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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1997 Commission File No. 0-14710
XOMA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2756657
(State of Incorporation) (I.R.S. Employer Identification No.)
2910 Seventh Street,
Berkeley, California 94710
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(510) 644-1170
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of February 28, 1998: $200,005,539.
Number of shares of Common Stock outstanding as of February 28, 1998:
40,524,221.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
PART I
Item 1. Business
General
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical company
developing products to treat infections, infectious complications of traumatic
injury and surgery, and immunologic and inflammatory disorders. The Company's
current product development programs include:
Neuprex(TM) (rBPI21), a modified recombinantly-derived fragment of human
bactericidal/permeability-increasing protein ("BPI") and XOMA's lead BPI-derived
product, which is currently in Phase III efficacy clinical trials in two
indications and in earlier-stage clinical trials in three additional
indications.
I-PREX(TM), a proprietary topical formulation of rBPI21 for the treatment
of ophthalmic disorders, which is undergoing preclinical testing as a treatment
for corneal injuries, including ulcerations and transplants.
Mycoprex(TM), a fungicidal peptide compound derived from BPI that is
currently in preclinical product development.
hu1124 (anti-CD11a), a humanized monoclonal antibody product being
developed in collaboration with Genentech, Inc. ("Genentech"), which originally
discovered the antibody and characterized it as anti-CD11a. The hu1124 product
is in Phase II clinical trials for psoriasis. Other indications are under
review.
In April 1997, XOMA and Pfizer Inc. ("Pfizer") decided to discontinue the
U.S. clinical trial of the Company's E5(R) monoclonal antibody product as a
treatment for gram-negative sepsis. In June 1997, the Company announced that
Pfizer had decided to end its marketing arrangement for E5(R).
Product Areas
The following describes XOMA's more significant therapeutic product
development and clinical activities:
The BPI Product Platform
The Company's current programs are primarily focused on developing novel
therapeutic products from bactericidal/permeability-increasing protein ("BPI").
BPI is a naturally-occurring human host-defense protein found in white blood
cells (neutrophils). BPI kills certain bacteria. It also binds to and
neutralizes endotoxins, molecular components of the cell walls of gram-negative
bacteria that can trigger severe complications in infected patients.
Furthermore, BPI inhibits angiogenesis (growth of new blood vessels) by binding
to and neutralizing heparin, a natural protein involved in blood vessel
formation. Angiogenesis is an essential component of inflammation and solid
tumor growth.
BPI was discovered in 1978 by Peter Elsbach, M.D., Professor of Medicine,
and Jerrold Weiss, Ph.D., Professor of Microbiology, both at New York University
School of Medicine. XOMA has collaborated with NYU since 1991 to extend and
apply BPI-related research to the commercial development of pharmaceutical
products. Since March 1993, the U.S. Patent and Trademark Office ("Patent
Office") has issued four patents and a Notice of Allowance relating to BPI to
NYU, and the Company is the exclusive licensee of these
2
patents and the Notice of Allowance. See "Patents and Trade Secrets". XOMA has
an agreement with New York University ("NYU") relating to its rBPI products. See
"Research and License Agreements".
XOMA has adopted the BPI molecule as a platform for developing multiple
pharmaceutical products. In 1991 XOMA scientists developed a modified
recombinant fragment of the BPI molecule, called rBPI21, which is potent and
stable and can be manufactured at commercially viable yields. This modified
fragment is the basis for the Company's Neuprex(TM) and I-PREX(TM) products. In
1994 XOMA scientists discovered three functional domains in the BPI molecule
with pharmacologically-desirable activities. Based on this discovery, XOMA is
developing peptides from these domains into additional therapeutic products,
including the Mycoprex(TM) antifungal peptide product.
Neuprex(TM)
In December 1992, XOMA submitted an investigational new drug application
("IND") to the U.S. Food and Drug Administration ("FDA") to begin Phase I human
testing of Neuprex(TM). In March 1993, the Company began Phase I human safety
and pharmocokinetic testing under the IND. Beginning in 1995, the Company
initiated five clinical efficacy studies evaluating Neuprex(TM) as a treatment
for primary infections and major complications of infectious diseases, traumatic
injury and surgery. These indications are:
Severe pediatric meningococcemia: a deadly bacterial infection that usually
afflicts children. In August 1996, FDA's Center for Biologics Evaluation and
Research ("CBER") granted XOMA a Subpart E designation for Neuprex(TM) for the
treatment of severe pediatric meningococcemia following favorable results in an
open label Phase I/ II pilot study. This designation is intended to expedite the
development of treatments for life-threatening illnesses. The Company
subsequently began a Phase III pivotal trial for the indication in October 1996
in the United States and Canada. In the first quarter of 1997, XOMA added a
trial site in the United Kingdom to increase patient accrual. The company
enrolled additional U.K. sites in late 1997 and early 1998.
Hemorrhage due to trauma: accidents or injuries that cause acute blood loss
may trigger serious complications in up to 40% of patients who survive the
initial trauma and surgery. These patients may be infected by bacteria and their
endotoxins translocated from the gastrointestinal tract into the bloodstream. A
placebo-controlled, double-blinded Phase II study in 401 patients began in June
1995 and was completed in October 1996. A follow-on single-blinded Phase II
pharmacokinetics study explored alternative dosing regimens in 169 patients.
Based on data from the Phase II studies, XOMA initiated in the fourth quarter of
1997 a Phase III pivotal trial, designed to enroll 1650 patients in 40 centers,
testing Neuprex(TM) to prevent serious pulmonary complications in trauma
patients.
Partial hepatectomy: surgical removal of part of the liver, usually to
remove an isolated tumor temporarily impairs liver function. Since the liver
normally clears bacteria and their endotoxins, these patients are at risk for
infectious complications. The double-blinded, placebo-controlled Phase II study
in 35 patients began in mid-1995 and was concluded at the end of 1997. Review
and analysis of results is in progress.
Severe intra-abdominal infections: in 1996, the Company began a Phase I/II
open-label dose-ranging study testing Neuprex(TM) with conventional antibiotics
to treat patients with serious abdominal infections that required surgery.
Cystic fibrosis (CF): in the third quarter of 1997, XOMA initiated a
program to test Neuprex(TM) in CF patients whose genetic disorder predisposes
them to recurring bacterial lung infections (exacerbations). Over repeated
antibiotic treatments, the infecting bacteria often become resistant to
antibiotic treatment. A natural history study in the second half of 1997 tested
rBPI21, alone and in combina-
3
tion with antibiotics, against bacterial cultures collected from CF patients. A
Phase I safety and pharmacokinetics study began in the fourth quarter of 1997.
There can be no assurance that any of the continuing trials will yield data
that will result in licensure of Neuprex(TM) in the U.S.
I-PREX(TM)
XOMA has developed a proprietary topical formulation of rBPI21 for the
treatment of ophthalmic infections. Although standard antibiotics fight
bacterial infections, they do not inhibit the growth of new blood vessels in the
cornea that may be associated with these infections. This neovascularization can
lead to scarring and permanently impaired vision. In preclinical testing, the
I-PREX(TM) product has shown both anti-ineffective and anti-angiogenic
(inhibition of blood vessel growth) properties in the treatment of corneal
injury and associated infection. The use of I-PREX(TM) to treat corneal
injuries, including ulcers and other corneal diseases, could eliminate the need
for current anti-inflammatory therapies, such as corticosteroids, which have
undesirable side effects.
Mycoprex(TM)
XOMA scientists discovered that certain peptide sequences derived from BPI
display potent fungicidal activity. Further research demonstrated that many of
these compounds not only kill strains of Candida, the most common fungi to cause
systemic illness, but also show activity against other strains of fungi,
including those resistant to the currently available drugs. Based on these
findings, the Company is conducting a program to develop compounds with a broad
spectrum of fungicidal activity and a better safety profile than
currently-available fungicidals.
LBP Assay
In the first quarter of 1997, the Company granted to BioSite Diagnostics
Incorporated of San Diego, California an exclusive U.S. license to make, use and
sell certain non-automated, point-of-care diagnostic and prognostic products for
measuring Lipopolysaccharide Binding Protein ("LBP") to detect bacterial
endotoxin exposure in patients with endotoxemia or sepsis. A non-exclusive
license was granted to SRL, Inc., a Japanese company, to make, use and sell
certain automated diagnostic and prognostic products for centralized laboratory
use in Japan.
hu1124 (anti-CD11a) Monoclonal Antibody Product
In April 1996, XOMA and Genentech entered into an agreement to co-develop
Genentech's anti-CD11a humanized monoclonal antibody product (hu1124). In late
1996, the Company started a Phase I trial in moderate to severe psoriasis
patients. In the second quarter of 1997, in response to findings that hu1124 was
active at smaller doses, XOMA started additional Phase I studies at lower doses.
XOMA announced a Phase II efficacy study in Canadian psoriasis patients in
February 1998. Other indications are under review by XOMA and Genentech.
Additional Product Areas
XOMA continues to seek opportunities to realize value from products and
technologies outside its core research efforts, including immunoconjugates,
immunofusions, mammalian and microbial cell expression technologies,
osteoinductive proteins for bone repair, and non-cariogenic proteins for
low-calorie flavor enhancement. Various licenses and sublicenses have been
entered into in these areas. Discussions are ongoing with other entities that
have expressed interest in these products and technologies. No assurance can be
given that any agreement or agreements will be reached as a result of the
ongoing discussions.
4
In 1996, XOMA received a $2.2 million payment related to the sale of its
T-cell receptor ("TCR") technology to Connective Therapeutics, Inc., now called
Connetics Corporation ("Connetics"). Connetics is using the technology in its
TCR vaccines in development for treatment of multiple sclerosis (MS) and
rheumatoid arthritis. XOMA is entitled to royalties on future sales of these
products. In December 1997, Connetics successfully completed a Phase I/II study
of their MS TCR vaccine.
In 1996, XOMA also received a $3.0 million payment for an exclusive license
to Genentech, including a sublicense to IDEC Pharmaceuticals Corporation
("IDEC"), to intellectual property covering the use of chimeric IgG1 antibodies
specific to the CD20 antigen on the surface of human B-cells. XOMA was entitled
to royalties on the sale of products employing the anti-CD20 technology that are
sold in the United States and in other countries where XOMA held relevant
patents. In December 1997, XOMA assigned these anti-CD20 antibody patents and
royalty rights to Pharmaceutical Partners, LLC for $17.0 million.
XOMA has granted licenses to a number of biotechnology and pharmaceutical
companies for use of patented and proprietary technologies relating to a
bacterial expression system used to manufacture recombinant pharmaceutical
products. Licensees include: Affymax Research Institute, Cantab Pharmaceuticals
Research Ltd, Eli Lilly and Company, Enzon, Inc., the Hoechst Group, ICOS
Corporation, Invitrogen Corporation, Pasteur Merieux Serums & Vaccins, and The
Pharmacia & Upjohn Group.
