XOMA: Another possible reason for Long Exposure! Don’t follow me, I could be wrong.

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Upcoming (?) News from the Xoma – Novartis Partnership (c.p.)

could cause an unexpected 10%-25% PPS increase … or more! - Apparently the Market completely forgot about this partnership! -

While investors are anxiously awaiting upcoming news with respect to Eyeguard-A (Primary

Completion Date June 2014), Eyeguard-B (Primary Completion Date December 2014), Eyeguard-C

(Primary Completion Date December 2014)1, (important) results from the POC studies in patients

with erosive osteoarthritis of the hand (2013Q1) as well as a possible partnership announcement for

XMet S in type 1 and type 2 diabetes …

… Phase 1 results & a possible Phase 2 start for LFA102 (a potential blockbuster developed by

Novartis) might offer some unexpected upside potential (Primary Completion Date January 2014).

The probability of a compound to make it to the market when in Phase I … is approximately 11%.

This probability increases to 18% at the Phase II testing stage (see here)2. Obviously, such a change in

probabilities has a sensible impact on the valuation of the compound’s future economic benefits.

Xoma is expecting (if LFA102 succeeds) to receive:

“… Royalty rates ranging from low-double digit to high-teen percentage rates … LFA102 …”

(Xoma 2012 FORM 10-K, page 11).

Moussatos at Wedbush (current Price Target on XOMA: $13.00):

“…estimate gross peak annual sales could reach over $3 billion worldwide for LFA102 …”

(Link here)

Assuming,

- FDA Approval in 7 years (Commercialization start in 8 years)

- Royalty rate of 15% (mid-point per Xoma 2012 FORM 10-K) and ignoring other Royalties

- Pear Sales of $3,500m in 12 years starting to decrease at year 15, $100m after year 27

- 11% WACC for Xoma Inc and a 20% taxes

>>>>> A transition to Phase II would result in a NPV increase of approx. $76m (which represent

10% of the Current Market Cap of $760m) // Well … considering Market likes to over-

react … who knows what will happen!? 1 Please note that top-line data are expected (per biopharmcatalyst.com and Company’s 3Q CC) in H1 2014. 2 Differing percentages are reported in various studies. However, as a rule of thumb, the chances of approval increase

by approximately 60-90% during a transition from PI to PII (see 1, 2, 3).

XOMA: Another possible reason for Long Exposure! Don’t follow me, I could be wrong.

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Even more interesting is the fact that … probably … Mr. Market hasn’t been factoring LFA102

potential / partnership … into XOMA PPS at all! Did the Market write LFA102 completely off?

Read what Moussatos (Wedbush) had to say in its January 29, 2013 Research Report (Rpt. 23186847):

“Last year we saw that Novartis no longer included Lucatumumab in their oncology portfolio and we

believe this program is no longer active. However, we found a Phase 1 trial for LFA102 which was

listed on clinicaltrials.gov (NCT01338831) to complete this month and presume the $7MM milestone

was for a successful Phase 1 trial.” (Public Link here)

Apparently, also Ritu Baral at CanaccordGenuity did forget to include LFA102 in its Valuation (dated

August 7, 2013):

Do you see somewhere in the table LFA102 for the treatment of Castration-resistant Prostate Cancer?

I don’t see it in the reported Valuation Table3!!

Isn’t it time now … for Mr. Market … to start … writing back up … LFA102?

3 Please note … that if I had used the same procedure used by Ritu Baral in valuing LFA102 … the resulting valuation

would have been way higher than the one I did obtain. Using the 18% probability, the 15% royalties assumptions …

LFA102 NPV would be well north of the $500m figure!

XOMA: Another possible reason for Long Exposure! Don’t follow me, I could be wrong.

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Now that LFA102 … after a successful (yet to be announced) Phase 1 (see the $7MM milestone) … is

likely to be brought into a Phase II … … we should see the market starting to price in LFA102

potential (from licensing) again (which would approximately be $196.74m).

Ceteris Paribus … therefore … XOMA seems to have a 26% valuation gap (upside potential) at

current levels (simply because market has been ignoring LFA102).

Dreaming is a free Commodity! … Let’s dream:

In case LFA102 were to successfully complete the Phase II study (let’s say 4 years from today) … the

NPV of the Novartis licensing deal Alone should have a NPV of $791m ($670m in case of a 10%

royalty deal). The current Market Capitalization of Xoma is approx. $760m.

Were LFA102 to be approved? The Novartis licensing deal alone would/should be worth more than

$2,549m ($1,700m in case of a 10% royalty deal) … 8-10 years from now.

Back to reality: What is the Options Market thinking: A couple of interesting Trades …

SIGNALING A RATHER BULLISH SENTIMENT:

XOMA: Another possible reason for Long Exposure! Don’t follow me, I could be wrong.

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2014 will to be an interesting year for XOMA Shareholders & Traders.

An expected steady flow of news over the next 6 months should assure above average

fluctuations in Xoma PPS … … and … in case of a positive news flow … …

… I am already planning a partial exit in the high $10’s low $20’s region … during … the 2nd

half of the year .

Manage your Risk … & … Happy Trading!