipment when there is
persuasive evidence that an arrangement exists, delivery has occurred, the price
is fixed, and determinable and collectibility is reasonably assured. Allowances
are established for estimated uncollectible amounts, product returns, and
discounts, if any.
Research and Development
The Company expenses research and development costs as incurred. Research
and development expenses consist of direct and research-related allocated
overhead costs such as facilities costs, salaries and related personnel costs
and material and supply costs. In addition, research and development expenses
include costs related to clinical trials to validate the Company's testing
processes and procedures and related overhead expenses.
Comprehensive Income (Loss)
Unrealized gains or losses on the Company's available-for-sale securities
are included in other comprehensive income. During the years ended December 31,
2001, 2000, and 1999 these unrealized gains and losses were not material and
total comprehensive loss closely equaled net loss in each period.
Stock-Based Compensation
In accordance with the provisions of the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations,
and to adopt the "disclosure only" alternative described in SFAS 123. Under APB
25, if the exercise price of the Company's employee share options equals or
exceeds the fair market value on the date of the grant or the fair value of the
underlying shares on the date of the grant as determined by the Company's Board
of Directors, no compensation expense is recognized.
Income Taxes
Income taxes are computed using the asset and liability method, under which
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws. A
valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
F-8
Net Loss Per Common Share
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the period in accordance with
Financial Accounting Standard No. 128.
The following potentially dilutive outstanding securities were not
considered in the computation of diluted net loss per share because they would
be antidilutive for each of the years ended December 31:
Amount (in thousands): 2001 2000 1999
- ---------------------- ---- ---- ----
Options for common shares 4,167 3,753 4,231
Warrants for common shares 700 1,444 1,884
Convertible notes, debentures and related interest 6,499 3,887 12,141
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid debt instruments with maturities of
three months or less at the time the Company acquires them to be cash
equivalents. Short term investments include equity securities classified as
available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized
gains and losses, net of tax, if any, reported in other comprehensive income
(loss). Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
and other income. The cost of investments sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are also included in investment and other income.
Inventories
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories, which related principally to
the Company's agreement with Baxter, consist of the following (in thousands):
December 31,
-------------------------
2001 2000
---- ----
Raw materials $ 195 --
Finished goods 1,104 --
---------- ---------
$ 1,299
---------- ---------
Property and Equipment
Property and equipment, including equipment under capital leases, are
stated at cost. Equipment depreciation is calculated using the straight-line
method over the estimated useful lives of the assets (five to seven years).
Leasehold improvements, buildings, and building improvements are amortized and
depreciated using the straight-line method over the shorter of the lease terms
or the useful lives (one to seven years).
F-9
Property and equipment consist of the following (in thousands):
December 31,
--------------------------
2001 2000
---------- ------------
Equipment $ 18,461 $ 17,330
Leasehold and building improvements 15,416 15,189
Construction-in-progress 10,919 5,293
---------- ------------
44,796 37,812
---------- ------------
Less accumulated depreciation and amortization (30,151) (29,391)
---------- ------------
Property and equipment, net $ 14,645 $ 8,421
At December 31, 2001 and 2000, property and equipment includes equipment
acquired under capital lease obligations which had a cost of approximately $2.4
million and $0.6 million, respectively and accumulated amortization of $0.4
million and $0.1 million, respectively.
Long-lived Assets
In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
In the fourth quarter of 2000, the Company decided to renovate a facility
which had previously been held for sale and consolidate a significant portion of
its Santa Monica technical development and pilot plant functions into this
facility. Due to this decision, the facility was reclassified from "Asset Held
for Sale" to construction-in-progress as of December 31, 2001 and 2000. The
renovations are expected to be completed by early 2002.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
2001 2000
---- ----
Accrued payroll costs $ 2,347 $ 2,255
Accrued clinical trial costs 445 1,151
Other 1,630 905
---------- ------------
$ 4,422 $ 4,311
========== ============
Fair Value of Financial Instruments
The fair value of marketable debt and equity securities is based on quoted
market prices. The carrying value of those securities approximates their fair
value.
F-10
The fair value of notes is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
carrying values of these obligations approximate their respective fair values.
The fair value of capital lease obligations is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities. The carrying values of these
obligations approximate their respective fair values.
Supplemental Cash Flow Information
Cash paid for interest was $0.1 million, $0.0 million, and $0.0 million
during the years ended December 31, 2001, 2000 and 1999, respectively. In
addition, dividends paid in common shares were $0.0 million, $0.0 million and
$0.2 million during the years ended December 31, 2001, 2000 and 1999,
respectively.
Non-cash transactions from financing activities included the conversion of
convertible subordinated notes held by Genentech, Inc. to equity of $1.5
million, $3.0 million and $0.0 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Segment Information
Effective January 1, 1998, the Company adopted Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. As the Company operates in a single segment, the adoption
of Statement 131 had no significant effect on results of operations or the
financial position of the Company.
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. Specifically,
SFAS 141 requires that an intangible asset may be separately recognized only if
such an asset meets the contractual-legal criterion or the separability
criterion. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The application
of SFAS 141 is expected to have no material impact on the Company's position or
results of operations.
In July of 2001, the FASB issued Statements of Financial Accounting
Standards No. 142, or SFAS 142, "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. For intangible assets with indefinite useful lives, the
impairment review will involve a comparison of fair value to carrying value,
with any excess of carrying value over fair value being recorded as an
impairment loss. For goodwill, the impairment test shall be a two-step process,
consisting of a comparison of the fair value of a reporting unit with its
carrying amount, including the goodwill allocated to each reporting unit. If the
carrying amount is in excess of the fair value, the implied fair value of the
reporting unit goodwill is compared to the carrying amount of the reporting unit
goodwill. Any excess of the carrying value of the reporting unit goodwill over
the implied fair value of the reporting unit goodwill will be recorded as an
impairment loss. Separable intangible assets that are deemed to have a finite
life will continue to be amortized over their useful lives (but with
F-11
no maximum life). Intangible assets with finite useful lives will continue
to be reviewed for impairment in accordance with Statements of Financial
Accounting Standards No. 121, or SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. The adoption of SFAS 142 on January 1, 2002 is expected to have
no material impact on the Company's position or results of operations.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is in the process of assessing the
effect of adopting SFAS 143, which will be effective for the Company's fiscal
year ending December 31, 2002.
