BoB@JPM: Owen Hughes & Brad Sitko, XOMA Royalty

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On this episode of the Business of Biotech, recorded on-site at the 2025 JP Morgan Healthcare Conference, we explore a new approach to biotech financing with XOMA Royalty's Owen Hughes and Brad Sitko. The CEO and CIO, respectively, share an innovative royalty aggregation model that mitigates risk while enabling immediate capital access to biotech firms. We learn the differences between royalty financing and equity-based funding, how the model addresses traditional risk in biotech financing, the evolution of XOMA's business model, and much more. 

The 2025 BoB@JPM series is supported by Alston & Bird, whose national health care and life sciences practice has more than 100 attorneys actively involved and integrated across the full spectrum of legal disciplines including regulatory, compliance, public policy, transactional, corporate governance, securities, FDA, biotechnology, intellectual property, government investigations, and litigation practice areas. Learn more at www.alston.com.

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Episode Transcript

Speaker 1 (00:04):
Owen Hughes and Brad Sitko are CEO and CIO,
respectively, of a new companyplaying by a new set of biotech
investment rules.
It's called XOMA Royalty andthese two are collectively
mastering the art of mitigatingbiotech investment risk while
simultaneously expediting thepath of a host of therapeutics

(00:28):
to patients.
I'm Matt Pillar.
This is the Business of Biotech, jp Morgan edition.
We're here in the beautifuloffices of the law firm of
Alston and Byrd, who we'repartnering up with on this
series, and we're very thankfulfor the space.
If you have any biotech or lifesciences legal needs, alston
and Bird is your firm.
I want to start out by gettingto know you guys a little bit.

(00:52):
But before we get into the meatof you, you guys and what
collective expertise you bringto do this new sort of
investment paradigm, I want tolearn about that.
So I want to start there.
Originally I was thinking we'lljust start by getting to know
these guys, but let's start withsharing the fundamental layout

(01:13):
of what royalty aggregation isand then we'll get into your
backgrounds and how you'reuniquely suited to move into
this business.
Sure thing.
Well, first, thanks very muchfor the invitation.
We certainly appreciate it.
My pleasure.
Second, for taking time out ofa very busy week to join me.
Our pleasure, our pleasure,second is, if that introduction
has not been trademarked, weactually can take that.

(01:34):
You can have it.
That was the most eloquentapproach in description of XOMA
and what we're trying to do.
I wrote it out so that I woulddeliver it.
I appreciate it.
Well, brad is much more steepedin royalty finance than I am.
So, brad, why don't you give asense of what we're doing?
Absolutely so what we are doingis actually bringing forward

(01:55):
for a payment to pay futureat-risk cash flows from
pharmaceutical products, andthat could be where a
partnership is in place.
So say, a biotech company isdeveloping a drug and they
partner with a big farm.
There's a contractualarrangement that usually has
milestones, like when youachieve your next phase of
clinical development and whenyou achieve your regulatory

(02:18):
approval or filing, and then youhave royalties, so a portion of
future net sales of the drugs.
So that's all risk.
I have risk and it takes time,and what we do is pull that
forward to a bolus of capitaltoday, and what that allows
companies to do is be flexibleand deploy that type of capital
to a new project that they'reworking on.

(02:39):
Maybe they have a proprietaryprogram that they want to
advance, or a platform that theywant to take forward to the
next stage and advance aprogramming to IND.
So what we're doing is kind ofcreating a novel form of
financing that's not equityrelated.
So, instead of selling piecesof a specific company or shares
of your overall company, you'relimiting the economic dilution

(03:03):
to just a single partner program.
That's interesting, all right,so it's interesting, but it
sounds a little bit complicatedand I'm curious about how well
known this model is.
Are you guys coming out of leftfield sometimes?
When you propose?
Rural financing is somewhatsimilar to SPACs Okay, in the

(03:26):
sense that it was a four-letterword that had a very adverse
connotation until really thelast couple of years.
So I would say, is that whenyou're in a board meeting and
you're looking at all thefinancing options that are
available to you as a company,royalty financing is probably at
the bottom, historicallyspeaking, given what's happening

(03:46):
in the public markets today andover the last several years
it's ascending the order.
It is probably right up therewith equity, with debt actually
being below that, and so it's invogue in the sense because of
what Brad just said, which is,you can isolate the dilution to
a single product relative to anentire company.
So if you believe that thecompany is worth the summation
of its cash flows, the cashflows are divided by the slowly

(04:10):
diluted shares outstanding.
You're selling equity andyou're giving people parts of
every single product that you'redelivering.
In a royalty monetization,you're isolating it to one
particular program and youmaintain your equity ownership
across the entire spectrum ofyour pipeline.
In a royalty monetization,you're isolating it to one
particular program and youmaintain your equity ownership
across the entire spectrum ofyour pipeline.
In a royalty monetization,which is quite different.

(04:31):
Now, if you think about biotech, it's somewhat similar to
actually building a house, inthat it always takes more time
and it always takes more money.
That translates to is moredilution for equity shareholders
and what we're trying toprovide management teams and
their shareholders an ability toactually progress molecules
without suffering the equitydilution that is consistent or
inherently drug developed.

(04:51):
So, owen, you have a uniquebackground in that you've worked
in finance, but also you'veworked on the biotech side, so
you've seen some of thatfirsthand.
Tell us a little bit about thatand sort of give us your
background in the context of howit set you up.
To start zelma, I certainlydidn't start.
Uh, it's almost better rightnow.
It's 1981.

(05:12):
Uh, it started as, oh so youknow, I mean in 1981 you were
like a toddler, I was just ababy, that is true, um, but made
a little history in the companybecause I think that's
important relative to where weare and then where Brad and I
come in.
So Zoma started in 1981.
It actually went public in 1984.
It's actually the longesttenured publicly traded quote

(05:34):
unquote biotech company.
So people know Zoma as anantibody discovery company and
over those ensuing probably 30to 40 years, zoneman has touched
hundreds of antibodies.
Over the course of that time themanagement team decided that
they want to take someadditional risk and try to get
into clinical development sothey can actually generate

(05:57):
better returns to thetrailblazer over time.
Unfortunately, the company wasnot very successful in that
endeavor.
But what they were verysuccessful in is actually
creating the CDRs, the sequencesthat actually make an antibody.
That was their bread and butter.
So there are a number ofdifferent assets antibodies that
were actually discovered byZona.
One of the most prolific onesis a drug called Rituxanin.

