UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
on
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended
December 31, 1995 Commission File No. 0-14710
XOMA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2756657
(State of Incorporation) (I.R.S. Employer Identification No.)
2910 Seventh Street,
Berkeley, California 94710
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(510) 644-1170
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of February 29, 1996: $114,627,723.
Number of shares of Common Stock outstanding as of February 29, 1996:
28,312,868.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Company's 1996 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
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PART I
Item 1. Business
General
XOMA Corporation ("XOMA" or the "Company") is a biopharmaceutical
company developing products for the treatment of infectious diseases and major
complications due to infections, traumatic injury and surgery. The Company's
current product development programs include:
o Neuprex(TM), a recombinantly-derived fragment of human
bactericidal/permeability-increasing protein ("BPI") and XOMA's
lead BPI product, which is currently in efficacy clinical trials
for four different indications.
o I-PREX(TM), a proprietary topical formulation of BPI for the
treatment of ophthalmic disorders, which is undergoing
preclinical testing as a treatment for corneal ulcerations and
transplants.
o Mycoprex(TM), a potent fungicidal peptide compound derived from
BPI that is currently in preclinical product development.
o E5(R), XOMA's monoclonal antibody product, which is in a Phase
III trial in the United States as a treatment for gram-negative
sepsis and has been submitted for approval in Japan as a
treatment for endotoxemia.
Product Areas
The following describes XOMA's significant therapeutic product
development and clinical activities:
The BPI Product Platform
The Company's current programs are primarily focused on the development
of therapeutic products derived from BPI. BPI is a naturally-occurring human
host- defense protein found in white blood cells (neutrophils). BPI kills
bacteria, apparently by permeating bacterial cell walls. It also neutralizes
poisonous endotoxins produced on the surface of gram-negative bacteria, which
can trigger severe complications in infected patients. Furthermore, BPI inhibits
angiogenesis (growth of new blood vessels) by binding to heparin, a natural
protein involved in blood vessel formation.
XOMA scientists developed a modified recombinant fragment of the BPI
molecule, called rBPI21, which is potent and stable and can be manufactured in
commercially viable quantities. This fragment is the basis for the Company's
Neuprex(TM) product.
In December 1992, XOMA submitted an investigational new drug
application ("IND") to the U.S. Food and Drug Administration ("FDA") to begin
Phase I human testing of Neuprex(TM). In March 1993, the Company initiated human
safety and pharmocokinetic testing under the IND. In mid-1995, the Company
initiated three clinical efficacy trials testing the Neuprex(TM) product as a
treatment for bacterial endotoxin-related conditions. A fourth trial started in
the first quarter of 1996.
XOMA has an agreement with New York University ("NYU") relating to its
rBPI products. See "Research and License Agreements." In March 1993, the U.S.
Patent and Trademark Office ("Patent Office") issued a patent related to BPI to
NYU, and the Company is the exclusive licensee of this patent. The Company is
aware of an agreement between Genentech Inc. ("Genentech") and Incyte
Pharmaceuticals Inc. ("Incyte") pursuant to which Incyte claims to hold
worldwide rights to all Incyte and Genentech technology related to BPI and
through which Genentech will receive a royalty on Incyte's BPI product sales.
Between 1992 and 1994, the Patent
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Office issued five patents related to BPI to Incyte. Based on the
opinion of its patent counsel, Marshall, O'Toole, Gerstein, Murray & Borun, the
Company believes that it does not infringe any valid claims of any of the Incyte
patents. See "Patents and Trade Secrets."
Neuprex(TM)
In the second quarter of 1995, XOMA started three clinical trials
evaluating Neuprex(TM) as a treatment for bacterial endotoxin-related
conditions.
The indications are:
o Meningococcemia: a potentially deadly bacterial infection that
usually afflicts children, characterized by extremely high
endotoxin levels.
o Hemorrhagic trauma: accidents or injuries that cause acute blood
loss may trigger serious complications, possibly from
translocation of endotoxin or endotoxin-carrying bacteria from
the gastrointestinal tract into the bloodstream.
o Partial hepatectomy: surgical removal of part of the liver,
usually to remove an isolated tumor. Since the liver clears
endotoxin, the resulting temporarily impaired liver function can
lead to endotoxin- related complications.
In the first quarter of 1996, the Company started a fourth clinical
trial for Neuprex(TM) to be used with conventional antibiotics in the treatment
of severe intra-abdominal infections, including those caused by
antibiotic-resistant organisms.
I-PREX(TM)
XOMA has developed a proprietary topical formulation of rBPI21 for the
treatment of ophthalmic infections. Although standard antibiotics fight
bacterial infections, they do not inhibit the growth of new blood vessels in the
cornea associated with eye infections. This neovascularization can lead to
scarring and permanently impaired vision. In preclinical testing, the I-PREX(TM)
product has shown anti-infective and anti-angiogenic (inhibition of blood vessel
growth) properties in the treatment of corneal injury and associated infection.
The use of I-PREX(TM) to treat corneal ulcers and other corneal diseases could
eliminate the need for therapies, such as those with corticosteroids, which have
undesirable side effects.
Mycoprex(TM)
XOMA scientists discovered that certain peptide sequences derived from
BPI displayed potent fungicidal activity. Further research demonstrated that
many of these compounds not only killed strains of Candida, the most common
fungi to cause systemic illness, but also showed activity against other strains
of fungi including fungi resistant to the currently available drugs.
Based on these findings, the Company has initiated a program to screen
for compounds with a broad spectrum of potent fungicidal activity and a better
safety profile than currently-available fungicidals. The Company has selected a
lead antifungal compound and several alternates and has moved them from the
research phase into product development.
E5(R) Monoclonal Antibody Product
The term sepsis is commonly used to describe a severe systemic
inflammatory response by the body's immune system to invasion by bacteria.
Sepsis can be a complication of many different underlying causes, including
infections, cancer, trauma, massive blood loss and surgery.
Gram-negative sepsis refers to sepsis caused by infection by
gram-negative bacteria. Gram-negative bacteria are distinctive because their
cell walls contain endotoxin (lipopolysaccharide or LPS), a chemical that can
trigger the
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inflammatory cascade that leads to sepsis. Thus, sepsis could be thought of as
late-stage endotoxin poisoning.
XOMA's product for the treatment of gram-negative sepsis, E5(R), is a
murine monoclonal antibody that neutralizes the effects of endotoxin. XOMA has
completed several clinical trials of E5(R), including two randomized,
double-blind, placebo-controlled, multi-center Phase III studies involving
nearly 1300 patients. In March 1989, XOMA filed a Product License Application
("PLA") for FDA licensure of E5(R). In September 1991, an FDA advisory committee
heard E5(R) data presentations but made no recommendations regarding the safety
or efficacy of the product. In June 1992, FDA informed XOMA that E5(R) was not
approvable without further clinical testing. In June 1993, a third Phase III
clinical trial of the E5(R) product began with narrower entry criteria than the
previous trials. The trial is being managed and co-funded by Pfizer Inc.
("Pfizer"). In December 1995, an independent Data Safety Monitoring Board
("DSMB") completed the first of two planned interim analyses for this trial. The
data were not disclosed to XOMA or to Pfizer. The DSMB found no evidence
suggesting safety concerns and concluded that the results met predetermined
criteria for continuing the trial. There can be no assurance that the continuing
trial will yield data that will result in licensure of E5(R) in the U.S. See
"Development and Marketing Arrangements."
In October 1993, Pfizer submitted an application for approval to market
E5(R) for endotoxin reduction to regulatory authorities in Japan. There can be
no assurance that such application will be approved. See "Development and
Marketing Arrangements".
Genimune(TM)
XOMA believes there is potential for the use of a T lymphocyte-targeted
product in autoimmune disease therapy. For several years, the Company developed
and evaluated several proprietary variants of genetically-engineered proteins
and targeted immunofusions ("TIF"). In mid-1993 the Company selected a lead
immunofusion compound and named it Genimune(TM). In December 1993, XOMA entered
into cross-license agreements with Research Development Foundation concerning
recombinant DNA-derived gelonin ("r-gelonin"), a plant-derived enzyme that is a
component of the Company's TIF program. In the fourth quarter of 1994, XOMA
terminated further internal development of Genimune(TM) and is attempting to
outlicense the product. See "Research and License Agreements."
Additional Product Areas
XOMA continues to review alternatives to realize value from products
and technologies outside the scope of its core research efforts, including
immunoconjugates, immunofusions, bacterial and mammalian expression technology,
osteoinductive proteins for bone repair, and non-cariogenic proteins for low-
calorie flavor enhancement. Several licenses and sublicenses have been entered
into in these areas, and discussions are ongoing with various other entities
that have expressed interest in these products and technologies. No assurance
can be given that any agreement or agreements will be reached as a result of the
ongoing discussions.
Manufacturing
XOMA is currently producing its Neuprex(TM) product for clinical and
toxicological testing needs at its Berkeley and Santa Monica facilities,
pursuant to a drug manufacturing license obtained from the State of California.
The Company's E5(R) manufacturing facilities are located in Berkeley,
California.
The Company's manufacturing capabilities include: recombinant
technology- based production; the purification of monoclonal antibodies; the
isolation and purification of cytotoxic enzymes and their fragments; the
conjugation of monoclonal antibodies to such enzymes and/or fragments to form
immunoconjugates; the formulation of pharmaceutical products for final sterile
filling and finishing; and the capacity to do small-scale filling. FDA licensure
of XOMA's
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manufacturing facilities will be required prior to any commercial use or sale of
Neuprex(TM), E5(R) or any other product.
XOMA obtains the unpurified ascites containing the monoclonal
antibodies used in its E5(R) product from a single supplier, Charles River
Laboratories ("CRL"), which has multiple manufacturing sites. XOMA and CRL
entered into a supply agreement in February 1989 and renewed the agreement in
October 1991, committing CRL to supply and the Company to purchase its
anticipated ascites needs for five years after FDA licensure of E5(R). Among the
requirements for FDA licensure of E5(R) is that the CRL manufacturing facilities
be licensed by FDA. If the Company must obtain ascites from other sources,
including its own facilities or a different facility of the same supplier,
regulatory licensure of such other sources will be required. Although XOMA
believes that it currently has sufficient quantities of ascites for product
launch and the first few years of sales, any significant future interruption in
supply could materially and adversely affect the Company's business relating to
E5(R).
Pfizer currently sterile-fills, packages and distributes E5(R) at a
manufacturing plant in Brooklyn, New York. FDA licensure of this facility and
the related process also is required. In the future, Pfizer may carry out some
or all of the manufacturing processes for the production of the purified bulk
E5(R) intermediate product, supplementing XOMA's current manufacturing capacity.
If so, additional FDA licensure would be required.
During December 1991 and January 1992 XOMA, CRL and Pfizer facilities
were inspected for licensure by the FDA with respect to E5(R) and XOMA believes
that there are no major manufacturing issues outstanding. Such licenses are
currently pending and will not be finalized unless and until E5(R) has been
approved for sale.
The Company has accumulated inventories of raw material and
intermediates for E5(R). Because the achievement, timing and terms of regulatory
licensures and subsequent sales of pharmaceutical products are uncertain, there
can be no assurance that the inventories of raw materials and intermediates will
be usable. In connection with its October 1992 restructuring, the Company
established a $6.0 million reserve for a portion of its E5(R) inventory and
recorded a $2.5 million charge to earnings for future idle manufacturing
capacity. The Company increased the reserve to $6.9 million in 1993 and to $11.1
million in 1995 to cover the entire value of the inventory.
