Executive Summary / Key Takeaways

• XOMA Royalty Corporation has successfully pivoted from a traditional biotech model to a focused royalty aggregator, leveraging its historical expertise to acquire economic rights to future milestone and royalty payments from partnered therapeutic candidates.
• The company's portfolio, built through strategic acquisitions like Kinnate Biopharma , Pulmokine, Castle Creek Biosciences , Twist Bioscience , BioInvent International , and Turnstone Biologics , now spans over 120 royalty assets, providing diversified potential revenue streams across various development stages and therapeutic areas.
• Recent financial performance demonstrates significant growth in income from purchased receivables, with Q1 2025 revenues of $15.9 million driven by contributions from VABYSMO, OJEMDA, IXINITY, and a Takeda Pharmaceutical milestone, a substantial increase from $1.5 million in Q1 2024.
• XOMA operates with a lean cost structure, aiming for positive cash flow over time by aligning expenses with revenue generation from its partner-funded portfolio, reducing reliance on external capital markets.
• While facing risks inherent in drug development, macroeconomic factors, and regulatory environments, XOMA's strategy of acquiring rights to assets developed and funded by well-capitalized partners, coupled with a diversified portfolio, positions it to potentially mitigate some of these challenges and drive long-term value.

The Pivot to Aggregation: Forging a New Path

XOMA Royalty Corporation, with roots tracing back to 1981 as a biotechnology discovery and development firm, has undergone a profound transformation. Historically engaged in proprietary drug development and out-licensing, including significant programs like gevokizumab and collaborations with major pharmaceutical partners, the company faced the inherent volatility and high costs associated with late-stage clinical trials. A pivotal moment arrived in 2015 with unexpected clinical results for its lead asset, prompting a strategic re-evaluation.

This led to a decisive pivot: XOMA shed its high-cost internal R&D and manufacturing infrastructure, divesting legacy assets and dramatically reducing its operational footprint. The new strategic direction, formalized around 2017, positioned XOMA as a biotech royalty aggregator. The core business model shifted to acquiring economic rights to future potential milestone and royalty payments associated with therapeutic candidates being developed and funded by other pharmaceutical and biotechnology companies. This strategy aims to capitalize on the significant value embedded in drug development pipelines without bearing the direct costs and risks of clinical trials and commercialization.

XOMA's historical expertise in antibody discovery and its extensive phage libraries, while no longer the focus of internal development, remain foundational to its current model. This deep understanding of drug development, particularly in biologics, provides a competitive edge in evaluating potential royalty assets and structuring complex deals. The company's ability to assess the scientific merit, clinical potential, and market opportunity of diverse therapeutic candidates is a direct outgrowth of its decades in the lab and clinic. This historical technological capability now serves as a critical filter for identifying promising royalty streams, rather than driving internal innovation.

Competitive Positioning in the Royalty Landscape

In the specialized field of biotech royalty aggregation, XOMA operates alongside larger, more established players and niche participants. Key publicly traded competitors include Royalty Pharma (RPRX), DRI Healthcare Trust (DHT), and BioPharma Credit PLC (BPCR).

Royalty Pharma is the dominant force, focusing primarily on royalties from approved or late-stage commercial assets. It boasts a significantly larger portfolio (over 100 assets) and generates substantially higher revenue and cash flow, benefiting from the predictable streams of marketed drugs. Royalty Pharma's gross margins are typically higher, reflecting the lower risk profile of its assets.

DRI Healthcare Trust and BioPharma Credit PLC represent closer comparators, with DRI also focusing on healthcare royalties and BPCR engaging in debt and royalty financing. XOMA positions itself as a mid-tier player, with an estimated 5-10% market share, focusing on a mix of early- to mid-stage clinical assets (Phase 1/2) alongside select late-stage and commercial opportunities.

