XOMA

Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

XOMA daily

6/04/09

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 © BigCharts.com

60 40 20

Apr

May

Jun

Millions

volume

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MARKET DATA

Share Statistics (04/29/09) Symbol Current price Low/ High 52 weeks Average Volume Market Cap Dil. Shares Outstanding

FY2007

FY2008

% Chg -19.3%

XOMA

Revenues, $ Mn.

84.3

68.0

$0.76

Gross margin

100%

100%

0.0 %

$0.37 –2.40

Operating margin

-3.0%

-56.9%

-53.9%

2,148,230

Net margin

-14.6%

-66.5%

-51.9%

-0.10

-0.34

n/m

$108.17Mn 142.3 Mn

EPS, $

Recommendation XOMA continues to seek opportunities to collaborate and license its novel antibody technologies. The Company’s development successes, Lucentis, Raptiva and Cimzia, indicate the potential of Company’s research team and offer decent chances for another success with XOMA 052. The potential to treat many diseases, including diabetes, rheumatoid arthritis, acute gout, systemic juvenile idiopathic arthritis (sJIA), and cardiovascular disease, makes XOMA 052 a blockbuster drug candidate. Accordingly we rate XOMA as a Speculative Buy.

Highlights Recently, the U.S. Patent and Trademark Office issued U.S. Patent No. 7,531,166, covering the Company’s flagship, XOMA 052, and other antibodies and antibody fragments with similar binding properties for human interleukin-1 beta (IL-1 beta). XOMA recently completed enrollment in phase 1 trials for XOMA 052 in nearly 100 type 2 diabetes patients. These interim results support the potential for XOMA 052 as a novel anti-inflammatory approach XOMA Limited (Nasdaq: XOMA)

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Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

XOMA Ltd. is a biopharmaceutical company that discovers, develops and manufactures therapeutic antibody and other agents designed to treat inflammatory, autoimmune, infectious and oncological diseases. The Company’s proprietary product pipeline includes XOMA 052, an anti-IL-1 beta antibody, and XOMA 3AB, a biodefense antibotulism antibody candidate. In addition to developing proprietary antibody product candidates, XOMA’s research teams have contributed to the development of approved antibody therapies. The Company has also contributed significantly to the development of HCD122, a monoclonal antibody to CD40 partnered with Novartis.

XOMA is primarily funded by multiple revenue streams resulting from royalties on three approved products: RAPTIVA, which is marketed globally for the treatment of chronic moderate-to-severe plaque psoriasis; LUCENTIS, which is marketed globally for the treatment of neovascular (wet) age-related macular degeneration; and CIMZIA, which is approved in the U.S. and Switzerland for the treatment of Crohn’s disease.

The Company has collaborative agreements with Genentech Inc.; UCB Celltech; National Institute of Allergy and Infectious Diseases; Takeda Pharmaceutical Company Ltd.; Schering-Plough Research Institute; and Novartis AG. XOMA Ltd. was founded in 1981 and is headquartered in Berkeley, Calif.

to diabetes treatment. XOMA plans to initiate a multicenter, randomized, placebo-controlled phase 2 trial in type 2 diabetes in the third quarter of 2009.

In September 2008, XOMA was awarded a $65 million multiple year contract from the National Institute of Allergy and Infectious Diseases (NIAID), a component of the National Institutes of Health (NIH), to support XOMA’s ongoing development of drug candidates toward clinical trials in the treatment of botulism poisoning, a potentially deadly muscle paralyzing disease. The contract is the third that NIAID has awarded to XOMA for the development of botulinum antitoxins and brings the program’s total to nearly $100 million.

The Company has expanded its existing collaboration to provide Takeda with access to multiple antibody technologies. XOMA will receive a $29 million expansion fee and may receive potential milestones and royalties on antibody products. In addition, in May 2009 XOMA entered into a definitive agreement with an institutional investor to sell 11,764,706 units, with each unit consisting of one of the Company’s common shares and a warrant to purchase 0.50 of a common share, for gross proceeds of approximately $10 million. The Company intends to use the net proceeds of this offering to continue development of its XOMA 052 product candidate and for other working capital and general corporate purposes.

In May 2009, XOMA announced that its bacterial cell expression (BCE) technology licensee UCB S.A. has received FDA approval to market CIMZIA, an anti-tumor necrosis factor product, for the treatment of moderate to severe rheumatoid arthritis in adults.

XOMA will receive royalty payments on sales of CIMZIA for this indication and will continue to receive royalties on sales of CIMZIA for the treatment of moderate to severe Crohn’s disease, for which it was approved in April 2008.

