XOMA: A Hidden Gem In The Crowded Biotech Sector

| About: XOMA Corporation (XOMA)
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Physicians are becoming increasingly aware that inflammation plays a central role in our health. Chronic inflammation is associated with a wide diversity of seemingly unrelated diseases such as arthritis, cardiovascular disease, and even cancer. More problematically, researchers are now discovering that inflammation is often the underlying cause of health problems, not simply a symptom of them. Yet, anti-inflammatory treatments are essentially still in their infancy, with NSAIDs being by far the drug(s) of choice.

Chronic inflammatory conditions have a similar molecular basis across tissue types, with proinflammatory cytokines Interleukin-1 α and β being key mediators in the process. Although the biochemical cascade involved in generating an inflammatory response is mind-bogglingly complex, the IL-1 pathway governs a number of diseases, making it a primary therapeutic target. By targeting this critical biochemical pathway, Sobi and Amgen (NASDAQ:AMGN) developed Kineret to treat rheumatoid arthritis, which has been approved by the FDA. In a similar manner, Novartis's (NYSE:NVS) Ilaris and Regeneron Pharmaceuticals' (NASDAQ:REGN) Arcalyst are IL-1 inhibitors indicated for an extremely rare condition called cryopyrin-associated periodic syndromes (NASDAQ:CAPS), and both of these drugs have successfully passed FDA muster. As this promising research has progressed since 1998, more and more therapies are being developed to specifically target interleukin-1 β (IL-1β) for a wide range of chronic inflammatory conditions.

Interleukin-1 β as a therapeutic target

Interleukin-1β is a proinflammatory cytokine that exerts pleiotrophic effects on a variety of cell types, thus playing a key role in acute and chronic inflammatory, as well as autoimmune disorders. The overproduction of IL-1β is suspected in a diversity of disease states, including rheumatoid arthritis, neuropathic pain, inflammatory bowel disease, osteoarthritis, vascular disease, multiple sclerosis, Alzheimer's disease, among many others. Theoretically, compounds that inhibit IL-1β production should be able to provide clinically significant benefits to patients suffering from chronic inflammation. And the clinical trials of IL-1β inhibitors Kineret and Ilaris have provided strong empirical evidence to back this claim. Yet the safety profile of these drugs has been called into question on numerous occasions.

The first generation of IL-1 inhibitors, like Kineret and Ilaris, have well-documented problems associated with their safety profiles. Specifically, these drugs are potent immunosuppressors that tend to increase the risk of serious infections. Ilaris was even rejected by the FDA in 2011 as an indication for gout due to serious safety concerns, despite the fact that the drug showed strong efficacy as a treatment option in clinical trials. And it's far from the first IL-1 inhibitor to exhibit problems in terms of its safety profile.

The goal of the next generation of IL-1 inhibitors is to thus increase potency, convenience through infrequent dosing, and most importantly, safety. Indeed, if these types of drugs cannot overcome these safety issues, they will not live up to their amazing potential to alleviate debilitating chronic inflammation associated with a host of life-threatening disease states.

XOMA Corp.'s Gevokizumab (XOMA 052)

XOMA Corporation (NASDAQ:XOMA) is a developmental-stage biopharma whose pipeline focuses on innovative antibody-based therapeutics. The company's leading drug candidate, gevokizumab (formerly XOMA 052), is a potent humanized monoclonal antibody with unique allosteric modulating properties. To meet the commercial and therapeutic challenges associated with IL-1 inhibitors, the company designed gevokizumab for high potency and infrequent dosing. Specifically, gevokizumab can be dosed infrequently (often once a month compared to daily for Ilaris) due to its long half-life of approximately 22 days. In 2011, XOMA entered into a license and collaboration agreement with Les Laboratoires Servier ("Servier") to develop and commercialize gevokizumab in multiple indications.

Under this agreement, gevokizumab is being evaluated in a global Phase III trial termed EYEGUARD. The goal of this program is to determine gevokizumab's ability to treat acute non-infectious uveitis (NIU), to prevent disease flares in patients with Behçet's uveitis, and to prevent disease flares in NIU patients who are controlled with steroids and immunosuppressants. Additionally, XOMA has a Proof-of-Concept (POC) program underway to explore the efficacy and safety of gevokizumab in multiple indications, with the company expecting to select a Phase III indication in the 4th Quarter of 2013.

