Business Overview and History
XOMA Royalty Corporation (XOMA) is a unique biotech royalty aggregator that has built a sizable portfolio of economic rights to future potential milestone and royalty payments associated with partnered commercial and pre-commercial therapeutic candidates. The company's strategy of selectively acquiring royalty economics across the lifecycle of drug development has positioned it as a leading player in the biotech royalty space.
XOMA was founded in 1981 as an antibody discovery and development company, initially focusing on developing its own proprietary products and platforms. Over the years, XOMA built a legacy discovery and development business, out-licensing its proprietary products and platforms. In 2017, the company pivoted its business model to become a royalty aggregator, acquiring rights to future milestone payments, royalties, and commercial payments from other biotechnology and pharmaceutical companies. This strategic shift allowed XOMA to transition from a traditional drug developer to an innovative royalty-based business model.
Since implementing its royalty aggregator strategy, XOMA has built a diverse portfolio of over 100 assets, ranging from revenue-generating commercial therapeutics to pre-clinical programs. The company's portfolio includes royalty and milestone economics on both late-stage and early-stage clinical assets licensed to large-cap biopharmaceutical partners.
One of XOMA's key focus areas is acquiring rights to milestone payments and royalties on assets in Phase 1 and Phase 2 clinical development, which the company believes have significant commercial potential. Additionally, XOMA selectively targets late-stage or commercial assets that address unmet medical needs, have long market exclusivity, and are expected to generate royalty or milestone payments in a relatively short timeframe.
Through a series of acquisitions, XOMA has expanded its portfolio of economic interests in various drug candidates. Some key milestones include the acquisition of rights to potential royalties and milestones related to Agenus' immuno-oncology assets in 2018, Aronora's hematology products in 2019, and Viracta's oncology programs in 2021. The company has faced challenges along the way, including impairments of certain royalty and commercial payment receivables. In 2023, XOMA recorded a $15.8 million impairment charge related to its Agenus royalty purchase agreement due to program discontinuation. Earlier in 2023, the company also recorded a $9 million impairment charge related to its Aronora royalty purchase agreement after Bayer terminated its license agreement with Aronora.
To address these challenges, XOMA has taken a disciplined approach to evaluating and selecting royalty and milestone assets to acquire, focusing on programs with significant commercial potential and durable patent protection. The company has also diversified its portfolio to mitigate risk, acquiring rights to a broad range of therapeutic candidates across multiple disease areas and development stages.
Financial Performance
XOMA's financial performance has shown significant improvement in recent quarters, despite challenges in previous years. For the fiscal year ended December 31, 2023, the company reported total revenue of $4.76 million, a decrease from $6.03 million in the prior year. This decline was primarily due to a reduction in revenue recognized under the units-of-revenue method, which is associated with the company's historical royalty interest sales. Net loss for the full year 2023 was $40.83 million, compared to a net income of $15.8 million in 2021. The increase in net loss was primarily driven by higher operating expenses, including research and development (R&D) costs and general and administrative (G&A) expenses, as well as impairment charges related to certain royalty assets.
However, the company's financial performance has improved substantially in recent quarters. For the third quarter of 2024, XOMA reported revenue of $7.20 million, a dramatic increase from $830,000 in the same quarter of the previous year, representing year-over-year growth of over 760%. This significant revenue growth was primarily driven by income from purchased receivables, which totaled $6.46 million for the quarter. This included $5.40 million in estimated income under the effective interest rate (EIR) method related to sales of Roche's VABYSMO and $1.00 million in estimated income from royalties on sales of Day One's OJEMDA.
For the nine months ended September 30, 2024, income from purchased receivables was $11.89 million, consisting of $10.00 million from the EIR method for VABYSMO, $1.40 million from OJEMDA royalties, and $0.50 million from the $9.00 million milestone payment earned upon FDA approval of OJEMDA. XOMA expects income related to VABYSMO and OJEMDA to increase in future periods as sales of these products grow.
Despite the revenue growth, XOMA reported a net loss of $17.24 million for Q3 2024, partially due to a $14.00 million impairment charge related to its Agenus RPA based on updates received about that program.
The company's cash flow metrics for Q3 2024 showed negative operating cash flow (OCF) and free cash flow (FCF) of $8.63 million. For the full year 2023, OCF was -$18.16 million, and FCF was -$18.18 million.
XOMA's revenue from contracts with customers, which includes upfront fees, annual license fees, and milestone payments related to out-licensing of legacy product candidates and technologies, contributed $25.00 million for Q3 2024 and $6.05 million for the first nine months of 2024. This revenue stream was primarily driven by a $5.00 million milestone payment under the Rezolute license agreement and a $1.00 million milestone from AVEO.
The company also continues to recognize revenue under the units-of-revenue method from its 2016 sale of certain royalty interests to HCRP. This revenue stream generated $709,000 in Q3 2024 and $1.83 million for the first nine months of 2024, relatively consistent with the prior year periods.
Liquidity
Despite recent financial challenges, XOMA has maintained a strong balance sheet. As of September 30, 2024, the company reported $142.05 million in cash and cash equivalents, providing ample liquidity to fund its ongoing operations and future acquisitions. The company's working capital position remains strong, with a current ratio of 7.52 and a quick ratio of 7.52 as of September 30, 2024.
