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Xoma Ltd. (NASDAQ:XOMA)

Q4 2008 Earnings Call Transcript

March 11, 2009 at 4:30 pm ET

Executives

Steven Engle - Chairman and Chief Executive Officer

Fred Kurland - Chief Financial Officer

Alan Solinger - Vice President of Clinical Immunology

Carol DeGuzman - Senior Director, Investor Relations

Analysts

Joseph Pantginis - Merriman Curhan Ford

Jeff Nelson - Ladenburg Thalmann & Co.

Jason Butler - Rodman & Renshaw, LLC

Aaron Lindberg - William Smith & Company

Liana Moussatos - Wedbush Morgan

Jason Kantor - RBC Capital Markets

Mark Monane - Needham & Company

Operator

Greetings, ladies and gentlemen and welcome to the XOMA webcast and conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator's instruction) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol DeGuzman, Senior Director of Investor Relations for XOMA. Thank you, Ms. DeGuzman, you may begin.

Carol DeGuzman

Thank you, Jack. Good afternoon and welcome to XOMA’s conference call. A short while ago, XOMA issued a news release of our 2008 financials and we will be filing our annual report on Form 10-K shortly. Both 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 June 10th, 2009. A telephone replay will be available beginning later this afternoon until the close of business on April 10th, 2009. Access numbers for the replay are listed in the news release that we issued this afternoon.

Leading today’s call will be Steven Engle, Chairman and Chief Executive Officer and Fred Kurland, Chief Financial Officer.

We wish to remind all listeners that certain statements made on the call today will be forward-looking. We had based those statements on 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 2008 and in other SEC filings. Please consider such risks carefully before making any investment decisions.

I will now turn the call over to Mr. Steve Engle, XOMA's Chairman and Chief Executive officer.

Steven Engle

Thank you, Carol. Good afternoon everyone and thank you for joining our call today. I want to briefly discuss our recent progress as well our current efforts to focus on the development of XOMA 052 and revenue generating collaborations. Fred Kurland, our Chief Financial Officer, will then detail 2008 financial results and then Dr. Alan Solinger, our Vice President of Clinical Immunology will provide a brief clinical update and afterwards, we will open the call up for Q&A.

Earlier today, as Carol indicated, we issued our 2008 earnings press release addressing the achievements we made last year. We were successful in 2008 and early 2009 including dealing with the reality of a very difficult market situation. We are pleased to say that we met hard guidance for revenues, spending and cash balances for 2008. We were generating XOMA 052 data supporting a groundbreaking anti-inflammatory approach in diabetes. We initiated a rheumatoid arthritis clinical trial for XOMA 052 expanding into other indications besides diabetes.

We expanded the dedicated collaboration providing XOMA with the $29 million fee and potential milestones and royalties. We also spent quite a bit of time and effort reducing operating cost to a number of key actions. We postponed clinical studies for the additional indications of XOMA 052. We postponed the development of XOMA 629, and we restructured the Novartis oncology collaboration which provided an immediate cash payment, debt reduction, eliminated plan for project expenditures and generated revenues both in 2008 and 2009.

These measures have allowed the Company to focus research installment spending on the most promising proprietary development programs including XOMA 052 in Type II diabetes. We also reduced our work force by approximately 42% or 144 employees, a majority of which were in manufacturing-related areas. The Company expects an annualized reduction of $27 million in cash expenditures when the reductions have been completed in the second quarter of 2009. No bonuses were paid for 2008 and no salary increases had been awarded for 2009.

So, indeed we already have been quite successful in making this forward. We have a plan, the asset, resources, time and people to accomplish our goals for 2009. Let me share this with you.

