XOMA Q3 2007 Earnings Call Transcript

XOMA Ltd. (XOMA)

Q3 2007 Earnings Call

November 8, 2007 8:30 a.m. ET

Executives

Greg Mann - Senior Director of IR

Steven Engle - Chairman and CEO

Alan Solinger - VP of Clinical Immunology

David Boyle - CFO

Analysts

Jason Napodano – Zachs

Aaron Lindberg - William Smith

Mike King - Rodman & Renshaw

Jason Kolbert - Susquehanna Capital

Joe Pantginis - Canaccord Adams

Presentation

Operator

Good afternoon. Welcome to XOMA's Third Quarter, 2007 Conference Call. At this time, all participants are in a listen-only mode. Later the company will hold a question-and-answer session and I will give you more instructions at that time. As a reminder to all participants, this conference is being recorded. Our host for today's call is Greg Mann, XOMA's Senior Director of IR. Please go ahead, Greg.

Greg Mann

Good morning and welcome to XOMA's third quarter conference call. Earlier this morning XOMA filed its quarterly report on Form 10-Q with the SEC for the quarter ended September 30, 2007 and issued a news release with third quarter 2007 financials. Each document is available on the XOMA website, www.xoma.com.

Today's webcast can be accessed by XOMA's website and will be available for replay until close of business on February 28, 2008. The telephone replay will be available beginning later this morning until close of business on November 23, 2007. Access numbers for the replay are listed in the news release that we issued this morning.

Leading today's call will be Steven Engle, Chairman and Chief Executive Officer; Dr. Alan Solinger, Vice President of Clinical Immunology; and David Boyle, Chief Financial Officer.

Before beginning we wish to remind all listeners that certain statements made on the call today will be forward-looking. We have 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 include the success of our existing collaborations, the marketing and sales efforts for RAPTIVA and LUCENTIS, 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-Q for the third quarter 2007 filed today and in other SEC filings. Please consider such risks carefully before making any investment decisions.

I will now turn the call over to Steve Engle.

Steven Engle

Thank you, Greg. Good morning and thank you for joining today's call. We are pleased and excited to report our third quarter 2007 results. XOMA had an excellent quarter. In fact, it was the single best quarterly performance in XOMA's history.

Revenues for the third quarter were greater than revenues for all prior quarterly and annual periods. David Boyle will speak in more detail, but to be specific we had $43.1 million in revenues this quarter. Net income was a positive $21.8 million and the [ending] cash is $47.6 million.

All areas of our business performed well, enhancing our financial strength significantly. Royalty revenues grew. Our collaboration programs made continued progress. Our bio-defense development activities advanced, and we added a major player to our list of technology licensees. We are well positioned to move forward as a premier therapeutic antibody development company.

Today's call will proceed as follows. I will begin with an update of our overall progress during the quarter, review our licensing agreement with Pfizer and say a few words about our strategy review process. Alan will summarize the progress of XOMA 052 program, our proprietary anti IL-1 beta antibody. David will review third quarter's strong financial results and provide updated guidance for 2007.

Let me review our recent highlights starting with XOMA 052. During the third quarter, we initiated two Phase I studies of XOMA 052 in patients with Type 2 diabetes, one in the US and one in Europe. The XOMA 052 is a potent monoclonal antibody that interrupts inflammatory process via the IL-1 pathway and that has the potential to reduce inflammation in a number of diseases. It was discovered and developed using XOMA's integrated antibody capabilities and expertise.

With the start of the two studies, we are now speaking more about XOMA 052, something we had not discussed prior to April of this year. Alan will be discussing the details, but I would like to touch upon four key points important for understanding XOMA 052.

Based on the use of another IL-1 blocker in multiple diseases, we believe that our IL-1 blocker, XOMA 052, is likely to help patients in several indications. We are running the studies in diabetes to start because it is easier to enroll patients more quickly. As soon as we have identified a safe dose, we plan to begin testing the product in other indications.

It is usually an advantage in biotech to have a drug that has potential in several indications, as it raises the probability of success in treating patients and addressing a larger overall market. We call this having multiple shots on goals, which in soccer, is a good thing. These indications could include SJIA or systemic juvenile idiopathic arthritis, Type 2 diabetes, gout and rheumatoid arthritis.

XOMA 052 targets are proven and well-understood disease pathway, where the safety and effectiveness interrupting pathway have been demonstrated in the clinic and a drug has actually been approved. Researchers have been closely studying the IL-1 pathway for over 30 years. So a great deal is now already known about the IL-1 pathway in inflammatory disease and we've designed our clinical program to build on this general body of knowledge.

An approved drug called Kineret has been available to patients since 2001. Kineret blocks the IL-1 pathway and demonstrates the potential of this drug development approach. There have been studies of the successful use of Kineret in rheumatoid arthritis, SJIA, osteoarthritis, NOMID, (inaudible), gout, multiple myeloma and Type II diabetes. Because of this information, we believe the probability of succeeding with our product is much higher than usual for a Phase I drug.