Previously, XOMA reported encouraging interim data from a Phase II trial in moderate to severe inflammatory acne in January 2013. Moreover, XOMA is expected to announce full results from its two POC studies in patients with erosive osteoarthritis of the hand (see below) and data from the National Eye Institute's study of gevokizumab in patients with active non-infectious anterior scleritis later this year. The company also recently launched a pilot study in pyoderma gangrenosum, a rare skin ulceration disease.

Pending Catalysts for Gevokizumab

Gevokizumab's successful Phase II trial results for moderate to severe acne announced in January helped XOMA shares rally 86% year-to-date. One of the most critical aspects of these interim results is that gevokizumab appears to be well tolerated, with no statistical differences between placebo and treatment groups in terms of adverse events. Combined with data from a number of other studies on gevokizumab, the safety profile of the drug looks promising compared to the earlier generation of IL-I inhibitors. As such, investors are eagerly awaiting data from additional POC trials to see if the trend keeps up, and if gevokizumab could possibly be used to treat a wide range of inflammatory conditions.

In July, the company completed enrollment of 90 patients in a POC study for EOA. XOMA subsequently announced that it expects to release top-line results from the study this month, which should be yet another major catalyst for the stock going forward. Unfortunately, the company has yet to announce a data release date for the POC study for active non-infectious anterior scleritis, although these results also offer investors another potential catalyst in the near-term.

Most importantly, XOMA has three possible routes to launching its own Phase III trial in order to advance gevokizumab into the commercial stage of its life-cycle. In doing so, XOMA has greatly reduced the risk for investors that gevokizumab will be a complete waste of time and money -- like so many other leading clinical candidates. To my mind, the expected announcement of a Phase III trial in the 4th quarter will be a major catalyst for the stock, which could push the company into the $600 M market cap range (presently the company is around $400 M). The encouraging results coming out of the EYEGUARD work should also have a positive impact on PPS.

Company Fundamentals and Risk Factors

As of June 30th, 2013, XOMA had roughly $58 M in cash and cash equivalents, with a burn rate of $4.3 M a month. Adding to its cash reserves, XOMA raised $29M via a secondary offering last month. Although the company had previously stated that it expected its cash needs to be met into late 2014 based on its previous current financial situation, this "smallish" secondary offering is likely a taste of things to come, in my opinion. Namely, I believe XOMA will use one of the upcoming catalysts to raise funds again via a larger secondary offering.

According to my estimates, the company should have about $69 M in the till around November. If the company is serious about advancing one of its indications for gevokizumab into a Phase III trial (assuming Servier doesn't opt in per their agreement), this is nowhere near enough money. And it only makes sense to execute a secondary around a positive catalyst for PPS.

That said, another secondary wouldn't be the end of the world for investors. As with all biotechs at this stage, XOMA needs significant chunks of cash to advance its clinical candidates; investors, however, need to remember that this actually creates value for them in the long term. Moreover, institutions have repeatedly shown that they are willing to snap up XOMA shares, with institutions now holding > 68% of outstanding shares and a number of new holders initiating positions last quarter. Overall, I suspect another, larger, secondary offering is likely in the works, yet its impact on PPS should be temporary, in my opinion.

Conclusion

XOMA is a mid-cap biopharma that is rapidly developing its lead clinical candidate gevokizumab with its partner Servier for a wide variety of indications. On the back of positive Phase II POC results for moderate to severe acne and Servier's ongoing EYEGUARD trials, the stock has begun to take flight. Even so, there are a number of pending catalysts for gevokizumab in the coming weeks, which should further help to bolster XOMA's PPS. While the company will almost certainly use this opportunity to raise additional funds, I believe this is a good thing in the long run, as it allows XOMA to expand its clinical activities. On a final note, I am expecting the EOA trial results announced this month to be a positive catalyst for the stock, especially in light of the fact that Kineret appears to work in this condition. In sum, there are a number of reasons why traders and investors alike should take a look at XOMA.

Disclosure: I am long XOMA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.