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XOMA AND ELAN: THE TALE OF TWO COMPANIES

Prohost Biotech - Tuesday, January 11, 2011

The tale, this time, is not about London and Paris and is not written by Charles Dickens in 1859. It is about two biotech firms, Xoma (XOMA) and Elan (ELN), written by the market in the 21st century. The similarity between the old and the new tales is the furry the constituents of the two cities and companies have against their rulers’ mismanagement.

Days after some analysts selected both firms’ CEOs as candidates for the worst chief executive officer of the year award both stocks rallied on good news, but the general investors remained skeptical. They took their profits in XOMA and ran. Elan’s rally began to fade a little. Unless the good news is confirmed or the take-over gossip materializes, the skepticism is expected to evaporate ELN’s gains. The depth of shareholders’ resentment about the mistakes committed by previous managements seems to prohibit them from considering any good news from these two firms. The irony is that the managements that did the damage left long ago, and the scientists, together with new CEOs, are taking the heat.

Reassessing these firms in light of their technologies, product pipelines, clinical trial results and new products’ promises is essential for fair and realistic evaluation. We decided to find out the approximate fair value of each of the two firms and take the risk of announcing our findings.

XOMA

Nobody who knew Xoma could have imagined that this firm’s value would melt away over three decades. In fact, nobody would have imagined that a company with breakthrough technologies, such as its Bacterial Cell Expression Technology and Human Engineering™ (HE™) Technology, would fail to develop a safe and effective proprietary monoclonal antibody therapeutic for years. Xoma’s rich antibody phage display libraries and array of antibody optimization and expression technologies turned each multiple display library into a repertoire of more than 10 billion different human antibodies. These capabilities are all servicing the creation of far-reaching therapeutics, which sets Xoma apart from all other companies. It is the main reason pharmaceutical and biotechnology companies are assigning the design of their products to Xoma. It is unfortunate that those companies were capable of putting these products on the market, while Xoma has none there by its name. Fairness compels us to stress the fact that the reasons for Xoma’s lack of approved proprietary products are complex, and do not emanate only from management’s wrong-doing as has been perpetrated.

For example, the firm’s first product, an anti-sepsis antibody, saved the lives of children with the severest sepsis conditions while the drug was in clinical trials. However, the drug failed to pass the statistical tests. In other words, it did not help as many patients as it should have for statistical significance. Xoma, like all drug developers at the time, did not have the information or the tools to enable development of a clinical laboratory test that would pinpoint a subgroup of patients who would benefit from the drug or be harmed by it.

With regard to its psoriasis drug Raptiva (efalizumab), a chain of unfortunate events began when Xoma’s management at the time miscalculated the firm’s financial capability with regard to co-developing this drug with Genentech. The decision to share in the expenses ended up obliging Xoma to surrender to Genentech the rights to Raptiva, and be content with a one-digit percentage of the royalties on the drug’s sales. To make things worse, an increasing number of patients receiving the drug developed progressive multifocal leukoencephalopathy (PML), a life-threatening complication that was not worth the reward for a psoriasis drug. The drug was withdrawn from the market probably indefinitely.

Notwithstanding investors’ anger at Xoma for its inability to build shareholders’ equity during three decades, no one has ever doubted the firm’s technological superiority. As a matter of fact, the anger has always been directed at the management’s failure to take advantage of the great technologies to become a top-tier income-generating and growing firm. The good news is that Xoma’s technologies remained in-house. The company never disposed of any of them, even under the most backbreaking financial burdens that the firm has gone through time and time again. Xoma has always been well aware that only its technological superiority would resurrect it and enable it to realize the dream that was the foundation of its establishment in the first place. It is these technologies that created the current company’s promising product pipeline comprised of cardiovascular, metabolic, inflammatory, autoimmune, infectious diseases and cancer drugs. In addition to Xoma’s proprietary products, the pipeline also includes products co-partnered with other firms and with the United States government.

Following are products that made headlines in the past month:

XOMA 052 is an IL-1 modulator, which qualifies it to treat many diseases of inflammatory nature. The drug, in fact, is being developed for several diseases having an inflammatory component in their etiologies. The suggestion by critics of the company that one drug is a jack of all trades and master of none is not the case here. It is a property that is common to many anti-inflammatory biological targeted products that modulate TNF or other inflammatory cytokine antagonists to have many therapeutic indications. Having the opportunity to treat many diseases is a big plus, as the size of the market for these therapeutics is tremendously increased.

