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 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended
December 31, 1996 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, 1997: $271,522,508.
Number of shares of Common Stock outstanding as of February 28, 1997:
39,614,551.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 1996 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
1
PART I
Item 1. Business
General
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical
company developing products for the treatment of infections, infectious
complications of traumatic injury and surgery, and immunologic disorders. The
Company's current product development programs include:
- Neuprex(TM) (rBPI(21)), a modified recombinantly-derived fragment of
human bactericidal/permeability-increasing protein ("BPI") and XOMA's lead
BPI-derived product, which is currently in efficacy clinical trials for four
different 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 potent fungicidal peptide compound derived from BPI
that is currently in preclinical product development.
- E5(R), XOMA's monoclonal antibody product, which is in a Phase III
trial in the United States as a treatment for gram-negative sepsis and has been
submitted for approval in Japan as a treatment for endotoxemia.
- 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 I clinical trials for two indications.
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 the development
of novel therapeutic products derived from bactericidal/permeability-increasing
protein ("BPI"). BPI is a naturally-occurring human host-defense protein found
in white blood cells (neutrophils). BPI binds to and kills cer tain bacteria. It
also neutralizes endotoxin, a molecule that is an integral part of the cell
walls of gram-negative bacteria and that can trigger severe complications in
infected patients. Furthermore, BPI inhibits angiogenesis (growth of new blood
vessels) by binding to and neutralizing heparin, a natu ral protein involved in
blood vessel formation.
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) product.
In December 1992, XOMA submitted an investigational new drug
application ("IND") to the U.S. Food and Drug Administration ("FDA") to begin
Phase I hu man testing of Neuprex(TM). In March 1993, the Company initiated
human safety and pharmacokinetic testing under the IND. In 1995, the Company
initiated three clinical efficacy trials testing the Neuprex(TM) product in
different in dications, and a fourth trial started in 1996.
2
XOMA has an agreement with New York University ("NYU") relating to its
rBPI products. See "Research and License Agreements". BPI was discovered in 1978
by Peter Elsbach, M.D., professor of medicine, and Jerrold Weiss, PhD.,
professor of microbiology, both at New York University School of Medicine. XOMA
has collaborated with NYU since 1991 to extend and apply BPI-related re search
to the commercial development of pharmaceutical products. In March 1993, the
U.S. Patent and Trademark Office ("Patent Office") issued a patent related to
BPI to NYU, and the Company is the exclusive licensee of this pat ent. See
"Patents and Trade Secrets".
Neuprex(TM)
In the second quarter of 1995, XOMA initiated three clinical trials
evaluating Neuprex(TM) as a treatment for primary infections and major
complications of infectious diseases, traumatic injury and surgery. The
indications are:
- Severe Pediatric Meningococcemia: a potentially deadly bacterial
infection that usually afflicts children.
- Hemorrhagic trauma: accidents or injuries that cause acute blood loss
may trigger serious complications, possibly from translocation of bacteria and
their endotoxins from the gastrointestinal tract into the bloodstream.
- Partial hepatectomy: surgical removal of part of the liver, usually
to remove an isolated tumor. Since the liver normally clears translocated
bacteria and their endotoxins, the resulting temporarily impaired liver function
can lead to infectious complications.
In the first quarter of 1996, the Company started a fourth clinical
trial for Neuprex(TM) to be used with conventional antibiotics in the treatment
of severe intra-abdominal infections.
In August 1996, the FDA Center for Biologics Evaluation and Research
("CBER") granted XOMA a Subpart E designation for Neuprex(TM) for the treatment
of severe pediatric meningococcemia. This designation is intended to expedite
the development of treatments for life-threatening illnesses. The Company
subsequently started a Phase III pivotal trial in the indication in October 1996
in the United States and Canada. In the first quarter of 1997, the Phase III
trial added additional sites in the United Kingdom.
In late 1996, XOMA completed patient enrollment in the hemorrhagic
trauma Phase II trial. A preliminary analysis of the data was completed in
February 1997 which supports advancing to a Phase III trial. A final decision on
a pivotal trial will be made after a more complete review of the data.
There can be no assurance that 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
(angiogenesis) in the cornea that can be associated with eye infections. This
neovascularization can lead to scarring and permanently impaired vision. In
preclinical testing, the I-PREX(TM) product has shown anti-infective 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
3
for current anti-inflammatory therapies, such as corticosteroids, which have
undesirable side effects.
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 diagnostic 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 diagnostic products in Japan.
Mycoprex(TM)
XOMA scientists discovered that certain peptide sequences derived from
BPI displayed potent fungicidal activity. Further research demonstrated that
many of these compounds not only killed strains of Candida, the most common
fungi to cause systemic illness, but also showed activity against other strains
of fungi, including those resistant to the currently available drugs.
Based on these findings, the Company has initiated a program to develop
compounds with a broad spectrum of potent fungicidal activity and a better
safety profile than currently-available fungicidals.
E5(R) Monoclonal Antibody Product
The term sepsis is commonly used to describe a severe systemic
inflammatory response by the body's immune system to invasion by bacteria.
Sepsis is a secondary condition which results from a variety of serious
underlying dis eases, including infections, cancer, trauma, massive blood loss
and surgery. Gram-negative sepsis refers to sepsis caused by infection by
gram-negative bacteria. Gram-negative bacteria are distinctive because their
cell walls contain endotoxin (lipopolysaccharide or LPS), a chemical that can
trigger the inflammatory cascade that leads to sepsis. Thus, gram-negative
sepsis could be thought of as late-stage infectious endotoxin poisoning.
XOMA's product for the treatment of gram-negative sepsis, E5(R), is a
murine monoclonal antibody that binds and assists the body to clear bacterial
endotoxin. XOMA has completed several clinical trials of E5(R), including two
randomized, double-blind, placebo-controlled, multi-center Phase III studies
involving nearly 1300 patients. In March 1989, XOMA filed a Product License
Application ("PLA") for FDA licensure of E5(R). In September 1991, an FDA
advisory committee heard E5(R) data presentations but made no recommendations
regarding the safety or efficacy of the product. 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 of the E5(R) product began with narrower entry
criteria than the previous trials. This trial is being managed and co-funded by
Pfizer Inc. ("Pfizer"). In December 1995, an independent Data Safety Monitoring
Board ("DSMB") completed a first interim analysis for this trial, found no
evidence suggesting safety concerns and concluded that the results met pre
determined criteria for continuing the trial. There can be no assurance that the
continuing trial will yield data that will result in licensure of E5(R) in the
U.S. See "Development and Marketing Arrangements".
In October 1993, Pfizer Japan submitted an application to regulatory
authorities for approval to market E5(R) in Japan for treatment of endotoxemia.
As of February 1997, the application is at the "Expert Committee" level. There
can be no assurance that such application will be approved. See "Development and
Marketing Arrangements".
4
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. In
September 1996, XOMA filed an IND for a Phase I trial in moderate to severe
psoriasis patients. In January 1997, XOMA filed an IND for a Phase I trial to
prevent rejection in renal transplant patients. Both trials are underway.
Genimune(TM)
Genimune(TM) is XOMA's humanized immunofusion product that targets T
lym phocytes (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. See
"Research and License Agreements".
