XOMA Royalty Corporation (XOMA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the XOMA Corporation 2020 Annual Meeting. I will now introduce Chief Executive Officer, Mr. Jim Neal. Jim, the floor is yours.

Thank you very much. Good morning, everyone. I'm Jim Neal, CEO of XOMA. It's my pleasure to welcome you to the 2020 Annual Meeting of the Stockholders of the Corporation. Appreciate you taking the time today out of your busy schedules to attend the stockholder meeting. This morning, Denny Van Ness, who is the Chairman of our Board, will be presiding over the meeting. And at this point, Denny, I'll pass the podium over to you.

Thank you, Jim. XOMA is pleased to be conducting our 2020 Annual Meeting of Stockholders as a virtual meeting. The order of our agenda is that we will first finalize the voting on the 3 proposals up for approval by the XOMA stockholders, and then Jim will provide a fireside chat regarding the current status of the company. We will leave time at the end of the meeting for any general questions. In addition to Jim and me, also present for the meeting today is Tom Burns, XOMA's Senior Vice President, Finance and Chief Financial Officer; and Bob Maddox, XOMA's Corporate Counsel, along with fellow XOMA Board members, Joe Limber; Matthew Perry; Jack Wyszomierski; and Barbara Kosacz. Nathan Mitchell of Deloitte & Touche LLP, XOMA's independent registered public accounting firm, is also present for the meeting; as are Michael Tenta and Marina Remennik of Cooley LLP, our independent outside Counsel; and Juliane Snowden of the Oratorium Group, XOMA's outside Investor Relations firm. Mr. Maddox will act as Secretary of this meeting and keep minutes. Anthony P. Carideo of the Carideo Group has been appointed to act as Inspector of Elections and has taken the customary oath of office. Broadridge has delivered an affidavit of distribution establishing that notice of this meeting was properly given. All stockholders of record at the close of business on Thursday, March 25, 2020, are entitled to vote at this meeting. The Inspector of Elections has examined the proxies received and reports that the holders of the majority of the shares of XOMA common stock outstanding as of Thursday, March 25, 2020, are represented at this meeting. Therefore, a quorum is present and we may proceed. I will now summarize the 3 proposals to be voted on today, which are described in more detail in the proxy statement. As a reminder, you may view the proxy statement along with our annual report on Form 10-K via the links underneath the "Vote Here" button on your screen. After summarizing the 3 proposals, I will invite questions on any of the proposals, which may be submitted to us online via the Ask a Question box in the lower left portion of your screen. If you have a question on any proposal, please enter it into that box and click Submit. After the conclusion of the meeting, we will answer any general questions submitted online through the Ask a Question box. After the proposals have been summarized and questions addressed, I will open the polls for voting on each of the pending proposals. If you have previously voted by proxy, you do not need to vote today unless you wish to change your vote. The first proposal is the election of directors to serve until the Annual Meeting of Stockholders in 2021 or until their successors are elected and qualified. The XOMA Board of Directors recommends the election of W. Denman Van Ness, Joseph M. Limber, James R. Neal, Matthew D. Perry, Jack L. Wyszomierski and Barbara Kosacz. No other director nominations were received and the nominations are therefore closed. The second proposal is to ratify the appointment of Deloitte & Touche LLP to act as the company's independent registered public accounting firm for the 2020 fiscal year. The third proposal is to approve on a nonbinding advisory basis the compensation of the company's named executive officers, as disclosed in this proxy statement. The XOMA Board of Directors recommends approval of all 3 proposals. Are there any questions on any of these proposals? I will pause for a moment to allow for transmittal of questions.

Denny, there are no questions.

Thank you. We will proceed then. Voting on these proposals is by proxy and by online voting from those in attendance. The polls are now open. If you previously voted by proxy, you need not vote today unless you wish to change your vote. If you wish to vote today or to change your proxy vote, you may do so on the meeting web page by clicking on the Vote Here link in the lower right portion of your screen. I will now pause again for a few moments for those of you who are voting online today to complete the voting process. We will be closing the polls in just a moment, so please complete your voting at this time [Voting]

It is now approximately 9:06 a.m. Pacific time. The polls are now closed and voting on the proposals set forth on the notice of annual meeting has now concluded. The Inspector of Elections will tabulate the votes. Will the secretary please report the results of the voting?

