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

This is the Business of Biotech , jp Morgan edition . We're here in the beautiful offices of the law firm of Alston and Byrd , who we're partnering up with on this series , and we're very thankful for the space . If you have any biotech or life sciences legal needs , alston and Bird is your firm . I want to start out by getting to know you guys a little bit .

But before we get into the meat of you , you guys and what collective expertise you bring to do this new sort of investment paradigm , I want to learn about that . So I want to start there .

Originally I was thinking we'll just start by getting to know these guys , but let's start with sharing the fundamental layout of what royalty aggregation is and then we'll get into your backgrounds and how you're uniquely suited to move into this business . Sure thing . Well , first , thanks very much for the invitation . We certainly appreciate it . My pleasure .

Second , for taking time out of a very busy week to join me . Our pleasure , our pleasure , second is , if that introduction has not been trademarked , we actually can take that . You can have it . That was the most eloquent approach in description of XOMA and what we're trying to do . I wrote it out so that I would deliver it . I appreciate it .

Well , brad is much more steeped in royalty finance than I am . So , brad , why don't you give a sense of what we're doing ? Absolutely so what we are doing is actually bringing forward for a payment to pay future at-risk cash flows from pharmaceutical products , and that could be where a partnership is in place .

So say , a biotech company is developing a drug and they partner with a big farm . There's a contractual arrangement that usually has milestones , like when you achieve your next phase of clinical development and when you achieve your regulatory approval or filing , and then you have 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 capital today , and what that allows companies to do is be flexible and deploy that type of capital to a new project that they're working on .

Maybe they have a proprietary program that they want to advance , or a platform that they want to take forward to the next stage and advance a programming to IND . So what we're doing is kind of creating a novel form of financing that's not equity related .

So , instead of selling pieces of a specific company or shares of your overall company , you're limiting the economic dilution to just a single partner program . That's interesting , all right , so it's interesting , but it sounds a little bit complicated and I'm curious about how well known this model is . Are you guys coming out of left field sometimes ?

When you propose ? Rural financing is somewhat similar to SPACs Okay , in the sense that it was a four-letter word that had a very adverse connotation until really the last couple of years .

So I would say , is that when you're in a board meeting and you're looking at all the financing options that are available to you as a company , royalty financing is probably at the bottom , historically speaking , given what's happening in the public markets today and over the last several years it's ascending the order .

It is probably right up there with equity , with debt actually being below that , and so it's in vogue in the sense because of what Brad just said , which is , you can isolate the dilution to a single product relative to an entire company .

So if you believe that the company is worth the summation of its cash flows , the cash flows are divided by the slowly diluted shares outstanding . You're selling equity and you're giving people parts of every single product that you're delivering .

In a royalty monetization , you're isolating it to one particular program and you maintain your equity ownership across the entire spectrum of your pipeline . In a royalty monetization , you're isolating it to one particular program and you maintain your equity ownership across the entire spectrum of your pipeline . In a royalty monetization , which is quite different .

Now , if you think about biotech , it's somewhat similar to actually building a house , in that it always takes more time and it always takes more money .

That translates to is more dilution for equity shareholders and what we're trying to provide management teams and their shareholders an ability to actually progress molecules without suffering the equity dilution that is consistent or inherently drug developed .

So , owen , you have a unique background in that you've worked in finance , but also you've worked on the biotech side , so you've seen some of that firsthand . Tell us a little bit about that and sort of give us your background in the context of how it set you up . To start zelma , I certainly didn't start . Uh , it's almost better right now . It's 1981 .

Uh , it started as , oh so you know , I mean in 1981 you were like a toddler , I was just a baby , that is true , um , but made a little history in the company because I think that's important relative to where we are and then where Brad and I come in . So Zoma started in 1981 . It actually went public in 1984 .

It's actually the longest tenured publicly traded quote unquote biotech company . So people know Zoma as an antibody discovery company and over those ensuing probably 30 to 40 years , zoneman has touched hundreds of antibodies .

Over the course of that time the management team decided that they want to take some additional risk and try to get into clinical development so they can actually generate better returns to the trailblazer over time . Unfortunately , the company was not very successful in that endeavor .

But what they were very successful in is actually creating the CDRs , the sequences that actually make an antibody . That was their bread and butter . So there are a number of different assets antibodies that were actually discovered by Zona . One of the most prolific ones is a drug called Rituxanin . It actually came from our BC and phage display technologies .

It actually came from our BC and phased display technologies .

So in 2017 , after several setbacks , the company tried to win on the verge of bankruptcy and the existing management team , namely our CFO , tom Burns , and the existing CEO at that point in time , they contacted a number of funds to see if they could actually work a different business model , and there's a fund here in San Francisco by the name of the Biotechnology

Valuing Fund . It was instrumental in the development of a company called Ligand , which is a competitor to ours , but slightly bigger than we are , and they actually recapped the company in 2017 with some capital and set us on the process of being there .

So we understand the trials and tribulations of drug development Because we've lived it , not only personally , but the company as a whole , the culture of the company , is looking at it . They were on the verge of bankruptcy several times and they sold different royalties at that point To various parties so they could continue on their drug development path .