In October of 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
However, SFAS 144 retains the fundamental provisions of SFAS 121 for: 1)
recognition and measurement of the impairment of long-lived assets to be held
and used; and 2) measurement of long-lived assets to be disposed of by sale.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS 144 to have a material effect on
its financial condition or results of operations.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 2001 and 2000, cash and cash equivalents consisted of money
market funds and overnight deposits. These investments have short maturities
and cost of investments approximates fair market value. The cost and gross
unrealized holding gain on short term investments are $270,000 and $50,000,
respectively, at December 31, 2001. The cost and gross unrealized holding loss
on short term investments were $272,000 and $100,000, respectively, at December
31, 2000.
During the years ended December 31, 2001 and 2000, available-for-sale
securities incurred no significant gross realized gains or losses. Gains and
losses are determined on a specific identification basis.
3. COLLABORATIVE AGREEMENTS
Total research and development expenses incurred related to the Company's
collaborative agreements were approximately $13.4 million, $15.7 million and
$3.3 million in 2001, 2000 and 1999, respectively.
In November of 2001, XOMA announced its agreement with Millennium to
develop two of Millennium's biotherapeutic agents, CAB2 and MLN01, for certain
vascular inflammation indications. CAB2 is a recombinant fusion protein that
inhibits complement activation and MLN01 is a humanized monoclonal antibody that
inhibits inflammatory responses by blocking the attachment of Beta 2 integrins
to their adhesion molecules. Under the terms of the agreement, XOMA will be
responsible for development activities and related costs through the completion
of Phase II trials. XOMA will make future payments to Millennium upon
achievement of certain clinical milestones. After successful completion of Phase
II, Millennium will have the right to commercialize the products and XOMA will
have the option to choose between further participation in the development
program and eventual profit sharing, or alternatively being entitled to future
royalty and milestone payments.
In January of 2001, XOMA signed a strategic process development and
manufacturing agreement with Onyx for its ONYX-015 product. XOMA is currently
manufacturing ONYX-015 in a 500-liter bioreactor, which is substantially larger
than the previous Onyx production scale. Development activities are progressing
to
F-12
further increase the scale of production. ONYX-015 is in Phase III clinical
trials for recurrent head and neck cancer and in Phase I/II trials for other
cancers.
In January of 2000, Baxter's Hyland Immuno division acquired the worldwide
rights to XOMA's NEUPREX(R) (rBPI21) for development in antibacterial and
anti-endotoxin indications. XOMA received initial non-refundable license and
signing fees of $10.0 million and may receive additional milestone payments and
royalties if the product is successfully commercialized. The license and signing
fees will be amortized over the period of continuing involvement, which period
is expected to be 36 months. In 2000, the Company recorded an additional $3.4
million in revenue related to the continued development of the product. Under
the Baxter agreements, the Company may receive payments of up to $35 million for
meningococcemia. In addition, Baxter has committed to fund development of the
product in multiple indications. Baxter will pay all future development costs,
and XOMA may receive additional milestone payments related to additional
indications. XOMA will receive royalties from future rBPI21 sales, and will
supply initial product needs from its Berkeley manufacturing facility.
In July of 1998, XOMA signed an exclusive license with Incyte Genomics,
Inc. ("Incyte") for all of Incyte's patents and patent applications relating to
bactericidal/permeability-increasing protein ("BPI"), a human host-defense
protein from which XOMA is developing a pipeline of pharmaceutical products. The
license provides that XOMA will pay Incyte a royalty on sales of BPI products
covered by the license, up to a maximum of $11.5 million. In July of 1998, XOMA
made a non-refundable $1.5 million advance royalty payment consisting of
$750,000 in cash and 158,103 XOMA common shares. Incyte also received warrants
(the "Incyte Warrants") to purchase 250,000 XOMA common shares at $6.00 per
share. The value of the warrants and the advance royalty payment have been
included in a $2.4 million charge recorded in the second quarter of 1998. The
entire value of the warrants has been recorded as a non-recurring charge in the
Company's statement of operations in 1998 since the technology rights received
relate to very early stage research which has no assurance of commercial
viability and no alternative future use.
In April of 1996, the Company entered into a collaborative agreement with
Genentech, Inc. ("Genentech") to jointly develop Xanelim(TM), for treatment of
psoriasis and organ transplant rejection. In connection with the agreement,
Genentech purchased 1.5 million common shares for approximately $9.0 million and
has agreed to fund the Company's development costs for Xanelim(TM) until the
completion of Phase III clinical trials through a series of convertible
subordinated notes. During 1996, Genentech made loans totalling $13.5 million
($5.0 and $8.5 million, respectively, for funding 1996 and 1997 clinical trials
and development costs) to XOMA under this arrangement. An additional loan of
$10.0 million was made in December of 1997 to fund 1998 costs. Under the terms
of the agreement, the Company will scale up and develop Xanelim(TM) and bring it
through Phase II clinical trials. In December of 1998, Genentech made a $2.0
million milestone payment to XOMA for successful completion of a Phase II study.
In April of 1999, the companies extended and expanded the agreement. XOMA is
entitled to receive a 25% interest in U.S. profits from Xanelim(TM) in all
indications, and a royalty on sales outside the U.S. Genentech will continue to
finance XOMA's share of development costs via a long-term convertible loan,
which is due at the earlier of 2005 or first product approval. The Company
received $10.5 million, $5.1 million and $6.5 million net funding from Genentech
under the development agreement for the years ended December 31, 2001, 2000 and
1999, respectively.
In June of 1994, the Company assigned its exclusive worldwide rights in T
cell receptor ("TCR") peptide technology to Connetics Corporation. In December
of 1999, Connetics Corporation and XOMA assigned certain TCR intellectual
property to The Immune Response Corporation ("IRC") in exchange for cash, IRC
common stock and future royalties. IRC owns additional TCR-related intellectual
property and is developing pharmaceutical products using this technology for the
treatment of autoimmune diseases. In 2000, IRC announced it had started a Phase
II study of a TCR-based vaccine against multiple sclerosis (MS).
