Xoma Ltd. Q3 2008 Earnings Call Transcript

Nov.10.08 | About: XOMA Corporation (XOMA)

Xoma Ltd. (NASDAQ:XOMA)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Steven Engle - Chairman and Chief Executive Officer

Alan Solinger - Vice President of Clinical Immunology

Analysts

Aaron Lindberg - William Smith & Company

Jason Kantor - RBC Capital Markets

Jason Kolbert - SIG

Operator

Good afternoon and welcome to XOMA’s Third Quarter 2008 Conference Call. Today, XOMA issued a press release with financial information for the third quarter period and filed the quarterly report on Form 10-Q with the SEC for the quarter ended September 30th, 2008. Each document will be available on the XOMA website, www.xoma.com.

Today’s webcast can be accessed via XOMA’s website and will be available for replay until close of business on February 3rd, 2009. A telephone replay will be available beginning later today until close of business on February 3rd, 2009. Access numbers for the replay are listed in the news release that we issued today.

Leading today’s call will be Steven Engle, Chairman and Chief Executive Officer. Joining Mr. Engle is Dr. Alan Solinger, Vice President of Clinical Immunology.

We wish to remind all listeners that certain statements made on the call today will be forward-looking that are based on statements and assumptions that may not prove to be accurate. XOMA’s actual results could differ materially from those we anticipate due to risks inherent in the biotechnology industry, as well as for companies engaged in product development in a regulated market. These risks, including the success of our existing collaborations, the marketing and sales efforts for RAPTIVA, LUCENTIS and CIMZIA, the potential regulatory approval of CIMZIA, our ability to enter into additional arrangements, the size and timing of expenditures, the timing of clinical trials and other events, changes in our collaborative relationships and actions by the Food and Drug Administration, international drug regulatory bodies and the U.S. Patent and Trademark Office are discussed in XOMA’s Form 10-K for 2007 and XOMA’s Form 10-Q for September 30th, 2008 and in other SEC filings. Please consider such risks carefully before making any investment decisions.

I’ll now turn the call over to Mr. Steve Engle.

Steven Engle - Chairman and Chief Executive Officer

Thank you. Good afternoon everyone and thank you for joining our call today. Earlier today, we issued our quarterly earnings press release addressing the remarkable achievements we made in Q3 and announcing our efforts to focus our R&D spending on our most promising proprietary programs, including XOMA 052 in Type II diabetes while postponing spending on other indications and programs and continuing to develop and offer the next generation of antibody discovery, development, and manufacturing technology.

I want to briefly discuss our recent progress as well as our current efforts to refocus and rational for doing so and then we will open the call for Q&A. As you are probably aware in the third quarter of 2008 in a remarkable drive forward for the company and for diabetes patients, XOMA presented encouraging results for supporting one of the most significant medical advances in diabetes in decades that is a move from insulin-based therapy to anti-inflammatory treatment. For the first time we showed that a single dose of an interleukin-1 beta blocker, XOMA 052, increased insulin production up to 91 days in Type II diabetes patients, a remarkable finding supporting the disease- modifying and monthly dosing or longer potential of this anti-inflammatory approach. These results were presented at the European Association Study of Diabetes, EASD meeting in September in a headlining data presentation. The result also demonstrated that XOMA 052 was both safe and well tolerated in patients with Type II diabetes and that use of XOMA 052 reduced glycosylated hemoglobin levels, a standard measure of blood glucose control and reduced C-reactive proteins.

In addition, we advanced our biodefense business by signing a $65 million contract with the U.S. Government, we initiated new therapeutic antibody programs under the existing collaboration with Takeda Pharmaceutical Company Limited, signed a Memorandum of Understanding with the Texas A&M University System to jointly explore options for the development and manufacture of antibodies and protein-based therapeutics and recently presented positive XOMA 052 data in preclinical animal models of rheumatoid arthritis and gout at the American College of Rheumatology 2008 Annual Conference. Based on new clinical results, we began prioritizing our efforts including the restructuring of our Novartis partnership and established a new committed equity financing facility that provides additional financial flexibility. Finally, we are pleased to report receipt of the first royalty payment on Swiss sales of CIMZIA(r), UCB's recently approved drug for Crohn's disease.