And it wasn't until 2017 when Tom , our CFO , came to the light and was like we should probably stop doing this . History would suggest that we're not very good at it , but what we are very good at is actually making these antibodies . So we started with a base of around 40 to 50 assets that came from our licenses .

We went out and prosecuted VIP around those licenses and brought everything back the realities and milestones . That's actually what started .

So that's really important , because to try to replicate our business model would probably take a decade or so , and today very few people actually have the patience in this particular space , and then overall as an investment perspective , to wait 10 years for this type of investment to come to fruition .

Yeah , so that's the history of the company and that's why I think it's really important to understand , kind of , what we're doing , because we live it , we breathe it . People often ask Brad and I , you know what's the difference between investing and operating ? We've done both , yeah , and what we say is that actually they're very similar .

More often than not , you walk home with your head between your tail asking yourself why am I doing 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 business is , frankly , maybe not really good at either .

Kind of sit right in the middle , okay , right , um , so maybe you can give them a little your background . Yeah , I'll talk to them absolutely . So I'm kind of 20 years grizzled in life sciences and different forms and factions and I've touched royalties over that entire career from different angles . So started out early as a strategy consultant .

Working with royalty fundings is one of the things that's mandated on to find , assess and value different types of future royalties that they could apply Like it's the space of development , like what Owen had said earlier about financing of last resort to now financing a priority . That's where that evolution started .

Then I was on Wall Street at an investment bank , mts Health Partners , where I was doing mergers and acquisitions , equity capital raises and , most importantly , royalty monetization from the agent inside , so helping companies or universities raise capital by bringing some of the payments , the future payments for those royalties forward .

And it was really interesting in that because you didn't see how the entire royalty universe worked , how people behaved , how they thought about things , how they structured , how their strengths and their weaknesses .

It was kind of like seeing the chessboard and analyzing how each of the chess pieces could move across the board and each has their unique place in the universe and you've got to deploy them , reduce them at the right time .

I went on to become an operator at a company called DNA Nexus , which was orchestrating a turnaround in a healthcare IT company , and then ended up as an investor at RTW Investments , a large biotech full lifecycle investment fund , where I was leading the structured finance and alternatives practice and I was doing non-pollutive capital solutions for companies , and so I

did each step along the way . They have to look at the royalty space in different ways and see what is something that we could provide with this asset class . That's truly differentiated , and is there a better place for it in the market than where it was existing ? It exists primarily for commercial products .

Products that had been launched , already had sales it was very much credit-like Whereas what we're doing is a little bit different .

Take where we're looking at that same asset class and looking at it earlier , because we in this public company can benefit from being patient and having time and in the meantime we're creating a lot of value for the biotech ecosystem because we're providing a type of capital that's otherwise unavailable in their life cycle .

So there's really interesting synergistic way . Yeah , I can see where this would be appealing to your point sort of moving up the ranks in recent years , as you can imagine , a lot of requests and inquiries around creative sources of capital , because that direct route has been a little bit dry , as we know .

It occurs to me this is just theoretically it occurs to me that the risk aspect still has to remain somewhere right , like the risk shifts . So where does the risk shift still has to remain somewhere right , like the risk shifts .

So where does the risk shift in this model Maybe shift in height If you actually think about our business model and we do have several competitors , but our competitors , generally speaking , are actually further up to the right , meaning they're actually at a later stage , so we're the only company that we're aware of that actually spans the entire drug development

spectrum . We'll underwrite risk at a preclinical stage all the way up to a commercial stage , and so the way we think about risk is not much different than actually what we learned in our CFA days right , support , portfolio management .

What we're trying to find is the efficient frontier how much risk do we need to take in order to engender a return that's commensurate with that risk ?

And so we take the principles of finance and we apply it to drug development , and if you take equity-like risk for credit-like returns , I would suggest that's a pretty bad business model and I wouldn't suggest that our competitors are doing that per se , but what I would say is that as you go further and further right to more and more assets that are further

de-risked , your returns will come down over time . So for us , just given where our balance sheet is relative to what our business model is , that we try to focus on the earlier stage assets . You will be wrong more often than you're right , but there's a difference between your bounding average and your slugging percentage .

You can bat 200 , but have a slugging percentage of 600 and still make significant money . Yeah , and we look at any portfolio attribution analysis . Generally speaking , what you find is two or three things that power the returns of the overall portfolio , whether it's a hedge fund , a private equity fund , a mutual fund and a public perspective .

There's three or four things , three or four investments , that drive the overall returns . There's several investments that come in the middle that are plus minus 25% , and the key is to try to limit the zeros and if you can do that , you can generate pretty good IRRs over time .

So wherever our focus is on essentially the asymmetric risk reward , where we don't have enough information to truly underwrite to 50% probability of success , in our world it's either zero or 100% . It don't either work . It's not going to work . So the way we think about risk is how much money are we willing to lose ?

