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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 0-14710
XOMA Ltd.
(Exact name of registrant as specified in its charter)
Bermuda 52-2154066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2910 Seventh Street, Berkeley, California 94710
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 204-7200
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No ____
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, as of June 30, 2002: $278,392,977
The aggregate market value of voting common equity held by nonaffiliates of the
registrant, as of February 28, 2003: $257,543,974
Number of Common Shares outstanding as of February 28, 2003: 71,906,234
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 2003 Annual General
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
Table of Contents
PART I......................................................................................................1
Item 1. Business..................................................................................1
Item 2. Properties...............................................................................15
Item 3. Legal Proceedings........................................................................15
Item 4. Submission Of Matters To A Vote Of Security Holders......................................16
PART II....................................................................................................16
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters....................16
Item 6. Selected Financial Data..................................................................17
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations............................................................................19
Item 7A. Quantitative And Qualitative Disclosures About Market Risk...............................40
Item 8. Financial Statements And Supplementary Data..............................................41
PART III...................................................................................................41
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.....................................................................41
Item 10. Directors And Executive Officers Of The Registrant.......................................41
Item 11. Executive Compensation...................................................................41
Item 12. Security Ownership Of Certain Beneficial Owners And Management and
Related Shareholder Matters..............................................................42
Item 13. Certain Relationships And Related Transactions...........................................42
Item 14. Controls And Procedures..................................................................42
PART IV....................................................................................................42
Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K..........................42
SIGNATURES.................................................................................................44
CERTIFICATIONS.............................................................................................45
INDEX TO FINANCIAL STATEMENTS.............................................................................F-1
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PART I
Item 1. Business
Overview
XOMA Ltd. ("XOMA" or the "Company") is a biopharmaceutical company that develops
and manufactures antibodies and other protein-derived products that target
cancer, immunological and inflammatory disorders and infectious diseases, while
leveraging its development and manufacturing infrastructure through
collaborations with other companies and research institutions.
The Company's strategy with respect to its proprietary products is to enter into
arrangements with established pharmaceutical companies in order to facilitate
and finance development and marketing. Assuming timely regulatory approval,
which cannot be assured, the successful commercialization of XOMA's products
depends to a large extent upon the development and marketing capabilities of its
collaborative partners. In addition to developing its own products, the Company
also seeks to leverage its preclinical, process development, manufacturing,
quality and clinical development capabilities by entering into agreements to
collaborate on development of other companies' products.
The Company's current product development programs include:
o Raptiva(TM)(Efalizumab) with Genentech, Inc. ("Genentech"). Previously
known as Xanelim(TM), Raptiva(TM)is a humanized anti-CD11a monoclonal
antibody developed to treat immune system disorders. In February of 2003,
Genentech received formal acknowledgement from the U.S. Food and Drug
Administration ("FDA") that it had received the December 2002 submission of
the Biologics License Application ("BLA") for marketing approval of
Raptiva(TM)in patients with moderate-to-severe plaque psoriasis. The BLA
filing is based on efficacy and safety data from three Phase III studies.
Genentech has projected a 10-month regulatory review period for
Raptiva(TM)in the U.S. with FDA action expected in late 2003. Genentech has
granted Serono S.A. ("Serono") exclusive marketing rights to
Raptiva(TM)outside the U.S. and Japan. In February of 2003, Serono
announced the filing of an application for European Union marketing
approval of Raptiva(TM)in moderate-to-severe plaque psoriasis.
In 2002, XOMA and Genentech initiated a Phase II clinical study of
Raptiva(TM) in patients suffering from rheumatoid arthritis. The
240-patient trial has completed enrollment and results will be evaluated
after a 24-week treatment period. In January of 2003, Genentech and XOMA
announced initiation of a Phase II study to evaluate Raptiva(TM) as a
possible treatment for patients with psoriatic arthritis. Genentech and
XOMA continue to assess additional indications for Raptiva(TM).
o CAB2 and MLN01 with Millennium Pharmaceuticals, Inc. ("Millennium"). CAB2
and MLN01 are two biotherapeutic agents being developed for certain
vascular inflammation indications. Current plans call for completion of
preclinical testing and, if successful, commencement of clinical testing in
2003.
o ONYX-015 with Onyx Pharmaceuticals, Inc. ("Onyx"). ONYX-015 is a
therapeutic, tumor-selective, modified adenovirus genetically engineered to
destroy cancer cells. In 2002, under a strategic process development and
manufacturing alliance with Onyx, XOMA scaled up production to 500-liter
fermentation scale and improved the manufacturing process for ONYX-015. In
January of 2003, Onyx announced the suspension of development activities
related to ONYX-015 until it successfully engages a marketing partner.
o NEUPREX(R)with Baxter Healthcare Corporation ("Baxter"). NEUPREX(R)is an
injectable formulation of rBPI21, a genetically engineered fragment of
human bactericidal/permeability-
-2-
increasing protein ("BPI"). XOMA completed a Phase III efficacy trial in
1999, testing NEUPREX(R)in pediatric patients with severe meningococcemia,
but the data from the trial were deemed not sufficient to file for
regulatory approval. Further development of this product is continuing
under a license agreement with a division of Baxter, and a Phase II study
testing NEUPREX(R)in Crohn's disease completed enrollment in November of
2002 but results are not yet known. Plans for further development,
including potentially gaining access to additional resources by
collaborating with another pharmaceutical company, are being pursued with
Baxter to provide additional resources for development.
o ING-1. ING-1 is a recombinant monoclonal antibody that binds with high
affinity to an antigen expressed on epithelial cell cancers (breast,
colorectal, prostate and others) and is designed to destroy cancer cells by
recruiting the patient's own immune system. Enrollment has been completed
in two Phase I studies testing intravenous administration in advanced
adenocarcinoma patients. In May of 2002, XOMA announced results of a Phase
I clinical study in patients with solid tumors which showed safety and
tolerability results that supported further clinical development. The
Company is conducting a Phase I study to further evaluate the safety and
other features of the drug and to document any observed anti-tumor
activity. Phase I dosing and safety studies have been completed for
intravenous administration; a similar study with subcutaneous
administration is ongoing. Further product development efforts will be
determined based on the results of these studies and any future
collaborative arrangements. The ING-1 monoclonal antibody incorporates
XOMA's patented Human Engineering(TM)technology, designed to reduce
immunogenicity.
o BPI-derived compounds for retinal disorders. Results of in vitro and in
vivo studies conducted by Joslin Diabetes Center at Harvard University
("Joslin"), presented in April of 2001 and published in February of 2002,
showed that compounds derived from BPI inhibits the function of multiple
growth factors involved in blood vessel formation and angiogenesis in the
retina while sparing key retinal cells (pericytes). These data suggest that
these compounds may have potential for treating retinal disorders. XOMA is
conducting further research together with Joslin.
o A BPI-derived compound for acne. This compound is a topical anti-bacterial
agent that XOMA investigators are reviewing for possible
anti-Propionibacterium acnes properties. Pending favorable results of
upcoming toxicology testing, the Company intends to initiate clinical
testing in the second half of 2003.
The following table summarizes the products currently in development,
highlighting indications, FDA regulatory status and names of collaborators, if
any:
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Program Description Indication Status* Collaborator
- ---------------------------------------------------------------------------------------------------------------
Raptiva(TM)(Efalizumab) Humanized anti-CD11a Moderate-to-severe BLA Submitted Genentech
monoclonal antibody plaque psoriasis December 2002
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Rheumatoid arthritis Phase II/III Genentech
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Psoriatic arthritis Phase II Genentech
- ---------------------------------------------------------------------------------------------------------------
CAB2 Recombinant fusion Cardiopulmonary bypass Preclinical Millennium
protein complement surgeries
inhibitor
- ---------------------------------------------------------------------------------------------------------------
MLN01 Humanized monoclonal Vascular inflammation Preclinical Millennium
antibody indications
- ---------------------------------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------------------------------
Program Description Indication Status* Collaborator
- ---------------------------------------------------------------------------------------------------------------
ONYX-015 Genetically modified Head and neck cancer Phase III** Onyx
adenovirus
- ---------------------------------------------------------------------------------------------------------------
NEUPREX(R) IV formulation of Crohn's disease Phase II Baxter
(Opebacan) rBPI21, a modified
recombinant fragment of
bactericidal/permeability-
increasing protein(rBPI21)
- ---------------------------------------------------------------------------------------------------------------
ING-1 Human Adenocarcinomas Phase I Available for
Engineered(TM) licensing
antibody to Ep-CAM
- ---------------------------------------------------------------------------------------------------------------
Other BPI-Derived Anti-angiogenic Retinal disorders Preclinical Available for
Compounds licensing
-------------------------------------------------------------------------------------
Topical antibacterial Acne Preclinical In-house
protein fragment
- ---------------------------------------------------------------------------------------------------------------
* Research: in vitro studies; Preclinical: in vivo studies
** In January of 2003, Onyx announced the suspension of development activities
related to ONYX-015 until it successfully engages a marketing partner.
Development Programs and Enabling Technologies
Below is a more detailed description of XOMA's key products, development
programs, and enabling technologies available for licensing.
Raptiva(TM)
Raptiva(TM) (Efalizumab) is designed to inhibit the adhesion of T-lymphocytes (a
type of white blood cell) to other cell types by inhibiting the binding of the
LFA-1 molecule on the surface of lymphocytes to adhesion molecules such as
ICAM-1 on target cells. Raptiva(TM) interacts with various cell types by
inhibiting: (1) T-lymphocyte activation, proliferation and cytokine release, (2)
T-lymphocyte migration, and (3) T-lymphocyte interactions with tissue-specific
cells. In clinical studies, Raptiva(TM) is usually given as a once-a-week
subcutaneous injection.
In September of 1996, XOMA and Genentech announced the initiation of clinical
testing of Raptiva(TM) in patients with moderate-to-severe plaque psoriasis.
XOMA completed a Phase II efficacy study in psoriasis patients in late 1998,
subsequently received a $2.0 million milestone payment from Genentech, and
agreed with Genentech to continue collaborative development in psoriasis and to
expand the program to include all indications for the product.
In December of 2002, Genentech and XOMA submitted a BLA to the FDA for marketing
approval of Raptiva(TM) in patients with moderate-to-severe plaque psoriasis.
The BLA filing is based on efficacy and safety data from three Phase III studies
of Raptiva(TM) in over 2,100 patients. The trials met all primary and secondary
endpoints. The FDA formally acknowledged receipt of this BLA in February of
2003.
In April of 2002, XOMA and Genentech initiated a Phase II clinical study of
Raptiva(TM) in patients suffering from rheumatoid arthritis. XOMA has completed
enrollment of over 240 patients in this study and will analyze the results after
completion of a 24-week treatment period.
In January of 2003, Genentech and XOMA initiated a Phase II study to evaluate
Raptiva(TM) in patients with psoriatic arthritis.
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Genentech has granted Serono S.A. exclusive marketing rights to Raptiva(TM)
outside the U.S. and Japan. In February of 2003, Serono announced the filing of
an application for European Union approval of Raptiva(TM) in moderate-to-severe
plaque psoriasis.
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. Current plans call for completion of preclinical
testing for both products which, if successful, may lead to commencement of
clinical testing in 2003.
ONYX-015
In January of 2001, Onyx and XOMA announced 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.
In 2002, under a strategic process development and manufacturing alliance with
Onyx, XOMA scaled up production to 500-liter fermentation scale and improved the
manufacturing process for ONYX-015. In January of 2003, Onyx announced the
suspension of development activities related to ONYX-015, including the
suspension of a Phase III clinical trial for recurrent head and neck cancer and
Phase I and II clinical trials for a number of additional cancer indications,
until it successfully engages a marketing partner. ONYX continues to seek
marketing partners for ONYX-015. XOMA's agreement with Onyx remains in effect,
but at this time it is difficult to estimate the impact on XOMA's future results
of operations.
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) and 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 investigational new drug ("IND") for
testing ING-1 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; results of that study demonstrated safety and
tolerability that support further clinical development. The Company is
conducting a Phase I study to further evaluate the safety and other features of
the drug and to document any observed anti-tumor activity. Phase I dosing and
safety studies have been completed for intravenous administration; a similar
study with subcutaneous administration is ongoing. The results of these studies
and any future collaborative arrangements will determine further product
development efforts.
BPI-Based Products
The Company is developing novel therapeutic products derived 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
-5-
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 the function of multiple growth factors involved in
blood vessel formation and angiogenesis (growth of new blood vessels).
Angiogenesis is an essential component of inflammation and solid tumor growth as
well as diseases such as retinopathies.
BPI was discovered in 1978 at the New York University ("NYU") School of Medicine
by Peter Elsbach, M.D., and Jerrold Weiss, Ph.D. XOMA has collaborated with NYU
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) program.
NEUPREX(R)
In December of 1992, XOMA submitted an IND to begin human testing of NEUPREX(R),
a genetically-engineered fragment of the BPI protein. In March of 1993, the
Company began Phase I human safety and pharmacokinetic testing. 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:
o Meningococcemia: 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
pediatric patients with severe meningococcemia 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. Investigators published trial results in the September
16, 2000 issue of The Lancet.
o 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.