Genimune(TM) is XOMA's humanized immunofusion product that targets T
lymphocytes (white blood cells that attack foreign cells) in autoimmune disease
therapy. For several years, the Company developed and evaluated several
proprietary variants of genetically-engineered proteins and targeted
immunofusions ("TIF"). In mid-1993 the Company selected a lead immunofusion
compound designated Genimune(TM). In December 1993, XOMA entered into
cross-license agreements with Research Development Foundation concerning
recombinant DNA-derived gelonin ("r-gelonin"), a plant-derived cytotoxic enzyme
used as a TIF component. In the fourth quarter of 1994, XOMA terminated further
internal development of Genimune(TM) and is attempting to outlicense the
product, but no assurance can be given that it will successfully do so.
Thaumatin, a flavor-enhancing protein developed by XOMA, was classified as
generally recognized as safe ("GRAS") by the Flavor and Extract Manufacturer's
Association ("FEMA"). GRAS designation permits the use of this ingredient as a
flavor enhancer in food without additional regulatory approval. Thaumatin is the
first flavoring ingredient produced through biotechnology to be granted GRAS
status. The Company is seeking to outlicense this technology, but no assurance
can be given that it will successfully do so.
Manufacturing
XOMA is currently producing its Neuprex(TM) and hu1124 products for
clinical trial and other testing needs at its Berkeley manufacturing facility,
pursuant to a drug manufacturing license obtained from the State of California.
The Company's manufacturing capability is based on recombinant DNA
technology, with production of therapeutic proteins from either mammalian or
microbial cells. XOMA has fermentation capacity for up to 5500 liters with
associated isolation and purification systems in place. The Company does its own
formulation for final sterile filling and finishing and has the capacity to do
its own small-scale filling.
Development and Marketing Arrangements
The Company has developed a strategy of entering into arrangements with
established pharmaceutical company partners in order to facilitate and finance
the development and marketing of its products. Assuming timely regulatory
approval, which cannot be assured, the successful commercialization of XOMA's
products will be dependent to a large extent upon the marketing capabilities of
any pharmaceutical partners.
5
Neuprex(TM)
The Company is seeking one or more strategic alliances with respect to its
Neuprex(TM) product. Discussions have taken place with several entities
regarding such a product alliance. The Company cannot predict whether or when
any such alliance(s) will be consummated.
hu1124 (antiCD11a)
In April 1996, XOMA and Genentech entered into an agreement whereby XOMA
agreed to co-develop Genentech's humanized monoclonal antibody product,
originally called anti-CD11a. Under the terms of the agreement Genentech
purchased 1.5 million shares of XOMA common stock at $5.90/share and is funding
development through Phase II by making a series of convertible subordinated
loans. XOMA is manufacturing the product, now called hu1124, for clinical trial
use and managing clinical trials through Phase II. In April and December 1996
respectively, Genentech loaned $5.0 million and $8.5 million to fund 1996 and
1997 development costs. In December 1997, Genentech loaned an additional $10.0
million to fund 1998 development costs.
E5(R) Monoclonal Antibody Product
In 1987, XOMA and Pfizer entered into agreements relating to a potentially
wide range of monoclonal antibody-based products for the treatment of
gram-negative sepsis. Pfizer paid XOMA an initial license fee and made payments
based on development progress. In June 1997, the Company announced that Pfizer
had decided to end its development and marketing agreements with XOMA. See
"Regulatory Process".
Other
From time to time, the Company reviews development opportunities with other
biotechnology companies with a view toward providing process scale-up,
regulatory and/or clinical services to them.
Competition
The biotechnology and pharmaceutical industries are subject to continuous
and substantial technological change. Competition in the areas of recombinant
DNA-based and monoclonal antibody-based technologies is intense and expected to
increase as established biotechnology firms and large chemical and
pharmaceutical companies advance in the field. A number of these large
pharmaceutical and chemical companies have enhanced their capabilities by
entering into arrangements with or acquiring biotechnology companies or entering
into business combinations with other large pharmaceutical companies. Many of
these companies have significantly greater financial resources, larger research
and development and marketing staffs and larger production facilities than those
of XOMA. Moreover, certain of these companies have extensive experience in
undertaking preclinical testing and human clinical trials. These factors may
enable other companies to develop products and processes competitive with or
superior to those of the Company. In addition, a significant amount of research
in biotechnology is being carried out in universities and other non-profit
research organizations. These entities are becoming increasingly interested in
the commercial value of their work and may become more aggressive in seeking
patent protection and licensing arrangements. There can be no assurance that
developments by others will not render the Company's products or technologies
obsolete or uncompetitive.
The Company is aware of an agreement between Genentech and Incyte
Pharmaceuticals, Inc. ("Incyte") pursuant to which Incyte claims to hold
worldwide rights to all Incyte and Genentech technology related to BPI. In
addition, it is possible that another company may be developing one or more
products based on BPI, and there can be no assurance that such product(s) will
not prove to be more effective than or receive regulatory approval prior to
Neuprex(TM).
6
Regulatory Process
XOMA's products are subject to comprehensive preclinical and clinical
testing requirements and to approval processes by FDA and similar authorities in
other countries. The Company's products are primarily regulated on a
product-by-product basis under the U.S. Food, Drug and Cosmetic Act and Section
351(a) of the Public Health Service Act. Most of the Company's human therapeutic
products are or will be classified as biologic products and would be subject to
regulation by CBER. Approval of a biologic for commercialization requires
licensure of the product and the manufacturing facilities.
The FDA regulatory process is carried out in several phases. Prior to
beginning clinical testing of a proposed new biologic product, an IND is filed
with FDA. This document contains scientific information on the proposed product,
including results of testing of the product in animal and in vitro or laboratory
models. Also included is information on manufacture of the product and studies
on toxicity in animals, and a clinical protocol outlining the initial
investigation in humans.
The initial stage of clinical testing, Phase I, ordinarily encompasses
safety, pharmacokinetics and pharmacodynamic evaluations. Phase II testing
encompasses investigation in specific disease states designed to provide
preliminary efficacy data and additional information on safety. Phase III
studies are designed to further establish clinical safety and efficacy and to
provide information allowing proper labeling of the product following approval.
Phase III studies are most commonly multicenter, randomized, placebo-controlled
trials in which rigorous statistical methodology is applied to clinical results.
Other designs may also be appropriate in specific circumstances.
Following completion of clinical trials, a BLA (Biologics License
Application) is submitted to FDA to request marketing approval. Internal FDA
committees are formed which evaluate the application, including scientific
background information, animal and in vitro or laboratory efficacy studies,
toxicology, manufacturing facility and clinical data. During the review process,
a dialogue between FDA and the applicant is established in which FDA questions
are raised and additional information is submitted. During the final stages of
the approval process, FDA generally requests presentation of clinical or other
data before an FDA advisory committee. Also, during the later stages of review,
FDA conducts an inspection of the manufacturing facility to establish that the
product is made in conformity with good manufacturing practice. If all
outstanding issues are satisfactorily resolved and labeling established, FDA
issues a license for the product and for the manufacturing facility, thereby
authorizing commercial distribution.
In December 1992, the Company filed an IND with FDA to begin Phase I human
testing of its Neuprex(TM) product and, in March 1993, began the testing.
Eighteen randomized, double-blind, placebo-controlled Phase I studies have been
completed and three Phase II efficacy studies were initiated in 1995. Two other
Phase II studies were initiated in 1996 and 1997.
In August 1996, the FDA granted XOMA a Subpart E designation for the
Neuprex(TM) product for severe pediatric meningococcemia. Subpart E designation
is intended to expedite the development, evaluation and marketing of new
therapies for life-threatening and debilitating illnesses. In October 1996, XOMA
started a Phase III pivotal clinical trial to test the drug for this indication
in multiple medical centers in the United States and Canada. In January 1997,
the trial was expanded to include sites in the United Kingdom. See "Product
Areas - Neuprex(TM)".
In November 1997, XOMA initiated a randomized, placebo-controlled,
double-blind Phase III pivotal trial to test Neuprex(TM) in patients suffering
severe hemorrhage caused by traumatic injury and a Phase I study in CF patients
who suffer recurring bacterial lung infections (exacerbations). See "Product
Areas - Neuprex(TM)".
7
Other potential XOMA products will require significant additional
development, including extensive clinical testing. 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.
XOMA's product for the treatment of gram-negative sepsis, E5(R), was a
murine monoclonal antibody that binds and assists the body to clear bacterial
endotoxins. XOMA completed two double-blind, placebo-controlled, Phase III
studies of E5(R) involving nearly 1300 patients. In March 1989, XOMA filed a
Product License Application ("PLA") for FDA licensure of E5(R). In June 1992,
FDA informed XOMA that E5(R) was not approvable without further clinical
testing. In June 1993, a third Phase III clinical trial began with narrower
entry criteria than previous trials. In April 1997, XOMA and Pfizer decided to
discontinue this trial. In June 1997, the Company announced that Pfizer had
decided to end its marketing arrangement for E5(R).
FDA has substantial discretion in the product approval process and it is
not possible to predict at what point, or whether, FDA will be satisfied with
the Company's submissions or whether FDA will raise questions which may delay or
preclude product approval. As additional clinical data are accumulated, they
will be submitted to FDA and may have a material impact on the FDA product
approval process. Given that regulatory review is an interactive and continuous
process, the Company has adopted a policy of limiting announcements and comments
upon the specific details of the ongoing regulatory review of its products,
subject to its obligations under the securities laws, until definitive action is
taken.
Patents and Trade Secrets
As a result of its ongoing activities, the Company holds and is in the
process of applying for a number of patents in the United States and abroad to
protect its products and important processes. The Company also has obtained or
has the right to obtain exclusive licenses to certain patents and applications
filed by others. However, the patent position of biotechnology companies
generally is highly uncertain and no consistent policy regarding the breadth of
allowed claims has emerged from the actions of the Patent Office with respect to
biotechnology patents. Accordingly, no assurance can be given that the Company's
patents will afford protection against competitors with similar technologies, or
that others will not obtain patents claiming aspects similar to those covered by
the Company's patent applications.