Development and Marketing Arrangements
The Company has developed a strategy of entering into arrangements with
established pharmaceutical company partners in order to facilitate and help fund
the development and marketing of its products. Assuming timely regulatory
approval, which cannot be assured, the successful commercialization of XOMA's
products will be dependent to a large extent upon the marketing capabilities of
its pharmaceutical partners.
Neuprex(TM)
The Company has engaged an investment banking firm to assist it in
completing one or more strategic alliances with respect to its Neuprex(TM)
product. The Company cannot predict whether or when any such alliance(s) will be
consummated.
E5(R) Monoclonal Antibody Product
In June 1987, XOMA and Pfizer entered into agreements relating to a
potentially wide range of monoclonal antibody-based products for the treatment
of gram-negative sepsis. XOMA believes that Pfizer's marketing force and
experience in the development and marketing of anti-infective products, which
are expected to be used in conjunction with E5(R), make Pfizer a strong partner
and will contribute to the effective marketing of E5(R). The agreements provide
Pfizer
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with exclusive rights to E5(R) in exchange for funding of certain clinical and
development activities. In January 1994, the territory covered by the agreements
was redefined to include only the countries of Japan and the United States.
Pfizer paid XOMA an initial license fee and has made payments based on
development progress. XOMA is reimbursed for manufacturing costs and will
receive a portion of the gross profits obtained from any sales on a formula
basis. Pfizer also has a limited first right to negotiate for future XOMA
products, other than BPI-derived products, if they will be used for the
treatment, cure or prevention of gram-negative sepsis. The agreements can be
canceled with appropriate notice upon reimbursement by Pfizer of certain of
XOMA's research and development expenses. XOMA has granted a security interest
to Pfizer in assets related to its E5(R) program to secure performance of XOMA's
obligations under the agreements under certain conditions, including bankruptcy.
In the third quarter of 1995, XOMA and Pfizer agreed to modify the funding
arrangement of the current E5(R) clinical trial and the payment terms relating
to certain patent litigation costs (see Notes 1 and 6 to the Financial
Statements). The Company believes that termination of its relationship with
Pfizer could have a material adverse effect on its future revenues and
prospects.
Other
From time to time, the Company reviews development opportunities with
other biotechnology companies with a view toward providing process scale-up,
regulatory and/or clinical services to them.
Competition
The biotechnology and pharmaceutical industries are subject to
continuous and substantial technological change. Competition in the areas of
recombinant DNA-based and monoclonal antibody-based technologies is intense and
expected to increase in the future as a number of established biotechnology
firms and large chemical and pharmaceutical companies diversify into the field.
A number of these large pharmaceutical and chemical companies have enhanced
their capabilities by entering into arrangements with or acquiring biotechnology
companies. Substantially all of these companies have significantly greater
financial resources, larger research and development and marketing staffs and
larger production facilities than those of the Company. Moreover, certain of
these companies have extensive experience in undertaking preclinical testing and
human clinical trials. These factors may enable such companies to develop
products and processes competitive with or superior to those of the Company. In
addition, a significant amount of research in biotechnology is being carried out
in universities and other non-profit research organizations. These entities are
becoming increasingly aware of the commercial value of their work and may become
more aggressive in seeking patent protection and licensing arrangements. There
can be no assurance that developments by others will not render the Company's
products or technologies obsolete or uncompetitive.
Earlier in the 1990's, a number of corporations including Centocor,
Inc., Synergen, Inc. and Chiron, Inc. discontinued development of products (like
E5(R)) designed to treat gram negative sepsis. These actions may have a material
adverse effect on the regulatory review of E5(R), and there can be no assurance
that E5(R) will receive regulatory approval or that Pfizer will be able to
market E5(R) effectively. The Company believes that research and human testing
is being conducted with other products, some of which are designed to treat a
broader population of sepsis patients, including patients with gram-positive as
well as gram-negative sepsis. E5(R) is intended to treat only patients with
severe gram- negative sepsis. There is no assurance, however, that products
currently unknown to the Company will not prove to be more effective than or
receive regulatory approval prior to E5(R).
In addition, it is possible that Incyte or some other company is
developing one or more products based on BPI, and there can be no assurance that
such product(s) will not prove to be more effective than Neuprex(TM).
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Regulatory Process
XOMA's products are subject to rigorous preclinical and clinical
testing requirements and to approval processes by FDA and similar authorities in
other countries. The Company's products are primarily regulated on a product by
product basis under the U.S. Food, Drug and Cosmetic Act and Section 351(a) of
the Public Health Service Act. Most of the Company's human therapeutic products
are or will be classified as biologic products and would be subject to
regulation by the FDA Center for Biologics Evaluation and Research. Approval of
a biologic for commercialization requires licensure of the product and the
manufacturing facilities.
The FDA regulatory process is carried out in several phases. Prior to
beginning clinical testing of a proposed new biologic product, an IND is filed
with FDA. This document contains scientific information on the proposed product,
including results of testing of the product in animal and in vitro models. Also
included is information on manufacture of the product and studies on toxicity in
animals, and a clinical protocol outlining the initial investigation in humans.
The initial stage of clinical testing, Phase I, ordinarily encompasses
safety, pharmacokinetics and pharmacodynamic evaluations. Phase II testing
encompasses investigation in specific disease states designed to provide
preliminary efficacy data and additional information on safety. Phase III
studies are designed definitively to document clinical safety and efficacy and
to provide information allowing proper labelling of the product following
approval. Phase III studies are most commonly multicenter, randomized, placebo-
controlled trials in which rigorous statistical methodology is applied to
clinical results. Other designs are also appropriate in specific circumstances.
Following completion of clinical trials, a PLA is submitted to FDA to
request marketing approval. For biologic products, an internal FDA committee is
formed which evaluates the application, including scientific background
information, animal and in vitro efficacy studies, toxicology, manufacturing and
control and clinical data. Concurrently with the filing of the PLA, an
establishment license application is filed which describes in detail the
manufacturing facility, personnel, procedures and equipment used in the
manufacture of the product. During the review process, a dialogue between FDA
and the applicant is established during which FDA questions on both applications
are raised and additional information is submitted. During the final stages of
the approval process, FDA generally requests presentation of clinical or other
data before an FDA advisory committee. Also, during the later stages of review,
FDA conducts an inspection of the manufacturing facility to establish that the
product is made in conformity with good manufacturing practice. If all
outstanding issues are satisfactorily resolved and labelling established, FDA
issues licenses for the product and for the manufacturing facility, thereby
authorizing commercial distribution.
In March 1989, XOMA filed a PLA for approval of E5(R), a monoclonal
antibody product, for the treatment of gram-negative sepsis. FDA responded to
the PLA with a request for additional information, including clinical data. XOMA
made a further submission and met and corresponded with the FDA on relevant
matters. In September 1991, an FDA advisory committee heard E5(R) data
presentations but made no recommendations regarding the safety or efficacy of
the product. In June 1992, FDA informed XOMA that E5(R) was not approvable
without further clinical testing. In June 1993, a third Phase III clinical trial
of the E5(R) product began with narrower entry criteria than the previous
trials. The trial is being managed and co-funded by Pfizer Inc. There can be no
assurance that the continuing trial will yield data that will result in
licensure of E5(R) in the U.S. See "Product Areas--E5(R) Monoclonal Antibody
Product" and Note 1 to the Financial Statements.
In December 1991 and January 1992 the manufacturing facility for E5(R)
was inspected for licensure by FDA. XOMA believes there are no major
manufacturing issues outstanding. The license is currently pending but will not
be finalized unless and until the relevant product has been approved for sale.
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In December 1992, the Company filed an IND with FDA to begin Phase I
human testing of its Neuprex(TM) product and, in March 1993, began the testing.
Three randomized, double-blind, placebo-controlled Phase I studies have been
completed and three Phase II efficacy studies were initiated in 1995. See
"Product Areas--Neuprex(TM)". Other potential XOMA products will require
significant additional development, including extensive clinical testing. There
can be no assurance that any of the products under development by the Company
will be developed successfully, obtain the requisite regulatory approval or be
successfully manufactured or marketed.
FDA has substantial discretion in the product approval process and it
is not possible to predict at what point, or whether, FDA will be satisfied with
the Company's submissions or whether FDA will raise questions which may delay or
preclude product approval. As additional clinical data are accumulated, they
will be submitted to FDA and may have a material impact on the FDA product
approval process. Given that regulatory review is an interactive and continuous
process, the Company has adopted a policy of limiting announcements and comments
upon the specific details of the ongoing regulatory review of its products,
subject to its obligations under the securities laws, until definitive action is
taken.
Patents and Trade Secrets
As a result of its ongoing activities, the Company holds and is in the
process of applying for a number of patents in the United States and abroad to
protect its products and important processes. The Company also has obtained or
has the right to obtain exclusive licenses to certain patents and applications
filed by others. However, the patent position of biotechnology companies
generally is highly uncertain and no consistent policy regarding the breadth of
allowed claims has emerged from the actions of the Patent Office with respect to
biotechnology patents. Accordingly, no assurance can be given that the Company's
patents will afford protection against competitors with similar technologies, or
that others will not obtain patents claiming aspects similar to those covered by
the Company's patent applications.
During the period from September 1994 to February 1996, the Patent
Office issued nine patents to the Company related to its BPI-based products,
including novel compositions, their manufacture, formulation, assay and use. The
Patent Office issued to the Company U.S. Patent No. 5,420,019 in May 1995 which
is directed to novel recombinant amino-terminal fragments and fragment analogs
of BPI and methods for their recombinant production. The Company believes that
this patent will provide comprehensive protection for the manufacture, use and
sale of its BPI-derived Neuprex(TM) and I-PREX(TM) products in the U.S. In
September 1995, the Patent Office issued U.S. Patent No. 5,447,913 which
addresses novel pharmaceutical compositions of dimeric BPI protein products,
including rBPI42, with enhanced biological activities.
In addition to such composition patents, U.S. Patent No. 5,439,807
issued to the Company in August 1995 addresses improved manufacturing methods
for the Company's BPI-related products and U.S. Patent No. 5,488,034 issued to
the Company in January 1996 describes novel pharmaceutical formulations of
BPI-based protein products, including the Company's Neuprex(TM) product
formulation. The Company's first two diagnostic assay patents, U.S. Patent Nos.
5,466,580 and 5,466,581, were issued in November 1995 and describe methods for
quantifying BPI levels in blood as well as screening methods for detecting
increased levels of BPI in septic patients. The Company's third diagnostic assay
patent, U.S. Patent No. 5,484,705, was issued in January 1996 directed to
methods of measuring levels of lipopolysaccharide-binding protein ("LBP")
elevated in humans as a specific response to bacterial endotoxin exposure.
In addition to such composition, manufacturing, formulation and assay
patents, the Company has been issued two patents related to therapeutic uses of
BPI-derived proteins. In September 1994, U.S. Patent No. 5,348,942 was issued
addressing the use of BPI protein products for neutralizing anti-coagulant
effects of heparin. In February 1996, the Patent Office issued U.S. Patent
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No. 5,494,896 directed to methods of treating burn injuries with BPI protein
products.
