Back to GetFilings.com
- --------------------------------------------------------------------------------
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 September 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 83,126,916
Class Outstanding at November 11, 2003
- --------------------------------------------------------------------------------
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
September 30, 2003 and December 31, 2002...................1
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002....2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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.................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...27
Item 4. Controls and Procedures......................................28
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................29
Item 2. Changes in Securities and Use of Proceeds....................29
Item 3. Defaults upon Senior Securities..............................29
Item 4. Submission of Matters to a Vote of Security Holders..........29
Item 5. Other Information............................................29
Item 6. Exhibits and Reports on Form 8-K.............................29
Signatures...............................................................32
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
----------------- ----------------
ASSETS (Unaudited) (Note A)
Current assets:
Cash and cash equivalents $ 80,078 $ 36,262
Short-term investments 676 391
Restricted cash - 1,500
Receivables 10,657 8,656
Related party receivables - current 100 206
Inventory - 1,306
Prepaid expenses and other 1,093 449
----------------- ----------------
Total current assets 92,604 48,770
Property and equipment, net 22,050 22,650
Related party receivables - long-term 107 190
Deposits and other 159 172
----------------- ----------------
Total assets $ 114,920 $ 71,782
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
Current liabilities:
Accounts payable $ 2,532 $ 3,201
Accrued liabilities 6,520 7,096
Short-term loan - 763
Capital lease obligations - current 530 667
Deferred revenue - current 635 1,729
Convertible subordinated note - current 5,248 5,146
----------------- -----------------
Total current liabilities 15,465 18,602
Capital lease obligations - long-term 353 729
Deferred revenue - long-term - 800
Note payable long-term 7,956 -
Convertible subordinated note - long-term 69,282 63,016
----------------- -----------------
Total liabilities 93,056 83,147
Shareholders' equity (net capital deficiency):
Common shares 41 36
Additional paid-in capital 601,550 529,354
Accumulated other comprehensive income 153 121
Accumulated deficit (579,880) (540,876)
----------------- -----------------
Total shareholders' equity (net capital deficiency) 21,864 (11,365)
----------------- -----------------
Total liabilities and shareholders' equity $ 114,920 $ 71,782
================= =================
Note A - 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 Nine months ended
September 30, September 30,
-------------------------------- ----------------------------
2003 2002 2003 2002
-------------------------------- ----------------------------
Revenues:
License and collaborative fees $ 12,050 $ 1,423 $ 14,125 $ 9,076
Contract and other revenue 582 2,810 4,032 9,103
------------------ -------------- ----------- -----------
Total revenues 12,632 4,233 18,157 18,179
------------------ -------------- ----------- -----------
Operating costs and expenses:
Research and development 15,933 9,701 41,417 30,395
Marketing, general and administrative 6,266 6,416 14,869 15,114
------------------ -------------- ------------ ----------
Total operating costs and expenses 22,199 16,117 56,286 45,509
------------------ -------------- ------------ ----------
Loss from operations (9,567) (11,884) (38,129) (27,330)
Other income (expense):
Investment and other income 166 194 549 698
Interest expense (449) (572) (1,424) (1,714)
------------------ -------------- ------------ ----------
Net loss $ (9,850) $ (12,262) $ (39,004) $ (28,346)
================== ============== ============ ==========
Basic and diluted net loss per common share $ (0.13) $ (0.17) $ (0.54) $ (0.40)
================== ============== ============ ==========
Shares used in computing basic and diluted net loss per
common share 73,224 70,330 72,371 70,291
================== ============== ============ ==========
-2-
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
September 30,
---------------------------
2003 2002
---------------------------
Cash flows from operating activities:
Net loss $ (39,004) $ (28,346)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,941 1,332
Common shares contribution to 401(k) and management incentive plans 754 541
Increase in notes to a collaborative partner
for cost allocations 2,245 2,050
Accrued interest on convertible notes 1,292 1,354
(Gain) loss on disposal/retirement of property and equipment and investments (298) 1
Changes in assets and liabilities:
Receivables and related party and other receivables (1,812) (4,438)
Inventory 1,306 (7)
Prepaid expenses and other (644) (484)
Deposits and other 13 22
Accounts payable (669) 365
Accrued liabilities (576) 2,577
Deferred revenue (1,894) (2,510)
------------- -------------
Net cash used in operating activities (36,346) (27,543)
------------- -------------
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 (2,341) (8,783)
Proceeds from sale of short-term investments 4,045 -
------------- -------------
Net cash used in investing activities (796) (8,783)
------------- -------------
Cash flows from financing activities:
Proceeds from short-term loan - 1,000
Principal payments - short-term loan (763) -
Principal payments under capital lease obligations (513) (627)
Proceeds from issuance of convertible notes 10,787 4,020
Proceeds from issuance of common shares, net of issuance costs 71,447 474
------------- -------------
Net cash provided by financing activities 80,958 4,867
------------- -------------
Net increase (decrease) in cash and cash equivalents 43,816 (31,459)
Cash and cash equivalents at the beginning of the period 36,262 67,320
------------- -------------
Cash and cash equivalents at the end of the period $ 80,078 $ 35,861
============= =============
-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 adjustments, consisting only of 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 nine months ended September 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 nine months ended September 30, 2003, two
customers represented 64% and 19% of total revenues and as of September 30, 2003
there were billed and unbilled receivables outstanding from one of these
customers of $10,000. For the nine months ended September 30, 2002, three
customers represented 43%, 28% and 26% of total revenues and as of September 30,
2002 billed and unbilled receivables totaled $1,725, $4,000, and $232 for these
customers, respectively.