(06:20):
It actually came from our BCand phage display technologies.
It actually came from our BCand phased display technologies.
So in 2017, after severalsetbacks, the company tried to
win on the verge of bankruptcyand the existing management team
, namely our CFO, tom Burns, andthe existing CEO at that point
in time, they contacted a numberof funds to see if they could
actually work a differentbusiness model, and there's a

(06:43):
fund here in San Francisco bythe name of the Biotechnology
Valuing Fund.
It was instrumental in thedevelopment of a company called
Ligand, which is a competitor toours, but slightly bigger than
we are, and they actuallyrecapped the company in 2017
with some capital and set us onthe process of being there.
So we understand the trials andtribulations of drug

(07:05):
development Because we've livedit, not only personally, but the
company as a whole, the cultureof the company, is looking at
it.
They were on the verge ofbankruptcy several times and
they sold different royalties atthat point To various parties
so they could continue on theirdrug development path.
And it wasn't until 2017 whenTom, our CFO, came to the light
and was like we should probablystop doing this.

(07:26):
History would suggest thatwe're not very good at it, but
what we are very good at isactually making these antibodies
.
So we started with a base ofaround 40 to 50 assets that came
from our licenses.
We went out and prosecuted VIParound those licenses and
brought everything back therealities and milestones.
That's actually what started.
So that's really important,because to try to replicate our

(07:46):
business model would probablytake a decade or so, and today
very few people actually havethe patience in this particular
space, and then overall as aninvestment perspective, to wait
10 years for this type ofinvestment to come to fruition.
Yeah, so that's the history ofthe company and that's why I
think it's really important tounderstand, kind of, what we're
doing, because we live it, webreathe it.

(08:08):
People often ask Brad and I, youknow what's the difference
between investing and operating?
We've done both, yeah, and whatwe say is that actually they're
very similar.
More often than not, you walkhome with your head between your
tail asking yourself why am Idoing this?
Because they're both extremely,extremely difficult.
And then, yeah, with that said,our backgrounds are akin to, uh
, both investing and operating,which is essentially what this

(08:31):
business is, frankly, maybe notreally good at either.
Kind of sit right in the middle, okay, right, um, so maybe you
can give them a little yourbackground.
Yeah, I'll talk to themabsolutely.
So I'm kind of 20 yearsgrizzled in life sciences and
different forms and factions andI've touched royalties over
that entire career fromdifferent angles.

(08:53):
So started out early as astrategy consultant.
Working with royalty fundingsis one of the things that's
mandated on to find, assess andvalue different types of future
royalties that they could applyLike it's the space of
development, like what Owen hadsaid earlier about financing of
last resort to now financing apriority.

(09:13):
That's where that evolutionstarted.
Then I was on Wall Street at aninvestment bank, mts Health
Partners, where I was doingmergers and acquisitions, equity
capital raises and, mostimportantly, royalty
monetization from the agentinside, so helping companies or
universities raise capital bybringing some of the payments,

(09:34):
the future payments for thoseroyalties forward.
And it was really interestingin that because you didn't see
how the entire royalty universeworked, how people behaved, how
they thought about things, howthey structured, how their
strengths and their weaknesses.
It was kind of like seeing thechessboard and analyzing how
each of the chess pieces couldmove across the board and each

(09:54):
has their unique place in theuniverse and you've got to
deploy them, reduce them at theright time.
I went on to become an operatorat a company called DNA Nexus,
which was orchestrating aturnaround in a healthcare IT
company, and then ended up as aninvestor at RTW Investments, a
large biotech full lifecycleinvestment fund, where I was

(10:14):
leading the structured financeand alternatives practice and I
was doing non-pollutive capitalsolutions for companies, and so
I did each step along the way.
They have to look at the royaltyspace in different ways and see
what is something that we couldprovide with this asset class.
That's truly differentiated,and is there a better place for

(10:35):
it in the market than where itwas existing?
It exists primarily forcommercial products.
Products that had been launched, already had sales it was very
much credit-like Whereas whatwe're doing is a little bit
different.
Take where we're looking atthat same asset class and
looking at it earlier, becausewe in this public company can

(10:57):
benefit from being patient andhaving time and in the meantime
we're creating a lot of valuefor the biotech ecosystem
because we're providing a typeof capital that's otherwise
unavailable in their life cycle.
So there's really interestingsynergistic way.
Yeah, I can see where this wouldbe appealing to your point sort
of moving up the ranks inrecent years, as you can imagine

(11:27):
, a lot of requests andinquiries around creative
sources of capital, because thatdirect route has been a little
bit dry, as we know.
It occurs to me this is justtheoretically it occurs to me
that the risk aspect still hasto remain somewhere right, like
the risk shifts.
So where does the risk shiftstill has to remain somewhere
right, like the risk shifts.
So where does the risk shift inthis model Maybe shift in

(11:49):
height If you actually thinkabout our business model and we
do have several competitors, butour competitors, generally
speaking, are actually furtherup to the right, meaning they're
actually at a later stage, sowe're the only company that
we're aware of that actuallyspans the entire drug
development spectrum.
We'll underwrite risk at apreclinical stage all the way up
to a commercial stage, and sothe way we think about risk is

(12:11):
not much different than actuallywhat we learned in our CFA days
right, support, portfoliomanagement.
What we're trying to find is theefficient frontier how much
risk do we need to take in orderto engender a return that's
commensurate with that risk?
And so we take the principlesof finance and we apply it to
drug development, and if youtake equity-like risk for
credit-like returns, I wouldsuggest that's a pretty bad

(12:32):
business model and I wouldn'tsuggest that our competitors are
doing that per se, but what Iwould say is that as you go
further and further right tomore and more assets that are
further de-risked, your returnswill come down over time.
So for us, just given where ourbalance sheet is relative to
what our business model is, thatwe try to focus on the earlier
stage assets.
You will be wrong more oftenthan you're right, but there's a

(12:55):
difference between yourbounding average and your
slugging percentage.
You can bat 200, but have aslugging percentage of 600 and
still make significant money.
Yeah, and we look at anyportfolio attribution analysis.
Generally speaking, what youfind is two or three things that
power the returns of theoverall portfolio, whether it's
a hedge fund, a private equityfund, a mutual fund and a public

