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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2003
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, CA 94710
(Address of principal executive offices) (Zip Code)
(510) 204-7200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares US$.0005 par value 72,629,047
Class Outstanding at August 11, 2003
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XOMA Ltd.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002..............1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,
2003 and 2002.............................................................................2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003
and 2002..................................................................................3
Notes to Condensed Consolidated Financial Statements.........................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................26
Item 4. Controls and Procedures.....................................................................26
PART II OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................28
Item 2. Changes in Securities and Use of Proceeds...................................................28
Item 3. Defaults upon Senior Securities.............................................................28
Item 4. Submission of Matters to a Vote of Security Holders.........................................28
Item 5. Other Information...........................................................................29
Item 6. Exhibits and Reports on Form 8-K............................................................29
Signatures..............................................................................................30
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
----------------- ----------------
ASSETS (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 26,946 $ 36,262
Short-term investments 2,592 391
Restricted cash - 1,500
Receivables 484 8,656
Related party receivables - current 100 206
Inventory 1,306 1,306
Prepaid expenses and other 1,044 449
----------------- ----------------
Total current assets 32,472 48,770
Property and equipment, net 22,699 22,650
Related party receivables - long-term 108 190
Deposits and other 159 172
----------------- ----------------
Total assets $ 55,438 $ 71,782
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
Current liabilities:
Accounts payable $ 2,961 $ 3,201
Accrued liabilities 5,379 7,096
Short-term loan - 763
Capital lease obligations - current 542 667
Deferred revenue - current 1,650 1,729
Convertible subordinated note - current 5,214 5,146
----------------- -----------------
Total current liabilities 15,746 18,602
Capital lease obligations - long-term 497 729
Deferred revenue - long-term 30 800
Note payable long-term 5,260 -
Convertible subordinated note - long-term 69,617 63,016
----------------- -----------------
Total liabilities 91,150 83,147
Shareholders' equity (Net capital deficiency):
Common shares 36 36
Additional paid-in capital 534,054 529,354
Accumulated comprehensive income 228 121
Accumulated deficit (570,030) (540,876)
----------------- -----------------
Total shareholders' equity (Net capital deficiency) (35,712) (11,365)
----------------- -----------------
Total liabilities and shareholders' equity $55,438 $ 71,782
================= =================
Note 1 - Amounts derived from the Company's audited financial statements
appearing in the Annual Report on Form 10-K for the year ended December 31, 2002
as filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------
2003 2002 2003 2002
-------------- ------------- ------------ -----------
Revenues:
License and collaborative fees $ 920 $ 1,340 $ 2,075 $ 7,653
Contract and other revenue 1,441 3,384 3,450 6,293
-------------- ------------- ------------- ----------
Total revenues 2,361 4,724 5,525 13,946
-------------- ------------- ------------- ----------
Operating costs and expenses:
Research and development 13,502 10,759 25,484 20,694
Marketing, general and administrative 4,698 3,849 8,603 8,698
-------------- ------------- ------------- ----------
Total operating costs and expenses 18,200 14,608 34,087 29,392
-------------- ------------- ------------- ----------
Loss from operations (15,839) (9,884) (28,562) (15,446)
Other income (expense):
Investment and other income 268 232 383 504
Interest expense (489) (493) (975) (1,142)
-------------- ------------- ------------- ----------
Net loss $ (16,060) $ (10,145) $ (29,154) $ (16,084)
============== ============= ============= ==========
Basic and diluted net loss per common share $ (0.22) $ (0.14) $ (0.41) $ (0.23)
============== ============= ============= ==========
Shares used in computing basic and diluted net loss
per common share 72,023 70,309 71,937 70,269
============== ============= ============= ==========
See accompanying notes to condensed consolidated financial statement.
-2-
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended
June 30,
--------------------------
2003 2002
--------------- ----------
Cash flows from operating activities:
Net loss $ (29,154) $ (16,084)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,878 823
Common shares contribution to 401(k) and management incentive plans 685 541
Increase (decrease) in notes to (from) a collaborative partner
for cost allocations 270 1,250
Accrued interest on convertible notes 872 834
(Gain) loss on disposal/retirement of property and equipment and investments (193) 1
Changes in assets and liabilities:
Receivables and related party and other receivables 8,360 (5,169)
Inventory - (7)
Prepaid expenses and other (595) (460)
Deposits and other 13 (12)
Accounts payable (240) 2,346
Accrued liabilities (1,717) 1,164
Deferred revenue (849) (2,593)
--------------- ----------
Net cash used in operating activities (20,670) (17,366)
--------------- ----------
Cash flows from investing activities:
Issuance of short-term investments (4,000) -
Transfer from restricted cash 1,500 -
Purchase of property and equipment, net of sale proceeds (1,927) (5,851)
Proceeds from sale of short-term investments 2,099 -
--------------- ----------
Net cash used in investing activities (2,328) (5,851)
--------------- ----------
Cash flows from financing activities:
Proceeds from short-term loan - 1,000
Principal payments - short-term loan (763) -
Principal payments under capital lease obligations (357) (374)
Proceeds from issuance of convertible notes 10,787 4,020
Proceeds from issuance of common shares, net of closing costs 4,015 399
--------------- ----------
Net cash provided by financing activities 13,682 5,045
--------------- ----------
Net increase (decrease) in cash and cash equivalents (9,316) (18,172)
Cash and cash equivalents at the beginning of the period 36,262 67,320
--------------- ----------
Cash and cash equivalents at the end of the period $26,946 $ 49,148
=============== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a
biopharmaceutical company that develops and manufactures products to treat
cancer, immunologic and inflammatory disorders, and infectious diseases. The
Company's products are presently in various stages of development and all are
subject to regulatory approval before the Company or its collaborators can
commercially introduce any products. There can be no assurance that any of the
products under development by the Company will be developed successfully, obtain
the requisite regulatory approval or be successfully manufactured or marketed.
