XOMA - NASDAQ

Ashleigh Barreto - IR John Varian - CEO Paul Rubin - SVP, R&D and CMO Tom Burns - VP, Finance and CFO

Phil Nadeau - Cowen and Company

Good afternoon, ladies and gentlemen and welcome to the XOMA Corporation's Third Quarter 2015 Financial Results And Corporate Update Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Ashleigh Barreto, Investor Relations at XOMA. You may begin.

Thank you, operator and good afternoon everyone. Joining us on the call today are John Varian, Chief Executive Officer; Paul Rubin, Senior Vice President, Research and Development and Chief Medical Officer and Tom Burns, Chief Financial Officer. Before we begin, I'd like to remind everyone this conference call will contain forward-looking statements about the company. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions only as of the date of this call. We will undertake no obligation to revise or publicly release results of any revisions to these forward-looking statements in light of new information or future events. Factors that could cause our actual results or outcomes to differ materially from those expressed in or implied by such forward-looking statements are discussed in greater detail in our most recent filings on Form 10-K and other SEC filings. I would now like to turn the call over to John.

Thanks, Ashleigh. And thank you everyone for joining us this afternoon. Sometimes an unexpected event opens the door to new opportunities. Opportunities that make you stronger and puts you on the past you are truly meant to be on. The EYEGUARD study result was that unexpected event. While it was unexpected, we had prepared for it and now we’ve used it as an opportunity to put XOMA on the path we are meant to be on. We have the potential to evolve to be stronger than ever. It’s been 100 days since we received the EYEGUARD-B data. On our second quarter call two weeks later, we said four steps will be taken to complete our pivot to endocrinology. First, we would move quickly to stop our spend on the EYEGUARD program and incorporate ongoing reviews into the pyoderma gangrenosum study to allow go, no-go decision points. Second, we would launch our Phase-2 XOMA 358 clinical program in hyperinsulinemia patients. Third, we would monetize our non-endocrine assets, and lastly we would reorganize the company to reflect our new direction. We’ve accomplished all of these goals in these past several months. We are not going to dwell on the past on this call. We are going to talk about the actions we’ve taken in just the approximate 100 days since one door closed and another opened. Our actions have made XOMA stronger and ensure our path to develop a portfolio of endocrine assets most of which address rare diseases allows us the opportunity to realize the company’s full potential. In early 2015, it became evident XOMA 358 could have a major impact on hyperinsulinemia. The fact that we had also recently brought XOMA 213 back into our line up signaled to us that we have the beginnings of an endocrinology portfolio. With this in mind, Paul challenged our scientific team to probe our exceptionally deep libraries and anti-bodies for their potential to treat any of the broad spectrum of endocrine diseases and disorders. In a very short period of time, Paul and his identified four additional programs designed to treat endocrine disorders. Today, we have six endocrine assets we are developing for our own portfolio. XOMA 358 for hyperinsulinemic -- hypoglycaemia, XOMA 129 in antibody fragment or fab from the XMetD program for severe acute hypoglycaemia, XOMA 213 for hyperprolactinemia conditions, XOMA 159 our lead XMet A antibody for rare inherited insulin receptor defects and our anti PTHr and our anti ACTH research programs. Prior to this September XOMA operated multiple organizations within one company, including a huge effort on gevokizumab. Obviously with our decision to terminate all development for the compound with the exception of the pyoderma gangrenosum studies we no longer needed the headcount. We also didn’t need our manufacturing facility to support bio defense, since we recently completed all the manufacturing requirements under our existing our NIAID contracts. We have been clear since early 2013; we weren’t going to pursue any further bio defense contracts. Beyond bio defense our needs for future manufacturing capacity are quite limited. They can be best met by third parties on an as needed basis. We told the world that we are interested in spinning out our biological manufacturing operations and bio defense programs in August. In the past week we were able to complete contracts for both netting XOMA approximately $5 million in cash and $1 million in stock and further reducing our headcount. Importantly, approximately 35 of our former colleagues have been offered positions within the company’s taking these businesses forward. We entered August with a staff of approximately 190 and today we have a staff of approximately 90. With these non-core businesses and activities gone, we can squarely focus our selected staff on our promising portfolio. To fund our clinical activities for XOMA 358 and XOMA 213 we had two options; raise dilutive capital at evaluation we believe did not begin to reflect the actual value of our pipeline or license up most promising late stage non-core preclinical assets to generate non-dilutive financing. While we knew that development of XOMA-089 our anti-TGF beta monoclonal antibody did not match our long term focus, we had many discussions as to when we should partner it. Should we keep it and develop a two phase-1 before seeking a partner or should we license it out now, which would bring the best valuation considering the cost and risk involved. Ultimately the board’s and my decision was to use 089 and the programs other antibodies to allow an unfeathered focus on our endocrine platform now. Not surprisingly, many companies were interested in their anti-TGF beta program. Novartis, a partner of ours for a decade and a recognized leader in oncology made an offer we didn’t want to refuse. That deal brought in $37 million in cash and separately deferred our very low interest rate debt of $13.5 million for five years. Collectively this had the net effect of generating $50.5 million in immediate non-dilutive funding. At least as importantly we were convinced that having our TGF beta program in Novartis’s hand gave it the best chance of it becoming a potential important therapeutic for the patients who need it. This is the whole point of what we do. With these deals done, we have enough capital to fund our lean laser focused operations into 2017 at which time we expect to have data from at least a portion if not all the patients in the XOMA 358 trials and possibly proof of concept data from XOMA 213. We will also have made go, go-no decisions on the pyoderma gangrenosum Phase 3 studies. Now I’m going to turn the call over to Tom, who will walk you through how our recent activities impact our financial position and to provide guidance for the remainder of 2015 Tom?

