XOMA: The royalty aggregator that thinks like a biotech

For biotech companies, the prospect of receiving non-dilutive, non-recourse funding to advance their assets even through the early stages of clinical development may sound too good to be true.

But that is exactly what is offered by XOMA (Nasdaq: XOMA), a unique company that started to provide an alternative financing model as a result of its own experiences as a biotech company.

‘Nice clean way to bring cash into the balance sheet’

Jim Neal (pictured), XOMA’s chief executive, explained: “We provide an alternative mechanism for biotech companies to raise capital. If early stage licensed assets are being viewed as non-strategic or their potential to deliver financial value is years away, we offer a way for the company to be able to monetize those licenses and raise immediate capital from XOMA.

“In a nutshell, we provide capital upfront, in exchange for a promise to receive milestone payments and royalties in the future.”

There are clear advantages to what XOMA offers, Mr Neal added.

“If your equity holders are dilution sensitive, this is non-dilutive to the equity holders,” he said. “If you’re thinking about debt, this is non-recourse, as we don’t take a security interest in the company. Royalty monetization is a nice clean way to bring cash into the balance sheet without recourse.”

It was XOMA’s own experience of seeking financing on those terms and there being no royalty aggregators interested in purchasing licenses to early stage clinical development assets that alerted the company to this important gap in the drug development ecosystem.

A one-off in an emerging field

XOMA’s experiences since 2017—which is when it transformed itself from a traditional biotech platform company to a royalty aggregator, initially with its own portfolio of out-licensed assets—have proven the wider demand for this attractive funding mechanism.

“About two-thirds of the assets in today’s portfolio are from XOMA’s legacy history as a biotech company doing antibody discovery and development and out-licensing. We have added a significant number of assets to our portfolio through multiple acquisition transactions since the 2017 pivot,” Mr Neal said.

“So there’s strong evidence that this is potentially an attractive fund raising option, and, while it’s not for every company, we are seeing increasing interest in royalty monetization as an alternative financing vehicle.”

A further indication of this was the $2.2 billion raised last year in a huge initial public offering by Royalty Pharma (Nasdaq: RPRX), the largest buyer of biopharmaceutical royalties.

Yet XOMA is a one-off in the emerging royalty aggregator field, Mr Neal said.

He explained: “Two things make us unique: we look for the presence of an existing license between the biotech company and the pharma company—that’s our first screening criteria. The second critical component is we are willing to do a monetization transaction when the underlying drug candidate is in the Phase II or Phase I development stage. By being willing to do that, we’re very unique. We can take on the risk associated with earlier stage licensed assets because we have a portfolio of 65+ assets today that genuinely share the same characteristics—the underlying asset is partnered with well-financed, capable development partners.

‘We have lived in the shoes of a biotech’

“There is a reason that XOMA stands alone in what it does. We have a 35-year history as an antibody company, and over that history, we invested $1 billion in those scientific endeavours, which resulted in dozens of partnerships and milestone and royalty licenses. Ordinarily, the chances of any one of the assets reaching the market from Phase I/II are slim, but with so many in the portfolio, the likelihood of one or several becoming a blockbuster become very good.”

XOMA is particularly confident of this happening because of its expertise in selecting those candidates. While Mr Neal has been with the company since 2009, chief financial officer Tom Burns joined in 2006.

The pair’s understanding of the value of XOMA’s licensed assets led them to see the value in allowing them to mature in the hands of the partners and to transform the company.

Mr Neal said: “People like me who have been in the business for multiple years, who have done deals, know deals, and have deep connections within the biotech network, know where to look for opportunities.

“We have lived in the shoes of the biotech company we are doing a deal with, so we know where they are. We also know how to construct and structure an arrangement that’s win-win.”

Within sight of Phase III trials

While all of this is a new way of financing in the life sciences arena, royalty monetization has actually been used successfully in other industries for quite some time, though the ultimate validation of XOMA’s approach will not come until its portfolio assets hit the market and start paying back royalties. That time is slowly coming into view.

“Today, we have Phase II assets primarily in the portfolio, but if you scroll forward a few years, the center of gravity of that portfolio now moves to Phase III, and all of a sudden it’s a very, very interesting portfolio,” Mr Neal said.

As assets reach Phase III and, hopefully, gain regulatory approval and start delivering royalties, XOMA will at the same time continue enhancing its portfolio by adding more early stage candidates with new transactions.

The most recent such deal was the $13.5 million deal announced in March with Viracta Therapeutics (Nasdaq: VIRX) to buy potential future milestones and royalties associated with existing licenses relating to two clinical-stage drugs.

Milestone payments will also continue to come in, such as the $25 million that came from Novartis (NYSE: NVS) in the fall of 2020 when NIS793, an anti-TGFβ monoclonal antibody licensed from XOMA, advanced to the Phase II development stage.

From that asset alone, XOMA has the potential to earn over $400 million in additional milestone payments followed by tiered royalties on any net product sales that range from the mid-single digits to the low double digits.

Playing a long game

With the potential to generate such sums and with a small team and no research and development or commercialization expenses to cover, it is no wonder that Wall Street is learning to love XOMA’s strategy. The company’s share price has shot up by more than 800% since the early 2017 pivot.

The transformation followed on from a catalyst investment by the Biotechnology Value Fund (BVF), with Matthew Perry, president of BVF Partners, joining an experienced XOMA board, all of whom will help to guide the company on a path ahead that, while exciting, will require patience.

Mr Neal once remarked that “all you have to do is be around long enough” to realize the value in the portfolio, because rather than selling on assets when they reach Phase III or are subject to New Drug Applications, XOMA plans to hang on and see the return on them, delivering value back to the shareholders.

“In the words of our CFO, he thinks of us as being in the second inning of a baseball game,” Mr Neal said.

“So yes, it’s relatively early. We’ve seen some success, and we’re proud of that success. What we see in front of us is even more exciting, and the growth possibilities are huge.”

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