There are several reasons to believe that XOMA 052 will be a better drug than Kineret. Although we will need to demonstrate this with clinical data, we believe that XOMA 052 could involve significantly less frequent dosing since it has a significantly higher binding affinity than Kineret. In addition, it targets the ligand which we believe, will require less drug to achieve a higher effect than Kineret.

Because the list of IL-1 mediated diseases includes certain acute conditions, we believe our development program may be able to show effect more quickly. There are also several IL-1 mediated diseases that fall into the orphan disease category, where patients desperately need new therapy.

A single dose treatment may be able to demonstrate the activity of XOMA 052 in some of these diseases. As a result, our clinical trials may be relatively short in duration and could provide data at an earlier date.

Another major development of the third quarter was in the area of technology licensing. We licensed our bacterial cell expression or BCE technology to Pfizer. Pfizer agreed to pay us $30 million in upfront cash for the license plus future milestones from royalties on products developed or manufactured using the technology.

As reflected in today's financial report, we recognized the entire $30 million payment in third quarter revenue as has been our practice for BCE licensing arrangements in the past. We believe the agreement with Pfizer is an important validation of XOMA's antibody technology platform. We are pleased to have the world's largest pharmaceutical company join as one of our 45 BCE licensees.

The BCE license to Pfizer highlights the power of our technology position and XOMA's financial strength. It is worth noting that the cash payment of $30 million is roughly equivalent to our net revenues for the full year of 2006. In addition little, if any, cost is directly involved with the license fee revenue and the agreement keeps open the possibility of additional downstream revenue on all BCE-enabled products moving through Pfizer's massive development pipeline.

Pfizer has indicated that they have multiple products in late-stage development derived from the use of our BCE technology. So we look forward to Pfizer's success.

Regarding strategy, one of my first steps as CEO was to initiate in concert with my executive team and the Board of Directors an internal review of XOMA's long-term business strategy. I'm pleased to report that the review is advancing well and look forward to discussing it more fully later in the fourth quarter.

This concludes my opening remarks. Dr. Alan Solinger will discuss some key aspects of our XOMA 052 program. I would note for you that Alan's background includes being the lead medical director in the development of Rituxan at IDEC that he actually watched over and ensured the approval of Kineret, an IL-1 pathway product, and was also involved with Enbrel, both at Amgen. I'm very pleased to have a person with that much experience working on this program with us. Alan?

Alan Solinger

Thank you, Steve. I would like to say a few words this morning about why I believe XOMA 052 has such significant potential for treating patients with debilitating inflammatory conditions.

First, as Steve mentioned, we have proof-of-concept for the IL-1 mediated pathway. Years of research and experience point to IL-1 as an important mediator of inflammatory processes. When IL-1 levels get out of control patients experience diseases like rheumatoid arthritis, acute gout, systemic juvenile idiopathic arthritis, and diabetes. We already know that the pathway is central to the pathogenesis of several diseases. Kineret, an approved drug, has validated this concept.

Second, we have reason to believe the blockade of IL-1 beta, the specific approach of XOMA 052 activity, is a superior mechanism of action. Although we must demonstrate this in clinical studies, we have reason to believe that this specific approach will provide superior results, compared to existing therapies. Kineret and XOMA 052 are both designed to prevent this signaling complex from forming, thereby shutting down the signaling process and reducing IL-1 levels. But they do this through very different mechanisms.

Kineret targets the IL-1 receptor. XOMA 052 blocks the ligand. We believe that blocking IL-1 beta is a more efficient process and superior to what Kineret does. The Kineret mechanism works and provides strong proof of concept for XOMA 052's approach to targeting IL-1 beta. However, we believe that sales of Kineret have been limited by two basic shortcomings that XOMA 052 can address well.

The first shortcoming relates to the large number of IL-1 receptors and the difficulty of blocking enough of them to reduce excess IL-1 signaling. IL-1 receptors reside on nearly all the cells of the body so there are an extremely large number of them. More importantly, the studies have shown that approximately 95% of these receptors must be blocked to achieve an anti-inflammatory effect.

Rather than going after the receptor, XOMA 052 goes after the ligand. It is a potentially easier and more efficient approach. There is much less IL-1 beta than receptors in patients, on the order of 100 to 1000 times less. Physiologically, IL-1 beta is a primary upstream mediator of inflammatory response and we may only need to reduce IL-1 beta concentration slightly in order to inhibit signaling.

The inconvenience of frequent daily dosing is the other Kineret disadvantage that XOMA 052 overcomes. Kineret must be administered in large daily doses, frequently associated with injection site reaction, in order to achieve clinical effects. In contrast, we believe XOMA 052 may be able to provide a much more desirable dosing regimen on the order of monthly or bimonthly treatment. XOMA 052's remarkable 300 femtomolar binding affinity makes it a very efficient molecule for binding with a potential target.

