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The tale of two, this time, is not about London and Paris and is not written by Charles Dickens in 1859. It is about two biotech firms, Xoma (XOMA) and Elan (ELN), written by the market in the 21st century. The similarity between the old and the new tales is the fury the constituents of the two cities/companies have against their rulers’ mismanagement.

Days after TheStreet.com selected both firms’ CEOs as candidates for the worst chief executive officer of the year award, both stocks rallied on good news, but the general investors remained skeptical. They took their profits in XOMA and ran. Elan’s rally began to fade a little. Unless the good news is confirmed or the take-over gossip materializes, the skepticism is expected to evaporate ELN’s gains. The depth of shareholders’ resentment about the mistakes committed by previous managements seems to prohibit them from considering any good news from these two firms. The irony is that the managements that did the damage left long ago, and the scientists, together with new CEOs, are taking the heat.

Reassessing these firms in light of their technologies, product pipelines, clinical trial results and new products’ promises is essential for fair and realistic evaluation. We decided to find out the approximate fair value of each of the two firms and take the risk of announcing our findings.

XOMA

Nobody who knew Xoma could have imagined that this firm’s value would melt away over three decades. In fact, nobody would have imagined that a company with breakthrough technologies, such as its Bacterial Cell Expression Technology and Human Engineering Technology, would fail to develop a safe and effective proprietary monoclonal antibody therapeutic for years. Xoma’s rich antibody phage display libraries and array of antibody optimization and expression technologies turned each multiple display library into a repertoire of more than 10 billion different human antibodies. These capabilities are all servicing the creation of far-reaching therapeutics, which sets Xoma apart from all other companies. It is the main reason pharmaceutical and biotechnology companies are assigning the design of their products to Xoma. It is unfortunate that those companies were capable of putting these products on the market, while Xoma has none there by its name. Fairness compels us to stress the fact that the reasons for Xoma’s lack of approved proprietary products are complex and do not emanate only from management’s wrong-doing as has been perpetrated.

For example, the firm’s first product, an anti-sepsis antibody, saved the lives of children with the severest sepsis conditions while the drug was in clinical trials. However, the drug failed to pass the statistical tests. In other words, it did not help as many patients as it should have for statistical significance. Xoma, like all drug developers at the time, did not have the information or the tools to enable development of a clinical laboratory test that would pinpoint a subgroup of patients who would benefit from the drug or be harmed by it.

With regard to its psoriasis drug Raptiva (efalizumab), a chain of unfortunate events began when Xoma’s management at the time miscalculated the firm’s financial capability with regard to co-developing this drug with Genentech. The decision to share in the expenses ended up obliging Xoma to surrender to Genentech the rights to Raptiva, and be content with a one-digit percentage of the royalties on the drug’s sales. To make things worse, an increasing number of patients receiving the drug developed progressive multifocal leukoencephalopathy, a life-threatening complication that was not worth the reward for a psoriasis drug. The drug was withdrawn from the market probably indefinitely.

Notwithstanding investors’ anger at Xoma for its inability to build shareholders’ equity during three decades, no one has ever doubted the firm’s technological superiority. As a matter of fact, the anger has always been directed at the management’s failure to take advantage of the great technologies to become a top-tier income-generating and growing firm. The good news is that Xoma’s technologies remained in-house. The company never disposed of any of them, even under the most backbreaking financial burdens that the firm has gone through time and time again. Xoma has always been well aware that only its technological superiority would resurrect it and enable it to realize the dream that was the foundation of its establishment in the first place. It is these technologies that created the current company’s promising product pipeline comprised of cardiovascular, metabolic, inflammatory, autoimmune, infectious diseases and cancer drugs. In addition to Xoma’s proprietary products, the pipeline also includes products co-partnered with other firms and with the United States government.

Following are products that made headlines in the past month:

XOMA 052 is an IL-1 modulator, which qualifies it to treat many diseases of inflammatory nature. The drug, in fact, is being developed for several diseases having an inflammatory component in their etiologies. The suggestion by critics of the company that one drug is a jack of all trades and master of none is not the case here. It is a property that is common to many anti-inflammatory biological targeted products that modulate TNF or other inflammatory cytokine antagonists to have many therapeutic indications. Having the opportunity to treat many diseases is a big plus, as the size of the market for these therapeutics is tremendously increased.