(13:16):
perspective.
There's three or four things,three or four investments, that
drive the overall returns.
There's several investmentsthat come in the middle that are
plus minus 25%, and the key isto try to limit the zeros and if
you can do that, you cangenerate pretty good IRRs over
time.
So wherever our focus is onessentially the asymmetric risk
reward, where we don't haveenough information to truly
underwrite to 50% probability ofsuccess, in our world it's

(13:41):
either zero or 100%.
It don't either work.
It's not going to work.
So the way we think about riskis how much money are we willing
to lose?
And so many of our investmentsare staged in the sense that
this whole quantum of capital isrelatively finite, in the sense
that we know exactly what it is, we don't put ourselves at risk
for future payments down theroad, generally speaking, and if

(14:03):
we lose that investment meaningwe lose that money it's not
detrimental to the overallcompany because it's shielded by
our overall portfolio.
So our objective since we camehere is trying to build a
portfolio, both in sheer sizebut diversified across the
actual risk spectrum preclinicalto commercial.
Diversified by the therapeuticindication ecology, virology,

(14:25):
immunology, et cetera.
Diversified by the stage andthen by the modality small
molecules, antibodies we haven'tventured into the gene therapy
space just quite yet.
We're looking at a few thingsthere and that gets you total
diversification.
Because what we learned in the2008-2009 timeframe, when we're

(14:47):
sitting on Wall Street,historically speaking, people
have said that stocks and bondsand gold and real estate, crypto
maybe is not really correlated,but in 2008, 2009, we learned
that it's the exact opposite,that all those asset classes are
totally, totally correlated.
Correlation one, everythingwent down.
And so the interesting thingabout our business model is that

(15:10):
an oncology asset and avirology asset, an antibiotic,
whatever it may be, are totallyuncorrelated.
Not only uncorrelated from ascience perspective, they're
uncorrelated from an economicperspective.
Recessions, generally speaking,will not hit pharmaceutical
product.
It may dip slightly.
So what we're developing is anasset class that's totally
uncorrelated to the equity andcredit markets, which should be

(15:31):
very appealing to an ultimateinvestor.
So, with all that said, where weare in the gestation of our
company is that we're just kindof getting out of the crib and
just starting to crawl.
Does that make sense?
It does, it does, but you'recrawling around a lot of moving
parts.
I'm curious about themanagement approach, right, like

(15:54):
it's highly situational a lotof moving parts, a lot of assets
at different stages, acrossmultiple modalities.
I mean, is there a mechanism bywhich an algorithm may be some
AI or machine learning, likewhat's the sexy sauce that
allows you to you know on adaily basis, make decisions
around these assets and at leastbe aware right of the progress

(16:18):
and where things are going?
I think it's probably betterthan any algorithm.
It's a black box.
It's the experience of theschool of hard knots.
Yeah, if you've been around theblock long enough and seen
enough things, you have anindication of what could be good
and what may not be good, andso there's no compression
algorithm for experience.

(16:39):
So I think that the way wegenerally look at it is you've
got to create that diversity.
There are ebbs and flows in thesector.
There are modalities that arereally interesting today that a
couple of years ago no one wouldtouch them.
There's pendulum swings allover the place and that lack of

(17:00):
correlation as much as possible,you know, with the focus on
that long-term end goal, whichfor us, is creating long-term
sustainable cash flows at asignificant rate and a ramping
rate.
And how you get there is, youknow, situation-dependent.
We talked to I mean, we've beenoverwhelmed with JP Morgan this
year talking to companies whoare trying to navigate the

(17:22):
environment.
So it's like how do you onefind something that we think is
interesting, has potential, like, has the potential to go
forward, a situation where wecan be helpful and meaningful?
We write checks that are onlyapplicable to certain sizes of
companies or situations.
So it's that combination ofkeeping track of what we have

(17:44):
and what we've built with theportfolio versus every situation
we see and can be at.
Yeah Well, I didn't get to yourbackground and how it sort of
feeds into your management atZoma.
So you mentioned experience.
What's the Albert, what's theblack box experience?
Tell us about your experienceleading up to your leadership at

(18:07):
Zoma and how it sort of feedsinto what Brad was just talking
about.
That I don't know the intuition.
What I would say is a long scaris in the back.
So I spent 16 years as aninvestor, initially investment

(18:29):
banking sales and resources.
For the majority of the time,on the buy side, I worked for a
private equity firm.
I worked for a very large moneymanager largest money manager
in the world and invested inbiotech stocks, but also
hospital stocks and PBMs and etcetera.
So I had a pretty good view ofjust the overall healthcare
ecosystem.
And then in 2013, I left and Iwent to the operating side.

(18:49):
I worked for a GLP-1 companybefore GLP-1s were in vogue.
Oh wow, I worked for a-.
Any regrets getting out of thatspace before it blew up?
No, no, I would say so.
I grew up doing athletics and Iwould say that you can't
replicate what you have on theoperating side.
You know, in the investmentside, you generally operate in

(19:12):
chief teams.
There is a healthcare team anda finance team, a consumer team,
et cetera, and you may workthree or four people, but you
don't really interact with theother folks inside the firm.
I mean, you certainly do from asocial perspective, but not
necessarily from a businessperspective.
I would say there's nothingmore rewarding than actually
putting a drug into human andhaving it work and getting calls
from families and actualpatients that suggest that we've

(19:33):
extended our lives years.
That's why I did it and I'mcertainly very happy that I made
the decision.
Every now and then I'd like togo back to the investing route
because, as I mentioned before,investing and operating are very
similar.
Every day there's an alarm,fire, fire, alarm, fire.
The question is, is it onealarm or five alarm?
More often than not it's onealarm, but when it's five alarm

(19:56):
in the operating side it's muchmore difficult than it is on the
investing side.
The investing side, we justsell, we made a mistake and we
sell.
Yeah, I was curious about thatwhat the liquidity sort of
factor looks like on the assetright and is there any catch if

(20:17):
and when you decide to offloadan asset?
Is it any more difficult, giventhe model.
Yeah, it's a static investmentright.
It's either all or nothing,generally speaking, on occasions
we'll invest in something,we'll make a mistake and we'll
actually get the asset back.
But generally speaking, if theasset doesn't work, the asset
doesn't work, we write it offand we move on.
Yeah, so it goes back to mypoint about the batting
percentage relative to theslugging percentage.
We need to actually maximizethe slugging percentage.

