XOMA Royalty Corp. Annual Report 2014

FY2014 Annual Report · XOMA Royalty Corp.
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Annual Report 2014

2 0 1 4   A C C O M P L I S H M E N T S 
P O S I T I O N   X O M A   F O R   S U C C E S S

Behçet’s Disease Uveitis 
SERVIER,  our  gevokizumab  partner,  achieved  the  targeted 
enrollment  in  EYEGUARD™-B,  a  gevokizumab  study  in 
Behçet’s disease uveitis patients, a rare indication.  In order 
to  accelerate  the  time  to  reach  the  targeted  number  of 
exacerbation events, Servier continues to enroll patients.

Initiated  EYEGUARD-US  study,  a  XOMA-sponsored  clinical 
trial  conducted  at  U.S.  centers  to  study  gevokizumab  in 
patients with active or controlled Behçet’s disease uveitis as 
part of our strategy to submit the ﬁrst Biologics Licensing 
Application  (BLA)  for  gevokizumab  in  Behçet’s  disease 
uveitis.

Scleritis 
The  National  Eye  Institute  (NEI)  completed  enrollment  in 
an  8-patient  gevokizumab  open-label  proof-of-concept 
clinical trial in patients with active, non-infectious, anterior 
scleritis.

XMetA
Presented  preclinical  data  on  XMetA,  a  positive  allosteric 
modulator  of  the  insulin  receptor,  at  the  74th  Scientiﬁc 
Sessions of the American Diabetes Association (ADA).  One 
study showed XMetA was able to reduce hyperglycemia in 
a  naturally  diabetic,  insulin-requiring  animal  model  with 
no evidence of hypoglycemia.  Another study presentation 
concluded that partial agonism of the INSR allows XMetA to 
behave in a manner that can control high blood sugar with 
less effect on the potentially detrimental, but less sensitive, 
extracellular signal-regulated kinases (ERK) pathway.

Flexible Manufacturing
Entered into a license agreement with Texas A&M University 
System  providing  them  with  non-exclusive  access  to 
XOMA’s patented design covering the ﬂexible arrangement 
of  mobile  clean  rooms  within  the  manufacturing  facility. 
This  technology  may  become  an  important  component  of 
vaccine and medical countermeasure technologies.

Non-infectious Uveitis 
Continued  to  enroll  patients 
in  EYEGUARD-A  and 
EYEGUARD-C studies investigating gevokizumab in patients 
with  active  and  controlled  non-infectious  intermediate, 
posterior, or pan-uveitis (NIU).  These worldwide studies are 
being conducted jointly by XOMA and Servier.  

Pyoderma Gangrenosum 
Received Orphan Drug Designation by the U.S. Food and Drug 
Administration (FDA) for gevokizumab in the treatment of 
pyoderma gangrenosum (PG), a rare neutrophilic dermatosis 
of painful expanding necrotic skin ulcers.

Initiated  the  two  pivotal  Phase  3  gevokizumab  studies  in 
patients with PG.

XOMA 358
Launched  clinical  development  of  XOMA  358,  the  lead 
compound from the XMetD program, which is a fully human 
allosteric  monoclonal  antibody  that  inhibits  both  the 
binding  of  insulin  to  its  receptor  and  downstream  insulin 
signaling.    Successful  Phase  1  data  was  presented  at  the 
2015 Endocrine Society’s Annual Meeting (ENDO 2015).  We 
intend to investigate this compound as a novel treatment 
for  non-drug-induced,  endogenous  hyperinsulinemic 
hypoglycemia (low blood glucose caused by excessive insulin 
produced by the body).

Financial Transactions
Strengthened  XOMA’s  ﬁnancial  position  by  raising  $37.7 
million  in  December  2014,  after  deducting  offering  costs 
and out-of-pocket expenses, through the sale of units at a 
price of $4.94.  Each unit includes a share of common stock 
and  an  accompanying  warrant  with  a  term  of  two  years 
to  purchase  one  additional  share  of  common  stock  at  an 
exercise price of $7.90 per share. 

D E A R   S T O C K H O L D E R :

We sometimes get caught up in the minute-by-minute world of news ﬂashes and stock market 
volatility.  As I stop to write to you, I have a sense of excitement as I think about the bigger XOMA 
picture.  Three years ago we re-launched the Company with a new focus; we decided it was time 
to end XOMA’s fee-for-service model and establish a new XOMA that creates and captures the full 
value of our exceptional science to the beneﬁt of patients and our stockholders.  That change in 
strategy resulted in our ability to recapitalize XOMA and attract new stockholders that embrace 
our long-term vision for the Company.  

Under  the  leadership  of  Paul  Rubin,  MD,  our  Senior  Vice 
President,  Research  &  Development  and  Chief  Medical 
Ofﬁcer, and with Servier, our partner for gevokizumab, we 
launched a broad pivotal program in posterior segment non-
infectious uveitis (NIU) and Behçet’s disease uveitis (BDU). In 
parallel, both Servier and we developed a thoughtful proof-
of-concept program to identify the next Phase 3 indications 
for gevokizumab.  While we knew every indication selected 
for  proof-of-concept  testing  would  not  be  successful, 
we  knew  smart,  small  studies  would  allow  gevokizumab 
to  lead  us  to  its  next  indication  for  Phase  3  testing.    As 
hoped, it pointed us to pyoderma gangrenosum (PG), a rare 
neutrophilic dermatosis of painful expanding necrotic skin 
ulcers.

Before  I  continue  discussing  PG,  let  me  focus  on  our 
Behçet’s disease uveitis ﬁrst strategy.  We elected to pursue 
BDU as the ﬁrst indication for which we’d seek approval in 
the U.S. as it became evident EYEGUARD-B in BDU patients 
would  be  the  ﬁrst  study  in  the  EYEGUARD  program  to 
achieve its primary endpoint.  As we discussed this decision 
with  key  stakeholders,  it  became  clear  this  decision  had 
broader  strategic  beneﬁts.    Physicians  consider  their  BDU 
patients  to  be  among  their  most  difﬁcult  to  control  and 
as a group have the highest potential for the development 
of devastating visual loss. Payers need evidence a therapy 
works to determine where to place it on their formularies.  If 
we demonstrate gevokizumab is successful in treating and 
controlling  this  subgroup  of  NIU  patients  in  a  controlled 
Phase 3 study, we further enhance gevokizumab’s potential 
for a successful commercial launch, which most beneﬁts the 
BDU patient population.

As  I  write  to  you,  EYEGUARD-B  is  at  last  nearing  its  ﬁnal 
targeted  exacerbation  that  will  allow  Servier  to  unmask 
the  primary  endpoint  in  its  study  in  BDU  patients.    Also, 
the  light  is  at  the  end  of  the  tunnel  as  the  EYEGUARD-A 
and  EYEGUARD-C  studies  in  the  broader  NIU  population 
continue their slow steady climb toward full enrollment. 

The jointly run gevokizumab Phase 3 EYEGUARD-A and -C 
NIU studies have been extremely tough to enroll, especially 
as we are dedicated to complete studies that are scientiﬁcally 
rigorous  and  offer  the  best  chance  of  understanding  the 
beneﬁt  of  our  drug.    We  know  these  challenges  are  not 
a  XOMA-only  phenomenon;  other  companies  have  and 
continue  to  experience  difﬁculty  in  executing  studies  in 
this  patient  population.    But  importantly,  we  and  Servier 
have  not  wavered  in  our  commitment  to  complete 
these  studies.    Together  we  continue  to  look  for  ways  to 
accelerate  enrollment  by  identifying  countries  and  sites 
with the greatest potential to contribute patients without 
compromising quality.  

Our second pivotal program is in pyoderma gangrenosum, 
an indication that has given us compelling visible evidence 
that  gevokizumab  can  have  a  signiﬁcant  impact  on  these 
patients’ skin ulcers.  We shared with you the ﬁrst data we 
generated in the fall of 2013.  Several of the patients who 
were  in  the  pilot  study  enrolled  in  an  extension  study  to 
have access to gevokizumab should they experience new PG 
ulcers, as the published literature suggests up to 46 percent 
will experience additional ulcers within one year1.  For those 
patients who experienced new ulcers, we have seen positive 
results in these patients, too.  We launched the ﬁrst study 

result in signiﬁcant morbidities, including cerebral damage 
and  epilepsy.    We  are  investigating  XOMA  358  as  a  ﬁrst-
in-class  treatment  for  non-drug-induced,  endogenous 
hyperinsulinemic hypoglycemia (low blood glucose caused 
by excessive insulin production) and other related disorders.  
We will devote time in 2015 to identify the best indications 
to pursue in Phase 2 testing in order to expedite the clinical 
development path for XOMA 358.  If it is successful in future 
clinical  trials,  it  could  be  a  ﬁrst-in-class  therapy  to  treat 
several indications that result from the over production of, 
or inappropriate reaction to, insulin.  

In March 2015, we announced Tom Burns has been named 
our Chief Financial Ofﬁcer, as Fred Kurland is retiring from 
XOMA.  Tom has been with us for eight years and has played 
a  critical  role  in  our  day-to-day  ﬁnancial  operations,  as 
well as fully supporting all of our ﬁnancing activities.  He 
steps into his new role fully prepared to lead our ﬁnancial 
operations, and in the short time since the announcement, 
everyone  at  XOMA  has  recognized  his  natural  leadership 
skills.  We wish Fred all the best in this new stage of his life.

This is a great moment for XOMA, the patients who could 
beneﬁt  from  gevokizumab,  and  for  our  stockholders.  
Everything  we  put  in  motion  three  years  ago  is  about  to 
begin playing out.  2015 promises to be an exciting year!

Thank you for your continued support,

John Varian

in our Phase 3 PG program in the fall of 2014.  As this is 
a very rare disease, and this is the ﬁrst Phase 3 study ever 
conducted in the indication, we don’t know how long the 
study will take, but we know it is an important study for all 
stakeholders.

As  we  near  the  completion  of  the  EYEGUARD  program, 
the  all-important  marketing  and  commercialization 
plans  become  critical  elements  to  a  successful  product 
launch.  We hired Tom Klein from Genentech as our Chief 
Commercial Ofﬁcer in 2013, and he has put the commercial 
leadership  team  in  place.    We  now  have  over  40  years 
of  combined  commercial  biotech  and  pharmaceutical 
company  experience,  including  direct  launch  experience 
across  multiple  products  in  ophthalmology,  dermatology 
and  other  specialties.    Tom’s  ﬁrst  hire  was  an  expert  in 
market access, which includes pricing and reimbursement, 
reﬂecting the importance of this role to our overall needs.  
The commercial group has already begun to prepare us for 
the  launch  of  gevokizumab.    They  have  initiated  product 
positioning,  customer  targeting,  sales  ﬁeld  deployment 
and sales operations planning.  This team and its activities 
should  prepare  us  well  for  a  successful  U.S.  launch  if  we 
receive marketing approval for gevokizumab.

Success  with  gevokizumab  will  allow  us  to  fund 
development of the other compounds that were discovered 
and developed by the exceptional scientists at XOMA.  We 
also  intend  to  retain  the  value  of  those  assets  consistent 
with  our  commercial  plans:  commercialize  ourselves  in 
indications  that  are  treated  by  specialist  prescribers  with 
whom  we  can  develop  relationships  using  small  and 
targeted sales teams.

XOMA  358,  the  lead  compound  in  our  XMetD  program, 
has  completed  its  Phase  1  testing.    We  are  extremely 
excited  about  this  program  as  it  is  designed  to  down-
regulate the insulin receptor and its downstream signaling.  
Insulin  is  the  major  hormone  for  lowering  blood  glucose 
levels.  Abnormal increases in insulin secretion can lead to 
profound hypoglycemia (low blood sugar), a state that can 

1. Bennett ML et al. “Pyoderma gangrenosum. A comparison of typical and atypical forms with an emphasis on time to remission.  Case review of 86 patients 

from 2 institutions.” Medicine (Baltimore) Jan;79(1):37-46. PMID: 10670408

F O R M   1 0 -K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the fiscal year ended December 31, 2014
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from

to
Commission File No. 0-14710

XOMA Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)

2910 Seventh Street, Berkeley,
California 94710
(Address of principal executive offices,
including zip code)

52-2154066
(I.R.S. Employer Identification No.)

(510) 204-7200
(Telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, $0.0075 par value
Preferred Stock Purchase Rights

Name of each exchange on which registered

The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ‘ No È

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È
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 È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes È 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. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):

Large Accelerated Filer ‘ Accelerated Filer È Non-Accelerated filer ‘ Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of

1934). Yes ‘ No È

The aggregate market value of voting common equity held by non-affiliates of the registrant is $487,653,571 as of June 30, 2014.
Number of shares of Common Stock outstanding as of March 9, 2015: 116,185,969

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Company’s Proxy Statement for the Company’s 2015 Annual General Meeting of Stockholders are incorporated by

reference into Part III of this Report.

XOMA Corporation

2014 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

PART II

Item 5.

Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.

PART III

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

PART IV

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Item: Executive Officers of the Registrant

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15.

Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
23
44
44
45
45
45

47
49
50
70
72
72
72
73

75
75

75
75
75

76

77

INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

INDEX TO EXHIBITS

This annual report on Form 10-K includes trademarks, service marks and trade names owned by us or
others. “XOMA,” the XOMA logo and all other XOMA product and service names are registered or unregistered
trademarks of XOMA Corporation or a subsidiary of XOMA Corporation in the United States and in other
selected countries. EYEGUARD is a service mark of a subsidiary of XOMA Corporation in the United
States. All other trademarks, service marks and trade names included or incorporated by reference in this annual
report are the property of their respective owners.

PART I

Certain statements contained herein related to the anticipated size of clinical trials, the anticipated timing of
initiation of clinical trials, the expected availability of clinical trial results, the sufficiency of our cash resources,
the estimated costs of clinical trials and the amounts of certain revenues and certain costs in comparison to prior
years, 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, as amended
(the “Exchange Act”). The words “believe,” “may,” “estimate,” “continue,” “could,” “anticipate,” “assume,”
“intend,” “expect,” “predict,” “potential” “should,” “would,” and similar expressions are intended to identify
forward-looking statements. 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. Among other things: our
product candidates are still being developed, and we will require substantial funds to continue development
which may not be available; we have sustained losses in the past and we expect to sustain losses in the future; we
are substantially dependent on Les Laboratoires Servier (“Servier”) for the development and commercialization
of gevokizumab and for other aspects of our business; we have received negative results from certain of our
clinical trials, and we face uncertain results of other clinical trials of our product candidates; if our therapeutic
product candidates do not receive regulatory approval, neither our third-party collaborators, our contract
manufacturers nor we will be able to manufacture and market them; we may not obtain orphan drug exclusivity
or we may not receive the full benefit of orphan drug exclusivity even if we obtain such exclusivity; even once
approved, a product may be subject to additional testing or significant marketing restrictions, its approval may
be withdrawn or it may be voluntarily taken off the market; we may not be successful in commercializing our
products, which could also affect our development efforts; we are subject to various state and federal healthcare
related laws and regulations that may impact the commercialization of our product candidates and could subject
us to significant fines and penalties; and certain of our technologies are in-licensed from third parties, so our
capabilities using them are restricted and subject to additional risks. These and other risks, including those
related to current economic and financial market conditions, are contained principally in Item 1, Business;
Item 1A, Risk Factors; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations; and other sections of this Annual Report on Form 10-K. Factors that could cause or contribute to
these differences include those discussed in Item 1A, Risk Factors, as well as those discussed elsewhere in this
Annual Report on Form 10-K.

Forward-looking statements are inherently uncertain and you should not place undue reliance on these

statements, which speak only as of the date that they were made. These cautionary statements should be
considered in connection with any written or oral forward-looking statements that we may issue in the future. We
do not undertake any obligation to release publicly any revisions to these forward-looking statements after
completion of the filing of this Annual Report on Form 10-K to reflect later events or circumstances or to reflect
the occurrence of unanticipated events.

Item 1.

Business

Overview

XOMA Corporation (“XOMA”), a Delaware corporation, discovers and develops innovative antibody-based

therapeutics. Several of our antibodies have unique properties due to their interaction at allosteric sites on
specific protein rather than the orthosteric, or active sites. The compounds are designed to either enhance or
diminish the protein’s activity as desired. We believe allosteric-modulating antibodies may be more selective or
offer a safety advantage in certain disease indications when compared to more traditional modes of action.

Our lead product candidate, gevokizumab, is a proprietary potent, humanized allosteric-modulating

monoclonal antibody that binds to the inflammatory cytokine interleukin-1 beta (“IL-1 beta”). We believe that by
targeting IL-1 beta, gevokizumab has the potential to address the underlying inflammatory causes of a wide
range of diseases that have been identified as having unmet medical needs.

1

Together with our development partner, Servier, a leading independent French pharmaceutical research
company, we initiated three pivotal clinical trials evaluating gevokizumab for the treatment of non-infectious
intermediate, posterior or pan-uveitis (“NIU”) and Behçet’s disease uveitis. We are responsible for all of the
clinical study sites in the United States, and Servier is responsible for all of the clinical study sites outside of the
United States. These studies are known as the EYEGUARD™ program, which includes EYEGUARD-A
(patients with active NIU), EYEGUARD-B (patients with Behçet’s disease uveitis outside of the United States),
and EYEGUARD-C (patients with a history of NIU currently controlled with systemic treatment).

Our strategy is to pursue Behçet’s disease uveitis as our first indication for gevokizumab in the United
States. Upon the successful completion of Servier’s EYEGUARD-B study, we intend to meet with the U.S. Food
and Drug Administration (“FDA” or “the Agency”) to review the Phase 3 EYEGUARD-B data together with the
data from the two Behçet’s disease uveitis Phase 2 studies conducted independently by XOMA and Servier. We
believe the seriousness of this disease and the small patient population warrant consideration for approval based
upon positive data from a single pivotal study. There is significant precedence for regulatory approval based
upon a single study for indications of similar seriousness and patient populations. Should EYEGUARD-B
demonstrate that patients with Behçet’s disease uveitis who receive gevokizumab took longer to exacerbate than
the placebo-treated patients during the tapering of administered steroids, we believe we will be in position to
begin the Biologics License Application (“BLA”) submission process.

In September 2014, we opened the EYEGUARD-US supplemental gevokizumab clinical study of Behçet’s
disease uveitis to patients in the United States. The supplemental EYEGUARD-US study may be used in one of
several ways. It may not be required for the initial BLA submission, in which case it would merely provide
further information related to U.S. physicians’ and patients’ experiences with gevokizumab. It may be required
for the FDA’s review of our submission for informational purposes without being considered a pivotal study. In
this case, the study would be unmasked at a predetermined time when we are in a position to submit the BLA.
Finally, it may be required as a second pivotal study in order for the FDA to accept our submission. We’ve
designed the EYEGUARD-US study in a manner intended to fulfill whatever directive we are given by the
Agency and respond as quickly as possible.

In addition to the NIU clinical trials, we are studying gevokizumab in pyoderma gangrenosum (“PG”), a
rare ulcerative skin disease that is a specific indication under the umbrella of diseases known as neutrophilic
dermatoses. Patients experience painful expanding skin ulcers that have a significant impact on their quality of
life. Approximately 50 to 70 percent of the PG patient population have an underlying systemic condition, while
the remainder is idiopathic (unknown cause). The most prevalent underlying conditions are ulcerative colitis and
Crohn’s disease. The prognosis for PG is linked directly to the patient’s response to therapy for the underlying
disease. Physicians currently treat patients with systemic therapies that are approved for the underlying disease
and with topical therapies applied directly to the ulcers, yet published literature suggests that, on average, current
therapies can take six months to stop the ulcers from expanding and over eleven months to heal. The U.S.
Department of Health and Human Services’ National Institutes of Health’s Office of Rare Disease Research lists
PG as occurring in about one per 100,000 people. Claims data compiled over the past three years indicate the
number of diagnosed PG patients in the U.S. ranges between 11,000 and 14,000 annually.

Based upon what we believe are compelling data from our pilot study in patients with PG, we initiated a

Phase 3 clinical program. Final comments from the FDA were received in the third quarter of 2014, and we
initiated the first Phase 3 study in October 2014. The Phase 3 PG program includes two double-blind, placebo-
controlled clinical studies, each of which is designed to enroll 58 patients with active PG to receive gevokizumab
60 mg or placebo dosed subcutaneously once monthly, in addition to their current treatment regimen of low-dose
corticosteroids and/or immunosuppressants. The primary endpoint is the complete closure of the PG target ulcer
determined at Day 126 with confirmation of complete closure a minimum of two weeks later on or after Day 140.

Published literature indicates approximately 50% of patients will experience a recurrence within two to
three years. To follow the patients enrolled in our pilot study, we designed an extension study that allows the

2

pilot study patients the opportunity to receive further treatment if they experience new ulcers and allows us to
capture information on how gevokizumab performs with successive treatments. Four of the six patients from our
pilot study entered the extension study; three of whom were fully healed during the initial study, and one patient
who had an ulcer that was fully healed at Day 56 but reopened after an injury. To date, three of the four patients
enrolled in the extension study have received additional gevokizumab therapy for PG. One patient recurred at 7.5
months and upon receiving additional gevokizumab therapy obtained 100% ulcer closure prior to Day 56. One
patient recurred at 7 months and after additional gevokizumab therapy obtained 100% ulcer closure by Day
84. The patient who had initially healed but whose ulcer reopened after an injury continued receiving therapy and
obtained 100% ulcer closure. One patient has not received additional gevokizumab therapy as the condition has
not recurred for more than one year following initial gevokizumab treatment. All four patients continue to be
enrolled in the extension study and will be followed for up to 92 weeks.

We also have an active gevokizumab Proof-of-Concept (“POC”) development program to identify other

illness for late-stage development. Two studies are being conducted in collaboration with the U.S. National
Institutes of Health (“NIH”). The National Eye Institute (“NEI”) is conducting a gevokizumab study in patients
with non-infectious anterior scleritis. The North Shore-Long Island Jewish Health System in collaboration with
the National Institute on Deafness and Other Communication Disorders (“NIDCD”) is conducting a
gevokizumab clinical study in patients with inflammatory autoimmune inner ear disease (AIED).

Previously, we conducted POC trials in moderate-to-severe inflammatory acne and in erosive osteoarthritis

of the hand (“EOA”). We have decided not to further pursue the acne indication based on our commercial
analysis. The EOA results led to our decision not to pursue Phase 3 testing in the broad EOA population,
although we continue to review the data to determine if there is a subgroup of the EOA population that could
benefit from gevokizumab therapy.

Gevokizumab has been generally well tolerated across all of our clinical studies. In both the acne and EOA

studies, there were no drug-related serious adverse events reported. The most common adverse events were
headache, pain, arthralgia, urinary tract infections, upper respiratory tract infections and pneumonia, and they
were comparable between gevokizumab and placebo.

Separately, Servier instituted its own active development program for gevokizumab beyond the NIU and
Behçet’s disease uveitis Phase 3 program. In 2012, Servier initiated a Phase 2 gevokizumab study in patients with
acute coronary syndrome, a cardiovascular disease within the cardiometabolic field where it has world-wide
rights. In 2013, Servier began testing gevokizumab in a variety of POC studies, including polymyositis/
dermatomyositis, Schnitzler syndrome, and giant cell arteritis. Servier has indicated these are the first studies in
an extensive multi-indication exploratory program it expects to conduct.

Our proprietary pipeline includes classes of allosteric modulating antibodies that activate, sensitize or
deactivate the insulin receptor in vivo, which we have named XOMA Metabolic or XMet. Insulin is the primary
hormone for lowering blood glucose levels. Abnormal increases in insulin secretion can lead to profound
hypoglycemia (low blood sugar), a state that may result in significant morbidities, including cerebral damage and
epilepsy. In some instances, profound hypoglycemia can result in fatality. There are three programs in the XMet
portfolio, XMetD, which is designed to deactivate the insulin receptor, XMetA, which is designed to activate the
insulin receptor, and XMetS, which is designed to sensitize the insulin receptor when in an insulin resistant state.
These programs are highly novel as the antibodies bind to different sites on the insulin receptor than currently
marketed drugs. This portfolio of antibodies represents potential new therapeutic approaches to the treatment of
several rare diseases that have insulin involvement and diabetes.

The lead compound from our XMetD program, XOMA 358, is a fully human monoclonal allosteric
modulating antibody that binds to insulin receptors and attenuates insulin action. It is designed to negatively
modulate the insulin receptor and its downstream signaling capabilities. We launched clinical development
activities for XOMA 358 in October 2014, with the first patient dosed in our Phase 1 safety and tolerability
study. The Phase 1 study was successful, and we intend to investigate this compound as a novel treatment for

3

non-drug-induced, endogenous hyperinsulinemic hypoglycemia (low blood glucose caused by excessive insulin
produced by the body). A therapy that safely and effectively mitigates insulin-induced hypoglycemia has the
potential to address a significant unmet therapeutic need for certain rare medical conditions associated with
hyperinsulinism.

We intend to retain full ownership of XOMA 358 and the compounds in the XMetD program, as they align

with our focus on developing products for diseases with significant unmet medical need that are treated by the
specialist prescriber. We intend to out-license the insulin receptor-activating drug candidate(s) for development
in diabetes to a pharmaceutical company with expertise in developing and commercializing compounds for
Types 1 and 2 diabetes.

We have developed these and other antibodies using some or all of our ADAPT™ antibody discovery and
development platform, our ModulX™ technologies for generating allosterically modulating antibodies, and our
OptimX™ technologies for optimizing biophysical properties of antibodies, including affinity, immunogenicity,
stability and manufacturability.

Our biodefense initiatives include XOMA 3AB, a biodefense anti-botulism product candidate comprised of

a combination of three antibodies. XOMA 3AB is directed against botulinum toxin serotype A and has been
developed through funding from the National Institute of Allergy and Infectious Diseases (“NIAID”), a part of
the NIH. A Phase 1 XOMA 3AB trial was completed with no product-related serious adverse events. Should the
government choose to acquire XOMA 3AB or other biodefense products in the future, we expect to be able to
produce these antibodies through an outside manufacturer.

We also have developed antibody product candidates with premier pharmaceutical companies including

Novartis AG (“Novartis”) and Takeda Pharmaceutical Company Limited (“Takeda”).

Corporate Strategy

We are committed to establishing XOMA as a commercial organization in the United States. Our
commercialization strategy is to market products in the United States through our own focused sales teams
calling on the specialist prescriber. For indications that will require clinical studies that are prohibitively large or
the targeted patient populations are not treated by the specialist provider, we will seek a development and
commercialization partner. For gevokizumab, we select our clinical development indications based upon data
that supports IL-1 beta’s role in the disease state and upon data indicating the affected patients are treated by a
specialized physician base. Additionally, we may seek to expand our pipeline by developing additional
proprietary products and technologies and by entering into additional licensing and collaborative arrangements
with pharmaceutical and biotechnology companies. The principal elements of our corporate strategy are to:

•

•

Complete pivotal clinical development for gevokizumab, our lead product candidate, in Behçet’s
disease uveitis, a rare ocular indication. Upon the receipt of successful primary endpoint data from the
EYEGUARD-B study in patients with Behçet’s disease uveitis, we will seek guidance from the FDA to
determine the requirements necessary to support a BLA in this rare indication. We believe positive
EYEGUARD-B results, combined with the results obtained by Servier and our independent Phase 2
studies, will be compelling and warrant the submission of a BLA for Behçet’s disease uveitis. The
FDA may require us to conduct a confirmatory study in patients with Behçet’s disease uveitis to
support a BLA filing in this indication; therefore we initiated the EYEGUARD-US study. Depending
upon the FDA’s feedback regarding what data is required to support a BLA filing for Behçet’s disease
uveitis, we hope to be able to file the application shortly after our pre-BLA meeting. This strategy was
designed to accelerate our path to commercialization.

Complete Phase 3 clinical development for gevokizumab in NIU. With Servier, we launched the
global gevokizumab Phase 3 clinical development program, named EYEGUARD™, in 2012. The
global program includes two Phase 3 trials in active and controlled NIU (EYEGUARD-A and

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EYEGUARD-C, respectively) and a Phase 3 trial outside the United States in patients who suffer from
Behçet’s disease uveitis (EYEGUARD-B). The EYEGUARD-A study defines active NIU as a vitreous
haze score of equal to or greater than two on the Standardization of Uveitis Nomenclature (“SUN”)/
NEI scale. The vitreous is a normally transparent gel that fills the eyeball behind the lens, and vitreous
haze is the clouding of that gel. The EYEGUARD-C study is designed to determine if physicians can
reduce or eliminate corticosteroid use from NIU patients without causing their disease to flare, or
exacerbate. EYEGUARD-A and -C are ongoing and continue to enroll patients. The EYEGUARD-B
study is also designed to determine if physicians can reduce or eliminate corticosteroid use in Behçet’s
disease patients without causing an acute exacerbation of their uveitis. In addition to establishing
efficacy, we believe these trials have been designed to provide data necessary to meet the minimum
FDA requirements for demonstrating safety for ophthalmic indications: at least 300 patients must be
treated for at least six months and 100 patients for one year at the to-be-marketed dose.

EYEGUARD-A and -C require 300 patients to be enrolled in each study. The pace of enrollment in
both studies has been slower than both Servier and we had anticipated. We increased the number of
study sites in the U.S. to 72 for EYEGUARD-A, 57 of which are open and 77 for EYEGUARD-C, of
which 53 are open. We have implemented and continue to implement a variety of activities to
accelerate patient enrollment. We are seeing slow but steady progress in enrolling patients in the
United States, particularly in EYEGUARD-C. As of March 1, 2015, Servier has obtained regulatory
approval for EYEGUARD-A and EYEGUARD-C in 20 of its targeted 22 territories and 19 of its
targeted 23 territories, respectively. These countries represent 52 of the planned 72 and 53 of the
planned 77 clinical sites in the Servier territory for EYEGUARD-A and -C, respectively. Opening the
study sites in Servier’s territories is crucial to getting the EYEGUARD-A and -C studies
completed. Based upon the pace of enrollment in EYEGUARD-C, we expect to complete enrollment in
2015. The primary endpoint readout will be achieved six months after achieving full enrollment. For
EYEGUARD-A, enrollment needs to increase outside of the United States, and the primary endpoint
readout will be achieved two months after achieving full enrollment. The pace of enrollment in
EYEGUARD-A or-C will need to accelerate from its present pace for us to have data from either study
in 2015. We believe we need positive results from any two of these three studies in order to file a BLA
in NIU with the FDA.

Advance a Phase 3 program in PG, a rare skin disease classified under the broader indication of
neutrophilic dermatoses. In late 2013, we launched a pilot study to determine gevokizumab’s ability to
treat acute inflammatory PG, one of several rare skin diseases classified under the broader cluster of
neutrophilic dermatoses. We designed the study to enroll as many as four patients to receive gevokizumab
60mg, dosed once monthly for three months. After this cohort completed one dose, we reviewed the data
and elected not to proceed to a higher dosing regimen, as the patients were responding to gevokizumab.
Three patients showed improvement in ulcer size by Day 28. One patient had total resolution of the ulcer
by Day 84; a second patient had 93% improvement in ulcer size by Day 56. Two additional patients were
enrolled in the pilot program. Today, four of the six patients in our pilot study are enrolled in an extension
study, and three have received additional therapy with gevokizumab, with similar results. One patient has
not exacerbated after the initial gevokizumab treatment over one year ago. In November 2014, we
launched the first of two Phase 3 clinical trials and are in the process of completing the regulatory filings
and clinical site identification to initiate the second study.

Continue to assess gevokizumab’s ability to treat a variety of diseases. In April 2013, NEI, a division
of NIH, opened its noninfectious, active, anterior scleritis trial for patient enrollment. The open-label
single-arm Phase 1/2 study is designed to assess the safety and potential efficacy of gevokizumab in up
to 10 patients experiencing non-infectious, active, anterior scleritis, which is the inflammation of the
sclera (the fibrous white membrane surrounding the eyeball excluding the cornea).

In August 2013, we announced a single-center clinical trial in ten patients with AIED, which falls
under the umbrella of sensorineural hearing loss. Patients with AIED usually experience multiple
episodes of rapid hearing loss either concurrently or sequentially in both ears. This study is being run

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•

•

•

•

by the Feinstein Institute for Medical Research, Hearing & Speech Center at North Shore-Long Island
Jewish Health System in collaboration with, and with funding from, the NIDCD and the NIH.

Establish commercial-scale manufacturing for gevokizumab. In August 2012, Servier and we
announced an agreement with Boehringer Ingelheim to transfer XOMA’s technology and processes for
the validation of our technology and processes in preparation for the commercial manufacture of
gevokizumab. Boehringer Ingelheim has completed Good Manufacturing Practices (“GMP”) runs with
successful biological comparability, including all process validation batches of the XOMA processes.
Boehringer Ingelheim is making preparations for the production of gevokizumab commercial batches
at its facility in Biberach, Germany.

Advance our proprietary pipeline candidates and generate revenues from our proprietary
technologies. We continue to develop assets in our proprietary pipeline, primarily focusing on the
development of allosteric modulating monoclonal antibodies. Our most advanced program, which
targets the insulin receptor, has generated three new classes of fully human monoclonal antibodies
known as Selective Insulin Receptor Modulators (“SIRMs”). These allosteric modulating antibodies
activate (“XMetA”), sensitize (“XMetS”) or deactivate/antagonize (“XMetD”) the insulin receptor in
vivo. XMetA and XMetS represent the potential for distinct, new therapeutic approaches for the
treatment of patients with diabetes. Separate studies of XMetA and XMetS have demonstrated reduced
fasting blood glucose levels and improved glucose tolerance in animal models of diabetes. We intend
to out-license the insulin receptor-activating drug candidate(s) for development in diabetes.

In the case of XMetD, we plan to develop this portfolio of compounds internally, as they have the
potential to treat several rare, life-threatening or severely debilitating diseases: hyperinsulinemic
hypoglycemia in post-gastric bypass surgery patients, congenital hyperinsulinism (“CHI”), and
insulinomas. The most advanced of these compounds is XOMA 358, a fully human, allosteric
modulating monoclonal antibody engineered to deactivate the insulin receptor. In preclinical models,
XOMA 358 has emulated the glucose lowering seen in patients with insulinomas, a beta cell tumor that
over secretes insulin, and with CHI, a hereditary disease resulting in lack of insulin regulation and
profound hypoglycemia that can result in seizures and brain damage. These models demonstrated
XOMA 358 was capable of restoring fasting blood glucose to normal levels. We launched clinical
development for XOMA 358 in October 2014 and successfully completed a Phase 1 clinical study of
XOMA 358. We have presented the results at the Endocrine Society’s Annual Meeting, ENDO 2015,
which show XOMA 358’s ability to deactivate the insulin receptor and its downward signaling. XOMA
358 is being evaluated for the treatment of non-drug-induced, endogenous hyperinsulinemic
hypoglycemia (low blood glucose caused by excessive insulin produced endogenously). We ultimately
hope to pursue the compound for use in patients with endogenous hypoglycemia.

•

Complete current biodefense contracts. To date, we have been awarded four contracts totaling
approximately $120 million from NIAID to support development of XOMA 3AB and several
additional product candidates for the treatment of botulism poisoning with botulinum toxin serotypes
A, B and E, as well as C and D.

NIAID has completed a Phase 1 trial of XOMA 3AB, a novel formulation of three antibodies designed
to prevent and treat botulism poisoning from serotype A. This double-blind, dose-escalation study in 24
healthy volunteers was designed to assess the safety and tolerability and determine the pharmacokinetic
profile of XOMA 3AB. This trial did not observe any drug product-related serious adverse events. The
results of this trial strongly support our platform approach for the remaining serotype-directed anti-
toxins. Under NIAID funding XOMA has also produced XOMA 3B drug product (directed against
Botulinum Toxin Serotype B (“BoNT”/B) and XOMA 3E drug product (directed against BoNT/E).
Pre- Investigational New Drug (“IND”) work has been completed for these products and Phase 1
studies will be scheduled by NIAID. Under additional funding, XOMA is developing an anti-BoNT/C/
D combination antibody product. This product will advance separately to IND and clinical studies.

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Proprietary Products

As part of our strategy, we are focusing our technology and resources on advancing our emerging

proprietary pipeline. Below is a summary of our proprietary products:

•

•

•

Gevokizumab is a proprietary potent humanized monoclonal antibody with unique allosteric
modulating properties that has the potential to treat patients with a wide variety of inflammatory
diseases. Gevokizumab binds strongly to IL-1 beta, a pro-inflammatory cytokine involved in NIU and
Behçet’s disease uveitis, PG, active non-infectious anterior scleritis, AIED, cardiovascular disease,
diseases under the neutrophilic dermatoses designation, Schnitzler syndrome and other diseases. By
binding to IL-1 beta, gevokizumab modulates the activation of the IL-1 receptor, thereby preventing
the cellular signaling events that produce inflammation. Based on its binding properties, specificity for
IL-1 beta and its half-life (the time it takes for the amount administered to be reduced by one-half) in
the body, gevokizumab may provide convenient dosing of once per month.

In December 2010, we entered into an agreement with Servier to jointly develop and commercialize
gevokizumab in multiple indications. Under the terms of that agreement, Servier has worldwide rights to
gevokizumab for cardiovascular disease and diabetes indications (cardiometabolic field) and rights outside
the United States and Japan to all other indications. We retain development and commercialization rights
in the United States and Japan to all indications except cardiovascular disease and diabetes, yet we have the
option to reacquire rights to these indications from Servier in these territories. In 2012, Servier initiated a
gevokizumab Phase 2 study in patients with acute coronary syndrome, a cardiovascular disease. In 2013,
Servier also began testing gevokizumab in a variety of proof-of-concept studies, including polymyositis/
dermatomyositis, Schnitzler syndrome, and giant cell arteritis.

XMet: XOMA Metabolic Activating, Sensitizing and Deactivating/Antagonizing Antibodies.
Insulin receptor-activating antibodies, such as XMetA, are designed to provide long-acting reduction of
hyperglycemia in Type 2 diabetic patients, potentially reducing the advancement to a number of insulin
injections needed to control their blood glucose levels. Insulin receptor-sensitizing antibodies, such as
XMetS, are being evaluated to reduce insulin resistance and could enable diabetic patients to use their
own insulin more effectively to control blood glucose levels. Insulin receptor-deactivating/
antagonizing antibodies, such as XOMA 358, are in development to treat several diseases that result
from the over-production or abnormal regulation to insulin. There are three rare disease indications that
may benefit from XOMA 358 that are of greatest interest to us: CHI, post-meal hypoglycemia in post-
gastric bypass surgery patients and possibly certain insulinomas. XOMA 358 has successfully
completed Phase 1 testing, and we are exploring clinical trial designs to further advance XOMA 358.

Studies performed with XMetA have demonstrated that it reduced hyperglycemia in rodents and larger
animals both acutely and over 6-week dosing periods. As significant reduction in Hemoglobin A1c
(“HbA1c”) levels—a standard clinical and regulatory measure for glucose metabolism—were also
observed, the potential product profile is encouraging for development in Type 2 diabetes.

XOMA’s antibotulinum toxin program has multiple antibody candidates that are in development.
Botulinum toxins Types A, B, C, D, and E cause paralysis and are potential bioterrorism threats.
XOMA 3AB is a multi-antibody product designed to neutralize the most potent of the botulinum
toxins, Type A. XOMA 3E is a multi-antibody product designed to neutralize another of the most
prevalent of the botulinum toxins, Type E. XOMA CD is a multi-antibody product directed to BoNT/C
and BoNT/D, and is our first divalent product directed simultaneously against two serotypes of
botulinum toxin, Types C and D. The antibodies are designed to bind to each toxin, neutralize them,
and enhance the clearance of the toxin from the body. The use of multiple antibodies increases the
likelihood of clearing the harmful toxins by providing specific protection against each toxin type. In
contrast to existing agents that treat botulism, XOMA uses advanced human monoclonal antibody
technologies in an effort to achieve superior safety, potency and efficacy and avoid life-threatening
immune reactions associated with animal-derived products. NIAID has completed a Phase 1 trial of
XOMA 3AB with no product-related serious adverse events.

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•

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XOMA 629 is a topical anti-bacterial formulation of a peptide derived from bactericidal/permeability-
increasing protein (“BPI”), an integral part of the protective human immune system. In 2012, XOMA
entered into a license agreement with Margaux Biologics, Inc. (“Margaux”), under which XOMA
transferred its rights, title, and interest in BPI. As consideration for the transferred assets and licenses,
Margaux issued shares of its common stock to XOMA, representing an amount of capital stock equal to
7% of the then outstanding capital stock of Margaux. Under the terms of this agreement, we may
receive milestone payments aggregating up to $5.6 million and low- to mid-single-digit royalties on
future sales of products subject to this license.

Preclinical Product Pipeline: We are pursuing additional opportunities to further broaden our
preclinical product pipeline, including internal discovery programs.

Partnership Products

Historically, we have provided research and development collaboration services for world-class

organizations, including Novartis and Takeda, in pursuit of new antibody products. In more recent years, we have
evolved our business focus from a service provider model to a proprietary product development model. However,
we will continue to capitalize on partnered product arrangements as opportunities arise. Below is a list of such
partnerships:

•

•

Therapeutic Antibodies with Takeda: Since 2006, Takeda has been a collaboration partner for
therapeutic monoclonal antibody discovery and development against multiple targets selected by
them. In February 2009, we expanded our existing collaboration to provide Takeda with access to
multiple antibody technologies, including a suite of research and development technologies and
integrated information and data management systems. We may receive potential milestones and
royalties on sales of antibody products in the future.

Therapeutic Antibodies with Novartis In November 2008, we restructured our product development
collaboration with Novartis, which was entered into in 2004 with Novartis (then Chiron Corporation).
Under the restructured agreement, Novartis received control over the two ongoing programs relating to
CD40 and prolactin receptor. Control of the prolactin receptor antibody program was returned to us in
2014. We may, in the future, receive milestones and/or double-digit royalty rates for the CD40
antibody program and options to develop or receive royalties from four additional programs.

Technologies

We have a unique set of antibody discovery, optimization and development technologies, including:

•

ADAPT™ (Antibody Discovery Advanced Platform Technologies): proprietary phage display libraries
integrated with yeast and mammalian display to enable antibody discovery;

• ModulX™: technology that enables positive and negative modulation of biological pathways using

allosterically modulating antibodies; and

•

OptimX™: technologies used for optimizing biophysical properties of antibodies, including affinity,
immunogenicity, stability and manufacturability.

Technology Licenses

Below is a summary of certain proprietary technologies owned by us and available for licensing to other

companies:

•

Antibody Discovery Technologies: We use human antibody phage display libraries, integrated with
yeast and mammalian display, which we call ADAPT™ Integrated Display, in our discovery of
therapeutic candidates. We offer access to this platform, including novel phage libraries developed
internally, as part of our collaboration business. We believe access to ADAPT™ Integrated Display

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offers a number of benefits to us and our collaboration partners because it enables us to combine the
diversity of phage libraries with accelerated discovery due to rapid immunoglobulin (“IgG”)
reformatting and Fluorescence-Activated Cell Sorting (“FACS”) based screening using yeast and
mammalian display. This increases the probability of technical and business success in finding rare and
unique functional antibodies directed to targets of interest.

• ModulX™ technology: ModulX™ technology allows modulation of biological pathways using

monoclonal antibodies and offers insights into regulation of signaling pathways, homeostatic control,
and disease biology. Using ModulX™, XOMA is generating product candidates with novel
mechanisms of action that specifically alter the kinetics of interaction between molecular constituents
(e.g. receptor-ligand). ModulX™ technology enables expanded target and therapeutic options and
offers a unique approach in the treatment of disease.

