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XOMA Corporation (NASDAQ:XOMA)

Q1 2012 Earnings Call

May 8, 2012 4:30 pm ET

Executives

Ashleigh Barreto – Investor Relations

John W. Varian – Chief Executive Officer

Paul D. Rubin – Senior Vice President, Research and Development and Chief Medical Officer

Fred Kurland – Vice President and Chief Financial Officer

Analysts

Adnan S. Butt – RBC Capital Markets Equity Research

Matthew L. Kaplan – Ladenburg Thalmann Securities

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Operator

Good afternoon, ladies and gentlemen, and welcome to the XOMA Corporation’s First Quarter 2012 Financial Results and Corporate Update 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 call may be recorded.

I would now like to turn the presentation over to your host for today, Ashleigh Barreto, Investor Relations at XOMA. You may proceed.

Ashleigh Barreto

Thank you, operator. Good afternoon and welcome to XOMA Corporation’s first quarter 2012 financial results and corporate update conference call. On our call today are John Varian, Chief Executive Officer; Dr. Paul Rubin, Senior Vice President, Research and Development and Chief Medical Officer; and Fred Kurland, Chief Financial Officer.

Certain statements made during this call concerning the timing of events related to clinical trials, anticipated size of clinical trials, continued sales of approved products, regulatory approval of unapproved product candidates and anticipated restructuring charges, sufficiency of our cash resources, and anticipated levels of cash utilization or that otherwise relate to future periods are forward-looking statements within the meaning of the Federal Securities laws. 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 timing of events related to clinical trials and delayed or may never occur as a result of actions or inaction by regulators of present or future collaboration partners. Complications in the design implementation or third party approval of clinical trials, complications in the collection or interpretation of statistical data or unanticipated safety issues; clinical trials may not reach their anticipated size if trials are not initiated or due to enrollment issues such as unavailability of patients, competing product candidates or unanticipated safety issues.

Continued sale of approved products maybe impacted by XOMA’s ability to implement its marketing efforts, competition or unanticipated safety issues, regulatory approval of unapproved product candidates maybe affected by the results of future clinical trials, actions or inaction by the FDA or unanticipated safety issues. Restructuring charges maybe other than more anticipated if we are not estimate properly. Implement additional or different XOMA activities. The period for which our cash resources are sufficient could be shortened if expenditures are made earlier or in larger amounts than anticipated or are unanticipated, if anticipated revenues or cost sharing arrangements do not materialize, or if funds are not otherwise available on acceptable terms.

Anticipated levels of cash utilization maybe other than as expected, due to unavailability of additional licensing or collaboration opportunities. Inability to obtain the services of contract manufacturing or service providers on anticipated terms, higher than expected costs for clinical trials, outsourced manufacturing or other services, the effects of the pace of development spending in light of the terms of XOMA’s existing collaboration agreement or unanticipated changes in XOMA’s research and development programs or other businesses. These and other risks, are described in more detail on XOMA’s most recent filing on Form 10-K and then other SEC filings. Consider such risks carefully when considering XOMA’s prospects.

At this time, I would like to the call over to John Varian, CEO. John?

John W. Varian

Thanks, Ashleigh. Good afternoon, everyone and thank you for joining us. Our last corporate update call was less than six weeks ago, and we used that time to focus on the significant changes we had implemented and the tangible progress we have made since November of 2011. Today, instead of repeating those items, we’ll use time together to provide you with a brief update on our activities over the last six weeks, as well as our near-term clinical development plans. Since the majority of the questions, we’ve received from investors are directly related to these topics. I’ve asked Paul Rubin to conduct a through presentation of our non-infectious uveitis, acne and erosive osteoarthritis studies.

You all have seen in our release that our March fund raising has led to the adoption of several accounting principles that warrant, and I use that word intentionally, discussion. Fred Kurland will walk through the specific elements of our financial results to bear color or require clarity. We will leave plenty of time to address your questions before our hour with you concludes.

You all know XOMA’s express strategy by now, invest in value creating activities. My decision to integrate all our research and development activities under Paul’s leadership is a reflection of this strategy. I believe we must understand the desired clinical and commercial profile of our compounds from day one in order to deliver innovative and valuable products in the future. To achieve this, our diverse expertise in discovery and product development [less] function as one fluid team.

Beginning at the earlier stages of our discovery work in compound formulation, into manufacturing optimization and then throughout the preclinical and clinical development processes. Paul is like minded in appreciating the need to integrate desired commercial profile and an understanding of the anticipated future landscape into all of our product development activities. By embracing the changing market dynamics and future clinical needs, we believe we’ll be able to focus all our activities on bringing high value therapies to market.

