10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

o 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	52-2154066
(State or other jurisdiction of incorporation or organization)	(I.R.S.  Employer Identification No.)
2910 Seventh Street, Berkeley, California 94710	(510) 204-7200
(Address of principal executive offices, including zip code)	(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o Accelerated filer x Non-accelerated filer o  (Do not check if a smaller reporting company) Smaller reporting company o

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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 5, 2014
Common Stock, $0.0075 par value	106,898,733

XOMA CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I        FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II       OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosure	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signatures		39

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PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

XOMA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2014			December 31, 2013
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	73,706		$	101,659
Short-term investments		19,996			19,990
Trade and other receivables, net		4,312			3,781
Prepaid expenses and other current assets		2,558			1,630
Total current assets		100,572			127,060
Property and equipment, net		6,028			6,456
Other assets		1,029			1,266
Total assets	$	107,629		$	134,782
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8,851		$	9,616
Accrued and other liabilities		4,895			9,934
Deferred revenue		2,158			2,218
Interest bearing obligation – current		4,085			5,835
Accrued Interest on interest bearing obligations – current		264			2,042
Total current liabilities		20,253			29,645
Deferred revenue – long-term		3,636			4,105
Interest bearing obligations – long-term		34,658			35,150
Contingent warrant liabilities		47,342			69,869
Total liabilities		105,889			138,769
Stockholders’ equity (deficit):
Common stock, $0.0075 par value, 138,666,666 shares authorized, 106,885,926 and 105,386,216 shares outstanding at March 31, 2014 and December 31, 2013, respectively		799			787
Additional paid-in capital		1,086,798			1,076,403
Accumulated comprehensive income (loss)		6			(1	)
Accumulated deficit		(1,085,863	)		(1,081,176	)
Total stockholders’ equity (deficit)		1,740			(3,987	)
Total liabilities and stockholders’ equity (deficit)	$	107,629		$	134,782

The accompanying notes are an integral part of these condensed consolidated financial statements.

(Note 1) The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

1

XOMA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

	Three months ended March 31,
	2014			2013
Revenues:
License and collaborative fees	$	964		$	399
Contract and other		2,446			9,054
Total revenues		3,410			9,453
Operating expenses:
Research and development		21,546			16,636
Selling, general and administrative		5,254			4,124
Restructuring		84			17
Total operating expenses		26,884			20,777
Loss from operations		(23,474	)		(11,324	)
Other income (expense):
Interest expense		(1,125	)		(1,172	)
Other (expense) income		(90	)		449
Revaluation of contingent warrant liabilities		20,002			(12,840	)
Net loss	$	(4,687	)	$	(24,887	)
Basic and diluted net loss per share of common stock	$	(0.04	)	$	(0.30	)
Shares used in computing basic and diluted net loss per share of common stock		106,158			82,595
Other comprehensive loss:
Net loss	$	(4,687	)	$	(24,887	)
Net unrealized gains on available-for-sale securities		7			3
Comprehensive loss	$	(4,680	)	$	(24,884	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

XOMA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(4,687	)	$	(24,887	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		477			780
Common stock contribution to 401(k)		870			828
Stock-based compensation expense		3,924			1,619
Accrued interest on interest bearing obligations		(1,764	)		1,586
Revaluation of contingent warrant liabilities		(20,002	)		12,840
Amortization of debt discount, final payment fee on debt, and debt issuance costs		674			603
Unrealized gain on foreign currency exchange		(66	)		(515	)
Unrealized loss on foreign exchange options		122			189
Other non-cash adjustments		1			(4	)
Changes in assets and liabilities:
Trade and other receivables, net		(530	)		1,997
Prepaid expenses and other assets		(923	)		(802	)
Accounts payable and accrued liabilities		(5,721	)		(7,097	)
Deferred revenue		(524	)		(111	)
Other liabilities		(51	)		(1,554	)
Net cash used in operating activities		(28,200	)		(14,528	)
Cash flows from investing activities:
Proceeds from maturities of investments		-			20,000
Net purchase of property and equipment		(49	)		(498	)
Net cash (used in) provided by investing activities		(49	)		19,502
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs		3,053			60
Proceeds from exercise of warrants		35			-
Principal payments of debt		(2,792	)		-
Net cash provided by financing activities		296			60
Net (decrease) increase in cash and cash equivalents		(27,953	)		5,034
Cash and cash equivalents at the beginning of the period		101,659			45,345
Cash and cash equivalents at the end of the period	$	73,706		$	50,379
Supplemental Cash Flow Information:
Cash paid for:
Interest	$	2,194		$	333
Non-cash investing and financing activities:
Reclassification of contingent warrant liability to equity upon exercise of warrants	$	(2,525	)	$	-
Interest added to principal balances on long-term debt	$	-		$	313

The accompanying notes are an integral part of these condensed consolidated financial statements.

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XOMA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 that 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 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 are subject to regulatory approval before they can be commercially launched.

2.  Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of XOMA and its subsidiaries. All intercompany accounts and transactions among consolidated entities were eliminated during consolidation. The unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted under those rules certain footnotes or other financial information can be condensed or omitted. These financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2014.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2014, the consolidated results of the Company’s operations and the Company’s cash flows for the three months ended March 31, 2014 and 2013. The interim results of operations are not necessarily indicative of the results that may be expected for the full fiscal year or any other periods.

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, 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. 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.

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 has been reclassified into contract and other revenue, and cost of sales has been reclassified into research and development expense, because the net product sales were not material for all periods presented. These reclassifications had no impact on the Company’s previously reported net loss or cash flows.

4

Concentration of Risk

Cash equivalents 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 has not experienced any significant credit losses and does not generally require collateral on receivables. For the three months ended March 31, 2014, three customers represented 47%, 40%, and 15% of total revenue and 57%, 28%, and 12% of the accounts receivable balance.

For the three months ended March 31, 2013, two customers represented 79% and 18% of total revenues. As of December 31, 2013, there were receivables outstanding from these two customers representing 73% and 13% of the accounts receivable balance.

3.  Condensed Consolidated Financial Statement Detail

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.

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):

	Three Months Ended March 31,
	2014		2013
Common stock options and restricted stock units		5,732		6,459
Warrants for common stock		14,273		16,176
Total		20,005		22,635

For the three months ended March 31, 2014 and 2013, all potentially dilutive securities outstanding were considered anti-dilutive, and therefore the calculation of basic and diluted net loss per share was the same.

Cash and Cash Equivalents

At March 31, 2014, cash and cash equivalents consisted of demand deposits of $10.1 million and money market funds of $63.6 million with maturities of less than 90 days at the date of purchase. At December 31, 2013, cash and 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 both March 31, 2014 and 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 5: 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.

5

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 condensed consolidated balance sheet and changes in fair value on these contracts are included in other income (expense) on the condensed consolidated statements of comprehensive loss.

The January 2014 foreign exchange option expired in January 2014 without being exercised. The January 2016 foreign exchange option was revalued at March 31, 2014 and had a fair value of $0.2 million. The Company recognized losses of $0.1 million and $0.2 million related to the revaluation for the three months ended March 31, 2014 and 2013, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following at March 31, 2014 and December 31, 2013 (in thousands):

	March 31, 2014		December 31, 2013
Accrued payroll and other benefits	$	2,401	$	3,009
Accrued management incentive compensation		1,050		4,386
Other		1,444		2,539
Total	$	4,895	$	9,934

Contingent Warrant Liabilities

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 would conditionally obligate the Company 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, the Company is required to account for the warrants issued in March 2012 as a liability at fair value. In addition, the estimated liability related to the warrants is required to be 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, the fair value of the warrant liability was estimated to be $68.7 million using the Black-Scholes Model. The Company revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $19.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of its condensed consolidated statements of comprehensive loss. The Company also reclassified $2.5 million from contingent warrant liabilities to equity on its condensed consolidated balance sheets due to the exercise of warrants. As of March 31, 2014, 12,109,418 of these warrants were outstanding and had a fair value of $46.6 million. This decrease in liability is due primarily to the decrease in the market price of XOMA’s common stock at March 31, 2014 compared to December 31, 2013.

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. In June 2009, the Company issued warrants to certain institutional investors as part of a registered direct offering. These 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. These warrants contain provisions that are contingent on the occurrence of a change in control, which would 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 is required to account for the warrants issued in February 2010 and June 2009 as liabilities at fair value. At December 31, 2013, the fair value of the warrant liability was estimated to be $1.2 million using the Black-Scholes Model. The Company revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $0.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of our condensed consolidated statements of comprehensive loss. As of March 31, 2014, all of these warrants were outstanding and had an aggregate fair value of approximately $0.7 million.

6

4.  Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies accounting standards, which establish a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. Accounting standards describe 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 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for similar 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 assets and liabilities, therefore requiring in entity to develop its own 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 March 31, 2014 and December 31, 2013.

Financial assets and liabilities carried at fair value as of March 31, 2014 and December 31, 2013 were classified as follows (in thousands):

	Fair Value Measurements at March 31, 2014 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	63,561	$	-	$	-	$	63,561
U.S. treasury securities		19,996		-		-		19,996
Foreign exchange options		-		239		-		239
Total	$	83,557	$	239	$	-	$	83,796
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	47,342	$	47,342

	Fair Value Measurements at December 31, 2013 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	82,759	$	-	$	-	$	82,759
U.S. treasury securities		19,990		-		-		19,990
Foreign exchange options		-		361		-		361
Total	$	102,749	$	361	$	-	$	103,110
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	69,869	$	69,869

(1)  Included in cash and cash equivalents

The fair value of the foreign exchange options at March 31, 2014 and December 31, 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.

7

The fair value of the contingent warrant liabilities at March 31, 2014 and December 31, 2013 was determined using the Black-Scholes Model, which requires unobservable 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 derive.

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at March 31, 2014 and December 31, 2013:

	March 31, 2014			December 31, 2013
Expected volatility		74.2% - 88.4	%		66.1% - 86.6	%
Risk-free interest rate		0.1% - 0.9	%		0.1% - 0.8	%
Expected term	0.7 - 2.9 years			0.9 - 3.2 years

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2014 (in thousands):

Contingent warrant liabilities	March 31, 2014
Balance at December 31, 2013	$	69,869
Reclassification of contingent warrant liability to equity upon exercise of warrants		(2,525	)
Net increase in fair value of contingent warrant liabilities upon revaluation		(20,002	)
Balance at March 31, 2014	$	47,342

The net decrease of $20.0 million in the estimated fair value of the contingent warrant liabilities was recognized as a gain in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014.

For the three months ended March 31, 2013, the Company recognized a net increase of $12.8 million in the estimated fair value of the contingent warrant liabilities as a loss in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.

5.  Long-Term Debt and Other Financings

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 March 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 March 31, 2014 and December 31, 2013, the outstanding principal balance under this note agreement was $13.0 million and $14.8 million, respectively. Pursuant to the terms of the arrangement as restructured in November 2008, the Company will not make any additional borrowings under the Novartis note. Pursuant to the 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 it received in December 2013, or $1.75 million, toward its outstanding debt obligation to Novartis.

8

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 2.33% to 3.83%. Interest for the six-month period from January 2014 through July 2014 was reset to 2.39%. 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 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 was 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 2014, the Company paid $1.9 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 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 both March 31, 2014 and December 31, 2013, the outstanding principal balance under this loan was $20.6 million using the March 31, 2014 Exchange Rate of 1.3752 and the December 31, 2013 Exchange Rate of 1.3766. For the three months ended March 31, 2013, the Company recorded an unrealized foreign exchange gain of $0.6 million related to the re-measurement of the loan. There was an immaterial re-measurement of the loan for the three months ended March 31, 2014.