In addition to the nine BPI-related U.S. patents issued to the Company,
the Company is the exclusive licensee of three BPI-related patents owned by NYU.
In March 1993, the Patent Office issued to NYU U.S. Patent No. 5,198,541 (the
"'541 patent") which contains claims covering the recombinant production of BPI.
The Company believes the '541 patent has substantial value because it covers
certain production methodologies that allow production of commercial-scale
quantities of BPI for human use. In February 1996, the Patent Office issued U.S.
Patent No. 5,489,676 to NYU, relating to the discovery of novel polypeptides
that potentiate BPI's ability to kill gram-negative bacteria. In May 1995, the
European Patent Office granted to NYU, EP 375724, with claims to N-terminal BPI
fragments and their use, alone or in combination with antibiotics, for the
treatment conditions associated with bacterial infections. This patent is the
first and only BPI-related patent that has been granted to date in Europe.
The Company has also received four more U.S. Notices of Allowance and
has more than twenty pending patent applications for its BPI-based products.
The Company is aware of an agreement between Genentech and Incyte
pursuant to which Incyte claims to hold worldwide rights to all Incyte and
Genentech technology related to BPI and through which Genentech will receive a
royalty on Incyte's BPI product sales. Between 1992 and 1994, the Patent Office
issued five patents related to BPI to Incyte. Based on the opinion of its patent
counsel, Marshall, O'Toole, Gerstein, Murray & Borun, the Company believes that
it does not infringe any valid claims of any of the Incyte patents.
The Company is the exclusive licensee of U.S. Patent No. 4,918,163 (the
"`163 Patent"), issued to The Regents of the University of California in April
of 1990. The `163 Patent relates to a method of treating gram-negative bacterial
infection using certain anti-endotoxin monoclonal antibodies. On the date of
issuance, the Company filed suit against Centocor alleging infringement of the
`163 Patent. Effective July 28, 1992, the Company, Centocor and all other
interested parties resolved all outstanding litigation and disputes worldwide
regarding products, patents and patent applications related to anti-endotoxin
monoclonal antibodies by consent judgements which held the `163 Patent valid and
infringed by Centocor. Centocor has agreed to pay royalties to XOMA for any
United States sales of its monoclonal antibody HA-1A, and the companies have
agreed to forego all future litigation and administrative proceedings regarding
certain of each other's patents and patent applications related to
anti-endotoxin monoclonal antibodies. In March, 1993, Centocor announced the
cancellation of the Phase III trial of its HA-1A product.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, the Company may require
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. There can be no
assurance that such licenses, if required, will be available on acceptable
terms.
Research and License Agreements
XOMA has contracted with a number of academic and institutional
collaborators to conduct certain research and development. Under these
agreements the Company generally funds either the research and development or
evaluation of products, technologies or both, will own or obtain an exclusive
license to products or technologies developed, and will pay royalties on sales
of products covered by the license. The rates and durations of such royalty
payments vary by product and institution, and range generally for periods from
five years to indefinite duration. Aggregate expenses of the Company under all
of its research agreements totalled $0.4 million, $0.4 million, and $0.8 million
in 1995, 1994, and 1993, respectively. The Company has entered into certain
license agreements with respect to the following products:
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Bactericidal/Permeability Increasing Protein
In August 1990, XOMA entered into a research collaboration and license
agreement with NYU whereby XOMA obtained an exclusive license to patent rights
for DNA materials and genetic engineering methods for the production of BPI and
fragments thereof. BPI is part of the body's natural defense against gram-
negative bacteria and XOMA is exploring the use of its Neuprex(TM) and
I-PREX(TM) products, based on BPI, for various indications. XOMA has obtained an
exclusive, worldwide license for the development, manufacture, sale and use of
BPI products for human therapeutic and diagnostic uses, and it has paid a
license fee and will make milestone payments and pay royalties to NYU on the
sale of such products. The license becomes fully-paid upon the later of the
expiration of the relevant patents or fifteen years after the first commercial
sale, subject to NYU's right to terminate for certain events of default.
E5(R) Monoclonal Antibody Product
In September 1986, XOMA obtained from the University of California an
exclusive license to several monoclonal antibody cell lines related to virulence
factors of gram-negative bacteria. One of these monoclonal antibodies is being
used in the Company's E5(R) anti-endotoxin product described herein. The Company
has entered into an exclusive, worldwide license agreement for this product
which provides for the payment of royalties on sales of products utilizing this
antibody. The license becomes fully paid upon the later of the expiration of
relevant patents or ten years after the first commercial sale, subject to the
University's right to terminate the license for certain events of default.
Recombinant Technology
XOMA has obtained licenses under certain Stanford University and
University of California patents relating to certain basic processes of
recombinant DNA technology. The Stanford agreement provides that the Company
will pay an annual fee and both agreements provide for royalties on sales of
products should processes used in making those product(s) come under the
licensed patents.
Employees
As of December 31, 1995 XOMA employed 129 full-time employees at its
Berkeley and Santa Monica, California facilities. The Company's employees are
engaged in clinical, manufacturing, quality assurance and control, research and
product development activities, and in executive, finance and administrative
positions. The Company considers its employee relations to be excellent.
The principal executive offices of XOMA are located at 2910 Seventh
Street, Berkeley, California 94710 (telephone 510-644-1170).
Item 2. Properties
XOMA's principal product development and manufacturing facilities are
located in Berkeley, California. The Company leases 98,000 square feet of space
including approximately 35,000 square feet of research and development
laboratories, 32,000 square feet of production and production support facilities
and 16,000 square feet of office space. The Company subleased 14,000 square feet
of office space as a result of the restructuring. An additional 16,500 square
foot production facility was completed and purchased by XOMA during 1992. A
decision was made during the third quarter of 1995 to dispose of this facility.
XOMA also maintains offices, laboratories and a manufacturing facility
occupying approximately 15,000 square feet in leased space in Santa Monica,
California. An additional 6,000 square foot facility for scale-up of the
Neuprex(TM) product was completed in May 1993. The Company also owns an
approximately 6,750 square foot parking lot in Santa Monica.
-10-
<PAGE>
<PAGE>
Item 3. Legal Proceedings
In June 1992, the Company and one of its officers were named in a
securities class action lawsuit entitled Warshaw et al. v. XOMA Corporation, et
al. filed in the United States District Court for the Northern District of
California. The suit alleges that the Company failed to adequately disclose
information related to FDA review of the Company's application for a license to
market its E5(R) product for the treatment of gram-negative sepsis. The suit
seeks unspecified damages for alleged violations of Section 10(b) of the
Securities Exchange Act of 1934. After permitting plaintiffs to amend their
complaint three times, the District Court granted defendants' motion to dismiss
the third amended complaint with prejudice by Memorandum and Order dated June
23, 1994. Plaintiffs filed appeals with the U.S. Court of Appeals for the Ninth
Circuit on July 22 and 26, 1994. On January 25, 1996, the Court of Appeals
reversed the District Court and remanded the case to the District Court for
further proceedings, finding that the allegations of the plaintiffs' third
amended complaint were sufficient to withstand a motion to dismiss. Defendants
filed a petition for rehearing and suggestion for rehearing en banc on February
8, 1996. On February 16, 1996, the Court of Appeals requested that plaintiffs
file a response to defendants' petition for rehearing, which plaintiffs filed on
March 1, 1996. The Court of Appeals has not yet ruled on the petition for
rehearing. The Company maintains that all material information related to FDA
review of its application to market E5(R) had been publicly disclosed on a
timely basis, and that neither the Company nor the officer named engaged in any
wrongdoing. The Company believes that the allegations contained in the suit are
without merit, and it intends to defend against the suit vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Officers
The officers of the Company are as follows:
Name Age Title
John L. Castello 59 Chairman of the Board, President
and Chief Executive Officer
Patrick J. Scannon, M.D., Ph.D. 48 Chief Scientific and Medical
Officer and Director
Clarence L. Dellio 50 Senior Vice President, Operations
Peter B. Davis 49 Vice President, Finance
and Chief Financial Officer
Marvin J. Garrett 45 Vice President, Clinical and
Regulatory Affairs
Christopher J. Margolin 49 Vice President, General Counsel and
Secretary
W. C. McGregor, Ph.D. 54 Vice President, Technical
Development and Santa Monica
Operations
-11-
<PAGE>
<PAGE>
Officers serve at the discretion of the Board of Directors. There is no
family relationship among any of the officers or directors.
-12-
<PAGE>
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock trades in the over-the-counter market on the
National Association of Securities Dealers, Inc. Automated Quotation System
National Market ("NASDAQ/National Market") under the symbol "XOMA." The
following table sets forth the quarterly range of high and low reported sale
prices of the Company's Common Stock on the NASDAQ/National Market for the
periods indicated.
Price Range
------------------------
High Low
1994:
First Quarter $ 6-1/4 $ 3-3/4
Second Quarter 4-1/4 2-1/2
Third Quarter 3-5/8 2-1/4
Fourth Quarter 4-1/8 2-3/16
1995:
First Quarter $3-1/16 $ 1-1/8
Second Quarter 2-7/8 1-9/32
Third Quarter 4-1/4 1-11/16
Fourth Quarter 4-1/8 1-7/8
1996:
First Quarter (through February 29, 1996) $5-3/4 $3-3/8
On February 29, 1996, there were approximately 2,636 record holders of
XOMA's Common Stock.
The Company has not paid dividends on its stock. The Company currently
intends to retain any earnings for use in the development and expansion of its
business. The Company, therefore, does not anticipate paying cash dividends in
the foreseeable future (see Note 4 to the Financial Statements, "CAPITAL
STOCK").
-13-
<PAGE>
<PAGE>
Item 6. Selected Financial Data
The following table contains selected financial information including
income statement and balance sheet data of XOMA for the years 1991 through 1995.
The selected financial information has been derived from the audited Financial
Statements of XOMA. The selected financial information should be read in
conjunction with the Financial Statements and notes thereto set forth beginning
on page 21 of this report, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 7 below.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data
Total revenues $ 1,165 $ 1,729 $ 571 $ 5,105 $ 17,140
Total operating
costs and
expenses(1) 27,469 38,460 35,259 53,999 58,400
Other income, net(2) 3,832 2,104 3,381 1,802 6,918
--------- --------- --------- --------- ---------
Net loss $(22,472) $(34,627) $(31,307) $(47,092) $(34,342)
========= ========= ========= ========= =========
Net loss per share $ (0.95) $ (1.58) $ (1.46) $ (2.20) $ (1.77)
========= ========= ========= ========= =========
Balance Sheet Data
Cash(3) $ 26,405 $ 39,650 $ 70,246 $ 83,413 $124,289
Total assets 40,878 62,429 94,131 109,269 154,289
Long-term debt (4) 7,692 120 425 1,054 1,503
Accumulated deficit (307,905) (284,847) (249,439) (218,132) (171,040)
Stockholders' equity 26,836 43,461 78,397 88,473 134,456
</TABLE>
(1) In 1994, includes $2.5 million related to employee termination benefits
associated with a restructuring and in 1992, includes $10.0 million
related to an E5(R) inventory write-down, idle capacity and personnel
costs associated with an earlier restructuring.