XOMA lost $45.2 million, or 34 cents per share, on $68 million in revenue in 2008. That compared to a 2007 loss of $12.3 million, or 10 cents per share, on revenue of $84.3 million. The loss was driven by increased research and development spending, as well as personnel-related costs. For the three months ended March 31, the Company posted a net income of $6.2 million, or 4 cents per share, compared with a loss of $14.2 million, or 11 cents, in the year-ago period. Thus, the Company succeeded for a second consecutive quarter to beat Wall Street expectations. However, for the full year 2009 and 2010, analysts predict loss of $0.18 and $0.21 on $75.5 and $70.8 million revenue, respectively.

XOMA cut 144 jobs — about 42% of its workforce — in January.

XOMA Limited (Nasdaq: XOMA)

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Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

STOCK PERFORMANCE (%)

3 Mo.

Price Change

-25.9

-72.8

-64.1

Last Qtr.

12 Mo.

3 Yr CAGR

229.2 n/m

-19.3 n/m

53.9 n/m

XOMA

Ind Avg

S&P 500

n/m n/m

1.82 10.3

21.1 20.0

GROWTH (%)

Revenues EPS

RETURN ON EQUITY (%) TTM 5 Yr. Avg.

1 Yr.

P/S comparison

3 Yr. (Ann)

Most of the cuts came in manufacturing. The Company now has about 200 employees and maintains pilot-scale manufacturing.

XOMA expects an annualized reduction of $27 million in cash expenditures when changes are completed in Q2 2009.

As a result of risks of life-threatening infections, including progressive multifocal leukoencephalopathy, in the first quarter of 2009, RAPTIVA was recommended for withdrawal from the European Union, Canadian and Australian markets, and in April of 2009, Genentech announced a phased voluntary withdrawal of RAPTIVA from the U.S. market. As a result of these announcements, the Company expects sales of RAPTIVA to cease in the second quarter of 2009. These events have significant adverse consequences under XOMA’s $55 million term loan with Goldman Sachs Specialty Lending Holdings Inc. The lenders have the right to accelerate payment of the full amount of the loan and the Company has already received a notice from them to this effect.

XOMA is currently in discussions with the lenders regarding a restructuring of the terms of this facility.

Financial Analysis The Company’s total revenues in 2008 were $68.0 million, compared with $84.3 million in 2007. The decrease was primarily due to a one-time cash payment in 2007 of $30 million by Pfizer Inc. (NYSE: PFE) for a license providing non-exclusive access to XOMA’s Bacterial Cell Expression technology. License and collaborative fees in 2008 were $16.4 million, compared with $36.5 million in 2007. Contract and other revenue was $30.5 million in 2008 compared with $31.1 million in 2007. Royalties were $21.1 million for 2008 compared with $16.7 million for 2007.

The Company used $33.0 million net cash in operating activities in 2008, compared with net cash of $4.5 million in 2007. Cash, cash equivalents and short-term investments at March 31, 2009, were $21.6 million compared with $10.8 million at December 31, 2008.

Source:Reuters.com

XOMA Limited (Nasdaq: XOMA)

As of March 31, 2009, the Company had approximately $63.3 million of indebtedness outstanding, including $12.9 million with Novartis AG classified as long-term debt, and $50.4 million with Goldman Sachs reclassified in the period as a current obligation.

On April 1, 2009, XOMA’s balance in restricted cash was used to make an interest payment of $3.1 million and a principal repayment of $8.4 million, reducing the outstanding principal balance of this loan to $42.0 million. In addition, the interest rate decreased to 11.5% from 12.3%, as a result of the decline in six-month LIBOR.

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Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

FY07 INCOME STATEMENT Net Sales ($mil) Gross profit ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil)

84.3 84.3 -2.5 -2.5 -12.3

68.0 68.0 -38.7 -38.7 -45.2

22.5 84.8 50.9 0.3

9.5 67.2 63.3 -31.4

-3.0% -3.0% 0.89 -14.5% -4,100%

-56.9% -56.9% 0.96 -67.3% n/m

2.46 99.4 n/m n/m

1.43 n/m n/m n/m

128.0 -0.10 0.0 n/a 1,488,019

132.9 -0.34 n/m 43% 1,048,981

BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil) PROFITABILITY EBITDA Margin Operating Margin Asset Turnover Return on Assets Return on Equity DEBT Current Ratio Debt/Capital Interest Expense ($mil) Interest Coverage SHARE DATA Dil. Shar. Outst.(mil) EPS Book value / share Institutional Own % Avg Daily Volume

FY08

Source: SEC filings; analyst estimates.

Q1 08

Q1 09

INCOME STATEMENT Net Sales ($mil) Gross profit ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil)

12.1 12.1 -13.0 -13.0 -14.2

39.7 39.7 13.8 13.8 6.2

BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil)

8.8 56.4 42.7 -12.2

21.6 72.9 63.3 -22.9

Source: SEC filings

XOMA Limited (Nasdaq: XOMA)

Industry analysis Unlike other manufacturing industries, the financial health of the pharmaceutical industry has been relatively immune to economic shifts and displayed a great performance over the past 40 years. In 2006, global spending on prescription drugs topped $643 billion growing at a compound annual growth rate (CAGR) of 10.0% between 1999 and 2006. North America accounts for the largest proportion of the world market at 45%; Europe accounts for 23% of total global sales. Emerging markets such as China, Russia, South Korea and Mexico outpaced that market, growing 81%. The global pharmaceutical market is forecast to grow to US$842 billion in 2010, an equivalent CAGR of 6.9% over the next five years.