Basis of Presentation
The interim information contained in this report is unaudited but, in
management's opinion, includes all normal recurring adjustments necessary for a
fair presentation of results for the periods presented. Interim results may not
be indicative of results to be expected for the full year or future periods. The
condensed consolidated balance sheet as of December 31, 2002 has been derived
from the audited consolidated financial statements included in the Company's
2002 Annual Report on Form 10-K. The unaudited consolidated condensed financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 2002 included in its Annual
Report on Form 10-K.
Critical Accounting Policies
We believe there have been no significant changes in our critical
accounting policies during the six months ended June 30, 2003 as compared to
those previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the SEC on March 28, 2003.
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, which bear minimal risk. The Company has not
experienced any significant credit losses and does not generally require
collateral on receivables. For the six months ended June 30, 2003, four
customers represented 43%, 28%, 18% and 10% of total revenues and as of June 30,
2003 there were no billed or unbilled receivables outstanding from these
customers. For the six months ended June 30, 2002, three customers represented
40%, 36% and 22% of total revenues.
-4-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 SFAS 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below for the three and six months ended June 30, 2003
and 2002 (in thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net loss - as reported $ (16,060) $ (10,145) $ (29,154) $ (16,084)
Deduct:
Total share-based employee compensation
expense determined under fair value
method (948) (1,053) (1,602) (1,846)
--------------- --------------- --------------- ---------------
Pro forma net loss $ (17,008) $ (11,198) $ (30,756) $ (17,930)
=============== =============== =============== ===============
Loss per share:
Basic and diluted - as reported $ (0.22) $ (0.14) $ (0.41) $ (0.23)
Basic and diluted - pro forma $ (0.24) $ (0.16) $ (0.43) $ (0.26)
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 periods indicated below:
Three and six months ended
June 30,
---------------------------
2003 2002
------------- ------------
Dividend yield 0% 0%
Expected volatility 96% 99%
Risk-free interest rate 1.17% 1.50%
Expected life 4.9 years 6.2 years
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.
-5-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 achievement 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 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 the
Company's 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 the Company's future research and development expenses.
Comprehensive Income (Loss)
Unrealized gains or losses on the Company's available-for-sale securities
are included in other comprehensive income (loss). Comprehensive income (loss)
and its components for the three and six months ended June 30, 2003 and 2002 are
as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ------------- ------------
Net loss $ (16,060) $ (10,145) $ (29,154) $ (16,084)
Unrealized gain (loss) on securities available-for-sale 141 -- 228 --
------------- ------------ ------------- ------------
Comprehensive loss $ (15,919) $ (10,145) $ (28,926) $ (16,084)
============= ============ ============= ============
-6-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Net Loss Per Share
Basic and diluted net loss per share is based on the weighted average
number of 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 the six months ended June 30, 2003 and
2002 (in thousands):
Six months ended
June 30,
---------------------------
2003 2002
--------------- -----------
Options for shares 5,719 4,655
Warrants for shares 700 700
Convertible notes, debentures and related interest, as if converted* 13,021 16,834
* The number of shares, as if converted represents a conversion price equal
to the prevailing market prices of $5.32 and $3.99 at the close of business
on June 30, 2003 and June 28, 2002, respectively.
Recent Accounting Pronouncements
In November of 2002, the Financial Accounting Standards Board (or 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 Company's adoption of
the recognition requirements in January of 2003 of FIN 45 did not have a
material impact on the Company's results of operations and financial position.
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's adoption of the recognition requirements in
June of 2003 of EITF Issue No. 00-21 did not have a material impact on its
consolidated financial position or results of operations.
In December of 2002, the FASB issued Statement No. 148 (or FAS 148),
"Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148
amends SFAS 123 "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair based method of
accounting for stock-based employee compensation. In addition, FAS 148 amends
the disclosure requirements of SFAS 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
-7-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 disclosure required by FAS 148.
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 structure 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 did not have an
impact on the Company's financial position and results of operations. The
adoption of the recognition requirements of FIN 46 in July of 2003 is not
expected to have a material impact on the Company's financial position or result
of operations.
In May 2003, the FASB issued Statements of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for the
classification and measurement of financial instruments with characteristics of
both liabilities and equity. FAS 150 will become effective for financial
instruments entered into or modified after May 31, 2003. The adoption of FAS 150
did not have a material effect on the Company's financial position or results of
operations.