During the period from September 1994 to December 1997, the U.S. Patent and
Trademark Office (the "Patent Office") issued twenty-one patents to the Company
related to its BPI-based products. These BPI-related patents include four
directed to novel compounds and compositions, one directed to manufacturing
methods, two directed to improved formulations and methods, three directed to
BPI and LBP assays and eleven directed to therapeutic uses of BPI protein
products, including uses of BPI in conjunction with antibiotics for the
treatment of gram-negative and gram-positive bacterial infections. U.S. Patent
No. 5,420,019 issued to the Company relates to novel recombinant amino terminal
fragments and fragment analogs of BPI and methods for their recombinant
production. The Company believes that this patent will provide comprehensive
protection for the manufacture, use and sale of its BPI-derived Neuprex(TM) and
I-PREX(TM) products in the U.S. The Company has received nine additional Notices
of Allowance from the Patent Office and has more than twenty patent applications
pending worldwide related to its BPI-based products.
In addition to the thirty BPI-related U.S. patents and Notices of Allowance
issued to the Company, the Company is the exclusive licensee of BPI-related
patents and applications owned by NYU. These include four issued U.S. patents
and one additional U.S. Notice of Allowance, directed to novel BPI-related
protein and DNA compositions, as well as their production and uses. U.S. Patent
No. 5,198,541 issued to NYU relates to the recombinant production of BPI. The
Company believes that this patent has substantial value because it covers
certain production methodologies that allow production of commercial-scale
quantities of BPI for human use. In addition, the European Patent Office granted
to NYU, EP 375724, with claims to N-terminal BPI fragments and their use, alone
or in conjunction with antibiotics, for the treatment of conditions associated
with bacterial infections.
8
Between 1992 and 1996, the Patent Office issued six patents related to BPI
to Incyte. Four of these patents originate from one initially-filed application
and are directed to endotoxin-associated uses of BPI, one patent is directed to
BPI/lipid carrier compositions and one patent relates to uses of BPI with
polymannuronic acid. Based on the opinion of its U.S. patent counsel, Marshall,
O'Toole, Gerstein, Murray & Borun, the Company believes that it does not
infringe any valid claims of any of the Incyte patents. The Company is aware
that the European Patent Office granted to Cornell and Rockefeller Universities
EP 272489 related to certain neutrophil-derived antimicrobial proteins and the
Company believes that Incyte may control this patent. The Company is aware of an
agreement between Genentech and Incyte pursuant to which Incyte claims to hold
worldwide rights to all Incyte and Genentech technology related to BPI.
During the period from July 1991 to December 1997, the Patent Office issued
seven patents and one Notice of Allowance to the Company related to its
bacterial expression technology, including claims to novel promoter sequences,
secretion signal sequences, compositions and methods for expression and
secretion of recombinant proteins from bacteria, including immunoglobulin gene
products. U.S. Patent No. 5,028,530 issued to the Company is directed to
expression vehicles containing an AraB promoter, host cells and processes for
regulated expression of recombinant proteins. U.S. Patent No. 5,576,195 is
related to DNA encoding a pectate lyase signal sequence, recombinant vectors,
host cells and methods for production and externalization of recombinant
proteins. U.S. Patent Nos. 5,595,898, 5,698,435 and 5,618,920 address secretable
immunoglobulin chains, DNA encoding the chains and methods for their recombinant
production. U.S. Patent Nos. 5,693,493 and 5,698,417 relate to methods for
recombinant production/secretion of functional immunoglobulin fragments.
Numerous foreign patents have been granted which, along with additional pending
foreign patent applications, correspond to the patents issued and allowed in the
U.S.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, the Company may require
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. There can be no
assurance that such licenses, if required, will be available on acceptable
terms.
Research and License Agreements
XOMA has contracted with a number of academic and institutional
collaborators to conduct certain research and development. Under these
agreements the Company generally funds either the research and development or
evaluation of products, technologies or both, will own or obtain an exclusive
license to products or technologies developed, and will pay royalties on sales
of products covered by the license. The rates and durations of such royalty
payments vary by product and institution, and range generally for periods from
five years to indefinite duration. Aggregate expenses of the Company under all
of its research agreements totaled $0.2 million, $0.3 million and $0.4 million
in 1997, 1996 and 1995, respectively. The Company has entered into certain
license agreements with respect to the following products:
Bactericidal/Permeability Increasing Protein (BPI)
In August 1990, XOMA entered into a research collaboration and license
agreement with NYU whereby XOMA obtained an exclusive license to patent rights
for DNA materials and genetic engineering methods for the production of BPI and
fragments thereof. BPI is part of the body's natural defenses against
gram-negative bacteria and XOMA is exploring the use of its Neuprex(TM) and
I-PREX(TM) products, based on BPI, for various indications. XOMA has obtained an
exclusive, worldwide license for the development, manufacture, sale and use of
BPI products for all therapeutic and diagnostic uses, and it has paid a license
fee and will make milestone payments and pay royalties to NYU on the sale of
such products. The license becomes fully-paid upon the later of the expiration
of the relevant patents or fifteen years after the first commercial sale,
subject to NYU's right to terminate for certain events of default.
9
Recombinant Technology
XOMA has obtained licenses under certain Stanford University and University
of California patents relating to certain basic processes of recombinant DNA
technology. The Stanford agreement provides that the Company will pay an annual
fee and both agreements provide for royalties on sales of products should
processes used in making those product(s) come under the licensed patents.
E5(R) Monoclonal Antibody Product
In conjunction with the decision to discontinue the Phase III E5(R)
clinical trial and the termination of Pfizer's marketing agreement with XOMA,
the Company's license agreement with the Regents of the University of California
has been terminated.
Employees
As of December 31, 1997 XOMA employed 160 full-time employees at its
Berkeley and Santa Monica, California facilities. The Company's employees are
engaged in clinical, manufacturing, quality assurance and control, research and
product development activities, and in executive, finance and administrative
positions. The Company considers its employee relations to be excellent.
The Company was incorporated in Delaware in 1981. The principal executive
offices of XOMA are located at 2910 Seventh Street, Berkeley, California 94710
(telephone 510-644-1170).
Item 2. Properties
XOMA's principal product development and manufacturing facilities are
located in Berkeley, California. The Company leases 83,000 square feet of space
in Berkeley including approximately 35,000 square feet of research and
development laboratories, 32,000 square feet of production and production
support facilities and 16,000 square feet of office space. An additional 3,000
square feet of office space has been subleased to a third party. Separately, a
16,500 square foot production facility in Berkeley is owned by XOMA.
XOMA also maintains offices, laboratories and a manufacturing facility
occupying approximately 15,000 square feet in leased space in Santa Monica,
California. An additional 6,000 square foot leased facility for scale-up of the
Neuprex(TM) product was completed in May 1993. The Company also owns an
approximately 6,750 square foot parking lot in Santa Monica.
Item 3. Legal Proceedings
In the securities class action lawsuit Warshaw, et al. v. XOMA Corporation,
et al., the defendants and plaintiffs reached an agreement on March 14, 1997 to
settle all claims for $3.75 million in cash and $2.25 million in XOMA common
stock. By order entered September 8, 1997, the United States District Court for
the Northern District of California approved the settlement. All of the cash
portion of the settlement has been paid by insurance into a settlement fund
administered by an escrow agent. The claims administration process was deemed
complete as of December 16, 1997, and on January 7, 1998, XOMA directed its
stock transfer agent to issue and distribute to authorized claimants 344,168
shares of XOMA common stock in accordance with the terms of the court-approved
settlement agreement.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
Officers
The officers of the Company are as follows:
Name Age Title
- ---- --- -----
John L. Castello 61 Chairman of the Board,
President and Chief
Executive Officer
Patrick J. Scannon, M.D., Ph.D. 50 Chief Scientific and Medical
Officer and Director
Clarence L. Dellio 51 Senior Vice President,
Operations
Stephen F. Carroll, Ph.D. 46 Vice President, Preclinical
Research
Peter B. Davis 51 Vice President, Finance
and Chief Financial
Officer
Marvin J. Garrett 47 Vice President, Clinical and
Regulatory Affairs
Bernardus Machielse 37 Vice President, Quality
Assurance and Quality
Control
Christopher J. Margolin 51 Vice President, General
Counsel and Secretary
W. C. McGregor, Ph.D. 56 Vice President, Technical
Development and Santa
Monica Operations
Officers serve at the discretion of the Board of Directors. There is no
family relationship among any of the officers or directors.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "XOMA". The following table sets forth the quarterly range of high and
low reported sale prices of the Company's Common Stock on the Nasdaq National
Market for the periods indicated.
Price Range
High Low
1996:
First Quarter $ 5-3/4 $ 3-3/8
Second Quarter 8-1/8 3-7/8
Third Quarter 7-5/8 4-1/16
Fourth Quarter 5-7/8 3-1/16
1997:
First Quarter $ 7-1/4 $4-15/16
Second Quarter 5-11/16 3-1/8
Third Quarter 8-1/2 4-5/8
Fourth Quarter 8-1/2 4-7/8
1998:
First Quarter (through February 28, 1998) $ 6-1/2 $ 4-7/8
On February 28, 1998, there were approximately 5,014 record holders of
XOMA's Common Stock.
The Company has not paid dividends on its common stock. The Company
currently intends to retain any earnings for use in the development and
expansion of its business. The Company, therefore, does not anticipate paying
cash dividends on its common stock in the foreseeable future (see Note 4 to the
Financial Statements, "CAPITAL STOCK").
12
Item 6. Selected Financial Data
The following table contains selected financial information including
statement of operations and balance sheet data of XOMA for the years 1993
through 1997. The selected financial information has been derived from the
audited Financial Statements of XOMA. The selected financial information should
be read in conjunction with the Financial Statements and notes thereto set forth
beginning on page 22 of this report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 7 below.
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Statement of
Operations Data
Total revenues (1) $ 18,383 $ 3,604 $ 1,165 $ 1,729 $ 571
Total operating costs and
expenses(2) 35,552 31,826 27,469 38,460 35,259
Other income or loss,
net(3) (1,404) (888) 3,832 2,104 3,381
Net loss $ (15,765) $ (29,110) $ (22,472) $ (34,627) $ (31,307)
========= ========= ========= ========= =========
Basic and diluted loss per
common share $ (0.44) $ (0.90) $ (0.97) $ (1.54) $ (1.46)
========= ========= ========= ========= =========
Balance Sheet Data
Cash(4) $ 55,146 $ 46,982 $ 26,633 $ 39,985 $ 70,787
Total assets 64,776 57,675 40,878 62,429 94,131
Long-term debt (5) 24,773 14,516 7,692 120 425
Accumulated deficit (354,526) (337,195) (307,905) (284,847) (249,439)
Stockholders' equity 31,240 34,748 26,836 43,461 78,397
(1) In 1997, includes $17.0 million from the assignment of patent and royalty
rights to Pharmaceutical Partners LLC.
(2) In 1994, includes $2.5 million related to employee termination benefits
associated with a restructuring.