In the last year, we gained clarity about which programs will generate the highest value and which antibody technologies will yield the most revenues. This knowledge and the recent unprecedented general economic conditions have given us the understanding and the opportunity to focus our resources and realize the full potential of XOMA's assets. We are now executing on focusing R&D spending to advance our most promising proprietary development programs, including XOMA 052 in Type 2 diabetes, and we have made the decision to postpone R&D spending on other indications and programs, while continuing to develop and license the next generation antibody discovery and development technology.

For XOMA 052, we will complete Phase I clinical testing in Type II diabetes and initiate a major Phase II diabetes study in 2009. We will also initiate a pharmacokinetic study and rheumatoid arthritis by year end. We will postpone other rheumatoid arthritis studies and instead leverage the recent encouraging results and additional expected confirmatory results of studies with another IL-1 blocker in RA to validate the XOMA 052 approach in this indication. Additionally, we will conduct small XOMA 052 proof of concept trials in other indications such as systemic juvenile idiopathic arthritis the arthritis and other diseases and will postpone a Phase II clinical study in gout.

Treating Type 2 diabetes with a potentially disease-modifying, anti-inflammatory therapy represents a large opportunity for patients and for XOMA. We recognize that to maximize the value of XOMA 052, and to offset our development costs, we need a pharmaceutical partner with strengths in worldwide development and marketing. Fortunately, large pharmaceutical companies need blockbuster potential drugs like XOMA 052 more than ever. Conversations are ongoing with several major pharmaceutical and biotechnology companies.

As far as controlling costs and focusing on the company’s most important programs, we have suspended the XOMA 629 development program until conditions improve and we have also postponed most planned capital expenses to reduce such costs in 2009. Further spending will depend on timing of additional biodefense and other contracts.

It is important to note regarding biodefense activities that most of XOMA’s activity is generally covered by contract revenues from the US government, and the company will therefore continue with its biodefense programs. The company will also continue with its fully funded collaboration.

As announced this morning, we have also restructured our collaboration with Novartis for development of HCD 122 and other drug candidates, providing us with cash and reducing our debt. The restructured agreement immediately gives us 6.2 million and under it Novartis will fully fund all future R&D expenses related to the agreement and pay potential future milestones and double-digit royalties as we meet specific requirements.

Our outstanding debt with Novartis is reduced by 7.5 million. The combined 13.7 million of cash payment plus debt reduction will be recognized as revenue in Q4 2008. In exchange, Novartis will have control over the novel Phase II oncology program, HCD122, and an additional ongoing program, as well as the right to expand the development of these programs into additional indications outside of oncology.

I will now quickly recap financials and then close my formal comments. XOMA is one of the few companies in biotechnology receiving royalties on marketed therapeutic products and we are delighted to begin receiving royalties on the Swiss sales of XOMA-enabled CIMZIA. We expect to see action soon from the FDA in EMEA for the approval of CIMZIA based on UCB’s comments in both -- in rheumatoid arthritis, which would yield additional royalty revenues.

We’ve released XOMA third quarter 2008 financial results and file the related 10-Q later today, and those will be available to you on our website and on the SEC's website. On the call today, I’ll discuss what I think is most helpful in understanding our current status and future prospects.

XOMA’s operating loss for the third quarter 2008 was $18.5 million compared with an operating income of 22.7 million for the same quarter last year. The net loss for the third quarter was 20.4 million compared to a net income of 21.8 million in the 2007 quarter.

Total revenues for the third quarter of 2008 were 7.9 million compared with 43.1 million last year. The decrease in revenue was primarily driven by the license fee received from Pfizer Inc. during the third quarter of 2007.

