“RZLT: Uncover Why XOMA Royalty Stock is Plummeting!”

Introduction

XOMA Royalty Corporation (NASDAQ: XOMA), a biotech royalty aggregator, saw its stock plunge over 20% in a single day after a major setback with a partner’s drug (^[1]). The drop was triggered by Rezolute, Inc. (NASDAQ: RZLT) announcing that its Phase 3 trial of ersodetug (RZ358) for congenital hyperinsulinism failed to meet primary or secondary endpoints (^[2]) (^[2]). Rezolute’s share price collapsed ~87% on the news (from $10.94 to $1.40) (^[2]), and XOMA’s stock fell in sympathy because XOMA had licensed this drug to Rezolute and was poised to receive milestone payments and royalties if it succeeded. This report dives into XOMA’s fundamentals – from its unique royalty-focused model to its dividends, debt, valuation, and the risks illuminated by the Rezolute debacle – to uncover why XOMA’s “royalty stock” is plummeting and what might lie ahead for investors.

Dividend Policy & Yield

Common Stock: XOMA does not pay a dividend on its common shares and does not anticipate paying one in the foreseeable future (^[3]). As a development-focused company with fluctuating earnings, any cash generated is reinvested or used for obligations rather than common shareholder payouts. In fact, XOMA just authorized a $50 million share repurchase program extending to 2027 (announced January 2024) instead of dividends (^[4]), signaling that excess capital (if any) would go to buybacks or deals rather than cash distributions. Traditional REIT metrics like FFO/AFFO don’t apply here – XOMA’s income stream comes from milestone and royalty payments, which are irregular, so it doesn’t report funds-from-operations as a REIT would.

Preferred Stock: Notably, XOMA does have two series of preferred shares that carry fixed dividends. The Series A Cumulative Perpetual Preferred (NASDAQ: XOMAP) yields 8.625% on a $25 liquidation preference (annual dividend $2.15625 per share) (^[3]). The Series B Preferred (NASDAQ: XOMAO, via depositary shares) yields 8.375% on its $25 equivalent per depositary share (annual ~$2.09 per share) (^[3]). These preferred dividends are cumulative and paid quarterly – an ongoing cash commitment XOMA must meet before any value can accrue to common stockholders (^[3]) (^[3]). As of Q4 2024, XOMA had 984,000 shares of Series A and 1,600,000 depositary shares of Series B outstanding (^[3]), implying roughly $5.4 million per year in preferred dividend outlays. XOMA has paid all such dividends on schedule and “expects to continue making these dividend payments using existing capital resources” (^[3]). The preferreds’ yields (8–9%) far exceed XOMA common’s nonexistent yield, effectively making them XOMA’s de facto “income stock” – but also a senior claim on cash flow that limits flexibility for the common equity (^[3]) (^[3]).

Leverage & Debt Maturities

XOMA’s strategy of acquiring royalty interests is capital-intensive, and it has leveraged its balance sheet to pursue deals. In late 2023, XOMA entered a $140 million credit facility with Blue Owl Capital, drawing an initial $130 million via a royalty-backed loan (^[3]) (^[3]). This loan is secured specifically by XOMA’s rights to royalties on Roche’s eye drug Vabysmo® (faricimab) and related assets, and notably has no recourse to XOMA’s other assets or the company at large (^[3]). In essence, XOMA pawned its Vabysmo royalty stream for upfront cash – a non-dilutive, non-recourse financing to fuel additional royalty acquisitions (^[4]) (^[5]). The loan carries a hefty 9.875% interest rate (^[3]), reflecting the risk of biotech royalties, and has a long-dated final maturity (due 2038 if not paid sooner) (^[3]). However, it is designed to amortize through the royalty income: XOMA began semi-annual interest payments in 2024 funded by Vabysmo royalties (^[3]), and the loan will be repaid over time from that revenue stream.