(20:40):
The only way we can do thatactually is actually have a
batting average enoughopportunities, because we need
to actually diminish the overallrisk.
The only way to diminish riskis you actually have to
distribute that risk across anumber of investment.
Does that make sense?
It does, yeah, so this is mybackground is in 16 years on the
buy side, sell side.
The last 13, 14 years onoperating companies.

(21:02):
I worked at a diabetes company.
I started my own oncologycompany.
It's publicly traded.
I was the CEO for five years.
I ran a nephrology company thatwe exited through a license
agreement with a big pharmacompany and I've worked at
venture capital firms.
I've worked at private equityfirms.
I've worked at mutual funds andI've kind of seen the flow from
an investment perspective andat the same time.

(21:23):
I've actually operatedcompanies.
I know what it takes to get adrug to the clinic and
ultimately to commercialization,and I say that they're both
unbelievably hard.
And it goes back to what Bradwas talking about in your
question as it relates to risk.
I'm pretty convinced at thispoint in time that when you look

(21:44):
at assets and clinical data,you can rule things out.
You can say fairly definitely,I don not believe this drug is
going to work and generally,you're going to be right because
that's what statistics suggest,genuinely going to be right.
So, yeah, you're going to beright, even if you even whether
or not you have You're going tobe right for the wrong reason.
Sure, right, but neverthelessyou're right, because 90 90 of

(22:04):
all drugs fail, plus or minus acouple percent here, yeah.
What's more difficult, however,is to rule something in yeah, to
look at a piece of data and sayI know this drug is gonna work
because it may workmechanistically, the biology
actually may work, but there's ahuman component to drug
development, which is execution,and what you find is that most
drugs that actually don't makeit don't make it because they

(22:24):
came to execution.
The people aspect is anunbelievably important.
In fact, it's more importantthan the actual science.
I'm pretty convinced at thatpoint.
Wow, yeah, and so when we dodeals, generally speaking, much
of what we do is actuallyalready been partnered, and so
we're underwriting to the riskof the company that's actually
developing the drug, not thecompany that started with the

(22:45):
drug, the company that should becurrently executing it on the
development time, and oftentimesthat is a large pharma company
or a very experienced you knowlarge or mid-cap biotech company
.
That's not to say that the riskdiminishes, but what I have
found is that, you know, smallercompanies, of which I have been
part of, unfortunately, haveparticipated in this.

(23:06):
We cut corners because we don'thave the capital to run the
correct settings, and so we'retrying to get to the end goal as
quickly as possible and we takerisks.
They're all calculated bets,whether it's the trial design,
the including and excludingcriteria, the geographic scope
of the trial, whatever it may be.
There's a hundred variables.
But inevitably you're cuttingsome corners because you don't

(23:27):
necessarily have the capital.
So when we think about ourbusiness, we can't affect those
things right.
We don't have enough capital tosurge or address all of the
issues that happen in drugdevelopment.
We don't have the skill sets.
So that goes back to what I wastalking before is that we're
really just finance individualsthat have some domain knowledge
in healthcare, perhaps biotech.

(23:48):
Specifically, we're trying toprovide the principles of
financial and portfoliomanagement to the actual biotech
space.
Not only do we do it from aninvestor perspective, but we
also do it just with our owncompany and we can get into kind
of how we finance the companyand how we think about our
shareholders, and we can getinto kind of how we finance the
company and how we think aboutour shareholders.
But I think the most importantthing is, at the end of the day,

(24:08):
is this is an inherently riskybusiness.
It's probably the most riskybusiness of anything out there
today, and we're seeing thatreflected in the public market
today, because in the 2018-19-20timeframe, when the cost of
capital was zero, not only wasthe cost of capital zero, but

(24:30):
people thought everything wasgoing to work Right.
Yeah, and that's just not thecase.
Today we're on the downside ofthat, which actually, to us, is
actually very beneficial,because that's actually where we
come in to provide capital tocompanies.
But we have to be very judiciousin the investments that we make
and the people that weunderwrite.
Yeah, what does the companylook like from a?
You're talking about, like,applying objectivity to, you
know, sometimes subjective spaceand the analysis of both

(24:56):
science and people.
You know, my friend, alan Shaw,likes to say you bet on jockeys
, not horses, right?
So you're talking about theteams.
So how is the companystructured to be able to do that
, to apply that objectivity toall these facets of potential
investments, and do it in aknowledgeable fashion?
I mean, obviously you guys bringgreat experience between the

(25:18):
two of you, but do you havescientific expertise on the team
?
Do you have folks who can diginto the weeds of these papers
and the mechanisms of action andfeel good about it prior to the
human element?
We certainly do, but I'm notnecessarily convinced that what
we have is any different thananyone else.
I've worked in many differentplaces.

(25:39):
I've seen what people have.
Not only do we have peopleinside, but we also have
consultants, we have networks,we have, honestly, hundreds of
people that have worked at Zomaover the course of years who are
antibody experts.
And, like I said, go back towhat I said before you can pull
things out, but I'm notnecessarily sure you can pull
things in.
And so, from our perspective,with our network to analyze data

(26:02):
, scientific assumptions,hypotheses, pre-climbal data,
whatever it may be.
We're trying to find justenough information where we can
make that rule in versus ruleout decision.
Once we made that decision,then we turned it over to Brad,
because Brad, at the end of theday, and his team are the
structuring experts.
The secret sauce of our businessis not the scientific
evaluation, because I'mabsolutely convinced that

(26:25):
there's no one in the worldthat's actually any better than
anyone else.
Otherwise, you would havesomeone that has significantly
better returns than anyone else.
Yeah, and that's actually notthe case today.
There may be periods of timewhere you have one particular
fund versus another that hassignificantly better returns,
but over a long time period,those average out.
Why?
Because we don't understandhuman biology.

(26:46):
Yeah, it's a dark genome, so tospeak, in terms of what we're
trying to figure out.
Yeah, so the secret sauce ofour business is actually the
structuring component.
So I may have a bright timeabout that, because that is what
I've learned from that.
I'm not a royalty guy, he's aroyalty guy.
He's the real brains behind theoperation.
I was just thinking about yourcomment.

