XOMA Limited Q4 2007 Earnings Call Transcript

Mar.11.08 | About: XOMA Ltd. (XOMA)

XOMA Ltd. (NASDAQ:XOMA)

Q4 2007 Earnings Call

March 11, 2008 4:30 pm ET

Executives

Greg Mann - Senior Director of IR and Corporate Communications

Steve Engle - Chairman and CEO

Alan Solinger - VP of Clinical Immunology

Dave Boyle - VP of Finance and CFO

Analysts

Michael King - Rodman & Renshaw

Joe Pantginis - Canaccord Adams

Aaron Lindberg - WM Smith & Company

Jason Kolbert - Susquehanna International Group

Jason Kantor - RBC Capital Markets

Leah Hartman - CRT Capital

Jason Napodano - Zacks Investment Research

Operator

Greetings, ladies and gentlemen, and welcome to the XOMA fourth quarter 2007 financial results conference call. (Operator Instructions)

It is now my pleasure to introduce your host Mr. Greg Mann, Senior Director, Investor Relations and Corporate Communications. Thank you. You may begin.

Greg Mann

Good afternoon and welcome to XOMA's 2007 conference call. About 30 minutes ago, XOMA filed its annual report on Form 10-K with the SEC for the year ended December 31, 2007 and issued a news release with 2007 financials. Each document is available on the XOMA website, www xoma.com.

Today's webcast can be accessed via XOMA's website and will be available for replay until close of business on April 31, 2008. A telephone replay will be available beginning later this afternoon until close of business on March 25, 2008. Access numbers for the replay are listed in the news release that we issued this afternoon.

Leading today's call will be Steven Engle, Chairman and Chief Executive Officer; Alan Solinger, MD, 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 including 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 US patent and trademark office are discussed in XOMA's Form 10-K for 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.

Steve Engle

Thanks, Greg. We are pleased and excited to report our results for 2007. 2007 was a banner year for XOMA and shows the team's success during the past few years in building a business and a diverse set of revenue streams.

In 2007, we more than doubled revenues growing them nearly a 190%. This increase reflects strong growth in technology licensing, our antibody collaborations, biodefense contracts and product royalties. A major contributor to the revenue growth was the $30 million upfront cash payment from Pfizer for our license to our bacterial cell expression technology. This was our largest technology license payment received to-date. The decision by Pfizer, the world's largest biopharmaceutical company, to take the license provides continued validation of the importance of XOMA technology in antibody discovery and development.

Since we generate no additional expenses related to these BCE license agreements, the revenue we receive, including license fees, milestones and royalties, is highly profitable for us. Even if one excludes the Pfizer related revenue, our 2007 revenue still nearly doubled growing approximately 86% to $54 million compared with $29 million in 2006.

Today, XOMA is in an attractive position for a biotechnology company since we are able to self-fund a significant portion of our research activities and development programs. We believe we have sufficient cash resources to meet our anticipated net cash needs through at least the next 12 months.

In November we put forth our revised product focused corporate strategy. The strategy is straightforward. Our goal is to maximize return on the antibody resources that we have in place, including our intellectual property, core technologies and capabilities in the discovery, optimization, development and production of antibody products, collaborations, know-how, technology licensing in an area of enormous excitement for us, our proprietary products.

Our flagship internal product candidate is XOMA 052. It was discovered and optimized using XOMA's integrated antibody capabilities and expertise. It is a highly potent monoclonal antibody that interrupts the disease causing an inflammatory process via the IL-1 pathway. And that has the potential to reduce inflammation in a number of diseases. With a very high binding affinity and long half-life, we believe XOMA 052 could offer a new therapeutic approach to these diseases and provide significant dosing convenience to patients.

Based on the use of another IL-1 blocker to multiple diseases, we believe that our IL-1 blocker, XOMA 052, is likely to help patients in several indications. XOMA started two Phase 1 studies of XOMA 052 in Type 2 diabetes patients in 2007. We started in diabetes because of the recent New England Journal of Medicine results, which we will discuss later and for enrollment purposes.

Each study is designed with six drug dose levels. We are currently in the third dosing group. We expect to have results from these studies in the third quarter of 2008. We believe that the probability of success for XOMA 052 is good and getting better.

Our Type 2 diabetes trials build upon clinical results that were published in the New England Journal of Medicine in April 2007. The study showed that blocking IL-1 using Kineret, a human engineered receptor antagonist, led to a statistically significant reduction in hemoglobin A1c levels in Type 2 diabetes patients after only four weeks.

With the approval of Regeneron's rilonacept last month, IL-1 blockade is now the basis for two approved drugs. We believe the precedence is significant. The FDA has first hand experience with IL-1. A regulatory pathway has been established and the disease pathway validated.

Finally, we think the safety of IL-1 blockade is supported by the clinical and preclinical data from IL-1 blockade, including 14 years of patient experience with Kineret use and generations of IL-1 knockout mice. In addition, our Phase 1 studies are proceeding well in terms of safety. We are now treating patients again in the third dose level.

Our press release today summarizes our company's many accomplishments in 2007. For me these accomplishments reflect the team's very remarkable success in accomplishing what it set out to do just three or four years ago, build foundational assets and the revenue needed to use them. In 2008, we planned to build upon this success expanding our leadership in the antibody arena and advancing our internal product pipeline. So let me now turn to our goals for 2008.

With regard to the internal products, as I noted, we expect to have data from our two Phase 1 studies of XOMA 052 by the end of third quarter '08. More specifically, this would be data from the European study and the first part of the US study, each of which is a single-dose, dose-escalation study of six groups of patients. Based on these two studies, we expect to start in 2008, clinical trials of XOMA 052 in three additional indications - gout, systemic juvenile idiopathic arthritis, which is an orphan disease category and rheumatoid arthritis.

Because of the Kineret results in these diseases, we believe our development program will be able to show beneficial effects fairly quickly and address conditions where patients are in critical need of new therapy. We also plan to start Phase 1 studies of XOMA 629, our antimicrobial product in skin surface infections; with studies we target impetigo and Staph infection including MRSA. The studies would involve [top code administrations] of the product and we believe we could get signs of clinical activity in these indications relatively quickly. We would expect to have data by the end of 2008.