Aside from the Blue Owl debt, XOMA carries no traditional bank debt or bonds on its balance sheet as of the latest filings – the company had even paid off a prior Silicon Valley Bank loan in 2021 (^[6]) (^[3]). The Blue Owl facility is the primary long-term liability, and XOMA had to set aside reserve accounts (about $6.3 million) to cover interest and fees on this loan (^[3]). The preferred stock can also be viewed as a form of leverage: while perpetual with no maturity date, the Series A and B preferences effectively function like expensive capital (8–9% cost) that XOMA must service indefinitely or until redeemed. There is no required principal repayment on the preferreds (they are equity), but XOMA could choose to call/redeem them after the applicable call dates if it had cheaper capital – though given its situation, redemption seems unlikely in the near term.

Debt/Capital Structure Summary: Following the Blue Owl financing, XOMA’s capital structure consists of roughly $119.6 million net debt from the loan (post fees) (^[3]) plus the ongoing preferred equity, versus a cash balance that was bolstered to ~$130 million at end of 2023 (^[4]). The company subsequently deployed cash on new royalty asset purchases – for example, it acquired Mural Oncology and LAVA Therapeutics royalty interests in Q4 2025 (^[7]) (^[7]) – so cash has likely come down. Still, XOMA management stated that existing cash and expected royalty inflows should fund operations “for multiple years” (^[4]), indicating they don’t anticipate near-term liquidity issues despite the leverage. Importantly, the Blue Owl loan’s structure means if the specific collateral royalties underperform, creditors could seize those royalties, but they cannot force XOMA into bankruptcy over this loan (^[3]) (^[3]). This limits worst-case downside for XOMA’s core business, but any loss of a major royalty (like Vabysmo) would hurt its long-term cash generation capacity.

Coverage & Cash Flow Adequacy

XOMA’s ability to cover its fixed charges – preferred dividends and loan interest – hinges on its royalty and milestone income, which can be lumpy. In 2023, XOMA received $15.5 million in cash from royalties and milestones (^[4]), including about $7.3 million from Roche’s Vabysmo sales and $1.7 million from Medexus’s IXINITY sales (a hemophilia B drug) (^[4]). It also earned one-time payments like $5.0 million from a partner’s NDA acceptance (Day One’s tovorafenib) (^[4]) and $5 million when Rezolute dosed the first patient in the Phase 3 RZ358 trial (^[3]). These infusions helped XOMA easily cover about $5.6 million in annual preferred dividends and interest costs in 2023. In fact, XOMA paid out $1.4 million in preferred dividends in one quarter (Oct 2023) alone (^[4]), but at the same time drew $130 million in cash from the Blue Owl loan to fortify its finances (^[4]).

However, coverage can swing quarter to quarter. For example, in Q3 2025 XOMA reported only $9.35 million in revenue (missed estimates by 25%) and a net loss of $0.35 per share (^[8]) (^[8]), suggesting that quarter didn’t bring in large milestone payments. By contrast, the prior quarter saw a surprise profit, as XOMA had an earnings beat with $0.06 EPS on $15.9 million revenue (far above the ~$6.8 million expected) (^[9]) – likely thanks to a significant one-time payment or deal closing. This volatility is inherent to XOMA’s model: baseline royalty revenues from already-marketed drugs (like Vabysmo, IXINITY, etc.) provide some steady cash, but the big jumps come from milestone events which are unpredictable.

XOMA’s fixed charges currently include roughly $12.8 million/year of interest on the Blue Owl loan (9.875% of $130M) and $5.4 million/year of preferred dividends, together about $18 million annually. In comparison, 2023 cash receipts of $15.5 million fell slightly short of that, but XOMA’s cash war chest (over $100 million after the loan funding (^[4])) provides a buffer to cover any shortfall in the near term. The company has explicitly stated it expects to meet its dividend payments “using existing capital resources” and has set up reserve accounts for loan interest (^[3]) (^[3]). Essentially, coverage of obligations is being managed through a combination of recurring royalties, milestone windfalls, and cash on hand. Investors should monitor the growth of recurring royalty streams – for instance, Roche’s Vabysmo sales are growing (over $1 billion in 2023, of which XOMA gets a tiny percentage) – because as more partnered drugs get approved and sold, XOMA’s coverage cushion improves. Conversely, a delay or failure in an expected milestone (as with Rezolute) can leave a gap. If multiple anticipated payments don’t materialize, XOMA might eventually have to curtail new investments or find alternative financing (^[3]) (^[3]). For now, XOMA appears to have sufficient liquidity to cover its fixed costs for a few years, but it is not yet self-sustaining purely from ongoing royalties.