F-13
XOMA has granted over 25 licenses to biotechnology and pharmaceutical
companies for use of patented and proprietary technologies relating to a
bacterial expression system used to manufacture recombinant pharmaceutical
products. Licensees include: Affymax, Inc., Alexion Pharmaceuticals, Inc.,
Avecia Ltd., Cantab Pharmaceuticals Research Ltd., Celltech Ltd., Dompe S.p.A.,
Eli Lilly and Company, Enzon, Inc., Genentech, Inc., the Hoechst Group, ICOS
Corporation, Invitrogen Corporation, MorphoSys AG, Pasteur Merieux Serums &
Vaccins, The Pharmacia & Upjohn Group and ZymoGenetics, Inc.
4. SHARE CAPITAL
Common Shares
In June of 2001, the Company issued 3,000,000 common shares for net
proceeds of $43.3 million in a registered public offering.
In February of 2000, the Company issued 6,145,000 common shares for net
proceeds of $29.0 million. The Company also issued five-year warrants to
purchase up to 250,000 common shares for $5.00 per share to each of the two
placement agents in this transaction. These warrants were exercisable upon
issuance and expire in February of 2005.
In July of 1999, the Company issued 3,024,086 common shares for net
proceeds of $16.4 million. The Company also issued five-year warrants to
purchase up to 150,000 common shares for $5.75 per share to the placement agents
in this transaction.
In January of 1999, the Company issued 2,051,254 common shares for net
proceeds of $11.4 million. In addition to the shares initially purchased, the
financing transaction provided the investors with i) a conditional right to
receive additional common shares for no additional consideration in the future;
and ii) a five-year warrant to purchase an aggregate of 240,000 shares of common
stock at an exercise price of $5.85. The initial purchase price to the investors
of $5.85 per share represented approximately a 60% premium over the then current
market value of XOMA's common shares at the date of the transaction. Since the
60% premium paid by the investors related to the value of the warrants as well
as the value of the potential to receive additional shares under the reset
provisions, the entire premium was accounted for as equity and included in
"additional paid in capital." The common shares were to be held in an escrow
account for up to three years or until such shares were released from the escrow
account, as stipulated in the agreement.
Beginning August 31, 1999, and every ninety days after that first reset
date, the investors were entitled to an adjustment to the number of shares
remaining in the escrow account based on an 11% discount from the prevailing
market price at each reset date. In the third quarter of 1999, based on the then
current fair market value of XOMA's common shares, the Company contributed
768,751 additional common shares to the escrow account. In the fourth quarter of
1999, the Company contributed 2,768,865 additional common shares to the escrow
account. In early 2000, all common shares in the escrow account were released,
and as a result, the investors relinquished their rights with respect to any
further reset privileges.
Preference Shares and Preferred Stock
Preference Shares
Series A. As of December 31, 2001, the Company has authorized 135,000
Series A Preference Shares of which none were outstanding at December 31, 2001,
2000, and 1999. (See "Shareholder Rights Plan" below.)
Series B. (See "Convertible Subordinated Notes" below.)
F-14
Convertible Subordinated Notes
Under an arrangement with Genentech (see Note 3), the Company receives
financing for its share of Xanelim(TM) development costs through the issuance of
convertible subordinated notes due at the earlier of 2005 or upon regulatory
approval of Xanelim(TM). The notes bear interest at rates of LIBOR plus 1% (4.9%
at December 31, 2001) compounded and reset at the end of June and December each
year. Interest is payable at maturity.
As of December 31, 2001, the Company had an outstanding balance of $51.0
million under this loan agreement. The agreement as amended in April of 1999
includes development cost sharing provisions. Under the agreement, the loan
balance is increased by cash advances from Genentech to XOMA and by interest
accruing on the outstanding loan balance. Conversely, cash repayments of the
debt or conversion of the debt to shares decreases the loan balance. Under the
cost sharing provisions, the two companies compare their actual spending on
Xanelim(TM) with their respective share of the aggregate costs under the
agreement. Any differences are recorded as increases/decreases to the respective
company's operating expenses and a related increase/decrease to the loan balance
as appropriate. The Company received cash advances from Genentech under this
agreement of $7.2 million, $5.8 million and $11 million, net of repayments of
the loan of $1.5 million, $3.0 million and $0 million in 2001, 2000 and 1999,
respectively. The loan balance was increased by $3.3 million in 2001 and
decreased by $0.7 million in 2000 and $4.5 million in 1999, according to the
cost sharing provisions of the loan agreement. At XOMA's option, the notes may
be repaid in cash on or before the due date, or may be converted on the due date
into one Series B Preference Share at the fair market value of common shares at
the time of conversion (7,500 shares are so designated) for each $10,000
outstanding in notes. The Series B Preference Shares are convertible into common
shares. The cumulative amount of interest accrued was $9.9 million, $7.4 million
and $4.7 million as of December 31, 2001, 2000 and 1999, respectively.
As announced in November of 2001, under an investment agreement, Millennium
has committed to purchase, at our option, up to $50.0 million worth of our
common shares over the next three years in several tranches, through a
combination of convertible debt and equity at the then prevailing market prices.
We have agreed to register the resale of the common shares that we may sell to
Millennium from each tranche and the common shares that we may issue to
Millennium upon conversion of the convertible debt. The convertible note balance
as of December 31, 2001 was $5.0 million and is due in November of 2002 at an
interest rate of LIBOR (1.9% at December 31, 2001).
Management Incentive Compensation Plan
The Board of Directors of the Company established a Management Incentive
Compensation Plan effective July 1, 1993 (as amended, the "Incentive Plan"), in
which management employees (other than the Chief Executive Officer), as well as
certain additional discretionary participants chosen by the Chief Executive
Officer, are eligible to participate.
Awards under the Incentive Plan vest over a three-year period with 50% of
each award payable during the first quarter of the following fiscal year, and
25% payable on each of the next two annual distribution dates, so long as the
participant remains an employee of the Company. The 50% on the first
distribution date is payable half in cash and half in common shares. The balance
on the next two annual distribution dates is payable, at the election of the
participant, all in cash or all in common shares or, for elections after
December 31, 2000, half in cash and half in common shares. The maximum number of
common shares issuable pursuant to awards made for the years ended December 31,
2001 and 2000 under the Incentive Plan were 44,781 and 28,673, respectively, and
these shares have been reserved under the Restricted Plan (as defined below).