We have a great molecule in gevokizumab. We have the right people in place to advance gevokizumab toward commercialization. The fourth quarter was centered on streamlining XOMA’s activities and identifying the most important activities that can create value. The first quarter was dedicated to telling the new XOMA story and culminated in attracting new capital from some of the leading biotech institutional investors. This gives us the ability to execute on our strategy. The team at XOMA understands the next six months must be focused on execution. We soon would have more people enrolled in XOMA-sponsored clinical studies than at any point in our history, which is exciting.

With that, I’ll turn the call over to Paul to review our clinical plans.

Paul D. Rubin

Thank you, John and hello everyone. Today I’m going to provide you with additional detail on the gevokizumab studies that we have discussed before. This update will include the soon-to-be-launched Phase 3 non-infectious uveitis and erosive osteoarthritis proof-of-concept trials, as well as the ongoing trial with moderate to severe inflammatory acne. We’re excited to get our NIU Phase 3 program underway. As you know, we are conducting this trial in tandem with Servier’s pivotal Behcet’s uveitis trial. Thus the trials must meet regulatory and commercial needs for all markets worldwide.

Both protocols are near final form and we continue to target first-patient enrolled by the end of June. Before I get into the nuances of the NIU Phase 3 study, the following are the top line details. The study will enroll 300 patients with active non-infectious intermediate posterior or pan uveitis with a vitreous haze score of greater than or equal to 2 using the standardization of uveitis nomenclature or SUN scale. We will be conducting the study in 100 to 120 centers with an approximately 50/50 split of patients between the U.S. and the rest of the world. These 300 patients will be randomized one to one to one, to either 30 milligrams of gevokizumab, 60 milligrams of gevokizumab or placebo, delivered via subcutaneous injection once every four weeks.

Patients will receive a total of 14 injections over a 12-month period. While patients will be dosed for one year, the primary endpoint is assessed on day 56. This primary endpoint is a proportion of patients demonstrating at least a two-unit improvement in the vitreous haze scores at day 56. The main objective of this study is to compare the effective dose of gevokizumab, at least one of the two doses, to placebo, in the treatment of patients with active non-infectious intermediate, posterior or pan uveitis.

To be enrolled in our study, participants must meet the following criteria. Patients must have at least one eye that fulfills the International Study Group Classification criteria of intermediate, posterior or pan uveitis and a diagnosis of NIU confirmed by documented medical history. They must have a vitreous haze score in at least one eye of 2 or higher using the SUN NEI criteria. The SUN NEI scale ranks the degree of vitreous haze on a zero to four point scale. Best corrected visual acuity, or BCVA by ETDRS, must range from 10 to 75 letters in the study eye.

Patients must be receiving background treatment for the ocular manifestation of uveitis. These treatments can include an oral dose of prednisone or an equivalent corticosteroid within a preset dose range per day and/or at least one systemic immunosuppressive drug. This can include azathioprine, cyclosporine, mycophenolate mofetil, mycophenolate sodium, tacrolimus, and/or methotrexate.

In addition to gevokizumab or placebo, patients will continue on these therapies throughout the study unless they need rescue criteria. For patients who need rescue criteria, the investigator may use his or her discretion to treat the patient with another appropriate compound, exclusive of additional study drug or steroid inserts. Patients who respond to rescue medication will be eligible to receive 60 milligram gevokizumab for 28 weeks in an open label treatment arm. Any patient who requires rescue medications will be considered a non-responder.

There are a number of secondary endpoints we will be assessing, including the proportion of responders at time points other than day 56, the mean change from baseline in vitreous haze score, the mean change from baseline in BCVA, the proportion of subjects with at least a 10 or 15 letter improvement in BCVA, the change in domains of vision-targeted health status, measured by composite score of the National Eye Institute Visual Functioning Questionnaire 25, the change in domains obtained through quality of life surveys.

The study will last 57 weeks, including the screening period of up to one week and a treatment follow-up period of 56 weeks. For patients who are rescued and choose to participate in the open label treatment arm, their participation will range from approximately seven months to 18 months, depending on when they were rescued.

In determining the sample size required to meet statistical significance, we have calculated that 93 subjects per treatment group will be sufficient for a 90% nominal power to detect a 25% absolute difference in response rate. We anticipate a 15% response rate for placebo, which conservatively based upon the historic average of 10%, and a 40% response rate for gevokizumab. Similar studies have reported a dropout rate of approximately 7%.

The study also includes stratification of patients for three baseline factors, and these are vitreous haze scores of 2 versus greater than 2, steroid dose less than 10 milligrams or greater than 10 milligrams per day, and duration of the patient’s disease, stratified by those who have experienced it for less than a year and those who have had it for longer than one year.

Now we anticipate it will take approximately 12 months to enroll the study. If our assumptions are correct, we will have top line data near the end of 2013. We are presently at the Association for Research in Vision and Ophthalmology Meeting in Florida and while here, we convened a meeting with our U.S. Expert Advisory Group. These conversations continue to give us a strong sense of their excitement to be a part of this study and it reemphasizes the need for additional therapies to benefit the approximately 150,000 patients that suffer from this serious disease.