The components of our third quarter revenues are discussed in today’s press release and 10-Q filing. As noted in these documents and in previous filings, certain European patents in our bacterial cell expression portfolio pertaining to LUCENTIS expired in July 2008. As a result, XOMA’s right to royalties on sales of LUCENTIS outside of the US ended in the third quarter of 2008. Consequently, we expect that LUCENTIS royalties will decline in Q4 and that this decline will be partially offset by the new royalty stream from CIMZIA.

It is relevant to note that historically XOMA’s revenues have increased significantly between the first and second half of the year. In 2007, we reported first half revenue of 26.4 million and then more than double that revenue with 57.9 in the second half for full year revenues of 84.3 million. While past performance is never a guarantee of future performance, our results in the year-to-date period are consistent with what we’ve been projecting and we expect that revenues will be concentrated in the second half once again in 2008.

XOMA’s R&D expense for the third quarter grew to 19.7 million from 14.6 million last year. The increase primarily reflects spending in our development of XOMA 052, including Phase I clinical trials and production of clinical materials for the Phase II studies, XOMA 629 and spending related to our work with Schering-Plough and Takeda. I want to note that this year a much larger portion of our R&D spending is on later-stage programs due to the positive progress of XOMA 052.

G&A expense for the quarter was 6.7 million compared with 5.8 million last year. The increase includes an increase in salaries related to both intellectual property legal activities and business development.

Cash, cash equivalents and short-term investments at September 30, 2008 were 10,600,000 compared with 27,400,000 at June 30, 2008. Restricted cash was $13.8 million at September 30, 2008 compared with 6 million at December 31, 2007 and 900,000 at March 31, 2008. Net cash used in operating activities was $9.3 million for the quarter as compared to $22.6 million provided by operating activities in the same quarter last year.

As with revenue, we expect a much better situation with respect to cash used in operations for the balance of the year and expect to be nearly break-even to slightly positive for the balance of the year. Both higher expected revenues for the balance of the year and certain non-recurring cash uses from the first half contribute to our expectation.

Based on funding sources we believe to be available, XOMA considers its cash and financial sources adequate for at least the next 12 months subject to the risk factors noted in the 10-K. Potential sources include new or existing antibody collaboration arrangements. Service contracts and licensing agreements may contribute to an increase in our cash position. In the normal course of our business, we have ongoing discussions with several potential collaboration partners, contract development service customers and technology licensees.

As previously indicated, the company is planning on closing one or more major transactions by year-end. Because there cannot be complete certainty as to the exact timing of these transactions, XOMA is updating its financial guidance for the full-year 2008.

The company expects that revenue for 2008 will be between 55 million and 85 million. The company expects that research and development expense for 2008 will be between 83 million and 87 million. General and administrative expense for 2008 is expected to be between 24 million and 26 million. And the company expects it will use cash of between 16 million and 48 million in 2008 operating activities and will spend between 10 million and 12 million in capital expenditures.

I want to remind you that the guidance we have provided amounts to a prediction of the future, and as such is based on a variety of assumptions and assessments of the probabilities associated with various future events, any of which could turn out be incorrect. So we caution you to take into account the risk factors described earlier and that are described in our public filings.

With the diverse revenue streams, a world-class antibody discovery platform and a growing pipeline featuring our anti-IL-1 antibody with multi-indication antiinflammatory potential, XOMA is well positioned for additional progress for the remainder of 2008 and beyond. We believe our initiatives to reduce spending and emphasize on those promising programs will enable the company to continue moving in the right direction well beyond 2009. In the coming year, we anticipate successful execution on multiple events and look forward to updating you on our progress in the future.

We will now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from the line of Aaron Lindberg with William Smith & Company. Please go ahead.

Aaron Lindberg

Thank you. What can you tell us about the Phase II trial you are planning to launch next year in terms of size, structure, location and point of costs? What can you help us out with there?

Steven Engle

Thank you, Aaron. Let me ask Dr. Solinger to speak to the design of the study.

Aaron Lindberg

Thanks.

Alan Solinger

Well, we really haven’t released any extensive details, but this is going to be a fairly good sized Phase II trial looking at dose binding, will most likely be an international trial and will make use of many of the same endpoints that we’ve been using earlier and they are fairly standard in those BD studies with emphasis click on the data that we are getting on beta cell preservation and improvement hemoglobin A1C.