Thank you, John. We have received a positive feedback on the new format we have implemented to review our financials limiting the conversation to those items that are of particular interest in each quarter and those that impact future quarters. John has just laid out our progress in implementing the four strategic activities we initiated in August and I will focus my comments on the financial impact we expect from those actions. We anticipate reducing gevokizumab product spending by over $18 million by the end of 2016. This was done through a combination of closing the EYEGUARD studies, CMC activities and looking critically at the PG trials. Our strategic focus now is almost exclusively on developing our endocrine portfolio. The indications we are pursuing for XOMA 358 are very rare and patients are treated in a very small number of medical centres, therefore we believe our clinical development expenses through Phase 3 will be significantly lower than what the EYEGUARD program would have required. Our Executive team has spent a great deal of time focusing on monetizing our non-core assets. As John said, we raised $37 million in non dilutive capital by licensing our anti TGF beta program to Novartis. Additionally, we negotiated a five year extension to our $13.5 million in debt. The combination of this results in $50.5 million in immediate, additional operating capital. We potentially could receive 480 million in milestone payments and have tiered royalties beginning in the mid single digits and ramping up to low double digits. Just the past few days we have finalized our strategic initiatives related to the bio defense manufacturing operations at XOMA. Several years ago, we announced that we would complete our ongoing work to develop anti bodies against [Indiscernible] with NIAID but not seek for their contracts. Of the original approximately $120 million of contracts worth NIAID approximately $5 million remains as of now. This remaining work has been performed by small team at XOMA supported by a few contract workers. This week, we signed an agreement with Nanotherapeutics to purchase our remaining bio defense business. They are making offers to the employees needed to perform their remaining NIAID work and will be responsible for all future cost and related revenues from this effort as our subcontractor. While this assumption of the fairly equal cost and revenues from the tail of this contract is not that significant it does allow us to fully exit the bio defense business. More importantly, we are starting the process known as [Indiscernible] with the government to allow Nano to replace us directly as the contractor for this program. Further we provided Nanotherapeutics with an exclusive license to pursue larger government contracts for the program which could be substantial. This is their core business. As I said, we will now pursue or except for the contracts. If they are successful we would receive a minimal upfront fee and 15% royalties and additional milestones on any stock piling [ph] arrangement they might secure. We feel this is a great outcome for XOMA as these assets will be in dedicated hands and will have the potential to realize significant payments some day. Most importantly, should the U.S. ever be required to distribute any of the compounds from our bio defense program, XOMA’s discoveries and efforts may play a role in benefitting America’s world fighters and our fellow citizens. Similarly, but on a larger scale our team has been successful in finding a home for our manufacturing team of facilities. Agenus and we have signed out an asset purchase agreement for the manufacturing facility we owned and the equipment within. We will receive approximately 5 million in cash and 1 million of common Agenus stock upfront upon the final close of the transaction. We are very glad that the bulk of the XOMA employees associated with the XOMA pilot skill CMC facility will be offered employment with the Agenus. Agenus is a great company and they are adding their outstanding team of dedicated employees to their team. Very importantly, the buildings, personnel and operational activities in our manufacturing operation carried an annual cost approximately $11 million. By completing the deal with Agenus we avoid these reoccurring fairly fixed cost going forward. Finally, to reflect our focus on advancing our endocrine portfolio we have reorganized the company resulting in a restructuring charge of 2.6 million in the third quarter. Our headcount has drastically reduced. With the completion of the bio defense and manufacturing strategic initiative and approximately 35 former employees being offered positions within the acquiring entities, we have reduced our positions from approximately 190 employees to approximately 90. We expect to see the full impact of these changes in the first quarter of 2016. As a result of our activities over these last 100 days we will have the financial resources to fund our operations through the first quarter of 2017. With that covered, Paul is going to review the XOMA 358 clinical protocols.