I will now provide some detail regarding the Behcet’s pivotal trial. Now this study will be conducted solely by survey, so the final design and timing is at their discretion. This study is expected to enroll approximately 110 Behcet’s uveitis patients, randomized to one of two arms, comparing monthly injectors of gevokizumab to placebo.

Only those patients who are not exhibiting signs of their disease while on a stable dose of corticosteroid will be entered. Randomized patients will undergo a forced taper of their corticosteroids, which in many cases will be expected to result in exacerbation of their disease. The primary endpoint is time to exacerbation.

This is an events-driven study. The study will be complete when a predetermined number of exacerbations occur. Patients will be followed for six months after randomization. Assumptions as to anticipated exacerbation rates for the active and placebo arms were determined based upon prior studies and expert experience.

While we can’t speak for them, we know Servier is working to start the study in the fall of this year. As it’s an event-driven trial, the timing of completion will be dictated based on the enrollment rate and the accuracy of the estimated events rates in the study arms. Based on the existing assumptions, we would expect data from the Behcet’s study to be available approximately a quarter after our NIU study. We anticipate the successful completion of both trials could allow BLA submission by the second half of 2014.

Let’s turn to our moderate to severe inflammatory acne vulgaris Phase 2 proof-of-concept study. As we have indicated in prior communications, we are seeking to enroll 171 patients over 18 years of age, who are diagnosed with moderate to severe acne vulgaris that has been unresponsive to oral antibiotics. In this study, patients are being randomized one to one to one, with gevokizumab 0.3 milligrams per kilogram, 0.6 milligrams per kilogram or placebo, delivered subcutaneously once monthly for three months. This dosing is very similar to the 30 and 60 milligram doses we’ll be using in our other studies.

Our primary end point is the mean absolute change from baseline in inflammatory facial lesion count at day 84. The secondary end point is a comparison of the change from baseline on Investigator’s Global Assessment Scale or IGA. The trial is ongoing with about 35% of the enrollment complete. We are in the process of adding additional sites and launching an extensive recruitment program that takes advantage of commonly used social media sites. We are optimistic that we can accelerate patient study entry and still anticipate top line data for the end of this year.

Turning to our Phase 2 proof-of-concept study, you are aware we have selected erosive inflammatory osteoarthritis of the hand as our second trial. This is also known by the acronym EOA. EOA is a relatively common ailment. The literature states that up to 4 million Americans suffer from this condition. It is an important subtype of osteoarthritis, characterized by an aggressive clinical course with a significant inflammatory profile, including elevations, circulating C-reactive protein of validated marker of inflammation.

There is general agreement that treatments usually recommended for traditional osteoarthritis are frequently disappointing in the EOA patients. Recent researchers highlighted the role of IL-1 in EOA disease progression. Pro-inflammatory cytokines, such as interleukin-1 beta have been shown to play a key role in the destruction of the cartilage matrix in this subset of arthritis patients, which is not the case in patients afflicted with the more common form of the disease.

Furthermore, the IL receptor antagonist, anakinra, which inhibits the effect of IL-1 by blocking its interaction cell surface receptors’ has been looked at in a pilot study by (inaudible) in 2009 for the treatment of EOA. The results from this small trial suggested use of the drug resulted in a decrease in pain, a decrease in global handicap and a decrease in non-steroidal anti-inflammatory drug use.

During this quarter, we anticipate enrolling the first of around 90 patients with active erosive inflammatory arthritis of the hand in our placebo-controlled double-blind study. To qualify for this study, the patient must have a diagnosis of primary hand EOA, as evidenced by the following: pain, aching or stiffness for more than 15 days during the previous 30 days and at least one painful episode treated with pain medication during the previous year.

Bone enlargement of two or more of the following joints: second or third distal interphalangeal joints, second or third proximal interphalangeal joints and first metacarpal. Bone enlargement of two or more distal interphalangeal joints, fewer than three swollen metacarpophalangeal joints or MCP joints. At least two bone erosions, detectable in conventional radiograph of the hand at the first CMC, PIP and/or DIP joints.

At baseline, patient self assessment of pain during the previous 24 hours must be at least 40% on a 100 millimeter digital analog scale. Also, a baseline of documented evidence of at least moderate pain must be present, based upon a standardized pain scale and patient subset to be negative for rheumatoid factor and anti-CCP antibody.

Patients who meet the eligibility criteria will be randomized two to one to treatment with placebo or gevokizumab and be treated for approximately six months. Patients will be allowed Acetaminophen as needed for breakthrough pain. Exploratory measurements assessed at three and six months will include total pain, stiffness from physical function.

