XOMA: Another possible reason for Long Exposure! Dont follow me, I could be wrong.

Upcoming (?) News from the Xoma Novartis Partnership (c.p.) could cause an unexpected 10%-25% PPS increase or more!
- Apparently the Market completely forgot about this partnership! While investors are anxiously awaiting upcoming news with respect to Eyeguard-A (Primary Completion Date June 2014), Eyeguard-B (Primary Completion Date December 2014), Eyeguard-C (Primary Completion Date December 2014) 1, (important) results from the POC studies in patients with erosive osteoarthritis of the hand (2013Q1) as well as a possible partnership announcement for XMet S in type 1 and type 2 diabetes

Phase 1 results & a possible Phase 2 start for LFA102 (a potential blockbuster developed by Novartis) might offer some unexpected upside potential (Primary Completion Date January 2014).

The probability of a compound to make it to the market when in Phase I is approximately 11%. This probability increases to 18% at the Phase II testing stage (see here) 2. Obviously, such a change in probabilities has a sensible impact on the valuation of the compounds future economic benefits.

Xoma is expecting (if LFA102 succeeds) to receive: Royalty rates ranging from low-double digit to high-teen percentage rates LFA102 (Xoma 2012 FORM 10-K, page 11).

Moussatos at Wedbush (current Price Target on XOMA: $13.00): estimate gross peak annual sales could reach over $3 billion worldwide for LFA102 (Link here)

Assuming, FDA Approval in 7 years (Commercialization start in 8 years) Royalty rate of 15% (mid-point per Xoma 2012 FORM 10-K) and ignoring other Royalties Pear Sales of $3,500m in 12 years starting to decrease at year 15, $100m after year 27 11% WACC for Xoma Inc and a 20% taxes

>>>>> A transition to Phase II would result in a NPV increase of approx. $76m (which represent 10% of the Current Market Cap of $760m) // Well considering Market likes to overreact who knows what will happen!?
1 2

Please note that top-line data are expected (per biopharmcatalyst.com and Companys 3Q CC) in H1 2014. Differing percentages are reported in various studies. However, as a rule of thumb, the chances of approval increase

by approximately 60-90% during a transition from PI to PII (see 1, 2, 3).

XOMA: Another possible reason for Long Exposure! Dont follow me, I could be wrong.

Even more interesting is the fact that probably Mr. Market hasnt been factoring LFA102 potential / partnership into XOMA PPS at all! Did the Market write LFA102 completely off?

Read what Moussatos (Wedbush) had to say in its January 29, 2013 Research Report (Rpt. 23186847):

Last year we saw that Novartis no longer included Lucatumumab in their oncology portfolio and we believe this program is no longer active. However, we found a Phase 1 trial for LFA102 which was listed on clinicaltrials.gov (NCT01338831) to complete this month and presume the $7MM milestone was for a successful Phase 1 trial. (Public Link here)

Apparently, also Ritu Baral at CanaccordGenuity did forget to include LFA102 in its Valuation (dated August 7, 2013):

Do you see somewhere in the table LFA102 for the treatment of Castration-resistant Prostate Cancer? I dont see it in the reported Valuation Table 3!!

Isnt it time now for Mr. Market to start writing back up LFA102?

Please note that if I had used the same procedure used by Ritu Baral in valuing LFA102 the resulting valuation

would have been way higher than the one I did obtain. Using the 18% probability, the 15% royalties assumptions LFA102 NPV would be well north of the $500m figure!

XOMA: Another possible reason for Long Exposure! Dont follow me, I could be wrong. Now that LFA102 after a successful (yet to be announced) Phase 1 (see the $7MM milestone) is likely to be brought into a Phase II we should see the market starting to price in LFA102 potential (from licensing) again (which would approximately be $196.74m).

Ceteris Paribus therefore XOMA seems to have a 26% valuation gap (upside potential) at current levels (simply because market has been ignoring LFA102).

Dreaming is a free Commodity! Lets dream: In case LFA102 were to successfully complete the Phase II study (lets say 4 years from today) the NPV of the Novartis licensing deal Alone should have a NPV of $791m ($670m in case of a 10% royalty deal). The current Market Capitalization of Xoma is approx. $760m. Were LFA102 to be approved? The Novartis licensing deal alone would/should be worth more than $2,549m ($1,700m in case of a 10% royalty deal) 8-10 years from now.

Back to reality: What is the Options Market thinking: A couple of interesting Trades SIGNALING A RATHER BULLISH SENTIMENT:

XOMA: Another possible reason for Long Exposure! Dont follow me, I could be wrong.

2014 will to be an interesting year for XOMA Shareholders & Traders.

An expected steady flow of news over the next 6 months should assure above average fluctuations in Xoma PPS and in case of a positive news flow I am already planning a partial exit in the high $10s low $20s region during the 2nd half of the year .

Manage your Risk & Happy Trading!