Business Overview and History

XOMA Royalty Corporation (NASDAQ: XOMA) is a biotech royalty aggregator with a sizable portfolio of economic rights to future potential milestone and royalty payments associated with partnered commercial and pre-commercial therapeutic candidates. The company has built its portfolio through the acquisition of rights to future milestones, royalties, and commercial payments since implementing its royalty aggregator business model in 2017, combined with out-licensing its proprietary products and platforms from its legacy discovery and development business.

XOMA was founded in 1981 and was originally focused on the discovery and development of innovative monoclonal antibodies for the treatment of various diseases. Over the years, the company has evolved its business model, transitioning from an R&D-driven biopharma to a royalty aggregator in 2017.

In the early 2000s, XOMA faced significant challenges in its legacy discovery and development business, including clinical trial failures and difficulties in securing partnerships for its product candidates. These setbacks prompted the company to reevaluate its strategy and ultimately led to the decision to transition to a royalty aggregator model in 2017.

Since implementing this new business model, XOMA has actively pursued acquisitions to build its portfolio of milestone and royalty rights. In addition to the previously mentioned deals, the company has completed several other strategic transactions, including the acquisition of rights from LadRx.

A significant milestone in XOMA's evolution as a royalty aggregator was the acquisition of Kinnate Biopharma in 2024. This transaction not only added several potential royalty streams to XOMA's portfolio but also provided the company with non-dilutive capital to further support its growth strategy.

XOMA has successfully generated revenue from its royalty and commercial payment assets, including income from the sales of products such as VABYSMO and OJEMDA. These commercial successes have validated the company's business model and demonstrated its ability to identify and acquire valuable economic rights.

Through these strategic transactions and commercial achievements, XOMA has effectively transformed itself from a traditional biotech company into a biotech royalty aggregator with a diverse and growing portfolio of economic rights.

Financial Performance and Liquidity

XOMA reported a net loss of $9.9 million for the nine months ended September 30, 2024, compared to a net loss of $20.7 million for the same period in the prior year. The company's total income and revenues for the nine-month period were $19.8 million, up significantly from $2.9 million in the prior year period, driven by increased income from purchased receivables and revenue from contracts with customers.

For the most recent quarter (Q3 2024), XOMA reported revenue of $7,197,000 and a net loss of $17,243,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter were both negative $8,625,000. As this is the first quarterly report available, year-over-year growth comparisons are not applicable.

As of September 30, 2024, XOMA had $142.1 million in cash and cash equivalents, and $4.8 million in restricted cash, providing the company with ample liquidity to fund its operations and continue pursuing strategic acquisitions. The company's working capital stood at $137.9 million, indicating a strong financial position. XOMA also has $80,000 in short-term restricted cash.

XOMA's capital structure includes 984,000 shares of 8.625% Series A Cumulative Perpetual Preferred Stock and 1,600 shares of 8.375% Series B Cumulative Perpetual Preferred Stock, which provide the company with a stable source of capital and a regular stream of dividend payments.

In December 2023, XOMA's wholly-owned subsidiary, XRL, entered into a $140 million senior secured credit facility with Blue Owl, which the company is using to fund the acquisition of commercial payment rights related to Roche's VABYSMO. The loan has a fixed interest rate of 9.88% per annum and matures in 2038, with principal and interest payments made from the VABYSMO commercial payments. As of September 30, 2024, $130 million of this facility has been drawn.

XOMA's financial metrics indicate a solid liquidity position, with a current ratio and quick ratio of 7.52. The company's debt-to-equity ratio stands at 1.39, reflecting its leverage from the Blue Owl credit facility.

Recent Developments and Outlook

In September 2024, Zevra Therapeutics received FDA approval for MIPLYFFA (arimoclomol) for the treatment of Niemann-Pick disease type C (NPC) in adult and pediatric patients. XOMA is entitled to receive a mid-single digit royalty on MIPLYFFA sales, as well as up to $52.6 million in potential milestone payments related to the product.

In October 2024, XOMA announced the acquisition of a 50% economic interest in over 60 early-stage programs across 30 partners from Twist Bioscience for a $15 million upfront payment. This transaction further expands XOMA's portfolio, providing exposure to a diverse range of potential future milestone and royalty payments.

XOMA's primary business segment, Royalty and Commercial Payment Purchase Agreements, has seen several key developments:

- In April 2024, XOMA entered into the Daré RPAs, paying $22 million upfront to acquire rights to royalties and milestones related to XACIATO, OVAPRENE, and Sildenafil Cream. XOMA is eligible for milestone payments of $11 million for each successive $22 million it receives under the Daré RPAs after reaching a return threshold.

- In January 2024, XOMA acquired the rights to receive 100% of the 15% royalty on commercial net sales of DSUVIA and 100% of the 75% of net sales to the Department of Defense, for an upfront payment of $8 million through the Talphera CPPA.

- In June 2023, XOMA acquired rights related to arimoclomol and aldoxorubicin through the LadRx AAA and LadRx RPA, paying an initial $5 million.

- The Affitech CPPA, acquired in October 2021 for an upfront $6 million, provides XOMA 0.5% of global net sales of Roche's VABYSMO product. XOMA recognized $10 million in income from VABYSMO sales during the first nine months of 2024 using the effective interest rate method.

XOMA's Contracts with Customers segment has also contributed to its revenue, including a $5 million milestone payment from Rezolute related to the RZ358 program and a $1 million milestone payment from AVEO during the nine months ended September 30, 2024.

Looking ahead, XOMA's management remains focused on selectively acquiring additional royalty and milestone payment rights to build a sustainable portfolio of cash flows. The company's extensive network and expertise in the biotech space allow it to identify and secure attractive opportunities that align with its strategy of prioritizing programs with significant commercial potential and long market exclusivity.

Risks and Challenges

While XOMA's royalty aggregator business model provides a degree of diversification and stability, the company is still subject to various risks inherent to the biotech industry. These include the potential for clinical trial failures, regulatory setbacks, and competitive pressures that could impact the commercial success of the products underlying XOMA's royalty and milestone interests.

Additionally, the company's future revenue and cash flows are dependent on the achievement of milestones and the commercial performance of its partners' drug candidates. Any delays or underperformance in these areas could adversely affect XOMA's financial results.

XOMA also faces the challenge of continuously identifying and acquiring high-quality royalty and milestone payment rights at favorable terms to maintain its growth trajectory. The competitive nature of the royalty aggregator space may make it difficult to secure the most attractive assets.

Conclusion

XOMA Royalty Corporation has successfully transformed itself from a traditional biopharma company to a diversified royalty aggregator, building a portfolio of over 100 assets that provide a sustainable stream of milestone payments and royalties. The company's strategic acquisitions, such as the recent Twist Bioscience deal, have expanded its exposure to a broad range of drug candidates, mitigating the risks associated with reliance on a limited number of programs.

With a strong balance sheet, experienced management team, and a disciplined approach to deal-making, XOMA is well-positioned to continue executing its growth strategy and delivering long-term value to shareholders. As the company further solidifies its position as a leading biotech royalty aggregator, investors will likely keep a close eye on XOMA's ability to consistently identify and secure attractive royalty and milestone payment rights across the drug development lifecycle.

XOMA's focus on the US market as a small-cap company, combined with its diverse portfolio of royalty and commercial payment rights, provides a unique investment opportunity in the biotech sector. The company's ability to generate income from both established products like VABYSMO and potential future blockbusters will be crucial in driving its financial performance and shareholder returns in the coming years.