Third, there is a strong support for the potential safety of IL-1 blockade. Here again, we can draw from the clinical experience of Kineret. Kineret has been marketed for approximately seven years and has been in clinical trials for more than 13 years, while retaining an excellent safety profile characterized by lack of excessive opportunistic infections or malignancy potential.

Studies have shown that high dosing is also tolerated. Animal studies also support the safety profile of the IL-1 blockade. Colonies of IL-1 beta knock out mice. That is engineered mice, whose otherwise normal genes have been stripped of the code for expressing IL-1 beta, have been living and reproducing without IL-1 beta for more than 100 generations in 10 years. The mice are clinically normal and healthy. Blood, bones and auto-defense are fine unless exposed to extreme stress.

Again, we are very excited about the potential of XOMA 052 to address multiple unmet medical needs and we are pleased to be in the clinic with the product and look forward to reporting on continued progress of the studies.

I will now turn the call over to David Boyle. David?

David Boyle

Thanks Alan. I think it's very clear that XOMA has had an outstanding third quarter. This is a year in which the company has made excellent progress on many fronts, including important licensing agreements, clinical progress on our products, our antibody discovery collaborations, the bio-defense work for NIAID and improving financial results.

I will take a few minutes to highlight some of the financial results that I think are most important to our investors. We released third quarter 2007, financial results and filed the 10-Q earlier today. Those documents are available to you on our website and on the SEC's website.

We are pleased to report that XOMA's net income for the third quarter was $21.8 million compared to a net loss of $10.8 million last year. For the first nine months of 2007, XOMA's net loss has been reduced to $2.4 million from $37.4 million last year.

Looking at the top line, we recorded $43.1 million in revenues for the third quarter compared with $7.4 million in the third quarter of 2006. Year-to-date revenues increased to $69.5 million from $20.5 million last year. Obviously, the upfront payment of $30 million from the Pfizer BCE license agreement has had a significant positive impact. But also, all categories of revenue, including royalties and contract revenues, have almost doubled for the first nine months of 2007 over 2006.

Worldwide sales of RAPTIVA in the third quarter of 2007 were $56 million, an increase of $15 million from the prior year's third quarter and LUCENTIS sales for the third quarter were $320 million, more than doubling from the $156 million in the same quarter last year.

We are increasing our guidance on the 2007 full year revenue forecast. We now expect to grow [2000] revenues 165% to 175% over the full year 2006 revenues of $29.5 million. This compares with our previous guidance of growth of 95% to 105%.

XOMA's R&D spending for the third quarter was $14.6 million in the 2007 quarter compared with $12.7 million for the 2006 quarter. For the first nine months, R&D spending increased from $37 million in 2006 to $47.9 million in 2007. These increases primarily reflects spending on our development of XOMA 052 and other pipeline products, spending on the NIAID, Taligen and AVEO contracts and are spending in the Schering-Plough and Takeda collaborations.

We are updating our guidance for the full year 2007 forecast for R&D expenses to grow between 30% and 35% per 2007 over the 2006 expense at $52.1 million. This guidance is an increase of 5% on both ends of the range from the previous guidance.

General and administrative expenses were $5.8 million in the third quarter of 2007, increasing from $4.2 million in the same quarter last year. Year-to-date, G&A spending increased to $15.1 million from $13.6 million last year. Previously, we provided guidance that G&A spending would be flat to the $18.1 million spent in 2006. We now expect that 2007 G&A spending will increase by approximately 10% to 20% as a result of certain personnel-related costs.

Under FASB 123R, we have recorded stock compensation expense of approximately $1 million this quarter and $2.1 million for the year-to-date compared to $0.2 million and $0.8 million for the respective periods of 2006.

Interest expense was $1.2 million for the third quarter of 2007 compared to $1.7 million in the same period of 2006. The interest expense in the third quarter of 2007 consisted primarily of interest on the Goldman Sachs loan of about $800,000 and on the Novartis line of credit of $400,000. Interest expenses related to the now retired convertible debt instrument were $6.5 million in the first nine months of 2007 compared to $7.7 million for the same period in 2006. We are confirming our previous guidance of a reduction of net interest expense of about 10% for 2007 from the 2006 amount of $11.3 million.

At September 30, XOMA had outstanding debt consisting of $30.3 million on a 5-year term loan facility with Goldman Sachs and $18.9 million of long-term debt with Novartis. At September 30, there was no convertible debt outstanding as the last of the convertible notes were converted into common shares in the first quarter of 2007.

Cash, cash equivalents and short-term investments at September 30, 2007 were $47.6 million compared with $46.4 million at December 31, 2006. This figure excludes an additional $1.6 million of restricted cash as of September 30 related to the Goldman Sachs loan.