2. BALANCE SHEET COMPONENTS
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 Healthcare Corporation, consist of the
following (in thousands):
June 30, December 31,
2003 2002
---------------- ---------------
Raw materials $ 202 $ 202
Finished goods 1,104 1,104
---------------- ---------------
Total $ 1,306 $ 1,306
================ ===============
-8-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
June 30, December 31,
2003 2002
---------------- ---------------
Accrued payroll expenses $ 3,054 $ 3,198
Accrued clinical trial expenses 356 559
Accrued legal and other professional
fees 1,100 2,425
Other 869 914
---------------- ---------------
Total $ 5,379 $ 7,096
================ ===============
3. LICENSE AGREEMENTS AND RELATED CONTINGENCIES
In February of 2002, XOMA and MorphoSys AG announced cross-licensing
agreements for antibody-related technologies. The term of the XOMA license to
MorphoSys 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 $5.0 million license fee was to be
paid in two installments. The first $1.0 million installment 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 the 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. Upon receipt of the tax exemption, MorphoSys
re-initiated the process, and on May 6, 2003, the shares were issued to XOMA.
The balance of these shares, totaling $2.1 million, are held as available-for-
sale and are classified as short-term investments in the financial statements.
During the second quarter of 2003, 171,581 shares were sold for net proceeds of
$2.1 million and the gain on the sale of investment of $0.2 million was
recognized as investment and other income.
In June of 2003, Onyx Pharmaceuticals, Inc. announced that it was
discontinuing its therapeutic virus program to focus its resources on its BAY
43-9006 anticancer compound. Onyx subsequently notified XOMA on June 23, 2003 of
its intention to terminate the Company's related process development and
manufacturing agreement effective 120 days from the date of notification. Under
the terms of the agreement, Onyx is obligated to pay $0.5 million as a facility
fee plus $1.0 million as a termination fee by the end of the 120-day
notification period. In accordance with our revenue recognition policy, these
amounts will be recognized in future periods as the Company's service
commitments are completed. Additionally, the Company plans to accelerate the
amortization of $1.0 million remaining in deferred revenue over the 120-day
notification period.
4. GENENTECH AGREEMENT MODIFICATION
In the first quarter of 2003, the Company's financing arrangement with
Genentech, Inc. related to development and commercialization of RaptivaTM was
modified to provide the following terms:
-9-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The credit limit under the convertible subordinated debt agreement to
finance XOMA's share of development costs was increased to $80.0 million. The
convertible subordinated note is due upon the earlier of (a) April of 2005,
except for advances made after April 2003 in which case payment will be due on
the second anniversary date(s) of such advances or (b) within 90 days after
first product approval (which could be before the end of 2003). At XOMA's
election, the convertible subordinated note may be repaid in cash or with shares
with the conversion price to be calculated at the time of payment based on the
fair market value at the time of election. If repayment is triggered by product
approval, XOMA may elect to defer payment of up to $40.0 million as an offset
against the Company's proceeds from its 25% share of U.S. operating profits on
the product. At June 30, 2003, the outstanding balance under this note totaled
$69.6 million.
A new $15.0 million debt facility was established to finance XOMA's share
of U.S. commercialization costs. The note payable is due upon the earlier of (a)
April of 2005, except for advances made after April 2003 in which case payment
will be due on the second anniversary date(s) of such advances or (b) within 90
days after first product approval by the FDA (which could be before the end of
2003). The commercial note payable must be repaid in cash. At June 30, 2003 the
outstanding balance under this note totaled $5.3 million.
XOMA granted Genentech a security interest in the Company's profit share on
RaptivaTM as collateral against any unpaid past due amounts of the loans.
5. MILLENNIUM INVESTMENT AGREEMENT MODIFICATION
In the second quarter of 2003, the Company announced the amendment of
certain terms of the investment agreement with Millennium Pharmaceuticals, Inc.
The key elements of the revised investment agreement include an extension of the
maturity date of the $5.0 million outstanding convertible debt from May of 2003
to February of 2004 and a re-scheduling of the Company's decision points
regarding whether to sell the remaining common shares from three option dates
through May of 2004 to six option dates through February of 2005. In June of
2003, the Company exercised an option to sell 608,766 shares to Millennium for
gross proceeds of $4.0 million or $6.57 per share, leaving a balance of $33.5
million available under this arrangement, excluding the convertible debt.
6. SUBSEQUENT EVENTS
On July 3, 2003, the Company and Baxter Healthcare Corporation terminated
the license and supply agreements for the NEUPREX(R) product. Baxter has agreed
to make a one-time termination payment of $10.0 million to the Company no later
than January of 2004. Until such payment is made, Baxter is committed to
reimburse the Company for a portion of certain development expenses which may be
incurred. The Company expects to recognize the $10.0 million termination payment
as revenue in the third quarter of 2003 and to establish an inventory reserve of
$1.3 million for NEUPREX(R) products that were included in inventory as of June
30, 2003.