Thanks, Tom and hello everyone. We are very excited to launch our proof of concept programs in patients who are at risk for hypoglycaemia due to either general of acquired hyperinsulinemia. These first two trials will be performed in patient with co-general hyperinsulinism a disease which manifest in infants and remains for a lifetime and we will to as CHI. And an acquired version which occurs in a small number of patients after undergoing bariatric bypass surgery which we’ll refer to as PBS. The over arching [ph] goal of these Phase 2 studies is to inform us as to the safety and kinetics of the drug in actual patients as well as the activity, dose response and duration of drug on these patients and should ultimately inform us as to how the design appropriate trials for Phase 3 Last week, we announced we had opened our CHI proof of concept study. This study is being conducted at Children’s hospital Philadelphia also known as CHOP. Very soon we expect to obtain approval to open a second international site for this study. The Phase 2 study will evaluate XOMA 358 in patients with congenital hyperinsulinism and pre disposition to significant hypoglycaemia after fasting. The study is designed to initially evaluate two cohorts of approximately six patients per cohort. The first cohort will receive a single XOMA 358 dose of 1 milligram per kilogram into intravenously. This dose was based upon data evaluating the ability of XOMA 358 to block the hypoglycaemic response from insulin fusion in normal volunteers. Now data derived from the first cohort will drive the dose chosen for the second group of patients. Patients will be enrolled in the trial after they complete a three day wash out period during which they will be taken off all of their current treatments. We’ve designed this study to allow each patient to service his or her own control. As prolonged fasting will induce hypoglycaemia patients will be fasted at multiple times before drug administration t o document a consistent response. Once this response is confirmed, drug will be administered, followed by further fastings to confirm biological activity, duration of effect and the relationship between dose given and prevention of lower blood sugar. Patient safety will be monitored throughout the study. Additionally, serial blood samples will be collected for pharmacokinetic and pharmacodynamic assessments. In addition to evaluating the ability of XOMA 358 to prevent hypoglycemia, other pharmacodynamic markers will be assess including glucose, ketones, insulin, C-peptide and free fatty acid levels, protein challenges and oral glucose tolerance test. The center is conducting our study -- are two of the leading CHI treatment centers in the world. My team and I've been working very close with them for the past few years. We are in the process of completing the design of additional Phase 2 study of XOMA 358 and patients who have previously had bariatric surgery and our predispose to significant hypoglycemia after meals. We hope to launch it in the second quarter of 2016 This study will be similar in design to our CHI trial, expect the provocation for hypoglycemia will be a controlled meal as oppose to a prolonged fast. We're anticipating opening the study at several prestigious sites in the U.S. and one or two European centers. Both of these patients population present the high unmet medical need and require safe consistent therapeutic option to prevent hypoglycemia. Based upon what we saw in our Phase 1 study, we believe XOMA 358 has a potential to offer its option. We'll be working very closely with the centers and regulatory throughout this process in an effort to expedite XOMA 358 pathway. With that, I believe John has some closing remarks.