In January of 2000, Baxter's Hyland Immuno division acquired the worldwide
rights to NEUPREX(R) for development in antibacterial and anti-endotoxin
indications. 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.
Enrollment in this study has been completed, but results are not yet known.
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. Plans
for further development, including potentially gaining access to additional
resources by collaborating with another pharmaceutical company, are being
pursued with Baxter to provide additional resources for development.
BPI-derived Compound for Acne
XOMA is currently evaluating a topical antibacterial formulation of a
BPI-derived compound for the possible treatment of acne. Acne is triggered by
common human pathogens, Propionibacterium acnes - bacteria that are considered
the primary cause of inflammatory lesions associated with acne and are often
isolated from various topical infections. Current treatment regimens include the
use of general antibiotics erythromycin and clindamycin. The emergence of
antibiotic resistant strains to these drugs has encouraged XOMA researchers to
-6-
review the anti-Propionibacterium acnes properties of this product. Pending
favorable results of upcoming toxicology testing, the Company intends to
initiate clinical testing in the second half of 2003.
Retinal Disease Program
XOMA is developing BPI-derived anti-angiogenic compounds with potential
application for treating retinal disorders. In April of 2001, researchers from
Joslin Diabetes Center at Harvard University presented data from in vitro and in
vivo studies at the Association for Research in Vision and Ophthalmology (ARVO)
meeting; these results were later published in the Investigative Ophthalmology
and Visual Science Journal in February of 2002. BPI-derived compounds suppressed
retinal neovascularization without negative effects on pericytes and retinal
pigmented epithelial cells necessary to the healthy functioning of the retina.
XOMA is conducting further research on these compounds together with Joslin for
their utility in retinal diseases. No assurance can be given regarding the
timing or likelihood of future development or licensing arrangements.
Proprietary Enabling Technologies
In addition to the products mentioned above, XOMA has proprietary technologies
relating to recombinant antibodies and proteins, including bacterial cell
expression systems and the Human Engineering(TM) method for creating human-like
antibodies, both of which are available for licensing. XOMA also uses these
technologies in developing its own products.
Bacterial Cell Expression Systems
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.
XOMA has granted more than 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.
In 2002, XOMA announced four antibody-related cross license arrangements related
to the use of its bacterial cell expression system technology in phage display.
Under these agreements, MorphoSys AG, Biosite Incorporated ("Biosite"), Dyax
Corp. and Cambridge Antibody Technology Limited received licenses to use XOMA's
antibody expression technology for developing antibody products using their own
phage display-based antibody libraries. XOMA has received and will receive
license and other fees, as well as access to and/or licenses for the following
intellectual property and services for its own product development programs:
o from MorphoSys AG: HuCAL(R)Gold antibody library
o from Biosite Incorporated: Dower patents and cell expression libraries,
including several high-affinity antibodies to targets
o from Dyax Corp.: Ladner phage display patents and library
-7-
o from Cambridge Antibody Technology Limited: phage display library.
These agreements also provide releases of all four companies and their
collaborators from claims under the XOMA patents arising from past activities
using the companies' respective technologies, to the extent they also used
XOMA's antibody expression technology. All parties are also allowed to use
XOMA's technology in combination with their own technology in collaborations.
The Company also has a broader program whereby it licenses its bacterial cell
expression systems for the production of recombinant proteins. A partial list of
licensees for XOMA's cell expression technology follows:
Affymax, Inc
Alexion Pharmaceuticals Inc.
Avecia Limited
Aventis Pharma Deutschland GmbH (Hoechst)
Biogen, Inc.
Biosite Incorporated
Cambridge Antibody Technology Limited
Celltech Therapeutics, Ltd.
Centocor, Inc.
Dompe, s.p.a.
Dyax Corp.
Eli Lilly and Company
Enzon, Inc.
Genentech, Inc.
ICOS Corporation
Invitrogen Corporation
Micromet AG
MorphoSys AG
Pasteur Merieux Serum and Vaccins
Pharmacia & Upjohn AB
Syrrx, Inc.
Viventia Biotech, Inc.
Xenova Group plc
ZymoGenetics, Inc.
Human Engineering(TM) Method for Antibodies
XOMA has developed a patented technology for reducing the immunogenicity of
antibodies while maintaining binding affinity. The Company has used the Human
Engineering(TM) ("HE") technology in the development of ING-1 and other
proprietary molecules and the technology is available for outlicensing. Phase I
data for ING-1 presented at the American Society of Clinical Oncology ("ASCO")
demonstrated how HE technology represents a novel alternative to the
complementarity-determining region ("CDR") grafting based humanization methods
in widespread use today.
LBP Technology and Assay Program
In August of 1998, the Company 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
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the LBP technology. In October of 2002, XOMA expanded its relationship with DPC,
granting DPC exclusive worldwide rights to XOMA's LBP technology to develop both
automated and point-of-care products.
Financial and Legal Arrangements of Product Collaborations
Genentech
On April 22, 1996, XOMA and Genentech entered into an agreement whereby XOMA
agreed to co-develop Genentech's humanized monoclonal antibody product
Raptiva(TM). In April of 1999, the companies extended and expanded the
agreement. XOMA will receive 25% of U.S. operating profits from Raptiva(TM) in
all indications, and a royalty on sales outside the United States. Genentech
continues to finance XOMA's share of development costs via convertible
subordinated loans, due at the earlier of April of 2005 or first product
approval, which may be repaid in cash, or at XOMA's option using company equity.
The initial focus of the collaboration agreement is to develop Raptiva (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 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.
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 development program and eventual profit sharing, or alternatively being
entitled to future royalty and milestone payments. Under an investment
agreement, Millennium committed to take, at XOMA's option, up to $50 million
worth of XOMA's common shares over three years, through a combination of equity
at prevailing market prices in return for cash and retirement of convertible
debt. In December of 2002, XOMA issued approximately 1,443,000 of its common
shares to Millennium for gross proceeds of approximately $7.5 million pursuant
to this arrangement, bringing the amount of Millennium's commitment to $42.5
million over the next 18 months, including conversion of $5.0 million of
currently outstanding convertible debt that was issued to Millennium in November
of 2001.
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 has the right to terminate the agreement. In
addition, any material breach by XOMA under the investment agreement, including
with respect to Millennium's registration rights, will give Millennium the right
to terminate. The agreements remain in effect until terminated.
-9-
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
is obliged to 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 was 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.
In January of 2003, Onyx announced the suspension of development activities
related to ONYX-015, until Onyx successfully engages a marketing partner. XOMA's
agreement with Onyx remains in effect, but at this time it is difficult to
estimate the impact on XOMA's future results of operations.
Baxter
On January 25, 2000, XOMA entered into license and supply agreements with the
Hyland Immuno division of Baxter for NEUPREX(R) (rBPI21) for treatment of
meningococcemia and substantially all future antibacterial and anti-endotoxin
human clinical indications. Under the terms of the agreements, XOMA has received
initial and milestone payments totaling $11.5 million. Additional payments will
be made depending upon the achievement of development milestones for future
indications. Baxter will pay all future clinical development costs. XOMA will
also receive royalties from future NEUPREX(R) sales and will supply initial
product needs from its Berkeley manufacturing facility. Plans for further
development, including a potential collaboration with another pharmaceutical
company, are under review with Baxter to provide additional resources for
development.
Either party may terminate the agreements upon a material breach by the other
party. Termination of the agreements 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 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.
Other Products
XOMA is seeking development and marketing partners for additional products in
the Company's pipeline. No assurance can be given regarding the timing or
likelihood of future collaborative arrangements or of product licensure.
The Company is also pursuing additional development opportunities with other
biotechnology companies with a view toward providing product development
services to them.
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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 the FDA has approved Amevive(R) to treat
moderate-to-severe chronic plaque psoriasis in adult patients who are
candidates for systematic therapy or phototherapy (Biogen submitted but has
withdrawn its application for approval in Europe of Amevive(R) for
psoriasis patients);
o Centocor, Inc., a unit of Johnson & Johnson, has announced that it has
tested its rheumatoid arthritis and Crohn's disease drug, Remicade(R), in
psoriasis showing clinical benefits (and it has been announced that the
drug has shown promising results in patients with psoriatic arthritis);
o it has been announced that Amgen Inc. tested its rheumatoid arthritis and
psoriatic arthritis drug, Enbrel(R), in a Phase III clinical trial in
patients with moderate-to-severe plaque psoriasis, meeting the primary
endpoint and all secondary endpoints;
o MedImmune, Inc. has completed enrollment in three Phase II trials to
evaluate its anti-T cell monoclonal antibody in psoriasis;
o GenMab A/S has announced that its investigational new drug application for
HuMax-CD4 for psoriasis has been cleared through the FDA to initiate a
Phase II study;
o Abbott Laboratories has announced the commencement of a Phase II psoriasis
trial and Phase III psoriatic arthritis trial of its rheumatoid arthritis
drug Humira(TM); 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 Abbott Laboratories markets Humira(TM);
o Amgen Inc. markets Enbrel(R)and Kineret; and
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o Centocor, Inc. is approved to market Remicade(R)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 GenMab A/S, 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.
Although we do not know of any, 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 other
BPI-derived 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. Approval of a biologic
for commercialization requires licensure of the product and the manufacturing
facilities. The FDA has announced that it is consolidating its responsibility
for reviewing new pharmaceutical products into its Center for Drug Evaluation
and Research, the body that currently reviews drug products, combining that
operation with part of its biologics review operation, the Center for Biologics
Evaluation and Research. Because implementation of this plan began only
recently, the Company does not know when or how this change will affect it.
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 establish 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.
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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 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 2002, the Patent Office
issued 63 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 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
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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 2002, 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 2002, XOMA was issued 10 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 six
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 2002, 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.
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 incurred by the Company under all of its
research agreements were negligible for each of 2002, 2001 and 2000. The Company
has entered into certain license agreements with respect to the following
products:
o 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
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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.
o 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. As of December 31, 2002, 125,000 of these warrants remain
outstanding. 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,
restrictions 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 when it 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.
Employees
As of December 31, 2002, XOMA employed 229 full-time employees at its Berkeley,
California facilities. The Company's employees are engaged in clinical, process
development and manufacturing, quality assurance and
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control, research and product development activities, and in executive, finance
and administrative positions. The Company considers its employee relations to be
excellent.
Website Access to Reports
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports, are made available free of charge
on our Internet website at www.xoma.com as soon as reasonably practicable after
such reports are filed with the U.S. Securities and Exchange Commission.
Item 2. Properties
XOMA's development and manufacturing facilities are located in Berkeley,
California. The Company leases approximately 113,000 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 30,000 square feet of office space. Separately, a 17,000 square foot
technology development facility is owned by XOMA.
XOMA is currently producing the rBPI21 ING-1, MLN01 and CAB2 products and has
produced Raptiva(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 bases its manufacturing capability on
recombinant DNA technology, that can produce therapeutic products from either
mammalian or microbial cells. XOMA has established two 500-liter and three
2,750-liter fermentation trains with associated isolation and purification
systems. XOMA does its own formulation and has the capacity to do its own
small-scale filling, but contracts with third parties for final sterile filling
and finishing.
The principal executive offices of XOMA are located at 2910 Seventh Street,
Berkeley, California 94710 U.S.A. (telephone 510-204-7200).
Item 3. Legal Proceedings
In June of 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. In July of 2001, the Company, XOMA (Bermuda) Ltd.,
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"), sought injunctive relief,
compensatory and punitive damages for fraud and misrepresentation, breach of
contract, patent infringement, misappropriation and unfair business practices.
In September of 2001, the court granted the Company's motion to dismiss the
Biosite Action. In November of 2001, 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. In March of 2002, Biosite
filed an amended answer to add additional defenses that certain of the patents
at issue were invalid, that certain alleged inequitable conduct on the part of
the XOMA entities rendered certain of the patents unenforceable and that alleged
patent misuse rendered the patents at issue unenforceable. In June of 2002, XOMA
announced that it filed an amended and supplemental complaint against Biosite
alleging that Biosite's announced "new" antibody expression technology continued
willfully to infringe XOMA's patents and that Biosite's statements regarding it
were false and misleading.
By order entered September 13, 2002, all claims and counterclaims in the XOMA
Action were dismissed with prejudice pursuant to a settlement agreement between
the parties. Other terms of the settlement included a
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royalty-free license to XOMA to practice certain Biosite patents, assignment to
XOMA of Biosite's antibody expression technology that had been announced earlier
in 2002, a royalty-free license to Biosite to utilize XOMA's bacterial cell
expression technology, an agreement pursuant to which XOMA may receive
expression libraries for up to an agreed number of targets it presents to
Biosite (without payment or royalty obligations), termination of the existing
license to Biosite from XOMA for the LBP diagnostic assay and an exchange of
releases.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Officers
The officers of the Company are as follows:
Name Age Title
---- --- -----
John L. Castello 66 Chairman of the Board, President and
Chief Executive Officer
Patrick J. Scannon, M.D., Ph.D. 55 Senior Vice President, Chief Scientific and Medical
Officer and Director
Clarence L. Dellio 57 Senior Vice President, Chief Operating Officer
Peter B. Davis 56 Vice President, Finance and Chief Financial
Officer
Christopher J. Margolin, Esq. 56 Vice President, General Counsel and Secretary
Michel L. E. Bergh, Ph.D. 51 Vice President, Business Development
Marc D. Better, Ph.D. 47 Vice President, Technical Development
Daniel P. Cafaro 46 Vice President, Clinical and Regulatory Affairs
Ronald H. Carlson, Ph.D. 50 Vice President, Quality
Stephen F. Carroll, Ph.D. 51 Vice President, Scientific and Product Development
Robert H. Gundel, Ph.D. 48 Vice President, Preclinical Research
Tim Sirichoke 35 Vice President, Operations
Charles C. Wells 52 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.