The amounts charged to expense under the Incentive Plan were $0.8 million,
$0.9 million and $0.8 million for the plan years 2001, 2000 and 1999,
respectively.
F-15
Employee Share Purchase Plan
In 1998, the shareholders approved the 1998 Employee Share Purchase Plan
(the "Share Purchase Plan") which provides employees of the Company the
opportunity to purchase common shares through payroll deductions. The Company
has reserved 500,000 common shares for issuance under the Share Purchase Plan.
An employee may elect to have payroll deductions made under the Share Purchase
Plan for the purchase of common shares in an amount not to exceed 15% of the
employee's compensation. The purchase price per common share will be either (i)
an amount equal to 85% of the fair market value of a common share on the first
day of a 24-month offering period or on the last day of such offering period,
whichever is lower, or (ii) such higher price as may be set by the Compensation
Committee of the Board at the beginning of such offering period. As of December
31, 2001, payroll deductions under the Share Purchase Plan totaled $0.3 million.
Shareholder Rights Plan
In October of 1993, the Company's Board of Directors unanimously adopted a
Shareholder Rights Plan (the "Rights Plan"). Under the Rights Plan, Preference
Share Purchase Rights ("Rights") were distributed as a dividend at the rate of
one Right for each common share held of record as of the close of business on
November 12, 1993. Each Right entitles the registered holder of common shares to
buy a fraction of a share of the new series of Preference Shares (the "Series A
Preference Shares") at an exercise price of $30.00, subject to adjustment. The
Rights will be exercisable, and will detach from the common share, only if a
person or group acquires 20 percent or more of the common shares, announces a
tender or exchange offer that if consummated will result in a person or group
beneficially owning 20 percent or more of the common shares, or if the Board of
Directors declares a person or group owning 10 percent or more of the
outstanding common shares to be an Adverse Person (as defined in the Rights
Plan). Once exercisable, each Right will entitle the holder (other than the
acquiring person) to purchase units of Series A Preference Share (or, in certain
circumstances, common shares of the acquiring person) with a value of twice the
Rights exercise price. The Company will generally be entitled to redeem the
Rights at $.001 per Right at any time until the close of business on the tenth
day after the Rights become exercisable. The Rights will expire at the close of
business on December 31, 2002.
Shares Reserved for Future Issuance
The Company has reserved common shares for future issuance as of December
31, 2001 as follows:
Share Option Plans 6,906,783
Employee Share Purchase Plan 245,253
Warrants 700,000
-----------
Total 7,852,036
===========
The convertible subordinated notes held by Genentech are convertible into
one Series B Preference Share at the market price of common shares at the time
of conversion (7,500 shares are so designated) for each $10,000 in notes. The
Series B Preference Shares are convertible into common shares.
5. SHARE OPTIONS AND WARRANTS
At December 31, 2001, the Company had three share-based compensation plans,
which are described below. The aggregate number of common shares that may be
issued under these plans is 8,950,000 shares.
Share Option Plan
Under the Company's amended 1981 Share Option Plan (the "Option Plan"),
qualified and non-qualified options of the Company's common shares may be
granted to certain employees and other individuals
F-16
as determined by the Board of Directors at not less than the fair market value
of the shares at the date of grant. Options granted under the Option Plan may be
exercised when vested and expire five years to ten years from the date of grant
or three months from the date of termination of employment. Options granted
generally vest over five years. The Option Plan will terminate on November 15,
2011. Up to 8,650,000 shares are authorized for issuance under the Option Plan.
As of December 31, 2001, options covering 3,593,815 common shares were
outstanding under the Option Plan.
Restricted Share Plan
The Company also has a Restricted Share Plan (the "Restricted Plan") which
provides for the issuance of options or the direct sale of common shares to
certain employees and other individuals as determined by the Board of Directors
at not less than 85% of fair market value of the common shares on the grant
date. Each option issued under the Restricted Plan will be a non-statutory share
option under the federal tax laws and will have a term not in excess of ten
years from the grant date. Options granted generally vest over five years. The
Restricted Plan will terminate on November 15, 2011.
The Company has granted options with exercise prices at 85% of fair market
value on the date of grant. Up to 1,250,000 shares are authorized for issuance
under the Restricted Plan, subject to the condition that not more than 8,650,000
shares are authorized under both the Option Plan and the Restricted Plan. As of
December 31, 2001, options covering 372,795 common shares were outstanding under
the Restricted Plan.
The Company amortizes deferred compensation, which is the difference
between the issuance price or exercise price as determined by the Board of
Directors and the fair market value of the shares at the date of sale or grant
over the period benefited.
Directors Share Option Plan
In 1992, the shareholders approved a Directors Share Option Plan (the
"Directors Plan") which provides for the issuance of options to purchase common
shares to non-employee directors of the Company at 100% of the fair market value
of the shares on the date of the grant. Up to 300,000 shares are authorized for
issuance during the term of the Directors Plan. Options vest on the date of
grant and have a term of up to ten years. As of December 31, 2001, options for
200,000 common shares were outstanding under the Directors Plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, the financial statements reflect
amortization of compensation resulting from options granted at exercise prices
which were below market price at the grant date. Had compensation cost for the
Company's shares-based compensation plans been based on the fair value at the
grant dates for awards under these plans consistent with the provisions of FASB
Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below for the years ended December
31 (in thousands except per share amounts):
2001 2000 1999
---- ---- ----
Net loss As reported $(28,040) $(29,412) $(45,779)
Pro forma $(31,230) $(31,447) $(47,342)
Net loss per share As reported $(0.41) $(0.45) $(0.87)
Pro forma $(0.46) $(0.49) $(0.90)
The fair value of each option grant under these plans is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the years indicated below:
F-17
2001 2000 1999
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 92% 91% 84%
Risk-free interest rate 3.7% 5.8% 5.3%
Expected life 7.8 years 6.3 years 4.7 years
A summary of the status of the Company's share option plans as of December
31, 2001, 2000, and 1999 and changes during years ending on those dates is
presented below:
2001 2000 1999
---------------------- ---------------------- -----------------------
OPTIONS: Shares Price* Shares Price* Shares** Price*
- -------- ---------- ---------- ----------- --------- ----------- ---------
Outstanding at beginning of year 3,752,662 $ 5.00 4,230,884 $ 4.58 4,005,771 $ 4.78
Granted
(1) 1,750 9.28 2,500 6.88 20,500 6.16
(2) 667,200 9.39 641,500 9.04 663,500 3.97
Exercised (105,502) 4.11 (856,241) 4.40 (76,652) 3.59
Forfeited, expired or canceled (149,500) 7.85 (265,981) 10.02 (382,235) 5.96
---------- ----------- -----------
Outstanding at end of year 4,166,610 5.59 3,752,662 5.00 4,230,884 4.58
========== =========== ===========
Exercisable at end of year 2,949,400 2,588,597 3,054,029
========== =========== ===========
Weighted average fair value of
options granted
(1) $ 7.92 $ 3.87 $ 3.77
(2) $ 7.45 $ 7.07 $ 2.65
* Weighted-average exercise price
** Includes cancellation and granting of 1,820,385 new options
(1) Option price less than market price on date of grant.