We have a plan to be successful in the coming year by completing the ongoing Phase I clinical trial of XOMA 052 in Type II diabetes by mid 2009. We plan to initiate a Phase II clinical study of XOMA 052 in Type II diabetes in the third quarter of 2009. We expect to establish a partnership for the development and worldwide marketing of XOMA 052 which will both reduce our costs as well as provide cash to the Company. We expect to present data on XOMA 052 at various medical conferences including the 2009 American Diabetes Association Scientific Sessions in June. We expect to complete the ongoing Phase IIa clinical trial of XOMA 052 in rheumatoid arthritis and we will all continue to seek opportunities to collaborate and license our novel antibody technology, again generating cash and fruitful collaborations.

Finally, we will continue whatever cost reduction activities are necessary in order to achieve our other goals. Stepping back, we can do all this because we have the right asset. XOMA 052 is a product which, based on the response we have been getting back from our potential corporate partners that is some of the largest pharmaceutical companies in the world, XOMA 052 appears to be first in class and best in class and target some of the largest markets, not only diabetes, but cardiovascular disease, rheumatoid arthritis and many others.

Secondly, we have antibody technology that enhances the speed and quality of antibody discovery, development and manufacturing and of course as the basis for the recent $29 million payment from our collaborator, the folks at Takeda Pharmaceutical. XOMA 3AB is an antibody drug candidate designed for the treatment of botulism poisoning, a potentially deadly muscle paralyzing disease which we are moving through to bring to a clinical phase and are working with US government on this and we continue with our collaborations with pharmaceutical companies and also with our work in the preclinical pipeline.

So, these are our assets that we feel very comfortable that they represent very high value to the companies we were talking to about collaborating as well as in for either the product side with 052 or with the providing of antibody technology like we recently done with Takeda. We also believe that we have the resources, time and people to execute the strategy. We are already executing in 2009. We saw the antibody technology licensing deal with Takeda. We have broadened our relationship with the largest pharmaceutical company in Japan, not once but twice in the last year.

For XOMA 052, we initiated the third of three studies in diabetes and a Phase IIa study in rheumatoid arthritis. We had also postponed conducting major rheumatoid arthritis study and instead, we leveraged the recent encouraging results from others and additional expected confirmatory results of studies with another IL-1 blocker RA to validate the XOMA 052 approach in the rheumatoid arthritis indication. Those results were expected towards the end of this year.

For XOMA 052, we have a number of companies who have completed their initial review of the product as a potential candidate to work with us on both in co-development and eventually in co-marketing, and these companies now are moving into due diligence stage of review. We have a number of technology licensing discussions ongoing and are discussing term sheet in some cases.

I have to say although things are moving well in general; recently we did hit what might be a speed bump for us. We are dealing with the RAPTIVA issue which Fred will talk about in detail but which has just occurred a few weeks ago for RAPTIVA is being taken off the market in Europe and in Canada. As a result, we are also dealing with the loan issue as our loan with Goldman Sachs is based on the royalties and we moved quickly and have already initiated discussions with our lenders. We expect to resolve these issues in the next few months and we also expect as we were given a going concern note from our accountants that we expect that this will be resolved and that the going concern will be removed at that time.

We will continue to look at cost, we do have contingency plans that include necessary slowing down of studies or reduction in spending in certain areas and we are prepared to do this as we have shown in the last four or five months for the reduction enforced as well as refocusing of resources and reducing other costs.

In summary then, we have the plan, we have the right asset and the resources and time to accomplish our goals for 2009 and for these reasons, and we believe that this will be a very successful year for the Company. Fred Kurland will now quickly recap financials and then at that point, Dr. Solinger will give us some comments regarding the clinical trial design situation.

Fred Kurland

Thanks, Steve and welcome everybody to the XOMA call. As has been already said by Carol, we released XOMA's 2008 financial results and are about to file our Form 10-K today and those are or will be available to you on our website and on the SEC's website. If you have had a chance to review our earnings release today, I am sure it will be clear to you that XOMA had a strong year in 2008 with revenues of $68 million well in line with what is set forth in our guidance. In fact, as Steve mentioned, I am pleased to say that we met our guidance in areas of revenue, spending and cash balance, in fact, every element in guidance that had been given.

