Sometimes you own a royalty on a promising drug, and sometimes that drug's clinical trial goes sideways in spectacular fashion. Thursday was one of those days for XOMA Royalty Corporation (XOMA), which watched its shares plunge over 23% after partner Rezolute Inc. (RZLT) delivered the kind of news that makes biotech investors wince.

The culprit? Disappointing Phase 3 results for Ersodetug (also known as RZ358), a drug designed to treat congenital hyperinsulinism. If you're not familiar with this rare genetic disorder, it's a serious condition where the pancreas goes rogue and pumps out too much insulin, causing dangerously low blood sugar levels in infants and children. Not a small problem.

When Your Drug Barely Beats Placebo (And Doesn't Really)

Rezolute's sunRIZE study was testing whether Ersodetug could reduce hypoglycemia events in patients with congenital hyperinsulinism. The primary endpoint measured changes in average weekly low blood sugar episodes tracked by patients themselves.

Here's where things get awkward. At the highest dose tested (10 mg/kg), Ersodetug reduced hypoglycemia events by roughly 45%. That sounds pretty good until you learn that the placebo group saw a 40% improvement. When your experimental drug barely edges out sugar pills—and fails to reach statistical significance—you've got a problem. The trial officially missed its primary endpoint.

What XOMA Stands to Lose

This isn't just bad news for Rezolute. XOMA Royalty had a lot riding on Ersodetug's success, thanks to a 2017 licensing agreement that looked quite promising at the time.

When Rezolute licensed RZ358 (then called XOMA 358) from XOMA for development in congenital hyperinsulinism, the deal included $18 million upfront in cash and stock. But the real money was supposed to come later: up to $222 million in clinical, regulatory, and sales milestones, plus royalties ranging from the high single digits to mid-teens based on annual net sales.

XOMA was also set to receive low single-digit royalties on sales of Rezolute's other products. A 2019 amendment sweetened the pot further, with Rezolute agreeing to pay an additional $8.5 million in quarterly installments.

XOMA did collect a $5 million milestone payment when Rezolute completed enrollment in the Phase 3 sunRIZE study. But with the trial now belly-up, the rest of those milestone payments and future royalties are looking increasingly hypothetical.

Market Reaction: Not Pretty

Investors didn't wait around to see if there might be a silver lining. Rezolute shares absolutely cratered, dropping 88.48% to just $1.26—a fresh 52-week low. When you're trading at a buck and change after failing your pivotal Phase 3 trial, the path forward gets pretty murky.

XOMA Royalty fared better in relative terms but still took a serious hit, falling 23.46% to $26.30. That's what happens when a meaningful chunk of your royalty portfolio suddenly looks a lot less valuable.

For XOMA shareholders, this is a reminder that royalty investments come with their own risks. You don't control the development process, and when your partner stumbles, you're along for the ride whether you like it or not.