Xencor, Inc. (XNCR) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Second Quarter 2016 Xencor Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would like to introduce your host for today’s conference Hannah Deresiewicz of Stern Investor Relations. Ma’am, you may begin.

Thank you, operator. Good afternoon. This is Hannah Deresiewicz with Stern Investor Relations, and welcome to Xencor’s second quarter 2016 financial results conference call. This afternoon, we issued a press release, which outlines the topics that we plan to discuss today. The release is available at www.xencor.com. Today on our call, Bassil Dahiyat, Ph.D., President and Chief Executive Officer, will discuss the company’s recent business and clinical highlights. John Kuch, Vice President of Finance will review the financial results from the second quarter; and then we will open up the call up for your questions. Before we begin, I would like to remind you that during the course of this conference call, Xencor management may make forward-looking statements including statements regarding the company’s future financial and operating results, future market conditions, the plans and objectives of management for future operations, and the company’s future product offerings. These forward-looking statements are not historical facts, but rather are based on Xencor’s current expectations and beliefs, and are based on the information currently available to us. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including but not limited to, those factors contained in the Risk Factors section of its most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q. With that, let me pass the call over to Bassil.

Thank you, Hannah, and good afternoon, everyone. This afternoon we will discuss the advances in our internally developed XmAb programs and the selection of two additional bispecific oncology candidates for development. We also signed a strategic collaboration with Novartis in June, in which we will share the costs and collaborate on our lead bispecific oncology candidates XmAb’s 14045 and 13676, while retaining full U.S. commercial rights to both programs. As part of our agreement with Novartis, we received $150 million upfront payment, which strengthens our balance sheet and provides us cash through at least the end of 2019. We look forward to next year, when we anticipate announcing initial data readouts for our pilot Phase 2 trial of XmAb5871 in IgG4-Related Disease, our Phase 1 subcutaneous formulation trial for XmAb7195 and our Phase 1 trial of XmAb14045 in acute myeloid leukemia. These data will provide important insights, as we determine the path forward for each of our compounds. And having a stronger balance sheet, we afford us greater flexibility to increase our development activity, extend our runway or both. Now, with that I’ll turn to XmAb5871, our first-in-class monoclonal antibody that targets CD19 with its variable domain and uses our proprietary XmAb immune inhibitor Fc domain to target FcγRIIb, a receptor that inhibits B-cell function. 5871 is currently in Phase 2 clinical studies for the treatment of IgG4-Related Disease or IgG4-RD and system lupus erythematosus or SLE, two diseases with strong rationale for B-Cell inhibition high unmet need. We believe we have the opportunity to be at the forefront in providing a treatment option to the estimated 40,000 patients suffering from IgG4-RD in the United States, and to the estimated 240,000 patients of afflicted with SLE in the U.S. We remain on track to report top line data from IgG4-RD study in the first-half of 2017 and top line data from our SLE trial in 2018. Now, as a remainder, the IgG4-RD study is a Phase 2 open-label pilot study designed to address control of disease activity with every other week IV administration of 5871. This trial’s plan to enroll approximately 15 subjects for up to 24-weeks of treatment, and the primary endpoint is to evaluate the effect on the IgG4-RD responder index to measure treatment activity. Our SLE trial of the Phase 2 randomized double blind placebo-controlled study, which uses a novel trial design to evaluate the ability of 5871 to maintain the improvement in disease activity after a short course of intra-muscular steroid therapy, and in the absence of immunosuppressant therapy. We believe this trial design will enable us to assess the effect of 5871 on SLE disease activity with a shorter time to endpoint and with fewer patients compared to the standard SLE trial design. Approximately, 90 SLE patients will be enrolled for up to 24 weeks with a one-to-one randomization of 5871 to placebo. Now additionally, in July, we initiated dosing of subjects in a bioequivalence trial with a subcutaneous formulation of 5871. Establishing subcu delivery of 5871 will provide a simple and more flexible option for patients and for doctors. Then we expect to announce initial data from this study in 2017. Now, turning to XmAb7195, which is our antibody that targets IgE with its variable domain and uses an identical XmAb immune inhibitor Fc domain as 5871. 