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• CC U

(

Robert S. Green (State Bar No. 136183) GREEN WELLING LLP 235 Pine Street, 15th Floor San Francisco, CA 94104 /

Telephone: (415) 477-6700 Facsimile: (415) 477-6710

William B. Federman FEDERMAN & SHERWOOD 120 N. Robinson, Suite 2720 Oklahoma City, OK 73102 Telephone: (405) 235-1560 Facsimile: (405) 239-2112

Attorneys for Plaintiff

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

PHYSICIAN EXECUTIVE BUSINESS CORP. Case No. on Behalf of Itself and All Others Similarly Situated, COMPLAINT

: Plaintiffs,

Lv,

DEMAND FOR JURY TRIAL XOMA, LTD.; JOHN L. CASTELLO; and PATRICK J. SCANNON,

Defendants.

Plaintiff, Physician Executive Business Corp. ("Plaintiff') individually and on behalf of

all other persons similarly situated, by its undersigned attorneys, allege upon personal

knowledge as to itself and its own acts, and information and belief as to all other matters, based

upon, inter alia, the investigation conducted by and through his attorneys, which included,

among other things: (i) a review of the public documents and announcements made by

defendants; (ii) Securities and Exchange Commission ("SEC's) filings made by defendants; (iii)

an analysis of publicly-available news articles and reports; (iii) press releases issued by

defendants; and (iv) other matters of public record.

COMPLAINT

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NATURE OF THE ACTION

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1. This is an action on behalf of Plaintiff, alleging that it was induced to own and

3 I hold its common stock of Xoma, Ltd. ("Xoma" or the "Company") during the period from

4 I July 7, 2004 through at least August 16, 2004, inclusive (the "Relevant Period") in reliance on

5 defendants' material misrepresentations and omissions and who were damaged thereby.

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2. During the Relevant Period, Xoma announced the results of Phase I clinical trials 7 8 of XMP.629, an acne drug being developed by the company. The announced results indicated

9 that XMP.629 would be an effective acne treatment. However, shortly after reiterating the

results of the Phase I studies, Xoma announced that Phase II studies did not show any clinical 10 11 benefit for XMP.629 and that additional clinical trials with XMP.629 were not going to be

12 pursued.

JURISDICTION AND VENUE 13

14 3. This Court has jurisdiction over the subject matter of this action pursuant to

28 U.S.C. § 1332 (a)(2). Plaintiff and Defendants are residents and citizens of different states 15 16 and the amount in controversy exceeds $75,000, exclusive of interest and costs.

4. Venue is proper in this District pursuant to 28 U.S.C. § 1391(a). Many of the acts 17 18 charged herein occurred in substantial part in this District. Additionally, Defendants maintain

19 their chief executive offices and principal place of business within this District.

20 5. This action is not a collusive one designed to confer jurisdiction on a court which

it would not otherwise have. 21

PARTIES 22

23 6. Plaintiff, Physician Executive Business Corp., is a Corporation located in Ponce,

24 Puerto Rico. As set forth in the accompanying certification incorporated by reference herein,

25 Plaintiff was a holder of Xoma common stock during the Relevant Period and was damaged

26 thereby.

27 7. Defendant Xoma is a corporation organized under the laws of Bermuda, having

28 its principal executive offices located at 2910 Seventh Street, Berkeley, California 94710.

Xoma describes itself as a biopharmaceutical company that develops and manufactures

COMPLAINT 2

C

1 recombinant antibodies and other protein products to treat cancer, immunological and

2 inflammatory disorders, and infectious diseases.

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8. Defendant John L. Castello ("Castello") is a resident of the State of California.

4 He served, at all relevant times, as Xoma's Chief Executive Officer and Chair of the Board of

5 Directors.

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9. Defendant Patrick J. Scannon ("Scannon") is a resident of the State of California.

7 He served, at all relevant times, as Xoma's Senior Vice President and Chief Scientific and

8 Medical Officer.

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10. Defendants Castello and Scannon will sometimes be referred to hereinafter

10 collectively as the "Individual Defendants".

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11. Because of the Individual Defendants' positions with the Company, they had

12 access to the adverse undisclosed information about its business, operations, products,

13 operational trends, financial statements, markets and present and future business prospects via

14 access to internal corporate documents (including the Company's operating plans, budgets and

15 forecasts and reports of actual operations compared thereto), conversations and connections

16 with other corporate officers and employees, attendance at management and Board of Directors

17 meetings and committees thereof and via reports and other information provided to them in

18 connection therewith.