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, resulting in a 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.  The Company recorded non-cash interest expense of $0.5 million and $0.4 million in the three months ended March 31, 2014 and 2013, respectively, resulting from the amortization of the loan discount. At March 31, 2014 and December 31, 2013, the net carrying value of the loan was $17.0 million and $16.5 million, respectively. For the three months ended March 31, 2013, the Company recorded an unrealized foreign exchange loss of $0.2 million related to the re-measurement of the loan discount. There was an immaterial re-measurement of the loan discount for the three months ended March 31, 2014.

The Company believes 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 the Company recorded $0.5 million and $0.4 million of related non-cash revenue during the three months ended March 31, 2014 and 2013, respectively.

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. 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.

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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 is 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.

At March 31, 2014 and December 31, 2013, the outstanding principal balance under the Amended Term Loan was $8.3 million and $9.4 million, respectively.

Interest Expense

Interest expense and amortization of debt issuance costs and discounts, recorded as other expense in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 are shown below (in thousands):

	Three Months Ended March 31,
	2014		2013
Interest expense
Servier loan	$	587	$	525
GECC term loan		448		545
Novartis note		77		91
Other		13		11
Total interest expense	$	1,125	$	1,172

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6.  Income Taxes

The Company did not recognize any income tax expense for the three months ended March 31, 2014 and 2013. The Company’s effective tax rate will fluctuate from period to period due to several factors inherent in the nature of the Company’s operations and business transactions. The factors that most significantly impact this rate include the variability of licensing transactions in foreign jurisdictions.

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, it has determined that total deferred tax assets should be fully offset by a valuation allowance.

7.  Stock-based Compensation

In the first quarter of 2014, the Board of Directors of the Company approved grants under the Company’s Long Term Incentive Plan for an aggregate of 1,099,239 stock options and an aggregate of 972,614 RSUs to certain employees of the Company. The stock options vest monthly over four years, and the RSUs vest annually over three years, in equal increments.

The Company recognizes compensation expense for all stock-based payment awards made to the Company’s employees, consultants and directors based on estimated fair values. The valuation of stock option awards is determined at the date of grant using the Black-Scholes 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 U.S. Treasury zero-coupon issues. The forfeiture rate impacts the amount of aggregate compensation for both stock options and RSUs. To establish an estimate of forfeiture rate, the Company considers its historical experience of option forfeitures and terminations.

The fair value of the stock options granted was estimated based on the following weighted average assumptions for three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
Dividend yield		0	%		0	%
Expected volatility		94	%		92	%
Risk-free interest rate		1.73	%		0.78	%
Expected term	5.6 years			5.6 years

Stock option activity for the three months ended March 31, 2014 was as follows:

	Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7,218,241		$	8.42		6.75	$	18,213
Granted		1,099,239			8.56
Exercised		(640,649	)		4.72
Forfeited, expired or cancelled		(116,766	)		24.72
Options outstanding at March 31, 2014		7,560,065		$	8.50		7.14	$	9,892
Options exercisable at March 31, 2014		4,562,868		$	10.85		5.95	$	5,422

The valuation of RSUs is determined at the date of grant using the closing stock price. To establish an estimate of forfeiture rate, the Company considers its historical experience of forfeitures and terminations.

Unvested RSU activity for the three months ended March 31, 2014 is summarized below:

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				Weighted-
	Number of			Average Grant-
	Shares			Date Fair Value
Unvested balance at December 31, 2013		1,738,037		$	2.73
Granted		972,614			8.64
Vested		(478,845	)		4.16
Forfeited		(77,536	)		2.82
Unvested balance at March 31, 2014		2,154,270		$	5.08

The following table shows total stock-based compensation expense included in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Research and development	$	2,406	$	997
Selling, general and administrative		1,518		622
Total stock-based compensation expense	$	3,924	$	1,619

8.  Subsequent Events

[OPEN FOR ANY SUBSEQUENT EVENTS]

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

We discover and develop innovative antibody-based therapeutics that have unique allosteric modulating properties. Our lead drug candidate, gevokizumab, is a proprietary potent, fully 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 (“Servier”), a leading independent French pharmaceutical company, we initiated three Phase 3 clinical trials evaluating gevokizumab for the treatment of non-infectious intermediate, posterior or pan-uveitis (“NIU”) and Behçet’s uveitis, a severe subset of NIU. 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 uveitis), and EYEGUARD-C (patients currently controlled with systemic treatment).

In addition to the NIU clinical trials, we also are conducting a trial of gevokizumab in pyoderma gangrenosum (“PG”), a rare ulcerative skin disease which is a specific indication under the umbrella of diseases known as neutrophilic dermatosis. Based upon what we believe are compelling data from our pilot study in patients with PG, we requested and in March 2014 held a meeting with the U.S. Food and Drug Administration (“FDA”) to solicit feedback on our proposed Phase 3 clinical development program.  We received feedback from the FDA early in the second quarter of 2014, and have finalized our plans for our gevokizumab Phase 3 program in PG. The Phase 3 program is expected to include two double-blind, placebo-controlled clinical studies, each of which is designed to enroll approximately 60 patients with active PG. The primary endpoint is complete wound closure of the target ulcer at approximately four months.

We also have an active gevokizumab Proof-of-Concept (“POC”) development program to identify indications for pivotal development. We conducted POC trials in moderate-to-severe inflammatory acne and in erosive osteoarthritis of the hand (“EOA”), and we have several other ongoing POC studies. In early 2013, we reported top-line results from our moderate-to-severe inflammatory acne study.  Based upon market analysis, we have decided not to pursue a pivotal program in moderate-to-severe inflammatory acne; however, we will consider conducting pilot studies in rare acne indications classified under the umbrella diagnosis of neutrophilic dermatoses.  In October 2013, we reported promising results from the Day 84 pain, stiffness and function endpoints in our gevokizumab POC study in patients with EOA and elevated C-reactive protein (“CRP”), known as Study 160.  At the same time, we announced we completed patient enrollment in a supplemental study for patients with EOA and non-elevated CRP, known as Study 162. On March 4, 2014, we reported that despite early positive results in Study 160, the top-line data at Day 168 in that study, as well as data at Day 84 in Study 162, were not positive.  These results led to our decision not to pursue Phase 3 testing in the broad EOA population.  We will continue to review the data to determine if there is a subgroup of the EOA population that could benefit from gevokizumab therapy.

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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.

We also have ongoing clinical studies assessing gevokizumab’s potential to treat several other rare diseases. Two studies are being conducted in collaboration with the U.S. National Institutes of Health (“NIH”). In March 2013, we announced that a gevokizumab study in patients with non-infectious anterior scleritis had opened for enrollment at the National Eye Institute (“NEI”). In August 2013, we announced a gevokizumab clinical study in patients with inflammatory autoimmune inner ear disease (“AIED”) run by the North Shore-Long Island Jewish Health System in collaboration with the National Institute on Deafness and Other Communication Disorders (“NIDCD”).

Separately, Servier instituted its own active development program for gevokizumab beyond the NIU and Behçet’s uveitis Phase 3 program. 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 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 preclinical pipeline includes classes of allosteric modulating antibodies that activate, sensitize or deactivate the insulin receptor in vivo, which we have named XMet.  This portfolio of antibodies represents potential new therapeutic approaches to the treatment of diabetes and several rare diseases that have insulin involvement.

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 trial was completed on XOMA 3AB, with no product-related serious adverse events. In January 2012, we announced that we will complete our NIAID biodefense contracts currently in place but will not actively pursue future contracts.  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”).  Clinical development of at least one of the product candidates is ongoing at Novartis.

Significant Developments in the First Quarter of 2014

Gevokizumab

· On February 24, 2014, we announced that gevokizumab has been granted Orphan Drug Designation by the FDA for the treatment of PG.

· On March 4, 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 will continue to review the data to determine if there is a subgroup of the EOA population that could benefit from gevokizumab therapy.

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Management Change

· On January 7, 2014, we announced that we and Patrick J. Scannon, M.D., Ph.D, our Executive Vice President and Chief Scientific Officer, amended Dr. Scannon’s employment arrangement with XOMA to reflect a change in Dr. Scannon’s status from full- to part-time service, reducing his annual base salary to $250,000, effective retroactively to January 1, 2014. Dr. Scannon will continue his service as a member of our Board of Directors and will remain our Chief Scientific Officer and an Executive Vice President.

Results of Operations

Revenues

Total revenues for the three months ended March 31, 2014 and 2013, were as follows (in thousands):

	Three Months Ended March 31,
	2014		2013		Increase (Decrease)
License and collaborative fees	$	964	$	399	$	565
Contract and other		2,446		9,054		(6,608	)
Total revenues	$	3,410	$	9,453	$	(6,043	)

License and Collaborative Fees

License and collaborative fees include fees and milestone payments related to the out-licensing of our products and technologies. The increase in license and collaborative fee revenue for the three months ended March 31, 2014, as compared to the same period of 2013, was due primarily to receipt of a $0.5 million milestone payment relating to an out-licensing arrangement. The generation of future revenue related to license fees and other collaborative arrangements is dependent on our ability to attract new licensees to our antibody technologies and new collaboration partners. We expect an increase in license and collaboration fee revenue during the remainder of 2014 compared to 2013 levels.

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 three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014			2013		Increase (Decrease)
Servier	$	884		$	7,027	$	(6,143	)
NIAID		1,596			1,695		(99	)
Other		(34	)		332		(366	)
Total contract and other	$	2,446		$	9,054	$	(6,608	)

The decrease in revenue from Servier is due primarily to $3.9 million for the partial funding of a Phase 3 trial received from Servier in the first quarter of 2013 for a fixed dose combination product to treat hypertension which was later sold to another company with continued XOMA financial interest. Also contributing to the decrease in revenue from Servier was a decrease in reimbursements due to our collaboration with Servier meeting the initial $50 million cap of fully reimbursable NIU costs during the third quarter of 2013. Servier and XOMA will each pay 50% of remaining NIU clinical development and CMC costs.

We expect contract and other revenue to decrease during the remainder of 2014 compared to 2013 levels. Revenue generating activity related to our Servier contract is expected to be reduced due to the collaboration reaching the $50 million fully reimbursable cap for NIU expenses.

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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 $21.5 million for the three months ended March 31, 2014, compared with $16.6 million for the same period of 2013. The increase was due primarily to a $2.1 million increase in external manufacturing activity and internal proprietary project costs. Also contributing to the increase was a $1.6 million increase in salaries and related personnel costs.

Salaries and related personnel costs are a significant component of research and development expenses. We recorded $9.2 million in research and development salaries and employee-related expenses for the three months ended March 31, 2014, as compared with $7.6 million for the same period of 2013. The increase was due primarily to a $1.4 million increase in stock-based compensation.