7195 has three distinct mechanisms of action producing IgE levels. It sequesters free IgE to block IgE signaling, it suppresses B-cell differentiation into IgE secreting plasma cells and it enables the rapid clearance of IgE from the circulation, because of its high FcγRIIb binding and the subsequent breakdown of IgE in the liver. Now, in May, we announced complete data results from our Phase 1a trial of 7195, which showed a rapid reduction of serum IgE and high IgE atopic patients and a potent suppression of free IgE below the level of detection. Including from single doses in 75% of high IgE subjects and five of six high IgE subjects dosed at 0.6 milligrams per kilogram. Now, moreover, 7195 was generally safe and well tolerated. We did see transient asymptomatic thrombocytopenia at doses greater than 2 milligrams per kilogram and Moderate urticaria was reported in some subjects with an apparent correlation of dose with frequency of occurrence. Now we believe 7195’s ability to effectively reduce IgE levels gives the compound potential in a range of allergic diseases, including allergic asthma and food allergy. Now, we plan to initiate a multi-dose Phase 1 study with the subcutaneous formulation of 7195 later this year and to report initial data in the first-half of 2017. Now, I’ll turn to our growing XmAb bispecific oncology pipeline. In June, we announced a strategic collaboration with Novartis to develop and commercialize our lead bispecific candidates XmAb’s 14045 and 13676. We look forward to partnering with Novartis, a leader in immuno-oncology space to advance these programs to clinical development and are especially pleased of retaining U.S. commercialization rights to both programs. I will provide more detail in a few minutes on this collaboration. But first, I want to talk about our bispecific antibody platform. As we’ve discussed previously, at the core of our bispecific program is a novel XmAb Fc domain. It’s a scaffold for two or potentially more different antigen binding domains. The result of using this Fc domain is a single molecule that combines two targets simultaneously. Now, by using this plug-and-play approach, we developed uniquely flexible platform that lets us rapidly create candidates by combining any two binding domains, while maintaining full-length antibody properties, such as favorable in vivo half-life and simple manufacturing. We believe it is this flexibility that differentiates our bispecific programs from others in the field. Now, our lead programs 14045 and 13676 are tumor-targeted T-cell engaging antibodies, they bind to and activate T cells for highly potent and targeted killing of malignant cells by binding a tumor antigen on one arm of the bispecific antibody and binding a CD3 on the other arm. We expect to initiate clinical trials for 14045 which targets CD123 on acute myeloid leukemia cells and for 13676 which targets CD20 on malignant B-cells both later this year. Now at our Analyst Day in June, we announced a selection of two additional bispecific antibodies to take forward to the clinic. The first is 18087, which targets SSTR2 and CD3 for the treatment of neuroendocrine tumors and we expect to initiate clinical testing for this compound in 2017. The second new compound is XmAb20717, which targets PD-1 and CTLA-4 for potential use in multiple oncology settings. Now, 20717 is our first bispecific antibody to simultaneously engage two T cell checkpoint targets to activate T cells against different tumor types. Now, we believe this dual checkpoint approach and these dual checkpoint bispecific antibodies have the potential to be better than combination therapies by improving selectivity and by eliminating the need for multiple checkpoint antibodies to be administered. And we plan to initiate trials for XmAb20717 also in 2017. I’ll also give a brief update on our partnerships. As I mentioned a few moments ago, we started working with Novartis on the development of 14045 and 13676. In addition the collaboration with them goes beyond these two programs. We’ll also apply our XmAb bispecific Fc domain to Novartis antibodies in four different Novartis antibody programs, for one of those programs we may elect to share in cost and U.S. profits in lieu of U.S. royalties too. In addition, Novartis will receive a non-exclusive license to use our other XmAb FC technologies, specifically our Cytotoxic, Xtend and immune inhibitor Fc domains in up to 10 molecules. Now, like our other partnerships that leverage the plug-and-play nature of our XmAb domain, this additional portion of our collaboration with Novartis, broadens the impact of our technology with little to no research commitment by Xencor. We’re eligible for up to $2.4 billion in milestones, if all programs are successful and for low double-digit royalties on ex-U.S. sales for XmAb’s 14045 and 13676 and for mid-single-digit royalties on worldwide sales for the Novartis programs for our bispecific platform. Now, with Novartis, there are now nine pharmaceutical companies and the NIH currently using our Fc technology to advance novel drug candidates that include our bispecific structure Fcs, our higher cytotoxicity, our longer half-life and our improved stability molecules. Now, with that, I’ll pass the discussion over to John.