(27:07):
I sat through some sessions atthe conference this week and
I've had multiple conversationswith biotech founders and
builders in the last three daysand conjecturing that there's no
one out there that's betterthan anybody else.
I'm not sure how that messagewould be received on the stage
at the JP Morgan conference.
So there's tremendous drughunters and people that can pick

(27:28):
out data, but it goes back towhat I said before, which is
that's only one aspect of drugdevelopment.
The other aspect is the people,and I am absolutely convinced
that there are no secret sauceto actually picking people.
Now, relationships matter,networks matter, and that's why
you may see some fountains orACs do better over a period of

(27:48):
time than others.
It may not necessarily be thescientific evaluation.
It actually may be the humancomponent.
Yeah, right, right, I mean, wejust talked about the kind of
how we structure things and whenadding the tip.
Absolutely, I think the keycomponent is we stay humble and
we stay realistic, and part ofthat is realizing that, the
optimism that we have in thisspace of biotech right.

(28:10):
Ultimately, the end goal is toimprove human health in some
form or fashion, but peopleoften over-index on the speed,
the timing, the cost and whatthe outcome will be, because
they look at comparables as whatwas the best of right.
They're selling their story.
What we all ultimately think ofis what could the best of right
?
That's their selling theirstory.
What we all ultimately think ofis what could realistically

(28:31):
happen.
And if that realisticallyhappens, can we do well.
If it fails, can we be okay.
If it succeeds and we can powerthe excess returns awesome,
that's fantastic.
So we can use structuring tokind of solve those elements
where we don't make it anacquisition that's far outsized

(28:53):
for the size of our balancesheet and our portfolio, where
we look at structure like whenwill the next payments come in?
Is there a way that we canbring some of that capital
forward to us so that if therest fails we're okay?
Like, if you think about ourprocess, every viable trial is a
, you know, generally a one or azero.

(29:15):
I mean it's hard when you havethe gray area.
I guess there are some 0.5sthat people can answer, but
there's the ones and zeros.
So it's a lot of stacked binaryrisk on top of each other.
So we've got to make sure thatwe're being cognizant of that
and also realistic.
The most fun that we have iswhen we're looking at assets and
there's discord amongst theteam because we can't quite
figure it out.
Someone's following a certainconcept or aspect of the deal,

(29:39):
someone's getting the tummyrumbles about parts of the deal
and it's like how do you balancethat and figure out how to make
the appropriate capitalallocation towards it?
Our friends at Alston and Byrdset us up with some amazing
space to record during JPM week.
The firm's national health careand life sciences practice has

(29:59):
more than 100 attorneys activelyinvolved in the health care
industry across the fullspectrum of legal disciplines.
Full spectrum of legaldisciplines.
The signature strength of thispractice is its ability to
master complex representationsthat draw on the coordinated
expertise of its regulatorycompliance, public policy,
transactional corporategovernance, securities, fda,

(30:23):
biotech, ip, governmentinvestigations and litigation
practice areas.
Alston Byrd represents lifesciences companies and their
partners in corporate stagesranging from private to newly
public to well-established, andin a variety of stages of
product development, frompreclinical to post-approval

(30:43):
commercial launch.
Learn more at alstoncom andtell them.
You learned about them on theBusiness of Biotech, oh, and you
hinted at the investmentstructure Like where does the
money come from?
Give us a picture of that.

(31:04):
Our capital, yeah, so it needsto go to our, our cfo, because
he's kind of figured out thecapital structure of the company
and who's in the room by theway of a camera shot.
I won't, I won't fan, I won'tfan, uh, fan over there, but uh.
And then a deal that we did,that brad could talk about a
second.
But um, we are truly consciousof our equity capital structure.

(31:26):
So if you think about a company, what a a company's worth?
A company's worth is thesummation of their cash flows
divided by the number of sharesoutstanding they have.
And then the comment I madeabout drug development and home
building is very similar, whichis it always takes more time, it
takes more money.
Well, in biotech parlance, thatmeans equity.
That doesn't mean you're notgoing to be successful.

(31:48):
It just means that you actuallyneed to generate more cash flow
to generate the equivalentdollar per share.
What we've done is use a numberof financial instruments to
bring capital into the companyin order to continue to deploy,
to increase the size of ourportfolio.
Interesting enough, we havethree financial instruments that

(32:09):
are publicly traded.
We have our common stock and wehave two perpetual referrers.
Those perpetual referrers yieldroughly around 8.5%.
Despite being the smallestroyalty company that's publicly
traded, we have the highestdividend yield of any company.
So for those investors thatwant security and a continuous

(32:31):
cashflow stream, they canactually buy our perpetual
prefers.
For those people that wouldlike to generate some more alpha
it takes some additional riskthey could buy our prefers plus
our common stock.
Then, in addition to that, wedid a very innovative deal in
December of 2023 that I'll haveBrad describe, because it was

(32:52):
actually his problem.
Stick at the center.
This is the same type ofstructuring that we do for our
own new royalty acquisitions.
I mean that learning is goingto be applied to how we manage
the company and how we thinkabout dilution.
So one of the things that we'rethinking about, as we're trying
to be more active and helpother companies have capital

(33:14):
that then set their programs bybuying the different royalties,
was how do we build our ownvalue sheet and we have
royalties with?
At that point it was early inits launch Roche's Bevisement
for Wet AMD, one of the fastestlaunches in Roche's history and
what we set up was a novelrecourse loan specifically

(33:37):
against a single asset.
We partnered with Blue OutPathetal to come up with a
structure that basically allowedus to loan that royalty stream
to them for a period of timesecured solely by the royalty
stream, after which time that ispaid off and will be reverted
back to us, and in that sametime we took that lower cost of

(33:57):
capital and are able to thenhave a full balance sheet and be
able to have helpfulconversations, like we're having
at JP Morgan now for companiesthat are seeking ways to advance
their own projects so that wecan buy new royalties.
Since the kind of 2007 pivot,we've had very minimal M&V
dilution.
We only had 20 million sharesoutstanding.

(34:18):
So you can imagine a situationwhereby we start generating
outboarding cash flow whichshould happen hopefully sometime
in the near future and weredeploy that capital not only
into new ideas but also into ourown company, and when that does
, it levers our future returnssuch that, if we're right on
assets 11, 16, and 22, insteadof generating $2 a share of

(34:42):
income, we generate five A.
We've made the rightinvestments, but we've also
reduced our equity capital base.
So in order to get bigger inthis environment, you need to
get small.
I'm a huge proponent of that.
If you look at companies thathave done very well, in fact, if
you look at the best performingcompanies in the S&P 500 over
the last 20 years.
You're moving to video, whichis apparently a technology play.