Net cash provided by operating activities was $22.6 million for the third quarter compared to net cash used in operating activity to $10.1 million in the prior year third quarter. Net cash provided for in operations for the first nine months of 2007 was $7.4 million compared with $28.6 million used in the first nine months of 2006.

Cash used in operations for 2007 includes -- excuse me, provided for operations -- from operations in 2007 includes a one-time payment of $5.2 million related to the [make hold] provision of the convertible notes and $1.4 million related to the semiannual interest payments on the convertible notes, both in the first quarter of 2007.

As we have previously stated, with the full conversion of the notes, the $6.6 million cash expense will not be present in future quarters. We are updating XOMA's full year forecast for cash used in operations to be less than 15% of the $33.3 million used in 2006.

Our previous guidance was that we expected cash used in operations to decrease to about 50% or to less than 50% of the 2006 amount. In addition to our cash and liquid investments position, XOMA continue to have an important line of credit with Novartis, which we may use to fund 75% of our cost share obligation in our joint development work with them and which carries attractive terms.

At September 30, we had $31 million remaining available on this credit line. XOMA considers its cash and financial resources adequate for the long term, subject to the risk factors noted in the 10-Q. On a short-term basis, our cash position may increase by the establishment of new and progress on existing antibody collaboration arrangements, service contracts and licensing agreements.

In the normal course of our business we may have discussions ongoing with several potential collaboration partners, contract development service customers, and technology licensees. We 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 the 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 as well as those described in our public filings.

We look forward to closing a strong 2007 year with a continued focus to building value for our shareholders. I will now hand the call back over to Steve Engle for some concluding remarks. Steve?

Steven Engle

Thank you, Dave. All areas of XOMA's business performed at a high level this quarter. Our collaboration activities, the Novartis, Schering-Plough, Takeda and others continued moving forward. Gross sales revenues from RAPTIVA and LUCENTIS continued to grow. Our bio-defense development activities were on track. We licensed our BCE technology to Pfizer.

Each of these areas contributed to a quarter of strong revenue growth. We are also very excited about XOMA 052 and its potential to benefit patients in a variety of diseases. The two Phase I studies started in the third quarter were important milestones for the company, and we look forward to the programs continued progress in 2008.

This concludes our prepared remarks for today. Operator, would you please review instructions for the question and answer session?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Joe Pantginis with Canaccord Adams. Please, proceed with your question.

Joe Pantginis - Canaccord Adams

Hi guys. Good morning. Congratulations on the financial progress.

Steven Engle

Thanks Joe. We appreciate it.

Joe Pantginis - Canaccord Adams

First, I would just like to ask a couple of questions then I will jump back into queue. For 052 I know it's early, obviously, in the development pathway, but can you share with us again, your commercial strategy surrounding the pipeline? I'm sorry, surrounding 052? And then, secondly, I know in the press release and then you mentioned it today, you are currently in your strategic review of the company. And one of the statements that was made was, you know, potentially looking to increase growth of internal pipeline. I just wanted to know if you have any more visibility on that? And then I will jump back in. Thanks.

Steven Engle

No problem, Joe. On the second question, I think we will be talking about that more once we finish with our strategic review. So if you will allow me we will get through that and get back to you in the next few weeks. On the first question, as far as commercial, can you just provide a little more clarity specifically, what were you looking for on the commercial --.

Joe Pantginis - Canaccord Adams

Sure. I mean how long you take a partnering strategy -- how far do you want to take it in different indications before you explore opportunities?

Steven Engle

Right, well, as you can understand, being in Phase I with something to go in multiple indications, some of which are chronic, and some of which are acute; and then also some of which are large markets and some of which are orphan. There is a lot of possibilities here. So our idea is in general, that as you look at the big indications you are going to be thinking about how you are going to fund large long trials and developments processes.

On the other hand when you look at these orphan drug indications or the indications like gout, where a single dose of Kineret can be shown to have a positive impact on patients, even though gout would be a large indication, you may already get signals from it that would be very positive. So, there are still some decisions we have to make there and we haven't completely gone one way or the other and it is fairly complex. Again, it will come down to what kind of results we get out of the studies and then which indication we decide to proceed with first.

Joe Pantginis - Canaccord Adams

Okay. Thanks. I will jump back in the queue.

Operator

Thank you. Our next question comes from the line of Jason Kolbert with Susquehanna Capital. Please, proceed with your question.

Jason Kolbert - Susquehanna Capital

Good morning guys. Thanks for the update and congratulations. Really great quarter.

Steven Engle

Thank you, Jason.

Jason Kolbert - Susquehanna Capital

Just would like to ask Alan a question about finding the maximum tolerated dose on XOMA 052 given its very long half-life. What does that process look like and if that is kind of the 1-A part of the trial, what might the 1-B look like given the opportunity to look at other signals in diabetic?