On the call today, I will discuss what I think is most helpful in understanding our current status as well as future prospects including guidance for 2009. XOMA's net loss for the 2008 fiscal year was $45.2 million or $0.34 a share compared with $12.3 million or $0.10 a share in 2007 and our loss from operations in 2008 was $38.7 million compared with $2.5 million in 2007.

Total revenues for 2008 were $68 million compared with $84.3 million in 2007. This decrease was primarily due to a one-time cash payment in 2007 of $30 million from Pfizer Inc. for a license providing nonexclusive access to XOMA's bacterial cell expression technology. Licensing and collaborative fees were $16.4 million in 2008 versus $36.5 million in 2007 therein lays the difference associated with the payment from Pfizer. Contract and other revenue decreased from $31.1 million in 2007 to $30.5 million in 2008 and royalties in 2008 increased by $4.4 million to a total of $21.1 million reflecting the growth in LUCENTIS sales as well as royalties from newly-marketed CIMZIA.

On the expense side, in 2008, research and development expenses were $82.6 million compared with $66.2 million in 2007. The increase was principally due to an increase in research and development spending supporting the clinical development of XOMA 052, research collaborations with Novartis, Schering-Plough and Takeda, and as well as our agreement with the National Institute of Allergy and Infectious Disease, NIAID.

In 2008, selling, general and administrative expense was $24.1 million compared to $20.6 million in 2007. This increase was primarily due to increase legal, marketing communications, consulting and employee costs.

Interest expense was $7.7 million in 2008 compared with $11.6 million in 2007. This decrease of $3.9 million is primarily due to the elimination in 2007 of the Company's convertible debt, partially offset by interest expense incurred in 2008 related to the loan from Goldman Sachs.

Turning to the balance sheet, cash and cash equivalents and short-term investments at December 31, 2008 were $10.8 million compared with $38.6 million in the prior year. In addition, restricted cash at the end of 2008 as well as 2007 were $9.5 million and $6 million respectively and consisted primarily of funds reserve for the repayment of the Goldman Sachs loan. In February 2009 as Steve has already mentioned, we received the $29 million fee before taxes and other costs from Takeda associated with the expansion of the companies' collaboration.

Cash used in operating activities during 2008 was $33 million compared with cash provided by operating activities of $4.5 million in 2007. At December 31st, 2008, XOMA had outstanding debt of $63.3 million and in October of 2008, XOMA entered into a $60 million committed equity financing facility where the Company can sell shares to Azimuth Opportunity Limited over a 24-month period. In 2008, the Company sold 7.9 million shares for a total of $7.5 million under this facility.

I would like to address further issue surrounding the recent events associated with RAPTIVA. In February, last month, the EMEA announced that due to safety issues, it has recommended suspension of the marketing authorization of RAPTIVA in the European Union. Merck Serono's Canadian affiliate has announced that in consultation with Health Canada, it will suspend marketing of RAPTIVA there, also due to safety issues. The FDA has issued a RAPTIVA public safety warning. As a result, sales of RAPTIVA are expected to decline significantly in Europe and Canada and may be impacted in the U.S. XOMA receives mid single-digit royalties on worldwide sales of RAPTIVA.

At the end of the year of 2008, XOMA had an outstanding principal balance of $50.4 million on a 5-year term loan from Goldman Sachs which was initiated in May of 2008. This loan is secured by the Company's royalty revenue for RAPTIVA, LUCENTIS and CIMZIA. The terms of this loan require that quarterly U.S. and outside-of-U.S. sales of RAPTIVA exceed specified minimums, and that we maintain a specified ratio of royalties collected to interest payable. Due to the anticipated reduction in RAPTIVA sales, XOMA may not be able to meet these requirements in the second or third quarter of this year and Goldman Sachs may accelerate repayment of the debt unless we can restructure the terms of the loan. The Company has initiated discussions with Goldman Sachs regarding a restructuring of the loan and expects to resolve this matter in the next few months.