In biodefense, XOMA has had a successful track record, a contract work for the US government having already been awarded contracts of up to $70 million. Based on our current activities, we expect to add one more major contract in 2008. We plan to pursue additional biodefense opportunities for our anti-botulism product with governments in Europe and Asia, and expect to begin development of additional therapeutic antibodies for biodefense purposes.

In technology licensing, we believe there is an opportunity to sign additional bacterial cell expression technology license agreements with global pharmaceutical companies in 2008. We're also pursuing opportunities, licensing opportunities for our validated antibody optimization technology Human Engineering.

In the collaborations business, we see that through a history of both internal development and cross-licensing, we have assembled and integrated in highly advanced suite of technologies and capabilities in the discovery, optimization, development and production of antibody products. Through collaborations with world class pharmaceuticals and biotechnology companies, our suite of capabilities provide XOMA with access to revenues, targets, technologies, product candidates and other resources from our partners.

As part of our new strategy initiatives, we plan to direct these technologies and capability to the development of our propriety pipeline. At the same time, we remain committed to our existing collaborators and intend to expand our collaboration activity with them. We are honored to be working with industry leaders such as Takeda, Novartis and Schering-Plough, and plan to pursue agreements with new potential collaborators of similar understanding.

Dr. Alan Solinger will now review our XOMA 052 clinical development plan followed by Dave Boyle, who will take you through our financial results for 2007 and discuss our guidance for 2008. I'll add some concluding comments about our 2008 goals before opening the calls to your questions.

Alan Solinger

Thank you, Steve, and good afternoon, everyone. Interest in the IL-1 pathway clearly is growing. This interest was highlighted by the recent article that Steve mentioned in the magazines - Nature and New England Journal cited earlier. The recent approval of Regeneron's rilonacept marks the second drug approved by the FDA, but address the pathway and further validate its clinical importance.

In addition, clearly, we are not the only company working in the area. There are number of world class companies who have decided IL-1 is an important approach to a general anti-inflammatory. We believe the approach we've chosen is superior. Reasons include XOMA 052s targeting of the ligand and very high binding affinity. Based on what we know of the other IL-1 blockers, we believe the XOMA 052 has the potential to be a best-in-class drug.

In context to this attention and interest, I am very pleased to report that we are making excellent progress on the clinical development in XOMA 052. As Steve mentioned, we expect to have initial data from our Phase 1 programs in the third quarter of 2008. We are currently in the third cohort of our two studies.

I'd like to review some of the key attributes and differentiators of XOMA 052. The design of the study is currently underway and our plans for moving XOMA 052 into additional trials later this year. XOMA 052 is a highly potent human engineered antibody targeting IL-1 beta. XOMA discovered, optimized and developed the antibody.

We believe that IL-1 pathway is the right approach in inflammatory disease and XOMA 052 has the right profile for targeting this pathway. The pathway is itself already well validated. Decades of research point to IL-1 as the upstream mediator of many inflammatory processes and years of clinical experience with Kineret, Amgen's IL-1 receptor antagonist, prove that IL-1 blockade is effective. There is also strong support for the safety of IL-1 blockade.

Kineret has been used in humans for 14 years and demonstrates an excellent safety profile. In addition, colonies of IL-1 data knockout mice, these are engineered mice whose otherwise normal (inaudible) have been stripped of the code for expressing IL-1 data, up and living and reproducing without IL-1 data for more than 10 years. The mice are clinically normal and healthy.

We believe XOMA 052 has the appropriate profile for blocking the IL-1 pathway. XOMA 052 has a very high binding affinity of 300 femtomolar. We believe this maybe the strongest binding affinity of any antibody to ever enter clinical development.

XOMA 052 has a long half-life, and as a result, could involve superior dosing, possibly every one or two months based on its half-life of 15 to 21 days. Kineret, with a short half-life of four to six hours, requires a daily subcutaneous injection. The short half-life of Kineret may, in fact, reduce its use, while also distorting the understanding of the therapeutic potential of the IL-1 pathway.

XOMA 052 is highly specific to IL-1 beta and has exclusive specificity binding to IL-1 beta and only IL-1 beta. The currently available anti-IL-1 products cannot make this claim. For instance, rilonacept targets and binds IL-1 alpha, IL-1 beta and IL-1 RA.

Finally, we expect the clinical studies will show that XOMA 052 has a superior mechanism of action. Anti-IL-1 products are generally designed to inhibit inflammatory signaling by preventing the formation of the IL-1 signaling complex. When the receptor, ligand and accessory protein come together, this complex is formed.

Kineret, which mimics the naturally occurring anti-inflammatory IL-1 RA, works by blocking the receptor. Unfortunately, it is generally difficult to block enough receptors to reduce IL-1 signaling. This seems to be the challenge for Kineret and may account for its high dosing requirement.

We believe that XOMA 052, which neutralizes the ligand and not the receptor, is a more efficient approach. There are approximately 10 to 100-fold more receptors than IL-1 beta ligands and must be targeted and 96% or greater of these receptors must be blocked to stop inflammation. Due to the efficiency of XOMA 052's mechanism of action, we believe we could see activity with significantly lower doses.

We were, of course, very pleased about the FDA approval of Regeneron's IL-1 Trap product rilonacept and believe it provides further validation of the IL-1 pathway and its clinical importance. When we compare the mechanism of action of rilonacept with that of XOMA 052, XOMA 052 is positively differentiated because of its efficiency.

The Trap product goes after three main targets; IL-1 beta, the pro-inflammatory ligand; IL-1 RA, the anti-inflammatory protein; and IL-1 alpha, essentially an inflammatory neutral ligand. The IL-1 Trap requires relatively large doses and one could speculate that this is due to the fact that it goes after multiple mediators, including both pro and anti-inflammatory.