Xoma’s superior technologies give XOMA 052 advantages of over similar antibodies targeting IL-1. The drug is a Human Engineered™ IgG2 antibody with a half-life of 22 days. The antibody is highly potent, highly specific, and binds strongly to Interleukin-1 beta (IL-1?), a pro-inflammatory signaling protein believed to be a primary instigator of inflammation. Based on its combined pharmacokinetic and binding properties, XOMA 052 provides convenient once-monthly dosing, or longer. The drug is in phase 2 trials for type 1 and type 2 diabetes, cardiovascular diseases, and rheumatoid arthritis. It is in early studies for Behçet's uveitis, gout, and systemic juvenile idiopathic arthritis (sJIA). In the preclinical and early clinical testing and in clinical trials, the drug demonstrated satisfactory results in diabetes and Behcet’s uveitis. Based on previous experience with anti-IL-1 marketed drugs, Xoma 052 is expected to produce superior outcomes in the selected indications. Results from early clinical trials in diabetes exceeded endocrine specialists’ expectations. Also, early Beçhet's uveitis’ results were real promising.

XOMA 3AB is a bio defense anti-botulism antibody for the treatment of botulism poisoning. To read today’s News click, or follow: XOMA Presents XOMA 3AB Data at National Biodefense Meeting

HCD122, a human anti-CD40 antagonist antibody for B-cell mediated diseases including lymphoma and autoimmune diseases, is partnered with Novartis. The drug is still in phase 1/2 trials, but to our knowledge, no recent results from have been announced.

In addition, Xoma licenses its proprietary technologies related to recombinant bacterial expression of pharmaceutical products to biotechnology and pharmaceutical companies. Xoma has collaboration agreements with the National Institute of Allergy and Infectious Diseases; SRI International; Genentech, Inc.; UCB Celltech; Takeda Pharmaceutical Company Ltd; Schering-Plough Research Institute; Novartis AG; and Arana Therapeutics Ltd.

Xoma has also contributed to the development of products currently marketed by Genentech and UCB.

Overview: Despite its great science and technology, Xoma has had an unfortunate history – the outcome of a mixture of past managements’ inefficiency and of bad luck. This dark history has created investors’ difficult-to-reverse skepticism towards the firm. For a while, a leak about a probable partner attracted to XOMA 052 sent an electric stimulating shock into the minds of the half skeptics of the firm, rushing them into buying the stock. A few days later, doubt resurfaced, prompting many who bought the stock to take their profit and run. When the agreement with Les Laboratoires Servier, of France was confirmed, it looked as if it was the breakthrough remedy that could cure the resistant doubt, at least in the minds of sincere investors and shareholders. Those who invest against all companies will always find frightening things to say about their targeted firms, including Xoma. We already started to hear many comments intended to raise doubt about the drug and about the partner’s marketing capability - none of the critics tried to give investors any estimation of the firm’s value.

Evaluation: Without the product pipeline, Xoma’s technologies, the revenues it currently generates through royalties on approved drugs, and the payments for licensing, the firm is, in our opinion, worth much more than the firm’s current market capitalization, which ranges between 125-150 million only. The pipeline as described above is promising, especially XOMA 052. The mechanism and approach of this drug have been validated hypothetically, biologically, and clinically as far as the clinical trials have gone until now. Controlling or preventing diabetes and halting the progressive destruction of the pancreas beta cells by IL-1 antagonists have also been validated through studies, the details and results of which are published in peer review journals around the country and the world.

The market for diabetes drugs is huge. if approved XOMA 052 would generate billions of dollars, especially if the drug is used to complement other treatments that are not capable of controlling blood glucose levels in moderate to severe cases of diabetes. Xoma’s investigational drugs that are paralyzed for lack of funding can now move forward as the French partner Les Laboratoires Servier takes charge of the cost of developing XOMA 052 and forwarding milestone payments. With XOMA 052 going into phase 3 trials, promising a radical change in the treatment of diabetes, uveitis and other diseases, and the presence of a partner that will finance the drug development for both diabetes and uveitis, Xoma’s market cap should be no less than $600 million at this time, i.e., four times the current stock price. If the expected results are positive, the market cap should be double this amount.