XOMA's competitive advantages stem from its lean operational structure and its focus on non-dilutive funding for selling partners. This can translate into potentially higher capital efficiency and return on invested capital compared to some competitors. Its historical biotech background provides a distinct lens for evaluating the scientific and clinical risks of development-stage assets. However, XOMA faces disadvantages due to its smaller scale compared to giants like Royalty Pharma, which can lead to lower overall revenue growth and potentially higher per-deal acquisition costs in competitive situations. While XOMA's historical technology provides evaluation expertise, it lacks the scale or advanced technological integration (like AI in deal processing) that larger competitors might leverage for faster deal execution or broader market reach. Barriers to entry in this market remain high, primarily due to the significant capital required and the specialized expertise needed to evaluate and structure complex royalty transactions, which helps protect XOMA's existing market position.

Executing the Aggregation Strategy: Portfolio Growth

The strategic pivot has seen XOMA actively build its portfolio through a series of targeted acquisitions and financing transactions. These deals are central to the company's growth engine, adding diverse potential revenue streams.

Recent key transactions underscore this strategy:

• In November 2024, XOMA acquired Pulmokine, gaining an economic interest in seralutinib, a Phase 3 asset for pulmonary arterial hypertension.
• April 2024 saw the acquisition of Kinnate Biopharma , which, post-Q1 2025, resulted in the sale of the acquired pipeline assets for potential future payments (up to $270 million in upfront/milestones plus royalties), with 85% of these proceeds prior to April 2029 allocated to Kinnate's former CVR holders.
• February 2025 included a $5 million upfront payment in a royalty financing deal with Castle Creek Biosciences for rights related to D-Fi, a Phase 3 asset for dystrophic epidermolysis bullosa, and potential Priority Review Voucher proceeds.
• October 2024 involved a $15 million upfront payment to Twist Bioscience (TWST) for 50% of contingent payments from over 60 early-stage programs across numerous partners.
• Post-Q1 2025, in May 2025, XOMA purchased mezagitamab (TAK-079) royalty and milestone rights from BioInvent International (BIVV) for up to $30 million ($20 million upfront).
• Also post-Q1 2025, in June 2025, XOMA entered an agreement to acquire Turnstone Biologics (TSBX) for cash plus a CVR.

These transactions complement existing significant assets in the portfolio, such as rights to Roche's (RHHBY) VABYSMO (acquired via Affitech CPPA), Medexus' (MEDS) IXINITY (via Aptevo Therapeutics (APVO) CPPA), Day One's (DAWN) OJEMDA (via Viracta Therapeutics (VIRX) RPA), and Takeda's mezagitamab (via Takeda Collaboration Agreement). The Blue Owl Loan, a non-recourse debt facility secured in December 2023 and backed primarily by VABYSMO royalties, is a key financing structure enabling portfolio expansion.

Financial Performance Reflecting the New Model

The financial results for the three months ended March 31, 2025, demonstrate the impact of XOMA's evolving royalty aggregation model. Total income and revenues surged to $15.9 million, a significant increase from $1.5 million in the same period of 2024.

This growth was primarily driven by:

• Income from purchased receivables under the EIR method: $6.1 million in Q1 2025, up from zero in Q1 2024. This includes approximately $5.8 million from VABYSMO and $0.3 million from IXINITY, reflecting the reclassification of these assets to the EIR method as cash flows became reliably estimable in 2024.
• Income from purchased receivables under the cost recovery method: $5.5 million in Q1 2025, also up from zero. This includes a $4.0 million milestone payment and $1.5 million in estimated royalties related to OJEMDA, where the initial purchase price has been fully recovered.
• Revenue from contracts with customers: Increased to $4.0 million in Q1 2025 from $1.0 million in Q1 2024, largely due to a $3.0 million milestone payment from Takeda for mezagitamab entering Phase 3.