The primary end point is the improvement in the osteoarthritis hand scale. We also will set multiple outcome measurements in this study, including improvement in pain, stiffness in physical function in the osteoarthritis hand scales, change from baseline in C-reactive protein and erythrocyte sedimentation rate, a substantive amount of rescue medication required by patients, as well as safety in pharmacokinetics. This study is designed to show 80% power at a 0.05 significant level. With an assumed 10% dropout rate, we need around 90 patients at about 2:1 distribution or 60:30. We’re excited to get this study underway and we believe we’ll have the EOA study enrolling patients this quarter and enrollment should be completed towards the end of this year.

We continue to discuss the merits of multiple indications for our third POC study. Reflecting John’s earlier comments about knowing the products required commercial profile from the beginning of the process, our marketing team is gathering marketing assessments and analyzing the competitive landscape for the indication under internal discussion. I’m not going to discuss, which are we consider as (inaudible) which is a lead possibility at this time.

Now that I’ve given you your fill of medical and scientific information, I am going to turn the call to Fred to do the same on the financial side. Fred.

Fred Kurland

Thank you, Paul and good afternoon, everybody, and thanks for attending our call. As you know, we issued warrants in conjunction with our financing in March. Therefore I’m going to be making more detailed remarks than I have over the past few calls. As the streamlining and the financing has impacted our financial results. I know most of you joining us today understand warrant valuation accounting. But since many of our investors who listen to the replays of our call have varying experience with these matters, we believe we should walk through how the accounting for warrant works. So for those whom this is the standard procedure I hope you will hold on for just a few minutes.

In our statement of operations, we reported total revenues of $9.9 million in the 2012 first quarter, compared with $15.6 million in the first quarter of 2011, which included revenue from about a third of the $15 million upfront payment received from Servier for the Gevokizumab collaboration agreement.

As you all know, we began the process of streamlining our operations in early January, particularly the 34% reduction in personnel, which reduced our expenses during the first quarter of 2012. Research and development expenses for the first quarter of 2012 were $15.8 million, compared with $17.3 million in the corresponding period of 2011.

General and administrative expenses were $4.7 million in the first quarter of 2012, a 13% reduction from the $5.4 million incurred in the first quarter of 2011. The streamlining is expected to result in total charges of $5.9 million, of which $3 million will be cash charges in 2012. In the first quarter of this year, we took a restructuring charge of $3.8 million, primarily in severance-related costs and the impairment of various assets and leasehold improvements.

As a result of the increase in XOMA warrants that were granted as part of the equity financing in early March and a significant subsequent increase in our stock price. We’re required to take non-cash charge this quarter and we will mark-to-market the value of our warrants on a quarterly basis. This means the contingent value of warrants will increase or decrease each quarter based upon a formula that you will find spelled out in great detail in our Form 10-Q, which was released today.

On March 9, 2012, the fair market value of our warrants was estimated to be $6.4 million, using the Black-Scholes Model. In accordance with generally accepted accounting principles, or GAAP for those of you who prefer acronyms, we revalued the warrants liability on March 31 of this year, again using the same methodology. As our stock price has increased since the time we completed our financing, the warrants at the end of the quarter had a fair value of $21.1million. The increase in fair value was $14.4 million or $0.33 per share, which we book as a non-cash charge to the revaluation of contingent warrant liabilities line of the statement of operations.

For the quarter ended March 31, 2012, we reported a net loss of $30.4 million or $0.69 per share, compared with a net loss of $6.3 million or $0.22 per share for the quarter ended March 31, 2011. Excluding the $14.4 million of non-cash charge, reflecting the increase in the fair value of our warrant liabilities, our net loss per share was $0.36 in the first quarter of 2012.

At the end of the first quarter of 2012, we had cash and cash equivalents of $74.9 million, including the $36.2 million that was raised during the equity offering in the quarter and that compares with $48.3 million on December 31, 2011.

Today, we reaffirmed our 2012 guidance that we issued on January 5. We anticipate cash used in ongoing operating activities will be approximately $35 million. We expect our cash will be sufficient to fund our operations into 2014, and comfortably pass the time, when we expect to report top line data readouts on the clinical trials that Paul has just discussed. I will turn the call back to John now.

John W. Varian

Thanks, Fred and thanks, Paul. You see, Paul, what happens when you get promoted, you have to talk the most on the quarterly call. I’m sorry about that. Okay. There are two items that we haven’t touched on yet. The past study in hypertension is enrolling well and we continue to believe we’ll have the study completed in early 2013.

Commercially, the three primary wholesalers are set up for electronic ordering and have place orders for ACEON. All of the ACEON that was started by Abbott is now depleted and all ACEON that is being shipped has XOMA’s logo on the boxes and package inserts.

We are on track for our first full quarter of sales in the second quarter. The little we generated in the first quarter was barely a blip as we anticipated, so we didn’t call it out in our financials. I can tell you that April, our first full month selling ACEON, was at a level, which would support the 12 months trailing average of $2.8 million we had discussed previously.