Thank you, Bassil. In this afternoon’s press release, we reported cash equivalents and marketable securities totaling $168.8 million as of June 30, 2016 compared to $193.3 million as of December 31, 2015. The decrease reflects in net spending for the six months ended June 30, 2016. In July 2016, we received a $150 million upfront payment in connection with our collaboration with Novartis. Revenues for the second quarter of 2016 were $66 million compared to $1 million in the same period of 2015. Revenues for the six months ended June 30, 2016 were $73.3 million compared to $2.5 million in the same period of 2015. The increased revenues earned in the three and six month period ended June 30, 2016 were primarily from our Novartis and Amgen collaborations. Research and development expenditures for the second quarter of 2016 were $14.4 million compared to $7.5 million for the same period in 2015. Total R&D expenses for the six months ended June 30, 2016 were $24.4 million compared to $12.7 million in the same period of 2015. The increased R&D spending in the three and six months ended June 30, 2016 over the same period in 2015 is primarily due to spending on our clinical programs, including our XmAb5871 program and our initial bispecific clinical programs XmAb14045 and XmAb13676. General and administrative expenses in the second quarter 2016 were $3 million, compared to $2.5 million for the same period in 2015. Total G&A expenses for the six months ended June 30, 2016 were $7 million compared to $5.3 million in the same period 2015. The increased spending in G&A reflects additional stock based compensation expenses. Non-cash share-based compensation for the six months of 2016 was $4 million, compared to $2.3 million for the first six months of 2015. Net income for the second quarter 2016 was $47.2 million or $1.13 on a fully diluted per share basis compared to a net loss of $8.9 million or $0.22 on a fully diluted per share basis for the same period 2015. For the six months ended June 30, 2016, net income was $40.8 million or $0.98 on a fully diluted per share basis, compared to a net loss of $15.3 million or $0.41 on a fully diluted per share basis for the first six months of 2015. The net income for the three and six months ended June 30, 2016 over the loss of report in the same period of 2015 is primarily due to income recognized under our Novartis and Amgen collaborations. The total shares outstanding was 40,944,080 as of June 30, 2016, compared to 40,460,091 shares outstanding as of June 30, 2015. Based on our current operating plans, we expect to have cash to fund research and development programs and operations through at least the end of 2019. With that, we’d now like to open up the call for your questions. Operator?

[Operator Instructions] And our first question comes from Michael Schmidt from Leerink Partners. Your line is open.

Hey, thanks for taking my questions. Bassil, I had one on XmAb5871. You mentioned the upcoming data in IgG4-Related Disease in the first-half of next year. And I was just wondering what investor [ph] expectation should be, will that data be on all patients, will that all have been followed up for 24 weeks, or will there be some kind of an interim analysis?

That really depends on the decisions we make with our collaborator, Dr. John Stone at Massachusetts General Hospital. I think that at the first opportunity when it makes sense, we’re going to share the data that we do have. I think it wouldn’t surprise me if we have data that’s an interim look where some of the subjects have been followed through the expected 24-week treatment period. And some of the subjects might still be on study. So I think we’re quite open to having earlier look.

Yes. And then, what were the goal posts here, sort of what is the hurdle to move this program forward?

This study was really designed, because it’s open-label it’s a pilot to understand the molecules activity in the disease to understand better the responder index and how it works in practice when you’re doing a therapeutic intervention. It is a new endpoint that’s currently being developed, and also to study the various biomarkers, cell-based biomarkers, imaging and radiology markers that we can use to understand the disease better. Now, with that said, we have as a basis of understanding of B-cell inhibition here, work that was done using Rituxan, the B-cell blading [ph] antibody by Dr. Stone. And that gives us a sense of the kind of activity levels that you can have with adequate B-cell intervention. I think the numbers that were published in some work late last year by Dr. Stone, the group led by him showed, I think six months about 60% of the subjects they had were in remissions that’s very low, responder index score had not required steroid rescue during the treatment period. And I think, overall, they had something around in 80% rate of response to Rituxan that is a reduction of disease symptoms by a certain amount. So we are certainly going to be looking to understand how our results which is in a very similar patient population, but obviously not controlled against any other agent, how our results might compare to those as well as learn what we can on the basic science.

I see. Great, thanks. And then, one on the 7195, the subcutaneous study. I was wondering if that’s in patients or in healthy volunteers.

That study is initially being done, there is a portion being done in patients and then assuming adequacy of safety and what we see there, we would then proceed in a Part B into atopic subjects, for atopic patients I should say, yes.

Yes, thanks. And then, regarding your partnered programs, I was just wondering, looking at some of the more advanced products then in the pipeline, in particular, the JNJ, CSL antibody that I believe went into Phase 2 a while ago. I was just wondering whether there are any or what’s sort of next value [ph] inflection points might be on that and maybe on sort of the other more advance partnered programs that are ongoing?