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Price Range
-----------
2002: High Low
- ----- ---- ---
First Quarter $ 12.19 $ 7.51
Second Quarter 8.51 3.00
Third Quarter 7.20 3.25
Fourth Quarter 6.25 3.80
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, 2003, there were approximately 3,128 record holders of XOMA's
common shares.
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 7 to the Consolidated
Financial Statements, "Share Capital").
On December 18, 2002, XOMA issued approximately 1,443,000 of its common shares
to Millennium Pharmaceuticals, Inc. for gross proceeds of approximately $7.5
million, pursuant to the existing collaboration and investment arrangement
announced in November of 2001. Under the investment agreement, Millennium
remains committed to take, at XOMA's option, up to an additional $42.5 million
of XOMA's common shares over the next 18 months, at then prevailing market
prices in return for cash and retirement of $5.0 million of currently
outstanding convertible debt that was issued to Millennium in November of 2001.
The sale of common shares to Millennium was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
XOMA continues to use the net proceeds from this sale of common shares
principally for the development of two of Millennium's biotherapeutic agents for
certain vascular inflammation indications pursuant to our collaboration
agreement with Millennium. Pending application of the net proceeds as described
above, the Company has invested the remaining net proceeds of the sale in
short-term, investment-grade, interest-bearing securities.
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 1998 through 2002.
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
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Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -----------
(In thousands, except per share amounts)
Statement of Operations Data
Total revenues $ 29,949 $ 17,279 $ 6,659 $ 2,361 $ 6,345
Total operating cost and
expenses (1)(2) 62,026 44,610 36,075 47,534 54,184
Other income (expense), net (1,170) (709) 4 (606) 636
Net loss available for common
shareholders $(33,247) $(28,040) $(29,412) $(45,779) $(47,203)
Net loss per common share $ (0.47) $ (0.41) $ (0.45) $ (0.87) $ (1.16)
December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -----------
(In thousands)
Balance Sheet Data
Cash $ 36,262 $ 67,320 $ 35,043 $ 18,539 $ 28,287
Restricted cash $ 1,500 - - - -
Total assets 71,782 86,107 45,212 28,312 37,304
Long-term debt 63,016 50,980 39,488 34,724 26,513
Redeemable convertible preferences
shares - - - - 6,440
Accumulated deficit (540,876) (507,629) (479,589) (450,177) (404,343)
__________________
(1) In 2002 and 2001, includes approximately $7.0 million and $1.9 million,
respectively, in legal expenses related to our litigation with Biosite
Incorporated and certain shareholder litigation. The litigation matters to
which these expenses related were settled or otherwise resolved in 2002.
(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.
Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001.
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Statement of Operations
-------------------------------------------------------------------
(In thousands, except per share amounts)
Quarters Ended
March 31 June 30 September 30 December 31
------------ ---------------- ---------------- ----------------
2002
----
Total revenues $ 9,222 $ 4,724 $ 4,233 $ 11,770
Total operating cost and expenses 14,784 14,608 16,117 16,517
Other income (expense), net (377) (261) (378) (154)
------------ ---------------- ---------------- ----------------
Net loss $(5,939) $(10,145) $(12,262) $ (4,901)
============ ================ ================ ================
Net loss per common share $ (0.08) $ (0.14) $ (0.17) $ (0.07)
============ ================ ================ ================
2001
----
Total revenues $ 2,856 $ 5,212 $ 3,285 $ 5,926
Total operating cost and expenses 10,080 11,560 10,164 12,806
Other income (expense), net (351) (300) 60 (118)
------------ ---------------- ---------------- ----------------
Net loss $(7,575) $ (6,648) $ (6,819) $ (6,998)
============ ================ ================ ================
Net loss per common share $ (0.11) $ (0.10) $ (0.10) $ (0.10)
============ ================ ================ ================
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Overview
XOMA Ltd. ("XOMA" or the "Company") is a biopharmaceutical company that develops
and manufactures antibodies and other protein-derived products that target
cancer, immunological and inflammatory disorders, and infectious diseases, while
leveraging its development and manufacturing infrastructure through
collaborations with other companies and research institutions.
The Company's strategy with respect to its proprietary products is to enter into
arrangements with established pharmaceutical companies in order to facilitate
and finance development and marketing. Assuming timely regulatory approval,
which cannot be assured, the successful commercialization of XOMA's products
depends to a large extent upon the development and marketing capabilities of its
collaborative partners. In addition to developing its own products, the Company
also seeks to leverage its preclinical, process development, manufacturing,
quality and clinical development capabilities by entering into agreements to
collaborate on development of other companies' products.
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.
The Company's current product development programs include:
o Raptiva(TM)(Efalizumab) with Genentech, Inc. ("Genentech"). Previously
known as Xanelim(TM), Raptiva(TM)is a humanized anti-CD11a monoclonal
antibody developed to treat immune system disorders. In February of 2003,
Genentech received formal acknowledgement from the U.S. Food and Drug
Administration ("FDA") that it had received the December 2002 submission of
the Biologics License Application ("BLA") for marketing approval of
Raptiva(TM)in patients with moderate-to-severe plaque psoriasis. The BLA
filing is based on efficacy and safety data from three Phase III studies.
Genentech has projected a 10-month regulatory review period for
Raptiva(TM)in the U.S. with FDA action expected in late 2003. Genentech has
granted Serono S.A. ("Serono")
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exclusive marketing rights to Raptiva(TM)outside the U.S. and Japan. In
February of 2003, Serono announced the filing of an application for
European Union marketing approval of Raptiva(TM)in moderate-to-severe
plaque psoriasis.
In 2002, XOMA and Genentech initiated a Phase II clinical study of
Raptiva(TM) in patients suffering from rheumatoid arthritis. The
240-patient trial has completed enrollment and results will be evaluated
after a 24-week treatment period. In January of 2003, Genentech and XOMA
announced initiation of a Phase II study to evaluate Raptiva(TM) as a
possible treatment for patients with psoriatic arthritis. Genentech and
XOMA continue to assess additional indications for Raptiva(TM).
o CAB2 and MLN01 with Millennium Pharmaceuticals, Inc. ("Millennium"). CAB2
and MLN01 are two biotherapeutic agents being developed for certain
vascular inflammation indications. Current plans call for completion of
preclinical testing and, if successful, commencement of clinical testing in
2003.
o ONYX-015 with Onyx Pharmaceuticals, Inc. ("Onyx"). ONYX-015 is a
therapeutic, tumor-selective, modified adenovirus genetically engineered to
destroy cancer cells. In 2002, under a strategic process development and
manufacturing alliance with Onyx, XOMA scaled up production to 500-liter
fermentation scale and improved the manufacturing process for ONYX-015. In
January of 2003, Onyx announced the suspension of development activities
related to ONYX-015 until it successfully engages a marketing partner.
XOMA's agreement with Onyx remains in effect, but at this time it is
difficult to estimate the impact on future results of operations.
o NEUPREX(R)with Baxter Healthcare Corporation ("Baxter"). NEUPREX(R)is an
injectable formulation of rBPI21, a genetically engineered fragment of
human bactericidal/permeability-increasing protein ("BPI"). XOMA completed
a Phase III efficacy trial in 1999, testing NEUPREX(R)in pediatric patients
with severe meningococcemia, but the data from the trial were deemed not
sufficient to file for regulatory approval. Further development of this
product is continuing under a license agreement with a division of Baxter,
and a Phase II study testing NEUPREX(R)in Crohn's disease completed
enrollment in November of 2002 but results are not yet known. Plans for
further development, including potentially gaining access to additional
resources by collaborating with another pharmaceutical company, are being
pursued with Baxter to provide additional resources for development.
o ING-1. ING-1 is a recombinant monoclonal antibody that binds with high
affinity to an antigen expressed on epithelial cell cancers (breast,
colorectal, prostate and others) and is designed to destroy cancer cells by
recruiting the patient's own immune system. Enrollment has been completed
in two Phase I studies testing intravenous administration in advanced
adenocarcinoma patients. In May of 2002, XOMA announced results of a Phase
I clinical study in patients with solid tumors which showed safety and
tolerability results that supported further clinical development. The
Company is conducting a Phase I study to further evaluate the safety and
other features of the drug and to document any observed anti-tumor
activity. Phase I dosing and safety studies have been completed for
Intravenous administration; a similar study with subcutaneous
administration is ongoing. Further product development efforts will be
determined based on the results of these studies and any future
collaborative arrangements. The ING-1 monoclonal antibody incorporates
XOMA's patented Human Engineering(TM)technology, designed to reduce
immunogenicity.
o BPI-derived compounds for retinal disorders. Results of in vitro and in
vivo studies conducted by Joslin Diabetes Center at Harvard University
("Joslin"), presented in April of 2001 and published in February of 2002,
showed that compounds derived from BPI inhibits the function of multiple
growth factors involved in blood vessel formation and angiogenesis in the
retina while sparing key retinal
-21-
cells (pericytes). These data suggest that these compounds may have
potential for treating retinal disorders. XOMA is conducting further
research together with Joslin.
o A BPI-derived compound for acne. This compound is a topical anti-bacterial
agent that XOMA investigators are reviewing for possible
anti-Propionibacterium acnes properties. Pending favorable results of
upcoming toxicology testing, the Company intends to initiate clinical
testing in the second half of 2003.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States 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. The following critical accounting policies are important
to our financial condition and results of operations presented in the financial
statements and require management to make judgments, assumptions and estimates
that are inherently uncertain:
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.
License and Collaborative Fees
Revenue from non-refundable license or technology access payments under license
and collaborative agreements where the Company has a continuing obligation to
perform is recognized as revenue over the period of the continuing performance
obligation.
Milestone payments under collaborative arrangements are recognized as revenue
upon completion of the 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. Amounts received in advance are recorded as
deferred revenue until the related milestone is completed.
Contract Revenue
Contract revenue for research and development involves the Company providing
research, development or manufacturing services to collaborative partners. The
Company recognizes revenue under these arrangements as the related research and
development costs are incurred and collectibility is reasonably assured.
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.
-22-
Research and Development Expenses
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 our
testing processes and procedures and related overhead expenses. From time to
time, research and development expenses may include upfront fees and milestones
paid to collaborative partners for the purchase of rights to in-process research
and development. Such amounts are expensed as incurred. The timing of upfront
fees and milestone payments in the future may cause variability in our future
research and development expenses.
Results of Operations
Revenues
Total revenues in 2002 were $29.9 million, compared with $17.3 million in 2001
and $6.7 million in 2000.
License fee revenues in 2002 increased to $16.9 million from $4.8 million in
2001 and $3.2 million in 2000. These revenues include "up front" and milestone
payments related to the outlicensing of XOMA's products and technologies and
other collaborative arrangements. The increase of $12.1 million in 2002 was
primarily due to licensing agreements with MorphoSys AG ("MorphoSys"), Dyax
Corp. and Cambridge Antibody Technology Limited that did not involve continuing
commitments by XOMA and were partially or completely recognized as revenue in
2002 in accordance with our revenue recognition policies. The increase of $1.6
million in 2001 compared with 2000 is primarily due to revenue recognized on
deferred license fees attributed to Baxter and Onyx.
During the fourth quarter of 2002, we were notified by MorphoSys of its
intention to exercise its option to pay the second installment totaling $4.0
million owed to XOMA under a license agreement with 363,466 of its ordinary
shares, which number of shares was determined with reference to the market price
of MorphoSys shares at the time of such notice (October 23, 2002). XOMA applied
for and on January 31, 2003 was granted an exemption from German withholding tax
on the full license fee from MorphoSys. The administrative process in Germany
for the issuance of the shares was delayed pending resolution of the withholding
tax matter. Now that we have received the tax exemption, MorphoSys has
re-initiated the process, but it is not yet complete. Given the delays already
encountered, it is difficult to determine when these shares will be received,
but the Company's current estimate is prior to the end of the second quarter of
2003.
XOMA has not recorded a provision related to changes in the market value of the
shares MorphoSys intends to issue. Since the date of MorphoSys's election on
October 23, 2002, the per share closing price for MorphoSys shares has ranged
from approximately $4.64 to $15.20. Future market conditions for the shares are
difficult to predict and may vary significantly. Therefore, under the provisions
of the Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, the Company has determined that the conditions related to the
likelihood of the events both probable and reasonably estimable have not been
met. If the future value of MorphoSys shares results in an unfavorable outcome
for XOMA, the Company's financial position and results of operations would be
adversely impacted.
