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UPDATE
Sales of all products that Xoma recieves a royalty on have
been reported by collaboration partners. We are expected
total royalty revenues for the fourth quarter 2007 of $4.9
million. This is up slightly from our previous forecast of $4.7
million thanks to stronger international sales of both Raptiva
and Lucentis. Xoma is expected to report fourth quarter
results on March 11, 2008. We are forecasting total
revenues for the quarter of $13.2 million (consensus is
$12.1 million) and EPS of -$0.10 (consensus is -$0.12).
Xoma remains significantly under-valued in our view. We
maintain our Buy rating and have established a $5 target...."
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SUMMARY
We continue to rate shares of Xoma a buy ahead of the fourth quarter earnings report. Results in the previous
quarters have been in-line with expectations and the company raised guidance in October 2007 thanks to the BCE
deal with Pfizer. We also believe that Xoma has the potential to deliver cash flow positive operation at some point
in 2008. We are maintaining our price target at $5. There are several reasons we see to own the stock.
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 worldwide
sales grow from $211 million in 2007 to $238 million in 2008. Meanwhile, sales of Lucentis are tracking well
over $1 billion worldwide and should continue to post solid growth outside the U.S. at Novartis. Finally, we
expect UCB s Cimzia to gain approval in the U.S. and E.U. sometime in 2008, 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 2008.
Xoma continues to expand its collaborative business with several deals signed over the past few quarters,
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 over the next year, along with
the potential for additional partnerships to come online.
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 50 previous licenses for the company s Bacterial Cell
Expression (BCE) technology over the past dozen years, mostly recently with Pfizer for a record $30 million.
Advancing HE products at AVEO and Attenuon and commercialization of BCE products at Pfizer both
represent the best near-term potential for sizable milestone payments in 2008.
Xoma should exit 2007 with $36 million in cash and investments. All outstanding convertible debt has been
converted as of March 2007. The company generated $7.4 million in cash from operations in the first nine
months of the year. Burn for the fourth quarter should be roughly $10 11 million. The cash position is
enough to fund operations in 2008 in our view.
With the shares trading at $2.74, Xoma is a very volatile stock. However, valuation is attractive based on our
view of what Xoma will look like in three years. We believe the shares are well supported that this price given
the growing royalty line, sufficient cash balance, and the recently signed and expanded collaborations with
Schering-Plough, Takeda, and Pfizer. Our price target is $5.00. |