Operating expenses saw notable shifts. Research and development expenses increased to $1.3 million from $33 thousand, primarily due to a $1.0 million pass-through licensing fee related to the Takeda milestone and costs associated with the Kinnate Biopharma acquisition assets (KIN-3248 clinical costs, which are expected to normalize post-asset sale). General and administrative expenses remained relatively stable at $8.1 million compared to $8.5 million, reflecting ongoing operational costs and professional fees, partially offset by lower stock compensation.

The company reported net income of $2.4 million for Q1 2025, a significant improvement from a net loss of $8.6 million in Q1 2024.

Liquidity and Capital Allocation

As of March 31, 2025, XOMA held $90.3 million in unrestricted cash and cash equivalents and $4.8 million in restricted cash. The company's cash flow from operations turned positive in Q1 2025, providing $2.2 million compared to using $4.9 million in the prior year, driven by the substantial increase in cash receipts from its purchased royalty and commercial payment streams ($13.4 million total).

Investing activities used $6.7 million, primarily for the $5.0 million upfront payment in the Castle Creek Biosciences (CCBS) royalty financing. Financing activities used $6.9 million, including $5.1 million in principal repayments on the Blue Owl Loan and $1.4 million in preferred stock dividends.

Management has stated that its current financial resources are sufficient to fund planned operations, commitments, and contractual obligations for at least one year from the 10-Q filing date (May 13, 2025). Material cash requirements include ongoing operating expenses, servicing the Blue Owl (OWL) Loan (funded by VABYSMO royalties), potential contingent payments on acquired assets (like the Exarafenib milestone, expected to be funded by the related asset receipt), potential milestones under RPAs/AAAs/CPPAs (expected to be funded by related receipts), and preferred stock dividends. The company retains the option to raise additional capital through existing ATM agreements for common and preferred stock if needed.

Outlook and Risks

XOMA's outlook is tied directly to the continued advancement and commercial success of the therapeutic candidates underlying its royalty portfolio. Management anticipates future income growth, particularly from VABYSMO and OJEMDA, as sales of these commercial products are expected to increase. The normalization of R&D costs following the divestiture of the Kinnate Biopharma (KNTE) pipeline assets should also contribute to improved financial performance.

The overarching goal remains to achieve positive cash flow and reduce dependence on capital markets by expanding the portfolio of income-generating assets and maintaining a disciplined cost structure. The recent acquisitions and transactions, including those announced post-Q1 2025, demonstrate active execution of this growth strategy.

However, the business is subject to significant risks. The value of XOMA's assets is contingent on the successful clinical development, regulatory approval, and commercialization by its partners, processes fraught with uncertainty. Macroeconomic conditions, such as inflation and high interest rates, and geopolitical instability could impact global drug sales or the ability of partners to fund development. Disruptions at regulatory agencies like the FDA, potentially exacerbated by changes in administration or budget constraints, could delay approvals and impact the timing of milestone and royalty payments. While XOMA's diversified portfolio aims to mitigate single-asset risk, a widespread downturn in the biotech sector or challenges affecting multiple partnered programs simultaneously could negatively impact financial results.

Conclusion

XOMA Royalty Corporation has successfully reinvented itself as a focused biotech royalty aggregator, moving past the high-risk, high-cost model of traditional drug development. By strategically acquiring economic rights to future payments from a growing portfolio of partner-funded assets, the company is building a business designed for potentially more predictable revenue streams and reduced reliance on capital markets.

The significant increase in income and positive operating cash flow demonstrated in Q1 2025 highlight the early financial benefits of this strategy, driven by contributions from key commercial assets like VABYSMO and OJEMDA and successful milestone achievements by partners like Takeda (TAK). While operating in a competitive landscape dominated by larger players, XOMA leverages its historical expertise and lean structure to identify and acquire valuable royalty streams, positioning itself as a key non-dilutive funding source for biotech innovators. The continued execution of its acquisition strategy, successful advancement of partnered programs, and disciplined cost management will be critical factors determining XOMA's ability to achieve sustained positive cash flow and deliver long-term value for investors amidst the inherent risks of the biotechnology ecosystem.