XOMA Royalty Corporation (XOMA) Earnings Call Transcript & Summary

Thank you for joining XOMA Corporation's 2021 Annual Meeting of Stockholders. The meeting is being recorded. Registered stockholders may use the Q&A button on the bottom right-hand of the screen if they have a question for XOMA management. I will now turn the call over to Jim Neal, Chief Executive Officer and Director of XOMA Corporation. Mr. Neal?

Good morning. I'm Jim Neal, Chief Executive Officer of XOMA. It's my pleasure to welcome you to the 2021 Annual Meeting of the Stockholders of XOMA Corporation. I appreciate your taking time today out of your busy schedules to attend our annual meeting. I will be presiding over the meeting. XOMA is pleased to be conducting our 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 I will provide an update on the company's progress in 2020 and its plans moving forward. We will leave time at the end of the meeting for any general questions. In addition to myself, 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, Barbara Kosacz and Natasha Hernday. Nathan Mitchell of Deloitte & Touche LLP, XOMA's outside independent registered public accounting firm, is also present for the meeting, as is 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. Cheryl Niebeling of the Carideo Group, Inc. has been appointed to act as Inspector of Election 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 Friday, March 26, 2021, are entitled to vote at this meeting. The inspector of election has examined the proxies received and reports that the holders of the majority of the shares of XOMA stock -- common stock outstanding as of Friday, March 26, 2021, 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 voting and the inspector of elections' report of the result of the voting, the formal portion of the meeting will conclude, and I will provide a corporate update. Upon conclusion of the corporate update, management 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 approvals. 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; Barbara Kosacz and Natasha Hernday. 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 outside independent registered public accounting plan for the fiscal '21 -- 2021 year. The third proposal is to approve the amendment of the company's certificate of incorporation to increase the authorized number of shares of preferred stock from 1 million to 11 million. The Board of Directors of the company 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. Seeing no questions, we will proceed. 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 a few moments for those of you who are voting online today to complete the voting process. [Voting]

We will be closing the polls in just a moment, so please complete your voting at this time. [Voting]

It is now approximately 9:07 Pacific Time. The polls are now closed and voting on the proposals set forth on the Notice of Annual Meeting is now concluded. The inspector of elections will tabulate the votes. Will the Secretary please report the results of the voting?