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 2014 compared to 2013 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):

	Three Months Ended March 31,
	2014		2013
Earlier stage programs	$	10,927	$	9,217
Later stage programs		10,619		7,419
Total	$	21,546	$	16,636

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):

	Three Months Ended March 31,
	2014		2013
Internal projects	$	14,969	$	9,825
Collaborative and contract arrangements		6,577		6,811
Total	$	21,546	$	16,636

For the three months ended March 31, 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 20% but less than 30% of our total research and development expenses and spending on other preclinical programs aggregate to more than 10% but less than 20% of our total research and development expenses. All remaining development programs accounted for less than 10% of our total research and development expenses for the three months ended March 31, 2014. For the three months ended March 31, 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. A second development program, XMet, accounted for more than 20% but less than 30% 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. All remaining development programs accounted for less than 10% of our total research and development expenses for the three months ended March 31, 2013.

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We expect our research and development spending during the remainder 2014 to increase compared to 2013 primarily due to our ongoing global Phase 3 clinical program for gevokizumab for the NIU indications, under our license and collaboration agreement with Servier, our ongoing gevokizumab Phase 2 proof-of-concept program, 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 costs and professional fees. Selling, general and administrative expenses were $5.3 million for the three months ended March 31, 2014, compared with $4.1 million for the same period of 2013. The increase was due primarily to a $0.9 million increase in stock-based compensation and a $0.3 million increase in salaries and related personnel costs.

Other Income (Expense)

Interest Expense

Interest expense and amortization of debt issuance costs and discounts are shown below for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013		Increase (Decrease)
Interest expense
Servier loan	$	587	$	525	$	62
GECC term loan		448		545		(97	)
Novartis note		77		91		(14	)
Other		13		11		2
Total interest expense	$	1,125	$	1,172	$	(47	)

Other Expense

Other income (expense) primarily consisted of unrealized (losses) gains. The following table shows the activity in other expense for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014			2013			Increase (Decrease)
Other income (expense)
Unrealized foreign exchange gain (1)	$	66		$	515		$	(449	)
Unrealized loss on foreign exchange options		(122	)		(189	)		67
Other		(34	)		123			(157	)
Total other (expense) income	$	(90	)	$	449		$	(539	)

(1) Unrealized foreign exchange gain (loss) for the three months ended March 31, 2014 and 2013 primarily relates to the re-measurement of the €15 million Servier loan.

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Revaluation of Contingent Warrant Liabilities

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 would 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 are required to account for the warrants issued in March 2012 as a liability at fair value. In addition, the estimated liability related to the warrants is required to be 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, the fair value of the warrant liability was estimated to be $68.7 million using the Black-Scholes Model. We revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $19.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of our condensed consolidated statements of comprehensive loss. We also reclassified $2.5 million from contingent warrant liabilities to equity on our consolidated balance sheets due to the exercise of warrants. As of March 31, 2014, 12,109,418 of these warrants were outstanding and had a fair value of $46.6 million. This decrease in liability is due primarily to the decrease in the market price of XOMA’s common stock at March 31, 2014 compared to December 31, 2013.

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. In June 2009, we issued warrants to certain institutional investors as part of a registered direct offering. These 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. These warrants contain provisions that are contingent on the occurrence of a change in control, which would 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 are required to account for the warrants issued in February 2010 and June 2009 as liabilities at fair value. At December 31, 2013, the fair value of the warrant liability was estimated to be $1.2 million using the Black-Scholes Model. We revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $0.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of our condensed consolidated statements of comprehensive loss. As of March 31, 2014, all of these warrants were outstanding and had an aggregate fair value of approximately $0.7 million.

The following table provides a summary of the changes in fair value of contingent warrant liabilities for the three months ended March 31, 2014 (in thousands):

Contingent warrant liabilities	March 31, 2014
Balance at December 31, 2013	$	69,869
Reclassification of contingent warrant liability to equity upon exercise of warrants		(2,525	)
Net increase in fair value of contingent warrant liabilities upon revaluation		(20,002	)
Balance at March 31, 2014	$	47,342

Income Taxes

We did not recognize any income tax expense for the three months ended March 31, 2014 and 2013.

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 March 31, 2014, we have not accrued interest or penalties related to uncertain tax positions.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents, our working capital and our cash flow activities as of the end of, and for each of, the periods presented (in thousands):

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	March 31, 2014		December 31, 2013		Change
Cash and cash equivalents	$	73,706	$	101,659	$	(27,953	)
Short-term investments	$	19,996	$	19,990	$	6
Working Capital	$	80,319	$	97,415	$	(17,096	)

	Three Months Ended March 31,
	2014			2013			Change
Net cash used in operating activities	$	(28,200	)	$	(14,528	)	$	(13,672	)
Net cash (used in) provided by investing activities		(49	)		19,502			(19,551	)
Net cash provided by financing activities		296			60			236
Effect of exchange rate changes on cash		-			-			-
Net increase in cash and cash equivalents	$	(27,953	)	$	5,034		$	(32,987	)

Working Capital

The decrease in working capital was due primarily to the $13.7 million increase in cash used in operations for the three months ended March 31, 2014, compared with the same period in 2013.

Cash Used in Operating Activities

The increase in net cash used in operating activities for the three months ended March 31, 2014 as compared with the same period in 2013 was primarily due to an increase in research and development spending relating to external manufacturing costs and internal proprietary projects, and a $2.0 million payment of accrued interest on our loan with Servier in the first quarter of 2014. Also contributing to the increase in cash used was lower cash receipts related to a decrease in reimbursements due to our collaboration with Servier meeting the initial $50 million cap of fully reimbursable NIU costs during the third quarter of 2013.

Cash (Used in) Provided by Investing Activities

Net cash provided by investing activities decreased by $19.5 million for the three months ended March 31, 2014, compared with the same period of 2013, primarily due to the maturity of $20.0 million in short-term investments during the first quarter of 2013.

Cash Provided by Financing Activities

Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2014, compared with $0.1 million for the same period of 2013. Cash provided by financing activities in the first quarter of 2014 related to net proceeds received from employee stock purchases and warrant exercises, partially offset by principal payments on our loans with GECC and Novartis. Cash provided by financing activities in the first quarter of 2013 related to net proceeds received from employee stock purchases.

***

We have incurred significant operating losses and negative cash flows from operations since our inception. At March 31, 2014, we had cash, cash equivalents, and short-term investments of $93.7 million. During 2014, we expect to continue using our cash, cash equivalents and short-term investments to fund ongoing operations. Additional licensing, antibody discovery and development collaboration agreements, government funding and financing arrangements may positively impact our cash balances. Based on our cash reserves and 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 estimate that we have sufficient cash resources to meet our anticipated net cash needs into 2015. Any significant revenue shortfalls, increases in planned spending on development programs or more rapid progress of development programs than anticipated, as well as the unavailability of anticipated sources of funding, could shorten this period.  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. Progress or setbacks by potentially competing products may also affect our ability to raise new funding on acceptable terms.

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Critical Accounting Estimates

Critical accounting estimates are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies including, but not limited to, revenue recognition, income taxes, contingent warrant liabilities, and stock-based compensation to be critical policies. There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2014, as compared with those previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 12, 2014.

Subsequent Events

[PENDING ANY SUBSEQUENT EVENTS]

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities. Our market risks related to interest rate sensitivities at March 31, 2014, have not changed materially from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2013 filed with the SEC.

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 the Euro to USD exchange rate could increase or decrease our unrealized gains or losses by approximately $0.2 million.

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 March 31, 2013, the €15.0 million outstanding principal balance under the Servier Loan Agreement would have equaled approximately $20.6 million using the March 31, 2014 Euro to USD exchange rate of 1.3752. 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. The January 2014 option expired in January 2014 without being exercised and the January 2016 option had a fair value of $0.2 million at March 31, 2014. Our use of derivative financial instruments represents risk management; we do not enter into derivative financial contracts for trading purposes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Vice President, Finance, Chief Financial Officer and Secretary (our principal financial and principal accounting officer), we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. 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 are effective as of the end of the period covered by this report in timely alerting them to material information relating to us and our consolidated subsidiaries required to be included in our periodic SEC filings.

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Changes in Internal Control

There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our revenues, expenses, operating results, cash flows, net loss and loss per share. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.  You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 have 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;

· 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, and through sales of our common stock.

Based on our cash, cash equivalents and short-term investments of $93.7 million at March 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 believe we have sufficient cash resources to meet our anticipated net cash needs into 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:

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· 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 March 31, 2014, we had an accumulated deficit of $1,085.9 million.

For the three months ended March 31, 2014, we had a net loss of approximately $4.7 million, or $0.04 per share of common stock (basic and diluted). For the three months ended March 31, 2013, we had a net loss of approximately $24.9 million, or $0.30 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 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 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 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 March 31, 2014, the €15.0 million outstanding principal balance under this Servier Loan Agreement would have equaled approximately $20.6 million using the March 31, 2014 Euro-to-U.S.-dollar exchange rate of 1.3752.

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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.

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, XMetD, XMetS, 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 and some of our product candidates will be regulated by the FDA as drugs. 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 Harmonisation 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 may not ultimately 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 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.

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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.

Many of our product candidates, including gevokizumab, XMet 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;

· 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.

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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 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, and chronic non-infectious anterior uveitis and Behçet’s uveitis. Under the Orphan Drug Act, the first company to receive FDA approval for gevokizumab 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 gevokizumab for the same orphan indication. 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 the same 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.

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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. For example, we initiated commercial operations in January 2012 through the licensing of U.S. commercial rights to Servier’s ACEON® (perindopril erbumine) and certain U.S. rights to a patent-protected portfolio of fixed dose combination (“FDC”) product candidates where perindopril is combined with other active ingredients to treat cardiovascular disease. Although we transferred the U.S. development and commercialization rights to the perindopril franchise to Symplmed Pharmaceuticals, LLC (“Symplmed”), we continue to hold the ACEON® NDA until transferred. As the holder of the ACEON NDA, we are subject to post-approval obligations for ACEON, including that we are required to submit annual reports to the FDA and are responsible for pharmacovigilance activities related to the product.

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.

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. In February 2009, the EMA announced it had recommended suspension of the marketing authorization of RAPTIVA^® in the EU and its Committee for Medicinal Products for Human Use (“CHMP”) had concluded the benefits of RAPTIVA no longer outweigh its risks because of safety concerns, including the occurrence of progressive multifocal leukoencephalopathy (“PML”) in patients taking the medicine. 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. We had participated in the development of RAPTIVA.

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 May 5, 2014, 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 138,666,666 shares of common stock, of which 106,898,733 were issued and outstanding as of May 5, 2014. If we issue additional equity securities, the price of our common stock may be materially and adversely affected.

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 the 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. From the inception of the 2011 ATM Agreement through May 5, 2014, we sold a total of 7,572,327 shares of common stock under this agreement for aggregate gross proceeds of $14.6 million. The registration statement under which the 2011 ATM was entered expires in June of 2014.

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As part of our fundraising efforts, from time to time we offer securities through underwritten public offerings.  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 1 2013, where we sold 10,925,000 shares of our common stock   at a public offering price of $5.25 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 shares of 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 May 5, 2014, the share price of our common stock has ranged from a high of $9.57  to a low of $3.72 Factors contributing to such volatility include, but are not limited to:

· 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;

· 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.

We may not be successful in commercializing our products, which could affect our development efforts.

