Stock in XOMA Corp. (XOMA) soared on Tuesday following an upgrade from an analyst at MLV & Co. Shares popped nearly 25 percent by the end of the day after gapping up and gaining ground throughout the day. The market response to one analyst’s improved outlook may appear excessive, but XOMA may have also been due for a rebound following a lengthy decline over the last two months that had several technical signs potentially indicating the stock was oversold.
The analyst with the upgrade, which was released prior to the opening bell, was Craig Suvannavejh, who upgraded the stock from hold to buy and increased his price target to $7 a share, 83 percent above its closing price on Monday.
“We now upgrade shares of XOMA. Our call is based on 1) valuation and 2) optimism around positive upcoming data from the P3 EYEGUARD-B trial in Behcet's uveitis (an orphan eye condition) for lead asset gevokizumab (gevo) expected sometime mid-year,” wrote Suvannavejh in a note to clients. “On positive data, we're expecting ~15-20% of upside to the stock, with potential for add'l upside in the form of two other P3 readouts for gevo expected by year-end (from the EYEGUARD-A/C trials), we feel comfortable taking XOMA now back up to Buy, while maintaining our 1-yr $7 PT.”
The markets were quick to react, with shares opening up 7.6 percent at $4.11 apiece. However, the stock gained momentum as the day wore on, ultimately pushing to an intraday high of $4.85 heading into the final hour of trading and appearing to hold gains of more than 20 percent on the day.
Given that the company was sporting a market cap just north of $400 million at Monday’s close, firmly into small-cap territory, a single analyst upgrade doesn’t seem as though it should hold this much sway. However, the response may also reflect the release of certain upward pressure building through some key technical indicators.
The company experienced a rapid run-up beginning in early December after it was revealed that biotech-focused hedge fund Baker Brothers had purchased a large stake in the company, worth more than $100 million, based on a positive outlook on the company’s lead therapy gevokizumab, an antibody with applications in treating a wide variety of inflammatory conditions.
However, since peaking in early March, the stock’s been giving up most of the gains from earlier in the year, plunging almost 60 percent. However, the decline also pushed the stock’s technical indicators towards undersold territory. On April 10, the 14-day RSI dipped below 30.0 and stayed there through April 14th.
The anemic RSI combined with the MACD line crossing the signal line from below on the 16th, a classic buy signal, may have been looking for a catalyst that could spark a jump in the stock. As such, Suvannavejh’s upgrade may have been just the news needed to turn XOMA into the day’s popular momentum play, something that may be supported by the way the initial gap up turned into an extended run over the course of the day.
Long term, though, XOMA is little different from other small-cap biotechs in that its success will stem from its product pipeline. The afore-mentioned gevokizumab is currently in Phase III clinical trials.
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