ELAN

Although investors’ fury at Elan’s management is understandable and legitimate, the management’s mistakes should not blind them from fairly assessing this firm, which has contributed to science and drug development more than most other drug developers, small and large. There is reason to believe that this contribution to science is the main reason behind the firm’s financial debacle. Nevertheless, Elan’s science, scientists, their discovered disease pathways, and the technologies they created have advanced the understanding of neurological diseases and made possible the management of diseases yet to find treatments. While drug companies design, discover and develop drugs that target validated pathways of diseases, Elan, itself, discovered the pathways of diseases for the drugs it designed and developed. In neuropathology, Elan’s research and findings have enriched the medical libraries with breakthrough knowledge about the pathophysiology of diseases such as Alzheimer’s disease, Parkinson’s disease and multiple sclerosis.

The firm developed several products for Alzheimer’s disease based on its understanding of the disease pathways. In addition to its small molecule inhibitors of beta secretase and gamma secretase, the firm developed small molecule drugs that target neurotrophic receptors that could protect vulnerable people’s neurons. It identified unusual forms of alpha-synuclein, a major component of Lewy bodies, which is a signature characteristic in the brain tissue of Parkinson’s disease patients. This finding has led to therapeutic targets that are the focus of Elan’s new drug discovery efforts.

It was Elan’s scientists who discovered the role of the selective adhesion molecule, alpha 4 integrin protein, in the etiology of multiple sclerosis and other autoimmune diseases, including Crohn’s disease. Alpha 4 integrin has a role in the movement of immune cells from the bloodstream into the tissues in response to inflammation. Elan’s breakthrough selective adhesion molecule inhibitor Tysabri® (natalizumab) is approved for the treatment multiple sclerosis and Crohn’s disease. Yet, Elan’s scientists continue to investigate new small molecule inhibitors that block alpha 4 integrin and may selectively block immune cell traficking. The firm’s scientists are also studying signaling molecules that may be involved in the brain inflammation characteristic of secondary progressive MS. The firm aims at disrupting the pathway of chronic inflammation-neurodegeneration that causes permanent disability in advanced MS.

In addition to illuminating the molecular pathological pathways, selecting therapeutic targets, and designing evidence-based drugs, Elan created state-of-the-art technologies that enhance the safety and efficacy of products and, even better, make possible the development of products that lacked the physicochemical requirements of therapeutics. Elan’s two important technologies, NanoCrystal technology and drug delivery technology have contributed to improving the actions, effects and side effects of several drugs.
Read: http://www.elandrugtechnologies.com

Oral Controlled Technology: READ: http://www.elandrugtechnologies.com/oral_controlled_release

That said, the question remains: Does the resentment of the management’s mistakes prevent us from trying to determine a fair value for this firm at the current stage?

Final word: Again, we prefer to be objective and do our homework, including taking into consideration the harm that resulted from the management’s miscalculations. This harm, which has been financial, has reached a stage where it had to slow, if not halt, the firm’s scientific ambitions, which, together with other unexpected circumstances, like the unexpected risk of progressive multifocal leukoencephalopathy (PML) as a side effect of Tysabri, caused the accumulation of large dept. Elan had to downsize. It did. It had to reform. It did. Still finding itself in a disagreeable territory, it had no option left but to relinquish most of its Alzheimer’s disease programs. It did. It then thought to dispose of its drug delivery technology to get rid of the rest of its dept. It did not.

This surprising hesitation of Elan to execute its own plan has probably been the firm’s belief that Tysabri’s sales could do the financial miracle now that the firm has already filed to include the anti-JC Virus antibody status test in Tysabri’s product labeling. The decrease, or elimination of the risk of PML, which has prevented the breakthrough drug from becoming a blockbuster drug, will, indeed, produce the miracle that would resurrect this firm.

Elan has marketed products that bring to its coffers over $1.1 billion. Around 60% of this revenues comes from Tysabri, which it partnered 50-50 with Biogen Idec. The firm is still offering its services for other firms through its technologies, and will continue to cash in royalties on products that have been approved and marketed for other firms. The latest apparent blockbuster drug Ampyra for MS leg walking difficulties was developed for Acorda (ACOR) Therapeutics with Elan’s technology; it had an excellent market penetration.

Tysabri is still the most effective MS drug on the market. Further diminishing the risk of developing PML would lead to sales that would generate between $2.5-$3.0 billion a year. The drug is approved in more than 45 countries; for relapsing forms of multiple sclerosis (MS) in the U.S. and for relapsing-remitting MS in Europe. It is not unrealisted to expect that both the US and EU would expand their approval of the drug to both indications. Elan’s current revenue increase was driven by the growth of Tysabri and the launch of Ampyra.

To make the story short, Elan is insured by Tysabri. We believe Elan will either be resurrected by Tysabri, or be taken over because of Tysabri. Either way would be rewarding to the shareholders.

We long both firms.

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