Before I turn the call over for Q&A, I’d like to outline the milestones you should expect from us through the second quarter. First, we’ll open enrollment in our U.S. Phase 3 non-infectious uveitis study. We are targeting our first patient enrolled by the end of June. Second, we’ll initiate enrollment in our erosive osteoarthritis study. Third, we’ll book our first quarter revenues from ACEON sales. Additionally, we’ll be making presentations at scientific meetings through the end of June.

So as we have the operator set up the queue for your questions, I will repeat what I hope you have heard today. We have a great candidate in gevokizumab and a broad clinical plan that gives the product a good opportunity in its initial pivotal studies, as well as an opportunity to point us in the right direction for the next Phase 3 indication. We have the right people in place to grow the company and we have the financing in place to focus all our attention on executing on our strategy.

Operator, we’re ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jason Kantor of RBC Capital Markets. Your line is now open.

John W. Varian

Hi, Jason.

Adnan Butt – RBC Capital Markets Equity Research

Hi, thanks for taking my question. It’s actually Adnan on Jason’s behalf.

John W. Varian

Okay, great. That’s great. Go ahead.

Adnan Butt – RBC Capital Markets Equity Research

I guess the first question is on the NIU program. How many patients have a score of two or higher? Basically, I’m trying to figure out how many patients you might need to screen before enrollment can be completed?

John W. Varian

Yeah. there’s kind of a preset percentage that typically happens. Paul, would you like to comment on that based on what we hear?

Paul D. Rubin

Well, I mean, certainly when we speak with potential participating physicians, they all believe that they can find the requisite number of patients in the enrollment period that we’ve actually defined. So the belief is that it is possible when we speak with them. But when you look, for example, at the data from the Ozurdex trial, we try to back calculate from what’s published, and it looks like about 40% of their patient population had 2 points or higher.

Adnan Butt – RBC Capital Markets Equity Research

Okay, thanks. And can you tell me if the background treatment (inaudible)?

Paul D. Rubin

During the primary end point, it has to remain stable. After the primary end point is actually determined, then there actually will be a [course taper] and doctors can treat more according to what they believe is best for the patient.

Adnan Butt – RBC Capital Markets Equity Research

Okay. And what are the criteria for a rescue?

Paul D. Rubin

The actual rescue criteria are quite extensive, and I don’t think that we actually gave the...

John W. Varian

No, we didn’t.

Paul D. Rubin

We didn’t disclose that. But as you would imagine, it’s movement is pre-specified movements in information going the wrong direction, basically.

John W. Varian

Correct. and it also – it’s done dependant upon what a patient’s baseline is.

Paul D. Rubin

Yeah.

John W. Varian

For example, exacerbation or a failure and someone who is at four would have to be considered differently than those who are at two.

Paul D. Rubin

Right.

Adnan Butt – RBC Capital Markets Equity Research

And have you said what the rescue medication are?

John W. Varian

Well, the rescue medications essentially are those that are typically used for treatment of these patients, with the exception of other biologics or our drugs, [yeah exactly].

Adnan Butt – RBC Capital Markets Equity Research

Okay. And thanks for sharing the assumptions on the NIU study. Are there details available similarly for the (inaudible) program or will that be available later?

John W. Varian

Again, this study is really being controlled by Servier, and we probably will not be giving that type of information on that study.

Paul D. Rubin

Yeah. so we are fully aware, we have talks and discussions around that through the [JFC]. It’s just not appropriate for us to share those at the same level of detail.

Adnan Butt – RBC Capital Markets Equity Research

One more question, and then I’ll jump back in queue. As for the third proof-of-concept trial, do you think you might be able to update us on the second quarter call? Are you close to deciding or is it an ongoing process?

John W. Varian

We’re planning to be able to – we’re going through a kind of the end-stage evaluation process, and we’re very hopeful that we’ll be able to give that information in the next conference call. Yeah.

Adnan Butt – RBC Capital Markets Equity Research

Okay. Thanks. I’ll get back in queue.

John W. Varian

Sure. We just heard a huge thunderbolt or we heard a lightning bolt, a thunderclap here in Florida, and so if we drop off, it’s just we were hit by lightning, I guess.

Operator

Thank you. Our next question comes from Matt Kaplan of Ladenburg Thalmann. Your line is now open.

Matthew Kaplan – Ladenburg Thalmann Securities

Hi, guys. Thanks for taking my questions. Can you hear me?

John W. Varian

Yes, we can.

Matthew Kaplan – Ladenburg Thalmann Securities

Great, great. And thanks for all the detail in terms of – Paul that you provided on each of the programs, it’s great. And maybe looking a little bit outside of those programs, just to give us a sense in terms of what the status is, can you talk a little bit about the ACEON Phase 3, the combo study, and when we should expect data from that?