The pharmaceutical industry is the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue. The U.S. is the single largest pharmaceutical market with an estimated market size of $ 286.5 billion for 2008. Per capita expenditure on drugs was $1,069 in 2006, nearly double the level found in the rest of the world. In the U.S., IMS forecasts compound annual pharmaceutical sales growth through 2012 of 3% to 6%. Dynamics that will shape the market during the next five years include the continued loss of exclusivity in major therapy areas, new specialist-driven products, greater levels of therapeutic substitution, along with greater awareness and focus on safety issues.

Analyst opinion Data from a phase I study of type 2 diabetes are encouraging, with patients across multiple dose groups showing evidence of biological activity. Based on ongoing phase 1 results in humans with type 2 diabetes and new preclinical findings, XOMA plans to initiate a phase 2 clinical trial in the third quarter of 2009. There’s a lot more work to do on XOMA 052, including new multi-dosing studies. If successful, it would be revolutionary if the drug, given intravenously once a month is proven to work against diabetes.

The Company has announced a string of clinical test results, contract awards, and collaborations over the past few years that might point to an impressive ability to transform itself into a resurgent biotech. The Company has licensed its technology to big hitters like Merck, Pfizer, Genentech, Takeda and Scherring.

During the last months, the Company has implemented multiple cost-reducing measures, including the postponement of clinical studies for additional indications of XOMA 052, the postponement of development on XOMA 629, the restructuring of the Novartis oncology collaboration, and a workforce reduction 4

Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

Consensus Estimates XOMA

FY 2009 31-Dec-09

FY 2010 31-Dec-10

EPS, $ Revenue, $Mil

-0.18 75.5

-0.21 70.8

consensus estimates are provided by Thomson Financial

Rev. consensus estimates, $Mil. Ticker Symbol QLTI ENZN DYAX SSRX AMAG AKRX

Revenue, $ Mn

2009

2010

%Chg

116.8 198.9 30.6 43.8 33.7 150.9

119.9 207.0 49.9 53.1 146.6 194.8

3% 4% 63% 21% 335% 29%

Despite these, XOMA is poised for a solid upside potential, with further advancement of XOMA 052 through the development pipeline. The potential to treat many diseases, including diabetes, rheumatoid arthritis, acute gout, systemic juvenile idiopathic arthritis (sJIA), and cardiovascular disease, makes XOMA 052 a blockbuster candidate. The past development successes with Lucentis, Raptiva, and Cimzia, are indicating the Company has decent chances to succeed with XOMA 052.

25%

Median 75.5

XOMA

of approximately 42%. Despite its efforts, the Company’s bottom line was in the red zone for three consecutive years. The recent announce of possible cease in royalty revenue from psoriasis drug RAPTIVA is also throwing gas on the fire. Ernst & Young LLP – XOMA’s auditor - said Xoma’s recurring operating losses and loan balances totaling $50.4 million raise “substantial doubt” about the Company’s ability to continue as a going concern.

70.8

-6%

Source: Thomson Reuters.

EPS. consensus estimates, $ Ticker Symbol QLTI ENZN DYAX SSRX AMAG AKRX

EPS, $

2009

2010

%Chg

0.16 -0.20 -0.97 0.52 -4.82 0.09

0.22 -0.20 -0.68 0.67 0.67 0.17

38% n/m -30% 29% n/m 89% 29%

Median XOMA

Comparative analyses

-0.18

-0.21

n/m

Company Name 18-May-2009

Ticker Symbol

QLT Inc. QLTI Enzon Pharmaceuticals Inc. ENZN Dyax Corp DYAX 3SBio Inc. SSRX AMAG Pharmaceuticals Inc. AMAG Akorn Inc. AKRX

Price per Share, $ 2.26 6.72 2.15 8.17 53.40 0.94

P/S Mrkt. Cap. $ Mn 2009 2010 123.4 303.1 139.9 175.7 908.8 8,821

Median Xoma Ltd.

XOMA

0.81

115.3

1.06 1.52 4.57 4.01 26.97 58.46

1.03 1.46 2.80 3.31 6.20 45.28

4.29

3.06

1.53

1.63

Source: Thomson Reuters.

Source: Thomson Reuters; Yahoo! Finance.

XOMA Limited (Nasdaq: XOMA)

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Analyst: Victor Sula, Ph.D. Initial Report June 4th, 2009

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We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

XOMA Limited (Nasdaq: XOMA)

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