•

OptimX™ technologies:

Human Engineering™ (“HE™”): HE™ is a proprietary humanization technology that allows
modification of non-human monoclonal antibodies to reduce or eliminate detectable
immunogenicity and make them suitable for medical purposes in humans. The technology uses a
unique method developed by us, based on analysis of the conserved structure-function
relationships among antibodies. The method defines which residues in a non-human variable
region are candidates to be modified. The result is an HE™ antibody with preserved antigen
binding, structure and function that has eliminated or greatly reduced immunogenicity. HE™
technology was used in development of gevokizumab and is used in the development of certain
other antibody products.

Targeted Affinity Enhancement™ (“TAE™”): TAE™ is a proprietary technology involving
the assessment and guided substitution of amino acids in antibody variable regions, enabling
efficient optimization of antibody binding affinity and selectivity modulation. TAE™ generates a
comprehensive map of the effects of amino acid mutations in the CDR region likely to impact
binding. The technology is utilized by XOMA scientists and has been licensed to a number of our
collaborators.

•

Flexible Manufacturing: This patented technology relates to a flexible arrangement of mobile clean
rooms (“MCRs”) within a manufacturing facility, with each MCR providing a portable, self-contained
environment that allows for drug development. The facility design allows MCRs to connect easily and
quickly to a central supply of utilities such as air, water, and electricity. This unique arrangement
facilitates flexible manufacturing and eliminates change-over downtime. This translates into
significantly reduced capital expenditures, production costs, and maintenance costs while offering
meaningful time advantages over conventional manufacturing facilities. When MCRs are not in use,
they can be easily moved to cleaning/refurbishing areas and prepared MCRs can be “plugged in” for
manufacturing. The flexible manufacturing system can be applied to fields as diverse as
pharmaceuticals, biologics, and electronics.

Financial and Legal Arrangements of Product Collaborations, Licensing and Other Arrangements

Collaboration and Licensing Agreements

Servier—Gevokizumab

We have entered into a license and collaboration agreement with Servier to jointly develop and commercialize
gevokizumab in multiple indications that provided us with a non-refundable upfront payment of $15 million, which
we received in January 2011. Under the terms of the agreement, Servier has worldwide rights to cardiovascular
disease and diabetes indications (cardiometabolic field) and rights outside the United States and Japan to all other
indications, including NIU, Behçet’s disease uveitis and other inflammatory and oncology indications. XOMA
retains development and commercialization rights in the United States and Japan for all indications other than
cardiovascular disease and diabetes. XOMA has an option to reacquire rights to cardiovascular disease and diabetes
indications from Servier in the United States and Japan (the “Cardiometabolic Indications Option”). If we exercise

9

the Cardiometabolic Indications Option, we will be required to pay Servier an option fee and partially reimburse
their incurred development expenses. Each party has the right in certain circumstances to pursue development in
indications not specified in the agreement, and in such event, the other party will have certain options to participate
in such development, including reimbursement of a portion of the developing party’s expenses.

Under this agreement, Servier will fund all activities to advance the global clinical development and future

commercialization of gevokizumab in cardiovascular-related diseases and diabetes. Also, Servier funded the first
$50 million of gevokizumab global clinical development and Chemistry, Manufacturing and Controls (“CMC”)
expenses and continues to fund 50% of further expenses related to the NIU and Behçet’s disease uveitis
indications.

In addition, under the agreement, we are eligible to receive a combination of Euro- and U.S. Dollar
(“USD”)-denominated, development and sales milestones for multiple indications aggregating to a potential
maximum of approximately $433 million when converted using the December 31, 2014, Euro to USD exchange
rate (the “12/31/14 Exchange Rate of 1.216”), if XOMA reacquires cardiovascular and/or diabetes rights for use
in the United States and Japan. If XOMA does not reacquire these rights, then the milestone payments aggregate
to a potential maximum of approximately $770 million converted using the December 31, 2014 Exchange Rate
of 1.216. Servier’s obligation to pay development and commercialization milestones will continue for so long as
Servier is developing or selling products under the agreement.

We are eligible to receive royalties on gevokizumab sales from sales outside of the United States and Japan,

and from global sales in cardiometabolic indications, which are tiered based on sales levels and range from a
mid-single-digit to up to a mid-teens percentage rate. Our right to royalties with respect to a particular product
and country will continue for so long as such product is sold in such country.

The collaboration is carried out and managed by committees mutually established by XOMA and Servier. In

general, in the event of any disputes, each party has decision-making authority over matters relating to its areas
of responsibility and territory, but neither party has unilateral decision-making rights if the decision would have a
material adverse impact on the other party’s rights in its territory. The agreement contains customary termination
rights relating to matters such as material breach by either party, safety issues and patents. Servier also has a
unilateral right to terminate the agreement on a country-by-country basis or in its entirety on six months’ notice.

We also entered into a loan agreement with Servier (the “Servier Loan Agreement”) that provided for an

advance of up to €15.0 million. The loan was fully funded in January 2011, with the proceeds converting to
approximately $19.5 million at the date of funding. The loan is secured by an interest in XOMA’s intellectual
property rights to all gevokizumab indications worldwide, excluding certain rights in the United States and
Japan. Interest is calculated at a floating rate based on a Euro Inter-Bank Offered Rate (“EURIBOR”) and is
subject to a cap. The interest rate is reset semi-annually in January and July of each year. The interest rate for the
initial interest period was 3.22% and was reset semi-annually ranging from 2.31% to 3.83%. Interest for the six-
month period from mid-January 2015 through mid-July 2015 was reset to 2.16%. Interest is payable semi-
annually; however, the Servier Loan Agreement provided for a deferral of interest payments over a period
specified in the agreement. During the deferral period, accrued interest was added to the outstanding principal
amount for the purpose of interest calculation for the next six-month interest period. On the repayment
commencement date, all unpaid and accrued interest shall be paid to Servier, and thereafter, all accrued and
unpaid interest shall be due and payable at the end of each six-month period. In January 2015, we paid $0.2
million in accrued interest to Servier.

On January 9, 2015, Servier and we entered into Amendment No. 2 (“Loan Amendment”) to the Servier

Loan Agreement. The Loan Agreement was initially entered into on December 30, 2010 and subsequently
amended by a Consent, Transfer, Assumption and Amendment Agreement entered into as of August 12, 2013.
The Loan Amendment modifies the maturity date of the loan from January 13, 2016, to three tranches due on
January 15, 2016, January 15, 2017 and January 15, 2018; however, after a specified period prior to final
maturity, the loan is to be repaid (i) at Servier’s option, by applying up to a significant percentage of any

10

milestone or royalty payments owed by Servier under our collaboration agreement and (ii) using a significant
percentage of any upfront, milestone or royalty payments we receive from any third-party collaboration or
development partner for rights to gevokizumab in the United States and/or Japan. In addition, the loan becomes
immediately due and payable upon certain customary events of default. At December 31, 2014, the outstanding
principal balance under this loan was $18.2 million using the December 31, 2014 Exchange Rate of 1.216. Refer
to Management’s Discussion and Analysis of Financial Condition and Results of Operations for further
information regarding the Servier Loan Agreement.

NIAID

In September 2008, we were awarded a third NIAID contract for $64.8 million under Contract No.

HHSN272200800028C (“NIAID 3”) to continue development of our anti-botulinum antibody product candidates,
including XOMA 3AB and additional product candidates directed against the B and E toxin serotypes. As part of
the contract, we have developed, evaluated and produced the clinical supplies to support an IND filing with the
FDA for XOMA 3AB. A Phase 1 trial was completed on XOMA 3AB, with no product-related serious adverse
events. Subsequently, XOMA manufactured XOMA 3B and XOMA 3E, which are currently on stability and are
in the process of IND preparation.

In October 2011, we announced we had been awarded a fourth NIAID contract for up to $28.0 million over
five years under Contract No. HHSN 272201100031C (“NIAID 4”) to develop broad-spectrum antitoxins for the
treatment of human botulism poisoning directed against the C and D toxin serotypes. XOMA has identified and
produced the product antibodies and is in the process of preparing for the execution of non-clinical work and
filling of the current Good Manufacturing Practices (“cGMP”) drug product.

Takeda

In November 2006, we entered into a fully funded collaboration agreement with Takeda for therapeutic
monoclonal antibody discovery and development activities under which we agreed to discover and optimize
therapeutic antibodies against multiple targets selected by Takeda. Takeda agreed to make up-front, annual
maintenance and milestone payments to us, fund our research and development and manufacturing activities for
preclinical and early clinical studies and pay royalties on sales of products resulting from the collaboration.
Takeda is responsible for clinical trials and commercialization of drugs after an IND submission and is granted
the right to manufacture once a product enters into Phase 2 clinical trials. We have completed a technology
transfer and do not expect to perform any further research and development services under this program. From
2011 through 2014, we received milestone payments relating to one currently active program.

Under the terms of this agreement, we may receive milestone payments aggregating up to $19.0 million
relating to one undisclosed product candidate and low single-digit royalties on future sales of all products subject
to this license. In addition, in the event Takeda develops additional qualifying product candidates under the terms
of our agreement, we would be eligible for milestone payments aggregating up to $20.75 million for each such
qualifying product candidate. Our right to milestone payments expires on the later of the receipt of payment from
Takeda of the last amount to be paid under the agreement or the cessation by Takeda of all research and
development activities with respect to all program antibodies, collaboration targets and/or collaboration products.
Our right to royalties expires on the later of 13.5 years from the first commercial sale of each royalty-bearing
discovery product or the expiration of the last-to-expire licensed patent.

In February 2009, we expanded our existing collaboration to provide Takeda with access to multiple
antibody technologies, including a suite of research and development technologies and integrated information
and data management systems. We may receive milestones of up to $3.25 million per discovery product
candidate and low single-digit royalties on future sales of all antibody products subject to this license. Our right
to milestone payments expires on the later of the receipt of payment from Takeda of the last amount to be paid
under the agreement or the cessation by Takeda of all research and development activities with respect to all

11

program antibodies, collaboration targets and/or collaboration products. Our right to royalties expires on the later
of 10 years from the first commercial sale of such royalty-bearing discovery product or the expiration of the last-
to-expire licensed patent.

Novartis

In November 2008, we restructured our product development collaboration with Novartis. Under the
restructured agreement, Novartis made a payment to us of $6.2 million in cash and reduced our existing debt by
$7.5 million; agreed to fund all future research and development expenses; agreed to pay potential milestones of
up to $14.0 million and royalty rates ranging from low-double-digit to high-teen percentage rates for certain
antibody products binding to CD40 or prolactin receptor antibody programs; and has provided us with options to
develop or receive royalties on four additional programs. In exchange, Novartis received control over the CD40
and prolactin receptor antibody programs, as well as the right to expand the development of these programs into
additional indications outside of oncology. Novartis has initiated clinical studies to test CFZ533, an anti-CD40
antibody arising from its collaboration with XOMA, in de novo renal transplantation and in Primary Sjögren’s
Syndrome. Novartis has returned control of the prolactin receptor antibody program to us and we are evaluating
options for its continued development. In 2013, we received a $7.0 million milestone relating to one currently
active program. Our right to milestone payments expires at such time as no collaboration product or former
collaboration product is being developed or commercialized anywhere in the world and no royalty payments on
these products are due. Our right to royalty payments expires on the later of the expiration of any licensed patent
covering each product or 20 years from the launch of each product.

In connection with the collaboration between XOMA and Novartis (then Chiron Corporation), a secured
note agreement was executed in May 2005. The note agreement is secured by our interest in the collaboration and
is due and payable in full in June 2015. At December 31, 2014, the outstanding principal balance under this note
agreement totaled $13.4 million and was included in our current portion of interest bearing obligations in our
consolidated balance sheet for the period ended December 31, 2014. Pursuant to the terms of the arrangement as
restructured in November 2008, we will not make any additional borrowings on the Novartis note. Pursuant to
our obligations under the note agreement, in January 2014, we made a payment equal to 25 percent of a $7.0
million milestone received, or $1.75 million, toward our outstanding debt obligation to Novartis.

Pfizer

In August 2007, we entered into a license agreement with Pfizer Inc. (“Pfizer”) for non-exclusive,
worldwide rights for XOMA’s patented bacterial cell expression technology for research, development and
manufacturing of antibody products. Under the terms of the agreement, we received a license fee payment of $30
million in 2007.

From 2011 through 2014, we have received milestone payments, and we also may be eligible for additional
milestone payments aggregating up to $17.9 million and low single-digit royalties on future sales of all products
subject to this license. In addition, we may receive potential milestone payments aggregating up to $1.7 million
for each additional qualifying product candidate. Our right to milestone payments expires on the later of the
expiration of the last-to-expire licensed patent or the tenth anniversary of the effective date. Our right to royalties
expires upon the expiration of the last-to-expire licensed patent. We expect to recognize revenue on milestones
when and if they are achieved and on royalties when and if the underlying sales occur.

In August 2005, we entered into a license agreement with Wyeth (subsequently acquired by Pfizer) for non-

exclusive, worldwide rights for certain of XOMA’s patented bacterial cell expression technology for vaccine
manufacturing. Under the terms of this agreement, we received a milestone payment in January 2015 relating to
TRUMENBA®, a meningococcal group B vaccine marketed by Pfizer. We anticipate receiving a fraction of a
percentage of sales of TRUMENBA as royalties. Our right to royalties expires on a country-by-country basis
upon the later of the expiration of the last-to-expire licensed patent or 10 years from the first commercial sale of
TRUMENBA.

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Symplmed

In July 2013, we transferred U.S. development and commercialization rights of the perindopril franchise,

and sublicensed the ACEON® U.S. marketing rights to Symplmed Pharmaceuticals, LLC (“Symplmed”). Under
the terms of the arrangement, we received a minority equity position in Symplmed and up to double-digit
royalties on sales of the first fixed-dose combination containing perindopril arginine and amlodipine besylate, if
it is approved by the FDA. We recorded the minority equity position in other assets on our consolidated balance
sheets. In July 2014, the ACEON new drug application (“NDA”) was transferred to Symplmed. Pursuant to the
terms of the transfer, Symplmed will pay us single-digit royalties on sales of ACEON and for the year ended
December 31, 2014, royalties received were de minimis.

On January 26, 2015, Symplmed announced that the FDA approved PRESTALIA® (perindopril arginine
and amlodipine) tablets, licensed from Servier, for the treatment of hypertension. In July 2013, we transferred the
development and commercialization rights of Prestalia to Symplmed. Pursuant to the transfer agreement with
Symplmed, we will receive up to double-digit in royalties on sales of PRESTALIA. Refer to Management’s
Discussion and Analysis of Financial Condition and Results of Operations for further information regarding
Symplmed Pharmaceuticals.

Tamus

In October 2014, we entered into a license agreement with Texas A&M University (“Tamus”) for non-
exclusive, worldwide rights for XOMA’s innovative design of a manufacturing facility. The patented technology
relates to a flexible arrangement of MCRs within the manufacturing facility with each MCR providing a portable,
self-contained environment that allows for drug development.

Financing Agreements

Outstanding Warrants

In March 2012, we issued warrants in connection with an underwritten public offering, which entitle the
holders to purchase up to an aggregate of 14,834,577 shares of XOMA common stock at an exercise price equal
to $1.76 per share. The warrants are exercisable immediately and will expire on March 6, 2017. As of
December 31, 2014, 12,109,418 of these warrants were outstanding.

In September 2012, we issued warrants in connection with an amendment to an existing debt financing,
which entitle the holder to purchase up to an aggregate of 39,346 unregistered shares of XOMA common stock at
an exercise price equal to $3.54 per share. The warrants are exercisable immediately and will expire on
September 27, 2017. As of December 31, 2014, all of these warrants were outstanding.

In December 2014, we issued warrants in connection with a registered direct offering, which entitle the
holders to purchase up to an aggregate of 8,097,165 shares of XOMA common stock at an exercise price equal to
$7.90 per share. The warrants are exercisable immediately and will expire on December 7, 2016. As of
December 31, 2014, all of these warrants were outstanding.

In February 2015, we entered into a new debt financing with Hercules Technology III, L.P., as lender, an
affiliate of Hercules Technology Growth Capital, Inc., as agent (collectively, “Hercules”). In connection with this
debt financing, we issued a warrant which entitles the holder to purchase up to an aggregate of 181,268 shares of
XOMA common stock at an exercise price equal to $3.31 per share. The warrant is exercisable immediately and
will expire on February 27, 2020. As of March 9, 2015, all of these warrants were outstanding. Refer to
Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information
regarding the Hercules Loan Agreement.

13

General Electric Capital Corporation Term Loan

In December 2011, we entered into a loan agreement (the “GECC Loan Agreement”) with General Electric
Capital Corporation (“GECC”), under which GECC agreed to make a term loan in an aggregate principal amount
of $10.0 million (the “Term Loan”) to us, and upon execution of the GECC Loan Agreement, GECC funded the
Term Loan. As security for our obligations under the GECC Loan Agreement, we granted a security interest in
substantially all of our existing and after-acquired assets, excluding its intellectual property assets (such as those
relating to our gevokizumab and anti-botulism products). The Term Loan accrued interest at a fixed rate of
11.71% per annum and was to be repaid over a period of 42 consecutive equal monthly installments of principal
and accrued interest and was due and payable in full on June 15, 2015. We incurred debt issuance costs of
approximately $1.3 million in connection with the Term Loan and were required to pay a final payment fee equal
to $500,000 on the maturity date, or such earlier date as the Term Loan is paid in full. The debt issuance costs
and final payment fee were being amortized and accreted, respectively, to interest expense over the term of the
Term Loan using the effective interest method.

In connection with the GECC Loan Agreement, we issued to GECC unregistered warrants that entitle GECC

to purchase up to an aggregate of 263,158 unregistered shares of XOMA common stock at an exercise price
equal to $1.14 per share. These warrants are exercisable immediately and have a five-year term. We allocated the
aggregate proceeds of the GECC Term Loan between the warrants and the debt obligation based on their relative
fair values. The fair value of the warrants issued to GECC was determined using the Black-Scholes Model. The
warrants’ fair value of $0.2 million was recorded as a discount to the debt obligation and was being amortized
over the term of the loan using the effective interest method.

In September 2012, we entered into an amendment to the GECC Loan Agreement providing for an
additional term loan in the amount of $4.6 million, increasing the term loan obligation to $12.5 million (the
“Amended Term Loan”) and providing for an interest-only monthly repayment period following the effective
date of the amendment through March 1, 2013, at a stated interest rate of 10.9% per annum. Thereafter, we were
obligated to make monthly principal payments of $347,222, plus accrued interest, over a 27-month period
commencing on April 1, 2013, and through June 15, 2015, at which time the remaining outstanding principal
amount of $3.1 million, plus accrued interest, was due. We incurred debt issuance costs of approximately $0.2
million and were required to make a final payment fee in the amount of $875,000 on the date upon which the
outstanding principal amount was required to be repaid in full. This final payment fee replaced the original final
payment fee of $500,000. The debt issuance costs and final payment fee were being amortized and accreted,
respectively, to interest expense over the term of the Amended Term Loan using the effective interest method.

In connection with the amendment, on September 27, 2012, we issued to GECC unregistered stock purchase

warrants, which entitle GECC to purchase up to an aggregate of 39,346 shares of XOMA common stock at an
exercise price equal to $3.54 per share. These warrants are exercisable immediately and have a five-year term.
The warrants’ fair value of $0.1 million was recorded as a discount to the debt obligation and was being
amortized over the term of the loan using the effective interest method. The warrants are classified in permanent
equity on the consolidated balance sheets.

The Amended Term Loan did not change the remaining terms of the GECC Loan Agreement. The GECC

Loan Agreement contains customary representations and warranties and customary affirmative and negative
covenants, including restrictions on the ability to incur indebtedness, grant liens, make investments, dispose of
assets, enter into transactions with affiliates and amend existing material agreements, in each case subject to
various exceptions. In addition, the GECC Loan Agreement contains customary events of default that entitle
GECC to cause any or all of the indebtedness under the GECC Loan Agreement to become immediately due and
payable. The events of default include any event of default under a material agreement or certain other
indebtedness.

We had the option to prepay the Amended Term Loan voluntarily in full, but not in part, and any voluntary

and certain mandatory prepayments are subject to a prepayment premium of 3% in the first year after the

14

effective date of the amendment to the GECC Loan Agreement, 2% in the second year and 1% thereafter, with
certain exceptions. We also were required to pay the $875,000 final payment fee in connection with any
voluntary or mandatory prepayment. On the effective date of the amendment to the GECC Loan Agreement, we
paid an accrued final payment fee in the amount of $0.2 million relating to the original final payment fee of
$500,000. At December 31, 2014, the outstanding principal balance under the Amended Term Loan was $5.2
million and was included in our current portion of interest bearing obligations in our consolidated balance sheet
for the period ended December 31, 2014.

On February 27, 2015, XOMA entered into the Hercules Loan Agreement, under which we borrowed $20.0

million. We used a portion of the proceeds received under the Hercules Loan Agreement to repay GECC’s
outstanding balance and interest of $5.5 million.

Hercules Loan and Security Agreement

In February 2015, we entered into a Loan and Security Agreement with Hercules, (the “Hercules Loan
Agreement”) under which we borrowed $20.0 million. We used a portion of the proceeds received under the
Hercules Loan Agreement to repay the outstanding GECC Loan Agreement balance, and we plan to use the
remaining proceeds for general corporate purposes.

The interest rate under the Hercules Loan Agreement will be calculated at a rate equal to the greater of
either (i) 9.40% plus the prime rate as reported from time to time in The Wall Street Journal minus 7.25%, and
(ii) 9.40%. Payments under the Hercules Loan Agreement are interest only until one month prior to the
Amortization Date, defined as July 1, 2016 (which will be extended to October 1, 2016, if we achieve certain
clinical milestones on or before July 1, 2016). The interest only period will be followed by equal monthly
payments of principal and interest amortized over a 30 month schedule through the scheduled maturity date of
September 1, 2018 (the “Hercules Loan Maturity Date”). The entire principal balance, including a balloon
payment of principal, as applicable, will be due and payable on the Hercules Loan Maturity Date. In addition, a
final payment equal to $1,150,000 will be due on the Hercules Loan Maturity Date, or such earlier date specified
in the Hercules Loan Agreement. Our obligations under the Hercules Loan Agreement are secured by a security
interest in substantially all of our assets, other than our intellectual property.

If we prepay the loan prior to the Hercules Loan Maturity Date, we will pay Hercules a prepayment charge,
based on a prepayment fee equal to 3.00% of the amount prepaid, if the prepayment occurs in any of the first 12
months following the closing date, 2.00% of the amount prepaid, if the prepayment occurs after 12 months from
the closing date but prior to 24 months from the closing date, and 1.00% of the amount prepaid if the prepayment
occurs after 24 months from the closing date.

The Hercules Loan Agreement includes customary affirmative and restrictive covenants, but does not
include any financial maintenance covenants, and also includes standard events of default, including payment
defaults. Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to
the outstanding loan balances, and Hercules may declare all outstanding obligations immediately due and
payable and take such other actions as set forth in the Hercules Loan Agreement.

In connection with the Hercules Loan Agreement, we issued a warrant to Hercules that is exercisable for an
aggregate of up to 181,268 shares of XOMA common stock at an exercise price of $3.31 per share (the “Hercules
Warrant”). The Hercules Warrant may be exercised on a cashless basis and is exercisable for a term beginning on
the date of issuance and ending on the earlier to occur of five years from the date of issuance or the
consummation of certain acquisitions of XOMA as set forth in the Hercules Warrant. The number of shares for
which the Hercules Warrant is exercisable and the associated exercise price are subject to certain proportional
adjustments as set forth in the Hercules Warrant.

15

Research and Development

Our research and development expenses currently include costs of personnel, supplies, facilities and
equipment, consultants, third-party costs and other expenses related to preclinical and clinical testing. In 2014,
our research and development expenses were $80.7 million, compared with $74.9 million in 2013 and $68.5
million in 2012.

Our research and development activities can be divided into those related to our internal projects and those

related to collaborative and contract arrangements, which are reimbursed by our customers. In 2014, research and
development expenses relating to internal projects were $51.3 million, compared with $47.5 million in 2013 and
$30.5 million in 2012. In 2014, research and development expenses related to collaborative and contract
arrangements were $29.4 million, compared with $27.4 million in 2013 and $37.9 million in 2012. Refer to
Management’s Discussion and Analysis of Financial Condition and Results of Operations- Research and
Development Expenses for further information regarding our research and development expenses.

Competition

The biotechnology and pharmaceutical industries are subject to continuous and substantial technological
change. Competition in antibody-based technologies is intense and is expected to increase as new technologies
emerge and established biotechnology firms and large chemical and pharmaceutical companies continue to
advance in the field. A number of these large pharmaceutical and chemical companies have enhanced their
capabilities by entering into arrangements with or acquiring biotechnology companies or entering into business
combinations with other large pharmaceutical companies. Many of these companies have significantly greater
financial resources, larger research and development and marketing staffs and larger production facilities than
ours. Moreover, certain of these companies have extensive experience in undertaking preclinical testing and
human clinical trials. These factors may enable other companies to develop products and processes competitive
with or superior to ours. 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 interested in
the commercial value of their work and may become more aggressive in seeking patent protection and licensing
arrangements. Furthermore, many companies and universities tend not to announce or disclose important
discoveries or development programs until their patent position is secure or, for other reasons, later. As a result,
we may not be able to track development of competitive products, particularly at the early stages. There can be
no assurance that developments by others will not render our products or technologies obsolete or uncompetitive.

Without limiting the foregoing, we are aware of the following competitors for the products and candidates

shown in the table below. This table is not intended to be representative of all existing competitors in the market:

Product/Candidate

Gevokizumab

XOMA 3AB

Government Regulation

Competitors

AbbVie Inc.
Biovitrum AB
Allergan
Novartis AG
pSivida
Regeneron Pharmaceuticals, Inc.
Santen Pharmaceutical Co., Ltd.

Emergent BioSolutions, Inc.

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries
impose substantial requirements upon the clinical development, pre-market approval, manufacture, marketing,
import, export and distribution of biopharmaceutical products. These agencies and other regulatory agencies
regulate research and development activities and the testing, approval, manufacture, quality control, safety,

16

effectiveness, labeling, storage, recordkeeping, advertising and promotion of products and product candidates.
Failure to comply with applicable FDA or other regulatory requirements may result in Warning Letters, civil or
criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total
suspension of production or withdrawal of a product from the market. The development and approval process
requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our
product candidates will be granted on a timely basis, if at all. We must obtain approval of our product candidates
from the FDA before we can begin marketing them in the United States. Similar approvals are also required in
other countries.

Product development and approval within this regulatory framework is uncertain, can take many years and
requires the expenditure of substantial resources. The nature and extent of the governmental review process for
our product candidates will vary, depending on the regulatory categorization of particular product candidates and
various other factors.

The necessary steps before a new biopharmaceutical product may be sold in the United States ordinarily

include:

•

•

•

•

•

•

preclinical in vitro and in vivo tests, which must comply with Good Laboratory Practices (“GLP”);

submission to the FDA of an IND which must become effective before clinical trials may commence,
and which must be updated annually with a report on development;

completion of adequate and well controlled human clinical trials to establish the safety and efficacy of
the product candidate for its intended use;

submission to the FDA of a BLA, which must often be accompanied by payment of a substantial user
fee;

FDA pre-approval inspection of manufacturing facilities for current Good Manufacturing Practices, or
GMP, compliance and FDA inspection of select clinical trial sites for Good Clinical Practice (“GCP”),
compliance; and

FDA review and approval of the BLA and product prescribing information prior to any commercial
sale.

The results of preclinical tests (which include laboratory evaluation as well as preclinical GLP studies to

evaluate toxicity) for a particular product candidate, together with related manufacturing information and
analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the
conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable
health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the
clinical trial can begin. IND submissions may not result in FDA authorization to commence a clinical trial. A
separate submission to an existing IND must also be made for each successive clinical trial conducted during
product development. Further, an independent institutional review board (“IRB”), for each medical center
proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences
at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a
clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. Clinical testing also must satisfy extensive GCP regulations and regulations for
informed consent and privacy of individually identifiable information.

Clinical trials generally are conducted in three sequential phases that may overlap or in some instances, be

skipped. In Phase 1, the initial introduction of the product into humans, the product is tested to assess safety,
metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase 2 usually
involves trials in a limited patient population to evaluate the efficacy of the potential product for specific,
targeted indications, determine dosage tolerance and optimum dosage and further identify possible adverse
reactions and safety risks. Phase 3 and pivotal trials are undertaken to evaluate further clinical efficacy and safety

17

often in comparison to standard therapies within a broader patient population, generally at geographically
dispersed clinical sites. Phase 4, or post-marketing, trials may be required as a condition of commercial approval
by the FDA and may also be voluntarily initiated by us or our collaborators. Phase 1, Phase 2 or Phase 3 testing
may not be completed within any specific period of time, if at all, with respect to any of our product candidates.
Similarly, suggestions of safety, tolerability or efficacy in earlier-stage trials do not necessarily predict findings
of safety and effectiveness in subsequent trials. Furthermore, the FDA, an IRB, or we may suspend a clinical trial
at any time for various reasons, including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Clinical trials are subject to central registration and results reporting requirements, such
as on www.clinicaltrials.gov.

The results of preclinical studies, pharmaceutical development and clinical trials, together with information

on a product’s chemistry, manufacturing, and controls, are submitted to the FDA in the form of a BLA, for
approval of the manufacture, marketing and commercial shipment of the biopharmaceutical product. Data from
clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaborators
interpret data. For all compounds seeking their first marketing approval, the FDA convenes an Advisory
Committee of external advisors to answer questions regarding the compound’s approvability and what labeling
the compound should receive based upon its NDA or BLA. Approved compounds seeking to expand their label
may also be the subject of an Advisory Committee depending upon the indication. The FDA also may convene
an Advisory Committee of external advisors to answer questions regarding the approvability and labeling of an
application. The FDA is not obligated to follow the Advisory Committee’s recommendation. The submission of a
BLA is required to be accompanied by a substantial user fee, with few exceptions or waivers. The user fee is
administered under the Prescription Drug User Fee Act, which sets goals for the timeliness of the FDA’s review.
A standard review period is twelve months from submission of the application, while priority review is eight
months from submission of the application. The testing and approval process is likely to require substantial time,
effort and resources, and there can be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny review of an application by refusing to file the application or not approve an application by
issuance of a complete response letter if applicable regulatory criteria are not satisfied, require additional testing
or information, or require risk management programs and post-market testing and surveillance to monitor the
safety or efficacy of the product. Approval may occur with significant Risk Evaluation and Mitigation Strategies,
or REMS, which limit the clinical use in the prescribing information, distribution or promotion of a product.
Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety
problems occur after the product reaches the market.

Orphan drugs are those intended for use in rare diseases or conditions. As a result of the high cost of

development and the low return on investment for rare diseases, governments provide regulatory and commercial
incentives for the development of drugs for small disease populations. In the United States, the term “rare disease
or condition” means any disease or condition that affects fewer than 200,000 people in the United
States. Applications for U.S. orphan drug status are evaluated and granted by the Office of Orphan Products
Development (“OOPD”) of the FDA and must be requested before submitting a BLA. In the United States,
orphan drugs are subject to the standard regulatory process for marketing approval but are exempt from the
payment of user fees for licensure, may receive market exclusivity for a period of seven years and some tax
benefits, and are eligible for OOPD grants. If a product with orphan designation subsequently receives the first
FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan
product exclusivity, which means the FDA may not approve any other applications to market the same drug or
biological product for the same indication, except in very limited circumstances, for seven years. Competitors,
however, may receive approval of different products for the indication for which the orphan product has
exclusivity or obtain approval for the same product but for a different indication for which the orphan product
has exclusivity. Orphan product exclusivity also could block the approval of one of our products for seven years
if a competitor obtains approval of the same drug or biological product as defined by the FDA or if our product
candidate is determined to be contained within the competitor’s product for the same indication or disease. If a
drug or biological product designated as an orphan product receives marketing approval for an indication broader
than what is designated, it may not be entitled to orphan product exclusivity.

18

Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the

FDA, including manufacture, labeling, advertising, distribution, advertising, promotion, recordkeeping, annual
product quality review and reporting requirements. Adverse event experience with the product must be reported
to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events are
mandated by the FDA. Manufacturers and their subcontractors are required to register their establishments with
the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain
state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain
procedural and documentation requirements upon us and our third-party manufacturers. Following such
inspections, the FDA may issue notices on Form 483 and Warning Letters that could cause us to modify certain
activities. A Form 483 notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA
investigators believe may have violated cGMP or other FDA regulations or guidance. Failure to adequately and
promptly correct the observations(s) can result in further regulatory enforcement action. In addition to Form 483
notices and Warning Letters, failure to comply with the statutory and regulatory requirements can subject a
manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product,
injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party
manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory
requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with
these requirements, the FDA may halt our clinical trials, not approve our products, and require us to recall a
product from distribution or withdraw approval of the BLA for that product. Failure to comply with ongoing
regulatory obligations can result in delay of approval or Warning Letters, product seizures, criminal penalties,
and withdrawal of approved products, among other enforcement remedies.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the

market. These regulations include standards and restrictions for direct-to-consumer advertising, industry-
sponsored scientific and educational activities, promotional activities involving the internet, and off-label
promotion. While physicians may prescribe for off-label uses, manufacturers may only promote for the approved
indications and in accordance with the provisions of the approved label. The FDA has very broad enforcement
authority under the Federal Food, Drug, and Cosmetic Act, and failure to abide by these regulations can result in
penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards,
and state and federal civil and criminal investigations and prosecutions.

Federal and state healthcare laws, including fraud and abuse and health information privacy and security

laws, are also applicable to our business. We could face substantial penalties and our business, results of
operations, financial condition and prospects could be adversely affected. The laws that may affect our ability to
operate include: the federal Anti-Kickback Statute, which prohibits soliciting, receiving, offering or paying
remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or
service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; federal
civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third-party payers that are false or fraudulent; and the federal Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit executing a
scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters and
was amended by the Health Information Technology and Clinical Health Act (“HITECH”), and its implementing
regulations, which imposes certain requirements relating to the privacy, security and transmission of individually
identifiable health information. State law equivalents of each of the above federal laws exist, many of which
differ from each other in significant ways and may not have the same effect, thus complicating compliance
efforts.

International Regulation

In addition to regulations in the United States, we are subject to a variety of foreign regulations governing

clinical trials and commercial sales and distribution of any future products. Whether or not we obtain FDA
approval for a product, we must obtain approval by the comparable regulatory authorities of foreign countries

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before we can commence clinical trials or market the product in those countries. The approval process varies
from country to country, and the time may be longer or shorter than that required for FDA approval. The
requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly
from country to country.

Patents and Trade Secrets

Patent and trade secret protection are important to our business and our future will depend in part on our
ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights
of others. As a result of our ongoing activities, we hold and have filed applications for a number of patents in the
United States and internationally to protect our products and important processes. We also have obtained or have
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 consistent policy regarding the breadth of
allowed claims has not emerged from the actions of the U.S. Patent and Trademark Office (“Patent Office”) with
respect to biotechnology patents. Accordingly, no assurance can be given that our patents will afford protection
against competitors with similar technologies or others will not obtain patents claiming aspects similar to those
covered by our patent applications.

We have established a portfolio of patents in the United States, Europe and certain other countries for our
gevokizumab program. U.S. Patent Nos. 7,531,166 (which expires in 2027) and 7,582,742 cover gevokizumab
and other antibodies and antibody fragments with similar binding properties for IL-1 beta, as well as nucleic
acids, expression vectors and production cell lines for the manufacture of such antibodies and antibody
fragments. U.S. Patent Nos. 7,744,865, 7,744,866 and 7,943,121 relate to additional IL-1 beta binding antibodies
and binding fragments. U.S. Patent Nos. 7,695,718, 8,101,166, 8,586,036, 8,545,846 and 8,377,429 relate to
methods of treating Type 2 diabetes or Type 2 diabetes-induced diseases or conditions with high affinity
antibodies and antibody fragments that bind to IL-1 beta, including gevokizumab. U.S. Patent No. 8,637,029
relates to methods of treating gout with certain doses of IL-1 beta binding antibodies or binding fragments. U.S.
Patent No. 7,695,717 relates to methods of treating certain IL-1 related inflammatory diseases, including
rheumatoid arthritis and osteoarthritis, with gevokizumab and other antibodies and antibody fragments with
similar binding properties for IL-1 beta. U.S. Patent No. 7,829,093 relates to methods of treating diabetes
mellitus (“Type 1”) with gevokizumab or other IL-1 beta antibodies and fragments having similar binding
properties. U.S. Patent No. 7,829,094 relates to methods of treating certain cancers with gevokizumab or other
IL-1 beta antibodies and fragments having similar binding properties, with the cancer being selected from
multiple myeloma, acute myelogenous leukemia and chronic myelogenous leukemia. U.S. Patent No. 7,988,968
relates to methods of treating certain IL-1 beta related coronary conditions, including myocardial infarction, with
gevokizumab or other IL-1 beta antibodies and fragments having similar binding properties. U.S. Patent
No. 8,377,442 relates to methods of treating certain IL-1 beta related conditions, including inflammatory eye
disease or uveitis, with gevokizumab or other IL-1 beta antibodies and fragments having similar binding
properties. U.S. Patent No. 8,551,487 relates to methods of treating refractory uveitis with IL-1 beta binding
antibodies and binding fragments. Also, patents have been granted by the European Patent Office and certain
other countries for gevokizumab, as well as nucleic acids, expression vectors and production cell lines for the
manufacture of gevokizumab.

On January 6, 2015 we were awarded U.S. Patent No. 8,926,976 covering insulin receptor-activating

antibodies having the functional properties of the lead antibody in our XMetA program. Patent applications
covering our other XMet programs are pending in the U.S. and certain other countries.

We have exclusively in-licensed a portfolio of patents and applications covering anti-botulinum toxin

antibodies from the Regents of the University of California. These include U.S. Patent Nos. 7,700,738,
7,999,079, and 8,263,747 covering certain XOMA 3AB antibodies, the longest of which expire in 2026, and U.S.
Patent No. 8,598,321 covering a XOMA 3B antibody. In September 2014, we were awarded U.S. Patent
No. 8,821,879 covering stable pharmaceutical formulations of certain anti-botulinum toxin antibodies.

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We have established a portfolio of patents related to our bacterial expression technology, including claims to

methods for expression and secretion of recombinant proteins from bacteria, including immunoglobulin gene
products, and improved methods and cells for expression of recombinant protein products. U.S. Patent
No. 5,618,920 relates to secretable immunoglobulin chains, DNA encoding the chains and methods for their
recombinant production. U.S. Patent Nos. 5,693,493, 5,698,417 and 6,204,023 relate to methods for recombinant
production/secretion of functional immunoglobulin molecules. U.S. Patent Nos. 7,094,579, 7,396,661, 7,972,811,
7,977,068 and 8,476,040 relate to particular eukaryotic signal sequences and their use in methods for prokaryotic
expression of polypeptides and for preparing polypeptide display libraries. U.S. Patent Nos. 8,546,307 and
8,546,308 relate to novel triple tag sequences, phage display antibody libraries with such sequences, and methods of
screening the libraries. U.S. Patent No. 6,803,210 relates to improved bacterial host cells that are deficient in one or
more of the active transport systems for an inducer of an inducible promoter, such as arabinose for an araB
promoter, and methods for the use of such cells for the production of recombinant proteins. Most of the more
important licensed European patents in this portfolio expired in July 2008 or earlier. The last of the more important
licensed United States patents in this portfolio expired in December 2014. We have granted more than 60 licenses to
biotechnology and pharmaceutical companies to use the Company’s patented and proprietary technologies relating
to bacterial expression of recombinant pharmaceutical products. The last-to-expire patent licensed under the
majority of these license agreements is Canadian patent 1,341,235, which is expected to expire in May 2018.

We also have established a portfolio of patents related to our mammalian expression technology, including

U.S. Patent Nos. 7,192,737, 7,993,915 and 7,794,976, which relate to methods of producing recombinant proteins
using particular vectors, including expression vectors comprising multiple copies of a transcription unit encoding
a polypeptide separated by at least one selective marker gene.

We have established a portfolio of patents related to our Human Engineering™ technology, including U.S.

Patent No. 5,766,886, directed to methods of modifying antibody variable domains to reduce immunogenicity.
We believe our patented Human Engineering™ technology provides an attractive alternative to other
humanization technologies.

In November 2013, we were awarded U.S. Patent No. 8,584,349, entitled “Flexible Manufacturing System.”
This patent is directed to a flexible system of movable manufacturing bays, adapted to easily and quickly connect
to a central supply of utilities such as air, water, and electricity. This unique arrangement facilitates flexible
design and eliminates change-over downtime, which translates into significantly reduced capital expenditures,
production costs, and maintenance costs. The flexible manufacturing system can be applied to fields as diverse as
pharmaceuticals, biologics, and electronics. In October 2014 we announced that the Texas A&M University
System agreed to a non-exclusive license to this technology.

If certain patents issued to others are upheld or if certain patent applications filed by others issue and are

upheld, we may require certain licenses from others in order to develop and commercialize certain potential
products incorporating our technology. There can be no assurance that such licenses, if required, will be available
on acceptable terms.

Where appropriate, we also rely on trade secrets to protect aspects of our technology. However, trade secrets

are difficult to protect. We protect our proprietary technology and processes, in part, by confidentiality
agreements with our employees, consultants and collaborators. These parties may breach these agreements, and
we may not have adequate remedies for any breach. Our trade secrets may otherwise become known or be
independently discovered by competitors. To the extent that we or our consultants or collaborators use
intellectual property owned by others, we may have disputes with our collaborators or consultants or other third
parties as to the rights in related or resulting know-how and inventions.

Financial Information about Geographic Areas

We believe, because the pharmaceutical industry is global in nature, international activities will be a

significant part of our future business activities, and when and if we are able to generate income, a portion of that

21

income may be derived from product sales and other activities outside the United States. As one of our
immediate strategic goals is to establish XOMA as a commercial organization in the United States, we will rely
upon other companies to market our product outside of the United States for the foreseeable future. Our decision
to retain the U.S. commercial rights to our product candidates while licensing the rights to our product candidates
outside the United States, or to license our product candidates globally to one or more partners, depends upon a
number of factors, including the primary indication and size of the potential patient population, the size of the
clinical trials required to obtain marketing approval in the United States and globally, and the size of the sales
force required to sell the product.

We have determined that we operate in one business segment as we only report operating results on an

aggregate basis to the chief operating decision maker of the XOMA. Our property and equipment is held
primarily in the United States.

Financial information regarding the geographic areas in which we operate and segment information is
included in Note 12 to the December 31, 2014, Financial Statements: Concentration of Risk, Segment and
Geographic Information.

Concentration of Risk

In 2014, NIAID and Servier accounted for 51 percent and 28 percent, respectively, of our total revenue.

Servier, NIAID and Novartis accounted for 43 percent, 26 percent, and 20 percent respectively, of our total
revenue in 2013. Servier and NIAID accounted for 47 percent and 33 percent, respectively, in 2012. At
December 31, 2014, NIAID and Servier accounted for 44 percent and 34 percent, respectively, of the accounts
receivable balance. Servier and NIAID accounted for 13 percent and 73 percent, respectively, of our total
accounts receivable balance in 2013 and 58 percent and 35 percent, respectively, at the same period of
2012. None of these parties represent a related party to XOMA and the loss of one or more of these customers
could have a material effect on our business and financial condition.

Organization

We were incorporated in Delaware in 1981 and became a Bermuda-exempted company in December
1998. Effective December 31, 2011, we changed our jurisdiction of incorporation from Bermuda to Delaware
and changed our name from XOMA Ltd. to XOMA Corporation. When referring to a time or period before
December 31, 1998, or when the context so requires, the terms “Company” and “XOMA” refer to XOMA
Corporation, a Delaware corporation, and when referring to a time or period after December 31, 1998, and before
December 31, 2011, such terms refer to XOMA Ltd., a Bermuda company.

Employees

As of March 9, 2015, we employed 183 full-time employees at our facilities, principally in Berkeley,
California, none of whom are unionized. Our employees primarily are engaged in clinical, process development,
research and product development, and in executive, business development, finance and administrative
positions. We consider our employee relations to be excellent.

