Unlocking Biotech's Hidden Gems: XOMA's Bold Play on Turnstone's TIL Pipeline

The biotech sector is a realm of high risk and high reward, where companies often bet billions on therapies that may never reach patients. Yet for investors with a taste for asymmetric upside, opportunities exist to profit from undervalued assets before their true potential is recognized. XOMA Royalty's recent acquisition of Turnstone Biologics, a developer of tumor-infiltrating lymphocyte (TIL) therapies, epitomizes this strategy. By acquiring Turnstone at a distressed valuation—$0.34 per share in cash plus contingent value rights (CVRs)—XOMA has positioned itself to capitalize on a breakthrough oncology pipeline at a fraction of its potential worth. For investors willing to stomach volatility, this deal offers a rare chance to bet on a transformative therapy without shouldering the full burden of its development costs.

The Distressed Valuation: A Fire Sale for a Game-Changing Asset

Turnstone's TIL platform targets solid tumors, a notoriously underserved market where traditional therapies like chemotherapy and checkpoint inhibitors often fail. Its lead candidate, TIDAL-01, is in Phase 1 trials for breast, colorectal, and melanoma cancers, with early data showing promise. Yet the company's stock has plummeted from $25 in 2021 to below $0.30 today, reflecting investor skepticism about its ability to fund clinical trials and compete with giants like ImmunoGen and NantKwest.

The $0.34 cash offer represents just 3% above Turnstone's pre-deal price, a stark indicator of its distressed state. Key red flags include:
- Weak Liquidity: Turnstone's cash reserves were insufficient to fund its pipeline through pivotal trials.
- Insider Sell-Offs: Executives like CEO Owen Hughes sold nearly $650K in shares over the past six months, signaling waning confidence in near-term prospects.
- Institutional Exodus: Funds like BVF Inc. reduced holdings by 40%, a move that often foreshadows a liquidity crunch.

XOMA, however, sees beyond the chaos. Its business model—acquiring pre-commercial biotech assets and monetizing their future revenue streams—allows it to acquire Turnstone's TIL pipeline at a fire-sale price while deferring risk via CVRs.

The CVR Mechanism: A Bet on Breakthroughs, Not Balance Sheets

The deal's true genius lies in its use of contingent value rights. Each Turnstone share comes with one CVR, which will pay out if Turnstone's therapies hit predefined milestones. While specifics are undisclosed, these are likely tied to:
- Clinical Milestones: Efficacy data from Phase 2 trials.
- Regulatory Approvals: FDA nod for TIDAL-01 or TIDAL-02 (a second TIL candidate).
- Commercial Success: Sales thresholds post-approval.

The CVRs create asymmetric upside: investors gain if the therapies succeed, but lose only the small cash component if they fail. For XOMA, this structure minimizes upfront costs while aligning incentives with Turnstone's scientists and former shareholders.

Why TIL Therapies Are Worth the Gamble

TIL therapies are a cutting-edge approach to immunotherapy. Unlike CAR-T, which focuses on blood cancers, TILs are engineered to attack solid tumors, a market with a $40B+ annual spend and few curative options. Turnstone's platform has two critical advantages:
1. Genetic Optimization: Its TILs are genetically modified to enhance tumor targeting and survival.
2. Combination Therapy Potential: Pairing TILs with checkpoint inhibitors could boost response rates, a strategy showing promise in trials by rivals like Adaptimmune.

XOMA's financial strength (its cash reserves exceed short-term liabilities by 5.5x) ensures it can fund Turnstone's trials without dilution. This contrasts sharply with Turnstone's prior struggles, positioning XOMA to fast-track the pipeline.

Risks and Reward: A High-Stakes Equation

This is not a conservative investment. Key risks include:
- Clinical Failure: TILs could underperform in later-stage trials, rendering CVRs worthless.
- Regulatory Hurdles: The FDA may demand additional data or impose safety restrictions.
- Deal Collapse: The tender offer requires 50% shareholder support, which is far from guaranteed.

Yet the upside is staggering. If TIDAL-01 gains approval, it could command peak sales exceeding $2B annually, translating to multi-bagger returns for CVR holders. Even partial success—say, a niche indication approval—could revalue the CVRs to levels far exceeding the $0.34 cash component.

The Investment Thesis: A Gold Mine at Discount Pricing

For risk-tolerant investors, this deal is a “heads-I-win, tails-I-don't-lose-much” proposition:
- Buy the CVRs: They're effectively free with the $0.34 cash. Monitor for FDA interactions or trial updates to time entries.
- Long XOMA: Its royalty-focused model gives it a pipeline of future revenue streams, including Turnstone's TILs. A successful trial could trigger a valuation re-rating.
- Avoid Turnstone's debt: If the tender fails, Turnstone's remaining shares may face liquidation, offering no upside.

Conclusion: A Blueprint for Biotech Contrarians

XOMA's Turnstone acquisition is a masterclass in asymmetric investing. By leveraging royalty aggregation and CVRs, it's acquired a potentially transformative oncology asset at a fraction of its peers' valuations. While the path is fraught with risks, the reward—a stake in a therapy with multibillion-dollar potential—is worth the gamble for investors with a long-term horizon. In a sector where hope often outpaces reality, this deal offers rare clarity: a chance to own a breakthrough at a fire-sale price.

Final Note: Monitor the tender offer's July 11 deadline and Phase 1 data readouts in late 2025 for catalysts. Proceed with caution, but don't ignore this rare opportunity.