We began commercializing our first product, ACEON, in January 2012, and we have limited experience in the sales, marketing and distribution of pharmaceutical products. We transferred U.S. development and commercialization rights to ACEON and the perindopril franchise to Symplmed in July 2013. Although Symplmed, under a sublicense agreement, assumes U.S. marketing responsibilities for ACEON (perindopril erbumine), XOMA continues to manage and be reimbursed for sales and distribution within its established commercial infrastructure until the ACEON NDA is transferred to Symplmed. There can be no assurance we will be able to successfully manage the transfer or commercialization activities to Symplmed or maintain the arrangements we have with third-party suppliers, distributors and other service providers that are necessary for us to perform these activities or our efforts will be successful. Transferring, maintaining or expanding these arrangements, or developing our own capabilities, may divert attention and resources from or otherwise negatively affect our development programs.

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 ACEON and any of our product candidates that may be approved for commercial sale.

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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 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, or 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, or 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 by the 90^th 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.

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.

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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.

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, such as ACEON. In addition, unforeseen safety issues may arise at any time, regardless of the length of time a product has been on the market.

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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 the ongoing HCD122 and LFA102 programs. In exchange for cash and debt reduction on our existing loan facility with Novartis, Novartis has control over the HCD122 and LFA102 programs, as well as the right to expand the development of these programs into additional indications outside of oncology.

· 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, an enabling technology 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 May 5, 2014, we were aware of two antibody products manufactured using this technology that have received FDA approval, Genentech’s LUCENTIS^® (ranibizumab injection) for treatment of neovascular wet age-related macular degeneration and UCB’s CIMZIA^® (certolizumab pegol) for treatment of Crohn’s disease and rheumatoid arthritis. In the third quarter of 2009, we sold our LUCENTIS royalty interest to Genentech. In the third quarter of 2010, we sold our CIMZIA royalty interest.

· On July 24, 2012, Servier and we entered into an agreement with Boehringer Ingelheim to transfer XOMA's technology and processes for the manufacture of gevokizumab to Boehringer lngelheim for Boehringer Ingelheim's implementation and validation in preparation for the commercial manufacture of gevokizumab. Upon the successful completion of the transfer and the establishment of biological comparability, including validation of the XOMA processes as implemented by Boehringer Ingelheim, we intend Boehringer Ingelheim will produce gevokizumab for XOMA's commercial use at its facility in Biberach, Germany. Servier and we retain all rights to the development and commercialization of gevokizumab. Transferring of our technology to Boehringer Ingelheim exposes us to numerous risks, including the possibility that Boehringer Ingelheim may not perform under the agreement as anticipated, and that we will need to successfully conduct a comparability trial demonstrating to the FDA’s satisfaction the similarity between XOMA-manufactured and Boehringer Ingelheim-manufactured product.

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.

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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.

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:

· significantly greater financial resources;

· larger research and development and marketing staffs;

· larger production facilities;

· 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. Other companies are developing other products based on the same or similar therapeutic targets as gevokizumab, and these products may prove more effective than gevokizumab. We are aware that:

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· 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 US 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 urticaria (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; TNF-receptor associated periodic syndrome (TRAPS); xerophthalmia; Schnitzler syndrome; polymyalgia rheumatica; hyperimmunoglobulinemia D (hyper-IgD) and periodic fever syndrome (HIDS); and abdominal aortic aneurysm (AAA).

· 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 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 in the United Kingdom investigating Kineret in patients with a certain type of myocardial infarction, or heart attack, has been completed. In August 2010, Biovitrum announced the FDA had granted orphan drug designation to Kineret for the treatment of CAPS, and in January 2013 they 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 SFDA; in January 2012, supplemental materials were required by the SFDA to conclude the review.

· AbbVie is developing ABT-981, a dual variable domain immunoglobulin (DVD-Ig) that incorporates anti-IL-1 alpha and anti-IL-1 beta antibodies, for the potential treatment of osteoarthritis. In October 2013, a phase I trial completed. In January 2014, the company expected to start phase II development later that year.

· Amgen was developing AMG 108, a fully human monoclonal antibody that targets inhibition of the action of IL-1.  In April 2008, Amgen reported results from a Phase 2 study in rheumatoid arthritis. AMG 108 showed statistically significant improvement in the signs and symptoms of rheumatoid arthritis and was well tolerated. In January 2011, MedImmune, the worldwide biologics unit for AstraZeneca PLC, announced Amgen granted it rights to develop AMG 108 worldwide except in Japan.

· In June 2009, Cytos Biotechnology AG announced the initiation of an ascending dose Phase 1/2a study of CYT013-IL1bQb, a therapeutic vaccine targeting IL-1 beta, in Type 2 diabetes. In June 2013, data were presented from a phase I, randomized, placebo-controlled, double-blinded, dose-escalation study in 48 type 2 diabetes patients at the 95th Endocrine Society Annual Meeting and Exposition. Decreases in HbA1c and glucose levels were observed. CYT-013-IL1bQb was reported to be safe and well-tolerated.

· 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); Lux Biosciences, Inc. – LUVENIQ^® (voclosporin); Novartis - Myfortic^® (mycophenalate sodium) and secukinumab, Santen Pharmaceutical Co., Ltd. – Sirolimus® (rapamycin), and pSivida Corp. – Fluacinolone Acetonide Intravitreal.

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.

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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.

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 ACEON and 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 and ACEON 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 and ACEON.

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 and ACEON 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 and ACEON, or cause any of our product candidates that may be approved for commercial sale and ACEON 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 which 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 operations and sales may be limited or disrupted by:

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· imposition of government controls;

· export license requirements;

· political or economic instability;

· trade restrictions;

· changes in tariffs;

· restrictions on repatriating profits;

· exchange rate fluctuations;

· withholding and other taxation; and

· difficulties in staffing and managing international operations.

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 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 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.

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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 European patents in our bacterial cell expression patent portfolio expired in July 2008 or earlier.

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.

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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, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers. We expect that 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 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; Fred Kurland, our Vice President, Finance, Chief Financial Officer and Secretary; 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.

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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), the Company 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, 2013, the Company has excluded the NOLs and R&D credits that will expire as a result of the annual limitations. 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 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 172 employees as of May 5, 2014. 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 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 warehouse and distribute ACEON, 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 and the commercialization of ACEON could be delayed or otherwise adversely affected.

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.

37

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 26.7% of our outstanding common stock as of May 5, 2014, 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. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On May 7, 2014, the Company issued a press release announcing the Company’s financial results for the third quarter ended March 31, 2014. A copy of the press release is furnished as Exhibit 99.1 to this report.

ITEM 6. EXHIBITS

See Index to Exhibits at the end of this Report, which is incorporated by reference here. The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report, except for Exhibit 99.1, which is furnished.

38

SIGNATURES

Pursuant to the requirements 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.

	XOMA Corporation
Date:  May 7, 2014	By:	/s/ JOHN VARIAN
		John Varian Chief Executive Officer (principal executive officer) and Director
Date: May 7, 2014	By:	/s/ FRED KURLAND
		Fred Kurland Vice President, Finance, Chief Financial Officer and Secretary (principal financial and principal accounting officer)

39

EXHIBIT INDEX

		Incorporation By Reference
Exhibit Number	Exhibit Description	Form	SEC File No.	Exhibit	Filing Date
3.1	Certificate of Incorporation of XOMA Corporation	8-K	000-14710	3.1	01/03/2012
3.2	Certificate of Amendment of Certificate of Incorporation of XOMA Corporation	8-K	000-14710	3.1	05/31/2012
3.3	By-laws of XOMA Corporation	8-K	000-14710	3.2	01/03/2012
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2	Specimen of Common Stock Certificate	8-K	000-14710	4.1	01/03/2012
4.3	Form of Certificate of Designations of Series A Preferred Stock	8-K	000-14710	3.1	01/03/2012
4.4	Form of Amended and Restated Warrant (June 2009 Warrants)	8-K	000-14710	10.6	02/02/2010
4.5	Form of Warrant (February 2010 Warrants)	8-K	000-14710	10.2	02/02/2010
4.6	Form of Warrant (December 2011 Warrants)	10-K	000-14710	4.9	03/14/2012
4.7	Form of Warrant (March 2012 Warrants)	8-K	000-14710	4.1	03/07/2012
4.8	Form of Warrant (September 2012 Warrants)	8-K	000-14710	4.10	10/03/2012
31.1+	Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
31.2+	Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
32.1+	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 May 7, 2014
101.INS+	XBRL Instance Document(2)
101.SCH+	XBRL Taxonomy Extension Schema Document(2)
101.CAL+	XBRL Taxonomy Extension Calculation Linkbase Document(2)
101.DEF+	XBRL Taxonomy Extension Definition Linkbase Document(2)
101.LAB+	XBRL Taxonomy Extension Labels Linkbase Document(2)
101.PRE+	XBRL Taxonomy Extension Presentation Linkbase Document(2)

+ Filed herewith

++ Furnished herewith. The information in Exhibit 99.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section or Sections II and 12(a)(2) of the Securities Act of 1933, as amended. The information contained in Exhibit 99.1 shall not be incorporated by reference into any filing with the U.S. Securities and Exchange Commission made by XOMA Corporation, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

(1) This certification accompanies the Form 10-Q 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-Q), irrespective of any general incorporation language contained in such filing.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John Varian, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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) and 15d-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 officer 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 the registrant’s board of directors (or persons performing the equivalent functions):

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.

	/s/    JOHN VARIAN
Date:  May 7, 2014	John Varian Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Fred Kurland, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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) and 15d-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 officer 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 the registrant’s board of directors (or persons performing the equivalent functions):

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.

	/s/    FRED KURLAND
Date:  May 7, 2014	Fred Kurland Vice President, Finance, Chief Financial Officer and Secretary

EX-32.1

Exhibit 32.1

CERTIFICATION

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.The Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

2.The information contained in the Periodic Report 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 7th day of May, 2014.

/s/    JOHN VARIAN

John Varian

Chief Executive Officer

/s/    FRED KURLAND

Fred Kurland

Vice President, Finance, Chief Financial Officer and Secretary

This certification accompanies the Form 10-Q 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-Q), irrespective of any general incorporation language contained in such filing.

EX-99.1

EXHIBIT 99.1

XOMA Reports First Quarter 2014 Operational Highlights and Financial Results

BERKELEY, Calif., May 7, 2014 -- XOMA Corporation (Nasdaq:XOMA), a leader in the discovery and development of therapeutic antibodies, today announced its operational highlights and financial results for the first quarter ended March 31, 2014.

First Quarter 2014 Operational Highlights

· Met with the U.S. Food and Drug Administration (FDA) to determine the requirements for a Phase 3 gevokizumab program in patients with pyoderma gangrenosum (PG), a rare neutrophilic dermatosis of painful expanding necrotic skin ulcers.  The Company is completing and will submit the Phase 3 protocols for final comments from the Agency within the next several weeks.

· Announced gevokizumab had been granted Orphan Drug Designation by the FDA for the treatment of PG.

· Reported data from the Company’s erosive osteoarthritis of the hand (EOA) proof-of-concept studies.  Based upon the results, the Company has elected not to pursue the broad EOA indication for Phase 3 testing.

· XOMA’s partner, SERVIER, continued to enroll patients in EYEGUARD™-B, which is studying gevokizumab in patients who have non-infectious uveitis (NIU) with underlying Behçet’s disease, a rare indication.

· Continued to enroll patients in EYEGUARD-A and EYEGUARD-C studies investigating gevokizumab in patients with active and controlled NIU involving the intermediate and/or posterior segment of the eye.

· As of April 30, 2014, SERVIER, had opened EYEGUARD-A and -C clinical trial sites in 15 countries representing 52 clinical study centers.  SERVIER also obtained approval in an additional 4 countries representing 12 clinical study sites.