And so many of our investments are staged in the sense that this whole quantum of capital is relatively finite , in the sense that we know exactly what it is , we don't put ourselves at risk for future payments down the road , generally speaking , and if we lose that investment meaning we lose that money it's not detrimental to the overall company because it's shielded

by our overall portfolio . So our objective since we came here is trying to build a portfolio , both in sheer size but diversified across the actual risk spectrum preclinical to commercial . Diversified by the therapeutic indication ecology , virology , immunology , et cetera .

Diversified by the stage and then by the modality small molecules , antibodies we haven't ventured into the gene therapy space just quite yet . We're looking at a few things there and that gets you total diversification .

Because what we learned in the 2008-2009 timeframe , when we're sitting on Wall Street , historically speaking , people have said that stocks and bonds and 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 , everything went down . And so the interesting thing about our business model is that an oncology asset and a virology asset , an antibiotic , whatever it may be , are totally uncorrelated . Not only uncorrelated from a science perspective , they're uncorrelated from an economic perspective . Recessions , generally speaking , will not hit pharmaceutical product .

It may dip slightly . So what we're developing is an asset class that's totally uncorrelated to the equity and credit markets , which should be very appealing to an ultimate investor . So , with all that said , where we are in the gestation of our company is that we're just kind of getting out of the crib and just starting to crawl . Does that make sense ?

It does , it does , but you're crawling around a lot of moving parts . I'm curious about the management approach , right , like it's highly situational a lot of moving parts , a lot of assets at different stages , across multiple modalities .

I mean , is there a mechanism by which an algorithm may be some AI or machine learning , like what's the sexy sauce that allows you to you know on a daily basis , make decisions around these assets and at least be aware right of the progress and where things are going ? I think it's probably better than any algorithm . It's a black box .

It's the experience of the school of hard knots . Yeah , if you've been around the block long enough and seen enough things , you have an indication of what could be good and what may not be good , and so there's no compression algorithm for experience . So I think that the way we generally look at it is you've got to create that diversity .

There are ebbs and flows in the sector . There are modalities that are really interesting today that a couple of years ago no one would touch them .

There's pendulum swings all over the place and that lack of correlation as much as possible , you know , with the focus on that long-term end goal , which for us , is creating long-term sustainable cash flows at a significant rate and a ramping rate . And how you get there is , you know , situation-dependent .

We talked to I mean , we've been overwhelmed with JP Morgan this year talking to companies who are trying to navigate the environment . So it's like how do you one find something that we think is interesting , has potential , like , has the potential to go forward , a situation where we can be helpful and meaningful ?

We write checks that are only applicable to certain sizes of companies or situations . So it's that combination of keeping track of what we have and what we've built with the portfolio versus every situation we see and can be at . Yeah Well , I didn't get to your background and how it sort of feeds into your management at Zoma . So you mentioned experience .

What's the Albert , what's the black box experience ? Tell us about your experience leading up to your leadership at Zoma and how it sort of feeds into what Brad was just talking about . That I don't know the intuition . What I would say is a long scar is in the back . So I spent 16 years as an investor , initially investment 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 money manager largest money manager in the world and invested in biotech stocks , but also hospital stocks and PBMs and et cetera . So I had a pretty good view of just the overall healthcare ecosystem .

And then in 2013 , I left and I went to the operating side . I worked for a GLP-1 company before GLP-1s were in vogue . Oh wow , I worked for a- . Any regrets getting out of that space before it blew up ? No , no , I would say so . I grew up doing athletics and I would say that you can't replicate what you have on the operating side .

You know , in the investment side , you generally operate in chief teams . There is a healthcare team and a finance team , a consumer team , et cetera , and you may work three or four people , but you don't really interact with the other folks inside the firm . I mean , you certainly do from a social perspective , but not necessarily from a business perspective .

I would say there's nothing more rewarding than actually putting a drug into human and having it work and getting calls from families and actual patients that suggest that we've extended our lives years . That's why I did it and I'm certainly very happy that I made the decision .

Every now and then I'd like to go 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 one alarm or five alarm ?

More often than not it's one alarm , but when it's five alarm in the operating side it's much more difficult than it is on the investing side . The investing side , we just sell , we made a mistake and we sell .

Yeah , I was curious about that what the liquidity sort of factor looks like on the asset right and is there any catch if and when you decide to offload an asset ? Is it any more difficult , given the model . Yeah , it's a static investment right .

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 the asset doesn't work , the asset doesn't work , we write it off and we move on . Yeah , so it goes back to my point about the batting percentage relative to the slugging percentage .

We need to actually maximize the slugging percentage . The only way we can do that actually is actually have a batting average enough opportunities , because we need to actually diminish the overall risk . The only way to diminish risk is you actually have to distribute that risk across a number of investment . Does that make sense ?

It does , yeah , so this is my background is in 16 years on the buy side , sell side . The last 13 , 14 years on operating companies . I worked at a diabetes company . I started my own oncology company . It's publicly traded . I was the CEO for five years .

I ran a nephrology company that we exited through a license agreement with a big pharma company and I've worked at venture capital firms . I've worked at private equity firms . I've worked at mutual funds and I've kind of seen the flow from an investment perspective and at the same time . I've actually operated companies .

