You want to sit by Phil?
Sure.
Yeah.
Do I want to sit by Phil?
Yeah.
The hot seat.
Do I will?
Hot seat.
Just a game of musical chairs. Well, good morning and welcome once again to TD Cowen's 46th Annual Healthcare Conference. I'm Phil Nadeau, one of the biotech analysts here at Cowen, and it's my pleasure to moderate.
The biotech analyst.
One of eight, actually. 15% of the team. It's my pleasure to moderate a fireside chat with XOMA Royalty. We have with us today Owen Hughes, CEO, Bradley Sitko, Chief Investment Officer, and Jeffrey Trigilio, the CFO. Recently joined the company. Welcome, guys. Thanks for coming. First, maybe I'll kick it to you. Can you give a state of the company overview? What are the biggest strengths, biggest challenges, and what do you think XOMA needs to do to create shareholder value over the next year?
You're starting right off with the big question.
Just getting warmed up.
Well, let me just give you an overview of XOMA. We're enterprise value around $550 million or so. Market cap around $450 million. We have about $80 million of cash in the balance sheet. We have one loan outstanding with Blue Owl for VABYSMO, and we have about $65 million of preferreds. At this point in time, we actually have the highest number of phase III assets in development in our portfolio. It's about 15 assets in phase III. If you think about us as a biotech company or a pharma company, we kind of rival any biotech company in terms of number of assets that are in phase III. If you think about it, most biotech companies aren't profitable even when they launch their drug, and every product for us is profitable. It's kind of interesting story.
We actually have the largest portfolio of any royalty company, of over 120 assets. Where we separate ourselves and where we're distinct is that, we invest across the actual drug development spectrum from preclinical all the way to commercial assets, where most of our competitors are focused on that type, top right quadrant, which is, commercial assets or very late-stage assets that have been de-risked to a certain extent. We're kinda the exact opposite. We take a lot more risk. We actually enjoy the risk. As much as I hate to say that, one of our assets actually just had a, equivocal result in phase III, the amazing thing is that, after the result, our stock went up.
Actually that's the thing I'm most proud about, 'cause what we're really trying to build is a portfolio that can withstand the binary nature of biotech. I think the only way to do that actually is strength in numbers. We've been accumulating assets for the past three years now. I think you have to do it similar to what if you're a coach at a NCAA football team, minus NIL, of course, which is you have to build, right, over time. You need to build your freshman class, your sophomore class, et cetera. That's what we've been doing for the last couple years. At this point, we have probably the most assets in our phase III portfolio ever inside the company. We've done some very creative things in order to get there.
Can you talk a little bit more about how you build a portfolio in terms of, in terms of balance? How do you balance stage of development, risk, market size, modality? How do you assess all those factors as you think about putting together a portfolio?
Yeah. Overall, we look at the portfolio. I mean, from the time Owen and I joined back in 2023, we had one commercial asset in the portfolio. Now we're up to seven. We looked at the later stage of the portfolio, and there was still binary risk left in it with the phase III because we didn't have the volume of assets in the portfolio. We took the approach that building the portfolio, we wanted to add on to what was existing from what we joined, which was about 60 assets, and kind of build on a barbell approach. Fill in some of the late stage or commercial assets as well as continue to build an early stage engine in the within the portfolio. How do we assess it?
We look for things where we think are fundamentally mispriced relative to the value that they could create for our shareholders. That's assets in therapeutic areas that may be overlooked, maybe in situations where there's assets where the amount of capital that a company needs to raise is less than many of the royalty players would look at. It could be those that are earlier in development where many people see the value of that royalty, but they won't look at the value of it for five, seven, or 10 years. We kind of take a balanced approach. Then the most important part, and I think the key lesson is, you continue to buy at the right price.
Find situations where there's almost a either a special situation or a disconnect in the capital required and the need of the company where we can add new assets to the portfolio.
XOMA's done a number of wind down transactions over the last year. Can you talk about the structure of those deals and why they're attractive?
Yeah.