In July of 2003, a complaint was filed in the General Court of Justice,
Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
amended, by a participant in one of the Phase III clinical trials of
Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
fiduciary duty, fraud, misrepresentation and medical negligence against the
plaintiff's treating physician, the physician's medical practice, Genentech,
XOMA, the institutional review board responsible for the trial and the contract
research organization retained to conduct the trial. The complaint seeks
unspecified compensatory damages alleged to be in excess of $10,000.00. As set
forth in the complaint, the plaintiff was initially in the placebo group of this
trial; he did not receive Raptiva(TM) during this time, and his claims are based
on his failure to receive his indicated treatment, not his receipt of
Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
against it to be without merit and intends to vigorously defend against them.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the three months ended June 30, 2003 were $2.4 million
compared with $4.7 million for the three months ended June 30, 2002, a 49%
decrease. This decrease was primarily due to lower recognition of deferred
revenue from license fees and milestone payments related to the NEUPREX(R)
license agreement with Baxter Healthcare Corporation ("Baxter") as a result of
achieving full amortization in the first quarter of 2003 and the fourth quarter
of 2002, respectively, and to lower development service revenues from Onyx
Pharmaceuticals, Inc. ("Onyx"). Revenues for the six months ended June 30, 2003
were $5.5 million compared with $13.9 million for the same period of 2002. This
decrease was primarily due to lower license fees due from the amortization of
deferred revenue mentioned earlier, to lower development service revenues from
Onyx, and to a non-recurring $5.0 million license fee from MorphoSys AG
recognized in the first quarter of 2002. License fee revenue is expected to be
higher in the second half of 2003 including the $11.0 million termination fees
associated with Baxter and Onyx. Contract revenue is expected to be lower in the
second half of 2003 due to reduced development services for Baxter and Onyx.
Research and development expenses for the three and six months ended June
30, 2003 were $13.5 million and $25.5 million, respectively, compared with $10.8
million and $20.7 million, respectively, for the same periods of 2002, or
increases of 25% and 23%, respectively. These increases reflected increased
development costs associated with RaptivaTM, MLN2201 (formerly known as MLN01),
CAB-2, and the Company's XMP.629 compound being developed for acne. These
increases were partially offset by decreased spending on Onyx-015, NEUPREX(R),
and ING-1. In July 2003, the Company's licensing arrangement with Baxter for
NEUPREX(R) was terminated, and future development plans are under review. In the
third quarter, the Company expects to establish an inventory reserve of $1.3
million for NEUPREX(R) products.
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 cost associated with these programs approximate the following (in
thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- --------- ---------- -----------
Earlier stage programs $ 9,492 $ 6,252 $ 16,691 $ 10,916
Later stage programs 4,010 4,507 8,793 9,778
---------- --------- ---------- -----------
Total $ 13,502 $ 10,759 $ 25,484 $ 20,694
========== ========= ========== ==========
Our research and development activities also can be divided into those
related to our internal projects and those related to collaborative
arrangements. The cost related to internal projects versus collaborative
arrangements approximate the following (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
Internal projects $ 5,077 $ 4,653 $ 9,499 $ 9,613
Collaborative arrangements 8,425 6,106 15,985 11,081
---------- --------- ---------- -----------
Total $ 13,502 $ 10,759 $ 25,484 $ 20,694
========== ========= ========== ==========
For the three and six months ended June 30, 2003, one project accounted for
approximately 20% of our total research and development costs. No other single
project was greater than 20% of our total research and development costs during
the three and six months ended June 30, 2003 and 2002.
-11-
Marketing, general and administrative expenses for the three months ended
June 30, 2003 increased to $4.7 million, or 24%, from $3.8 million for the three
months ended June 30, 2002. The most significant component of this increase was
pre-launch activities for RaptivaTM offset by lower legal expenses. Marketing,
general and administrative expenses for the six months ended June 30, 2003 were
$8.6 million compared with $ 8.7 million for the same period of 2002. The net
decrease of $0.1 million represents primarily an increase in pre-launch
activities for RaptivaTM and business development expenses, which were offset by
lower legal expenses. Pre-launch marketing expenses for RaptivaTM are expected
to continue at similar or higher levels until the product launch date.
Investment income for the three months ended June 30, 2003 increased to
$0.3 million, or 50%, compared to $0.2 million for the three months ended June
30, 2002 primarily due to gains recognized on the sale of MorphoSys AG shares
issued to XOMA on May 6, 2003. The gains were partially offset by lower interest
income due to lower interest rates and lower average cash balances. Investment
income for the six months ended June 30, 2003 decreased to $0.4 million, or 20%,
compared to $0.5 million for the same period of 2002. This decrease reflected
lower interest rates on lower average cash balance. Interest expense for the
three and six months ended June 30, 2003 were to $0.5 million and $1.0 million,
respectively, compared to $0.5 million and $1.1 million, respectively, for the
three and six months ended June 30, 2002. This reflected lower interest rates on
a higher average outstanding balance of the convertible notes due to Genentech,
Inc. ("Genentech") and Millennium Pharmaceuticals, Inc. ("Millennium"). Interest
expense for the remainder of 2003 is expected to increase due to anticipated
higher development and commercial loan balances due to Genentech.
Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and restricted cash
decreased during the six months ended June 30, 2003 by $8.7 million to $29.5
million at June 30, 2003, compared with $38.2 million at December 31, 2002. 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 RaptivaTM 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 $20.7 million for the six months
ended June 30, 2003, compared with $17.4 million for the six months ended June
30, 2002. The increase in the first half of 2003 when compared with the first
half of 2002 primarily reflected a higher net loss and reductions in accrued
expenses related primarily to legal expenses, partially offset by reductions in
accounts receivable in the first half of 2003 compared to increases in the first
half of 2002.
Net cash used in investing activities was $2.3 million for the six months
ended June 30, 2003, compared to cash used in investing activities of $5.9
million for the six months ended June 30, 2002. The decrease in the first half
of 2003 when compared to the first half of 2002 was primarily due to the release
of $1.5 million of restricted cash, which was securing a short-term loan that
was paid off during the first quarter of 2003, to proceeds received on the sale
of MorphoSys shares in the second quarter of 2003, and to reduced purchases of
property and equipment in 2003. Capital programs in 2002 included renovating and
expanding our manufacturing and warehouse facilities and other infrastructure
investments. Capital spending is expected to continue at this lower level for
the remainder of 2003.
Net cash provided by financing activities was $13.7 million for the six
months ended June 30, 2003, compared with $5.0 million for the six months ended
June 30, 2002. Financing activities in the first half of 2003 included $10.8
million net funding from Genentech under our development and commercial loan
agreements and $4.0 million proceeds from common share sold under our investment
agreement with Millennium. This was partially offset by principal payments of
$1.1 million to retire a short-term loan obligation and for principal payments
on capital lease obligations.
In the first quarter of 2003, the Company's financing arrangement with
Genentech related to development and commercialization of RaptivaTM was modified
to provide the following terms:
-12-
The credit limit under the convertible subordinated debt agreement to
finance XOMA's share of development costs was increased to $80.0 million. The
convertible subordinated debt is due upon the earlier of (a) April of 2005,
except for advances made after April 2003 in which case payment will be due on
the second anniversary date(s) of such advances or (b) within 90 days after
first product approval (which could be before the end of 2003). At XOMA's
election, the convertible subordinated debt may be repaid in cash or with shares
with the conversion price to be calculated at the time of payment based on the
fair market value at the time of election. If repayment is triggered by product
approval, XOMA may elect to defer payment of up to $40.0 million as an offset
against the Company's proceeds from its 25% share of U.S. operating profits on
the product. At June 30, 2003, the outstanding balance under this note totaled
$69.6 million.
A new $15.0 million debt facility was established to finance XOMA's share
of U.S. commercialization costs. The note payable is due upon the earlier of (a)
April of 2005, except for advances made after April 2003 in which case payment
will be due on the second anniversary date(s) of such advances or (b) within 90
days after first product approval by the FDA (which could be before the end of
2003). The commercial note must be repaid in cash. At June 30, 2003 the
outstanding balance under this note totaled $5.3 million.
XOMA granted Genentech a security interest in the Company's profit share on
RaptivaTM as collateral against any unpaid past due amounts of the loans.
In the second quarter of 2003, the Company announced the amendment of
certain terms of the investment agreement with Millennium. The key elements of
the revised investment agreement include an extension of the maturity date of
the $5.0 million outstanding convertible debt from May of 2003 to February of
2004 and a re-scheduling of the Company's decision points regarding whether to
sell the remaining common shares from three option dates through May of 2004 to
six option dates through February of 2005. In June of 2003, the Company
exercised an option to sell 608,766 shares to Millennium for gross proceeds of
$4.0 million or $6.57 per share, leaving a balance of $33.5 million available
under this arrangement, excluding the convertible debt.
The present outlook is for higher losses in 2003 than recorded in 2002,
primarily due to increased expenses on RaptivaTM and on the Millennium
collaboration. The Company's strategy is to attempt to continue broadening its
product pipeline through additional development collaborations such as its
arrangements with Genentech 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.
Based on current spending levels, anticipated revenues, debt financing
provided by Genentech for XOMA's share of RaptivaTM 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 RaptivaTM prior to
approval should have no material impact on liquidity due to the Company's
financing arrangement with Genentech. Approval of RaptivaTM during this period
would be expected to improve operating cash flow to the extent of XOMA's share
of operating profits from sales of RaptivaTM in the U.S., but require repayment
of amounts owed to Genentech under the financial arrangements discussed above.
Additional licensing arrangements or collaborations or otherwise entering into
new equity or other financing arrangements could potentially extend this period.
In December of 2002, Genentech submitted a Biologics License Application (or
BLA) to the U.S. Food and Drug Administration for marketing approval of
RaptivaTM 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 the Company in its other development programs or by
potentially competing companies' products may also affect XOMA's ability to
raise new funding on acceptable terms. The Company continues to evaluate
alternative financing arrangements to strengthen its overall financial position
and mitigate risks. 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 2 below.