Aaron Lindberg

And then in terms of cost, is it something that you’d like to see a partner come in before you get too far down the road on this, or is it something like to carry the phase-II trial by order partnering?

Alan Solinger

Our plan Aaron is get it initiated, but we don’t think it’ll be finished by the end of next year being a larger trial requiring more patients. So our expectation is that we would have a partner on before that study is complete. But we continue to think that somewhere around the end of next year, whether it's in the fourth quarter or first quarter of 2010, that we would bring a partner onboard. We have several partners, potential partners that we are talking to right now as you might guess both Big Pharma and others. And as we look at them they are mostly coming in with tiny capabilities you would expect to either very strong franchises in diabetes and cardio vascular and rheumatology. So those are ongoing and we’ll give you an update as we move along those conversations.

Aaron Lindberg

Okay. And so to confirm, all the other trials, the three that you have planned previously are postponed, the folks is all on a Phase II trial for type-2 diabetes, and then you mentioned that you made the change based on new clinical results, is that new data that is not yet been published?

Alan Solinger

So, let me just outline again what we were doing with the studies. We still expect that the four different parts which are really two studies under the Phase I protocol, the one being run in Switzerland and the one being run in the United States, all four of those will be finished by the middle of next year. And as you may remember, the first study is a single dose study looking at multiple dose levels. The second study would be then a vascular IV that will be subcu. The third study would – and the fourth study are both multiple dose studies. And that study would be both IV and subcu between the two of them. And those, we would intent all of those three finish by mid year 2009. And then we would expect after that startup the larger Phase II study.

Aaron Lindberg

Okay. You mentioned that you initiated a new therapeutic antibody programs under the Takeda collaboration, was that before the end of the quarter or after?

Alan Solinger

Yeah, let me just step back a second, it was one of the thing that I think we won’t to make sure – it was understood we all could be running RA pharmacokinetic study in that same period of time, some time in the beginning of the next year when it would startup. So back to the situation with Takeda, Takeda has assets to expand those programs and they were actually doing additional project for them.

Aaron Lindberg

And was that initiated before the end of the quarter I guess, what I am driving at is where there milestone payments associated with that and we just didn’t see them because they were amortized or did that come after the end of the quarter?

Alan Solinger

That’s exactly right. It was started before the end of the quarter and there were milestone payments that were amortized.

Aaron Lindberg

Okay. And that’s over like 15 or 16 years or some really long time.

Steven Engle

About 5 years.

Aaron Lindberg

Okay.

Steven Engle

But it’s about to knock it down. So…

Aaron Lindberg

Sure.

Steven Engle

We don’t put out a press release immediately on the day with that number.

Aaron Lindberg

Fair enough. And then can you help us understand the potential of partners almost 629?

Steven Engle

Yeah, I think at this point we place the program on a hold. We’ve had conversations with people who are telling us that we need to get that additional data that we have started to establish a study for. And so at this point I’m sure we’ll continue to have conversations, but I don’t want to set expectations too high, we still need to get through those studies.

Aaron Lindberg

Okay. So, that one – that’s not a near-term thing, it’s really just on hold at this point?

Steven Engle

That’s right. Yeah, you’ve got to give in somewhere in the current condition and our desire to focus in on the most important (technical difficulty).

Aaron Lindberg

Okay. And can you remind us how much longer you receive loyalties on LUCENTIS in the US?

Steven Engle

About five more years.

Aaron Lindberg

Okay. Great, I will jump back in the queue here and let somebody else get on.

Steven Engle

No problem, those were great questions.

Aaron Lindberg

Thanks.

Operator

Thank you. Our next question is from the line of Jason Kantor with RBC Capital Markets. Please go ahead.

Jason Kantor

Yeah, thanks for taking the call. There is a lot of interference on the phone, I apologize, could you tell us what is the minimum price, share price associated with the abstinence equity line?

Steven Engle

Its $1 Jason.