(3) In 1996, includes a non-recurring expense ($2.5 million) relating to a
securities class action lawsuit settlement. Other income in 1995
principally consists of interest income ($1.9 million), a one-time gain of
$4.3 million related to a modification of the funding arrangement with
Pfizer for the E5(R) clinical trial, and a $2.4 million loss related to
write-down of property and equipment.
(4) Includes cash, cash equivalents, short-term investments, and interest
receivable.
13
Excludes current portion. In 1997 and 1996, includes $23.5 million and
$13.5 million, respectively, aggregate principal amount of convertible
subordinated notes due to Genentech in 2005. In 1995, includes $6.5 million
aggregate principal amount of convertible debentures due 1998. As of December
31, 1996 all of the convertible debentures had been converted into 2,054,224
shares of Common Stock.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
XOMA is a biopharmaceutical company developing products to treat
infections, infectious complications of traumatic injury and surgery, and
immunologic and inflammatory disorders. The Company's primary focus is on
products derived from BPI. The first BPI-derived product, Neuprex(TM) is in
Phase III pivotal trials in two indications, and earlier stage clinical trials
in additional indications. Other BPI-derived products in preclinical testing
include I-PREX(TM) a topical ophthalmic product, and Mycoprex(TM), a peptide
product targeting systemic fungal infections.
XOMA is also developing the hu1124 humanized monoclonal antibody product
under a collaboration agreement with Genentech. The product is in Phase II
clinical testing for psoriasis. Other indications are under review. Genentech is
providing funding for development and clinical trials through a series of
long-term convertible loans.
The Company incurred a net loss in each of the past three years and is
expected to continue to operate at a loss until regulatory approval and
commencement of commercial sales of its products. The timing of product
approvals is uncertain, and there can be no assurance that approvals will be
granted or that revenues from product sales will be sufficient to attain
profitability.
Revenues
Total revenues were $18.4 million in 1997, compared with $3.6 million in
1996 and $1.2 million in 1995. Revenues for 1997 consisted of $17.0 million from
the assignment of anti-CD20 antibody patents and royalty rights to
Pharmaceutical Partners, LLC and $1.4 million for various licensing
transactions. Revenues for 1996 included $3.0 million for licensing of
intellectual property related to anti-CD20 antibodies to Genentech, and for 1995
included $0.8 million in partial consideration for the sale of the Company's T
cell receptor technology.
Costs and Expenses
In 1997, research and development expenses increased by $3.5 million, (13%)
versus 1996, following a $4.3 million (19%) increase from 1995 to 1996. These
increases reflect higher spending on clinical trials and preparing for
regulatory applications and inspections for Neuprex(TM) and the initiation of
development work and clinical trials for hu1124. The Company anticipates
research and development expenditures to continue at similar or higher levels
throughout 1998.
General and administrative expenses increased by $0.2 million (4%) from
1996 to 1997, following an increase of $0.1 million (1%) from 1995 to 1996.
Annual investment income has essentially remained unchanged through the
period 1995 - 1997, as improved average cash balances each successive year have
been offset by lower prevailing interest rates. Other expense in 1997 included
interest on the convertible notes due to Genentech in 2005, which accrues
interest at six-months LIBOR plus 1%. Interest expense in 1996 included interest
on the Genentech note and also on the Company's 4% Convertible Subordinated
Debentures.
14
Other Income (Expense)in 1996 included a provision of $2.5 million for
legal fees and settlement costs reflecting an agreement reached with plaintiff's
attorney in a class action law suit. An offsetting gain of $0.3 million was
realized in 1997 reflecting an adjustment to the value of the settlement. Other
Income in 1995 included a one-time gain of $1.9 million related to a
modification of the funding arrangement with Pfizer for the E5(R) clinical trial
and a write-down of property and equipment. Due to the termination of E5(R)
development, the contingent $22.4 million liability to Pfizer has been
eliminated.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $8.2 million
to $55.1 million at December 31, 1997. Financing activities of $21.7 million
included a $10.0 million advance from Genentech under a long-term credit
arrangement to fund 1998 development costs of hu1124, and $12.1 million net
proceeds from a private placement partially offset by principal payments under
capital lease obligations. The Company's cash, cash equivalents and short-term
investments are expected to continue to decrease while the Company pursues FDA
licensure, except to the extent the Company is able to secure additional
funding.
Net cash used in operating activities was $12.0 million in 1997, compared
with $22.4 million in 1996 and $24.7 million in 1995. The improvement in
operating cash flows in 1997 and 1996 is due primarily to cash from licensing
transactions, which there can be no assurance will continue. Capital
expenditures for 1997, 1996 and 1995 were $1.5 million, $1.1 million and $0.4
million, respectively. A second 2750-liter fermentor train was added to XOMA's
Berkeley facility in 1997 to provide additional capacity for Neuprex(TM) and
hu1124. The Company intends to continue to fund capital spending from internal
cash resources supplemented by capital financing where appropriate and
available.
The Company's cash position and resulting investment income are sufficient
to finance the Company's currently anticipated needs for operating expenses,
working capital, equipment and current research projects, for in excess of one
year. The Company continues to evaluate strategic alliances, potential
partnerships and financing arrangements which would further strengthen its
competitive position and provide additional funding. The Company cannot predict
whether or when any such alliance(s), partnership(s) or financing(s) will be
consummated or whether additional funding will be available when required.
Although operations are influenced by general economic conditions, the
Company does not believe that inflation had a material impact on financial
results for the periods presented. The Company believes that it is not dependent
on materials or other resources that would be significantly impacted by
inflation or changing economic conditions in the foreseeable future.
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications. The Company can provide no assurance that there will be no
year 2000 impact through third parties, such as suppliers of raw materials for
manufacturing and clinical research organizations.
Forward-Looking Statements
Certain statements contained herein that are not related to historical
facts may constitute "forward-looking" information, as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements are based
on the Company's current beliefs as to the outcome and timing of future events,
and actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events which may not prove accurate. The
forward-looking statements involve risks and uncertainties including, but not
limited to, results of pending or future clinical trials, actions by the U.S.
Food and Drug Administration, changes in the status of the Company's
collaborative relationships, and future actions by the U.S. Patent and Trademark
Office, as well as
15
more general risks and uncertainties related to regulatory approvals, product
efficacy and development, the Company's financing needs and opportunities,
scale-up and marketing capabilities, intellectual property protection,
competition, stock price volatility and other risk factors referred to herein
and in other of the Company's Securities and Exchange Commission filings.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable until the Company's 1998 fiscal year.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant, related
notes, and report of independent public accountants are set forth beginning on
page 21 of this report.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Item 9. Change in Accountants
On March 19, 1998, the Company appointed Ernst & Young, LLP ("Ernst &
Young") to serve as the Company's independent accountants for 1998, the
ratification of which appointment will be submitted to the stockholders at the
Company's 1998 annual meeting.
From fiscal 1983 through fiscal 1997, Arthur Andersen, LLP ("Arthur
Andersen") acted as the Company's independent accountants. Arthur Andersen was
dismissed on March 19, 1998. The decision to change accountants was approved by
the audit committee of the Board of Directors. The reports of Arthur Andersen on
the financial statements of the Company for the two most recent fiscal years did
not contain any adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles. During the
Company's two most recent fiscal years and all subsequent interim periods
preceding such dismissal, there were no disagreements with Arthur Andersen on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Arthur Andersen, would have caused it to make a reference
to the subject matter of disagreements in connection with its reports; nor has
Arthur Andersen ever presented a written report, or otherwise communicated in
writing to the Company or Board of Directors or the audit committee thereof the
existence of any "disagreement" or "reportable event" within the meaning of Item
304 of Regulation S-K.
The Company has authorized Arthur Andersen to respond fully to the
inquiries of Ernst & Young. The letter from Arthur Andersen addressed to the
Securities and Exchange Commission (the "SEC"), as required by Item 304 (a) (3)
of Regulation S-K, will be filed as an exhibit to this Annual Report on Form
10-K by amendment.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
The section labeled "Proposal 1 -- Election of Directors" appearing in the
Company's proxy statement for the 1998 annual meeting of stockholders is
incorporated herein by reference. Information concerning the Company's executive
officers is set forth in Part I of this Report on Form 10-K.
Item 11. Executive Compensation
The section labeled "Compensation of Executive Officers" appearing in the
Company's proxy statement for the 1998 annual meeting of stockholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Stock Ownership" appearing in the Company's proxy
statement for the 1998 annual meeting of stockholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Transactions" appearing in the Company's proxy
statement for the 1998 annual meeting of stockholders is incorporated herein by
reference.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1) Financial Statements:
All financial statements of the registrant referred to in
Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules:
All financial statements schedules have been omitted because
the required information is included in the financial
statements or the notes thereto or is not applicable or
required.
(3) Exhibits:
See "Index to Exhibits".
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the SEC on August 18, 1997.
Current Report on Form 8-K filed with the SEC on January 9, 1998.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 19th day of
March, 1998.
XOMA CORPORATION
By /s/ JOHN L. CASTELLO
--------------------------------------
John L. Castello,
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JOHN L. CASTELLO Chairman of the Board, President March 19, 1998
- ----------------------------- and Chief Executive Officer
/s/ PATRICK J. SCANNON Chief Scientific and Medical March 19, 1998
- ----------------------------- Officer and Director
/s/ PETER B. DAVIS Vice President, Finance and Chief March 19, 1998
- ----------------------------- Financial Officer (Principal
Financial and Accounting Officer)
/s/ JAMES G. ANDRESS Director March 19, 1998
- -----------------------------
(James G. Andress)
/s/ WILLIAM K. BOWES, JR. Director March 19, 1998
- -----------------------------
(William K. Bowes, Jr.)