So, in terms of its mechanism of action appears less efficient than XOMA 052, and based on the use of Kineret, we believe that our IL-1 blocker, XOMA 052, is likely to help patients in several indications. There have been studies of the successful use of Kineret in rheumatoid arthritis, systemic juvenile idiopathic arthritis, neonatal-onset multisystem inflammatory disease, otherwise known as NOMID, Muckle-Wells disease, gout, pseudogout, familial cold autoinflammatory syndrome, multiple myeloma and Type 2 diabetes.

IL-1 blockade may provide a new approach to treating diabetes unlike insulin driven therapeutic approaches. The New England Journal of Medicine study suggests that IL-1 blockade may reduce inflammation in the pancreas and supports the function of beta cells, the insulin producing cells that help regulate glucose. The study showed a statistically significant improvement in the control of blood glucose, improvement in beta cells secretory function and reduction of systemic inflammation.

Today's press release outlines the design of our two ongoing Phase 1 Type 2 diabetes trials. Both studies are randomized, double-blind placebo controlled studies intended to access the safety and pharmacokinetics of the XOMA 052. These studies also include biological measures of Hemoglobin A1c, C-reactive protein, erythrocyte sedimentation rates and other inflammatory markers. The inclusion of these measures certainly goes beyond the standard design of the typical Phase 1 study, and while the studies have the potential to show clinical trends, however, the studies are not powered to show statistically significant results.

From a clinical development perspective, the plan to move XOMA 052 into additional (inaudible) gout, systemic JIA and RA is a natural expansion of our Type 2 diabetes program. Type 2 diabetes trials will be an excellent source of a large safety and pharmacokinetic data set that we plan to use in subsequent IND indications.

We expect to be ready to act quickly once we've completed our review of the Type 2 diabetes data. We anticipate these trials will start in second half of 2008. We have not determined the order of the three indications and this will obviously depend on the review of data. We do not expect that the three trials will start simultaneously and expect it will be inevitable between each.

We are currently designing the studies and look forward to sharing details with you in the future. We expect to finalize these details during our review of the Type 2 diabetes data from the first part of the Phase 1 studies. I'd like to conclude with a few remarks on the rationale for studying XOMA 052 in RA, gout and systemic JIA.

Clinical experience with Kineret provides strong proof of principle for IL-1 blockade in each of these indications. While Kineret involves the inconvenience of daily dosing and large dosing requirements, it helps demonstrate a clinical benefit and each of these indications is used on a labeled and in off-label basis to help patients with these diseases. Interest in the IL-1 pathway as a therapeutic approach continues to grow in these areas.

If XOMA 052 shows the clinical activities that we believe it may have, we could have proof-of-concept for XOMA 052 in these indications by the end of 2009. Each of the trials should be capable of demonstrating clinical activity that showed order due to the nature of the diseases.

Rheumatoid Arthritis, is a debilitating form of inflammatory synovitis. IL-1 is critical in the path of physiology of joint inflammation and metrics degradation that is, cartilage loss and bone erosions, targeted in addition of IL-1 produces dramatic improvement and experimental arthritis. Approaches to IL-1, in addition, have included administration of soluble IL-1 receptor and IL-1 receptor antagonist, the physiologic inhibitor of IL-1.

The first therapeutic product that reached the market was recombinant IL-1 receptor antagonist. The proof-of-concept noted with this agent opened the possibility that a unique form of therapy has been initiated. However, optimal levels of clinical (inaudible) were not obvious. Since that time a more appropriate form of IL-1 blockade has been sought.

With the growth of the biologics market and rheumatologic diseases, the number of eligible patients has grown significantly, as these agents are put into use of initial therapy. The development of a significant IL-1 blocker for this disease may clinically evidence not only inflammatory components, but also in preserving joint structure integrity.

Systemic juvenile idiopathic arthritis is a severe condition, which can have a devastating effect on children, sometimes progressing to a fatal disease. Symptoms include fever, rash, joint pain, and swelling and inflammation of the internal organs. About a third of the children develop heart and organ complications and long-term disabilities. Treatments for systemic JIA are generally regarded as unsatisfactory. They include non-steroidal anti-inflammatories, prednisone, and methotrexate.

There are approximately 25,000 to 30,000 patients in need of therapy in the United States. IL-1 is thought to play a key role in the disease. IL-1 is known to be a key initiating cytokine responsible for the underlying inflammation.

In fact, at the 2007 American College of Rheumatology Meeting in Boston, a special panel of Systemic JIA was convened. Considering the severity and difficulty of the disease, the panel noted the therapeutic promise of IL-1 blockade is demonstrated by recent studies where Systemic JIA patients were successfully treated with Kineret.

Gout is a painful disease resulting from deposits of needle-like crystals of uric acid in connective tissues and/or joint spaces. Attacks are painful, usually occur at night and are common in the big toe. Prevalence is between 1.5% and 2%, and therefore 3 million to 4 million patients are at risk for acute gout attacks in the United States. Attacks are a common occurrence of starting uric acid lowering therapies.

There are an estimated 1.6 attacks per year per patient or between 3 million and 6 million attacks a year. As a prophylactic approach, physicians prescribe drugs that block uric acid production or improve its removal. For the pain associated with the gouty flare, patients will receive non-steroidal, steroids (inaudible) after flair onset. IL-1 data has been identified as a pivotal cytokine in gouty inflammation.

In a peer-reviewed open label study conducted at the University of Lausanne, researchers treated 10 gout patients who could not tolerate or did not respond to standard anti-inflammatory treatments. Patients were given Kineret as a daily subcutaneous dose of 100 milligrams for three days.

In all 10 patients subjective symptoms were relieved within 48 hours after the first injection. No side effects were observed and clinical examination showed the complete resolution of arthritis in 9 of the 10 patients after three days.

In addition, a press release from Regeneron also indicated that an open label study with rilonacept was also showing clinical improvement in acute gouty attacks. Based on studies of Kineret and IL-1 blockade in gout, we believe XOMA 052 could be a potential treatment for the pain associated with acute gout.

Steve Engle

Thanks, Alan. As many of you are aware, Alan has more experience than anyone in the clinical development of IL-1 drugs, and we're very pleased that he is a part of our team at XOMA.

I will now turn the call over to Dave Boyle, CFO, for a detailed financial discussion.