(2) Other income in 1995 principally consists of interest income ($1.9
million), gain on write-down of a litigation accrual ($8.5 million),
loss on write-down of E5(R) inventory ($4.2 million), and a loss on
write- down of certain fixed assets ($2.4 million), which are being
held for sale.
(3) Includes cash, cash equivalents, and short-term investments.
(4) Excludes current portion. In 1995, includes $6.5 million aggregate
principal amount of convertible debentures due 1998. As of February 29,
1996, $3.3 million aggregate principal amount of the convertible
debentures had been converted into 992,205 shares of Common Stock.
-14-
<PAGE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
XOMA is a biopharmaceutical company engaged in the development of
products for the treatment of infections and complications from traumatic injury
and surgery. The Company is developing its Neuprex(TM) product for the treatment
of gram-negative infections and bacterial endotoxin-related complications. Other
BPI-derived products are in development, such as I-PREX(TM), for treating
ophthalmic infections and disorders, and Mycoprex(TM), for treating systemic
fungal infections. The Company's monoclonal antibody product, E5(R), is in
clinical testing in the United States as a treatment for gram-negative sepsis,
and has been submitted for approval in Japan as a treatment for endotoxemia.
In December 1994, XOMA restructured its operations to reduce costs and
focus on the development of its portfolio of advanced products. Under the
restructuring, XOMA's work force was reduced at its facilities in Berkeley and
Santa Monica, California. Although the restructuring will preserve the functions
essential to the development of Neuprex(TM) and certain other products derived
from BPI, several research programs with longer lead times and a need for
substantial funding were curtailed or eliminated.
The Company incurred a net loss in each of the past three years and is
expected to continue to operate at a loss at least until regulatory approval and
commencement of commercial sales of its products occurs. However, the timing of
product approvals is uncertain and there can be no assurance that approvals will
be granted or that revenues from product sales will be sufficient to attain
profitability.
Revenues
Total revenues were $1.2 million in 1995, $1.7 million in 1994, and
$0.6 million in 1993. Revenues for 1995 and 1994 included $0.8 million and $1.4
million respectively in partial consideration for the sale of the Company's
T-cell receptor ("TCR") technology.
Since it is not possible to predict when or whether it will receive
regulatory approval for its products, the Company has established a reserve of
$11.1 million for its entire E5(R) inventory.
Costs and Expenses
Due to the regulatory status of the Company's E5(R) product, there has
been no significant production of this product, from 1993 through 1995.
In 1995, research and development expenses decreased by $5.2 million
from 1994 expenses, which were $0.4 million above 1993 expenses. The 1995
decrease was due primarily to the restructuring at the end of 1994. The 1994
increase was due primarily to the cost of BPI toxicology studies, partially
offset by lower personnel, supplies and outside research costs.
General and administrative expenses decreased by $3.3 million in 1995
primarily due to the effect of the 1994 restructuring. The $0.5 million increase
of 1994 over 1993 was principally the result of additional corporate salaries
and overhead related to Neuprex(TM) and Genimune(TM) project management.
In the fourth quarter of 1994, the Company recorded a $2.5 million
charge for the cost of termination benefits related to the restructuring of
operations to reduce costs and to accelerate development of Neuprex(TM) and the
other products derived from BPI.
Investment income decreased by $0.2 million in 1995 compared with 1994
and by $1.4 million in 1994 compared with 1993 due primarily to lower average
investment balances partially offset by higher interest rates.
-15-
<PAGE>
<PAGE>
During the third quarter of 1995, XOMA reached an agreement with Pfizer
to amend the cost sharing arrangement for the current ongoing Phase III clinical
trial for the Company's E5(R) product and certain other matters. This amendment
gives the Company the option to pay a reduced share of future costs for this
trial, in return for reduced future royalty payments by Pfizer on U.S. sales of
the product. The Company has also increased its reserves against its E5(R)
inventories to provide a 100 percent reserve. Finally, the Company made the
decision to attempt to sell its facility which was to be used for the production
of its CD5 Plus(TM) product and has re-classified it for financial reporting
purposes as an asset held for sale. The net result of these actions was a
one-time gain recorded in Other Income/(Expense) of $1.9 million ($0.08 per
share).
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments decreased by $13.2
million during 1995 primarily as a result of operating cash requirements of
$24.6 million, and capital expenditures and lease payments of $0.8 million,
offset by $1.8 million from a sale and leaseback transaction, $5.9 million from
debt incurrence, and $4.5 million from the issuance of equity.
Cash used in operating activities was $24.6 million in 1995. This was
primarily due to the net loss of $22.5 million plus a $3.9 million reduction in
accrued liabilities and an $8.5 million reduction in non-current liabilities,
partially offset by a $4.2 million increase to inventory reserves, $2.9 million
in charges for depreciation and amortization and a $2.4 million valuation
reduction in certain fixed assets which have been re- classified as property
held for sale. The $3.9 million reduction in accrued liabilities included $2.3
million in payments for re-structuring costs recorded in 1994, and a $2.0
million payment to Pfizer for previously recorded clinical trial costs. The
reduction in non-current liabilities related to the elimination of an $8.5
million litigation liability to Pfizer (see Notes 1 and 6 to the Financial
Statements).
Capital expenditures totalled $0.3 million in 1995, $1.3 million in
1994 and $1.8 million in 1993. Included in 1994 and 1993 were purchases of
research and manufacturing equipment and capital costs associated with the
expansion of the Neuprex(TM) product manufacturing facilities in Santa Monica
and Berkeley. In the near term, the Company intends to continue to fund capital
expenditures from internal cash resources supplemented by capital financing
where appropriate and available.
The Company's cash position and resulting investment income are
sufficient to finance the Company's currently anticipated needs for operating
expenses, working capital, equipment and current research projects for a minimum
of one year. The Company continues to evaluate strategic alliances, potential
partnerships, and financing arrangements which would further strengthen its
competitive position and provide additional funding. The Company has engaged an
investment banking firm to assist in completing one or more strategic alliances
with respect to the Neuprex(TM) product. The Company cannot predict whether or
when any such alliance(s) will be consummated or whether additional funding will
be available when required.
Although operations are influenced by general economic conditions, the
Company does not believe that inflation had a material impact on revenues or
expenses for the periods presented. The Company believes it is not dependent on
materials or other resources which would be significantly impacted by inflation
or changing economic conditions in the foreseeable future.
-16-
<PAGE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant,
related notes, and report of independent public accountants are set forth
beginning on page 21 of this report.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Item 9. Disagreements on Accounting and Financing Disclosures
None.
-17-
<PAGE>
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The section labeled "Proposal 1 -- Election of Directors" appearing in
the Company's proxy statement for the 1996 annual meeting of stockholders is
incorporated herein by reference. Information concerning the Company's executive
officers is set forth in Part I of this Report on Form 10-K.
Item 11. Executive Compensation
The section labeled "Executive Compensation" appearing in the Company's
proxy statement for the 1996 annual meeting of stockholders is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Stock Ownership" appearing in the Company's proxy
statement for the 1996 annual meeting of stockholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Transactions" appearing in the Company's
proxy statement for the 1996 annual meeting of stockholders is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1) Financial Statements:
All financial statements of the registrant referred to in Item
8 of this Report on Form 10-K.
(2) Financial Statement Schedules:
All financial statements schedules have been omitted since the
required information is included in the financial statements or
the notes thereto, or is not applicable or required.
(3) Exhibits:
See "Index to Exhibits."
(b) Reports on Form 8-K.
None.
-18-
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 26th day of
March, 1996.
XOMA CORPORATION
By /s/ JOHN L. CASTELLO
--------------------------------
John L. Castello,
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ JOHN L. CASTELLO Chairman of the Board, President March 26, 1996
- - --------------------- and Chief Executive Officer
(John L. Castello) (Principal Executive Officer
/s/ PATRICK J. SCANNON Chief Scientific and March 26, 1996
- - ------------------------ Medical Officer and Director
(Patrick J. Scannon)
/s/ PETER B. DAVIS Vice President, Finance March 26, 1996
- - ------------------------ and Chief Financial Officer
(Peter B. Davis) (Principal Financial and
Accounting Officer)
-19-
<PAGE>
<PAGE>
Signature Title Date
- - --------- ----- ----
/s/ JAMES G. ANDRESS Director March 26, 1996
- - -------------------------
(James G. Andress)
/s/ WILLIAM K. BOWES, JR. Director March 26, 1996
- - -------------------------
(William K. Bowes, Jr.)
