Zacks_Analysts' Blog : Xoma Partners Servier for XOMA 052 - Analyst Blog

Xoma Ltd. (XOMA) received a boost recently as it entered into a development and commercialization agreement for its pipeline candidate XOMA 052 with a privately held French company, Les Laboratories Servier, for an upfront payment of $35 million.

XOMA 052 is an anti-inflammatory drug being studied for multiple indications like Behcet's uveitis, diabetes and cardiovascular diseases.

In addition to the $35 million upfront payment, Xoma is also entitled to receive milestone payments of up to approximately $470 million as well as tiered royalties on net sales, which could go up to the mid-teens.

Xoma retains the US and Japan development and commercialization rights for the drug for Behcet's uveitis and other inflammatory and oncology indications. Servier will have similar rights for these indications in the rest of the world.  Servier will fund the first $50 million of development expenses for the Behcet's uveitis indication and thereafter will finance half the future expenses.

Servier will also develop XOMA 052 for diabetes and cardiovascular diseases in exchange for worldwide rights. However, Xoma retains the option to buy back the US and Japan rights for diabetes and cardiovascular disease and re-license them to one or more third parties. In the event of Xoma reacquiring these rights, the company could receive up to $470 million in milestone payments, much lower than $800 million otherwise. In the first quarter of 2011, Xoma expects to present data from two phase II studies of the drug in type II diabetes.

With Servier, Xoma gets an experienced partner who will help it advance the drug into phase III developmet for Behcet's uveitis in 2011 and also reduce its cash requirements for future. Moreover, Servier has substantial experience in the development of drugs for the treatment of cardiovascular diseases and diabetes. Its key marketed drugs are Diamicron for type II diabetes; Procoralan for congestive heart failure; Protelos for osteoporosis; and Valdoxan, a new antidepressant.

The $35 million upfront payment is broken up into an upfront cash payment of $15 million plus a €15 million loan (about $20 million USD) payable in early 2016. In late December 2010, Xoma announced that it expects to end 2010 with cash and cash equivalents balance of $36 million to $38 million. Including the upfront payment of $35 million due from Servier, Xoma’s cash balance should increase to $72 million.

Behcet's uveitis is a very rare disease, which is characterized by inflammation of blood vessels in the eye and can cause blindness. It is estimated that 250,000 patients are diagnosed with Behcet's disease worldwide including 20,000 in the US. Xoma has already presented positive results for XOMA 052 in Behcet's uveitis indication. XOMA 052 had also been granted orphan drug status for the indication in the US and European Union.

We are highly positive on the agreement as we believe it removes a significant financial risk for the company by boosting its cash resources and lowering the future cash burn rate. We have a Zacks #2 rank on the stock, which translates into a short-term Buy rating.