Yeah. I'd say three things. One is, just to be really clear, these companies are paying XOMA cash to acquire the company, so they're negative EV. We usually pick up a couple million and a fee to do it, which is last year totaled about $12 million net capital to XOMA, enough to cover most of our operating expenses for the year. The second thing and the third thing are probably more important where, you know, a lot of these have drugs, sometimes they're second, third, fourth in the pipeline, not being valued. We pick them up, we can partner them, deliver value for the shareholders of the company and keep a piece for XOMA. The third though, is significant tax deductions. A lot of these companies have capitalized their R&D expense.
Last year through those transactions, we accumulated about a half a billion dollars of tax deductions. As XOMA starts to deliver profits, those taxes will be shielded at the federal level for at least the next four or five years.
It's the first time I heard someone say half a billion. I always say $500 million. Like that's actually a lot. Interesting. We're quite scrappy, right? We have to be. We're kind of swimming upstream with one hand tied behind our back in terms of our capital situation. Not that that $80 million isn't significant capital, but if you compare us to our brethren. You know, their cost of capital generally is a lot lower than ours, and certainly their balance sheets are generally a lot more, have a lot more fortitude than ours. When this opportunity presented itself after doing actually the Kinnate deal, we realized that what we had stumbled upon and these tax credits are real.
We actually would have been paid federal income taxes in 2024 and in 2025 because we're actually free cash flow positive and because of these transactions, we actually have not paid federal income taxes. It just gives you a sense for kinda how we operate the business. Yes, we've been involved in healthcare and biotech for many years, but generally, we're financial people, generally speaking, right?
Right.
Once we understood what we stumbled upon, we went out in a concerted fashion trying to find these companies. It just so happens that every now and then when you do this, we actually come across assets as well. One I'd like to point out is just, you know, Generation Bio, which I believe was covered by Cowen, was an Atlas company, came out with a lot of fanfare in terms of trying to do the iqDNA plus the ctLNP. Based on the experience that we had in the LNP space, we actually think we've stumbled across essentially XOMA 2.0. If you think about XOMA initially as a company, it was phage display and BCE, bacterial cell expression. We were actually the creator of most antibodies through the 1980s and 1990s.
When you think about oligos and sRNAs and messenger RNA, we believe we've actually have a technology today sitting inside the company that was developed by Generation Bio. It's the first LNP that actually can deliver anything that I just said not to the liver.
Hmm.
Our emphasis and our objective at this point is actually to license this in a non-exclusive fashion to a whole host of companies and make this much more ubiquitous than actually what it would have been sitting in the hands of GenBio. Why? Because GenBio wanted to be a biotech company, which I totally understand. From a financial perspective, that was actually the right thought process as it relates to their shareholders. From our perspective today, we're not gonna put any capital into this thing.
If we can actually put this in the hands of people that can develop it, and based on the data that we've seen today, we believe it's actually significantly differentiated, we just create another engine inside of XOMA, very similar to what we had with the Phage Display Libraries that can generate hundreds of royalties and milestones over the next decade. It's gonna take us time to do that, but I actually believe there's a true opportunity. Yes, frankly, I think despite the fact that these acquisitions have given us some brand equity, there's actually real reasoning behind doing these. It's just that people didn't understand it until now.
Right. Right. Maybe diving into your portfolio in a bit more detail. First, can you outline the milestones or catalysts that will be emerging from your portfolio this year?
Sure. I'll start and then the guys can complement. As I said before, if you think back to our phase III programs today, we have 15 phase III programs that will read out over the next 24-30 months. I'm not aware of another company at this point in time that has that type of news flow sitting at a $500 million market cap company. More importantly is each additional asset, 100% of those royalties and milestones will flow right to the bottom line, and it'll be tax advantaged. We had two phase IIIs that just read out in the last couple of weeks. Unfortunately, both went against us. First was Rezolute, that was for congenital hyperinsulinism. The second study, which is tumor hyperinsulinism, will actually read out sometime in the third quarter, is what I understand.
The big difference there is that actually the endpoint is a hard endpoint relative to a subjective endpoint. There's a significant difference between the first study and the second study. What the company has said publicly is that the open label extension study in tumor hyperinsulinism has showed a 75% response rate, i.e., these patients are off all other medications and are only on Urso to actually control blood sugars. We have a decent amount of confidence. Of course, I will not opine on the actual phase III. I'm not really good at that, Phil, as you know. There is an opportunity to actually deliver value, continue to deliver value back to XOMA and the Rezolute shareholders. Just for reference, that is our largest royalty.