John W. Varian

Sure, I’ll start. I’ll let Paul fill in. It’s a very simple study; it’s a single dose, fixed-dose that we’re testing. Other doses of this exact combination of the clinical data already exist. So it’s a fixed-dose combination of, as you know, Perindopril, a particular – proprietary form of Perindopril that we have, it’s patented through 2023, and Amlodipine, a calcium channel blocker.

The factorial design study is – there’s three arms. There is one arm that gets this fixed-dose combination and the other two arms get just the other drug. So either Perindopril or Amlodipine, and you look for a difference in blood pressure control in the fixed-dose combination compared to both of those or either of those other arms. So the study started in February of this year. And as we said, it should be done about a year from the time we started it. So we should have that study done around February of next year. Yeah.

Matthew Kaplan – Ladenburg Thalmann Securities

Yeah.

John W. Varian

We’re on track for completion according to target, yeah.

Matthew Kaplan – Ladenburg Thalmann Securities

And in terms of paying for the study, is it – are you guys footing the bill, how does that work?

John W. Varian

So thanks for asking that. We try to make it clear in other – in each of the other communications, but thanks for bringing that up. So under our agreement between us and our CRO and Servier, this is a cash-neutral study to us. We’ve estimated the cost of the study at somewhere between $8 million to $10 million, and between a grant directly from Servier toward the study, so they can have information from the study, and the giving to us – the licensing to us of ACEON. The way it’s paid for is that grant and then profits from ACEON whenever those profits come. So we will be cash-neutral on this, because the profit from ACEON will go to pay for the study until the study is fully paid for.

Matthew Kaplan – Ladenburg Thalmann Securities

Great. And moving away from ACEON, give us an update in terms of your biodefense business and where that is?

John W. Varian

So Fred, do you want to talk a little bit about that, where we are on that financially, and we talked about it more broadly too?

Fred Kurland

Sure. Well, as you may recall, the XOMA has had a total of $120 million of contracts that has been working through over the last few years. We’re about two-thirds of the way through, so there is another $40 million of contracts that we’re working on over the next few years. These are cash flow positive and they are to help the government – we’re developing the antibodies that are used in cocktails for – as an antitoxin for botulinum toxin.

The important announcement that we made last January, as part of our restructuring, was that we’ve made the decision to de-emphasize and not seek any further contracts from the government. But we’re most happy to work through the contracts that we have now.

John W. Varian

Yeah, so Matt, the key thing this does for us is, as you probably remember, we no longer do Phase 3 or commercial manufacturing. but it’s very important that we have Phase I and Phase II manufacturing for our own products, both a partnering standpoint and from just a clinical development standpoint. And so what this remaining and continued program does for us, it pays for a large piece of that Phase I, Phase II capability over these next several years. So it’s important to us that it pays for something we would want anyway, but it’s not a core piece of our long-term business.

Matthew Kaplan – Ladenburg Thalmann Securities

Got you, got you. Thanks. And could you give us an update as well on your XMet programs?

John W. Varian

Sure. Paul, do you want to talk a little bit about that scientifically, and I can take about from the business side or...?

Paul D. Rubin

Sure. So right now, the candidate that’s furthest along is the XMetA program, what we’re calling XMetA, which is a partial agonist of the insulin receptor. We have done quite a few in vivo animal studies that have proven the concept that it clearly is active in controlling glucose metabolism. We have done other studies showing that there is less potential for lower blood sugar and also less potential for weight gain, and at that time, we’ve also done studies showing that it does not stimulate the mitogenic aspect of the insulin receptor.

So in theory, this could be a long acting insulin controller that could be dosed much less frequently than the existing insulin products. We’re in the process of improving our ability to manufacture it and once we complete that, we will have the opportunity to put this into further development.

John W. Varian

Yeah. And so where we are, Matt, is, we have been and we’ll continue to talk to the leaders in diabetes about licensing this program. We are in the process now of finding out, at this moment in time, with the data that we generate, what is the product’s worth. This could potentially be a world-changing drug; it’s preclinical, so you can’t get too excited about things at this stage. But it could potentially be a world-changing drug.

So what we want to do is make sure we get the right value for that. So, as we talk to companies who are in this space, who would be the right companies to develop it long-term, we’ll determine whether there is a value point now that it should be licensed or whether we should continue to do more work on it. And that’s exactly where we are right now. So I feel very strongly, we could license the product this year and may do so, but at the same time, we need to make sure we make the right choice long-term for XOMA, when it comes to getting value out of our own discoveries.

Matthew Kaplan – Ladenburg Thalmann Securities

And do how you define the right choice with – what terms are you looking for, I guess?

John W. Varian

Do you want me to list them exactly right now?

Matthew Kaplan – Ladenburg Thalmann Securities

Exactly.

