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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.

Ciao BigLinus :cool:
Auszug aus der Pressemitteilung zum Ergebnis des 2. Quartals :

(...)

XOMA had $71.8 million in cash, cash equivalents and short-term investments as of June 30, 2001, compared with $35.2 million at December 31, 2000. XOMA completed an underwritten equity offering in June 2001, selling 3.0 million common shares for net proceeds of $43.3 million.

``This has been an exciting and eventful quarter for XOMA,`` said Jack Castello, XOMA`s chairman, president and chief executive officer. ``The highlight was the presentation at scientific meetings of data from the two pivotal Phase III trials testing Xanelim(TM) in moderate-to-severe psoriasis patients. All primary and secondary efficacy endpoints were met in both trials, and we are working with our partner Genentech to prepare the BLA filing, pending favorable results after further data analysis. We also substantially strengthened the Company`s financial position with a successful $43 million equity offering in June.``

``Our second quarter financial results were in line with our expectations,`` said Peter B. Davis, XOMA`s chief financial officer. ``For the full year 2001, our current expectation is that the Company`s loss will be somewhat lower than in 2000, as higher revenues will more than offset higher expenses. Following our recent equity offering, based on current spending levels, we believe that XOMA`s cash resources are sufficient to meet currently anticipated needs for at least the next three years.``

(...)

Ciao BigLinus :cool:
AUGUST 7, 2001

INVESTING Q&A

Best Bets in Biotech
They`ll depend on your personal risk tolerance, says Tanager Capital`s Ira Leiderman, who has some well formed opinions on the sector

Companies with vaccines and treatments for HIV and AIDS are among the biotech avenues to explore for investment, according to Ira Leiderman, managing director for the life-sciences sector of Tanager Capital Group. He also lists the humanization of monoclonal antibodies and drug-targeting among the technologies to watch.

For developments in AIDS, he cites Vaxgen and Progenics as two companies he likes. For more general biotech investing, he suggests established names such as Amgen and Genentech. Then, depending on risk, an investor might try some companies with products but still no profits, and for a really long shot, companies with no approved products yet.

He made these comments in a chat presented Aug. 2 by BusinessWeek Online on America Online. He was replying to questions from the audience and from David Shook and Jack Dierdorff of BW Online. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.

Q: The biotech sector is more crowded than it has ever been. Can you give us your formula for picking biotech stocks? Besides products, what kinds of things do you like to see in a biotech/drug-discovery company?
A: Maturity of products, a strong pipeline, good management, as judged by how they execute -- and will they have enough money that will last them until they can get a product to market?

(...)

Q:What do you think of Genentech (DNA )?
A:I think Genentech is a good company, but it`s not as exciting as some of the younger, smaller companies.

Q: Ira, among those smaller companies, can you name a few with promising technologies and talk about why you like them?
A: I like Genta (GNTA ). I like Progenics Pharmaceuticals (PGNX ). For an earlier-stage company, Telik (TELK ). And I like XOMA, which has a partnership with Genentech. All of these companies fit the criteria I listed earlier: exciting products, management that`s executing, and a likelihood to get continued funding.

Q: What are some of those exciting products?
A: Progenics, for instance, has exciting HIV programs. Genta has equally exciting anticancer programs. And Telik has an excellent discovery engine that is starting to push products into the clinic. XOMA has exciting products, particularly to treat immune-based disorders.

(...)

Ciao BigLinus :cool:
XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

June 30, December 31,
2001 2000
(Unaudited) (Note 1)
Assets:
Cash and cash equivalents $ 71,808 $ 35,043
Short-term investments 40 172
Related party receivables 417 237
Receivables 2,381 1,008
Prepaid expenses and other 113 162
-------- --------
Total current assets 74,759 36,622

Property and equipment, net 11,440 8,421
Deposits and other 169 169
-------- --------
$ 86,368 $ 45,212
======== ========

Liabilities and Shareholders` Equity
(Net Capital Deficiency):
Accounts payable $ 4,085 $ 2,515
Accrued liabilities 3,848 4,311
Capital lease obligations -- current 292 185
Deferred revenue -- current 3,733 3,333
-------- --------
Total current liabilities 11,958 10,344

Capital lease obligations
-- long term 812 361
Deferred revenue -- long term 4,008 3,609
Convertible subordinated notes 42,965 39,488
-------- --------
Total liabilities 59,743 53,802
Shareholders` equity
(net capital deficiency) 26,625 (8,590)
-------- --------
$ 86,368 $ 45,212
======== ========

Note 1 -- Amounts derived from the Company`s Annual Report on Form
10-K for the year ended December 31, 2000 as filed with the Securities
and Exchange Commission


XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited -- in thousands, except per share data)

Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
License fees and contract
revenue $ 5,212 $ 2,283 $ 8,068 $ 4,855
-------- -------- -------- --------
Operating Costs and
Expenses:
Research and development 9,465 7,390 17,935 14,584
General and administrative 2,095 1,589 3,705 3,115
-------- -------- -------- --------
11,560 8,979 21,640 17,699
-------- -------- -------- --------
Loss from operations (6,348) (6,696) (13,572) (12,844)

Other Income (Expense):
Investment and other income 580 985 979 1,475
Interest and other expense (880) (615) (1,630) (1,241)
-------- -------- -------- --------
Net loss $ (6,648) $ (6,326) $(14,223) $(12,610)
======== ======== ======== ========
Basic and diluted net
loss per share $ (0.10) $ (0.10) $ (0.21) $ (0.20)
Shares used in computing
basic and diluted net
loss per share 66,280 65,391 66,227 63,531

Ciao BigLinus :cool:
Earnings Per Share
Last Quarter (Mar01) -0.11
Surprise N/A
Consensus Estimates
This Quarter (Jun 01) -0.11
This Year (Dec 01) -0.41
Next Year -0.38
Thursday August 23, 7:52 am Eastern Time
TheStreet.com - View from TSC
Xoma`s Rise and Fall Tell a Biotech Parable


It`s a cautionary tale: The quick rise on good news about a drug gets undone by safety worries.

By Adam Feuerstein
Staff Reporter


Xoma (Nasdaq: XOMA - news) is supposed to be codeveloping a brilliant new psoriasis drug, but the biotech company`s shares have slid 43% in the past two months. What gives?


Blame a lousy overall market, an abnormally sluggish biotech sector or profit-taking -- all this is putting pressure on Xoma, for sure. But investors shouldn`t ignore the fact that the company`s experimental psoriasis drug, dubbed Xanelim, is not living up to all the praise heaped upon it by Xoma executives and a cadre of bullish sell-side analysts.

In short, Xanelim has unresolved issues that have forced some institutional investors to step off Xoma`s gas pedal. Xoma closed Wednesday at $10.05 per share, off its 52-week high of $17.75 reached in late June. That was right after the company released seemingly positive, but early, results from late-stage tests of the psoriasis drug. Emphasize the word "early." Xoma`s recent fall is a cautionary tale for all biotech investors, not just Xoma shareholders wondering why their beloved stock is moving in the wrong direction. The big lesson: Biotech companies have a funny habit of accentuating a drug`s positive results and paying less attention to legitimate concerns. Add bullish comments from sell-side analysts to the mix and you have a recipe for biotech hype that can catch investors flat-footed when the inevitable problems crop up.

Xoma still has a good shot at getting Xanelim approved by U.S. drug regulators -- no one is seriously disputing that assertion. But the company and partner Genentech (NYSE: DNA - news) need to answer some tough questions about the drug before that happens. As long as those questions go unanswered, Xoma shares will likely remain under pressure.

Rebound and Safety Issues
TheStreet.com has examined some of these Xanelim issues previously -- namely that many patients got better while taking Xanelim, but saw their psoriasis roar back when they stopped taking the drug. Xoma and Genentech downplay the concerns over psoriasis rebound by insisting that patients would take the drug continuously for the rest of their lives. But tests to determine the long-term safety of Xanelim haven`t been finished yet, which could delay the drug`s review by the Food and Drug Administration.

"We`ve lightened our [long] position in Xoma because Xanelim still has issues that need to be resolved," says Alidad Mireskandari, fund manager with the Orbitex Health and BioScience Fund, just one of several institutional investors taking a more conservative approach to Xoma these days. Also weighing on Mireskandari`s decision is a rival psoriasis drug under development by Biogen (Nasdaq: BGEN - news) . That drug, Amevive, has already been sent to the FDA for approval.

Under their codevelopment deal, Xoma handled the early testing of Xanelim, while Genentech is responsible for the drug`s late-stage development and regulatory review process. Xoma receives 25% of Xanelim profits if the drug is approved. But because Xoma has no other drugs on the market, the Berkeley-based biotech firm`s stock is a purer proxy to gauge investor confidence in Xanelim.

Peter Davis, Xoma`s chief financial officer, says he`s aware of the concerns, but feels like they`re overblown because the researchers working with Xanelim are not worried. And while not happy with the stock`s performance over the past two months, he thinks it still fits within a general pattern that has seen Xoma rise on positive news and fall when the company goes silent for long stretches, like now.

