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XOMA Ltd. (NASDAQ:XOMA)

Q2 2011 Earnings Call

August 4, 2011 4:30 pm ET

Executives

Carol DeGuzman – IR

Steven Engle – Chairman and CEO

Fred Kurland – VP, Finance and CFO

Alan Solinger – VP, Clinical Immunology

Analysts

Liana Moussatos – Wedbush Securities

Christopher James – MLV

Ross Sweeney [ph] – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the XOMA second quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Carol DeGuzman, Senior Director of Investor Relations. Ms. DeGuzman, you may begin.

Carol DeGuzman

Thank you, operator. And good afternoon, everyone. A short while ago, we issued our news release, which included financial results for the quarter ended June 30, 2011 and a general business update. Our quarterly report on Form 10-Q was filed with the Securities and Exchange Commission this afternoon. Each document will be available on the XOMA website at xoma.com. Today’s webcast also can be accessed via our website and will be available for replay until the close of business on November 4, 2011.

Joining me on today’s call is Steven Engle, Chairman and Chief Executive Officer; and Fred Kurland, Vice President and Chief Financial Officer. Also joining us is Dr. Alan Solinger, our Vice President of Clinical Immunology. We wish to remind all listeners that certain statements concerning product, conduct or availability of results of clinical trials, entry into a O52 development partnership or potential licensing and collaboration arrangements or other aspects of product developments or that otherwise relate to future periods are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements are based on assumptions that may not prove accurate. Actual results could differ materially from those anticipated due to certain risks inherent in the biotechnology industry and for companies engaged in the development of new products in a regulated market. Among other things, the conduct or availability of results of clinical trials may be impacted by or delayed or may never as a result of unavailability of resources, actions or inaction by our present or future collaboration partners, insufficient enrollment in such trials or unanticipated safety issues.

These and other risks, including the generally unstable nature of current economic condition; the results of discovery, research and pre-clinical testing; the timing or results of pending and future clinical trials, including design and progress of clinical trials; safety and efficiency of the products being tested; action, inaction or delay by the FDA, European or other regulators or their advisory bodies; and analysis or interpretation by, or submission to, these entities or others of scientific data; uncertainties regarding the status of biotechnology patents; uncertainties as to the cause of protecting intellectual property; changes in the status of existing collaborative and licensing arrangements; the ability of collaborators, licensees and other third parties to meet their obligations; market demand for products; scale-up and marketing capabilities; competition; international operations; share price volatility; XOMA’s financing needs and opportunities; and risks associated with XOMA’s status as a Bermuda company are described in more detail in XOMA’s most recent Annual Report on Form 10-K and in other SEC filings. Consider such risks carefully when evaluating XOMA's prospects.

I'll now turn the call over to Steven Engle.

Steven Engle

Thank you, Carol. The first half of 2011 has been a very active time with a number of developments that will help shape our company’s strategic direction going forward. We are pleased to have the opportunity to discuss these with you today. To summarize, together with Servier, we continue to make progress towards launching the Phase 3 program for XOMA 052 in Behcet's uveitis by the end of this year.

At the same time, Servier is advancing toward initiation of the Phase 2 trial in cardiovascular disease based in part on the consistent and substantial reductions in C-reactive protein levels seen throughout our Phase 1 and Phase 2 diabetes trials, which enrolled more than 600 patients. Servier plans to begin the cardiovascular Phase 2 trial in the second quarter of 2012.

Next, the Phase 1 trial of our antibodies with some antitoxin XOMA 3AB for potential biodefense applications is enrolling patients. Third, at the recent American Diabetes Association Annual Scientific Sessions, we presented the first data from two new family of antibodies we discovered, which activate or sensitize the insulin receptor. These discoveries may provide entirely new approaches to treat diabetes and metabolic syndrome. Ultimately, we reduced the company’s net operating burn in the second quarter to approximately $8 million, as Freed will review in a few minutes.

I’ll begin with 052. One of the benefits we gain from the Servier agreement was their commitment to fund 100% of the first $50 million in the Behcet's uveitis development program and 50% of further expenses for this orphan indication. As you may recall, last year we successfully obtained orphan drug designation for XOMA 052 in Behcet's in both the United States and European Union. With these resources, we are working with Servier to design and implement our international Phase 3 program.

We have met with and have correspondence with the FDA and EMA, and we have obtained key influence on our proposed plans. We are also planning discussions with the regulatory authority in Japan, where there is a higher prevalence of Behcet's uveitis and many of the other developed countries. Still there is still effort in this area to be accomplished and we’re not finished with these conversations nonetheless we continue to make progress.

As you recall, in June, we announced top-line six-month results from our Phase 2a study in Type 2 diabetes, which enrolled 74 patients at a single center in Mexico. XOMA 052 treatment was well tolerated and showed biological activity with substantial reduction in levels of C-reactive protein or CRP, a biomarker of inflation associated with cardiovascular risk. As was expected, based on the previous announced Phase 2 results, there were no differences in glycemic control between the 052 groups and placebo.