Valuation & Comps

Valuing XOMA is challenging due to its portfolio of future contingent cash flows. Traditional metrics like P/E are not meaningful (XOMA has negative earnings on a full-year basis), and even book value is of limited use given many assets are off-balance-sheet rights. As of early December 2025, XOMA’s stock traded around $26–27 after the drop (^[1]), implying a market capitalization near $300–320 million (with ~12 million common shares outstanding (^[3])). This price already reflects a markdown after the Rezolute news – prior to that, XOMA was above $34 and near its 52-week high of ~$40 (^[1]). In effect, the market wiped out roughly $70–80 million of XOMA’s value in response to losing Rezolute’s potential royalties. Notably, XOMA’s deal with Rezolute had up to $232 million in milestone payments plus mid-single-digit to mid-teens royalties on sales of RZ358 (^[3]) (^[3]). If RZ358 had succeeded, those future payments (discounted to present value) might indeed have been worth on the order of ~$75+ million to XOMA. The stock’s plunge appears to mirror that logic, indicating investors had been pricing in substantial value for RZ358 which is now largely gone.

XOMA’s valuation can be thought of as a sum-of-parts of its royalty interests. It has stakes in dozens of drug programs; a few are already commercial (e.g. Vabysmo, IXINITY, and recently acquired DSUVIA (^[4])), and many are in development (from partners like Novartis, Janssen, Merck, etc. via acquired portfolios). Analysts often use a risk-adjusted NPV model for each royalty: estimating probability of approval and peak sales for pipeline drugs, then the present value of XOMA’s royalty slice. For instance, before the setback, analysts would assign a probability that RZ358 would reach market and generate X revenue – now that probability is ~0 for congenital HI indication, hence its NPV contribution drops to nil.

Despite the hit, sell-side sentiment on XOMA remains fairly positive as it is one of few pure-play biotech royalty companies. Even after the Rezolute trial failure, some analysts kept “Outperform” ratings but trimmed price targets (e.g. SVB Leerink cut target from $58 to $45) (^[1]), reflecting the lost value but still seeing upside from current ~$26 levels. This optimism stems from XOMA’s broad portfolio and new investments: the company has been actively purchasing additional royalty streams (e.g. oncology assets from Mural and LAVA) to diversify away from single-asset risk (^[7]). Peers or analogs include Royalty Pharma (a much larger, dividend-paying royalty aggregator) and Ligand Pharmaceuticals (which also monetizes milestones/royalties). Compared to big peers, XOMA is smaller and higher-risk, but potentially higher-growth if its partners’ pipelines deliver. On a price-to-book basis, XOMA trades near or slightly above 1× book – it had ~$188 million of total assets vs. ~$60 million liabilities at 2024 year-end (pro forma for the loan) (^[4]). The book doesn’t fully capture the value of future royalties, so investors are essentially betting on XOMA’s management to execute in acquiring and nurturing lucrative royalty rights. In summary, XOMA’s valuation is a bet on a portfolio of biotech “lottery tickets” – one just lost (Rezolute), but many others remain.

Risks & Red Flags

The Rezolute episode underscores XOMA’s biggest risk: dependence on the success of its partners’ drug development. XOMA doesn’t develop drugs internally; it buys or out-licenses assets to others and then waits for royalties. If those partners delay, fail, or cancel trials, XOMA’s expected revenue can evaporate (^[3]). This is exactly what happened with Rezolute’s RZ358: despite earlier positive signals, the Phase 3 failure means XOMA will likely receive no royalties from that program (and no further milestones) (^[2]). XOMA even holds shares of Rezolute (about 161,861 shares received as part of the 2017 deal) (^[3]), which lost most of their value in the 87% stock collapse (^[2]). Concentration risk is a concern – while XOMA has a growing portfolio, certain assets can represent outsized potential. Before its failure, RZ358 was presumably one of XOMA’s top anticipated royalty producers. Similarly, XOMA’s stake in Vabysmo is crucial, as it’s a significant current revenue source. Any competitive threats or safety issues for Vabysmo (e.g. new eye therapies or pricing pressure) could jeopardize the royalties earmarked to pay off the Blue Owl loan (^[3]). If Vabysmo sales disappoint, XOMA might face longer payback times and higher interest expense (the loan interest is calculated with an effective interest rate method based on projected royalties) (^[3]).