/s/ ARTHUR KORNBERG Director March 19, 1998
- -----------------------------
(Arthur Kornberg)
/s/ STEVEN C. MENDELL Director March 19, 1998
- -----------------------------
(Steven C. Mendell)
/s/ W. DENMAN VAN NESS Director March 19, 1998
- -----------------------------
(W. Denman Van Ness)
19
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants...................... 21
Balance Sheets................................................ 22
Statements of Operations...................................... 23
Statements of Stockholders' Equity............................ 24
Statements of Cash Flows...................................... 25
Notes to Financial Statements................................. 26
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To XOMA Corporation:
We have audited the accompanying balance sheets of XOMA Corporation (a
Delaware corporation) as of December 31, 1997 and 1996 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XOMA Corporation as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 3, 1998
21
XOMA CORPORATION
BALANCE SHEETS
(In thousands, except par and share amounts)
ASSETS
December 31
-----------
1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 37,225 $ 1,213
Short-term investments 17,921 45,769
Related party receivables 263 253
Other receivables 88 548
Prepaid expenses and other 142 219
Total current assets 55,639 48,002
--------- --------
NON-CURRENT ASSETS:
Property and equipment, net
Assets held for sale 4,442 4,442
Deposits and other 131 133
--------- --------
$ 64,776 $ 57,675
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,644 $ 1,778
Accrued liabilities 6,412 6,144
Capital lease obligations due within one year 707 489
--------- ---------
Total current liabilities 8,763 8,411
--------- ---------
NON-CURRENT LIABILITIES:
Capital lease obligations due after one year -- 703
Convertible notes 24,773 13,813
--------- ---------
Total non-current liabilities 24,773 14,516
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value, 1,000,000 shares authorized, 1,167 and 0
outstanding (liquidation preference $11,670 and $0) at December 31,
1997 and
1996, respectively -- --
Common stock, $.0005 par value, 70,000,000 shares
authorized, 39,891,104 and 39,609,275 outstanding at
December 31, 1997 and 1996, respectively 20 20
Paid-in capital 385,746 371,923
Accumulated deficit
(354,526) (337,195)
--------- ---------
Total stockholders' equity 31,240 34,748
--------- ---------
$ 64,776 $ 57,675
========= =========
The accompanying notes are an integral part of these financial statements.
22
XOMA CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years ended December 31
--------------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES:
Product sales and royalties $ 56 $ 61 $ 87
Research and development fees
Collaborative agreements 250 -- --
License fees 18,077 3,543 1,078
-------- -------- --------
Total revenues 18,383 3,604 1,165
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Research and development 29,878 26,371 22,086
General and administrative 5,674 5,455 5,383
-------- -------- --------
Total operating costs and expenses 35,552 31,826 27,469
-------- -------- --------
Loss from operations (17,169) (28,222) (26,304)
OTHER INCOME (EXPENSE):
Investment income 2,120 2,011 1,934
Litigation settlement -- (2,500) --
Other income(expense) (716) (399) 1,898
-------- --------
Net loss $(15,765) $(29,110) $(22,472)
========= ======== ========
BASIC AND DILUTED NET LOSS PER COMMON $ (0.44) $ (0.90) $ (0.97)
SHARE ========= ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 39,679 32,493 23,671
========= ======== ========
The accompanying notes are an integral part of these financial statements.
23
XOMA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Total
Paid-in Accumulated Stockholders'
Common Stock Preferred Stock Capital Deficit Equity
Shares Amount Shares Amount
BALANCE, DECEMBER 31, 1994 22,174 $11 16 $ 1 $328,296 $(284,847) $ 43,461
Exercise of stock options 25 -- -- -- 11 -- 11
Contributions to 401(k) and management
incentive plans 149 -- -- -- 434 -- 434
Sale of common stock 471 1 -- -- 717 -- 718
Amortization of deferred compensation -- -- -- -- 214 -- 214
Sale of preferred stock -- -- 5 -- 4,143 -- 4,143
Conversion of preferred stock 4,230 2 (13) (1) (1) -- --
Exercise of warrants 1 -- -- -- 7 -- 7
Unrealized gain (loss) on investments -- -- -- -- 125 -- 125
Dividends on preferred stock 253 -- -- -- 781 (586) 195
Net loss -- -- -- -- -- (22,472) (22,472)
------ --- --- --- -------- --------- --------
BALANCE, DECEMBER 31, 1995 27,303 14 8 -- 334,727 (307,905) 26,836
Exercise of stock options 72 -- -- -- 207 -- 207
Contributions to 401(k) and management
incentive plans 90 -- -- -- 395 -- 395
Sale of common stock 2,123 1 -- -- 10,651 -- 10,652
Amortization of deferred compensation -- -- -- -- 37 -- 37
Sale of preferred stock -- -- 7 -- 18,966 -- 18,966
Issuance of warrants -- -- -- -- 800 -- 800
Conversion of preferred stock 7,914 4 (15) -- (4) -- --
Conversion of debentures 2,054 1 -- -- 5,919 -- 5,920
Unrealized gain (loss) on investments -- -- -- -- 45 -- 45
Dividends on preferred stock 53 -- -- -- 180 (180) --
Net loss -- -- -- -- -- (29,110) (29,110)
------ --- --- --- -------- --------- --------
BALANCE, DECEMBER 31, 1996 39,609 20 -- -- 371,923 (337,195) 34,748
Exercise of stock options 53 -- -- -- 143 -- 143
Contributions to 401(k) and management
incentive plans 57 -- -- -- 319 -- 319
Sale of preferred stock -- -- 1 -- 10,936 -- 10,936
Conversion of preferred stock 169 -- -- -- -- -- --
Issuance of warrants -- -- -- -- 1,125 -- 1,125
Unrealized gain (loss) on investments -- -- -- -- (42) -- (42)
Dividends on preferred stock 3 -- -- -- 1,342 (1,566) (224)
Net loss -- -- -- -- -- (15,765) (15,765)
------ --- --- --- -------- --------- --------
BALANCE, DECEMBER 31, 1997 39,891 $20 1 $-- $385,746 $(354,526) $ 31,240
====== === === === ======== ========= ========
The accompanying notes are an integral part of these financial statements.
24
XOMA CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,765) $ (29,110) $(22,472)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,032 2,131 2,920
Inventory reserve -- -- 4,170
Write-down of assets held for sale -- -- 2,400
Deferred compensation expense -- 37 214
Loss (gain) on retirement of property and 21 2 (145)
equipment
Changes in assets and liabilities:
Decrease (increase) in related party and 450 1,742 (2,116)
other receivables
Decrease (increase) in prepaid expenses 77 (9) 612
Decrease (increase) in deposits and other 2 -- 1,350
assets
Increase (decrease) in accounts payable (134) (342) 705
Increase (decrease) in accrued liabilities 1,331 3,124 (3,921)
Increase (decrease) in non-current liabilities -- -- (8,465)
-------- --------- --------
Total adjustments 3,779 6,685 (2,276)
-------- --------- --------
Net cash used in operating activities (11,986) (22,425) (24,748)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 105,195 89,675 61,942
Payments for purchase of short-term (77,389) (129,073) (31,641)
investments
Purchase of property and equipment, net of
proceeds (1,519) (1,050) (350)
-------- --------- --------
Net cash provided by (used in) investing 26,287 (40,448) 29,951
-------- --------- --------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback -- -- 1,800
Principal payments under capital lease (485) (546) (488)
obligations
Proceeds from issuance of debentures 9,992 13,545 5,858
Proceeds from issuance of common or preferred
stock 12,204 30,687 4,451
-------- --------- --------
Net cash provided by financing activities 21,711 43,686 11,621
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents 36,012 (19,187) 16,824
Cash and cash equivalents at beginning of year 1,213 20,400 3,576
-------- --------- --------
Cash and cash equivalents at end of year $ 37,225 $ 1,213 $ 20,400
======== ========= ========
The accompanying notes are an integral part of these financial statements.
25
XOMA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical company
developing products to treat infections, infectious complications of traumatic
injury and surgery, and immunologic and inflammatory disorders. The Company's
products are presently in various stages of development and all are subject to
regulatory approval before the Company 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.
The Company's cash position and resulting investment income are sufficient
to finance the Company's currently anticipated needs for operating expenses,
working capital, equipment and current research projects for in excess of one
year. The Company continues to evaluate strategic alliances, potential
partnerships, and financing arrangements which would further strengthen its
competitive position and provide additional funding. The Company cannot predict
whether or when any such alliance(s), partnership(s) or financing(s) will be
consummated or whether additional funding will be available when required.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities 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.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding in accordance with Financial Accounting Standard No. 128.
26
Reconciliation of the numerator and the denominator of basic and diluted
net loss per share was derived as follows (in thousands, except per share
amounts):
Amount per
Year ended December 31 Loss Shares share
1997
Net loss $(15,765)
Preferred stock dividends (1,566)
--------
Basic and diluted loss available to common
shareholders $(17,331) 39,679 $(0.44)
========
1996
Net loss $(29,110)
Preferred stock dividends (180)
--------
Basic and diluted loss available to common
shareholders $(29,290) 32,493 $(0.90)
========
1995
Net loss $(22,472)
Preferred stock dividends (586)
--------
Basic and diluted loss available to common
shareholders $(23,058) 23,671 $(0.97)
========
The following potentially dilutive outstanding securities were not
considered in the computation of basic and diluted loss per share because they
would be antidilutive for each of the years ended December 31:
Amount (in thousands): 1997 1996 1995
- --------------------- ---- ---- ----
Weighted average options for shares of
common stock 3,627 3,162 2,992
Weighted average warrants for shares of
common stock 295 29 983
Common shares issuable to satisfy obligations 344 -- --
Shares of convertible preferred stock 1,167 -- 7,807
Convertible notes, debentures, and related
interest $24,773 $13,813 $6,500
Subsequent to December 31, 1997 the Company issued 344,168 shares of common
stock in settlement of a securities class action lawsuit(see Note 6).
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less at the
time the Company acquires them to be cash equivalents, except when such debt
instruments are part of a portfolio of investments managed by an independent,
outside investment manager, in which case these instruments are classified as
short-term investments.
27
Supplemental Cash Flow Information
Cash paid for interest was $0.1 million, $0.2 million, and $0.1 million
during the years ended December 31, 1997, 1996, and 1995, respectively.
In addition, during the years ended December 31, 1997, 1996 and 1995, the
Company had the following non-cash financing and investing activities (in
thousands):
1997 1996 1995
---- ---- ----
Stock contribution to the 401(k) and management $ 319 $ 395 $ 434
incentive plans (Notes 4 and 9)
Stock issuance cost paid with common or preferred -- -- 8
stock (Note 4)
Unrealized loss(gain) on investments (42) (45) 125
Conversion of debentures to common stock -- 5,861
Interest paid in common stock -- 59 --
Conversion of preferred stock to common stock 830 28,807 12,607
Dividends paid in common stock 15 180 781
Property and Equipment
Property and equipment, including equipment under capital leases, are
stated at cost. Equipment depreciation is calculated using the straight-line
method over the estimated useful lives of the assets (five to seven years).
Leasehold improvements, buildings, and building improvements are amortized and
depreciated using the straight-line method over the shorter of the lease terms
or the useful lives (one to seven years).
Property and equipment consist of the following (in thousands):
December 31
1997 1996
---- ----
Equipment $15,545 $14,500
Leasehold and building improvements 14,836 14,483
Construction-in-progress 97 208
------- -------
30,478 29,191
Less accumulated depreciation and amortization 25,914 24,093
------- -------
Property and equipment, net $ 4,564 $ 5,098
======= =======
Assets held for sale $ 4,442 $ 4,442
======= =======
The Company owns a facility originally intended for the production of CD5
Plus(TM) intermediates, which was re-classified as an asset held for sale in
1995 and written down to an estimated realizable value of $4.4 million resulting
in a charge to Other income and expense of $2.4 million. The amount the Company
will ultimately realize could differ materially from the amount assumed in
arriving at the realizable value.