John W. Varian

So I can’t answer that, Matt. I know you’re kidding. So it’s in the eye of the beholder, what value you get for what risk you take on or give up, so it’s – I can’t – I couldn’t define it, even if I were willing to on this call, okay?

Matthew Kaplan – Ladenburg Thalmann Securities

Fair enough.

John W. Varian

Okay.

Operator

Thank you. Our next question comes from Megan McCloskey of MLV & Company. Your line is now opened.

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Hi, guys. I hope you are safe in the Florida, it sounds...

John W. Varian

When the call started, it was safe. I might be – I don’t know whether this is a sign, but the lightning is moving closer to us as we’re thinking.

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Oh, man, nothing like an earnings call with a little level of excitement, right?

John W. Varian

We’re going to make Fred stand by the window.

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Paul, those were really wonderful walk-throughs of some of the clinical aspects of the trials. I am really encouraged to hear that the acne trial is moving along with (inaudible) faster. Curious if you guys are going to have any interim data work there, and then I also have a follow-up question.

Paul D. Rubin

Sure. There is no plan to do an interim analysis, in that we’ve got – the way it’s designed now, we’ll do analysis of data when the study is complete.

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Okay, great, because it sounds like you guys are actually going to do a lot of data analysis for all of these trials [the subsets of] different indications and secondary indications that could be coming out of all three of the trials; NIU, acne, and EOA. It sounds like you’re going to get a lot of information out of gevokizumab and I was curious if you could talk a bit about where you see it going and being able to design future trials for these?

John W. Varian

Yeah, that’s a really good question. I think what we stated previously is that the idea here, with a novel anti-inflammatory drug, when you don’t know our priority where it will be successful is to give it as many shots on goal as you possibly can, and we’ve sort of looked at our resource and decided three, at least at this stage, was the appropriate number. So the idea is to do these trials, power them in such a way that the signal we get will be unequivocal, and then allow the data to drive what our next full scale programs will be. Hopefully, we’ll have many choices when these studies are over.

Megan McCloskey – McNicoll, Lewis & Vlak LLC

Yeah. I think you will. All right, great, and it’s nice to get an update XMet as well. So thank you so much.

John W. Varian

Thank you.

Operator

Thank you. Our next question comes from Jason Kantor of RBC Capital Markets.

Adnan Butt – RBC Capital Markets Equity Research

Hey, thanks for taking the question again. So following up on the prior question, can you say something about gevokizumab safety?

John W. Varian

Yeah, it’s a very timely question. I mean, do you want to talk about it in context of the (inaudible) meeting or...

Adnan Butt – RBC Capital Markets Equity Research

Sure, you read my mind.

John W. Varian

Okay. That was an interesting meeting, and if you look at the results, they were very similar. Canakinumab got the very similar response from the scientific advisory board that (inaudible). It was unequivocal that the drug worked for gout, but it’s likely that these drugs will be used chronically and they only provide an acute dataset. So I don’t think anyone was concerned necessarily about the safety in the study that was done, they were more concerned about the unknown.

And aside from that, I think the safety profiles of these drugs are well known. We have given this drug to over 500 patients for up to six months, including now we have some patients that have received the doses that we will be exploring in these next trials. We don’t really see a signal that differs from placebo at this point in time.

Obviously, we still have to monitor and see what happens when we go from six months to a year. But the safety of gevokizumab seems to be at least in the dataset that we’ve accumulated, quite favorable.

Now we are not sure if that improved or good safety profile is due to its mechanism, which as you know mechanistically, the drug is dissimilar from the other compounds that inhibit IL-1 beta signaling, because if you recall, ours is an allosteric modulator, which still allows some IL-1 beta response to occur in the face of an overwhelming stimulus.

Adnan Butt – RBC Capital Markets Equity Research

Okay.

John W. Varian

So we have to just keep watching, but to-date, we don’t see any real signals that we have to – that would preclude aggressive development.

Adnan Butt – RBC Capital Markets Equity Research

Okay. And can you remind me the one to one to one that randomization, was that low dose and higher dose?

John W. Varian

For which study?

Adnan Butt – RBC Capital Markets Equity Research

For the NIU study, did I hear that right?

John W. Varian

It’s a placebo, 30 milligrams and 60 milligrams.

Adnan Butt – RBC Capital Markets Equity Research

Okay. And then finally on the osteoarthritis study, can you remind me again please the duration, and if you’re looking at any scans, and at what time points, if you’re looking at scans?

Paul D. Rubin

We haven’t given the information on the scans. Obviously, we’re considering every possible outcome that would give us useful information. The patients will be treated for a six month period, but we intend to do the primary analysis at three months, because if you don’t see an effect on pain and hand function over three months, it probably would be a suboptimal therapy.

Adnan Butt – RBC Capital Markets Equity Research

Okay.