Jason Kantor

So if your stock price is below $1 you no longer have access to that?

Steven Engle

I think at that point it becomes something that’s not specifically spelled out in the agreement, and it’s a negotiable item in this kind of agreement.

Jason Kantor

And, was this Novartis restructuring, was it something that was concentrated earlier on in the year end included in your previous guidance or is it somehow additional to that?

Alan Solinger

It is additional to that, we have been working to take full advantage of HCD 122 and I just want to make it clear to people in general, if we could have bought this out and run it ourselves we would have done that. But being the Novartis felt so strongly about keeping it, we felt that was a better use of our own funds, not to continue to work as a 30% partner. And so we changed the agreement accordingly.

Jason Kantor

And, I guess with respect to the same deal, how much money where you are spending on that before, by occurrences over – per quarter how much?

Steven Engle

You’ve asked a good question. First of all I just note that we don’t usually give details on the breakout of the R&D spending, we haven’t done that historically. I would say probably more generally to help you think about it, the number, because it goes up and down of course each quarter, is between 5 and 10% of total R&D spending. Does that help?

Jason Kantor

Yeah, that does help. And, the press release that it’s retroactive to July 1, is there – can you give us some sense of – is there – an additional payment that is going to be made to reimburse you for that, or is that already included in the upfront?

Steven Engle

We will see additional revenue coming from them before the end of the year and do compensate for things that we’re originally doing as part of our contribution by which now they are paying as part of a fully funded collaboration.

Jason Kantor

Okay.

Steven Engle

That was a very good news part of fueling the deal.

Jason Kantor

Right. And why is your partnering plan for ’05 too not changed? Yeah, I would think that given the tough situation you would be excited to partner the same kind of now…

Alan Solinger

Well, I think what we want to do is take the balance as you might get between having the information and having right partners at the table. On the information side, there are certain kinds of information that we will earn over the next few months that we think will increase the value of the deal for a potential partner. Secondly, in terms of getting everybody to the table we’ve got people who are getting up speed, but they are not there yet. Obviously, if they are all up speed and all the data was available we would close the deal now. We suspect, as usual Jason that it will take several months to get everybody lined up. Nonetheless I’d want to assure you we are going as fast as we can and there is always possibility that we will get the deals done maybe a year or something like that next year. But I just didn’t want everybody to plan on these kinds of things.

Jason Kantor

And one last question, the revenue that we may or may not see come in this year, maybe early next year, has you confidence level in the deals getting done changed at all, or is it just the timing issue?

Steven Engle

I think it is – a majority is the timing issue, which is as you get closer to the end of the year, it just gets harder to predict things and from a conservative events we see it as prudent to simply point it out because in the end you don’t control everything, but as far as our confidence in it occurring, our confidence has gone up since the last quarter.

Jason Kantor

Thank you.

Steven Engle

Thank you very much.

Operator

Thank you. Your next question is from the line of Jason Kolbert with SIG. Please go ahead.

Jason Kolbert

Hi, good afternoon. This is (inaudible) sitting in for Jason. Steve, I just had a quick question on the CEF, given your trading volume is in the neighborhood of 300,000 to 500,000 shares a day, could you offer some insights on how you plan to use the CEF, I noticed that in the press release you have already drawn down a small amount of it, are you going to take a percentage of the volume over a period of month, so you are going to may be have some larger trades more periodically?

Steven Engle

So, as you might guess, we are still thinking through exactly what to do with it and how to use it. It allows as part of the contract for a number around 2.5 to 3% as prescribed in the agreement and it also allows the use of this over years period of time. I think the question comes back to why if we want to use this in the first place and I think first of all we see it as kind of in an abundance of caution going to make sure that we could have this fund and so in that sense its insurance. Secondly is clearly the market uncertainty and because you can’t predict the timing of deals, you certainly want this kind of thing in place and we feel pleased that it is in place. The other issue as you know that often comes up in these situations is to avoid being in a position of perceived financial weakness if you will while you are involved in deal making and you don’t want people to be using it against you. And so for all those reasons we call this as the right thing to do to put the CEF in place. As to how we use it over time, we’ve not come to any specific strategy or conclusion, but -- and I would say also, we didn’t go the other way, we didn’t think it at all great time to raise a large amount of money, but we did think it was good to put this in place.