28
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31
1997 1996
---- ----
Accrued legal costs $ 198 $ 661
Accrued dividends 810 586
Accrued payroll costs 1,986 1,573
Provision for litigation settlement 2,028 2,500
Clinical trial costs 1,203 521
Other 187 303
------ ------
$6,412 $6,144
====== ======
Activities through December 31, 1997 affecting the provision for litigation
settlement established in 1996 are as follows (in millions):
Original amount $2.5
Charges against the accrual 0.2
Adjustment to the accrual 0.3
In December 1997, the Company elected to settle the claim through the
issuance of 344,168 shares of common stock which resulted in a $0.3 million
reduction in the accrual. The liability was eliminated in January 1998 upon
issuance of the shares.
Research and Development Fees
Research and development fees are recognized as revenues as research
activities are performed or as development milestones are completed under the
terms of research and development agreements. The excess of total research and
development expense over revenues recognized under collaborative agreements
amounted to $29.9 million, $26.4 million, and $22.1 million for the years 1997,
1996, and 1995, respectively.
Reclassifications
Certain reclassifications have been made to conform the prior years to the
1997 presentation.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued a final
statement on reporting comprehensive income. The adoption of the standard as
required on January 1, 1998 will not have a material impact on the Company's
financial statements.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 1997 and 1996, cash and cash equivalents consisted mostly
of money market mutual funds.
The Company follows a policy of investing only in marketable debt
securities and holding them to maturity; however, since the Company has from
time to time sold certain securities to meet cash requirements or improve
investment diversification, the Company's short-term investments have been
categorized as available-for-sale.
29
The aggregate fair values, amortized cost, gross unrealized holding gain,
and gross unrealized holding loss of the major types of debt securities at
December 31, 1997 were as follows (in millions):
Gross Unrealized Holding
Fair Amortized
Value Cost Gain Loss
U.S. Treasury Securities $9.5 $9.5 $ -- $ --
Corporate Bonds and Other 8.4 8.4 -- --
The contractual maturities of the Company's debt securities as of December
31, 1997 were as follows (in millions):
Less than 1 year $11.4
From 1 to 2 years 4.0
More than 2 years 2.5
During the year ended December 31, 1997, gross realized losses on
available-for-sale securities were negligible and the net change in the
unrealized gain or loss was negligible. Gross realized gains were negligible.
Gains and losses are determined on a specific identification basis. As of
December 31, 1997, short-term investments included $0.1 million in certificates
of deposit which guaranteed a standby letter of credit.
3. RESEARCH AND DEVELOPMENT AGREEMENTS
In April 1996, the Company entered into a collaborative agreement with
Genentech, Inc. ("Genentech") to jointly develop hull24 (anti-CD11a), for
treatment of psoriasis and for organ transplant rejection. In connection
therewith, Genentech purchased 1.5 million shares of common stock for
approximately $9 million and has agreed to fund the Company's development costs
for hull24 until the completion of Phase II clinical trials through a series of
convertible subordinated notes. During 1996, Genentech made loans totaling $13.5
million ($5.0 and $8.5 million, respectively, for funding 1996 and 1997 clinical
trials and development costs) to XOMA under this arrangement. An additional loan
of $10.0 million was made in December 1997 to fund 1998 costs. Under the terms
of the agreement, the Company will scale up and develop hull24 and bring it
through Phase II clinical trials. After completion of Phase II trials, Genentech
will determine the product's future development strategy.
In May 1996, the Company announced the granting of an exclusive license to
Genentech, including a sublicense to IDEC Pharmaceuticals Corporation, to
intellectual property covering the therapeutic use of chimeric IgG1 antibodies
specific to the CD20 antigen on the surface of human B-cells. The Company
received an initial cash payment of $3.0 million and the right to receive
royalties on the sale of products employing the anti-CD20 technology that are
sold in the United States and in other countries where the Company held relevant
patents. In December 1997, the Company assigned the related patents and royalty
rights to Pharmaceutical Partners, LLC for $17.0 million and recognized this
amount as license fee revenue.
In June 1994, the Company assigned its exclusive worldwide rights in T cell
receptor ("TCR") peptide technology to Connetics. The Company received a
promissory note in the amount of $1.4 million and warrants to purchase 450,000
shares of Connetics. stock, and will receive milestone payments and royalties on
product sales. In 1995, the Company received an additional note in the amount of
$0.8 million pursuant to the terms of the original assignment. The notes were
paid in full in February 1996 and the warrants cancelled.
In 1995, XOMA and Pfizer modified the funding arrangement of the then
current E5(R) clinical trial and of certain patent litigation costs. As a
result, the Company recorded a $4.3 million gain in Other income.
30
In June 1997, the Company announced that Pfizer had ended its agreements with
the Company relating to monoclonal antibody-based products for the treatment of
gram-negative sepsis, which resulted in the elimination of the contingent $22.4
million liability to Pfizer.
XOMA has granted licenses to a number of biotechnology and pharmaceutical
companies for use of patented and proprietary technologies relating to a
bacterial expression system used to manufacture recombinant pharmaceutical
products. Licensees include: Affymax Research Institute, Cantab Pharmaceuticals
Research Ltd, Eli Lilly and Company, Enzon, Inc., the Hoechst Group, ICOS
Corporation, Pasteur Merieux Serums & Vaccins, and The Pharmacia & Upjohn Group.
4. CAPITAL STOCK
Common Stock
In April 1996, Genentech purchased 1.5 million shares of common stock for
approximately $5.90 per share in connection with the collaborative agreement to
develop jointly Genentech's anti-CD11a monoclonal antibody product, hull24.
In March 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 606,061 shares of Common Stock for net proceeds of $1.9
million.
In June and July 1995, the Company issued 470,859 shares of Common Stock in
reliance on Regulation S for net proceeds of $0.7 million.
Preferred Stock
In August 1997, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2)
thereof, issuing 1,250 shares in the form of 5% Convertible Preferred Stock,
Series G ("Series G Preferred") for proceeds of approximately $12.1 million net
of cash issuance costs. The same investors have also committed to provide
additional financing of up to $12.5 million at XOMA's option, subject to certain
conditions.
Conversions of Series G Preferred will be based on the price of Common
Stock at the time of conversion. There is no initial discount on the conversion
price, but a discount of 2% will be added for each month the Series G Preferred
is held, up to a maximum discount of 14%, for which an additional $1.3 million
has been added to dividends and charged to Paid-in capital as of December 31,
1997. No conversions were permitted below a price of $7.80 for the first 60
days. The maximum conversion price for the first six months was $9.10. There are
certain restrictions on the volume of sales of underlying Common Stock by the
investors. The investors also received three-year warrants to purchase up to a
total of 432,000 common shares at a price of $10.00 per share. The additional
funding commitment also provides for limits on conversion price and trading, and
additional warrants, all based on the market price of Common Stock at the time
such funding is provided. Additional warrants to purchase 54,000 common shares
at the $10.00 price were issued to the placement agents.
In September 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 1,600 shares of its Convertible Preferred Stock, Series F
("Series F Preferred") for proceeds of approximately $15.0 million net of
issuance costs. As of December 31, 1996, all of the Series F Preferred, plus
accrued dividends, had been converted into 5,269,870 shares of Common Stock.
31
In March 1996, the Company completed a private placement exempt from
registration under the Securities Act of 1933 in reliance on Regulation D
thereunder, issuing 5,000 shares of its Convertible Preferred Stock, Series D
("Series D Preferred") for proceeds of $4.8 million net of issuance costs. As of
September 30, 1996, all of the Series D Preferred, plus accrued dividends, had
been converted into 1,048,610 shares of Common Stock.
In August 1995, the Company issued 4,799 shares of its Convertible
Preferred Stock, Series C ("Series C Preferred") to foreign investors in an
offering exempt from registration under the Securities Act of 1933 in reliance
on Regulation S thereunder. The offering yielded proceeds to the Company of $4.1
million net of issuance costs. As of December 31, 1995, all of the Series C
Preferred, plus accrued dividends, had been converted into 2,728,190 shares of
Common Stock.
In December 1993, the Company issued 18,775 shares of Senior Convertible
Preferred Stock, Series B ("Series B Preferred") to two investors for proceeds
of $17.7 million net of issuance costs. Costs of the issue were approximately
$1.1 million. An additional 250 shares of Series B Preferred were issued to the
placement agent as part of the fee for investment banking services.
In May 1994, the placement agent converted all 250 of its shares of
preferred stock into 47,595 shares of Common Stock. The amounts payable as
dividends at December 31, 1994 were paid with 252,745 shares of common stock in
January of 1995. During 1995, 7,808 shares of the Series B Preferred had been
converted into 1,501,731 shares of Common Stock. The remaining 7,807 shares were
converted into 1,648,115 shares of Common Stock in 1996 prior to the June 1996
dividend date.
The Company has authorized 650,000 shares of Series A Cumulative Preferred
Stock of which none were outstanding at December 31, 1997, 1996 and 1995. (See
"Stockholder Rights Plan", below.)
Convertible Notes and Debentures
Under the arrangement with Genentech (see Note 3) the Company receives
funding for development of hull24 in the form of convertible subordinated notes
due 2005 at interest rates of LIBOR plus 1% compounded and reset at the end of
June and December each year. Interest is payable at maturity. The Company has
received $5.0 million and $8.5 million of these loans, respectively, in April
and December of 1996, and a further $10.0 million in December 1997. The notes
are convertible into one share of Series E Preferred Stock (7,500 shares are so
designated) for each $10,000 in notes. The Series E Preferred Stock is
convertible into common stock. The cumulative amount of interest accrued was
$1.2 million and $0.3 million as of December 31, 1997 and 1996, respectively.
In November 1995, the Company issued $6.5 million aggregate principal
amount of 4% Convertible Subordinated Debentures due in 1998 to foreign
investors in an offering exempt from registration under the Securities Act of
1933 in reliance on Regulation S thereunder. The offering yielded net proceeds
to the Company of $5.9 million net of issuance costs. During the first quarter
of 1996 all of the Debentures, plus accrued interest, were converted into
2,054,224 shares of Common Stock. Unamortized issuance costs of $0.6 million
were charged to Paid-in capital in connection with the conversions of the
Debentures.
Management Incentive Compensation Plan
The Board of Directors of the Company established a Management Incentive
Compensation Plan effective July 1, 1993 (as amended, the "Incentive Plan"), in
which management employees (other than the Chief Executive Officer), as well as
certain additional discretionary participants chosen by the Chief Executive
Officer, are eligible to participate.