/s/ ARTHUR KORNBERG Director March 26, 1996
- - -------------------------
(Arthur Kornberg)
/s/ STEVEN C. MENDELL Director March 26, 1996
- - ------------------------
(Steven C. Mendell)
/s/ W. DENMAN VAN NESS Director March 26, 1996
- - ------------------------
(W. Denman Van Ness)
/s/ GARY WILCOX Director March 26, 1996
- - ------------------------
(Gary Wilcox)
-20-
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................. 22
Balance Sheets........................................................... 23
Statements of Operations................................................. 24
Statements of Stockholders' Equity....................................... 25
Statements of Cash Flows................................................. 26
Notes to Financial Statements............................................ 27
-21-
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To XOMA Corporation:
We have audited the accompanying balance sheets of XOMA Corporation (a
Delaware corporation) as of December 31, 1995 and 1994 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of XOMA Corporation as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
San Francisco, California ARTHUR ANDERSEN LLP
February 14, 1996
-22-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
XOMA CORPORATION
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
December 31
-----------------------------------------
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 1 and 2) $ 20,400 $ 3,576
Short-term investments (Note 2) 6,005 36,074
Notes receivable 2,205 --
Related party receivables (Note 8) 276 291
Interest and other receivables 384 565
Inventories (Note 1) -- 4,170
Prepaid expenses and other 210 822
--------- --------
Total current assets 29,480 45,498
NON-CURRENT ASSETS: Property and equipment, net (Note 1) 6,181 15,448
Assets held for sale 4,442 --
Deposits and other 775 1,483
--------- --------
$ 40,878 $ 62,429
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,120 $ 1,415
Accrued liabilities (Note 1) 3,684 8,662
Capital lease obligations due in one year (Note 6) 546 306
--------- --------
Total current liabilities 6,350 10,383
--------- --------
NON-CURRENT LIABILITIES:
Capital lease obligations due after one year (Note 6) 1,192 120
Convertible Debentures 6,500 --
Other non-current liabilities (Note 1) -- 8,465
--------- --------
Total non-current liabilities 7,692 8,585
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 4 and 5):
Preferred Stock, $.05 par value, 1,000,000 shares
authorized, 7,807 and 15,615 outstanding
(liquidation preference $7,807 and $15,615) at
December 31, 1995 and 1994, respectively
(Notes 4 and 5) -- 1
Common Stock, $.0005 par value, 40,000,000 shares
authorized, 27,303,186 outstanding at December 31,
1995 and 22,173,994 at December 31, 1994 14 11
Paid-in capital 334,727 328,296
--------- --------
Accumulated deficit (307,905) (284,847)
--------- --------
Total stockholders' equity 26,836 43,461
--------- --------
$ 40,878 $ 62,429
========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-23-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
XOMA CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years ended December 31
-------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
REVENUES:
Product sales and royalties $ 87 $ 202 $ 260
Research and development fees
(Notes 1 and 3):
Collaborative agreements -- 136 311
License fees 1,078 1,391 --
--------- --------- ---------
Total revenues 1,165 1,729 571
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales -- 3 172
Research and development
(Notes 1 and 3) 22,086 27,284 26,909
General and administrative 5,383 8,673 8,178
Restructuring charge (Note 1) -- 2,500 --
--------- --------- ---------
Total operating costs and expenses 27,469 38,460 35,259
--------- --------- ---------
Loss from operations (26,304) (36,731) (34,688)
OTHER INCOME (EXPENSE):
Investment income 1,934 2,169 3,590
Other income and expense 1,898 (65) (209)
--------- --------- ---------
Net loss $ (22,472) $ (34,627) $ (31,307)
========= ========= =========
NET LOSS PER COMMON SHARE (Note 1) $ (0.95) $ (1.58) $ (1.46)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 23,671 21,920 21,470
========= ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-24-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
XOMA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------- -------- -------- -------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 21,470 $ 11 -- -- $ 306,594 $(218,132) $ 88,473
Amortization of deferred
compensation -- -- -- -- 296 -- 296
Exercise of warrants -- -- -- -- 2 2
Issuance of warrants (Note 5) -- -- -- -- 5,992 -- 5,992
Sale of preferred stock
(Note 4) -- -- 19 1 14,940 -- 14,941
Net loss -- -- -- -- -- (31,307) (31,307)
------- ------ ------ ------- -------- --------- --------
BALANCE, DECEMBER 31, 1993 21,470 11 19 1 327,824 (249,439) 78,397
Contributions to 401(k) and
management incentive
plans 55 -- -- -- 360 -- 360
Amortization of deferred
compensation -- -- -- -- 240 -- 240
Conversion of preferred
stock (Note 4) 649 -- (3) -- -- -- --
Unrealized gain (loss) on
investments (Note 2) -- -- -- -- (128) -- (128)
Dividends on preferred
stock (Note 4) -- -- -- -- -- (781) (781)
Net loss -- -- -- -- -- (34,627) (34,627)
------- ------ ------ ------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 22,174 $ 11 16 $ 1 $ 328,296 $(284,847) $ 43,461
Exercise of stock options 25 -- -- -- 12 -- 12
Contributions to 401(k) and
management incentive plans 149 -- -- -- 434 -- 434
Sale of common stock 471 1 -- -- 717 -- 718
Amortization of deferred
compensation -- -- -- -- 214 -- 214
Sale of preferred stock -- -- 5 -- 4,143 -- 4,143
Conversion of preferred
stock (Note 4) 4,230 2 (13) (1) (1) -- --
Exercise of warrants 1 -- -- -- 7 -- 7
Unrealized gain (loss) on
investments (Note 2) -- -- -- -- 125 -- 125
Dividends on preferred
stock (Note 4) 253 -- -- -- 780 (586) 194
Net loss -- -- -- -- -- (22,472) (22,472)
------- ------ ------ ------- -------- --------- --------
BALANCE, DECEMBER 31, 1995 27,303 $ 14 8 $ -- $ 334,727 $(307,905) $ 26,836
======= ====== ====== ======= ======== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-25-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
XOMA CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,472) $ (34,627) $ (31,307)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,920 3,334 2,791
Inventory reserve 4,170 -- 900
Write-down of assets held for sale 2,400 -- --
Deferred compensation expense 214 240 296
Loss (gain) on retirement of capital
equipment (145) -- 1
Changes in assets and liabilities:
Decrease (increase) in interest and
other receivables (2,009) 274 (203)
Decrease (increase) in inventory -- -- 445
Decrease (increase) in prepaid
expenses 612 156 (195)
Decrease (increase) in deposits and
other assets 1,350 (1,350) --
Increase (decrease) in accounts payable 705 877 (417)
Increase (decrease) in accrued liabilities (3,921) 2,563 (1,195)
Increase (decrease) in non-current
liabilities (8,465) -- --
------- ------- -------
Total adjustments (2,169) 6,094 2,423
------- ------- -------
Net cash used in operating activities (24,641) (28,533) (28,884)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 61,835 312,262 244,152
Payments for purchase of short-term
investments (31,641) (301,708) (210,891)
Capital expenditures, net of proceeds (350) (1,308) (1,767)
------- ------- -------
Net cash provided by (used in)
investing activities 29,844 9,246 31,494
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback 1,800 -- --
Principal payments under capital
lease obligations (488) (627) (450)
Proceeds from issuance of debentures 5,858 -- --
Proceeds from issuance of warrants -- -- 2,994
Proceeds from issuance of common or
preferred stock 4,451 -- 14,940
------- ------- -------
Net cash provided by financing activities 11,621 (627) 17,484
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 16,824 (19,914) 20,094
Cash and cash equivalents at beginning
of year 3,576 23,490 3,396
------- ------- -------
Cash and cash equivalents at end of year $ 20,400 $ 3,576 $ 23,490
======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
-26-
<PAGE>
<PAGE>
XOMA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
XOMA Corporation ("XOMA" or the "Company") is a biotechnology and
pharmaceutical company engaged in the development of products for the treatment
of infectious and immune system diseases and other serious disorders. The
Company's products are presently in various stages of development or regulatory
review and all are subject to regulatory approval before the Company can
commercially introduce any products. There can be no assurance that any of the
products under development by the Company will be developed successfully, obtain
the requisite regulatory approval or be successfully manufactured or marketed.
The Company's cash position and resulting investment income are
sufficient to finance the Company's currently anticipated needs for operating
expenses, working capital, equipment and current research projects for a minimum
of one year. The Company continues to evaluate strategic alliances, potential
partnerships, and financing arrangements which would further strengthen its
competitive position and provide additional funding. The Company has engaged an
investment banking firm to assist in completing one or more strategic alliances
with respect to the Neuprex(TM) product. The Company cannot predict whether or
when any such alliance(s) will be consummated or whether additional funding will
be available when required.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Amendment to Pfizer Agreement
In the third quarter of 1995, XOMA and Pfizer Inc. ("Pfizer") agreed to
modify the funding arrangement of the current E5(R) clinical trial, so that XOMA
may at its option reduce its contributions towards the cost in return for a
reduction in future royalties otherwise payable by Pfizer. The agreement also
modifies the payment terms relating to the Company's $8.5 million obligation to
Pfizer for patent litigation costs. See Note 6, Commitments and Contingencies.
The maximum royalty reduction in any one year will be limited to 30% of the
royalties otherwise payable on Pfizer's U.S. sales of E5(R), until such time as
the amounts owed are fully paid. Pfizer was also paid $2.0 million for
previously recorded clinical trial costs.
Restructuring Charges
In the fourth quarter of 1994, the Company restructured its operations
to reduce costs and to accelerate the development of its Neuprex(TM) and other
BPI derived products. Other research programs will be curtailed or eliminated.
The Company recorded a charge to earnings of $2.5 million, primarily from the
cost of termination benefits related to the elimination of 75 positions in
research and research support functions.
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The activities during 1995 affecting the restructuring accrual
established in the fourth quarter of 1994 are as follows:
In Millions
-----------
Original amount accrued $2.5
Charges against the accrual 2.3
Adjustments to the accrual --
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Shares issuable upon exercise of options and warrants
are not considered in the computation of net loss per share because the effect
of including such shares in the computation would be antidilutive. Shares of
Common Stock issuable upon conversion of Preferred Stock and Convertible
Debentures outstanding at December 31, 1995 and 1994 are not considered because
the shares of Preferred Stock and Convertible Debentures are not Common Stock
equivalents.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers
all highly liquid debt instruments with maturities of three months or less at
the time the Company acquires them to be cash equivalents, except when such debt
instruments are part of a portfolio of investments managed by an independent,
outside investment manager, in which case these instruments are classified as
short-term investments.
Supplemental Cash Flow Information
Cash paid for interest during the years ended December 31, 1995, 1994,
and 1993 was as follows (in thousands):
1995 1994 1993
---- ---- ----
Interest $105 $119 $206
In addition, during the years ended December 31, 1995, 1994 and 1993,
the Company had the following non-cash financing and investing activities (in
thousands):
1995 1994 1993
---- ---- ----
Stock contribution to the 401(k) and
management incentive plans
(Notes 4 and 9) $ 434 $ 360 $ --
Litigation settled with issuance of
warrants (Note 5) -- -- 3,000
Stock issuance cost paid with common
or preferred stock (Note 4) 8 -- 250
Unrealized loss(gain) on investments 125 128 --
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Notes Receivable
The $2.2 million in notes receivable from Connective Therapeutics, Inc.
was collected in February of 1996. In 1994, the note for $1.4 million was
classified as long-term in Deposits and other.
Inventories
Inventories are stated at the lower of first-in-first-out cost or
market value. Inventories consist of the following (in thousands):
December 31
------------------------
1995 1994
---- ----
Raw materials $ -- $4,170
Work-in-process -- --
Finished goods -- --
------- --------
$ -- $4,170
======== ========
The inventories consist primarily of E5(R) raw materials net of a
reserve of $11.1 million and $6.9 million in 1995 and 1994, respectively. The
$4.2 million increase in the reserves in the third quarter of 1995 was charged
to Other income and expense.
Property and Equipment
Property and equipment, including equipment under capital leases, are
stated at cost. Equipment depreciation is calculated using the straight-line
method over the estimated useful lives of the assets (five to seven years).
Leasehold improvements, buildings, and building improvements are amortized and
depreciated using the straight-line method over the shorter of the lease terms
or the useful lives (one to nine years).
Property and equipment consist of the following (in thousands):
December 31
------------------------
1995 1994
---- ----
Land $ -- $ 459
Buildings -- 1,714
Equipment 13,916 15,557
Leasehold and building improvements 14,483 20,342
Construction-in-progress 19 117
-------- -------
28,418 38,189
Less accumulated depreciation and amortization 22,237 22,741
-------- -------
Property and equipment, net $ 6,181 $15,448
======== =======
Assets held for sale $ 4,442 $ --
======== =======
In 1994, land, buildings, equipment and building improvements included
approximately $7.2 million related to the net book value of a facility
originally intended for the production of CD5 Plus(TM) intermediates, which was
classified as assets held for sale in 1995. The facility was written down to
estimated realizable value of $4.4 million which resulted in a charge to other
income and expense of $2.4 million in the third quarter of 1995. The amounts the
Company will ultimately realize could differ materially from the amounts assumed
in arriving at the realizable value.
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Deposits and other
Deposits and other included $1.4 million in 1994 for a note receivable
from Connective Therapeutics, Inc. and was reclassified to notes receivable in
1995.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31
------------------------
1995 1994
---- ----
Accrued legal costs $ 500 $ 1,098
Accrued dividends 586 781
Accrued payroll costs 1,492 1,134
Restructuring costs 172 2,500
Clinical trial costs 593 2,611
Other 341 538
------- -------
$ 3,684 $ 8,662
======= =======
Other Non-current Liabilities
Liabilities or loss accruals are classified as non-current if their
expected payment dates or amortization periods (if non-cash) occur more than one
year from the balance sheet date. Other non-current liabilities in 1994
consisted of $8.5 million of patent litigation costs.
Research and Development Fees
Research and development fees are recognized as revenues as research
activities are performed or as development milestones are completed under the
terms of research and development agreements. The excess of total research and
development expense over revenues recognized under collaborative agreements
amounted to $22.1 million, $27.0 million, and $26.6 million for the years 1995,
1994, and 1993, respectively.