Xoma’s superior technologies give XOMA 052 advantages of over similar antibodies targeting IL-1. The drug is a Human Engineered IgG2 antibody with a half-life of 22 days. The antibody is highly potent, highly specific, and binds strongly to Interleukin-1 beta (IL-1?), a pro-inflammatory signaling protein believed to be a primary instigator of inflammation. Based on its combined pharmacokinetic and binding properties, XOMA 052 provides convenient once-monthly dosing, or longer. The drug is in Phase 2 trials for type 1 and type 2 diabetes, cardiovascular diseases, and rheumatoid arthritis. It is in early studies for Behçet's uveitis, gout, and systemic juvenile idiopathic arthritis (sJIA). In the preclinical and early clinical testing and in clinical trials, the drug demonstrated satisfactory results in diabetes and Behcet’s uveitis. Based on previous experience with anti-IL-1 marketed drugs, Xoma 052 is expected to produce superior outcomes in the selected indications. Results from early clinical trials in diabetes exceeded endocrine specialists’ expectations. Also, early Beçhet's uveitis’ results were real promising.

XOMA 3AB is a bio defense anti-botulism antibody for the treatment of botulism poisoning.

HCD122, a human anti-CD40 antagonist antibody for B-cell mediated diseases including lymphoma and autoimmune diseases, is partnered with Novartis (NVS). The drug is still in Phase 1/2 trials, but to our knowledge, no recent results from have been announced.

In addition, Xoma licenses its proprietary technologies related to recombinant bacterial expression of pharmaceutical products to biotechnology and pharmaceutical companies. Xoma has collaboration agreements with the National Institute of Allergy and Infectious Diseases; SRI International; Genentech, Inc.; UCB Celltech; Takeda Pharmaceutical Company Ltd; Schering-Plough Research Institute; Novartis AG; and Arana Therapeutics Ltd.

Xoma has also contributed to the development of products currently marketed by Genentech and UCB.

Overview: Despite its great science and technology, Xoma has had an unfortunate history – the outcome of a mixture of past managements’ inefficiency and of bad luck. This dark history has created investors’ difficult-to-reverse skepticism towards the firm. For a while, a leak about a probable partner attracted to XOMA 052 sent an electric stimulating shock into the minds of the half skeptics of the firm, rushing them into buying the stock. A few days later, doubt resurfaced, prompting many who bought the stock to take their profit and run. When the agreement with Les Laboratoires Servier, of France was confirmed, it looked as if it was the breakthrough remedy that could cure the resistant doubt, at least in the minds of sincere investors and shareholders. Those who invest against all companies will always find frightening things to say about their targeted firms, including Xoma. We already started to hear many comments intended to raise doubt about the drug and about the partner’s marketing capability - none of the critics tried to give investors any estimation of the firm’s value.

Evaluation: Without the product pipeline, Xoma’s technologies, the revenues it currently generates through royalties on approved drugs, and the payments for licensing, the firm is, in our opinion, worth much more than the firm’s current market capitalization, which ranges between 125-150 million only. The pipeline as described above is promising, especially XOMA 052. The mechanism and approach of this drug have been validated hypothetically, biologically, and clinically as far as the clinical trials have gone until now. Controlling or preventing diabetes and halting the progressive destruction of the pancreas beta cells by IL-1 antagonists have also been validated through studies, the details and results of which are published in peer review journals around the country and the world.

The market for diabetes drugs is huge. if approved XOMA 052 would generate billions of dollars, especially if the drug is used to complement other treatments that are not capable of controlling blood glucose levels in moderate to severe cases of diabetes. Xoma’s investigational drugs that are paralyzed for lack of funding can now move forward as the French partner Les Laboratoires Servier takes charge of the cost of developing XOMA 052 and forwarding milestone payments. With XOMA 052 going into Phase 3 trials, promising a radical change in the treatment of diabetes, uveitis and other diseases, and the presence of a partner that will finance the drug development for both diabetes and uveitis, Xoma’s market cap should be no less than $600 million at this time, i.e., four times the current stock price. If the expected results are positive, the market cap should be double this amount.

Disclosure: Long XOMA, ELN

Continue to Part 2, Xoma and Elan: A Tale of Two Mismanaged Biotech Companies >>

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Source: Xoma and Elan: A Tale of Two Mismanaged Biotech Companies, Part 1