Available Information

For information on XOMA’s investment prospects and risks, please contact Investor Relations and

Corporate Communications at (510) 204-7200 or by sending an e-mail message to investorrelations@xoma.com.
Our principal executive offices are located at 2910 Seventh Street, Berkeley, California 94710, U.S.A. Our
telephone number is (510) 204-7200.

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The following information can be found on our website at http://www.xoma.com or can be obtained free of

charge by contacting our Investor Relations Department:

•

•

•

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act will be available as soon as reasonably practicable after such material is electronically filed or
otherwise furnished to the SEC. All reports we file with the SEC also can be obtained free of charge
via EDGAR through the SEC’s website at http://www.sec.gov.

Our policies related to corporate governance, including our Code of Ethics applying to our directors,
officers and employees (including our principal executive officer and principal financial and
accounting officer) that we have adopted to meet the requirements set forth in the rules and regulations
of the SEC and its corporate governance principles, are available.

The charters of the Audit, Compensation and Nominating & Governance Committees of our Board of
Directors are available.

We intend to satisfy the applicable disclosure requirements regarding amendments to, or waivers from,

provisions of our Code of Ethics by posting such information on our website.

Item 1A. Risk Factors

The following risk factors and other information included in this annual report should be carefully
considered. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us also may impair our business operations. If any of the following risks
occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Because our product candidates are still being developed, we will require substantial funds to continue; we
cannot be certain that funds will be available, and if they are not available, we may be forced to delay,
reduce, or eliminate our product development programs or to take actions that could adversely affect your
investment and may not be able to continue operations.

We will need to commit substantial funds to continue development of our product candidates, and we may
not be able to obtain sufficient funds on acceptable terms, or at all. If we raise additional funds by issuing equity
securities, our stockholders will experience dilution. Any debt financing or additional equity that we raise may
contain terms that are not favorable to our stockholders or us. If we raise additional funds through collaboration
and licensing arrangements with third parties, we may be required to relinquish some rights to our technologies
or our product candidates, grant licenses on terms that are not favorable to us or enter into a collaboration
arrangement for a product candidate at an earlier stage of development or for a lesser amount than we might
otherwise choose.

Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If

adequate funds are not available on a timely basis, we may:

•

•

•

terminate or delay clinical trials for one or more of our product candidates; reduce or eliminate certain
product development efforts or commercialization efforts;

further reduce our headcount and capital or operating expenditures; or

curtail our spending on protecting our intellectual property.

We finance our operations primarily through our multiple revenue streams resulting from discovery and

development collaborations, biodefense contracts, the licensing of our antibody technologies, debt and through
sales of our common stock.

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Based on our cash and cash equivalents of $78.4 million at December 31, 2014, anticipated spending levels,
anticipated cash inflows from collaborations, biodefense contracts and licensing transactions, funding availability
included under our loan agreements, the proceeds from our equity offerings and other sources of funding that we
believe to be available, we anticipate that we will be required to seek additional equity or debt financing or to
increase the level or collaborative revenue to fund operations through at least December 31, 2015. Any
significant revenue shortfalls, increases in planned spending on development programs, more rapid progress of
development programs than anticipated, or the initiation of new clinical trials, as well as the unavailability of
anticipated sources of funding, could shorten this period or otherwise have a material adverse impact on our
ability to finance our continued operations. Progress or setbacks by potentially competing products also may
affect our ability to raise new funding on acceptable terms.

We do not know when or whether:

•

•

•

•

operations will generate meaningful funds;

additional agreements for product development funding can be reached;

strategic alliances can be negotiated; or

adequate additional financing will be available for us to finance our own development on acceptable
terms, or at all.

If adequate funds are not available, we will be required to delay, reduce the scope of, or eliminate one or

more of our product development programs and further reduce personnel-related costs.

We have sustained losses in the past, and we expect to sustain losses in the future.

We have been and are developing numerous product candidates, and as a result have experienced significant

losses. As of December 31, 2014, we had an accumulated deficit of $1.1 billion.

For the year ended December 31, 2014, we had a net loss of approximately $38.3 million, or $0.36 per share

of common stock, basic and $0.67 per share of common stock, diluted. For the year ended December 31, 2013,
we had a net loss of approximately $124.1 million, or $1.43 per share of common stock (basic and diluted).

Our ability to achieve profitability is dependent in large part on the success of our development programs,
obtaining regulatory approval for our product candidates and licensing certain of our preclinical compounds, all
of which are uncertain. Our product candidates are still being developed, and we do not know whether we will
ever achieve sustained profitability or whether cash flow from future operations will be sufficient to meet our
needs.

We are substantially dependent on Servier for the development and commercialization of gevokizumab
and for other aspects of our business, and if we are unable to maintain our relationship with Servier, or
Servier does not perform under its agreements with us, our business would be harmed significantly.

We have a number of agreements with Servier that are material to the conduct of our business, including:

•

In December 2010, we entered into a license and collaboration agreement with Servier, to jointly
develop and commercialize gevokizumab in multiple indications. Under the terms of the agreement,
Servier has worldwide rights to cardiovascular disease and diabetes indications and rights outside the
United States and Japan to all other indications, including Behçet’s disease uveitis and other
inflammatory and oncology indications. In late 2011, we announced Servier agreed to include the NIU
Phase 3 trials under the terms of the collaboration agreement for Behçet’s disease uveitis. We retain
development and commercialization rights for NIU and other inflammatory disease and oncology
indications in the United States and Japan and have an option to reacquire rights to cardiovascular
disease and diabetes indications from Servier in these territories. Should we exercise this option, we

24

will be required to pay an option fee to Servier and partially reimburse a specified portion of Servier’s
incurred development expenses. The agreement contains mutual customary termination rights relating
to matters such as material breach by either party. Servier may terminate for safety issues, and we may
terminate the agreement, with respect to a particular country or the European Patent Organization
(“EPO”) member states, for any challenge to our patent rights in that country or any EPO member
state, respectively, by Servier. Servier also has a unilateral right to terminate the agreement for the
European Union (“EU”) or for non-EU countries, on a country-by-country basis, or in its entirety, in
each case with six months’ notice.

•

In December 2010, we entered into a loan agreement with Servier (the “Servier Loan Agreement”),
which provides for an advance of up to €15.0 million and was funded fully in January 2011 with the
proceeds converting to approximately $19.5 million at the January 13, 2011, Euro-to-U.S.-dollar
exchange rate of 1.3020. This loan is secured by an interest in our intellectual property rights to all
gevokizumab indications worldwide, excluding the United States and Japan. The loan has a final
maturity date in 2016; however, after a specified period prior to final maturity, the loan is required to
be repaid (1) at Servier’s option, by applying up to a significant percentage of any milestone or royalty
payments owed by Servier under our collaboration agreement and (2) using a significant percentage of
any upfront, milestone or royalty payments we receive from any third-party collaboration or
development partner for rights to gevokizumab in the United States and/or Japan. In addition, the loan
becomes immediately due and payable upon certain customary events of default. At December 31,
2014, the €15.0 million outstanding principal balance under this Servier Loan Agreement would have
equaled approximately $18.2 million using the December 31, 2014 Euro-to-U.S.-dollar exchange rate
of 1.216.

On January 9, 2015, Servier and we entered into Amendment No. 2 (“Loan Amendment”). The Servier Loan

Agreement was initially entered into on December 30, 2010 and subsequently amended by a Consent, Transfer,
Assumption and Amendment Agreement entered into as of August 12, 2013. The Loan Amendment modifies the
maturity date of the loan from January 13, 2016 to three tranches due on January 15, 2016, January 15, 2017 and
January 15, 2018 and provides that principal shall be repaid as follows: €3.0 million to be repaid on January 13,
2016, €5.0 million to be repaid on January 15, 2017 and €7.0 million to be repaid on January 15, 2018. All other
terms of the Loan Agreement remain unchanged, including the interest rate calculations, EURIBOR+2% and the
formula for resetting the interest rate on the 15th of January and 15th of July every six months.

On January 9, 2015, Servier and we entered into an Amendment No. 2 to the Collaboration Agreement

Under the Collaboration Agreement we were eligible to receive up to approximately $433 million in the
aggregate in milestone payments, most of which were denominated in Euros, if we re-acquire cardiovascular and/
or diabetes rights for use in the United States, and approximately $770 million in aggregate milestone payments
if we do not re-acquire those rights. Under the Collaboration Amendment, we would be eligible to receive up to
$415 million in the aggregate in milestone payments in the event we re-acquire the cardiovascular and/or
diabetes rights for use in the United States and approximately $752 million if we do not re-acquire those rights.
The milestone reductions are related to a very low prevalence indication of which Servier would not have
pursued development had these payments been required. All other terms of the Collaboration Agreement remain
unchanged.

Because Servier is an independent third party, it may be subject to different risks than we are and has
significant discretion in, and different criteria for, determining the efforts and resources it will apply related to its
agreements with us. Even though we have a collaborative relationship with Servier, our relationship could
deteriorate or other circumstances may prevent our relationship with Servier from resulting in successful
development of marketable products. If we are not able to maintain our working relationship with Servier, or if
Servier does not perform under its agreements with us, our ability to develop and commercialize gevokizumab
would be materially and adversely affected.

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If our therapeutic product candidates do not receive regulatory approval, neither our third-party
collaborators nor we will be able to market them.

Our product candidates (including gevokizumab, XMetA, XMetS, XOMA 358 and XOMA 3AB) cannot be

manufactured and marketed in the United States or any other countries without required regulatory approvals.
The U.S. government and governments of other countries extensively regulate many aspects of our product
candidates, including:

•

•

•

•

•

•

•

clinical development and testing;

manufacturing;

labeling;

storage;

record keeping;

promotion and marketing; and

importing and exporting.

In the United States, the FDA regulates pharmaceutical products under the Federal Food, Drug, and
Cosmetic Act and other laws, including, in the case of biologics, the Public Health Service Act. At the present
time, we believe many of our product candidates (including gevokizumab, XMetA, XMetD, XMetS and XOMA
3AB) will be regulated by the FDA as biologics. Initiation of clinical trials requires approval by health
authorities. Clinical trials involve the administration of the investigational new drug to healthy volunteers or to
patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in
accordance with FDA and International Conference on Harmonization of Technical Requirements for
Registration of Pharmaceuticals for Human Use Good Clinical Practices and the European Clinical Trials
Directive under protocols that detail the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Other national, foreign and local regulations also may apply. The developer
of the drug must provide information relating to the characterization and controls of the product before
administration to the patients participating in the clinical trials. This requires developing approved assays of the
product to test before administration to the patient and during the conduct of the trial. In addition, developers of
pharmaceutical products must provide periodic data regarding clinical trials to the FDA and other health
authorities, and these health authorities may issue a clinical hold upon a trial if they do not believe, or cannot
confirm, that the trial can be conducted without unreasonable risk to the trial participants. We cannot assure you
that U.S. and foreign health authorities will not issue a clinical hold with respect to any of our clinical trials in the
future.

The results of the preclinical studies and clinical testing, together with chemistry, manufacturing and
controls information, are submitted to the FDA and other health authorities in the form of an NDA for a drug,
and in the form of a Biologic License Application (“BLA”) for a biological product, requesting approval to
commence commercial sales. In responding to an NDA or BLA, the FDA or foreign health authorities may grant
marketing approvals, request additional information or further research, or deny the application if it determines
the application does not satisfy its regulatory approval criteria. Regulatory approval of an NDA, BLA, or
supplement never is guaranteed, the approval process can take several years, is extremely expensive and can vary
substantially based upon the type, complexity, and novelty of the products involved, as well as the target
indications. FDA regulations and policies permit applicants to request accelerated or priority review pathways for
products intended to treat certain serious or life-threatening illnesses in certain circumstances. If granted by the
FDA, these review pathways can provide a shortened timeline to commercialize the product, although the
shortened review timeline is often accompanied with additional post-market requirements. Although we may
pursue the FDA’s accelerated or priority review programs, we cannot guarantee the FDA will permit us to utilize
these pathways or the FDA’s review of our application will not be delayed. Moreover, even if the FDA agrees to
an accelerated or priority review of any of our applications, we ultimately may not be able to obtain approval of
our application in a timely fashion or at all. The FDA and foreign health authorities have substantial discretion in

26

the drug and biologics approval processes. Despite the time and expense incurred, failure can occur at any stage,
and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional
preclinical, clinical or manufacturing-related studies.

Changes in the regulatory approval policy during the development period, changes in, or the enactment of
additional regulations or statutes, or changes in regulatory review for each submitted product application may
cause delays in the approval or rejection of an application. State regulations may also affect our proposed
products.

The FDA and other regulatory agencies have substantial discretion in both the product approval process and

manufacturing facility approval process, and as a result of this discretion and uncertainties about outcomes of
testing, we cannot predict at what point, or whether, the FDA or other regulatory agencies will be satisfied with
our or our collaborators’ submissions or whether the FDA or other regulatory agencies will raise questions that
may be material and delay or preclude product approval or manufacturing facility approval. In light of this
discretion and the complexities of the scientific, medical and regulatory environment, our interpretation or
understanding of the FDA’s or other regulatory agencies’ requirements, guidelines or expectations may prove
incorrect, which also could delay further or increase the cost of the approval process. As we accumulate
additional clinical data, we will submit it to the FDA and other regulatory agencies, as appropriate, and such data
may have a material impact on the approval process.

Given that regulatory review is an interactive and continuous process, we maintain a policy of limiting
announcements and comments upon the specific details of regulatory review of our product candidates, subject to
our obligations under the securities laws, until definitive action is taken.

We have received negative results from certain of our clinical trials, and we face uncertain results of other
clinical trials of our product candidates.

Drug development has inherent risk, and we are required to demonstrate through adequate and well-
controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile for use in
their target profiles before we can seek regulatory approvals for their commercial use. It is possible we may
never receive regulatory approval for any of our product candidates. Even if a product candidate receives
regulatory approval, the resulting product may not gain market acceptance among physicians, patients, healthcare
payors and the medical community. In March 2011, we announced our 421-patient Phase 2b trial of
gevokizumab in Type 2 diabetes did not achieve the primary endpoint of reduction in hemoglobin A1c
(“HbA1c”) after six monthly treatments with gevokizumab compared to placebo. In June 2011, we announced
top-line trial results from our six-month 74-patient Phase 2a trial of gevokizumab in Type 2 diabetes, and there
were no differences in glycemic control between the drug and placebo groups as measured by HbA1c levels. In
March 2014, we reported that despite early positive results in our gevokizumab proof-of-concept study in
patients with erosive osteoarthritis of the hand (“EOA”) and elevated C-reactive protein, the top-line data at Day
168 in that study, as well as data at Day 84 in patients with EOA and non-elevated CRP, were not positive.

Many of our product candidates, including gevokizumab, XMetA, XMetS, XOMA 358 and XOMA 3AB,

require significant additional research and development, extensive preclinical studies and clinical trials and
regulatory approval prior to any commercial sales. This process is lengthy and expensive, often taking a number
of years. As clinical results frequently are susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals, the length of time necessary to complete clinical trials and to submit an application for
marketing approval for a final decision by a regulatory authority varies significantly. As a result, it is uncertain
whether:

•

•

•

our future filings will be delayed;

our preclinical and clinical studies will be successful;

we will be successful in generating viable product candidates to targets;

27

•

•

•

we will be able to provide necessary additional data;

results of future clinical trials will justify further development; or

we ultimately will achieve regulatory approval for any of these product candidates.

The timing of the commencement, continuation and completion of clinical trials may be subject to

significant delays relating to various causes, including completion of preclinical testing and earlier-stage clinical
trials in a timely manner, engaging contract research organizations and other service providers, scheduling
conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients
who meet trial eligibility criteria and shortages of available drug supply. Patient enrollment is a function of many
factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility
criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments.
Regardless of the initial size or relative complexity of a clinical trial, the costs of such trial may be higher than
expected due to increases in duration or size of the trial, changes in the protocol pursuant to which the trial is
being conducted, additional or special requirements of one or more of the healthcare centers where the trial is
being conducted, or changes in the regulatory requirements applicable to the trial or in the standards or guidelines
for approval of the product candidate being tested or for other unforeseen reasons. In addition, we conduct
clinical trials in foreign countries, which may subject us to further delays and expenses as a result of increased
drug shipment costs, additional regulatory requirements and the engagement of foreign clinical research
organizations, as well as expose us to risks associated with foreign currency transactions insofar as we might
desire to use U.S. Dollars to make contract payments denominated in the foreign currency where the trial is being
conducted.

All of our product candidates are prone to the risks of failure inherent in drug development. Preclinical
studies may not yield results that satisfactorily support the filing of an Investigational New Drug application
(“IND”) (or a foreign equivalent) with respect to our product candidates. Even if these applications would be or
have been filed with respect to our product candidates, the results of preclinical studies do not necessarily predict
the results of clinical trials. Similarly, early stage clinical trials in healthy volunteers do not predict the results of
later-stage clinical trials, including the safety and efficacy profiles of any particular product candidates. In
addition, there can be no assurance the design of our clinical trials is focused on appropriate indications, patient
populations, dosing regimens or other variables that will result in obtaining the desired efficacy data to support
regulatory approval to commercialize the drug. Moreover, FDA officials or foreign regulatory agency officials
may question the integrity of our data or otherwise subject our clinical trials to additional scrutiny when the
clinical trials are conducted by principal investigators who serve, or previously served, as scientific advisors or
consultants to us and receive cash compensation in connection with such services. Preclinical and clinical data
can also be interpreted in different ways. Accordingly, FDA officials or officials from foreign regulatory
authorities could interpret the data differently than we or our collaboration or development partners do, which
could delay, limit or prevent regulatory approval.

Administering any of our products or potential products may produce undesirable side effects, also known

as adverse effects. Toxicities and adverse effects that we have observed in preclinical studies for some
compounds in a particular research and development program may occur in preclinical studies or clinical trials of
other compounds from the same program. Such toxicities or adverse effects could delay or prevent the filing of
an IND (or a foreign equivalent) with respect to such products or potential products or cause us to cease clinical
trials with respect to any drug candidate. In clinical trials, administering any of our products or product
candidates to humans may produce adverse effects. These adverse effects could interrupt, delay or halt clinical
trials of our products and product candidates and could result in the FDA or other regulatory authorities denying
approval of our products or product candidates for any or all targeted indications. The FDA, other regulatory
authorities, our collaboration or development partners or we may suspend or terminate clinical trials at any time.
Even if one or more of our product candidates were approved for sale, the occurrence of even a limited number
of toxicities or adverse effects when used in large populations may cause the FDA or other regulatory authorities
to impose restrictions on, or stop, the further marketing of such drugs. Indications of potential adverse effects or

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toxicities that may occur in clinical trials and that we believe are not significant during the course of such clinical
trials may actually turn out later to constitute serious adverse effects or toxicities when a drug has been used in
large populations or for extended periods of time. Any failure or significant delay in completing preclinical
studies or clinical trials for our product candidates, or in receiving and maintaining regulatory approval for the
sale of any drugs resulting from our product candidates, may severely harm our reputation and business.

We rely on third parties to provide services in connection with our product candidate development and
manufacturing programs. The inadequate performance by or loss of any of these service providers could
affect our product candidate development.

Several third parties provide services in connection with our preclinical and clinical development programs,

including in vitro and in vivo studies, assay and reagent development, immunohistochemistry, toxicology,
pharmacokinetics, clinical trial support, manufacturing and other outsourced activities. If these service providers
do not adequately perform the services for which we have contracted or cease to continue operations and we are
not able to find a replacement provider quickly or we lose information or items associated with our product
candidates, our development programs may be delayed.

We may not obtain orphan drug exclusivity, or we may not receive the full benefit of orphan drug
exclusivity even if we obtain such exclusivity.

The FDA has awarded orphan drug status to gevokizumab for the treatment of non-infectious, intermediate,

posterior or pan uveitis, chronic non-infectious anterior uveitis, pyoderma gangrenosum and Behçet’s uveitis.
Under the Orphan Drug Act, the first company to receive FDA approval for another drug for the designated
orphan drug indication will obtain seven years of marketing exclusivity, during which time the FDA may not
approve another company’s application for the same orphan indication unless the FDA concludes that the later
drug is safer, more effective or makes a major contribution to patient care. Even though we have obtained orphan
drug designation for certain indications for gevokizumab and even if we obtain orphan drug designation for our
future product candidates or other indications, due to the uncertainties associated with developing pharmaceutical
products, we may not be the first to obtain marketing approval for any particular orphan indication, or we may
not obtain approval for an indication for which we have obtained orphan drug designation. Further, even if we
obtain orphan drug exclusivity for a product, that exclusivity may not protect the product effectively from
competition because different drugs can be approved for the same condition. Even after an orphan drug is
approved, the FDA can subsequently approve the same drug for another condition if the FDA concludes that the
later drug is safer, more effective or makes a major contribution to patient care. Orphan drug designation neither
shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the
regulatory review or approval process.

Even after FDA approval, a product may be subject to additional testing or significant marketing
restrictions, its approval may be withdrawn or it may be removed voluntarily from the market.

Even if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory

oversight and review by the FDA and other regulatory entities. The FDA, the European Medicines Agency
(“EMA”) or another regulatory agency may impose, as a condition of the approval, ongoing requirements for
post-approval studies or post-approval obligations, including additional research and development and clinical
trials, and the FDA, EMA or other regulatory agency subsequently may withdraw approval based on these
additional trials.

Even for approved products, the FDA, EMA or other regulatory agency may impose significant restrictions
on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such
product. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-
keeping for our products are subject to extensive regulatory requirements.

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Furthermore, a marketing approval of a product may be withdrawn by the FDA, the EMA or another
regulatory agency or such a product may be withdrawn voluntarily by the company marketing it based, for
example, on subsequently arising safety concerns. The FDA, EMA and other agencies also may impose various
civil or criminal sanctions for failure to comply with regulatory requirements, including withdrawal of product
approval.

We may issue additional equity securities and thereby materially and adversely affect the price of our
common stock.

We are authorized to issue, without stockholder approval, 1,000,000 shares of preferred stock, of which
none were issued and outstanding as of March 9, 2015, which may give other stockholders dividend, conversion,
voting, and liquidation rights, among other rights, which may be superior to the rights of holders of our common
stock. In addition, we are authorized to issue, generally without stockholder approval, up to 277,333,332 shares
of common stock, of which 116,185,969 were issued and outstanding as of March 9, 2015. If we issue additional
equity securities, the price of our common stock may be materially and adversely affected.

As part of our fundraising efforts, we offer securities through underwritten public offerings from time to

time. In 2013, we completed two such offerings, one in August 2013 where we sold 8,736,187 shares of our
common stock at a public offering price of $3.62 per share and the other in December 2013, where we sold
10,925,000 shares of our common stock at a public offering price of $5.25 per share. In 2014, we completed a
registered direct offering where we sold 8,097,165 shares of our common stock at an offering price of $4.94 per
share.

In addition, funding from collaboration partners and others has in the past and may in the future involve

issuance by us of our common stock. We cannot be certain how the purchase price of such shares, the relevant
market price or premium, if any, will be determined or when such determinations will be made.

Any issuance by us of equity securities, whether through an underwritten public offering, an at the market

offering, a private placement, in connection with a collaboration or otherwise could result in dilution in the value
of our issued and outstanding shares, and a decrease in the trading price of our common stock.

Our share price may be volatile and there may not be an active trading market for our common stock.

There can be no assurance the market price of our common stock will not decline below its present market

price or there will be an active trading market for our common stock. The market prices of biotechnology
companies have been and are likely to continue to be highly volatile. Fluctuations in our operating results and
general market conditions for biotechnology stocks could have a significant impact on the volatility of our
common stock price. We have experienced significant volatility in the price of our common stock. From
January 1, 2014, through March 9, 2015, the share price of our common stock has ranged from a high of $9.57 to
a low of $3.22. Factors contributing to such volatility include, but are not limited to:

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results of preclinical studies and clinical trials;

information relating to the safety or efficacy of products or product candidates;

developments regarding regulatory filings;

announcements of new collaborations;

failure to enter into collaborations;

developments in existing collaborations;

our funding requirements and the terms of our financing arrangements;

technological innovations or new indications for our therapeutic products and product candidates;

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introduction of new products or technologies by us or our competitors;

sales and estimated or forecasted sales of products for which we receive royalties, if any;

government regulations;

developments in patent or other proprietary rights;

the number of shares issued and outstanding;

the number of shares trading on an average trading day;

announcements regarding other participants in the biotechnology and pharmaceutical industries; and

• market speculation regarding any of the foregoing.

As a public company in the United States, we are subject to the Sarbanes-Oxley Act. We have determined
our disclosure controls and procedures and our internal control over financial reporting are effective. We
can provide no assurance that we will, at all times, in the future be able to report that our internal controls
over financial reporting are effective.

Companies that file reports with the Securities and Exchange Commission, or the SEC, including us, are
subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management
to establish and maintain a system of internal control over financial reporting, and annual reports on Form 10-K
filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, must contain a report from
management assessing the effectiveness of our internal control over financial reporting. Ensuring we have
adequate internal financial and accounting controls and procedures in place to produce accurate financial
statements on a timely basis is a time-consuming effort that needs to be re-evaluated frequently. Failure on our
part to have effective internal financial and accounting controls would cause our financial reporting to be
unreliable, could have a material adverse effect on our business, operating results, and financial condition, and
could cause the trading price of our common stock to fall.

We disclosed in our Quarterly Reports on Form 10-Q/A and 10-Q for the quarters ended March 31, 2014,
June 30, 2014 and September 30, 2014, that we had identified a material weakness in our internal control over
financial reporting such that our disclosure controls and procedures related to the calculation and disclosure of
diluted earnings (loss) per share as it applies to our March 2012 warrants were not effective. During 2014, we
implemented improvements in our internal controls over financial reporting to address the material weakness
described above, including performing a more effective quarterly review of our diluted earnings (loss) per share
calculation. Our remediation efforts, including the testing of these controls continued throughout 2014. This
material weakness was considered remediated in the fourth quarter of 2014, once these controls were shown to be
operational for a sufficient period of time to allow management to conclude that these controls were operating
effectively.

We are subject to various state and federal healthcare related laws and regulations that may impact the
commercialization of our product candidates or could subject us to significant fines and penalties.

Our operations may be directly or indirectly subject to various state and federal healthcare laws, including,
without limitation, the federal Anti-Kickback Statute, the federal False Claims Act and state and federal privacy
and security laws. These laws may impact, among other things, the commercial operations for any of our product
candidates that may be approved for commercial sale.

The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an
individual, or the furnishing or arranging for a good or service for which payment may be made under a federal
healthcare program, such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s
intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce

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referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad
and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry.
Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as
fines, penalties, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare
programs.

The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim
to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the
False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and
such individuals, commonly known as “whistleblowers”, may share in any amounts paid by the entity to the
government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical
device and other healthcare companies to have to defend a False Claims Act action. When an entity is determined
to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained
by the government, plus civil penalties for each separate false claim. Various states also have enacted laws
modeled after the federal False Claims Act.

The Federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), created new federal
criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false
statements relating to healthcare matters. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including private payors. The false statements
statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care
benefits, items or services. HIPAA, as amended by the Health Information Technology and Clinical Health Act
(“HITECH”), and its implementing regulations, also impose certain requirements relating to the privacy, security
and transmission of individually identifiable health information. We take our obligation to maintain our
compliance with these various laws and regulations seriously.

In addition, there has been a recent trend of increased federal and state regulation of payments made to
physicians. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, (collectively, “PPACA”), among other things, imposed new requirements on
manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare,
Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers
for Medicare & Medicaid Services (“CMS”), information related to payments or other “transfers of value” made
to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching
hospitals, and applicable manufacturers and group purchasing organizations to report annually to CMS
ownership and investment interests held by physicians (as defined above) and their immediate family members
and payments or other “transfers of value” to such physician owners and their immediate family members.
Manufacturers were required to begin data collection on August 1, 2013, and were required to report such data to
the government by March 31, 2014, and will be by the 90th calendar day of each year thereafter. Failure to submit
required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to
an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or
investment interests not reported in an annual submission.

Many states also have adopted laws similar to each of the federal laws described above, some of which
apply to healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
In addition, some states have laws that require pharmaceutical companies to comply with the pharmaceutical
industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal
government, or otherwise restrict payments that may be made to healthcare providers and other potential referral
sources, and to report information related to payments and other transfers of value to physicians and other
healthcare providers; and state laws governing the privacy and security of health information in certain
circumstances, many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts.

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Because of the breadth of these laws, it is possible that some of our business activities could be subject to

challenge under one or more of such laws. The PPACA also make several important changes to the federal Anti-
Kickback Statute, false claims laws, and health care fraud statute by weakening the intent requirement under the
anti-kickback and health care fraud statutes that may make it easier for the government, or whistleblowers to
charge such fraud and abuse violations. A person or entity no longer needs to have actual knowledge of this
statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a
claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a
false or fraudulent claim for purposes of the false claims statutes.

If we are found to be in violation of any of the laws and regulations described above or other applicable
state and federal healthcare laws, we may be subject to penalties, including civil and criminal penalties, damages,
fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our
operations, any of which could have a material adverse effect on our business and results of operations.

Certain of our technologies are in-licensed from third parties, so our capabilities using them are restricted
and subject to additional risks.

We license technologies from third parties. These technologies include but are not limited to phage display

technologies licensed to us in connection with our bacterial cell expression technology licensing program and
antibody products. However, our use of these technologies is limited by certain contractual provisions in the
licenses relating to them, and although we have obtained numerous licenses, intellectual property rights in the
area of phage display are particularly complex. If the owners of the patent rights underlying the technologies that
we license do not properly maintain or enforce those patents, our competitive position and business prospects
could be harmed. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce
our in-licensed intellectual property. Our licensors may not be successful in prosecuting the patent applications to
which we have licenses, or our licensors may fail to maintain existing patents. They may determine not to pursue
litigation against other companies that are infringing these patents, or they may pursue such litigation less
aggressively than we would. Our licensors also may seek to terminate our license, which could cause us to lose
the right to use the licensed intellectual property and adversely affect our ability to commercialize our
technologies, products or services.

We do not know whether there will be, or will continue to be, a viable market for the products in which we
have an ownership or royalty interest.

Even if products in which we have an interest receive approval in the future, they may not be accepted in the

marketplace. In addition, we or our collaborators or licensees may experience difficulties in launching new
products, many of which are novel and based on technologies that are unfamiliar to the healthcare community.
We have no assurance healthcare providers and patients will accept such products, if developed. For example,
physicians and/or patients may not accept a product for a particular indication because it has been biologically
derived (and not discovered and developed by more traditional means) or if no biologically derived products are
currently in widespread use in that indication. Similarly, physicians may not accept a product if they believe
other products to be more effective or more cost effective or are more comfortable prescribing other products.

Safety concerns also may arise in the course of on-going clinical trials or patient treatment as a result of

adverse events or reactions. For example, in February 2009, the EMA announced it had recommended
suspension of the marketing authorization of RAPTIVA in the EU, and EMD Serono Inc., the company that
marketed RAPTIVA in Canada (“EMD Serono”) announced that in consultation with Health Canada, the
Canadian health authority (“Health Canada”), it would suspend marketing of RAPTIVA in Canada. In March
2009, Merck Serono Australia Pty Ltd, the company that marketed RAPTIVA in Australia (“Merck Serono
Australia”), following a recommendation from the Therapeutic Goods Administration, the Australian health
authority (“TGA”), announced it was withdrawing RAPTIVA from the Australian market. In the second quarter
of 2009, Genentech announced and carried out a phased voluntary withdrawal of RAPTIVA from the U.S.
market, based on the association of RAPTIVA with an increased risk of PML, and sales of the product ceased.

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Furthermore, government agencies, as well as private organizations involved in healthcare, from time to

time publish guidelines or recommendations to healthcare providers and patients. Such guidelines or
recommendations can be very influential and may adversely affect product usage directly (for example, by
recommending a decreased dosage of a product in conjunction with a concomitant therapy or a government entity
withdrawing its recommendation to screen blood donations for certain viruses) or indirectly (for example, by
recommending a competitive product over our product). Consequently, we do not know if physicians or patients
will adopt or use our products for their approved indications.

Even approved and marketed products are subject to risks relating to changes in the market for such

products. Introduction or increased availability of generic versions of products can alter the market acceptance of
branded products. In addition, unforeseen safety issues may arise at any time, regardless of the length of time a
product has been on the market.

In addition to our agreements with Servier, our agreements with other third parties, many of which are
significant to our business, expose us to numerous risks.

Our financial resources and our marketing experience and expertise are limited. Consequently, our ability to
develop products successfully depends, to a large extent, upon securing the financial resources and/or marketing
capabilities of third parties other than Servier. For example:

•

•

In March 2004, we announced we had agreed to collaborate with Chiron Corporation (now Novartis)
for the development and commercialization of antibody products for the treatment of cancer. In April
2005, we announced the initiation of clinical testing of the first product candidate out of the
collaboration, HCD122, an anti-CD40 antibody, in patients with advanced chronic lymphocytic
leukemia. In October 2005, we announced the initiation of the second clinical trial of HCD122 in
patients with multiple myeloma. In November 2008, we announced the restructuring of this product
development collaboration, which involved six development programs including CD40 and prolactin
receptor antibody programs. In exchange for cash and debt reduction on our existing loan facility with
Novartis, Novartis received control over the CD40 and prolactin receptor antibody programs, as well as
the right to expand the development of these programs into additional indications outside of oncology.
Novartis has initiated clinical studies to test CFZ533, an anti-CD40 antibody arising from its
collaboration with XOMA, in de novo renal transplantation and in Primary Sjögren’s Syndrome.
Novartis has returned control of the prolactin receptor antibody program to us, and we are evaluating
options for its continued development.

In March 2005, we entered into a contract with the National Institute of Allergy and Infectious
Diseases (“NIAID”) to produce three monoclonal antibodies designed to protect U.S. citizens against
the harmful effects of botulinum neurotoxin used in bioterrorism. In July 2006, we entered into an
additional contract with NIAID for the development of an appropriate formulation for human
administration of these three antibodies in a single injection. In September 2008, we announced we had
been awarded an additional contract with NIAID to support our on-going development of drug
candidates toward clinical trials in the treatment of botulism poisoning. In October 2011, we
announced we had been awarded an additional contract with NIAID to develop broad-spectrum
antitoxins for the treatment of human botulism poisoning.

• We have licensed our bacterial cell expression technology, a set of enabling technologies used to

discover and screen, as well as develop and manufacture, recombinant antibodies and other proteins for
commercial purposes, to over 60 companies. As of March 9, 2015, we were aware of three products
manufactured using this technology that have received FDA approval: Genentech’s LUCENTIS®
(ranibizumab injection) for treatment of neovascular wet age-related macular degeneration, Macular
Edema Following Vein Occulsion, Diabetic Macular Edema, and Diabetic Retinopathy in patients with
Diabetic Macular Edema; UCB’s CIMZIA® (certolizumab pegol) for treatment of Crohn’s disease and
rheumatoid arthritis; and Pfizer’s TRUMENBA®, a meningococcal group B vaccine. In the third

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quarter of 2009, we sold our LUCENTIS royalty interest to Genentech. In the third quarter of 2010, we
sold our CIMZIA royalty interest. We anticipate receiving a fraction of a percentage royalty on sales of
TRUMENBA.

•

In August 2012, Servier and we announced an agreement with Boehringer Ingelheim to transfer
XOMA’s technology and processes for the validation of our technology and processes in preparation
for the commercial manufacture of gevokizumab. Boehringer Ingelheim has completed GMP runs with
successful biological comparability, including all process validation batches of the XOMA processes.
Boehringer Ingelheim is making preparations for the production of gevokizumab commercial batches
at its facility in Biberach, Germany.

Because our collaborators, licensees, suppliers and contractors are independent third parties, they may be

subject to different risks than we are and have significant discretion in, and different criteria for, determining the
efforts and resources they will apply related to their agreements with us. If these collaborators, licensees,
suppliers and contractors do not successfully perform the functions for which they are responsible, we may not
have the capabilities, resources or rights to do so on our own.

We do not know whether we, our collaborators or licensees will successfully develop and market any of the
products that are or may become the subject of any of our collaboration or licensing arrangements. In some cases
these arrangements provide for funding solely by our collaborators or licensees, and in other cases, all of the
funding for certain projects and a significant portion of the funding for other projects is to be provided by our
collaborator or licensee, and we provide the balance of the funding. Even when we have a collaborative
relationship, other circumstances may prevent it from resulting in successful development of marketable
products. In addition, third-party arrangements such as ours also increase uncertainties in the related decision-
making processes and resulting progress under the arrangements, as we and our collaborators or licensees may
reach different conclusions, or support different paths forward, based on the same information, particularly when
large amounts of technical data are involved. Furthermore, our contracts with NIAID contain numerous standard
terms and conditions provided for in the applicable Federal acquisition regulations and customary in many
government contracts, some of which could allow the U.S. government to exercise certain rights under the
technology developed under these contracts. Uncertainty exists as to whether we will be able to comply with
these terms and conditions in a timely manner, if at all. In addition, we are uncertain as to the extent of NIAID’s
demands and the flexibility that will be granted to us in meeting those demands. Under our contract with NIAID,
we invoice using NIH provisional rates, and these are subject to future audits at the discretion of NIAID’s
contracting office. These audits can result in an adjustment to revenue previously reported, which potentially
could be significant.

Although we continue to evaluate additional strategic alliances and potential partnerships, we do not know

whether or when any such alliances or partnerships will be entered into.

Products and technologies of other companies may render some or all of our products and product
candidates noncompetitive or obsolete.

Developments by others may render our products, product candidates, or technologies obsolete or
uncompetitive. Technologies developed and utilized by the biotechnology and pharmaceutical industries are
changing continuously and substantially. Competition in antibody-based technologies is intense and is expected
to increase in the future as a number of established biotechnology firms and large chemical and pharmaceutical
companies advance in these fields. Many of these competitors may be able to develop products and processes
competitive with or superior to our own for many reasons, including that they may have:

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significantly greater financial resources;

larger research and development and marketing staffs;

larger production facilities;

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entered into arrangements with, or acquired, biotechnology companies to enhance their capabilities; or

extensive experience in preclinical testing and human clinical trials.

These factors may enable others to develop products and processes competitive with or superior to our own

or those of our collaborators. 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 interested in
the commercial value of their work and may become more aggressive in seeking patent protection and licensing
arrangements. Furthermore, many companies and universities tend not to announce or disclose important
discoveries or development programs until their patent position is secure or, for other reasons, later; as a result,
we may not be able to track development of competitive products, particularly at the early stages. Positive or
negative developments in connection with a potentially competing product may have an adverse impact on our
ability to raise additional funding on acceptable terms. For example, if another product is perceived to have a
competitive advantage, or another product’s failure is perceived to increase the likelihood that our product will
fail, then investors may choose not to invest in us on terms we would accept or at all.

The examples below pertain to competitive events in the market that we review quarterly yet are not

intended to be representative of all existing competitive events.

Gevokizumab

We, in collaboration with Servier, are developing gevokizumab, a potent monoclonal antibody with unique

allosteric modulating properties that binds strongly to interleukin-1 beta (IL-1 beta), a pro-inflammatory
cytokine. In binding to IL-1 beta, gevokizumab inhibits the activation of the IL-1 receptor, thereby modulating
the cellular signaling events that produce inflammation. Certain other companies are developing products based
on the same or similar therapeutic targets as gevokizumab. The efficacy and safety profile of gevokizumab
relative to these potential competitors is unknown.

• Novartis markets and is developing ILARIS® (canakinumab, ACZ885), a fully human monoclonal
antibody that selectively binds to and neutralizes IL-1 beta. Since 2009, canakinumab has been
approved in over 50 countries for the treatment of children and adults suffering from Cryopyrin-
Associated Periodic Syndrome (“CAPS”). The product is indicated in the U.S. for the treatment of
CAPS in patients over four years of age, including familial cold auto-inflammatory syndrome
(“FCAS”) and Muckle-Wells syndrome (“MWS”), as well as for active systemic juvenile idiopathic
arthritis (“SJIA”) in patients aged two years and older. In the EU, canakinumab is indicated for the
treatment of FCAS, MWS, neonatal-onset multisystem inflammatory disease (“NOMID”)/ chronic
infantile neurological cutaneous articular syndrome (“CINCA syndrome”), severe forms of FCAS/
familial cold urticarial (“FCU”) presenting with signs and symptoms beyond cold-induced urticaria
skin rash, for the symptomatic treatment of adults with frequent gouty arthritis attacks, and for SJIA in
patients aged two years and above who have responded inadequately to previous therapy with non-
steroidal anti-inflammatory drugs and systemic corticosteroids. In Japan, canakinumab is indicated for
the treatment of CAPS and associated autoinflammatory symptoms, including FCAS, MWS and
NOMID. Novartis also is pursuing other diseases in which IL-1 beta may play a prominent role, such
as: systemic secondary prevention of cardiovascular events; hereditary periodic fever (familial
Mediterranean fever (“FMF”)); chronic obstructive pulmonary disorder (“COPD”); osteoarthritis;
urticarial vasculitis; tumor necrosis factor receptor-associated periodic syndrome (“TRAPS”);
xerophthalmia; Schnitzler syndrome; polymyalgia rheumatica; hyperimmunoglobulinemia D (hyper-
IgD) and periodic fever syndrome (“HIDS”); and abdominal aortic aneurysm (“AAA”).

• Regeneron markets and is developing ARCALYSTt® (rilonacept), an interleukin-1 blocker currently
indicated in the U.S. for the treatment of CAPS, including FCAS and MWS in adults and children 12
and older. Rilonacept is also approved, but not marketed, in the EU for the same patient population.

•

In 2008, Swedish Orphan Biovitrum obtained from Amgen the global exclusive rights to Kineret®
(anakinra) for rheumatoid arthritis as currently indicated in its label. In November 2009, the agreement

36

regarding Swedish Orphan Biovitrum’s Kineret license was expanded to include certain orphan
indications. Kineret is an IL-1 receptor antagonist (IL-1ra) that has been evaluated in multiple
IL-1-mediated diseases, including indications we are considering for gevokizumab. In addition to other
on-going studies, a proof-of concept clinical trial investigating Kineret in patients with a certain type of
myocardial infarction, or heart attack, has been completed in the United Kingdom. In January 2013,
Biovitrum obtained FDA approval for NOMID, a severe form of CAPS. In November 2013, Kineret
was approved by the European Commission for the treatment of CAPS. Shanghai CP Guojian
Pharmaceutical is developing an injectable formulation of recombinant human IL-1Ra, presumed to be
a follow-on biologic version of anakinra, for the potential treatment of rheumatoid arthritis. In February
2010, an NDA was filed with the China Food and Drug Administration (“SFDA”); in January 2012,
supplemental materials were required by the SFDA to conclude the review.

• The following companies have completed or are conducting or planning Phase 3 clinical trials of the

following products for the treatment of noninfectious intermediate, posterior or pan-uveitis: AbbVie—
HUMIRA® (adalimumab); Novartis—Myfortic® (mycophenalate sodium); Santen Pharmaceutical Co.,
Ltd.—Opsiria® (intravitreal sirolimus); pSivida Corp.—Fluocinolone Acetonide Intravitreal; and
Allergan—Ozurdex® (dexamethasone).

In May 2014, AbbVie announced the FDA had granted HUMIRA® (adalimumab) orphan drug designation

for the treatment of noninfectious intermediate, posterior, or pan-uveitis, or chronic non-infectious anterior
uveitis.

In April 2014, Santen announced SAKURA 1, the first of two Global Phase 3 studies in patients with non-

infectious posterior segment uveitis, met its primary endpoint.