Reclassifications
Certain reclassifications have been made to conform the prior years to
the 1995 presentation.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
On December 31, 1995 and 1994, cash and cash equivalents consisted
mostly of money market mutual funds.
Effective January 1, 1994, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investment in Debt and Equity Securities". Adoption of SFAS 115, a
change in accounting principle, had no material cumulative effect on retained
earnings as of that date.
The Company follows a policy of investing only in marketable debt
securities and holding them to maturity; however, since the Company has from
time to time sold certain securities to meet cash requirements or improve
investment diversification, the Company's short-term investments have been
categorized as available-for-sale as required by SFAS 115.
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The aggregate fair values, amortized cost, gross unrealized holding
gain, and gross unrealized holding loss of the major types of debt securities at
December 31, 1995 were as follows (in millions):
<TABLE>
<CAPTION>
Gross Unrealized
Holding
Fair Amortized
Value Cost Gain Loss
-------------- ------------------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $1.7 $1.7 $ -- $ --
U.S Government Agency Issues 3.0 3.0 -- --
Corporate Bonds and Other 1.3 1.3 -- --
</TABLE>
The contractual maturities of the Company's debt securities as of
December 31, 1995 were as follows (in millions):
Less than 1 year $5.4
From 1 to 2 years 0.6
More than 2 years --
During the year ended December 31, 1995, gross realized losses on
available-for-sale securities were negligible and the net change in the
unrealized gain or loss was a $0.1 million gain. Gross realized gains were
negligible. Gains and losses are determined on a specific identification basis.
As of December 31, 1995, term investments includes $0.6 million in certificates
of deposit which guarantees a standby letter of credit in favor of the Lessor of
the $1.8 million sale and lease back of certain equipment in July of 1995.
3. RESEARCH AND DEVELOPMENT AGREEMENTS
In June 1994, the Company assigned its exclusive worldwide rights in
T-cell receptor ("TCR") peptide technology to Connective Therapeutics, Inc. The
Company received a promissory note in the amount of $1.4 million and warrants to
purchase 450,000 shares of Connective Therapeutics, Inc. stock, and will receive
milestone payments and royalties on product sales. In 1995, the Company received
an additional note in the amount of $0.8 million pursuant to the terms of the
original assignment. The notes were paid in full in February 1996.
In June 1987, the Company and Pfizer entered into agreements relating
to monoclonal antibody-based products for the treatment of gram-negative sepsis.
The agreements provide Pfizer with exclusive rights to E5(R) in exchange for the
funding of certain clinical and development activities. In January 1994, the
territory covered by the agreements was redefined to include only the countries
of Japan and the United States. Research and development fees earned under the
agreements were negligible over the last three years. The Company is reimbursed
for manufacturing costs and will receive a portion of the gross margins obtained
from any sales on a formula basis. Pfizer also has a limited first right to
negotiate for future XOMA products (other than BPI-derived products) if they
will be used for the treatment, cure or prevention of gram-negative sepsis. The
agreements can be canceled with appropriate notice upon reimbursement by Pfizer
of certain of XOMA's research and development expenses. XOMA has granted a
security interest to Pfizer in assets related to its E5(R) program to secure
performance of XOMA's obligations under the agreements under certain conditions,
including bankruptcy. In the third quarter of 1995, XOMA and Pfizer agreed to
modify the funding
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arrangement of the current E5(R) clinical trial and the payment terms relating
to certain patent litigation costs (see Note 1, Operations and Summary of
Significant Accounting Policies, Amendment to Pfizer Agreement, and Note 6,
Commitments and Contingencies).
4. CAPITAL STOCK
Common Stock
In June and July 1995, the Company issued 470,859 shares of common
stock in reliance on Regulations S for net proceeds of $0.7 million.
Preferred Stock
The Company has authorized 650,000 shares of Series A Cumulative
Preferred Stock of which none were outstanding at December 31, 1995 and 1994.
(See Stockholder Rights Plan, below.)
In December 1993, the Company issued 18,775 shares of Senior
Convertible Preferred Stock, Series B ("Series B Preferred Stock"), $.05 par
value, to two investors for proceeds of $18.8 million. In addition, warrants to
purchase 1,787,210 shares of Common Stock were issued to the two investors (see
Note 5, Stock Options and Warrants). Costs of the issue were approximately $1.1
million. Of the net proceeds, $3.0 million have been allocated to the warrants.
An additional 250 shares of Series B Preferred Stock and 23,770 warrants were
issued to the placement agent as part of the fee for investment banking
services. A total of 30,000 shares of Series B Preferred Stock was authorized
for this transaction.
Each share of Series B Preferred Stock has a liquidation preference of
$1,000 per share and a cumulative annual dividend of $50 per share payable
semiannually in cash or Common Stock at the Company's discretion, and is
convertible into 206.2442 shares of Common Stock (subject to certain
anti-dilution adjustments). In May of 1994, the placement agent converted all
250 of its shares of preferred stock into 47,595 shares of Common Stock. The
amounts payable as dividends at December 31, 1994 were paid with 252,745 shares
of common stock in January of 1995. During 1995, 7,808 shares of the Series B
Preferred Stock had been converted into 1,501,731 shares of Common Stock and the
warrants to purchase 1,787,210 shares of Common Stock had expired unexercised.
In August 1995, the Company issued 4,799 shares of its Convertible
Preferred Stock, Series C to foreign investors in an offering exempt from
registration under the Securities Act of 1933 in reliance on Regulation S
thereunder. The offering yielded net proceeds to the Company after expenses of
$4.1 million. As of December 31, 1995, all of the Series C Preferred Stock had
been converted into 2,728,190 shares of Common Stock.
Debentures
In November 1995, the Company issued $6.5 million aggregate principal
amount of 4% Convertible Subordinated Debentures due in 1998 to foreign
investors in an offering exempt from registration under the Securities Act of
1933 in reliance on Regulation S thereunder. The offering yielded net proceeds
to the Company after expenses of $5.9 million. Beginning 45 days after issuance,
50% of the principal amount of the Debentures, and beginning 75 days thereafter,
all of the outstanding principal amount thereof, will be convertible by the
holder into Common Stock of the Company at a conversion price equal to 80% of
the then current market price of the Common Stock.
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After two years the Debentures may be converted by the Company at the same
conversion price. The Company will not be required to issue more than
approximately 4.9 million shares of Common Stock upon conversion of the
Debentures.
Management Incentive Compensation Plan
The Board of Directors of the Company established a Management
Incentive Compensation Plan effective July 1, 1993 (as amended, the "Incentive
Plan"), in which management employees (other than the Chief Executive Officer),
as well as certain additional discretionary participants chosen by the Chief
Executive Officer, are eligible to participate. Under the Incentive Plan, at the
beginning of each fiscal year, the Board of Directors (with advice from the
Compensation Committee) establishes a target incentive compensation pool, which
is adjusted at year-end to reflect the Company's performance in achieving its
corporate objectives. After each fiscal year, the Board of Directors and the
Compensation Committee make a determination as to the performance of the Company
and Incentive Plan participants in meeting corporate objectives and individual
objectives, which are determined from time to time by the Board of Directors in
its sole discretion. Awards to Incentive Plan participants will vary depending
upon the achievement of corporate objectives, the size of the incentive
compensation pool, the Incentive Plan participants' base salaries and the
Incentive Plan participants' performance during the fiscal year and expected
ongoing contribution to the Company. The Company must meet a minimum percentage
of its corporate objectives (currently 70%) before any awards will be made under
the Incentive Plan.
Awards under the Incentive Plan vest over a three-year period with 50%
of each award payable on a date to be determined, expected to be in the first
quarter of the following fiscal year, and 25% payable on each of the next two
annual distribution dates, so long as the Incentive Plan participant continues
to participate in the Incentive Plan. The portion payable on the first
distribution date is payable 50% in cash and 50% in Common Stock (based on a
10-day average market price). Incentive Plan participants must choose prior to
the end of the first year of the three-year period whether the balance is to be
paid in cash or Common Stock.
If, within a year after a "change in control" (as defined) of the
Company, an Incentive Plan participant's employment is involuntarily terminated
other than for cause or an Incentive Plan participant voluntarily terminates his
or her employment because his or her duties or compensation are no longer
substantially equivalent to what they were at the time of the "change in
control," then all awards authorized but not yet distributed to the Incentive
Plan participant will be distributed. The amounts accrued under the Incentive
Plan were $0.6 million and $0.3 million for the plan years 1995 and 1993
respectively. There was no accrual for 1994.
Stockholder Rights Plan
In October 1993, the Company's Board of Directors unanimously adopted a
Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, Preferred
Stock Purchase Rights ("Rights") were distributed as a dividend at the rate of
one Right for each share of the Company's Common Stock held of record as of the
close of business on November 12, 1993. Each Right entitles the registered
holder of Common Stock to buy a fraction of a share of the new series of
Preferred Stock (the "Series A Preferred Stock") at an exercise price of $30.00,
subject to adjustment. The Rights will be exercisable, and will detach from the
Common Stock, only if a person or group acquires 20 percent or more of the
Common Stock, announces a tender or exchange offer that, if consummated will
result in a person or group beneficially owning 20 percent or more of the Common
Stock, or if the Board of Directors declares a
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person or group owning 10 percent or more of the outstanding shares of Common
Stock to be an Adverse Person (as defined in the Rights Plan). Once exercisable,
each Right will entitle the holder (other than the acquiring person) to purchase
units of Series A Preferred Stock (or, in certain circumstances, common stock of
the acquiring person) with a value of twice the Rights exercise price. The
Company will generally be entitled to redeem the Rights at $.001 per Right at
any time until the close of business on the tenth day after the Rights become
exercisable. The Rights will expire at the close of business on December 31,
2002.
5. STOCK OPTIONS AND WARRANTS
Stock Option Plan
Under the Company's amended 1981 Stock Option Plan (the "Option Plan"),
qualified and non-qualified options of the Company's Common Stock may be granted
to certain employees and other individuals as determined by the Board of
Directors at not less than the fair market value of the stock at the date of
grant. Options granted under the Option Plan may be exercised when vested and
expire five years and two months to ten years from the date of grant or three
months from the date of termination of employment. Options granted generally
vest over five years. The Option Plan will terminate on November 15, 2001. As of
December 31, 1995, options covering 2,392,401 shares of Common Stock were
outstanding under the Option Plan.
Restricted Stock Plan
The Company also has a Restricted Stock Plan (the "Restricted Plan")
which provides for the issuance of options or the direct sale of Common Stock to
certain employees and other individuals as determined by the Board of Directors
at not less than 85% of fair market value of the Common Stock on the grant date.
Individuals eligible to receive option grants or stock issuances under the
Restricted Plan will be limited to those employees (including officers and
directors) who have contributed to the management, growth or financial success
of the Company. During 1992 the number of shares of Common Stock authorized for
issuance over the term of the Restricted Plan was increased to 1,000,000,
subject to the aggregate limitation discussed below. Each option issued under
the Restricted Plan will be a non-statutory option under the federal tax laws
and will have a term not in excess of ten years from the grant date. Options
granted generally vest over five years. The Restricted Plan will terminate on
December 15, 2003.