Thank you, Paul. We entered the third quarter believing we were on one path, and when that door close, another open before us. The endocrinology portfolio that we quietly developed over the past year holds great promise for XOMA patients and our shareholders. In 100 days we achieved a great deal. Our gevokizumab pyoderma gangrenosum clinical study continues and we've incorporate ongoing reviews that give us the opportunity to make informed, go, no go decisions. We are shutting down the EYEGUARD study databases in an orderly fashion. We initiated the Phase 2 XOMA 358 and general hypoglycemia study and the Children's Hospital of Philadelphia is the first site open for enrollment. We license our Anti-TGF-beta Antibody Program to Novartis, which gave us essentially $50.5 million in operating capital, $37 million upfront in the payment and separately we receiving a five-year extension of $13.5 million debt obligation. The longer term financial potential from this deal is also significant. We completed transaction for the manufacturing facilities and bio defense program with interested parties, which benefit XOMA financially and retain a significant number of jobs for our dedicated friends and colleagues. We have reorganized the company. Our headcount has drastically reduced from approximately 190 employees to approximately 90. We've made some very tough decision rapidly, but with enough thought, discussion and debate to understand each separately and in the aggregate. We believe they were the right decisions for the company and have put us on a path that we are excited to travel. Our decisions give us financial capital into 2017. All of the noise is behind us. And everyone here is laser focused on advancing our endocrinology portfolio, particularly executing the XOMA 358 Phase 2 study, so we can advance this development path expeditiously. These patients need a therapy that allows them to potential avoid significant surgeries. They don't carry the risk of disfiguring side effects and gives them the ability to think about being a kid, not managing their disease on an hour by hour basis. We hope XOMA 358 is that product. XOMA now is on the path that was always meant to be in. XOMA now had potential to evolve to be stronger than ever. With that we'll open the call for questions. Operator?

Thank you, sir. [Operator Instructions] Our first question is from Phil Nadeau of Cowen and Company. Your question please.

Good afternoon. Thanks for taking my question and congratulations on all you’ve accomplished in the last 100 days, it certainly seems like you took a lot of the household?

Thanks, Phil. It's an exciting day for us. We've been looking forward to this call actually. So, thank you.

First, financial question, I'm trying to get a little bit of better sense of kind of what the OpEx is going to look like going forward, kind of reading between the lines your comments, it sounds like maybe you have 80 million in OpEx or so in Q4 and 50 million in all of 2016, are those numbers kind of in the right ballpark or might way off?

Yes. No, I think in that's in the ballpark certainly. So our pro forma cash was the…

Yes. So we ended with $32 million in cash and then of course with the Novartis deal and that glad to report $37 million has been received. So, on a pro forma basis you could see a $69 million cash balance as of September 30 with that -- including that receivable.

Okay. Got it.

And what we said, Phil, as Tom pointed out is that cash with the expectation of events that we feel very comfortable with would take us through the end of Q1, 2017.

Okay. Second on the PG trial, do you have a sense of when those go, no go decision points will be reached?

When we first talked about it, we said, around the end of Q1 is when we'd have a first kind of look at it. I don't think there is, based upon the enrollment everything like that Paul I think that still right, does it.

Yes. I think that still probably an accurate time and we'll enough information that will help us make the decision.

Okay. And what's your data disclosure plan for the 358 ongoing study, would we get data just upon completion that trial or there some chance we could see interim result?

I'll let Paul to talk little bit more about it, but just to say, its going to be an interesting study and that its not a typical Phase 2 where we announce that we started it. We announced the enrollment targets and then there's a date and time when all the data is known when there's an unwinding, right. This is an open label study where we'll be learning as we go. With that said, we're going to have to be very careful about not making disclosures before enough is known and so what we're working to do now is to make sure we have kind of points in time where enough will be known that we can talk about it, where we can make appropriate disclosures but not confuse the investment world. So, Paul as we talk about it, we're not final yet but we've been these conversations.