As the result of the anticipated decline in RAPTIVA royalty revenue and its impact on the Goldman Sachs loan, the Company's independent registered public accounting firm has included a going concern qualification in its opinion contained in XOMA's annual report on Form 10-K for the year ended December 31st, 2008 filed with the SEC on March today, March 11. A more detailed tabulation of XOMA's financial results appeared below in the press release and a further discussion is included in the Company's 2008 10-K filing.

As to guidance, the Company will not be providing guidance on revenues or cash receipts for 2009 so as to best manage its on-going negotiations for XOMA 052 and technology licensing and in the light of general economic and market conditions. The Company expects that cash used in operating activities may range from $15 million to being cash neutral or positive. This guidance does not include cash from royalty payments. We hope this guidance will be helpful for our investors; however, I want to remind you that guidance amounts to a prediction of the future and as such, is based on a variety of assumptions and assessment of the probabilities associated with various future events. Any of which could turn out to be incorrect. So, we caution you to take into account the risk factors described earlier and described in our public filings.

I would like to turn the floor over now to Dr. Solinger.

Alan Solinger

Thank you, Fred. As you were probably aware in a remarkable drive forward for the Company and for diabetes patients, XOMA presented encouraging results in 2008 supporting one of the most significant medical advances in diabetes in decades, a move from insulin-base therapy to anti-inflammatory treatment. For the first time, we showed that a single dose of an interleukin-1 blocker, XOMA 052 increase insulin production up to 91 days in Type II diabetes patients, a finding that supports the disease modifying and monthly dosing or longer potential of this anti-inflammatory approach.

We have continued to make progress in advancing XOMA 052 for Type II diabetes. In the U.S., the Phase I clinical trials consist of three parts. First, the single-dose IVR; Enrolment is now complete in this 36-patient study which examines six escalating doses of XOMA 052 ranging from 0.01 to 3 mg/kg. The second section, a single-dose subcutaneous arm has enrolment continuing on this study and it was planned for 18 patients and is evaluating three different doses of XOMA 052 ranging from 0.03 to 0.3 mg/kg. And the third section of this study is a multi-dose subcutaneous arm which is planned to enroll 12 patients administering XOMA 052 once a week for three weeks at either the 0.03 or 0.3 mg/kg dose.

In addition, we are conducting a multi-center placebo controlled study in Switzerland that is similar to the U.S. intravenous study. Each of these studies is evaluating safety, pharmacokinetics and a number of inflammatory and metabolic parameters and will provide important guidance as we plan the next steps in the XOMA 052 program. On a preliminary basis, we anticipate that the Phase II trial that we plan to initiate in the third quarter will enroll approximately 300 patients in five cohorts with four dose levels and one placebo group treated. We expect to complete this trial by yearend 2010.

Last week, we were pleased to announce the initiation of a Phase IIa clinical study in rheumatoid arthritis. This randomized placebo controlled study is designed to enroll up to 18 patients with moderate to severe rheumatoid arthritis and evaluate the safety, pharmacokinetics and disease specific outcomes of XOMA 052. Patients will be enrolled into one of three groups; one receiving subcutaneous injections and two, receiving IV infusions. The patients will be followed for eight weeks.

Now, I will turn the call over to Mr. Engle.

Steven Engle

Thanks, Alan. We are really excited about the results of the Phase I studies coming up in the second quarter and hope you are too. With multiple revenue streams, a world class antibody discovery platform and a growing pipeline featuring our anti IL-1 antibody with multi-indication anti-inflammatory potential, XOMA is well positioned for additional progress for the remainder of 2009 and beyond. We believe our initiatives to reduce spending and emphasize our 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. Carol?

Carol DeGuzman

Yes, operator, we can now open the call for questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Joe Pantginis - Merriman Curhan Ford.

Joseph Pantginis - Merriman Curhan Ford

Congratulations on the progress and looking for the timely fixing of the going concern here. Couple of quick questions in 052; first, is it because of just some of the financial concerns right now that the study has been pushed out from basically Q2 to Q3 in just managing your resources and the second question is, based on the guidance that we just got on the Phase II study, what would be probably the primary endpoint of that study?