We own roughly high single digits to low double digits. The second was Gossamer, which was eaten by the placebo bug. What's somewhat reassuring is that the response rate was fairly consistent across all the geographies with the active arm. Obviously, they have some work in front of them, and I would defer you to Brian's comments at the Oppenheimer conference last week to get a sense for where they are. Actually, in just a couple of weeks to months, we'll actually have the Velixabat data in PSC. By way of reference, at the end of last year, we actually did a swap transaction with Takeda.
In early 25, we identified a company that owned a 2% royalty on mezagitamab, and we own a mid-single digit royalty based on some prior relationships that we had with Takeda. The thought process was is that we go to that company, we buy their share of mezagitamab, and now we create something that we can barter with Takeda with.
Hmm.
We took a 5.5% royalty to Takeda and actually exchanged that for nine assets and kept a portion of the mezagitamab royalty. we took one asset and we turned it into 10, which is essentially our business model, right? It's strength in numbers, diversity. within that transaction, we were able to get access to Velixabat, which is being developed by Mirum. osavampator, which is being developed by Neurocrine. a drug called OHB-607, which is being developed by Oak Hill, which is a spinoff of Shire's rare disease portfolio. It's actually being developed for BPD, and it's in a potential registrational study. we received a royalty on the MEK1/2 inhibitor from Recursion for FAP, in addition to five preclinical assets.
Essentially for $20 million, we were able to maintain our royalty on mezagitamab, acquire nine assets, and still have essentially upside on some other things that we're working on as it relates to that portfolio. I actually thought it was a pretty interesting deal. You didn't write about it because it was actually over the holiday. Candidly, I actually think if we could replicate this. What I will say is that there are external royalties that are sitting inside every major pharma company that most pharma companies aren't paying attention to, and understandably so, because it doesn't hit their top line.
I think the reason why Takeda was interested in this portfolio or this idea, one was that they had just completed a deal with Blackstone of a royalty financing for or clinical project financing.
Yeah
E ssentially for mezagitamab, their gross profit was actually diminished. Secondly, more importantly is that we took an asset, or assets that would have hit their other income line, they gave those to us, and we gave something that's gonna hit their top line.
Hmm. Interesting.
When you look at the XOMA portfolio today, we have a number of essentially chits that are sitting inside the portfolio where we actually own royalties on some of the very interesting drugs that are owned by pharma companies. In Bill Belichick fashion, can you take a first-round pick and turn them into three or four second -round picks and actually create the same value, but diversify by doing that? I think there's an opportunity to do that. We're gonna find out.
Yeah. Remind me where your remaining royalty is on mezagitamab. Is it still low single digits?
Low single digits. Yeah.
Low single. Okay.
Yeah.
Got it.
I only answered the first part of your question, but why don't you guys answer the second part, which is what else are we looking forward to?
I think, Oh, you covered all the registrational readouts. There's two this year from Rezolute. The only other ones on the portfolio, we have some regulatory decisions outside the U.S. with MIPLYFFA and with OJEMDA, their partner with Ipsen.
Actually, the ONIVYDE news this morning is actually very helpful to us, right? They get this positive CHMP.
CHMP
D ecision. I would assume that that drug will be approved in Europe, and that will actually allow us to continue to grow our royalties today. If you actually think about the company from a business perspective, is that our royalties alone, for all intents and purposes, are covering our expense base. When milestones come in, they essentially flow right to the bottom line and they're tax-advantaged. Our hope is that in 2026, 2027, and 2028, that our royalties continue to grow such that those actually start to hit the bottom line in addition to the royalties. One other thing is that we bought back about 5% of the company last year. You have a very small royalty company that's generating revenue, generating free cash in a tax-advantaged position, buying back their stock.