Alan Solinger

Thanks for the question. It's a very good one. I would say that really, our approach isn't necessarily to find the maximum tolerated dose as much as to find an effective dose that gives us enough of a biological signal that we can move on into the other additional indications while continuing with our plans for the Type II diabetes trials. I think that in the case of most biologics, it is sometimes very difficult to find a maximum tolerated dose clinically.

You end up – really, ending up looking at more volume of drug given, cost of goods. So, I don't think those will be the kinds of issues we will be dealing with. We are really looking for biologic activity that indicates that we have the right track in our program so we can move into these additional indications that very seriously need intervention.

Jason Kolbert - Susquehanna Capital

And on the 1-B side of it, Alan, what kind of indicators would you be looking for in diabetes?

Alan Solinger

I think the standard ones accepted by most regulatory agencies certainly are items such as glycoslated hemoglobin, sometimes called hemoglobin A1c, changes in the fasting blood sugar levels and various functional capabilities of the pancreas that we can look at during the course of our trials.

Jason Kolbert - Susquehanna Capital

And one last question is --

Steven Engle

I'm sorry, let me just step in for one second because I want to make sure you get an additional part to that question. Alan, maybe you could talk about what is being measured in the study.

Alan Solinger

In the current trials, we are not only looking at specific items related to diabetes, such as blood sugars, hemoglobin A1c, C-peptide, but we are also looking at inflammatory mediators and inflammatory indicators that would show us that the mechanism of action of our drug is what we anticipated should be by our excellent modeling systems. Though we are looking at things such as sed rate, C-reactive protein, various levels of cytokines such as IL-6 and we will be looking at the clinical manifestations as well. But for the early readings, we will be looking more at the biologic indicators.

Jason Kolbert - Susquehanna Capital

Can you help us with a timeline on how long it will take for the Phase I part of the trial to play out?

Steven Engle

Alan, could I speak to that for just a second?

Alan Solinger

Certainly.

Steven Engle

So what we're doing is a dose escalation study and so the question is when do you arrive at the right dose? We have put into the study which is on clintrials.gov, if you would like to look at the details. Basically, six dose levels and those we would expect to take somewhere between six and eight weeks apiece based on the kind of enrollment that we are experiencing.

So you can multiply that out and if you had to go through all six and then look at the data, you would be talking about having the information to talk about in the third quarter of 2008. Now our hope of course is that one of the doses that occurs earlier in the group will be the dose we can take forward. But at any rate for planning purposes, I think you got to know that that could be the time period and we will hope that it actually shows up sooner.

Jason Kolbert - Susquehanna Capital

Thanks guys. I will jump back in the queue.

Operator

Thank you. Our next question comes from the line of Christopher James with Rodman & Renshaw. Please, proceed with your question.

Mike King - Rodman & Renshaw

Hey guys. It's Mike King with Chris.

Steven Engle

Hi, Mike. How are you?

Mike King - Rodman & Renshaw

Congratulations as well. I just wanted to -- could we get an update on the HCD122 please? It seems like things have been fairly quiet there for a while. I just wondered when we might get another update from Novartis?

Steven Engle

Alan?

Alan Solinger

At the present time, there will be an oral presentation on HCD122 at the ASH meeting in early December. In this, we will discuss some of the data from the ongoing trials as well as data from preclinical.

Mike King - Rodman & Renshaw

Can you maybe more specific about the nature of that, Alan?

Alan Solinger

I believe the abstract will be going online very shortly and I think because of the embargo placed on abstracts to those meetings, I really can't say much about the specifics.

Mike King - Rodman & Renshaw

I guess the other question is -- I got on the call late and so I haven't had a chance to really examine the income statement, but X the 30 million that you booked for the Pfizer license fee, it looks like your revenues were down modestly sequentially. A) Am I correct in that? And B) Can you talk about what the contributors were to that?

Steven Engle

We will be happy to have David.

David Boyle

I'll take this. The revenues may have been down sequentially. There's a couple of things going on, but the primary thing is that we do have actually a plant shutdown in the third quarter of the year, which means that some of the revenues from our contract work are less during the quarter during that shutdown period and that is basically it.

Mike King - Rodman & Renshaw

So would that be licensed in collaborative, Dave, or contract?

David Boyle

In contract.

Mike King - Rodman & Renshaw

And can I just ask you because again, I don't have the breakdown here. Can you give -- oh, I see, with $7.4 million okay versus 9.7 in the second? Okay, so that was a major contribution?

David Boyle

Yes.

Mike King - Rodman & Renshaw

Okay. Thank you. I'll get back in queue.

Steven Engle

Mike, just one other thing. I think we are aware of is that we do believe that the people at Novartis are looking to begin programs for the non-oncology space, particularly the autoimmune. So we are looking forward to hearing about those plans in the upcoming future.

Mike King - Rodman & Renshaw

Do you know what the nature of that would be, Steve?

Steven Engle

Alan, can you say anymore?