(2) Option price equal to market price on date of grant. The Company adjusts
for forfeitures as they occur.
The following table summarizes information about share options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------------ ----------------------------
Range of Number Number
Exercise Prices Outstanding Life * Price ** Exercisable Price **
--------------- ----------- ------ -------- ----------- --------
$ 1.86 - 2.38 178,612 3.20 $ 2.36 177,562 $ 2.36
2.56 - 2.56 1,115,481 3.03 2.56 1,115,481 2.56
2.60 - 4.56 797,020 6.08 3.87 582,599 3.99
4.68 - 6.75 713,726 5.78 5.66 585,025 5.75
6.81 - 8.94 703,066 7.64 8.18 284,517 7.76
9.56 - 22.75 658,705 8.48 10.82 204,216 11.86
---------------- -------------
1.86 - 22.75 4,166,610 5.73 5.59 2,949,400 4.61
================ =============
* Weighted-average remaining contractual life
** Weighted-average exercise price
F-18
Warrants
In February of 2000, warrants to purchase up to 250,000 common shares at
$5.00 per share and expiring in February of 2005 were issued to the placement
agents in conjunction with a private placement of common shares. As of December
31, 2001, all of these warrants were outstanding.
In July of 1999, warrants to purchase up to 150,000 common shares at $5.75
per share and expiring in July of 2004 were issued to the placement agents in
conjunction with a private placement of common shares. As of December 31, 2001,
all of these warrants were outstanding.
In January of 1999, warrants to purchase up to 240,000 common shares at
$5.85 per share were issued to investors in a private placement of common
shares. Additional warrants to purchase up to 64,000 common shares at $5.85 were
issued to the placement agent and separately warrants for 75,000 common shares
at $5.85 were issued to an advisor. All of these warrants expire in January of
2004. As of December 31, 2001, there were 175,000 of the January 1999 warrants
still outstanding.
In July of 1998, warrants to purchase 250,000 common shares at $6.00 per
share were issued to Incyte in partial payment of license fees. These warrants
expire in July of 2008. As of December 31, 2001, there were 125,000 warrants
still outstanding.
Warrants to purchase 550,000 common shares at $7.00 per share were issued
in conjunction with the issuance of the Series H Preferred in June of 1998.
These warrants were valued at $1.0 million in paid-in capital. Additional
warrants to purchase 68,681 common shares at $7.00 per share were issued to
placement agents. All of these warrants expired in June of 2001.
All of the above warrants were exercisable upon issuance. The fair value of
the warrants issued to placement agents and advisors were determined using the
Black Scholes valuation method and capitalized as issuance costs associated with
the equity financing and charged against paid-in capital.
6. COMMITMENTS AND CONTINGENCIES
Collaborative Agreements and Royalties
The Company is obligated to pay royalties, ranging generally from 1.5% to
5% of the selling price of the licensed component and up to 25% of any
sublicense fees to various universities and other research institutions based on
future sales or licensing of products that incorporate certain products and
technologies developed by those institutions.
Liability Insurance
The testing and marketing of medical and food additive products entails an
inherent risk of allegations of product liability. XOMA believes that its
product liability insurance levels are adequate for its clinical trial activity.
The Company will seek to obtain additional insurance, if needed, if and when its
products are commercialized; however, there can be no assurance that adequate
insurance coverage will be available or be available at acceptable costs or that
a product liability claim would not materially adversely affect the business or
financial condition of the Company.
The Company insures and indemnifies its directors and officers against
actions brought against them as a result of their management of the Company's
operations. There can be no assurance that adequate directors and officers
insurance coverage will be available or be available at acceptable costs or that
a claim against the directors and officers would not materially adversely affect
the business or financial condition of the Company.
F-19
Leases
As of December 31, 2001, the Company leased administrative, research
facilities, certain laboratory and office equipment under capital and operating
leases expiring on various dates through 2008. Future minimum lease commitments
are as follows (in thousands):
Capital Leases Operating Leases
-------------- ----------------
2002 $ 872 $ 2,845
2003 785 2,864
2004 572 2,895
2005 221 2,891
2006 - 2,901
Thereafter - 3,932
-------------- ----------------
Net minimum lease payments 2,450 $ 18,328
================
Less: amount representing interest expense (384)
--------------
Present value of net minimum lease payments 2,066
Less: current portion (673)
--------------
Long-term capital lease obligations $ 1,393
==============
Total rental expense was approximately $3.2 million, $3.3 million, and $2.7
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Legal Proceedings
On or about June 8, 2001, an action was commenced against the Company and
certain of its affiliates styled Biosite Diagnostics Inc. v. XOMA Ltd., et al.,
No. C-01-2251 (PJH)(N.D. Cal.) (the "Biosite Action"). The action sought
declarations that Biosite was not infringing certain XOMA patents and that
certain licenses continued in effect despite XOMA's notice of termination
thereof. The action sought an injunction against the Company and such affiliates
maintaining the license agreements in effect. On June 13, 2001, the court denied
Biosite's motion for a temporary restraining order. On or about July 5, 2001,
the Company, XOMA Ireland Limited and XOMA Technology Ltd. brought an action
against Biosite in the same court. The action, styled XOMA Ltd., et al. v.