From a financial perspective, if we are able to continue this business momentum, you're gonna see major leverage in the bottom line, and ultimately, that's how we're gonna get valued. What's gonna change the trajectory of the company, 'cause we've been in this trading range for the last, you know, seven years, more or less, is that hopefully we can actually really start to generate free cash flow, you know, if we're successful in that endeavor. The only way you can do that is just take more shots on goal and also be creative about doing that. I think the thing that we're most proud about is actually our shares outstanding since we arrived in 2023 has actually gone down by roughly 5%, and yet the number of assets, commercial, phase III, has increased exponentially.
Hmm.
If we can continue that financial discipline, then I would suggest or surmise that there's probably some good things on the horizon. We just need some of these things to work.
Maybe to dive into a couple of the products that we get the most questions on, Rezolute, and the tumor hyperinsulinism market. What is the size of that market in your estimation?
I think for both of those assets, I think both Rezolute, Inc. and Day One Biopharmaceuticals have done extensive work on it, and I think we're internally very aligned with the models that the companies have put out. I think as we look at Rezolute, Inc. in particular, you know, the questions that we have are whether congenital hyperinsulinism now can come alongside of tumor hyperinsulinism, and that's gonna have the biggest effect in our minds on pricing, although it's ultimately gonna be a trade-off between price and then the size of the market with tumor hyperinsulinism, and if you can start to open up some of the ex-US markets.
With OJEMDA, the continued question we have is the durability of response and then starting to see the data that's gonna come out in first line and start to remove, you know, some of the market overhang as to what is the eventual size of the market.
Got it.
I think, as it relates to Rezolute, I believe, don't quote me on this, but I believe that prior to the actual CHI data, the company did an R&D day and kinda laid out some of the estimates that they have. What I would suggest that I believe they believe that the tumor hyperinsulinism market is actually greater in terms of number of patients relative to CHI. Do you remember specifically?
Not off the top of my head.
I think I do, but I don't wanna misquote them.
Yeah.
I think, you know, they believe that the CHI market was around 3,000 patients, more or less. I believe they believe that the tumor hyperinsulin market is actually multiples of that. What's the applicable patient population within THI is what I think they're trying to determine.
Okay.
When we went through, we had hired a third party to kind of help us assess this opportunity. Depending where the pricing is, our view was is that you could get to a drug that is, you know, much greater than $500 million. Obviously, it remains to be seen how they're going to actually approach the CHI from a regulatory perspective, but it's quite clear to us, and in speaking with the PIs that are part of the CHI study, the drug works. Like, there's no doubt the drug works. The nature of the trial design has created some unwanted effects as it relates to the placebo response, mainly because it's a very subjective endpoint. The major difference with a THI market and the trial design is that it's a hard endpoint.
Mm-hmm.
It's glucose dependence. What we know from the open label study, what they said publicly, is that 75% of the patients, it was roughly 10 patients, I believe it was nine, actually have been weaned off all of their other medications. They're only on Urso, and have removed glucose completely. There's a high, you know, we call it biological plausibility. We know this drug works. Actually, this was a drug that we developed at XOMA. We brought it through phase I and then outlicensed it when we did the actual change in the business model in 2017. We have a high degree of confidence the drug works. On the CHI, they need to figure out how they're gonna develop it.
In THI, which the data's forthcoming, all I can tell you is that biologically the drug works. Whether they execute on the trial, that's up to them.
Right. On Gossamer, the other one bitten by the placebo bug, I think Gossamer is saying that they're gonna go to the FDA to discuss path forward. Do you have any opinion on what's next there or chances that that could move despite the placebo?
No, I feel if I said something I'd probably be wrong. I would just suggest to listen to what Brian said last week. What is clear, looking at the data, is two things. One, I was struck by the uniformity of the data across the different geographic regions. In almost every region, they're getting 20-25 meters of improvement. The second thing I thought that was actually really interesting was that they said that there were six patients that were on background sotatercept. The inclusion/exclusion criteria is that you actually had to be stable on sotatercept for at least 24 weeks, or you had to be withdrawn with a washout period.
They said that all six patients that were in the study were actually on background sotatercept, and the average increase in the Six-Minute Walk Test was 70 meters on top of sotatercept. That's unbelievable. If you actually look at the poster that they had last year, there's actually a biological reason as to why that could be happening, why it's synergistic. Whether that means anything from a regulatory perspective, I don't really know. If I was Chiesi sitting on the other side, I think that's actually the most important, actually the most interesting, anecdote...