32
Awards under the Incentive Plan vest over a three-year period with 50% of
each award payable on a date to be determined, expected to be in the first
quarter of the following fiscal year, and 25% payable on each of the next two
annual distribution dates, so long as the participant continues to participate
in the Incentive Plan.
The amounts charged to expense under the Incentive Plan were $0.8 million,
$0.7 million and $0.6 million for the plan years 1997, 1996 and 1995
respectively.
Stockholder Rights Plan
In October 1993, the Company's Board of Directors unanimously adopted a
Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, Preferred
Stock Purchase Rights ("Rights") were distributed as a dividend at the rate of
one Right for each share of the Company's Common Stock held of record as of the
close of business on November 12, 1993. Each Right entitles the registered
holder of Common Stock to buy a fraction of a share of the new series of
Preferred Stock (the "Series A Preferred Stock") at an exercise price of $30.00,
subject to adjustment. The Rights will be exercisable, and will detach from the
Common Stock, only if a person or group acquires 20 percent or more of the
Common Stock, announces a tender or exchange offer that if consummated will
result in a person or group beneficially owning 20 percent or more of the Common
Stock, or if the Board of Directors declares a person or group owning 10 percent
or more of the outstanding shares of Common Stock to be an Adverse Person (as
defined in the Rights Plan). Once exercisable, each Right will entitle the
holder (other than the acquiring person) to purchase units of Series A Preferred
Stock (or, in certain circumstances, common stock of the acquiring person) with
a value of twice the Rights exercise price. The Company will generally be
entitled to redeem the Rights at $.001 per Right at any time until the close of
business on the tenth day after the Rights become exercisable. The Rights will
expire at the close of business on December 31, 2002.
5. STOCK OPTIONS AND WARRANTS
At December 31, 1997, the Company had three stock-based compensation plans,
which are described below. The aggregate number of shares of Common Stock that
may be issued under these plans is 5,300,000 shares.
Stock Option Plan
Under the Company's amended 1981 Stock Option Plan (the "Option Plan"),
qualified and non-qualified options of the Company's Common Stock may be granted
to certain employees and other individuals as determined by the Board of
Directors at not less than the fair market value of the stock at the date of
grant. Options granted under the Option Plan may be exercised when vested and
expire five years and two months to ten years from the date of grant or three
months from the date of termination of employment. Options granted generally
vest over five years. The Option Plan will terminate on November 15, 2001. As of
December 31, 1997, options covering 3,132,386 shares of Common Stock were
outstanding under the Option Plan.
Restricted Stock Plan
The Company also has a Restricted Stock Plan (the "Restricted Plan") which
provides for the issuance of options or the direct sale of Common Stock to
certain employees and other individuals as determined by the Board of Directors
at not less than 85% of fair market value of the Common Stock on the grant date.
Each option issued under the Restricted Plan will be a non-statutory option
under the federal tax laws and will have a term not in excess of ten years from
the grant date. Options granted generally vest over five years. The Restricted
Plan will terminate on December 15, 2003.
33
The Company has granted options with exercise prices at 85% of fair market
value on the date of grant. Up to 1,200,000 shares are authorized for issuance
under the Restricted Plan. As of December 31, 1997, options covering 537,479
shares of Common Stock were outstanding under the Restricted Plan.
The Company amortizes deferred compensation, which is the difference
between the issuance price or exercise price and the fair market value of the
shares as determined by the Board of Directors at the date of sale or grant over
the period benefited.
Directors Stock Option Plan
In 1992, the stockholders approved a Directors Stock Option Plan (the
"Directors Plan") which provides for the issuance of options to purchase shares
of Common Stock to non-employee directors of the Company at 100% of the fair
market value of the stock on the date of the grant. Up to 150,000 shares are
authorized for issuance during the term of the Directors Plan. Options vest on
the date of grant and have a term of up to ten years. As of December 31, 1997,
options for 50,000 shares of Common Stock were outstanding under the Directors
Plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, the financial statements reflect
amortization of compensation resulting from options granted at exercise prices
which were below market price at the grant date. Had compensation cost for the
Company's stock-based compensation plans been based on the fair value at the
grant dates for awards under these plans consistent with the provisions of FASB
Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below for the years ended December
31 (in thousands except per share amounts):
1997 1996 1995
---- ---- ----
Net loss As reported $(15,765) $(29,110) $(22,472)
Pro forma $(17,639) $(30,213) $(23,953)
Net loss per share As reported $ (0.44) $ (0.90) $ (0.97)
Pro forma $ (0.48) $ (0.94) $ (1.04)
The fair value of each option grant under these plans is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the years indicated below:
1997 1996 1995
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 71% 73% 73%
Risk-free interest rate 6.3% 5.2% 7.6%
Expected life 7 years 7 years 6 years
34
A summary of the status of the Company's stock option plans as of December
31, 1997, 1996, and 1995, and changes during years ending on those dates is
presented below:
1997 1996 1995
---- ---- ----
OPTIONS: Shares Price* Shares** Price* Shares Price*
------ ------ -------- ------ ------ ------
Outstanding at
beginning of year 3,196,150 $ 4.50 2,847,017 $ 4.50 3,000,692 $ 10.33
Granted
(1) 1,750 5.36 2,500 4.84 34,000 2.29
(2) 671,000 6.68 499,750 4.97 2,204,605 2.53
(3) -- -- 145,333 5.00 1,250 2.94
Exercised (52,422) 2.72 (67,132) 2.68 (5,315) 2.40
Forfeited, Expired
or Canceled (96,613) 4.33 (231,318) 6.40 (2,388,215) 9.97
--------- --------- ----------
Outstanding at end
of year 3,719,865 4.92 3,196,150 4.50 2,847,017 4.50
========= ========= =========
Exercisable at end
of year 2,317,321 1,816,185 1,310,938
========= ========= =========
Weighted average
fair value of
options granted
(1) 3.89 2.71 1.92
(2) 4.78 3.09 1.51
(3) -- 1.59 0.99
* Weighted-average exercise price
** Includes cancellation and granting of 1,820,385 new options
(1) Option price less than market price on date of grant
(2) Option price equal to market price on date of grant
(3) Option price greater than market price on date of grant
The Company adjusts for forfeitures as they occur.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Range of Number Number
-------- ------ ------
Exercise Prices Outstanding Life* Price** Exercisable Price**
--------------- ----------- ---- ----- ----------- -----
$ 1.70 - 2.38 329,646 7.1 $ 2.36 184,472 $ 2.36
2.55 - 3.81 1,561,058 7.0 2.57 1,193,839 2.57
4.06 - 5.94 620,413 6.6 4.79 281,273 4.80
6.06 - 7.50 976,083 5.9 7.09 472,739 7.38
7.56 -13.25 75,700 7.9 8.92 28,033 10.98
16.36 - 22.75 154,965 2.8 18.68 154,965 18.68
26.50 - 26.50 2,000 3.3 26.50 2,000 26.50
-------------- --------- --- ------ --------- -------
$ 1.70 - 26.50 3,719,865 6.5 $ 4.92 2,317,321 $ 5.01
* Weighted-average Remaining Contractual Life
** Weighted-average Exercise Price
35
Warrants
Warrants to purchase 486,000 shares of Common Stock were issued in
conjunction with the issuance of the Series G Preferred in August 1997, all of
which expire in August 2000, at an exercise price of $10.00 per share. These
warrants were valued at $1.1 million in paid-in capital.
The Company issued warrants valued at $0.8 million in Paid-in capital to
purchase 109,739 shares of Common Stock in conjunction with the issuance of the
Series F Preferred, one-half of which expire on March 24, 1998 and the remainder
expiring on September 24, 1999, at an exercise price of $7.29 per share.
Warrants to purchase 1,810,980 shares of Common Stock issued in conjunction
with the issuance of the Series B Preferred Stock in December 1993 expired on
December 19, 1995. These warrants were valued at $3.0 million in paid-in
capital.
Warrants with an aggregate value of $3.0 million at the time of issuance
were issued during the second quarter of 1993 to conclude the settlement of
certain stockholder and derivative litigation brought in 1991. A total of
2,214,633 warrants were issued, and warrants for 2,213,476 shares of Common
Stock expired unexercised in June of 1995.
6. COMMITMENTS AND CONTINGENCIES
Clinical Trial
Due to the termination of E5(R) development in mid-1997, the contingent
$22.4 million in future reduced royalties from Pfizer has been eliminated.
Collaborative Agreements and Royalties
As of December 31, 1997, the Company has commitments under research
agreements with universities and other research institutions that require the
Company to fund research in the amount of $0.1 million through August 1998.
Research and development expenses include research agreement expenses of
approximately $0.2 million, $0.3 million, and $0.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company is also obligated to
pay royalties, ranging generally from 1.5% to 5% of the selling price of the
licensed component and up to 25% of sublicense fee income, to various
universities and other research institutions based on future sales or licensing
of products that incorporate certain products and technologies developed by
those institutions.
Leases
As of December 31, 1997, the Company leased administrative, research
facilities, certain laboratory and office equipment under operating and capital
leases expiring on various dates through 2008.
36
Future minimum lease commitments are as follows (in thousands):
Capital Leases Operating Leases
1998 $ 753 $ 2,427
1999 -- 2,413
2000 -- 2,439
2001 -- 2,239
2002 -- 2,239
Thereafter -- 12,378
----- -------
Net minimum lease payments 753 $24,135
=======
Less--Amount representing interest expense 46
-----
Present value of net minimum lease payments 707
Less--Current maturities 707
-----
Long-term capital lease obligations $ --
=====
Total rental expense was approximately $2.0 million, $2.0 million, and $2.3
million for the years ended December 31, 1997, 1996, and 1995, respectively.
Legal Proceedings
In the securities class action lawsuit Warshaw, et al. v. XOMA Corporation,
et al., the defendants and plaintiffs reached an agreement on March 14, 1997 to
settle all claims for $3.75 million in cash and $2.25 million in Common Stock.
By order entered September 8, 1997, the United States District Court for the
Northern District of California approved the settlement. All of the cash portion
of the settlement has been paid by insurance into a settlement fund administered
by an escrow agent. The claims administration process was deemed complete as of
December 16, 1997, and on January 7, 1998, XOMA directed its stock transfer
agent to issue and distribute to authorized claimants 344,168 shares of Common
Stock in accordance with the terms of the court-approved settlement agreement.
Liability Insurance
The testing and marketing of medical and food additive products entails an
inherent risk of allegations of product liability. XOMA believes that its
product liability insurance levels are adequate for its clinical trial activity.