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12. Each of the above officers of Xoma, by virtue of their high-level positions with

20 the Company, directly participated in the management of the Company, was directly involved in

21 the day-to-day operations of the Company at the highest levels and was privy to confidential

22 proprietary information concerning the Company and its business, as alleged herein. Said

23 defendants were involved in drafting, producing, reviewing and/or disseminating the false and

24 misleading statements and information alleged herein, were aware, or recklessly disregarded,

25 that the false and misleading statements were being issued regarding the Company, and

26 I approved or ratified these statements.

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13. As officers and controlling persons of a publicly-held company whose common

28 stock was, and is, registered with the SEC pursuant to the Exchange Act; and is traded on

I COMPLAINT

H . . C

1 NASDAQ; and is governed by the provisions of the federal securities laws, the Individual

2 Defendants each had a duty to disseminate promptly, accurate and truthful information with

3 respect to the Company's business, products, and present and future business prospects, and to

4 correct any previously-issued statements that had become materially misleading or untrue. The

5 Individual Defendants' misrepresentations and omissions during the Relevant Period violated

6 these specific requirements and obligations.

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14. The Individual Defendants participated in the drafting, preparation, and/or

8 approval of the various public and shareholder and investor reports and other communications

9 complained of herein and were aware of, or recklessly disregarded, the misstatements contained

10 therein and omissions therefrom, and were aware of their materially false and misleading

11 nature. Because of their Board membership and/or executive and managerial positions with

12 II Xoma, each of the Individual Defendants had access to the adverse undisclosed information

13 about Xoma's business prospects and financial condition and performance as particularized

14 herein and knew (or recklessly disregarded) that these adverse facts rendered the positive

15 I representations made by or about Xoma and its business issued or adopted by the Company

16 I materially false and misleading.

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15. The Individual Defendants, because of their positions of control and authority as

18 I officers and/or directors of the Company, were able to and did control the content of the various

19 SEC filings, press releases and other public statements pertaining to the Company during the

20 Relevant Period. Each Individual Defendant was provided with copies of the documents

21 alleged herein to be misleading prior to or shortly after their issuance and/or had the ability

22 and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of

23 the Individual Defendants is responsible for the accuracy of the public reports and releases

24 I detailed herein and is therefore primarily liable for the representations contained therein.

25

SUBSTANTIVE ALLEGATIONS

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16. Xoma describes itself as a biopharmaceutical company that develops and

27 manufactures recombinant antibodies and other protein products to treat cancer, immunological I 28 and inflammatory disorders, and infectious diseases.

COMPLAINT

.

17. The Relevant Period begins on July 7, 2004. On that date, Xoma issued a press

release entitled XOMA Reports Notable Progress in its Product Portfolio. The press release

II states as follows:

Patient enrollment has been completed in a Phase II clinical trial testing XOMA's XMP.629 product, which is being developed as topical treatment for acne. Preliminary results are expected to be released by the end of August of 2004.

"Efficacy data from the Phase II study, combined with an analysis of the compound's safety and tolerability within these controlled patient testing groups, should enable us to determine further development of the XMP.629 compounds, including potentially moving into Phase III trials," said Patrick J. Scannon, M.D., Ph.D., XOMA's senior vice president, chief scientific and medical officer.

Clinical data from two Phase I studies, evaluating potential cumulative skin irritation and absorption, will be presented at the upcoming 62' d Annual Meeting of the American Academy of Dermatology (AAD) in late July 2004.

About the XMP.629 Clinical Trial

The XMP.629 Phase II trial is a randomized, double-blind placebo-controlled dose-ranging efficacy and safety study of 240 patients with mild-to-moderate acne, Treatment is administered once daily for 12 weeks as either a placebo or one of three concentrations of XMP.629. In several preclinical studies, evidence suggested the XMP.629 peptide to be a potent agent against Propionibacterium acnes and other related skin microorganisms associated with acne, demonstrating favorable topical properties. Phase I studies in health volunteers and acne patients have already shown that the topical application of XMP.629 is safe, non-irritating, well tolerated and, importantly, does not have measurable systemic absorption.

18. On July 29, 2004, Xoma issued a press release entitled "XOMA Announces

Results of Two Phase I Clinical Trial Studies for XMP.629 Topical Acne Treatment." The

press states, in relevant part, as follows:

XOMA Ltd. announced today results from two Phase 1 clinical trial studies with its XMP.629 compound, which is being developed as a topical treatment for mild to moderate acne. Results of the cumulative skin irritation and absorption clinical trial studies show that the XMP.629 acetate gel (0.1%) in healthy volunteers and acne patients causes no significant skin irritation, lacks systemic absorption and shows a reduction in lesion counts as early as two weeks after daily dosing. Results from both studies are being presented at the American Academy of Dermatology (AAD) Summer Meeting in New York City from July 28-31, 2004.

[Said Patrick J. Scannon] "We are encouraged by the positive, preliminary data from the cumulative skin irritation and absorption studies, as well as earlier pre-clinical studies that show XMP.629's potent bactericidal activity and undetectable level of systemic absorption within various patient groups. We look forward to seeing more data from our

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COMPLAINT

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. .

controlled Phase II trial in mild to moderate acne patients, which should be available in August of 2004.'

* * *

Absorption Study Results

Data from this single center, open-label absorption study show that the daily topical application of 4 grams of the XMP.629 gel in fifteen patients with moderate to very severe acne lacked measurable systemic absorption, was well tolerated, and demonstrated a reduction in baseline erythema, itching, and lesion count after 14 days of topical treatment.

Preliminary activity results show a 33% decrease from baseline in mean inflammatory lesion count, a 28% decrease in mean non-inflammatory lesion count and a 30% decrease in mean total lesion count at Day 15. In addition, 53% of patients had at least a one grade improvement on the Evaluator Global Severity Scale (a visual evaluation of acne severity based on a six-point scale) score in their face, 40% on their back, and 33% on their chest.

XOMA is currently conducting a randomized, double-blind, placebo-controlled, dose-ranging efficacy and safety study of 240 patients with mild-to-moderate acne. Preliminary results are expected to be released by the end of August of 2004. The company expects to make a decision as to the next development steps for the product, including potentially entering into Phase III trials before year end of 2004.

(Emphasis added.)

19. On August 9, 2004, Xoma issued a press release entitled "XOMA Reports

Second Quarter 2004 Financial Results" in which the Phase I results of testing on XMP.629

released in the July 29, 2004 press release were reiterated. In addition, the press release stated

as followed:

XOMA completed enrollment in a Phase II study of XMP.629 in acne patients and expects to release preliminary results by the end of August of 2004. In July, investigators presented encouraging data from two Phase I studies of XMP.629, showing an acceptable safety and skin tolerance profile in healthy volunteers and preliminary signs of activity in patients with moderate-to-very severe acne.

(Emphasis added.)

20. On August 16, 2004, Xoma issued a press release entitled "XOMA Announces

Preliminary Phase II Results of XMP.629 For Acne." The press report stated as follows:

XOMA Ltd. announced today preliminary results of a Phase II trial with XMP.629 gel, a novel topical peptide formulation, for the treatment of mild-to-moderate acne. The results were inconclusive in terms of clinical benefit of XMP.629 compared to

COMPLAINT

Ell

r L

vehicle gel. There was no discernable dose response and the vehicle response was higher than anticipated. The drug appeared safe and well-tolerated.

The double-blind, randomized, controlled clinical study enrolled 253 patients and was designed to evaluate safety, tolerability and efficacy. Patients were dosed with either vehicle gel or one of three dosages of an XMP.629 gel (0.01%, 0.05% and 0.1%), administered nightly for 12 weeks. The primary endpoint of this study was to compare the percentage change from baseline at Week 12 in inflammatory lesion counts, non-inflammatory lesion counts and total lesion counts between patients applying XMP.629 gel and those receiving vehicle gel. The study also evaluated the percentage of patients who were clear or almost clear after 12 weeks of treatment.

"We plan to analyze the data more closely and will continue to review the results with leading dermatology experts," said John L. Castello, chairman, president and chief executive officer. "At this point in time, however, XOMA does not plan to initiate additional clinical trials with XMP.629."

(Emphasis added.)