(35:04):
Three companies stand outAdelaide Zeman, dow Jones and
UnitedHealthcare.
Three companies stand outArrozon, dalmatos and
UnitedHealthcare.
Okay, yeah, that would havebeen the three that I assumed.
Me neither, actually.
Let me do the analysis.
I looked at the analysis andthere's one commonality across
all three of those companiesthat each and every year they
remove about 5% of their equitycap, meaning they remove, they

(35:27):
buy back shares.
Their equity cap structure isbeing reduced.
They're generating 3% to 5%maybe sometimes more, maybe
sometimes less revenue growth onan annual basis.
They're leveraging that down to20%, 25% earnings growth.
So there's leverage in the P&L.
But, more importantly, there'sleverage from a full included
shares outstanding.
It's going lower each and everytime, which enables you to

(35:49):
generate actually higherearnings per share, which
generates a higher PE multiple,which lowers your cost of
capital.
So I go back to what I saidbefore, which is that we're
British finance guys operatingin the biotech environment where
, frankly, there's not a lot offiscal prudence in our
environment and we're trying tobring some discipline from our

(36:10):
capital structure to thisenvironment and at the same time
, as Brad mentioned, bringingdrugs to market and allowing
people to rebuild wars of theirsuccess and the fruits of their
labor in a business that'scurrently very difficult.
Yeah, yeah, this is where I wishMatthew Mamak, the department
here at Alston Byrd, who wasgoing to join us but

(36:31):
unfortunately couldn't.
I wish he was here because I'mcurious about the perhaps legal
implications or if there'sanything you have to be careful
about in this model where you'redoing some pretty creative
things with money.
Oftentimes, creative thingswith money puts you in the red
zone of potential danger.
I mean, is there any risk there?

(36:52):
Is there any consideration?
I think the way to think aboutit legally for a company is it's
more complex documentation.
That being said, there's anumber of councils that are very
experienced in the States nowthat can shepherd a client
through that type of a situation.
I mean, the way we think aboutit is ultimately, we want to

(37:14):
stay out of the company's way.
We're a passive recipient ofthose same future capsules that
they would have received and thewhole point is, unlike, say,
debt, which would have a lienagainst all of the assets of the
company, this is independent ofthat.
It can be just treated as ifsomeone had sold us a brick of a
house and a complete sale ofthe asset.

(37:37):
So it actually fits reallysynergistically with other types
of finances.
It doesn't get in the way ofdifferent things that they're
doing when the product measures.
If they want to pursue otherthings, like sell the company,
it doesn't get in the way of atransaction.
It's not like blocking oroversharing.
It doesn't have reportingrequirements.

(37:58):
We're not sitting in a board ofdirectors of companies.
It's like if you had, say, anew venture investor come into
your company.
So it's the best of both worlds.
For management teams it feelsvery light-touching hair-dove.
For us it's great.
It allows us to put the sameinformation that they would have
otherwise gotten from theirlarge farmer or large biotech

(38:22):
partner.
And it's actually, aside frominvesting the time and doing the
work, it's quite an elegantsolution.
Yeah, I'm a bit biased, ofcourse, but having run companies
, I would sell royalty every dayof the week Because at the end
of the day, a 2% royalty is notgoing to be valued by the

(38:46):
partner that I'm selling theasset to.
It's immaterial.
You can get that through Kong'sefficiency and S&J and A
efficiencies.
But what it does do it limitsthe dilution to the equity
shareholders significantly, suchthat they can actually generate
a greater return so then theycan go back to their LPs and
return additional capital andthat capital goes back into the
venture community, spawn newcompanies.

(39:08):
This is a very intense,capital-intensive business and,
to the extent that you can usecapital that's outside of the
equity spectrum and not actuallybe debt because you don't want
to lean in your business, thekiss of death in biotech is, in
my view, venture debt orconverts, so you have to pay
those back and sometimes youcan't pay it back From a royalty

(39:32):
perspective.
Where's hitting all the risk?
If the asset is not approved,it's on us.
There's no downstreamimplications to the actual
equity investors.
From my perspective, this is anunbelievable piece of paper,
not only from our perspective,but mainly from the management

(39:53):
team and equity holders at thecompany.
I said I would do this each andevery day.
Yeah, you mentioned that you'reentertaining a lot of attention
here this week at JPM.
What is the appetite for growthof the portfolio at this point?
Yeah, brandon, you go ahead.
Yeah, I think for us, we'reincredibly disciplined about

(40:15):
what we do.
The most important thing.
People are like how many dealsare you going to do in 2025?
I think that's the wrong metric.
Let's say, maybe we do one dealbut it's like in, the right
thing that aligns with ourinvestor.
So it's not about volume, it'sabout what we're actually
creating.
But to your question earlierabout thinking about context of

(40:40):
other solutions, I just want tocome back to what I think about
this, enterking with math for asecond.
Oh, I love math, talking to anaccompanied earlier.
Journalists love math.
Hopefully we can scale it down.
This is where it sounds likethat aha moment as to why like,
oh, it's like that is superior.

(41:00):
But a company that's publiclytraded has a $150 million market
cap.
It wants to raise $50 millionto give themselves some
operating cash flow and turnover the next clinical trial
card.
If they went to the equitycommunity and did a follow-up,
they would be selling a quarterof their company to someone else

(41:21):
New investors that now ownfractional shares of the company
or the 25% of the company.
And if they have partnershipsin place, like they're waiting
for big milestones or bigpotential future royalties,
they've sold that entitlement to25% of those academics.
Through that shared dilution.
It put more pieces of the piein place versus what we could do

(41:44):
In addition to 25% oneverything else that they have
yeah, the future, the creativity, whatever they do, and what we
were illustrating to them wasthat the type of deal that Zoma
Royalty could do with them meansit's focused dilution around
the economics on a very specificasset or set of assets.