Alan Solinger

We are still in discussions as far as what these non-oncology indications may be, but I think because of the literature out there in the place where CD40 might fit in, it could be in the anti-inflammatory and autoimmune diseases as well as a large number of other inflammation-mediated processes. And there is also likely to be further word on some additional oncology indications that we're looking at.

Mike King - Rodman & Renshaw

So who's the most likely party to the relationship that would announce that? Would that be Novartis in the form of an analyst update or quarterly call? Would that be XOMA when the agreements have been put in place?

Steven Engle

Dave, do you have a --?

David Boyle

Right. Well, let me just sort of go back. With respect to the non-oncology indications, I just want to revisit that our initial collaboration with Chiron was exclusive to their oncology so actually going into non-oncology indication requires that we revisit that agreement with Novartis, something that, of course, we are both interested in doing.

So you would expect probably an announcement from us if there are any developments on that front. With respect to the clinical trials ongoing in the collaboration, we have typically kept investors up-to-date as to what is happening. We've suggested in oncology from the additional likely future indications and we will keep you updated as those trials initiate.

Mike King - Rodman & Renshaw

Okay. I appreciate that. And in fact, it brings up the other question about the nature of the relationship and the need for XOMA to continue to invest dollar for dollar. I know that has been a work in progress for a while as it is all bound up in the discussions about additional indications and such. Is that all going to get resolved in kind of one package?

Steven Engle

That would be a reasonable expectation and a fair hope, I would say.

Mike King - Rodman & Renshaw

Dave, if I might just again, on the operation side. I notice that you had a fairly large sequential increase in G&A. So maybe you could speak to that. And I feel also, that R&D expense was down sequentially, so can you give us a sense of what is going on the spending side?

David Boyle

I can and there are a couple of things that I want to highlight in particular. Let me talk about R&D first. We did have a significant credit of $2.8 million from one of our collaborators that was recorded in the quarter, and that was actually noted in the financials, related to some cost around that collaboration. So that had a very positive impact and it is basically why there is the sequential decrease in R&D.

With respect to G&A we had certain personnel-related cost including the CEO transition which we are extremely pleased about, that have increased G&A sequentially for the quarter and those have been commented on in the Q.

Mike King - Rodman & Renshaw

Okay. Fine. Thanks so much for helping me out there.

Steven Engle

You are welcome.

Operator

Thank you. Our next question comes from the line of Aaron Lindberg with William Smith. Please, proceed with your question.

Aaron Lindberg - William Smith

Thanks. A couple of quick follow-ups there. The plant is back online now. That's just the annual shutdown that happens during Q3?

David Boyle

Yes, we do a couple of shutdowns for cleaning and calibration during the year. I mean, this is just basically, normal maintenance periods that we have scheduled for the plant.

Aaron Lindberg - William Smith

Do the Novartis discussions include trial design?

Steven Engle

We actually, of course participate with Novartis in all of our joint committees and teams in terms of trial design, discussions and all the development programs and I might invite Alan to comment a little bit more about this specifically since he is our project team leader for HCD122.

Alan Solinger

Yes, we have regular teleconferences, face-to-face meetings to discuss design and ongoing issues with our trials. So this is a very collaborative agreement. We take a very active part in discussions and design of the trial setting.

Aaron Lindberg - William Smith

Would it be fair to characterize the negotiations with Novartis to be just ongoing for all quarters at this point from when you eliminated the exclusivity on oncology up till today it's just been a continual process until you had a resolution?

Steven Engle

I think that's a fair statement. I might just say that we have a very positive collaboration with Novartis and relationship and feel it is going very well. You know we have expressed interest as have they in developing the non-oncology side of HCD122 which we think could be a great potential benefit to both parties and we are exploring that in recent discussions.

Aaron Lindberg - William Smith

When do you expect the 629 trials to begin?

Steven Engle

629 trials, we are actually as part of these strategic review taking a look at the indications and we will update you on that as we go forward probably with part of the strategic review early next year.

Aaron Lindberg - William Smith

Is it possible that you don't start the trial?

Steven Engle

We haven't made final decisions around development of that product. I think what we have said is that we are looking at a number of superficial skin infections for that product. I think there are some very interesting indications available because of the nature of the product, including that bugs don't develop resistance to it. So we are looking at a number of indications and I think if we complete that review as part of our strategy, we will give you more guidance around what to expect.

David Boyle

We apologize but we can't give you quite as much clarity until we finish the process. I hope that is easy to understand.

Aaron Lindberg - William Smith

The two compounds that are kind of being most heavily scrutinized there, 629 and NEUPREX?

David Boyle

All the compounds are being scrutinized and certainly NEUPREX and 629 are getting their share.

Aaron Lindberg - William Smith

Then have you set new targets into the Takeda collaboration during Q3?

David Boyle

We haven't typically in the past commented on the number of project and/or targets in any specific collaboration. I think we will probably stick to that for now.

Aaron Lindberg - William Smith

Okay. And then can you comment on the enrollment so far in the 052 trial?

