Wedbush Securities expects cash runway for XOMA Ltd. (NASDAQ: XOMA) through the start of phase 3 Behcet’s Uveitis study by year-end 2011. The brokerage maintained its outperform rating on shares of Xoma with a fair value estimate of $16.

While the future of the diabetes program remains unclear, we see opportunity for XOMA-052 in cardiovascular diseases, Behcet’s Uveitis and other inflammatory diseases. Xoma is waiting for the Phase 2a diabetes data expected in mid-2011 and to discuss the results with their partner, Servier, before deciding on the fate of the diabetes program, said analyst Liana Moussatos of Wedbush PacGrow Life Sciences.

Moussatos believes this data will also be useful in determining the next steps for the cardiovascular program and anticipate a Phase 2 study could begin in 2012. Furthermore, an international Phase 3 program for Behcet’s Uveitis remains on track to begin by year-end as Xoma and Servier are currently in talks with regulatory authorities on trial design.

Moussatos said other anticipated catalysts in 2011 include release of 6 month XOMA—052/T2D Phase 2a data in second quarter, potential licensing of new XOMA-052 patents, technology licensing deals, and initiation of a Phase 3 trial for Behcet’s uveitis.

Moussatos said XOMA-052 is being developed to treat Type 2 Diabetes, Behcet’s disease, cardiovascular diseases, and potentially other antiinflammatory indications. XOMA-052 is a monoclonal antibody being tested in early-to-mid-stage clinical trials to treat type 2 diabetes patients.

Initial data suggested to Moussatos that treatment may regenerate pancreatic beta cells and preserve their production of insulin which could indicate that XOMA-052 is a potentially disease-modifying therapy. The development strategy for XOMA-052 was expanded to include cardiovascular diseases after the company saw signs of efficacy with C-reactive protein (CRP) reduction during early clinical and preclinical trials.

While the Phase 2b study in diabetes failed to meet its primary endpoint of glucose control, secondary endpoints including CRP reduction and high-density lipoprotein (HDL) improvement were positive.

Given the positive effects seen on these cardiovascular biomarkers, Xoma and partner Servier plan to conduct a Phase 2 program that Moussatos estimates could start in 2012. Furthermore XOMA-052 has shown proof-of-concept data in Behcet’s disease (BD), an orphan indication.

The FDA has granted orphan drug designation for XOMA-052 in BD and the Committee for Orphan Medical Products of the European Medicines Agency (EMA) has recommended granting orphan drug designation in the EU as well.

Given that BD is an orphan indication, Moussatos believes that it may provide a faster route to approval for XOMA-052. With funding from the Servier partnership, Xoma now plans to initiate a pivotal trial for Behcet’s uveitis by year-end 2011.

We have made changes to our model and valuation as the company shifts its focus to Behcet’s Uveitis and cardiovascular diseases. Previously, our fair value included potential revenues from only Xoma’s diabetes and biodefense programs. We have now updated our valuation to also include the cardiovascular and Behcet’s Uveitis programs, said Moussatos.

Moussatos added cardiovascular to her fair value due to the positive effects on cardiovascular biomarkers seen in the Phase 2b and previous trials. Additionally, XOMA-052 has shown proofof-concept data in Behcet’s Uveitis.

Since the diabetes program has not yet been terminated, Moussatos is keeping it in her fair value but delaying the potential launch date by 10 months. The net effect of changing her launch date but adding cardiovascular and Behcet’s Uveitis leaves her fair value unchanged at $16.

Moussatos said the company's first quarter financials were uneventful but she projects Xoma’s cash runway extends well into 2012. Revenues in first quarter were $15.6 million, ahead of $12.4 million consensus (range $7.5 million to $23.7 million) and loss was $0.22 per share, better than consensus loss of $0.45 (loss range $0.09 to $0.77).

Since revenues are not derived from recurring product sales, we believe the most important financial is cash and its runway. The company ended first quarter with about $57 million in cash and we project cash runway well into 2012. Xoma has guided to net cash usage of about $30 million for 2011 and we have adjusted our model to reflect this, said Moussatos.

The brokerage widened its 2011 loss per share estimate for Xoma to $1.03 from $0.78, while lowering its revenue estimate to $38.8 million from $64.9 million. For the fiscal 2012, the brokerage maintained its loss per share estimate of $1.92 on revenue of $29.1 million.

Quarter-wise, the brokerage narrowed its 2011 second quarter loss per share estimate to $0.21 from $0.26, while widening its third quarter loss estimate to $0.26 from $0.22 and its fourth quarter loss estimate to $0.34 from $0.22. The brokerage reduced its second quarter revenue estimate to $12.3 million from $13.7 million, its third quarter estimate to $9.5 million from $13.7 million and its fourth quarter estimate to $8.4 million from $13.7 million.

Xoma stock closed Friday's regular trading up 4.81 percent at $3.05 on the NASDAQ Stock Market.

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