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.
In 1996, XOMA received a $2.2 million payment related to the sale of
its T-cell receptor (TCR) technology to Connective Therapeutics, Inc. (CTI). CTI
is using the technology in its TCR vaccines for treatment of multiple sclerosis
and rheumatoid arthritis. XOMA is also entitled to royalties on future sales of
the products.
In addition, XOMA has granted licenses to eight biotechnology and
pharmaceutical companies for use of patented and proprietary technologies
relating to a bacterial expression system used to manufacture recombinant
pharmaceutical products.
Thaumatin, a flavor-enhancing protein developed by XOMA, was classified
as generally recognized as safe (GRAS) by the Flavor and Extract Manufac turer's
Association (FEMA). GRAS designation permits the use of this ingredi ent 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
clini cal trial and other testing needs at its Berkeley manufacturing facility,
pur suant to a drug manufacturing license obtained from the State of California.
The Company's E5(R) manufacturing facility is also located in Berkeley,
California.
5
The Company's recombinant manufacturing capability is based on
recombinant DNA technology, with production of therapeutic proteins from either
mam malian or microbial cells. XOMA has fermentation capacity for up to 2750
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.
A large-scale purification system for manufacture of E5(R) has been
recently re-validated and remains ready for use as required for ongoing Phase
III clinical trials. XOMA's cGMP development facility and pilot plant in Santa
Monica provides process development and validation support as well as Phase I/II
clinical trial production as needed. FDA licensure of XOMA's manufacturing
facilities will be required prior to any U.S. commercial use or sale of
Neuprex(TM), E5(R), hu1124, or any other product.
Pfizer currently sterile-fills, packages and distributes E5(R) at one
or more Pfizer-owned manufacturing plants. FDA licensure of these facilities and
the related processes are required. In the future, Pfizer may carry out some or
all of the manufacturing processes for the production of the purified bulk E5(R)
intermediate product, supplementing XOMA's current manufacturing capacity.
If so, additional FDA licensure would be required.
During December 1991 and January 1992, XOMA, CRL and Pfizer facilities
were inspected for licensure by the FDA with respect to E5(R) and XOMA believes
that there are no major manufacturing issues outstanding. XOMA may need to be
reinspected for licensure before E5(R) is approved for sale.
The Company has accumulated inventories of raw material and
intermediates for E5(R). Because the achievement, timing and terms of regulatory
licensures and subsequent sales of pharmaceutical products are uncertain, there
can be no assurance that the inventories of raw materials and intermediates will
be usable. In connection with its October 1992 restructuring, the Company
established a $6.0 million reserve for a portion of its E5(R) inventory and
recorded a $2.5 million charge to earnings for future idle manufacturing
capacity. The Company increased the reserve to $6.9 million in 1993 and to $11.1
million in 1995 to cover the entire value of the inventory.
The Company has significant experience in manufacturing monoclonal anti
body products. The human hu1124 monoclonal is produced at XOMA's Berkeley
facility at a 2750 liter scale which yields significant capacity for a broad
range of clinical endeavors.
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
its pharmaceutical partners.
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.
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
6
gram-negative sepsis. XOMA believes that Pfizer's sales force and experience in
the development and marketing of anti-infective products, which are expected to
be used in conjunction with E5(R), make Pfizer a strong partner and will
contribute to the effective marketing of E5(R). The agreements provide Pfizer
with exclusive rights to E5(R) in exchange for funding of certain clinical and
development activities. In 1994, the territory covered by the agreements was
redefined to include only the countries of Japan and the United States. Pfizer
paid XOMA an initial license fee and has made payments based on development
progress. XOMA is reimbursed for manufacturing costs and will re ceive a portion
of the gross profits obtained from any sales on a formula basis. Pfizer also has
a limited first right to negotiate for future XOMA products, other than
BPI-derived products, if they will be used for the treatment, cure or prevention
of gram-negative sepsis. The agreements can be canceled with appropriate notice
upon reimbursement by Pfizer of certain of XOMA's re search and development
expenses. XOMA has granted a security interest to Pfizer in assets related to
its E5(R) program to secure performance of XOMA's obligations under the
agreements under certain conditions, including bank ruptcy. In 1995, XOMA and
Pfizer agreed to modify the funding arrangement of the current E5(R) clinical
trial and the payment terms relating to certain pat ent litigation costs (see
Note 6 to the Financial Statements). The Company be lieves that termination of
its relationship with Pfizer could have a material adverse effect on its future
revenues and prospects.
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
develop ment 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 the trials through Phase II. In April 1996, Genentech loaned
$5.0 million to fund 1996 development costs, and in December 1996, Genentech
loaned an additional $8.5 million to fund 1997 development costs.
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 continu
ous and substantial technological change. Competition in the areas of
recombinant DNA-based and monoclonal antibody-based technologies is intense and
ex pected to increase in the future as a number of 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. 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 such 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 be
coming 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.
7
Earlier in the 1990s, a number of corporations, including Centocor,
Inc., Synergen, Inc. and Chiron, Inc., discontinued development of products
designed to treat gram-negative sepsis. These actions may have a material
adverse effect on the regulatory review of E5(R), and there can be no assurance
that E5(R) will receive regulatory approval or that Pfizer will be able to
market E5(R) effectively. The Company believes that research and human testing
is being conducted with other products, some of which are designed to treat
a broader population of sepsis patients, including patients with gram-positive
as well as gram-negative sepsis. E5(R) is intended to treat only patients with
severe gram-negative sepsis. There can be no assurance that products currently
unknown to the Company will not prove to be more effective than or receive
regulatory approval prior to E5(R).
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).
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 the FDA Center for Biologics Evaluation and Research (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 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 labelling 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 PLA is submitted to FDA to
request marketing approval. For biologic products, an internal FDA committee is
formed which evaluates the application, including scientific background in
formation, animal and in vitro efficacy studies, toxicology, manufacturing and
control and clinical data. Concurrently with the filing of the PLA, an
establishment license application (ELA) is filed which describes in detail the
manufacturing facility, personnel, procedures and equipment used in the
manufacture of the product. During the review process, a dialogue between FDA
and the applicant is established in which FDA questions on both the PLA and the
ELA 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
8
establish that the product is made in conformity with good manufacturing
practice. If all outstanding issues are satisfactorily resolved and labelling
established, FDA issues licenses for the product and for the manufacturing
facility, thereby authorizing commercial distribution.
During 1996, the FDA streamlined the license application process for
certain biologic products where a single application can be made without the
need for a separate ELA. This subset of products includes most XOMA products
under development; the application is referred to as a biologics license
application (BLA). There can be no assurance that this streamlined procedure
will result in faster approvals since the requirements for testing and manu
acturing facilities remain unchanged.
