XOMA Royalty Corporation (NASDAQ: XOMA) has carved out a unique niche for itself in the dynamic biotech industry as a royalty aggregator, steadily building a diverse portfolio of economic rights to future milestone and royalty payments associated with an array of commercial and pre-commercial therapeutic candidates. With a strong focus on early to mid-stage clinical assets licensed to large-cap partners, as well as strategic acquisitions of milestone and royalty revenue streams on late-stage and commercial products, XOMA Royalty has positioned itself as a compelling option for investors seeking exposure to the thriving biotech sector.
Business Overview and Comprehensive History XOMA Royalty's origins trace back to 1981, when it was founded as XOMA Corporation, a biopharmaceutical company focused on the discovery and development of innovative therapeutic antibodies. Over the years, the company established a robust pipeline of proprietary product candidates and forged numerous strategic partnerships with leading pharmaceutical and biotechnology companies, leveraging its expertise in antibody engineering and development.
In 2017, XOMA Corporation pivoted its business model to that of a royalty aggregator, transitioning away from its legacy discovery and development activities. This strategic shift was partly driven by the failure of its lead drug candidate, gevokizumab, in late-stage clinical trials in 2016, which prompted the company to reevaluate its strategy. The company began systematically acquiring rights to future milestone payments, royalties, and commercial payments associated with partnered therapeutic candidates, primarily those in early to mid-stage clinical development.
One of XOMA's early challenges during this transition was addressed through the sale of its royalty interests to healthcare investment firm HCRP in 2016 for $18 million, which provided much-needed capital to fund the company's operations. Since then, XOMA has established strategic partnerships with pharmaceutical companies such as Novartis, Janssen, and Rezolute, securing milestone payments and royalties on the development and commercialization of their products. These partnerships have been instrumental in diversifying XOMA's revenue streams and building its royalty-focused business model.
XOMA Royalty's portfolio has grown steadily since the implementation of its royalty aggregator model, with the company now boasting economic rights to over 100 assets ranging from revenue-generating commercial therapeutics to pre-clinical programs. Key acquisitions have included the Agenus Royalty Purchase Agreement in 2018, the Aronora Royalty Purchase Agreement in 2019, the Viracta Royalty Purchase Agreement in 2021, and the Twist Bioscience Royalty Purchase Agreement in 2024, which added over 60 early-stage programs to the company's arsenal.
Financials and Solvency XOMA Royalty reported a net loss of $9.9 million for the nine months ended September 30, 2024, an improvement from the $20.7 million net loss recorded in the same period of the prior year. This was driven by a $19.3 million gain recognized on the acquisition of Kinnate Biopharma in early 2024, which more than offset the $23.0 million in royalty purchase agreement asset impairment charges recorded during the period.
The company's total revenue for the nine-month period stood at $19.8 million, up significantly from $2.9 million in the prior-year period, primarily due to a $10.0 million increase in income from purchased receivables under the effective interest rate method, as well as a $4.7 million rise in revenue from contracts with customers.
For the full year 2023, XOMA reported annual revenue of $4.76 million and an annual net loss of $40.83 million. The company's annual operating cash flow was negative $18.16 million, with annual free cash flow at negative $18.18 million.
In the third quarter of 2024, XOMA generated total income and revenues of $7.20 million, a substantial increase from $0.83 million in the prior year period. This growth was primarily driven by $6.46 million in income from purchased receivables, which included $5.40 million in estimated income under the effective interest rate method related to sales of Roche's VABYSMO product and $1.00 million in estimated income from royalties on sales of Day One's OJEMDA. Revenue from contracts with customers was $25.00 million, which included a $5.00 million milestone payment from Rezolute.
Research and development expenses for the third quarter of 2024 were $0.82 million, compared to $0.03 million in the prior year period, primarily due to clinical trial costs related to the KIN-3248 program obtained through the Kinnate acquisition. General and administrative expenses increased to $8.02 million from $6.37 million in the prior year quarter, largely due to costs associated with the Kinnate acquisition, including legal, consulting, IT, and insurance expenses, as well as increased stock-based compensation.
During the quarter, XOMA recorded a $14.00 million impairment charge related to its Agenus royalty purchase agreement based on updates received regarding that program. The company also recognized a $19.32 million gain on the acquisition of Kinnate and an $8.10 million change in fair value of an embedded derivative related to the Viracta RPA. Interest expense for the quarter was $3.49 million, reflecting the debt incurred through the Blue Owl Loan Agreement entered into in December 2023.
As of September 30, 2024, XOMA Royalty reported $142.1 million in cash and cash equivalents, up from $153.3 million at the end of 2023. The company's working capital position remained strong at $137.9 million, compared to $149.8 million at the close of the previous year. XOMA Royalty's balance sheet is further bolstered by the $119.6 million in net proceeds it received from the Blue Owl Loan Agreement entered into in December 2023, which the company is utilizing to fund its ongoing operations and strategic acquisitions.
While the company has incurred significant operating losses since its inception, reaching an accumulated deficit of $1.2 billion as of September 30, 2024, XOMA Royalty's transition to a royalty aggregator model has helped to stabilize its financial position. The company's focus on acquiring rights to milestone payments and royalties from partnered assets, many of which are in late-stage clinical development or already commercialized, is expected to provide a steadier stream of revenue in the years ahead.
