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XOMA AT A GLANCE

P/E ► 20.8 AVG EV/EBITDA ► -7.55   ROA ► 24.2% HIGH Debt to Equity ► 4.05 HIGH Current Ratio ► 1.27 LOW Interest Coverage Ratio ► -5.16 AVG

 

 

 

 

 

 

XOMA Ltd. (NASDAQ:XOMA) is a biopharmaceutical company focused on the discovery, development and manufacture of therapeutic antibodies and other agents designed to treat inflammatory, autoimmune, infectious and oncological diseases. XOMA is a growing company involved in a variety of R&D projects with diverse partners. Its pipeline is comprised of various therapeutic antibodies among which two are in phase 1 of clinical trials for treatment of type 2 diabetes rheumatoid arthritis and botulism poisoning. XOMA is developing those products in partnership with major drugmakers such as Pfizer Inc (NYSE:PFE) and Novartis AG and has been awarded hundreds of million of dollars of federal grants for one of its projects. Most of these researches are fully funded by partners.

It currently has three marketed products with partnering companies and three research technologies that are licensed to over 50 major pharmaceutical companies. Since its establishment in 1994, it has had highly variable revenues but over the last 5 years its revenues have grown by more than 800%. However XOMA has never been profitable in its history. In 2009 the FDA expressed its concerns about the safety of XOMA's Raptiva product which resulted in a drop in sales and XOMA's royalties triggering the early repayment of a $50-million loan to Goldman Sachs and forcing XOMA to reduce its operating costs by firing 42% of its workforce, lowering it to around 200 employees.

Company Overview

As a biotech company, XOMA has drawn its revenues from irregular sources. Indeed royalties on marketed products only represent a portion of its revenues while other revenues come from license agreements and fees and other research contracts. This unusual pattern creates a lot of uncertainty in XOMA's revenues since most research contracts are based on research progress.

2009 and 2010 are financially challenging years for XOMA with patents' expiration in Europe and the likely withdrawal of regulatory approval for Raptiva.

Business and financial metrics

• Revenues have been very irregular but since 2004 they're constantly growing. As mentioned before a significant portion of revenues is dependent on research progress and therefore can difficultly be rightly predicted. On december 31, 2008 the company had $17.2 million in deferred revenue. Its revenues keep on growing though with three products having been released in the last 5 years. The company has also obtained new contracts and license agreements on a regular basis as the last quarterly results showed. However the company has for years been unprofitable due to high R&D and SG&A expenses and interest expenses. It is not expected to be profitable anytime soon and it has an accumulated deficit of $789 million and a shareholders' net capital deficiency of $18.3 million.

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• XOMA has always devoted a high amount of resources to R&D which naturally is the core of its business. About 30% of the R&D expenses are fully funded by outside partners while 70% of these expenses are devoted to internal projects. XOMA's R&D expenses have always been high and will increase as more projects will go through expensive phase II and III of clinical trials. R&D expenses have often exceeded revenues.

• SG&A have remained constantly high and unrelated to the company revenues. Some actions have been taken such as bonus reduction and layoffs.

• Xoma's financing is a major issue since the company hasn't had any net profit in the last 5 years. In 2009 with the loss of the regulatory approval for Raptiva, XOMA has been required to repay its main Goldman Sachs loan of $55 million. As of June 30, 2009 $42 million were still owed to Goldman Sachs and classified as current liabilities expected to be repaid by the end of the year. However the company can still count on a $13 million loan from Novartis due in 2014. Besides it has secured an equity credit line and $52.5 million are still available. In H1 2009 XOMA also received capitals from institutional investors for a total amount of $22 million. XOMA will face financing issues in H2 2009 for it will have to repay Goldman Sachs loan and keep some cash for its operations.

Business segment

XOMA earns its revenues from three main sources. Each of them is based on a different business model.