In March 1989, XOMA filed a PLA for approval of E5(R), a monoclonal
anti body product, for the treatment of gram-negative sepsis. FDA responded to
the PLA with a request for additional information, including clinical data. XOMA
made a further submission and met and corresponded with the FDA on relevant
matters. In September 1991, an FDA advisory committee heard E5(R) data presenta
tions but made no recommendations regarding the safety or efficacy of the
product. 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 of the
E5(R) product began with narrower entry criteria than the previous trials. The
trial is being managed and co-funded by Pfizer. There can be no assurance that
the continuing trial will yield data that will result in licensure of E5(R) in
the U.S. See "Product Areas - E5(R) Monoclonal Antibody Product" and Note 1 to
the Financial Statements.
In December 1991 and January 1992 the manufacturing facility for E5(R)
was inspected for licensure by FDA. XOMA believes there are no major
manufacturing issues outstanding. The license is currently pending but will not
be finalized unless and until the relevant product has been approved for sale.
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.
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 thera
pies for life-threatening and debilitating illnesses. In October 1996, XOMA
started a Phase III pivotal clinical trial to test the drug for this indica tion
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)".
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.
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
9
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 November 1996, the U.S. Patent
and Trademark Office (the "Patent Office") issued twelve patents to the Company
related to its BPI-based products. These BPI-related patents include two
directed to novel compounds and compositions, one directed to manufacturing
methods, one directed to improved formulations, three directed to BPI and LBP
assays and five 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 world
wide related to its BPI-based products.
In addition to the twenty-one BPI-related U.S. patents and U.S. Notices
of Allowance issued to the Company, the Company is the exclusive licensee of
BPI-related patents and applications owned by New York University ("NYU"). These
include four issued patents and one 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
complications from bacterial infections.
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 uni versities
EP 272489 related to certain neutrophil-derived antimicrobial pro teins and the
Company believes that Incyte may control this patent. The Com pany 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.
The Company is the exclusive licensee of U.S. Patent No. 4,918,163 (the
"'163 Patent"), issued to The Regents of the University of California in April
1990. The '163 Patent relates to a method of treating gram-negative bacterial
10
infections using certain anti-endotoxin monoclonal antibodies. On the
date of issuance, the Company filed suit against Centocor alleging infringement
of the '163 Patent. Effective July 28, 1992, the Company, Centocor and all other
in terested parties resolved all outstanding litigation and disputes worldwide
regarding products, patents and patent applications related to anti-endotoxin
monoclonal antibodies by consent judgments which held the '163 Patent valid and
infringed by Centocor. Centocor has agreed to pay royalties to XOMA for any
United States sales of its monoclonal antibody HA-1A, and the companies have
agreed to forego all future litigation and administrative proceedings regarding
certain of each other's patents and patent applications related to
anti-endotoxin monoclonal antibodies. In March, 1993, Centocor announced the
cancellation of the Phase III trial of its HA-1A product.
During the period from July 1991 to January 1997, the Patent Office is
sued three patents and four Notices of Allowance to the Company related to its
bacterial expression technology, including claims to recombinant vectors with
novel promoter sequences, secretion signal sequences, compositions and methods
for expression and secretion of recombinant proteins from bacteria, including
immunoglobulin gene products. Numerous foreign patents have been granted which,
along with additional pending foreign patent applications, correspond to the
patents issued and allowed in the U.S.
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 totalled $0.3 million, $0.4 million, and $0.4 million
in 1996, 1995, and 1994, respectively. The Company has entered into certain
license agreements with respect to the following products:
Bactericidal/Permeability Increasing Protein
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 defense 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 exclu sive, worldwide license for the development, manufacture, sale and use
of BPI products for human 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, sub ject to NYU's right to terminate for certain events of default.
E5(R) Monoclonal Antibody Product
In September 1986, XOMA obtained from the University of California an
exclusive license to several monoclonal antibody cell lines related to virulence
factors of gram-negative bacteria. One of these monoclonal antibodies is
11
being used in the Company's E5(R) anti-endotoxin product described
herein. The Company has entered into an exclusive, worldwide license agreement
for this product which provides for the payment of royalties on sales of
products utilizing this antibody. The license becomes fully paid upon the later
of the ex piration of relevant patents or ten years after the first commercial
sale, subject to the University's right to terminate the license for certain
events of default.
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 pat ents.
Employees
As of December 31, 1996 XOMA employed 139 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 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 98,000 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 15,000
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 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 have 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. It is anticipated that all of the cash portion of the of
the settlement will be covered by insurance. The Company retains the option, up
to fifteen days after the later of the date that the court's approval be comes
final or the processing of claims is substantially complete, to pay the stock
portion in cash. The settlement is subject to court approval after notice to
shareholders.
12
Item 4. Submission of Matters to a Vote of Security Holders
None.
Officers
The officers of the Company are as follows:
Name Age Title
John L. Castello 60 Chairman of the Board, President and
Chief Executive Officer
Patrick J.Scannon, M.D., Ph.D. 49 Chief Scientific and Medical Officer
and Director
Clarence L. Dellio 50 Senior Vice President, Operations
Stephen F. Carroll, Ph.D. 45 Vice President, Preclinical Research
Peter B. Davis 50 Vice President, Finance and Chief Fi
nancial Officer
Marvin J. Garrett 46 Vice President, Clinical and Regula
tory Affairs
Bernardus Machielse 36 Vice President, Quality Assurance and
Quality Control
Christopher J. Margolin 50 Vice President, General Counsel and
Secretary
W. C. McGregor, Ph.D. 55 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.
13
PART II
Item 5. Market for Registrant's Common Equity and
Relatedated 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
1995:
First Quarter $3-1/16 $1-1/8
Second Quarter 2-7/8 1-9/32
Third Quarter 4-1/4 1-11/16
Fourth Quarter 4-1/8 1-7/8
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 (through $7-1/4 $4
February 28, 1997)
On February 28, 1997, there were approximately 2,621 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").
Item 6. Selected Financial Data
The following table contains selected financial information including
income statement and balance sheet data of XOMA for the years 1992 through 1996.
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 21 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
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Statement of Operations
Data
Total revenues $ 3,604 $ 1,165 $ 1,729 $ 571 $ 5,105
Total operating
costs and ex-
penses(1) 31,826 27,469 38,460 35,259 53,999
Other income or loss,
net(2) (888) 3,383(2) 2,104 3,381 1,802
---- ----- ----- ----- -----
14
Year Ended December 31
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Net loss $ 29,110) $(22,472) $(34,627) $(31,307) $(47,092)
======== ======== ======== ======== ========
Net loss per share $ (0.90) $ (0.95) $ (1.58) $ (1.46) $ (2.20)
======== ======== ======== ======== ========
Balance Sheet Data
Cash(3) $ 46,660 $ 26,405 $ 39,650 $ 70,246 $ 83,413
Total assets 57,675 40,878 62,429 94,131 109,269
Long-term debt (4) 14,248 7,692 120 425 1,054
Accumulated deficit (337,195) (307,905) (284,847) (249,439) (218,132)
Stockholders' equity 34,748 26,836 43,461 78,397 88,473
- - --------------------
(1) In 1994, includes $2.5 million related to employee termination benefits
associated with a restructuring and in 1992 includes $10.0 million
related to an E5(R) inventory write-down, idle capacity and personnel
costs associated with an earlier restructuring.