I know what it takes to get a drug to the clinic and ultimately to commercialization , and I say that they're both unbelievably hard . And it goes back to what Brad was talking about in your question as it relates to risk . I'm pretty convinced at this point in time that when you look 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 be right , even if you even whether or not you have You're going to be right for the wrong reason .

Sure , right , but nevertheless you're right , because 90 90 of all drugs fail , plus or minus a couple percent here , yeah .

What's more difficult , however , is to rule something in yeah , to look at a piece of data and say I know this drug is gonna work because it may work mechanistically , the biology actually may work , but there's a human component to drug development , which is execution , and what you find is that most drugs that actually don't make it don't make it because they came

to execution . The people aspect is an unbelievably important . In fact , it's more important than the actual science . I'm pretty convinced at that point .

Wow , yeah , and so when we do deals , generally speaking , much of what we do is actually already been partnered , and so we're underwriting to the risk of the company that's actually developing the drug , not the company that started with the drug , the company that should be currently executing it on the development time , and oftentimes that is a large pharma company

or a very experienced you know large or mid-cap biotech company . That's not to say that the risk diminishes , but what I have found is that , you know , smaller companies , of which I have been part of , unfortunately , have participated in this .

We cut corners because we don't have the capital to run the correct settings , and so we're trying to get to the end goal as quickly as possible and we take risks . They're all calculated bets , whether it's the trial design , the including and excluding criteria , the geographic scope of the trial , whatever it may be . There's a hundred variables .

But inevitably you're cutting some corners because you don't necessarily have the capital . So when we think about our business , we can't affect those things right . We don't have enough capital to surge or address all of the issues that happen in drug development . We don't have the skill sets .

So that goes back to what I was talking before is that we're really just finance individuals that have some domain knowledge in healthcare , perhaps biotech . Specifically , we're trying to provide the principles of financial and portfolio management to the actual biotech space .

Not only do we do it from an investor perspective , but we also do it just with our own company and we can get into kind of how we finance the company and how we think about our shareholders , and we can get into kind of how we finance the company and how we think about our shareholders .

But I think the most important thing is , at the end of the day , is this is an inherently risky business .

It's probably the most risky business of anything out there today , and we're seeing that reflected in the public market today , because in the 2018-19-20 timeframe , when the cost of capital was zero , not only was the cost of capital zero , but people thought everything was going to work Right . Yeah , and that's just not the case .

Today we're on the downside of that , which actually , to us , is actually very beneficial , because that's actually where we come in to provide capital to companies . But we have to be very judicious in the investments that we make and the people that we underwrite . Yeah , what does the company look like from a ?

You're talking about , like , applying objectivity to , you know , sometimes subjective space and the analysis of both science and people . You know , my friend , alan Shaw , likes to say you bet on jockeys , not horses , right ? So you're talking about the teams .

So how is the company structured to be able to do that , to apply that objectivity to all these facets of potential investments , and do it in a knowledgeable fashion ? I mean , obviously you guys bring great experience between the two of you , but do you have scientific expertise on the team ?

Do you have folks who can dig into the weeds of these papers and the mechanisms of action and feel good about it prior to the human element ? We certainly do , but I'm not necessarily convinced that what we have is any different than anyone else . I've worked in many different places . I've seen what people have .

Not only do we have people inside , but we also have consultants , we have networks , we have , honestly , hundreds of people that have worked at Zoma over the course of years who are antibody experts . And , like I said , go back to what I said before you can pull things out , but I'm not necessarily sure you can pull things in .

And so , from our perspective , with our network to analyze data , scientific assumptions , hypotheses , pre-climbal data , whatever it may be . We're trying to find just enough information where we can make that rule in versus rule out decision .

Once we made that decision , then we turned it over to Brad , because Brad , at the end of the day , and his team are the structuring experts . The secret sauce of our business is not the scientific evaluation , because I'm absolutely convinced that there's no one in the world that's actually any better than anyone else .

Otherwise , you would have someone that has significantly better returns than anyone else . Yeah , and that's actually not the case today . There may be periods of time where you have one particular fund versus another that has significantly better returns , but over a long time period , those average out . Why ? Because we don't understand human biology .

Yeah , it's a dark genome , so to speak , in terms of what we're trying to figure out . Yeah , so the secret sauce of our business is actually the structuring component . So I may have a bright time about that , because that is what I've learned from that . I'm not a royalty guy , he's a royalty guy . He's the real brains behind the operation .

I was just thinking about your comment . I sat through some sessions at the conference this week and I've had multiple conversations with biotech founders and builders in the last three days and conjecturing that there's no one out there that's better than anybody else . I'm not sure how that message would be received on the stage at the JP Morgan conference .

So there's tremendous drug hunters and people that can pick out data , but it goes back to what I said before , which is that's only one aspect of drug development . The other aspect is the people , and I am absolutely convinced that there are no secret sauce to actually picking people .

Now , relationships matter , networks matter , and that's why you may see some fountains or ACs do better over a period of time than others . It may not necessarily be the scientific evaluation . It actually may be the human component . Yeah , right , right , I mean , we just talked about the kind of how we structure things and when adding the tip .