Steven Engle

On the first one if I could and thanks, Joe for the question. On the Phase II start, it really comes down to exactly what you said which is we think it is still possible that on the upside, we can start it midyear as we originally had said. Probably, we are trying to leave some room open around the issue of controlling cost and so as we go along the next month or two, we will give you a better idea of where we are on that but it is really being conditioned on what is going on with the cost control situation. Alan?

Alan Solinger

I forgot, your question had to do with..?

Joseph Pantginis - Merriman Curhan Ford

More of the Phase II primary endpoints.

Alan Solinger

Yes, the primary endpoint will be the six-month hemoglobin A1c change from baseline. So, it is a fairly standard endpoint used in Type II diabetes trials.

Joseph Pantginis - Merriman Curhan Ford

Sure, okay and then the secondary endpoint with the inflammatory markers.

Alan Solinger

Correct, and additional diabetes markers and obviously, we will be looking at safety very closely.

Operator

Your next question comes from the line of Jeff Nelson - Ladenburg Thalmann & Co.

Jeff Nelson - Ladenburg Thalmann & Co.

I was wondering, I have a couple of quick questions for you. First of all, what data will you be expecting to be presenting at this June American Diabetes Association Meeting? I am just wondering if the timing, if you are going to have that multi-dose subcutaneous out around then or if you think it is just going to be the Phase I in the first part of the subcutaneous.

And then my second question is under the Azimuth deal, can you give us a sense of how many shares have been tendered so far in 2009 under recent deal and whether or not you are kind of thinking of that as you backstop if the balance sheet weakens prior to getting a deal done on 052 this year? Is that where you are going to go back to in order to keep cash coming in?

Steven Engle

Jeff, I will answer the second question first which is that, we have not actually done anything with the Azimuth facility in 2009 and so yes, it is something that we originally just initiated as a backstop again. We are just trying to be prudent so we think it was an insurance policy. Alan?

Alan Solinger

Okay and as to the data being presented at the ADA, obviously we cannot say what is in the abstracts or the presentations but we do have two abstracts accepted for oral presentations. One is working with our preclinical model in the aspects of our drug and the other has to do with the clinical data.

Steven Engle

Does that help you?

Jeff Nelson - Ladenburg Thalmann & Co.

Yes, a little bit, just maybe then you can breakdown this a little bit of the timing of these different phases or the Phase I, do you have a better sense of…

Steven Engle

Again, in timing you mean timing of completion or..?

Jeff Nelson - Ladenburg Thalmann & Co.

Yes, and the data coming out on them.

Steven Engle

Well, there is three parts there and they will probably come in that order.

Jeff Nelson - Ladenburg Thalmann & Co.

Right.

Steven Engle

And so we have said specifically which month yet. If you will get us a little more time, we will give you an idea of what is coming but fundamentally, they will come in that order during the second quarter.

Jeff Nelson - Ladenburg Thalmann & Co.

Yes, but do you still expect data from all of those things in the second quarter?

Steven Engle

Absolutely, nothing has changed about the data coming out of this system.

Operator

Your next question comes from the line of Jason Butler - Rodman & Renshaw.

Jason Butler - Rodman & Renshaw, LLC

I guess just a couple more questions on Phase II trial and some detail around the design of the trial, could you give us an idea what the frequency of administration would be in the trial and then secondly, a little bit of detail about the planned patient population? Can you give us any idea of what you are thinking about in terms of the severity of disease or duration the patients have had diabetes and then maybe any treatment that they kind of have been on prior to coming into the trial.

Alan Solinger

Okay, the trial is going to be a fairly standard type of trial for Type II diabetics. The patient population will be narrowed down slightly from what we had in the Phase I trial and that we will be using patients with hemoglobin A1c of approximately seven to approximately ten. We used a wider range for the initial proof of concept study. The dose will be given on a monthly basis and will be given sub-Q.