(2) In 1996, includes a non-recurring expense ($2.5 million) relating to
Warshaw litigation settlement. Other income in 1995 principally
consists of interest income ($1.9 million), gain on write-down of a
litigation accrual ($8.5 million), loss on write-down of E5(R)
inventory ($4.2 million), and a loss on write-down of certain property
($2.4 million), which is being held for sale.
(3) Includes cash, cash equivalents, and short-term investments.
(4) Excludes current portion. In 1996, includes $13.5 million 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 engaged in the development of
products for the treatment of infections, infectious complications of traumatic
injury and surgery, and immunologic disorders. The Company is developing its
Neuprex(TM) product for the treatment of gram-negative infections and infectious
complications. Other BPI-derived products in development include I-PREX(TM), for
treating ophthalmic infections and disorders, and Mycoprex(TM), for treating
systemic fungal infections. The Company's monoclonal antibody product, E5(R), is
in Phase III clinical testing in the United States as a treatment for gram-
15
negative sepsis and has been submitted for approval in Japan as a treatment
for endotoxemia.
In December 1994, XOMA restructured its operations to reduce costs and
focus on the development of its portfolio of advanced products. Under the re
structuring, XOMA's work force was reduced at its facilities in Berkeley and
Santa Monica, California. Although the restructuring preserved the functions
essential to the development of Neuprex(TM) and certain other products derived
from BPI, several research programs with longer lead times and a need for
substantial funding were curtailed or eliminated.
The Company incurred a net loss in each of the past three years and is
expected to continue to operate at a loss at least until regulatory approval and
commencement of commercial sales of its products occurs. 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 $3.6 million in 1996, compared with $1.2 million in
1995 and $1.7 million in 1994. Revenues for 1996 included $3.0 million for the
licensing of intellectual property related to chimeric IgG1 antibodies (anti-
CD20) to Genentech. Revenues in 1995 and 1994 included $0.8 million and $1.4
million, respectively, in partial consideration for the sale of the Company's
T-cell receptor ("TCR") technology.
Costs and Expenses
In 1996, research and development expenses increased by $4.3 million,
or 19%, versus 1995. The increase was due to higher spending on clinical trials
for Neuprex(TM) and to the initiation of development work on hu1124. For 1995,
research and development expenses were $5.2 million less than in 1994,
reflecting the restructuring of the Company at the end of 1994.
General and administrative expenses in 1996 were essentially unchanged
at $0.1 million, or 1%, more than in 1995. As a result of the restructuring,
1995 general and administrative expenses were $3.3 million, or 38%, less than
1994.
Investment income was unchanged for 1996 compared to 1995, as higher
cash balances were offset by lower prevailing interest rates. Investment income
for 1995 was $0.2 million less than in 1994 due to lower investment balances,
partially offset by higher interest yields.
Other income (expense) also includes a $2.5 million provision for legal
fees and settlement costs reflecting an agreement reached on March 14, 1997 with
plaintiff's attorneys in a class action law suit (see Note 6 to Financial
Statements). The agreement is subject to court approval after notice to share
holders.
1995 income included a one-time gain of $1.9 million related to a
modification of the funding arrangement with Pfizer for the current E5(R)
clinical trial (see Note 6).
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $20.2
million in 1996, to $46.7 million. Financing activities of $43.7 million in
cluded an equity investment of $8.8 million, two long-term loans, totaling $13.5
million, to fund development costs of hu1124 from Genentech, and two
16
private placements under Regulation D totaling $21.4 million. Cash used
in operations was $22.4 million, and capital expenditures and lease payments
totaled $1.6 million.
The $22.4 million of cash used in operations compared with $24.6
million in 1995. The Company's 1996 net loss of $29.1 million was partially
offset by the collection of a $2.2 million receivable related to sale of the
Company's TCR technology, the establishment of the $2.5 million provision for
the class action litigation and $2.1 million in depreciation expense.
Capital expenditures for 1996, 1995, and 1994 totaled $1.0 million,
$0.3 million and $1.3 million, respectively. Capital expenditures for 1996
included manufacturing equipment for Neuprex(TM) and hu1124. In the near term,
the Com pany intends to continue to fund capital expenditures from internal cash
re sources 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 re quired.
Although operations are influenced by general economic conditions, the
Company does not believe that inflation had a material impact on revenues or
expenses 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.
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 begin
ning 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. Disagreements on Accounting and Financing Disclosures
None.
17
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 1997 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 "Executive Compensation" appearing in the Company's
proxy statement for the 1997 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 1997 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 1997 annual meeting of stockholders is incorporated
herein by reference.
18
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 since the required information is included
in the financial state ments or the notes thereto,
or is not applicable or re quired.
(3) Exhibits:
See "Index to Exhibits".
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the SEC on October 4,
1996.
19
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 day of March,
1997.
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
- - ------------------------- and Chief Executive Officer
(John L. Castello) (Principal Executive Officer)
/s/ PATRICK J. SCANNON Chief Scientific and
- - ------------------------- Medical Officer and Director
(Patrick J. Scannon)
/s/ PETER B. DAVIS Vice President, Finance
- - ------------------------- and Chief Financial Officer
(Peter B. Davis) (Principal Financial and
Accounting Officer)
/s/ JAMES G. ANDRESS Director
- - -------------------------
(James G. Andress)
/s/ WILLIAM K. BOWES, JR. Director
- - -------------------------
(William K. Bowes, Jr.)
/s/ ARTHUR KORNBERG Director
- - -------------------------
(Arthur Kornberg)
/s/ STEVEN C. MENDELL Director
- - -------------------------
(Steven C. Mendell)
20
/s/ W. DENMAN VAN NESS Director
- - -------------------------
(W. Denman Van Ness)
21
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants........................... 22
Balance Sheets..................................................... 23
Statements of Operations........................................... 24
Statements of Stockholders' Equity................................. 25
Statements of Cash Flows........................................... 26
Notes to Financial Statements...................................... 27
22
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, 1996 and 1995 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Corporation'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 esti mates made by
management, as well as evaluating the overall financial state ment 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
March 17, 1997
23
XOMA CORPORATION
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
December 31
----------------------------------------
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,213 $ 20,400
Short-term investments 45,447 6,005
Notes receivable -- 2,205
Related party receivables 253 276
Interest and other receivables 870 384
Prepaid expenses and other 219 210
--------- ---------
Total current assets 48,002 29,480
NON-CURRENT ASSETS:
Property and equipment, net 5,098 6,181
Assets held for sale 4,442 4,442
Deposits and other 133 775
--------- ---------
$ 57,675 $ 40,878
========= -=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,778 $ 2,120
Accrued liabilities 6,412 3,684
Capital lease obligations due in one year 489 546
--------- ---------
Total current liabilities 8,679 6,350
--------- ---------
NON-CURRENT LIABILITIES:
Capital lease obligations due after one year 703 1,192
Convertible debentures 13,545 6,500
--------- ---------
Total non-current liabilities 14,248 7,692
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value, 1,000,000 shares
authorized, 0 and 7,807 outstanding -- --
(liquidation preference $0 and $7,807) at
December 31, 1996 and 1995, respectively
Common stock, $.0005 par value, 70,000,000 shares 20 14
authorized, 39,609,275 outstanding at December 31,
1996 and 27,303,186 at December 31, 1995
Paid-in capital 371,923 334,727
Accumulated deficit (337,195) (307,905)
--------- ---------
Total stockholders' equity 34,748 26,836
--------- ---------
$ 57,675 $ 40,878
========= -=========
The accompanying notes are an integral part of these financial statements.