The Company has granted options with exercise prices at 85% of fair
market value on the date of grant. As of December 31, 1995, options covering
412,720 shares of Common Stock were outstanding under the Restricted Plan.
The Company amortizes deferred compensation, which is the difference
between the issuance price or exercise price and the fair market value of the
shares as determined by the Board of Directors at the date of sale or grant over
the period benefitted.
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Directors Stock Option Plan
In 1992, the stockholders approved a Directors Stock Option Plan (the
"Directors Plan") which provides for the issuance of options to purchase shares
of Common Stock to non-employee directors of the Company at 100% of the fair
market value of the stock on the date of the grant. Up to 150,000 shares are
authorized for issuance during the term of the Directors Plan. Options vest on
the date of grant and have a term of up to ten years. As of December 31, 1995,
options for 33,000 shares of Common Stock were outstanding under the Directors
Plan.
Ingene Plan
In connection with the merger with International Genetic Engineering,
Inc. ("Ingene"), the Company assumed the rights and obligations of Ingene under
then outstanding options to purchase shares of Ingene Common Stock. After the
merger, the outstanding Ingene options became options to purchase 134,800 shares
of XOMA Corporation Common Stock. No options can be granted under the Ingene
Plan subsequent to the merger. These options expire ten years after the date of
original grant by Ingene and become exercisable ratably over periods of up to
four years starting from one year after the date of original grant. All options
are fully vested at December 31, 1994. As of December 31, 1995, options for
8,896 shares of common stock were outstanding under this plan.
The aggregate number of shares of Common Stock that may be issued
under the Option Plan, the Restricted Plan, the Directors Plan and the Ingene
Plan is 4,300,000 shares. The following table summarizes the activity under the
Company's stock option plans:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1994 1993
---------------------- ---------------------- -----------------------
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 3,000,692 $2.07-26.50 2,861,854 $4.99-26.50 2,806,700 $7.00-28.00
Granted 2,239,855 $1.70-2.94 517,000 $2.07-4.38 846,300 $4.99-7.50
Exercised (5,315) $1.81-2.56 -- -- -- --
Canceled (2,388,215) $2.38-26.50 (378,162) $3.72-26.50 (791,146) $6.38-28.00
----------- --------- ---------
Outstanding, end of period 2,847,017 $1.70-22.75 3,000,692 $2.07-26.50 2,861,854 $4.99-26.50
----------- --------- ---------
Exercisable, end of period 1,310,938 $1.70-22.75 1,480,886 $2.07-26.50 1,364,943 $4.99-26.50
=========== ========= =========
</TABLE>
Warrants
Warrants to purchase 1,810,980 shares of Common Stock issued in
conjunction with the issuance of the Series B Preferred Stock in December 1993
expired on December 19, 1995. These warrants were valued at $3.0 million and are
reflected in Paid-in capital.
Warrants with an aggregate value of $3.0 million at the time of
issuance were issued during the second quarter of 1993 to conclude the
settlement of certain stockholder and derivative litigation brought in 1991. A
total of 2,214,633 warrants were issued, and warrants for 2,213,476 shares of
Common Stock expired unexercised in June of 1995.
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6. COMMITMENTS AND CONTINGENCIES
Clinical Trial
In the third quarter of 1995, the Company and Pfizer reached an
agreement regarding the funding of the current Phase III E5(R) clinical trial
and payment terms relating to the $8.5 million of patent litigation costs due to
Pfizer. Under this agreement, the Company may, at its option, reduce its minimum
funding commitment ($3.6 million at December 31, 1995) for the remainder of the
trial in return for a reduction in future royalties otherwise payable to XOMA by
Pfizer on Pfizer's U.S. sales of E5(R). The agreement also provides that XOMA
will repay the $8.5 million of patent litigation costs by reducing the future
royalties otherwise payable to XOMA by Pfizer on Pfizer's U.S. sales of E5(R).
As a result, the $8.5 million was credited to Other income and expense in the
third quarter of 1995. The maximum royalty reduction in any one year related to
these items will be limited to 30% of the royalties otherwise payable on
Pfizer's U.S. sales of E5(R), until such time as the amounts owed ($9.9 million
at December 31, 1995) are fully paid.
Collaborative Agreements and Royalties
As of December 31, 1995, the Company has commitments under research
agreements with universities and other research institutions that require the
Company to fund research in the amount of $0.2 million through December 1996.
Research and development expenses include research agreement expenses of
approximately $0.4 million, $0.4 million, and $0.8 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The Company is also obligated to
pay royalties, ranging generally from 1.5% to 5% of the selling price of the
licensed component and up to 25% of sublicense fee income, to various
universities and other research institutions based on future sales or licensing
of products that incorporate certain products and technologies developed by
those institutions.
Leases
As of December 31, 1995, the Company leased administrative, research
facilities, certain laboratory and office equipment under operating and capital
leases expiring on various dates through 2003.
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Future minimum lease commitments are as follows (in thousands):
Capital Leases Operating Leases
1996 $ 744 $ 1,824
1997 623 1,761
1998 753 916
1999 -- 571
2000 -- 571
Thereafter -- 1,569
------- -------
Net minimum lease payments 2,120 $ 7,212
=======
Less--Amount representing interest
expense 382
-------
Present value of net minimum
lease payments 1,738
Less--Current maturities 546
-------
Long-term capital lease obligations $ 1,192
=======
Total rental expense was approximately $2.3 million, $2.3 million, and
$2.5 million for the years ended December 31, 1995, 1994, and 1993,
respectively.
Patents
As a result of its ongoing activities, the Company owns and is in the
process of applying for a number of patents in the United States and abroad
which may protect its products and important processes. The Company also has
obtained or has the right to obtain exclusive licenses to certain patents and
applications filed by others. However, the patent position of biotechnology
companies generally is highly uncertain and no consistent policy regarding the
breadth of allowed claims has emerged from the actions of the Patent Office with
respect to biotechnology patents. Accordingly, no assurance can be given that
the Company's patents will afford protection against competitors with similar
technologies, or that others will not obtain patents claiming aspects similar to
those covered by the Company's patent applications.
During the period from September 1994 to February 1996, the U.S. Patent
and Trademark Office (the "Patent Office") issued nine patents to the Company
related to its BPI-based products, including novel compositions, their
manufacture, formulation, assay and use. The Patent Office issued to the Company
U.S. Patent No. 5,420,019 in May 1995 which is directed to novel recombinant
amino-terminal fragments and fragment analogs of BPI and methods for their
recombinant production. The Company believes that this patent will provide
comprehensive protection for the manufacture, use and sale of its BPI- derived
Neuprex(TM) and I-PREX(TM) products in the U.S. In September 1995, the Patent
Office issued U.S. Patent No. 5,447,913 which addresses novel pharmaceutical
compositions of dimeric BPI protein products, including rBPI42, with enhanced
biological activities.
In addition to such composition patents, U.S. Patent No. 5,439,807
issued to the Company in August 1995 addresses improved manufacturing methods
for the Company's BPI-related products and U.S. Patent No. 5,488,034 issued to
the Company in January 1996 describes novel pharmaceutical formulations of
BPI-based protein products, including the Company's Neuprex(TM) product
formulation. The Company's first two diagnostic assay patents, U.S. Patent Nos.
5,466,580 and 5,466,581, were issued in November 1995 and describe methods for
quantifying BPI levels in blood as well as screening methods for detecting
increased levels of BPI in septic patients. The Company's third diagnostic assay
patent, U.S. Patent No. 5,484,705, was issued in January 1996 directed to
methods of measuring levels of lipopolysaccharide-binding protein
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("LBP") elevated in humans as a specific response to bacterial endotoxin
exposure.
In addition to such composition, manufacturing, formulation and assay
patents, the Company has been issued two patents related to therapeutic uses of
BPI-derived proteins. In September 1994, U.S. Patent No. 5,348,942 was issued
addressing the use of BPI protein products for neutralizing anti-coagulant
effects of heparin. In February 1996, the Patent Office issued U.S. Patent No.
5,494,896 directed to methods of treating burn injuries with BPI protein
products.
In addition to the nine BPI-related U.S. patents issued to the Company,
the Company is the exclusive licensee of three BPI-related patents owned by New
York University ("NYU"). In March 1993, the Patent Office issued to NYU U.S.
Patent No. 5,198,541 (the "`541 patent") which contains claims covering the
recombinant production of BPI. The Company believes the '541 patent has
substantial value because it covers certain production methodologies that allow
production of commercial-scale quantities of BPI for human use. In February
1996, the Patent Office issued U.S. Patent No. 5,489,676 to NYU, relating to the
discovery of novel polypeptides that potentiate BPI's ability to kill
gram-negative bacteria. In May 1995, the European Patent Office granted to NYU,
EP 375724, with claims to N-terminal BPI fragments and their use, alone or in
combination with antibiotics, for the treatment conditions associated with
bacterial infections. This patent is the first and only BPI-related patent that
has been granted to date in Europe.
The Company has also received four more U.S. Notices of Allowance and
has more than twenty pending patent applications for its BPI-based products.
The Company is aware of an agreement between Genentech and Incyte
pursuant to which Incyte claims to hold worldwide rights to all Incyte and
Genentech technology related to BPI and through which Genentech will receive a
royalty on Incyte's BPI product sales. Between 1992 and 1994, the Patent Office
issued five patents related to BPI to Incyte. Based on the opinion of its patent
counsel, Marshall, O'Toole, Gerstein, Murray & Borun, the Company believes that
it does not infringe any valid claims of any of the Incyte patents.
The Company is the exclusive licensee of U.S. Patent No. 4,918,163 (the
"`163 Patent"), issued to The Regents of the University of California in April
1990. The `163 Patent relates to a method of treating gram-negative bacterial
infection using certain anti-endotoxin monoclonal antibodies. On the date of
issuance, the Company filed suit against Centocor alleging infringement of the
`163 Patent. Effective July 28, 1992, the Company, Centocor and all other
interested parties resolved all outstanding litigation and disputes worldwide
regarding products, patents and patent applications related to anti-endotoxin
monoclonal antibodies by consent judgements which held the `163 Patent valid and
infringed by Centocor. Centocor has agreed to pay royalties to XOMA for any
United States sales of its monoclonal antibody HA-1A, and the companies have
agreed to forego all future litigation and administrative proceedings regarding
certain of each other's patents and patent applications related to
anti-endotoxin monoclonal antibodies. In March, 1993, Centocor announced the
termination of a Phase III trial of its HA-1A product.
If certain patents issued to others are upheld or if certain patent
applications filed by others issue and are upheld, the Company may require
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. There can be no
assurance that such licenses, if required, will be available on acceptable
terms.