-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 nine months ended September 30,
2003 and 2002 (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net loss - as reported $ (9,850) $ (12,262) $ (39,004) $ (28,346)
Deduct:
Total share-based employee compensation
expense determined under fair value
method (838) (1,013) (2,441) (2,859)
--------------- --------------- --------------- ---------------
Pro forma net loss $ (10,688) $ (13,275) $ (41,445) $ (31,205)
=============== =============== =============== ===============
Loss per share:
Basic and diluted - as reported $ (0.13) $ (0.17) $ (0.54) $ (0.40)
Basic and diluted - pro forma $ (0.15) $ (0.19) $ (0.57) $ (0.44)
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 Nine months ended
September 30,
-------------------------------
2003 2002
-------------- ---------------
Dividend yield 0% 0%
Expected volatility 93% 99%
Risk-free interest rate 1.20% 1.50%
Expected life 5.0 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)
Revenue arrangements with multiple elements are divided into separate units
of accounting if certain criteria are met, including whether the delivered item
has value to the customer on a stand-alone basis and whether there is objective
and reliable evidence of the fair value of the undelivered items. The
consideration the Company receives is allocated among the separate units of
accounting based on their respective fair values, and the applicable revenue
recognition criteria are considered separately for each of the separate units.
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 nine months ended September 30, 2003 and
2002 are as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------
2003 2002 2003 2002
--------------------- --------------------------- -------------
Net loss $ (9,850) $ (12,262) $ (39,004) $ (28,346)
-6-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Unrealized gain (loss) on securities available-for-sale (75) 12 32 12
--------------------- ------------ ------------ --------------
Comprehensive loss $ (9,925) $ (12,250) $ (38,972) $ (28,334)
===================== ============ ============ ==============
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 nine months ended September 30, 2003
and 2002 (in thousands):
Nine months ended
September 30,
--------------------------
2003 2002
--------------- ----------
Options for shares 5,601 4,661
Warrants for shares 700 700
Convertible notes, debentures and related interest,
as if converted* 9,743 10,577
* The number of shares, as if converted, represents a conversion price
equal to the average prevailing market prices as specified in the
conversion terms of the note.
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
July of 2003 of EITF Issue No. 00-21 did not have a material impact on its
consolidated financial position or results of operations.
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
-7-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 at the end of the first
fiscal year or interim period ending after December 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 December 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 is effective for financial instruments
entered into or modified after May 31, 2003 except for certain mandatorily
redeemable financial instruments for which the FASB announced on November 5,
2003 deferred effective dates for certain provisions of FAS150. The adoption of
FAS 150 and the subsequent deferred effective dates did not and will 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 related principally to
the Company's agreement with Baxter Healthcare Corporation ("Baxter") were
reserved for during the quarter due to the termination of the arrangement in the
third quarter of 2003 and the determination that the inventories would not be
sold to Baxter as a result of the agreement termination (in thousands):
September 30, December 31,
2003 2002
---------------- ---------------
Raw materials $ 202 $ 202
Finished goods 1,104 1,104
---------------- ---------------
1,306 1,306
Inventory reserve $ (1,306) -
---------------- ---------------
Total $ - $ 1,306
================ ===============
-8-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30, December 31,
2003 2002
---------------- ---------------
Accrued payroll expenses $ 3,501 $ 3,198
Accrued clinical trial expenses 623 559
Accrued legal and other professional
fees 1,630 2,425
Other 766 914
---------------- ---------------
Total $ 6,520 $ 7,096
================ ===============
3. LICENSE AGREEMENTS AND RELATED CONTINGENCIES
In February of 2002, XOMA and MorphoSys AG ("MorphoSys") 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 were 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. As
of September 30, 2003, the balance of these shares, totaling $0.3 million, was
held as available-for-sale and was classified as short-term investments in the
financial statements. Through September 30, 2003 the Company sold 340,499 shares
for net proceeds of $4.0 million and a gain on the sale of investment of $0.3
million was recognized as investment and other income. In October of 2003, the
remaining shares were sold (see Note 8 Subsequent Events).
In June of 2003, Onyx Pharmaceuticals, Inc. ("Onyx") 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 are expected to be recognized primarily in the fourth quarter of 2003 as
the Company's service commitments are completed. Additionally, the Company
accelerated the amortization of $1.0 million remaining in deferred revenue over
the 120-day notification period.
On July 3, 2003, the Company and Baxter 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
recognized the $10.0 million termi-
-9-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
nation fee as revenue in the third quarter of 2003 and established an inventory
reserve of $1.3 million and the related charge to research and development
expense for NEUPREX(R) products that were included in inventory as of September
30, 2003.
