XOMA
Ltd.
2910
Seventh Street
Berkeley,
California 94710
VIA
FACSIMILE AND EDGAR
April
10,
2006
Mr.
Jim
B. Rosenberg
Senior
Assistant Chief Accountant
Securities
and Exchange Commission
Division
of Corporate Finance
100
F
Street, N.E.
Mail
Stop
6010
Washington,
D.C. 20549
Re:
XOMA Ltd. (the “Company”)
Form 10-K for the fiscal year ended December 31, 2005 (the “2005 Form
10-K”)
Filed March 8, 2006
File No. 000-14710
Dear
Mr.
Rosenberg:
This
letter will respond to your letter dated March 28, 2006 to John L. Castello,
Chairman of the Board, President and Chief Executive Officer of the Company,
regarding the staff’s comment relating to the 2005 Form 10-K. This letter sets
forth the staff’s comment as set forth in your letter, followed by the Company’s
response.
Comment:
Notes
to Consolidated Financial Statements, page F-7
1.
Business and Summary of Critical Accounting Policies, page
F-7
Critical
Accounting Policies, page F-8
Contract
Revenue, page F-9
1.
Please
tell us why it is appropriate to recognize revenue on certain contracts using
the percentage of completion method, as footnote 1 of SOP 81-1 states that
SOP
81-1 is not intended to apply to service transactions. In addition, please
tell
us why it is appropriate to recognize revenue as you progress towards, as
opposed to upon completion of, the deliverables and milestones that your policy
suggests are established in the contracts. In so doing, please tell us how
the
input measures used in that method are reasonable surrogates for the output
measures established in the contracts and how your recognition complies with
SAB
104.
Response:
The
particular contract at issue is one that XOMA entered into with the
National Institute of Allergy and Infectious Diseases (NIAID), part of the
National Institutes of Health,
to
produce three botulinum neurotoxin monoclonal antibodies designed to protect
U.S. citizens against the harmful effects of biological agents used in
bioterrorism. Under the 18-month
agreement, XOMA is developing therapeutic
products
using
proprietary antibody expression systems to produce anti-type A-botulinum
neurotoxin monoclonal antibodies including a Master Cell Bank, Manufacturer’s
Working Cell Bank and other designated deliverables detailed in Article C.1.
-
Statement of Work of the contract. The contract is available on EDGAR as Exhibit
10.53 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
Payments
under the contract are not dependent upon achievement of “milestones” or
specific deliverables but are based on agreed progress toward elements defined
in the Statement of Work. The progress is agreed with NIAID based on monthly
technical progress reports. We recognize revenue under this contract based
on
the proportional performance method, not the percentage of completion method.
In
response to the Staff’s comment, the Company will revise its future disclosure
to clarify the revenue recognition method we are using for this contract.
We
have
concluded that due to the nature of this contract
the
proportional performance method of revenue recognition is appropriate based
on
the following:
| · |
XOMA
is performing a service to NIAID’s
specifications.
|
| · |
The
contract is a legally enforceable
agreement.
|
| · |
Performance
extends over a long period.
|
| · |
XOMA’s
right to receive payment depends on agreed progress in accordance
with the
agreement.
|
| · |
The
contract services include development and manufacture of cGMP bulk
drug
substance for up to three human or human-compatible
monoclonal
antibodies (starting
with material provided by NIAID).
|
We
determined that recognizing revenue using proportional performance or output
based methodology was the most appropriate versus a cost based methodology
implied by the percentage of completion methodology. The expected output
was
the
most appropriate basis because it is a reasonable dependable estimate of the
revenue applicable to various contract elements. Output performance,
as
defined in the Statement of Work,
is
reviewed and discussed with NIAID on a monthly basis.
We
have
reviewed this arrangement with respect to guidance from SAB 104 and determined
that:
persuasive evidence of an arrangement does exist as evidenced by the contract
with NIAID;
delivery
has
occurred and services have been rendered as evidenced by monthly technical
progress updates discussed and agreed with NIAID;
the
price
is fixed and determinable as evidenced by the contract fixed price of $15
million;
and
collectibility is reasonably assured as evidenced by
past
receipt
of regular payments
and
given
that the customer is an agency of the US government.
Based
on
the foregoing, we believe recognition of revenue under this contract using
the
proportional
performance method to be appropriate.
*
* *
In
addition, the Company acknowledges that:
| · |
the
Company is responsible for the adequacy and accuracy of the disclosure
in
the filing;
|
| · |
staff
comments or changes to disclosure in response to staff comments do
not
foreclose the Commission from taking any action with respect to the
filing; and
|
| · |
the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
If
you
have any further questions, please do not hesitate to contact me at (510)
204-7234. Thank you for your time and attention.
Very
truly yours,
/s/
J.
DAVID BOYLE II
J.
David
Boyle II
Vice
President, Finance and Chief Financial Officer
cc:
James
Peklenk
Oscar
M.
Young
John
L.
Castello
Christopher
J. Margolin
Candileigh
Monzo
Geoffrey
E. Liebmann