"Our first quarter 2014 activities centered on advancing gevokizumab towards a Biologics Licensing Application.  We have initiated a program to further increase patient enrollment at the 70 U.S. clinical sites conducting the EYEGUARD-A and C studies, and we are starting to see the first signs that this new outreach program could have the impact we are seeking.  We conducted our meeting with the FDA to determine the Agency’s requirements for a gevokizumab Phase 3 program in patients with pyoderma gangrenosum.  Based upon the oral and written comments, we are submitting our Phase 3 protocol and while we await any final comments, we are very actively working with clinical sites in the U.S. and in several other countries to ensure they are ready to enroll patients in the PG studies as soon as they are launched,” stated John Varian, Chief Executive Officer of XOMA.  “SERVIER is nearing their anticipated date for the pre-set final exacerbation in the EYEGUARD-B study, which will give us our first Phase 3 data in patients who have non-infectious uveitis and underlying Behçet’s disease.  Our clinical team has been working on the protocol for a supplemental Phase 3 study in this indication, which will give us the option to pursue a Behçet’s uveitis-only label.”

Financial Results

The financial results for the first quarter of 2014 reflect reduced reimbursements from SERVIER associated with gevokizumab development activities, as SERVIER met the initial $50 million cap of fully reimbursable NIU costs during the third quarter of 2013.  XOMA now pays 50% of the cost of gevokizumab development costs in NIU.  The comparisons between the first quarters ended March 31, 2014 and 2013, reflect this development.

XOMA recorded total revenues of $3.4 million for the three months ended March 31, 2014, compared with $9.5 million during the corresponding period of 2013, which included a $3.9 million milestone payment from SERIVER related to a product development program that XOMA subsequently transferred to Symplmed.

Annual research and development (R&D) expenses for first quarter ended 2014 were $21.5 million compared to $16.6 million in the corresponding 2013 period.  The increases reflect the increased external clinical trial costs associated with XOMA’s gevokizumab clinical development programs, increased spending on preclinical development activities related to the XMet platform, and an increase in stock-based compensation.  Selling, general and administrative expenses (SG&A) were $5.3 million for the three months ended March 31, 2014, compared to $4.1 million incurred during the same period of 2013, primarily reflecting an increase in stock-based compensation.

For the first quarter ended March 31, 2014, XOMA had a net loss of $4.7 million, or $0.04 per share, compared with a net loss of $24.9 million, or $0.30 per share, in the quarter ended March 31, 2013.  The net losses in the three months ended March 31, 2014 and 2013, included a $20.0 million gain and $12.8 million loss, respectively, in non-cash revaluations of contingent warrant liabilities, resulting primarily from fluctuations in XOMA’s stock price.  Excluding those revaluations, the net loss for the three months ended March 31, 2014, was $24.7 million, or $0.23 per share, compared with the net loss for the same reporting period in 2013 of $12.0 million, or $0.15 per share.

On March 31, 2014, XOMA had cash, cash equivalents, and short-term investments of $93.7 million compared with $121.6 million at December 31, 2013.

“Our first quarter spend is well aligned with our expectations of the cash requirements for XOMA’s operations in 2014,” commented Fred Kurland, Vice President, Finance, Chief Financial Officer and Secretary of XOMA.  “Today we reaffirm our anticipated cash used in ongoing operating activities of approximately $55.0 million to $60.0 million during 2014.  This guidance reflects the costs associated with conducting two separate Phase 3 programs for the gevokizumab, the EYEGUARD program and the pyoderma gangrenosum program, and it includes the expectation we will receive license and contract-related revenue during the year, which is consistent with our history of entering into such agreements.”

Investor Conference Call and Webcast

XOMA will host a conference call and webcast today, May 7, 2014, at 4:30 p.m. ET / 1:30 PT.  The webcast can be accessed via the Investors and Media section of XOMA's website at  http://investors.xoma.com/events.cfm and will be available for replay until close of business on August 7, 2014.  Telephone numbers for the live audiocast are 877-369-6589 (U.S./Canada) and 408-337-0122 (international).

About Gevokizumab

Gevokizumab is a potent monoclonal antibody with unique allosteric modulating properties and has the potential to treat patients with a wide variety of inflammatory and other diseases. Gevokizumab binds strongly to interleukin-1 beta (IL-1 beta), a pro-inflammatory cytokine, and modulates the cellular signaling events that produce inflammation. IL-1 beta has been shown to be involved in diverse array of disease states, including non-infectious uveitis (including Behçet's uveitis), cardiovascular disease, and other auto-inflammatory diseases.

Gevokizumab currently is being studied in a global Phase 3 clinical program, termed EYEGUARD™, which is being conducted by SERVIER and XOMA.  This program is designed to determine gevokizumab's ability to treat acute non-infectious uveitis (NIU) involving the intermediate and/or posterior segment of the eye in EYEGUARD-A, to prevent disease flares in patients with Behçet's uveitis in EYEGUARD-B, and to prevent disease flares in NIU patients who are controlled with steroids in EYEGUARD-C.

XOMA has a Proof-of-Concept (POC) program underway in which the Company is exploring the efficacy and safety of gevokizumab in multiple indications.  Separately, SERVIER initiated a Phase 2 study to determine gevokizumab's ability to reduce arterial wall inflammation in patients with marked atherosclerotic plaque inflammation and who have experienced an acute coronary syndrome event in the previous twelve months, as well as POC studies in polymyositis/dermatomyositis, giant cell arteritis, and Schnitzler syndrome.  Information about gevokizumab clinical studies can be found at www.clinicaltrials.gov and www.clinicaltrialsregister.eu .

About XOMA

XOMA has built a portfolio of innovative therapeutic antibodies, both in late-stage clinical development and in preclinical research.  XOMA focuses its antibody research and development on allosteric modulation, which offers opportunities for new classes of therapeutic antibodies to treat a wide range of human diseases.  XOMA's lead product candidate, gevokizumab (IL-1 beta modulating antibody), is in a global Phase 3 program in non-infectious uveitis with its partner SERVIER and multiple proof-of-concept studies in other IL-1-mediated diseases.  XOMA's scientific research also produced the XMet program, which consists of three classes of preclinical antibodies, including Selective Insulin Receptor Modulators (SIRMs) that could have a significant effect on the treatment of diabetes.

More detailed information can be found at www.xoma.com.

About SERVIER

Founded in 1954, SERVIER is an independent French pharmaceutical research company. Its development is based on the continuous pursuit of innovation in the therapeutic areas of cardiovascular, metabolic, neurologic, psychiatric, bone and joint diseases, as well as cancer. In 2013, the company recorded a turnover of 4.2 billion euros. 91% of SERVIER drugs are consumed internationally. 27% of turnover from SERVIER drugs were reinvested in Research and Development in 2013. With a strong international presence in 140 countries, SERVIER employs more than 21,000 people worldwide. The SERVIER Group contributed 35% to the 2013 French trade surplus in the pharmaceuticals sector.

Forward-Looking Statements

Certain statements contained in this press release including, but not limited to, statements related to anticipated timing of initiation and completion of clinical trials, Proof-of-Concept trials, anticipated size of clinical trials, regulatory approval of unapproved product candidates, sufficiency of our cash resources and anticipated levels of cash utilization, or statements that otherwise relate to future periods are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on assumptions that may not prove accurate, and 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. Potential risks to XOMA meeting these expectations are described in more detail in XOMA's most recent filing on Form 10-K and in other SEC filings. Consider such risks carefully when considering XOMA's prospects. Any forward-looking statement in this press release represents XOMA's views only as of the date of this press release and should not be relied upon as representing its views as of any subsequent date. XOMA disclaims any obligation to update any forward-looking statement, except as required by applicable law.

XOMA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

	March 31
	2014			2013
Revenues:
License and collaborative fees	$	964		$	399
Contract and other		2,446			9,054
Total revenues		3,410			9,453
Operating expenses:
Research and development		21,546			16,636
Selling, general and administrative		5,254			4,124
Restructuring		84			17
Total operating expenses		26,884			20,777
Loss from operations		(23,474	)		(11,324	)
Other income (expense):
Interest expense		(1,125	)		(1,172	)
Other (expense) income		(90	)		449
Revaluation of contingent warrant liabilities		20,002			(12,840	)
Net loss	$	(4,687	)	$	(24,887	)
Basic and diluted net loss per share of common stock	$	(0.04	)	$	(0.30	)
Shares used in computing basic and diluted net loss per share of common stock		106,158			82,595
Other comprehensive loss:
Net loss	$	(4,687	)	$	(24,887	)
Net unrealized gains on available-for-sale securities		7			3
Comprehensive loss	$	(4,680	)	$	(24,884	)

XOMA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31			December 31
	2014			2013
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	73,706		$	101,659
Short-term investments		19,996			19,990
Trade and other receivables, net		4,312			3,781
Prepaid expenses and other current assets		2,558			1,630
Total current assets		100,572			127,060
Property and equipment, net		6,028			6,456
Other assets		1,029			1,266
Total assets	$	107,629		$	134,782
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8,851		$	9,616
Accrued and other liabilities		4,895			9,934
Deferred revenue		2,158			2,218
Interest bearing obligation - current		4,085			5,835
Accrued interest on bearing obligations – current		264			2,042
Total current liabilities		20,253			29,645
Deferred revenue – long-term		3,636			4,105
Interest bearing obligations – long-term		34,658			35,150
Contingent warrant liabilities		47,342			69,869
Total liabilities		105,889			138,769
Stockholders’ equity (deficit):
Common stock, $0.0075 par value, 138,666,666 shares authorized, 106,885,926 and 105,386,216 shares outstanding at March 31, 2014 and December 31, 2013, respectively		799			787
Additional paid-in capital		1,086,798			1,076,403
Accumulated comprehensive income		6			(1	)
Accumulated deficit		(1,085,863	)		(1,081,176	)
Total stockholders’ equity (deficit)		1,740			(3,987	)
Total liabilities and stockholders’ equity (deficit)	$	107,629		$	134,782

CONTACT: XOMA Corporation

Company and Investor Contact:

Ashleigh Barreto

510-204-7482

barreto@xoma.com

Juliane Snowden

The Oratorium Group, LLC

jsnowden@oratoriumgroup.com

Media Contact:

Canale Communications

Carolyn Hawley

619-849-5375

carolyn@canalecomm.com

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Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Measurements [Abstract]

Fair Value Measurements

4.  Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies accounting standards, which establish a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. Accounting standards describe 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 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for similar 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 assets and liabilities, therefore requiring in entity to develop its own 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 March 31, 2014 and December 31, 2013.

Financial assets and liabilities carried at fair value as of March 31, 2014 and December 31, 2013 were classified as follows (in thousands):

	Fair Value Measurements at March 31, 2014 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	63,561	$	-	$	-	$	63,561
U.S. treasury securities		19,996		-		-		19,996
Foreign exchange options		-		239		-		239
Total	$	83,557	$	239	$	-	$	83,796
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	47,342	$	47,342

	Fair Value Measurements at December 31, 2013 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	82,759	$	-	$	-	$	82,759
U.S. treasury securities		19,990		-		-		19,990
Foreign exchange options		-		361		-		361
Total	$	102,749	$	361	$	-	$	103,110
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	69,869	$	69,869

(1) Included in cash and cash equivalents

The fair value of the foreign exchange options at March 31, 2014 and December 31, 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 March 31, 2014 and December 31, 2013 was determined using the Black-Scholes Model, which requires unobservable 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 derive.

