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CEO: Reinvigorated from Novartis deal, Xoma looks to next asset sale

XOMA Corp., once a classic biotech company searching for the next big drug, was on the verge of collapse before it turned to a new target: becoming a "royalty aggregator."

"A year ago, we were literally weeks from insolvency," CEO Jim Neal said in an interview.

Repeatedly, the company's experimental therapies were missing the mark in clinical trials, so it started licensing their development to other drugmakers.

"We went from a company that had in excess of $30 million of debt on the balance sheet, much of it due in the very short term, to today, where we have over $40 million worth of cash," Neal said.

XOMA now has about a four-year cash runway, Neal estimates. But getting there took some difficult decisions, including slashing half its workforce and closing shop on what had been a 30-year run of drug research and development.

It also took a significant licensing deal: the $31 million upfront agreement with Novartis AG for gevokizumab, a monoclonal antibody that blocks the IL-1 beta protein — a target that XOMA had tested across a range of inflammatory diseases before a large Novartis trial opened a world of possibilities in heart disease and cancer treatment.

XOMA had tried gevokizumab against a type of leg ulcer, the vision-impairing Behçet's disease, a form of osteoarthritis and other inflammatory diseases. After its latest failure, a phase 3 trial for the rare leg ulcers, the company cut half of its workforce and searched for gevokizumab suitors.

Meanwhile, Novartis had been running its 10,000-patient cardiovascular disease trial, dubbed Cantos, using a similar IL-2 blocking antibody, canakinumab. The drug reduced not only heart disease risk but lung cancer risk and death.

That was a complete surprise but quickly reinforced the idea that inflammation played a role in heart disease and other conditions, said Neal.

"This was suspected by many but proven by none," he said. "And Novartis drew that line in the Cantos study."

Novartis' findings were formally presented at the European Society of Cardiology Congress in August 2017, the same month that Novartis bought gevokizumab and injected new life into XOMA.

The smaller biotech has projected $60 million in overall milestone payments on gevokizumab and others over the next 36 months, which only incorporates certain clinical developments, such as a product hitting a late-stage trial goal. Expected royalty payments, the cut that XOMA could get once a drug is launched and starts making sales, are not included just yet.

At the moment, the biotech's business model relies heavily on Novartis: 95% of total 2017 revenue came from Novartis payments on both gevokizumab and the larger anti-IL-1 beta intellectual property, Wedbush analyst Liana Moussatos said in a March 13 note.

XOMA recorded a $1.3 million fourth-quarter 2017 loss, down from a $17.5 million loss a year prior. As the company shifted to different facilities and types of employees, it racked up $6.7 million in fourth-quarter general and administrative costs.

Yet XOMA's focus on portfolio breadth over depth — holding drug licenses across disease areas and targets rather than building particular expertise — is an advantage, Moussatos said.

The royalty-aggregating biotech

There are still a few ongoing development programs, remnants from the prepivot days. But once those are licensed out, there will be no more traditional research and development costs, Neal said.

"Key to this whole model we're pursuing is that we don't spend a dime on any of that [research and development]," Neal said. "It's all being done by our partners, and so it costs us nothing … as long as we're around at the time the milestone is achieved."

That means maintaining the company's public listing and a "skinny" version of the original organization, he said.

"It's not an easy decision, and XOMA struggled with that," Neal added, discussing the job cuts it took to get here. "But by virtue of doing that, it really puts us in good stead about the ability to execute the strategy going forward."

Neal says one asset yet to be licensed out, the companies IL-2 antibody-targeting program, could garner some interest after Bristol-Myers Squibb Co.'s $1.85 billion upfront payment to Nektar Therapeutics for a similar asset.

XOMA's IL-2 program "has a very similar biology, done a different way," Neal said. Bristol-Myers plans to use Nektar's NKTR-214 in combination with its already-approved immuno-oncology drug Yervoy and Opdivo, the latter of which nets more than $4 billion in annual revenue across cancer types.

After the current portfolio is cleared out in licensing deals, XOMA could buy license agreements of other companies' earlier-stage products, or build out to agreement purchases in other disease areas such as neuroscience, Neal said.

"What we really want to see in our portfolio is a diversity of therapeutic areas represented, a diversity of stages from pre-clinical to clinical, and ultimately a diversity of both small molecule and large molecules," he said.

Despite this new structure, Neal says XOMA is still very much a biotech company.

"What's underlying all these royalty arrangements are drug candidates is that most of them have been advanced by our company," he said. "There's lots of science, lots of understanding from a patient benefit point of view and from a clinical trial design perspective that needs to be understood to be capable to be able to run this type of a business."