Yes. I think obviously it would be probably reckless of us to report the data on a patient by patient basis. Just give you some context. I think [Indiscernible] publish to study of a similar design where she looked at a drug called [Indiscernible] 229, I think its – in that study they saw very significant results in a very similar population that we're testing in about nine people. So we want to finish at least one of the cohorts and possible both for we would feel comfortable for communicating these data.

That's very helpful. Thanks for taking my questions.

Thanks, Phil.

Our next question is from Adnan Butt of RBC Capital Markets. Your question please.

[Indiscernible] On behalf of Adnan, just a few question here on 358. Are the endpoints in the two studies different, you might have touched upon that?

You mean the post-bariatric surgery versus the Congenital Hyperinsulinism.

CHI, right.

In both cases, the key to the design of this trial was prior to enrollment, making sure that we saw consistent hypoglycemic response of medication. And in fact this technique I think again is validated from what people have shown in the past. So in both cases each patient will serve its own control or prior to dosing will document that after the provocation which is either a fast in the Congenital Hyperinsulinism study or a meal in the post-bariatric surgery they will get a very consistent low blood sugar in the absence of therapy. So in both cases the endpoint will be prevention of that drop in blood sugar after dosing and we'll look at it various times after we give medication. So I think we've reported on the Phase 1 data where we showed that the elimination half life was 21 days. So we have the opportunity to look over about a 10 day to two week period that looks at not only the duration of the response, but also as the drug levels will be going down, we'll be able to a dose responses to what [Indiscernible] concentration is necessary for us to have beneficial result. So in both cases we'll see that type of data. Does it okay?

Okay. Thank you. And will -- are 358 going to be injected or infuse and how long do you expect to be or you just said its 21 days, but are they going to be inject or infuse?

In this first trial we'll be given it intravenously because as I'd mentioned previously we're really trying to understand the PK/PD relationship.

Okay.

In our Phase 1 trial we saw positive biological effect as low as 0.3 milligrams per kilogram. So our intent is, once we confirm the dose response and it is consistent with what we saw in Phase 1 we would have the ability to shift from intravenous to either subcutaneous run into the muscular form.

Okay. Thank you very much. And probably in that study that you were talking about that drug is given by infusion?

It's IV in this trial and it's given rapidly intravenously there. And then as I said what we need to do is understand the kinetics and dynamics in the diseases and that will help us to inform the best way to administer the drug in the multi-dose trials.

Thank you.

At this time, I show no further questions, I would now like to turn it back over to John Varian for closing remarks.

Great. Thank you, operator. Just before leave you today, I want to take a momentum to thank the members of the XOMA team who led our success pivot to endocrinology over the past 100 days. Paul Rubin, who let our build our team to build the plans for each of our endocrine assets. Jim Neal and [Indiscernible] who drove our teams to complete the Novartis, Agenus, and Nanotherapeutic transactions. These efforts were supported by many throughout our organization and took everyone's efforts to get us to this new day. Lastly, I want to thank our bio defense and manufacturing teams, who have been extremely dedicated to XOMA for many years. Without their efforts we would not stand in this exciting launching point today. I'll close with just one example of their dedication and commitment. Once we stated publicly that we would explore strategic alternatives for our manufacturing operation, we ask our team to complete two final runs of XOMA 358 for us. During this time of immense uncertainty they once again performed in an outstanding manner with one batch done and the other nearing successful completion. This is amazing to me. I'd also like to acknowledge one specific person who will be going to Agenus. Al Dadson, our Vice President and Manufacturing Operations will lead the Agenus team. Al's many years leadership will also be appreciated. He is one of the finest men I have ever known. Nanotherapeutics and Agenus will benefit greatly from the fine teams, they are fortunate to have joined them. I wish these employees are very best. And thanks again to you for your support. Thank you.