XOMA - XOMA Preferreds: I Upped My Rating On One Preferred Stock To A Buy

2023-12-29 07:00:00 ET

Summary

• XOMA Corporation specializes in financing new drug development and offers preferred stocks as investment options.
• XOMA's strategy involves acquiring economic rights to future milestones and royalty payments associated with partnered pre-commercial clinical candidates.
• For investors looking to diversify their Issuer exposure, XOMA fits that bill. I initially rated XOMA's preferred stocks as a sell due to concerns about the company's weak financial strength.
• I have reconsidered and upped my rating to Buy for XOMAO; Hold for XOMAP. Other choices are used to compare these against and provide background to my rating change.

Introduction

I discovered the XOMA Corporation ( XOMA ) last summer while reviewing a list of potential preferred stocks to diversify what I hold in my income-generating ladder which comprises both some preferreds but mostly baby bonds. Being that XOMA specializes in financing new drug development, it is not like most of the banks, BDCs, and mREIT issuers that dominate my income-generating ladder.

My article examined two preferreds issued by XOMA but I rated them as a Sell in that article out of concerns that the company seemed to have weak financial strength. Needless to say, many readers did not agree with my assessment. That is okay as readers want to hear from people on both sides of a rating the author has expressed. Also, being an overall conservative investor can affect how one evaluates unusual assets.

Along with a brief overview of XOMA Corporation, I will review both preferred stocks available:

• XOMA Corporation 8.375% DP PFD B ( XOMAO )
• XOMA Corporation 8.625% CUM PERP PFD SER A ( XOMAP )

One test I do when deciding to buy a preferred is to measure its yield and yield-to-call against others on the market, though that usually is limited to similar issuers. Here I decided to do that against some of those that I own, all with different industry exposures. This is also a good test to decide if a switch in what I hold makes sense. I decided I was too harsh last time and upped my rating on XOMAO to Buy; Hold for XOMAP. That said, my comparison later shows there are competitors for inclusion in an income-based ladder to think about.

Understanding XOMA Royalty Corporation

Seeking Alpha provides this description of the company:

XOMA Corporation operates as a biotech royalty aggregator in Europe, the United States, and the Asia Pacific. The company engages in helping biotech companies for enhancing human health. It acquires the potential future economics associated with pre-commercial therapeutic candidates that have been licensed to pharmaceutical or biotechnology companies. The company focuses on early to mid-stage clinical assets primarily in Phase 1 and 2 with commercial sales potential that are licensed to partners. The company was incorporated in 1981.

Source: seekingalpha.com XOMA

XOMA describes its strategy as:

XOMA plays a unique role in helping biotech companies achieve their goal of improving human health. We do this by acquiring the economic rights to future milestone and royalty payments associated with partnered pre-commercial clinical candidates. In return the seller receives non-dilutive, non-recourse funding to advance their internal drug candidate(s).

Source: XOMA - A biotech royalty aggregator

Their website lists three sets of assets they have rights to; I included two here to give readers a flavor of what they provide/provided funding for.

What makes it tough on companies like XOMA and one reason they also exist is the high failure rate, over 90% according to ASBMB Today , for drug trials. In exchange for funding the trials, XOMA gets a royalty if the drug is approved for sale. The next chart shows the long, slow road from concept to success.

Unlike most companies, a company dependent on royalty payments is very erratic in what it gets to report to shareholders. The latest quarter is no exception.

The next chart shows how few times XOMA has had positive quarterly earnings, but thanks to a doubling of the shares outstanding since 2014, the shareholders' equity is back to 1990 levels. Currently, that value is just under 2X of the Par value of the two preferred stocks.

Preferreds overview

QuantumOnline.com is a good site for basic data about many preferreds and Notes from which these are taken.

Portfolio strategy

Along with the two XOMA preferreds, I will compare features against some preferreds I own to decide if XOMAO or XOMAP should be added to my income-generating ladder. I chose the following for this analysis as they all are different types of Issuers.

• PennyMac Mortgage Investment Trust 6.75% RED PFD C ( PMT.PR.C )
• Priority Income Fund, 6.0% Series J Term Preferred Stock due 12/31/2028 ( PRIF.PR.J )
• Stifel Financial Corp. 4.50% DEP PFD D ( SF.PR.D )
• WESCO International, Inc. DP SH FXRT PFD A ( WCC.PR.A )

I have articles on most of those preferreds readers can check out.

*This Term PFD matures on 12/31/28

Conclusions from the comparison

• While SF-D has the highest YTC, with a 4.5% coupon, odds do not favor that happening. With the lowest yield in this set, it might be time for swapping it out for another PFD or even a Note.
• PMT-C places 2nd for YTC. Being a mREIT, it is likely the most affected by the level and shape of the interest rate curve, meaning to me more risky than the others.
• WCC-A is almost certain to be Called and with only a 6.4% YTC, that overrides the fact it has the highest yield. Like me, viewing this as an 18-mo CD seems logical.
• Both XOMA PFDs are now Callable and with their prices over Par currently, that might happen if XOMA can issue new preferreds at a lower coupon. That said, issuing common shares is another option with only $57m needed to retire both.
• Between the two XOMA PFDs, I would hold XOMAO despite its lower yield as it would be Called after the higher coupon XOMAP.
• PRIF-J looks attractive when comparing its YTC to the XOMA yields, especially considering the PRIF issue has a maturity date.

Final thoughts

After taking a second look at XOMA, the preferreds appear safer than my original analysis, as some readers said. I will up my ratings to Buy for XOMAO; Hold for XOMAP. For more cautious investors, check out the Note that PennyMac just issued, which I also reviewed, as I have most of the others used in the comparison. Here are those article links:

• PennyMac Exposure Now Available To Note Investors
• SF.PR.D Vs. MS.PR.O: Better Choice Revisited, Plus 1
• WCC 'A' Preferred Vs. CD: I Chose The Preferred

For further details see: