Zacks Update
We continue to rate shares of Xoma a buy after the fourth quarter earnings report. Guidance for the full year 2007
was above expectations and the company remains on track for potential cash flow positive results in 2008. We are
adjusting our price target up to $5 based on greater than expected revenues and higher profitability in the years to
come. The key reasons to own the stock are:
Royalty revenue continues to provide meaningful growth to Xoma. Genentech report positive long-term data
on Raptiva in early February 2007 at the American Academy of Dermatology (AAD) that should help sales
grow from $163 million worldwide in 2006 to over $210 million in 2007. Meanwhile, sales of Lucentis have
blown away expectations, and in only seven months on market in 2006 the drug posted sales of $383 million.
Worldwide Lucentis sales should approach $1B in 2007. Finally, UCB s Cimzia is expected to gain approval
during the second half of the year, providing yet another royalty stream to the company.
In late July 2006 Xoma was awarded a second exclusive $16 million contract from the National Institute of
Allergy and Infectious Disease (NIAID). This contract follows the first 18-month, $15 million development and
manufacturing contract signed in 2005. Both contracts focus on the production monoclonal antibodies for the
treatment of botulism to protect U.S. citizens against the harmful effects of botulinum neurotoxins used in
bioterrorism. In November 2006, the company won a subcontract from NIAID to manufacture antibodies over
a 5 year period potentially worth $28 million. The government work focus is starting to payoff significantly for
Xoma. We expect continued positive developments on this front in 2007.
Xoma continues to expand its collaborative business with several deals signed in 2006, including Schering-
Plough and Takeda, as well as continuation of the Novartis oncology program originally signed with Chiron.
Even more impressive than signing these deals last year is the fact that both Schering-Plough and Takeda
have since expanded their relationship with Xoma, validating the research efforts on the company. We expect
a significant ramp in revenues from collaboration partners in 2007.
The company also remains committed to expanding its already broad licensing business, signing two Human
Engineering ( HE ) technology deal with privately held Attenuon, LLC in October 2006 and AVEO
Pharmaceuticals in April 2006. These deals follow 45+ previous licenses for the company s Bacterial Cell
Expression (BCE) technology over the past dozen years. The AVEO HE deal has since moved to the second
phase of the agreement where Xoma will begin manufacturing activities in support of AVEO s IND filing and
early clinical trials. Xoma s HE technology offers upfront payments, development milestones, and potential
royalties on sales of HE derived products.
Xoma exited 2006 with $46.4 million in cash and investments. All outstanding convertible debt has been
converted as or March 2007. The company burned $33.3 million in cash from operations in 2006.
Management expects that number to decline by more than half in 2007 and potential reach breakeven levels in
2008. We believe that Xoma has enough cash now to fund operations to profitability in 2009.
With the shares trading at $3.05, Xoma is a very volatile stock. However, valuation is attractive based on our
2007 total revenue forecast of $59 million. We believe the shares are well supported given the growing royalty
line, the large cash balance, and the recently signed and expanded collaborations with Schering-Plough and
Takeda. Our price target is now $5.00. |