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Marketed products

XOMA earns royalties on three marketed products which are all licensed to other companies for marketing matters. The company has three drugs on the market:

• Raptiva, a humanized therapeutic monoclonal antibody developed to treat immune system disorders designed to provide long-term control of chronic moderate-to-severe plaque psoriasis. It is marketed in the US by Genentech Inc. And outside of the US by Merck Serono. Global sales in 2008 were more than $200 million on which XOMA collects small royalties. In 2009 Raptiva was issued an a public health warning and is set for regulatory withdrawal later this year.

• Lucentis, a humanized antibody developed to treat neovascular (wet) age-related macular degeneration. Approved in 2007, it is marketed by Genentech in the US and by Novartis outside of the US. Global sales in 2008 were about $1,8 billion, split evenly between the US and the rest of the world. Lucentis is a really blockbuster with high potential. In January 2009 it was approved in Japan. However Lucentis's patents expired in Europe in 2009^[4]. There are uncertainties about the royalties XOMA might earn in the future on Lucentis sales.

• Cimzia, an antibody fragment used to treat moderate-to-severe Crohn’s disease in adults who have not responded to conventional therapies. Cimzia was approved in the US in 2008 and in Switzerland in 2007. It is worldwide marketed by UCB S.A. And had total sales of $13 million in 2008 with no royalties earned for XOMA. UCB S.A. Expects the FDA to approve additional uses for Cimzia in the treatment of rheumatoid arthritis.

Licensed Technologies

Trough its researches, XOMA has developed multiple technologies that can reuse for further researches and drug production. XOMA licenses these technologies to a great number of international companies and earns royalties, fees and milestone payments. These technologies are all proprietary technologies of XOMA and XOMA uses them as a platform to start or deepen existing researches and to develop new partnerships with drug manufacturers. They include:

• Bacterial Cell Expression (BCE): XOMA's most licensed technology which is used in the production and development of antibodies. This technology has over 50 licensees which include Pfizer Inc, Bayer Healthcare AG, Unilever plc, sanofi-aventis. In 2009 some patents on BCE expired in Europe.

• Human Engineering™: a proprietary technology that allows modification of non-human monoclonal antibodies to make them suitable for medical purposes in humans. This technology has very useful and profitable possibilities.

Product collaborations and license agreements

XOMA has evolved into a sort of R&D outsourcing company which offers a wide range of technologies and antibodies researches. In some way XOMA can appear like a R&D contractor. Thus it has signed a few R&D partnerships that earns XOMA fees, milestone payments and R&D supports. These partnerships include:

• Partnership with Novartis. Fully funded R&D, milestone payments up to $14 million and double-digit royalty rates. Under this contract XOMA has also obtained a $13 million note.

• Fully-funded collaboration agreement with Schering-Plough

• Fully-funded partnership with Takeda which was expanded in 2009 and includes a $29 million milestone payment to XOMA. ^[5]

• NIAID contracts: XOMA has been awarded a total of three contracts with federal agencies to develop anti-botulinum antibodies to protect US citizens against potential bioterrorist attacks.

Key Forces and Trends

Pipeline and product risks

As with any pharmaceutical company, XOMA is exposed to the risk of its R&D not being fully satisfying. However XOMA is clearly on a high-growth market with very innovative technologies and a lot of room for new discoveries. Antibodies research represents a new field and the demand from large drug makers is huge. XOMA's revenues are highly dependent on R&D outcomes and progress since most fees and milestone payments are contractually bounded to tangible R&D results.

In 2009 due to financial constraints XOMA halted the majority of its internal projects to essentially focus on its XOMA 052 products. This antibody has already been used for numerous conditions. XOMA's researches have focused on diabetes and cardio-vascular conditions. This product has already gone through Phase I of clinical trials and XOMA is moving it to Phase II while seeking a partner for this program. XOMA 052 has a potential market of $12 billion by 2020 in the US. ^[6]

However XOMA's pipeline contains very few products in late stage of development which raises concerns about the company's ability to put final products on the market. Its main sources of revenue in the short term are its technologies and R&D potentialities that can be licensed out to outside companies.