Certain of our license agreements involve continuing performance obligations by
XOMA for services, and in these cases the related licensing payments received
are recorded as deferred revenue and then recognized as revenue over the period
of continuing performance obligation. The following table illustrates the
activity in deferred revenue for the years ended December 31, 2002, 2001 and
2000 (in millions):
-23-
2002 2001 2000
---- ---- ----
Beginning deferred revenue $ 6.5 $ 6.9 $ -
Payments received 1.5 4.3 10.0
Revenue recognized (5.5) (4.7) (3.1)
-------------- -------------- -------------
Ending deferred revenue $ 2.5 $ 6.5 $ 6.9
============== ============== =============
Of the $2.5 million balance in deferred revenue at December 31, 2002, $1.7
million is expected to be recognized as revenue in 2003 and $0.4 million in 2004
and 2005, respectively. Future amounts may also be impacted by additional
consideration received, if any, under existing or any future licensing or other
collaborative arrangements.
Revenues from contract services were $13.1 million in 2002, up from $10.1
million in 2001 and $3.4 million in 2000. These revenues relate primarily to
service arrangements with Baxter. Future revenue for contract services are
dependent upon purchases for research and development activities by Baxter and
Onyx that may cause variability in our future revenue.
Product sales revenues, related primarily to supplying NEUPREX(R)?product to
Baxter for use in clinical and other testing, were $0.0 million in 2002 compared
with $2.4 million in 2001 and $0.1 million in 2000. Revenue for product sales
are dependent upon future research and development activities for Baxter that
may cause variability in our future revenue.
Research and Development Expenses
In 2002, research and development expense increased to $42.6 million, compared
with $35.9 million in 2001 and $30.0 million in 2000. The $6.7 million increase
in 2002 compared to 2001 primarily reflected increased spending related to our
co-development agreement with Genentech for Raptiva(TM), our collaboration with
Millennium for early stage research and development on CAB2 and MLN01 and our
collaboration with Onyx. The increase was partially offset by savings on certain
earlier stage development programs that were discontinued in the later part of
2001. 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.
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):
2002 2001 2000
---- ---- ----
Earlier stage programs $ 18.2 $ 14.0 $ 9.6
Later stage programs 24.4 21.9 20.4
-------------- -------------- --------------
Total $ 42.6 $ 35.9 $ 30.0
============== ============== ==============
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):
-24-
2002 2001 2000
---- ---- ----
Internal projects $ 17.9 $ 22.2 $ 14.3
Collaborative arrangements 24.7 13.7 15.7
-------------- -------------- --------------
Total $ 42.6 $ 35.9 $ 30.0
============== ============== ==============
For 2002, 2001 and 2000, no single project accounted for more than 30% of our
total research and development costs for that year. For each of 2002 and 2001,
only Raptiva(TM) accounted for more than 20% of our total research and
development costs for that year. For 2000, only Raptiva(TM) and NEUPREX(R)
accounted for more than 20% of our total research and development costs for that
year.
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
- ---------------------------------------------------------------------------------------------------------------
Raptiva(TM) Humanized anti-CD11a Moderate-to-severe BLA Submitted Genentech
(Efalizumab) monoclonal antibody plaque psoriasis December 2002
-----------------------------------------------------------
Rheumatoid arthritis Phase II/III Genentech
-----------------------------------------------------------
Psoriatic arthritis Phase II Genentech
- ---------------------------------------------------------------------------------------------------------------
CAB2 Recombinant fusion Cardiopulmonary bypass Preclinical Millennium
protein complement surgeries
inhibitor
- ---------------------------------------------------------------------------------------------------------------
MLN01 Humanized monoclonal Vascular inflammation Preclinical Millennium
antibody indications
- ---------------------------------------------------------------------------------------------------------------
ONYX-015 Genetically modified Head and neck cancer Phase III Onyx
adenovirus **
- ---------------------------------------------------------------------------------------------------------------
NEUPREX(R) IV formulation of Crohn's disease Phase II Baxter
rBPI21, a modified
(Opebacan) recombinant fragment of
bactericidal/permeability-
increasing protein(rBPI21)
- ---------------------------------------------------------------------------------------------------------------
ING-1 Human Adenocarcinomas Phase I Available for
Engineered(TM) licensing
antibody to Ep-CAM
- ---------------------------------------------------------------------------------------------------------------
Other BPI-Derived Anti-angiogenic Retinal disorders Preclinical Available for
Compounds licensing
-------------------------------------------------------------------------------------
Topical antibacterial Acne Preclinical In-house
protein fragment
- ---------------------------------------------------------------------------------------------------------------
* Research: in vitro studies; Preclinical: in vivo studies
** In January of 2003, Onyx announced the suspension of development activities
related to ONYX-015 until it successfully engages a marketing partner
-25-
We currently anticipate that research and development spending will increase in
2003, due primarily to increased spending on Raptiva(TM), CAB2 and MLN01. 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 XOMA 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 Raptiva(TM). In December of 2002, Genentech and
XOMA submitted a Biologics License Application ("BLA") to the U.S. Food and Drug
Administration for marketing approval of Raptiva(TM) in patients with
moderate-to-severe plaque psoriasis. The BLA filing is based on efficacy and
safety data from three Phase III studies of Raptiva(TM) in moderate-to-severe
plaque psoriasis patients. We have also initiated separate Phase II studies
testing Raptiva(TM) in patients suffering from rheumatoid arthritis and
psoriatic arthritis. If these latter clinical trials are successful, one or more
additional trials may be required before regulatory approval.
Two of Millennium's biotherapeutic agents, CAB2 and MLN01, are being developed
for certain vascular inflammation indications pursuant to a collaboration
agreement with Millennium that was announced in November of 2001. Current plans
call for completion of early stage development work for both products, and if
successful, may lead to clinical testing in 2003.
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 term of this agreement
continues through January of 2006, with options to extend for additional
periods. Along with a facility occupancy fee and potential milestone payments,
XOMA's spending under this agreement is billed back to Onyx on a "cost-plus"
basis. In January of 2003, Onyx announced the suspension of development
activities related to ONYX-015 until it successfully engages a marketing
partner. Onyx continues to seek a marketing partner for ONYX-015. Our current
planning assumption anticipates that research and development spending and the
related billing to ONYX will decrease in 2003. XOMA's agreement with Onyx
remains in effect, but at this time it is difficult to estimate the impact on
XOMA's future results of operations.
NEUPREX(R), also known as rBPI21, is a genetically-engineered fragment of a
particular human protein. We completed a Phase III efficacy clinical trial in
1999, testing NEUPREX(R) in patients with 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. Enrollment
of patients has been completed in a Phase II study testing NEUPREX(R) in Crohn's
disease, but the results are not yet known. We are providing the product for
testing. Plans for further development, including a potential collaboration with
another pharmaceutical company, are being pursued with Baxter to provide
additional resources for development.
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) and 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 investigational new drug ("IND") for
testing ING-1 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; results of that study demonstrated safety and
tolerability that
-26-
support further clinical development. The Company is conducting a Phase I study
to further evaluate the safety and other features of the drug and to document
any observed anti-tumor activity. Phase I dosing and safety studies have been
completed for intravenous administration; a similar study with subcutaneous
administration is ongoing. The results of these studies and any future
collaborative arrangements will determine further product development efforts.
XOMA has a number of other products at various stages of preclinical
development, including BPI-derived compounds targeting retinal disease and acne,
that may move into clinical testing in the future if warranted.
Marketing, General and Administrative Expenses
In 2002, marketing, general and administrative expenses increased to $19.4
million compared with $8.7 million in 2001 and $6.1 million in 2000. The most
significant component of these increases was legal expenses related to our
litigation with Biosite Incorporated and certain shareholder litigation, which
totaled approximately $7.0 million in 2002 and $1.9 million in 2001. The
litigation matters to which these expenses related were settled or otherwise
resolved in 2002. Spending in 2002 also increased for XOMA's share of marketing
expenses related to pre-launch activities for Raptiva(TM). These marketing,
general and administrative expenses are expected to be higher in 2003, due to
expanded pre-launch activities for Raptiva(TM).
Investment and Other Income
Investment income decreased by $1.1 million in 2002 compared with 2001,
reflecting lower cash investment balances and lower interest rates. 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 in
2003 is expected to decrease slightly due to lower interest rates and lower
average cash balances.
Interest and Other Expense
Interest expense decreased by $0.7 million in 2002 compared with 2001, and
consisted of interest on the convertible notes due to Genentech and Millennium.
This decrease of $0.7 million versus 2001was due to lower interest rates offset,
in part, by higher loan balances. The convertible subordinated note to Genentech
is due and payable in 2005 and compounds interest semi-annually at a rate of
LIBOR plus 1% (3.0% at December 31, 2002), and the convertible note to
Millennium is due and payable in a single installment in May 2003 and bears
interest at LIBOR (2.6% , LIBOR rate as of November 26, 2001). In 2001and 2000,
interest expense mainly consisted of interest on the convertible subordinated
note due to Genentech. Interest expense in 2003 is expected to increase due to
the higher convertible note balance due Genentech.
Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and restricted cash decreased by
$29.4 million to $38.2 million at December 31, 2002. In 2002, financing
activities of $15.4 million include $7.1 million of net proceeds from the
issuance of common shares under the terms of our investment agreement with
Millennium and $7.7 million net funding from Genentech under our development
agreement. Subsequent to December 31, 2002, we paid off a $0.8 million capital
lease obligation and restrictions on the $1.5 million of cash were released. The
Company's cash, cash equivalents and short-term investments are expected to
decrease through 2003, except to the extent that the Company may utilize debt
funding by Genentech for XOMA's share of Raptiva(TM) development and marketing
costs, obtain additional funding under the terms of our investment agreement
with Millennium or secure additional sources of funding.
Net cash used in operating activities was $34.8 million in 2002, compared with
$22.4 million in 2001 and $23.2 million in 2000. The increase in 2002 primarily
reflected higher net operating losses as a result of higher
-27-
marketing expenses, related to the pre-launch activities for Raptiva(TM) and
litigation expenses. The increase in cash used in operating activities in 2001
compared with 2000 reflected reduced losses and favorable working capital
movements, offset by a non-recurring $10 million initial payment received from
Baxter in 2000, related to the licensing of NEUPREX(R). Revenue from this
initial payment was deferred and is being recognized over the period of
continuing performance obligation, which period is estimated to be 36 months.
Net cash used in investing activities for 2002, 2001 and 2000 were $11.6
million, $7.1 million and $1.0 million, respectively. The increases in 2002 and
2001 are primarily due to costs of renovating and expanding our manufacturing
and warehouse facilities and other infrastructure improvements. Capital spending
is expected to be significantly lower in 2003. Additionally, investing
activities for 2002 include $1.5 million used to satisfy a restricted cash
requirement related to short-term loan agreement.
Net cash provided by financing activities was $15.4 million in 2002, compared
with $61.8 million in 2001 and $40.7 million in 2000. The decrease in 2002
compared with 2001 and 2000 reflected no additional funding from underwritten
stock offerings. In 2002, financing activities included $7.1 million net
proceeds from the issuance of common shares under the terms of our investment
agreement with Millennium and $7.7 million net funding from Genentech under our
development agreement. Total debt financing from Millennium and Genentech was
$12.2 million and $5.8 million in 2001 and 2000, respectively.
As of December 31, 2002, future contractual obligations are as follows (in
thousands):
Short-term Capital Operating Convertible Total
Loan Leases Leases Notes *
--------------- -------------- -------------- -------------- --------------
2003 $ 790 $ 785 $ 2,850 $ 5,146 $ 9,571
2004 - 572 2,894 - 3,466
2005 - 221 2,890 63,016 66,127
2006 - - 2,900 - 2,900
2007 - - 2,730 - 2,730
Thereafter - - 708 - 708
--------------- -------------- -------------- -------------- --------------
Total $ 790 $1,578 $14,972 $ 68,162 $ 85,502
=============== ============== ============== ============== ==============
_______________________
* The amount due in 2005 relates to XOMA's agreement with Genentech. This
amount is due at the earlier of April of 2005 or the first product approval
(which could be before the end of 2003) and can be repaid in the form of
cash or XOMA preference shares (see Note 7 to the Consolidated Financial
Statements, "Share Capital").
The present outlook is for higher losses in 2003 than recorded in 2002,
primarily due to increased expenses on Raptiva(TM) and on the Millennium
collaboration, as well as lower licensing and contract services revenue. 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 expanded
its manufacturing capacity and other development capabilities during 2001 and
2002. For example, the Company relocated its technical development and pilot
plant facilities from Santa Monica to Berkeley in 2001 to improve efficiencies.
XOMA also installed a third 2750-liter fermentation line in its Berkeley
production facility, which became operational in the second half of 2002.
-28-
Based on current spending levels, anticipated revenues, debt financing provided
by Genentech for XOMA's share of Raptiva(TM) development and marketing costs,
and financing commitments from Millennium under the collaborative agreement
between the companies, the Company estimates it has sufficient cash resources to
meet its operating needs through at least the end of 2004. Any significant
revenue shortfalls, or increases in planned spending on development programs
could shorten this period. Any change in spending on Raptiva(TM) should have no
impact on liquidity due to the Company's financing arrangement with Genentech.