Absolutely , I think the key component is we stay humble and we stay realistic , and part of that is realizing that , the optimism that we have in this space of biotech right .

Ultimately , the end goal is to improve human health in some form or fashion , but people often over-index on the speed , the timing , the cost and what the outcome will be , because they look at comparables as what was the best of right . They're selling their story . What we all ultimately think of is what could the best of right ? That's their selling their story .

What we all ultimately think of is what could realistically happen . And if that realistically happens , can we do well . If it fails , can we be okay . If it succeeds and we can power the excess returns awesome , that's fantastic .

So we can use structuring to kind of solve those elements where we don't make it an acquisition that's far outsized for the size of our balance sheet and our portfolio , where we look at structure like when will the next payments come in ? Is there a way that we can bring some of that capital forward to us so that if the rest fails we're okay ?

Like , if you think about our process , every viable trial is a , you know , generally a one or a zero . I mean it's hard when you have the gray area . I guess there are some 0.5s that people can answer , but there's the ones and zeros . So it's a lot of stacked binary risk on top of each other .

So we've got to make sure that we're being cognizant of that and also realistic . The most fun that we have is when we're looking at assets and there's discord amongst the team because we can't quite figure it out .

Someone's following a certain concept or aspect of the deal , someone's getting the tummy rumbles about parts of the deal and it's like how do you balance that and figure out how to make the appropriate capital allocation towards it ? Our friends at Alston and Byrd set us up with some amazing space to record during JPM week .

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You learned about them on the Business of Biotech , oh , and you hinted at the investment structure Like where does the money come from ? Give us a picture of that . Our capital , yeah , so it needs to go to our , our cfo , because he's kind of figured out the capital structure of the company and who's in the room by the way of a camera shot .

I won't , I won't fan , I won't fan , 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 conscious of our equity capital structure . So if you think about a company , what a a company's worth ?

A company's worth is the summation of their cash flows divided by the number of shares outstanding they have . And then the comment I made about drug development and home building is very similar , which is it always takes more time , it takes more money . Well , in biotech parlance , that means equity . That doesn't mean you're not going to be successful .

It just means that you actually need to generate more cash flow to generate the equivalent dollar per share . What we've done is use a number of financial instruments to bring capital into the company in order to continue to deploy , to increase the size of our portfolio . Interesting enough , we have three financial instruments that are publicly traded .

We have our common stock and we have two perpetual referrers . Those perpetual referrers yield roughly around 8.5% . Despite being the smallest royalty company that's publicly traded , we have the highest dividend yield of any company . So for those investors that want security and a continuous cashflow stream , they can actually buy our perpetual prefers .

For those people that would like to generate some more alpha it takes some additional risk they could buy our prefers plus our common stock . Then , in addition to that , we did a very innovative deal in December of 2023 that I'll have Brad describe , because it was actually his problem . Stick at the center .

This is the same type of structuring that we do for our own new royalty acquisitions . I mean that learning is going to be applied to how we manage the company and how we think about dilution .

So one of the things that we're thinking about , as we're trying to be more active and help other companies have capital that then set their programs by buying the different royalties , was how do we build our own value sheet and we have royalties with ?

At that point it was early in its launch Roche's Bevisement for Wet AMD , one of the fastest launches in Roche's history and what we set up was a novel recourse loan specifically against a single asset .

We partnered with Blue Out Pathetal to come up with a structure that basically allowed us to loan that royalty stream to them for a period of time secured solely by the royalty stream , after which time that is paid off and will be reverted back to us , and in that same time we took that lower cost of capital and are able to then have a full balance sheet

and be able to have helpful conversations , like we're having at JP Morgan now for companies that are seeking ways to advance their own projects so that we can buy new royalties . Since the kind of 2007 pivot , we've had very minimal M&V dilution . We only had 20 million shares outstanding .

So you can imagine a situation whereby we start generating outboarding cash flow which should happen hopefully sometime in the near future and we redeploy that capital not only into new ideas but also into our own company , and when that does , it levers our future returns such that , if we're right on assets 11 , 16 , and 22 , instead of generating $2 a share of

income , we generate five A . We've made the right investments , but we've also reduced our equity capital base . So in order to get bigger in this environment , you need to get small . I'm a huge proponent of that . If you look at companies that have done very well , in fact , if you look at the best performing companies in the S&P 500 over the last 20 years .

You're moving to video , which is apparently a technology play . Three companies stand out Adelaide Zeman , dow Jones and UnitedHealthcare . Three companies stand out Arrozon , dalmatos and UnitedHealthcare . Okay , yeah , that would have been the three that I assumed . Me neither , actually . Let me do the analysis .

I looked at the analysis and there's one commonality across all three of those companies that each and every year they remove about 5% of their equity cap , meaning they remove , they buy back shares . Their equity cap structure is being reduced . They're generating 3% to 5% maybe sometimes more , maybe sometimes less revenue growth on an annual basis .