Biosite Inc., No. C-01-2580 (PJH) (N.D. Cal.) (the "XOMA Action"), seeks
injunctive relief, compensatory and punitive damages for fraud and
misrepresentation, breach of contract, patent infringement, misappropriation and
unfair business practices. On September 24, 2001, the court denied Biosite's
motion in its action for a preliminary injunction and granted the Company's
motion to dismiss the Biosite Action. On that same day, the court granted a
portion of Biosite's motion to dismiss the XOMA Action relating to the fraud
allegations with leave to replead. On October 31, 2001, the plaintiffs in the
XOMA Action filed their amended complaint asserting the same claims for relief.
On November 7, 2001, Biosite answered the amended complaint denying the
substantive allegations. On that same day, Biosite filed counterclaims seeking
the same relief as the original Biosite Action and adding claims for breach of
contract, breach of covenant of good faith and fair dealing, intentional
interference with contracts and with prospective economic advantage, unfair
business practices and violation of the Lanham Act. Biosite seeks damages in an
unspecified amount, prejudgment interest, injunctive relief, punitive damages
and attorneys' fees. On November 30, 2001, the Company answered the
counterclaims denying the substantive allegations therein. On December 3, 2001,
the court denied Biosite's motion to bifurcate the case such that Biosite's
license validity claims would be tried first. On January 7, 2002, the court
denied Biosite's motion to sever the patent issues from the license issues and
to address the license issues first. In February of 2002, Biosite announced that
it has begun implementing an antibody expression technology intended to allow it
to operate its business without using XOMA's patents and that it is launching a
licensing program. On or about March 5, 2002, Biosite filed an amended answer to
add additional defenses that certain of the patents at issue are invalid, that
certain alleged inequitable conduct on the part of the XOMA enti-
F-20
ties renders certain of the patents unenforceable and that alleged patent misuse
renders the patents at issue unenforceable. Discovery has commenced as to all
claims, defenses and counterclaims and is continuing.
On November 15, 2001, a purported securities class action complaint was
filed in the United States District Court for the Northern District of
California against the Company and certain of its officers in an action
captioned Tingle v. XOMA Ltd., et al., No. C-01-4256 (CW) (N.D. Calif.). On
November 29, 2001 and December 20, 2001, respectively, two similar purported
class action complaints, captioned Scala v. XOMA Ltd., et al., No. C-01-4610
(WHA) (N.D. Calif.) and Malmut v. XOMA Ltd., et al., No. C-01-5006 (MJJ) (N.D.
Calif.), were filed in that same federal district court. (The three lawsuits are
referred to collectively hereinafter as the "Class Action Lawsuits.") The
complaints in the Class Action Lawsuits purported to assert claims, under
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b)
(and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934, arising out of XOMA's joint development with Genentech of XanelimTM, a
drug for the treatment of psoriasis. (Genentech and certain of its officers were
also named as defendants in the Class Action Lawsuits.) The Class Action
Lawsuits alleged that XOMA and Genentech made material misrepresentations and
omissions concerning the anticipated timetable for the filing of a Biologics
License Application ("BLA") with the Food and Drug Administration in connection
with their development of XanelimTM. The complaints in the Class Action Lawsuits
sought unspecified money damages, costs and expenses.
In January of 2002, a complaint was filed in the California Superior Court
in San Diego County against XOMA, Genentech and certain unidentified "John Doe"
defendants, which tracks many of the allegations that had been made in the Class
Action Lawsuits, purporting to assert claims pursuant to the California Unfair
Competition Act seeking injunctive relief and other equitable remedies in
connection with the defendants alleged misrepresentations and omissions
concerning the anticipated timetable for the filing of the XanelimTM BLA.
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities as of
December 31are as follows (in millions):
2001 2000
----------- -----------
Capitalized R&D expense $ 29.4 $ 28.6
Net operating loss carryforwards 75.0 73.1
R&D and other credit carryforwards 19.7 18.5
Other 0.7 --
Valuation allowance (124.8) (120.2)
----------- -----------
Total deferred tax asset $ -- $ --
=========== ===========
The net change in the valuation allowance was a $4.6 million increase, a
$3.4 million decrease, and a $1.2 million increase for the years ended December
31, 2001, 2000 and 1999, respectively.
FASB Statement No. 109 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 the Company's historical operating
performance and carryback potential, the Company has determined that total
deferred tax assets to be fully offset by a valuation allowance.
F-21
XOMA's accumulated federal and state tax net operating loss carryforwards
("NOLs") and credit carryforwards as of December 31, 2001 are as follows:
Amounts Expiration
(in millions) Dates
------------- -----
Federal
NOLs $ 216.1 2002-2021
Credits 14.3 2002-2021
State
NOLs 24.7 2002-2006
Credits 4.8 Do not expire
The availability of the Company's net operating loss and tax credit
carryforwards may be subject to substantial limitation if it should be
determined that there has been a change in ownership of more than 50 percent of
the value of the Company's shares over a three year period.
8. RELATED PARTY TRANSACTIONS
In 1993, the Company granted a short-term, secured loan to an officer,
director and shareholder of the Company which has been extended annually.
9. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective June 1, 1987, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make contributions which
defer up to 14% of their total salary, up to a maximum for 2001 of $10,500. The
Company may, at its sole discretion, make contributions each plan year, in cash
or in the Company's common shares in amounts which match up to 50% of the salary
deferred by the participants. The expense related to these contributions was
$328,000, $358,000 and $271,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
10. SUBSEQUENT EVENTS (unaudited)
In January of 2002, XOMA and Genentech announced plans to conduct a Phase
II clinical study of Efalizumab (anti-CD11a) in rheumatoid arthritis patients.
The randomized, placebo controlled, double-blinded study will evaluate the
efficacy and safety of Efalizumab in several hundred rheumatoid arthritis
patients.