Right, right, now, of course we can only report what’s publically disclosed by our partners around those programs. We don’t have any role in executing on the programs. For example, with morphosis, or with Janssen CSL, or with Alexion, the three of our partners that are in Phase 2. So what we know about those and starting with morphosis, is they’ve already started trial in diffuse large B-cell lymphoma for MOR208 in combination with lenalidomide. That’s I think an open-label study, single arm that using to explore the combination therapy there, and that they also just announced that they are eminently going to start the safety run-in phase to a Phase 2/3 trial. The Phase 3 portion of which will be pivotal for MOR208 in combination with bendamustine in diffuse large B-cell lymphoma. And I think, they said that the Phase 3 portion of that study should start in the New Year in 2017. And so we are very excited and eager to hear the study start times for those. And I don’t know if they’ve guided on data readouts. I think that the program with CSL/Janssen, yes, they started Phase 2 for that program in AML second half of last year. I think that study based on public information, is a Phase 2/3 study and I imagine there is some kind of assessment they would do in order to proceed forward into a pivotal phase. I have no information or insight on to the timing of that. We will, of course, watch as everybody else will. And with Alexion, we can disclose the nature or the identity of that program with them, but they do have a Phase 2 program with our half-life extension technology Fc domain, it didn’t got [ph] our Xtend Fc domain in it.

Yes. And maybe a follow-up on that, is there any reason or based on your experience is the Xtend technology is that suitable for subcutaneous administration as well, or is that has not been tested at this point?

We’ve tested that in several antibody molecules in primate models and there were neither formulation nor administration nor PK behaviors that were at all different from a typical antibody or I should say the controlled antibodies we use which were just the identical antibody with native Fc domain. So there is nothing about there is two mutations in the Xtend Fc domain that makes it any less suitable based on the experience we’ve had pre-clinically that makes it any less suitable for subcutaneous formulation or delivery.

Great, thanks. Well, congrats on the process and congrats on Novartis partnership again and thank you very much.

Thank you.

And our next question comes from Arlinda Lee from Canaccord. Your line is open.

Hi guys. Thanks for taking my questions. I maybe wanted to dig a little bit more about the mechanics of the Novartis deal. That was a great deal. Congratulations.

Thank you.

I’m kind of curious how mechanistically it works in terms of how you decide on which bispecific combinations to do when you can opt-in, when they formally opt-in and so on and so forth.

Well, so there are three components to the deal. Component one is the joint development and ex-U.S. license to Novartis for XmAb’s 14045 and 13676, both programs which we expect to initiate first patient dose in this year. So for that this deal structure is we share 50-50 on the costs, we share equally in decision-making regarding development decisions and all sort of related decisions. They would commercialize ex-U.S., we would commercialize in the U.S. And those commercialization activities are each borne by each party in terms of costs fully in their own territories and they have the decision-making authority in their own territories. So it’s truly we’re in it together in development both from a cost and decision-making standpoint. It really is a peer-relationship and we really control the U.S. commercialization, they control ex-U.S. And that’s sort of it. There is no real optionality there. There are, of course, elements of the structure that we will disclose more fully when we file our Q that talk about various contingencies. I will say that we’re very comfortable that the way the deal was structured in its particularities around these two read assets is one that gives Xencor a lot of flexibility in how we continue to build value around those two programs, both how we use the U.S. rights, commercial rights which we retained really fully and how we can manage our risks in our financial costs going forward. Now, the other piece of the deal is the license of use of our Fc demand for bispecific antibodies into four Novartis programs, where it’s very much similar to our earlier deal we did last year with Amgen. It’s really about four Novartis programs that they can define subject to various limitations around our - not conflicting with our internal programs and of course being available for license. And then, they would provide the antibodies, we would essentially combine them with our Fc demands, hand them back and they do all development - all research and all development work on those, and we receive royalty and milestones on those. For one of those programs that we can choose later at the point of IND, we can opt-in to that program for a 50-50 U.S. cost share and 50-50 U.S. profit split, where we would also have the right to co-detail and sell with our own sales force that product. In which case, we would in that program take half of the U.S. commercialization costs and have half the responsibility and we would split the development costs and the profits as well. And so, that’s how that piece is structured. The final piece was just for our other Fc technologies, the half-life extension to extend the cytotoxic and the immune inhibitor Fc domains. They have nonexclusive licenses to apply those to up to 10 of their own programs and that’s just a straight IP license like we’ve done in our deals for the Alexion or with Janssen CSL or with BI or whoever.