We have been informed by the inspector of election that the results of the voting were as follows: with respect to the first proposal. Denman Van Ness, Joe Limber, Jim Neal, Matthew Perry, Jack Wyszomierski, Barbara Kosacz and Natasha Hernday have been elected as directors. With respect to the second proposal, the appointment of Deloitte & Touche LLP as XOMA's outside independent registered public accounting firm for the calendar year 2021 has been ratified. With respect to the third proposal, the amendment of the company's certificate of incorporation to increase the authorized number of shares of preferred stock from 1 million to 11 million was not approved by the requisite number of shareholders. 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, the formal meeting of the meeting -- formal portion of the meeting is now over. I will now provide a corporate update. Welcome to the informal portion of the meeting, where we provide a bit of a background on 2020 results and beginning of 2021 results. We are a royalty aggregation company, and I think that's going to be an important theme emerging even further in 2020 and 2021 as we go forward. We will make forward-looking statements during presentation, I would refer you to the SEC filings associated with the company. In addition, we referenced assets in this presentation and an asset in XOMA lingo, just to be completely clear, is the right to receive -- the potential right to receive future payments as milestones and royalties in the future. And so oftentimes, an asset in corporate biotech presentations can be an underlying drug candidate. In this case, in XOMA world, that is actually the economic rights associated with the license agreement that we have done a monetization transaction for. You are shareholders in a company that today has a portfolio of over 70 assets, that's right to receive future payments, in greater than 30 disclosed indications today and growing, with very many well-known household names of partners along this portfolio, from Novartis to Merck to Bayer to Janssen. You can see the names of the molecules associated with that. But it's a great portfolio of over 70 assets, up significantly from in 2020 -- 2017. Our business is to acquire drug royalties associated with mid- to early clinical stage candidates. We differentiate by focusing on development stage assets with blockbuster potential license to big cap partners. There's a lot bundled into that sentence. It's important to understand. We do pre-commercial candidates. And you'll see the set gravity of our portfolio is definitely in the Phase I, Phase II stage of development. Many of these products, these underlying drug candidates are licensed with large cap partners who are well equipped to do the development financially and intellectually to take these assets forward. So we do this with monetization of royalties of pre-commercial candidates. From an investor point of view, this is an opportunity for you to receive exposure through royalties to the upside potential of biotech. It's a very capital-efficient model where the R&D costs are borne by the partners. We receive interim milestone payments along the way, and they've covered much of our low operating costs to date. Exposure is risk mitigated through diverse portfolio effects. And partners spend up to hundreds of millions of dollars a year to develop these individual XOMA royalty assets. They don't do that to provide us with royalties, they do that for their own purposes. But along the way, we receive the potential for milestone and royalty payments. We like royalties because they're not dilutive as companies raise capital. It's an important consideration from a shareholder return perspective. The next slide, Slide 4, represents our portfolio today. You can see, as I've mentioned, the center of gravity of this 70-plus asset portfolio is in the Phase I, Phase II stage of development. The key aspect about this is all of the expense associated with the advancement of this portfolio is on the hands of the partners, it's borne by the partners. Over 50% of the assets are with large cap partners. You can see the overall portfolio is something, if you are a pharma company, this would actually be something to be very, very proud of with this many assets at this stage of development. And we do have one asset now at the point of BLA filing, looking for an approval and one in the Phase III stage of development. The prior slide of the 70-plus assets is impressive from the point of view of the portfolio. What is difficult to see in that snapshot is what the movie looks like, and this slide on Slide #5, represents the advancement of this portfolio in the hands of the partners, really the investment being made, the drumbeat of activity every day that goes on by our partners in advancing these assets. Since 2017, when we conducted the strategic pivot, our portfolio has seen 27 advancements from phase to phase. That's from preclinical to the clinic or within the clinic stage to stage advancement. So that shows you the advancement and the move, if you like, of this portfolio. That center of gravity is actually moving to the right, as we would say, towards commercialization, all as a result of the investment by the partners. And while it's great to have a 70-plus asset portfolio, and we really do think that's valuable for the point of risk mitigation and continuing to see expansion of revenue possibilities. It's a tough task to sort of say, well, what in that 70-asset portfolio should I focus on? It's a tall order to know all the assets. This next slide represents actually some of the key assets in the portfolio. You can see we have multiple assets in Novartis' hands. We have iscalimab, an anti-CD40 program, where we stand to potentially receive mid-single-digit to low-teen digit royalties associated with the commercialization of this very exciting product that Novartis is advancing in transplant and autoimmune. Another one that has similar profile from the point of view of the royalty being double digit is an anti-TGF-beta program, which we licensed to Novartis in 2015. And actually, we received a nice milestone associated with its advancement into Phase 2 at the end of last year. This is an exciting program also in the hands of Novartis. You can see here across this portfolio, even of these 12 programs, significant -- names and programs with significant royalties associated with their advancement. One thing I will mention on this slide, for those of you who have an opportunity to hit our website, the right-hand boxes associated with these programs, indicating clinical trials, news and posters and presentations are in live links. So if you want to find out the latest status of this particular asset, you can hit clinicaltrials.gov just by simply going to our website. The simple approval of one of these assets alone would transform this company and be a huge change. So if you think about a multibillion-dollar drug possibility as many of these represent, but with double digit royalties, you can think about the royalty revenue associated with that. It would completely transform the company that we are today. We're a little bit away from that in terms of the timing, but it's an exciting portfolio. I will also mention cetrelimab. This is the Janssen J&J product that we have the