4. GENENTECH AGREEMENT MODIFICATION
In the first quarter of 2003, the Company's financing arrangement with
Genentech, Inc. ("Genentech") related to development and commercialization of
RAPTIVATM (Efalizumab) was modified to provide the following terms:
o 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 was to mature upon the
earlier of (a) April of 2005, except for advances made after April of
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 occurred on October 27, 2003; see Note 8 Subsequent
Events ). At XOMA's election, the convertible subordinated note was to
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 were triggered by product approval,
XOMA could 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 September 30, 2003, the outstanding balance
under this note totaled $69.3 million. On November 3, 2003, XOMA
announced its election to defer payment of $40.0 million of this debt
as provided above and to pay the remaining balance (approximately
$29.3 million) with convertible preference shares (See Note 8
Subsequent Events).
o A new $15.0 million debt facility was established to finance XOMA's
share of U.S. commercialization costs. The note payable was to mature
upon the earlier of (a) April of 2005, except for advances made after
April of 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 occurred on October 27, 2003; see
Note 8 Subsequent Events). The commercial note payable must be repaid
in cash. At September 30, 2003 the outstanding balance under this note
totaled approximately $8.0 million.
o 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.
("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. In October of
2003, the remaining commitments available under the agreement were reduced due
to the discontinuation of one of the products (see Note 8 Subsequent Events).
6. SALE OF COMMON SHARES.
On September 24, 2003, the Company sold 9,000,000 common shares at a price
of $8.00 per share in an underwritten public offering. The Company received
approximately $67.2 million of net proceeds during the third quarter of 2003. In
October of 2003, the underwriters exercised their over-allotment option and
purchased an additional 1,350,000 common shares (see Note 8 Subsequent Events).
-10-
XOMA Ltd.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. 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 participants in one of the Phase III clinical trials of RAPTIVATM .
The complaint asserts claims for alleged negligence, breach of fiduciary duty,
fraud, misrepresentation and medial 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 RAPTIVATM during this time, and his claims are based on his failure to
receive his indicated treatment, not his receipt of RAPTIVATM. 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. XOMA has filed a motion to
dismiss all claims against it, and discovery has not yet commenced.
8. SUBSEQUENT EVENTS.
On October 9, 2003, the Company sold the remaining 22,967 shares of
MorphoSys stock at approximately the net carrying value of those shares and
received net proceeds of approximately $0.2 million.
On October 10, 2003, the Company announced the discontinuation of
development of MLN2201, one of two products of ongoing development collaboration
with Millennium. Under the terms of the amended investment agreement and as a
result of the termination of the MLN2001 development program, if the Company
decides to sell common shares to Millennium, the funding amounts will be reduced
40% from a total of $33.5 million to a total of $20.1 million. Under the terms
of the development agreement, the Company has no future obligations to pay
milestone payments to Millennium for this product.
On October 17, 2003, the underwriters for the public offering exercised
their option to purchase 1,350,000 common shares at $8.00 per share to cover
over-allotments. The Company received $10.2 million in additional net cash
proceeds.
On October 27, 2003, the FDA approved RAPTIVA(TM) for the treatment of
adults with chronic moderate-to-severe plaque psoriasis who are candidates for
systemic therapy or phototherapy. Under the terms of our financing arrangement
with Genentech, this approval triggers a 90-day period at the end of which the
convertible subordinated debt and the commercial note payable (see Note 4
Genentech Agreement Modification) will mature. The commercial note payable must
be paid in cash. For payment of the convertible subordinated debt, the Company
elected pursuant to the development loan agreement 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 and to pay the remaining balance
(approximately $29.3 million) with preference shares before December 31, 2003.
These preference shares will be convertible upon issuance into common shares at
a price of $7.75 per share. The commercial note payable, which had a balance of
approximately $8.0 million as of September 30, 2003, will be paid in cash in
January of 2004.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the three months ended September 30, 2003 were $12.6 million
compared with $4.2 million for the three months ended September 30, 2002, a
200.0% increase. This increase was primarily due to license revenue for the
$10.0 million termination fee related to the Company's agreement with Baxter
Healthcare Corporation ("Baxter") and partially offset by $2.2 million of lower
development service revenues from Baxter and Onyx Pharmaceuticals, Inc.
("Onyx"). Revenues for the nine months ended September 30, 2003 were $18.2
million compared with $18.2 million for the same period of 2002. License and
collaborative fee revenue was $14.1 million for the nine months ended September
30, 2003 compared with $9.1 million for the same period of 2002, a net increase
of $5.0 million. This change in license revenue represents the $10.0 million
license termination fee from Baxter partially offset by a decrease in
amortization of deferred revenue on the Baxter agreement compared with a
non-recurring $5.0 million license fee from MorphoSys AG ("MorphoSys")
recognized in the first quarter of 2002. Contract and other revenue was $4.0
million for the nine months ended September 30, 2003 compared with $9.1 million
for the same period of 2002, a decrease of $5.1 million primarily due to the
discontinuance of development services by Baxter and Onyx. In October of 2003,
the U.S. Food and Drug Administration ("FDA") approved RAPTIVATM (Efalizumab)
for marketing. The Company expects no material revenues for the fourth quarter
of 2003 from its 25% share of operating profits and other royalties related to
RAPTIVATM. Revenues are expected to be lower in the fourth quarter of 2003
compared with the third quarter due to the non-recurring license fee revenue
related to Baxter that was recognized in the third quarter of 2003.