(42:06):
Then they can keep and maintainthe rest of the value they're
creating across the company.
The proprietary pipeline canstay the proprietary pipeline so
that when, hopefully one day,the financing environment on the
equity side feels healthier,you could raise capital when
more people are excited aboutthe space, when that's created

(42:26):
more value.
So it's a different paradigm.
Hopefully the math wasn't toohard.
No, not at all.
No, no, I mean, I get thefundamentals.
You talked about the investmentcommunity's receptivity to the
space or a space.
That's obviously situationaldepending on the

(42:48):
biopharmaceutical developer, thebiotherapeutic developer we're
talking about.
But we see a lot of likefrequent ebbing and slowing of
interest in RNA and geneticmedicine and you know,
bispecific antibodies,multispecific antibodies.
Like there's a du jour thatseems like the you know, the

(43:08):
daily part of that du jourequation is like real frequent
right now, right Like I don'tknow what do they call the
frequency of waves.
Like you know, there was a timewhen there was a little bit
more of a swell, right, but nowit's.
So how does that play into whatphenomenal looks like?
To your point, brad, you saidyou know maybe we do one deal on
25 and it's, but it's aphenomenal deal and I know that

(43:31):
it's.
You know that there's no hardand fast answer to what
phenomenal looks like, but doesthat make it more difficult for
us?
It makes it more difficult forme, right?
I mean, if you take a step backand think about our space, the
ecosystem, the biotech ecosystem, there were 250 publicly traded
biotech companies back in the2005 or 2000 timeframe.

(43:54):
Fund sizes generally weremeasured in the millions, not
billions.
And when you have excessprofits in any industry, that
invites excess investing whichdrives downward currents.
It happens in every industryand I would make a conjecture
that I think that's actuallywhat we're seeing in biotech
today.
I think there's actually toomuch're seeing in biotech today.

(44:14):
I think there's actually toomuch capital in our space.
I know people are clamoring forcapital and I know the sidebar
conversations here this week arejust people aren't investing in
biotech, but I actually don'tbelieve that to be the case.
There's a ton of capitalconcentrated in the private
markets.
There's very little capitalconcentrated in public markets
and ultimately, we need to getthese companies public, because

(44:36):
the duration of the funds thatare invested privately are
measured in a decade, generallyspeaking, plus minus a little
bit.
There are some permanentcapital structures, but
nevertheless the far majority ofthe capital is measured in a
finite time period.
We need these companies to getpublic but frankly, we haven't
given the public a great reasonto invest in this system at this

(44:57):
point in time.
We funded too many companies.
There's too much capital towash, which is drawing down the
returns.
So we're seeing a bit of awashout in the space, and the
problem that we have when weassign or analyze certain
opportunities is the therapeuticdensity that exists.
Just look at CD19 in theoncology space.

(45:18):
You have five-cyclic antibodies, you have CAR-Ts, you have it
across the globe and at onepoint in time I believe there
are probably over 100 CD19s indevelopment across the different
modalities, essentially goingafter the same indications.
That is what we call MADMutually Assured Destruction.

(45:40):
That's what we learned in whatwas the first thing?
Mad, m-a-d Mutually AssuredDestruction.
Okay, that's what we learned inour political science 101 class
.
Right, and we're doing it toourselves.
So we as an industry need to bemore disciplined in terms of
how we allocate the capital.
I'm absolutely convinced ofthat, and when we do that,
you're going to see the returnsskyrocket because of what you

(46:00):
said, which is we have all thesenew modalities.
Many of them are actuallybringing game-changing results,
both from FTC perspective, asafety perspective and,
ultimately, the patients.
There are some we haven't quitefigured out yet, but that's
always the case.
If you look at the antibodyspace, it was totally foreign to
people in the early 2000s andyet it's now probably the most

(46:25):
efficient way to actually make adrop in how well we can
actually do this engineering onthe antibody side.
You have the RNA space andyou've got the genetic, the gene
therapy space, and what we'retrying to figure out there is
how do we deliver all this stuff?
And we'll figure it out.
It's just a matter of time andthat's where we need that long
duration capital.
But the thing that's making itdifficult is just excess capital

(46:47):
is driving down our returns andcreating this huge therapeutic
density.
I don't know, actually, what'sgoing to happen in the obesity
sites.
What I can tell you is that theamount of capital that's gone
in, even if it is the largesttherapeutic area and it likely
will be just given all thebenefits.
The question you have to askyourself is what are the returns

(47:08):
going to be like?
And the one thing that'schanged in the space today is
I'm not quite sure that theclinical side is as important as
the commercial side.
It is Right, many drugs lookvery similar.
Is there a big differencebetween 22% weight loss and 24%
weight loss?
I don't know, I don't know.
But what I do know is that whenyou get to the commercial side,

(47:29):
there are not even impedimentsthat the PBMs and managed care
companies have put up, wherethat 22 versus 24 is probably
meaningless.
You have to follow the money intheir industry and
unfortunately there are veryperverse incentives across the
entire sector that drive certainbehaviors that are not to the
benefit of the patient andultimately we need to change

(47:50):
that.
Hopefully, that will changeover time, but there are certain
things in our industry that wejust need to change ourselves in
order to make that industry socapital can come back in the
right pockets.
Does that make sense?
It does, yeah.
Yeah, you covered a lot ofground there, olin.
We started out talking aboutsome of these very specific
indications and the impacts ofthose sort of micro economy and

(48:13):
biotech.
But I wanted to get yourperspectives and you know when
you start talking commercialweight loss drugs and companies
in the public markets.
Now we're talking a little bitmore about macroeconomic
influences.
So I'm curious about what youknow, maybe some prognostication
on what macroeconomicinfluences will impact your
business model in the comingyear.
You know, think about thingslike inflation.

(48:35):
You think about things like theelection year, that we're in
the unknowns around who's goingto be heading up FDA and NIH and
so on and so forth.
Any thoughts on, like, whatyour management and execution
plan might look like in the faceof some unknowns going into 25?
So I played sports growing up.

(48:57):
I played hockey in college.
Are you Canadian, by the way?
No, but I sound Canadian.
Sometimes you do, sometimes youdo.
Yeah, border state, maybe CloseMassachusetts is not really a
border state, but close.
You played hockey long enoughyou started to sound Canadian.
I heard that quite often, but Ihad my bell run more than a few
times and my father was mycoach.