chance to hit a -- receive a 0.75 royalty on is actually a Phase III development as well. And so you see a nice set of assets here, again, any one of which could pop and we think of this a little bit in a venture sense that there's multiple assets here that could completely transform the company at various stages of development. We did mention Novartis as earlier in the presentation, and this is from their presentation, their results presentation, a slide we -- a couple of slides we've taken, which highlight royalties and products within the Novartis pipeline for which XOMA has some significant economics. I mentioned iscalimab, the anti CD40 program. We have the opportunity to receive mid-single digit to low-teen royalties. VPM087 is the anti Il-1 beta program, which we licensed to Novartis in 2017, where we have the opportunity for high single-digit to mid-teens of royalties, NIS-793 as the anti-TGF-beta program, where, again, we have mid-single-digit to low-teen royalty opportunity. And NIR178 is actually a program that came into our portfolio as a result of a monetization transaction with Palobiofarma targeting A2A receptor. Again, another exciting program within the Novartis pipeline. So there are some significant efforts being undertaken by Novartis, a partner of ours around various assets. All of these actually in oncology, with the exception of iscalimab, which is a very, very interesting autoimmune candidate. In 2021, we expect a number of clinical events. This has been disclosed by the partners in public filings. You can see a couple of these have actually occurred already. I mentioned J&J's cetrelimab. They did initiate Phase III development of this particular program earlier this year. We have had discussions with and seen announcements from who have an FDA decision date for their BLA submission in August of this year. There's a PDUFA date been established for that particular program and regulatory feedback at that point in time. And Rezolute announced Phase I data for their RZ 402 program earlier stage, but you can see the bulk of the news -- the bulk of the portfolio, again, is in that Phase II stage of development. We expect further announcements from the likes of Novartis and AVEO and Rezolute insights got some exciting programs in their portfolio. So you can see this is the -- again, news that should be forthcoming through the balance of this year, a couple of which have occurred already. In terms of who we are, we're a small team, but we have a very, very powerful approach to business development transactions, and that's really Tom's background, my background as leaders of the organization. We have a development team, business development team who are looking for and constructing transactions supported by legal and finance and many consultants who help us identify and evaluate opportunities. Our Board of Directors is a set of well-known names that we continue to recruit for. And all joined together in us -- in a singular focus on making the company more valuable about having a key transactions and licensing background commonality. You may have seen this year actually some significant activity by Royalty Pharma and DRI in terms of their IPO. So there's been an interest in or resurgence in royalties as an opportunity to use that as a vehicle in investing in biotech and pharma. And these IPOs were tremendous from the point of view of bringing that into focus. There's royalties and then there's royalties, And then what Royalty Pharma does, and from a competitive point of view, has been very, very successful. They take late-stage assets into royalty monetization deals associated with them, often deploying upwards of $200 million or $300 million in the transaction, but always on a really a late-stage commercial approved asset. We are very different. Our monetization transactions and our royalties are the result of license agreements that have been put in place. We tend to focus on Phase I/Phase II clinical stage assets, the amount of capital we deploy is significantly less in a particular transaction. So we're very differentiated within a very exciting space and focused on mid to early clinical stage assets as our bread and butter. When one thinks about our royalty monetization transaction XOMA style, one needs to understand the couple of steps that are critical to that. In step 1, a biotech company outlined here in the green box, will essentially sell their innovative candidate product to big pharma via a CVR or a licensing transaction. The program is licensed to the big pharma. And in exchange, the big pharma, and I use that term a little loosely, this could be a partner. The big pharma promises to make royalty and milestone payments associated with the advantage of that molecule as they put it through their development pipeline. That's the step one. And that's a very common transaction in biotech. We're the innovator, the biotech company licenses the asset candidate to big pharma. In step two, sometime after step 1 has been concluded, the second part of this transaction occurs, where we, as XOMA, provide capital to that biotech company in exchange for those royalties and milestones that they've negotiated as a part of the license agreement that they constructed in step 1. This is important because what you really end up with then is us providing capital to a biotech company for where there are oftentimes significant needs in exchange for these at-risk receivables, if you like, but the entity behind those receivables is the big pharma company. So we're actually looking for and buying milestone and royalty rights associated with license agreements that have been conducted with the big pharma companies, and it's an important screening aspect, but also a financial management aspect as well. As I've suggested, opportunities abound for royalty monetization through -- in 2014 through 2019, there are 2,600 licensing deals done over that period of time. And think about it as a deal a day in many ways. And so you can see the distribution of the licensing arrangements done in this business. It's a very common transaction, all the way through from preclinical to Phase III, but they consist typically of a stream of milestone payments potentially associated with advance for the molecule and then royalty obligations if the molecule makes it all the way through to commercialization. And as you can think about this, the company is funding this increase over time -- the investment made in the program increases with time. The point is there's lots of these transactions -- these license transactions that occur and are out there. Historically, we have opportunities to monetize the milestone and royalty obligations there under. As we look at assets that we profile and prioritize, the first key thing we look for in a target asset for acquisition or monetization is the presence of the strong developer and marketer. Oftentimes, we use big pharma as the broad categorization of that. But basically, we're looking for assets that are partnered with high-quality biopharma companies. That means the asset has met the hurdle required by the big pharma company to in-license it into their portfolio and treat it as one of their own. So that's a key criteria for us to select those biotech assets that we want to take our monetization transaction to. . From