XOMA 3AB

We also are developing XOMA 3AB, a combination, or cocktail, of antibodies designed to neutralize the
most potent of botulinum toxins. Other companies are developing other products targeting botulism poisoning,
and these products may prove more effective than XOMA 3AB. We are aware:

• Emergent Biosolutions Inc. has a contract with the U.S. Department of Health & Human Services,

expected to be worth $423.0 million, to manufacture and supply an equine heptavalent botulism anti-
toxin. In March 2013, the product was approved by the FDA.

Manufacturing risks and inefficiencies may adversely affect our ability to manufacture products for
ourselves or others.

To the extent we continue to provide manufacturing services for our own benefit or to third parties, we are

subject to manufacturing risks. Additionally, unanticipated fluctuations in customer requirements may lead to
manufacturing inefficiencies, which if significant could lead to an impairment on our long-lived assets or
restructuring activities. We must utilize our manufacturing operations in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining acceptable product quality and
manufacturing costs. Additional resources and changes in our manufacturing processes may be required for each
new product, product modification or customer or to meet changing regulatory or third-party requirements, and
this work may not be completed successfully or efficiently.

Manufacturing and quality problems may arise in the future to the extent we continue to perform these

manufacturing activities for our own benefit or for third parties. Consequently, our development goals or
milestones may not be achieved in a timely manner or at a commercially reasonable cost, or at all. In addition, to
the extent we continue to make investments to improve our manufacturing operations, our efforts may not yield
the improvements that we expect.

37

Failure of our products to meet current Good Manufacturing Practices standards may subject us to delays
in regulatory approval and penalties for noncompliance.

Our contract manufacturers are required to produce our clinical product candidates under current Good
Manufacturing Practices (“cGMP”) to meet acceptable standards for use in our clinical trials and for commercial
sale, as applicable. If such standards change, the ability of contract manufacturers to produce our product
candidates on the schedule we require for our clinical trials or to meet commercial requirements may be affected.
In addition, contract manufacturers may not perform their obligations under their agreements with us or may
discontinue their business before the time required by us to successfully produce clinical and commercial
supplies of our product candidates.

We and our contract manufacturers are subject to pre-approval inspections and periodic unannounced
inspections by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP
and other applicable government regulations and corresponding foreign standards. We do not have control over a
third-party manufacturer’s compliance with these regulations and standards. Any difficulties or delays in our
contractors’ manufacturing and supply of our product candidates or any failure of our contractors to maintain
compliance with the applicable regulations and standards could increase our costs, cause us to lose revenue,
make us postpone or cancel clinical trials, prevent or delay regulatory approval by the FDA and corresponding
state and foreign authorities, prevent the import and/or export of our product candidates, or cause any of our
product candidates that may be approved for commercial sale to be recalled or withdrawn.

Because many of the companies with which we do business also are in the biotechnology sector, the
volatility of that sector can affect us indirectly as well as directly.

As a biotechnology company that collaborates with other biotechnology companies, the same factors that
affect us directly also can adversely impact us indirectly by affecting the ability of our collaborators, partners and
others with whom we do business to meet their obligations to us and reduce our ability to realize the value of the
consideration provided to us by these other companies.

For example, in connection with our licensing transactions, we have in the past and may in the future agree

to accept equity securities of the licensee in payment of license fees. The future value of these or any other shares
we receive is subject both to market risks affecting our ability to realize the value of these shares and more
generally to the business and other risks to which the issuer of these shares may be subject.

As we do more business internationally, we will be subject to additional political, economic and regulatory
uncertainties.

We may not be able to operate successfully in any foreign market. We believe that because the

pharmaceutical industry is global in nature, international activities will be a significant part of our future business
activities and when and if we are able to generate income, a substantial portion of that income will be derived
from product sales and other activities outside the United States. Foreign regulatory agencies often establish
standards different from those in the United States, and an inability to obtain foreign regulatory approvals on a
timely basis could put us at a competitive disadvantage or make it uneconomical to proceed with a product or
product candidate’s development. International sales may be limited or disrupted by:

•

•

•

•

•

•

imposition of government controls;

export license requirements;

political or economic instability;

trade restrictions;

changes in tariffs;

restrictions on repatriating profits;

38

•

exchange rate fluctuations; and

• withholding and other taxation.

We are subject to foreign currency exchange rate risks.

We are subject to foreign currency exchange rate risks because substantially all of our revenues and

operating expenses are paid in U.S. Dollars, but we incur certain expenses, as well as interest and principal
obligations with respect to our loan from Servier in Euros. To the extent the U.S. Dollar declines in value against
the Euro, the effective cost of servicing our Euro-denominated debt will be higher. Changes in the exchange rate
result in foreign currency gains or losses. Although we have managed some of our exposure to changes in foreign
currency exchange rates by entering into foreign exchange option contracts, there can be no assurance foreign
currency fluctuations will not have a material adverse effect on our business, financial condition, liquidity or
results of operations. In addition, our foreign exchange option contracts are re-valued at each financial reporting
period, which also may result in gains or losses from time to time.

If we and our partners are unable to protect our intellectual property, in particular our patent protection
for our principal products, product candidates and processes, and prevent its use of the covered subject
matter by third parties, our ability to compete in the market will be harmed, and we may not realize our
profit potential.

We rely on patent protection, as well as a combination of copyright, trade secret, and trademark laws to

protect our proprietary technology and prevent others from duplicating our products or product candidates.
However, these means may afford only limited protection and may not:

•

•

•

prevent our competitors from duplicating our products;

prevent our competitors from gaining access to our proprietary information and technology; or

permit us to gain or maintain a competitive advantage.

Because of the length of time and the expense associated with bringing new products to the marketplace, we
and our collaboration and development partners hold and are in the process of applying for a number of patents in
the United States and abroad to protect our product candidates and important processes and also have obtained or
have the right to obtain exclusive licenses to certain patents and applications filed by others. However, the mere
issuance of a patent is not conclusive as to its validity or its enforceability. The U.S. Federal Courts, the U.S.
Patent & Trademark Office or equivalent national courts or patent offices elsewhere may invalidate our patents
or find them unenforceable. In addition, the laws of foreign countries may not protect our intellectual property
rights effectively or to the same extent as the laws of the United States. If our intellectual property rights are not
protected adequately, we may not be able to commercialize our technologies, products, or services, and our
competitors could commercialize our technologies, which could result in a decrease in our sales and market share
that would harm our business and operating results. Specifically, the patent position of biotechnology companies
generally is highly uncertain and involves complex legal and factual questions. The legal standards governing the
validity of biotechnology patents are in transition, and current defenses as to issued biotechnology patents may
not be adequate in the future. Accordingly, there is uncertainty as to:

• whether any pending or future patent applications held by us will result in an issued patent, or that if
patents are issued to us, that such patents will provide meaningful protection against competitors or
competitive technologies;

• whether competitors will be able to design around our patents or develop and obtain patent protection
for technologies, designs or methods that are more effective than those covered by our patents and
patent applications; or

•

the extent to which our product candidates could infringe on the intellectual property rights of others,
which may lead to costly litigation, result in the payment of substantial damages or royalties, and/or
prevent us from using technology that is essential to our business.

39

We have established a portfolio of patents, both United States and foreign, related to our bacterial cell
expression technology, including claims to novel promoter sequences, secretion signal sequences, compositions
and methods for expression and secretion of recombinant proteins from bacteria, including immunoglobulin gene
products. Most of the more important licensed European patents in our bacterial cell expression patent portfolio
expired in July 2008 or earlier. The last of the more important licensed United States patents in our bacterial cell
expression (“BCE”) patent portfolio expired in December 2014. The last-to-expire patent licensed under the
majority of our BCE license agreements is Canadian patent 1,341,235, which is expected to expire in May 2018.

If certain patents issued to others are upheld or if certain patent applications filed by others issue and are

upheld, we may require licenses from others to develop and commercialize certain potential products
incorporating our technology or we may become involved in litigation to determine the proprietary rights of
others. These licenses, if required, may not be available on acceptable terms, and any such litigation may be
costly and may have other adverse effects on our business, such as inhibiting our ability to compete in the
marketplace and absorbing significant management time.

Due to the uncertainties regarding biotechnology patents, we also have relied and will continue to rely upon

trade secrets, know-how and continuing technological advancement to develop and maintain our competitive
position. All of our employees have signed confidentiality agreements under which they have agreed not to use
or disclose any of our proprietary information. Research and development contracts and relationships between us
and our scientific consultants and potential customers provide access to aspects of our know-how that are
protected generally under confidentiality agreements. These confidentiality agreements may be breached or may
not be enforced by a court. To the extent proprietary information is divulged to competitors or to the public
generally, such disclosure may affect our ability to develop or commercialize our products adversely by giving
others a competitive advantage or by undermining our patent position.

Litigation regarding intellectual property can be costly and expose us to risks of counterclaims against us.

We may be required to engage in litigation or other proceedings to protect our intellectual property. The cost

to us of this litigation, even if resolved in our favor, could be substantial. Such litigation also could divert
management’s attention and resources. In addition, if this litigation is resolved against us, our patents may be
declared invalid, and we could be held liable for significant damages. In addition, we may be subject to a claim
that we are infringing another party’s patent. If such claim is resolved against us, we or our collaborators may be
enjoined from developing, manufacturing, selling or importing products, processes or services unless we obtain a
license from the other party.

Such license may not be available on reasonable terms, thus preventing us from using these products,

processes or services and adversely affecting our revenue.

We may be unable to price our products effectively or obtain adequate reimbursement for sales of our
products, which would prevent our products from becoming profitable.

If we or our third-party collaborators or licensees succeed in bringing our product candidates to the market,
they may not be considered cost effective, and reimbursement to the patient may not be available or may not be
sufficient to allow us to sell our products on a competitive basis. In both the United States and elsewhere, sales of
medical products and treatments are dependent, in part, on the availability of reimbursement to the patient from
third-party payors, such as government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for pharmaceutical products and services. Our business is affected by the efforts
of government and third-party payors to contain or reduce the cost of healthcare through various means. In the
United States, there have been and will continue to be a number of federal and state proposals to implement
government controls on pricing.

In addition, the emphasis on managed care in the United States has increased and will continue to increase
the pressure on the pricing of pharmaceutical products. We cannot predict whether any legislative or regulatory
proposals will be adopted or the effect these proposals or managed care efforts may have on our business.

40

Healthcare reform measures and other statutory or regulatory changes could adversely affect our
business.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and
regulatory proposals to change the healthcare system in ways that could impact our business. In March 2010, the
U.S. Congress enacted and President Obama signed into law the PPACA, which includes a number of healthcare
reform provisions that are expected to significantly impact the pharmaceutical industry. The PPACA, among
other things, imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell
“branded prescription drugs”; increases the minimum level of Medicaid rebates payable by manufacturers of
brand-name drugs from 15.1% to 23.1%; requires collection of rebates for drugs paid by Medicaid managed care
organizations; addresses new methodologies by which rebates owed by manufacturers under the Medicaid Drug
Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs
that are line extension products; and requires manufacturers to participate in a coverage gap discount program,
under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs
to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs
to be covered under Medicare Part D. While the law may increase the number of patients who have insurance
coverage for our products or product candidates, its cost containment measures also could adversely affect
coverage and reimbursement for our existing or potential products; however, the full effects of this law cannot be
known until these provisions are implemented and the relevant Federal and state agencies issue applicable
regulations or guidance.

Other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2,
2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint
Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint
Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through
2021, triggering the legislation’s automatic reductions to several government programs. These reductions include
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on
April 1, 2013, and are scheduled to remain in effect until 2024. On January 2, 2013, President Obama signed into
law the American Taxpayer Relief Act of 2012 (“ATRA”), which, among other things, further reduced Medicare
payments to several providers, including hospitals, imaging centers and cancer treatment centers. We expect
additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the
amounts that federal and state governments will pay for healthcare products and services, which could result in
reduced demand for our products once approved or additional pricing pressures, a decrease in the share price of
our common stock, limit our ability to raise capital or to obtain strategic collaborations or licenses or successfully
commercialize our products.

The pharmaceutical and biotechnology industries are subject to extensive regulation, and from time to time,

legislative bodies and governmental agencies consider changes to such regulations that could have significant
impact on industry participants. For example, in light of certain highly publicized safety issues regarding certain
drugs that had received marketing approval, the U.S. Congress has considered various proposals regarding drug
safety, including some that would require additional safety studies and monitoring and could make drug
development more costly. We are unable to predict what additional legislation or regulation, if any, relating to
safety or other aspects of drug development may be enacted in the future or what effect such legislation or
regulation would have on our business.

We are exposed to an increased risk of product liability claims.

The testing, marketing and sales of medical products entails an inherent risk of allegations of product

liability. In the past, we were party to product liability claims filed against Genentech Inc. and, even though
Genentech agreed to indemnify us in connection with these matters and these matters have been settled, there can
be no assurance other products liability lawsuits will not result in liability to us or that our insurance or
contractual arrangements will provide us with adequate protection against such liabilities. In the event of one or
more large, unforeseen awards of damages against us, our product liability insurance may not provide adequate

41

coverage. A significant product liability claim for which we were not covered by insurance or indemnified by a
third party would have to be paid from cash or other assets, which could have an adverse effect on our business
and the value of our common stock. To the extent we have sufficient insurance coverage, such a claim would
result in higher subsequent insurance rates. In addition, product liability claims can have various other
ramifications, including loss of future sales opportunities, increased costs associated with replacing products, a
negative impact on our goodwill and reputation, and divert our management’s attention from our business, each
of which could also adversely affect our business and operating results.

The loss of key personnel, including our Chief Executive Officer, could delay or prevent achieving our
objectives.

Our research, product development and business efforts could be affected adversely by the loss of one or
more key members of our scientific or management staff, particularly our executive officers: John Varian, our
Chief Executive Officer; Patrick J. Scannon, M.D., Ph.D., our Executive Vice President and Chief Scientific
Officer; Paul D. Rubin, M.D., our Senior Vice President, Research and Development and Chief Medical Officer;
and Tom Klein, our Vice President and Chief Commercial Officer. We currently do not have key person
insurance on any of our employees.

Our ability to use our net operating loss carry-forwards and other tax attributes will be substantially
limited by Section 382 of the U.S. Internal Revenue Code.

Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally limits the ability of a
corporation that undergoes an “ownership change” to utilize its net operating loss carry-forwards (“NOLs”) and
certain other tax attributes against any taxable income in taxable periods after the ownership change. The amount
of taxable income in each taxable year after the ownership change that may be offset by pre-change NOLs and
certain other pre-change tax attributes is generally equal to the product of (a) the fair market value of the
corporation’s outstanding shares (or, in the case of a foreign corporation, the fair market value of items treated as
connected with the conduct of a trade or business in the United States) immediately prior to the ownership
change and (b) the long-term tax exempt rate (i.e., a rate of interest established by the U.S. Internal Revenue
Service (“IRS”) that fluctuates from month to month). In general, an “ownership change” occurs whenever the
percentage of the shares of a corporation owned, directly or indirectly, by “5-percent shareholders” (within the
meaning of Section 382 of the Internal Revenue Code) increases by more than 50 percentage points over the
lowest percentage of the shares of such corporation owned, directly or indirectly, by such “5-percent
shareholders” at any time over the preceding three years.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-

change NOLs and certain other pre-change tax attributes that can be utilized to an annual limitation), we
experienced ownership changes in 2009 and 2012, which substantially limit the future use of our pre-change
NOLs and certain other pre-change tax attributes per year. As of December 31, 2014, we have excluded the
NOLs and R&D credits that will expire as a result of the annual limitations. To the extent that we do not utilize
its carry-forwards within the applicable statutory carry-forward periods, either because of Section 382 limitations
or the lack of sufficient taxable income, the carry-forwards will also expire unused.

Because we are a relatively small biopharmaceutical company with limited resources, we may not be able
to attract and retain qualified personnel.

Our success in developing marketable products and achieving a competitive position will depend, in part, on

our ability to attract and retain qualified scientific and management personnel, particularly in areas requiring
specific technical, scientific or medical expertise. We had approximately 183 employees as of March 9, 2015.
We may require additional experienced executive, accounting, research and development, legal, administrative
and other personnel from time to time in the future. There is intense competition for the services of these
personnel, especially in California. Moreover, we expect that the high cost of living in the San Francisco Bay

42

Area, where our headquarters and manufacturing facilities are located, may impair our ability to attract and retain
employees in the future. If we do not succeed in attracting new personnel and retaining and motivating existing
personnel, our operations may suffer and we may be unable to implement our current initiatives or grow
effectively.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our current

and any future collaborators, licensees, suppliers, contractors and consultants are vulnerable to damage from
cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication
and electrical failures. We could experience failures in our information systems and computer servers, which
could be the result of a cyber-attack and could result in an interruption of our normal business operations and
require substantial expenditure of financial and administrative resources to remedy. System failures, accidents or
security breaches can cause interruptions in our operations and can result in a material disruption of our
development programs, commercialization activities and other business operations. The loss of clinical trial data
from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. Similarly, we rely on third parties to supply components for
and manufacture our product and product candidates, conduct clinical trials of our product candidates, and
similar events relating to their computer systems could also have a material adverse effect on our business. To
the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications,
or inappropriate disclosure of confidential or proprietary information, we could incur liability and the
development of gevokizumab or any of our other product candidates could be delayed or otherwise adversely
affected.

Data breaches and cyber-attacks could compromise our intellectual property or other sensitive
information and cause significant damage to our business and reputation.

In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual

property and proprietary or confidential business information relating to our business and that of our customers
and business partners. The secure maintenance of this information is critical to our business and reputation. We
believe companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other
attempts to gain unauthorized access. These threats can come from a variety of sources, all ranging in
sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may
be custom-crafted against our information systems. Over the past year, cyber-attacks have become more
prevalent and much harder to detect and defend against. Our network and storage applications may be subject to
unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is
often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These
data breaches and any unauthorized access or disclosure of our information or intellectual property could
compromise our intellectual property and expose sensitive business information. A data security breach could
also lead to public exposure of personal information of our clinical trial patients, customers and others. Cyber-
attacks could cause us to incur significant remediation costs, result in product development delays, disrupt key
business operations and divert attention of management and key information technology resources. These
incidents could also subject us to liability, expose us to significant expense and cause significant harm to our
reputation and business.

Calamities, power shortages or power interruptions at our Berkeley headquarters and manufacturing
facility could disrupt our business and adversely affect our operations.

Our principal operations are located in Northern California, including our corporate headquarters and

manufacturing facility in Berkeley, California. This location is in an area of seismic activity near active
earthquake faults. Any earthquake, terrorist attack, fire, power shortage or other calamity affecting our facilities
may disrupt our business and could have material adverse effect on our business and results of operations.

43

We have a significant stockholder, which may limit other stockholders’ ability to influence corporate
matters and may give rise to conflicts of interest.

Entities controlled by Felix J. Baker and Julian C. Baker beneficially own approximately 18.0% of our
outstanding common stock as of March 9, 2015, which includes warrants to purchase approximately 7.6 million
shares of XOMA’s common stock at an exercise price of $1.76 per share. On July 19, 2012, our Board of
Directors elected Kelvin Neu, M.D., to serve on our Board of Directors. Dr. Neu is a Managing Director at Baker
Bros. Advisors, LLC, an entity controlled by Felix J. Baker and Julian C. Baker. Accordingly, these entities may
exert significant influence over us and any action requiring the approval of the holders of our stock, including the
election of directors and approval of significant corporate transactions. In addition, on June 12, 2014, we entered
into a registration rights agreement with entities affiliated with Felix J. Baker and Julian C. Baker, pursuant to
which we subsequently filed a registration statement to register for resale the shares of our common stock
(including shares issuable upon the exercise of warrants) held by these entities. Furthermore, conflicts of interest
could arise in the future between us, on the one hand, and these entities, on the other hand, concerning potential
competitive business activities, business opportunities, the issuance of additional securities and other matters.

Our organizational documents contain provisions that may prevent transactions that could be beneficial to
our stockholders and may insulate our management from removal.

Our charter and by-laws:

•

•

require certain procedures to be followed and time periods to be met for any stockholder to propose
matters to be considered at annual meetings of stockholders, including nominating directors for
election at those meetings; and

authorize our Board of Directors to issue up to 1,000,000 shares of preferred stock without stockholder
approval and to set the rights, preferences and other designations, including voting rights, of those
shares as the Board of Directors may determine.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law (the

“DGCL”), that may prohibit large stockholders, in particular those owning 15% or more of our outstanding
common stock, from merging or combining with us.

These provisions of our organizational documents and the DGCL, alone or in combination with each other,

may discourage transactions involving actual or potential changes of control, including transactions that
otherwise could involve payment of a premium over prevailing market prices to holders of common stock, could
limit the ability of stockholders to approve transactions that they may deem to be in their best interests, and could
make it considerably more difficult for a potential acquirer to replace management.

Item 1B. Unresolved Staff Comments

None.

Item 2.

Properties

Our corporate headquarters and development and manufacturing facilities are located in Berkeley and

Emeryville, California. We currently lease three buildings and space in a fourth building, for which we had a
sublease tenant under contract through May 2014. These buildings house our research and development
laboratories, manufacturing facilities and office space. A separate pilot scale manufacturing facility is owned by
us. Our building leases expire in the period from 2021 to 2023, and total minimum lease payments due from
January 2015 until expiration of the leases are $28.9 million. We have the option to renew our lease agreements
for periods ranging from three to ten years.

44

Item 3.

Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

Supplementary Item: Executive Officers of the Registrant

Our executive officers and their respective ages, as of December 31, 2014, and positions are as follows:

Name

Age Title

John Varian . . . . . . . . . . . . . . . . . . . . .

55 Chief Executive Officer

Patrick J. Scannon, M.D., Ph.D.

. . . . .

67 Executive Vice President and Chief Scientific Officer

Paul D. Rubin, M.D.

. . . . . . . . . . . . . .

61

Senior Vice President, Research and Development and
Chief Medical Officer

Fred Kurland . . . . . . . . . . . . . . . . . . . .

64 Vice President, Finance, Chief Financial Officer, and

Secretary

Tom Klein . . . . . . . . . . . . . . . . . . . . . .

53 Vice President, Chief Commercial Officer

The Board of Directors elects all officers annually. There is no family relationship between or among any of

the officers or directors.

Business Experience

Mr. Varian was appointed Chief Executive Officer of XOMA in January 2012 after serving as Interim

Chief Executive Officer since August 31, 2011. He has served as a XOMA director since December 2008. He
was Chief Operating Officer of Aryx Therapeutics from December 2003 through August 2011 and was its Chief
Financial Officer from April 2006 through March 2011. Previously, Mr. Varian was Chief Financial Officer of
Genset S.A., until the company’s sale to Serono S.A. in 2002. From October 1998 to April 2000, Mr. Varian
served as Senior Vice President, Finance and Administration of Elan Pharmaceuticals, Inc., joining the company
as part of its acquisition of Neurex Corporation. Prior to the acquisition, he served as Neurex Corporation’s Chief
Financial Officer from June 1997 until October 1998. From 1991 until 1997, Mr. Varian served as the Vice
President Finance and Chief Financial Officer of Anergen Inc. Mr. Varian was an Audit Principal / Senior
Manager at Ernst & Young from 1987 until 1991 where he focused on life sciences. He is a founding member of
the Bay Area Bioscience Center and a former chairman of the Association of Bioscience Financial Officers
International Conference. Mr. Varian received a B.B.A. degree from Western Michigan University. Currently,
Mr. Varian serves as a member of the Board of Directors of Versartis, Inc., a publicly trade biopharmaceutical
company.

Dr. Scannon is one of our founders and has served as a Director since our formation. Dr. Scannon became

Executive Vice President and Chief Scientific Officer in February 2011. In January 2014, Dr. Scannon’s
employment agreement was amended to change his status from full- to part-time, continuing to serve in his
previous roles a Director and Executive Vice President and Chief Scientific Officer. Previously he was our
Executive Vice President and Chief Medical Officer beginning in March 2009 and served as Executive Vice
President and Chief Biotechnology Officer from May 2006 until March 2009, Chief Scientific and Medical
Officer from March 1993 until May 2006, Vice Chairman, Scientific and Medical Affairs from April 1992 to
March 1993 and our President from our formation until April 1992. From 2007 until 2012, Dr. Scannon served
on the National Biodefense Science Board, reporting to the Secretary for the Department of Health and Human

45

Services. In 2007, he also became a member of the Board of Directors for Pain Therapeutics, Inc., a
biopharmaceutical company. He has served on the Defense Sciences Research Council for the Defense Advanced
Research Projects Agency (DARPA) and on the Threat Reduction Advisory Committee for the Department of
Defense. From 1979 until 1981, Dr. Scannon was a clinical research scientist at the Letterman Army Institute of
Research in San Francisco. A Board-certified internist, Dr. Scannon holds a Ph.D. in organic chemistry from the
University of California, Berkeley and an M.D. from the Medical College of Georgia.

Dr. Rubin is our Senior Vice President, Clinical Development and Chief Medical Officer. Dr. Rubin joined

the Company in June 2011. Prior to joining XOMA, Dr. Rubin was Chief Medical Officer at Funxional
Therapeutics Ltd. He was Chief Executive Officer of Resolvyx Pharmaceuticals, Inc. from 2007 to 2009 and
President and Chief Executive Officer of Critical Therapeutics, Inc. from 2002 to 2007. From 1996 to 2002,
Dr. Rubin served as Senior Vice President, Development, and later as Executive Vice President, Research &
Development at Sepracor. He was responsible for the successful development of all of Sepracor’s internally
developed approved products including Xopenex®, Lunesta®, Xopenex HFA® and Brovana®. From 1993 to
1996, Dr. Rubin held senior level positions at Glaxo-Wellcome Pharmaceuticals, most recently as Vice President
of Worldwide Clinical Pharmacology and Early Clinical Development. During his tenure with Abbott from 1987
to 1993, Dr. Rubin served as Vice President, Immunology and Endocrinology, where he successfully advanced
from discovery to approval zilueton, the first 5-lipoxygenase inhibitor for the treatment of asthma. Dr. Rubin
received a BA from Occidental College and his M.D. from Rush Medical College. He completed his training in
internal medicine at the University of Wisconsin.

Mr. Kurland is our Vice President, Finance, Chief Financial Officer, and Secretary. He joined XOMA in

December 2008. Mr. Kurland is responsible for directing the Company’s financial strategy, accounting, financial
planning and investor relations functions. He has more than 30 years of experience in biotechnology and
pharmaceutical companies including Aviron/MedImmune, Protein Design Labs and Syntex/Roche. Prior to
joining XOMA, Mr. Kurland served as Chief Financial Officer of Bayhill Therapeutics, Inc., Corcept
Therapeutics Incorporated and Genitope Corporation. From 1998 to 2002, Mr. Kurland served as Senior Vice
President and Chief Financial Officer of Aviron, acquired by MedImmune in 2001 and developer of FluMist.
From 1996 to 1998, he was Vice President and Chief Financial Officer of Protein Design Labs, Inc., an antibody
design company, and from 1995 to 1996, he served as Vice President and Chief Financial Officer of Applied
Immune Sciences, Inc. Mr. Kurland also held a number of financial management positions at Syntex
Corporation, a pharmaceutical company acquired by Roche, including Vice President and Controller between
1991 and 1995. He received his J.D. and M.B.A. degrees from the University of Chicago and his B.S. degree
from Lehigh University.

Mr. Klein is our Vice President, Chief Commercial Officer. He joined XOMA in 2013 from Genentech,

where he was Vice President, Business Unit Head, Virology and Specialty Care from 2009-2012. He joined
Genentech from Roche, where he was the Vice President and Franchise Head for the Virology Sale and
Marketing. From 2002 to 2006, he was the Vice President, Primary Care Sales overseeing a variety of brands
including Tamiflu®, Boniva® and Rocephin®. Mr. Klein also held a number of senior commercial positions in
both specialty and primary care therapeutic areas. Prior to his 12 years with Roche, Mr. Klein spent 11 years with
Westwood-Squibb/Bristol Myers-Squibb in several sales and product management roles. He has an MBA,
Management from Temple University and a BA, Marketing, from Pennsylvania State University.

46

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Market for Registrant’s Common Equity

Our common stock trades on The NASDAQ Global Market under the symbol “XOMA.” All references to

numbers of shares of common stock and per-share information in this Annual Report have been adjusted
retroactively to reflect the our reverse stock split effective August of 2010. The following table sets forth the
quarterly range of high and low reported sale prices of our common stock on The NASDAQ Global Market for
the periods indicated:

2014
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Price Range

High

Low

$9.57
$5.54
$4.95
$5.95

$3.67
$4.40
$5.53
$7.45

$4.77
$3.42
$3.66
$3.50

$2.43
$3.02
$3.61
$3.67

On March 9, 2015, there were 809 stockholders of record of our common stock, one of which was Cede &

Co., a nominee for Depository Trust Company (“DTC”). All of the shares of our common stock held by
brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into
participant accounts at DTC and are therefore considered to be held of record by Cede & Co. as one stockholder.

Dividend Policy

We have not paid dividends on our common stock. We currently intend to retain any earnings for use in the

development and expansion of our business. We, therefore, do not anticipate paying cash dividends on our
common stock in the foreseeable future. In addition, our loan agreement with Hercules generally restricts the
declaration and payment of cash dividends.

47

Performance Graph

The following graph compares the five-year cumulative total stockholder return for XOMA common stock
with the comparable cumulative return of certain indices. The graph assumes $100 invested on the same date in
each of the indices. Returns of the company are not indicative of future performance.

FIVE-YEAR PERFORMANCE GRAPH

S
R
A
L
L
O
D

.

.

S
U

$400

$350

$300

$250

$200

$150

$100

$50

$-

2009

2010

2011

2012

2013

2014

XOMA Corporation

Nasdaq Composite Index

AMEX Biotechnology Index

This Section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by

reference in any filing of XOMA Corporation under the Securities Act, or the Exchange Act, whether made
before or after the date hereof and irrespective of any general incorporation language in any such filing.

As of December 31,

XOMA Corporation

Nasdaq
Composite Index

AMEX
Biotechnology Index

2009
2010
2011
2012
2013
2014

$100.00
$ 48.86
$ 10.95
$ 22.86
$ 64.10
$ 34.19

$100.00
$116.91
$114.81
$133.07
$184.06
$208.71

$100.00
$137.73
$115.85
$164.21
$247.36
$365.04

48

 
Item 6.

Selected Financial Data

The following table contains our selected financial information including consolidated statement of

operations and consolidated balance sheet data for the years 2010 through 2014. The selected financial
information has been derived from our audited consolidated financial statements. The selected financial
information should be read in conjunction with Item 8: Financial Statements and Supplementary Data and
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations included in
this Annual Report. The data set forth below is not necessarily indicative of the results of future operations.

Consolidated Statement of Operations Data
Total revenues (1) . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . .
Restructuring costs . . . . . . . . . . . . . . . . . . . . .

Loss from operations . . . . . . . . . . . . . . . . . . . .
Other income (expense), net (2) . . . . . . . . . . .

Net loss before taxes . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense), net . . . . . . . . . .

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic net loss per share of common stock . . . .

Diluted net loss per share of common stock . .

Balance Sheet Data
Cash and cash equivalents . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . .
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities (3)
. . . . . . . . . . . . . . . . .
Redeemable convertible preferred stock, at

par value . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity (deficit) . . . . . . . . .

Year Ended December 31,

2014

2013

2012

2011

2010

(In thousands, except per share amounts)

18,866
100,614
84

(81,832)
43,531

(38,301)
—

$

35,451
93,328
328

$ 33,782
85,332
5,074

$ 58,196
92,151
—

$ 33,641
100,663
82

(58,205)
(65,867)

(124,072)
14

(56,624)
(14,515)

(71,139)
74

(33,955)
1,227

(32,728)
(15)

(67,104)
(1,625)

(68,729)
(27)

(38,301) $ (124,058) $ (71,065) $ (32,743) $ (68,756)

(0.36) $

(1.43) $

(1.10) $

(1.04) $

(3.69)

(0.67) $

(1.43) $

(1.10) $

(1.04) $

(3.69)

2014

2013

2012

2011

2010

December 31,

(In thousands)

101,659
19,990
127,060
97,415
134,782
29,645
109,124

$ 45,345
$ 39,987
$ 95,837
$ 72,004
$ 105,676
$ 23,833
$ 60,376

78,445

$
— $
$
$
$
$
$

83,842
47,367
89,631
36,475
50,057

— $

$ 48,344
$
$ 62,695
$ 42,064
$ 78,036
$ 20,631
$ 42,394

$ 37,304
—

$ 58,880
$ 23,352
$ 74,252
$ 35,528
$ 15,133

$

$

$

$

$
$
$
$
$
$
$

— $

1
$
$(1,119,477) $(1,081,176) $(957,118) $(886,053) $(853,310)
$ 23,591
$

(3,987) $ 21,467

$ 15,011

— $

— $

— $

3,099

$

We have paid no dividends in the past five years.

(1) 2010 includes a non-recurring fee of $4.0 million related to the sale of our CIMZIA® royalty interest to an

undisclosed buyer.

(2) 2014, 2013 and 2012 include $39.5 million, ($59.9) million and ($9.5) million, respectively, related to the
revaluation of contingent warrant liabilities issued in connection with an equity financing in March 2012.
2010 includes a loss associated with the $4.5 million paid in the first quarter of 2010 to the holders of
warrants issued in June 2009, upon modification of the terms.

(3) 2014, 2013 and 2012 include $26.7 million, $68.7 million and $15.0 million, respectively, related to

contingent warrant liabilities in connection with an equity financing in March 2012. The balance in 2014,

49

2013, 2012, and 2011 includes a €15.0 million loan from Servier, which had a principal balance equal to
approximately $18.2 million, $20.6 million, $19.8 million, and $19.4 million as of December 31, 2014,
2013, 2012, and 2011, respectively, and a term loan from GECC, which had a principal balance equal to
$5.2 million, $9.4 million, $12.5 million, and $10.0 million as of December 31, 2014, 2013, 2012, and 2011,
respectively.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

XOMA Corporation (“XOMA”), a Delaware corporation, discovers and develops innovative antibody-based

therapeutics. Several of our antibodies have unique properties due to their interaction at allosteric sites on
specific protein rather than the orthosteric, or active sites. The compounds are designed to either enhance or
diminish the protein’s activity as desired. We believe allosteric-modulating antibodies may be more selective or
offer a safety advantage in certain disease indications when compared to more traditional modes of action.

Our lead product candidate, gevokizumab, is a proprietary potent, humanized allosteric-modulating

monoclonal antibody that binds to the inflammatory cytokine interleukin-1 beta (“IL-1 beta”). We believe that by
targeting IL-1 beta, gevokizumab has the potential to address the underlying inflammatory causes of a wide
range of diseases that have been identified as having unmet medical needs.

Together with our development partner, Servier, a leading independent French pharmaceutical research
company, we initiated three pivotal clinical trials evaluating gevokizumab for the treatment of non-infectious
intermediate, posterior or pan-uveitis (“NIU”) and Behçet’s disease uveitis. We are responsible for all of the
clinical study sites in the United States, and Servier is responsible for all of the clinical study sites outside of the
United States. These studies are known as the EYEGUARD™ program, which includes EYEGUARD-A
(patients with active NIU), EYEGUARD-B (patients with Behçet’s disease uveitis outside of the United States),
EYEGUARD-C (patients with a history of NIU currently controlled with systemic treatment).

Our strategy is to pursue Behçet’s disease uveitis as our first indication for gevokizumab in the United
States. Upon the successful completion of Servier’s EYEGUARD-B study, we intend to meet with the U.S. Food
and Drug Administration (“FDA” or “the Agency”) to review the Phase 3 EYEGUARD-B data together with the
data from the two Behçet’s disease uveitis Phase 2 studies conducted independently by XOMA and Servier. We
believe the seriousness of this disease and the small patient population warrant consideration for approval based
upon positive data from a single pivotal study. There is significant precedence for regulatory approval based
upon a single study for indications of similar seriousness and patient populations. Should EYEGUARD-B
demonstrate that patients with Behçet’s disease uveitis who receive gevokizumab took longer to exacerbate than
the placebo-treated patients during the tapering of administered steroids, we believe we will be in position to
begin the Biologics License Application (“BLA”) submission process.

In September 2014, we opened the EYEGUARD-US supplemental gevokizumab clinical study of Behçet’s

disease uveitis patients in the United States. The supplemental EYEGUARD-US study may be used in one of
several ways. It may not be required for the initial BLA submission so that it merely provides further information
related to U.S. physicians’ and patients’ experiences with gevokizumab. It may be required for the FDA’s review
of our submission but for informational purposes without being considered a pivotal study. In this case, the study
would be unmasked at a predetermined time when we are in a position to submit the BLA. Finally, it may be
required as a second pivotal study in order for the FDA to accept our submission. We’ve designed the
EYEGUARD-US study in a manner intended to fulfill whatever directive we are given by the Agency and
respond as quickly as possible.

In addition to the NIU clinical trials, we are studying gevokizumab in pyoderma gangrenosum (“PG”), a
rare ulcerative skin disease that is a specific indication under the umbrella of diseases known as neutrophilic
dermatoses. Patients experience painful expanding skin ulcers that have a significant impact on their quality of

50

life. Approximately 50 to 70 percent of the PG patient population have an underlying systemic condition, while
the remainder is idiopathic (unknown cause). The most prevalent underlying conditions are ulcerative colitis and
Crohn’s disease. The prognosis for PG is linked directly to the patient’s response to therapy for the underlying
disease. Physicians currently treat patients with systemic therapies that are approved for the underlying disease
and with topical therapies applied directly to the ulcers, yet published literature suggests that, on average, current
therapies can take six months to stop the ulcers from expanding and over eleven months to heal. The U.S.
Department of Health and Human Services’ National Institutes of Health’s Office of Rare Disease Research lists
PG as occurring in about one per 100,000 people. Claims data compiled over the past three years indicate the
number of diagnosed PG patients in the U.S. ranges between 11,000 and 14,000 annually.

Based upon what we believe are compelling data from our pilot study in patients with PG, we initiated a

Phase 3 clinical program. Final comments from the FDA were received in the third quarter of 2014, and we
initiated the first Phase 3 study in October 2014. The Phase 3 PG program includes two double-blind, placebo-
controlled clinical studies, each of which is designed to enroll 58 patients with active PG to receive gevokizumab
60 mg or placebo dosed subcutaneously once monthly, in addition to their current treatment regimen of low-dose
corticosteroids and/or immunosuppressants. The primary endpoint is the complete closure of the PG target ulcer
determined at Day 126 with confirmation of complete closure a minimum of two weeks later on or after Day 140.

Published literature indicates approximately 50% of patients will experience a recurrence within two to
three years. To follow the patients enrolled in our pilot study, we designed an extension study that allows the
pilot study patients the opportunity to receive further treatment if they experience new ulcers and allows us to
capture information on how gevokizumab performs with successive treatments. Four of the six patients from our
pilot study entered the extension study; three of whom were fully healed during the initial study, and one patient
who had an ulcer which was fully healed at Day 56 but reopened after an injury. To date, three of the four
patients enrolled in the extension study have received additional gevokizumab therapy for PG. One patient
recurred at 7.5 months and upon receiving additional gevokizumab therapy obtained 100% ulcer closure prior to
Day 56. One patient recurred at 7 months and after additional gevokizumab therapy obtained 100% ulcer closure
by Day 84. The patient who had initially healed but whose ulcer reopened after an injury continued receiving
therapy and obtained 100% ulcer closure. One patient has not received additional gevokizumab therapy as the
condition has not recurred more than one year following initial gevokizumab treatment. All four patients
continue to be enrolled in the extension study and will be followed for up to 92 weeks.

We also have an active gevokizumab Proof-of-Concept (“POC”) development program to identify other

illness for late-stage development. Two studies are being conducted in collaboration with the U.S. National
Institutes of Health (“NIH”). The National Eye Institute (“NEI”) is conducting a gevokizumab study in patients
with non-infectious anterior scleritis. The North Shore-Long Island Jewish Health System in collaboration with
the National Institute on Deafness and Other Communication Disorders (“NIDCD”) are conducting a
gevokizumab clinical study in patients with inflammatory AIED.

Previously, we conducted POC trials in moderate-to-severe inflammatory acne and in erosive osteoarthritis

of the hand (“EOA”). We have decided not to further pursue the acne indication based on our commercial
analysis. The EOA results led to our decision not to pursue Phase 3 testing in the broad EOA population,
although we continue to review the data to determine if there is a subgroup of the EOA population that could
benefit from gevokizumab therapy.

Gevokizumab has been generally well tolerated across all of our clinical studies. In both the acne and EOA

studies, there were no drug-related serious adverse events reported. The most common adverse events were
headache, pain, arthralgia, urinary tract infections, upper respiratory tract infections and pneumonia, and they
were comparable between gevokizumab and placebo.

Separately, Servier instituted its own active development program for gevokizumab beyond the NIU and
Behçet’s disease uveitis Phase 3 program. In 2012, Servier initiated a Phase 2 gevokizumab study in patients with

51

acute coronary syndrome, a cardiovascular disease within the cardiometabolic field where it has world-wide
rights. In 2013, Servier began testing gevokizumab in a variety of POC studies, including polymyositis/
dermatomyositis, Schnitzler syndrome, and giant cell arteritis. Servier has indicated these are the first studies in
an extensive multi-indication exploratory program it expects to conduct.

Our proprietary pipeline includes classes of allosteric modulating antibodies that activate, sensitize or
deactivate the insulin receptor in vivo, which we have named XOMA Metabolic or XMet. Insulin is the primary
hormone for lowering blood glucose levels. Abnormal increases in insulin secretion can lead to profound
hypoglycemia (low blood sugar), a state that may result in significant morbidities, including cerebral damage and
epilepsy. In some instances, profound hypoglycemia can result in fatality. There are three programs in the XMet
portfolio, XMetD, which is designed to deactivate the insulin receptor, XMetA, which is designed to activate the
insulin receptor, and XMetS, which is designed to sensitize the insulin receptor when in an insulin resistant state.
These programs are highly novel as the antibodies bind to different sites on the insulin receptor than currently
marketed drugs. This portfolio of antibodies represents potential new therapeutic approaches to the treatment of
several rare diseases that have insulin involvement and diabetes.

The lead compound from our XMetD program, XOMA 358, is a fully human monoclonal allosteric
modulating antibody that binds to insulin receptors and attenuates insulin action. It is designed to negatively
modulate the insulin receptor and its downstream signaling capabilities. We launched clinical development
activities for XOMA 358 in October 2014, with the first patient dosed in our Phase 1 safety and tolerability
study. The Phase 1 study was successful, and we intend to investigate this compound as a novel treatment for
non-drug-induced, endogenous hyperinsulinemic hypoglycemia (low blood glucose caused by excessive insulin
produced by the body). A therapy that safely and effectively mitigates insulin-induced hypoglycemia has the
potential to address a significant unmet therapeutic need for certain rare medical conditions associated with
hyperinsulinism.

We intend to retain full ownership of XOMA 358 and the compounds in the XMetD program, as they align

with our focus on developing products for diseases with significant unmet medical need that are treated by the
specialist prescriber. We intend to out-license the insulin receptor-activating drug candidate(s) for development
in diabetes to a pharmaceutical company with expertise in developing and commercializing compounds for
Types 1 and 2 diabetes.

We have developed these and other antibodies using some or all of our ADAPT™ antibody discovery and
development platform, our ModulX™ technologies for generating allosterically modulating antibodies, and our
OptimX™ technologies for optimizing biophysical properties of antibodies, including affinity, immunogenicity,
stability and manufacturability.

Our biodefense initiatives include XOMA 3AB, a biodefense anti-botulism product candidate comprised of

a combination of three antibodies. XOMA 3AB is directed against botulinum toxin serotype A and has been
developed through funding from the National Institute of Allergy and Infectious Diseases (“NIAID”), a part of
the NIH. A Phase 1 XOMA 3AB trial was completed with no product-related serious adverse events. Should the
government choose to acquire XOMA 3AB or other biodefense products in the future, we expect to be able to
produce these antibodies through an outside manufacturer.

