XOMA Royalty Corporation 8.625% Perpetual Preferred Stock Series A

Company Overview

Business Model: XOMA Royalty Corporation operates as a biotech royalty aggregator, a business model implemented in 2017. The Company acquires economic rights to future potential milestone and royalty payments from partnered commercial and pre-commercial therapeutic candidates. Its portfolio strategy focuses on early to mid-stage clinical assets (Phase 1 and 2) with significant commercial sales potential, licensed to well-funded partners, as well as late-stage or commercial assets addressing unmet medical needs or offering therapeutic advantages with long market exclusivity. Future revenue and income are primarily derived from milestones and royalties, with periodic income recognition under the effective interest rate (EIR) method. XOMA Royalty Corporation's strategy includes expanding its portfolio through third-party acquisitions for diversification.

Market Position: XOMA Royalty Corporation operates within the highly competitive and technologically dynamic biotechnology and pharmaceutical industries. Its royalty aggregator model faces competition from other royalty buyers and alternative financing providers, some of whom may possess lower target rates of return, lower cost of capital, or greater access to capital. The Company's partners and licensees also compete with larger pharmaceutical companies that often have greater resources and experience. A significant portion of the calculated net present value of XOMA Royalty Corporation's portfolio is concentrated in a limited number of products, indicating a degree of portfolio concentration risk.

Recent Strategic Developments:

• Corporate Name Change: Effective July 10, 2024, the Company changed its name to XOMA Royalty Corporation from XOMA Corporation.
• Pulmokine Acquisition: In November 2024, XOMA Royalty Corporation acquired Pulmokine for a $20.0 million cash payment at closing, gaining economic interest in seralutinib, a Phase 3 asset for pulmonary arterial hypertension (PAH). The Company is eligible for net royalties ranging from low to mid-single-digits on commercial sales and will retain a portion of milestone payments.
• Kinnate Acquisition: In April 2024, XOMA Royalty Corporation acquired Kinnate Biopharma Inc. through a tender offer for $2.5879 in cash per share plus one non-transferable contractual Contingent Value Right (CVR) per share. This acquisition included an In-Process Research and Development (IPR&D) asset related to KIN-3248 (a Fibroblast Growth Factor Receptors inhibitor in Phase 1 clinical study) and pre-clinical intangible assets for KIN-8741 (c-MET inhibitor), KIN-7136 (MEK inhibitor), and CDK4 (CDK4 inhibitor). The acquisition resulted in a bargain purchase gain of $19.3 million.
• Twist Bioscience Royalty Purchase Agreement: In October 2024, XOMA Royalty Corporation entered into an agreement with Twist Bioscience Corporation, acquiring 50% of certain contingent payments (royalties, milestones, sublicense income, option exercise payments) related to Twist Bioscience Corporation’s 60-plus early-stage programs across over 30 partners for $15.0 million upfront.
• Daré Royalty Purchase Agreements: In April 2024, XOMA Royalty Corporation paid $22.0 million cash to Daré Bioscience, Inc., acquiring 100% of remaining royalties related to XACIATO™ (clindamycin phosphate) and all potential commercial milestones. The Company also acquired a 4% synthetic royalty on net sales of OVAPRENE® and a 2% synthetic royalty on net sales of Sildenafil Cream, 3.6% (decreasing after a pre-specified return threshold), and a portion of Daré Bioscience, Inc.’s right to a milestone payment under the Bayer Pharma AG License Agreement.
• Talphera Commercial Payment Purchase Agreement: In January 2024, XOMA Royalty Corporation acquired an economic interest in DSUVIA® (sufentanil sublingual tablet) from Talphera, Inc. for $8.0 million. The Company is entitled to 100% of all royalties and milestones until $20.0 million is received, with a shared structure thereafter.
• Stock Repurchase Program: In January 2024, the Board authorized a stock repurchase program of up to $50.0 million of common stock through January 2027. As of December 31, 2024, the Company purchased 660 shares for $13,000.
• Alexion License Agreement: In December 2024, Alexion Pharmaceuticals exercised an option to develop anti-PTH1R monoclonal antibodies, making XOMA Royalty Corporation eligible for up to $10.5 million in milestone payments and royalties ranging from low single to low double-digits on net commercial sales. XOMA Royalty Corporation earned a $0.5 million payment upon exercise.
• Castle Creek Royalty Purchase Agreement (Subsequent Event): In February 2025, XOMA Royalty Corporation contributed $5.0 million to Castle Creek Biosciences, Inc.’s syndicated royalty financing, acquiring a mid-single-digit royalty interest in D-Fi (FCX-007), a Phase 3 asset for dystrophic epidermolysis bullosa.