John W. Varian

What Paul just was able to disclose phase of things that we know will be in the final protocol. If there are additional items in there, we’ll talk about those as we go. but at this point, the ones that we’re certain are in are the ones he spoke of – in that study, because it’s close to final, but not at the very, very final stage.

Adnan Butt – RBC Capital Markets Equity Research

And then finally a question for Fred, in terms of the cost sharing with your partner, can you give an update on that, when might have an impact?

Fred Kurland

Well, the – sure, sure, happy to, Adnan. I’ll address the answer specifically to non-infectious uveitis, which what you might be referring to. So the arrangement with Servier is that they will pay for the first $50 million of development costs, and once that amount is reached, then both parties each share equally in any future expenses. And we’ve not disclosed much else on that other than to say that there is going to be a point in time in which that $50 million is reached, at which point, we will start kicking in our fair share, and just want to make sure that you know and then all the listeners know that we have taken that into account as we have discussed our financial guidance going forward.

Adnan Butt – RBC Capital Markets Equity Research

Okay. Do you think it might begin in 2012, can you say anything on that?

Fred Kurland

Well, we haven’t been specific as to the specific dates beyond that.

Adnan Butt – RBC Capital Markets Equity Research

Okay. Thank you.

Operator

Thank you. Our next question comes from Matt Kaplan of Ladenburg Thalmann. Your line is now opened.

Matthew Kaplan – Ladenburg Thalmann Securities

Hi, guys. Just a follow-up on the NIU study and also the EOA study. Paul, can you go over again kind of the primary end points for each of the studies and the assumption that you have in terms of powering, just went over those a little quickly, want to make sure I had those right.

Paul D. Rubin

Sure. For the NIU study, the primary end point is the number of responders after 56 days on therapy, and a response is defined as a two grade or a two point change in the vitreous haze score.

Matthew Kaplan – Ladenburg Thalmann Securities

The number of responders at 56. Okay.

Paul D. Rubin

Correct. And we have done the calculations and we have 90% power to detect the 25% difference between the placebo and active.

Matthew Kaplan – Ladenburg Thalmann Securities

And that assumes a 15% response rate for placebo and 40% for gevokizumab?

Paul D. Rubin

Yes, correct.

John W. Varian

And as Paul pointed out earlier that 15% is pretty conservative, because the lead after that and other studies we looked at it was about 10% at that same time point.

Matthew Kaplan – Ladenburg Thalmann Securities

And then you are going to continue to follow the patients for 28 weeks?

John W. Varian

For actually up to a year.

Paul D. Rubin

Yeah, year.

Matthew Kaplan – Ladenburg Thalmann Securities

But the secondary endpoints are based on 28-week look?

John W. Varian

Well, there is a number of secondary endpoints. Some will occur at the time of the primary analysis, others will occur throughout the study.

Matthew Kaplan – Ladenburg Thalmann Securities

Okay.

Paul D. Rubin

Yeah. And we will do an important secondary endpoint would be visual acuity at day 56.

Matthew Kaplan – Ladenburg Thalmann Securities

Okay.

Paul D. Rubin

Yeah. And the endpoint of osteoarthritis is we are looking at – there are design scales that can capture both pain and function of the hand. So we’re looking at changes in the pain scales and the function scales as primary endpoints.

Matthew Kaplan – Ladenburg Thalmann Securities

And what do you expect to be able to tease out in terms of impact on pain? And those are VAS scales or what do you use there?

John W. Varian

Well, we are doing VAS pain scales, but these are actually – they are scales that are developed, validated scales that are able to quantify the amount of hand function improvement, as well as the amount of pain improvement.

Matthew Kaplan – Ladenburg Thalmann Securities

Those are validated osteoarthritis pain scale and then also a functional scale.

John W. Varian

There is a number that are possible right now, with starting which one to use. We’re reflecting between a couple of them.

Matthew Kaplan – Ladenburg Thalmann Securities

Okay. And the plan is to have what is the 80% power to show a P-value of 0.05.

John W. Varian

Yeah, exactly.

Matthew Kaplan – Ladenburg Thalmann Securities

And remind me what the output is in terms – for the NIU study?

John W. Varian

Of the NIU study, we haven’t – we didn’t give that information.

Matthew Kaplan – Ladenburg Thalmann Securities

Okay. Thanks, guys.

John W. Varian

Okay.

Operator

Thank you. At this time, I’m not showing any further questions. I’d like to turn the call back to Mr. John Varian for any closing remarks.

John W. Varian

Thanks operator, and thanks everyone for joining our call today. We appreciate it. We are very excited about the work that’s in front of us at XOMA and we’re even more, so excited about what the results of that work might be. We think this has been a lot of fun, we are having a great time doing the work we’re doing now, but because we can actually see that in the future should have a great impact. So we look forward to sharing our future at XOMA with you and again appreciate for having on the call today. Thanks very much.

Operator

Ladies and gentlemen, thank you for participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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