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at March 31, 2014 and December 31, 2013:

	March 31, 2014			December 31, 2013
Expected volatility		74.2% - 88.4	%		66.1% - 86.6	%
Risk-free interest rate		0.1% - 0.9	%		0.1% - 0.8	%
Expected term	0.7 - 2.9 years			0.9 - 3.2 years

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2014 (in thousands):

Contingent warrant liabilities	March 31, 2014
Balance at December 31, 2013	$	69,869
Reclassification of contingent warrant liability to equity upon exercise of warrants		(2,525	)
Net increase in fair value of contingent warrant liabilities upon revaluation		(20,002	)
Balance at March 31, 2014	$	47,342

The net decrease of $20.0 million in the estimated fair value of the contingent warrant liabilities was recognized as a gain in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014.

For the three months ended March 31, 2013, the Company recognized a net increase of $12.8 million in the estimated fair value of the contingent warrant liabilities as a loss in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.

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Condensed Consolidated Financial Statement Detail

3 Months Ended

Mar. 31, 2014

Condensed Consolidated Financial Statement Detail [Abstract]

Condensed Consolidated Financial Statement Detail

3.  Condensed Consolidated Financial Statement Detail

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.

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):

	Three Months Ended March 31,
	2014		2013
Common stock options and restricted stock units		5,732		6,459
Warrants for common stock		14,273		16,176
Total		20,005		22,635

For the three months ended March 31, 2014 and 2013, all potentially dilutive securities outstanding were considered anti-dilutive, and therefore the calculation of basic and diluted net loss per share was the same.

Cash and Cash Equivalents

At March 31, 2014, cash and cash equivalents consisted of demand deposits of $10.1 million and money market funds of $63.6 million with maturities of less than 90 days at the date of purchase. At December 31, 2013, cash and 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 both March 31, 2014 and 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 5: 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 condensed consolidated balance sheet and changes in fair value on these contracts are included in other income (expense) on the condensed consolidated statements of comprehensive loss.

The January 2014 foreign exchange option expired in January 2014 without being exercised. The January 2016 foreign exchange option was revalued at March 31, 2014 and had a fair value of $0.2 million. The Company recognized losses of $0.1 million and $0.2 million related to the revaluation for the three months ended March 31, 2014 and 2013, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following at March 31, 2014 and December 31, 2013 (in thousands):

	March 31, 2014		December 31, 2013
Accrued payroll and other benefits	$	2,401	$	3,009
Accrued management incentive compensation		1,050		4,386
Other		1,444		2,539
Total	$	4,895	$	9,934

Contingent Warrant Liabilities

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 would conditionally obligate the Company 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, the Company is required to account for the warrants issued in March 2012 as a liability at fair value. In addition, the estimated liability related to the warrants is required to be 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, the fair value of the warrant liability was estimated to be $68.7 million using the Black-Scholes Model. The Company revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $19.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of its condensed consolidated statements of comprehensive loss. The Company also reclassified $2.5 million from contingent warrant liabilities to equity on its condensed consolidated balance sheets due to the exercise of warrants. As of March 31, 2014, 12,109,418 of these warrants were outstanding and had a fair value of $46.6 million. This decrease in liability is due primarily to the decrease in the market price of XOMA's common stock at March 31, 2014 compared to December 31, 2013.

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. In June 2009, the Company issued warrants to certain institutional investors as part of a registered direct offering. These 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. These warrants contain provisions that are contingent on the occurrence of a change in control, which would 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 is required to account for the warrants issued in February 2010 and June 2009 as liabilities at fair value. At December 31, 2013, the fair value of the warrant liability was estimated to be $1.2 million using the Black-Scholes Model. The Company revalued the warrant liability at March 31, 2014 using the Black-Scholes Model and recorded the $0.5 million decrease in the fair value as a gain in the revaluation of contingent warrant liabilities line of our condensed consolidated statements of comprehensive loss. As of March 31, 2014, all of these warrants were outstanding and had an aggregate fair value of approximately $0.7 million.

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 73,706	$ 101,659	[1]
Short-term investments	19,996	19,990	[1]
Trade and other receivables, net	4,312	3,781	[1]
Prepaid expenses and other current assets	2,558	1,630	[1]
Total current assets	100,572	127,060	[1]
Property and equipment, net	6,028	6,456	[1]
Other assets	1,029	1,266	[1]
Total assets	107,629	134,782	[1]
Current liabilities:
Accounts payable	8,851	9,616	[1]
Accrued and other liabilities	4,895	9,934	[1]
Deferred revenue	2,158	2,218	[1]
Interest bearing obligation - current	4,085	5,835	[1]
Accrued Interest on interest bearing obligations - current	264	2,042	[1]
Total current liabilities	20,253	29,645	[1]
Deferred revenue - long-term	3,636	4,105	[1]
Interest bearing obligations - long-term	34,658	35,150	[1]
Contingent warrant liabilities	47,342	69,869	[1]
Total liabilities	105,889	138,769	[1]
Stockholders' equity (deficit):
Common stock, $0.0075 par value, 138,666,666 shares authorized, 106,885,926 and 105,386,216 shares outstanding at March 31, 2014 and December 31, 2013, respectively	799	787	[1]
Additional paid-in capital	1,086,798	1,076,403	[1]
Accumulated comprehensive income (loss)	6	(1)	[1]
Accumulated deficit	(1,085,863)	(1,081,176)	[1]
Total stockholders' equity (deficit)	1,740	(3,987)	[1]
Total liabilities and stockholders' equity (deficit)	$ 107,629	$ 134,782	[1]

[1] (Note 1) The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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Description of Business

3 Months Ended

Mar. 31, 2014

Description of Business [Abstract]

Description of Business

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 that 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 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 are subject to regulatory approval before they can be commercially launched. 

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Long-Term Debt and Other Financings (Details)	3 Months Ended			1 Months Ended	3 Months Ended			1 Months Ended	3 Months Ended		12 Months Ended			3 Months Ended		1 Months Ended	3 Months Ended				3 Months Ended
	Mar. 31, 2014 USD ($)	Mar. 31, 2013 USD ($)	Dec. 31, 2013 USD ($)	Jan. 31, 2014 Novartis Note [Member] USD ($)	Mar. 31, 2014 Novartis Note [Member] USD ($)	Mar. 31, 2013 Novartis Note [Member] USD ($)	Dec. 31, 2013 Novartis Note [Member] USD ($)	Jan. 31, 2014 Servier Loan [Member] USD ($)	Mar. 31, 2014 Servier Loan [Member] USD ($)	Mar. 31, 2013 Servier Loan [Member] USD ($)	Dec. 31, 2011 Servier Loan [Member] USD ($)	Dec. 31, 2013 Servier Loan [Member] USD ($)	Dec. 31, 2011 Servier Loan [Member] EUR (€)	Mar. 31, 2014 Servier Loan [Member] Minimum [Member]	Mar. 31, 2014 Servier Loan [Member] Maximum [Member]	Sep. 30, 2012 General Electric Capital Corporation Term Loan [Member] USD ($) Installment	Mar. 31, 2014 General Electric Capital Corporation Term Loan [Member] USD ($) Installment	Mar. 31, 2013 General Electric Capital Corporation Term Loan [Member] USD ($)	Sep. 27, 2012 General Electric Capital Corporation Term Loan [Member] USD ($)	Dec. 31, 2011 General Electric Capital Corporation Term Loan [Member] USD ($)	Mar. 31, 2014 Other Financings [Member] USD ($)	Mar. 31, 2013 Other Financings [Member] USD ($)
Debt Instrument [Line Items]
Maturity date					Jun. 30, 2015												Jun. 15, 2015
Research and development expenses funded through loan facility, maximum (in hundredths)					75.00%
Maximum borrowing capacity under loan agreement					$ 50,000,000								€ 15,000,000
Variable rate basis					six-month LIBOR				Euro Inter-Bank Offered Rate ("EURIBOR")
Basis spread on variable rate (in hundredths)					2.00%
Interest rate at period end (in hundredths)					2.35%
Outstanding principal balance			9,400,000		13,000,000		14,800,000		20,600,000								8,300,000		3,100,000	10,000,000
Percentage of milestone received (in hundredths)				25.00%
Milestone received under the collaboration agreement				7,000,000
Repayment of debt				1,750,000
Periodic Payment, Principal																347,222
Proceeds from loan											19,500,000					4,600,000
Increase (Decrease) in term loan obligation																12,500,000
Initial interest rate during period (in hundredths)									3.22%
Interest rate reset semi-annually during period (in hundredths)									2.39%					2.33%	3.83%
Accrued interest	1,764,000	(1,586,000)						1,900,000
Unamortized discount on debt									8,900,000
Unrealized foreign exchange gain (loss)	66,000	515,000								600,000
Unrealized foreign exchange loss related to re-measurement of loan discount										200,000
Euro to US Dollar exchange rates									1.3752			1.3766
Amortization period for loan discount									5 years
Amortization of debt discount									500,000	400,000
Carrying value of the loan									17,000,000			16,500,000
Recognition of deferred revenue									500,000	400,000
Debt issuance costs																200,000	1,300,000
Final payment fee																	500,000		875,000
Fixed interest rate accrued (in hundredths)																	11.71%		10.90%
Number of monthly installments																27	42
Prepayment premium year one (in hundredths)																	3.00%
Prepayment premium year two (in hundredths)																	2.00%
Prepayment premium year thereafter (in hundredths)																	1.00%
Aggregate number of unregistered shares of common stock called by warrants (in shares)																	263,158		39,346
Warrants exercise price (in dollars per share)																	$ 1.14		$ 3.54
Immediate Term for warrants exercisable (in years)																5 years	5 years
Fair value of warrant liability																	200,000		100,000
Interest expense and amortization of debt issuance costs [Abstract]
Interest expense	$ 1,125,000	$ 1,172,000			$ 77,000	$ 91,000			$ 587,000	$ 525,000							$ 448,000	$ 545,000			$ 13,000	$ 11,000

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Basis of Presentation and Significant Accounting Policies

3 Months Ended

Mar. 31, 2014

Basis of Presentation and Significant Accounting Policies [Abstract]

Basis of Presentation and Significant Accounting Policies

2.  Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of XOMA and its subsidiaries. All intercompany accounts and transactions among consolidated entities were eliminated during consolidation. The unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. and Article 10 of Regulation S-X. As permitted under those rules certain footnotes or other financial information can be condensed or omitted. These financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission ("SEC") on March 12, 2014.

In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the Company's consolidated financial position as of March 31, 2014, the consolidated results of the Company's operations and the Company's cash flows for the three months ended March 31, 2014 and 2013. The interim results of operations are not necessarily indicative of the results that may be expected for the full fiscal year or any other periods.

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, 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. 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.

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 has been reclassified into contract and other revenue, and cost of sales has been reclassified into research and development expense, because the net product sales were not material for all periods presented. These reclassifications had no impact on the Company's previously reported net loss or cash flows.

Concentration of Risk

Cash equivalents 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 has not experienced any significant credit losses and does not generally require collateral on receivables. For the three months ended March 31, 2014, three customers represented 47%, 40%, and 15% of total revenue and 57%, 28%, and 12% of the accounts receivable balance.

For the three months ended March 31, 2013, two customers represented 79% and 18% of total revenues. As of December 31, 2013, there were receivables outstanding from these two customers representing 73% and 13% of the accounts receivable balance.