there, it really is the characteristics of the underlying clinical candidate that we look for. So it's mid- to early-stage clinical stage of development. As I've mentioned, we are a therapeutic area agnostic. We look for long durations of market exclusivity and high revenue potential. This would mean the opportunity for royalties to occur, if we actually get through clinical development, regulatory approval and commercialization, that there's a reasonable period of time for us to be able to enjoy the revenue and the high revenue associated with the molecule as it is commercialized. So long duration comes from either patent expiration or regulatory exclusivity and high revenue potential really means molecules that have the characteristics of being -- targeting high unmet clinical needs or clear clinical benefit over alternatives. Those are the types of assets that we look to do monetization transactions around. You can see the actual tactical execution of that on this next slide, as we think about transactions that we've conducted since 2018. The most recent of this was actually in 2021. We constructed a royalty monetization transaction with Viracta being the biotech company, the partner and licensee or de novo on day 1, some exciting molecules they've got being advanced. We deployed $13.5 million worth of capital into this transaction. And you can see down this list, the partner licensees, the key column Merck, Incyte, Bayer and Novartis, [ KC ], well known, Day One, well-known, thanks for doing the investment in intellectual capital associated with the advancement of these molecules through clinical development. And you can see this covers a broad range of therapeutic areas from oncology to immuno-oncology, the thrombotics, NASH, asthma lysosomal storage disease disorders. There's a broad portfolio here being developed in addition to what we have from a legacy point of view at the company. From a financial point of view, the profile of this company has changed completely since 2017 when we conducted the strategic pivot. You can see expense profile has essentially eliminated any R&D expense associated with the company. All of the R&D that goes on with the programs that we are associated with now is being done by our partners. And so we have, essentially, from an expense point of view about $1 million a month of cash that we expend to run the company in the [ pivot ] of transactions. And you can see the increase in the year-end cash associated with -- on the balance sheet at the point in time of the end of the year arising from sort of $20 million to over $80 million. And we've had subsequently an additional fundraising activity, where now our cash balance is even stronger. And what's not represented on this chart is actually a reduction in the debt that we owe others associated with the balance sheet as well. So the company has changed this profile completely. We think about our balance sheet as an important consideration. We need to be a credible provider of capital and the balance of cash on the balance sheet like we have at this point in time is extremely important for those purposes. I will highlight to you some of the recent activities on an operational side, but also with our partners and partnered assets. In 2020, it was really a sort of a year, if you like, of 2 halves. In the first half of the year, COVID hit and there was lots of uncertainty associated with clinical development, with financial markets and so forth. We are all part of that. I think it impacted everybody's life. But in the second half, sort of we see the COVID hit in the first half and biotech hit back in the second half. There's lots of activity. People figured out how to run clinical studies. And we saw the effect of that in our business. We had financial milestones hit with Novartis, providing a $25 million check, as I've mentioned already, and some additional milestones from payments from Merck and Takeda and Rezolute. So almost $30 million worth of capital coming into the company in the second half of 2020. And since 2017, when we launched the royalty monetization strategy, we have more than doubled the license portfolio associated with the company with acquisitions. And you can see we've got Affimed and Janssen advancements. And so these are really important programs for us going forward. We did a $60 million worth of preferred perpetual stock offering associated with the company as well. So part of building that balance sheet strength. But particularly, what matters here is the advancements by the partners. And again, as I said, in the second half of 2020, we saw some significant events that are listed on the slide. The highlight would be the advancement of the TGFß program at Novartis, but others as well, including the Takeda program, the Janssen program, Merck's non-small cell lung cancer study and so forth. This is an exciting portfolio and gives us really the sort of evidence, if you like, biotech hitting back is biotech figuring out how to do clinical development that we saw the benefit of that in the second half of 2020. XOMA is an exciting company that you, our shareholders in, and we have over 70 assets where we have the opportunity to receive milestone and royalty payments associated with their advancements. What's key here is that the pharmaceutical companies fund 100% of those R&D costs associated with those molecules. I've mentioned iscalimab, osocimab, cetrelimab with Janssen, Bayer, Merck, Novartis. We source the royalty rights through our deep industry network. This is not the sort of assets that you go out and find on Bloomberg and look for it on the balance sheet. These assets, if you like, these milestone royalty opportunities need to be sourced, and we do that through our relationships in the industry. We attend bio shows. We have a strong relationship with BVF, a major shareholder, who's sees companies coming through their doors every day looking for opportunities to provide capital. We are able, through our industry association by being biotech company of ourselves, to find these royalty opportunities. We construct an increasingly diverse and expanding portfolio to increase the odds of success and to mitigate the binary risk associated with clinical development. So it's a really important component to have portfolio effects occurring in our favor. Our future royalty revenues are paired with low-cost infrastructure. So when one thinks about the royalty revenue possibilities and that comes in as essentially 100% margin coming into our P&L., there's no cost of goods. There's no cost of sales associated with those royalty revenues. You pair that with our low in low-cost infrastructure, it gets to be earnings very, very quickly and highly leveraged. It's an exciting possibility. We're a couple of years away from the real impact of this. But that portfolio is continuing to advance. We really saw the evidence of that in late 2020 with the work from our partners, and then continuing to be expanded by the work we're doing by acquiring assets like we did in the Viracta transaction and the Affimed transaction where we had significant assets to the portfolio. With that, I'll conclude my remarks. This concludes the formal portion of the informal portion of the meeting. If you have any questions, I'd invite you to submit them at this point in time.