Thank you, Denny. We have been informed by the Inspector of Elections that the results of the voting are as follows: with respect to the first proposal, W. Denman Van Ness, Joseph M. Limber, James R. Neal, Matthew D. Perry, Jack L. Wyszomierski and Barbara A. Kosacz have been elected as directors. With respect to the second proposal, the appointment of Deloitte & Touche LLP as XOMA's independent registered public accounting firm, has been ratified. And with respect to the third proposal, the compensation of the company's named executive Officers, as disclosed in the proxy statement, has been approved on a nonbinding advisory basis. The Inspector of Election will make a final report that will be included as part of the minutes of this meeting. Final voting results will be published in XOMA's report on Form 8-K, which will be filed with the Securities and Exchange Commission.

Thanks, Bob. At this point, I would like to pass the podium to Jim Neal to provide a corporate update.

Thanks, Denny. And actually, I'm going to do the same thing. I'm going to turn the call over to Juliane, who, I think all of you know, works with us on the Investor Relations side. So Juliane?

Okay. Thanks, Jim. Hi, everybody. Today, we thought we'd take a different approach. Instead of delivering the corporate presentation, Jim and I thought it would be more interesting for all of you if we conducted a fireside chat. As always, our corporate presentation is available on the XOMA website, and we do update it monthly. And we do hope that you'll continue to use our website as a resource for updates and detailed information about the assets in XOMA's milestone and royalty portfolio.

So with that, let's get started. Jim, we're 3 years into the royalty aggregator business model. When you think about the expectations you and Tom had back in 2017 and where XOMA is today, notwithstanding COVID, how many of your expectations have been met? Which are still in process? And which ones have you decided aren't important for the company's overall success?

Well, thanks, Juliane. It's nice to be able to have this conversation and talk generally about the business. I think as I reflect back on the time from 2017 through now, I'd say that Tom and I knew the major elements of the strategy and what had to be done. I think we've really focused and refined our understanding of that and execution of that in the period of time that's passed since we first did the recap and the launch and pivot of the company in 2017. At the outset, and still today, we would say that there are sort of 3 things that are critical to this strategy and its success. The first is to be able to identify, structure and negotiate and close worthy asset acquisition transactions to build out that fully funded portfolio. The second is to allow the fully funded portfolio to mature in the hands of the partners. And the third piece is to get expenses to a low level to ensure we're good stewards of and behaving consistently with our very capital-efficient model. So those 3 things we knew were important. I think we've really executed well on all 3 and more to come in the future around that. But just as an example, on the transactions side, in that period of time, we've actually completed 3 transactions where, in each case, we purchased a mini basket, if you like, of assets, and asset in our lingo is the right to receive milestone and royalty payments in the future. We also added a couple of platform companies to the portfolio as well. So some good work in building a track record of being able to conduct monetization transactions successfully. We've also grown a fully funded portfolio, developed and progressed in the clinic. And so as a -- as sign of that, if you like, we've seen payments come in from partners, netting of $10 million in 2017 from Novartis, $5 million in 2018 from another party and $16 million in 2019, as milestone receipts that really are signals of assets moving forward in the hands -- in the clinic, in the hands of the partners. And that capital is important for us to be able to grow the portfolio, turn around and acquire additional assets. The final piece, as we talked about, is this notion of sort of a lean-and-mean expense structure. And in the end of 2019, we made some significant progress with an early exit from our historical lease obligation. So those 3 things, I think we've made great progress on over the really 3 years since we pivoted the company to this new strategy. And so I think we're feeling pretty positive about what we've got. We've really been able to refine our focus on the elements that matter in terms of being successful going forward.

It has been a great 3 years, and we're looking forward to seeing the business model play out. Curious if you have any regrets for having given up XOMA's R&D capabilities, given all of the interest in these therapies to treat COVID?

Juliane, I think it's really simple to answer that question. And it's a -- a 1-word answer would be no or 2-word answer would be no regrets. I think what we have as a company is a fantastic strategy to support the biotech industry to do what it does best in doing R&D. And what we've done as XOMA is establish a platform out there in the hands of many partners, whether they are pursuing COVID, whether they are pursuing oncology opportunities, the antibody platform in the hands of our partners is a powerful tool, and we get potential economics associated with the use of that tool by our partners. I think I really must say that there's been an admirable response on the part of the biotech industry to sort of find therapies and to treat the COVID, vaccines to prevent it. And being part of this industry is really what makes this fun. We are a part of that biotech ecosystem. But we don't do R&D in a traditional sense. It's being done by our partners, and that's I think the beauty and the success of the strategy that we are pursuing. We let the work be done by those who are best at doing it.