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Stockholders' equity (deficit):
Common stock, par value (in dollars per share)	$ 0.0075	$ 0.0075
Common stock, shares authorized (in shares)	138,666,666	138,666,666
Common stock, shares outstanding (in shares)	106,885,926	105,386,216

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Stock-based Compensation (Tables)

3 Months Ended

Mar. 31, 2014

Stock-based Compensation [Abstract]

Weighted average assumptions

The fair value of the stock options granted was estimated based on the following weighted average assumptions for three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
Dividend yield		0	%		0	%
Expected volatility		94	%		92	%
Risk-free interest rate		1.73	%		0.78	%
Expected term	5.6 years			5.6 years

Stock option activity

Stock option activity for the three months ended March 31, 2014 was as follows:

	Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7,218,241		$	8.42		6.75	$	18,213
Granted		1,099,239			8.56
Exercised		(640,649	)		4.72
Forfeited, expired or cancelled		(116,766	)		24.72
Options outstanding at March 31, 2014		7,560,065		$	8.50		7.14	$	9,892
Options exercisable at March 31, 2014		4,562,868		$	10.85		5.95	$	5,422

Unvested RSU activity

Unvested RSU activity for the three months ended March 31, 2014 is summarized below:

				Weighted-
	Number of			Average Grant-
	Shares			Date Fair Value
Unvested balance at December 31, 2013		1,738,037		$	2.73
Granted		972,614			8.64
Vested		(478,845	)		4.16
Forfeited		(77,536	)		2.82
Unvested balance at March 31, 2014		2,154,270		$	5.08

Stock-based compensation expense

The following table shows total stock-based compensation expense included in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Research and development	$	2,406	$	997
Selling, general and administrative		1,518		622
Total stock-based compensation expense	$	3,924	$	1,619

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 05, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	XOMA Corp
Entity Central Index Key	0000791908
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		106,898,733
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2014

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Description of Business (Details)	Mar. 31, 2014 Antibody
Description of Business [Abstract]
Number of classes of preclinical antibodies	3

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenues:
License and collaborative fees	$ 964	$ 399
Contract and other	2,446	9,054
Total revenues	3,410	9,453
Operating expenses:
Research and development	21,546	16,636
Selling, general and administrative	5,254	4,124
Restructuring	84	17
Total operating expenses	26,884	20,777
Loss from operations	(23,474)	(11,324)
Other income (expense):
Interest expense	(1,125)	(1,172)
Other (expense) income	(90)	449
Revaluation of contingent warrant liabilities	20,002	(12,840)
Net loss	(4,687)	(24,887)
Basic and diluted net loss per share of common stock (in shares)	$ (0.04)	$ (0.30)
Shares used in computing basic and diluted net loss per share of common stock (in shares)	106,158	82,595
Other comprehensive loss:
Net loss	(4,687)	(24,887)
Net unrealized gains on available-for-sale securities	7	3
Comprehensive loss	$ (4,680)	$ (24,884)

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Stock-based Compensation

3 Months Ended

Mar. 31, 2014

Stock-based Compensation [Abstract]

Stock-based Compensation

7.  Stock-based Compensation

In the first quarter of 2014, the Board of Directors of the Company approved grants under the Company’s Long Term Incentive Plan for an aggregate of 1,099,239 stock options and an aggregate of 972,614 RSUs to certain employees of the Company. The stock options vest monthly over four years, and the RSUs vest annually over three years, in equal increments.

The Company recognizes compensation expense for all stock-based payment awards made to the Company’s employees, consultants and directors based on estimated fair values. The valuation of stock option awards is determined at the date of grant using the Black-Scholes 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 U.S. Treasury zero-coupon issues. The forfeiture rate impacts the amount of aggregate compensation for both stock options and RSUs. To establish an estimate of forfeiture rate, the Company considers its historical experience of option forfeitures and terminations.

The fair value of the stock options granted was estimated based on the following weighted average assumptions for three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014			2013
Dividend yield		0	%		0	%
Expected volatility		94	%		92	%
Risk-free interest rate		1.73	%		0.78	%
Expected term	5.6 years			5.6 years

Stock option activity for the three months ended March 31, 2014 was as follows:

	Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7,218,241		$	8.42		6.75	$	18,213
Granted		1,099,239			8.56
Exercised		(640,649	)		4.72
Forfeited, expired or cancelled		(116,766	)		24.72
Options outstanding at March 31, 2014		7,560,065		$	8.50		7.14	$	9,892
Options exercisable at March 31, 2014		4,562,868		$	10.85		5.95	$	5,422

The valuation of RSUs is determined at the date of grant using the closing stock price. To establish an estimate of forfeiture rate, the Company considers its historical experience of forfeitures and terminations.

Unvested RSU activity for the three months ended March 31, 2014 is summarized below:

				Weighted-
	Number of			Average Grant-
	Shares			Date Fair Value
Unvested balance at December 31, 2013		1,738,037		$	2.73
Granted		972,614			8.64
Vested		(478,845	)		4.16
Forfeited		(77,536	)		2.82
Unvested balance at March 31, 2014		2,154,270		$	5.08

The following table shows total stock-based compensation expense included in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Research and development	$	2,406	$	997
Selling, general and administrative		1,518		622
Total stock-based compensation expense	$	3,924	$	1,619

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Income Taxes

3 Months Ended

Mar. 31, 2014

Income Taxes [Abstract]

Income Taxes

6.  Income Taxes

The Company did not recognize any income tax expense for the three months ended March 31, 2014 and 2013. The Company's effective tax rate will fluctuate from period to period due to several factors inherent in the nature of the Company's operations and business transactions. The factors that most significantly impact this rate include the variability of licensing transactions in foreign jurisdictions.

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, it has determined that total deferred tax assets should be fully offset by a valuation allowance.

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Stock-based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2012
Stock-based awards weighted average assumptions [Abstract]
Dividend yield (in hundredths)	0.00%	0.00%
Expected volatility (in hundredths)	94.00%	92.00%
Risk free interest rate (in hundredths)	1.73%	0.78%
Expected term	5 years 7 months 6 days	5 years 7 months 6 days
Stock option activity [Roll Forward]
Options outstanding beginning of period (in shares)	7,218,241
Granted (in shares)	1,099,239
Exercised (in shares)	(640,649)
Forfeited, expired or cancelled (in shares)	(116,766)
Options outstanding end of period (in shares)	7,560,065
Options exercisable at end period (in shares)	4,562,868
Stock options activity, weighted average exercise price [Roll Forward]
Options outstanding, beginning of period (in dollars per share)	$ 8.42
Granted (in dollars per share)	$ 8.56
Exercised (in dollars per share)	$ 4.72
Forfeited, expired or cancelled (in dollars per share)	$ 24.72
Options outstanding, end of period (in dollars per share)	$ 8.50
Options exercisable weighted average exercise price (in dollars per share)	$ 10.85
Additional Disclosures [Abstract]
Options outstanding weighted average remaining contractual term beginning of period	7 years 1 month 20 days		6 years 9 months
Options outstanding weighted average remaining contractual term end of period	7 years 1 month 20 days		6 years 9 months
Options exercisable weighted average remaining contractual term	5 years 11 months 12 days
Options outstanding, aggregate intrinsic value at beginning of period	$ 18,213
Options outstanding, aggregate intrinsic value at end of period	9,892
Options exercisable, aggregate intrinsic value	5,422
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	3,924	1,619
Research and Development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	2,406	997
Selling, General and Administrative Expenses [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 1,518	$ 622
Stock Options [Member] | Director [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	3 years
Unvested RSU activity [Roll Forward]
Unvested balance beginning of period (in shares)	1,738,037
Granted (in shares)	972,614
Vested (in shares)	(478,845)
Forfeited (in shares)	(77,536)
Unvested balance end of period (in shares)	2,154,270
Unvested RSU activity, weighted average grant date fair value [Roll Forward]
Unvested balance, beginning of period (in dollars per share)	$ 2.73
Granted (in dollars per share)	$ 8.64
Vested (in dollars per share)	$ 4.16
Forfeited (in dollars per share)	$ 2.82
Unvested balance, end of period (in dollars per share)	$ 5.08
Long Term Incentive Plan [Member] | Stock Options [Member]
Stock option activity [Roll Forward]
Granted (in shares)	1,099,239
Long Term Incentive Plan [Member] | Restricted Stock Units (RSUs) [Member]
Stock option activity [Roll Forward]
Granted (in shares)	972,614

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Basis of Presentation and Significant Accounting Policies (Details) (Customer Concentration Risk [Member])	3 Months Ended		12 Months Ended
	Mar. 31, 2014 Customer	Mar. 31, 2013 Customer	Dec. 31, 2013 Customer
Concentration Risk [Line Items]
Number of major customers	3	2	2
Revenues [Member] | Customer 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	47.00%	79.00%
Revenues [Member] | Customer 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	40.00%	18.00%
Revenues [Member] | Customer 3 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	15.00%
Accounts Receivable [Member] | Customer 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	57.00%		73.00%
Accounts Receivable [Member] | Customer 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	28.00%		13.00%
Accounts Receivable [Member] | Customer 3 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	12.00%

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Measurements [Abstract]

Financial assets and liabilities carried at fair value

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 March 31, 2014 and December 31, 2013.

Financial assets and liabilities carried at fair value as of March 31, 2014 and December 31, 2013 were classified as follows (in thousands):

	Fair Value Measurements at March 31, 2014 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	63,561	$	-	$	-	$	63,561
U.S. treasury securities		19,996		-		-		19,996
Foreign exchange options		-		239		-		239
Total	$	83,557	$	239	$	-	$	83,796
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	47,342	$	47,342

	Fair Value Measurements at December 31, 2013 Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds (1)	$	82,759	$	-	$	-	$	82,759
U.S. treasury securities		19,990		-		-		19,990
Foreign exchange options		-		361		-		361
Total	$	102,749	$	361	$	-	$	103,110
Liabilities:
Contingent warrant liabilities	$	-	$	-	$	69,869	$	69,869

(1) Included in cash and cash equivalents

Warrant liabilities fair value assumptions

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at March 31, 2014 and December 31, 2013:

	March 31, 2014			December 31, 2013
Expected volatility		74.2% - 88.4	%		66.1% - 86.6	%
Risk-free interest rate		0.1% - 0.9	%		0.1% - 0.8	%
Expected term	0.7 - 2.9 years			0.9 - 3.2 years

Summary of changes in fair value of Level 3 financial liabilities

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2014 (in thousands):

Contingent warrant liabilities	March 31, 2014
Balance at December 31, 2013	$	69,869
Reclassification of contingent warrant liability to equity upon exercise of warrants		(2,525	)
Net increase in fair value of contingent warrant liabilities upon revaluation		(20,002	)
Balance at March 31, 2014	$	47,342

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Basis of Presentation and Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Basis of Presentation and Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements include the accounts of XOMA and its subsidiaries. All intercompany accounts and transactions were eliminated during consolidation. The unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. These financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2014.

In management’s opinion, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2014, the consolidated results of the Company’s operations and the Company’s cash flows for the three months ended March 31, 2014 and 2013. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year or future periods.

Use of Estimates

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, 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. 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.

Reclassifications

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.

Concentration of Risk

Concentration of Risk

Cash equivalents 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 has not experienced any significant credit losses and does not generally require collateral on receivables. For the three months ended March 31, 2014, three customers represented 58%, 25%, and 18% of total revenue and 67%, 15%, and 14% of the accounts receivable balance.