Geographic Footprint: XOMA Royalty Corporation's corporate headquarters are located in Emeryville, California, U.S. While its physical property and equipment are held in the U.S., its revenue streams are geographically diversified through its partners and licensees. In 2024, income and revenues were generated from partners located in Switzerland ($14.8 million), the United States ($12.1 million), Asia Pacific ($1.1 million), and Europe ($0.5 million).

Financial Performance

Revenue Analysis

Note: Operating Income (Loss) is calculated as Total Income and Revenues less Business development and deal related costs, R&D expenses, Depreciation, Other G&A expenses, Credit losses on purchased receivables, and Amortization of intangible assets.

Profitability Metrics:

• Gross Margin: Not explicitly disclosed.
• Operating Margin: -175.4% (2024)
• Net Margin: -48.5% (2024)

Investment in Growth:

• R&D Expenditure: $2.9 million (10.1% of total income and revenues) in 2024, compared to $0.1 million in 2023. The increase was primarily due to KIN-3248 clinical trial costs from the Kinnate Biopharma Inc. acquisition.
• Capital Expenditures: Not explicitly disclosed.
• Strategic Investments:
  • Pulmokine Acquisition: $20.0 million cash payment.
  • Twist Bioscience Royalty Purchase Agreement: $15.0 million upfront.
  • Daré Royalty Purchase Agreements: $22.0 million cash.
  • Talphera Commercial Payment Purchase Agreement: $8.0 million upfront.
  • LadRx Agreements: $5.0 million upfront (in 2023).
  • Castle Creek Royalty Purchase Agreement: $5.0 million (subsequent event in February 2025).

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: In 2024, XOMA Royalty Corporation purchased 660 shares of common stock for $13,000. The Board authorized a stock repurchase program of up to $50.0 million through January 2027.
• Dividend Payments: XOMA Royalty Corporation has an obligation to pay cumulative cash dividends on its Series A Preferred Stock (8.625% of $25.00 liquidation preference per year) and Series B Preferred Stock (8.375% of $25,000 liquidation preference per year, or $2.09375 per depositary share). Total accumulated dividends for Series A and Series B Preferred Stock were $5.472 million in 2024.
• Dividend Yield: Not explicitly disclosed.
• Future Capital Return Commitments: The Company expects to continue making scheduled dividend payments on its Series A and Series B Preferred Stock using existing capital resources and has an authorized common stock repurchase program.

Balance Sheet Position:

• Cash and Equivalents: $101.7 million as of December 31, 2024, down from $153.3 million as of December 31, 2023.
• Total Debt: $118.3 million (carrying value of initial term loan) as of December 31, 2024.
• Net Cash Position: -$16.6 million (net debt) as of December 31, 2024.
• Credit Rating: Not disclosed.
• Debt Maturity Profile: The Blue Owl Loan matures on December 15, 2038. Projected future principal payments are $12.9 million in 2025, $19.3 million in 2026, $25.9 million in 2027, $32.3 million in 2028, and $32.7 million in 2029, totaling $123.1 million.

Cash Flow Generation:

• Operating Cash Flow: -$13.7 million in 2024, an improvement from -$18.2 million in 2023. This decrease in cash used was due to increased operating cash inflows, partially offset by net payments for Kinnate Biopharma Inc. operations.
• Free Cash Flow: Not explicitly disclosed.
• Cash Conversion Metrics: Not explicitly disclosed.

Operational Excellence

Production & Service Model: As a biotech royalty aggregator, XOMA Royalty Corporation's operational philosophy centers on identifying, acquiring, and managing a diversified portfolio of royalty and commercial payment streams from partnered biopharmaceutical assets. The Company does not engage in internal research, development, or manufacturing of pharmaceutical products. Its business model relies on the successful development, regulatory approval, and commercialization efforts of its partners and licensees.

Facility Network: XOMA Royalty Corporation leases space for its corporate headquarters in Emeryville, California, with the lease expiring in April 2029.