21. The day after the August 16, 2004 press release, the price of Xoma's common

stock tumbled nearly 37% from $3.58 to $2.26. On August 18, 2004, the share price tumbled

I yet another 13% to $1.98. On both days, the trading volume was approximately 14 times the

average volume.

22. In the July 7, 2004 press release, the Defendants stated that Phase II enrollment

had been completed for the twelve week study. Three weeks later, the Defendants issued their

July 29, 2004 press release which announced the results of the Phase I clinical trial and stated

that preliminary Phase II clinical trial results would be announced at the end of August, 2004.

However, three weeks later (and six weeks after the July 7, 2004 press release) the Defendants

issued the August 16, 2004 press release containing the preliminary results of the Phase II

clinical trial. The August 16, 2004 press release indicated that the study had lasted for twelve

weeks. This would mean that the Phase II trial had begun, at the very latest, on approximately

May 24, 2004. This means that the Phase II trial was in its sixth week, and was half completed,

as of the July 7, 2004 press release, and was in its ninth week as of the July 29, 2004 press

release which touted the results of the Phase I clinical trial.

23. The statements made in ¶J 17, 18, 19 and 20 were materially false and

misleading because they failed to disclose and misrepresented the following material adverse

facts which were known to the defendants or recklessly disregarded by them prior to the

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COMPLAINT

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July 29, 2004 announcement: (1) that the Phase II trial of XMP.629 was not showing any

2 clinical benefit for XMP.629; and (2) that additional clinical trials with XMP.629 were not

3 going to be pursued.

4

24. Plaintiff read the statements made in ¶J 17, 18, 19 and 20 and relied on this

5 information in deciding to hold its shares of Xoma common stock through the Relevant Period.

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25. If Defendants had issued truthful accounts of XMP.629 beginning on July 7,

7 2004, Plaintiff would have sold all of its stock in Xoma on July 8, 2004, or as soon thereafter as

8 would reasonably have been possible.

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26. On August 17, 2004, L Luis Adrian Rivera Pomales, M.D., M.B.A., President of

10 Physician Executive Business Corporation, sent a letter to Defendant Castello informing

11 Castello that he felt the Company had issued false and misleading statements regarding

12 XMP.629 in its August 9, 2004 press release. The Company has not retracted its prior false and

13 misleading statements.

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27. Any statutory safe harbor provided for forward-looking statements under

15 certain circumstances does not apply to any of the allegedly false statements pleaded in this

16 complaint as the statements were not forward-looking statements or otherwise covered by any

17 statutory safe harbor.

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28. In addition to the above—described involvement, each Individual Defendant had

19 knowledge of the above problems with XMP.629 and was motivated to conceal such problems.

20 Each defendant is liable for (i) making false statements, or (ii) failing to disclose adverse facts

21 I known to him about Xoma.

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29. Defendants' fraudulent scheme and course of business that operated as a fraud

23 on the owners of Xoma common stock was a success, as it (i) deceived the Xoma shareholders

24 regarding Xoma's prospects and business; and (ii) caused plaintiff to hold its shares of Xoma

25 common stock when it otherwise would have sold them.

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COMPLAINT

El

1

FIRST CLAIM FOR RELIEF

2

Fraud

3

30. Plaintiff repeats and restates each and every allegation contained above as if

4 fully set forth herein.

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31. During the Relevant Period, Xoma and the Individual Defendants carried out a

6 plan, scheme and course of conduct which was intended to and, throughout the Relevant Period,

7 did: (1) deceive the holders of Xoma common stock, including plaintiff, as alleged herein; (ii)

8 artificially inflate and maintain the market price of Xoma's securities; and (iii) cause plaintiff to

9 hold its shares of Xoma common stock when it otherwise would have sold the stock. In

10 furtherance of this unlawful scheme, plan and course of conduct, these defendants took the

11 actions set forth herein.

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32. The defendants named in this Claim: (i) employed devices, schemes, and

13 artifices to defraud; (ii) made untrue statements of material fact and/ or omitted to state material

14 facts necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a

15 course of business which operated as a fraud and deceit upon the in an effort to maintain

16 artificially high market prices for Xoma's securities.

17

33. In addition to the duties of full disclosure imposed on defendants as a result of

18 the making of affirmative statements and reports to the investing public, the defendants named

19 in this claim had a duty to promptly disseminate truthful information that would be material to

20 investors, including accurate and truthful information with respect to the Company's operations,

21 financial condition and earnings so that the market price of the Company's securities would be

22 based on truthful, complete and accurate information.