Recently, investors have been asking us if there is anything in the XOMA portfolio that's being tested as a treatment against COVID? Do you know of any?

I don't. I think it's early days. It's quite possible that there are targets being pursued. Antibodies themselves are great therapeutic candidates for something like COVID. They could be also very valuable as research tools to support sort of discovery and development of diagnostics or vaccines. So it's very possible that there are antibody technologies being applied to this opportunity. But at this point in time, in terms of what it might mean for XOMA, I think it's very early days. And I'm not aware of anything that's specific from our technology that's being advanced to treat COVID.

Jim, you touched on XOMA's legacy platform. The company has a long history with hundreds of license agreements with companies across the biotech space and the pharma space. Walk us through how the team protects XOMA's intellectual property.

Yes. Well, I think that's actually -- the whole fact that we've got the legacy portfolio of licenses that came from XOMA's foundational work in the area of antibody discovery is really, really important. That gives us a leg up from a competitive point of view. It gives us a great portfolio to start from as we did the pivot to the new strategy in 2017. So it's foundational and fundamental in so many ways to who we are today is that history. We actually embrace that history. We continue to see advancements from that R&D that XOMA had many years ago, producing potential drug candidates in the hands of partners yet to this day. So one of the things that's really important for us as we continue with this strategy is to ensure not so much around the IP, but the enforcement of the license terms that we negotiated and put down on paper many years ago over the course of time. I was an author of many of those license agreements as the BD guy at the company, and so I know a lot of those agreements. And we make sure that the benefits that accrue to XOMA from those license agreements are fully met by our partners. And so some of those discussions, for example, have led -- in the case of Janssen, for example, to the asset being added to the portfolio. We were able to clarify with Janssen which assets were actually subject to the XOMA technology, and therefore, the economics that go with that. So that's an example of us being assertive, if you like, in terms of making sure that we see full benefit of the license agreements that we've put in place over time.

Wonderful. 2019 was a very busy year for the XOMA team. When you -- what are you most proud of when you think about what the team has achieved?

Yes. There is a lot to be proud of in 2019, and it's hard to sort of narrow it down to just a couple of things, but let me try. I always think in these categories and buckets, so we've talked a little bit about these 2 dimensions to value creation for our shareholders, one of them being adding assets to the portfolio through transactions where we acquire milestone and royalty rights. The other one being the advancement of that fully funded portfolio for no expense on our part, but by our partners who are very capable financially and developmentally. On the asset acquisition side, in 2019, we closed 2 transactions that picked up assets from both Aronora and Palobiofarma, where we deployed about $19 million of capital, I think, and picked up 11 potential milestone and royalty opportunities. These transactions, there were lead assets that were contained in them where the key player was Bayer for the Aronora assets and Novartis in the case of Palobiofarma. Again, the profile of these milestone and royalty assets being in the hands of a well established and very capable development partner like Bayer and like Novartis. So on the asset acquisition side, those are a couple of signs of success, I think. In terms of the fully funded portfolio, I think there is just one event that really comes to mind for me that was very exciting in 2019. And I think, long term, it's going to pay big dividends for many of us. That is the Novartis announcement on their R&D Day in December of last year with respect to the iscalimab data, what that might mean for patients, what that could mean ultimately for us, should that program continue to show the great results it's done so far in kidney transplant population, for example. It's pretty exciting science, and its potential impact on XOMA with our potential royalties is significant.

Yes. That December Day was truly one of the highlights of my year, and I was really pleased to be in the room with you, Jim, when Novartis shared what the potential clinical implication iscalimab could have on the kidney transplant population. It's why we're in this business. And I believe I can speak for all shareholders in saying that we're all rooting for Novartis to continue having success with this program. Thinking about the opportunities to further expand the milestone and royalty portfolio, acquisitions require capital. XOMA's taken the unusual approach to financing these acquisitions by using rights offerings, which is a tool that's more frequently used in the EU and less so in the U.S. So you guys have raised capital twice through this financing mechanism. Why this approach? And how does it benefit XOMA shareholders?