Approval of Raptiva(TM) during this period would be expected to improve
operating cash flow, but require repayment in cash or stock of amounts owed to
Genentech. Additional licensing arrangements or collaborations or otherwise
entering into new equity or other financing arrangements, could extend this
period. In December of 2002, Genentech and XOMA submitted a BLA to the U.S. Food
and Drug Administration for marketing approval of Raptiva(TM) for the treatment
of moderate-to-severe plaque psoriasis. The timeliness of review of the BLA 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.
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.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 (or FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including residual value
guarantees issued in conjunction with operating lease agreements. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company's adoption
of the disclosure requirements in Novemver of 2002 and the recognition
requirements in January of 2003 of FIN 45 neither had nor is anticipated to have
a material impact on the Company's results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company's
adoption of the disclosure requirements in January of 2003 and ultimate adoption
of the recognition requirements of FIN 46 did not and is not anticipated to have
a material impact on the Company's financial position or result of operations.
-29-
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." FAS 148 amends FAS 123 "Accounting
for Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, FAS 148 amends the disclosure requirements
of FAS 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
additional disclosure requirements of FAS 148 are effective for fiscal years
ending after December 15, 2002. The Company elected to continue to follow the
intrinsic value method of accounting as prescribed by Accounting Principles
Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to Employees," to
account for employee stock options.
In November of 2002, the Financial Accounting Standards Board issued Emerging
Issues Task Force (referred to as EITF) Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of
the accounting by a company for arrangements under which it will perform
multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and
how an arrangement involving multiple deliverables should be divided into
separate units of accounting. EITF Issue No. 00-21 provides guidance with
respect to the effect of certain customer rights due to company nonperformance
on the recognition of revenue allocated to delivered units of accounting. EITF
Issue No. 00-21 also addresses the impact on the measurement and/or allocation
of arrangement consideration of customer cancellation provisions and
consideration that varies as a result of future actions of the customer or the
company. Finally, EITF Issue No. 00-21 provides guidance with respect to the
recognition of the cost of certain deliverables that are excluded from the
revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company is currently evaluating the effect that the
adoption of EITF Issue No. 00-21 will have on its consolidated financial
statements.
Non-Audit Services Performed by Independent Auditors
The Company's audit committee has approved certain non-audit services provided
or to be provided by Ernst & Young LLP, the Company's independent auditors.
These services include consultation services relating to the Company's
preparation for internal control reporting under Section 404 of the Sarbanes
Oxley Act of 2002, general accounting matters and tax matters; audit services
required by certain foreign jurisdictions and relating to the Company's 401(k)
plan; and review services relating to a pending systems upgrade.
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 2003, the relative size of various financial items for 2003,
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 the regulatory process, as well as timing of
clinical trials and regulatory filings and approvals, 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 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. Among other
things, the actual loss for 2003 could be higher depending on revenues from
licensees and collaborators, the size and timing of expenditures and whether
there are unanticipated expenditures; the relative size of a particular
financial item could be higher or lower in the event of unanticipated
scientific, regulatory, collaborative or other developments; the sufficiency of
cash resources could be shortened if expenditures are made earlier or in larger
amounts than anticipated or are unanticipated or if funds are not available; and
regulatory approvals could be delayed or denied as a result of safety or
efficacy issues regarding the products being tested, action, inaction or delay
by the FDA, European or other regulators, or issues relating to analysis,
interpretation or submission of scientific data. These and other risks,
including those related to changes in the status of existing collaborative
relationships, availability of additional licensing or
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collaboration opportunities, the timing or results of pending and future
clinical trials, the ability of collaborators and other partners to meet their
obligations, market demand for products, actions by the FDA or the U.S. Patent
and Trademark Office, scale-up and marketing capabilities, competition,
international operations, share price volatility, the Company's financing needs
and opportunities, uncertainties regarding the status of biotechnology patents,
uncertainties as to the costs of protecting intellectual property and risks
associated with our status as a Bermuda company are described in more detail in
the remainder of this section.
None Of Our Therapeutic 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 advanced therapeutic product has not received regulatory approval.
Our products cannot be manufactured and marketed in the United States and other
countries without required regulatory approvals. 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 FDA 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. The FDA has announced
that it is consolidating its responsibility for reviewing new pharmaceutical
products into its Center for Drug Evaluation and Research, the body that
currently reviews drug products, combining that operation with part of its
biologics review operation, the Center for Biologics Evaluation and Research.
Because implementation of this plan began only recently, we do not know when or
how this change will affect us. 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 or our collaborators' 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
o our studies will be successful
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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 testing Raptiva(TM)(Efalizumab, formerly
Xanelim(TM)) in patients with moderate-to-severe psoriasis. In April of
2002, we and Genentech announced that a pharmacokinetic study conducted on
Raptiva(TM)comparing XOMA-produced material and Genentech-produced material
did not achieve the pre-defined statistical definition of comparability,
and the FDA requested that another Phase III study be completed before the
filing of a Biologics License Application for Raptiva(TM), delaying the
filing of a Biologics Licensing Application with the FDA for
Raptiva(TM)beyond the previously-planned time frame of summer 2002. In
September of 2002, we and Genentech announced the results of the additional
Phase III study which achieved its primary efficacy endpoint. In December
of 2002, Genentech submitted a Biologics License Application for
Raptiva(TM)for the treatment of moderate-to-severe plaque psoriasis, which
was accepted by the FDA in February of 2003. Genentech has projected a
10-month regulatory review period, which could potentially lead to FDA
action in late 2003. However, we do not yet know what issues the FDA may
raise with respect to efficacy or safety of the drug or other elements of
the application. We have also completed enrollment in a Phase II study of
Raptiva(TM)in patients suffering from rheumatoid arthritis. 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 the initiation of enrollment in
a Phase II study of Raptiva(TM)as a possible treatment for patients with
psoriatic arthritis. We do not know whether or when any such testing will
demonstrate product safety and efficacy in these patient populations 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 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 neither we nor Baxter have 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 November of 2002, Baxter completed
enrollment in a Phase II study with NEUPREX(R)in Crohn's disease patients,
but because we do not know the results, we do not know whether the results
will 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.
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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 Investment
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, anticipated revenues, debt financing provided
by Genentech for our share of Raptiva(TM) development and marketing costs, and
financing commitments from Millennium under the collaborative agreement between
the companies, we estimate we have sufficient cash resources to meet our
operating needs through at least the end 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 or
anticipated revenues otherwise do not materialize, 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.
Specifically, although changes in spending on Raptiva(TM) should not impact
liquidity due to our financing arrangement with Genentech and FDA approval of
Raptiva(TM) would generally be expected to improve operating cash flow, such
approval will also require repayment in cash or shares of amounts owed to
Genentech (approximately $63.0 million as of December 31, 2002). In addition,
any delays in the review by the FDA of the Biologics License Application for
Raptiva(TM) may have a material impact on our cash flow and on our ability to
raise new funding on acceptable terms.
The Financial Terms Of Some Of Our Existing Collaborative Arrangements Could
Result In Dilution Of Our Share Value
We have financed, and anticipate continuing to finance, our most significant
development program, Raptiva(TM), principally by borrowing from Genentech, and
this debt is convertible at XOMA's option into our common shares. The
outstanding amount of such debt as of December 31, 2002 was approximately $63.0
million. This debt will come due at the earlier of April of 2005 or first
product approval (which could be before the end of
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2003). Unless we secure substantial alternative financing, it is likely that
some or all of this debt, as well as some or all of any convertible debt issued
in the future as part of this financing arrangement, will be converted into
equity when it comes due rather than be repaid in cash, resulting in the
issuance of additional common shares.
Our financing arrangement with Millennium includes a $5.0 million convertible
note we issued to Millennium in November of 2001, which comes due in May of 2003
and may be converted into common shares at that time. In addition, we have the
option to issue up to $42.5 million worth of common shares to Millennium over
the next 18 months, including the conversion of current outstanding convertible
debt. The total amount issuable in 2003, including debt conversion, could be
$27.5 million.
These arrangements, as well as future arrangements we may enter into with
similar effect, could result in dilution in the value of our shares.
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, 2002, we had an
accumulated deficit of $540.9 million.
For the year ended December 31, 2002, we had a net loss of approximately $33.2
million, or $0.47 per common share (basic and diluted). We expect to incur
additional losses in the future, primarily due to increased expenses on
Raptiva(TM) and on the Millennium collaboration, as well as lower licensing and
contract services revenue.
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.
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, we and Genentech entered into an agreement whereby we
agreed to co-develop Genentech's humanized monoclonal antibody product
Raptiva(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 to 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.
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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.
Specifically, in January of 2003, Onyx announced suspension of development
activities, including manufacturing, related to the product that is the subject
of our alliance while Onyx seeks a marketing partner for the product to enable
it to reinitiate development, and we are not involved in assisting Onyx in this
process. In addition, plans for further development, including a potential
collaboration with another pharmaceutical company, are being pursued with Baxter
to provide additional resources for development. Because these efforts are
on-going, we do not know whether any additional partners or resources will be
found in either of these situations.
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.
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, 2001 through March 10,
2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
March 10, 2003, the last reported sale price of the common shares as reported on
the Nasdaq National Market was $3.41 per share. Factors contributing to such
volatility include, but are not limited to:
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.
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Because Many Of The Companies We Do Business With Are Also In The Biotechnology
Sector, The Volatility Of That Sector Can Affect Us Indirectly As Well As
Directly
The same factors that affect us directly because we are a biotechnology company
can also adversely impact us indirectly by affecting the ability of our
collaborators, partners and others we do business with to meet their obligations
to us or our ability to realize the value of the consideration provided to us by
these other companies. For example, in connection with our licensing transaction
with MorphoSys AG, MorphoSys has announced that it has exercised its option to
pay a portion of the license fee owed to us in the form of equity securities of
MorphoSys. The administrative process in Germany that is required in order for
these shares to be issued has not yet been completed and the future value of
those shares is subject both to market risks affecting our ability to realize
the value of those shares and more generally to the business and other risks to
which the issuer of those shares is subject. Since the date of MorphoSys'
election on October 23, 2002, the per share closing price for MorphoSys shares
has ranged from approximately $4.64 to $15.20, which demonstrates the volatility
of these shares in the current market.
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.
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 And Our Partners' Patent Protection For Our Principal Products And
Processes Is Not Enforceable, We May Not Realize Our Profit Potential
Because of the length of time and the expense associated with bringing new
products to the marketplace, we and our partners 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
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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 approximately 63 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 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 marketplace 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 competitive 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 affect 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 Expose Us To Risks Of
Counterclaims Against Us
We may be required to engage in litigation or other proceedings to protect our
intellectual property. The cost to us of this litigation, even if resolved in
our favor, could be substantial. Such litigation could also divert management's
attention and resources. In addition, if this 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.
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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.
These factors may enable others to develop products and processes competitive
with or superior to our own or those of our collaborators. 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.
Furthermore, positive or negative developments in connection with a potentially
competing product may have an adverse impact on our ability to raise additional
funding on acceptable terms. For example, if another product is perceived to
have a competitive advantage, or another product's failure is perceived to
increase the likelihood that our product will fail, then investors may choose
not to invest in us on terms we would accept or at all.
Without limiting the foregoing, we are aware that:
o Biogen Inc. has announced that the FDA has approved Amevive(R)to treat
moderate-to-severe chronic plaque psoriasis in adult patients who are
candidates for systematic therapy or phototherapy;
o Centocor Inc., a unit of Johnson & Johnson, has announced that it has
tested its rheumatoid arthritis and Crohn's disease drug, Remicade(R), in
psoriasis showing clinical benefits (and it has been announced that the
drug has shown promising results in patients with psoriatic arthritis);
o it has been announced that Amgen Inc. tested its rheumatoid arthritis and
psoriatic arthritis drug, Enbrel(R), in a Phase III clinical trial in
patients with moderate-to-severe plaque psoriasis, meeting the primary
endpoint and all secondary endpoints;
o MedImmune, Inc. has completed enrollment in three Phase II trials to
evaluate its anti-T cell monoclonal antibody in psoriasis;
o GenMab A/S has announced that its investigational new drug application for
HuMax-CD4 for psoriasis has been cleared through the FDA to initiate a
Phase II study;
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o Abbott Laboratories has announced the commencement of a Phase II psoriasis
trial and Phase III psoriatic arthritis trial of its rheumatoid arthritis
drug Humira(TM); 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 Abbott Laboratories markets Humira(TM);
o Amgen Inc. markets Enbrel(R)and Kineret; and
o Centocor Inc. is approved to market Remicade(R)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 GenMab A/S, 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.
As We Do More 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 exchange rate fluctuations
o withholding and other taxation and
o difficulties in staffing and managing international operations.
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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 Senior Vice President and Chief Scientific and Medical
Officer; Clarence L. Dellio, our Senior Vice President and Chief Operating
Officer; 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.
Even If We Bring Products To Market, We May Be Unable To Effectively Price Our
Products Or Obtain Adequate Reimbursement For Sales Of Our Products, Which Would
Prevent Our Products From Becoming Profitable.