24
XOMA CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years ended December 31
- - ---------------------------------------------------------------
1996 1995 1994
---- ---- ----
REVENUES:
Product sales and royalties $ 61 $ 87 $ 202
Research and development fees
Collaborative agreements -- -- 136
License fees 3,543 1,078 1,391
-------- -------- --------
Total revenues 3,604 1,165 1,729
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales -- -- 3
Research and development 26,371 22,086 27,284
General and administrative 5,455 5,383 8,673
Restructuring charge -- -- 2,500
-------- -------- --------
Total operating costs and expenses 31,826 27,469 38,460
-------- -------- --------
Loss from operations (28,222) (26,304) (36,731)
OTHER INCOME (EXPENSE):
Investment income 2,011 1,934 2,169
Litigation settlement (2,500) -- --
Other income and (expense) (399) 1,898 (65)
-------- -------- --------
Net loss $(29,110) $(22,472) $(34,627)
======== ======== ========
NET LOSS PER COMMON SHARE $ (0.90) $ (0.95) $ (1.58)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES 32,493 23,671 21,920
======== ======== =======
OUTSTANDING
The accompanying notes are an integral part of these financial statements.
25
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, 1993 21,470 $ 11 19 $ 1 $327,824 $ (249,439) $78,397
Contributions to 401(k) and 55 -- -- -- 360 -- 360
management incentive plans
Amortization of deferred com- -- -- -- -- 240 -- 240
pensation
Conversion of preferred stock 649 -- (3) -- -- -- --
Unrealized gain (loss) on in- -- -- -- -- (128) -- (128)
vestments
Dividends on preferred stock -- -- -- -- -- (781) (781)
Net loss -- -- -- -- -- (34,627) (34,627)
------ ---- ---- ---- -------- ------- -------
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 149 -- -- -- 434 -- 434
management incentive plans
Sale of common stock 471 1 -- -- 717 -- 718
Amortization of deferred com- -- -- -- -- 214 -- 214
pensation
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 in- -- -- -- -- 125 -- 125
vestments
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 90 -- -- -- 395 -- 395
management incentive plans
Sale of common stock 2,123 1 -- -- 10,651 -- 10,652
Amortization of deferred com- -- -- -- -- 37 -- 37
pensation
Sale of preferred stock -- -- 7 -- 19,766 -- 19,766
Conversion of preferred stock 7,914 4 (15) -- (4) -- --
Conversion of debentures 2,054 1 -- -- 5,919 -- 5,920
Unrealized gain (loss) on in- -- -- -- -- 45 -- 45
vestments
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
====== ==== ==== ==== ======== ========== =========
The accompanying notes are an integral part of these financial statements.
26
XOMA CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(29,110) $(22,472) $(34,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,131 2,920 3,334
Inventory reserve -- 4,170 --
Write-down of assets held for sale -- 2,400 --
Deferred compensation expense 37 214 240
Loss (gain) on retirement of property and 2 (145) --
equipment
Changes in assets and liabilities:
Decrease (increase) in interest and other 1,742 (2,009) 274
receivables
Decrease (increase) in prepaid expenses (9) 612 156
Decrease (increase) in deposits and other -- 1,350 (1,350)
assets
Increase (decrease) in accounts payable (342) 705 877
Increase (decrease) in accrued liabilities 3,124 (3,921) 2,563
Increase (decrease) in non-current liabili- -- (8,465) --
ties --------- -------- --------
Total adjustments 6,685 (2,169) 6,094
-------- -------- --------
Net cash used in operating activities (22,425) (24,641) (28,533)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 89,675 61,835 312,262
Payments for purchase of short-term invest- (129,073) (31,641) (301,708)
ments
Purchase of property and equipment, net of (1,050) (350) (1,308)
proceeds -------- -------- --------
Net cash provided by (used in) investing (40,448) 29,844 9,246
activities -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback -- 1,800 --
Principal payments under capital lease obliga- (546) (488) (627)
tions
Proceeds from issuance of debentures 13,545 5,858 --
Proceeds from issuance of common or preferred 30,687 4,451 --
stock -------- -------- --------
Net cash provided by financing activities 43,686 11,621 (627)
-------- -------- --------
Net increase (decrease) in cash and cash (19,187) 16,824 (19,914)
equivalents
Cash and cash equivalents at beginning of year 20,400 3,576 23,490
-------- -------- --------
Cash and cash equivalents at end of year $ 1,213 $ 20,400 $ 3,576
======== ======== ========
The accompanying notes are an integral part of these financial statements.
27
XOMA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical com
pany engaged in the development of products for the treatment of infections,
infectious complications of traumatic injury and surgery, and immunologic
disorders. The Company's products are presently in various stages of development
or regulatory review 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 ex
penses, 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 from those estimates.
Restructuring Charges
In the fourth quarter of 1994, the Company restructured its operations
to reduce costs and to accelerate the development of Neuprex(TM) and other
BPI-derived products. Other research programs were curtailed or eliminated. The
Company recorded a charge to earnings of $2.5 million, primarily from the cost
of termination benefits related to the elimination of 75 positions in research
and research support functions.
The activities through December 31, 1996 affecting the restructuring
accrual established in the fourth quarter of 1994 are as follows:
In Millions
-----------
Original amount accrued $2.5
Charges against the accrual 2.4
Adjustments to the accrual 0.1
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Shares issuable upon exercise of options and warrants
are not considered in the computation of net loss per share because the effect
of including such shares in the computation would be antidilutive. Shares of
Common Stock issuable upon conversion of Preferred Stock and Con-
28
vertible Debentures outstanding at December 31, 1996, 1995 and 1994 are not
considered because the shares of Preferred Stock and Convertible Debentures are
not Common Stock equivalents.
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.
Supplemental Cash Flow Information
Cash paid for interest during the years ended December 31, 1996, 1995,
and 1994 was as follows (in thousands):
1996 1995 1994
---- ---- ----
Interest $ 198 $ 105 $ 119
In addition, during the years ended December 31, 1996, 1995 and 1994,
the Company had the following non-cash financing and investing activities (in
thousands):
1996 1995 1994
---- ---- ----
Stock contribution to the 401(k) and
management incentive plans
(Notes 4 and 9) $ 395 $ 434 $ 360
Stock issuance cost paid with common
or preferred stock (Note 4) -- 8 --
Unrealized loss(gain) on investments (45) 125 128
Conversion of debentures to common 5,861 -- --
stock
Interest paid in common stock 59 -- --
Conversion of preferred stock to com 28,807 12,607 3,160
mon stock
Dividends paid in common stock 180 781 --
Notes Receivable
The $2.2 million in notes receivable from Connective Therapeutics, Inc.
was collected in February of 1996.
Inventories
Inventories consist primarily of raw materials for manufacture of E5(R)
net of a reserve of $11.1 million in 1996 and 1995.