The other is that these patients will be on a background of Metformin and will be stabilized before entering the trial. The severity of disease is pretty much a standard Type II diabetics. We will put some restrictions in there on patients with chronic infections, patients with extremely advance disease. So these are likely be patients with less than ten years of disease but well enough established to be on Metformin therapy.

Operator

Your next question comes from the line of Aaron Lindberg - William Smith & Company.

Aaron Lindberg - William Smith & Company

What is your expectation for BCE, phage plan, and other licensing deals in 2009?

Steven Engle

Again, we do have several conversations ongoing with different company and in this case, we also have a couple of term sheets that we are already working with. The reality is we have already done what we originally plan for the tier in getting the $29 million Takeda deal done and so we just feel really good that people are interested in the technology and as we move further in these conversations, we will come back to you on a little bit more about the timing and so forth.

Aaron Lindberg - William Smith & Company

How about making any headway on other companies that maybe potentially already using the BCE technology with the drugs that are in their pipeline but not yet carrying a license?

Steven Engle

Yes, so as you might guess, we spend some resources to find this out and so it is a matter of going out hunting, which we do regularly and we have of course identified some of those in the recent few months and we are going after those. As soon as we get that closer to fruition, we will comeback to you on it.

Aaron Lindberg - William Smith & Company

Okay, and then…

Steven Engle

May I just add, there are more people than ever who want to use antibody technology particularly both the phage library as well as manufacturing, and they are looking for more than just BCE in what they are trying to do? So, the interest in this area as you might guess starting a year or two ago has just continued to grow.

Aaron Lindberg - William Smith & Company

And as you say, kind of broaden our cost to technology.

Steven Engle

Absolutely! We are very much, as you see with these last deals that we did, moving beyond just the BCE focus. There are a number of things that people want to get both at the earlier and later stages of the process itself.

Aaron Lindberg - William Smith & Company

Anything with the human engineering or is that kind of tertiary to the others?

Steven Engle

Those are all part of what we are discussing and we report the deals that we did with our friends in Japan recently.

Aaron Lindberg - William Smith & Company

Okay and then do you anticipate any further contract manufacturing revenues in 2009?

Steven Engle

We, I think, we always are thinking at least some but as you may remember, it is a part of rescaling our manufacturing capability in January. Our feeling at that time, there was not a high need for it and because of where some of the commercial companies were in their need to use it and so, we want to be a little careful about over projecting at this point. I think as the year goes on, we will see how things go.

Aaron Lindberg - William Smith & Company

How quickly can you turn on manufacturing capabilities if you got a contract either through another company government, SRI or what have you or is that something if it was a smaller contract, you just try to handle in a pilot plan?

Steven Engle

Yes, I think you named some of the options which is of course some of it can be done in the smaller scale but I think we are maintaining our J&P capabilities at this point in time and I think the question for us is as we look forward, how to minimize those costs but still making sure we got enough to cover the kinds of things we expect to do and those are the kinds of things that we are looking at right now. Obviously with the U.S., there is still interest going along on that side and I think as we work through these conversations, we will have a better idea of where we are.

Aaron Lindberg - William Smith & Company

Okay, finally, can you just tell us what you current cash balance is?

Steven Engle

Fred?

Fred Kurland

Aaron, this is Fred, well I can say, obvious that the cash balance at the end of the year was $10 million in restricted cash. That is as far as I can go, I am afraid.

Aaron Lindberg - William Smith & Company

Okay and then about 20 net from Takeda?

Fred Kurland

Well, we have announced of course that $29 million fee came in subject to of course to those expenses that you mentioned.

Aaron Lindberg - William Smith & Company

On the income statement side of that, do you have a sense of how much of that you anticipate recognizing in Q1 or throughout 2009?

Fred Kurland

It was all recognizable upon the execution of the agreement in the first quarter.

Operator

Your next question comes from the line of Liana Moussatos - Wedbush Morgan.

Liana Moussatos - Wedbush Morgan

When do you think the ADA abstract will be published and when will the Phase IIa RA data be released?