Market Access & Customer Relationships

Go-to-Market Strategy: XOMA Royalty Corporation's go-to-market strategy involves direct engagement with biopharmaceutical companies to acquire economic rights to future potential milestone and royalty payments. This involves identifying promising therapeutic candidates and structuring agreements to secure future revenue streams.

Customer Portfolio: XOMA Royalty Corporation's "customers" are its partners and licensees from whom it acquires royalty and milestone streams. The Company's financial performance is highly dependent on the success and performance of these third-party entities. Enterprise Customers: Key partners and licensees include Roche, Day One Biopharmaceuticals, Inc., Zevra Therapeutics, Inc., Medexus Pharmaceuticals, Inc., Talphera, Inc., Organon, Johnson & Johnson, Rezolute, Inc., LG Chem, Takeda Pharmaceutical Company Limited, Bayer Pharma AG, AstraZeneca, Chiesi Farmaceutici S.p.A., Affimed, LadRx Corporation, National Resilience, Inc., Palobiofarma, S.L., Regeneron Pharmaceuticals, Inc., Denovo Biopharma, Compugen, Monopar Therapeutics, Molecular Templates, Twist Bioscience Corporation, Castle Creek Biosciences, Inc., and Alexion Pharmaceuticals. Customer Concentration: A large percentage of the calculated net present value of XOMA Royalty Corporation's portfolio is represented by a limited number of products, indicating a concentration risk related to the performance of these key assets and their respective partners.

Geographic Revenue Distribution:

• Switzerland: 51.9% of total income and revenues ($14.8 million) in 2024.
• United States: 42.3% of total income and revenues ($12.1 million) in 2024.
• Asia Pacific: 3.9% of total income and revenues ($1.1 million) in 2024.
• Europe: 1.8% of total income and revenues ($0.5 million) in 2024.

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics: The biotechnology and pharmaceutical industries are characterized by significant technological change, substantial competition, and extensive government regulation. Product sales are influenced by pricing pressures, demand, competition from generics/biosimilars and next-generation therapies, clinical trial outcomes, market acceptance, obsolescence, and patent protection. The market for royalty aggregation is competitive, with other buyers and alternative financing providers.

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors: XOMA Royalty Corporation's primary competitors are other royalty buyers and alternative financing providers in the biopharmaceutical sector. Specific names are not disclosed in the filing in the context of direct competition to XOMA Royalty Corporation's business model.

Emerging Competitive Threats: New products and technologies from other companies, including gene editing and cell/gene therapies, could render XOMA Royalty Corporation's or its providers' product candidates obsolete. Additionally, biological products may face competition sooner than anticipated due to biosimilar pathways, impacting potential milestone and royalty revenues.

Competitive Response Strategy: XOMA Royalty Corporation's strategy to maintain competitive advantage involves expanding its portfolio through third-party acquisitions for diversification, aiming to mitigate risks associated with individual product performance and market dynamics.

Risk Assessment Framework

Strategic & Market Risks

Market Dynamics: Biopharmaceutical product sales are subject to lower-than-expected performance due to pricing pressures, insufficient demand, competition, clinical trial failures, lack of market acceptance, obsolescence, loss of patent protection, or government regulations. Unstable market and macroeconomic conditions, including high interest rates, inflation, geopolitical instability, and financial institution instability, may adversely affect XOMA Royalty Corporation's business, financial condition, and stock price. Technology Disruption: New products or technologies from other companies could render the product candidates underlying XOMA Royalty Corporation's acquired royalty streams obsolete, diminishing future revenue potential. Customer Concentration: A large percentage of the calculated net present value of XOMA Royalty Corporation's portfolio is represented by a limited number of products. The failure of any of these products to advance in clinical development or commercialization could materially affect the Company's financial condition and results of operations.

Operational & Execution Risks

Supply Chain Vulnerabilities: XOMA Royalty Corporation's financial performance is indirectly exposed to supply chain risks through its partners. Potential milestone/royalty providers often rely on third parties for preclinical/clinical development and manufacturing. Inadequate performance or loss of these third-party providers could delay product development and commercialization, negatively impacting acquired revenue streams.

