After meeting with management and reviewing the company's revolutionary work in both antimicrobial peptides and monoclonal antibodies, I determined that XOMA's market valuation was ludicrously depressed. It may have been a nerve-shattering, sickeningly volatile ride. But my bullish views on the stock have been vindicated.

I downgraded XOMA to a "Hold" when it blew through my US$14 target near the peak of the Q1 biotech bubble. This downgrade was purely technical. I remain a believer in XOMA's management and pipeline and would recommend holding on to your shares for further long-term gains. However, I find it hard to recommend the stock as a new money buy, given the glowing Wall Street coverage and its US$750 million market cap.

During my research into the maligned field of agricultural biotechnology over the last 12 months, I uncovered a tiny company with an intriguing antimicrobial peptide technology: Demegen (DBOT:OTC). In my view, DBOT's successes in agbiotech alone warrant a US$2 to US$3 share price. But the real kicker is pharmaceuticals: DBOT is about to launch several clinical trials for human biotech products. Given DBOT's US$0.60 share price and US$17 million market cap, the downside is small compared to the massive and immediate upside.

The human body uses lytic proteins and peptides (peptides are basically small proteins) as part of its natural immune system. An example of this is Bactericidal/Permeability Increasing protein (BPI), the molecule that forms the basis of XOMA's antimicrobial products. Lytic peptides offer a revolutionary means of fighting life-threatening diseases, such as antibiotic-resistant superbugs.

The first lytic peptides were isolated from the natural immune systems of humans, silkworms, frogs, and other animals. While the initial focus of lytic peptide research was pathogen destruction, it has become evident that certain lytic peptides have multiple mechanisms of action against diseases. Some of the same peptides that can kill bacteria appear to have possible anti-angiogenic activity, the Holy Grail of cancer research.

One of the pioneers of lytic peptide research is Dr. Jesse Jaynes. While on the faculty of Louisiana State University, Dr. Jaynes discovered novel synthetic peptide-like molecules that appeared to have powerful lytic activity. In fact, Dr. Jayne's structures appeared to be far more powerful and far less toxic than any peptides that appear in nature.

Dr. Jaynes's work forms the basis of DBOT's technology. LSU transferred key lytic peptide patents for agricultural applications to DBOT (two patents related to Jayne's first-generation structures were transferred to a company called Helix Biomedix [HXBM:OTC]). While at Demegen, Dr. Jaynes invented new families of molecules, including a series of unique beta-pleated sheet designs. Dr. Jaynes, DBOT's co-founder, is still with DBOT as VP of Research.

Most of the competition in the agbio space seems to be focused on insect resistance and herbicide tolerance. While this is a logical approach for herbicide and pesticide manufacturers, it leaves a huge chunk of the market up for grabs.

Dow Agrosciences, a division of Dow Chemical, has paid DBOT over US$2 million in cash, plus additional fees including milestone payments, research support, and royalties, for two licenses from DBOT. These licenses include disease-resistant and nutritionally enhanced crops.

DBOT's peptides seem to have broad efficacy against a number of major cash crop diseases. Assuming significant market penetration, I believe that DBOT's antimicrobial ag products could eventually generate tens, if not hundreds of millions in revenues. I can't think of a better partner than Dow to help dominate the market...

Applying its vast knowledge of protein structures, DBOT has figured out how to make protein-enhanced sweet potatoes. These and other plants could catch on in developing countries — and generate substantial revenue for DBOT...

DBOT is about to apply its deep knowledge of lytic peptides to human pharmaceuticals. I expect DBOT to announce 3 to 4 Investigational New Drug applications (INDs) over the next 12 months. DBOT's initial biotech products include a topical gel for infected burns, a topical gel for infected wounds, and a vaginal gel for killing sexually transmitted diseases.

The announcement of one or more INDs should trigger a re-rating of the stock from agbio to biotech status. Considering its depressed market cap, I don't believe the market is assigning any value to DBOT's biotech product pipeline.

I also expect DBOT to release additional preclinical results from its cancer research. DBOT's in vivo results were even better than its in vitro results, suggesting that DBOT's anti-cancer peptide works through one or more unexpected mechanisms of action, in additional to cell lysis. Based on the company's outstanding success in animal models, I am excited about the release of additional information on its anti-cancer peptide. In addition, DBOT may release preclinical results from its cystic fibrosis research over the next 6 to 12 months.

DBOT's topical vaginal gel targets chlamydia. The vaginal gel is a potential blockbuster drug. There are many millions of infected vaginas in the world. Activist pressure groups have been clamoring for topical anti-STD gels to distribute to the third world. This product could generate substantial media buzz for DBOT once it's in the clinic.

The key to DBOT's biotech pipeline is its small, stable, highly potent lytic peptides. While I am not a molecular biologist, I know a screaming bargain when I see one.

There is a great deal of risk to this stock. First of all, DBOT is an OTC BB-listed penny stock (however, it is fully reporting, so regular information is available). Secondly, even though DBOT is lean and mean (total G&A in FY99 was only US$780,000!), the company will need to sell additional equity to stay in business, which means some dilution for shareholders. Last of all, the warrants and convertible preferred represent potential overhead supply, which could temporarily cap gains in the stock. As with any development-stage biotech, you should view this company as an aggressive, long-term speculation.

Given the Dow licenses, the exciting preclinical results, the potential blockbuster drugs, and the expected news flow over the next 12 months, DBOT is an excellent high-risk bet — if you can stomach the volatility of an illiquid stock. Management has a big incentive to create value: the CEO is a large shareholder and the new COO took milestone-triggered stock options as part of his compensation package — an excellent sign for the stock. I view Demegen (DBOT:OTC) as a Speculative Buy with a one-year target of US$1.50 and a three-year target of US$5.

For more information, contact Demegen, 1501 Brinton Road, Pittsburgh, PA 15221, tel. 412-241-2150, fax 412-241-2161, or visit the company's website: www.demegen.com. I strongly recommend reviewing the company's SEC filings before investing in the stock.