Alan Solinger

We expect that approximately a month before the ADA meeting, the abstracts generally go online for people to review so that is probably would be May because the meeting is in June in New Orleans and as to the rheumatoid arthritis data, we certainly expect to have data this year and depending upon how the trial goes, we will look for a proper venue to present that data.

Operator

Your next question comes from the line of Jason Kantor - RBC Capital Markets.

Jason Kantor - RBC Capital Markets

I got a couple of questions; what data is gating for getting a deal done for XOMA 052?

Steven Engle

Are you talking about hte 052 product?

Jason Kantor - RBC Capital Markets

Yes.

Steven Engle

Okay, in this case, people were talking to understand that the information that is coming out on the Phase I studies over the next few months. So that is the key information I think that they will be looking at as we go through the process. Obviously the Phase II falls with more fuller scale trial. We will not start until third quarter and so, that data is not gating for what we are trying to do. There are few other things that are not visible to the investors at this point simply because they are confidential but there are some other activities we have ongoing that is clinical level with preclinical but all of that will be available plenty of time for these conversations.

Jason Kantor - RBC Capital Markets

And can we talk about the loan a little bit, the restricted cash that you have that is there to pay off the loan and then what does Goldman have as an option here since you are not meeting your end of the deal in terms of the royalty? Do they demand that you pay it all back immediately or do they just take the royalty stream as it is? What actually, what are their rights?

Steven Engle

Both have couple of things and I will let Fred talk the details but just to make clear, that money is in the restricted account as you alluded to Jason and we have indicated in the 10-K as well as in the press release that we expect in April that that amount available in the said account could pay the load down from its current level down to about approximately $42 million.

So, that is the number that we are looking at as what we kind of deal with and then I think beyond that in terms of what we are doing with the lenders is that they had in this agreement certain requirements about the amount of sales ex U.S. RAPTIVA as well as other levels required and we ended up as part of this looking at that and we believe that at some point, the near term that we will have a problem meeting that because of this situation with RAPTIVA being taken off the market and so at that point, we do have the ability to come to us and at least consider what they want to do next including of course the ability to ask for a more rapid repayment of the loan itself.

So, as you might guess, we have already met with them. We did that within a week and half as quickly as we could to get together with them and start a conversation. The issue is that of course that in this particular case, this call and the reporting of these earnings and the wire report are all being done in the middle of this and so our key issue is we just cannot resolve this in a day or two so our intent is to sit down with them, get a term sheet going and work this out as quickly as possible. They have options and of course, we have options so what we got from the first conversation was that at least was an indication that parties want to sit down ad try to work through this, and so that is what we are going to do and our expectation is that rational minds will prevail.

The reality is that even without any of the European funds being available going forward, it does not dramatically slowdown the repayment of this loan and so our pulling back to them is going to be that we can get there and that we have ways to do it and those things we kind of talk about so we will sit down with them and go through it in as quickly as possible, but you know how it is going.

Jason Kantor - RBC Capital Markets

What I am trying to get at is this is secured by these royalty steams. Is that changed or is it secured by your cash, I mean can they come up to you and take your cash or they can just take ownership of those royalty streams? That is what the question.

Steven Engle

It is secured by the royalties.

Fred Kurland

Yes, I do not if I heard right, it is only secured by the royalty streams.

Jason Kantor - RBC Capital Markets

Okay, and severance charges this quarter, first quarter?

Fred Kurland

The total was $3 million.

Operator

(Operator's instruction) Your next question comes from the line of Mark Monane - Needham & Company.

Mark Monane - Needham & Company

I have a question about the diabetes trial. Generally, we have seen in cholesterol has to do with the outcomes of interest. In recent cholesterol studies or as suggested by the FDA, outcome studies will need to show not only a decrease in cholesterol but also, there is going to be as in large population decrease in cardiovascular outcomes or MACE outcomes. Clearly, diabetes presents another chance for the FDA to have somewhat of a tighter reign on what outcomes are acceptable.