Financial & Regulatory Risks

Market & Financial Risks: XOMA Royalty Corporation has sustained net losses, with a net loss of $13.8 million and negative cash flows from operations of $13.7 million for the year ended December 31, 2024, and an accumulated deficit of $1.2 billion. The royalty aggregator strategy may necessitate raising additional funds, which may not be available on acceptable terms or could cause dilution. The obligation to pay quarterly dividends to Series A and Series B Preferred Stock holders represents an ongoing expenditure. Limited information regarding the intellectual property or biopharmaceutical products underlying acquired royalties can constrain the analysis of future cash flows. Reductions or declines in income from potential milestones/royalties, or impairments, could materially affect financial condition. Regulatory & Compliance Risks: The research, development, manufacturing, and marketing of pharmaceutical and biological products are subject to extensive regulation by U.S. (e.g., FDA, FDCA, Public Health Service Act) and international governmental authorities. Compliance failures can lead to delays, suspension of approvals, and civil/criminal sanctions. Various state and federal healthcare laws, such as the federal Anti-Kickback Statute, federal False Claims Act, and HIPAA, also apply. Government authorities and third-party payors increasingly limit or regulate medical product prices, exemplified by the Inflation Reduction Act of 2022 (IRA), which mandates Medicare price negotiations and imposes inflation-based rebates, potentially leading to lower royalties.

Geopolitical & External Risks

Geopolitical Exposure: International business activities increase XOMA Royalty Corporation's exposure to political, economic, and regulatory uncertainties in various jurisdictions. Sanctions & Export Controls: The Company is subject to U.S. Foreign Corrupt Practices Act and other anti-corruption laws, export control laws, import/customs laws, and trade/economic sanctions laws. Non-compliance could result in criminal or civil penalties. Catastrophic Events: Actual or threatened epidemics, pandemics, public health crises, natural disasters, political crises, and other catastrophic events can adversely affect XOMA Royalty Corporation and its licensees, potentially causing delays or elimination of milestone and royalty receipts.

Innovation & Technology Leadership

Research & Development Focus: While XOMA Royalty Corporation primarily functions as a financial aggregator and does not conduct internal R&D for product development, its portfolio includes IPR&D assets. The Company acquired an IPR&D asset related to KIN-3248 (a Fibroblast Growth Factor Receptors inhibitor in Phase 1 clinical study) and pre-clinical intangible assets for KIN-8741 (c-MET inhibitor), KIN-7136 (MEK inhibitor), and CDK4 (CDK4 inhibitor) through the Kinnate Biopharma Inc. acquisition. R&D expenses increased in 2024 due to costs associated with the KIN-3248 clinical trial. Core Technology Areas: Intellectual property is crucial for XOMA Royalty Corporation's business and future income. The Company and its partners/licensees rely on patent protection, copyright, trade secret, and trademark laws. Innovation Pipeline: XOMA Royalty Corporation's portfolio includes economic interests in over 60 early-stage programs across more than 30 partners through the Twist Bioscience Corporation Royalty Purchase Agreement, indicating exposure to a broad innovation pipeline. Intellectual Property Portfolio: XOMA Royalty Corporation's portfolio includes rights to various patented programs, such as those related to Rezolute, Inc.'s Anti-INSR antibodies (expected last expiration 2030-2043), Ology Bioservices Inc.'s Anti-BoNT antibodies (expected last expiration 2030), XOMA Royalty Corporation's phage display library components (expected last expiration 2032), AVEO Pharmaceuticals, Inc.'s Anti-HGF antibodies (expected last expiration 2028), Alexion Pharmaceuticals' Anti-PTH1R antibodies (expected last expiration 2037), and Day One Biopharmaceuticals, Inc.'s OJEMDA™ (tovorafenib) compositions and methods of use (expected last expiration 2031). Some agreements include "step-down" provisions for royalty rates after patent expiration. IP Litigation: The Company acknowledges that intellectual property litigation can be costly and that an inability to protect intellectual property could harm its ability to realize profit potential. Technology Partnerships: XOMA Royalty Corporation's business model is built upon a network of partnerships and licensing agreements with numerous biopharmaceutical companies, including Roche, Day One Biopharmaceuticals, Inc., Zevra Therapeutics, Inc., Medexus Pharmaceuticals, Inc., Talphera, Inc., Organon, Johnson & Johnson, Rezolute, Inc., LG Chem, Takeda Pharmaceutical Company Limited, Bayer Pharma AG, AstraZeneca, Chiesi Farmaceutici S.p.A., Affimed, LadRx Corporation, National Resilience, Inc., Palobiofarma, S.L., Regeneron Pharmaceuticals, Inc., Denovo Biopharma, Compugen, Monopar Therapeutics, Molecular Templates, Twist Bioscience Corporation, Castle Creek Biosciences, Inc., and Alexion Pharmaceuticals.

