Why Bay Area's XOMA Surged 700% in 2017 by Not Making Drugs

It’s a common and accepted business practice for venture capital firms to invest in biotech companies, often running those companies until they get to a point where they can be acquired or partnered. In some cases, venture partners run the companies and decide they like running the companies and off they go. It’s unusual for the reverse to happen—for a biotech company to stop trying to develop drugs and instead decide to invest in other biotech companies. But that’s exactly what XOMA Corporation appears to be doing.

XOMA is based in Berkeley, California. The San Francisco Business Times writes, "Long considered one of biotech’s walking dead, drug developer XOMA Corp. is coming alive—but not by making drugs. XOMA essentially is transforming itself from a drug-development company to a financing company, leveraging its scientific hits, cutting its costs and shedding its strategic missteps. In the end, company leaders believe, the new XOMA will leave costly and time-consuming drug development to its partners, sit back and reap the financial rewards."

Investors, at least, seem interested in the idea. Company shares traded at $4.20 at the beginning of 2017 and closed the year at $35.51, an increase of 745 percent. Shares are currently trading at $32.88.

In November 2017, when it announced its third-quarter financial results, the company’s chief executive officer, Jim Neal, said in a statement, "We made significant progress on multiple fronts executing our new business strategy, and in doing so we completely transformed the Company. The highlight events were clearly the license agreements we secured for both gevokizumab and our IL-1 beta intellectual property portfolio with Novartis. Our strategy was further reinforced with new license agreements for use of our proprietary phage display libraries for antibody discovery. We also received milestone payments from our extensive portfolio of partner-funded programs. These third quarter transactions have resulted in a completely revamped balance sheet and multiple years of projected cash runway. With more than two dozen partner-funded programs that have the potential to generate substantial additional milestone and royalty payments, we are very well positioned to deliver sustained growth in the years ahead and create long-term value for shareholders."

It appears, according to the San Francisco Business Times, that the company now plans to focus on taking payments from those partnership milestones and royalties to funding early-stage programs, which would then result in receiving royalties as those drugs are approved. The Times writes, "The strategy is a flip for XOMA, which had developed and licensed out platform technologies and experimental drugs that other companies turned into windfalls, but it was never able to convert those into approved drugs of its own. But the move also highlights how drug-development companies sometimes must get creative to translate their innovations into long-term payoffs."

The company reported nine-month revenues of $47.3 million, all coming from license and collaborative fees or "contract and other." Total operating expenses were $28.3 million for the nine-month period.

The San Francisco Business Times notes that since its founding in 1981, the company has gone through $1.2 billion, created $40 million in debt, and "seemed to wander zombie-like from drug programs in diabetes, cancer and hepatitis to programs in hypertension, eye diseases, acne and a condition that causes leg ulcers. The wide-ranging nature of XOMA’s programs, however, could prove to be its salvation. Licensing its experimental drugs cedes the heavy lifting and risk to partners that must take the drugs through the three-phase FDA trial-and-approval process, which generally takes six to 10 years and often requires $1 billion or more."

Over the next three years, XOMA believes its partnered programs could create $60 million in milestone payments. "We’d been chasing these shiny baubles," Neal told the Times. "We hadn’t talked about what we’d licensed to others—to people who can do later-stage development."

Neal is XOMA’s fourth chief executive officer in 10 years. When Neal and Tom Burns, the company’s chief financial officer, took on their new roles in 2017, they decided it might be time to approach things differently. Both executives had been in finance and accounting positions with XOMA since 2006.

Matthew Perry, the president of XOMA’s largest shareholder, San Francisco-based investment firm BVF, told the Times, "There was very little, if any, value ascribed to (XOMA’s) collection of technologies and the royalties they were getting from partners. They were valued as a company going out of business."

Getting out of drug development saves a lot of money, even though it dramatically changes what the company was founded for. Neal states, "The core of the company had always been R&D—that was the last thing anyone wanted to let go. But we couldn’t afford that ‘luxury.’"