Dave Boyle

Thanks, Steve. We released XOMA's 2007 financial results and filed the 10-K earlier today, and those are available to you on our website and on SEC's website.

If you've had a chance to review our earnings press release today, I'm sure it is clear to you that XOMA had an outstanding year in 2007, with the record revenues of $84.3 million, a reduction in our net loss from $51.8 million in 2006 to only $12.3 million in 2007, and cash at $4.5 million provided from its operating activities in 2007.

On the call today, I'll discuss what I think is most helpful in understanding our current status and future prospects, including guidance for 2008.

XOMA's net loss for the 2007 year was $12.3 million or $0.10 per share compared with $51.8 million or $0.54 per share in 2006 and our loss from operations in 2007 was just $2.5 million. In addition to the very positive trend in financial results for 2007, another important financial event for the year was the complete conversion to equity of the convertible debt in the first quarter of 2007.

Looking at revenues, total revenues for 2007 were $84.3 million compared with $29.5 million in 2006, a 186% increase. The increase in license and collaborative fees of $33.7 million resulting from one-time payments from Pfizer and an existing technology partner in 2007 totaling $31.3 million contributed significantly to the overall revenue growth.

Contract and other revenue grew from $16.3 million in 2006 to $31.1 million in 2007, resulting from increased activities in our contracts with AVEO, Schering-Plough, Takeda and NIAID. Royalties in 2007 increased by $6.4 million to $16.7 million, reflecting the growth in RAPTIVA and LUCENTIS sales.

Turning to expenses, in 2007 research and development expenses were $66.2 million compared with $52.1 million in 2006. The $14.1 million increase in 2007 primarily reflects increases in our spending on the development of XOMA 052, including our Phase 1 clinical trial and our contracts with NIAID, AVEO and Takeda, partially offset by decreased spending for the Taligen contract.

In 2007, general and administrative expenses were $20.6 million compared with $18.1 million in 2006. The $2.5 million increase for 2007 resulted primarily from increased employee-related costs and professional fees.

Stock compensation expenses resulting from the implementation of FAS 123(NYSE:R) was $2.9 million in 2007 compared to $1 million for the prior year. Prior to 2006, stock compensation expense was disclosed in the footnotes to the financial statements, but not included in the income statement expenses. There is no cash impact from the adoption of FAS 123(R).

Interest expense was $11.6 million in 2007 compared with $12.9 million in 2006. Interest expense for 2007 primarily consisted of $6.1 million from the reevaluation of the embedded derivative on our convertible debt, $3.4 million on our Goldman Sachs loan and $1.3 million of interest payable on our note with Novartis.

At December 31, 2007, XOMA had outstanding debt of $30.3 million remaining on our five-year term loan facility with Goldman Sachs established in November 2006 and $20.6 million of long-term debt with Novartis due in 2015.

Cash, cash equivalents and short-term investments at December 31, 2007 were $38.6 million compared with $46.4 million at December 31, 2006. Net cash provided from operating activities was $4.5 million in 2007 compared with net cash used in operating activities of $33.3 million in 2006. In addition, at December 31, 2007 and 2006, restricted cash was $6 million and $4.3 million respectively.

In addition to our cash and liquid investments position, XOMA continues 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 the end of 2007, we had $29.4 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-K. 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 ongoing discussions with several potential collaboration partners, contract development service customers and technology licensees.

Looking at 2008, we are providing the following guidance that we will update on a quarterly basis with our earnings calls. We expect revenue for 2008 to be similar to 2007 and are guiding to a range of 90% to 105% of the $84.3 million achieved in 2007. Our revenues in 2008 will continue to be driven primarily by our royalties from RAPTIVA and LUCENTIS, our biodefense and contract manufacturing, our collaboration services and our technology licensing businesses.

We expect R&D spending in 2008 will grow from the $66.2 million spent in 2007 by 25% to 40%, with increased spending on clinical stage opportunities like XOMA 052, XOMA 629, HCD122 and increased spending to support our antibody discovery in development collaborations and contract development and manufacturing agreements.

We expect general and administrative expenses for 2008 to grow 15% to 25% over the $20.6 million spent in 2007. We expect to use $15 million to $20 million of cash in operating activities in 2008 and to spend $12 to $13 million for capital items. We hope that this guidance will be helpful to our investors to better understand the trends in our financial results as we invest in our business.

However, I want to remind you that guidance amounts to a prediction of the future, and as such, is based upon 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 Greg described earlier and that are described in our public filings.

Now, I'll turn it back over to Steve for some closing comments.

Steve Engle

In closing, I want to congratulate the XOMA team on a strong and very successful 2007, and for making progress in every area of our business, including important advances in the clinical development of our pipeline. We are already making progress and fulfilling our goal of maximizing value for our shareholders as we have outlined in our strategic plan. We believe 2008 will be an important year for the company and its shareholders, and I hope you will stay tuned.

Operator, would you please review the instructions for the question-and-answer segment?

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from Michael King with Rodman & Renshaw. Please proceed with your question.

Michael King - Rodman & Renshaw

Thanks. Good afternoon, guys. Can you hear me?

Steve Engle

Yes. Thanks, Michael.

Michael King - Rodman & Renshaw

Let's see, maybe working in reverse order. Can I just get a little bit more color on the guidance? Dave, you guided to topline of -- I'm sorry, give me your G&A guidance again because I just missed it?

Dave Boyle

Growth of 15% to 25% over 2007 levels.

Michael King - Rodman & Renshaw

Okay. You guys have been pretty tight on expenses on the G&A side, so can you give us a sense of what's going to make that increase by that amount with that proportion?

Dave Boyle

Yes, a couple of things. I mean, stock compensation expense, there has been some alignment of management interest with investor interest, will increase and I might remind everybody that there is actually a non-cash type of expense that's recorded in P&L these days and that's certainly a part of the increase in the guidance.

Normal personnel costs, we're adding significant resources in areas to really focus on expanding and building our business by adding business development resources and investing and looking at other biodefense opportunities as well. So, we think that the spend there is really towards a value build for the company.