XOMA's debt-to-equity ratio stood at 1.39 as of September 30, 2024, indicating a moderate level of leverage. The company has access to additional capital through a $140 million senior secured credit facility with Blue Owl, of which $10 million is a delayed draw term loan that had not been utilized as of September 30, 2024. This available credit line provides XOMA with financial flexibility to pursue further acquisitions and manage its operations.
Recent Developments and Acquisitions
XOMA has been actively expanding its royalty and milestone portfolio through strategic acquisitions. In October 2024, the company announced a $15 million royalty monetization arrangement with Twist Bioscience Corporation, acquiring a 50% economic interest in over 60 early-stage programs across 30 partners. This transaction further diversified XOMA's portfolio and provided exposure to a broad range of pre-clinical and clinical-stage assets.
Earlier in 2024, XOMA completed the acquisition of Kinnate Biopharma Inc., adding several potential royalty streams, as well as more than $9.5 million in non-dilutive capital. The Kinnate acquisition provided XOMA with an IPRD asset related to a Fibroblast Growth Factor Receptors inhibitor, as well as pre-clinical intangible assets for several other oncology programs.
Additionally, in April 2024, XOMA entered into royalty purchase agreements with Daré Bioscience, acquiring rights to royalties and milestones related to the company's XACIATO™ (clindamycin phosphate) vaginal gel 2% and two novel Phase 3 assets, OVAPRENE and Sildenafil Cream.
These recent acquisitions have further diversified XOMA's portfolio and provided the company with a broader range of potential revenue streams, both in the near and long term.
Regulatory Approvals and Milestones
XOMA's portfolio has also benefited from several regulatory approvals and milestone achievements in 2024. In September 2024, the U.S. Food and Drug Administration (FDA) granted approval to Zevra Therapeutics' MIPLYFFA™ (arimoclomol) for the treatment of neurological manifestations 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.
Additionally, in April 2024, Day One Biopharmaceuticals received FDA approval for OJEMDA, a treatment for certain solid tumors. XOMA is eligible to receive mid-single-digit royalties on OJEMDA sales, as well as up to $59.5 million in potential milestone payments related to this asset.
These regulatory approvals and milestone achievements have added to XOMA's growing portfolio of commercial and late-stage assets, strengthening the company's long-term revenue potential.
Risks and Challenges
While XOMA's royalty-based business model offers the potential for sustainable and diversified revenue streams, the company is not without its risks. The success of XOMA's portfolio is heavily dependent on the clinical and commercial performance of its partners' drug candidates. Delays, setbacks, or failures in the development or commercialization of these assets could negatively impact XOMA's financial results.
Additionally, XOMA faces competition from other royalty aggregators and traditional biopharmaceutical companies, which may limit its ability to acquire attractive royalty and milestone assets. The company's acquisition strategy also carries integration risks, which could disrupt its operations and impact financial performance.
Furthermore, XOMA's reliance on a limited number of large customers for a significant portion of its revenue presents concentration risk. The loss or underperformance of these key customers could have a material adverse effect on the company's financial condition and results of operations.
Outlook and Conclusion
Despite the recent financial challenges, XOMA's strategic shift to a royalty aggregator model has positioned the company for potential long-term growth. The company's diversified portfolio of assets, ranging from commercial products to early-stage clinical programs, provides exposure to a variety of revenue streams and mitigates reliance on any single asset or partner.
XOMA's recent acquisitions, such as the Twist Bioscience and Kinnate Biopharma transactions, have further expanded its reach and diversified its portfolio. Additionally, the regulatory approvals and milestone achievements within its existing portfolio have the potential to drive incremental revenue and cash flow in the coming years.
The company's financial performance has shown significant improvement in recent quarters, particularly in terms of revenue growth. The substantial increase in income from purchased receivables, especially from VABYSMO and OJEMDA, suggests that XOMA's strategy of acquiring rights to promising assets is beginning to bear fruit. As these products continue to gain market traction, XOMA expects their contribution to its revenue to grow further.
XOMA's strong liquidity position, with over $142 million in cash and cash equivalents and access to additional credit, provides the company with the financial flexibility to pursue further acquisitions and manage its operations effectively. This solid financial foundation is crucial as XOMA continues to execute its growth strategy in the dynamic biotech landscape.
As XOMA continues to navigate the challenges and opportunities in the biotech sector, the company's ability to selectively acquire valuable royalty and milestone assets, while managing its operational costs, will be crucial to its long-term success. The recent impairment charges highlight the importance of maintaining a diversified portfolio to mitigate risks associated with individual programs.
Investors should closely monitor XOMA's progress in executing its growth strategy, diversifying its revenue sources, and managing its portfolio of assets. Key metrics to watch include the performance of recently approved products like VABYSMO and OJEMDA, the advancement of pipeline assets, and the company's ability to continue making strategic acquisitions that enhance its royalty portfolio.
While challenges remain, XOMA's unique business model, improved financial performance, and strong liquidity position it well for potential long-term value creation in the biotech royalty space. The company's success will depend on its ability to capitalize on the growing market for biotech royalties while effectively managing the risks inherent in this innovative business model.