Clearly, a lot of states have shown that lowing blood glucose, fasting glucose, HbA1c has been helping. Are you planning a trial with these kinds of outcomes versus a larger more provocative clinical outcome study?

Alan Solinger

Well, thanks for your question. It is actually a very timely question and very important, something that has been on our agenda for quite some time since we certainly saw that our agent, XOMA 052 was able to affect cholesterol and several other features in our animal model. We have been evaluating this at a preliminary level in our current trials and have worked with several key opinion leaders including the proper designs into our Phase II trial and looking at the long-term development plans so that we can have the appropriate data at the time of submission to the regulatory agencies. I think that the position of XOMA 052 temporarily is such that we should be able to work this into our plans much more efficiently than many of the drugs that are currently closer to approval and we will definitely look at cardiovascular and other metabolic components of diabetes, in particular, cardiovascular events.

Steven Engle

Mark, I would just add to that is that couples of things are going on in parallel which is that in interacting with potential pharmaceutical partners, we are also getting a sense of what their interest are and we will definitely be integrating that as we move forward. So that is happening and the other part is simply that we are getting lots of very interesting results as you have noted and we will be taking advantage of that but it has been happening so quickly. We are actually still integrating some of the information.

Mark Monane - Needham & Company

That was helpful and then a topical question that has to do with the opportunity in biosimilars. Is that something of strategic importance to XOMA going forward? What are your plans?

Steven Engle

At this point, we do not have any plans in that, Mark. That is where we are at this point. We are very much focused on the things that we are doing right now, obviously from collaboration point of view, there maybe things that could be done with people who want help getting into the area and we will be interested in that.

Operator

You have a follow up question from the line of Jason Kantor - RBC Capital Markets.

Jason Kantor - RBC Capital Markets

Yes, RAPTIVA, with it being pulled from the market in Europe, I think there is a lot of inventory that then have to be that maybe bought back by the Company, is there a possibility that you will actually have to return some royalties to any of your partners, as a result of this?

Steven Engle

It is a great question, Jason. That is not the way the arrangement works. They are fully in charge of how much they want to stock pile and they pick all the risks associated with that. We actually have no effect on what they are doing there so that, we will not expect to have any feedback from the system that way.

Jason Kantor - RBC Capital Markets

So, any other possible charges or any other things that will be related to that?

Steven Engle

You can think so, nothing that we have identified and we have, right now, it is basically they let us know how much they are doing and pay us the royalty and that is basically it. So, there is nothing really going in the other direction.

Jason Kantor - RBC Capital Markets

Okay, thank you.

Steven Engle

Jason?

Jason Kantor - RBC Capital Markets

Yes?

Steven Engle

Just the other thing was that, I know one of the questions that come up previously in our discussions was simply the targeting of the 052 drug in the rheumatoid arthritis area and the idea of how high a hurdle or what hurdle do we need to set for the development of the drug and in particular, what kind of goals are we setting for the trial this year and what we will have to see in order to think that it was worth taking forward and I think I just want to make sure that as we put it in the press release a little bit and I said it verbally is that it is our intent that this very much we will be watching our friends at Novartis and others as to how they are doing with their trial because they are running some fairly large studies this year. We anticipate at least one of those will provide some results and therefore insight into how well a drug to target IL-1 data does.

As you remember, we do not target it quite the same way that they do so we actually think there are some benefits in the way our drug works both higher binding and other attributes but anyway, I think that part of what we are doing is we are very much looking at what they are doing to see how that goes and then of course we will have our own results coming out and have a sense. When I said all that, I hope that was true.

Jason Kantor - RBC Capital Markets

Yes, definitely.

Steven Engle

So, having asked and answered Jason, I hope that was helpful to one of our previous discussion.

Operator

There are no further questions on the queue at this time. I would like to hand it back over to management for closing comments.

Carol DeGuzman

We would like to thank you all for joining us today and for the terrific questions. We look forward to seeing you at some of the upcoming conferences and scientific meetings. Thank you.

Operator

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

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Source: Xoma Ltd. Q4 2008 Earnings Call Transcript
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