They're leveraging that down to 20% , 25% earnings growth . So there's leverage in the P&L . But , more importantly , there's leverage from a full included shares outstanding . It's going lower each and every time , which enables you to generate actually higher earnings per share , which generates a higher PE multiple , which lowers your cost of capital .

So I go back to what I said before , which is that we're British finance guys operating in the biotech environment where , frankly , there's not a lot of fiscal prudence in our environment and we're trying to bring some discipline from our capital structure to this environment and at the same time , as Brad mentioned , bringing drugs to market and allowing people to

rebuild wars of their success and the fruits of their labor in a business that's currently very difficult . Yeah , yeah , this is where I wish Matthew Mamak , the department here at Alston Byrd , who was going to join us but unfortunately couldn't .

I wish he was here because I'm curious about the perhaps legal implications or if there's anything you have to be careful about in this model where you're doing some pretty creative things with money . Oftentimes , creative things with money puts you in the red zone of potential danger . I mean , is there any risk there ? Is there any consideration ?

I think the way to think about it legally for a company is it's more complex documentation . That being said , there's a number of councils that are very experienced in the States now that can shepherd a client through that type of a situation . I mean , the way we think about it is ultimately , we want to stay out of the company's way .

We're a passive recipient of those same future capsules that they would have received and the whole point is , unlike , say , debt , which would have a lien against all of the assets of the company , this is independent of that . It can be just treated as if someone had sold us a brick of a house and a complete sale of the asset .

So it actually fits really synergistically with other types of finances . It doesn't get in the way of different things that they're doing when the product measures . If they want to pursue other things , like sell the company , it doesn't get in the way of a transaction . It's not like blocking or oversharing . It doesn't have reporting requirements .

We're not sitting in a board of directors of companies . It's like if you had , say , a new venture investor come into your company . So it's the best of both worlds . For management teams it feels very light-touching hair-dove . For us it's great .

It allows us to put the same information that they would have otherwise gotten from their large farmer or large biotech partner . And it's actually , aside from investing the time and doing the work , it's quite an elegant solution .

Yeah , I'm a bit biased , of course , but having run companies , I would sell royalty every day of the week Because at the end of the day , a 2% royalty is not going to be valued by the partner that I'm selling the asset to . It's immaterial . You can get that through Kong's efficiency and S&J and A efficiencies .

But what it does do it limits the dilution to the equity shareholders significantly , such that they can actually generate a greater return so then they can go back to their LPs and return additional capital and that capital goes back into the venture community , spawn new companies .

This is a very intense , capital-intensive business and , to the extent that you can use capital that's outside of the equity spectrum and not actually be debt because you don't want to lean in your business , the kiss of death in biotech is , in my view , venture debt or converts , so you have to pay those back and sometimes you can't pay it back From a royalty

perspective . Where's hitting all the risk ? If the asset is not approved , it's on us . There's no downstream implications to the actual equity investors . From my perspective , this is an unbelievable piece of paper , not only from our perspective , but mainly from the management team and equity holders at the company . I said I would do this each and every day .

Yeah , you mentioned that you're entertaining a lot of attention here this week at JPM . What is the appetite for growth of the portfolio at this point ? Yeah , brandon , you go ahead . Yeah , I think for us , we're incredibly disciplined about what we do . The most important thing . People are like how many deals are you going to do in 2025 ?

I think that's the wrong metric . Let's say , maybe we do one deal but it's like in , the right thing that aligns with our investor . So it's not about volume , it's about what we're actually creating .

But to your question earlier about thinking about context of other solutions , I just want to come back to what I think about this , enterking with math for a second . Oh , I love math , talking to an accompanied earlier . Journalists love math . Hopefully we can scale it down .

This is where it sounds like that aha moment as to why like , oh , it's like that is superior . But a company that's publicly traded has a $150 million market cap . It wants to raise $50 million to give themselves some operating cash flow and turn over the next clinical trial card .

If they went to the equity community and did a follow-up , they would be selling a quarter of their company to someone else New investors that now own fractional shares of the company or the 25% of the company .

And if they have partnerships in place , like they're waiting for big milestones or big potential future royalties , they've sold that entitlement to 25% of those academics . Through that shared dilution .

It put more pieces of the pie in place versus what we could do In addition to 25% on everything else that they have yeah , the future , the creativity , whatever they do , and what we were illustrating to them was that the type of deal that Zoma Royalty could do with them means it's focused dilution around the economics on a very specific asset or set of assets .

Then they can keep and maintain the rest of the value they're creating across the company . The proprietary pipeline can stay 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 about the space , when that's created more value .

So it's a different paradigm . Hopefully the math wasn't too hard . No , not at all . No , no , I mean , I get the fundamentals . You talked about the investment community's receptivity to the space or a space . That's obviously situational depending on the biopharmaceutical developer , the biotherapeutic developer we're talking about .

But we see a lot of like frequent ebbing and slowing of interest in RNA and genetic medicine and you know , bispecific antibodies , multispecific antibodies . Like there's a du jour that seems like the you know , the daily part of that du jour equation is like real frequent right now , right Like I don't know what do they call the frequency of waves .