Research and development expenses for the three months ended September 30,
2003 were $15.9 million compared with $9.7 million for the same period of 2002,
an increase of 63.9%. This increase reflected higher development costs
associated with CAB-2, RAPTIVATM,, the Company's XMP.629 compound being
developed for acne and a charge of $1.3 million for an inventory reserve of
NEUPREX(R) products as a result of the cancellation of product sales associated
with the termination of the Baxter agreement . This increase was partially
offset by decreased spending on NEUPREX(R), Onyx-015, ING-1and, MLN2201
(formerly known as MLN01). In October of 2003, the Company announced the
discontinuation of development on MLN2201. Research and development expense for
the nine months ended September 30, 2003 were $41.4 million compared with $30.4
million in the same period of 2002, an increase of 36.2%. This increase
reflected higher development costs associated with CAB-2, RAPTIVATM,, MLN2201,
the Company's XMP.629 compound being developed for acne and a charge of $1.3
million for the inventory reserve recorded for NEUPREX(R) products inventory
related to the termination of the Baxter agreement partially offset by lower
spending on NEUPREX(R), Onyx-015, and ING-1. The Company continues to explore
new collaborative arrangements that may affect future spending for research and
development.
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 Nine months ended
September 30, September 30,
------------------------ ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -------------
Earlier stage programs $ 11,024 $ 4,620 $ 27,715 $ 15,536
Later stage programs 4,909 5,081 13,702 14,859
----------- ----------- ----------- -------------
Total $ 15,933 $ 9,701 $ 41,417 $ 30,395
=========== ============ ============ =============
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):
-12-
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
------------ ----------- ------------- -----------
Internal projects $ 7,282 $ 2,991 $ 16,782 $ 12,605
Collaborative arrangements 8,651 6,710 24,635 17,790
---------- ----------- ------------- -----------
Total $ 15,933 $ 9,701 $ 41,417 $ 30,395
========== =========== ============= ===========
For the three and nine months ended September 30, 2003, one project
accounted for approximately 19% and 20%, respectively, 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 nine months ended September
30, 2003 and 2002.
Marketing, general and administrative expenses for the three months ended
September 30, 2003 decreased to $6.3 million from $6.4 million for the three
months ended September 30, 2002. This reflected pre-launch activities for
RAPTIVATM partially offset by lower legal expenses. Marketing, general and
administrative expenses for the nine months ended September 30, 2003 were $14.9
million compared with $15.1 million for the same period of 2002. The net
decrease of $0.3 million, or 1.0%, primarily represents an increase in
pre-launch activities for RAPTIVATM and business development expenses, which
were partially offset by lower legal expenses. RAPTIVATM marketing expenses are
expected to increase in future quarters related to the product launch
activities.
Investment income was $0.2 million for the three months ended September 30,
2003 and 2002 the major components were decreased interest income due to reduced
cash balances partially offset by gains recognized on the sale of MorphoSys
shares issued to XOMA on May 6, 2003. Investment income for the nine months
ended September 30, 2003 decreased to $0.5 million, or 28.6%, compared to $0.7
million for the same period of 2002. This decrease reflected lower interest
rates on lower average cash balance. Interest expense for the three and nine
months ended September 30, 2003 was $0.5 million and $1.4 million, respectively,
compared to $0.6 million and $1.7 million, respectively, for the three and nine
months ended September 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
income is expected to be higher in the fourth quarter of 2003 due to increased
cash balances.
Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and restricted cash
increased during the nine months ended September 30, 2003 by $43.8 million to
$80.1 million at September 30, 2003, compared with $36.3 million at December 31,
2002. This increase primarily reflects the net cash proceeds received from the
Company's public offering during the third quarter of 2003.
Net cash used in operating activities was $36.2 million for the nine months
ended September 30, 2003, compared with $27.5 million for the nine months ended
September 30, 2002. The increase in 2003 when compared with 2002 primarily
reflected a higher net loss and reductions in accrued expenses related primarily
to clinical trials, partially offset by reductions in accounts receivable in
2003 compared to increases in 2002.
Net cash used in investing activities was $0.9 million for the nine months
ended September 30, 2003, compared to cash used in investing activities of $8.8
million for the nine months ended September 30, 2002, a 90.0% decrease. The
decrease in the first nine months of 2003 when compared to the first nine months
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 and
third quarters 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 $81.0 million for the nine
months ended September 30, 2003, compared with $4.9 million for the nine months
ended September 30, 2002. Financing activities in the first nine months of 2003
included $67.2 million in net proceeds from common shares sold under a public
offering, $10.8 mil-
-13-
lion net funding from Genentech, under our development and commercial loan
agreements, $4.0 million proceeds from common shares sold under our investment
agreement with Millennium, and $0.2 million from proceeds of common shares
primarily related to employee share purchase and option incentive programs. This
was partially offset by principal payments of $1.3 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:
o 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 was to mature upon the
earlier of (a) April of 2005, except for advances made after April of
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 occurred on October 27, 2003). At XOMA's election, the
convertible subordinated note was to 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. XOMA's
repayment obligation was triggered by the product approval in October
of 2003. The Company elected to defer payment of $40.0 million as an
offset against the proceeds from its 25% share of U.S. operating
profits on the product. The remaining balance (approximately $29.3
million) will be paid with preference shares before December 31, 2003.
These preference shares will be convertible upon issuance into common
shares at a price of $7.75 per share. At September 30, 2003, the
outstanding balance under this note totaled approximately $69.3
million.
o A new $15.0 million debt facility was established to finance XOMA's
share of U.S. commercialization costs. The note payable was to mature
upon the earlier of (a) April of 2005, except for advances made after
April of 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, occurred on October 27, 2003). The
commercial note must be repaid in cash in January of 2004. At
September 30, 2003 the outstanding balance under this note totaled
$8.0 million.
o 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 commitment of $33.5 million available
under this arrangement, excluding the convertible debt. In October of 2003, the
Company announced the discontinuation of development of MLN2201, one of the two
products of an ongoing development agreement with Millennium. Under the terms of
the amended investment agreement and the termination of the MLN2201development
program, if the Company decides to sell common shares to Millennium the funding
amounts will be reduced by 40% from a total of $33.5 million to a total of $20.1
million.