We also have developed antibody product candidates with premier pharmaceutical companies including

Novartis AG (“Novartis”) and Takeda Pharmaceutical Company Limited (“Takeda”).

Significant Developments in 2014

Gevokizumab

•

In February 2014, we announced gevokizumab has been granted Orphan Drug Designation by the FDA
for the treatment of Pyoderma Gangrenosum.

52

•

•

•

•

•

In March 2014, we reported that despite early positive results in the first of two Phase 2 programs in
patients with EOA, the top-line data at Day 168 in that study, as well as data at Day 84 in the second
study, were not positive. These results led to our decision not to pursue Phase 3 testing in the broad
EOA population. We continue to review the data to determine if there is a subgroup of the EOA
population that could benefit from gevokizumab therapy.

In April 2014, we finalized our plans for our gevokizumab Phase 3 program in PG and submitted the
protocols to the FDA for any further comments. Final comments from the FDA were received in the
third quarter of 2014. The Phase 3 program will include two double-blind, placebo-controlled clinical
studies, each of which is designed to enroll 58 patients with active PG. The primary endpoint is the
complete closure of the PG target ulcer determined at Day 126 and confirmation of complete closure a
minimum of two weeks later at Day 140.

In September 2014, we announced we opened the EYEGUARD-US supplemental clinical study to
patients at study sites located in the United States. The objective of this trial is to assess the efficacy
and safety of gevokizumab in treating Behçet’s disease uveitis. Upon the successful completion of
SERVIER’s EYEGUARD-B study, we intend to meet with the FDA to review the Phase 3
EYEGUARD-B data together with the data from the two Behçet’s disease uveitis Phase 2 studies
conducted by XOMA and Servier. Should EYEGUARD-B successfully demonstrate that Behçet’s
disease uveitis patients receiving gevokizumab took longer to exacerbate than the placebo-treated
patients during the tapering of administered steroids, we believe we will be in position to begin the
BLA submission process. The supplemental EYEGUARD-US study may be used in one of several
ways. It may not be required for the initial BLA submission so that it merely provides further
information as to U.S. physicians and patients’ experiences with gevokizumab. It may be required for
the FDA’s review of our submission but for informational purposes without being considered a pivotal
study. In this case, the study would be unmasked at a predetermined time when we are in a position to
submit the BLA. Finally, it may be required by the FDA as a second pivotal study of U.S. Behçet’s
disease uveitis patients in order for the Agency to accept our submission. We’ve designed the
EYEGUARD-US study to fulfill whatever directive we are given by the FDA. We are prepared to
respond as quickly as possible to any of the anticipated outcomes from our pre-BLA meeting.

In October 2014, we announced we have initiated dosing in our Phase 1 study exploring the safety and
tolerability of single intravenous dose (“IV”) of XOMA 358, the lead compound from the our XMetD
program, in healthy volunteers. The study also will explore the biologic effects of ascending single IV
doses of XOMA 358 on glucose and insulin levels, as well as insulin sensitivity.

In November 2014, we announced the pivotal Phase 3 gevokizumab study in patients with active PG, is
open for patient enrollment. The objective of the study is to assess the efficacy and safety of
gevokizumab in treating the active ulcers caused by this rare and debilitating disease. The Phase 3
randomized, placebo-controlled study will enroll 58 patients with active PG to receive gevokizumab 60
mg or placebo dosed subcutaneously once monthly, in addition to their current treatment regimen of
low-dose corticosteroids and/or immunosuppressants.

Licensing

•

•

In July 2014, we completed the transfer of our U.S. marketing rights in ACEON to Symplmed and are
no longer selling this drug product.

In September 2014, we granted a non-exclusive license for our innovative design of a manufacturing
facility to the Texas A&M University System. The patented technology relates to a flexible
arrangement of MCRs within the manufacturing facility, with each MCR providing a portable, self-
contained environment for product manufacture. The flexible manufacturing facility design allows
MCRs to connect easily and quickly to a central supply of utilities such as air, water, and electricity.
The unique arrangement facilitates flexible design and eliminates change-over downtime. This
translates into significantly reduced capital expenditures, production costs, and maintenance costs,

53

while offering meaningful time advantages over conventional manufacturing facilities. When MCRs
are not in use, they can be easily moved to cleaning/refurbishing areas and prepared MCRs can be
“plugged in” for manufacturing. The A&M System will use MCRs for certain government programs at
The National Center for Therapeutics Manufacturing (“NCTM”) facility, a multidisciplinary workforce
education institution and biopharmaceutical manufacturing center, located at Texas A&M University in
College Station, Texas.

Financing

•

•

In December 2014, we completed a registered direct offering of 8,097,165 shares of our common stock
for gross proceeds of $40.0 million to select institutional investors, before deducting underwriting
discounts and commissions an estimated offering expenses totaling approximately $2.3 million. In
connection with the offering, we issued two year warrants to purchase up to an aggregate of 8,097,165
shares of our common stock at an exercise price of $7.90 per share.

In February 2015, we entered into a Loan and Security Agreement with Hercules in which we
borrowed $20.0 million. We used a portion of the proceeds received under the Hercules Loan
Agreement to repay existing indebtedness, and we plan to use the remaining proceeds for general
corporate purposes. In connection with the Hercules Loan Agreement, we issued a warrant to Hercules
which is exercisable for an aggregate of up to 181,268 shares of XOMA common stock at an exercise
price of $3.31 per share.

Critical Accounting Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based

upon our consolidated financial statements and the related disclosures, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates, assumptions and judgments that affect the reported amounts in our consolidated
financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, assumptions and
judgments described below that have the greatest potential impact on our consolidated financial statements,
including those related to revenue recognition, research and development activities warrant liabilities and stock-
based compensation. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Accounting
assumptions and estimates are inherently uncertain and actual results may differ materially from these estimates
under different assumptions or conditions.

The consolidated financial statements include the accounts of XOMA and its wholly-owned subsidiaries.

All significant intercompany accounts and transactions among the entities have been eliminated.

While our significant accounting policies are more fully described in Note 2 to the Consolidated Financial

Statements, we believe the following policies to be the most critical to an understanding of our financial
condition and results of operations because they require us to make estimates, assumptions and judgments about
matters that are inherently uncertain.

Revenue Recognition

License and Collaborative Fees

Revenue from non-refundable license, technology access or other payments under license and collaborative
agreements where we have a continuing obligation to perform is recognized as revenue over the estimated period
of the continuing performance obligation. We estimate the performance period at the inception of the
arrangement and re-evaluate it each reporting period. Management makes its best estimate of the period over

54

which it expects to fulfill the performance obligations, which may include clinical development activities. Given
the uncertainties of research and development collaborations, significant judgment is required to determine the
duration of the performance period. This re-evaluation may shorten or lengthen the period over which the
remaining revenue is recognized. Changes to these estimates are recorded on a prospective basis. Cost
reimbursement revenue under collaborative agreements is recognized as the related research and development
costs are incurred, as provided for under the terms of these agreements.

Our license and collaboration agreements with certain third parties also provide for contingent payments to
be paid to us based solely upon the performance of the partner. For such contingent payments we recognize the
payments as revenue upon completion of the milestone event, once confirmation is received from the third party,
provided that collection is reasonably assured and the other revenue recognition criteria have been satisfied.

Contract Revenue

Contract revenue for research and development involves our providing research and development and
manufacturing services to collaborative partners, biodefense contractors or others. Revenue for certain contracts
is accounted for by a proportional performance, or output-based, method where performance is based on
estimated progress toward elements defined in the contract. The amount of contract revenue and related costs
recognized in each accounting period are based on estimates of the proportional performance during the period.
Adjustments to estimates based on actual performance are recognized on a prospective basis and do not result in
reversal of revenue should the estimate to complete be extended.

In addition, revenue related to certain research and development contracts is billed based on actual hours
incurred by XOMA related to the contract, multiplied by full-time equivalent (“FTE”) rates plus a mark-up. The
FTE rates are developed based on our best estimates of labor, materials and overhead costs. For certain contracts,
such as our government contracts, the FTE rates are agreed upon at the beginning of the contract and are subject
to review or audit by the contracting party at any time. Under our contracts with NIAID, a part of the NIH, we
bill using NIH provisional rates and thus are subject to future audits at the discretion of NIAID’s contracting
office. These audits can result in adjustments to previously reported revenue.

In 2011, the NIH conducted an audit of our actual data under two contracts for the period from January 1,

2007, through December 31, 2009, and developed final billing rates for this period. As a result, we retroactively
applied these NIH rates to the invoices from this period, which resulted in an increase in revenue of $3.1 million
from the NIH, excluding $0.9 million billed to the NIH in 2010 as a result of a comparison of 2009 calculated
costs incurred and costs billed to the government under provisional rates. Final rates were settled for one contract
resulting in the recognition of revenue of $2.0 million in 2012. The remaining deferred revenue in connection
with the 2011 NIH rate audit will be recognized upon negotiation with and approval by NIH. In 2014, upon
completion of a NIAID review of hours and external expenses for the period spanning from 2008 to 2013,
XOMA agreed to exclude certain hours and external expense resulting in a $1.8 million adjustment, which
reduced deferred revenue and accounts receivable.

Upfront fees are recognized ratably over the expected benefit period under the arrangement. Given the
uncertainties of research and development collaborations, significant judgment is required to determine the
duration of the arrangement.

Research and Development Expenses

We expense research and development costs as incurred. Research and development expenses consist of

direct costs such as salaries and related personnel costs, and material and supply costs, and research-related
allocated overhead costs, such as facilities costs. In addition, research and development expenses include costs
related to clinical trials. From time to time, research and development expenses may include up-front fees and
milestones paid to collaborative partners for the purchase of rights to in-process research and development. Such
amounts are expensed as incurred.

55

Our accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to

contracts with clinical trial centers and clinical research organizations. Payments under the contracts depend on
factors such as the achievement of certain events, successful enrollment of patients, and completion of portions
of the clinical trial or similar conditions. We may terminate these contracts upon written notice and we are
generally only liable for actual effort expended by the organizations to the date of termination, although in
certain instances we may be further responsible for termination fees and penalties. We make estimates of our
accrued expenses as of each balance sheet date based on the facts and circumstances known to us at that time.
Expenses resulting from clinical trials are recorded when incurred based, in part, on estimates as to the status of
the various trials. There have been no material adjustments to our prior period accrued estimates for clinical trial
activities through December 31, 2014.

Stock-based Compensation

Stock-based compensation expense for stock options and other stock awards is estimated at the grant date
based on the award’s fair value-based measurement and is recognized on a straight-line basis over the award’s
vesting period, assuming appropriate forfeiture rates. The valuation of stock-based compensation awards is
determined at the date of grant using the Black-Scholes option pricing model (the “Black-Scholes Model”). This
model requires highly complex and subjective inputs, such as the expected term of the option, expected volatility,
and risk-free interest rate. Further, the forfeiture rate also impacts the amount of aggregate compensation. These
inputs are subjective and generally require significant analysis and judgment to develop. Our current estimate of
volatility is based on the historical volatility of our stock price. To the extent volatility in our stock price
increases in the future, our estimates of the fair value of options granted in the future could increase, thereby
increasing stock-based compensation cost recognized in future periods. To establish an estimate of expected
term, we consider the vesting period and contractual period of the award and our historical experience of stock
option exercises, post-vesting cancellations and volatility. To establish an estimate of forfeiture rate, we consider
our historical experience of option forfeitures and terminations. The risk-free rate is based on the yield available
on United States Treasury zero-coupon issues. We review our valuation assumptions quarterly and, as a result,
we likely will change our valuation assumptions used to value stock-based awards granted in future periods.
Stock-based compensation expense is recognized ratably over the requisite service period. In the future, as
additional empirical evidence regarding these input estimates becomes available, we may change or refine our
approach of deriving these input estimates. These changes could impact our fair value-based measurement of
stock options granted in the future. Changes in the fair value-based measurement of stock awards could
materially impact our operating results.

Warrants

We have issued warrants to purchase shares of our common stock in connection with financing activities.

We account for some of these warrants as a liability at fair value and others as equity at fair value. The fair value
of the outstanding warrants is estimated using the Black-Scholes Model. The Black-Scholes Model requires
inputs, such as the expected term of the warrants, expected volatility and risk-free interest rate. These inputs are
subjective and require significant analysis and judgment to develop. For the estimate of the expected term, we
use the full remaining contractual term of the warrant. We base our estimate of expected volatility on our
historical stock price volatility. The assumptions associated with contingent warrant liabilities are reviewed each
reporting period and changes in the estimated fair value of these contingent warrant liabilities are recognized in
other income (expense).

56

Results of Operations

Revenue

Total revenues for the years ended December 31, 2014, 2013, and 2012, were as follows (in thousands):

License and collaborative fees . . . . . . . . . . . . . . . . . . . . . .
Contract and other revenue . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,683
13,183

$11,028
24,423

$ 5,727
28,055

$ (5,345) $ 5,301
(3,632)
(11,240)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,866

$35,451

$33,782

$(16,585) $ 1,669

Year ended December 31,

2014

2013

2012

2013-2014
Change

2012-2013
Change

License and Collaborative Fees

License and collaborative fee revenue includes fees and milestone payments related to the out-licensing of
our products and technologies. The primary components of license and collaboration fee revenue in 2014 were
$3.0 million in milestone payments relating to various out-licensing arrangements, including $1.9 million in
revenue recognized related to the loan agreement with Servier and $0.8 million in upfront fees and annual
maintenance fees relating to various out-licensing arrangements.

The primary components of license and collaboration fee revenue in 2013 were $8.6 million in milestone

payments relating to various out-licensing arrangements, including a $7.0 million milestone payment from
Novartis, $1.6 million in revenue recognized related to the loan agreement with Servier, and $0.8 million in
upfront fees and annual maintenance fees relating to various out-licensing arrangements.

The primary components of license and collaboration fee revenue in 2012 were $3.3 million in upfront fees
and annual maintenance fees relating to various out-licensing arrangements, $1.4 million in revenue recognized
related to the loan agreement with Servier, and $1.0 million recognized for six milestone payments.

Contract and Other Revenue

Contract and other revenues include agreements where we provide contracted research and development
services to our contract and collaboration partners, including Servier and NIAID. Contract and other revenues
also include net product sales and royalties. The following table shows the activity in contract and other revenue
for the years ended December 31, 2014, 2013, and 2012 (in thousands):

Servier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NIAID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,523
9,565
95

$13,568
9,098
1,757

$14,529
11,191
2,335

$(10,045) $ (961)
(2,093)
(578)

467
(1,662)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,183

$24,423

$28,055

$(11,240) $(3,632)

Year ended December 31,

2014

2013

2012

2013-2014
Change

2012-2013
Change

The 2014 decrease in contract and other revenue, as compared to 2013, was primarily due to a decrease of

$6.3 million in reimbursement due to our collaboration with Servier meeting the initial $50.0 million cap of fully
reimbursable NIU costs in third quarter of 2013. Servier and XOMA will each pay 50% of the remaining NIU
clinical development and CMC costs. Also contributing to the decrease were a decrease of $3.9 million for the
partial funding of fixed dose combination of perindopril arginine and amlodipine besylate (“FDC1”) Phase 3 trial
received from Servier in 2013 for which there was no equivalent payment received in 2014, a decrease of $0.8
million received from ACEON sales and a decrease of $0.7 million in manufacturing activities for Allergan. The
decrease in contracts and other revenue was partially offset by a $0.5 million increase in NIAID related revenue.

57

The 2013 decrease in contract and other revenue, as compared to 2012, was primarily due to the 2012
recognition of $2.0 million in revenue related to an adjustment to previously reported revenue from NIAID
resulting from an audit by NIAID’s contracting office. Also contributing to the decrease were decreases of $1.4
million in CMC activity and $0.6 million in gevokizumab clinical development activity under our collaboration
with Servier, partially offset by a $0.9 million increase in partial funding received from Servier for the FDC1
Phase 3 trial.

We expect revenue to increase in 2015 compared to 2014 levels based on anticipated licensing activities.

The following table shows the activity in deferred revenue for the years ended December 31, 2014, 2013,

and 2012 (in thousands):

Year ended December 31,

2014

2013

2012

Beginning deferred revenue . . . . . . . . . . . . . . . . .
Revenue deferred . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue recognized . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue adjustment . . . . . . . . . . . . . . . .

$ 6,323
798
(2,246)
(1,847)

$ 9,724
1,478
(4,879)
—

$13,234
5,881
(9,391)
—

Ending deferred revenue . . . . . . . . . . . . . . . . . . .

$ 3,028

$ 6,323

$ 9,724

We defer revenue until all requirements under our revenue recognition policy are met. In 2014, we deferred

revenue from contracts including Servier and NIAID. In 2013 and 2012, we deferred revenue from contracts
including Servier, NIAID and Takeda.

In 2014, we recorded an adjustment to reduce deferred revenue by $1.8 million as a result of a final

settlement with NIAID upon the completion of their review of billed hours and external expenses.

We expect a significant portion of the $3.0 million in deferred revenue as of December 31, 2014 to be
recognized in 2015 with the remainder to be earned during 2016. Future amounts may be affected by additional
consideration received, if any, under existing or any future licensing or other collaborative arrangements as well
as changes in the estimated period of obligation or services to be provided under the arrangements.

Research and Development Expenses

Biopharmaceutical development includes a series of steps, including in vitro and in vivo preclinical testing,
and Phase 1, 2 and 3 clinical studies in humans. Each of these steps is typically more expensive than the previous
step, but actual timing and the cost to us depends on the product being tested, the nature of the potential disease
indication and the terms of any collaborative or development arrangements with other companies or entities.
After successful conclusion of all of these steps, regulatory filings for approval to market the products must be
completed, including approval of manufacturing processes and facilities for the product. Our research and
development expenses currently include costs of personnel, supplies, facilities and equipment, consultants, other
third-party costs and expenses related to preclinical and clinical testing.

Research and development expenses were $80.7 million in 2014, compared with $74.9 million in 2013 and

$68.5 million in 2012. The increase of $5.8 million in 2014, compared to 2013, was primarily due to higher
clinical trial-related cost, salaries and related personnel costs and outside consulting services, partially offset by
decrease in external manufacturing activities. External manufacturing activity, internal proprietary project cost
and salaries and related personnel costs increased in 2013, as compared to 2012, however, this increase was
offset by decreases in FDC clinical trial costs and internal facility costs.

Salaries and related personnel costs are a significant component of research and development expenses. We

recorded $31.8 million in research and development salaries and employee-related expenses in 2014, compared

58

with $27.0 million in 2013 and $25.9 million in 2012. Included in these expenses for 2014 were $23.4 million for
salaries and benefits, $2.8 million for bonus expense and $5.6 million for stock-based compensation. The
increase in salaries and personnel costs in 2014, as compared to 2013, was primarily due to an increase in salaries
and benefits of $1.6 million resulting from increased headcount and an increase of $3.2 million in stock-based
compensation.

Included in these expenses for 2013 were $21.7 million for salaries and benefits, $2.9 million for bonus

expense and $2.4 million for stock-based compensation. The increase in 2013, as compared to 2012, was
primarily due to an increase in salaries and benefits of $0.9 million resulting from increased headcount.

Our research and development activities can be divided into earlier-stage programs and later-stage
programs. Earlier-stage programs include molecular biology, process development, pilot-scale production and
preclinical testing. Also included in earlier-stage programs are costs related to excess manufacturing capacity.
We expect excess manufacturing capacity to continue to decrease in 2015 compared to 2014 due to our
streamlining objective implemented in 2012 to utilize a contract manufacturing organization. Later-stage
programs include clinical testing, regulatory affairs and manufacturing clinical supplies. The costs associated
with these programs approximate the following (in thousands):

Earlier stage programs (1) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Later stage programs (1)

$28,327
52,421

$40,840
34,011

$33,170
35,297

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$80,748

$74,851

$68,467

Year ended December 31,

2014

2013

2012

(1) Certain research and development segment reclassifications have been made to previously reported amounts

to conform to the current year’s presentation.

Our research and development activities also can be divided into those related to our internal projects and

those projects related to collaborative and contract arrangements. The costs related to internal projects versus
collaborative and contract arrangements approximate the following (in thousands):

Year ended December 31,

2014

2013

2012

Internal projects (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collaborative and contract arrangements (1) . . . . . . . . . . . . . . . . . . .

$51,281
29,467

$47,489
27,362

$30,531
37,936

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$80,748

$74,851

$68,467

(1) Certain research and development segment reclassifications have been made to previously reported amounts

to conform to the current year’s presentation.

In 2014, the gevokizumab program, for which we incurred the largest amount of expense, accounted for

more than 40% but less than 50% of our total research and development expenses. A second development
program, XMet, accounted for more than 10% but less than 20% of our total research and development expenses
and a third development program, NIAID, accounted for more than 10% but less than 20% of our total research
and development expenses.

In 2013, the gevokizumab program, for which we incurred the largest amount of expense, accounted for
more than 40% but less than 50% of our total research and development expenses. XMet, accounted for more
than 20% but less than 30% of our total research and development expenses. NIAID accounted for more than
10% but less than 20% of our total research and development expenses.

59

In 2012, the gevokizumab program, for which we incurred the largest amount of expense, accounted for
more than 40% but less than 50% of our total research and development expenses. NIAID accounted for more
than 20% but less than 30% of our total research and development expenses and XMet accounted for more than
10% but less than 20% of our total research and development expenses.

We expect our research and development spending in 2015 will be comparable primarily due to our ongoing

global Phase 3 clinical program for gevokizumab for the NIU indication under our license and collaboration
agreement with Servier, our ongoing gevokizumab Phase 2 proof-of-concept program, our PG indications and the
continued development of our XMet program.

Future research and development spending also may be impacted by potential new licensing or collaboration

arrangements, as well as the termination of existing agreements. Beyond this, the scope and magnitude of future
research and development expenses are difficult to predict at this time.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include salaries and related personnel costs, facilities cost and
professional fees. In 2014, selling, general and administrative expenses were $19.9 million compared with $18.5
million in 2013 and $16.9 million in 2012. The increase in selling, general and administrative expenses in 2014
as compared with 2013 was primarily due to increases in salaries and related personnel costs of $1.1 million, and
an increase of $2.5 million in stock-based compensation, partially offset by a decrease in professional service
costs of $1.7 million.

The increase in selling, general and administrative expenses in 2013 as compared with 2012 primarily was

due to increases in consulting services of $1.3 million, primarily reflecting investments in market research
activities made during 2013, and salaries and related personnel costs of $0.5 million, partially offset by a
decrease in profession service costs of $0.6 million.

We expect selling, general and administrative expenses in 2015 to be comparable to 2014 levels.

Restructuring Charges

In January 2012, we implemented a streamlining of operations, which resulted in a restructuring plan
designed to sharpen our focus on value-creating opportunities led by gevokizumab and its unique antibody
discovery and development capabilities. The restructuring plan included a reduction of XOMA’s personnel by 84
positions, or 34%. These staff reductions resulted primarily from our decisions to utilize a contract
manufacturing organization for Phase 3 and commercial antibody production and to eliminate internal research
functions that are non-differentiating or that can be obtained cost effectively by contract service providers.

In connection with the streamlining of operations, we incurred restructuring charges in 2012 of $2.0 million
related to severance, other termination benefits and outplacement services, $2.2 million related to the impairment
and accelerated depreciation of various assets and leasehold improvements, and $0.7 million related to moving
and other facility costs. In 2014 and 2013, we incurred $0.1 million and $0.3 million, respectively in
restructuring charges related to facility costs.

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Other Income (Expense)

Interest Expense

Interest expense and amortization of debt issuance costs and discounts are shown below for the years ended

December 31, 2014, 2013, and 2012 (in thousands):

Year ended December 31,

2014

2013

2012

2013-2014
Change

2012-2013
Change

Interest expense
Servier loan . . . . . . . . . . . . . . . . . . .
GECC term loan . . . . . . . . . . . . . . .
Novartis note . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Other

$2,330
1,638
312
23

$2,152
2,064
362
53

$2,097
1,850
397
43

Total interest expense . . . . . . . . . .

$4,303

$4,631

$4,387

$ 178
(426)
(50)
(30)

$(328)

$ 55
214
(35)
10

$244

The decrease in interest expense in 2014 as compared to 2013 was due primarily to a decrease in the

principal balance of GECC term loan.

The increase interest expense in 2013 as compared to 2012 was due primarily to an increase in the principal

balance of the GECC term loan, which was amended in September 2012.

Other Income (Expense)

Other expense primarily consisted of unrealized (losses) gains. The following table shows the activity in

other expense for the years ended December 31, 2014, 2013, and 2012 (in thousands):

Year ended December 31,

2014

2013

2012

2013-2014
Change

2012-2013
Change

Other income (expense)
Unrealized foreign exchange gain (loss) (1) . . . . . . . . . . . . . . . . .
Realized foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on foreign exchange options . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

$2,447
—
(355)
(31)

$(442) $(329)
6
(714)
81

(90)
(127)
462

$2,889
90
(228)
(493)

$(113)
(96)
587
381

Total other income (expense)

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,061

$(197) $(956)

$2,258

$ 759

(1) Unrealized foreign exchange gain (loss) for the years ended December 31, 2014, 2013, and 2012 primarily

relates to the re-measurement of the €15 million Servier loan.

Revaluation of Contingent Warrant Liabilities

In December 2014, in connection with a registered direct offering, we issued two-year warrants to purchase

8,097,165 shares of XOMA’s common stock at an exercise price of $7.90 per share. These warrants contain
provisions that are contingent on the occurrence of a change in control, which could conditionally obligate us to
repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Option Pricing
Model (the “Black-Scholes Model”) on the date of such change in control. Due to these provisions, we account
for the warrants issued in December 2014 as a liability at fair value. In addition, the estimated liability related to
the warrants is revalued at each reporting period until the earlier of the exercise of the warrants, at which time the
liability will be reclassified to stockholders’ equity, or expiration of the warrants. As of December 8, 2014, the
date of issuance of the warrants, the fair value of the liability was estimated to be approximately $10.3 million
using the Black-Scholes Model. We revalued the warrant liability at December 31, 2014, and recorded a $5.1
million decline in the fair value as a gain in the revaluation of contingent warrant liabilities in the consolidated

61

statements of comprehensive loss. The decrease in liability is due primarily to the decrease in the market price of
XOMA’s common stock at December 31, 2014. As of December 31, 2014, all of the warrants were outstanding
and had a fair value of $5.2 million.

In March 2012, in connection with an underwritten offering, we issued five-year warrants to purchase

14,834,577 shares of XOMA’s common stock at an exercise price of $1.76 per share. These warrants contain
provisions that are contingent on the occurrence of a change in control, which could conditionally obligate us to
repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Model on the date
of such change in control. Due to these provisions, we account for the warrants issued in March 2012 as a
liability at fair value. In addition, the estimated liability related to the warrants is revalued at each reporting
period until the earlier of the exercise of the warrants, at which time the liability will be reclassified to
stockholders’ equity, or expiration of the warrants. At December 31, 2013, 12,562,682 of these warrants were
outstanding and had a fair value of $68.7 million. We revalued the warrant liability at December 31, 2014 using
the Black-Scholes Model and recorded a $39.5 million decline in the fair value as a gain in the revaluation of
contingent warrant liabilities in the accompanying consolidated statements of comprehensive loss. In 2014, we
also reclassified $2.5 million from contingent warrant liabilities to equity on our consolidated balance sheet due
to the exercise of warrants. As of December 31, 2014, 12,109,418 of these warrants were outstanding and had a
fair value of $26.7 million.

In February 2010, in connection with an underwritten offering, we issued five-year warrants to purchase

1,260,000 shares of XOMA’s common stock at an exercise price of $10.50 per share. The warrants contain
provisions that are contingent on the occurrence of a change in control, which could conditionally obligate us to
repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Model on the date
of such change in control. Due to these provisions, we account for the warrants as liabilities at fair value. As of
December 31, 2013, all of the warrants were outstanding and had a fair value of $1.0 million, using the Black-
Scholes Model. We revalued the warrant liability at December 31, 2014 using the Black-Scholes Model and
recorded a $1.0 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities in
the accompanying consolidated statements of comprehensive loss. As of December 31, 2014, all of the warrants
were outstanding and the fair value was de minimis. The decrease in liability is due primarily to the decrease in
the market price of XOMA’s common stock at December 31, 2014.

In June 2009, we issued warrants to certain institutional investors as part of a registered direct offering. The

warrants represent the right to acquire an aggregate of up to 347,826 shares of XOMA’s common stock over a
five-year period beginning December 11, 2009 at an exercise price of $19.50 per share. The warrants contain
provisions that are contingent on the occurrence of a change in control, which could conditionally obligate us to
repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes Model on the date
of such change in control. Due to these provisions, we account for the warrants as liabilities at fair value. At
December 31, 2013 all of the warrants were outstanding and had a fair value of $0.1 million using the Black-
Scholes Model. As of December 31, 2014, the warrants had expired unexercised.

62

The following table provides a summary of the changes in fair value of contingent warrant liabilities for the

years ended December 31, 2014, 2013, and 2012 (in thousands):

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
Initial fair value of warrants issued in March 2012 . . . . . . . .
Reclassification of contingent warrant liability to equity

Warrant
Liabilities

$

379
6,390

upon exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . .

(940)

Net increase in fair value of contingent warrant liabilities

upon revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of contingent warrant liability to equity

9,172

15,001

upon exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,171)

Net increase in fair value of contingent warrant liabilities

upon revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .
Initial fair value of warrants issued in December 2014

61,039

69,869

warrant

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,258

Reclassification of contingent warrant liability to equity

upon exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,526)

Net decrease in fair value of contingent warrant liabilities

upon revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(45,773)

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . .

$ 31,828

Income Taxes

There was no income tax expense for the years ended December 31, 2014, 2013 and 2012. The income tax

benefit in 2013 and 2012 relates to federal refundable credits.

Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”) provides for the recognition of

deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available
evidence, which includes our historical operating performance and carry-back potential, we have determined that
total deferred tax assets should be fully offset by a valuation allowance.

We have recorded cumulative gross deferred tax assets of $190.1 million and $160.1 million at
December 31, 2014 and 2013, respectively, principally attributable to the timing of the deduction of certain
expenses associated with certain research and development expenses, net operating loss and other carry-forwards.
We also recorded corresponding valuation allowances of $190.1 million and $160.1 million at December 31,
2014 and 2013, respectively, to offset these deferred tax assets, as management cannot predict with reasonable
certainty that the deferred tax assets to which the valuation allowances relate will be realized.

As of December 31, 2014, we had federal net operating loss carry-forwards (“NOLs”) of approximately

$292.3 million and state net operating loss carry-forwards of approximately $132.3 million to offset future
taxable income. We also had federal research and development tax credit carry-forwards of approximately $1.5
million and state research and development tax credit carry-forwards of approximately $18.1 million.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-

change NOLs and certain other pre-change tax attributes that can be utilized to an annual limitation), we
experienced ownership changes in 2009 and 2012 which substantially limit the future use of our pre-change
NOLs and certain other pre-change tax attributes per year. We have excluded the NOLs and R&D credits that

63

will expire as a result of the annual limitations in the deferred tax assets as of December 31, 2014. To the extent
that we do not utilize our carry-forwards within the applicable statutory carry-forward periods, either because of
Section 382 limitations or the lack of sufficient taxable income, the carry-forwards will expire unused.

We do not expect the unrecognized tax benefits to change significantly over the next twelve months. We
will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax
expense. As of December 31, 2014, we have not accrued interest or penalties related to uncertain tax positions.

Liquidity and Capital Resources

The following table summarizes our cash, cash equivalents and short-term investments, our working capital

and our cash flow activities as of the end of, and for each of, the periods presented (in thousands):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working Capital

$78,445
$ —
$47,367

$101,659
$ 19,990
$ 97,415

December 31,

2014

2013

2013-2014
Change

$(23,214)
$(19,990)
$(50,048)

Year ended December 31,

2014

2013

2012

2013-2014
Change

2012-2013
Change

Net cash used in operating activities . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . .
Net cash provided by financing activities . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . .

$(78,282) $(45,915) $(40,765) $(32,367) $ (5,150)
60,856
(42,016)
3,607
79,782
—
—

835
(47,829)
(167)

19,675
35,560
(167)

18,840
83,389
—

Net (decrease) increase in cash and cash equivalents . . .

$(23,214) $ 56,314 $ (2,999) $(79,528) $59,313

Working Capital

The decrease in working capital in 2014 as compared to 2013 was primarily due to XOMA’s gevokizumab

clinical development programs and preclinical development activities related to the XMet platform. Also,
contributing to the decrease was the reclassification from long-term to short-term liabilities of $16.3 million of
principal payment related to our loans with GECC and Novartis, which are due to mature in June 2015. The
increase is partially offset by the completion of an equity offering in 2014 contributing to a net $37.7 million
increase in cash and cash equivalents.

On February 27, 2015, XOMA entered into the Hercules Loan Agreement, under which we borrowed
$20.0 million. We used a portion of the proceeds received under the Hercules Loan Agreement to repay GECC’s
outstanding balance and interest of $5.5 million. Refer to the Subsequent Events section below for further
information regarding the Hercules Loan Agreement.

Cash Used in Operating Activities

The increase in net cash used in operating activities in 2014 as compared to 2013 was primarily due an
increase in research and development spending primarily related to gevokizumab clinical development programs
and an increase in salaries and related personnel expenses primarily related to an increase in headcount.

The increase in net cash used in operating activities in 2013 as compared to 2012 was primarily due to an

increase in research and development spending relating to external manufacturing costs and internal proprietary
projects.

64

We expect net cash used in operating activities in 2015 to decrease compared to 2014 levels due to projected

spending levels and anticipated licensing activities.

Cash Used in Investing Activities

Cash provided by investing activities for the year ended December 31, 2014, consisted of $20.0 million in

proceeds from maturities of investments, partially offset by $0.3 million in purchases of fixed assets. Cash
provided by investing activities for the year ended December 31, 2013, consisted of $40.0 million in proceeds
from maturities of short-term investments, partially offset by purchases of short-term investments of $20.0
million and fixed asset purchases of $1.2 million. Cash used in investing activities for the year ended
December 31, 2012, consisted of purchases of short-term investments of $57.0 million and fixed asset purchases
of $2.5 million, partially offset by $17.0 million in proceeds from maturities of short-term investments and $0.5
million in proceeds from the sale of fixed assets.

Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2014, was primarily related to net

proceeds received from the issuance of common stock of $37.7 million, net of offering expenses, from the
December 2014 registered direct offering, and $3.7 million from employee stock purchases. These net proceeds
were partially offset by $5.9 million of principal payments on our loans with GECC and Novartis. Refer to the
Subsequent Events section below for information regarding debt financing activity in February 2015.

Net cash provided by financing activities for the year ended December 31, 2013, was primarily related to net

proceeds received from the issuance of common stock of $29.4 million from the August 2013 public offering,
$53.6 million from the December 2013 public offering, $2.2 million of net proceeds from the exercise of
warrants, and $1.4 million of net proceeds received from employee stock purchases. These net proceeds were
partially offset by $3.1 million of principal payments on our loan with GECC.

Net cash provided by financing activities for the year ended December 31, 2012, was primarily related to net

proceeds received from the issuance of common stock of $77.5 million, including net proceeds of $36.2 million
from the March 2012 underwritten public offering, net proceeds of $37.0 million from the October 2012
underwritten public offering, net proceeds of $3.2 million received from the issuance of common stock under the
2011 ATM Agreement, net proceeds of $1.0 million from the exercise of warrants issued as part of the March
2012 underwritten public offering, and net proceeds of $0.2 million from the exercise of outstanding options.
Also contributing to net cash provided by financing activities was net loan proceeds of $4.4 million received
from GECC, partially offset by $2.1 million principal payments on our loan with GECC.

Registered Direct Offerings

In June of 2009, we entered into a definitive agreement with certain institutional investors to sell 695,652
units, with each unit consisting of one share of our common stock and a warrant to purchase 0.50 of a share of
our common stock, for gross proceeds of approximately $12.0 million, before deducting placement agent fees
and estimated offering expenses of $0.8 million, in a second registered direct offering. The investor purchased
the units at a price of $17.25 per unit. The warrants, which represent the right to acquire an aggregate of up to
347,826 shares of common stock, are exercisable at any time on or prior to December 10, 2014 at an exercise
price of $19.50 per share. As of December 31, 2014 these warrants were expired.

On December 8, 2014, we completed a registered direct offering of 8,097,165 shares of our common stock,
and accompanying warrants to purchase up to 8,097,165 shares of our common stock at a public offering price of
$4.94 per share to certain institutional investors. Total gross proceeds from the offering were approximately
$40.0 million, before deducting underwriting discounts and commissions and offering expenses totaling
approximately $2.3 million. The warrants are exercisable immediately and have a two-year term and an exercise
price of $7.90 per share. As of December 31, 2014, all of these warrants were outstanding.

65

Underwritten Offerings

In February 2010, we completed an underwritten offering of 2.8 million units, with each unit consisting of

one share of our common stock and a warrant to purchase 0.45 of a share of our common stock, for gross
proceeds of approximately $21.0 million, before deducting underwriting discounts and commissions and
estimated offering expenses of $1.7 million. The warrants, which represent the right to acquire an aggregate of up
to 1.26 million shares of our common stock, are exercisable beginning six months and one day after issuance and
have a five-year term and an exercise price of $10.50 per share. As of December 31, 2014, all of these warrants
were outstanding.

On March 9, 2012, we completed an underwritten public offering of 29,669,154 shares of our common
stock, and accompanying warrants to purchase one half of a share of common stock for each share purchased, at
a public offering price of $1.32 per share. Total gross proceeds from the offering were approximately $39.2
million, before deducting underwriting discounts and commissions and offering expenses totaling approximately
$3.0 million. The warrants, which represent the right to acquire an aggregate of up to 14,834,577 shares of
common stock, are exercisable immediately and have a five-year term and an exercise price of $1.76 per share.
As of December 31, 2014, 12,109,418 of these warrants were outstanding.

On October 29, 2012, we completed an underwritten public offering of 13,333,333 shares of our common
stock, at a public offering price of $3.00 per share. Total gross proceeds from the offering were approximately
$40.0 million, before deducting underwriting discounts and commissions and offering expenses totaling
approximately $3.0 million.

On August 23, 2013, we completed an underwritten public offering of 8,736,187 shares of our common

stock, including 1,139,502 shares of our common stock that were issued upon the exercise of the underwriters’
30-day over-allotment option, at a public offering price of $3.62 per share. Total gross proceeds from the offering
were approximately $31.6 million, before deducting underwriting discounts and commissions and estimated
offering expenses totaling approximately $2.2 million.

On December 18, 2013, we completed an underwritten public offering of 10,925,000 shares of our common

stock, including 1,425,000 shares of our common stock that were issued upon the exercise of the underwriters’
30-day over-allotment option, at a public offering price of $5.25 per share. Total gross proceeds from the offering
were approximately $57.4 million, before deducting underwriting discounts and commissions and estimated
offering expenses totaling approximately $3.8 million.

ATM Agreements

On February 4, 2011, we entered into an At Market Issuance Sales Agreement (the “2011 ATM

Agreement”), with McNicoll, Lewis & Vlak LLC (now known as MLV & Co. LLC, “MLV”), under which we
may sell shares of our common stock from time to time through MLV, as our agent for the offer and sale of the
shares, in an aggregate amount not to exceed the amount that can be sold under our registration statement on
Form S-3 (File No. 333-172197) filed with the SEC on February 11, 2011, and amended on March 10, 2011,
June 3, 2011, and January 3, 2012, which was most recently declared effective by the SEC on January 17, 2012.
MLV may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in
Rule 415 of the Securities Act, including without limitation sales made directly on The NASDAQ Global
Market, on any other existing trading market for our common stock or to or through a market maker. MLV also
may sell the shares in privately negotiated transactions, subject to our prior approval. We will pay MLV a
commission equal to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under
the 2011 ATM Agreement. From the inception of the 2011 ATM Agreement through December 31, 2013, we
sold a total of 7,572,327 shares of common stock under this agreement for aggregate gross proceeds of $14.6
million. No shares of common stock have been sold under this agreement since February 3, 2012. Total offering
expenses incurred related to sales under the 2011 ATM Agreement from inception to December 31, 2013, were
$0.5 million. The registration statement under which the 2011 ATM was entered expired in June of 2014, and as
of December 31, 2014, the 2011 ATM agreement is expired.

66

Servier Loan

In December 2010, we entered into a loan agreement with Servier (the “Servier Loan Agreement”), which
provided for an advance of up to €15.0 million. The loan was fully funded in January 2011, with the proceeds
converting to approximately $19.5 million at the date of funding. The loan is secured by an interest in XOMA’s
intellectual property rights to all gevokizumab indications worldwide, excluding certain rights in the U.S. and
Japan. Interest is calculated at a floating rate based on a Euro Inter-Bank Offered Rate (“EURIBOR”) and is
subject to a cap. The interest rate is reset semi-annually in January and July of each year. The interest rate for the
initial interest period was 3.22% and was reset semi-annually ranging from 2.31% to 3.83%. Interest for the six-
month period from mid-January 2015 through mid-July 2015 was reset to 2.16%. Interest is payable semi-
annually; however, the Servier Loan Agreement provides for a deferral of interest payments over a period
specified in the agreement. During the deferral period, accrued interest will be added to the outstanding principal
amount for the purpose of interest calculation for the next six-month interest period. On the repayment
commencement date, all unpaid and accrued interest shall be paid to Servier, and thereafter, all accrued and
unpaid interest shall be due and payable at the end of each six-month period. In January 2015, we paid $0.2
million in accrued interest to Servier. The loan matures in 2016; however, after a specified period prior to final
maturity, the loan is to be repaid (i) at Servier’s option, by applying up to a significant percentage of any
milestone or royalty payments owed by Servier under our collaboration agreement and (ii) using a significant
percentage of any upfront, milestone or royalty payments we receive from any third-party collaboration or
development partner for rights to gevokizumab in the U.S. and/or Japan. In addition, the loan becomes
immediately due and payable upon certain customary events of default. At December 31, 2014, the outstanding
principal balance under this loan was $18.2 million using the December 31, 2014 Euro to U.S. Dollar exchange
rate of 1.216. On January 9, 2015, Servier and we entered into Amendment No. 2 (“Loan Amendment”), to the
Servier Loan Agreement initially entered into on December 30, 2010, and subsequently amended by a Consent,
Transfer, Assumption and Amendment Agreement entered into as of August 12, 2013. Refer to the Subsequent
Events section below for further information regarding Amendment No. 2 to the Servier Loan Agreement.

GECC Term Loan

In December 2011, we entered into a loan agreement (the “GECC Loan Agreement”) with GECC, under

which GECC agreed to make a term loan in an aggregate principal amount of $10 million (the “Term Loan”) to
us, and upon execution of the GECC Loan Agreement, GECC funded the Term Loan. As security for our
obligations under the GECC Loan Agreement, we granted a security interest in substantially all of our existing
and after-acquired assets, excluding our intellectual property assets (such as those relating to our gevokizumab
and anti-botulism products). The Term Loan accrued interest at a fixed rate of 11.71% per annum and was to be
repaid over a period of 42 consecutive equal monthly installments of principal and accrued interest and was due
and payable in full on June 15, 2015. We incurred debt issuance costs of approximately $1.3 million in
connection with the Term Loan and were required to pay a final payment fee equal to $500,000 on the maturity
date, or such earlier date as the Term Loan is paid in full.

In connection with the GECC Loan Agreement, we issued to GECC unregistered warrants that entitle GECC

to purchase up to an aggregate of 263,158 unregistered shares of XOMA common stock at an exercise price
equal to $1.14 per share. These warrants were exercisable immediately upon issuance and have a five-year term.