If we succeed in bringing our product candidates to the market, they may not be
considered cost-effective, and reimbursement to the patient may not be available
or may not be sufficient to allow us to sell our products on a competitive
basis. In both the United States and elsewhere, sales of medical products and
treatments are dependent, in part, on the availability of reimbursement to the
patient from third-party payors, such as government and private insurance plans.
Third-party payors are increasingly challenging the prices charged for
pharmaceutical products and services. Our business is affected by the efforts of
government and third-party payors to contain or reduce the cost of health care
through various means. In the United States, there have been and will continue
to be a number of federal and state proposals to implement government controls
on pricing. In addition, the emphasis on managed care in the United States has
increased and will continue to increase the pressure on the pricing of
pharmaceutical products. We cannot predict whether any legislative or regulatory
proposals will be adopted or the effect these proposals or managed care efforts
may have on our business.
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.
We May Be Subject To Increased Risks Because We Are A Bermuda Company
Alleged abuses by certain companies that have changed their legal domicile from
jurisdictions within the United States to Bermuda have created an environment
where, notwithstanding that we changed our legal domicile in a transaction that
was approved by our shareholders and fully taxable to our company under U.S.
law, we may be exposed to various prejudicial actions, including:
o "blacklisting" of our common shares by certain pension funds
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o legislation restricting certain types of transactions and
o punitive tax legislation.
We do not know whether any of these things will happen, but if implemented one
or more of them may have an adverse impact on our future operations or our share
price.
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 (1) actions against XOMA or our directors and
officers that are predicated upon the civil liability provisions of the U.S.
securities laws or (2) 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.
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.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
-41-
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, 2002, all cash equivalents and short-term investments are
classified as fixed rate.
XOMA also has a long-term convertible subordinated 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, 2002:
Fair Value Average
Maturity (in thousands) Interest Rate
--------------------------------------------------------
Cash equivalents, fixed rate Daily $ 36,262 1.14%
Other Market Risk. At December 31, 2002, the Company had convertible notes
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.
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 2003 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
-42-
The section labeled "Compensation of Executive Officers" appearing in the
Company's proxy statement for the 2003 annual general meeting of shareholders is
incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management and
Related Shareholder Matters
The section labeled "Share Ownership" appearing in the Company's proxy statement
for the 2003 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 2003 annual general meeting of shareholders is incorporated
herein by reference.
Item 14. Controls And Procedures
Under the supervision and with the participation of our management, including
our Chairman of the Board, President and Chief Executive Officer and our Vice
President, Finance and Chief Financial Officer, we conducted an evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days before the filing date of this report. Based on this evaluation,
our Chairman of the Board, President and Chief Executive Officer and our Vice
President, Finance and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company and its consolidated subsidiaries required
to be disclosed in our periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referenced above.
PART IV
Item 15. 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."
-43-
(b) Reports on Form 8-K:
Amendment No. 2 to Current Report on Form 8-K/A dated and filed
October 24, 2002.
-44-
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 14th day of March
2003.
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 14, 2003
- ----------------------------- and Chief Executive Officer
(John L. Castello)
/s/ Patrick J. Scannon Director, Senior Vice President and Chief March 14, 2003
- ----------------------------- Scientific and Medical Officer
(Patrick J. Scannon)
/s/ Peter B. Davis Vice President, Finance and March 14, 2003
- ----------------------------- Chief Financial Officer (Principal
(Peter B. Davis) Financial and Accounting Officer)
/s/ James G. Andress Director March 14, 2003
- -----------------------------
(James G. Andress)
/s/ William K. Bowes, Jr. Director March 14, 2003
- -----------------------------
(William K. Bowes, Jr.)
/s/ Arthur Kornberg Director March 14, 2003
- -----------------------------
(Arthur Kornberg)
/s/ Steven C. Mendell Director March 14, 2003
- -----------------------------
(Steven C. Mendell)
/s/ W. Denman Van Ness Director March 14, 2003
- -----------------------------
(W. Denman Van Ness)
/s/ Patrick J. Zenner Director March 14, 2003
- -----------------------------
(Patrick Zenner)
-45-
Certifications
I, JOHN L. CASTELLO, certify that:
1. I have reviewed this annual report on Form 10-K of XOMA Ltd.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect
-46-
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: March 14, 2003 By: /s/ JOHN L. CASTELLO
-------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
-47-
I, PETER B. DAVIS, certify that:
1. I have reviewed this annual report on Form 10-K of XOMA Ltd.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
-48-
Date: March 14, 2003 By: /s/ PETER B. DAVIS
-------------------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
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, 2002 and 2001 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, 2002. 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, 2002 and 2001 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 7, 2003, except for Note 13
as to which the date is February 28, 2003
F-2
XOMA Ltd.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
------------------------------------
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,262 $ 67,320
Short-term investments 391 320
Restricted cash (Note 3) 1,500 -
Receivables 8,656 1,662
Related party receivables - current 206 418
Inventory 1,306 1,299
Prepaid expenses and other 449 249
---------------- ---------------
Total current assets 48,770 71,268
Property and equipment, net 22,650 14,645
Related party receivables - long-term 190 -
Deposits and other 172 194
---------------- ---------------
Total Assets $ 71,782 $ 86,107
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
CURRENT LIABILITIES:
Accounts payable $ 3,201 $ 3,520
Accrued liabilities 7,096 4,422
Short-term loan 763 -
Capital lease obligations - current 667 673
Deferred revenue - current 1,729 5,017
Convertible note - current 5,146 5,013
---------------- ---------------
Total current liabilities 18,602 18,645
Capital lease obligations - long-term 729 1,393
Deferred revenue - long-term 800 1,470
Convertible subordinated note - long-term 63,016 50,980
---------------- ---------------
Total Liabilities 83,147 72,488
---------------- ---------------
COMMITMENTS AND CONTINGENCIES
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 71,793,647 and 70,184,693 shares
outstanding at December 31, 2002 and 2001, respectively 36 35
Additional paid-in-capital 529,354 521,163
Accumulated comprehensive income 121 50
Accumulated deficit (540,876) (507,629)
---------------- ---------------
Total Shareholders' Equity (Net Capital Deficiency) (11,365) 13,619
---------------- ---------------
$ 71,782 $ 86,107
================ ===============
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,
----------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
REVENUES:
License and collaborative fees $ 16,850 $ 4,821 $ 3,194
Contract revenue 13,050 10,078 3,400
Product sales 49 2,380 65
--------------- ---------------- ---------------
Total revenues 29,949 17,279 6,659
--------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES:
Research and development 42,621 35,929 30,006
Marketing, general and administrative 19,405 8,681 6,069
--------------- ---------------- ---------------
Total operating costs and expenses 62,026 44,610 36,075
--------------- ---------------- ---------------
Loss from operations (32,077) (27,331) (29,416)
OTHER INCOME (EXPENSE):
Investment and other income 871 1,959 2,684
Interest expense (2,041) (2,570) (2,680)
Other expense -- (98) --
--------------- ---------------- ---------------
Net loss $ (33,247) $ (28,040) $ (29,412)
=============== ================ ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.47) $ (0.41) $ (0.45)
=============== ================ ===============
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 70,355 68,159 64,719
=============== ================ ===============
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)
----------------------------------------------------------------------------------------
Total
Shareholders'
Common Shares Accumulated Equity (Net
------------- Paid-In Comprehensive Accumulated Capital
Shares Amount Capital Income(Loss) Deficit Deficiency)
---------- ---------- ------------ -------------- ------------- -----------------
BALANCE, DECEMBER 31, 1999 58,324 $ 29 $ 433,302 $ - $ (450,177) $ (16,846)
Exerecise of share options,
contributions to 401(k) and
incentive plans 1,053 1 4,570 - - 4,571
Exercise of warrants 204 - 1,192 - - 1,192
Sales of common shares 6,145 3 28,967 - - 28,970
Conversion of redeemable
debentures into common shares 382 - 3,035 - - 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 66,108 33 471,066 (100) (479,589) (8,590)
Exercise of share options,
contributions to 401(k)
and incentive plans 324 - 1,541 - - 1,541
Exercise of warrants 652 - 3,808 - - 3,808
Sales of common shares 3,000 2 43,256 - - 43,258
Conversion of redeemable
debentures into common shares 100 - 1,492 - - 1,492
Comprehensive loss:
Unrealized gain on
investments - - - 150 - 150
Net loss - - - (28,040) (28,040)
---------- ---------- ------------ -------------- ------------- -----------------
Comprehensive loss - - - - - (27,890)
---------- ---------- ------------ -------------- ------------- -----------------
BALANCE, DECEMBER 31, 2001 70,184 35 521,163 50 (507,629) 13,619
Exercise of share options,
contributions to 401(k)
and incentive plans 167 - 1,050 - - 1,050
Sales of common shares 1,443 1 7,141 - - 7,142
Comprehensive loss:
Unrealized gain on
investments - - - 71 - 71
Net loss - - - - (33,247) (33,247)
---------- ---------- ------------ -------------- ------------- -----------------
Comprehensive loss - - - - - (33,176)
---------- ---------- ------------ -------------- ------------- -----------------
BALANCE, DECEMBER 31, 2002 71,794 $ 36 $ 529,354 $ 121 $ (540,876) $ (11,365)
========== ========== ============ ============== ============= =================
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,
-------------------------------------------------
2002 2001 2000
------------- --------------- ---------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (33,247) $ (28,040) $ (29,412)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,118 1,254 1,189
Common shares contribution to 401 (k) and
management incentive plans 541 477 421
Increase (decrease) in convertible notes to (from)
a collaborative partner for cost allocations 2,718 3,364 (700)
Accrued interest on convertible notes 1,779 2,456 2,679
Common shares received from a vendor - (231) -
Gain on investments - (20) (278)
(Gain) loss on disposal/retirement of property and
equipment 10 (97) 2
Change in assets and liabilities:
Receivables and related party and other receivables (6,972) (835) (868)
Inventory (7) (1,299) -
Prepaid expenses and other (200) (87) 517
Deposit and other assets 22 (25) (45)
Accounts payable (319) 1,005 (1,400)
Accrued liabilities 2,674 111 (2,208)
Deferred revenue (3,958) (455) 6,942
------------- --------------- ---------------
Net cash used in operating activities (34,841) (22,422) (23,161)
------------- --------------- ---------------
CASH FLOW FROM INVESTING ACTIVITES
Proceeds from sale of short-term investments - 253 506
Transfer to restricted cash (1,500) - -
Purchase of property and equipment, net of sale proceeds (10,133) (7,381) (1,519)
------------- --------------- ---------------
Net cash used in investing activities (11,633) (7,128) (1,013)
------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback transactions - 1,828 546
Proceeds from short-term loan 1,000 - -
Principal payments short-term loan (237) - -
Principal payments under capital lease obligations (670) (308) -
Proceeds from issuance of convertible notes 7,672 12,177 5,820
Proceeds from issuance of common or convertible
preference shares and warrants 7,651 48,130 34,312
------------- --------------- ---------------
Net cash provided by financing activities 15,416 61,827 40,678
------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (31,058) 32,277 16,504
Cash and cash equivalents at beginning of year 67,320 35,043 18,539
------------- --------------- ---------------
Cash and cash equivalents at end of year $ 36,262 $ 67,320 $ 35,043
============= =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
XOMA Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business 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 accounting principles
generally accepted in the United States 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 short-term investments that bear minimal risk. The Company has not
experienced any significant credit losses and does not generally require
collateral on receivables. In 2002, four customers represented 35%, 25%, 17% and
15% of total revenues and as of December 31, 2002 billed and unbilled
receivables totaled $2.1 million, $0.0 million, $4.0 million and $2.3 million
for these customers, respectively. In 2001, two customers represented 57% and
39% of total revenues and as of December 31, 2001 billed and unbilled
receivables totaled $0.5 million and $1.2 million for these customers,
respectively.
Reclassifications
Certain reclassifications have been made to conform the prior years to the 2002
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 license or technology access payments under license
and collaborative agreements where the Company has a continuing obligation to
perform is recognized as revenue over the period of the continuing performance
obligation.
Milestone payments under collaborative arrangements are recognized as revenue
upon completion of the 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. Amounts received in advance are recorded as
deferred revenue until the related milestone is completed.
Contract Revenue
Contract revenue for research and development involves the Company providing
research, development or manufacturing services to collaborative partners. The
Company recognizes revenue under these arrangements as the related research and
development costs are incurred and collectibility is reasonably assured.
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. The Company's research
and development expenses include costs incurred to provide services to third
parties under terms of various collaborative arrangements. From time to time,
research and development expenses may include upfront fees and milestones paid
to collaborative partners for the acquisition of rights to in-process research
and development. Such amounts are expensed as incurred.
Share-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 continue 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.
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 method 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):
F-8
2002 2001 2000
---------------- ---------------- ---------------
Net loss - as reported $ (33,247) $ (28,040) $ (29,412)
Deduct - Total share-based employee compensation
expense determined under fair value method (3,812) (3,190) (2,035)
---------------- ---------------- ---------------
Pro forma net loss $ (37,059) $ (31,230) $ (31,447)
================ ================ ===============
Loss per share:
Basic and diluted - as reported $ (0.47) $ (0.41) $ (0.45)
Basic and diluted - pro forma $ (0.53) $ (0.46) $ (0.49)
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:
2002 2001 2000
-------------- -------------- --------------
Dividend yield 0% 0% 0%
Expected volatility 99% 92% 91%
Risk-free interest rate 1.50% 3.70% 5.80%
Expected life 6.2 years 7.8 years 6.3 years
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.
