XOMA Corp. (NASDAQ:XOMA) is a small, late-stage biotechnology company with a market cap of $421.78 million. It has no approved products, but has partnered with France's Servier to develop and commercialize lead drug, gevokizumab, for a variety of inflammatory eye, skin, and other diseases. On May 28, the company announced that the gevokizumab Phase 3 EYEGUARD-B study had reached its pre-specified target exacerbation event. Top line results will be released in 6-8 weeks, providing investors with a unique industry experience: an advanced clinical trial readout with a tight 2-week window (as opposed to the usual 1-2 quarter period) that won't catch anyone by surprise, and enough time to act on it.
A True Binary Catalyst Event
The French EYEGUARD-B study (a randomized, double-masked, placebo-controlled study of the efficacy of gevokizumab in the treatment of patients with Behçet's disease uveitis) is also an active-control trial, and its protocol is detailed in XOMA's Q1 2014 conference call. Servier conducted EYEGUARD-B in 110 patients with a history of Behçet's disease uveitis (BDU) involving the posterior segment of the eyeball, who have experienced a recent ocular exacerbation successfully treated with corticosteroids. The treatment group received gevokizumab 60 mg subcutaneously once-monthly and oral placebo. The placebo patients started on oral prednisone 20 mg or equivalent steroid per day and tapered down to 5 mg per day.
The primary endpoint is the time to first acute ocular exacerbation since enrolling. EYEGUARD-B defines an exacerbation as an ocular disease-related worsening by 2 units in a vitreous haze scale or a ≥ 15-letter (3 lines) decrease in a best-corrected Early Treatment Diabetic Retinopathy Study visual acuity score. EYEGUARD-B study is 90% powered based on the expectation of 0.3 exacerbations in the gevokizumab group for each exacerbation in the placebo group. The level of significance was set at 5% (requiring a P value lower than 0.05). This means that with the number of patients enrolled, if gevokizumab reduces the risk of exacerbation by 70% compared to placebo, there is less than 5% possibility that this finding would be due to chance, and the primary endpoint will be met.
Gevokizumab's Evidence of Efficacy
Gevokizumab targets interleukin-1β (IL-1β), a potent pro-inflammatory cytokine (signaling protein) that is over-secreted and contributes to the development of autoimmune diseases such as BDU. A 14-week, open-label pilot study evaluated gevokizumab as a treatment for acute BDU attacks that were resistant to azathioprine/cyclosporine and prednisolone. A single infusion of gevokizumab 0.3 mg/kg rapidly and completely resolved intraocular inflammation in all 7 patients in 4-21 days (median 14 days), with a median duration of response of 7 weeks (range 3-14 weeks); one patient had no further exacerbations during the study. Furthermore, whole blood assay levels of other pro-inflammatory cytokines IL-1α and IL-6 were reduced, which certainly helps in lengthening exacerbation-free periods. Conversely, there were increased levels of interferon-γ (INF-γ), a pro-immunity cytokine, which is good because INF-γ protects against infection.
Management's claims of exacerbations occurring within 90 days are true. An 8-week study of 20 BDU patients who had been on 4 months of Janssen's Remicade, a tumor necrosis factor-α (TNF-α) inhibitor, found that 25% of patients suffered acute attacks (any type of acute episodes of intraocular inflammation) at least twice within 1-8 weeks of the first monitored infusion. On the other hand, a longer 1-year study noted ocular attacks in 24% of patients (12/50) during months 1-6, but 42% (28/48) during months 7-12. This increase was statistically significant (P < 0.02), and there was also a trend toward an increased proportion of severe attacks among all ocular attacks. Human antichimera antibodies are surmised to be the culprit in a well-known, similar decline in patients' therapeutic response to Remicade over time in the inflammatory bowel disease setting. Gevokizumab is a recombinant, fully humanized monoclonal antibody ((mAb)), while Remicade is a chimeric mAb with a larger proportion of non-human protein. Therefore, there is less theoretical risk for gevokizumab to lose efficacy in the long term.