High dependance on partnerships

To fully exploit its discoveries and technologies XOMA has made the choice to partner with various companies. XOMA is involved in R&D contracts with Genentech, Novartis, Schering-Plough, Takeda and US federal agencies. Furthermore it has licensed its technologies to over 50 companies. Moreover XOMA has no marketed product on its own. Thus it is highly dependent on partners for its revenues.

While this strategy maximizes the use of discoveries and allows XOMA to diversify its activities away from its internal projects, it also represents a constant challenge to work with other companies but also to find new partners to develop new projects and replace ending ones. XOMA has managed to gain great benefits from its partnerships with as an example the $13 million loan obtained from Novartis. But this strategy leads to great uncertainty about the timing of incomes as well as the very source of those incomes.

Patents expiration

In 2009 XOMA has been confronted with multiple expirations of its patents. While patents' expiration is a threat for every healthcare company (see Eli Lilly), it is even more accurate in the case of small growing biotech companies whose revenues are dependent on very few products. In 2009, one of XOMA's was withdrawn from the market and one lost its regulatory protection leaving XOMA with only one marketed product. XOMA makes about 30% (see graph above) of its revenues from royalties on marketed products but it still represents a major drawback for the company. Moreover patents on its BCE technology also expired in Europe. XOMA will need to quickly develop new products and that's part of the reason why in 2009 it decided to shift resources away from various projects and to divert them only to its XOMA 052 project.

Financing issues and profitability

Being a biotech XOMA has always devoted large resources to its R&D. Research is truly the heart of the biotech business and biotech companies are constantly forced to heavily invest in R&D projects before they can benefit from those investments. Given the volatility of XOMA's revenues, keeping up with R&D expenses seems to be a real challenge. Up till today XOMA has managed to fully fund a large share of its R&D. Yet the company has never been sustainably profitable and won't be profitable in the near future which has forced the executives to take action and drastically reduce its workforce by 42% in 2009. It also cut its internal R&D programs to focus on a single project. XOMA seems to have found adequate funding for the next couple of months.

Competitors

Given XOMA's specific strategy, identifying competitors might seem a bit chancy. In fact many of XOMA's partners can turn to be competitors in other markets, in the past or in the future. Besides XOMA doesn't target any specific final market but it's rather focused on the initial raw material which are antibodies. Thus depending on the contracts and partnerships it signs, XOMA could enter various specific drug markets. Plus XOMA has developed all of its products under partnership agreements and plans to keep on doing so. Therefore it is not facing competition on its own but with the help of other bigger pharmaceutical companies. Competitors include:

• For XOMA 052 project: Novartis, Amgen Inc., Regeneron Pharmaceuticals

• For Cimzia: Arthritis Drug market is a very large market with major players involved such as Abbott, Roche, and Johnson&Johnson

• For Lucentis: Pfizer, Novartis, Opko

• For Raptiva: Amgen Inc., Johnson&Johnson, Abbott

• On the anti-butolinum market: Cangene and Emergent biosolutions which compete with XOMA for federal contracts.

References

1. ↑ http://investors.xoma.com/annuals.cfm XOMA, Form 10-K, FY2008
2. ↑ http://investors.xoma.com/annuals.cfm XOMA, Form 10-K, FY2008]
3. ↑ http://investors.xoma.com/annuals.cfm XOMA, Form 10-K, FY2008
4. ↑ [ http://www.marketwatch.com/story/xoma-announces-plan-to-fully-repay-goldman-sachs-loan-2009-09-14 ] MarketWatch.com, 9/14/09]
5. ↑ http://investors.xoma.com/secfiling.cfm?filingID=1193125-09-167169 XOMA 10-Q Form, Q2 2009
6. ↑ http://www.xoma.com/media/files/XOMA%20Pres%20August%202009.pdf XOMA August Presentation, Aug 2009