Jim, we have one question. You mentioned the IPOs of DRI and Royalty Pharma. Are you seeing competition for assets that you want to acquire?

We are really happy with the IPOs of DRI and Royalty Pharma. As I mentioned, they've actually shone a light on royalties as a way to participate from an investor point of view in the overall biotech and pharma market. So that -- by itself, the presence of those 2 companies being public and bringing attention from the investment community has been a good thing, and this actually has a halo effect, I think, in really how we've been viewed overall from the investment community point of view. On the asset side, they really operate in a very, very different place from where we operate. As I mentioned, Royalty Pharma and DRI really are focused on commercial stage assets. And so these are drugs that have received regulatory approval and now being commercialized. And so from a couple of different perspectives, both the amount of capital that is typically deployed by Royalty Pharma in a transaction, but also most particularly the stage of the underlying asset. They're very, very different. So the overall impact of those 2 IPOs, I would suggest, is being positive from the point of view of the interest in royalties as a way to participate from an investment community point of view. But from the competition for assets, really has not had any impact at all into what we're doing.

Thank you very much, and we don't have any additional questions.

Great. Thank you. So with that, and no further questions, the meeting is now adjourned. I thank you for attending, and I thank you for your ongoing support of the company.

Thank you for participating in today's meeting. This concludes the call.