Potential Behçet's Uveitis Market Only the Beginning
Behçet's disease involves the posterior eye segment in 36-68% of cases. BDU is a heterogenous condition; there is individual variability in the frequency and severity of BDU attacks. Some exacerbations are serious enough to cause permanent blindness, although gradual loss of vision may come from recurrent and cumulative damage to the eye. In the U.S., the approximate Behçet's disease incidence per 100,000 people is 0.38; the prevalence is around 5.2 per 100,000. These estimates put gevokizumab's addressable market at 6,000-11,000 people initially and 400-800 new cases per year.
Pricing is difficult to gauge - orphan drugs typically command 6 figure annual costs. However, based on small studies, INF-alfa, TNF-α inhibitors, and other anti-IL therapies have been used off-label in resistant cases (the rival INF agents and TNF-α blockers have been reviewed elsewhere). Although these biologics also have relatively high prices compared to generic azathioprine, these costs will be dwarfed by gevokizumab. Naturally, a lot depends on the drug's sustained remission rates; if they aren't considered superior enough to standard of care, price and side effect comparisons will come into play for prescribers, patients and payers.
Capturing 10% of the market could mean a few million in revenue, and XOMA will only need a small specialty sales force. However, BDU represents the tip of the iceberg. A successful trial also bodes well for the rest of the EYEGUARD series, which targets the entire non-infectious uveitis (NIU) spectrum. An American population study showed a prevalence of uveitis as 114.5 per 100,000 population, and an incidence rate of 52.0 new uveitis cases per 100,000 per year. Thus, the NIU market is much bigger than that of BDU. Because uveitis is more prevalent in the 65+ demographic, the market is likely now larger than the approximately 150,000 U.S. patients first cited by management years ago. XOMA's NIU trials of EYEGUARD-A and EYEGUARD-C could have data readouts this year, contingent on faster patient enrollment completion. EYEGUARD-A and EYEGUARD-C's primary endpoint will be measured two and six months after the respective studies are fully enrolled.
Impact of Results to the Company
EYEGUARD-B is XOMA's first pivotal trial of gevokizumab up for judgment. If the trial is a success, the company will use the EYEGUARD-B results to request a pre-Biologics License Application (BLA) meeting with the U.S. Food and Drug Administration (FDA). Ideally, the agency could accept EYEGUARD-B, the Phase 2 pilot study, and a Phase 2 safety study as together providing sufficient information to evaluate gevokizumab in BDU. If the FDA requires supporting Phase 3 data from the American EYEGUARD-US study - which is enrolling ahead of schedule, but whose completion will still take months - then gevokizumab's approval will be delayed by at least half a year.
XOMA may have enough cash to see this potential delay through. As of March 31, the company had cash and equivalents of $67.5 million, after a burn of $21.7 million in the first quarter. XOMA is guiding the operating activities to use around $34-43 million for the rest of 2015. This is reasonable, because EYEGUARD-B is over, and the bulk of expenses come from research and development.
Positive results should catapult the stock to a new 52-week high (currently $5.95). Actually, some traders can afford to forget the binary event for now. There should be a substantial run-up leading to the unblinding of the data. Nothing fundamental has changed about the company since a secondary equity raise in December; even the promotion of a new chief financial officer to replace the one who retired was a smooth transition. Yet, the shares are running at a 29% discount to the $4.94 offered price; expect this level to be breached sometime in the next four weeks. That should be enough to satisfy nervous traders. When they exit, XOMA's price could then be depressed enough to attract those willing to truly gamble on the results.
Conclusion
The bottom line is that money can be made several ways. Investors may buy and hold long term, based on gevokizumab's future value and many shots on goal. Momentum traders can ride the run-up for 4-5 weeks or gamble on a possible bear raid/rebound further out. Finally, some may consider that gevokizumab only needs to reduce the risk of ocular exacerbations by 70%, compared to placebo for EYEGUARD-B to succeed, and bet with long positions or options. For options players, July 17 is probably too soon to see any significant stock volatility, and they should aim straight for the September 18 expiration. For example, the call contract at the $4.00 strike price has the highest open interest and a current bid of $1.25. If called away, covered call sellers will gain 49% but lose out on any upside if XOMA shares soar past $5.25. Call buyers breakeven above $5.25, and of course, can profit if premiums rise; when they sell their calls before expiration, they pocket the difference in premiums per contract. Conversely, put options at $4 or $4.50 may protect against a trial failure, pushing shares below $2.25 (-36%).