Another red flag is XOMA’s fixed financial obligations relative to its still-emerging cash flow. The high-cost capital – nearly 10% interest debt and ~8.5% dividend prefs – means XOMA’s hurdle rate for success is steep. It must consistently earn enough from royalties to cover these charges. This leaves little margin for error if multiple programs slip. XOMA does have the option to cut costs (its own operating expenses are modest, ~$6–7 million G&A per quarter (^[10])) or pause new investments, but it cannot avoid paying interest or preferred dividends without severe consequences. In a stress scenario where royalty income dropped, XOMA might need to raise equity or sell some royalty rights to meet obligations – actions that could dilute shareholders or crimp future upside (^[3]) (^[3]).

Governance and ownership present some considerations too. A single investor, BVF Partners, owns about 25% of XOMA’s common stock (and could own up to ~47% if they convert preferred shares) (^[3]). Such a large stake by Biotechnology Value Fund means they have significant influence over XOMA’s strategic direction. While BVF is a sophisticated biotech investor (which could be a vote of confidence), their presence also means the company might prioritize long-term royalty growth (or even a potential sale of XOMA) over near-term shareholder returns. Public float is somewhat limited, and the stock can be volatile (as evidenced by the 23% single-day swing) (^[1]) (^[1]). Low liquidity and high insider ownership can amplify price moves – both upward and downward.

Finally, valuation uncertainty itself is a risk. With many pipeline assets, it’s not always clear if the market is appropriately pricing in their chances. Unexpected negative events (like clinical holds, regulatory rejections, or partner bankruptcies) could hit XOMA without much warning, since XOMA is not in control of those programs (^[3]) (^[3]). On the flip side, positive surprises (a partner’s drug approval) could spike the stock. This binary, event-driven risk profile is inherently higher than a stable operating company. In summary, XOMA’s model gives investors exposure to a broad swath of biotech upside, but the risks of failure, delays, and financing strain are ever-present – as starkly highlighted by the Rezolute-induced plunge.

Open Questions

– Can Rezolute or XOMA Salvage RZ358? Rezolute’s congenital hyperinsulinism trial failed, but will they continue any development of ersodetug (RZ358)? Rezolute had another Phase 3 trial in tumor-induced hyperinsulinism ongoing (^[11]) – it’s unclear if the drug might still show value in that niche. Rezolute has the right to terminate the license and return RZ358 to XOMA on 90 days’ notice (^[3]). If that happens, could XOMA find a new partner or indication for the antibody? Or is the asset effectively dead? These questions will determine if RZ358’s royalty stream is gone for good or just deferred. Right now, investors are assuming the worst (zero value), but any hint of salvage could be upside optionality.

– How Will XOMA Deploy Capital Post-Setback? XOMA raised a large pool of cash with the Blue Owl loan and has been on an acquisition spree (Mural, LAVA Therapeutics deals in late 2025) (^[7]) (^[7]). With RZ358’s anticipated income wiped out, does XOMA feel pressure to find new royalty assets to “fill the gap”? The timing is tricky: biotech valuations are depressed lately, which could present attractive buying opportunities – but XOMA must be careful not to overpay or overstretch. Also, will XOMA continue its $50 million stock buyback authorization (^[4]) after this drop, potentially signaling confidence by repurchasing shares at lower prices? How management allocates capital in 2026 (toward buybacks, new deals, or paying down debt) will signal their priorities and the health of the business.