29
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
-----------
1996 1995
---- ----
Equipment $14,500 $13,916
Leasehold and building improvements 14,483 14,483
Construction-in-progress 208 19
------- -------
29,191 28,418
Less accumulated depreciation and amortization 24,093 22,237
------- -------
Property and equipment, net $ 5,098 $ 6,181
======= =======
Assets held for sale $ 4,442 $ 4,442
======= =======
Land, buildings, equipment and building improvements include a facility
originally intended for the production of CD5 Plus(TM) intermediates, which was
re-classified as assets 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 amounts the Company will ultimately realize could
differ materially from the amounts assumed in arriving at the realizable value.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31
-----------
1996 1995
---- ----
Accrued legal costs $ 661 $ 500
Accrued dividends 586 586
Accrued payroll costs 1,573 1,492
Restructuring costs -- 172
Provision for litigation settlement 2,500 --
- - -------------
Clinical trial costs 521 593
Other 571 341
------ ------
$6,412 $3,684
====== ======
Research and Development Fees
Research and development fees are recognized as revenues as research ac
tivities 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 $26.4 million, $22.1 million, and $27.1 million for the years 1996,
1995, and 1994, respectively.
30
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 1996 and 1995, 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 invest
ment diversification, the Company's short-term investments have been categorized
as available-for-sale.
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, 1996 were as follows (in millions):
Gross Unrealized
Holding
-------
Fair Amortized
Value Cost Gain Loss
----- ---- ---- ----
U.S. Treasury Securities $35.2 $35.2 $ -- $ --
Corporate Bonds and Other 10.2 10.2 -- --
The contractual maturities of the Company's debt securities as of
December 31, 1996 were as follows (in millions):
Less than 1 year $ 43.4
From 1 to 2 years 2.0
More than 2 years --
During the year ended December 31, 1996, 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, 1996, short-term investments includes $0.7 million in certificates
of deposit which guarantees 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 loans. During 1996, Genentech made loans totalling
$13.5 million ($5 and $8.5 million respectively for funding 1996 and 1997
clinical trials) to XOMA under this arrangement. 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 re-
31
ceived an initial cash payment of $3.0 million and will 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 holds relevant patents.
In June 1994, the Company assigned its exclusive worldwide rights in
T-cell receptor ("TCR") peptide technology to Connective Therapeutics, Inc. The
Company received a promissory note in the amount of $1.4 million and warrants to
purchase 450,000 shares of Connective Therapeutics, Inc. 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 June 1987, the Company and Pfizer entered into agreements relating
to monoclonal antibody-based products for the treatment of gram-negative sepsis.
The agreements provide Pfizer with exclusive rights to E5(R) in exchange for the
funding of certain clinical and development activities. In January 1994, the
territory covered by the agreements was redefined to include only Japan and the
United States. Research and development fees earned under the agreements were
negligible over the last three years. The Company is reimbursed for
manufacturing costs and will receive a portion of the gross margins obtained
from any sales on a formula basis. Pfizer also has a limited first right to
negoti ate for future XOMA products (other than BPI-derived products) if they
will be used for the treatment, cure or prevention of gram-negative sepsis. The
agree ments can be canceled with appropriate notice upon reimbursement by Pfizer
of certain of XOMA's research and development expenses. XOMA has granted a
security interest to Pfizer in assets related to its E5(R) program to secure per
formance of XOMA's obligations under the agreements under certain conditions,
including bankruptcy. In the third quarter of 1995, XOMA and Pfizer agreed to
modify the funding arrangement of the current E5(R) clinical trial and the pay
ment terms relating to certain patent litigation costs (see Note 6, Commitments
and Contingencies).
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 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 is
suance 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.
32
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 Pre
ferred Stock, Series C ("Series C Preferred") to foreign investors in an of
fering 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 of 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, 1996 and 1995.
(See Stockholder Rights Plan, below.)
Debentures
Under the agreement with Genentech (see Research and Development
Agreements above) 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. As of December 31,
1996, $0.3 million in interest had been accrued.
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. Under the Incentive Plan, at the
33
beginning of each fiscal year, the Board of Directors (with advice from the
Compensation Committee) establishes a target incentive compensation pool, which
is adjusted at year-end to reflect the Company's performance in achiev ing its
corporate objectives. After each fiscal year, the Board of Directors makes a
determination as to the performance of the Company and Incentive Plan
participants in meeting corporate and individual objectives. Awards to Incen
tive Plan participants will vary depending upon the achievement of corporate
objectives, the size of the incentive compensation pool, the participants' base
salaries and the participants' performance during the fiscal year and ex pected
ongoing contribution to the Company. The Company must meet a minimum percentage
of its corporate objectives (currently 70%) before any awards will be made under
the Incentive Plan.
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 portion payable on the first distribution date is
payable 50% in cash and 50% in Common Stock (based on a 10-day average market
price). Incentive Plan participants must choose prior to the end of the first
year of the three-year period whether the balance is to be paid in cash or
Common Stock.
The amounts accrued under the Incentive Plan were $0.7 million and $0.6
million for the plan years 1996 and 1995 respectively. There was no accrual for
1994.
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 en title 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 gen erally 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, 1996, 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 4,300,000 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
34
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 gen erally
vest over five years. The Option Plan will terminate on November 15, 2001. As of
December 31, 1996, options covering 2,721,680 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.
The Company has granted options with exercise prices at 85% of fair
market value on the date of grant. Up to 1,500,000 shares are authorized for is
suance under the Restricted Plan. As of December 31, 1996, options covering
429,470 shares of Common Stock were outstanding under the Restricted Plan.
The Company amortizes deferred compensation, which is the difference be
tween 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 benefitted.
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, 1996,
options for 45,000 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, no compensation cost related to these
plans has been recognized in the financial statements. 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 method 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):
1996 1995
---- ----
Net loss As reported $(29,110) $(22,472)
Pro forma $(30,250) $(24,167)
Net loss per share As reported $ (0.90) $ (0.95)
Pro forma $ (0.93) $ (1.02)
35
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:
1996 1995
---- ----
Dividend yield 0% 0%
Expected volatility 73% 73%
Risk-free interest rate 5.2% 7.6%
Expected life 7 years 6 years
Expected forfeiture rate 0% 0%
A summary of the status of the Company's stock option plans as of
December 31, 1996, 1995, and 1994, and changes during years ending on those
dates is presented below:
1996 1995 1994
---- ---- ----
OPTIONS: Shares Price* Shares** Price Shares
Price***
- - -------- ------ ------ -------- ----- ------
- - --------
Outstanding at be-
ginning of year 2,847,017 $ 4.50 3,000,692 $ 10.33 2,861,854
$4.99-26.50
Granted 517,000
2.07-4.38
(1) 2,500 4.84 34,000 2.29
(2) 499,750 4.97 2,204,605 2.53
(3) 145,333 5.00 1,250 2.94
Exercised (67,132) 2.68 (5,315) 2.40
Forfeited -- -- -- -- --
--
Expired/Canceled (231,318) 6.40 (2,388,215) 9.97 (378,162)
3.72-26.50
------- --------- -------
Outstanding at end
of year 3,196,150 4.50 2,847,017 4.50 3,000,692
2.07-26.50
========= ========= =========
Exercisable at end
of year 1,816,185 1,310,938 1,480,886
2.07-26.50
========= ========= =========
Weighted average
fair value of op-
tions granted
(1) 2.71 1.92
(2) 3.09 1.51
(3) 1.59 0.99
* Weighted-average exercise price
** Includes cancellation and granting of 1,820,385 new options
*** Range of exercise prices
(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, 1996:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Number
Exercise Prices Outstanding Life* Price** Exercisable Price**
--------------- ----------- ----- ------- ----------- -------
$1.70 - 2.38 351,141 8.1 $2.35 132,253 $ 2.36
2.55 - 3.81 1,640,269 8.0 2.57 918,151 2.57
4.06 - 5.94 565,913 7.3 4.70 203,687 4.88
6.25 - 7.50 446,050 3.1 7.46 372,817 7.50
9.75 - 13.25 35,812 4.7 10.89 32,312 11.02
16.36 - 22.75 154,965 3.8 18.68 154,965 18.68
36
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Number
Exercise Prices Outstanding Life* Price** Exercisable Price**
--------------- ----------- ----- ------- ----------- -------
26.50 - 26.50 2,000 4.3 26.50 2,000 26.50
-------------
$1.70 - 26.50 3,196,150 7.0 $4.50 1,816,185 $ 5.38
* Weighted-average Remaining Contractual Life
** Weighted-average Exercise Price
Warrants
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.