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<PAGE>
Legal Proceedings
In June 1992, the Company and one of its officers were named in a
securities class action lawsuit entitled Warshaw et al. v. XOMA Corporation, et
al. filed in the United States District Court for the Northern District of
California. The suit alleges that the Company failed to adequately disclose
information related to FDA review of the Company's application for a license to
market its E5(R) product for the treatment of gram-negative sepsis. The suit
seeks unspecified damages for alleged violations of Section 10(b) of the
Securities Exchange Act of 1934. After permitting plaintiffs to amend their
complaint three times, the District Court granted defendants' motion to dismiss
the third amended complaint with prejudice by Memorandum and Order dated June
23, 1994. Plaintiffs filed appeals with the U.S. Court of Appeals for the Ninth
Circuit on July 22 and 26, 1994. On January 25, 1996, the Court of Appeals
reversed the District Court and remanded the case to the District Court for
further proceedings, finding that the allegations of the plaintiffs' third
amended complaint were sufficient to withstand a motion to dismiss. Defendants
filed a petition for rehearing and suggestion for rehearing en banc on February
8, 1996. On February 16, 1996, the Court of Appeals requested that plaintiffs
file a response to defendants' petition for rehearing, which plaintiffs filed on
March 1, 1996. The Court of Appeals has not yet ruled on the petition for
rehearing. The Company maintains that all material information related to FDA
review of its application to market E5(R) had been publicly disclosed on a
timely basis, and that neither the Company nor the officer named engaged in any
wrongdoing. The Company believes that the allegations contained in the suit are
without merit, and it intends to defend against the suit vigorously.
Liability Insurance
The testing and marketing of medical and food additive products entails
an inherent risk of allegations of product liability. XOMA believes that its
product liability insurance levels are adequate for its clinical trial activity.
XOMA will seek to obtain additional insurance, if needed, if and when the
Company's products are commercialized; however, there can be no assurance that
adequate insurance coverage will be available or be available at acceptable
costs or that a product liability claim would not materially adversely affect
the business or financial condition of the Company.
The Company insures and indemnifies its directors and officers against
actions brought against them as a result of their management of the Company's
operations. There can be no assurance that adequate directors and officers
insurance coverage will be available or be available at acceptable costs or that
a claim against the directors and officers would not materially adversely affect
the business or financial condition of the Company.
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<PAGE>
7. INCOME TAXES
The significant components of net deferred tax assets and liabilities
as of December 31, are as follows (in $ millions):
1995 1994
---- ----
Property and equipment $1.4 $ 1.1
Purchased technology 6.3 7.0
Capitalized R&D expense 40.1 29.5
Accrued liabilities and other 1.3 5.0
Net operating loss carryforwards 68.1 66.1
R&D and other credit carryforwards 11.9 12.2
Valuation allowance (129.1) (120.9)
-------- -------
Total deferred tax asset $ -- $ --
======== ========
There were no deferred tax liabilities, no current or deferred expense, and no
current or non-current net deferred income tax assets or liabilities for any tax
jurisdiction.
The net change in the valuation allowance for the year ended December
31, 1995 was a $8.2 million increase.
XOMA's accumulated federal and state tax net operating losses ("NOLs")
and credits as of December 31, 1995 are as follows:
Amounts Expiration
(in millions) Dates
------------- ------------
Federal
NOLs $203.1 1996-2010
Credits 9.2 1996-2010
State
NOLs 38.6 1996-1999
Credits 2.7 2002-2010
These amounts are subject to audit by federal and state tax authorities
and could change.
Certain future changes in the ownership of significant shareholders
could limit utilization of the Company's tax NOLs and credits.
8. RELATED PARTY TRANSACTIONS
Certain directors and stockholders of the Company are or have been
principals of investment banking firms which have performed investment banking
services for the Company. These firms have received customary discounts, fees,
and commissions in connection with these services. In 1993, the Company granted
a short-term, secured loan to an officer, director and stockholder of the
Company.
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<PAGE>
9. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective June 1, 1987, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make contributions which
defer up to 15% of their total salary, up to a maximum for 1995 of $9,240. The
Company may, at its sole discretion, make contributions each plan year, in cash
or in shares of the Company's Common Stock in amounts which match up to 100% of
the salary deferred by the participants. The expense of these contributions was
$326,000, $431,000, and $166,000, for the years ended December 31, 1995, 1994
and 1993, respectively.
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- - -------
3.1 Restated Certificate of Incorporation, as amended.12
3.2 Amended and Restated Bylaws.12
3.3 Stockholder Rights Agreement dated October 27, 1993
between the Company and First Interstate Bank of
California, as Rights Agent.13
3.4 Certificate of Designation of Preferences and
Rights of Convertible Preferred Stock, Series C
of the Company.18
4.1 Form of 4% Convertible Subordinated Debenture due
November __, 1998 and form of 4% Convertible
Subordinated Debenture due November 30, 1998,
Series A.18
10.1 Form of Stock Option Agreement
for 1981 Stock Option Plan.15
10.2 Form of Stock Option Agreement for
Restricted Stock Plan.15
10.3 Warrant Agreement dated as of October 11,
1985 between the Company and Equitec Leasing
Company.1
10.4 License Agreement dated July 5, 1983 between
the Company and ICRF Patent Limited.1
10.5 License Agreement dated October 26, 1984
between the Company and Carlton Medical
Products Limited.1
10.6 License Agreement dated February 3, 1986
between the Company and the Kallestad
Laboratories Division of Erbamont, Inc.
(with certain confidential information
deleted.)1
10.7 Restricted Stock Plan as amended and restated
and further amended.7
10.8 Restricted Stock Purchase Agreement.2
10.9 License Agreement dated September 3, 1986
between the Company and the Regents of the
University of California (with certain
confidential information deleted).2
10.10 Research, Development and Option Agreement,
License Agreement, Supply Agreement, and
Security Agreement all dated as of June 9,
1987 between the Company and Pfizer,
Inc. (with certain confidential
information deleted).3
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<PAGE>
<PAGE>
Exhibit
Number
- - -------
10.11 Manufacturing Agreement dated as of January
1, 1991 between the Company and Pfizer, Inc.9
10.12 Lease of premises at 890 Heinz Street,
Berkeley, California dated as of July 22,
1987.4
10.13 Lease of premises at Building E at Aquatic
Park Center, Berkeley, California dated as
of July 22, 1987 and amendment thereto dated
as of April 21, 1988.4
10.14 Lease of premises at Building C at Aquatic
Park Center, Berkeley, California dated as
of July 22, 1987 and amendment thereto dated
as of August 26, 1987.4
10.15 Letter of Agreement regarding CPI adjustment
dates for leases of premises at Buildings
C, E and F at Aquatic Park Center, Berkeley,
California dated as of July 22, 1987.4
10.16 Form of indemnification agreement for
officers.9
10.17 Form of indemnification agreement for
employee directors.9
10.18 Form of indemnification agreement for
non-employee directors.9
10.19 XOMA Corporation 1981 Stock Option Plan
as amended and restated and further
amended.7
10.20 Lease of premises at 2910 Seventh Street,
Berkeley, California dated March 25, 1992.15
10.21 Master Equipment Lease Agreement between
Equitable Life Leasing Corporation and
the Company.6
10.22 Supply Agreement effective February 27,
1989 between the Company and Charles River
Biotechnical Services, Inc. (with certain
confidential information deleted).6
10.23 Amendment Agreement dated as of October
17, 1991 between the Company and Charles
River Laboratories, Inc. (with certain
confidential information deleted).9
10.24 License Agreement dated as of August 31,
1988 between the Company and Sanofi (with
certain confidential information
deleted).5
10.25 1985 Non-Qualified Stock Option Plan and
form of Stock Option Agreement.8
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<PAGE>
<PAGE>
Exhibit
Number
- - -------
10.26 Lease dated June 22, 1992, between the
Company and Richard B. Gomez,
Josephine L. Gomez, TTEE-U/A/D, 10,31-90,
FBO Gomez Family Trust.15
10.27 Lease dated October 2, 1992, between the
Company and Virginia Merritt, as Trustee
of the Bowman Merritt and Virginia Merritt
Trust.15
10.28 [Omitted]
10.29 [Omitted]
10.30 Research and License Agreement dated
August 6, 1990 between the Company
and New York University (with certain
confidential information deleted).9
10.31 First Amendment to Agreement dated
November 6, 1992 between the Company and
New York University (with certain confidential
information deleted).15
10.32 [Omitted]
10.33 License Agreement dated June 11, 1991
between the Company and Sterling Drug Inc.
(with certain confidential information deleted).9
10.34 Employment Agreement dated April 29, 1992
between the Company and John L. Castello.15
10.35 Employment Agreement dated April 29, 1992
between the Company and Steven C. Mendell15
10.36 Stipulation and Agreement of Settlement,
Compromise and Dismissal dated May 10, 1992.10
10.37 Settlement Agreement for Litigation with
Centocor dated July 28, 1992 (with certain
confidential information deleted).11
10.38 Securities Purchase Agreement dated November 19,
1993 among the Company, Ortelius and GDK.14
10.39 Subscription Agreement dated November 21, 1993
between the Company and Shipley Raidy Capitol
Corporation.16
10.40 Letter Agreement dated July 14, 1993 between the
Company and Pfizer, Inc. (with certain confidential
information deleted).16
10.41 Cross License Agreement dated December 15, 1993
between Research Development Foundation and the
Company (with certain confidential information
deleted).16
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<PAGE>
Exhibit
Number
- - -------
10.42 Cross License Agreement dated December 15, 1993
between the Company and Research Development
Foundation (with certain confidential information
deleted).16
10.43 Management Incentive Compensation Plan.16
10.44 Employment Agreement dated March 29, 1993 between
the Company and Patrick J. Scannon, M.D., Ph.D.16
10.45 [Omitted]
10.46 Technology Acquisition Agreement dated
June 3, 1994 between Connective Therapeutics,
Inc. and the Company (with certain confidential
information deleted).17
10.47 Employment Agreement dated April 1, 1994 between
the Company and Peter B. Davis.17
10.48 Letter Agreement dated November 7, 1995 between the
Company and Pfizer, Inc. (with certain confidential
information deleted).18
10.49 Amendment No. 1 to License Agreement dated
March 23, 1995 between the Company and Burroughs
Wellcome Co. (with certain confidential information
deleted).18
10.50 Form of Offshore Subscription Agreement relating to
the Company's Convertible Preferred Stock, Series C.18
10.51 Form of Offshore Securities Subscription Agreement
relating to the Company's 4% Convertible Subordinated
Debentures due 1998.18
10.52 Form of Letter Agreement relating to the Company's
4% Convertible Subordinated Debentures due
November 30, 1998, Series A.18
23.1 Consent of Independent Public Accountants.18
27.1 Financial Data Schedule.18
- - -------------------------
1 Incorporated by reference to the Company's initial Registration Statement
on Form S-1 (File No. 33-4793).
2 Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-12832).
3 Incorporated by reference to the Company's report on Form 10-Q for the
quarter ended June 30, 1987 (File No. 0-14710).
4 Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987 (File No. 0-14710).
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<PAGE>
5 Incorporated by reference to the Company's report on Form 10-Q for the
quarter ended September 30, 1988 (File No.0-14710).
6 Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-27319).
7 Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-39155).
8 Incorporated by reference to Ingene Registration Statement on Form S-1
(File No. 33-5150).
9 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 (File No. 0-14710).
10 Incorporated by reference to the Company's Current Report on Form 8-K dated
May 28, 1992.
11 Incorporated by reference to the Company's Current Report on Form 8-K dated
September 18, 1992, as amended.
12 Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 33-74982).
13 Incorporated by reference to the Company's Current Report on Form 8-K dated
October 27, 1993.
14 Incorporated by reference to the Company's Current Report on Form 8-K dated
December 21, 1993.
15 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (File No. 0-14710).
16 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (File No. 0-14710).
17 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-14710).
18 Previously filed.
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