Like you know , there was a time when there was a little bit more of a swell , right , but now it's . So how does that play into what phenomenal looks like ? To your point , brad , you said you know maybe we do one deal on 25 and it's , but it's a phenomenal deal and I know that it's .

You know that there's no hard and fast answer to what phenomenal looks like , but does that make it more difficult for us ? It makes it more difficult for me , right ? I mean , if you take a step back and think about our space , the ecosystem , the biotech ecosystem , there were 250 publicly traded biotech companies back in the 2005 or 2000 timeframe .

Fund sizes generally were measured in the millions , not billions . And when you have excess profits in any industry , that invites excess investing which drives downward currents . It happens in every industry and I would make a conjecture that I think that's actually what we're seeing in biotech today . I think there's actually too much're seeing in biotech today .

I think there's actually too much capital in our space . I know people are clamoring for capital and I know the sidebar conversations here this week are just people aren't investing in biotech , but I actually don't believe that to be the case . There's a ton of capital concentrated in the private markets .

There's very little capital concentrated in public markets and ultimately , we need to get these companies public , because the duration of the funds that are invested privately are measured in a decade , generally speaking , plus minus a little bit .

There are some permanent capital structures , but nevertheless the far majority of the capital is measured in a finite time period . We need these companies to get public but frankly , we haven't given the public a great reason to invest in this system at this point in time . We funded too many companies .

There's too much capital to wash , which is drawing down the returns . So we're seeing a bit of a washout in the space , and the problem that we have when we assign or analyze certain opportunities is the therapeutic density that exists . Just look at CD19 in the oncology space .

You have five-cyclic antibodies , you have CAR-Ts , you have it across the globe and at one point in time I believe there are probably over 100 CD19s in development across the different modalities , essentially going after the same indications . That is what we call MAD Mutually Assured Destruction . That's what we learned in what was the first thing ?

Mad , m-a-d Mutually Assured Destruction . Okay , that's what we learned in our political science 101 class . Right , and we're doing it to ourselves . So we as an industry need to be more disciplined in terms of how we allocate the capital .

I'm absolutely convinced of that , and when we do that , you're going to see the returns skyrocket because of what you said , which is we have all these new modalities . Many of them are actually bringing game-changing results , both from FTC perspective , a safety perspective and , ultimately , the patients .

There are some we haven't quite figured out yet , but that's always the case . If you look at the antibody space , it was totally foreign to people in the early 2000s and yet it's now probably the most efficient way to actually make a drop in how well we can actually do this engineering on the antibody side .

You have the RNA space and you've got the genetic , the gene therapy space , and what we're trying 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 and that's where we need that long duration capital .

But the thing that's making it difficult is just excess capital is driving down our returns and creating this huge therapeutic density . I don't know , actually , what's going to happen in the obesity sites .

What I can tell you is that the amount of capital that's gone in , even if it is the largest therapeutic area and it likely will be just given all the benefits . The question you have to ask yourself is what are the returns going to be like ?

And the one thing that's changed in the space today is I'm not quite sure that the clinical side is as important as the commercial side . It is Right , many drugs look very similar . Is there a big difference between 22% weight loss and 24% weight loss ? I don't know , I don't know .

But what I do know is that when you get to the commercial side , there are not even impediments that the PBMs and managed care companies have put up , where that 22 versus 24 is probably meaningless .

You have to follow the money in their industry and unfortunately there are very perverse incentives across the entire sector that drive certain behaviors that are not to the benefit of the patient and ultimately we need to change that .

Hopefully , that will change over time , but there are certain things in our industry that we just need to change ourselves in order to make that industry so capital can come back in the right pockets . Does that make sense ? It does , yeah . Yeah , you covered a lot of ground there , olin .

We started out talking about some of these very specific indications and the impacts of those sort of micro economy and biotech . But I wanted to get your perspectives and you know when you start talking commercial weight loss drugs and companies in the public markets . Now we're talking a little bit more about macroeconomic influences .

So I'm curious about what you know , maybe some prognostication on what macroeconomic influences will impact your business model in the coming year . You know , think about things like inflation . You think about things like the election year , that we're in the unknowns around who's going to be heading up FDA and NIH and so on and so forth .

Any thoughts on , like , what your management and execution plan might look like in the face of some unknowns going into 25 ? So I played sports growing up . I played hockey in college . Are you Canadian , by the way ? No , but I sound Canadian . Sometimes you do , sometimes you do .

Yeah , border state , maybe Close Massachusetts is not really a border state , but close . You played hockey long enough you started to sound Canadian . I heard that quite often , but I had my bell run more than a few times and my father was my coach .

He played in college as well and 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 actually what's happening externally . We need to be cognizant of it for sure .

But the one thing I do know is that great products , great sites and great people will always actually work to the benefit of patients . It's happened every single time . There's no doubt in my mind it'll continue to happen .

So what we need to do is actually focus on those three components , search those out and just structure things appropriately so that we don't put our own company in jeopardy .

We could sit here for days talking about macroeconomics I love talking about it , tom , and I talk about it all the time Interest rates and those type of things , but it does affect our industry for sure .