-13-
As of June 30, 2003, future contractual obligations are as follows (in
thousands):
Note Capital Operating Convertible
Payable* Leases Leases Notes** Total
----------- ---------- ----------- ------------ ---------
Remainder of 2003 $ - $ 246 $ 1,515 $ - $ 1,761
2004 - 572 2,894 5,214 8,680
2005 5,260 221 2,890 69,617 77,988
2006 - - 2,900 - 2,900
2007 - - 2,730 - 2,730
Thereafter - - 708 - 708
----------- ---------- ----------- ------------ ---------
Total $ 5,260 $ 1,039 $ 13,637 $ 74,831 $ 94,767
=========== ========== =========== ============ =========
* The amount due in 2005 relates to XOMA's commercial loan agreement with
Genenetech. This amount is due at the earlier of (a) April of 2005, except
for advances made after April 2003 in which case payment will be due on the
second anniversary date(s) of such advances or (b) within 90 days after
first product approval (which could be before the end of 2003).
** The amount due in 2005 relates to XOMA's convertible subordinated debt
agreement with Genentech. This amount is due at the earlier of (a) April of
2005, except for advances made after April 2003 in which case payment will
be due on the second anniversary date(s) of such advances or (b) within 90
days after the first product approval (which could be before the end of
2003). The amount due in 2004 represents the amount due to Millennium in
February of 2004.
Under an effective shelf registration statement filed on November 17, 2000,
we registered 10,000,000 common shares, of which 7,000,000 common shares have
not been issued and remain available to be sold from time to time by us. We also
intend to file a registration statement with the SEC to increase the common
shares available to be issued under this shelf registration by an additional
13,000,000 shares. Once this registration statement becomes effective, we will
be able to issue these shares from time to time in response to market conditions
or other circumstances. This Form 10-Q does not itself constitute an offer to
sell or the solicitation of offers to purchase any securities.
In addition, pursuant to our agreements with Millennium, we have an
effective registration statement filed on December 12, 2002 and amended on May
23, 2003 covering the resale by Millennium of up to 6,000,000 common shares we
have issued or may issue to Millennium, and we have issued a total of 2,052,184
shares to Millennium which may be resold under that registration statement.
Pursuant to our arrangement with Genentech, we have an effective registration
statement filed on August 5, 1999 covering the resale by Genentech of up to
2,000,000 common shares we may issue to Genentech, of which 482,000 have been
issued and resold.
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:
We believe there have been no significant changes in our critical
accounting policies during the six months ended June 30, 2003 as compared to
those previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the SEC on March 28, 2003.
-14-
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.
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.
Forward-Looking Statements And Cautionary Factors That May Affect Future Results
Certain statements contained herein related to the relative size of the
Company's loss for 2003, the estimated levels of its expenses and revenues for
the balance of 2003, the sufficiency of its cash resources, the FDA advisory
committee review and the BLA review timeframe, as well as other statements
related to current plans for product development (including the progress of
clinical trials, the regulatory process and the timing of clinical trials and
regulatory filings and approvals) and existing and potential collaborative and
licensing relationships, or that otherwise relate to future periods, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are based on assumptions that may not prove accurate. Actual results
could differ materially from those anticipated due to certain risks inherent in
the biotechnology industry and for companies engaged in the development of new
products in a regulated market. 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 expenses. The
suf-
-15-
ficiency 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 on acceptable terms; 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
their advisory bodies, or issues relating to analysis or interpretation by, or
submission to, these entities or others of scientific data. These and other
risks, including those related to the results of pre-clinical testing, the
design and progress of clinical trials, changes in the status of existing
collaborative relationships, availability of additional licensing or
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 U.S. Food and Drug
Administration, the U.S. Patent and Trademark Office or the U.S. Securities and
Exchange Commission, 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 Our Third Party
Collaborators Nor We 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 may not be complete, 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,
-16-
o our studies will be successful,
o we will be able to provide 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 RaptivaTM (Efalizumab) in
patients with moderate-to-severe psoriasis. In April of 2002, we
and Genentech announced that a pharmacokinetic study conducted on
RaptivaTM 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 RaptivaTM, delaying the filing of a Biologics
Licensing Application with the FDA for RaptivaTM 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 RaptivaTM for the treatment of moderate-to-severe
plaque psoriasis, which was accepted by the FDA in February of
2003. Genentech has projected a single cycle (approximately
10-month) regulatory review period, which could potentially lead
to FDA action in late 2003. A FDA advisory committee is scheduled
to review the Biologics License Application for RaptivaTM on
September 9, 2003. However, we do not yet know what issues the
FDA or its advisory committee may raise with respect to efficacy
or safety of the drug or other elements of the application. In
March 2003, we announced completion of enrollment in a Phase II
study of RaptivaTM in patients suffering from rheumatoid
arthritis. In May of 2003, we and Genentech announced our
decision to terminate Phase II testing of RaptivaTM in patients
suffering from rheumatoid arthritis based on an evaluation by an
independent Data Safety Monitoring Board that suggested no
overall net clinical benefit in patients receiving the study
drug. We have also announced the initiation of enrollment in a
Phase II study of RaptivaTM 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 this
patient population or result in regulatory approval.
o in December of 1992, we began human testing of our
NEUPREX(R)product, a genetically engineered fragment of a
particular human protein, and 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. In November of
2002, Baxter completed enrollment in a Phase II pilot study with
NEUPREX(R) in Crohn's disease patients. In July of 2003, XOMA
announced the termination of its license and supply agreements
with Baxter for XOMA's NEUPREX(R)product, and the rights returned
to XOMA.