Michael King - Rodman & Renshaw

Okay. And then just on the top-line, just wondering if you expect sort of biodefense to come in. It's been historically pretty stable and I would imagine that you'd expect royalty revenue to grow from RAPTIVA and LUCENTIS. It seems like that's a pretty low bogie for you guys to hit, so I am just wondering if you can maybe give us your thoughts on how you get to the components of the revenue?

Dave Boyle

Well, of course we are not giving specific guidance as to the components. But I think you pretty well understood a lot of the moving parts. We do expect that biodefense and our CMO revenues will continue to be relatively stable, possibly growing. Certainly, we'll look at the royalties you know as expected growth opportunity.

And of course, as you've seen in the past years, we have some pieces of our revenue which we think are some of the big opportunities, which run collaborations and technology licensing and we feel very good about where we are headed on those. We've asked people to watch for those events throughout the year, but certainly it would be important to achieving our revenue guidance.

Michael King - Rodman & Renshaw

Okay. And I noticed that you said you mentioned CIMZIA in the press release but not in your formal remarks. I presume that some proportion of the CIMZIA royalties are in your top-line guidance?

Dave Boyle

Not really. I mean it's difficult to tell the timing of the regulatory bodies and we've not really assumed any great contribution from CIMZIA in 2008, and now going forward we would hope that would be a very different story for future years. It's based on the timing. I think that we haven't assumed a lot would be in there this year.

Michael King - Rodman & Renshaw

Okay. And then, a couple of hopefully quick questions for Alan with regard to 052. Just curious if this is a single-dose study how meaningful is HbA1c going to be? Or is that only going to be a metric that you report out in the multi-dose trials?

Alan Solinger

Thanks for the question, Mike. You're very right. We don't expect necessarily to see much with the single dose part of the study although we will evaluate that as a potential marker. Certainly the more robust information will come from the multi-dose part of the US trial.

Michael King - Rodman & Renshaw

Multi-dose part of the US trial.

Alan Solinger

Yes.

Michael King - Rodman & Renshaw

Okay. And also you know that we have recent white paper from the FDA on guidelines for the development of drugs for the treatment of diabetes, and I was wondering how it is affecting the company's strategy about taking 052 forward given your limited resources?

And whether, maybe Steve, you can speak on, to which direction you will hope to push 052? Whether you would prefer to go to the orphan disorders, where your resources might be better leveraged? Or do you want to go really for the grand slam homerun with the larger market that Type 2 diabetes present?

Steve Engle

Sure, Mike. Good question and we recognize the FDA is shifting the goal post right now. Unfortunately, we do not have to go in there and talk to them on our Phase 3 results at this moment. Our thought is that we will continue to gather results from both this trial and then next year hopefully in the three other indications that we will have those results out before the end of the year. And so we will have those different kinds of results.

And then I think at that point there is question of how far do you carry it forward and then in which indications and of course we see things like diabetes and rheumatoid arthritis as being longer-term development programs, vis-à-vis what we think might be achieved in either the SJIA orphan drug type situations where you might have faster and better attention from the agency due to the needs of the patients as well as in the gout situation where there is an acute disease and a situation where a single dose may show the clear activity that we're looking for.

So, we think as a result of that there are a couple of other ways that will be shorter term in nature. Nonetheless we expect for things like diabetes and so forth we'll be looking to get a partner at some point, but we would like to do it after we've gotten the results from all of these -- the study we have plus the three we are proposing and assuming we do that I think we'll position ourselves in a very good position with the companies out there as you know both RA and diabetes are extremely important areas for the large pharmas.

And we have been approached already on 052. It's just our feeling that relative to the amounts of money that we're talking about spending in this Phase 1 type study that we think it's prudent for us to move this forward and to get results up particularly since Kineret already suggests results are going to be positive.

Michael King - Rodman & Renshaw

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

Steve Engle

Thank you, Mike

Operator

Next question is from Joe Pantginis with Canaccord Adams. Please state your question.

Joe Pantginis - Canaccord Adams

Hi guys. Thanks for taking the call. I apologize for my voice ahead of time, just having some chest cold. So maybe this will be a question for Alan, maybe, you did a pretty extensive compare and contrast of rilonacept in 052. Do you think you can add a little more color regarding the signaling dynamics that you mentioned specifically the targets and why it might not be necessarily clinically beneficial to target say the alpha and RA part? Thank you.

Alan Solinger

Sure thanks. A very interesting question and it's not necessarily really an easy one to follow, but I think the major issues are that if you've got a certain amount of your drugs in the system to neutralize the players in the IL-1 cascade, you want to make the most efficient use of your product and if it's binding and taking out of circulation not only, shall we call it the bad guy, IL-1 beta, but also taking out the body's own anti-inflammatory protein IL-1 RA then you are basically getting into a balancing act where it's very dependent on the local [MIL-U].

If you can you have a product that specifically only takes out the bad player in this equation, then I think you have a much better chance to optimize your clinical results and specifically to IL-1 alpha; it is not a mediator that has much of an inflammatory component. It's more of a self surface marker and an internal cellular player as far as the structure and function of cell. So, the major players are IL-1 beta and IL-1 RA and you really want to try to target as much as possible to IL-1 beta.

Joe Pantginis - Canaccord Adams

Okay. Thanks for the info.

Steve Engle

You are welcome.

Operator

Our next question is from Aaron Lindberg with WM Smith & Company. Please state your question.

Aaron Lindberg - WM Smith & Company

Thank you. Just one quick follow-up on revenue line. Is it fair to assume that as far as the breakdown between licensing contracts revenues and royalties, you could assume that the licensing revenues are in the same kind of ballpark as you saw in 2007?

Steve Engle

Same kind of ballpark, generally, yes. I mean, now we would expect to see some variance there; we do anticipate again that royalties to be growing. Probably some of our other more service-oriented revenues would be relatively stable to growing, which means for guiding 90% to 105%, the licensing revenues were in the same ballpark. I am not sure numerically how you describe that but it is relatively similar to what we saw in 2007.

Aaron Lindberg - WM Smith & Company

Fair enough. And then specifically on the contract revenues, you said you expect to add one more contract in 2008. Is that the SRI/NSAID contract or is that an addition to that contract?