The cost of capital , as you can see , the XBI is essentially inversely correlated to interest rates , but that essentially has always been the case in some respects . You talked about these waves in terms of growth development . Well , the same thing happens in the capital markets , and the two actually kind of essentially sit apart from each other in many respects .

But with that all that said , I go back to my father's advice just keep your head down and your eyes up and you stick to your business plan , the one thing that we have recognized , as we've tried to bring in different things into the business , is that sometimes sticking to your core competencies is actually the best .

You look at companies that try to go outside their core competency . More often than not it's actually a failure and it actually works to the detriment of their core competency , their core business .

So we know what we're relatively good at , which is identifying opportunities that can generate very good returns , both for the patients that we're trying to actually help but also for the companies that we're trying to underwrite , and , at the same time , we're very judicious in terms of how we allocate our capital .

We're very cognizant of our equity structure and , at the end of the day , our business is a function of one thing just how much cash can we generate ? Because if we don't generate cash , we're going to dilute our shareholders , which means that we can't necessarily put the money to work underwriting these companies that are developing the assets .

Yeah , yeah , what does JPM week mean to you guys ? What's your agenda here , brad ? What have you been spending your time doing ? A lot of community , and now folks exploring , learning , trying to understand . They've heard about world humanization . They're trying to understand how it could be applicable to them . There's a huge educational component to what we do .

So we have a couple of suites set up in one of the San Francisco hotels and scale up pretty much every half hour or in four days . Expensive hotels and scale up pretty much every half hour or in four days . It's expensive . It's expensive . Indeed . Yes , I'm staying in one of the lesser expensive . Come to your own .

Yeah , the great thing about Zona is that we have champagne taste on a beer budget . So we've been busy Seeing a lot , learning a lot . We keep our ear to the ground and we're always learning , because you never know where you're going to find the next piece of information that's going to be insightful . So that's part of it .

The other part is stopping new investors , helping educate them on your own story , what we're doing , what our philosophy is as a management team , how we're trying to get great alignment between the management team and the shareholders and I vote for Michael Donovan Both on the deal execution and new asset acquisition side and the delivery side for Wall Street .

It's all about trust and relationships and doing the right thing for the wall . So then I would go over there . The only thing I would say is what does shaping me , shaping what I mean to us . Essentially , what every day means to us is learning , and you asked me what we've done in our career . We actually love to learn .

Yeah , I mean , there's nothing better than actually meeting . We met with a company yesterday that is trying to develop an AI system to predict clinical results . I have absolutely no idea whether this will be successful or not . What if it is ? Can you imagine the benefit of that ? That would be absolutely groundbreaking .

Sure , whether it can happen or not , we don't really know . Right , that's fodder for another podcast . That's that podcast . We meet with probably I don't know 10 to 15 companies a day here and probably meet with probably 10 companies a week , more or less . Yeah , and the things that we learn are just job-breaking .

In fact , we were just this morning , we were at a meeting yesterday with one of our partners and they mentioned something as it relates to the mechanism of action of a particular drug and essentially , our chief scientific officer and I looked at each other . We said that's why the drug works .

It's an adverse event actually is what differentiates that drug relative to a top tissue ? And we never heard it said in a way that it was said to us . Yeah , I mean , you learned something . I'm totally in like , right , I'm like I wish I knew this two years ago . Yeah , amazing . It's all about keeping you on just listening to people .

Sure , it's a good place to do it , but it also reminds me of why . This week reminds me of why I would be a terrible investor , because I'm so prone to the ooh shiny moments and everybody's shiny at JP Morgan and everyone's putting the best foot forward , so it's tricky .

It's tricky , but I would just say is that , uh , you know , if you're , if you're in this business , sometimes looking where other people aren't is the best place to look . Yeah , well , uh , I appreciate the time guys . We're we're running short on it right now .

Uh , but the education that you just need to talk about , you know the value of coming here to learn . I appreciate what you've taught our audience , what you've shared with our audience today . I think it was super beneficial educational conversation . So thank you for that . Well , thank you , appreciate it .

Yeah , appreciate you guys taking time out of the super busy week to help your audience . We appreciate it , but we certainly do . I know they would . Yeah , yeah , I appreciate it . Owen Hughes , brad Sitko Zoma Royalty , zoma Royalty , right , zoma Royalty . Yeah , it's at 2024 . How do folks get to if there's ?

I know you're entertaining a lot of interest right now , but if there's some interest , where do they find you ? Our emails are actually relatively straightforward First name , dot . Last name at Zomacom All right , good deal . Or web page , something like that . And the last thing is just that introduction . If it isn't trademarked , can you just send it ?

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 with Business of Biote , jp Morgan edition at Alston and Beard's offices here at San Francisco . We drop every Monday . We'll have a fresh JPM episode dropping next Monday .

Make sure you subscribe wherever you listen to podcasts . Better yet , go to our website at Bioprocess Online or Life Science Leader . Check out the Listen and Watch tab where you can watch these conversations play out . And in the meantime , we'll see you next Monday .