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.
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.
-17-
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 RaptivaTM 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 RaptivaTM should not impact
liquidity due to our financing arrangements with Genentech and FDA approval of
RaptivaTM would generally be expected to improve operating cash flow to the
extent of XOMA's share of operating profits from sales of RaptivaTM in the U.S.,
such approval will also require repayment in cash, shares or deferred repayment
of up to $40.0 million of amounts owed to Genentech (approximately $74.9 million
under both loan agreements as of June 30, 2003). In addition, any delays in the
review by the FDA of the Biologics License Application for RaptivaTM 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, RaptivaTM, principally by borrowing from
Genentech, and this debt is convertible at XOMA's option into our common shares
with the conversion price to be calculated at the time of conversion. The
outstanding amount of such convertible debt as of June 30, 2003 was
approximately $69.6 million. This debt will come due at the earlier of April of
2005 or within 90 days after first product approval (which could be before the
end of 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
February of 2004 and may be converted into common shares at that time. In
addition, we have the option to issue up to $33.5 million worth of common
shares, excluding the converti-
-18-
ble debt, to Millennium through February of 2005. The total amount issuable in
the remainder of 2003 could be $9.0 million. The number of shares to be issued
will be based on a conversion price to be calculated at the time of conversion.
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 June 30, 2003, we had an
accumulated deficit of $570.0 million.
For the six months ended June 30, 2003, we had a net loss of approximately
$29.2 million, or $0.41 per common share (basic and diluted). 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 RaptivaTM, on the Millennium
collaboration and on our XMP.629 compound.
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 RaptivaTM. In April of 1999, the companies extended and
expanded the agreement. In March of 2003, the Company further expanded
the agreement.
o In November of 2001, we entered into a collaboration with Millennium
Pharmaceuticals, Inc. to develop two of Millennium's products for
certain vascular inflammation indications.
Because our collaborators are independent third parties, they may be
subject to different risks than we are and have significant discretion in
determining the efforts and resources they will apply. We do not know whether
Genentech or Millennium will successfully develop or market any of the products
we are collaborating on.
Even when we have a collaborative relationship, other circumstances may
prevent it from resulting in successful development of marketable products.
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. In July of 2003, this arrangement was
terminated, and the rights returned to XOMA. Although we are
evaluating future options for developing this product, we do not know
whether any options we may pursue will succeed.
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. In June of 2003, Onyx notified XOMA
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that it was discontinuing development of the product and terminating
the agreement so that it could focus on its anticancer compound.
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 August 12,
2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
August 11, 2003, the last reported sale price of the common shares as reported
on the Nasdaq National Market was $8.40 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
o market speculation regarding any of the foregoing.
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.
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XOMA has only recently received these shares and the future value of
these shares is subject both to market risks affecting our ability to realize
the value of these shares and more generally to the business and other risks to
which the issuer of these 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 $4.77 to $15.95, 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 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 69 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
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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.
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
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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, that the primary and key
secondary endpoints were met in a second Phase III trial, and that a
filing for regulatory approval with the U.S. FDA for this medication
was submitted in July of 2003;
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 HumiraTM; and
o other companies, including Medarex, Inc., are developing monoclonal
antibody or other products for treatment of inflammatory skin
disorders.
A number of companies are developing monoclonal antibodies targeting
cancers, which may prove more effective than 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:
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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.
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
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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;
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 actions against XOMA or our directors and
officers that are predicated upon the civil liability provisions of the U.S.
securities laws or entertain 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.
In February of 2003, we renewed our shareholder rights agreement, which
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
-25-
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market rate risk due to changes in interest rates
relates primarily to the Company's investment portfolio. The Company 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 as fixed rate if the rate of return on
an instrument remains fixed over its term. As of June 30, 2003, all the
Company's cash equivalents are classified as fixed rate.
The Company also has a long-term convertible note due to Genentech in 2005.
Interest on this note of LIBOR plus 1% is reset at the end of June and December
each year and is therefore variable.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents at June 30, 2003:
Fair Value Average
Maturity (in thousands) Interest Rate
------------ --------------- -------------
Cash equivalents, fixed rate Daily $26,946 1.15%
Other Market Risk
At June 30, 2003, the Company had a long-term convertible note outstanding
which is convertible into common shares based on the market price of the
Company's common shares at the time of conversion. A 10% decrease in the market
price of the Company's common shares would increase the number of shares
issuable upon conversion of either security by approximately 11%. An increase in
the market price of Company common shares of 10% would decrease the shares
issuable by approximately 9%.
The Company's investment in MorphoSys stock is subject to market risk
volatility as evidenced by the range of closing prices from $4.77 to $15.95 per
share from October 23, 2002, the date of MorphoSys' election to issue shares,
through August 11, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including 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, as
of the end of the period covered by 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 included in our periodic SEC filings.