Steve Engle

There would be an addition to that contract.

Aaron Lindberg - WM Smith & Company

And no work has started on that contract yet, is that correct?

Steve Engle

That's correct.

Aaron Lindberg - WM Smith & Company

Okay. And then can you just help me understand the time line as it relates to the current 052 trial; my recollection was that the dosing period was six to eight weeks from your last call and being a third of the way into at this point. I guess my thought was that you got probably four to six weeks left on that. Is that just the single dose period or does that cover the multi-dose as well or is it just a big period of data analysis at the end that gets you to release the data. At the end of Q3, it just seems like the data might be available?

Steve Engle

There are six drug dose levels. And if you assume six to eight weeks per and you had started back in August last year, you will find yourself sitting out in the middle of the summer. And particularly, we are in the third dose level right now, and you got to assume a few more weeks to complete that and then you start the next one at another six weeks and another one after that at another six weeks. So, you got three months, maybe three and half months, so pretty quickly you can get out into June, July to get the results.

And then the question is closing up the database and then giving the analysis and obviously we are going to try to move forward as quickly as we can. And all of it assumes you are going to need all six doses to come to some conclusion in terms of moving the studies forward, which could be true, but also it could turn out that we will know by the third, fourth whatever dose what the answer is.

So, there are some scenarios here that we go faster. The key thing is just getting through this six to eight week period there.

Aaron Lindberg - WM Smith & Company

Got it. And now, is the multi-dose running in parallel with the single dose?

Steve Engle

No.

Aaron Lindberg - WM Smith & Company

That will be initiated after the ...

Steve Engle

That's right. And what we will do then; we will be unlikely to carry of course all dose levels forward. We will be looking at maybe one or two of those dose levels to carry forward, maybe three and then take those forward over the next few months.

Aaron Lindberg - WM Smith & Company

Okay. And then can you just help us understand the increase in R&D costs for 2008, I don't know the easiest way to break it down is, if say kind of rank them in order of what the biggest costs are, if you can help pick out a couple of the big ones. Obviously, we've got the collaborations we are sharing in Takeda and then the individual 052 trials and 629, but can you help us just put some parameters on where those costs lay?

Steve Engle

Aaron, I am very pleased to say that we expect to be doing four clinical trials in 052 and a couple in 629 this year, and that certainly is a big driver of the increase.

Aaron Lindberg - WM Smith & Company

Are those the primary drivers, is the 052 big trials.

Steve Engle

It's the primary driver of the increase, we continue to build and do more work around our collaboration projects. As we both increase the number of projects and take those projects deeper into the development cycle, where the spending does tend to ramp as well.

Aaron Lindberg - WM Smith & Company

Okay. And then can you just bring us up to date a little bit as it relates to Novartis. I know there wasn't much conversation there or a heck of a lot in the release, but can you just help us understand what's going on with the relationship there as it relates to the HCD122. I know that Novartis is kind of driving the car there, but what do you look at in terms of all the potential indications and the ability to get trials underway here in 2008?

Steve Engle

Well, we continue to be disappointed with the pace, the development of that particular product, the product we're very enthusiastic about, something we're trying to get accelerated. We do expect to start in another indication this year. We talked about lymphomas and that continues to be on track. And we continue to have other discussions ongoing with Novartis because of our mutual interest in considering developing HCD for other than oncology indications as well and we will update you as we have more to say about that.

Aaron Lindberg - WM Smith & Company

Would you anticipate that that be a kind of broader announcement that these are kind of broad sweeping changes to the relationship rather than just we're going to start a trial on this specific indication?

Steve Engle

I think that remains to be seen and we'll just let you know when we know more.

Aaron Lindberg - WM Smith & Company

One final question on 629, its seems like the case may be that that trial maybe a little bit more robust and a little bit more costly than originally anticipated, is that a fair assumption?

Steve Engle

No, I don't think so.

Alan Solinger

Actually, we think it will be fairly efficient and is designed to give us quick proof-of-concept.

Aaron Lindberg - WM Smith & Company

Okay. So, on that same scale as the prior thoughts around acne trials?

Alan Solinger

Similar.

Aaron Lindberg - WM Smith & Company

Okay. Wonderful.

Alan Solinger

That means if we are talking about different indications and in particularly impetigo, that was a different type of situation that we're looking with acne.

Aaron Lindberg - WM Smith & Company

Similar enrollment size?

Alan Solinger

I don't think we've actually commented on the enrollment size.

Steve Engle

Similar to what I guess may be the question.

Aaron Lindberg - WM Smith & Company

Your original thoughts, their original plans around acne.

Alan Solinger

I would yes.

Aaron Lindberg - WM Smith & Company

Okay.

Alan Solinger

It's within the ballpark range.

Aaron Lindberg - WM Smith & Company

Okay. Thank you.

Steve Engle

Thank you.

Operator

The next question is from Jason Kolbert with Susquehanna International Group. Please state your question.

Jason Kolbert - Susquehanna International Group

Thank you, guys and congratulations on a good year. Just a couple of questions, the financial guidance on revenue and I know this has been asked a few times already, but David, you seem to be assuming another big collaboration similar to what happen with Pfizer. Are there active discussions going on with other new potential partners?

Dave Boyle

Well, a couple of things. First of all, and I think it's important just to make sure that we're using the same wording around our Pfizer deal which was actually a technology license. And the reason that's important because we view a collaboration, particularly as having on going commitments, spending and utilizing our resources, whereas that Pfizer's deal was a non-exclusive license of our bacterial cell expression technology and its commitments under that deal were done almost immediately bond signing.

So really that's a very different situation as you might image. A lot more of that deal drops to the bottomline than the revenues generated by our collaborations. I will say that we do believe there is good opportunity using our platform technologies due to both additional significant collaboration and technology licensing deals around our technology, and that's why we may or may not see a deal the size of Pfizer. We believe that the chances of getting that level of revenue through multiple deals on either technologies and their collaborations is very good this year.

Jason Kolbert - Susquehanna International Group

Okay. And one last question. We haven't talked about NEUPREX at all, well, how are plans proceeding to try to monetize and partner out those assets?