The Company issued warrants with an aggregate value of $0.8 million to
purchase 109,739 shares of Common Stock to the placement agent (and its
designees) in the placement 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.
6. COMMITMENTS AND CONTINGENCIES
Clinical Trial
In the third quarter of 1995, the Company and Pfizer reached an agree
ment regarding the funding of the current Phase III E5(R) clinical trial and
payment terms relating to the $8.5 million of patent litigation costs due to
Pfizer. Under this agreement, the Company may, at its option, reduce its mini
mum funding commitment ($2.0 million at December 31, 1996) for the remainder of
the trial in return for a reduction in future royalties otherwise payable to
XOMA by Pfizer on Pfizer's U.S. sales of E5(R). The agreement also provides that
XOMA will repay the $8.5 million of patent litigation costs by reducing the
future royalties otherwise payable to XOMA by Pfizer on Pfizer's U.S. sales of
E5(R). As a result, the $8.5 million was credited to Other Income and Expense in
the third quarter of 1995. The maximum royalty reduction in any one year related
to these items will be limited to 30% of the royalties otherwise payable on
Pfizer's U.S. sales of E5(R), until such time as the amounts owed ($22.4 million
at December 31, 1996) are fully paid.
Collaborative Agreements and Royalties
As of December 31, 1996, 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 July 1997. Re
search and development expenses include research agreement expenses of ap
proximately $0.3 million, $0.4 million, and $0.4 million for the years ended
December 31, 1996, 1995 and 1994, 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 uni
versities and other research institutions based on future sales or licensing
37
of products that incorporate certain products and technologies developed by
those institutions.
Leases
As of December 31, 1996, the Company leased administrative, research
facilities, certain laboratory and office equipment under operating and capital
leases expiring on various dates through 2003.
Future minimum lease commitments are as follows(in thousands):
Capital Lease Operating Leases
------------- ----------------
1997 $ 623 $1,840
1998 748 1,645
1999 -- 924
2000 -- 571
2001 -- 571
Thereafter -- 999
---- ------
Net minimum lease payments 1,371 $6,550
======
Less--Amount representing interest
expense 179
Present value of net minimum
less payments 1,192
Less--Current maturities 489
-----
Long-term capital lease
obligations $ 703
=====
Total rental expense was approximately $2.0 million, $2.3 million, and
$2.3 million for the years ended December 31, 1996, 1995, and 1994,
respectively.
Legal Proceedings
In the securities class action lawsuit Warshaw, et al. v. XOMA
Corporation, et al., the defendants and plaintiffs have reached an agreement to
settle all claims for $3.75 million in cash and $2.25 million in XOMA common
stock. It is anticipated that all of the cash portion of the of the settlement
will be covered by insurance. The Company retains the option, up to fifteen days
after the later of the date that the court's approval becomes final or the
processing of claims is substantially complete, to pay the stock portion in
cash. The settlement is subject to court approval after notice to share holders.
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 in
surance coverage will be available or be available at acceptable costs or that
38
a claim against the directors and officers would not materially
adversely affect the business or financial condition of the Company.
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities
as of December 31, are as follows (in $ millions):
1996 1995
---- ----
Property and equipment $ 2.3 $ 1.4
Purchased technology 5.7 6.3
Capitalized R&D expense 50.8 40.1
Accrued liabilities and other 1.4 1.3
Net operating loss carryforwards 66.8 66.1
R&D and other credit carryforwards 13.0 11.7
Valuation allowance (140.0) (126.9)
------ ------
Total deferred tax asset $ -- $ --
====== ======
The net change in the valuation allowance was a $13.1 million and a
$6.0 million increase for the years ended December 31, 1996 and 1995,
respectively.
XOMA's accumulated federal and state tax net operating losses ("NOLs")
and credits as of December 31, 1996 are as follows:
Amounts Expiration
(in millions) Dates
------------- -----
Federal
NOLs $199.5 1997-2012
Credits 9.7 1997-2012
State
NOLs 37.6 1997-2002
Credits 3.3 2002-2012
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 1996 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
39
match up to 50% of the salary deferred by the participants. The expense of these
contributions was $243,000, $326,000, and $431,000, for the years ended December
31, 1996, 1995 and 1994, respectively.