In September 2012, we entered into an amendment to the GECC Loan Agreement providing for an additional
term loan in the amount of $4.6 million, increasing the term loan obligation to $12.5 million (the “Amended Term
Loan”) and providing for an interest-only monthly repayment period following the effective date of the amendment
through March 1, 2013, at a stated interest rate of 10.9% per annum. Thereafter, we are obligated to make monthly
principal payments of $347,222, plus accrued interest, over a 27-month period commencing on April 1, 2013, and
through June 15, 2015, at which time the remaining outstanding principal amount of $3.1 million, plus accrued
interest, is due. We incurred debt issuance costs of approximately $0.2 million and are required to make a final
payment fee in the amount of $875,000 on the date upon which the outstanding principal amount is required to be
repaid in full. This final payment fee replaced the original final payment fee of $500,000.

67

In connection with the amendment, on September 27, 2012, we issued to GECC unregistered stock purchase

warrants, which entitle GECC to purchase up to an aggregate of 39,346 shares of XOMA common stock at an
exercise price equal to $3.54 per share. These warrants were exercisable immediately upon issuance and have a
five-year term.

At December 31, 2014, the outstanding principal balance under the Amended Term Loan was $5.2 million.

On February 27, 2015, XOMA entered into the Hercules Loan Agreement, under which we borrowed $20.0
million. We used a portion of the proceeds to repay GECC’s outstanding balance and interest of $5.5 million.
Refer to the Subsequent Event section below for further information regarding the Hercules Loan Agreement.

Proceeds received during the years 2014, 2013, and 2012 are being used to continue development of our

gevokizumab and XMet product candidate and for other working capital and general corporate purposes.

*

*

*

We have incurred operating losses since inception and have an accumulated deficit of $1.1 billion at

December 31, 2014. Management expects operating losses and negative cash flows to continue for the
foreseeable future. As of December 31, 2014, we had $78.4 million in cash and cash equivalents, which is
available to fund future operations. Taking into account the repayment of our outstanding debt classified within
current liabilities on our Consolidated Balance Sheet as of December 31, 2014, we anticipate that we will be
required to seek additional equity or debt financing or to increase the level of collaborative revenue to fund
operations through at least December 31, 2015. If we are unable to achieve the level of revenues from licensing,
development and collaboration agreements and the level of government funding and external financing during
2015, as contemplated in our operating plan, we have plans to implement certain cost cutting actions
commencing early in the fourth quarter of 2015 to reduce our working capital requirements. Consistent with the
actions we have taken in the past, we will prioritize necessary and appropriate steps to enable the continued
operations of the business and preservation of the value of our assets beyond the next twelve months, including
but not limited to actions, such as reduced personnel-related costs, additional curtailment of our development
activities and other discretionary expenditures that are within our control. These reductions in expenditures, if
required, may have an adverse impact on our ability to achieve certain of our planned objectives during 2015. In
addition to seeking equity or debt financing, we may seek to access additional capital to support future operations
through licensing, partnering or other strategic collaborative arrangements. It is unclear if or when any such
transactions will occur, on satisfactory terms or at all.

Our ability to raise additional capital in the equity and debt markets, should we choose to do so, is

dependent on a number of factors, including, but not limited to, the market demand for our common stock, which
itself is subject to a number of pharmaceutical development and business risks and uncertainties, as well as the
uncertainty that we would be able to raise such additional capital at a price or on terms that are favorable to us.

Commitments and Contingencies

Schedule of Contractual Obligations

Payments by period due under contractual obligations at December 31, 2014, are as follows (in thousands):

Contractual Obligations

Operating leases (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt Obligations (2)
Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

Less than
1 year

1 to 3 years

3 to 5 years

More than
5 years

$28,923

$ 3,428

$ 7,167

$7,594

$10,733

36,797
1,926

18,565
1,711

18,232
215

—
—

—
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$67,646

$23,704

$25,614

$7,594

$10,733

68

(1) See Note 11: Commitment and Contingencies to the accompanying consolidated financial statements for

further discussion.

(2) See Item 7A: Quantitative and Qualitative Disclosures about Market Risk and Note 7: Long-Term Debt and
Other Arrangements to the accompanying consolidated financial statements for further discussion of our
debt obligation. Refer to Management’s Discussion and Analysis of Financial Condition and Results of
Operations for further information regarding the Hercules Loan Agreement.

We lease administrative, research facilities and office equipment under operating leases expiring on various

dates through April 2023. These leases require us to pay taxes, insurance, maintenance and minimum lease
payments. In addition to the above, we have committed to make potential future “milestone” payments to third
parties as part of licensing and development programs. Payments under these agreements become due and
payable only upon the achievement of certain developmental, regulatory and/or commercial milestones. Because
it is uncertain if and when these milestones will be achieved, such contingencies, aggregating up to $77.3 million
(assuming one product per contract meets all milestones) have not been recorded on our consolidated balance
sheet as of December 31, 2014. We are also obligated to pay royalties, ranging generally from 0.5% to 5% of the
selling price of the licensed component and up to 40% of any sublicense fees 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. We are unable to determine precisely when and if our payment
obligations under the agreements will become due as these obligations are based on future events, the
achievement of which is subject to a significant number of risks and uncertainties.

Although operations are influenced by general economic conditions, we do not believe inflation had a
material impact on financial results for the periods presented. We believe that we are not dependent on materials
or other resources that would be significantly impacted by inflation or changing economic conditions in the
foreseeable future.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K

promulgated by the SEC.

Subsequent Events

On January 9, 2015, Servier and we entered into Amendment No. 2 (“Loan Amendment”), to the Servier
Loan Agreement initially entered into on December 30, 2010, and subsequently amended by a Consent, Transfer,
Assumption and Amendment Agreement entered into as of August 12, 2013. The Loan Amendment modifies the
maturity date of the loan from January 13, 2016 to three tranches due on January 15, 2016, January 15, 2017 and
January 15, 2018 and provides that principal shall be repaid as follows: €3.0 million to be repaid on January 15,
2016, €5.0 million to be repaid on January 15, 2017 and €7.0 million to be repaid on January 15, 2018. All other
terms of the Loan Agreement remain unchanged, including the interest rate calculations, EURIBOR+2% and the
formula for resetting the interest rate on the 15th of January and July each year.

On January 9, 2015, Servier and we entered into Amendment No. 2 to the Collaboration Agreement. Under

the Collaboration Agreement, we are eligible to receive up to approximately $433 million in the aggregate in
milestone payments, most of which were denominated in Euros, if XOMA re-acquires cardiovascular and/or
diabetes rights for use in the United States, and approximately $770 million in aggregate milestone payments if
we do not re-acquire those rights. Under the Collaboration Amendment, we would be eligible to receive up to
$415 million in the aggregate in milestone payments in the event we re-acquire the cardiovascular and/or
diabetes rights for use in the United States and approximately $752 million if we do not re-acquire those rights.
The milestone reductions are related to a very low prevalence indication of which Servier would not have
pursued development had these payments been required. All other terms of the Collaboration Agreement remain
unchanged.

69

On January 26, 2015, Symplmed Pharmaceuticals announced that the FDA approved PRESTALIA®
(perindopril arginine and amlodipine) tablets, licensed from Servier, for the treatment of hypertension. In July
2013, we transferred the development and commercialization rights of Prestalia to Symplmed. Pursuant to the
transfer agreement with Symplmed, we will receive up to double-digit in royalties on sales of PRESTALIA.

On February 26, 2015, Fred Kurland, Vice President, Finance, Chief Financial Officer and Secretary of
XOMA, who serves as the Company’s principal financial and accounting officer, notified the Board of Directors
of XOMA of his retirement from XOMA, effective as of April 3, 2015. Mr. Kurland qualifies as “retirement
eligible” under our equity incentive plan and will, therefore, be eligible to hold the awards of options and
restricted stock units for the remainder of the life of each award granted to him by us. On February 26, 2015,
XOMA’s Board of Directors appointed Thomas Burns, currently Vice President, Finance of the Company as our
Chief Financial Officer, effective immediately upon Mr. Kurland’s retirement from XOMA. As Chief Financial
Officer, Mr. Burns will serve as the XOMA’s principal financial and accounting officer.

On February 27, 2015, Hercules and we entered into a Loan and Security Agreement (the “Hercules Loan

Agreement”), under which we borrowed $20.0 million. We used a portion of the proceeds under the Hercules
Loan Agreement to repay GECC’s outstanding principle balance and interest of $5.5 million and we plan to use
the remaining proceeds for general corporate purposes. The interest rate will be calculated at a rate equal to the
greater of either (i) 9.40% plus the prime rate as reported from time to time in The Wall Street Journal minus
7.25%, and (ii) 9.40%. Payments under the Hercules Loan Agreement are interest only until one month prior to
the Amortization Date, defined as July 1, 2016 (which will be extended to October 1, 2016, if we achieve certain
clinical milestones on or before July 1, 2016). The interest only period will be followed by equal monthly
payments of principal and interest amortized over a 30-month schedule through the scheduled maturity date of
September 1, 2018 (the “Loan Maturity Date”). The entire principal balance, including a balloon payment of
principal, as applicable, will be due and payable on the Loan Maturity Date. In addition, a final payment equal to
$1,150,000 will be due on the Loan Maturity Date, or such earlier date specified in the Hercules Loan
Agreement. Our obligations under the Hercules Loan Agreement are secured by a security interest in
substantially all of our assets, other than our intellectual property. If we prepay the loan prior to the Loan
Maturity Date, we will pay Hercules a prepayment charge based on a prepayment fee equal to 3.00% of the
amount prepaid, if the prepayment occurs in any of the first 12 months following the Closing Date, 2.00% of the
amount prepaid if the prepayment occurs after 12 months from the Closing Date but prior to 24 months from the
Closing Date, and 1.00% of the amount prepaid if the prepayment occurs after 24 months from the Closing Date.
The Hercules Loan Agreement includes customary affirmative and restrictive covenants, but does not include any
financial maintenance covenants, and also includes standard events of default, including payment defaults. Upon
the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding
loan balances, and Hercules may declare all outstanding obligations immediately due and payable and take such
other actions as set forth in the Hercules Loan Agreement.

In connection with the Hercules Loan Agreement, we issued a warrant to Hercules which is exercisable in
whole or in part for an aggregate of up to 181,268 shares of common stock with an exercise price of $3.31 per
share (the “Warrant”). The Warrant may be exercised on a cashless basis and is exercisable for a term beginning
on the date of issuance and ending on the earlier to occur of five years from the date of issuance or the
consummation of certain acquisitions of us as set forth in the Warrant. The number of shares for which the
Warrant is exercisable and the associated exercise price are subject to certain proportional adjustments as set
forth in the Warrant.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio
and our loan facilities. By policy, we make our investments in high-quality debt securities, limit the amount of
credit exposure to any one non-U.S. Treasury issuer, and limit duration by restricting the term of the instrument.

70

We generally hold investments to maturity, with a weighted average portfolio period of less than twelve months.
However, if the need arose to liquidate such securities before maturity, we may experience losses on liquidation.

We hold interest-bearing instruments that are classified as cash, cash equivalents and short-term

investments. Fluctuations in interest rates can affect the principal values and yields of fixed income investments.
If interest rates in the general economy were to rise rapidly in a short period of time, our fixed income
investments could lose value.

The following table presents the amounts and related weighted average interest rates of our cash, cash
equivalents, and short-term investments at December 31, 2014 and 2013 (in thousands, except interest rate):

Maturity

Carrying
Amount
(in thousands)

Fair Value
(in thousands)

Weighted
Average
Interest Rate

December 31, 2014
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Daily to 90 days
December 31, 2013
Cash, cash equivalents, and short-term

$ 78,445

$ 78,445

0.07%

investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Daily to 90 days

$121,649

$121,649

0.08%

As of December 31, 2014, we have an outstanding principal balance on our note with Novartis of $13.4

million, which is due in 2015. The interest rate on this note is charged at a rate of USD six-month London
Interbank Offered Rate (“LIBOR”) plus 2%, which was 2.35% at December 31, 2014. No further borrowing is
available under this note.

As of December 31, 2014, we have an outstanding principal balance on our loan with Servier of

€15.0 million, which converts to approximately $18.2 million at December 31, 2014. The interest rate on this
loan is charged at a floating rate based on a Euro Inter-Bank Offered Rate (“EURIBOR”) and subject to a cap.
The interest rate for the initial interest period was 3.22% and was reset semi-annually ranging from 2.31% to
3.83%. Interest for the six-month period from mid-January 2015 through mid-July 2015 was reset to 2.16%. No
further borrowing is available under this loan.

As of December 31, 2014, we have an outstanding principal balance on our loan with GECC of $5.2 million,

which is to be repaid with monthly principal payments of $347,222, plus accrued interest, over a 27-month
period commencing on April 1, 2013, and through June 15, 2015, at which time the remaining outstanding
principal amount of $3.1 million, plus accrued interest, is due. The loan accrues interest at a fixed rate of
10.90% per annum. No further borrowing is available under this loan.

The variable interest rate related to our long-term debt instruments is based on LIBOR for our Novartis note

and EURIBOR for our Servier loan. We estimate a hypothetical 100 basis point change in interest rates could
increase or decrease our interest expense by approximately $0.3 million on an annualized basis. Our loan with
GECC is not subject to interest rate risk as it accrues interest at a fixed rate.

Foreign Currency Risk

We hold debt, incur expenses, and may be owed milestones denominated in foreign currencies. The amount

of debt owed, expenses incurred, or milestones owed to us will be impacted by fluctuations in these foreign
currencies. When the U.S. Dollar weakens against foreign currencies, the U.S. Dollar value of the foreign-
currency denominated debt, expense, and milestones increases, and when the U.S. Dollar strengthens against
these currencies, the U.S. dollar value of the foreign-currency denominated debt, expense, and milestones
decreases. Consequently, changes in exchange rates will affect the amount we are required to repay on our
€15.0 million loan from Servier and may affect our results of operations. We estimate that a hypothetical 0.01
change in the Euro to USD exchange rate could increase or decrease our unrealized gains or losses by
approximately $0.2 million.

71

Our loan from Servier was fully funded in January 2011, with the proceeds converting to approximately

$19.5 million using the January 13, 2011 Euro-to-U.S.-Dollar exchange rate of 1.3020. At December 31, 2014,
the €15.0 million outstanding principal balance under the Servier Loan Agreement would have equaled
approximately $18.2 million using the December 31, 2014 Euro-to-USD exchange rate of 1.216. In May 2011, in
order to manage our foreign currency exposure relating to our principal and interest payments on our loan from
Servier, we entered into two foreign exchange option contracts to buy €1.5 million and €15.0 million in January
2014 and January 2016, respectively. Upfront premiums paid on these foreign exchange option contracts totaled
$1.5 million, as of December 31, 2014, one option contract had expired. The remaining foreign exchange option
contract had a fair value of $6,000 at December 31, 2014. Our use of derivative financial instruments represents
risk management; we do not enter into derivative financial contracts for trading purposes.

Item 8.

Financial Statements and Supplementary Data

The following consolidated financial statements of the registrant, related notes and report of independent

registered public accounting firm are set forth beginning on page F-1 of this report.

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Stockholders’ Equity (Deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer

and our Vice President, Finance, Chief Financial Officer and Secretary, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15 the promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Our disclosure
controls and procedures are intended to ensure that the information we are required to disclose in the reports that
we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms and
(ii) accumulated and communicated to our management, including the Chief Executive Officer and Vice
President, Finance, Chief Financial Officer and Secretary, as the principal executive and financial officers,
respectively, to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief
Executive Officer and our Vice President, Finance, Chief Financial Officer and Secretary concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Management, including our Chief Executive Officer and our Vice President, Finance, Chief Financial
Officer and Secretary, is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-159f). The Company’s internal control system was
designed to provide reasonable assurance to the Company’s management and board of directors regarding the
preparation and fair presentation of published financial statements in accordance with accounting principles
generally accepted in the United States.

72

Management assessed the effectiveness of our internal control over financial reporting as of December 31,

2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013
Framework). Based on our assessment we believe that, as of December 31, 2014, our internal control over
financial reporting is effective based on those criteria.

The Company’s internal control over financial reporting as of December 31, 2014, has been audited by

Ernst & Young, LLP, independent registered public accounting firm who also audited the Company’s
consolidated financial statements. Ernst & Young’s report on the Company’s internal control over financial
reporting follows.

Changes in Internal Control over Financial Reporting

As disclosed in our Quarterly Reports on Form 10-Q/A and 10-Q for the quarters ended March 31, 2014,
June 30, 2014 and September 30, 2014, we identified a material weakness in our internal control over financial
reporting such that our disclosure controls and procedures related to the calculation and disclosure of diluted
earnings (loss) per share as it applies to our March 2012 warrants were not effective. During 2014, we
implemented improvements in our internal controls over financial reporting to address the material weakness
described above, including performing a more effective quarterly review of our diluted earnings (loss) per share
calculation. Our remediation efforts, including the testing of these controls continued throughout 2014. This
material weakness was considered remediated in the fourth quarter of 2014, once these controls were shown to be
operational for a sufficient period of time to allow management to conclude that these controls were operating
effectively.

Except as noted in the preceding paragraph, there were no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of XOMA Corporation:

We have audited XOMA Corporation’s internal control over financial reporting as of December 31, 2014,

based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). XOMA Corporation’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, XOMA Corporation maintained, in all material respects, effective internal control over

financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated balance sheets of XOMA Corporation as of December 31, 2014 and 2013 and
the related consolidated statements of comprehensive loss, stockholders’ equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2014, and our report dated March 11, 2015 expressed an
unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California
March 11, 2015

74

PART III

Item 10. Directors, Executive Officers, Corporate Governance

Certain information regarding our executive officers required by this Item is set forth as a Supplementary
Item at the end of Part I of this Form 10-K (pursuant to Instruction 3 to Item 401(b) of Regulation S-K). Other
information required by this Item will be included in the Company’s proxy statement for the 2014 Annual
General Meeting of Stockholders (“2015 Proxy Statement”), under the sections labeled “Item 1—Election of
Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934”, and is incorporated
herein by reference. The 2015 Proxy Statement will be filed with the SEC within 120 days after the end of the
fiscal year to which this report relates.

Code of Ethics

The Company’s Code of Ethics applies to all employees, officers and directors including the Chief
Executive Officer (principal executive officer) and the Vice President, Finance, Chief Financial Officer and
Secretary (principal financial and principal accounting officer) and is posted on the Company’s website at
www.xoma.com. We intend to satisfy the applicable disclosure requirements regarding amendments to, or
waivers from, provisions of our Code of Ethics by posting such information on our website.

Item 11. Executive Compensation

Information required by this Item will be included in the sections labeled “Compensation of Executive
Officers”, “Summary Compensation Table”, “Grants of Plan-Based Awards”, “Outstanding Equity Awards as
of December 31, 2014”, “Option Exercises and Shares Vested”, “Pension Benefits”, “Non-Qualified Deferred
Compensation” and “Compensation of Directors” appearing in our 2015 Proxy Statement, and is incorporated
herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Information required by this Item will be included in the sections labeled “Stock Ownership” and “Equity

Compensation Plan Information” appearing in our 2015 Proxy Statement, and is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this Item will be included in the section labeled “Transactions with Related

Persons” appearing in our 2015 Proxy Statement, and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information required by this Item will be included in the section labeled “Item 2—Appointment of
Independent Registered Public Accounting Firm” appearing in our 2015 Proxy Statement, and is incorporated
herein by reference.

75

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are included as part of this Annual Report on Form 10-K:

(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 because the required information is included
in the consolidated financial statements or the notes thereto or is not applicable or required.

(3) Exhibits:

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of

this Annual Report on Form 10-K.

76

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 11th
day of March 2015.

SIGNATURES

XOMA CORPORATION

By:

/S/

JOHN VARIAN
John Varian
Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below

constitutes and appoints John Varian and Fred Kurland, and each of them, as his or her true and lawful attorneys-
in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place,
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection therewith, with the SEC, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every
act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or
their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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 VARIAN
(John Varian)

/S/ FRED KURLAND

(Fred Kurland)

Chief Executive Officer (Principal
Executive Officer) and Director

March 11, 2015

Vice President, Finance, Chief
Financial Officer and Secretary
(Principal Financial and Principal
Accounting Officer)

March 11, 2015

/S/ PATRICK J. SCANNON

(Patrick J. Scannon)

Executive Vice President and Chief
Scientific Officer and Director

March 11, 2015

/S/ W. DENMAN VAN NESS

Chairman of the Board of Directors

March 11, 2015

(W. Denman Van Ness)

/S/ WILLIAM K. BOWES, JR.

Director

(William K. Bowes, Jr.)

(Peter Barton Hutt)

/S/

JOSEPH M. LIMBER
(Joseph M. Limber)

/S/ KELVIN M. NEU

(Kelvin M. Neu)

/S/ TIMOTHY P. WALBERT

(Timothy P. Walbert)

(Jack L. Wyszomierski)

Director

Director

Director

Director

Director

77

March 11, 2015

March 11, 2015

March 11, 2015

March 11, 2015

March 11, 2015

March 11, 2015

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Stockholders’ Equity (Deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of XOMA Corporation:

We have audited the accompanying consolidated balance sheets of XOMA Corporation as of December 31,
2014 and 2013, and the related consolidated statements of comprehensive loss, stockholders’ equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the
responsibility of XOMA Corporation’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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
consolidated financial position of XOMA Corporation at December 31, 2014 and 2013, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity
with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), XOMA Corporation’s internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) and our report dated March 11, 2015 expressed
an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California
March 11, 2015

F-2

XOMA Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

December 31,

2014

2013

ASSETS

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

78,445
—
3,309
2,088

83,842
5,120
669

101,659
19,990
3,781
1,630

127,060
6,456
1,266

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

89,631

$

134,782

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing obligations—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest on interest bearing obligations—current . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue—long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing obligations—long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent warrant liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies (Note 11)
Stockholders’ equity (deficit):
Preferred stock, $0.05 par value, 1,000,000 shares authorized, 0 issued and

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.0075 par value, 277,333,332 and 138,666,666 shares authorized
at December 31, 2014 and 2013, respectively, 115,892,450 and 105,386,216
shares issued and outstanding at December 31, 2014 and 2013, respectively . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5,990
9,892
1,089
19,247
257

36,475
1,939
16,290
31,828

86,532

9,616
9,934
2,218
5,835
2,042

29,645
4,105
35,150
69,869

138,769

—

—

869
1,121,707
—

(1,119,477)

787
1,076,403
(1)
(1,081,176)

Total stockholders’ equity (deficit)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,099

(3,987)

Total liabilities and stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

89,631

$

134,782

The accompanying notes are an integral part of these consolidated financial statements.

F-3

XOMA Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per share amounts)

Year Ended December 31,

2014

2013

2012

Revenues:
License and collaborative fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5,683
13,183

18,866

$ 11,028
24,423

$ 5,727
28,055

35,451

33,782

Operating expenses:
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80,748
19,866
84

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100,698

74,851
18,477
328

93,656

68,467
16,865
5,074

90,406

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of contingent warrant liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .

(81,832)

(58,205)

(56,624)

(4,303)
2,061
45,773

(4,631)
(197)
(61,039)

(4,387)
(956)
(9,172)

Net loss before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(38,301)
—

(124,072)
14

(71,139)
74

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (38,301) $(124,058) $(71,065)

Basic net loss per share of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net loss per share of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(0.36) $

(1.43) $

(1.10)

(0.67) $

(1.43) $

(1.10)

Shares used in computing basic net loss per share of common stock . . . . . . . .

107,435

86,938

64,629

Shares used in computing diluted net loss per share of common stock . . . . . .

115,333

86,938

64,629

Other comprehensive loss:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . .

$ (38,301) $(124,058) $(71,065)
8

(9)

1

Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (38,300) $(124,067) $(71,057)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

XOMA Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)

Balance, December 31, 2011 . . . . .
Exercise of stock options,

contributions to 401(k) and
incentive plans . . . . . . . . . . . . . .
Release of restricted stock units . .
Stock-based compensation

expense . . . . . . . . . . . . . . . . . . .
Sale of shares of common stock . .
Issuance of warrants . . . . . . . . . . .
Exercise of warrants . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .

Balance, December 31, 2012 . . . . .
Exercise of stock options,

contributions to 401(k) and
incentive plans . . . . . . . . . . . . . .
Release of restricted stock units . .
Stock-based compensation

expense . . . . . . . . . . . . . . . . . . .
Sale of shares of common stock . .
Exercise of warrants . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . .

Balance, December 31, 2013 . . . . .
Exercise of stock options,

contributions to 401(k) and
incentive plans . . . . . . . . . . . . . .
Release of restricted stock units . .
Stock-based compensation

expense . . . . . . . . . . . . . . . . . . .
Sale of shares of common stock . .
Issuance of warrants . . . . . . . . . . .
Exercise of warrants . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .

Common Stock

Shares

Amount

Paid-In
Capital

Accumulated
Comprehensive
Income

Accumulated
Deficit

Total
Stockholders’
(Deficit)
Equity

35,107

$263

$ 900,801

$—

$ (886,053) $ 15,011

1,089

8

397 —

—
45,288
—
566
—
—

82,447

933
801

—
19,661
1,544
—
—

105,386

1,065
981

—
8,097

363
—
—

—
340
—

4

—
—

615

7
6

—
147
12
—
—

787

11
7

—
61

3

—
—

1,323
—

4,284
75,960
(6,335)
1,929
—
—

977,962

2,213
(6)

5,099
82,799
8,336
—
—

1,076,403

4,515
(7)

10,772
37,725
(10,258)
2,557
—
—

8

8

—
—

—
—
—
—
—

—
—

—
—
—
—

(9)

(1)

—
—

—
—

—
—

1

—
—

—
—
—
—
(71,065)
—

1,331
—

4,284
76,300
(6,335)
1,933
(71,065)
8

(957,118)

21,467

—
—

—
—
—

(124,058)

—

2,220
—

5,099
82,946
8,348
(124,058)
(9)

(1,081,176)

(3,987)

—
—

—
—

—
(38,301)
—

4,526
—

10,772
37,786
(10,258)
2,560
(38,301)
1

Balance, December 31, 2014 . . . . .

115,892

$869

$1,121,707

$—

$(1,119,477) $

3,099

The accompanying notes are an integral part of these consolidated financial statements.

F-5

XOMA Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock contribution to 401(k)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest on interest bearing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of contingent warrant liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charge related to long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount, final payment fee on debt, and debt issuance costs . . . .
Loss on sale and retirement of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on foreign exchange options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Trade and other receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2014

2013

2012

$ (38,301) $(124,058) $(71,065)

1,856
870
10,772
(1,444)
(45,773)
—
2,707
—
(2,280)
355
(9)

472
(662)
(3,774)
(2,983)
(88)

2,575
828
5,099
2,284
61,039
—
2,470
281
662
127
(20)

4,486
481
2,901
(3,399)
(1,671)

4,124
1,134
4,284
1,186
9,172
2,460
1,958
29
295
714
(11)

4,064
(158)
4,485
(3,511)
75

Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(78,282)

(45,915)

(40,765)

Cash flows from investing activities:
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
20,000
(325)
—

(19,991)
40,000
(1,169)
—

(56,970)
17,000
(2,509)
463

Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,675

18,840

(42,016)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs . . . . . . . . . . . . . . . . . .
Proceeds from exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt, net of issuance costs . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments of debt

41,442
35
—
(5,917)

84,338
2,176
—
(3,125)

76,498
993
4,434
(2,143)

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,560

83,389

79,782

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(167)

—

—

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . .

(23,214)
101,659

56,314
45,345

(2,999)
48,344

Cash and cash equivalents at the end of the year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 78,445

$ 101,659

$ 45,345

Supplemental Cash Flow Information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities:
Issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of contingent warrant liability to equity upon exercise of warrants . . .
Interest added to principal balances on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Symplmed Pharmaceuticals, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,009

$

1,262

$ 1,035

$
$ 10,258
$ (2,526) $
$
$
313
$ — $
$ — $

— $ 6,390
(940)
$ 1,160
$ —

(6,171) $
935
171
— $

(55)

The accompanying notes are an integral part of these consolidated financial statements.

F-6

XOMA Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

XOMA Corporation (“XOMA” or the “Company”), a Delaware corporation combines a portfolio of late-
stage clinical programs and research activities to develop innovative therapeutic antibodies for which it intends to
commercialize. XOMA focuses its scientific research on allosteric modulation, which offers opportunities for
new classes of therapeutic antibodies to treat a wide range of human diseases. XOMA is developing its lead
product candidate gevokizumab (IL-1 beta modulating antibody) with Les Laboratoires Servier (“Servier”)
through a global Phase 3 clinical development program and ongoing proof-of-concept studies in other
IL-1-mediated diseases. XOMA’s scientific research also has produced the XMet platform, which consists of
three classes of preclinical antibodies, including selective insulin receptor modulators that could offer new
approaches in the treatment of diabetes. The Company’s products are presently in various stages of development
and most are subject to regulatory approval before they can be commercially launched.

Liquidity and Management Plans

The Company has incurred operating losses since its inception and had an accumulated deficit of $1.1
billion at December 31, 2014. Management expects operating losses and negative cash flows to continue for the
foreseeable future. As of December 31, 2014, the Company had $78.4 million in cash and cash equivalents,
which is available to fund future operations. Taking into account the repayment of its outstanding debt classified
within current liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2014, the Company
anticipates that it will be required to seek additional equity or debt financing or to increase the level of
collaborative revenues to fund its operations through December 31, 2015. If the Company is unable to achieve
the level of revenues from licensing, development and collaboration agreement and the level of government
funding and external financing during 2015, as contemplated in its operating plan, the Company has plans to
implement certain cost cutting actions commencing early in the fourth quarter of 2015 to reduce its working
capital requirements. Consistent with the actions the Company has taken in the past, it will prioritize necessary
and appropriate steps to enable the continued operations of the business and preservation of the value of its assets
beyond the next twelve months, including but not limited to actions such as reduced personnel-related costs,
additional curtailment of the Company’s development activities and other discretionary expenditures that are
within the Company’s control. These reductions in expenditures, if required, may have an adverse impact on the
Company’s ability to achieve certain of its planned objectives during 2015. In addition to seeking equity or debt
financing, the Company may seek to access additional capital to support future operations through licensing,
partnering or other strategic collaborative arrangements. It is unclear if or when any such transactions will occur,
on satisfactory terms or at all. The Company’s ability to raise additional capital in the equity and debt markets,
should the Company choose to do so, is dependent on a number of factors, including, but not limited to, the
market demand for the Company’s common stock, which itself is subject to a number of pharmaceutical
development and business risks and uncertainties, as well as the uncertainty that the Company would be able to
raise such additional capital at a price or on terms that are favorable to the Company.

2. Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions among the entities have been eliminated from
consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the

United States requires management to make estimates and assumptions that affect the reported amounts of assets,

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

liabilities, revenue and expenses, and related disclosures. On an on-going basis, management evaluates its
estimates including, but not limited to, those related to contingent warrant liabilities, revenue recognition,
research and development expense, long-lived assets, derivative instruments and stock-based compensation. The
Company bases its estimates on historical experience and on various other market-specific and other relevant
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ significantly from these estimates, such as the Company’s billing under
government contracts and the Company’s accrual for clinical trial expenses. Under the Company’s contracts with
the National Institute of Allergy and Infectious Diseases (“NIAID”), a part of the National Institutes of Health
(“NIH”), the Company bills using NIH provisional rates and thus are subject to future audits at the discretion of
NIAID’s contracting office. These audits can result in an adjustment to revenue previously reported which
potentially could be significant. The Company’s accrual for clinical trials is based on estimates of the services
received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations.
Payments under the contracts depend on factors such as the achievement of certain events, successful enrollment
of patients, and completion of portions of the clinical trial or similar conditions.

Correction of an Immaterial Error

During the fourth quarter of 2014, we identified an immaterial error in our interim consolidated financial
statements primarily pertaining to the three month period ended September 30, 2014 driven by certain stock-
based compensation expense recorded in the period. We corrected the immaterial error in the fourth quarter of
2014, resulting in a decrease to operating expenses and net loss by $1.6 million and a decrease to basic and
diluted loss per share of $0.01 and $0.02, respectively, for the three months ended December 31, 2014. The error
does not affect results from operations for the year ended December 31, 2014. Based on management’s
evaluation of the materiality of the error from a qualitative and quantitative perspective as required by
authoritative guidance, we concluded that correcting the error had no material impact on any of the Company’s
previously issued interim financial statements, would be immaterial to the fourth quarter results for 2014 and had
no effect on the trend of financial results.

Reclassifications

Certain reclassifications of prior period amounts have been made to the financial statements and

accompanying notes to conform to the current period presentation. Prior period presentations of net product sales
and royalty revenue have been reclassified into contract and other revenue because the net product sales and
royalty revenue were not material for all periods presented. These reclassifications had no impact on the
Company’s previously reported net loss or cash flows.

Revenue Recognition

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence

of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured. The determination of criteria (2) is based on
management’s judgments regarding whether a continuing performance obligation exists. The determination of
criteria (3) and (4) are based on management’s judgments regarding the nature of the fee charged for products or
services delivered and the collectability of those fees. Allowances are established for estimated uncollectible
amounts, if any.

The Company recognizes revenue from its license and collaboration arrangements, contract services,

product sales and royalties. Revenue arrangements with multiple elements are divided into separate units of

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

accounting if certain criteria are met, including whether the delivered element has stand-alone value to the
customer and whether there is objective and reliable evidence of the fair value of the undelivered items. Each
deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a
separate unit of accounting or whether it should be combined with other deliverables. In order to account for the
multiple-element arrangements, the Company identifies the deliverables included within the arrangement and
evaluates which deliverables represent separate units of accounting. Analyzing the arrangement to identify
deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right
or license to use an asset, or another performance obligation. The consideration received is allocated among the
separate units based on their respective fair values and the applicable revenue recognition criteria are applied to
each of the separate units. Advance payments received in excess of amounts earned are classified as deferred
revenue until earned.

License and Collaborative Fees

Revenue from non-refundable license, technology access or other payments under license and collaborative

agreements where the Company has a continuing obligation to perform is recognized as revenue over the
estimated period of the continuing performance obligation. The Company estimates the performance period at
the inception of the arrangement and reevaluates it each reporting period. Management makes its best estimate of
the period over which it expects to fulfill the performance obligations, which may include clinical development
activities. Given the uncertainties of research and development collaborations, significant judgment is required to
determine the duration of the performance period. This reevaluation may shorten or lengthen the period over
which the remaining revenue is recognized. Changes to these estimates are recorded on a prospective basis. Cost
reimbursement revenue under collaborative agreements is recognized as the related research and development
costs are incurred, as provided for under the terms of these agreements.

License and collaboration agreements with certain third parties also provide for contingent payments to be

paid to XOMA based solely upon the performance of the partner. For such contingent payments revenue is
recognized upon completion of the milestone event, once confirmation is received from the third party, provided
that collection is reasonably assured and the other revenue recognition criteria have been satisfied. Milestone
payments that are not substantive or that require a continuing performance obligation on the part of the Company
are recognized over the expected period of the continuing performance obligation. Amounts received in advance
are recorded as deferred revenue until the related milestone is completed.

Contract Revenue

Contract revenue for research and development involves the Company providing research and development

and manufacturing services to collaborative partners, biodefense contractors or others. Revenue for certain
contracts is accounted for by a proportional performance, or output-based, method where performance is based
on estimated progress toward elements defined in the contract. The amount of contract revenue and related costs
recognized in each accounting period are based on management’s estimates of the proportional performance
during the period. Adjustments to estimates based on actual performance are recognized on a prospective basis
and do not result in reversal of revenue should the estimate to complete be extended. In 2014, the Company had a
$1.8 million adjustment to decrease previously invoiced balances from the NIAID contract. Refer to Note 4
Collaborative, Licensing and Other Arrangements.

Up-front fees are recognized in the same manner as the final deliverable, which is generally ratably over the

period of the continuing performance obligation. Given the uncertainties of research and development
collaborations, significant judgment is required to determine the duration of the arrangement.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

Royalty Revenue

Royalty revenue and royalty receivables are recorded in the periods these royalty amounts are earned, and

collection is reasonably assured. The royalty revenue and receivables recorded in these instances are based upon
communication with collaborative partners or licensees, historical information and forecasted sales trends.

Research and Development Expenses

The Company expenses research and development costs as incurred. Research and development expenses
consist of direct costs such as salaries and related personnel costs, and material and supply costs, and research-
related allocated overhead costs, such as facilities costs. In addition, research and development expenses include
costs related to clinical trials. From time to time, research and development expenses may include up-front fees
and milestones paid to collaborative partners for the purchase of rights to in-process research and development.
Such amounts are expensed as incurred.

The Company’s accrual for clinical trials is based on estimates of the services received and efforts expended

pursuant to contracts with clinical trial centers and clinical research organizations. The Company may terminate
these contracts upon written notice and are generally only liable for actual effort expended by the organizations
to the date of termination, although in certain instances the Company may be further responsible for termination
fees and penalties. The Company makes estimates of its accrued expenses as of each balance sheet date based on
the facts and circumstances known to the Company at that time. Expenses resulting from clinical trials are
recorded when incurred based, in part on estimates as to the status of the various trials. In 2014, the Company
changed its methodology of accrual for the per-patient component of clinical trial expense from straight-line over
the patient treatment period to scheduled costs as projected by the contract research organization. The change
resulted in a $0.2 million adjustment to the Company’s accrued estimates for clinical trial activities from
inception of the trials through December 31, 2014.

Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid debt instruments with maturities of three months or less at the time

the Company acquires them and that can be liquidated without prior notice or penalty to be cash equivalents.

Short-term investments include debt securities classified as available-for-sale. Available-for-sale securities

are carried at fair value, with unrealized gains and losses, net of tax, if any, reported in other comprehensive
income (loss). The estimate of fair value is based on publicly available market information. Realized gains and
losses and declines in value judged to be other-than-temporary on available-for-sale securities are also included
in other income (expense). The Company reviews its instruments for other-than-temporary impairment whenever
the value of the instrument is less than the amortized cost. The cost of investments sold is based on the specific
identification method. Interest and dividends on securities classified as available-for-sale are included in other
income (expense).

Property and Equipment and Long-Lived Assets

Property and equipment is stated at cost less depreciation. Equipment depreciation is calculated using the
straight-line method over the estimated useful lives of the assets (three to seven years). Leasehold improvements,
buildings and building improvements are depreciated using the straight-line method over the shorter of the lease
terms or the useful lives (one to fifteen years).

The Company reviews the carrying values and depreciation lives of its long-lived assets whenever events or

changes in business circumstances or planned use of long-lived assets indicate that the asset may not be

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

recoverable. An impairment loss is recognized when the estimated future net cash flows expected to result from
the use of an asset is less than its carrying amount. Long-lived assets include property and equipment and
building and leasehold improvements.

Warrants

The Company has issued warrants to purchase shares of its common stock in connection with financing
activities. The Company accounts for some of these warrants as a liability at fair value and others as equity at fair
value. The fair value of the outstanding warrants is estimated using the Black-Scholes Option Pricing Model (the
“Black-Scholes Model”). The Black-Scholes Model requires inputs such as the expected term of the warrants,
expected volatility and risk-free interest rate. These inputs are subjective and require significant analysis and
judgment to develop. For the estimate of the expected term, the Company uses the full remaining contractual
term of the warrant. In 2013, the Company changed its expected volatility assumption in the Black-Scholes
Model from a volatility implied from warrants issued by XOMA in recent private placement transactions to a
volatility based on historical stock price volatility observed on XOMA’s underlying stock. A historical stock
price volatility rate was determined to be a more precise indicator for the fair value calculation of the Company’s
warrants due to time elapsed since these warrants were granted. The assumptions associated with contingent
warrant liabilities are reviewed each reporting period and changes in the estimated fair value of these contingent
warrant liabilities are recognized in revaluation of contingent warrant liabilities within the Consolidated
Statements of Comprehensive Loss.

Income Taxes

The Company accounts for uncertain tax positions in accordance with Accounting Standards Codification

Topic 740, Income Taxes (“ASC 740”). The application of income tax law and regulations are inherently
complex.

Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more

likely than not. The Company assessed the likelihood that deferred tax assets will be recovered as deductions
from future taxable income. The Company has provided a full valuation allowance on its deferred tax assets at
December 31, 2014 and 2013 because it believes it is more likely than not that the deferred tax assets will not be
realized as of December 31, 2014, and 2013.

Based upon the weight of available evidence, which includes the Company’s historical operating

performance and carry-back potential, the Company has determined that total deferred tax assets should be fully
offset by a valuation allowance.

Net Loss per Share of Common Stock

Basic net loss per share of common stock is based on the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per share of common stock is based on the weighted average
number of shares outstanding during the period, adjusted to include the assumed conversion of certain stock
options, restricted stock units (“RSUs”), and warrants for common stock. The calculation of diluted loss per
share requires that, to the extent the average market price of the underlying shares for the reporting period
exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per
share for the period, adjustments to net income or net loss used in the calculation are required to remove the
change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to
reflect the related dilutive shares.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

Potentially dilutive securities are excluded from the calculation of loss per share if their inclusion is anti-

dilutive. The following table shows the total outstanding securities considered anti-dilutive and therefore
excluded from the computation of diluted net loss per share (in thousands):

Options for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2014

2013

2012

6,666
2,073

8,739

7,087
15,839

5,603
13,840

22,926

19,443

For the year ended December 31, 2014, the following is a reconciliation of the numerators and denominators

of the basic and diluted net loss per share of common stock (in thousands):

Numerator
Net loss before taxes
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for revaluation of contingent warrant liabilities . . . . . . . . . . . . . . .

December 31,
2014

$ (38,301)
(39,512)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (77,813)

Denominator
Weighted average shares outstanding used for basic net loss per share . . . . . . .
Effect of dilutive warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average shares outstanding for dilutive net loss per share . . . . . . . . .

107,435
7,898

115,333

For the years ended December 31, 2013 and 2012, all potentially dilutive securities outstanding were

considered anti-dilutive, and therefore the calculations of basic and diluted net loss per share were the same.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting

Standards Codification (“ASC”) 606, Revenue Recognition—Revenue from Contracts with Customers, which
amends the guidance in former ASC 605, Revenue Recognition. The standard’s core principle is that a company
will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. The standard
is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption
is not permitted. The Company is currently evaluating the impact of the provisions of ASC 606.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability

to Continue as a Going Concern. This ASU introduces an explicit requirement for management to assess if there
is substantial doubt about an entity’s ability to continue as a going concern, and to provide related footnote
disclosures in certain circumstances. In connection with each annual and interim period, management must assess
if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the
issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for
all entities in the first annual period ending after December 15, 2016. The Company is currently assessing the
potential effects of this ASU on the consolidated financial statements.

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

In November 2014, the FASB issued ASU No. 2014-16, Determining whether the Host Contract in a

Hybrid Instrument issued in the form of a share is more akin to debt or to equity. This ASU introduces a
requirement for management to separate an embedded derivative feature from the host contract and account for
the feature as a derivative according to Subtopic 815-10 on derivatives and hedging if certain criteria are met.
That is, management should determine the nature of the host contract by considering the economic characteristics
and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being
evaluated for separate accounting from the host contract. ASU 2014-16 is effective date for public entities for
annual and interim report beginning after December 15, 2015. Early adoption in an interim period, is permitted.
The Company is currently evaluating the potential effects of this ASU on the consolidated financial statements.

3. Consolidated Financial Statement Detail

Cash and Cash Equivalents

At December 31, 2014, cash equivalents consisted of demand deposits of $10.8 million and money market
funds of $67.6 million with maturities of less than 90 days at the date of purchase. At December 31, 2013, cash
equivalents consisted of demand deposits of $18.9 million and money market funds of $82.8 million with
maturities of less than 90 days at the date of purchase.

Short-term Investments

At December 31, 2014, there were no short term investments. At December 31, 2013, short-term

investments consisted of U.S. treasury securities of $20.0 million, with maturities of greater than 90 days and less
than one year from the date of purchase.