Leadership & Governance

Executive Leadership Team

Leadership Continuity: The Company acknowledges that the loss of or changes in key personnel could delay its objectives. With a small workforce of 13 full-time employees as of March 13, 2025, XOMA Royalty Corporation faces potential challenges in attracting and retaining qualified personnel.

Board Composition: The Board of Directors includes Jack L. Wyszomierski (Chairman), Heather L. Franklin, Natasha Hernday, Barbara Kosacz, Joseph M. Limber, and Matthew Perry. Further details on independence, expertise areas, and committee structure are incorporated by reference from the Company's 2025 Proxy Statement.

Human Capital Strategy

Workforce Composition:

• Total Employees: As of March 13, 2025, XOMA Royalty Corporation employed 13 full-time employees.
• Geographic Distribution: Not explicitly disclosed beyond the corporate headquarters in Emeryville, California.
• Skill Mix: Not explicitly disclosed.

Talent Management: Acquisition & Retention: The Company's small workforce may pose challenges in attracting and retaining qualified personnel. The loss of or changes in key personnel could delay the achievement of corporate objectives.

Environmental & Social Impact

Environmental Commitments: XOMA Royalty Corporation has not identified any significant compliance issues with environmental laws. The Company currently assesses climate change risks, such as increased operating costs or disruptions, as not material to its business.

Business Cyclicality & Seasonality

Demand Patterns: XOMA Royalty Corporation's business model, as a royalty aggregator, is not directly subject to seasonal demand patterns in the traditional sense. However, the underlying biopharmaceutical products in its portfolio may experience seasonal trends or economic sensitivity, which could indirectly affect the timing and amount of royalty and milestone payments received.

Planning & Forecasting: The Company's future income is dependent on numerous milestone and royalty-specific assumptions, which may prove inaccurate, leading to lower-than-expected returns.

Regulatory Environment & Compliance

Regulatory Framework: The biopharmaceutical products underlying XOMA Royalty Corporation's royalty streams are subject to extensive regulation by U.S. (e.g., FDA, state authorities, FDCA, Public Health Service Act) and international governmental authorities. Compliance failures can result in delays, suspension of approvals, and civil or criminal sanctions. Various state and federal healthcare laws, including the federal Anti-Kickback Statute, federal False Claims Act, and HIPAA, also apply. Government authorities and third-party payors increasingly limit or regulate medical product prices, with the Inflation Reduction Act of 2022 (IRA) being a significant example, potentially impacting royalty revenues. Trade & Export Controls: XOMA Royalty Corporation is subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, export control laws, import/customs laws, and trade/economic sanctions laws. Non-compliance with these regulations could result in criminal or civil penalties. Legal Proceedings: XOMA Royalty Corporation is not currently engaged in any legal proceedings deemed to have a material adverse effect on its business. However, the Company may become involved in material legal proceedings in the future.

Tax Strategy & Considerations

Tax Profile: XOMA Royalty Corporation reported an income tax benefit of $5.7 million in 2024. The federal statutory tax rate is 21%. The Company maintains a full valuation allowance against its net deferred tax assets. Geographic Tax Planning: While not explicitly detailed, the Company's international business activities increase its exposure to political, economic, and regulatory uncertainties, which can include varying international tax structures and transfer pricing considerations. Tax Reform Impact: Healthcare reform measures, such as the Patient Protection and Affordable Care Act (ACA) and the Inflation Reduction Act of 2022 (IRA), along with other statutory and regulatory changes, could adversely affect XOMA Royalty Corporation's business and tax profile.

Insurance & Risk Transfer

Risk Management Framework: XOMA Royalty Corporation evaluates its cybersecurity strategy annually within its enterprise risk management framework, focusing on human elements, perimeter, network, application, endpoint, and data security. The Company utilizes processes, controls, technologies, and outside consultants, and maintains an Incident Response Plan. Cash balances held at commercial banks exceed FDIC insurance limits, representing a concentration of risk.