While we continue to advance our clinical development program, we have extended our intellectual property estate for XOMA 052 in the cardiovascular area. Earlier this week, we were issued a new US patent covering methods of treating certain coronary conditions, including acute myocardial infarction or heart attack using XOMA 052 and IL-1 beta antibodies with similar binding properties. This is the 10th US patent to have issued from our XOMA 052 program and there continue to be numerous pending applications filed in the US and around the world, several of which also have been granted.

Moving on to our biodefense program in June, we were pleased to announce the Phase 1 trial that’s started in XOMA 3AB. XOMA 3AB is our novel formation of three antibodies directed to botulinum toxin, one of the deadliest bioterror threats. Johns Hopkins in Baltimore is conducting this dose escalation trial in healthy volunteers under a contract with the National Institute of Allergy and Infectious Diseases, which is supporting our biodefense program. Based on results of Phase 1 study combined with our scientific work, we anticipate the potential for future biodefense-related contracts.

On the new product development front, we are pleased to unveil our discovery of two novel classes of insulin-regulating antibodies at the American Diabetes Association Meeting. Insulin is a key metabolic hormone for regulating blood sugar. Insulin balances blood sugar by sending signals to the insulin receptor on the surface of the cells. They are working to develop antibodies that are highly specific to the insulin receptor in order to affect these signals.

This work could lead to new therapies to address different aspects of the diabetes disease spectrum. Antibodies that activate the insulin receptors such as the XMetA antibody are designed to provide long-acting insulin-like activity. This is important for diabetic patients who cannot take sufficient insulin. Ultimately these antibodies may reduce the number of insulin injections needed to control blood glucose levels.

In contrast, insulin receptor-sensitizing antibodies such as XMetS are designed to reduce insulin resistance. These antibodies could enable diabetic patients’ own insulin to be more effective in controlling blood glucose levels. Results presented at the ADA meeting on the XMetA antibody demonstrated a reduced fasting blood glucose levels and improved glucose tolerance in a mouse model of diabetes.

After six weeks of treatment, there was a statically significant reduction in hemoglobin A1c levels, a standard measure of average blood glucose levels over time, in mice treated with XMetA compared to control. In addition, there were statistically significant reductions in elevated non-HDL cholesterol levels.

We also presented results from the XMetS antibody in a mouse model of obesity-induced insulin resistance. XMetS showed enhanced insulin sensitivity and statistically significant improvements in fasting blood glucose levels and glucose tolerance in treated mice compared to control. In addition, there were statistically significant reductions in elevated non-HDL cholesterol levels.

With this brief summary of recent developments, I’ll now turn the call over to Fred to review our financials.

Fred Kurland

Thanks, Steve. And welcome, everybody, to our second quarter call. XOMA had total revenues of $16.5 million in the second quarter of 2011 compared with $5.9 million in the second quarter of 2010. The increase in revenues in the 2011 period compared with 2010 was due primarily to funding from our Servier collaboration for XOMA 052 and increased funding under contracts with the United States government for XOMA 3AB development, to which Steve just referred.

Our net loss in the 2011 second quarter was $8.1 million, or $0.27 per share, compared with a net loss of $15.6 million, or $0.93 per share, for the year-ago quarter. R&D expenses in the second quarter of 2011 were $18.3 million as compared with $19.3 million a year ago, with a modest reduction in 2011 primarily due to lower expenses for the XOMA 052 Phase 2 clinical program. SG&A expenses were $6.1 million in the second quarter of 2011 as compared with $5.0 million in the second quarter of 2010. It is important to note that the higher non-cash share-based compensation expense in the 2011 second quarter was the predominant reason for the SG&A increase over the 2010 period.

I’m very pleased to report that the company’s cash used in operations in the second quarter was $8 million, which is on target with our cash use guidance for the year. At June 30, 2011, we had cash and cash equivalents of $51.2 million compared with $37.3 million at December 31 of 2010. Since the beginning of the second quarter, we have received gross proceeds of $5.9 million from the sale of common shares under our 2011 At Market Issuance or ATM Sales Agreement, of which $3.7 million in cash was received in the second quarter and the remaining $2.2 million in the third quarter of this year.

As has been our practice, we will not be providing specific guidance on overall revenues or cash receipts for 2011 so as best to manage business development discussions and other activities. However, we currently expect that cash used in operating activities in 2011 may range from $30 million to cash neutral.

Operator, this concludes our prepared remarks. Please open the call for questions and answers.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Liana Moussatos from Wedbush Securities.

Liana Moussatos – Wedbush Securities

Thank you. I have a couple questions. One, can you – you mentioned all the patents for 052. When is the expiration of composition patent? What year?

Steven Engle

I’m sorry. Which one? You are saying the new one, Liana?

Liana Moussatos – Wedbush Securities

Yes. Well, the composition of matter patent for 052, when does that expire?

Steven Engle

2027.