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. 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, revenue estimates, net proceeds received
from our recent underwritten public offering, repayment obligations of our debt
owed to Genentech for our share of RAPTIVA(TM) marketing
-14-
costs, deferral of a portion of the development loan from Genentech, issuance of
shares in repayment of the remainder of the development loan from Genentech and
financing commitments from Millennium under the collaborative agreement between
the companies, the Company estimates it has sufficient cash resources, together
with sources of funding available to us, to meet its current net cash
consumption levels through at least the end of 2005. Any significant revenue
shortfalls, or increases in planned spending on development programs could
shorten this period. The recent FDA approval of RAPTIVATM is 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. Our actual share of
profits or losses from RAPTIVATM may materially impact our cash reserves.
Additional licensing arrangements or collaborations or otherwise entering into
new equity or other financing arrangements could potentially extend or shorten
this period. 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.
As of September 30, 2003, future contractual obligations are as follows (in
thousands):
Note Capital Operating Convertible
Payable* Leases Leases Notes** Total
------------- ----------- ------------- -------------- -----------
Remainder of 2003 $ - $ 89 $ 698 $ - $ 787
2004 - 572 2,894 5,248 8,714
2005 7,956 221 2,890 69,282 80,349
2006 - - 2,900 - 2,900
2007 - - 2,730 - 2,730
Thereafter - - 708 - 708
------------- ------------ ------------- -------------- ------------
Total $ 7,956 $ 882 $ 12,820 $ 74,530 $ 96,188
============= ============ ============= ============== ============
* 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 occurred on October 27, 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 occurred on October 27, 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 3,000,000 common shares were
issued in 2001. In the third quarter of 2003, we filed 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. We issued 9,000,000 of
our registered shares in September of 2003 in an underwritten public offering
and an additional 1,350,000 of these shares in October of 2003 upon exercise of
the underwriters' over-allotment option. We will be able to issue the remaining
9,650,000 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. We are also obligated to file a registration statement
covering the resale by Genentech of all of the common shares issuable upon
conver-
-15-
sion of the preference shares we have elected to issue to Genentech in repayment
of our convertible debt owed to them.
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 nine months ended September 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.
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.
Revenue arrangements with multiple elements are divided into separate units
of accounting if certain criteria are met, including whether the delivered item
has value to the customer on a stand-alone basis and whether there is objective
and reliable evidence of the fair value of the undelivered items. The
consideration the Company receives is allocated among the separate units of
accounting based on their respective fair values, and the applicable revenue
recognition criteria are considered separately for each of the separate units.
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.
-16-
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, and the sufficiency of its cash resources, as well as other
statements related to current plans for product development 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; and the sufficiency of cash resources could be shortened
if expenditures are made earlier or in larger amounts than anticipated or are
unanticipated or if funds are not available on acceptable terms; and the
marketing and sales effort for RAPTIVA(TM) may not be successful due to the
strength of competition or if physicians do not adopt the product as treatment
for their patients. These and other risks, including those related to the
results of pre-clinical testing; the timing or results of pending and future
clinical trials (including the design and progress of clinical trials; safety
and efficacy of the products being tested; action, inaction or delay by the FDA,
European or other regulators or their advisory bodies; and analysis or
interpretation by, or submission to, these entities or others of scientific
data); changes in the status of existing collaborative relationships; the
ability of collaborators and other partners to meet their obligations;
competition; market demand for products; scale-up and marketing capabilities;
availability of additional licensing or collaboration opportunities;
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.
The Marketing And Sales Effort In Support Of Our Only Product To Receive
Regulatory Approval Has Not Begun And May Not Be Successful.
RAPTIVA(TM), our only product to receive regulatory approval, was approved
by the FDA on October 27, 2003 for the treatment of chronic moderate-to-severe
plaque psoriasis in adults who are candidates for systemic therapy or
phototherapy. Genentech is responsible for the marketing and sales effort in
support of this product and has not yet commenced, or launched, the full
intended scope of this effort. Unless and until RAPTIVA(TM) is approved in this
or other indications outside the United States, our interest in this product in
this indication is limited to our 25% share of the operating profits from sales
of the product in the United States. We currently have no active role in this
marketing and sales effort. Successful commercialization of this product is
subject to a number of risks, including Genentech's ability to implement its
marketing and sales effort and achieve sales; the strength of competition from
other products being marketed or developed to treat psoriasis; physicians' and
patients' acceptance of RAPTIVA(TM) as a treatment for psoriasis; Genentech's
ability to provide its manufacturing capacity to meet demand for the product;
and pricing and reimbursement issues. Many of these risks are discussed in more
detail below.
Because All Of Our Products Are Still Being Developed, 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 file for bankruptcy protection in extreme circumstances. 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 various human clinical trials and
o protection of our intellectual property.
