What happened

After the company announced that it will repurchase up to $420 million of its shares at a price no lower than $30 nor higher than $33 apiece, shares in XBiotech (NASDAQ:XBIT) are surging 32.7% higher at 3:00 pm EST on Tuesday.

So what

The share repurchase follows Johnson & Johnson's (NYSE:JNJ) acquisition of XBiotech's only clinical-stage asset, bermekimab, for $750 million in December.

A man sits on the floor as dollar bills fall around him.

IMAGE SOURCE: GETTY IMAGES.

At the time, XBiotech said it planned to use the windfall for research that can resupply its clinical-stage pipeline and for a "capital transaction, such as a stock repurchase, subject to board review and approval." Although it was clear XBiotech was considering returning some of the proceeds to shareholders, the price it has agreed to pay appears to have caught investors off guard given yesterday's closing price of $18.62.

Shareholders can tender their shares in return for a cash payment equal to no less than $30 per share and no more than $33 per share through Feb. 12. According to management, this modified Dutch auction offer represents the best way for the company to reward investors who might want to unlock liquidity by selling shares following the disposition of bermekimab.

As you can see in the following chart, XBiotech's offer price is in line with the highest price at which XBiotech shares have traded since its IPO in 2015.

XBIT Chart

XBIT data by YCharts.

Now what

Developed using human antibodies, bermekimab is being evaluated in multibillion-dollar dermatology indications, including eczema. Initial efficacy in these indications made it incredibly attractive to Johnson & Johnson, which already markets immune-disease drugs such as Stelara and Simponi. In announcing its agreement to acquire bermekimab, J&J said, "It is the only antibody targeting IL-1a currently in clinical development and has the potential for superior efficacy and safety compared to the current standard of care" -- high praise indeed.

Perhaps J&J considered acquiring XBiotech outright; however, the price tag might have been too high. After all, XBiotech believes its human antibody platform targeting IL-1a has potential beyond dermatology in other high-value areas, including cancer and heart disease. For this reason, XBiotech included a provision in its deal allowing it to develop new therapies for nondermatological indications, and it structured its deal with J&J so that J&J will pay it up to $600 million in milestones if J&J expands bermekimab use beyond dermatology.

Regardless, XBiotech is starting over again, and that means risks. Bermekimab's purchase helps validate XBiotech's approach, but it doesn't guarantee future success. In short, the buyback offer shows management recognizes shareholders might not want to start over again, but it remains to be seen whether selling shares or sticking with management will prove to be the smarter choice in the end.