Biotech Asset Holder Xoma to Sell Preferred

Xoma Corporation (XOMA) has announced they will be selling a new issue of cumulative, perpetual preferred stock.

Xoma appears to be a company that helps fund other biotech companies in exchange for a future royalty–honestly I don’t know anything about them, but I will be doing more research to help understand the company.

While it appears the coupon will be pretty high everyone should do some deep due diligence if you know as little as I do about Xoma.

The preliminary prospectus can be found here.

mcg was right on this one and yield talk is in the 8.875% area.

17 thoughts on “Biotech Asset Holder Xoma to Sell Preferred”

  1. I first became acquainted with XOMA when I was on a Biotech binge in the early – mid nineties. IMHO, avoid.

    1. Do you still invest in biotech companies, and if so what do you think about the strategy of buying the economic rights to future biotech royalty and milestone payments?

        1. Royalty Pharma is certainly a major competitor to Xoma for biotech royalty rights…and a much bigger one also. They’ve been around for almost 25 years prior to their going public, so there’s some longevity to this market niche as well. Xoma seems headed in the right direction on this one.

      1. If you don’t have a Barron’s subscription…

        Royalty Pharma Jumps 58% From Its IPO. That’s More Money for Drug Research.
        By Bill Alpert
        June 16, 2020 

        Royalty Pharma’s investors have received annual dividends of about 25% of the business’s free cash flow.

        Pablo Legorreta says his biopharma financing firm is an integral part of America’s world-leading drug innovation ecosystem. Investors seemed to agree Tuesday, as they lifted the stock of his Royalty Pharma more than 50% above its initial public offering price of $28, in the year’s biggest IPO to date.

        The offering raised $2.2 billion for Royalty Pharma’s business of acquiring royalty rights in drugs from the research institutions that developed them, as well as investing in the clinical trials for new treatments. The first trade in the stock (ticker: RPRX) on Tuesday was at $44, and the shares maintained that 58% gain through midday.

        The firm’s royalty deals have allowed research institutions such as Memorial Sloan Kettering to redeploy the rewards from discoveries, including the cancer drugs Neupogen and Neulasta, according to Legorreta. Royalty Pharma financed the turnaround of the long-struggling biotech company Immunomedics (IMMU), which allowed it to finish developing its recently approved treatment Trodelvy for hard-to-treat breast cancers.

        “Royalty Pharma has carved for itself a role in the middle of this ecosystem where we work with all of the innovators,” Legorreta said in an interview.

        Since 1996, Royalty Pharma has invested $18 billion in deals in which it buys rights to a percentage of the top-line sales of products such as the Vertex Pharmaceutical (VRTX) drugs for cystic fibrosis Kalydeco and Trikafta, which brought the firm $425 million in royalties last year. It acquired the rights to those royalties from the Cystic Fibrosis Foundation.

        From the Biogen (BIIB) drug for multiple sclerosis Tysabri, Royalty Pharma received $333 million. The company believes its deals have accounted for more than half of all drug industry royalty transactions since its founding.

        Because Royalty Pharma collects a piece of a drug’s sales without having to cover the associated expenses, it enjoys operating cash flow margins of better than 90%. “We don’t do the sales and marketing or manufacturing, so our operating expenses are incredibly light,” Legorreta said.

        Since 2012, the firm’s cash receipts have grown at an annual rate of 11%. Net income rose from $580 million in 2015 to $2.35 billion in 2019. Royalty Pharma’s investors have received annual dividends of about 25% of the business’s free cash flow. After a reorganization for the IPO, the quarterly dividend now equals 15 cents a share. That amounts to a 1.3% dividend yield, at Tuesday’s $44 stock price.

        Legorreta oversees a team of a dozen analysts who pick the firm’s royalty deals. The current portfolio is a diverse bet on 45 marketed products, with 22 of them generating more than $1 billion in 2019 end-market sales apiece. That doesn’t mean that Royalty Pharma’s bets always pay off. The firm funded a recent clinical trial of the Pfizer (PFE) breast cancer drug Ibrance that was halted in May when data indicated that long-term use of the drug didn’t seem to prevent a recurrence of the disease.

        About three-quarters of the drugs approved in the U.S. or Europe in the past decade have come from America’s academic and biotech research complex, Legorreta said. Royalty Pharma’s IPO will give it more money to pump into this system.

        “The U.S. has this extraordinary ecosystem in life sciences that is very difficult to replicate,” he said. “Countries have tried—China is making a huge effort—but the U.S. has a lead that’s probably more than a decade.”

      2. I no longer invest in that sectors common stock, and very few common stocks in general. The last one I sold was BMY. I see nothing wrong with the strategy of buying a future income stream at a decent rate of return. Of course it can become risky if a better drug is approved and unexpected market share is lost or greatly reduced. I received a small percentage of my loss in XOMA after a class action court settlement. So many years ago I can’t remember the exact details. I have absolutely no confidence nor interest in anything associated with XOMA.

  2. XOMA …………

    Don’t buy it, not matter the coupon. This is a company whose survival is in question. They are going from a research based biotech co (with no record of success) to collecting biotech royalties.

    If you like the story buy the common. The pref will have little upside and 100% downside. You’re taking all the risk of the common with no upside. If successful in the change of strategy it could be a 10-bagger.

    1. So, I am almost always wrong. I say for those who want to use this as a buy indictor.

      Xoma mission : XOMA plays a unique role in helping biotech companies achieve their goal of improving human health. We do this by acquiring the economic rights to future potential milestone and royalty payments associated with partnered pre-commercial clinical candidates. In return the seller receives non-dilutive, non-recourse funding to advance their internal drug candidate(s).

      Look at their largest clients; Merck, Bayer, and Novartis.

      Why do they need XOMA to fund clincal expenses?
      Are they licensing their most or least promising candidates?

      If they were funding small biotech’s or pharma, I would be more willing to see a good business model. I don’t see why Merck, Bayer, or Novartis would give up a shares of their royalty payments for those drugs they see as likely to come to market. Even if they do, these large pharma’s have lots of talent to make sure they get a great deal.

      I’ll pass (depending on how it opens). May mean it is a great buy.

      1. Looks like Xoma is providing liquidity to biotech firms by purchasing the rights to long term royalty payments and other income streams via lump sum payments at a discount to future value…much like companies that purchase annuity streams, structured settlements, etc. Its a new twist on an old business model, with the preferred offering providing the cash needed to spur growth…interesting.

          1. PDLI went the route of trying to convert from a grandfathered royalty stream via Genentech, to transitioning to acquisition of new streams. They’re liquidating now I think.

            1. PDL BioPharma seems ripe for a private equity take over…delisting their common shares is a big step in that direction.

  3. Company has a market cap of around $380 million-small cap to say the least.

    In the past 10 yrs,-through 2019-Revenues have ranged from $58 million to $18 million in ’19.

    They have never shown a profit, and FCF is almost always negative.

    Source: Morningstar “Key Ratios”. Tim, send me your email address and I’ll forward the page to you.

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