Based on current spending levels, revenue estimates, net proceeds received
from out recent underwritten public offering, repayment obligations of our debt
owed to Genentech for our share of RAPTIVATM marketing costs, deferral of a
portion of our development loan from Genentech, issuance of shares in repayment
of the remainder of our development loan from Genentech and financing
commitments from Millennium, we estimate we have sufficient cash resources,
together with sources of funding available to us, to meet our current net cash
consumption levels through at least the end of 2005. 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. In particular, our share of profits or losses from
RAPTIVATM may materially impact our cash reserves. 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 the recent 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 also
requires repayment in cash, shares or deferred repayment of up to $40.0 million
of amounts owed to Genentech (approximately $77.2 million under both loan
agreements as of September 30, 2003). In November of 2003, we announced our
election to defer $40.0 million of such repayment and to repay the remainder of
the development loan using shares. The commercialization loan is payable only in
cash and is due in January of 2004. In addition, the receipt of regulatory
approval terminated Genentech's obligation to continue to loan us our portion of
commercialization expenses for RAPTIVA(TM).
Most Of Our Therapeutic Products Have Not Received Regulatory Approval. If These
Products Do Not Receive Regulatory Approval, Neither Our Third Party
Collaborators Nor We Will Be Able To Manufacture And Market Them.
Our products cannot be manufactured and marketed in the United States and
other countries without required regulatory approvals. Only one of our
therapeutic products has received regulatory approval. The United States
government and governments of other countries extensively regulate many aspects
of our products, including:
o testing,
o manufacturing,
-18-
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
most of our products will be regulated by the FDA as biologics. The FDA has
recently consolidated its responsibility for reviewing new pharmaceutical
products into its Center for Drug Evaluation and Research, the body that
formerly reviewed only 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 might affect us. State regulations may also affect our proposed
products.
The FDA has substantial discretion in both the product approval process and
manufacturing facility approval process and, as a result of this discretion and
uncertainties about outcomes of testing, we cannot predict at what point, or
whether, the FDA will be satisfied with our or our collaborators' submissions or
whether the FDA will raise questions which may be material and delay or preclude
product approval or manufacturing facility approval. As we accumulate additional
clinical data, we will submit it to the FDA, which may have a material impact on
the FDA product approval process.
Our potential products will require significant additional research and
development, extensive preclinical studies and clinical trials and regulatory
approval prior to any commercial sales. This process is lengthy, often taking a
number of years, and expensive. As clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory
approvals, the length of time necessary to complete clinical trials and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly. As a result, it is uncertain whether:
o our future filings will be delayed,
o our studies will be successful,
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 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 the summer of
2002. 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 completed enrollment
in a Phase II study of RAPTIVATM as a possible treatment for patients
with psoriatic arthritis. Although we expect to know preliminary
results of the psoriatic arthritis trial by the first quarter of 2004,
we do not know whether or when such testing will demonstrate product
safety and efficacy in this patient population or result in regulatory
approval. As is our practice, more details regarding the
-19-
clinical data would be revealed at an upcoming medical conference or
other appropriate scientific, peer-reviewed forum later in 2004.
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.
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 Being Developed, We Have Sustained Losses
In The Past And We Expect To Sustain Losses In The Future.
We have experienced significant losses and, as of September 30, 2003, we
had an accumulated deficit of $580.0 million.
For the nine months ended September 30, 2003, we had a net loss of
approximately $39.0 million, or $0.54 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 sales and marketing
expenses related to 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 being
developed, 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 companies further
expanded the agreement. In October of 2003, RAPTIVA(TM) was approved
by the FDA for the treatment of chronic moderate-to-severe plaque
psoriasis.
o In November of 2001, we entered into a collaboration with Millennium
to develop two of Millennium's products for certain vascular
inflammation indications. In October of 2003, we announced that we had
discontinued one of these products, MLN2201.
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.
-20-
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 to scale-up production to
commercial volume of one of Onyx's cancer products. In June of 2003,
Onyx notified XOMA that it was discontinuing development of the
product and terminating the agreement so that it could focus on
another of its anticancer compounds.
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 November
11, 2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
November 11, 2003, the last reported sale price of the common shares as reported
on the Nasdaq National Market was $6.84 per share. Factors contributing to such
volatility include, but are not limited to:
o sales and estimated or forecasted sales of products
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
-21-
o announcements regarding other participants in the biotechnology and
pharmaceutical industries and
o market speculation regarding any of the foregoing.
We Or Our Third Party Collaborators May Not Be Able To Increase Existing Or
Acquire New Manufacturing Capacity Sufficient To Meet Market Demand.
Genentech will be responsible for manufacturing commercial quantities of
RAPTIVA(TM). Genentech may have difficulty or may not be able to increase its
manufacturing capacity to produce RAPTIVA(TM) in sufficient quantities to meet
market demand. If any of our other products are approved, because we have never
commercially introduced any pharmaceutical products, 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 or our
third party collaborators 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 Only Recently Received Approval For Our Only Approved Product And We
Do Not And Cannot Currently Market Any Of Our Other Products For Commercial
Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products.
Even though we and Genentech recently received FDA approval to market
RAPTIVA(TM) and even if we receive regulatory approval for our other products,
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.
Similarly, physicians may not accept RAPTIVA(TM) if they believe other products
to be more effective or are more comfortable prescribing other products that
have been on the market longer than RAPTIVA(TM). Consequently, we do not know if
physicians or patients will adopt or use our products for their approved
indications.