Liana Moussatos – Wedbush Securities

Okay. And then for XOMA 3AB, can you talk about what you need from the Phase 1 study? I know it’s healthy volunteers. But what do you need to see in order for the government to want to renew contract for it?

Steven Engle

Liana, I don’t know all the exact details. But just generally, it’s safety. I mean, they are looking for obviously – when you are doing with a biodefense kind of product, you can’t go in there and test it in humans with the actual active agent obviously. So what you’re looking for to start with is just know that it’s safe in humans.

Liana Moussatos – Wedbush Securities

Okay. All right. Thank you.

Steven Engle

Great. Thank you.

Operator

Thank you. Our next question comes from Christopher James from MLV.

Christopher James – MLV

Thanks for taking my question. Fred, could you tell us a little bit about the R&D line, the $18 million? Could you break that out for the quarter 052 versus 3AB? And could you give us a sense of guidance for R&D for the rest of the year?

Fred Kurland

As you know – well, let me start out by saying that on XOMA 052, Chris, the spending in the first quarter is larger than the second because that’s when most of our Phase 2 expense was incurred. And while spending levels on 052 continue to be, I’d say, at relatively high rate, a bit lower than the first quarter, probably the biggest difference between the first and second quarters is that in quarter number two, virtually all of our expenses with the exception of those directly associated with the Phase 2 trials were reimbursed to us by Servier.

So what that means is that, perhaps more important than looking at the gross expenses to look at the difference in the revenue line as well as the expense because the two of course need to be netted out in order to see the overall net picture. The same can be said of XOMA 3AB. Operating activity in the second quarter was more or less equal to the first. And in case of both quarters, they were fully reimbursed by the US government. And so perhaps the larger difference between quarters one and two is not so much on the expense side but on the revenue side. You’ve got significantly higher revenue in quarter number two.

Christopher James – MLV

Got it. Okay. And then the Phase 2 for cardiovascular disease for 052, CV is obviously is a big area. Are you specifically holding back on endpoints or areas that you are targeting for competitive reasons or do you have a sense of where you’re going to go in cardiovascular disease?

Steven Engle

Chris, it’s not just us. Obviously we are working – Servier is driving this particular focus. Servier has over $1 billion franchise in the cardiovascular area worldwide. And so there is a number of different things that they are considering. And so it would just be premature to be trying to point at specific endpoints or designs and so forth at this time. The usual question is just what kind of patients, acute coronary syndrome and so forth. And they are still working on that kind of stuff.

Christopher James – MLV

All right. Okay.

Steven Engle

Sorry. Can’t give you more information, yes.

Christopher James – MLV

No, that makes sense. And then a question on Behcet's uveitis, remind me – you’re going to start that trial by the end of the year. Did you say in the past that you’re going to start enrolling patients, you’re going to start dosing patients by the end of the year, or that your plan is simply old [ph]?

Steven Engle

Our intent is to initiate the program by the end of the year. And as we get closer, we will try to be more specific about that. But the idea is to initiate a trial. Is that all? Sorry.

Operator

Our next question is from Jason Kantor from RBC Capital Markets.

Ross Sweeney – RBC Capital Markets

It’s Ross Sweeney [ph] on behalf of Jason Kantor. I was wondering if you have any plans to announce any additional antibody license deals sometime this year by the end of the year.

Steven Engle

We have a number of different discussions going on related both to the libraries and the products and the questions, want of timing. And so we hopefully will do more. And as we get closer, we’ll let you know.

Ross Sweeney – RBC Capital Markets

I was often wondering about how much additional stock that you sold this quarter.

Fred Kurland

Yes. This is Fred. The total shares outstanding at the end of the quarter were 32.2 million. At the beginning of the quarter, there were – I think it’s 29.7 million. So the obvious difference is the amount sold during the course of the quarter.

Ross Sweeney – RBC Capital Markets

Thanks.

Operator

Thank you. And we do have a follow-up from Liana Moussatos from Wedbush Securities.

Liana Moussatos – Wedbush Securities

Just a follow-up on 3AB on Phase 1 trial. When will we hear when it’s done and that it’s safe and then what the next steps are? Will that be like sometime this year or will it take longer?

Steven Engle

Yes. Let me refer this over to Alan. Alan, do you have a better idea?

Alan Solinger

We anticipate roughly a year.

Ross Sweeney – RBC Capital Markets

So, in 2012?

Alan Solinger

Most of the control of that trial actually from an operation standpoint is at the NIH as our partner.

Ross Sweeney – RBC Capital Markets

Okay. Thank you very much.

Steven Engle

Sure.

Operator

Thank you. I’m showing no further questions at this time and would like to turn the call back over to Carol DeGuzman.

Carol DeGuzman

Thank you, operator. And thanks to all of you for joining us today. We hope to see many of you at the Wedbush Conference in New York later this month and obviously to keeping you informed of our progress. Operator, this concludes our call for today.

Operator

Thank you. Ladies and gentlemen, this does conclude your conference. You may all disconnect and have a wonderful day.

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