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 (in thousands):
2002 2001 2000
-------------- ------------- -------------
Options for common shares 4,769 4,167 3,753
Warrants for common shares 700 700 1,444
Convertible notes, debentures and
related interest, as if converted 14,917 6,499 3,887
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
F-9
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 relate principally to
the Company's agreement with Baxter, consist of the following (in thousands):
December 31,
-------------------------
2002 2001
---------- -----------
Raw materials $ 202 $ 195
Finished goods 1,104 1,104
---------- -----------
Total $ 1,306 $ 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).
Property and equipment consist of the following (in thousands):
December 31,
-------------------------------
2002 2001
-------------- --------------
Equipment $ 22,988 $ 18,461
Leasehold and building improvements 29,660 15,416
Construction-in-progress 1,839 10,919
-------------- --------------
54,487 44,796
Less accumulated depreciation and
amortization (31,837) (30,151)
-------------- --------------
Property and equipment, net $ 22,650 $ 14,645
============== ==============
At December 31, 2002 and 2001, property and equipment includes equipment
acquired under capital lease obligations which had a cost of approximately $2.4
million in each of the years and accumulated amortization of $0.8 million and
$0.4 million, respectively.
Long-lived Assets
In accordance with FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which superseded 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-
F-10
progress as of December 31, 2001 and allocated to the appropriate property and
equipment categories as the assets were put into service. The renovations were
completed in 2002.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
------------------------------
2002 2001
------------- --------------
Accrued payroll cost $ 3,198 $ 2,347
Accrued clinical trial cost 559 445
Accrued legal fees 2,425 505
Other 914 1,125
------------- --------------
Total $ 7,096 $ 4,422
============= ==============
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.
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 $0.3 million, $0.1 million, and $0.0 million during
the years ended December 31, 2002, 2001 and 2000, respectively. In addition,
there were no dividends paid in common shares during the years ended December
31, 2002, 2001 and 2000, respectively.
Non-cash transactions from financing activities included the conversion of
convertible subordinated notes held by Genentech, Inc. to equity of $0.0
million, $1.5 million and $3.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.
Segment Information
The Company currently operates in a single business segment as there is only one
measurement of profit (loss) for its operations. Revenues are attributed to the
following countries for each of the years ended December 31 are as follows (in
thousands):
F-11
2002 2001 2000
------------ ------------ -------------
United States $ 14,259 $ 13,084 $ 3,676
Ireland 15,616 4,033 2,952
Others 74 162 31
------------ ------------ -------------
Total $ 29,949 $ 17,279 $ 6,659
============ ============ =============
Recent Accounting Pronouncements
In November of 2002, the FASB issued Interpretation No. 45 (or FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including residual value
guarantees issued in conjunction with operating lease agreements. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company's adoption
of the disclosure requirements in November of 2002 and the recognition
requirements in January of 2003 of FIN 45 neither had nor is anticipated to have
a material impact on the Company's results of operations and financial position.
In January of 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company's
adoption of the disclosure requirements in January of 2003 and ultimate adoption
of the recognition requirements of FIN 46 did not and is not anticipated to have
a material impact on the Company's financial position or result of operations.
In December of 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." FAS 148 amends FAS 123
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require more prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of FAS 148 are effective for
fiscal years ending after December 15, 2002. The Company elected to continue to
follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to
Employees," to account for employee stock options. See above in the "Significant
Accounting Policies" note for the disclosures required by FAS 148.
In November of 2002, the Financial Accounting Standards Board issued Emerging
Issues Task Force (referred to as EITF) Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables." EITF Issue No. 00-21 addresses
F-12
certain aspects of the accounting by a company for arrangements under which it
will perform multiple revenue-generating activities. EITF Issue No. 00-21
addresses when and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF Issue No. 00-21 provides
guidance with respect to the effect of certain customer rights due to company
nonperformance on the recognition of revenue allocated to delivered units of
accounting. EITF Issue No. 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of the
customer or the company. Finally, EITF Issue No. 00-21 provides guidance with
respect to the recognition of the cost of certain deliverables that are excluded
from the revenue accounting for an arrangement. The provisions of EITF Issue No.
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is currently evaluating the effect
that the adoption of EITF Issue No. 00-21 will have on its consolidated
financial statements.
2. Cash, Cash Equivalents And Short-Term Investments
On December 31, 2002 and 2001, 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 of short-term
investments was $0.3 million at December 31, 2002 and 2001, respectively.
Short-term investments consist of only equity securities at December 31, 2002
and 2001. During the years ended December 31, 2002, 2001 and 2000, short-term
investments incurred no significant gross realized gains or losses. Gains and
losses are determined on a specific identification basis.
3. Short-term Loan and Restricted Cash
In March of 2002, the Company entered into a secured loan agreement that was
collateralized by equipment and property improvements with interest at a rate of
11.1%. The balance of the loan at December 31, 2002 was $0.8 million.
Effective as of December 31, 2002, the Company held $1.5 million in restricted
cash as additional security under the loan. The restricted cash was included in
current assets at December 31, 2002. Subsequent to year end, the loan was paid
off. See Note 13 to the Consolidated Financial Statements.
4. License Agreements
XOMA has granted more than 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.
In 2002, XOMA announced four antibody-related cross license arrangements related
to the use of its bacterial cell expression system technology in phage display.
Under these agreements, MorphoSys AG, Biosite Incorporated ("Biosite"), Dyax
Corp., and Cambridge Antibody Technology Limited received licenses to use XOMA's
antibody expression technology for developing antibody products using their own
phage display-based antibody libraries. XOMA has received and will receive
license and other fees and access and/or licenses to the following intellectual
patents for its own product development programs:
o MorphoSys AG: HuCAL(R)Gold antibody library
o Biosite Incorporated: Dower patents and cell expression libraries,
including several high-affinity antibodies to targets
o Dyax Corp: Ladner phage display patents and antibody library
o Cambridge Antibody Technology Limited: phage display library
F-13
These agreements also provide releases of all four companies and their
collaborators from claims under the XOMA patents arising from past activities
using the companies' respective technologies, to the extent they also used
XOMA's antibody expression technology. All parties are also allowed to use
XOMA's technology in combination with their own technology in any future
collaborations.
In February of 2002, XOMA and MorphoSys AG announced cross-licensing agreements
for antibody-related technologies. The term of this license agreement commenced
in February of 2002 and remains in effect until the expiration of the last
patent within the XOMA patent rights provided under the terms of the agreement.
Because there are no continuing performance obligations on the part of the
Company under the MorphoSys agreement, the license fee provided for in that
agreement was recognized as revenue in the first quarter of 2002. Under the
terms of the agreement, the license fee was to be paid in two installments. The
first was due and paid in the first quarter of 2002, and the second portion in
the amount of $4.0 million was due in the fourth quarter of 2002. The second
installment could be paid in either cash or with MorphoSys shares valued at the
time of MorphoSys' election to pay the second installment in shares.
During the fourth quarter of 2002, we were notified by MorphoSys of its
intention to exercise its option to pay the second installment totaling $4.0
million owed to XOMA under a license agreement with 363,466 of its ordinary
shares, which number of shares was determined with reference to the market price
of MorphoSys shares at the time of such notice (October 23, 2002). XOMA applied
for and on January 31, 2003 was granted an exemption from German withholding tax
on the full license fee from MorphoSys. The administrative process in Germany
for the issuance of the shares was delayed pending resolution of the withholding
tax matter. Now that we have received the tax exemption, MorphoSys has
re-initiated the process, but it is not yet complete. Given the delays already
encountered, it is difficult to determine when these shares will be received,
but the Company's current estimate is prior to the end of the second quarter of
2003.
XOMA has not recorded a provision related to changes in the market value of the
shares MorphoSys intends to issue. Since the date of MorphoSys' election on
October 23, 2002, the per share closing price for MorphoSys shares has ranged
from approximately $4.64 to $15.20. Future market conditions for the shares are
difficult to predict and may vary significantly. Therefore, under the provisions
of the Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, the Company has determined that the conditions related to the
likelihood of the events both probable and reasonably estimable have not been
met.
5. Collaborative Agreements
Total research and development expenses incurred related to the Company's
collaborative agreements were approximately $24.7 million, $13.7 million and
$15.7 million in 2002, 2001 and 2000, respectively.
In April of 1996, the Company entered into a collaborative agreement with
Genentech, Inc. ("Genentech") to jointly develop Raptiva(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
F-14
fund the Company's development costs for Raptiva(TM) until the completion of
Phase III clinical trials through a series of convertible subordinated notes.
During 1996, Genentech made loans totaling $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 would scale up and develop Raptiva(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 Raptiva(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 $10.4 million, $10.5
million, and $5.1 million net funding from Genentech under the development
agreement for the years ended December 31, 2002, 2001, and 2000, respectively.
See Note 6 to the Consolidated Financial Statements for a discussion of the
financing arrangement with XOMA and Genentech.
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. Under the terms of the agreement, XOMA is 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. See Note 6 to the Consolidated Financial Statements for a discussion
of the financing arrangement with XOMA and Millennium.
In January of 2001, XOMA signed a strategic process development and
manufacturing agreement with Onyx for its ONYX-015 product. In January 2003,
Onyx announced the suspension of development activities related to ONYX-015
until it successfully engages a marketing partner. XOMA's agreement with Onyx
remains in effect, but at this time it is difficult to estimate the impact on
future results of operations.
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 performance obligations,
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.
6. Convertible Notes
Genentech
Under an arrangement with Genentech (see Note 3), the Company receives financing
for its share of Raptiva(TM) development costs through the issuance of
convertible subordinated notes due at the earlier of April of 2005 or upon
regulatory approval of Raptiva(TM). The notes bear interest at rates of LIBOR
plus 1% (3.0% at December 31, 2002) compounded and reset at the end of June and
December each year. Interest is payable at maturity.
As of December 31, 2002, the Company had an outstanding balance of $63.0 million
under this loan agreement. The agreement as amended in April of 1999 includes
development cost sharing provisions. Under the
F-15
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 Raptiva(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 $7.7 million, $7.2 million and $5.8 million,
net of repayments of the loan of $0 million, $1.5 million and $3.0 million in
2002, 2001 and 2000, respectively. The loan balance was increased by $2.7
million in 2002 and $3.3 million in 2001 and decreased by $0.7 million in 2000,
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 for each $10,000
outstanding in notes. The Series B Preference Shares are convertible into common
shares at the fair market value of common shares at the time of conversion
(7,500 shares are so designated). The cumulative amount of interest accrued was
$11.5 million, $9.9 million and $7.4 million as of December 31, 2002, 2001 and
2000, respectively.
Millennium
As announced in November of 2001, under an investment agreement, Millennium has
committed to take, at our option, up to $50.0 million worth of our common shares
over the initial term of the agreement in several tranches, through a
combination of equity at the then prevailing market prices in return for cash
and retirement of convertible debt. As of December 31, 2002, the convertible
note balance was $5.1 million and is due in May of 2003 at an interest rate of
LIBOR (2.6%, the LIBOR rate set as of November 2001). 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. In December of 2002, the Company issued 1,443,418 common
shares for net proceeds of $7.1 million related to the investment agreement with
Millennium.
7. Share Capital
Common Shares
In December of 2002, the Company issued 1,443,418 common shares for net proceeds
of $7.1 million related to the investment agreement with Millennium.
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.
Preference Shares
Preference Shares
Series A. As of December 31, 2002, the Company has authorized 135,000 Series A
Preference Shares of which none were outstanding at December 31, 2002, 2001 and
2000. (See "Shareholder Rights Plan" below.)
Series B. See Note 6 to the Consolidated Financial Statements, Convertible
Notes.
F-16
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,
2002 and 2001 under the Incentive Plan were 158,139 and 44,781, respectively,
and these shares have been reserved under the Restricted Plan (as defined
below).
The amounts charged to expense under the Incentive Plan were $1.0 million, $0.8
million and $0.9 million for the plan years 2002, 2001 and 2000, respectively.
As of December 31, 2002, $1.0 million was accrued related to this plan.
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. In 2002 and 2001,
employees purchased 28,227 common shares and 171,595 common shares, respectively
under the Share Purchase Plan and payroll deductions under the Share Purchase
Plan totaled $0.5 million, $0.3 million and $0.3 million for 2002, 2001 and
2000, respectively.
Shareholder Rights Plan
In October of 1993, the Company's Board of Directors unanimously adopted a
Shareholder Rights Plan (the "Original Rights Plan") which expired at the close
of business on December 31, 2002. Subsequent to year end, the Company's Board of
Directors adopted a new Shareholders Rights Plan. See Note 13 to the
Consolidated Financial Statements for a discussion about the new plan.
Shares Reserved for Future Issuance
The Company has reserved common shares for future issuance as of December 31,
2002 as follows:
Share Option Plans 6,819,410
Employee Share Purchase Plan 1,217,026
Warrants 700,000
-------------------
Total 8,736,436
===================
F-17
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.