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
-22-
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 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 FDA for this medication was
submitted in July of 2003;
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 systemic therapy or phototherapy and the
product has been launched in the U.S.;
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 Abbott Laboratories has announced the commencement of a Phase II
psoriasis trial and Phase III psoriatic arthritis trial of its
rheumatoid arthritis drug HumiraTM;
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; 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 product developed by
XOMA.
Even If We Or Our Third Party Collaborators 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 or our third party collaborators 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
-23-
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.
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 70 patents to us related to our
products based on human bactericidal permeability-increasing protein, which we
call BPI, including novel compositions, their manufacture, formulation, assay
and use. In addition, we are the exclusive licensee of BPI-related patents and
applications owned by New York University and Incyte Pharmaceuticals Inc. The
Patent Office has also issued nine patents to us related to our bacterial
expression technology.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, we may require licenses from
others in order to develop and commercialize certain potential products
incorporating our technology or we may become involved in litigation to
determine the proprietary rights of others. These licenses, if required, may not
be available on acceptable terms, and any such litigation may be costly and may
have other adverse effects on our business, such as inhibiting our ability to
compete in the marketplace and absorbing significant management time.
Due to the uncertainties regarding biotechnology patents, we also have
relied and will continue to rely upon trade secrets, know-how and continuing
technological advancement to develop and maintain our competitive position. All
of our employees have signed confidentiality agreements under which they have
agreed not to use or disclose any of our proprietary information. Research and
development contracts and relationships between us and our scientific
consultants and potential customers provide access to aspects of our know-how
that are protected generally under confidentiality agreements. These
confidentiality agreements may not be honored or may not be enforced by a court.
To the extent proprietary information is divulged to competitors or to the
public generally, such disclosure may adversely affect our ability to develop or
commercialize our products by giving others a competitive advantage or by
undermining our patent position.
-24-
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.
The Financial Terms Of Some Of Our Existing Or Future Collaborative Arrangements
Could Result In Dilution Of Our Share Value.
In November of 2003, we announced that we exercised our option to defer
payment of $40 million of our convertible loan from Genentech related to the
development of RAPTIVA(TM) and pay the remaining balance of approximately $29.3
million under the development loan with preference shares before year-end 2003.
These preference shares will be convertible upon issuance into common shares at
a price of approximately $7.75 per share, the price determined under the loan
agreements at the time we notified Genentech of our election. Although the
precise numbers remain to be determined, we anticipate issuing preference shares
convertible into approximately four million common shares in repayment of the
non-deferred portion of the development loan.
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 $20.1 million worth of common
shares, excluding the convertible debt, to Millennium through February of 2005.
The total amount issuable in the remainder of 2003 could be $5.4 million. The
number of shares to be issued will be based on a conversion price to be
calculated at the time of conversion. This arrangement, as well as future
arrangements we may enter into with similar effect, could result in dilution in
the value of our shares.
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
transactions relating to our bacterial expression technology, we have in the
past and may in the future agree to accept equity securities of the licensee in
payment of license fees. The future value of these or any other shares we
receive 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 may be subject.
As We Do More Business Internationally, We Will Be Subject To Additional
Political, Economic And Regulatory Uncertainties.
We may not be able to successfully operate in any foreign market. We
believe that, because the pharmaceutical industry is global in nature,
international activities will be a significant part of our future business
activities and that, when and if we are able to generate income, a substantial
portion of that income will be derived from product sales and other activities
outside the United States. Foreign regulatory agencies often establish standards
different from those in the United States, and an inability to obtain foreign
regulatory approvals on a timely basis could put us at a competitive
disadvantage or make it uneconomical to proceed with a product's development.
International operations may be limited or disrupted by:
o imposition of government controls,
o export license requirements,
-25-
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.
We Are Exposed To An Increased Risk Of Product Liability Claims.
The sale, testing and marketing of medical products entails an inherent
risk of allegations of product liability. We believe that we currently have
adequate levels of insurance for our clinical trials, however, in the event of
one or more large, unforeseen awards, such levels may not provide adequate
coverage. We will seek to obtain additional insurance, if needed, as
commercialization of RAPTIVA(TM) continues; however, because we have not yet
determined whether additional insurance is needed, 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.
-26-
We do not know whether any of these things will happen, but if implemented
one or more of them may have an adverse impact on our future operations or our
share price.
If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
Against Us Because We Are A Foreign Entity.
We are a Bermuda company. All or a substantial portion of our assets may be
located outside the United States. As a result, it may be difficult for
shareholders and others to enforce in United States courts judgments obtained
against us. We have irrevocably agreed that we may be served with process with
respect to actions based on offers and sales of securities made hereby in the
United States by serving Christopher J. Margolin, c/o XOMA Ltd., 2910 Seventh
Street, Berkeley, California 94710, our United States agent appointed for that
purpose. We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
that there is doubt as to whether Bermuda courts would enforce judgments of
United States courts obtained in (1) actions against XOMA or our directors and
officers that are predicated upon the civil liability provisions of the U.S.
securities laws or (2) original actions brought in Bermuda against XOMA or such
persons predicated upon the U.S. securities laws. There is no treaty in effect
between the United States and Bermuda providing for such enforcement, and there
are grounds upon which Bermuda courts may not enforce judgments of United States
courts. Certain remedies available under the United States federal securities
laws may not be allowed in Bermuda courts as contrary to that nation's policy.
Our Shareholder Rights Agreement Or Bye-laws May Prevent Transactions That Could
Be Beneficial To Our Shareholders And May Insulate Our Management From Removal.