Liquidity XOMA Royalty's liquidity position remains strong, with $142.1 million in cash and cash equivalents as of September 30, 2024. This solid cash position, combined with the company's working capital of $137.9 million, provides XOMA with ample resources to fund its ongoing operations and pursue strategic acquisitions. The Blue Owl Loan Agreement, which provided $119.6 million in net proceeds, further enhances the company's financial flexibility and ability to capitalize on attractive royalty and milestone opportunities as they arise.
The company's debt-to-equity ratio stood at 1.40 as of September 30, 2024. XOMA's current ratio of 7.52 and quick ratio of 7.64 further underscore its strong liquidity position. In December 2023, XOMA entered into a $140 million senior secured credit facility with Blue Owl, of which $130 million was drawn initially. This credit facility has a maturity date of December 15, 2038, providing the company with long-term financial flexibility.
Diversified Portfolio and Strategic Acquisitions XOMA Royalty's portfolio now encompasses a diverse array of assets, ranging from revenue-generating commercial products to early-stage candidates in clinical development. This diversification helps to mitigate the company's risk profile, as the performance of any single asset is less likely to have an outsized impact on its overall financial results.
One of the key drivers of XOMA Royalty's growth has been its strategic acquisition of royalty and milestone interests. In October 2024, the company announced the acquisition of Pulmokine, adding the rights to potential milestone payments and royalties on seralutinib, a Phase 3 asset being developed for pulmonary arterial hypertension. This transaction marked XOMA Royalty's seventh Phase 3 royalty asset, further strengthening its late-stage pipeline.
Perhaps the most significant acquisition in recent years was the company's purchase of a 50% economic interest in Twist Bioscience's portfolio of over 60 early-stage programs across approximately 30 partners. This $15 million deal, announced in October 2024, significantly expanded XOMA Royalty's exposure to the high-potential, high-volume end of the biotech development spectrum, complementing its focus on more advanced assets.
In September 2024, XOMA Royalty celebrated the FDA approval of Zevra Therapeutics' MIPLYFFA™ (arimoclomol) for the treatment of Niemann-Pick disease type C. As the sixth commercial asset in the company's portfolio, MIPLYFFA™ is expected to generate a mid-single digit royalty for XOMA Royalty, as well as up to $52.6 million in potential milestone payments.
Risks and Challenges While XOMA Royalty's transition to a royalty aggregator model has bolstered its financial stability, the company still faces inherent risks associated with the biotech industry. The success of its portfolio is largely dependent on the ability of its partners to advance their respective programs through clinical development and achieve regulatory approvals and commercial success.
Additionally, the company's reliance on third-party partners introduces the risk of potential delays, setbacks, or even failures in the development and commercialization of the assets in which XOMA Royalty holds economic interests. The loss of key partnerships or the underperformance of any major asset could have a material adverse impact on the company's financial results.
XOMA Royalty also faces competition from other royalty-focused companies and the potential for increased consolidation within the biotech industry, which could make acquisitions more challenging or costly. The company's ability to continue sourcing attractive royalty and milestone opportunities will be crucial to its long-term growth and success.
Geographic Markets and Industry Trends XOMA Royalty operates exclusively in the United States, focusing on the biotech and pharmaceutical sectors. As a small-cap company with a specialized business model, its performance is closely tied to the overall health and dynamics of the biotech industry. While specific industry trends were not provided in the available information, the company's strategic focus on acquiring rights to promising therapeutic candidates across various stages of development positions it to capitalize on broader trends in drug discovery, development, and commercialization.
Outlook and Conclusion XOMA Royalty's transformation into a biotech royalty aggregator has positioned the company as a unique and compelling investment opportunity within the dynamic healthcare sector. By systematically building a diversified portfolio of economic rights to future milestone and royalty payments, the company has established a sustainable model that aims to provide shareholders with steadier, less volatile returns compared to traditional drug developers.
The company's recent acquisitions, such as the Twist Bioscience deal and the addition of the seralutinib asset from Pulmokine, demonstrate XOMA Royalty's strategic vision and ability to identify and secure valuable royalty and milestone interests across the spectrum of biotech development. With a growing pipeline of commercial, late-stage, and early-stage assets, the company appears well-positioned to continue delivering long-term value for its shareholders.
However, the inherent risks and challenges of the biotech industry, including the reliance on third-party partners and the potential for increased competition or industry consolidation, will require XOMA Royalty to remain vigilant and nimble in its approach. Prudent capital allocation, rigorous due diligence, and the ability to adapt to a constantly evolving landscape will be critical to the company's continued success.
Overall, XOMA Royalty's transformation into a leading biotech royalty aggregator, combined with its diversified portfolio, strategic acquisitions, and strong financial position, make it a compelling investment proposition for those seeking exposure to the growth potential of the healthcare sector. The company's focus on early to mid-stage clinical assets, coupled with its strategic acquisitions of late-stage and commercial assets, provides a balanced approach to risk and potential returns in the dynamic biotech industry.