XOMA will seek to obtain additional insurance, if needed, if and when the
Company's products are commercialized; however, there can be no assurance that
adequate insurance coverage will be available or be available at acceptable
costs or that a product liability claim would not materially adversely affect
the business or financial condition of the Company.
The Company insures and indemnifies its directors and officers against
actions brought against them as a result of their management of the Company's
operations. There can be no assurance that adequate directors and officers
insurance coverage will be available or be available at acceptable costs or that
a claim against the directors and officers would not materially adversely affect
the business or financial condition of the Company.
37
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities as of
December 31, are as follows (in millions):
1997 1996
Property and equipment $ 2.3 $ 2.3
Purchased technology 5.0 5.7
Capitalized R&D expense 62.8 50.8
Accrued liabilities and other 2.3 1.4
Net operating loss carryforwards 61.7 66.8
R&D and other credit carryforwards 14.1 13.0
Valuation allowance (148.2) (140.0)
------- -------
Total deferred tax asset $ -- $ --
======= =======
The net change in the valuation allowance was a $8.2 million and a $13.1
million increase for the years ended December 31, 1997 and 1996, respectively.
XOMA's accumulated federal and state tax net operating losses ("NOLs") and
credits as of December 31, 1997 are as follows:
Amounts Expiration
(in millions) Dates
Federal
NOLs $ 186.4 2001-2013
Credits 10.3 1998-2013
State
NOLs 26.5 1998-2003
Credits 3.8 2005-2013
For the year ended December 31, 1997 the Company had taxable income of
$12.5 million and $11.1 million for Federal income tax and State tax,
respectively. Except for the impact of Federal alternative minimum tax, which
was not material, these taxable income amounts were offset by NOL and tax credit
carryforwards. These amounts are subject to audit by federal and state tax
authorities and could change.
Certain future changes in the ownership of significant shareholders could
limit utilization of the Company's tax NOLs and credits.
8. RELATED PARTY TRANSACTIONS
In 1993, the Company granted a short-term, secured loan to an officer,
director and stockholder of the Company.
9. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective June 1, 1987, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make contributions which
defer up to 14% of their total salary, up to a maximum for 1997 of $9,500. The
Company may, at its sole discretion, make contributions each plan year, in cash
or in shares of the Company's Common Stock in amounts which match up to 50% of
the salary deferred by the participants. The expense of these contributions was
$233,000, $243,000, and $326,000, for the years ended December 31, 1997, 1996
and 1995, respectively.
38
INDEX TO EXHIBITS
Exhibit
Number
3.1 Restated Certificate of Incorporation, as amended.
3.1A Certificate of Amendment of Restated Certificate of Incorporation
(Exhibit 4.2).1
3.2 Amended and Restated Bylaws.
3.3 Stockholder Rights Agreement dated October 27, 1993 between the Company
and First Interstate Bank of California, as Rights Agent, including
Certificate of Designation of Preferences and Rights of Series A
Cumulative Preferred Stock (Exhibit 1).2
3.4 Certificate of Designation of Preferences and Rights of Senior
Convertible Preferred Stock, Series B.
3.5 Certificate of Designation of Preferences and Rights of Convertible
Preferred Stock, Series C (Exhibit 3.4).3
3.6 Certificate of Designations of Non-Voting Cumulative Convertible
Preferred Stock, Series D (Exhibit 4.4).4
3.7 Certificate of Designation of Convertible Preferred Stock, Series E
(Exhibit 4.5).4
3.8 Amended Certificate of Designation of Convertible Preferred Stock,
Series E (Exhibit 4.7).1
3.9 Certificate of Designations of Non-Voting Cumulative Convertible
Preferred Stock, Series F (Exhibit 4.8).1
3.10 Form of Common Stock Purchase Warrant issued in connection with offering
of Series F Preferred Stock (Exhibit 4.9).1
3.11 Certificate of Designation of Convertible Preferred Stock, Series G
(Exhibit 2).5
3.12 Form of Common Stock Purchase Warrant issued in connection with offering
of Series G Preferred Stock (Exhibit 3).5
10.1 1981 Stock Option Plan as amended and restated.
10.1A Form of Stock Option Agreement for 1981 Stock Option Plan.
10.2 Restricted Stock Plan as amended and restated.
10.2A Form of Stock Option Agreement for Restricted Stock Plan.
10.2B Form of Restricted Stock Purchase Agreement for Restricted Stock Plan.
10.3 1985 Non-Qualified Stock Option Plan and form of Stock Option Agreement.
10.3A Form of Assumption Agreement for 1985 Non-Qualified Stock Option Plan.
39
10.3B Amendment to 1985 Non-Qualified Stock Option Plan.
10.4 1992 Directors Stock Option Plan as amended and restated.
10.4A Form of Stock Option Agreement for 1992 Directors Stock Option Plan
(initial grants).
10.4B Form of Stock Option Agreement for 1992 Directors Stock Option Plan
(subsequent grants).
10.5 Management Incentive Compensation Plan.
10.6 Form of indemnification agreement for officers.
10.7 Form of indemnification agreement for employee directors.
10.8 Form of indemnification agreement for non-employee directors.
10.9 Employment Agreement dated April 29, 1992 between the Company and John
L. Castello.
10.10 Employment Agreement dated April 1, 1994 between the Company and Peter
B. Davis (Exhibit 10.47).6
10.11 Employment Agreement dated March 29, 1997 between the Company and
Patrick J. Scannon, M.D., Ph.D.
10.12 Lease of premises at 890 Heinz Street, Berkeley, California dated as of
July 22, 1987.
10.13 Lease of premises at Building E at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
April 21, 1988.
10.14 Lease of premises at Building C at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987 and amendment thereto dated as of
August 26, 1987.
10.15 Letter of Agreement regarding CPI adjustment dates for leases of
premises at Buildings C, E and F at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987.
10.16 Lease of premises at 2910 Seventh Street, Berkeley, California dated
March 25, 1992.
10.17 Lease dated June 22, 1992, between the Company and Richard B. Gomez,
Josephine L. Gomez, TTEE-U/A/D, 10,31-90, FBO Gomez Family Trust.
10.18 Sublease dated January 20, 1997, between the Company and UroGenesys,
Inc.
10.19 Lease dated October 2, 1992, between the Company and Virginia Merritt,
as Trustee of the Bowman Merritt and Virginia Merritt Trust.
10.19A First Extension of Lease dated April 23, 1997, between the Company and
Virginia Merritt and Kim Merritt Campot, as Trustees of the Bowman
Merritt and Virginia Merritt 1987 Trust.
10.20 License Agreement dated September 3, 1986 between the Company and the
Regents of the University of California (with certain confidential
information deleted).
40
10.21 Research, Development and Option Agreement, License Agreement, Supply
Agreement, and Security Agreement all dated as of June 9, 1987 between
the Company and Pfizer, Inc. (with certain confidential information
deleted).
10.22 Manufacturing Agreement dated as of January 1, 1991 between the Company
and Pfizer, Inc.
10.23 Letter Agreement dated July 14, 1993 between the Company and Pfizer,
Inc. (with certain confidential information deleted) (Exhibit 10.41).7
10.24 Letter Agreement dated November 7, 1995 between the Company and Pfizer,
Inc. (with certain confidential information deleted) (Exhibit 10.48).3
10.25 Settlement Agreement for Litigation with Centocor dated July 28, 1992
(with certain confidential information deleted).
10.26 Supply Agreement effective February 27, 1989 between the Company and
Charles River Biotechnical Services, Inc. (with certain confidential
information deleted).
10.26A Amendment Agreement dated as of October 17, 1991 between the Company and
Charles River Laboratories, Inc. (with certain confidential information
deleted).
10.27 License Agreement dated as of August 31, 1988 between the Company and
Sanofi (with certain confidential information deleted).
10.28 Amended and Restated Research and License Agreement dated September 1,
1993 between the Company and New York University (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission).
10.28A Third Amendment to License Agreement dated June 12, 1997 between the
Company and New York University (with certain confidential information
omitted, which omitted information is the subject of a confidential
treatment request and has been filed separately with the Securities and
Exchange Commission).
10.29 Cross License Agreement dated December 15, 1993 between Research
Development Foundation and the Company (with certain confidential
information deleted) (Exhibit 10.42).7
10.30 Cross License Agreement dated December 15, 1993 between the Company and
Research Development Foundation (with certain confidential information
deleted) (Exhibit 10.43).7
10.31 Technology Acquisition Agreement dated June 3, 1994 between Connective
Therapeutics, Inc. (now called Connetics Corporation) and the Company
(with certain confidential information deleted) (Exhibit 10.46).6
10.32 Collaboration Agreement, dated as of April 22, 1996, between the Company
and Genentech, Inc. (with certain confidential information omitted,
which omitted information is the subject of a confidential treatment
request and has been filed separately with the Securities and Exchange
Commission (Exhibit 10.1).1
10.33 Common Stock and Convertible Note Purchase Agreement, dated as of April
22, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit 10.2).1
10.33 Convertible Subordinated Note Agreement, dated as of April 22, 1996,
between the Company and Genentech, Inc. (with certain confidential
information omitted, which omitted
41
information is the subject of a confidential treatment request and has
been filed separately with the Securities and Exchange Commission)
(Exhibit 10.3).1
10.33A Amendment to Convertible Subordinated Note Agreement, dated as of June
13, 1996, between the Company and Genentech, Inc. (with certain
confidential information omitted, which omitted information is the
subject of a confidential treatment request and has been filed
separately with the Securities and Exchange Commission) (Exhibit 10.4).1
10.34 Form of Preferred Stock Subscription Agreement by and between the
Company and the purchasers of Series F Preferred Stock (Exhibit 10.5).1
10.35 Form of Registration Rights Agreement by and between the Company and the
purchasers of Series F Preferred Stock (Exhibit 10.6).1
10.36 Form of Convertible Preferred Stock Purchase Agreement by and between
the Company and the purchasers of Series G Preferred Stock (Exhibit 4).5
10.37 Form of Registration Rights Agreement by and between the Company and the
purchasers of Series G. Preferred Stock (Exhibit 5).5
10.38 Patent and Exclusive License Purchase Agreement by and between
Pharmaceutical Partners, L.L.C. and the Company dated as of December 30,
1997 (Exhibit 2).8
16.1 Letter re: change of certifying accountant.9
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
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Footnotes
1 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed June 28, 1996 (File No.
333-07263).
2 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated October 27, 1993 (File No. 0-14710).
3 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 (File No.
0-14710).
4 Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-3 filed April 12, 1996 (File 333-02493).
5 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated August 13, 1997 (File No. 0-14710).
42
6 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 (File No.
0-14710).
7 Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 (File No.
0-14710).
8 Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated December 30, 1997 (File No. 0-14710).
9 To be filed by amendment.
43