(49:17):
He played in college as welland he said son, I'm going to
give you one piece of advice,which is you're going to keep
your head down.
At least have your eyes up.
It's the same in our business.
We can't worry about actuallywhat's happening externally.
We need to be cognizant of itfor sure.
But the one thing I do know isthat great products, great sites

(49:37):
and great people will alwaysactually work to the benefit of
patients.
It's happened every single time.
There's no doubt in my mindit'll continue to happen.
So what we need to do isactually focus on those three
components, search those out andjust structure things
appropriately so that we don'tput our own company in jeopardy.
We could sit here for daystalking about macroeconomics I

(49:57):
love talking about it, tom, andI talk about it all the time
Interest rates and those type ofthings, but it does affect our
industry for sure.
The cost of capital, as you cansee, the XBI is essentially
inversely correlated to interestrates, but that essentially has
always been the case in somerespects.
You talked about these waves interms of growth development.

(50:19):
Well, the same thing happens inthe capital markets, and the
two actually kind of essentiallysit apart from each other in
many respects.
But with that all that said, Igo back to my father's advice
just keep your head down andyour eyes up and you stick to
your business plan, the onething that we have recognized,
as we've tried to bring indifferent things into the
business, is that sometimessticking to your core

(50:41):
competencies is actually thebest.
You look at companies that tryto go outside their core
competency.
More often than not it'sactually a failure and it
actually works to the detrimentof their core competency, their
core business.
So we know what we'rerelatively good at, which is
identifying opportunities thatcan generate very good returns,
both for the patients that we'retrying to actually help but
also for the companies thatwe're trying to underwrite, and,

(51:04):
at the same time, we're veryjudicious in terms of how we
allocate our capital.
We're very cognizant of ourequity structure and, at the end
of the day, our business is afunction of one thing just how
much cash can we generate?
Because if we don't generatecash, we're going to dilute our
shareholders, which means thatwe can't necessarily put the
money to work underwriting thesecompanies that are developing
the assets.

(51:24):
Yeah, yeah, what does JPM weekmean to you guys?
What's your agenda here, brad?
What have you been spendingyour time doing?
A lot of community, and nowfolks exploring, learning,
trying to understand.
They've heard about worldhumanization.
They're trying to understandhow it could be applicable to
them.
There's a huge educationalcomponent to what we do.

(51:45):
So we have a couple of suitesset up in one of the San
Francisco hotels and scale uppretty much every half hour or
in four days.
Expensive hotels and scale uppretty much every half hour or
in four days.
It's expensive.
It's expensive.
Indeed.
Yes, I'm staying in one of thelesser expensive.
Come to your own.
Yeah, the great thing aboutZona is that we have champagne
taste on a beer budget.

(52:09):
So we've been busy Seeing a lot,learning a lot.
We keep our ear to the groundand we're always learning,
because you never know whereyou're going to find the next
piece of information that'sgoing to be insightful.
So that's part of it.
The other part is stopping newinvestors, helping educate them
on your own story, what we'redoing, what our philosophy is as
a management team, how we'retrying to get great alignment

(52:30):
between the management team andthe shareholders and I vote for
Michael Donovan Both on the dealexecution and new asset
acquisition side and thedelivery side for Wall Street.
It's all about trust andrelationships and doing the
right thing for the wall.
So then I would go over there.
The only thing I would say iswhat does shaping me, shaping

(52:51):
what I mean to us.
Essentially, what every daymeans to us is learning, and you
asked me what we've done in ourcareer.
We actually love to learn.
Yeah, I mean, there's nothingbetter than actually meeting.
We met with a company yesterdaythat is trying to develop an AI
system to predict clinicalresults.
I have absolutely no ideawhether this will be successful
or not.

(53:11):
What if it is?
Can you imagine the benefit ofthat?
That would be absolutelygroundbreaking.
Sure, whether it can happen ornot, we don't really know.
Right, that's fodder foranother podcast.
That's that podcast.
We meet with probably I don'tknow 10 to 15 companies a day

(53:32):
here and probably meet withprobably 10 companies a week,
more or less.
Yeah, and the things that welearn are just job-breaking.
In fact, we were just thismorning, we were at a meeting
yesterday with one of ourpartners and they mentioned
something as it relates to themechanism of action of a
particular drug and essentially,our chief scientific officer

(53:52):
and I looked at each other.
We said that's why the drugworks.
It's an adverse event actuallyis what differentiates that drug
relative to a top tissue?
And we never heard it said in away that it was said to us.
Yeah, I mean, you learnedsomething.
I'm totally in like, right, I'mlike I wish I knew this two
years ago.
Yeah, amazing.

(54:13):
It's all about keeping you onjust listening to people.
Sure, it's a good place to doit, but it also reminds me of
why.
This week reminds me of why Iwould be a terrible investor,
because I'm so prone to the oohshiny moments and everybody's
shiny at JP Morgan andeveryone's putting the best foot
forward, so it's tricky.
It's tricky, but I would justsay is that, uh, you know, if

(54:36):
you're, if you're in thisbusiness, sometimes looking
where other people aren't is thebest place to look.
Yeah, well, uh, I appreciatethe time guys.
We're we're running short on itright now.
Uh, but the education that youjust need to talk about, you
know the value of coming here tolearn.
I appreciate what you've taughtour audience, what you've
shared with our audience today.
I think it was super beneficialeducational conversation.

(54:58):
So thank you for that.
Well, thank you, appreciate it.
Yeah, appreciate you guystaking time out of the super
busy week to help your audience.
We appreciate it, but wecertainly do.
I know they would.
Yeah, yeah, I appreciate it.
Owen Hughes, brad Sitko ZomaRoyalty, zoma Royalty, right,
zoma Royalty.
Yeah, it's at 2024.

(55:18):
How do folks get to if there's?
I know you're entertaining alot of interest right now, but
if there's some interest, wheredo they find you?
Our emails are actuallyrelatively straightforward First
name, dot.
Last name at Zomacom All right,good deal.
Or web page, something likethat.
And the last thing is just thatintroduction.
If it isn't trademarked, canyou just send it?

(55:40):
I'll send it right over.
Yeah, I'll send my notes.
It's a great idea, guys.
Thanks for joining me.
Absolute pleasure.
Thanks, matt.
This is Matt Pillar withBusiness of Biote, jp Morgan
edition at Alston and Beard'soffices here at San Francisco.
We drop every Monday.
We'll have a fresh JPM episodedropping next Monday.
Make sure you subscribewherever you listen to podcasts.

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Better yet, go to our websiteat Bioprocess Online or Life
Science Leader.
Check out the Listen and Watchtab where you can watch these
conversations play out.
And in the meantime, we'll seeyou next Monday.