Yes. And I think this tide of uncertainty in financial and capital dislocation reminds us all that this business, as all businesses, it's really important to have a strong balance sheet. So our balance sheet can be fed through either operations, receipt of milestones, through the appropriate and judicious deployment of debt and also through equity. And that's what rights offerings, that last category, is really where rights offering fits in. It's another way to strengthen our balance sheet, to add cash as we did last year. We put $22 million of cash on the balance sheet at the end of the year, taking our total cash on hand at the end of the year to around $58 million. So we've really strengthened the balance sheet for the corporation through that rights offering transaction. What's unique about them, the rights offering, is it allows all shareholders to get into the opportunity to participate. So it's actually really looking after those who brought you to the dance in some way, so to speak. It's not open to non-shareholders. It's equitable across all current shareholders, and we like that approach in terms of the equity across the shareholder base. And the final piece about the rights offering is it's a very cost-effective way to raise funds to add strength to the balance sheet, again from the point of view of the fees. And so we've seen this mechanism work a couple of times, and we would certainly think about it for the future. But what's great about it is the ability for all shareholders to participate alongside each other and the cost-effective nature of it.

That capital has given us opportunities to further build out the portfolio. Given that the biotech industry has never been under as bright as spotlight as it has been for the past couple of months, are you finding companies are more receptive to having conversations about monetizing their partnered assets? Or is all this media attention on biotech resulted in an asset price inflation?

Juliane, probably, like most situations in life, there is a little bit of both of those things going on. I think there's certainly been some excitement, a spotlight brought on biotech for its potential to deliver vaccines and therapeutic solutions, whether that's COVID-related or otherwise. And so there's actually some enthusiasm around the biotech business. The other side of this, though, is we actually rely on clinical studies to truly test our candidates for therapeutics, for example, safe and effective. It's really important that those clinical trials be conducted and conducted in a good fashion. And with the disruption at hospitals and so forth, there is uncertainty around sort of when inflections might -- inflection points might be hit by biotech companies advancing Phase I, Phase II, Phase III assets. So that, I think, is an area that is really not known at this point in time, the impact of what this might mean for small biotech companies and their ability to be able to hit the time lines that they were thinking about. It's clear that biotech, whether in the COVID time or other, require significant amounts of capital. And we see those overall as being opportunities for XOMA as a provider of capital in this ecosystem to be well positioned to find the right opportunities to further expand the portfolio at attractive return profiles for the right situations, and to provide companies with access to capital that's appropriate for their purposes. So I think we've seen potentially for more opportunities than in the second half of this year and into 2021, and time will tell.

Well, we definitely look forward to seeing how those opportunities to build out the portfolio play out. That leads to my next question, Jim. Investors often ask us how we balance our desire to increase the size of the portfolio with our available capital. What changes have you made to reflect today's environment?

We've done a few things, Juliane. And in a time of uncertainty like this, you look at yourself as well as the market and think through what's the right thing for us to do. One of the things that Tom talked a lot about is do no harm, sort of the Hippocratic Oath. In this case, we're talking about our business. And so we constantly think about our runway, how much cash we have to be able to be in position to receive milestone and royalty payments in the future, and that's a focus for us. So in response to this uncertainty, just generally in the marketplace, we've done a couple of things. We've actually tightened our belt a little bit on the expense side. We didn't think there was a lot of room to further reduce expenses, but we've found some creative ways to do that. So that's, in the scheme of things, an important signal, if nothing else, in terms of our ability to sort of continue to be good stewards of the capital, as I mentioned before. The other thing that we've done as we look at potential for acquisitions is to be more critical of our assessment on the assets that we're looking at, think about what the risk profile looks like, the IRR profile and be careful around those acquisition possibilities. And then the final piece I would say is -- that links those two is actually sort of sequencing our capital deployments with capital inflows. So if we get milestones coming in, for example, that gives us the opportunity to be out with more potential capital deployment opportunities as well. So thinking through the runway, the expense structure and the capital inflows and outflows, even more focused on that is something we've actually implemented as a result of the changes in the environment.

Well, thank you for giving us that insight into how you're thinking about portfolio expansion right now. I wanted to switch gears and give shareholders a little insight into the team and you as a business leader. What has surprised you most as CEO during the stay-at-home directive?

Yes. It's actually really interesting, Juliane, and I think none of us expected the circumstances that we're facing right now. But let me say this, I think I always knew we had a fantastic team. What I've really been impressed by is how well that team has seamlessly transitioned to working remotely. We actually designed our operating systems, working systems to be able to allow folks to -- the team to work remotely, not anticipating COVID. But that actually has served us in good status. When you think about the situation we face today, where we're now forced to work remotely, we haven't dropped the ball. There's been an amazing commitment by the team. So I really think about the respect that I have for those on the team who are juggling full-time parenting, with homeschooling and responsibilities to the company all hours of the day, and it really is a 24/7 world we're living in. But really to all of that, not a single ball has been dropped, and people are still willing to say, I think we can be more efficient, more effective in this area, look for cost savings and so forth. So it's been really revelationary for me, thinking about what I knew was a fantastic team is better than I thought it was, and we've been able to do this transition in a pretty smooth fashion, I would have to say.