In February of 2002, XOMA and MorphoSys AG announced cross-licensing
agreements for antibody-related technologies. Under the agreements, XOMA will
receive license payments from MorphoSys in addition to a license to use the
MorphoSys HuCAL(R) GOLD antibody library for its target discovery and research
programs. MorphoSys and its partners receive a license to use the XOMA antibody
expression technology for developing antibody products using MorphoSys's phage
display-based HuCAL(R) antibody library. MorphoSys also receives a license for
the production of antibodies under the XOMA patents.
On March 13, 2002, the Court entered an Order dismissing each of the
following lawsuits without prejudice: Tingle v. XOMA Ltd., et al; Scala v. XOMA
Ltd., et al.; and Malmut v. XOMA Ltd., et al. No consideration was exchanged,
and neither plaintiffs nor their counsel received any compensation or
reimbursement of expenses.
F-22
INDEX TO EXHIBITS
Exhibit
Number
1 Underwriting Agreement dated as of June 26, 2001 by and between XOMA Ltd.
and the several underwriters named therein (Exhibit 2).1
3.1 Memorandum of Continuance of XOMA Ltd. (Exhibit 3.4).2
3.2 Bye-Laws of XOMA Ltd. (Exhibit 3.5).2
4.1 Amended and Restated Shareholder Rights Agreement dated as of October 27,
1993 and amended and restated December 31, 1998 by and among XOMA
Corporation (to be renamed XOMA Ltd.) and Chase Mellon Shareholder Services
L.L.C. (successor to First Interstate Bank of California) as Rights Agent
as amended by Amendment No. 1 to Amended and Restated Shareholders rights
Agreement dated as of February 21, 2001 (Exhibit 4.1).3
4.2 Form of Resolution Regarding Preferences and Rights of Series A Preference
Shares (Exhibit 4.2).2
4.3 Form of Resolution Regarding Preferences and Rights of Series B Preference
Shares (Exhibit 4.3).2
4.4 Form of Resolution Regarding Preferences and Rights of Series C Preference
Shares (Exhibit 4.4).2
4.5 Form of Common Stock Purchase Warrant (1998 Warrants) (Exhibit 3).4
4.6 Form of Common Stock Purchase Warrant (Incyte Warrants) (Exhibit 2).5
4.7 Form of Common Share Purchase Warrant (January and March 1999 Warrants)
(Exhibit 5).6
4.8 Form of Common Share Purchase Warrant (July 1999 Warrants) (Exhibit 4).7
4.9 Form of Common Share Purchase Warrant (2000 Warrants) (Exhibit 4).8
10.1 1981 Share Option Plan as amended and restated (Exhibit 10.1).9
10.1A Form of Share Option Agreement for 1981 Share Option Plan (Exhibit
10.1A).9
10.2 Restricted Share Plan as amended and restated (Exhibit 10.2).9
10.2A Form of Share Option Agreement for Restricted Share Plan (Exhibit 10.2A).9
10.2B Form of Restricted Share Purchase Agreement for Restricted Share Plan
(Exhibit 10.2B).10
10.3 1992 Directors Share Option Plan as amended and restated (Exhibit 10.4).10
10.3A Form of Share Option Agreement for 1992 Directors Share Option Plan
(initial grants) (Exhibit 10.4A).9
10.3B Form of Share Option Agreement for 1992 Directors Share Option Plan
(subsequent grants) (Exhibit 10.4B).9
10.4 Management Incentive Compensation Plan as amended and restated (Exhibit
10.5).9
10.5 1998 Employee Share Purchase Plan (Exhibit 10.1).10
10.5A Amendment No. 1 to 1998 Employee Share Purchase Plan (Exhibit 10.2).10
10.6 Form of indemnification agreement for officers (Exhibit 10.6).9
10.7 Form of indemnification agreement for employee directors (Exhibit 10.7).9
10.8 Form of indemnification agreement for non-employee directors (Exhibit
10.8).9
10.9 Employment Agreement dated April 29, 1992 between the Company and John L.
Castello (Exhibit 10.9).9
10.10 Employment Agreement dated April 1, 1994 between the Company and Peter B.
Davis (Exhibit 10.10).11
10.11 Employment Agreement dated March 26, 2001 between XOMA (US) LLC and
Patrick J. Scannon, M.D., Ph.D.
10.12 Lease of premises at 890 Heinz Street, Berkeley, California dated as of
July 22, 1987 (Exhibit 10.12).9
10.13 Lease of premises at Building E at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
April 21, 1988 (Exhibit 10.13).9
10.14 Lease of premises at Building C at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
August 26, 1987 (Exhibit 10.14).9
10.15 Letter of Agreement regarding CPI adjustment dates for leases of premises
at Buildings C, E and F at Aquatic Park Center, Berkeley, California dated
as of July 22, 1987 (Exhibit 10.15).9
10.16 Lease of premises at 2910 Seventh Street, Berkeley, California dated March
25, 1992 (Exhibit 10.16).9
10.17 Sublease dated January 20, 1997, between the Company and UroGenesys, Inc.
(Exhibit 10.18).9
10.18 Lease dated October 2, 1992, between the Company and Virginia Merritt, as
Trustee of the Bowman Merritt and Virginia Merritt Trust (Exhibit 10.19).9
10.18A First Extension of Lease dated April 23, 1997, between the Company and
Virginia Merritt and Kim Merritt Campot, as Trustees of the Bowman Merritt
and Virginia Merritt 1987 Trust (Exhibit 10.19A).9
10.19 Lease of premises at 5860 and 5864 Hollis Street, Emeryville, California
dated as of November 2, 2001 (with addendum).
10.20 Lease of premises at 2850 Seventh Street, Second Floor, Berkeley,
California dated as of December 28, 2001 (with addendum and guaranty).