40
INDEX TO EXHIBITS
Exhibit
Number
- - -------
3.1 Restated Certificate of Incorporation, as amended.(12)
3.1A Certificate of Amendment of Restated Certificate of Incorporation.(19)
3.2 Amended and Restated Bylaws.(12)
3.3 Stockholder Rights Agreement dated October 27, 1993 between the Company
and First Interstate Bank of California, as Rights Agent.(13)
3.4 Certificate of Designation of Preferences and Rights of Convertible
Preferred Stock, Series C of the Company.(18)
3.5 Certificate of Designations of Non-Voting Cumulative Convertible
Preferred Stock, Series D.(20)
3.6 Certificate of Designations of Convertible Preferred Stock, Series
E.(19)
3.6A Amended Certificate of Designation of Convertible Preferred Stock,
Series E.(20)
3.7 Certificate of Designations of Non-Voting Cumulative Convertible
Preferred Stock, Series F.(19)
3.8 Form of Common Stock Purchase Warrant.(19)
4.1 Form of 4% Convertible Subordinated Debenture due November 30, 1998 and
form of 4% Convertible Subordinated Debenture due November 30, 1998,
Series A.(18)
10.1 Form of Stock Option Agreement for 1981 Stock Option Plan.(15)
10.2 Form of Stock Option Agreement for Restricted Stock Plan.(15)
10.3 Warrant Agreement dated as of October 11, 1985 between the Company and
Equitec Leasing Company.(1)
10.4 [Omitted]
10.5 License Agreement dated October 26, 1984 between the Company and
Carlton Medical Products Limited.(1)
10.6 License Agreement dated February 3, 1986 between the Company and the
Kallestad Laboratories Division of Erbamont, Inc. (with certain
confidential information deleted.)(1)
10.7 Restricted Stock Plan as amended and restated and further amended.(7)
10.8 Restricted Stock Purchase Agreement.(2)
41
10.9 License Agreement dated September 3, 1986 between the Company and the R
gents of the University of California (with certain confidential
information deleted).(2)
10.10 Research, Development and Option Agreement, License Agree ment, Supply
Agreement, and Security Agreement all dated as of June 9, 1987 between
the Company and Pfizer, Inc. (with certain confidential information
deleted).(3)
10.11 Manufacturing Agreement dated as of January 1, 1991 between the Company
and Pfizer, Inc.(9)
10.12 Lease of premises at 890 Heinz Street, Berkeley, California dated as of
July 22, 1987.(4)
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, 1988.410.14 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.(4)
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.(4)
10.16 Form of indemnification agreement for officers.(9)
10.17 Form of indemnification agreement for employee directors.(9)
10.18 Form of indemnification agreement for non-employee directors.(9)
10.19 XOMA Corporation 1981 Stock Option Plan as amended and re stated and
further amended.(7)
10.20 Lease of premises at 2910 Seventh Street, Berkeley, Cali fornia dated
March 25, 1992.(15)
10.21 Master Equipment Lease Agreement between Equitable Life Leasing
Corporation and the Company.(6)
10.22 Supply Agreement effective February 27, 1989 between the Company and
Charles River Biotechnical Services, Inc. (with certain confidential
information deleted).(6)
10.23 Amendment Agreement dated as of October 17, 1991 between the Company
and Charles River Laboratories, Inc. (with certain confidential
information deleted).(9)
10.24 License Agreement dated as of August 31, 1988 between the Company and
Sanofi (with certain confidential information deleted).5
42
10.25 1985 Non-Qualified Stock Option Plan and form of Stock Option
Agreement.(8)
10.26 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.(15)
10.27 Lease dated October 2, 1992, between the Company and Vir ginia Merritt,
asTrustee of the Bowman Merritt and Virginia Merritt Trust.(15)
10.28 [Omitted]
10.29 [Omitted]
10.30 Research and License Agreement dated August 6, 1990 between the Company
and New York University (with certain confidential information
deleted).(9)
10.31 First Amendment to Agreement dated November 6, 1992 between the Company
and New York University (with certain confidential information
deleted).(15)
10.32 [Omitted]
10.33 License Agreement dated June 11, 1991 between the Company and Sterling
Drug Inc. (with certain confidential information deleted).(9)
10.34 Employment Agreement dated April 29, 1992 between the Company and John
L. Castello.(15)
10.35 [Omitted]
10.36 [Omitted]
10.37 Settlement Agreement for Litigation with Centocor dated July 28, 1992
(with certain confidential information deleted).(11)
10.38 Securities Purchase Agreement dated November 19, 1993 among the
Company, Ortelius and GDK.(14)
10.39 Subscription Agreement dated November 21, 1993 between the Company and
Shipley Raidy Capitol Corporation.16
10.40 Letter Agreement dated July 14, 1993 between the Company and Pfizer,
Inc. (with certain confidential information deleted).(16)
10.41 Cross License Agreement dated December 15, 1993 between Research
Development Foundation and the Company (with certain confidential
information deleted).(16)
10.42 Cross License Agreement dated December 15, 1993 between the Company and
Research Development Foundation (with certain confidential information
deleted).(16)
43
10.43 Management Incentive Compensation Plan.(16)
10.44 Employment Agreement dated March 29, 1993 between the Company and
Patrick J. Scannon, M.D., Ph.D.(16)
10.45 [Omitted]10.46 Technology Acquisition Agreement dated June 3, 1994
between Connective Therapeutics, Inc. and the Company (with certain
confidential information deleted).(17)
10.47 Employment Agreement dated April 1, 1994 between the Company and Peter
B. Davis.(17)
10.48 Letter Agreement dated November 7, 1995 between the Company and Pfizer,
Inc. (with certain confidential information de leted).(18)
10.49 Amendment No. 1 to License Agreement dated March 23, 1995 between the
Company and Burroughs Wellcome Co. (with certain confidential
information deleted).(18)
10.50 Form of Offshore Subscription Agreement relating to the Company's
Convertble Preferred Stock, Series C.1810.51 Form of Offshore
Securities Subscription Agreement relating to the Company's 4%
Convertible Subordinated Debentures due 1998.(18)
10.52 Form of Letter Agreement relating to the Company's 4% Con vertible
Subordinated Debentures due November 30, 1998, Series A.(18)
10.53 Collaboration Agreement, dated as of April 22, 1996, be tween XOMA
Corporation and Genentech, Inc. (with certain confidential information
omitted, which omitted informa tion is the subject of a confidential
treatment request and has been filed separately with the Securities and
Exchange Commission).(19)
10.54 Common Stock and Convertible Note Purchase Agreement, dated as of April
22, 1996, between XOMA Corporation 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).(19)
10.55 Convertible Subordinated Note Agreement, dated as of April 22, 1996,
between XOMA Corporation and Genentech, Inc. (with certain confidential
information omited, which omit ted information is the subject of a
confidential treatment request and has been filed separately with the
Securities and Exchange Commission).(19)
10.55A Amendment to Convertible Subordinated Note Agreement, dated as of June
13, 1996, between XOMA Corporation and Genen tech, 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).(19)
10.56 Form of Preferred Stock Subscription Agreement, datedas of September
20, 1996, by and between XOMA Corporation and the purchasers of Series
F Preferred Stock.(19)
10.57 Form of Registration Rights Agreement, dated as of September 24, 1996,
by and between XOMA Corporation and the pur chasers of Series F
Preferred Stock.(19)
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
_________________________
1 Incorporated by reference to the Company's initial Registration Statement
on Form S-1 (File No. 33-4793).
2 Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-12832).
3 Incorporated by reference to the Company's report on Form 10-Q for the
quarter ended June 30, 1987 (File No. 0-14710).
4 Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987 (File No. 0-14710).
5 Incorporated by reference to the Company's report on Form 10-Q for the
quarter ended September 30, 1988 (File No.0-14710).
6 Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-27319).
7 Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-39155).
8 Incorporated by reference to Ingene Registration Statement on Form S-1
(File No. 33-5150).
9 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 (File No. 0-14710).
10 [Omitted]
11 Incorporated by reference to the Company's Current Report on Form 8-K dated
September 18, 1992, as amended.
12 Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 33-74982).
13 Incorporated by reference to the Company's Current Report on Form 8-K dated
October 27, 1993.
14 Incorporated by reference to the Company's Current Report on Form 8-K dated
December 21, 1993.
45
15 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (File No. 0-14710).
16 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (File No. 0-14710).
17 Incorporated by reference to the Company's Annual Reporton Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-14710).
18 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 0-14710).
19 Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 333-07263).
20 Incorporated by reference to the Company's Registration Statement on Form
S-3 (File 333-02493).
46