– Is XOMA’s Portfolio Truly Diversified? XOMA touts an “extensive and growing portfolio” of royalty assets (^[5]). Investors should ask for a clearer breakdown of its top royalty prospects. For instance, what are the next big milestones due? Two partner NDAs were submitted in late 2023 (^[4]) – did those drugs get approved in 2024/2025, and what payout will XOMA receive if so? Understanding the pipeline cadence is key: XOMA’s stock could rebound if, say, an Alzheimer’s drug or cancer therapy in its portfolio hits a success, unlocking a sizable payment. Conversely, more failures could compound the pessimism. XOMA’s recent Q3 2025 report highlighted “upcoming events expected to drive shareholder value” (^[12]) – shareholders will be keen to know if those events (likely drug trial readouts or approvals) are still on track after the Rezolute shock. A related question: Does XOMA adjust its strategy in vetting deals after this? The Rezolute license was struck in 2017 when Rezolute was very early-stage; since then XOMA has also started acquiring economic interests in already-approved drugs (like DSUVIA in 2024) (^[4]) which carry less binary risk. Will XOMA tilt more toward purchasing royalties on marketed products for stability, even if they have lower yield, rather than pure pipeline bets?

– What is the Long-Term Earnings Potential? Looking beyond the noise, can XOMA eventually reach a point where its recurring royalty revenues exceed its expenses (including debt and pref dividends) so that it generates sustainable profits available to common shareholders? The current guidance implies cash flows from Vabysmo, IXINITY, DSUVIA, etc., along with existing cash, are enough for a few years (^[4]), but at what point will XOMA cover its costs without one-time milestones? Analysts project about -$1.41 EPS for 2025 (a loss) (^[9]); is there a pathway to positive EPS in 2026 or 2027 as more assets mature? If not, XOMA might remain reliant on external financing (deals, loans) to bridge the gaps. This ties into whether common shareholders will ever see direct returns (dividends) or if all cash will perpetually be recycled into new deals and servicing preferreds. Clarity on this “steady-state” scenario – perhaps shared in management’s investor communications or a shareholder letter (^[13]) – would help investors gauge the endgame for XOMA.

In conclusion, XOMA’s stock plummet can be traced to the very nature of its business: big rewards but big risks riding on drug development outcomes. The Rezolute failure was a harsh reminder that not every ticket in XOMA’s royalty lottery will pay off. Going forward, investors will be watching how XOMA regroups from this setback, manages its financial obligations, and leverages its unique royalty-aggregator model to create value (or whether further pitfalls await). The coming quarters – with potential drug approvals and deal news – should begin to answer these open questions and determine if XOMA’s recent plunge is a temporary setback or part of a larger re-rating of its risk profile.

Sources

1. https://ainvest.com/news/xoma-plummets-23-rezolute-trial-setback-biotech-royalty-2512/
2. https://fiercebiotech.com/biotech/rezolutes-stock-plunges-87-after-hypoglycemia-drug-flunks-pivotal-phase-3-test
3. https://sec.gov/Archives/edgar/data/791908/000155837025003131/xoma-20241231x10k.htm
4. https://investors.xoma.com/news-events/press-releases/detail/449/xoma-reports-fourth-quarter-and-full-year-2023-financial
5. https://stocktitan.net/news/XOMA/xoma-royalty-announces-closing-of-transaction-to-acquire-mural-wkpi500uhmfo.html
6. https://marketscreener.com/quote/stock/XOMA-ROYALTY-CORPORATION-31660656/news/XOMA-CORP-Management-s-Discussion-and-Analysis-of-Financial-Condition-and-Results-of-Operations-fo-43202363/
7. https://stocktitan.net/news/XOMA/xoma-earns-1-9-million-associated-with-two-partner-1m3z6ysvi3ij.html
8. https://nasdaq.com/articles/xoma-royalty-xoma-reports-q3-loss-lags-revenue-estimates
9. https://marketbeat.com/instant-alerts/xoma-royalty-nasdaqxoma-stock-rating-lowered-by-wall-street-zen-2025-08-03/
10. https://globenewswire.com/news-release/2023/05/09/2664299/0/en/XOMA-Reports-First-Quarter-2023-Financial-Results-and-Provides-Update-on-the-Acceleration-of-its-Differentiated-Royalty-Monetization-Strategy.html
11. https://ir.rezolutebio.com/news/detail/361/rezolute-announces-alignment-with-fda-on-streamlined-design-for-ongoing-phase-3-trial-of-ersodetug-in-tumor-hyperinsulinism
12. https://investors.xoma.com/news-events/press-releases/detail/440/xoma-reports-third-quarter-2023-financial-results-and
13. https://xoma.com/2024-letter-to-shareholders/

For informational purposes only; not investment advice.