10.21 License Agreement dated as of August 31, 1988 between the Company and
Sanofi (with certain confidential information deleted) (Exhibit 10.27).9
10.22 Amended and Restated Research and License Agreement dated September 1,
1993 between the Company and New York University (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.28).9
10.22A Third Amendment to License Agreement dated June 12, 1997 between the
Company and New York University (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities and
Exchange Commission) (Exhibit 10.28A).9
10.22B Fourth Amendment to License Agreement dated December 23, 1998 between the
Company and New York University (Exhibit 10.22B).12
10.22C Fifth Amendment to License Agreement dated June 25, 1999 between the
Company and New York University (Exhibit 10.21C). 13
10.22D Sixth Amendment to License Agreement dated January 25, 2000 between the
Company and New York University (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities and
Exchange Commission) (Exhibit 10.1). 14
10.23 Cross License Agreement dated December 15, 1993 between Research
Development Foundation and the Company (with certain confidential
information deleted) (Exhibit 10.23).12
10.24 Cross License Agreement dated December 15, 1993 between the Company and
Research Development Foundation (with certain confidential information
deleted) (Exhibit 10.24).12
10.25 Technology Acquisition Agreement dated June 3, 1994 between Connective
Therapeutics, Inc. (now called Connetics Corporation) and the Company (with
certain confidential information deleted) (Exhibit 10.46).11
10.25A Amendment Number One to Technology Acquisition Agreement dated December
8, 1999 between Connetics Corporation and XOMA (US) LLC (with certain
confidential information deleted) (Exhibit 10.23A).13
10.25B Agreement dated December 8, 1999 by and between The Immune Response
Corporation and XOMA (US) LLC (with certain confidential information
deleted) (Exhibit 10.23B).13
10.26 Collaboration Agreement, dated as of April 22, 1996, between the Company
and Genentech, Inc. (with certain confidential information omitted, which
omitted information is the subject of a confidential treatment request and
has been filed separately with the Securities and Exchange Commission)
(Exhibit 10.1).14
10.26A Amendment to Collaboration Agreement, dated as of April 14, 1999, between
the Company and Genentech, Inc. (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities and
Exchange Commission) (Exhibit 10.5).16
10.27 Common Stock and Convertible Note Purchase Agreement, dated as of April
22, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.2).15
10.27A Amendment to Common Stock and Convertible Note Purchase Agreement, dated
as of April 14, 1999, between XOMA Ltd. and Genentech, Inc. (Exhibit
10.6).16
10.28 Convertible Subordinated Note Agreement, dated as of April 22, 1996,
between the Company and Genentech, Inc. (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.3).15
10.28A Amendment to Convertible Subordinated Note Agreement, dated as of June
13, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.4).15
10.28B Second Amendment to Convertible Subordinated Note Agreement, dated as of
April 14, 1999, between the XOMA Ltd. and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 10.7).16
10.29 License Agreement between Incyte Pharmaceuticals, Inc. and XOMA
Corporation effective as of July 9, 1998 (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 1).5
10.30 Registration Rights Agreement dated as of July 9, 1998 by and among the
Company and Incyte Pharmaceuticals, Inc. (Exhibit 3).5
10.31 Form of Subscription Agreement, dated as of January 28, 1999, by and
between XOMA Ltd. and the purchasers of Common Shares in the January 1999
Private Placement (Exhibit 2).6
10.32 Form of Registration Rights Agreement, dated as of January 28, 1999, by
and between XOMA Ltd. and the purchasers of Common Shares in the January
1999 Private Placement (Exhibit 3).6
10.33 Form of Escrow Agreement, dated as of January 28, 1999, by and between
XOMA Ltd., Brian W. Pusch, as Escrow Agent and the purchasers of Common
Shares in the January 1999 Private Placement (Exhibit 4).6
10.34 License Agreement dated as of January 25, 2000 between XOMA Ireland
Limited and Baxter Healthcare Corporation (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 2).17
10.35 Supply and Development Agreement dated as of January 25, 2000 between XOMA
(US) LLC and Baxter Healthcare Corporation (with certain confidential
information omitted, which omitted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 3).17
10.36 Form of Subscription Agreement, dated as of February 8, 2000 by and
between XOMA Ltd. and the purchasers of Common Shares in the February 2000
Private Placement (Exhibit 2).8
10.37 Form of Registration Rights Agreement, dated as of February 11, 2000 by
and between XOMA Ltd. and the purchasers of Common Shares in February 2000
Private Placement (Exhibit 3).8
10.38 Form of Registration Rights Agreement, dated as of February 11, 2000 by
and between XOMA Ltd. and the placement agents in the February 2000 private
placement (Exhibit 5).8
10.39 Process Development and Manufacturing Agreement dated as of January 29,
2001 between XOMA (US) LLC and Onyx Pharmaceuticals, Inc. (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 2).18
10.40 Investment Agreement dated as of November 26, 2001 by and among XOMA,
Millennium Pharmaceuticals, Inc. and mHoldings Trust (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 3).19
10.41 Convertible Subordinated Promissory Note dated November 26, 2001 (with
certain confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed separately
with the Securities and Exchange Commission) (Exhibit 4).19
10.42 Registration Rights Agreement dated as of November 26, 2001 by and among
XOMA, Millennium Pharmaceuticals, Inc. and mHoldings Trust (with certain
confidential information omitted, which omitted information is the subject
of a confidential treatment request and has been filed separately with the
Securities and Exchange Commission) (Exhibit 5).19
23.1 Consent of Ernst & Young LLP, Independent Auditors.
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Footnotes
1. Incorporated by reference to the referenced exhibit to Company's Current
Report on Form 8-K dated and filed on June 27, 2001.
2. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-4 filed November 17, 1998, as amended.
3. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form 8-A filed May 21, 1999
4. Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated June 28, 1998 filed June 29, 1998.
5. Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated July 9, 1998 filed July 16, 1998.
6. Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated January 28, 1999 filed January 29, 1999,
as amended.
7. Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated July 23, 1999 filed July 26, 1999.
8. Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated February 11, 2000 filed February 14, 2000.
9. Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as
amended.
10. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8 filed October 27, 1998.
11. Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
12. Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
13. Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
14. Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2000.
15. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed June 28, 1996.
16. Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999.
17. Incorporated by reference to the referenced exhibit to the Company's
Amendment No. 2 to Current Re-port on Form 8-K/A dated and filed March 9,
2000.
18. Incorporated by reference to the referenced exhibit to the Company's
Amendment No. 1 on Form 8-K/A dated and filed February 13, 2001.
19. Incorporated by reference to the referenced exhibit to the Company's
Amendment No. 1 to Current Report on Form 8-K/A dated and filed December
13, 2001.