XOMA Making the Right Moves

Advancement of XOMA-052 in the current phase I trials remains the chief focus of the management of Xoma Ltd. (XOMA - Snapshot Report). Data on these two trials are expected in the third quarter 2008. We expect an initiation of a phase I trial on XOMA-629 also in the third quarter 2008.

Management will look to bring in one additional collaboration partner on board at some point this year. All the above milestones should get the stock moving higher in the second half of the year.

We believe Xoma's antibody discovery platform is starting to show signs of paying off, as both -052 and -629 could prove to be significant products in the not-so-distant future. The name remains significantly under-valued in our view.

Royalty revenue continues to provide meaningful growth to Xoma. Sales of Raptiva totaled $61 million in the first quarter 2008. Sales of Lucentis totaled $393 million in the first quarter. Both products are growing at double-digits rates. In May 2008 Xoma used this growing royalty line to secure a $55 million loan with Goldman Sachs (GS - Analyst Report). But with the shares trading at $2.15, Xoma is a very volatile stock.

However, valuation is attractive based on our view of what Xoma will look like in three to four years. If all the above things work out, the market capitalization in 2012 should be in the area of $1 to $1.5 billion based on comparable companies. That would be an impressive return from the current market value of only $310 million. In 2012 we see total revenues of $146.6 million. Based on the industry average P/S ratio of 8x, that would be a market value of $1.25 billion.

Thus, when we look at the future value of Xoma based on its current business strategy we see the stock around $9-$10 by the end of 2012. Discounting that price by 25% back to present day we arrive at our fair-value target price of $5. We continue to rate shares of Xoma a Buy.

Read the full analyst report on XOMA.