23

34. Xoma and Individual Defendants employed devices, schemes and artifices to

24 defraud, while in possession of material adverse non-public information and engaged in acts,

25 practices, and a course of conduct as alleged herein in an effort to assure investors of Xoma's

26 value and performance and continued substantial growth, which included the making of, or the

27 participation in the making of, untrue statements of material facts and omitting to state material

28 facts necessary in order to make the statements made about Xoma and its business operations

COMPLAINT

is

1 and future prospects in the light of the circumstances under which they were made, not

2 misleading, as set forth more particularly herein, and engaged in transactions, practices and

3 a course of business which operated as a fraud and deceit upon the holders of Xoma's

4 securities during the Relevant Period.

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35. These Defendants' material misrepresentations and/or omissions were done

6 knowingly or recklessly and for the purpose and effect of concealing Xoma's operating

7 condition and future business prospects from the investing public and supporting the artificially

8 inflated price of its securities.

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36. As a result of the dissemination of the materially false and misleading

10 information and failure to disclose material facts, as set forth above, the market price of Xoma's

11 securities was artificially inflated during the Relevant Period. In ignorance of the fact that

12 market prices of Xoma's publicly-traded securities were artificially inflated, and relying on the

13 false and misleading statements made by these defendants, and/or on the absence of material

14 adverse information that was known to or recklessly disregarded by defendants but not

15 disclosed in public statements by defendants during the Relevant Period, plaintiff held Xoma

16 securities during the Relevant Period and were damaged thereby.

17

37. At the time of said misrepresentations and omissions, plaintiff was ignorant of

18 their falsity, and believed them to be true. Had plaintiff and the marketplace known of the true

19 financial condition and business prospects of Xoma, which were not disclosed by the

20 defendants named in this Claim, plaintiff would not have held its Xoma securities.

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38. As a direct and proximate result of defendants' wrongful conduct, plaintiff

22 suffered damages in connection with their respective holding of the Company's securities during

23 the Relevant Period.

24

SECOND CLAIM FOR RELIEF

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Negligent Misrepresentation

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39. Plaintiff repeats and realleges each and every allegation contained above as if

27 fully set forth herein.

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COMPLAINT

ID

[I:

1

40. During the Relevant Period, Xoma announced the results of Phase I clinical trials

2 of XMP.629, an acne drug being developed by the company. The announced results indicated

3 that XMP.629 would be an effective acne treatment. However, shortly after reiterating the

4 results of the Phase I studies, Xoma announced that Phase II studies did not show any clinical

5 benefit for XMP.629 and that additional clinical trials with XMP.629 were not going to be

6 pursued.

7

41. The defendants named in this Claim had no reasonable ground for believing the

8 assertions made about XMP.629 prior to the August 16, 2004 announcements were true. The

9 Phase II study was a twelve week study which most likely was completed at least before the

10 August 9, 2004 press release. The results of the Phase II study showed that there was no

11 clinical benefit for XMP.629; however, knowing this, defendants continued to issue rosy press

12 releases about the potential for XIVIP.629.

13

JURY TRIAL DEMANDED

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Plaintiff hereby demands a trial by jury.

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WHEREFORE, plaintiff prays for relief and judgment, as follows:

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a. Awarding compensatory damages in favor of plaintiff against defendants

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for all damages sustained as a result of defendant's wrongdoing, in an amount to be proven at

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trial, including interest thereon;

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b. Awarding plaintiff its reasonable costs and expenses incurred in

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this action, including counsel fees and expert fees; and

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C. Such other and further relief as the Court may deem just and proper.

22 Dated: November 16, 2004 Respectfully submitted,

23

GREEN WELLING LLP

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By: '"Robert S. Green

26 235 Pine Street, 15th Floor

27

San Francisco, CA 94104 Telephone: (415) 477-6700

28

Facsimile: (415) 477-6710

COMPLAINT

11

H S S

William B. Federman FEDERMAN & SHERWOOD 120 N. Robinson Avenue, Suite 2720 Oklahoma City, OK 73102 Tel: (405) 235-1560 Fax: (405) 239-2112

-and- 2926 Maple Ave., Suite 200 Dallas, TX 75201

Attorneys for Plaintiff

COMPLAINT

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