Dave Boyle

We are proceeding in discussions with potential licensees.

Steve Engle

And I think also, Jason, our feeling is that unless the EMEA comes back positively through the discussions that are going on regarding exceptional circumstances that there are chances that we will partner it is not high.

Jason Kolbert - Susquehanna International Group

And is, Steve, any indication on when they might come to some conclusion there?

Steve Engle

I wish I knew. Its one of these ping pong processes with regulatory agencies where they give you something and then you've got more questions about it, then they give you something more, and then you give them smart answers and so we just don't have closure on the issue yet.

Jason Kolbert - Susquehanna International Group

But there are low level dialogues still keeping that process alive?

Steve Engle

Absolutely.

Jason Kolbert - Susquehanna International Group

Terrific. Thank you.

Steve Engle

We continue. Thank you.

Operator

The next question is from Jason Kantor with RBC Capital Markets. Please state your question.

Jason Kantor - RBC Capital Markets

Most of my questions have been answered, I guess with regard to the dose-escalation that's ongoing you say you're in the third dose, those early doses are ones where you might not expect to see any efficacy and not again up into doses that might have some therapeutic interest. Will there be any situation where you would relieve data on some kind of piecemeal fashion prior to completing all dosing.

Steve Engle

A couple of things, this is double-blinded placebo controlled and randomized, so just to make sure everybody has got the same information on the design. I guess the question is would we see something that would drive us to say that we were prepared to start one of the other studies. It's not something that one can say no to, but again, it is double-blinded placebo controlled. And so it's hard to say, with any certainty that you might be able to do something sooner than that.

Jason Kantor - RBC Capital Markets

You guys are not looking at the data one dose at a time that you're going up in dose.

Steve Engle

The data is blinded and so we're going through the information just like you might expect us to. We can, of course, watch what's going on. The question is whether we can interpret the data without knowing the blind and what the allocations are? You know the data safety review committee on an ongoing basis looks at all of the safety related data and obviously, some of that data is also related to the endpoint that we would be interested in from an activity point of view such as fed rates and so forth.

So there is information pulling around like that. Again, it is double-blind and placebo controlled. So at this point, it's hard for us to make any statement except to say that we're going to run the trial, get the information and go from there.

Jason Kantor - RBC Capital Markets

And do you have all the animal talk necessary to do the multi-dose portion of the study and towards all of the three programs that you've outlined starting this year, or are there other animal talk studies to be completed?

Steve Engle

We do not believe there are additional talk studies required to move forward.

Jason Kantor - RBC Capital Markets

Okay. That's good news.

Steve Engle

Absolutely

Jason Kantor - RBC Capital Markets

Okay. And if there is a milestone associated with the CIMZIA approval or would that just be the initiation of royalties?

Steve Engle

That would just be the initiation of royalties.

Jason Kantor - RBC Capital Markets

Okay. Terrific. Thank you.

Steve Engle

Absolutely. Thank you

Operator

Next question is from Leah Hartman with CRT Capital. Please state your question.

Leah Hartman - CRT Capital

Thank you for taking the call gentlemen, and thank you very much for the detailed disclosure in the press release and then the presentation was very helpful. I have questions surrounding '05 Qs partnering, which I think mostly has been addressed but you said, you had already been approached and was that someone approaching just from the diabetes perspective or for the broader indications for the whole compound?

Steve Engle

Yes, sorry.

Leah Hartman - CRT Capital

I take it as for later.

Steve Engle

Yes, there is more than one company that's coming to door.

Leah Hartman - CRT Capital

Okay

Steve Engle

And they look at it from different ways. You can imagine the people, I mean, there is an interesting situation, right, because we've seen this happen before over the years of biotech where a particular mechanism of action starts becoming visible and it doesn't only improve companies like ourselves, but also, because in this case you've got Amgen and Novartis, both working on drugs scenario.

And we still think our drug is better but we like the idea that there are several large pharmaceutical and biotechnology companies, who are focusing on this particular mechanism. It provides lot of validation. It gives the market and the investors a lot more information about the right way to success, just because more trials are being run.

And so, we think that's all positive for us. However, you would also guess that being that you're targeting potentially because Canada was proof RA and we talked about the use of Kineret and diabetes and things like this, that there are companies who have franchises in those areas that are not either Novartis or Amgen who might be players who would say, gee, we would like to be in those areas.

So with that there are a number of people out there. Our ideas have been to simply tell them very politely that we appreciate the interest and what we need to do is based on relatively lower cost of developing this through the Phase 1 stages that we feel like we need to go ahead and go through that. And in the meantime, let's stay in touch and so forth.

Leah Hartman - CRT Capital

And if I heard you correctly with respect to 052 that you look at the data you see at the end of 2008 and you make the determination about which one or two of the three other programs you might pursue, and that you would wait post the conclusion of those Phase 1 trials to make a determination whether or not to partner?

Steve Engle

Overall, what you said, we would like to wait till we get the results out. Timing wise we expect to see the results from the diabetes study come out in the third quarter of this year.

Leah Hartman - CRT Capital

Okay.

Steve Engle

And based on that, we do plan to move forward with the three indications which we've identified now. Something could come out of the study that will lean us to pick another indication added in there, but as long as it's in the same ballpark, our idea is that there are three studies running by the end of the year, all in indications other than the one we're studying right now.

And then the results from that we would have -- what we're thinking and I have to say Dr. Solinger hasn't given me the specifics on trial design for the other trials so I can't quite say it. But we in ballpark thought that sometime in the third quarter or fourth quarter of next year those studies would be complete and we'd have a much bigger data set both from an efficacy and the safety point of view.

Leah Hartman - CRT Capital

And this maybe a naive question, but since Phase 1 is principally safety, that you see a nice safety profile and you look at that orphan designation, can that be a Phase 1 plus 2 trial design?

Steve Engle

You've asked the right question, I mean clearly because the drugs have never been in humans, we think of this trial as a Phase 1, now you step into the other studies and you began to think that maybe people would realize that, you are looking at downstream endpoints and so what do you call that, is it a 1B 2A or 2A?