Mm-hmm
Coming from that study, was that on background sotatercept you're able to actually have a 70-meter increase. I would say that's pretty significant.
Yeah. That's impressive. Maybe to talk about some of the commercial products. MIPLYFFA is launching in Niemann-Pick. How's that launch going versus your internal expectations?
I think it's exceeded our expectations. When we first did the transaction, we had realized that this was a market because of the expanded access program that could quickly flip from patients on drug to commercial paying patients quickly. I think with more as with many of the rare diseases, as you get awareness out there and you get the advocacy groups and there's finally something that you can prescribe, they start to identify more patients. I think the benefit of the weight-based dosing within the drug has been helpful. We're we've been very pleased with that launch.
Sorry.
Key now is, you know, external growth from other geographies. I think the other thing they said is that identification of new patients. When we were actually doing diligence on this, one of the things that caught our eye was that we were speaking to a, one of the PIs at UCSF saying that they're increasingly identifying actually adult patients with NPC.
Hmm.
The reason why that's interesting, one is, the fact that they weren't diagnosed earlier on is kind of intriguing, the second thing is that, you're starting a patient in their adult life where the weight is significantly greater, therefore the price point is actually going to change pretty dramatically. You only need a few patients in the adult setting to kind of carry the growth for any one given year, given the actual weight-based dosing. Kind of reminds me of my wife when she actually was launching Myozyme. She came back after two days in the field, puts her feet up on the desk, I'm like, she's a very Type A person. I'm like, "What are you doing?" She goes, "We found a 300 pound patient for Myozyme." She made her entire quota in the two days of launch.
This weight-based dosing is actually it's kind of amazing, all right? It can actually have a profound impact on the P&L of a company if you find the right patients.
Yeah, I remember Genzyme used to call it a de facto price increase every year because their patients were getting larger and larger.
Correct.
They weren't changing the price of the drug.
Correct
Revenue per patient was going up.
Yeah, exactly. Exactly.
Maybe one other commercial product. Ovaprene, or close to commercial. What do you think is the market potential there? How enthusiastic about that one are you?
Yeah. So, with Ovaprene, Bayer, who was at an option agreement, Darè, had opted out of the program, so the program is back in Darè's hands. Taking it through the fully funded phase III, which should start to read out next year. The early data was as expected with the drug. I imagine that Darè is gonna be finding a partner for the asset, but at this point, waiting until the phase III reads out. I mean, what we're seeing overall in the women's health space is a resurgence, or change in the way that you have a new channel. Like the Hers, even with male products, Hims channels, you're starting to see a different form of distribution.
Like, for example, out of that Daré portfolio and that acquisition, the Sildenafil cream product is now available compounded through the 503B pathway, so accelerated time to commercial by three years. That's gonna be an asset in the portfolio that's gonna start generating some revenue. We're gonna see how products launch within that channel. I think we're starting to see a change in the way that you're getting promotion and distribution.
If you're from a biologic or from a clinical perspective, commercial perspective, the bet that we're making there is that the growth in the non-hormonal market is significantly outpacing the hormonal market, and I'd say the preliminary diligence that we did at the time that we did that deal would suggest that it's gonna continue to increase on the non-hormonal side. I think there's actually as Calley Means, no Calley Means at the surgeon general, actually there was a brief interlude about hormonal products, OCs. I mean, she herself said that there are side effects, right?
There's actually bleeding and potential strokes and those type of things. We're, we're planning on the bet that the non-hormonal market will increase dramatically over the next kinda five to 10 years. This is one of the first non-hormonal products that actually could get approved.
Oh, interesting. Okay.
Phil, just on the commercial products too.
Yeah.
OJEMDA, MIPLYFFA, those two alone with the royalties in 2027 are gonna bring XOMA to the point where it's profitable on those two assets alone. All these are just, you know,
Added
To our growth profile.
Great. That was actually gonna be my next question 'cause we project XOMA's gonna become profitable in 2027 with VABYSMO as well. It sounds like that's reasonable.