For the three months ended March 31, 2013, two of these customers represented 40% and 49% of total revenues. As of December 31, 2013, there were receivables outstanding from these two customers representing 73% and 13% of the accounts receivable balance.

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Condensed Consolidated Financial Statement Detail (Tables)

3 Months Ended

Mar. 31, 2014

Condensed Consolidated Financial Statement Detail [Abstract]

Outstanding securities considered 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):

	Three Months Ended March 31,
	2014		2013
Common stock options and restricted stock units		5,732		6,459
Warrants for common stock		14,273		16,176
Total		20,005		22,635

Accrued liabilities

Accrued liabilities consisted of the following at March 31, 2014 and December 31, 2013 (in thousands):

	March 31, 2014		December 31, 2013
Accrued payroll and other benefits	$	2,401	$	3,009
Accrued management incentive compensation		1,050		4,386
Other		1,444		2,539
Total	$	4,895	$	9,934

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Long-Term Debt and Other Financings (Tables)

3 Months Ended

Mar. 31, 2014

Long-Term Debt and Other Financings [Abstract]

Interest expense and amortization of debt issuance costs

Interest expense and amortization of debt issuance costs and discounts, recorded as other expense in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 are shown below (in thousands):

	Three Months Ended March 31,
	2014		2013
Interest expense
Servier loan	$	587	$	525
GECC term loan		448		545
Novartis note		77		91
Other		13		11
Total interest expense	$	1,125	$	1,172

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			12 Months Ended	3 Months Ended	12 Months Ended
	Mar. 31, 2014 Warrant Liabilities [Member]	Mar. 31, 2013 Warrant Liabilities [Member]	Mar. 31, 2014 Warrant Liabilities [Member] Minimum [Member]	Dec. 31, 2013 Warrant Liabilities [Member] Minimum [Member]	Mar. 31, 2014 Warrant Liabilities [Member] Maximum [Member]	Dec. 31, 2013 Warrant Liabilities [Member] Maximum [Member]	Mar. 31, 2014 Recurring [Member]		Dec. 31, 2013 Recurring [Member]		Mar. 31, 2014 Recurring [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]		Dec. 31, 2013 Recurring [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]		Mar. 31, 2014 Recurring [Member] Significant Other Observable Inputs (Level 2) [Member]		Dec. 31, 2013 Recurring [Member] Significant Other Observable Inputs (Level 2) [Member]		Mar. 31, 2014 Recurring [Member] Significant Unobservable Inputs (Level 3) [Member]		Dec. 31, 2013 Recurring [Member] Significant Unobservable Inputs (Level 3) [Member]
Assets:
Money market funds							$ 63,561	[1]	$ 82,759	[1]	$ 63,561	[1]	$ 82,759	[1]	$ 0	[1]	$ 0	[1]	$ 0	[1]	$ 0	[1]
U.S. treasury securities							19,996		19,990		19,996		19,990		0		0		0		0
Foreign exchange options							239		361		0		0		239		361		0		0
Total							83,796		103,110		83,557		102,749		239		361		0		0
Liabilities:
Contingent warrant liabilities							47,342		69,869		0		0		0		0		47,342		69,869
Fair Value Inputs, Liabilities, Quantitative Information [Line Items]
Expected volatility (in hundredths)			74.20%	66.10%	88.40%	86.60%
Risk-free interest rate (in hundredths)			0.10%	0.10%	0.90%	0.80%
Expected term			0 years 8 months 12 days	0 years 10 months 24 days	2 years 10 months 24 days	3 years 2 months 12 days
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance, beginning of period	69,869
Reclassification of contingent warrant liability to equity upon exercise of warrants	(2,525)
Net increase in fair value of contingent warrant liabilities upon revaluation	(20,002)	12,800
Balance, end of period	$ 47,342

[1] Included in cash and cash equivalents

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Cash flows from operating activities:
Net loss	$ (4,687)		$ (24,887)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	477		780
Common stock contribution to 401(k)	870		828
Stock-based compensation expense	3,924		1,619
Accrued interest on interest bearing obligations	(1,764)		1,586
Revaluation of contingent warrant liabilities	(20,002)		12,840
Amortization of debt discount, final payment fee on debt, and debt issuance costs	674		603
Unrealized gain on foreign currency exchange	(66)		(515)
Unrealized loss on foreign exchange options	122		189
Other non-cash adjustments	1		(4)
Changes in assets and liabilities:
Trade and other receivables, net	(530)		1,997
Prepaid expenses and other assets	(923)		(802)
Accounts payable and accrued liabilities	(5,721)		(7,097)
Deferred revenue	(524)		(111)
Other liabilities	(51)		(1,554)
Net cash used in operating activities	(28,200)		(14,528)
Cash flows from investing activities:
Proceeds from maturities of investments	0		20,000
Net purchase of property and equipment	(49)		(498)
Net cash (used in) provided by investing activities	(49)		19,502
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs	3,053		60
Proceeds from the exercise of warrants	35		0
Principal payments of debt	(2,792)		0
Net cash provided by financing activities	296		60
Net (decrease) increase in cash and cash equivalents	(27,953)		5,034
Cash and cash equivalents at the beginning of the period	101,659	[1]	45,345
Cash and cash equivalents at the end of the period	73,706		50,379
Cash paid for:
Interest	2,194		333
Non-cash investing and financing activities:
Reclassification of contingent warrant liability to equity upon exercise of warrants	(2,525)		0
Interest added to principal balances on long-term debt	$ 0		$ 313

[1] (Note 1) The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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Long-Term Debt and Other Financings

3 Months Ended

Mar. 31, 2014

Long-Term Debt and Other Financings [Abstract]

Long-Term Debt and Other Financings

5.  Long-Term Debt and Other Financings

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 March 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 March 31, 2014 and December 31, 2013, the outstanding principal balance under this note agreement was $13.0 million and $14.8 million, respectively. Pursuant to the terms of the arrangement as restructured in November 2008, the Company will not make any additional borrowings under the Novartis note. Pursuant to the 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 it received in December 2013, 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 2.33% to 3.83%. Interest for the six-month period from January 2014 through July 2014 was reset to 2.39%. 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 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 was 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 2014, the Company paid $1.9 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 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 both March 31, 2014 and December 31, 2013, the outstanding principal balance under this loan was $20.6 million using the March 31, 2014 Exchange Rate of 1.3752 and the December 31, 2013 Exchange Rate of 1.3766. For the three months ended March 31, 2013, the Company recorded an unrealized foreign exchange gain of $0.6 million related to the re-measurement of the loan. There was an immaterial re-measurement of the loan for the three months ended March 31, 2014.

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, resulting in a 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.  The Company recorded non-cash interest expense of $0.5 million and $0.4 million in the three months ended March 31, 2014 and 2013, respectively, resulting from the amortization of the loan discount. At March 31, 2014 and December 31, 2013, the net carrying value of the loan was $17.0 million and $16.5 million, respectively. For the three months ended March 31, 2013, the Company recorded an unrealized foreign exchange loss of $0.2 million related to the re-measurement of the loan discount. There was an immaterial re-measurement of the loan discount for the three months ended March 31, 2014.

The Company believes 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 the Company recorded $0.5 million and $0.4 million of related non-cash revenue during the three months ended March 31, 2014 and 2013, respectively.

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. 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 is 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.

At March 31, 2014 and December 31, 2013, the outstanding principal balance under the Amended Term Loan was $8.3 million and $9.4 million, respectively.

Interest Expense

Interest expense and amortization of debt issuance costs and discounts, recorded as other expense in the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013 are shown below (in thousands):

	Three Months Ended March 31,
	2014		2013
Interest expense
Servier loan	$	587	$	525
GECC term loan		448		545
Novartis note		77		91
Other		13		11
Total interest expense	$	1,125	$	1,172

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Condensed Consolidated Financial Statement Detail (Details)	3 Months Ended				1 Months Ended	3 Months Ended			1 Months Ended	3 Months Ended				1 Months Ended			3 Months Ended									3 Months Ended
	Mar. 31, 2014 USD ($)	Mar. 31, 2013	Dec. 31, 2013 USD ($)		Feb. 28, 2010 Five year warrants issued in February 2010 [Member] USD ($)	Mar. 31, 2014 Five year warrants issued in February 2010 [Member] USD ($)	Dec. 31, 2013 Five year warrants issued in February 2010 [Member] USD ($)	Feb. 28, 2010 Five year warrants issued in February 2010 [Member]	Mar. 31, 2012 Five year warrants issued in March 2012 [Member] USD ($)	Mar. 31, 2014 Five year warrants issued in March 2012 [Member] USD ($)	Mar. 31, 2014 Five year warrants issued in March 2012 [Member]	Dec. 31, 2013 Five year warrants issued in March 2012 [Member] USD ($)	Mar. 31, 2012 Five year warrants issued in March 2012 [Member]	Jun. 30, 2009 Warrants issued to private investors [Member] USD ($)	Mar. 31, 2014 Warrants issued to private investors [Member] USD ($)	Jun. 30, 2009 Warrants issued to private investors [Member]	Mar. 31, 2014 Options Contract [Member] USD ($) Contract	Mar. 31, 2013 Options Contract [Member] USD ($)	Mar. 31, 2014 Options Contract [Member] EUR (€)	Mar. 31, 2014 Option Contract 1 [Member] EUR (€)	Mar. 31, 2014 Option Contract 2 [Member] EUR (€)	Mar. 31, 2014 Demand Deposits [Member] USD ($)	Dec. 31, 2013 Demand Deposits [Member] USD ($)	Mar. 31, 2014 Money Market Funds [Member] USD ($)	Dec. 31, 2013 Money Market Funds [Member] USD ($)	Mar. 31, 2014 Common stock options and restricted stock units [Member]	Mar. 31, 2013 Common stock options and restricted stock units [Member]	Mar. 31, 2014 Warrants for common stock [Member]	Mar. 31, 2013 Warrants for common stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share (in shares)	20,005,000	22,635,000																								5,732,000	6,459,000	14,273,000	16,176,000
Cash and Cash Equivalents [Line Items]
Cash equivalents																						$ 10,100,000	$ 18,900,000	$ 63,600,000	$ 82,800,000
Short-term Investments [Abstract]
Short-term investments, U.S. treasury securities	19,996,000		19,990,000	[1]
Derivative [Line Items]
Notional amount of derivative liability																			15,000,000
Number of foreign exchange option contracts																	2
Derivative, amount of hedged item																				1,500,000	15,000,000
Derivative, premiums																	1,500,000
Derivative fair value																	200,000
Derivative, loss																	100,000	200,000
Accrued liabilities [Abstract]
Accrued payroll and other benefits	2,401,000		3,009,000
Accrued management incentive compensation	1,050,000		4,386,000
Other	1,444,000		2,539,000
Total	4,895,000		9,934,000	[1]
Class of Warrant or Right [Line Items]
Warrants outstanding (in shares)								1,260,000			12,109,418		14,834,577			347,826
Exercise price (in dollars per share)					$ 10.50				$ 1.76					$ 19.50
Fair value of warrant liability							1,200,000			46,600,000		68,700,000			700,000
Gain (loss) on revaluation of warrant liability						500,000				19,500,000
Warrant Term					5 years				5 years					5 years
Reclassification of warrant liability to equity	$ 2,500,000

[1] (Note 1) The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.