Foreign Exchange Options

The Company holds debt and may incur revenue and expenses denominated in foreign currencies, which
exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and
the Euro. The Company is required in the future to make principal and accrued interest payments in Euros on its
€15.0 million loan from Servier (See Note 7: Long-Term Debt and Other Arrangements). In order to manage its
foreign currency exposure related to these payments, in May 2011, the Company entered into two foreign
exchange option contracts to buy €1.5 million and €15.0 million in January 2014 and January 2016, respectively.
By having these option contracts in place, the Company’s foreign exchange rate risk is reduced if the U.S. dollar
weakens against the Euro. However, if the U.S. dollar strengthens against the Euro, the Company is not required
to exercise these options, but will not receive any refund on premiums paid.

Upfront premiums paid on these foreign exchange option contracts totaled $1.5 million. The fair values of

these option contracts are revalued at each reporting period and are estimated based on pricing models using
readily observable inputs from actively quoted markets. The fair values of these option contracts are included in
other assets on the consolidated balance sheet and changes in fair value on these contracts are included in other
income (expense) on the consolidated statements of comprehensive loss.

As of December 31, 2014, one option contract had expired. The remaining foreign exchange option was
revalued at December 31, 2014 and the fair value was de minimis. As of December 31, 2013, the fair value was
$0.4 million. The Company recognized losses of $0.4 million, $0.1 million, and $0.7 million related to the
revaluation for the years ended December 31, 2014, 2013, and 2012, respectively.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

Receivables

Accounts receivable are stated at their net realizable value. Specific allowances are recorded for known

troubled accounts or based on other available information. Accounts receivable are written off after all
reasonable means to collect the full amount have been exhausted.

Receivables consisted of the following at December 31, 2014 and 2013 (in thousands):

Trade receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,993
316

$3,731
50

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,309

$3,781

December 31,

2014

2013

Property and Equipment

Property and equipment consisted of the following at December 31, 2014 and 2013 (in thousands):

December 31,

2014

2013

Equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings, leasehold and building improvements . . . . . . . . . . . . . . .
Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28,638
9,343
337
310

$ 28,365
9,316
225
310

Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . .

38,628
(33,508)

38,216
(31,760)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,120

$ 6,456

Depreciation and amortization expense was $1.9 million, $2.9 million and $4.1 million for the years ended

December 31, 2014, 2013, and 2012, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following at December 31, 2014 and 2013 (in thousands):

Incentive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued clinical trial costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,295
3,061
1,424
1,112

$4,386
3,009
878
1,661

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,892

$9,934

December 31,

2014

2013

Contingent Warrant Liabilities

In December 2014, in connection with a registered direct offering to select institutional investors, the
Company issued two-year warrants to purchase up to an aggregate of 8,097,165 shares of XOMA’s common
stock at an exercise price of $7.90 per share. These warrants contain provisions that are contingent on the

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

occurrence of a change in control, which could conditionally obligate the Company to repurchase the warrants
for cash in an amount equal to their fair value using the Black-Scholes Model on the date of such change in
control. Due to these provisions, the Company accounts for the warrants issued in December 2014 as a liability at
fair value. In addition, the estimated liability related to the warrants is revalued at each reporting period until the
earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders’ equity, or
expiration of the warrants. On December 8, 2014, the date of issuance, the fair value of the warrant liability was
estimated to be $10.3 million using the Black-Scholes Model. The Company revalued the warrant liability at
December 31, 2014, and recorded a $5.1 million decline in the fair value as a gain in the revaluation of
contingent warrant liabilities in the accompanying consolidated statements of comprehensive loss. The decrease
in liability is due primarily to the decrease in the market price of XOMA’s common stock at December 31, 2014.
As of December 31, 2014, all of the warrants were outstanding and had a fair value of $5.2 million.

In March 2012, in connection with an underwritten offering, the Company issued five-year warrants to
purchase 14,834,577 shares of XOMA’s common stock at an exercise price of $1.76 per share. These warrants
contain provisions that are contingent on the occurrence of a change in control, which could conditionally
obligate the Company to repurchase the warrants for cash in an amount equal to their fair value using the Black-
Scholes Model on the date of such change in control. Due to these provisions, the Company accounts for the
warrants issued in March 2012 as a liability at fair value. In addition, the estimated liability related to the
warrants is revalued at each reporting period until the earlier of the exercise of the warrants, at which time the
liability will be reclassified to stockholders’ equity, or expiration of the warrants. As of December 31, 2013,
12,562,682 of these warrants were outstanding and had a fair value of $68.7 million. The Company revalued the
warrant liability at December 31, 2014 using the Black-Scholes Model and recorded the $39.5 million decrease
in the fair value of as a gain in the revaluation of contingent warrant liabilities in the accompanying consolidated
statements of comprehensive loss. In 2014, the Company reclassified $2.5 million from contingent warrant
liabilities to equity on the consolidated balance sheet due to the exercise of these warrants. As of December 31,
2014, 12,109,418 of these warrants were outstanding and had a fair value of $26.7 million. The decrease in
liability is due primarily to the decrease in the market price of XOMA’s common stock at December 31, 2014.

In February 2010, in connection with an underwritten offering, the Company issued five-year warrants to

purchase 1,260,000 shares of XOMA’s common stock at an exercise price of $10.50 per share. The warrants
contain provisions that are contingent on the occurrence of a change in control, which could conditionally
obligate the Company to repurchase the warrants for cash in an amount equal to their fair value using the Black-
Scholes Model on the date of such change in control. Due to these provisions, the Company accounts for the
warrants as liabilities at fair value. At December 31, 2013, all of the warrants were outstanding and had a fair
value of $1.1 million. The Company revalued the warrant liability at December 31, 2014 using the Black-Scholes
Model and recorded the $1.1 million decrease in the fair value as a gain in the revaluation of contingent warrant
liabilities in the accompanying consolidated statements of comprehensive loss. As of December 31, 2014, all of
the warrants were outstanding and the fair value was de minimis. The decrease in liability is due primarily to the
decrease in the market price of XOMA’s common stock at December 31, 2014.

In June 2009, the Company issued warrants to certain institutional investors as part of a registered direct

offering. The warrants represent the right to acquire an aggregate of up to 347,826 shares of XOMA’s common
stock over a five year period beginning December 11, 2009 at an exercise price of $19.50 per share. The warrants
contain provisions that are contingent on the occurrence of a change in control, which could conditionally
obligate us to repurchase the warrants for cash in an amount equal to their fair value using the Black-Scholes
Model on the date of such change in control. Due to these provisions, the Company accounts for the warrants as
liabilities at fair value. At December 31, 2013, all of the warrants were outstanding and had a fair value of $0.1
million. As of December 31, 2014, all of the warrants had expired unexercised.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

4. Collaborative, Licensing and Other Arrangements

Collaborative and Other Agreements

Servier

In December 2010, the Company entered into a license and collaboration agreement with Servier, to jointly

develop and commercialize gevokizumab in multiple indications, which provided for a non-refundable upfront
payment of $15.0 million that was received by the Company in January 2011. The upfront payment was
recognized over the eight month period that the initial group of deliverables were provided to Servier. In
addition, the Company received a loan of €15.0 million, which was fully funded in January 2011, with the
proceeds converting to $19.5 million at the date of funding. See Note 7: Long-Term Debt and Other
Arrangements. Under the terms of the agreement, Servier has worldwide rights to cardiovascular disease and
diabetes indications and rights outside the United States and Japan to all other indications, including NIU,
Behçet’s disease uveitis and other inflammatory and oncology indications. XOMA retains development and
commercialization rights in the United States and Japan for all indications other than cardiovascular disease and
diabetes. XOMA has an option to reacquire rights to cardiovascular disease and diabetes indications from Servier
in the United States and Japan (the “Cardiometabolic Indications Option”). If the Company exercises the
Cardiometabolic Indications Option, the Company will be required to pay Servier an option fee and partially
reimburse their incurred development expenses. Each party has the right in certain circumstances to pursue
development in indications not specified in the agreement, and in such event, the other party will have the option
to participate in such development in certain circumstances, including reimbursement of a portion of the
developing party’s expenses.

Under this agreement, Servier will fund all activities to advance the global clinical development and future

commercialization of gevokizumab in cardiovascular-related diseases and diabetes. Also, Servier funded the first
$50 million of gevokizumab global clinical development and Chemistry, Manufacturing and Controls (“CMC”)
expenses and continues to fund 50% of further expenses related to the pan-uveitis (“NIU”) and Behçet’s disease
uveitis indications. For the years ended December 31, 2014, 2013, and 2012, the Company recorded revenue of
$3.5 million, $13.6 million, and $14.5 million, respectively.

Under the agreement, the Company is eligible to receive a combination of Euro and USD-denominated,
development and sales milestones for multiple indications aggregating to a potential maximum of approximately
$433 million converted using the December 31, 2014 Euro to U.S. Dollar (“USD”) exchange rate (the
“December 31, 2014 Exchange Rate of 1.216”) if XOMA reacquires cardiovascular and/or diabetes rights in the
U.S. and Japan. If XOMA does not reacquire these rights, then the milestone payments aggregate to a potential
maximum of approximately $770 million converted using the December 31, 2014 Exchange Rate of 1.216.
Servier’s obligation to pay development and commercialization milestones will continue for so long as Servier is
developing or selling products under the agreement.

The Company is also eligible to receive royalties on gevokizumab sales, which are tiered based on sales

levels and range from a mid-single digit to up to a mid-teens percentage rate. The Company’s right to royalties
with respect to a particular product and country will continue for so long as such product is sold in such country.

On January 9, 2015, the Company and Servier entered into Amendment No. 2 to the Collaboration

Agreement. Refer to Note 13, Subsequent Events for further discussion.

NIAID

In July 2006, the Company was awarded a $16.3 million contract to produce monoclonal antibodies for the
treatment of botulism to protect United States citizens against the harmful effects of botulinum neurotoxins used
in bioterrorism. The contract work was performed on a cost plus fixed fee basis. The original contract was for a

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

three-year period, however the contract was extended into 2010. The Company recognizing revenue as the
services are performed on a proportional performance basis. This work was complete in the third quarter of 2010.
In 2011, the NIH conducted an audit of the Company’s actual data for the period from January 1, 2007 through
December 31, 2009 and developed final billing rates for this period. As a result, the Company retroactively
applied these NIH rates to the invoices from this period resulting in an increase in revenue of $2.0 million from
the NIH. Upon settlement, the Company recognized the $2.0 million in revenue in 2012.

In September 2008, the Company announced that it had been awarded a $64.8 million multiple-year contract

funded with federal funds from NIAID, a part of the NIH (Contract No. HHSN272200800028C), to continue
development of anti-botulinum antibody product candidates. The contract work is being performed on a cost plus
fixed fee basis over a three-year period. The Company is recognizing revenue under the arrangement as the
services are performed on a proportional performance basis. In 2011, the NIH conducted an audit of the
Company’s actual data for period from January 1, 2007 through December 31, 2009 and developed final billing
rates for this period. As a result, the Company retroactively applied these NIH rates to the invoices from this
period resulting in an increase in revenue of $1.1 million from the NIH, excluding $0.9 million billed to the NIH
in 2010 resulting from the Company’s performance of a comparison of 2009 calculated costs incurred and costs
billed to the government under provisional rates. In 2014, upon completion of a NIAID review of hours and
external expenses, XOMA agreed to exclude certain hours and external expenses resulting in a $1.8 million
adjustment to decrease previously invoiced balances. The adjustment was offset by a $1.9 million deferred
revenue balance that was recorded in 2012 as a result of a rate adjustment for the period 2007 to 2009. This
adjustment reduced accounts receivable and deferred revenue by $1.8 million to reflect the final settlement of the
2008 to 2013 hours and external review. The remaining $0.1 million in deferred revenue in connection with the
2011 NIH rate audit will be recognized upon completion of negotiations with and approval by the NIH. In 2014,
the Company recognized revenue of $1.2 million under this contract, compared with $4.4 million in 2013 and
$6.6 million in 2012.

In October 2011, the Company announced that NIAID had awarded the Company a new contract under
Contract No. HHSN272201100031C for up to $28.0 million over 5 years to develop broad-spectrum antitoxins
for the treatment of human botulism poisoning. The contract work is being performed on a cost plus fixed fee
basis over the life of the contract and the Company is recognizing revenue under the arrangement as the services
are performed on a proportional performance basis. In 2014, the Company recognized revenue of $8.4 million
under this contract, compared with $4.7 million in 2013 and $2.5 million in 2012.

Servier – U.S. Perindopril Franchise

On January 17, 2012, the Company announced it had acquired certain U.S. rights to a portfolio of
antihypertensive products from Servier. The portfolio includes ACEON® (perindopril erbumine), a currently
marketed angiotensin converting enzyme (“ACE”) inhibitor, and three Fixed Dose Combination (“FDC”) product
candidates where a form of proprietary perindopril (perindopril arginine) is combined with another active
ingredient(s). The Company assumed commercialization activities for ACEON in January 2012. In November
2012, the Company announced that the 837-patient Phase 3 trial for the FDC of perindopril arginine and
amlodipine besylate (“FDC1”) met its primary endpoint. Partial funding for the trial was provided by Servier.

In connection with the original agreement, the Company paid a $1.5 million license fee to Servier in the
third quarter of 2010. In July 2013, the Company transferred U.S. development and commercialization rights of
perindopril franchise and sublicensed the U.S. marketing rights to ACEON, to Symplmed. Under the terms of the
arrangement, the Company received a minority equity position in Symplmed and up to double-digit royalties on
sales of the first fixed-dose combination containing perindopril arginine and amlodipine besylate, if it is

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

approved by the FDA. The Company recorded the minority equity position in other assets of the Company’s
consolidated balance sheets. Symplmed, under a sublicense agreement, assumes U.S. marketing responsibilities
for ACEON (perindopril erbumine). Following the ACEON NDA transfer, Symplmed will pay the Company
single-digit royalties on sales of ACEON. In July 2014, the U.S. marketing rights to ACEON New Drug
Application (“NDA”) was transferred to Symplmed. In 2014, the Company recognized a de minimis amount in
royalties.

Takeda

In November 2006, the Company entered into a fully funded collaboration agreement with Takeda for
therapeutic monoclonal antibody discovery and development. Under the agreement, Takeda will make up-front,
annual maintenance and milestone payments to the Company, fund its research and development and
manufacturing activities for preclinical and early clinical studies and pay royalties on sales of products resulting
from the collaboration. Takeda will be responsible for clinical trials and commercialization of drugs after an
Investigational New Drug Application (“IND”) submission and is granted the right to manufacture once the
product enters into Phase 2 clinical trials. During the collaboration, the Company will discover therapeutic
antibodies against targets selected by Takeda. The Company will recognize revenue on the up-front and annual
payments on a straight-line basis over the expected term of each target antibody discovery, on the research and
development and manufacturing services as they are performed on a time and materials basis, on the milestones
when they are achieved and on the royalties when the underlying sales occur. In 2014, the Company recognized
revenue of $1.6 million under this agreement, compared with $0.1 million in 2013 and $1.2 million in 2012.

Under the terms of this agreement, the Company may receive milestone payments aggregating up to $19.0

million relating to one undisclosed product candidate and low single-digit royalties on future sales of all products
subject to this license. In addition, in the event Takeda were to develop additional future qualifying product
candidates under the terms of the agreement, the Company would be eligible for milestone payments aggregating
up to $20.75 million for each such qualifying product candidate. The Company’s right to milestone payments
expires on the later of the receipt of payment from Takeda of the last amount to be paid under the agreement or
the cessation of all research and development activities with respect to all program antibodies, collaboration
targets and/or collaboration products. The Company’s right to royalties expires on the later of 13.5 years from the
first commercial sale of each royalty-bearing discovery product or the expiration of the last-to-expire licensed
patent.

In February 2009, the Company expanded its existing collaboration agreement with Takeda to provide

Takeda with access to multiple antibody technologies, including a suite of research and development
technologies and integrated information and data management systems. The Company may receive milestones of
up to $3.25 million per discovery product candidate and low single-digit royalties on future sales of all antibody
products subject to this license. The Company’s right to milestone payments expires on the later of the receipt of
payment from Takeda of the last amount to be paid under the agreement or the cessation of all research and
development activities with respect to all program antibodies, collaboration targets and/or collaboration products.
The Company’s right to royalties expires on the later of 10 years from the first commercial sale of such royalty-
bearing discovery product, or the expiration of the last-to-expire licensed patent.

Novartis

In November 2008, the Company restructured its product development collaboration with Novartis entered
into in 2004 for the development and commercialization of antibody products for the treatment of cancer. Under
the restructured agreement, the Company received $6.2 million in cash and $7.5 million in the form of debt
reduction on its existing loan facility with Novartis. In addition, the Company may, in the future, receive

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

potential milestones of up to $14.0 million and royalty rates ranging from low-double digit to high-teen
percentage rates for two ongoing product programs, HCD122 and LFA 102 and options to develop or receive
royalties on additional programs. In exchange, Novartis received control over the HCD122 and LFA 102
programs, as well as the right to expand the development of these programs into additional indications outside of
oncology. Novartis has returned control of the prolactin receptor antibody program to the Company and is
evaluating options for its continued development. The Company’s right to royalty-style payments expires on the
later of the expiration of any licensed patent covering each product or 20 years from the launch of each product
that is produced from a cell line provided to Novartis by XOMA. In 2013, the Company received a $7.0 million
milestone relating to one currently active program. Pursuant to the obligations under the agreement, in January
2014, the Company made a payment, equal to 25 percent of the milestone received, or $1.75 million, toward its
outstanding debt obligation to Novartis. In 2014, no revenue was recognized under the collaboration agreement
with Novartis.

A loan facility of up to $50 million was available to the Company to fund up to 75% of its share of
development expenses incurred beginning in 2005. Refer to Note 7: Long-Term Debt and Other Arrangements
for additional disclosure of the financing arrangement between the Company and Novartis.

Licensing Agreements

XOMA has granted more than 60 licenses to biotechnology and pharmaceutical companies to use the
Company’s patented and proprietary technologies relating to bacterial expression of recombinant pharmaceutical
products. In exchange, the Company receives license and other fees as well as access to certain of these
companies’ antibody display libraries, intellectual property and/or services that complement the Company’s
existing development capabilities and support the Company’s own antibody product development pipeline.

Certain of these agreements also provide releases of the licensee companies and their collaborators from
claims under the XOMA patents arising from past activities using the companies’ respective technologies to the
extent they also used XOMA’s antibody expression technology. Licensees are often also allowed to use XOMA’s
technology in combination with their own technology in future collaborations.

Pfizer

In August 2007, the Company entered into a license agreement with Pfizer Inc. (“Pfizer”) for non-exclusive,

worldwide rights for XOMA’s patented bacterial cell expression technology for research, development and
manufacturing of antibody products. Under the terms of the agreement, the Company received a license fee
payment of $30 million in 2007.

From 2011 through 2014, the Company received milestone payments and also may be eligible for additional
milestone payments aggregating up to $17.9 million and low single-digit royalties on future sales of all products
subject to this license. In addition, the Company may receive potential milestone payments aggregating up to
$1.7 million for each additional qualifying product candidate. The Company’s right to milestone payments
expires on the later of the expiration of the last-to-expire licensed patent or the tenth anniversary of the effective
date. The Company’s right to royalties expires upon the expiration of the last-to-expire licensed patent. The
Company will recognize revenue on milestones when they are achieved and on royalties when the underlying
sales occur.

5. Restructuring Charges

In January 2012, the Company implemented a streamlining of operations, which resulted in a restructuring
plan designed to sharpen its focus on value-creating opportunities led by gevokizumab and its unique antibody
discovery and development capabilities. The restructuring plan included a reduction of XOMA’s personnel by 84

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

positions, or 34%. These staff reductions resulted primarily from the Company’s decisions to utilize a contract
manufacturing organization for Phase 3 and commercial antibody production, and to eliminate internal research
functions that are non-differentiating or that can be obtained cost effectively by contract service providers.

In 2014, 2013 and 2012, the Company incurred $0.1 million, $0.3 million and $4.9 million, respectively in

restructuring charges related to facility costs.

The outstanding restructuring liabilities are included in accrued and other liabilities and on the

accompanying consolidated balance sheets and are based upon restructuring charges recognized as of
December 31, 2014 and 2013 in connection with the Company’s restructuring plans. As of December 31, 2014
and 2013, the components of these liabilities are shown below (in thousands):

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Facility
Charges (1)

$ 21
84
(128)
23

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Facility
Charges (1)

$ 75
328
(434)
52

$ 21

(1)

Includes moving and relocation costs, and lease payments, net of sublease payments.

6. Available-for-Sale and Fair Value Measurements

The classification of the Company’s available-for-sale securities consisted of the following (in thousands):

Money Market funds . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2014

December 31,
2013

$67,569
—

$67,569

$ 82,759
19,989

$102,748

The Company had no unrealized gains or losses associated with its available-for-sale securities as of

December 31, 2014. As of December 31, 2013, gross unrealized losses of approximately $1,000 were included in
accumulated comprehensive loss on its consolidated balance sheet.

Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a

liability in an orderly transaction between market participants at the measurement date. The Company applies
Accounting Standards Codification Topic 820, Fair Value Measurement and Disclosures, (“ASC 820”), which

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in
valuation techniques. The accounting standard describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that may be used to measure fair value
which are the following:

Level 1 – Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs, either directly or indirectly, other than quoted prices in active markets for
similar assets or liabilities, that are not active or other inputs that are not observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities; therefore, requiring an entity to develop its own valuation
techniques and assumptions.

The following tables set forth the Company’s fair value hierarchy for its financial assets and liabilities

measured at fair value on a recurring basis as of December 31, 2014 and 2013 as follows (in thousands):

Fair Value Measurements at December 31, 2014 Using

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

Significant
Other
Observable
Inputs

(Level 2)

Significant
Unobservable
Inputs

(Level 3)

Total

Assets:
Money market funds (1) . . . . . . . . . . . . . .
Foreign exchange options . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities:
Contingent warrant liabilities . . . . . . . . . .

$67,569
—

$67,569

$—

6

6

$

$ —
—

$ —

$67,569
6

$67,575

$ —

$—

$31,828

$31,828

Fair Value Measurements at December 31, 2013 Using

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

Significant
Other
Observable
Inputs

(Level 2)

Significant
Unobservable
Inputs

(Level 3)

Total

$ 82,759
19,989
—

$102,748

$—
—
361

$361

$ —
—
—

$ —

$ 82,759
19,989
361

$103,109

$ —

$—

$69,869

$ 69,869

Assets:
Money market funds (1) . . . . . . . . . . . . .
U.S. treasury securities . . . . . . . . . . . . . .
Foreign exchange options . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities:
Contingent warrant liabilities . . . . . . . . .

(1)

Included in cash and cash equivalents

There were no transfers between Level 1 and Level 2 during the twelve months ended December 31, 2014.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The fair value of the foreign exchange options at December 31, 2014 and 2013 was determined using
readily observable market inputs from actively quoted markets obtained from various third-party data providers.
These inputs, such as spot rate, forward rate and volatility have been derived from readily observable market
data, meeting the criteria for Level 2 in the fair value hierarchy.

The fair value of the contingent warrant liabilities at December 31, 2014 and 2013 was determined using the

Black-Scholes Model, which requires inputs such as the expected term of the warrants, volatility and risk-free
interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. In
2013, the Company changed its expected volatility assumption in the Black-Scholes Model from a volatility
implied from warrants issued by XOMA in recent private placement transactions to a volatility based on
historical stock price volatility observed on XOMA’s underlying stock. A historical stock price volatility rate was
determined to be a more precise indicator for the fair value calculation of the Company’s warrants due to time
elapsed since these warrants were granted. The Company’s common stock price represents a significant input
that impacts sensitivity in the valuation of the warrants.

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions

at December 31, 2014 and 2013:

December 31,
2014

December 31,
2013

Expected volatility . . . . . . . . . . . . . . . . . . .

69.6% - 72.9%

66.1% - 86.6%

Risk-free interest rate . . . . . . . . . . . . . . . . .

0.03% - 0.67%

0.10% - 0.80%

Expected term . . . . . . . . . . . . . . . . . . . . . .

0.09 - 2.19 years

0.90 - 3.20 years

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial

liabilities for the years ended December 31, 2014, 2013, and 2012 (in thousands):

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial fair value of warrants issued in March 2012 . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of contingent warrant liability to equity upon exercise of

warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in fair value of contingent warrant liabilities upon revaluation . . . . .

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of contingent warrant liability to equity upon exercise of

warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in fair value of contingent warrant liabilities upon revaluation . . . . .

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial fair value of warrants issued in December 2014 warrant . . . . . . . . . . . . . . .
Reclassification of contingent warrant liability to equity upon exercise of

Warrant
Liabilities

$

379
6,390

(940)
9,172

15,001

(6,171)
61,039

69,869
10,258

warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in fair value of contingent warrant liabilities upon revaluation . . . .

(2,526)
(45,773)

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 31,828

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The fair value of the Company’s outstanding debt is estimated based on market interest rates. The carrying

amount and the estimated fair value of the Company’s outstanding debt at December 31, 2014 and 2013 are as
follows:

Outstanding debt . . . . . . . . . . . . . . . . . .

$35,537

$36,461

$40,985

$41,813

December 31, 2014

December 31, 2013

Carrying Amount

Fair Value

Carrying Amount

Fair Value

7. Loans and Other Arrangements

Novartis Note

In May 2005, the Company executed a secured note agreement with Novartis (then Chiron Corporation),

which is due and payable in full in June 2015. Under the note agreement, the Company borrowed semi-annually
to fund up to 75% of the Company’s research and development and commercialization costs under its
collaboration arrangement with Novartis, not to exceed $50 million in aggregate principal amount. Interest on the
principal amount of the loan accrues at six-month LIBOR plus 2%, which was equal to 2.35% at December 31,
2014, and is payable semi-annually in June and December of each year. Additionally, the interest rate resets in
June and December of each year. At the Company’s election, the semi-annual interest payments can be added to
the outstanding principal amount, in lieu of a cash payment, as long as the aggregate principal amount does not
exceed $50 million. The Company has made this election for all interest payments thus far. Loans under the note
agreement are secured by the Company’s interest in its collaboration with Novartis, including any payments
owed to it thereunder.

At December 31, 2014 and 2013, the outstanding principal balance under this note agreement was $13.4

million and $14.8 million. Pursuant to the terms of the arrangement as restructured in November 2008, the
Company will not make any additional borrowings under the Novartis note. Accrued interest of $0.3 million,
$0.4 million and $0.4 million was added to the principal balance of the loan for the years ended December 31,
2014, 2013 and 2012, respectively.

Pursuant to its obligations under the collaboration with Novartis, in January 2014, the Company made a
payment, equal to 25 percent of a $7.0 million milestone received, or $1.75 million, toward its outstanding debt
obligation to Novartis.

Servier Loan

In December 2010, in connection with the license and collaboration agreement entered into with Servier, the

Company executed a loan agreement with Servier (the “Servier Loan Agreement”), which provided for an
advance of up to €15.0 million. The loan was fully funded in January 2011, with the proceeds converting to
approximately $19.5 million. The loan is secured by an interest in XOMA’s intellectual property rights to all
gevokizumab indications worldwide, excluding certain rights in the U.S. and Japan. Interest is calculated at a
floating rate based on a Euro Inter-Bank Offered Rate (“EURIBOR”) and subject to a cap. The interest rate is
reset semi-annually in January and July of each year. The interest rate for the initial interest period was 3.22%
and was reset semi-annually ranging from 2.31% to 3.83%. Interest for the six-month period from mid-January
2015 through mid-July 2015 was reset to 2.16%. Interest is payable semi-annually; however, the Servier Loan
Agreement provides for a deferral of interest payments over a period specified in the agreement. During the
deferral period, accrued interest will be added to the outstanding principal amount for the purpose of interest
calculation for the next six-month interest period. On the repayment commencement date, all unpaid and accrued
interest shall be paid to Servier and thereafter, all accrued and unpaid interest shall be due and payable at the end
of each six-month period. In January 2015, the Company paid $0.2 million in accrued interest to Servier.

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The loan matures in 2016; however, after a specified period prior to final maturity, the loan is to be repaid
(i) at Servier’s option, by applying up to a significant percentage of any milestone or royalty payments owed by
Servier under the Company’s collaboration agreement and (ii) using a significant percentage of any upfront,
milestone or royalty payments the Company receives from any third party collaboration or development partner
for rights to gevokizumab in the U.S. and/or Japan. In addition, the loan becomes immediately due and payable
upon certain customary events of default. At December 31, 2014, the outstanding principal balance under this
loan was $18.2 million using the December 31, 2014 Exchange Rate of 1.216. For the year ended December 31,
2014, the Company recorded unrealized foreign exchange gain of $2.4 million, and for the years ended
December 2013 and 2012 the Company recorded unrealized foreign exchange losses of $0.8 million and $0.4
million, respectively, related to the re-measurement of the loan.

The loan has a stated interest rate lower than the market rate based on comparable loans held by similar
companies, which represents additional value to the Company. The Company recorded this additional value as a
discount to the face value of the loan amount, at its fair value of $8.9 million. The fair value of this discount,
which was determined using a discounted cash flow model, represents the differential between the stated terms
and rates of the loan, and market rates. Based on the association of the loan with the collaboration arrangement,
the Company recorded the offset to this discount as deferred revenue.

The loan discount is amortized under the effective interest method over the expected five-year life of the
loan. For the years ended December 31, 2014, 2013, and 2012, the Company recorded non-cash interest expense
of $1.9 million, $1.6 million, and $1.4 million, respectively, resulting from the amortization of the loan discount.
At December 31, 2014 and 2013, the net carrying value of the loan was $16.2 million and $16.5 million,
respectively. For the year ended December 31, 2014 the Company recorded unrealized foreign exchange loss of
$0.3 million and for the years ended December 2013 and 2012, the Company recorded unrealized foreign
exchange gains of $0.2 million and $0.1 million, respectively, related to the re-measurement of the loan discount.

The Company believes that realization of the benefit and the associated deferred revenue is contingent on

the loan remaining outstanding over the five-year contractual term of the loan. If the Company were to stop
providing service under the collaboration arrangement and the arrangement is terminated, the maturity date of the
loan would be accelerated and a portion of measured benefit would not be realized. As the realization of the
benefit is contingent, in part, on the provision of future services, the Company is recognizing the deferred
revenue over the expected five-year life of the loan. The deferred revenue is amortized under the effective
interest method, and for the years ended December 31, 2014, 2013, and 2012, the Company recorded $1.9
million, $1.6 million, and $1.4 million, respectively, of related non-cash revenue.

On January 9, 2015, Servier and the Company entered into Amendment No. 2 (“Loan Amendment”) to the

Servier Loan Agreement. Refer to Note 13, Subsequent Events for further discussion.

General Electric Capital Corporation Term Loan

In December 2011, the Company entered into a loan agreement (the “GECC Loan Agreement”) with
General Electric Capital Corporation (“GECC”), under which GECC agreed to make a term loan in an aggregate
principal amount of $10 million (the “Term Loan”) to the Company, and upon execution of the GECC Loan
Agreement, GECC funded the Term Loan. As security for its obligations under the GECC Loan Agreement, the
Company granted a security interest in substantially all of its existing and after-acquired assets, excluding its
intellectual property assets (such as those relating to its gevokizumab and anti-botulism products). The Term
Loan accrued interest at a fixed rate of 11.71% per annum and was to be repaid over a period of 42 consecutive
equal monthly installments of principal and accrued interest and was due and payable in full on June 15, 2015.

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The Company incurred debt issuance costs of approximately $1.3 million in connection with the Term Loan and
was required to pay a final payment fee equal to $500,000 on the maturity date, or such earlier date as the Term
Loan is paid in full. The debt issuance costs and final payment fee were being amortized and accreted,
respectively, to interest expense over the term of the Term Loan using the effective interest method.

In connection with the GECC Loan Agreement, the Company issued to GECC unregistered warrants that

entitle GECC to purchase up to an aggregate of 263,158 unregistered shares of XOMA common stock at an
exercise price equal to $1.14 per share. These warrants are exercisable immediately and have a five-year term.
The Company allocated the aggregate proceeds of the GECC Term Loan between the warrants and the debt
obligation based on their relative fair values. The fair value of the warrants issued to GECC was determined
using the Black-Scholes Model. The warrants’ fair value of $0.2 million was recorded as a discount to the debt
obligation and was being amortized over the term of the loan using the effective interest method.

In September 2012, the Company entered into an amendment to the GECC Loan Agreement providing for
an additional term loan in the amount of $4.6 million, increasing the term loan obligation to $12.5 million (the
“Amended Term Loan”) and providing for an interest-only monthly repayment period following the effective
date of the amendment through March 1, 2013, at a stated interest rate of 10.9% per annum. Thereafter, the
Company is obligated to make monthly principal payments of $347,222, plus accrued interest, over a 27-month
period commencing on April 1, 2013, and through June 15, 2015, at which time the remaining outstanding
principal amount of $3.1 million, plus accrued interest, is due. The Company incurred debt issuance costs of
approximately $0.2 million and are required to make a final payment fee in the amount of $875,000 on the date
upon which the outstanding principal amount is required to be repaid in full. This final payment fee replaced the
original final payment fee of $500,000. The debt issuance costs and final payment fee are being amortized and
accreted, respectively, to interest expense over the term of the Amended Term Loan using the effective interest
method.

In connection with the amendment, on September 27, 2012 the Company issued to GECC unregistered stock

purchase warrants, which entitle GECC to purchase up to an aggregate of 39,346 shares of XOMA common
stock at an exercise price equal to $3.54 per share. These warrants are exercisable immediately and have a five-
year term. The warrants’ fair value of $0.1 million was recorded as a discount to the debt obligation and is being
amortized over the term of the loan using the effective interest method. The warrants are classified in permanent
equity on the consolidated balance sheets.

The Amended Term Loan does not change the remaining terms of the GECC Loan Agreement. The GECC

Loan Agreement contains customary representations and warranties and customary affirmative and negative
covenants, including restrictions on the ability to incur indebtedness, grant liens, make investments, dispose of
assets, enter into transactions with affiliates and amend existing material agreements, in each case subject to
various exceptions. In addition, the GECC Loan Agreement contains customary events of default that entitle
GECC to cause any or all of the indebtedness under the GECC Loan Agreement to become immediately due and
payable. The events of default include any event of default under a material agreement or certain other
indebtedness.

The Company may prepay the Amended Term Loan voluntarily in full, but not in part, and any voluntary

and certain mandatory prepayments are subject to a prepayment premium of 3% in the first year after the
effective date of the loan amendment, 2% in the second year and 1% thereafter, with certain exceptions. The
Company will also be required to pay the $875,000 final payment fee in connection with any voluntary or
mandatory prepayment. On the effective date of the loan amendment, the Company paid an accrued final
payment fee in the amount of $0.2 million relating to the original final payment fee of $500,000.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

At December 31, 2014 and 2013, the outstanding principal balance under the Amended Term Loan was $5.2

million and $9.4 million, respectively.

Aggregate future principal, final fee payments and discounts of the Company’s total interest bearing

obligations—long-term as of December 31, 2014 are as follows (in thousands):

Year Ending December 31,

Total

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 20,276
18,447

Less: interest, final payment and discount

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,723
(3,186)

35,537
(19,247)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 16,290

On February 27, 2015, the Company entered into a Loan and Security Agreement with Hercules Technology

III, L.P., as lender, an affiliate of Hercules Technology Growth Capital, Inc., as agent (collectively, “Hercules”),
under which the Company borrowed $20.0 million. The Company used a portion of the proceeds to repay
GECC’s outstanding principle balance and interest of $5.5 million. Refer to Note 13, Subsequent Events for
further discussion.

Interest Expense

Interest expense and amortization of debt issuance costs and discounts, recorded as other expense in the
accompanying consolidated statements of comprehensive loss for the year ended December 31, 2014, 2013 and
2012 are shown below (in thousands):

Year ended December 31,

2014

2013

2012

Interest expense
Servier loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GECC term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novartis note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,330
1,638
312
23

$2,152
2,064
362
53

$2,097
1,850
397
43

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,303

$4,631

$4,387

8.

Income Taxes

The total income tax benefit consists of the following (in thousands):

Federal income tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-26

Year ended December 31,

2014

$—

$—

2013

$(14)

$(14)

2012

$(74)

$(74)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The Company has significant losses in 2014, 2013 and 2012 and as such there was no income tax expense

for the years ended December 31, 2014, 2013 and 2012. The income tax benefit in 2013 and 2012 relate to
federal refundable credits.

Reconciliation between the tax provision computed at the federal statutory income tax rate of 34% and the

Company’s actual effective income tax rate is as follows:

Federal tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrant valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,

2014

2013

2012

34%
40%
-1%
-73%

0%

34%
-17%
0%
-17%

0%

34%
-4%
-1%
-29%

0%

The significant components of net deferred tax assets as of December 31, 2014 and 2013 were as follows (in

millions):

December 31,

2014

2013

Capitalized research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development and other credit carryforwards . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 50.9
105.0
12.1
22.1

$ 49.4
78.4
8.8
23.5

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

190.1
(190.1)

160.1
(160.1)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$ —

The net increase (decrease) in the valuation allowance was $30.0 million, $(74.0) million and $(6.0) million

for the years ended December 31, 2014, 2013 and 2012, respectively.

As of December 31, 2014, the Company had federal net operating loss carry-forwards of approximately

$292.3 million and state net operating loss carry-forwards of approximately $132.3 million to offset future
taxable income. The net operating loss carry-forwards include $5.2 million which relates to stock option
deductions that will be recognized through additional paid in capital when utilized. As such, these deductions are
not reflected in the Company’s deferred tax assets. No federal net operating loss carry-forward expired in 2014,
2013 and 2012. California net operating losses of $54.3 million, $16.8 million, and $10.4 million expired in the
years 2014, 2013 and 2012, respectively.

Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more
likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating
performance and carry-back potential, the Company has determined that total deferred tax assets should be fully
offset by a valuation allowance.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-

change NOLs and certain other pre-change tax attributes that can be utilized to an annual limitation), the
Company experienced ownership changes in 2009 and 2012 which substantially limit the future use of its pre-
change Net Operating Losses (“NOLs”) and certain other pre-change tax attributes per year. The Company has

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

excluded the NOLs and R&D credits that will expire as a result of the annual limitations in the deferred tax assets
as of December 31, 2014. To the extent that the Company does not utilize its carry-forwards within the
applicable statutory carry-forward periods, either because of Section 382 limitations or the lack of sufficient
taxable income, the carry-forwards will expire unused.

The Company files income tax returns in the U.S. federal jurisdiction, State of California, and Ireland. The

Internal Revenue Service has completed an audit of the Company’s 2009 and 2010 federal income tax returns
which resulted in no change. The Company’s federal income tax returns for tax years 2012 and beyond remain
subject to examination by the Internal Revenue Service. The Company’s California and Irish income tax returns
for tax years 2010 and beyond remain subject to examination by the Franchise Tax Board and Irish Revenue
Commissioner. In addition, all of the net operating losses and research and development credit carry-forwards
that may be used in future years are still subject to adjustment.

The following table summarizes the Company’s activity related to its unrecognized tax benefits (in

thousands):

Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to current year tax position . . . . . . . . . . . . . . . . . . . . . .
Increase related to prior year tax position . . . . . . . . . . . . . . . . . . . . . . . .

$4,274
720
509

$4,104
164
6

$ —
49
4,055

Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,503

$4,274

$4,104

2014

2013

2012

As of December 31, 2014, the Company had a total of $4.0 million of net unrecognized tax benefits, none of
which would affect the effective tax rate upon realization. The Company currently has a full valuation allowance
against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any
of these uncertain tax positions be favorably settled in the future.

The Company does not expect the unrecognized tax benefits to change significantly over the next twelve

months. The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of December 31, 2014, the Company has not accrued interest or penalties
related to uncertain tax positions.

9. Compensation and Other Benefit Plans

The Company grants qualified and non-qualified stock options, restricted stock units (“RSUs”), common
stock and other stock-based awards under various plans to directors, officers, employees and other individuals.
Stock options are granted at exercise prices of not less than the fair market value of the Company’s common
stock on the date of grant. Generally, stock options granted to employees fully vest four years from the grant date
and expire ten years from the date of the grant or three months from the date of termination of employment
(longer in case of death or certain retirements). However, certain options granted to employees vest monthly or
immediately, certain options granted to directors vest monthly over one year or three years and certain options
may fully vest upon a change of control of the Company or may accelerate based on performance-driven
measures. Additionally, the Company has an Amended and Restated Employee Stock Purchase Plan (“ESPP”)
that allows employees to purchase Company shares at a purchase price equal to 95% of the closing price on the
exercise date.

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

Employee Stock Purchase Plan

Under the ESPP plan approved by the Company’s stockholders, the Company is authorized to issue up to

233,333 shares of common stock to employees through payroll deductions at a purchase price per share equal to
95% of the closing price of XOMA shares on the exercise date. An employee may elect to have payroll
deductions made under the ESPP for the purchase of shares in an amount not to exceed 15% of the employee’s
compensation.

In 2014, 2013, and 2012, employees purchased 17,702, 15,262, and 17,054 shares of common stock,
respectively, under the ESPP. Net payroll deductions under the ESPP totaled $74,000, $60,000, and $46,000 for
2014, 2013, and 2012, respectively.

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 50% of their eligible compensation per payroll period, up to a maximum for 2014
of $17,500 (or $23,000 for employees over 50 years of age). 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 50% of the salary deferred by the participants. The expense related to these contributions was $1.0 million,
$0.9 million, and $0.8 million for the years ended December 31, 2014, 2013, and 2012, respectively, and 100%
was paid in common stock in each year.

Stock Option Plans

Historically, option grants intended as long-term incentive compensation have been made pursuant to the
Company’s 1981 Share Option Plan (the “Option Plan”) and Restricted Share Plan (the “Restricted Plan”). In
May of 2010, the Compensation Committee and the full Board adopted, and in July of 2010 the Company’s
stockholders approved, a new equity-based compensation plan, the 2010 Long Term Incentive and Share Award
Plan, which has since been amended and restated as the Amended and Restated 2010 Long Term Incentive and
Stock Award Plan (the “Long Term Incentive Plan”). The Long Term Incentive Plan is intended to consolidate
the Company’s long-term incentive compensation under a single plan, by replacing the Option Plan, the
Restricted Plan and the 1992 Directors Share Option Plan (the “Directors Plan”) going forward, and to provide a
more current set of terms pursuant to which to provide this type of compensation. In May 2014, the Company’s
stockholders approved an amendment to the Company’s Long Term Incentive Plan to (a) increase the number of
shares of common stock issuable over the term of the plan by an additional 5,350,000 to 18,771,206 shares in the
aggregate and (b) provide that, for each stock appreciation right, restricted share, restricted stock unit,
performance share, performance unit, dividend equivalent or other stock-based award issued, the number of
available shares under the plan will be reduced by 1.18 shares.

The Long Term Incentive Plan grants stock options, RSUs, and other stock-based awards to eligible
employees, consultants and directors. No further grants or awards will be made under the Option Plan, the
Restricted Share Plan or the Directors Plan. Shares underlying options previously issued under the Option Plan,
the Restricted Share Plan or the Directors Plan that are currently outstanding will, upon forfeiture, cancellation,
surrender or other termination, become available under the Long Term Incentive Plan. Stock-based awards
granted under the Long Term Incentive Plan may be exercised when vested and generally expire ten years from
the date of the grant or three to six months from the date of termination of employment (longer in case of death
or certain retirements). Vesting periods vary based on awards granted, however, certain stock-based awards may
vest immediately or may accelerate based on performance-driven measures.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

As of December 31, 2014, the Company had 6,221,101 shares available for grant under the stock option

plans. As of December 31, 2014, options and RSUs covering 10,005,649 shares of common stock were
outstanding under the stock option plans.