Yeah, I think as long as these companies continue to execute, which they have been, that's the plan.
As you think going forward about capital allocation, what is the strategy? I think you've touched on a number of the different pieces between purchasing royalty streams and other assets, returning capital to shareholders. Like, how do you balance those two parts of your business model?
Well, I think it's the $64,000 question, right? In 2025, we were successful in accumulating assets without actually significant outlays from a cash perspective, and we actually used that cash to buy back our stock. Our view is that something just based on statistics, something has to work within the 15 phase 3s that we have, right, such that we actually start to actually have the inflection point. By buying back stock at this point in time and not waiting for the phase 3 results, our belief is that we can actually lever our future returns, right? Shares outstanding actually go down, net income starts to increase, you generate more on an an EPS basis.
With that said, the one thing that kinda transpired over 2024 and 2025 was that, it's public in certain situations, that we actually were trying to acquire companies that are much bigger than us, actually not in the royalty space, but biotech companies.
Hmm.
Not to actually run them as a biotech company. What our view was is that we actually identified assets, royalties that were sitting inside these companies that we believe dwarfed the actual value of the company publicly. If we buy those assets, we split them apart, we let the actual R&D engine run separate from XOMA, but we get access to those royalties. I still think that is a tremendous opportunity today. It's one way where we could have a major inflection point inside the company. We did not win those situations because we didn't have enough cash in the balance sheet. I think based on what's transpired in the last 24 months or so at the company, I think we have greater access to capital today.
We haven't pulled it down 'cause we don't need it, and we don't want it sitting on our balance sheet and having it be dilutive to the company. If we can identify those opportunities again, I think we actually have an opportunity to really create a major inflection point in the company. That would be the first part. The second part I would say is that, you know, the tried and true business, we're always gonna have opportunities to deploy capital. The question is it better than what's sitting inside the company today? Do you actually wanna go out and actually buy something that's actually gonna dilute the overall returns of the company on a risk-adjusted basis? That doesn't make a lot of sense to us.
While we were extremely busy in 2025, we did it in a different fashion. You could see us just continuing on that path today, mainly because we actually think on a risk-adjusted return, we actually have better assets sitting inside the portfolio than we would actually acquire externally. We're not gonna do business just the sake of doing businesses. We have to make sure that the actual return is commensurate with the risk that we're taking.
How would you as an external person value XOMA as we look forward over the next year? There's a lot of events. Do you think people should do a risk-adjusted DCF? Kind of feedback we get from investors is just applying a multiple, like taking royalty from as multiples to your future earnings. Like, how would you advise investors to value?
I value, like, high.
Higher than where we are.
No, that's everyone has a different approach. Are we doing that internally? Yes. We understand that you know, our portfolio has to execute. Like, how are we gonna generate value? The drugs have to work, right? If the drugs don't work, we have to make sure that we can replenish the pipeline without actually diluting our shareholders, and that's what we've been doing so far. I'm hopeful that we can continue that. Listen, XOMA is a tough business to actually value, right? Because you got 120 different assets, and no one's gonna do 120 actually, Monte Carlo simulation on the portfolio.
Except us.
Except us.
Except for Jeff.
We know Jeff does it every day.
Yeah.
With our 14 FTs. Other than that.
He is pretty good at modeling, I will say that. you know, like any situation, my assumption is that there's probably a couple. If we had not done the actual VABYSMO deal, would VABYSMO actually be powering the returns for the company? Yeah, we'd be generating $30 million of free cash just on that asset alone, more or less, right? The other ones would actually take up the actual expenses. Rest assured that we're trying to optimize our capital structure. We need something to work. As in, like, any portfolio, there's probably one or two things that are sitting inside that portfolio that can actually drive the overall returns for a period of time.
Whether you're a mutual fund, a hedge fund, our portfolio, or frankly, even RP others, generally, there's like one or two things that people kinda gravitate towards, and then they start to think that everything's gonna work inside the portfolio. Often that's not the case, but if we can get to that point, we'll all be very, very happy.
Awesome. With that, I think we're out of time. Thank you for an interesting session.
Thank you, Phil. It's a pleasure.
Great to see you guys.