Jason Kolbert

Okay, thank you. And just could you just remind us of the 2.5 to 3% figure you referred to, what was that referring to?

Steven Engle

If you look at the contract, which is online and you can see it, there is a prescribed number in the agreement as to the standard amount that’s expected to be used when you are using this, and so it’s not a large amount at all, it’s a very small amount.

Jason Kolbert

Okay, understand. And with regard to the payment from Novartis, that’s recognized in this quarter?

Steven Engle

No. In this quarter means fourth quarter, yes, not in the third quarter, no. We would expect that 13 million plus to be revenues recognized in the fourth quarter.

Jason Kolbert

Okay, thank you.

Operator

(Operator Instructions). Our next question is from the line of Aaron Lindberg. Please go ahead.

Aaron Lindberg

Just had a quick followup. Do you still expect to have one more contract revenue agreement in 2008 in addition to that SRI and NIAID one?

Steven Engle

We still expect to do another major agreement for collaboration or something like that. It could be an existing collaboration or it could be a new collaboration before the end of this year and that’s why the guidance spread is as wide as it is and it could be more than one, so we decided to air on the side of a bigger spread.

Aaron Lindberg

Okay. And I am talking specifically in contract revenue and kind of a separate -- I know that you talked about additional contract revenue that would be coming in where you’re doing contract manufacturing work, antibody development?

Steven Engle

We don’t think a lot more there, I mean there are things that we are doing, but not of the scope that we are talking about with the collaborations and so forth.

Aaron Lindberg

Okay. I guess my thought was the big guidance range was primarily due to your expectation around BCE licenses, it looks like you are expecting something in the neighborhood of 13 to 33 million depending on whether one or a couple of these deals close before the end of the year at the…?

Steven Engle

That’s exactly right except that wouldn’t limit us to BCE licences. There are other things that we are talking to people about and so – but, yes in that direction exactly.

Aaron Lindberg

Okay. And then have you begun work on that SRI and NIAID contract?

Steven Engle

The SRI and NIAID – the SRI contract to be specific is designed to allow us to help other people who are developing products to manufacture them and although there has been great deal of discussion, we have not actually used any of that particular contract rather we’ve been working under the NIAID II, NIAID III contract.

Aaron Lindberg

Okay. Nobody is really just stepped up to the government initiatives around that at this point?

Steven Engle

Not that we are involved with and we probably would know if it was happening. We are in the preferred manufacturer if you will.

Aaron Lindberg

Okay, great. And then, how do you feel about the types of shareholders you are getting from the equity financing facility?

Steven Engle

Are you talking about the staff?

Aaron Lindberg

Yes.

Steven Engle

Yeah, no, basically in this case we are fine with the way that that’s working.

Aaron Lindberg

Excellent. Thank you.

Steven Engle

Thank you.

Operator

Thank you. There are no further questions in the queue at this time. I’d like to turn the floor back over to management for any closing comments.

Steven Engle

Well, I hope everybody gets a sense of how we are trying to move to both take advantage of the recent Pfizer results with 052 and at the same time to deal with the recent economic events. Let me assure you that we are continuing to evaluate things and as a result of those it could make more changes as we go long here and we are in conversations with partners and other people to work through a number of issues and understand where they want to go. So, we are doing all of those things and as a result we’d say we have made a lot of progress in focusing and we plan to continue to keep watching and keep working with these and we will keep you informed as we make changes in these areas. In the meantime, I can’t tell you how excited the team remains. I think many of you probably may have seen the announcement today of positive results in the trial that Crestor was used in suggesting that inflammation was a big part of the cardiovascular benefit in patients taking patents and we continue to think that this kind of data will over time actually support the value of an anti-inflammatory like XOMA 052 as well. So, it’s been a very very good day for us overall and we look forward to talking to you in the future. Thanks.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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