Stock Options

In 2014, the Board of Directors of the Company approved grants under the Company’s Amended and
Restated 2010 Long Term Incentive Plan for an aggregate of 1,891,989 stock options to certain employees and
directors of the Company. The stock options vest monthly over four years for employees and one year for
directors.

In 2013, the Board of Directors of the Company approved grants under the Company’s Amended and
Restated 2010 Long Term Incentive Plan for an aggregate of 1,168,203 stock options to certain employees and
the directors of the Company. The stock options vest monthly over four years for employees and one year for
directors.

In 2012, the Board of Directors of the Company approved grants under the Company’s Amended and
Restated 2010 Long Term Incentive Plan for an aggregate of 2,351,445 stock options to certain employees and
the directors of the Company. The stock options vest monthly over four years for employees and one year for
directors.

Stock options held by employees who qualify for retirement age (defined as employees that are a minimum

of 55 years of age and the sum of their age plus years of full-time employment with the Company exceeds 70
years) vest immediately.

Stock Option Plans Summary

The following table summarizes the Company’s stock option activity:

2014

2013

2012

Outstanding at beginning of year . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited, expired or cancelled . . . . . . . . .

Number of
Shares

7,216,041
1,891,989
(915,911)
(489,810)

Outstanding at end of year . . . . . . . . . . . .

7,702,309

Exercisable at end of year . . . . . . . . . . . . .

4,908,925

Weighted average grant date fair value . .

Weighted
Average
Exercise
Price

$ 8.42
6.69
3.91
14.36

8.15

9.98

$ 4.49

Number of
Shares

6,788,383
1,168,203
(589,355)
(151,190)

Weighted
Average
Exercise
Price

$ 8.99
3.13
2.26
17.46

Number of
Shares

5,053,435
2,351,445
(90,252)
(526,245)

Weighted
Average
Exercise
Price

$12.55
2.59
1.68
15.84

7,216,041

8.42

6,788,383

8.99

4,814,926

11.14

4,276,834

12.42

$ 2.27

$ 1.89

The aggregate intrinsic value of stock options exercised in 2014, 2013, and 2012 was $2.9 million, $1.7

million, and $0.1 million, respectively.

As of December 31, 2014, there were 7,418,259 stock options vested and expected to vest with a weighted

average exercise price per share of $8.27, aggregate intrinsic value of $3.1 million, and a weighted average
remaining contractual term of 6.7 years. As of December 31, 2014, there were 4,908,925 stock options
exercisable with an aggregate intrinsic value of $2.3 million and a weighted average remaining contractual term
of 5.7 years.

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

As of December 31, 2014, $6.0 million of total unrecognized compensation expense related to stock options

is expected to be recognized over a weighted average period of 2.4 years.

Restricted Stock Units

In 2014, the Board of Directors of the Company approved grants under the Amended and Restated 2010

Long Term Incentive Plan for an aggregate of 1,506,194 RSUs to certain employees and directors of the
Company. The RSUs vest annually over three years in equal increments.

In 2013, the Board of Directors of the Company approved grants under the Amended and Restated 2010
Long Term Incentive Plan for an aggregate of 958,385 RSUs to certain employees and directors of the Company.
The RSUs vest annually over three years in equal increments.

In 2012, the Board of Directors of the Company approved grants under the Amended and Restated 2010

Long Term Incentive Plan for an aggregate of 1,292,923 RSUs to certain employees and directors of the
Company. The RSUs vest annually over three years in equal increments.

RSUs held by employees who qualify for retirement age (defined as employees that are a minimum of 55
years of age and the sum of their age plus years of full-time employment with the Company exceeds 70 years)
vest immediately.

Unvested RSU activity for the year ended December 31, 2014 is summarized below:

Unvested awards at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Shares

1,738,037
1,506,194
(1,099,701)
(190,651)

Unvested awards at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .

1,953,879

Weighted
Average Grant
Date Fair Value

$2.73
7.03
3.51
4.22

5.46

The total grant-date fair value of RSUs that vested during the year ended December 31, 2014 was $3.9
million. As of December 31, 2014, $5.9 million of total unrecognized compensation expense related to employee
RSUs was expected to vest over a weighted average period of 1.7 years.

Stock-based Compensation Expense

The Company recognizes compensation expense for all stock-based payment awards made to the

Company’s employees, consultants and directors that are expected to vest based on estimated fair values. The
valuation of stock option awards is determined at the date of grant using the Black-Scholes option pricing model.
This model requires inputs such as the expected term of the option, expected volatility and risk-free interest rate.
To establish an estimate of expected term, the Company considers the vesting period and contractual period of
the award and its historical experience of stock option exercises, post-vesting cancellations and volatility. The
estimate of expected volatility is based on the Company’s historical volatility. The risk-free rate is based on the
yield available on United States Treasury zero-coupon issues corresponding to the expected term of the award.
To establish an estimate of forfeiture rate, the Company considers its historical experience of option forfeitures
and terminations.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

The fair value of stock option awards was estimated using the Black-Scholes model with the following

weighted average assumptions for the years ended December 31, 2014, 2013, and 2012:

Year Ended December 31,

2014

2013

2012

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0%
92%
1.72%
5.6 years

0%
92%
0.89%
5.6 years

0%
92%
0.82%
5.6 years

The valuation of RSUs is determined at the date of grant using the closing stock price. The forfeiture rate

impacts the amount of aggregate compensation for both stock options and RSUs. To establish an estimate of
forfeiture rate, the Company used an independent third party to consider the Company’s historical experience of
option forfeitures and terminations.

The following table shows total stock-based compensation expense included in the accompanying
consolidated statements of comprehensive loss for the years ended December 31, 2014, 2013, and 2012 (in
thousands):

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,557
5,215

$2,358
2,741

$2,391
1,893

Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .

$10,772

$5,099

$4,284

Year Ended December 31,

2014

2013

2012

There was no capitalized stock-based compensation cost as of December 31, 2014, 2013 and 2012, and there

were no recognized tax benefits related to the Company’s stock-based compensation expense during the years
ended December 31, 2014, 2013 and 2012.

10. Capital Stock

In May 2014, the Company’s stockholders approved an amendment to the Company’s Certificate of
Incorporation to increase the number of authorized shares of the Company’s common stock, par value $0.0075
per share, by an additional 138,666,666 to 277,333,332 shares.

Registered Direct Offerings

In June of 2009, the Company entered into a definitive agreement with certain institutional investors to sell
695,652 units, with each unit consisting of one share of the Company’s common stock and a warrant to purchase
0.50 of a share of common stock, for gross proceeds of approximately $12.0 million, before deducting placement
agent fees and estimated offering expenses of $0.8 million, in a second registered direct offering. The investor
purchased the units at a price of $17.25 per unit. The warrants, which represent the right to acquire an aggregate
of up to 347,826 shares of common stock, are exercisable at any time on or prior to December 10, 2014 at an
exercise price of $19.50 per share. As of December 31, 2014 these warrants have expired unexercised.

On December 8, 2014, the Company completed a registered direct offering of 8,097,165 shares of its
common stock, and accompanying warrants to purchase one share of common stock for each share purchased at
an offering price of $4.94 per share to certain institutional investors. Total gross proceeds from the offering were

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

approximately $40.0 million before deducting underwriting discounts, commissions and estimated offering
expenses totaling approximately $2.3 million. The warrants, which represent the right to acquire up to an
aggregate of 8,097,165 shares of common stock, are exercisable immediately, have a two-year term and an
exercise price of $7.90 per share. As of December 31, 2014 all of these warrants were outstanding.

Underwritten Offerings

In February of 2010, the Company completed an underwritten offering of 2.8 million units, with each unit
consisting of one share of the Company’s common stock and a warrant to purchase 0.45 of a share of common
stock, for gross proceeds of approximately $21 million. As of December 31, 2014 all of these warrants were
outstanding.

On March 9, 2012, the Company completed an underwritten public offering of 29,669,154 shares of its
common stock, and accompanying warrants to purchase one half of a share of common stock for each share
purchased, at a public offering price of $1.32 per share. Total gross proceeds from the offering were
approximately $39.2 million, before deducting underwriting discounts and commissions and offering expenses
totaling approximately $3.0 million. The warrants, which represent the right to acquire an aggregate of up to
14,834,577 shares of common stock, are immediately exercisable and have a five-year term and an exercise price
of $1.76 per share. As of December 31, 2014, 12,109,418 of these warrants were outstanding.

On October 29, 2012, the Company completed an underwritten public offering of 13,333,333 shares of its

common stock, at a public offering price of $3.00 per share. Total gross proceeds from the offering were
approximately $40.0 million, before deducting underwriting discounts and commissions and offering expenses
totaling approximately $3.0 million.

On August 23, 2013, the Company completed an underwritten public offering of 8,736,187 shares of its

common stock, including 1,139,502 shares of its common stock that were issued upon the exercise of the
underwriters’ 30-day over-allotment option, at a public offering price of $3.62 per share. Total gross proceeds
from the offering were approximately $31.6 million, before deducting underwriting discounts and commissions
and estimated offering expenses totaling approximately $2.2 million.

On December 18, 2013, the Company completed an underwritten public offering of 10,925,000 shares of its

common stock, including 1,425,000 shares of its common stock that were issued upon the exercise of the
underwriters’ 30-day over-allotment option, at a public offering price of $5.25 per share. Total gross proceeds
from the offering were approximately $57.4 million, before deducting underwriting discounts and commissions
and estimated offering expenses totaling approximately $3.8 million.

ATM Agreements

On February 4, 2011, the Company entered into an At Market Issuance Sales Agreement (the “2011 ATM

Agreement”), with McNicoll, Lewis & Vlak LLC (now known as MLV & Co. LLC, “MLV”), under which it
may sell shares of its common stock from time to time through the MLV, as the agent for the offer and sale of the
shares, in an aggregate amount not to exceed the amount that can be sold under the Company’s registration
statement on Form S-3 (File No. 333-172197) filed with the SEC on February 11, 2011 and amended on
March 10, 2011, June 3, 2011 and January 3, 2012, which was most recently declared effective by the SEC on
January 17, 2012. MLV may sell the shares by any method permitted by law deemed to be an “at the market”
offering as defined in Rule 415 of the Securities Act, including without limitation sales made directly on The
NASDAQ Global Market, on any other existing trading market for the Company’s common stock or to or

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

through a market maker. MLV also may sell the shares in privately negotiated transactions, subject to the
Company’s prior approval. The Company will pay MLV a commission equal to 3% of the gross proceeds of the
sales price of all shares sold through it as sales agent under the 2011 ATM Agreement. From the inception of the
2011 ATM Agreement through December 31, 2013, the Company sold a total of 7,572,327 shares of common
stock under this agreement for aggregate gross proceeds of $14.6 million. No shares of common stock have been
sold under this agreement since February 3, 2012. Total offering expenses incurred related to sales under the
2011 ATM Agreement from inception to December 31, 2013, were $0.5 million. As of December 31, 2014, the
2011 ATM Agreement expired.

11. Commitments and Contingencies

Collaborative Agreements, Royalties and Milestone Payments

The Company is obligated to pay royalties, ranging from 0.5% to 5% of the selling price of the licensed
component and up to 40% of any sublicense fees 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.

In addition, the Company has committed to make potential future “milestone” payments to third parties as

part of licensing and development programs. Payments under these agreements become due and payable only
upon the achievement of certain developmental, regulatory and/or commercial milestones. Because it is uncertain
if and when these milestones will be achieved, such contingencies, aggregating up to $77.3 million (assuming
one product per contract meets all milestones events) have not been recorded on the accompanying consolidated
balance sheet. The Company is unable to determine precisely when and if payment obligations under the
agreements will become due as these obligations are based on milestone events, the achievement of which is
subject to a significant number of risks and uncertainties.

Leases

As of December 31, 2014, the Company leased administrative, research facilities, and office equipment

under operating leases expiring on various dates through April 2023. These leases require the Company to pay
taxes, insurance, maintenance and minimum lease payments.

The Company estimates future minimum lease payments, excluding sub-lease income as of December 31,

2014 to be (in thousands):

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

Operating
Leases

$ 3,428
3,531
3,637
3,742
3,852
10,733

Minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$28,923

Total rental expense, including other costs required under the Company’s leases, was approximately $3.5

million, $3.5 million and $4.5 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Rental expense based on leases allowing for escalated rent payments are recognized on a straight-line basis. At
the expiration of the lease, the Company is required to restore certain of its leased property to certain conditions
in place at the time of lease inception. The Company believes these costs will not be material to its operations.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

In 2012, the Company vacated and subleased two of its leased facilities, which housed its large scale
manufacturing operations and associated quality functions. The Company incurred $0.1 million in restructuring
charges during 2014 in connection with a portion of lease payments not offset by sublease income for these
buildings. The Company does not expect to incur restructuring charges during 2015 in connection with these
lease payments.

As a result of the restructuring in the second quarter of 2009, the Company vacated one of its leased
buildings. Effective December 2010, the Company entered into a sublease agreement for this building through
May of 2014. For the year ended December 31, 2014, the Company recognized $49,000 in sublease income
under this agreement.

12. Concentration of Risk, Segment and Geographic Information

Concentration of Risk

Cash equivalents, short-term investments, and receivables are financial instruments, which potentially
subject the Company to concentrations of credit risk, as well as liquidity risk for certain cash equivalents such as
money market funds. The Company has not encountered such issues during 2014. The Company’s policy is to
investments with high credit quality and liquidity to limit the amount of credit exposure. The Company currently
maintains a portfolio of cash equivalents and have not experienced any losses.

The Company has not experienced any significant credit losses and does not generally require collateral on
receivables. For the year ended December 31, 2014, two customers represented 51% and 28% of total revenue,
respectively, and as of December 31, 2014, and three customers represented 44%, 34% and 12% of the accounts
receivable balance, respectively.

For the year ended December 31, 2013, three customers represented 43%, 26%, and 20% of total revenue,

respectively, and as of December 31, 2013, and two customers represented 73% and 13% of the accounts
receivable balance respectively.

Receivables are recorded at invoice value. The Company reviews their exposure to accounts receivable,

including the requirement for allowances based on management’s judgment. The Company has not historically
experienced any significant losses. The Company does not currently require collateral for any of its accounts
receivable.

Segment Information

The Company has determined that it operates in one business segment as it only reports operating results on

an aggregate basis to the chief operating decision maker of the Company. The Company’s property and
equipment is held primarily in the United States.

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

Geographic Information

Revenue attributed to the following geographic regions for each of the three years ended December 31,

2014, 2013 and 2012 was as follows (in thousands):

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,756
5,510
1,600

$19,955
15,396
100

$14,134
18,454
1,194

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,866

$35,451

$33,782

Year ended December 31,

2014

2013

2012

13. Subsequent Events

On January 9, 2015, Servier and the Company entered into Amendment No. 2 (“Loan Amendment”) to the
Servier Loan Agreement initially entered into on December 30, 2010 and subsequently amended by a Consent,
Transfer, Assumption and Amendment Agreement entered into as of August 12, 2013. The Loan Amendment
modifies the maturity date of the loan from January 13, 2016 to three tranches due on January 15,
2016, January 15, 2017 and January 15, 2018 and provides that principal shall be repaid as follows: €3.0 million
to be repaid on January 15, 2016, €5.0 million to be repaid on January 15, 2017, and €7.0 million to be repaid on
January 15, 2018. All other terms of the Loan Agreement remain unchanged, including the interest rate
calculations, EURIBOR+2% and the formula for resetting the interest rate on the 15th of January and July every
six months.

On January 9, 2015, Servier and the Company entered into Amendment No. 2 to the Collaboration

Agreement. Under the Collaboration Agreement the Company was eligible to receive up to approximately $433
million in the aggregate in milestone payments, most of which were denominated in Euros, if the Company re-
acquires cardiovascular and/or diabetes rights for use in the United States, and approximately $770 million in
aggregate milestone payments if the Company does not re-acquire those rights. Under the Collaboration
Amendment, the Company would be eligible to receive up to $415 million in the aggregate in milestone
payments in the event the Company re-acquires the cardiovascular and/or diabetes rights for use in the United
States and approximately $752 million if the Company does not re-acquire those rights. The milestone reductions
are related to a very low prevalence indication of which Servier would not have pursued development had these
payments been required. All other terms of the Collaboration Agreement remain unchanged.

On January 26, 2015, Symplmed Pharmaceuticals announced the FDA approved PRESTALIA® (perindopril

arginine and amlodipine) tablets, licensed from Servier, for the treatment of hypertension. In July 2013, the
Company transferred the development and commercialization rights of Prestalia to Symplmed. Pursuant to the
transfer agreement with Symplmed, the Company will receive up to double-digit royalties on sales of
PRESTALIA.

On February 27, 2015, Hercules and the Company, entered into a Loan and Security Agreement (the
“Hercules Loan Agreement”), under which the Company borrowed $20.0 million. The Company used a portion
of the proceeds under the Hercules Loan Agreement to repay GECC’s outstanding principle balance and interest
of $5.5 million and plans to use the remaining proceeds for general corporate purposes. The interest rate will be
calculated at a rate equal to the greater of either (i) 9.40% plus the prime rate as reported from time to time in
The Wall Street Journal minus 7.25%, and (ii) 9.40%. Payments under the Hercules Loan Agreement are interest
only until one month prior to the Amortization Date, defined as July 1, 2016 (which will be extended to

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

October 1, 2016, if the Borrower achieves certain clinical milestones on or before July 1, 2016). The interest only
period will be followed by equal monthly payments of principal and interest amortized over a 30 month schedule
through the scheduled maturity date of September 1, 2018 (the “Loan Maturity Date”). The entire principal
balance, including a balloon payment of principal, as applicable, will be due and payable on the Loan Maturity
Date. In addition, a final payment equal to $1,150,000 will be due on the Loan Maturity Date, or such earlier date
specified in the Hercules Loan Agreement. The Company’s obligations under the Hercules Loan Agreement are
secured by a security interest in substantially all of its assets, other than its intellectual property. If the Company
prepays the loan prior to the Loan Maturity Date, it will pay Hercules a prepayment charge, based on a
prepayment fee equal to 3.00% of the amount prepaid, if the prepayment occurs in any of the first 12 months
following the Closing Date, 2.00% of the amount prepaid, if the prepayment occurs after 12 months from the
Closing Date but prior to 24 months from the Closing Date, and 1.00% of the amount prepaid if the prepayment
occurs after 24 months from the Closing Date. The Hercules Loan Agreement includes customary affirmative
and restrictive covenants, but does not include any financial maintenance covenants, and also includes standard
events of default, including payment defaults. Upon the occurrence of an event of default, a default interest rate
of an additional 5% may be applied to the outstanding loan balances, and Hercules may declare all outstanding
obligations immediately due and payable and take such other actions as set forth in the Hercules Loan
Agreement.

In connection with the Hercules Loan Agreement, the Company issued a warrant to Hercules which is
exercisable in whole or in part for up to an aggregate of 181,268 shares of common stock with an exercise price
of $3.31 per share (the “Warrant”). The Warrant may be exercised on a cashless basis and is exercisable for a
term beginning on the date of issuance and ending on the earlier to occur of five years from the date of issuance
or the consummation of certain acquisitions of the Company as set forth in the Warrant. The number of shares for
which the Warrant is exercisable and the associated exercise price are subject to certain proportional adjustments
as set forth in the Warrant.

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

XOMA Corporation

14. Quarterly Financial Information (unaudited)

The following is a summary of the quarterly results of operations for the years ended December 31, 2014

and 2013:

Consolidated Statements of Operations

Quarter Ended

March 31

June 30

September 30 December 31

(In thousands, except per share amounts)

2014
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses (1) . . . . . . . . . . . . . . . . . . .
Other income (expense), net (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,410
(26,884)
18,787
—

$ 5,973
(24,750)
6,880
—

$ 5,136
(25,589)
6,054
—

$ 4,347
(23,475)
11,810
—

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (4,687) $(11,897)

$(14,399)

$ (7,318)

Basice net loss per share of common stock . . . . . . . . . . . . . . . .

Diluted net loss per share of common stock . . . . . . . . . . . . . . .

2013
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . . .
Other (expense) income, net (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(0.04) $

(0.11)

(0.21) $

(0.17)

$

$

(0.13)

(0.17)

$

$

(0.07)

(0.12)

$ 9,453
(20,777)
(13,563)
—

$ 7,151
(21,230)
(3,169)
—

$ 6,312
(23,535)
(12,416)
15

$ 12,535
(28,114)
(36,719)
(1)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(24,887) $(17,248)

$(29,624)

$(52,299)

Basic and diluted net loss per share of common stock . . . . . . .

$

(0.30) $

(0.21)

$

(0.34)

$

(0.55)

(1)

In 2014, the Company corrected an immaterial error driven by certain stock-based compensation expense in
the fourth quarter of 2014, resulting in a decrease to operating expenses and net loss by $1.6 million and a
decrease to basic and diluted loss per share of $0.01 and $0.02, respectively, for the three months ended
December 31, 2014. Refer to Note 2, Basis of Presentation and Significant Accounting Policies—Correction
of an Immaterial Error

(2) Fluctuations in 2014 and 2013 primarily relate to (losses) gains on the revaluation of the contingent warrant

liabilities.

F-38

Exhibit
Number

3.1

3.2A

3.2B

3.3

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

4.10

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

Exhibit Description

Form SEC File No.

Exhibit

Filing Date

Incorporation By Reference

Certificate of Incorporation of XOMA Corporation

Certificate of Amendment of Certificate of
Incorporation of XOMA Corporation

Certificate of Amendment of Certificate of
Incorporation of XOMA Corporation

8-K

8-K

000-14710

000-14710

3.1

3.1

01/03/2012

05/31/2012

8-K

000-14710

3.1

05/28/2014

By-laws of XOMA Corporation

8-K

000-14710

3.2

01/03/2012

Reference is made to Exhibits 3.1, 3.2 and 3.3

Specimen of Common Stock Certificate

Form of Certificate of Designations of Series A
Preferred Stock

8-K

8-K

000-14710

000-14710

4.1

3.1

01/03/2012

01/03/2012

Form of Amended and Restated Warrant (June 2009
Warrants)

8-K

000-14710

10.6

02/02/2010

Form of Warrant (February 2010 Warrants)

8-K

000-14710

10.2

02/02/2010

Form of Warrant (December 2011 Warrants)

10-K 000-14710

Form of Warrant (March 2012 Warrants)

Form of Warrant (September 2012 Warrants)

Registration Rights Agreement, dated June 12, 2014, by
and among XOMA Corporation, 667, L.P., Baker
Brothers Life Sciences, L.P., and 14159, L.P.

8-K

8-K

8-K

000-14710

4.9

4.1

03/14/2012

03/07/2012

000-14710

4.10

10/03/2012

000-14710

4.1

06/12/2014

Form of Warrants (December 2014 Warrants)

8-K

000-14710

4.1

12/09/2014

1981 Share Option Plan as amended and restated

S-8

333-171429

10.1

12/27/2010

Form of Share Option Agreement for 1981 Share Option
Plan

10-K 000-14710

10.1A 03/11/2008

Restricted Share Plan as amended and restated

S-8

333-171429

10.1

12/27/2010

Form of Share Option Agreement for Restricted Share
Plan

10-K 000-14710

10.2A 03/11/2008

2007 CEO Share Option Plan

8-K

000-14710

10.7

08/07/2007

1992 Directors Share Option Plan as amended and
restated

Form of Share Option Agreement for 1992 Directors
Share Option Plan (initial grants)

Form of Share Option Agreement for 1992 Directors
Share Option Plan (subsequent grants)

10.9*

2002 Director Share Option Plan

10.10*

10.11*

XOMA Corporation Amended and Restated 2010 Long
Term Incentive and Stock Award Plan

Form of Stock Option Agreement for Amended and
Restated 2010 Long Term Incentive and Stock Award
Plan

S-8

333-171429

10.1

12/27/2010

10-K 000-14710

10.3A 03/11/2008

10-K 000-14710

10.3B 03/11/2008

S-8

S-8

333-151416

10.10

06/04/2008

000-14710

99.1

09/12/2014

10-K 000-14710

10.6A 03/14/2012

Exhibit
Number

10.12*

Exhibit Description

Form SEC File No.

Exhibit

Filing Date

Incorporation By Reference

Form of Restricted Stock Unit Agreement for
Amended and Restated 2010 Long Term Incentive and
Stock Award Plan

10-K 000-14710

10.6B 03/14/2012

10.13*

Management Incentive Compensation Plan as amended
and restated

8-K

000-14710

10.3

11/06/2007

10.14*

CEO Incentive Compensation Plan

10-K 000-14710

10.4A 03/11/2008

10.15*

Amendment No. 1 to CEO Incentive Compensation
Plan

10-K 000-14710

10.7B 03/14/2012

10.16*

Bonus Compensation Plan

10-K 000-14710

10.4B 03/11/2008

10.17*

Amended and Restated 1998 Employee Stock Purchase
Plan

POS
AM

333-174730

10.2

01/03/2012

10.18

10.19

10.20

10.21*

10.22*

10.23

10.24*

10.25

10.26*

10.27*

10.28

10.29

10.30

10.31

Form of Amended and Restated Indemnification
Agreement for Officers

Form of Amended and Restated Indemnification
Agreement for Employee Directors

Form of Amended and Restated Indemnification
Agreement for Non-employee Directors

10-K 000-14710

10.6

03/08/2007

10-K 000-14710

10.7

03/08/2007

10-K 000-14710

10.8

03/08/2007

Employment Agreement entered into between XOMA
(US) LLC and Fred Kurland, dated as of December 29,
2008

Amended and Restated Employment Agreement
entered into between XOMA (US) LLC and Charles C.
Wells, dated as of December 30, 2008

10-
K/A

10-
K/A

000-14710

10.7B 12/27/2010

000-14710

10.7D 12/27/2010

Officer Employment Agreement dated March 19, 2013
between XOMA Corporation and Paul Rubin

Employment Agreement effective as of January 4,
2012 between XOMA (US) LLC and John Varian

Officer Employment Agreement dated March 10, 2014
between XOMA Corporation and Pat Scannon

Form of Change of Control Severance Agreement
entered into between XOMA Ltd. and certain of its
executives

Change of Control Agreement entered into between
XOMA Ltd. and John Varian, dated January 4, 2012

Retention Benefit Agreement entered into between
XOMA Corporation and John Varian, dated March 11,
2014

Lease of premises at 804 Heinz Street, Berkeley,
California dated February 13, 2013

Lease of premises at 2910 Seventh Street, Berkeley,
California dated February 13, 2013

First amendment to lease of premises at 2910 Seventh
Street, Berkeley, California dated February 22, 2013

10-K 000-14710

10.23

03/12/2014

10-K 000-14710

10.10G 03/14/2012

10-K 000-14710

10.25

03/12/2014

10-K 000-14710

10.12

03/10/2011

10-K 000-14710

10.12A 03/14/2012

10-K 000-14710

10.28

03/12/2014

10-K 000-14710

10.29

03/12/2014

10-K 000-14710

10.30

03/12/2014

10-K 000-14710

10.31

03/12/2014

Exhibit
Number

10.32

10.33

10.34†

10.35†

10.36†

10.37A†

10.37B

10.38†

10.39†

10.40†

10.41†

10.42

Exhibit Description

Form SEC File No.

Exhibit

Filing Date

Incorporation By Reference

Lease of premises at 5860 and 5864 Hollis Street,
Emeryville, California dated February 13, 2013

Lease of premises at 2850 Seventh Street, Second
Floor, Berkeley, California dated as of December 28,
2001 (with addendum and guaranty)

Second Amended and Restated Collaboration
Agreement dated January 12, 2005, by and between
XOMA (US) LLC and Genentech, Inc.

Agreement related to LUCENTIS® License
Agreement and RAPTIVA® Collaboration Agreement
dated September 9, 2009, by and between XOMA
(Bermuda) Ltd., XOMA (US) LLC and Genentech,
Inc.

License Agreement by and between XOMA Ireland
Limited and MorphoSys AG, dated as of February 1,
2002

10-K 000-14710

10.32

03/12/2014

10-K 000-14710

10.20

04/01/2002

10-K 000-14710

10.26C 03/15/2005

10-Q 000-14710

10.18A 11/09/2009

10-K 000-14710

10.43

02/01/2002

License Agreement, dated as of December 29, 2003,
by and between Diversa Corporation (n/k/a BP
Biofuels Advanced Technology Inc.) and XOMA
Ireland Limited

8-K/
A

000-14710

2

03/19/2004

First Amendment, dated October 28, 2014, to the
License Agreement between XOMA (US) LLC
(assigned to it by XOMA Ireland Limited) and BP
Biofuels Advanced Technology Inc. (previously
Diversa Corporation, previously Verenium
Corporation).

GSSM License Agreement, effective as of May 2,
2008, by and between Verenium Corporation (n/k/a
BP Biofuels Advanced Technology Inc.) and XOMA
Ireland Limited

Secured Note Agreement, dated as of May 26, 2005,
by and between Chiron Corporation and XOMA (US)
LLC

Amended and Restated Research, Development and
Commercialization Agreement, executed November 7,
2008, by and between Novartis Vaccines and
Diagnostics, Inc. (formerly Chiron Corporation) and
XOMA (US) LLC

Amendment No. 1 to Amended and Restated
Research, Development and Commercialization
Agreement, effective as of April 30, 2010, by and
between Novartis Vaccines and Diagnostics, Inc. and
XOMA (US) LLC

Manufacturing and Technology Transfer Agreement,
executed December 16, 2008, by and between
Novartis Vaccines and Diagnostics, Inc. (formerly
Chiron Corporation) and XOMA (US) LLC

10-Q 000-14710

10.3

11/06/2014

10-K 000-14710

10.25A 03/10/2011

10-Q 000-14710

10.3

08/08/2005

10-K 000-14710

10.24C 03/11/2009

10-K 000-14710

10.25B 03/14/2012

10-K 000-14710

10.24D 03/11/2009

Exhibit
Number

10.43

10.44

10.45†

10.46

10.47

10.48†

10.49

10.50

10.51†

10.52

10.53

10.54

10.55†

10.56

10.57

10.58†

Exhibit Description

Form SEC File No.

Exhibit

Filing Date

Incorporation By Reference

Agreement dated March 8, 2005, between XOMA (US)
LLC and the National Institute of Allergy and
Infectious Diseases

Agreement dated July 28, 2006, between XOMA (US)
LLC and the National Institute of Allergy and
Infectious Diseases

Agreement dated September 15, 2008, between XOMA
(US) LLC and the National Institute of Allergy and
Infectious Diseases

Second Amendment to Agreement dated September 15,
2008, between XOMA (US) LLC and the National
Institute of Allergy and Infectious Diseases

Agreement dated September 30, 2011, between XOMA
(US) LLC and the National Institute of Allergy and
Infectious Diseases

Collaboration Agreement, dated as of November 1,
2006, between Takeda Pharmaceutical Company
Limited and XOMA (US) LLC

10-K 000-14710

10.53

03/15/2005

10-K 000-14710

10.60

08/09/2006

10-Q 000-14710

10.39

11/10/2008

10-Q 000-14710

10.24C 11/04/2010

S-4

000-14710

10.28D 10/04/2011

10-K 000-14710

10.46

03/08/2007

First Amendment to Collaboration Agreement,
effective as of February 28, 2007, between Takeda
Pharmaceutical Company Limited and XOMA (US)
LLC

10-
Q/A

000-14710

10.48

03/05/2010

Second Amendment to Collaboration Agreement,
effective as of February 9, 2009, among Takeda
Pharmaceutical Company Limited and XOMA (US)
LLC

License Agreement, effective as of August 27, 2007,
by and between Pfizer Inc. and XOMA Ireland Limited

Common Share Purchase Agreement, dated as of
July 23, 2010, by and between XOMA Ltd. and
Azimuth Opportunity Ltd.

Securities Purchase Agreement dated June 5, 2009,
between XOMA Ltd. and the investors named therein

Engagement Letter dated June 4, 2009

Discovery Collaboration Agreement dated
September 9, 2009, by and between XOMA
Development Corporation and Arana Therapeutics
Limited

Amendment to At Market Issuance Sales Agreement
dated December 31, 2011, between XOMA
Corporation and McNicoll, Lewis & Vlak LLC

Form of Warrant Amendment Agreement dated
February 2, 2010 (June 2009 Warrants)

10-K 000-14710

10.31B 03/11/2009

8-K

000-14710

2

09/13/2007

8-K

000-14710

10.1

07/23/2010

8-K

000-14710

10.1

06/10/2009

000-14710

10.3

06/10/2009

000-14710

10.35

03/05/2010

333-172197

1.2

01/03/2012

8-K

10-
Q/A

POS
AM

8-K

000-14710

10.3

02/02/2010

Royalty Purchase Agreement, dated as of August 12,
2010, by and among XOMA CDRA LLC, XOMA
(US) LLC, XOMA Ltd. and the buyer named therein

10-
Q/A

000-14710

10.38

04/13/2011

Exhibit
Number

10.59†

10.60†

10.61†

10.62

10.63†

10.64†

10.65†

10.66†

10.67†

10.68†

10.69

10.70

Exhibit Description

Form SEC File No.

Exhibit

Filing Date

Incorporation By Reference

Collaboration and License Agreement dated as of
December 30, 2010, by and between XOMA Ireland
Limited, Les Laboratoires Servier and Institut de
Recherches Servier

Amended and Restated Collaboration and License
Agreement dated as of February 14, 2012, by and
between XOMA Ireland Limited, Les Laboratoires
Servier and Institut de Recherches Servier

10-K 000-14710

10.42

03/10/2011

10-K 000-14710

10.41A 03/14/2012

Loan Agreement dated as of December 30, 2010, by and
between XOMA Ireland Limited and Les Laboratoires
Servier

10-
K/A

000-14710

10.42A 05/26/2011

Foreign Exchange and Options Master Agreement
(FEOMA) dated as of May 16, 2011, between Royal
Bank of Canada and XOMA Ltd., with letter agreement
dated May 17, 2011

Loan Agreement dated as of December 30, 2011, among
XOMA (US) LLC, as Borrower, XOMA Ltd., as Parent,
each other loan party from time to time party thereto,
General Electric Capital Corporation, as Agent, and
each other lender from time to time party thereto

Guaranty, Pledge and Security Agreement dated as of
December 30, 2011, among XOMA (US) LLC, each
other guarantor from time to time party thereto and
General Electric Capital Corporation, as Agent

Amended and Restated License and Commercialization
Agreement effective as of January 11, 2012, by and
between Les Laboratoires Servier and XOMA Ireland
Limited

Amended and Restated Trademark License Agreement
entered into as of January 11, 2012, between Biofarma
and XOMA Ireland Limited

Master Services Agreement dated as of November 9,
2009, between Medpace, Inc. and XOMA (US) LLC

Amendment No. 1 to Master Services Agreement dated
as of October 4, 2011, between Medpace, Inc. and
XOMA (US) LLC

First Amendment to Loan Agreement, by and between
General Electric Capital Corporation, the Company as
guarantor, XOMA (US) LLC as borrower, and certain
other wholly-owned subsidiaries of the Company, dated
September 27, 2012

Second Amendment to Loan Agreement, by and
between General Electric Capital Corporation, the
Company as guarantor, XOMA (US) LLC as borrower,
and certain other wholly-owned subsidiaries of the
Company, dated August 12, 2013

10-Q 000-14710

10.1

08/04/2011

10-K 000-14710

10.43

03/14/2012

10-K 000-14710

10.43A 03/14/2012

10-K 000-14710

10.44

03/14/2012

10-K 000-14710

10.44A 03/14/2012

10-K 000-14710

10.45

03/14/2012

10-K 000-14710

10.45A 03/14/2012

8-K 000-14710

10.46

10/03/2012

10-Q 000-14710

10.1

11/06/2014

Exhibit
Number

10.70

10.71†+

10.72†+

10.73+

10.74+

10.75

21.1+

23.1+

24.1+

31.1+

31.2+

32.1+

Exhibit Description

Form SEC File No. Exhibit

Filing Date

Incorporation By Reference

10-Q 000-14710

10.2

11/06/2014

Third Amendment to Loan Agreement, by and
between General Electric Capital Corporation, the
Company as guarantor, XOMA (US) LLC as
borrower, and certain other wholly-owned
subsidiaries of the Company, dated August 22, 2014
and effective as of August 18, 2014

Amendment No. 2, effective January 9, 2015, to the
Loan Agreement, effective December 30, 2010, by
and among XOMA (US) LLC, Les Laboratoires
Servier and Institut de Recherches Servier

Amendment No. 2, effective January 9, 2015, to the
Amended and Restated Collaboration and License
Agreement, effective February 14, 2012, by and
among XOMA (US) LLC, Les Laboratoires Servier
and Institut de Recherches Servier

Amendment No. 1, effective November 4, 2014, to
the Amended and Restated Collaboration and License
Agreement, effective February 14, 2012, by and
among XOMA (US) LLC (assigned from XOMA
Ireland Limited), Les Laboratoires Servier and Institut
de Recherches Servier

Amendment No. 1 (Consent, Transfer, Assumption
and Amendment), effective August 12, 2013, to the
Loan Agreement, effective December 30, 2010, by
and among XOMA (US) LLC, Les Laboratoires
Servier and Institut de Recherches Servier

Reference is made to Exhibit 4.9

Subsidiaries of the Company

Consent of Independent Registered Public
Accounting Firm

Power of Attorney (included on the signature pages
hereto)

Certification of Chief Executive Officer, as required
by Rule 13a-14(a) or Rule 15d-14(a)

Certification of Chief Financial Officer, as required
by Rule 13a-14(a) or Rule 15d-14(a)

Certification of Chief Executive Officer and Chief
Financial Officer, as required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C.
§1350) (1)

99.1+

Press Release dated March 11, 2014

101.INS+

XBRL Instance Document

101.SCH+

XBRL Taxonomy Extension Schema Document

Exhibit
Number

101.CAL+

101.DEF+

101.LAB+

101.PRE+

Exhibit Description

Form SEC File No. Exhibit

Filing Date

Incorporation By Reference

XBRL Taxonomy Extension Calculation Linkbase
Document

XBRL Taxonomy Extension Definition Linkbase
Document

XBRL Taxonomy Extension Labels Linkbase
Document

XBRL Taxonomy Extension Presentation Linkbase
Document

†

Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits
the information subject to this confidentiality request. Omitted portions have been filed separately with the
SEC.
Indicates a management contract or compensation plan or arrangement.
Filed herewith

*
+
(1) This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made
before or after the date of the Form 10-K), irrespective of any general incorporation language contained in
such filing.

Subsidiaries of the Company

Exhibit 21.1

Jurisdiction of Organization

XOMA Ireland Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XOMA Technology Ltd.
XOMA (US) LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XOMA Commercial LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XOMA CDRA LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XOMA UK Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ireland
Bermuda
Delaware
Delaware
Delaware
United Kingdom

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 of XOMA Corporation
(Nos. 333-108306, 333-151416, 333-171429, 333-174730, 333-181849 and 333-198719) pertaining to the 1981
Share Option Plan, the Restricted Share Plan, the 1992 Directors Share Option Plan, the Amended and Restated
1998 Employee Stock Purchase Plan, the 2007 CEO Share Option Plan and the Amended and Restated 2010
Long Term Incentive and Stock Award Plan and in the Registration Statement on Form S-3 of XOMA
Corporation (Nos. 333-183486, 333-191078, 333-196707 and 333-201882) and the related Prospectuses of
XOMA Corporation, of our reports dated March 11, 2015, with respect to the consolidated financial statements
of XOMA Corporation, and the effectiveness of internal control over financial reporting of XOMA Corporation
included in this Annual Report (Form 10-K) for the year ended December 31, 2014.

/s/ ERNST & YOUNG LLP

San Francisco, California
March 11, 2015

CERTIFICATION

Exhibit 31.1

I, John Varian, certify that:

1.

I have reviewed this annual report on Form 10-K of XOMA Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f))) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to

be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial

reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2015

/S/

JOHN VARIAN
John Varian
Chief Executive Officer

CERTIFICATION

Exhibit 31.2

I, Fred Kurland, certify that:

1.

I have reviewed this annual report on Form 10-K of XOMA Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f))) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to

be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial

reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2015

/S/ FRED KURLAND
Fred Kurland

Vice President, Finance, Chief Financial Officer and Secretary

CERTIFICATION

Exhibit 32.1

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), John
Varian, Chief Executive Officer of XOMA Corporation (the “Company”), and Fred Kurland, Chief Financial
Officer of the Company, each hereby certifies that, to the best of his or her knowledge:

1.

2.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2014, to which this
Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Exchange Act; and

The information contained in Exhibit 32.1 fairly presents, in all material respects, the financial condition
and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 11th day of March, 2015.

/S/

JOHN VARIAN
John Varian
Chief Executive Officer

/S/ FRED KURLAND
Fred Kurland
Vice President, Finance, Chief Financial Officer and Secretary

3.

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference into any filing of XOMA Corporation
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether
made before or after the date of the Form 10-K), irrespective of any general incorporation language
contained in such filing.

C O R P O R A T E   I N F O R M A T I O N

DIRECTORS

EXECUTIVE OFFICERS

ANNUAL MEETING

W. Denman Van Ness 1,2,3
Chairman of the Board
Hidden Hill Advisors

William K. Bowes, Jr. 3
Founding Partner
U.S. Venture Partners

Peter Barton Hutt 3
Senior Counsel
Covington & Burling LLP

John Varian 
Chief Executive Ofﬁcer

Patrick J. Scannon, M.D., Ph.D.
Executive Vice President and  
Chief Scientiﬁc Ofﬁcer

Paul D. Rubin, M.D.
Senior Vice President,  
Research and Development and  
Chief Medical Ofﬁcer

Joseph M. Limber 2
President and Chief Executive Ofﬁcer
Gradalis, Inc.

Thomas Burns
Vice President, Finance and
Chief Financial Ofﬁcer 

Kelvin M. Neu, M.D.
Managing Director
Baker Brothers Advisors LP

Patrick J. Scannon, M.D., Ph.D.
Executive Vice President and  
Chief Scientiﬁc Ofﬁcer
XOMA Corporation

John Varian 
Chief Executive Ofﬁcer
XOMA Corporation

Timothy P. Walbert 1,3
Chairman, President and
Chief Executive Ofﬁcer
Horizon Pharma, Inc.

Jack L. Wyszomierski 1,2
Former Executive Vice
President and Chief Financial Ofﬁcer
VWR International, LLC

1  Audit Committee

2  Compensation Committee

3  Nominating & Governance Committee

Thomas Klein
Vice President, Chief Commercial 
Ofﬁcer

XOMA CORPORATION
2910 Seventh Street
Berkeley, CA 94710
Tel: (510) 204-7200
www.xoma.com

INDEPENDENT AUDITORS

Ernst & Young LLP
San Francisco, CA

TRANSFER AGENT AND 
REGISTRAR

Wells Fargo Shareowner Services
P.O. Box 64874
St. Paul, MN 55164
www.shareowneronline.com
Tel: (800) 468-9716 or  
(651) 450-4064

The annual meeting of shareholders 
will be held at 9:00 a.m. on May 21, 
2015 at the company’s ofﬁces at 2910 
Seventh Street, Berkeley, CA.

SOURCES OF 
INFORMATION

XOMA’s website, with news releases, 
ﬁnancial and other information, is 
accessible on the Internet at:  
www.xoma.com

SEC FORM 10-K

A copy of XOMA’s annual report ﬁled 
with the Securities and Exchange 
Commission on Form 10-K was made 
available to all shareholders of record 
and is available on XOMA’s website. To 
request a copy contact:

Investor Relations
XOMA Corporation
2910 Seventh Street
Berkeley, CA 94710
Tel: (510) 204-7200
investorrelations@xoma.com

TRADEMARK

ACEON® is a registered  
trademark of Biofarma

XOMA is an afﬁrmative action,  
equal-opportunity employer.

XOMA CORPORATION

2910 Seventh Street

Berkeley, CA 94710

(510) 204-7200