8. Share Options And Warrants
At December 31, 2002, the Company had share-based compensation plans, as
described below. The aggregate number of common shares that may be issued under
these plans is 8,965,000 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 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 generally ten years from the date of grant or three months from the date
of termination of employment (longer in the case of death or certain
retirements). Options granted generally vest over four or 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, 2002, options covering
4,149,168 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 or three months from the date of termination of
employment (longer in the case of death or certain retirements) . Options
granted generally vest over four or 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, 2002, options covering 404,795 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 and Other Options
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, 2002, options for
200,500 common shares were outstanding under the Directors Plan.
In addition, in July 2002, the Company granted a non-qualified fully-vested
option to a director to purchase 15,000 common shares at 100% of the fair market
value of the shares on the date of grant, which will expire in ten years. This
option was not issued as part of the Directors Plan.
A summary of the status of the Company's share option plans as of December 31,
2002, 2001 and 2000 and changes during years ended on those dates is presented
below:
F-18
2002 2001 2000
--------------------------- ------------------------- ------------------------
Options: Shares Price * Shares Price * Shares Price *
-------------- ----------- ------------- ---------- ------------ ----------
Outstanding at beginning of year 4,166,610 $5.58 3,752,662 $5.00 4,230,884 $4.58
Granted
(1) 33,500 5.00 1,750 9.28 2,500 6.88
(2) 791,625 8.19 667,200 9.39 641,500 9.04
Exercised (83,589) 4.44 (105,502) 4.11 (856,241) 4.40
Forfeited, expired or cancelled (3) (138,683) 10.57 (149,500) 7.85 (265,981) 10.02
--------------- ------------- ------------
Outstanding at end of year 4,769,463 5.89 4,166,610 5.59 3,752,662 5.00
=============== ============= ============
Exercisable at end of year 3,334,392 2,949,400 2,588,597
=============== ============= ============
Weighted average fair value of options granted:
(1) $4.42 $7.92 $3.87
(2) $6.46 $7.45 $7.07
* Weighted-average exercise price:
(1) Option price less than market price on date of grant as provided for in the
Restricted Share Plan.
(2) Option price equal to market price on date of grant.
(3) The Company adjusts for forfeitures as they occur.
The following table summarizes information about share options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------ -------------------------------------
Range of Exercise Prices Number Outstanding Life * Price ** Number Exercisable Price **
- ------------------------ ------------------- ------------ ---------- ---------------------- -------------
$ 2.00 - 2.38 174,362 2.20 $ 2.36 173,712 $ 2.37
2.56 - 2.56 1,113,731 2.03 2.56 1,113,731 2.56
2.60 - 4.56 876,064 5.71 3.90 648,874 3.97
4.68 - 6.75 847,500 5.76 5.57 658,315 5.67
6.88 - 9.75 1,032,014 6.91 8.70 564,090 8.50
9.99 - 13.95 725,792 8.82 10.61 175,670 11.25
------------------- ---------------------
2.00 - 13.95 4,769,463 5.47 5.89 3,334,392 4.90
=================== =====================
* Weighted-average remaining contractual life
** Weighted-average exercise price
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,
2002, 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, 2002,
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
F-19
were issued to an advisor. All of these warrants expire in January of 2004. As
of December 31, 2002, 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, 2002, there were 125,000 warrants still
outstanding.
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.
9. 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.
Leases
As of December 31, 2002, 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
---------------------- -----------------------
2003 $ 785 $ 2,850
2004 572 2,894
2005 221 2,890
2006 2,900
2007 2,730
Thereafter 708
---------------------- -----------------------
Minimum lease payments 1,578 $ 14,972
=======================
Less: amount representing interest expense (182)
----------------------
Present value of minimum lease payments 1,396
Less: current portion 667
----------------------
Long-term capital lease obligations $ 729
======================
Total rental expense was approximately $2.8 million, $3.2 million, and $3.3
million for the years ended December 31, 2002, 2001 and 2000, respectively.
Legal Proceedings
In June of 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. In July of 2001, the Company, XOMA (Bermuda) Ltd.,
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"),
F-20
sought injunctive relief, compensatory and punitive damages for fraud and
misrepresentation, breach of contract, patent infringement, misappropriation and
unfair business practices. In September of 2001, the court granted the Company's
motion to dismiss the Biosite Action. In November of 2001, 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. In March
of 2002, Biosite filed an amended answer to add additional defenses that certain
of the patents at issue were invalid, that certain alleged inequitable conduct
on the part of the XOMA entities rendered certain of the patents unenforceable
and that alleged patent misuse rendered the patents at issue unenforceable. In
June of 2002, XOMA announced that it filed an amended and supplemental complaint
against Biosite alleging that Biosite's announced "new" antibody expression
technology continued willfully to infringe XOMA's patents and that Biosite's
statements regarding it were false and misleading.
By order entered September 13, 2002, all claims and counterclaims in the XOMA
Action were dismissed with prejudice pursuant to a settlement agreement between
the parties. Other terms of the settlement included a royalty-free license to
XOMA to practice certain Biosite patents, assignment to XOMA of Biosite's
antibody expression technology that had been announced earlier in 2002, a
royalty-free license to Biosite to utilize XOMA's bacterial cell expression
technology, an agreement pursuant to which XOMA may receive expression libraries
for up to an agreed number of targets it presents to Biosite (without payment or
royalty obligations), termination of the existing license to Biosite from XOMA
for the LBP diagnostic assay and an exchange of releases.
10. Income Taxes
The significant components of net deferred tax assets and liabilities as of
December 31are as follows (in millions):
2002 2001
--------------- ---------------
Capitalized R&D expenses $ 30.2 $ 29.4
Net operating loss carryforwards 74.3 75.0
R&D and other credit carryforwards 19.8 19.7
Other 0.7 0.7
Valuation allowance (125.0) (124.8)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
The net change in the valuation allowance was a $0.2 million increase, a $4.6
million increase, and a $3.4 million decrease for the years ended December 31,
2002, 2001 and 2000, 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.
XOMA's accumulated federal and state tax net operating loss carryforwards
("NOLs") and credit carryforwards as of December 31, 2002 are as follows:
F-21
Amounts
(in milion) Expiration Dates
----------------- -------------------------
Federal
NOLs $ 211.4 2003 - 2022
Credits 14.7 2003 - 2022
State
NOLs 39.4 2003 - 2007
Credits 7.8 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.
11. 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.
12. 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 50% of their eligible compensation per payroll period, up to a
maximum for 2002 of $11,000 (or $12,000 for employees over 50). 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 $0.5
million; $0.3 million and 0.4 million for the years ended December 31, 2002,
2001 and 2000, respectively.
13. Subsequent Events
On February 26, 2003, the Company's Board of Directors unanimously adopted a
Shareholder Rights Plan (the "Rights Plan"), which is designed to extend the
provisions of the Original Rights Plan. Under the Rights Plan, Preference Share
Purchase Rights ("Rights") will be authorized and granted at the rate of one
Right for each common share held of record as of the close of business on April
2, 2003. 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 February 26, 2013.
On February 28, 2003, the Company paid off a short-term loan in the amount of
$0.8 million and a $1.5 million restriction on cash was released to the Company.
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. (as amended).
4.1 Shareholder Rights Agreement dated as of February 26, 2003 by and between
XOMA Ltd. and Mellon Investor Services LLC as Rights Agent.
4.2 Form of Resolution Regarding Preferences and Rights of Series A Preference
Shares (Included as Exhibit A to Exhibit 4.1 above).
4.3 Form of Resolution Regarding Preferences and Rights of Series B Preference
Shares (Exhibit 4.3).(2)
4.5 Form of Common Stock Purchase Warrant (Incyte Warrants) (Exhibit 2).(3)
4.6 Form of Common Share Purchase Warrant (January and March 1999 Warrants)
(Exhibit 5).(4)
4.7 Form of Common Share Purchase Warrant (July 1999 Warrants) (Exhibit 4).(5)
4.8 Form of Common Share Purchase Warrant (2000 Warrants) (Exhibit 4).(6)
10.1 1981 Share Option Plan as amended and restated (Exhibit 10.1).(7)
10.1A Amendment to Amended and Restated 1981 Share Option Plan.
10.1B Form of Share Option Agreement for 1981 Share Option Plan.(7)
10.2 Restricted Share Plan as amended and restated (Exhibit 10.2).(7)
10.2A Amendment to Amended and Restated Restricted Share Plan.
10.2B Form of Share Option Agreement for Restricted Share Plan.(7)
10.2C Form of Restricted Share Purchase Agreement for Restricted Share Plan
(Exhibit 10.2B).(8)
10.3 1992 Directors Share Option Plan as amended and restated (Exhibit 10.4).(8)
10.3A Form of Share Option Agreement for 1992 Directors Share Option Plan
(initial grants) (Exhibit 10.4A).(8)
10.3B Form of Share Option Agreement for 1992 Directors Share Option Plan
(subsequent grants) (Exhibit 10.4B).(7)
10.4 Management Incentive Compensation Plan as amended and restated.
10.5 1998 Employee Share Purchase Plan (Exhibit 10.1).(8)
10.5A Amendment No. 1 to 1998 Employee Share Purchase Plan (Exhibit 10.2).(8)
10.6 Form of indemnification agreement for officers (Exhibit 10.6).(7)
10.7 Form of indemnification agreement for employee directors (Exhibit 10.7).(7)
10.8 Form of indemnification agreement for non-employee directors (Exhibit
10.8).(7)
10.9 Employment Agreement dated April 29, 1992 between the Company and John L.
Castello (Exhibit 10.9).(7)
10.10 Employment Agreement dated April 1, 1994 between the Company and Peter B.
Davis (Exhibit 10.10).(9)
10.11 Employment Agreement dated March 26, 2002 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).(7)
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).(7)
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).(7)
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).(7)
10.16 Lease of premises at 2910 Seventh Street, Berkeley, California dated March
25, 1992 (Exhibit 10.16).(7)
10.17 Sublease dated January 20, 1997, between the Company and UroGenesys, Inc.
(Exhibit 10.18).(7)
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).(7)
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).(7)
10.19 Lease of premises at 5860 and 5864 Hollis Street, Emeryville, California
dated as of November 2, 2001 (with addendum)(Exhibit 10.19).(10)
10.20 Lease of premises at 2850 Seventh Street, Second Floor, Berkeley,
California dated as of December 28, 2001 (with addendum and
guaranty)(Exhibit 10.20).(10)
10.21 License Agreement dated as of August 31, 1988 between the Company and
Sanofi (with certain confidential information deleted) (Exhibit 10.27).(7)
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).(7)
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).(7)
10.22B Fourth Amendment to License Agreement dated December 23, 1998 between the
Company and New York University (Exhibit 10.22B).(11)
10.22C Fifth Amendment to License Agreement dated June 25, 1999 between the
Company and New York University (Exhibit 10.21C).(12)
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).(13)
10.23 Cross License Agreement dated December 15, 1993 between Research
Development Foundation and the Company (with certain confidential
information deleted) (Exhibit 10.23).(11)
10.24 Cross License Agreement dated December 15, 1993 between the Company and
Research Development Foundation (with certain confidential information
deleted) (Exhibit 10.24).(11)
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).(9)
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).(12)
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).(12)
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).(13)
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).(14)
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).(14)
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).(14)
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).(3)
10.30 Registration Rights Agreement dated as of July 9, 1998 by and among the
Company and Incyte Pharmaceuticals, Inc. (Exhibit 3).(3)
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).(4)
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).(4)
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).(4)
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).(16)
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).(16)
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).(6)
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).(6)
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).(6)
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).(17)
10.39A Amendment #1 to the Process Development and Manufacturing Agreement,
dated as April 15, 2002 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
39A).(18)
10.40 Development and License Agreement, dated November 26, 2001, by and among
XOMA (US) LLC, XOMA Ireland Limited and Millennium 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)(19)
10.41 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)
10.42 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)
10.42A Amendment No. 1 to Convertible Subordinated Promissory Note dated
November 5, 2002 (Exhibit 10.3A).(20)
10.43 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)
10.44 License Agreement by and between XOMA Ireland Limited and MorphoSys AG,
dated as of February 1, 2002 (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 10.43).(21)
10.45 License Agreement by and between XOMA Ireland Limited and DYAX Corp.,
dated as of October 16, 2002 (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).
10.46 License Agreement by and between XOMA Ireland Limited and Cambridge
Antibody Technology Limited, dated as of December 22, 2002 (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).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
_________________________
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
Current Report on Form 8-K dated July 9, 1998 filed July 16, 1998.
4. 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.
5. 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.
6. 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.
7. 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.
8. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8 filed October 27, 1998.
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, 1994.
10. Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
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, 1998.
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, 1999.
13. 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.
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,
1999.
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
Amendment No. 2 to Current Re-port on Form 8-K/A dated and filed March 9,
2000.
17. 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.
18. Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2002.
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 as amended by Amendment No. 2 to Current Report on Form 8-K/A
dated and filed October 24, 2002.
20. Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed November 6, 2002.
21. Incorporated by reference to the referenced exhibit to Amendment No. 2 to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002, dated and filed on December 12, 2002.