David Boyle

That is not something that we have been publicly updating on and as there is important data available. We will make that available, but as Steve and Alan have indicated, the time frame for getting data from that trial is sometime out into next year.

Steven Engle

But I think also, just to clarify from my comments and Alan's regarding the study itself indicating that a six to eight weeks to go through a dose level. You can already draw conclusions about where we are in the process and it may differ as we go along to say on enrollment as long as it stays in that general frame, then that's the way we will keep reporting things at this point.

Aaron Lindberg - William Smith

Okay. Can you tell me when exactly the European trial started?

Steven Engle

A press release was --

David Boyle

It was at the last press release and we will get the date for you --

Aaron Lindberg - William Smith

Slightly after the US trial?

David Boyle

Yes.

Steven Engle

Yes.

Aaron Lindberg - William Smith

And then, what did you buy for $6.5 million? The fixed assets purchase there, just looked like PP&E only went up $1 million in the quarter.

David Boyle

The $6.5 million fixed assets is year to date and I mean, frankly, there are number of things around that as you might anticipate some of the equipments that support antibody discovery in the preclinical areas relatively costly. We continue to do things for both the pilot and the GMP manufacturing plant. We have also added a facility next door, where we have moved some of our people into, relatively smaller expenditure, but it is a number of typical things and just moving our business forward. There is no one, sort of to say, large chunk out of that $6.5 million that is specific to anything.

Aaron Lindberg - William Smith

Okay. So, it's scattered about. I didn’t know it's year-to-date, but still year-to-date looks like the PP&E just went up $2 million. So, the lion share that's scattered amongst other things?

Steven Engle

Right.

David Boyle

By the way, the announcement date for the start of this trial was September 12.

Aaron Lindberg - William Smith

Thank you. One last question for you, given the strong Q3, do you anticipate minimal licensing and collaborative revenues in Q4?

David Boyle

I think you would have to think in terms of the relative terms. You wouldn’t expect to see the same thing happen this quarter, whether we’ll some probably it's hard to tell when you are getting closer to the end of the year. Sometimes the end of the year works for you and people close thing out because they want to take care of them and sometimes they float on over into the first quarter. So, we will try and keep you aware of it, as it happens.

Aaron Lindberg - William Smith

Okay. I will jump back in queue, thanks.

Steven Engle

Thank you very much.

Operator

Thank you. Our next question comes from the line of Joseph Napodano with Zachs. Please, proceed with your questions.

Jason Napodano - Zachs

Hey guys, it’s Jason. I am wondering if you could talk a little bit about the discussions with scientific advisors at the EMEA as far as the new practice?

Steven Engle

Alan?

Alan Solinger

Yes, thanks Jason. At the present time, we are doing ongoing discussions with the EMEA related to the various aspects of the submission. So, this is an iterative type of process that will get us closer to being able to make a decision on how to proceed. Those discussions are going well, but as you probably are aware that you take some time since they are iterative and then there is a lot of back and forth. So, this can involve anything from looking at the clinical data, manufacturing issues, labeling, follow-on discussions. At the present time, I think the best thing to say is that it's proceeding as scheduled.

Steven Engle

Okay. And I would just add that when Alan says that it's proceeding well, he means the process is going well, because it is sequential and iterative. We don’t know the answer till we get there. It is exceptional circumstances and I have been through this at my last company and you will not know until you get to the end of it where you are to be aware of that place.

Jason Napodano - Zachs

Got you. How would you say the investigators (inaudible) are going?

Steven Engle

Alan?

Alan Solinger

I would say that they are certainly going as anticipated by the investigators. The data is coming in any moment as expected and so, because many of these are investigator-initiated studies, we don’t necessarily have much influence on the enrolment rates. But, we are in close contact with the principal investigators and I think that data should be forthcoming in several of those trials.

Jason Napodano - Zachs

Got you. Let me ask about your government work. I think this is something that you guys are focusing pretty heavily on beginning of the year and last year. But now there seems to be a lot of activity with in-house pipeline, which is great. But I am wondering as far as government work is going, are you guys still focusing on growing the government business?

Alan Solinger

Yes Jason, as you know we've already had two major contracts left in 2005 and 2006 and we are now working on the third one. So, we believe we have a good reputation with the government on time, on budget. We also think we have to write contacts and interactions to grow this into a more significant piece. There are two ways to do that of course with the government business. One would be the stock piling of drugs such as (inaudible) and then we've seen one or two companies do that quite effectively.

We obviously need to get through our clinical work to get there. In the meantime then, we are looking for the R&D payment revenues to us for the work being done to move that as well as some of the other projects forward. We do think in the next three to five years this could be a much larger business and then from that point of view we still see it as a proprietary pipeline piece and so we do see it as a key part of generating revenues because it's high margin profits over the longer term

Jason Napodano - Zachs

And you think you have sufficient manufacturing capacity to continue to grow that business?

