August 09, 2001
XOMA LTD /DE/ (XOMA)
Quarterly Report (SEC form 10-Q)
MANAGEMENT`S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Revenues in the second quarter of 2001 increased to $5.2 million, from $2.3 million in the second quarter of 2000. For the six-month periods ending June 30, 2001, revenuers were $8.1 million, compared with $4.9 million in the comparable prior year period. Licensing revenue, primarily reflecting the amortization into revenue of certain license fees and other payments received from Baxter Healthcare Corporation and Onyx Pharmaceuticals, Inc., increased to $1.0 million and $2.1 million in the three- and six-month periods ended June 30, 2001, respectively, compared to $0.8 million and $1.4 million in the comparable prior year periods. Contract revenue increased to $4.1 million and $6.0 million in the three- and six-month periods ended June 30, 2001 from $1.4 million and $3.4 million in the comparable 2000 periods.
Operating expenses increased to $11.6 million in the second quarter of 2001 from $9.0 million in the second quarter of 2000. For the six-month period ending June 30, 2001, operating expenses were $21.6 million, compared with $17.7 million in the comparable 2000 period. This reflected increased spending on Xanelim(TM) and XOMA`s internal antibody programs, as well as expenses related to litigation with Biosite Incorporated.
Research and development expenses increased to $9.5 million and $17.9 million, respectively in the three and six-month periods ending June 30, 2001, from $7.4 million and $14.6 million in the comparable prior year periods. Spending in 2001 reflected increased development costs associated with Xanelim(TM), ING-1, GENIMUNE(TM) and the Onyx CI-1042 product. This was partially offset by reduced spending on NEUPREX(R).
General and administrative expenses increased from $1.6 million and $3.1 million in the in the three- and six-month periods ending June 30, 2000, to $2.1 million and $3.7 million in the same 2001 periods.
Interest expense was higher in the second quarter first six months of 2001 compared to 2000 due to higher interest rates and the higher average note balance of the convertible subordinated notes due Genentech, Inc.
Liquidity and Capital Resources:
XOMA ended the quarter with $71.8 million in cash, cash equivalents and short-term investments, compared with $35.2 million at December 31, 2000. Net cash used in
operations in the first six months of 2001 was $11.5 million, compared with net cash used in operations of $7.3 million in the second quarter of 2000. The prior year cash flow benefited from $10.0 million in licensing fees received from Baxter in January 2000, which is being recognized as revenue over a 36 month period. See footnote 4, "Revenue Recognition," to the Consolidated Financial Statements.
Capital expenditures increased from $0.4 million in the first six months of 2000 to a net of $3.1 million in the current year period. Current year spending included expenses related to the transfer of XOMA`s technical development operations from Santa Monica to Berkeley, as well as investments related to our collaborative arrangement with Onyx.
For the full year 2001, the Company currently expects its loss to be somewhat lower than in 2000, with increased expense levels being more than offset by higher revenues.
Proceeds from the issuance of common shares, net, were $47.7 million for the six months ended June 30, 2001, compared to $33.3 million for the comparable period of the prior year. The amount for the first six months of 2001 resulted primarily from a registered offering of 3,000,000 of the Company`s common shares in June 2001 for net proceeds of $43.3 million.
The Company has been able to control its operating cash consumption by carefully monitoring its costs. As a result, based on current spending levels and taking into account the Onyx transaction, the Company believes its cash position and resulting investment income are sufficient to finance the Company`s currently anticipated levels of spending through approximately the middle of 2004. Strategic arrangements with Onyx, Baxter and Genentech have reduced Company spending levels by paying certain product development costs. The Company continues to evaluate a variety of arrangements that would further strengthen its competitive position and provide additional funding, but cannot predict whether or when any such arrangement or additional funding will be consummated or whether additional funding will be available. Without additional funding, the Company will have to decrease or eliminate the development of some of its products.
Quantitative and Qualitative Disclosures About Market Risk:
Interest Rate Risk. The Company`s exposure to market rate risk due to changes in interest rates relates primarily to the Company`s investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. By policy, the Company places its investments with high quality debt security issuers, limits the amount of credit exposure to any one issuer, limits duration by restricting the term and holds investments to maturity except under rare circumstances. The Company classifies its cash equivalents as
fixed rate if the rate of return on an instrument remains fixed over its term. As of June 30, 2001, all the Company`s cash equivalents are classified as fixed rate.
The Company also has a long-term convertible note due to Genentech in 2005. Interest on this note of LIBOR plus 1% is reset at the end of June and December each year and is therefore variable.
The table below presents the amounts and related weighted interest rates of the Company`s cash equivalents and long-term convertible note at June 30, 2001:
Fair Value Average
Maturity ($ in millions) Interest Rate
------------- ------------------- -----------------
Cash equivalents, fixed rate Daily $ 71.8 4.3%
Long-term convertible note, variable rate 2005 43.0 7.1%
Other Market Risk. At June 30, 2001, the Company had a long-term convertible note outstanding which is convertible into common shares based on the market price of the Company`s common shares at the time of conversion. A 10% decrease in the market price of the Company`s common shares would increase the number of shares issuable upon conversion of either security by approximately 11%. An increase in the market price of Company common shares of 10% would decrease the shares issuable by approximately 9%.
Forward Looking Statements:
Statements made herein related to the estimated size of the Company`s loss for 2001, the estimated levels of its expenses and revenues for the balance of 2001, the sufficiency of its cash resources, present or future collaborative arrangements and current plans for product development, or that otherwise relate to future periods, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on assumptions that may not prove accurate. Actual results could differ materially from those anticipated due to certain risks inherent in the biotechnology industry and for companies engaged in the development of new products in a regulated market. These risks, including those related to size and timing of expenditures, unanticipated expenditures, availability of funds, changes in the status of the existing collaborative relationships, availability of additional collaboration opportunities, the time or results of pending and future clinical trials, the ability of collaborators and other partners to meet their obligations, market demand for products, actions by the Food and Drug Administration of the U.S. Patent and Trademark Office, and uncertainties regarding the status of biotechnology patents, are discussed in the Company`s most recent annual report on Form 10-K and in other SEC filings.
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