In April of 2003, the Company implemented a new financial reporting system
which represents a significant change in our internal controls. During our
evaluation of internal controls conducted for the second quarter of 2003,
special procedures were performed regarding the system conversion and
implementation. We concluded that the system conversion and implementation was
properly controlled to ensure accurate financial reporting. Apart from this new
system, there were no changes in the Company's internal control over financial
reporting during the
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fiscal quarter to which this report relates that have materially affected, or
are reasonable likely to materially affect, the Company's internal control over
financial accounting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July of 2003, a complaint was filed in the General Court of Justice,
Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
amended, by a participant in one of the Phase III clinical trials of
Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
fiduciary duty, fraud, misrepresentation and medical negligence against the
plaintiff's treating physician, the physician's medical practice, Genentech,
XOMA, the institutional review board responsible for the trial and the contract
research organization retained to conduct the trial. The complaint seeks
unspecified compensatory damages alleged to be in excess of $10,000.00. As set
forth in the complaint, the plaintiff was initially in the placebo group of this
trial; he did not receive Raptiva(TM) during this time, and his claims are based
on his failure to receive his indicated treatment, not his receipt of
Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
against it to be without merit and intends to vigorously defend against them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company continues to use the net proceeds from its June 2001 registered
offering of common shares for general corporate purposes, including leasehold
improvements, equipment acquisitions, current research and development projects,
the development of new products or technologies, general working capital and
operating expenses. Pending application of the net proceeds as described above,
the Company has invested the remaining net proceeds of the offering in
short-term, investment-grade, interest-bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2003, the Company held its annual general meeting of
shareholders. The following persons (the only nominees) were elected as the
Company's directors, having received the indicated votes:
Name Votes For Votes Withheld
- ---- --------- --------------
James G. Andress 57,160,604 2,067,616
William K. Bowes, Jr. 54,754,802 4,473,418
John L. Castello 57,115,248 2,112,972
Arthur Kornberg, M.D. 57,155,671 2,072,549
Steven C. Mendell 56,484,064 2,744,156
Patrick J. Scannon, M.D., Ph.D. 57,144,481 2,083,739
W. Denman Van Ness 54,765,642 4,462,578
Patrick J. Zenner 57,156,285 2,071,935
The appointment of Ernst & Young LLP to act as the Company's independent
auditors for the 2003 fiscal year was ratified and the authorization of the
Board to agree to such auditors' fee was approved, having received 58,186,546
votes for, 836,846 votes against, 204,828 abstentions and no broker non-votes.
The amendments to the Company's 1981 Share Option Plan and Restricted Share
Plan to increase the number of shares issuable over the term of the plans by
2,500,000 shares to 11,150,000 shares in the aggregate was approved, having
received 18,072,914 votes for, 4,430,910 votes against, 945,374 abstentions and
35,779,022 broker non-votes.
The amendment to the Company's Restricted Share Plan to increase the number
of shares issuable over the term of the plan by 250,000 shares to 1,500,000
shares in the aggregate was approved, having received 15,448,525 votes for,
7,734,725 votes against, 265,948 abstentions and 35,779,022 broker non-votes.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Letter Agreement dated May 16, 2003 by and among XOMA Ltd., Millennium
Pharmaceuticals, Inc. and mHoldings Trust. (1)
10.2 Press Release dated May 20, 2003. (1)
10.3 Letter Agreement dated June 30, 2003 terminating the License Agreement
dated as of January 25, 2000 between XOMA Ireland Limited and Baxter
Healthcare Corporation. (2)
10.4 Letter Agreement dated June 30, 2003 terminating the Supply Agreement
effective as of January 25, 2000 between XOMA (US) LLC and Baxter
Healthcare Corporation. (2)
10.5 Press Release dated August 13, 2003. (3)
31.1 Certification of John L. Castello, filed pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (2)
31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (2)
32.1 Certification of John L. Castello ,furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (3)
32.2 Certification of Peter D. Davis, furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 . (3)
- -------------------
(1) Incorporated by reference to the referenced exhibit to XOMA's
Amendment No. 1 to Current Report on Form 8-K/A filed May 21,
2003 (File No. 0-14710).
(2) Filed herewith.
(3) Furnished herewith.
Reports on Form 8-K:
1. Current Report on Form 8-K dated and filed on November 27, 2001, as
amended by amendments on Form 8-K/A dated and filed on December 13,
2001, October 24, 2002 and May 21, 2003, respectively (file no.
0-14710).
2. Current Report on Form 8-K dated and filed on April 11, 2003, as
amended by amendment on Form 8-K/A dated and filed on April 18, 2003
(file no. 0-14710).
3. Current Report on Form 8-K dated and filed on June 30, 2003 (file no.
0-14710).
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XOMA Ltd.
SIGNATURES
Pursuant to the requirements 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.
XOMA Ltd.
Date: August 13, 2003 By: /s/ JOHN L. CASTELLO
--------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 13, 2003 By: /s/ PETER D. DAVIS
------------------
Peter D. Davis
Vice President, Finance and
Chief Financial Officer
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