Steven Engle

Where we are at, we are fine. Obviously, as we begin to anticipate a real buildup, then we begin to ship things as necessary and we are looking at all sorts of alternatives there

Jason Napodano - Zachs

Okay and may be just one last question guys. You talked about I think Pfizer said -- I think you guys have mentioned in a presentation that Pfizer has 14 biotherapeutic products in mid to late stages. Any idea about when we will start to hear what some of these products are?

Steven Engle

I am sorry, say last part. When the --

Jason Napodano - Zachs

When we will hear more about those products, specifically what the products are?

Steven Engle

I think we probably are not going to see [surprises] that we -- we will let you know as soon as we know. It's one of those things trying to get the information out and it’s the same problem that the analysts have in general of trying to find out from the big companies exactly what is going on inside the pipeline. And so, we will try to do that, but it is not straightforward just because of their approach to how they want to disclose things about their pipeline.

Jason Napodano - Zachs

Okay guys. Thanks a lot. I appreciate it.

Operator

Thank you. Our next question comes from the line of Joe Pantginis with Canaccord Adams. Please, proceed with your question.

Joe Pantginis - Canaccord Adams

Hi guys. My follow-ups were answered. Thanks a lot.

Steven Engle

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Aaron Lindberg with William Smith. Please, proceed with your question.

Aaron Lindberg - William Smith

Thank you. Can you describe the progress on the Lexicon collaboration?

Steven Engle

Okay. Lexicon collaboration continues to move forward very positively -- frankly excellent relationship, we have some very complementary capabilities. We will reiterate some things that we've said before that these are early stage projects. There are relatively higher risks and they are very novel interesting targets, but also potentially high rewarded if we are successful. They do continue moving forward, but they are good ways away from the clinic, and there is nothing more specific that we are actually able to communicate to you at this time.

Aaron Lindberg - William Smith

Okay. We haven't heard anything on that for a while or so. In relation to the contract with NIAID, at this point there has been no revenue; you are still finalizing the details, is that correct?

Steven Engle

Yes.

Alan Solinger

That's correct on the NIAID contract.

Aaron Lindberg - William Smith

Okay. And then do you anticipate revenue in Q4 from them?

David Boyle

Probably not at this point. We are not absolutely sure but, in the guidance, I did not include revenue from that contract in Q4.

Aaron Lindberg - William Smith

Okay. And then do you expect to make similar size transferable payments on your Goldman facility in Q4 (inaudible) maybe in Q3?

David Boyle

Actually, Goldman has the option to draw down from the restricted cash only twice a year and that happens actually in Q1 and Q3. So there will be no principal payments made on Goldman in Q4, just mechanistically, that cannot happen.

Aaron Lindberg - William Smith

Okay. Can you just review the mechanism around that for us? I know that they've got the ability to draw -- I guess, I thought that you guys also have the ability to make prepayments on that as you [talk to us].

Steven Engle

We can do within certain limitations something we would not at this point choose to do. They do mechanistically every six months, I believe it's in March and September. Have the opportunity to draw down of course, the interests do, but also principal payments for excess amount of that maybe in the restricted cash which is derived from the royalty payment stream. As happened in September, though, when they elect not to do that that cash then gets returned to the XOMA unrestricted cash and that really is Goldman's call.

Aaron Lindberg - William Smith

Okay. On interest expense, you said that you had expected interest expense for the full year to be like 10% lower than ' 06?

David Boyle

Yeah.

Aaron Lindberg - William Smith

Okay. Can you tell me what you expected for -- it looks like then you would have a pretty large interest expense in Q4, just year-to-date I think the interest expense is really like $4.2 million.

David Boyle

Well, year-to-date net interest expense is about $9 million. Keep in mind that within that we had about $6.6 million in Q1 that was related to the convertible debt. [multiple speakers]. So, I mean, if you take that out and you certainly look at our last quarter where we had net interest expense, we had actually about $1.2 million in expense and about $3 million in income and less than a million (inaudible) that out you get a better idea of what Q4 is likely to be.

Aaron Lindberg - William Smith

Okay, yeah no primarily (inaudible) there. Last question do you believe there are additional other companies that may take significant BCE license like Pfizer, maybe companies that are using the BCE in development right now, the license that before they commercialize the product will need to have one?

Steven Engle

Well, let me just say that we expect to continue to license that technology as we've suggested in the call we are continuing discussions with a number of potential collaboration partners and licensees of our technology.

Alan Solinger

There are several large companies that have not taken a license that we believe probably should. So, we will target those companies aggressively to continue seeing revenues come out of this area. And then, of course, there may be smaller companies and so forth along the way.

Aaron Lindberg - William Smith

Perfect, thank you.

Steven Engle

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Steven Engle

We again, are just very excited about the progress this quarter. I hope you are too and we think we've got even bigger things to see in the coming months. So, please stay tuned. Thank you.

Operator

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

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