Those are the kinds of questions that we have debates around here as well. I think if we go back to the facts of it, the current trial, lets just go back to that, its called the Phase 1 because it focuses on safety and pharmacokinetics, but the reality is, that we're going to collect data on relevant endpoints to diabetes such as Hemoglobin A1c and also to inflammatory markers such as both C-reactive protein and Fed rates.

So, all of that data, we expect to be able to see as we finish out this current study. And so with that then we'll able to determine the kind of inflammatory affect we're having, and therefore, decide exactly what doses we want to have go forward into the other three studies.

Once we're on those studies though, Dr, Solinger is clearly focused on the idea of getting clinical activity out of those studies. So, the gout study will surely measure pain or something along that endpoint. And then, I wish it's not very hard to measure, as you know, from the studies that are done and it is an acute situation in gout.

And then secondly, with the So-JIA and with RA, of course, there are measures already predetermined and I think we know enough about those areas that we already know something of what those studies will look like. So, we will be gathering data that is, at least, in principle, using the same kind of endpoints you would use for a clinical efficacy study, and then using that data to think about what are the real studies going beyond that to actually go for registration.

Leah Hartman - CRT Capital

Nice predicament to be in. Well, good luck this year and thank you for taking my question.

Alan Solinger

Absolutely. Thank you.

Operator

Our next question is from Jason Napodano with Zacks Investment Research. Please go ahead with your question.

Jason Napodano - Zacks Investment Research

Hi, guys. Thanks for taking the question.

Steve Engle

Sure.

Jason Napodano - Zacks Investment Research

A question maybe for Alan, I'm just trying to better understand the efficiency that you spoke about in terms of 052 relative to some of the other drugs, mainly Kineret. In your opinion, what specifically makes 052, and I know you spoke about this in your prepared remarks, but in regard to comparing it to Kineret, is it specifically you think going after the IL-1 beta or is it the half-life that you spoke about that would allow for the monthly or potentially even bimonthly dosing?

In that regard, would Kineret be a more effective molecule if it had the same kind of dosing or half-life advantages that 052 would or would Kineret be a more effective molecule if it had, let's say, the same kind of dosing, but then went after the beta ligand?

Alan Solinger

Okay. Well, it's a complex question and you picked up on a lot of the issues. I think there are several points to this. First of all, I think having a very high affinity for the target with 052 versus Kineret is one part of the equation. Certainly the half-life of, let's say, roughly 2.5 to 3 weeks versus 4 to 6 hours makes a difference also in the formula that you're putting together. I think there is also a difference in going after the ligand versus going after blocking the receptor due to the significant differential between the number of receptors versus the number of ligands.

All three of these areas point towards XOMA 052 as having some superior aspects. So when you put them all together, you get a product that we all think has a great deal of potential.

Jason Napodano - Zacks Investment Research

Let me ask just another question. Amgen, as we all know, made a living off of taking, let's say, first generation molecules and extending the half-life for improving the dosing and launching second generation molecules. Is there an opportunity with Kineret as a potential competitor that they could engineer or pegylate or do something to Kineret that would improve its dosing that would potentially create a more effective molecule?

Alan Solinger

Well, actually, I think it's in the public domain. I'm pretty sure it is, because it's been presented at some national meetings, but they have actually made some attempts improving the half-life and the kinetics of Kineret by doing various manipulations. And although they have picked up some increased half-life, the overall profile hasn't been improved that much. They've gotten the dosing from once a day down to a couple of times a week with these types of modifications.

But that didn't put it commercially in a setting that was very good going up against the TNF blockers. I'm sure that Amgen will work very hard at finding other ways to approach this. It's very clear from their announcements over the last few months. They have other anti-IL-1 programs ongoing, and we just don't know much about the progress of those programs at this time.

Jason Napodano - Zacks Investment Research

Okay. Thank you.

Alan Solinger

You're welcome.

Operator

Our next question is from Michael King with Rodman & Renshaw. Please go ahead with your question.

Michael King - Rodman & Renshaw

Thanks. Just a quick follow-up technical question. Alan, can you speak on whether or not you have data that indicates that 052 gets tissue penetration?

Alan Solinger

We certainly haven't announced anything as far as human data and, I think that's probably the most appropriate data to talk about in animal models. Certainly, we've seen that. But at the present time we've not announced any data concerning tissue penetration and all, and in particular, in a disease like diabetes that would be a very difficult process to go after looking at penetration into the pancreas.

Steve Engle

And Mike, is there something particularly you'd --

Michael King - Rodman & Renshaw

No. Well, I wasn't talking about that. I was more concerned about whether you get into the joints, so that it would have efficacy in RA.

Alan Solinger

Well, I mean, we certainly have animal data, but to extrapolate to that level up into human trials is very difficult. The best animal studies for something like that are humans. We really need the data from humans to tell, but there is every indication that this should get into an inflamed tissue like the synovium very adequately. And we put those into our models.

Michael King - Rodman & Renshaw

Okay. Great.

Operator

Our last question is from Aaron Lindberg with WM Smith & Company. Please go ahead with your question.

Aaron Lindberg - WM Smith & Company

Thanks. Just a quick follow-up. Where do you expect the capital expenditures to be directed in 2008? Is that for increased manufacturing or other R&D capabilities, where is that targeted?

Dave Boyle

It's a combination of things. It has to do with continued improvement of our manufacturing facilities as we continue to do more projects there, both for our collaboration partners for biodefense, and frankly, for own products like XOMA 052 together with manufacturing facilities. But also it has to do with equipment related to our antibody discovery and technology capabilities. So it really is focused in both of those areas.

Aaron Lindberg - WM Smith & Company

Okay. Any change to the manufacturing capabilities?

Dave Boyle

I would characterize it more as enhancement rather than a significant change.

Aaron Lindberg - WM Smith & Company

Okay. Thanks much.

Operator

There are no further questions in the queue. I would like to turn the call back over to management for closing comments.

Steve Engle

Once again, we just thank everybody for being on the call with us today. We are very excited about this coming year. We think we've got a lot of very interesting things with the 052 and the other things that we're doing. So please stay tuned. I think there's going to be a number of events this year.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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