I can't say enough good things about the team. So having worked with you guys for a few years now, this team has been amazing. One other question. What have you learned about yourself during this period, Jim?

Yes. I think, Juliane, you know me pretty well. Patience wouldn't be a word you'd use to describe me. So we've even done some profiling to sort of reinforce that at some level, but getting something done and moving on to things and so forth is kind of my orientation. That said, we're in a business that we preach to our partners and to our shareholders that we need to be patient. So that dichotomy is actually not lost on me and sort of the irony in that. But it's actually an easy thing to say and a hard thing to do is to be patient, but this is the time when a strategy like ours really showed my view. So we've built a strategy and team for times like this. We feel like we're well positioned for both the short-term and mid long-term opportunities will drive success. And this is the time, I think, when a strategy like this really can shine. So being patient to now to the times like this has been important for us, and we have to exercise that patience as challenging as that is from a personal point of view on a go-forward basis and really go ahead and do the things that we need to do to build out the business and do that with discipline and patience.

Very true, the patience is hard for leaders. I just keep reminding myself, Warren Buffett advises all investors to have patience with their investments, and yet at the same time, we recognize how difficult that can be. And then drug development and the time lines on drug development require that patience and to see the benefits of the patience and the investment requires just biding time and waiting for the results to play out. What are we -- what should we be looking for from XOMA over the next 18 months?

Well, Juliane, you probably won't be surprised if I say you should look for the company to see and deliver results in a couple of different areas, the same 2 areas we've talked about before. So there will be developments by our partners. And so you could anticipate that -- and we anticipate that there will be some further data from Novartis on iscalimab, for instance, on the Phase II studies, particularly the kidney transplant study. So that will be exciting for patients. It also is exciting for us. We could see first patients dosed in some Phase II studies being run by Novartis, Merck and Takeda, for example. So additional sort of moving of these assets into the next phase of critical clinical development. The Phase II proof-of-concept is an important milestone for many, many molecules, and we anticipate that there are several molecules being sponsored by Novartis, Merck and Takeda, as I suggested, that are at that point. And so those would be significant inflection points for those programs, also important for us. You can anticipate that there's an interesting proof-of-concept of the strategy with Sesen Bio. They are finalizing their BLA for Vicinium and looking for an FDA decision at the end of the year. So that could, in a small population, deliver a relatively modest royalty, but a nice first asset to begin sort of contribution to their revenue line on a recurring, predictable basis from that arrangement. And then on the asset acquisition, build out the portfolio side, you should look and hold us accountable to identify new royalty and milestone acquisition opportunities and close on those when appropriate, at the right level of potential returns for us, but also to find the win-win situation for the biotech company who's on the other side of that transaction. So not surprising that the anticipation of where we would be in the next 18 months would be to add more assets to the portfolio and watch the portfolio to continue to mature and develop in the hands of our partners.

Well, thank you, Jim. I really appreciate you've shared these thoughts with us today. Do you have any final thoughts that you want to share with us before we turn the call back over to Denny.

I do have one last thing, and I guess it really comes -- as I reflect, I think about difficult times are really growth opportunities for companies with a very strategic focus, sound financials and strong creative teams. And really at XOMA, I think we're well positioned for success, despite the difficulties and the dislocations in the external environment. These are actually going to create opportunities for us to be an even better company, doing what we're doing in the royalty and monetization space and providing solutions for biotech companies while providing returns for our shareholders at the same time. So I think of this as actually a really exciting time to be us doubling down, if you like, on a royalty and monetization strategy with the clarity of focus that we've got and the strength of our financial situation, I feel very optimistic about the future.

Well, thank you very much. And hopefully, the shareholders who have been participating have a little better insight into who you are, Jim, and the team, and how we're all working together to achieve your vision for the company. Denny, are you ready to take back the podium?

Actually, I am, and thank you very much, Juliane and Jim. That concludes the formal portion of the meeting. If you have any additional questions, I invite you to submit them at this time, and we'll just pause for a moment so that can happen.

Denny, there are no further questions.

Okay. No questions. The meeting is now adjourned. Thank you for attending this meeting and for your ongoing support of XOMA.

Thank you for joining. You may now disconnect.