"Our focus right now is on gathering the [Xanelim] data for a BLA submission by the end of the year or early next year," he says, referring to Xanelim`s approval application for the FDA.

But Genentech and Xoma continue to have nagging issues that pop up when data is presented on Xanelim. At a scientific meeting in late July, company executives released more late-stage test results for Xanelim, which seemed to bolster the company`s bullish case for the drug. Buried in the press release was the seemingly inconsequential fact that two patients, one taking Xanelim and another on placebo, were hospitalized for severe psoriasis symptoms during the tests. No big deal, right?

Wrong. Later, responding to a question on an analyst conference call, Genentech executives admitted that the placebo patient who had been sent to the hospital was actually a patient who had been taking Xanelim successfully. He was taken off the drug and put on placebo to see if, and how fast, the psoriasis would come back. It seems clear that this patient suffered a severe psoriasis rebound -- bolstering concerns about the drug -- but investors wouldn`t know this unless they paid attention to the conference call.

This discrepancy between the actual data and the explanation offered by Genentech and Xoma bothers biotech drug watchers like Dan Dubin, a dermatologist and president of MedaCorp , an independent medical consultancy that evaluates the safety and efficacy of experimental drugs. Dubin has no position in Xoma, but his firm sells its advice to institutional investors.

Reflecting on this unresolved question of psoriasis rebound, Dubin says, "My biggest questions surrounding Xanelim are how, as a doctor, should I be taking patients off this drug if I need to; and just how safe is Xanelim for patients who are taking it long term?" If Dubin is asking these questions, rest assured: so is the FDA.

A Genentech spokeswoman confirms that the placebo patient was previously taking Xanelim before a psoriasis flare-up forced him to be hospitalized. But she defends the company`s reporting of the event, stating that because the patient was taking a placebo at the time of his hospitalization, Genentech was correct in the way he was characterized.

Building a Bullish Story
The concerns of experienced buy-side biotech watchers like Mireskandari and Dubin go a long way toward explaining to investors why Xoma has suffered over the past two months. But you won`t hear company executives acknowledging these concerns in their press releases, nor will you see much discussion aired in sell-side research reports.

U.S. Bancorp Piper Jaffray analyst Mark Augustine has been one of the most bullish Xoma supporters, rating the company a strong buy. On June 22 and 25, he published two research notes extolling the virtues of Xanelim, calling it the leader among several competing drugs all looking to grab market share for new psoriasis treatments.

Augustine could have been considered impartial because at the time, his firm had no banking relationship with Xoma. But the day after his June 25 research report -- a report in which he raised his 12-month price target from $23 per share to $26 per share -- Xoma announced the completion of a $43 million, follow-on stock offering of 3 million shares. Piper Jaffray -- Augustine`s firm -- acted as Xoma`s lead underwriter in the deal.

Augustine continues to publish very enthusiastic research on Xoma and its psoriasis drug -- two more reports were issued July 30 and 31 after the company released further test results. "We believe that Xanelim provides better rates of [efficacy] than its competition and that these new data strengthen its lead position in the psoriasis derby," he wrote.

But neither report includes an airing of any of the growing concerns about the drug and both blow off Xoma`s stock weakness as "overdone." Even more surprising, the reports don`t disclose his firm`s new banking relationship with the company.

Piper Jaffray spokeswoman Erin Freeman defends Augustine, stating that the analyst had no prior knowledge, or influence, over Xoma`s decision to choose the bank as its underwriter. In fact, Piper Jaffray`s trading department wasn`t even contacted by Xoma about participating in the stock offering until after Augustine`s report was published, she adds. As for the lack of subsequent disclosure in Augustine`s reports, Freeman blames it on an administrative oversight, one that was corrected a week later.

To be fair, Augustine is not the only analyst who deserves scrutiny over coverage of Xoma. In fact, analysts from nearly every major investment bank have issued positive research on Xoma and its new drug.

And as mentioned before, Xanelim still stands a good chance of gaining approval from the FDA, which should bode well for Xoma shareholders in the long term.

But how do investors reconcile the positive news flowing from Xoma and sell-side analysts with the cold, hard fact that Xoma`s shares have dropped 43% over the past two months? Sure, the broader American Stock Exchange Biotech Index is down about 15%, and some Xoma shareholders clearly sold shares to lock in some quick profits.

But the unanswered questions about Xanelim`s safety remain a significant anchor dragging down Xoma shares. Biotech investing is a very tricky game, and investors need to learn that a new drug`s development is never as easy or problem-free as companies want them to believe.

At this point, Xoma investors are learning this lesson the hard way.

Ciao BigLinus :cool:


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