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How 1 Sentence Caused XOMA Corp. Shares to Explode Higher

By Sean Williams - May 8, 2015 at 3:22PM

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XOMA Corp. released its first-quarter earnings results after the closing bell last night, but it was a single sentence from management, not its actually quarterly results, that has investors so excited today.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of XOMA (XOMA -2.78%), a clinical-stage biopharmaceutical company developing monoclonal antibodies for the treatment of metabolic, inflammatory, and cardiovascular diseases, rocketed higher by as much as 12% in Friday's trading session after releasing its first-quarter earnings report.

So what: For the quarter, XOMA generated $2.65 million in revenue, down 22% from $3.41 million it reported in the prior-year period. The absence of a $0.5 million out-licensing arrangement in 2015 compared to 2014 is what led to most of the drop.

XOMA's net loss, on an adjusted basis, shrank to $21.7 million from $24.7 million in the year-ago quarter. This works out to a per share loss of $0.19. Comparatively speaking, Wall Street was looking for $4.31 million in revenue and a narrower loss of $0.16 per share, so this was actually a double miss on XOMA's part.

So why the huge reaction higher? This sentence in the press release sums it up:

"Servier is just one ocular exacerbation away from being able to close the EYEGUARD(TM)-B study database and expects to reach the targeted ocular exacerbation event any day."

In other words, EYEGUARD-B, a study involving gevokizumab, XOMA's lead drug, and being conducted outside the U.S. by its partner Servier as a treatment for patients with Behcet's disease uveitis, is really close to yielding phase 3 data any day now. Binary events are the ultimate drivers of clinical-stage biotech stocks, and the clear reaction from investors is the expected data should be positive.

As one final addendum, XOMA ended the quarter with $67.5 million in cash and attained a $20 million secured loan during the quarter, thus signaling to investors its cash runway likely extends well into 2016 now.

Source: National Institutes of Health via Facebook.

Now what: One of the oddities of the biotech sector is that bad reports often get a reprieve as long as critical binary data is on the way, which is exactly what happened for XOMA shareholders today.

Should gevokizumab meet its primary endpoint in Behcet's disease uveitis, XOMA plans to request a pre-biologics licensing application with the Food and Drug Administration. An eventual approval here would open gevokizumab to a market of approximately 7,500 Behcet's disease patients in the U.S.

Although a bit of a rally may be warranted -- XOMA shares had fallen by roughly 50% in a six-month time span -- I can't throw my support behind XOMA until I see that phase 3 data. I understand that missing out on the binary event could cause investors to miss out on the potentially big gains if gevokizumab hits its primary endpoint. However, I also know that XOMA's success is intricately tied to the success of gevokizumab, with all but three of its internal and licensed development programs revolving around this drug. A failure of gevokizumab here could be devastating to XOMA shareholders.

I'm also a bit of a realist and understand that even in a utopian scenario where gevokizumab nails its primary endpoint in all of its EYEGUARD studies (it's being examined for non-infectious uveitis as well), it would likely take three years, or longer, for sales to ramp up to the point where XOMA is even at a breakeven level in terms of profit. This means the potential for more dilutive common stock offerings and investors waiting even longer for profits.

Personally, I'd much rather stick to the sidelines and wait for the data release.

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