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
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
-27-
remains fixed over its term. As of September 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 September 30, 2003:
Fair Value Average
Maturity (in thousands) Interest Rate
-------- -------------- -------------
Cash equivalents, fixed rate Daily $ 80,078 1.05%
Other Market Risk
At September 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%.
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
continuing implementation of this new system, there were no changes in the
Company's internal control over financial reporting during the third fiscal
quarter of 2003 to which this report relates that have materially affected, or
are reasonable likely to materially affect, the Company's internal control over
financial accounting.
-28-
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.
XOMA has filed a motion to dismiss all claims against it, and discovery has not
yet commenced.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 24, 2003, the Company completed a registered offering of
9,000,000 common shares. On October 21, 2003, the underwriters exercised their
over-allotment option and purchased an additional 1,350,000 common shares. The
managing underwriters in the offering were UBS Securities LLC, CIBC World
Markets Corp., U.S. Bancorp Piper Jaffray Inc., Adams, Harkness & Hill, Inc.,
Jefferies & Company, Inc. and ThinkEquity Partners LLC. The common shares sold
in the offering were registered under the Securities Act of 1933, as amended, on
a Registration Statement on Form S-3 (Reg. No. 333-107929) that was declared
effective by the SEC on September 8, 2003. After deducting the underwriting
discounts and offering expenses, the Company received net proceeds from the
offering, including the issuance to cover the underwriters' over-allotment
option, of approximately $77.4 million. None of the net proceeds of the offering
were paid directly or indirectly to any director, officer, general partner of
ours or our associates, persons owning 10% or more of any class of equity
securities of ours, or an affiliate of ours.
The Company is using the net proceeds from its September 2003 registered
offering of common shares for general corporate purposes, including current
research and development projects, the development of new products or
technologies, general working capital and operating expenses, leasehold
improvements and equipment acquisitions. 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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
1 Underwriting Agreement dated September 19, 2003 by and among the
Company and the underwriters named therein. (Exhibit 2) (1)
-29-
10.1 1981 Share Option Plan as amended and restated. (Exhibit 10.1)
(2)
10.2 Form of Share Option Agreement for 1981 Share Option Plan.
(Exhibit 10.2) (2)
10.3 Restricted Share Plan as amended and restated. (Exhibit 10.3) (2)
10.4 Form of Share Option Agreement for Restricted Share Plan.
(Exhibit 10.4) (2)
10.5 Form of Restricted Share Purchase Agreement for Restricted Share
Plan. (Exhibit 10.5) (2)
10.6 Management Incentive Compensation Plan as amended and restated.
(Exhibit 10.6) (2)
10.7 1992 Directors Share Option Plan as amended and restated.
(Exhibit 10.7) (2)
10.8 Form of Share Option Agreement for 1992 Directors Share Option
Plan (initial grants). (Exhibit 10.8) (2)
10.9 Form of Share Option Agreement for 1992 Directors Share Option
Plan (subsequent). (Exhibit 10.9) (2)
10.10 2002 Director Share Option Plan. (Exhibit 10.10) (2)
10.11 1998 Employee Share Purchase Plan as amended and restated.
(Exhibit 10.11) (2)
31.1 Certification of John L. Castello, filed pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (3)
31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (3)
32.1 Certification of John L. Castello ,furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (4)
32.2 Certification of Peter D. Davis, furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 . (4)
99 Press Release dated November 12, 2003. (4)
- ----------
(1) Incorporated by reference to the referenced exhibit to the Company's Form
8-K dated September 19, 2003 and filed September 24, 2003 (File No.
0-14710).
(2) Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8 filed August 28, 2003 (File No.
333-108306).
(3) Filed herewith.
(4) Furnished herewith.
-30-
Reports on Form 8-K:
1. Current Report on Form 8-K dated September 9, 2003 and filed on September
10, 2003 (file no. 0-14710).
2. Current Report on Form 8-K dated September 19, 2003 and filed on September
24, 2003 (file no. 0-14710).
-31-
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: November 12, 2003 By: /s/ JOHN L. CASTELLO
-------------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: November 12, 2003 By: /s/ PETER D. DAVIS
-------------------------------------
Peter D. Davis
Vice President, Finance and
Chief Financial Officer
-32-
Exhibit 31.1
Certification
Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
(Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
I, John L. Castello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 12, 2003 /s/ John L. Castello
--------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
-33-
Exhibit 31.2
Certification
Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
(Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
I, Peter B. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 12, 2003 /s/ Peter B. Davis
------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
-34-
Exhibit 32.1
Certification
Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
(Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
the Company on Form 10-Q for the period ended September 30, 2003 fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
as amended, and that the information contained in such report fairly presents,
in all material respects, the financial condition and results of operations of
the Company at the end of and for the periods covered by such Report.
Date: November 12, 2003 /s/ John L. Castello
--------------------
John L. Castello
Chairman of the Board, President
and Chief Executive Officer
This certification will not be deemed filed for purposes of Section 18 of the
Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference.
-35-
Exhibit 32.2
Certification
Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
(Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
the Company on Form 10-Q for the period ended September 30, 2003 fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
as amended, and that the information contained in such report fairly presents,
in all material respects, the financial condition and results of operations of
the Company at the end of and for the periods covered by such Report.
Date: November 12, 2003 /s/ Peter B. Davis
------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer
This certification will not be deemed filed for purposes of Section 18 of the
Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference.
-36-