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Why XOMA Corp. Shares Slumped

By Brian Pacampara – Mar 11, 2014 at 3:09PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of XOMA (XOMA -0.81%) sank 6% today after MLV & Co. downgraded the biotechnology company from buy to hold.

So what: Along with the downgrade, analyst Graig Suvannavejh lowered his price target to $7 (from $8), representing about 9% worth of upside to yesterday's close. So, while contrarians might be attracted to the stock's weakness of late (it plunged 28% last week on negative phase 2 data associated with gevokizumab's prospects in erosive osteoarthritis), Suvannavejh's call suggests ever-increasing skepticism on Wall Street over the drug's sales potential.

Now what: According to MLV, XOMA's risk/reward trade-off is pretty balanced at this point.

"Simply put, gevo's miss was big, especially given the rev opp'y we saw in EOA ($1B). While advancing gevo into P3 for pyoderma gangrenosum (PG, ultra orphan) has more appeal than going into severe acne, even with higher projected sales ($335M vs. prior $90M), gevo in PG just doesn't pack the same punch revenue-wise as gevo in EOA," said Suvannavejh. "Thus, while also finding the stock fully valued at current levels, we'd like to see more concrete progress with gevo before regaining full confidence in XOMA again."

Of course, when you couple gevo's still-available opportunities in other indications with the stock's big pullback, biotech-savvy value hunters might want to take a closer look.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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