Okay, great. Thanks. And the four bispecifics, those four pairs, have those pairs been nominated yet or what is the process to kind of nominate?

There is a process. Some of them are actively undergoing research now. Some of them are not. That is soon they’re going to be advances and started on. The processes essentially, it has to be available for license and it can’t conflict with an internal Xencor program. So we’re not willing to have partner program supersede a program we would have on the same target.

Okay. I guess and then as you guys move into the clinic with more of your own products, what are your plans to kind of build-out your - on the clinical side? Does Novartis under this partnership take some of that or takes some of that responsibility as well? Thanks.

So of course, we’re going to be sharing not just the costs but the duties. We are, again I want to emphasize, a peer in this relationship with Novartis, where we have actually the right to continue to be an active development partner, maintaining our own level of activities, within the context of a joint work plan throughout development, so at all stages of development. And I think that’s important, because that complements our drive to build the organization, not just to work on these two assets, but the other programs we have currently in the clinic like XmAb’s 5871 and 7195, as well as the programs we’re going to be advancing into the clinic next year, and hopefully in additional programs in the years beyond that. So we certainly see our Xencor clinical development team growing and some of that growth is going to be about committing to the activities we want to maintain our role in for - as part of the Novartis collaboration. I think the benefit we have from working with Novartis is they of course have scale already. So that gives you flexibility and speed to initiate things with an organization that’s already there and quite experienced and sophisticated at starting large trials, starting multiple trials at once. As well as the expertise in in-trial execution knowing the investigators, knowing the centers, understanding the pitfalls and the opportunities, having I think a very sophisticated regulatory organization also is helpful. So I think we benefit a lot from their scale and their expertise, but at the same time we’ve really maintained our ability and our right to be an active development partner, not just a passive cost share partner.

Okay, great. And then I guess, maybe, just - or getting back to some of Michael’s questions. What kind of disclosures, since these are now partnered with Novartis, are we going to get on 14045, 13676 and some of these other bispecifics going forward?

Well, the bispecifics that are just the Novartis programs, where they’re licensing our Fc technology. We have no control over how they develop those or how they disclose progress against those, that’s really up to Novartis. Much like our earlier Fc deals for other technologies are up to those partners or our Amgen deal is up to Amgen for the assets will be licensed to them. Now, for the 14045 and 13676 again, we are a co-visible [ph] partner and our plan is to have the same kind of publication and communication about those programs, as we would customarily have as a biotech company. So at the right medical conferences and the right medical journals we want to talk about how we’re progressing those programs.

I guess, sorry - on the four joint bispecifics programs?

Well, for those are really where we are licensing these, our Fc, for Novartis to pursue within their own programs for those four. For those we have no role in development or decision making or disclosure.

I guess then the final question is you guys have a very nice upfront payment coming in. And then curious as to how you see using those funds going forward. Are you going to - I mean, your bispecifics platform is pretty exciting. Are you planning to accelerate some of those programs and when might we hear more about what your plans are?

Well, I think, as we go forward over the next few quarters, our plans will crystallize on how we plan to grow the company, you grow the organization as well as commit the resources we can to both these and maybe in additional programs after these lead four bispecifics that we hope to have in the clinic by early 2018. So I think it’s going to let us expand our development activities. I am always hesitant to commit speeding development activities, when the development activities are first in-human dose escalation studies that have their own inherent pacing about them based on establishing safety around your drug. I think once you can do that, then you can talk about the additional things you might be able to do on timing. But I think building your organization, expanding the number programs, potentially accelerating programs in the future, and also providing Xencor with additional runway, let us get to maybe additional data readouts we couldn’t have. Those are all the pieces we can work with, with the strength in balance sheet that some of which depends on data, clinical data that will emerge in the coming quarters that will help us decide exactly how best to deploy it across that range of options I just talked about for stronger balance sheet. So it’s going to be a number of quarters before we can really get concrete plans beyond what we’ve already really committed to right now.

Okay, great. Thanks.

Thank you.

[Operator Instructions] And our next question comes from David Nierengarten from Wedbush Securities. Your line is open.

Thanks for the unique pronunciation of my name. And, hi, Bassil, so I had a question that was just a little bit out there on the 5871 program. If you had any thoughts for additional potential indications and additional metrics or readouts from the first few patients that you might be looking for in order to expand that even potential beyond lupus and IgG4 rare disease, given the ubiquity of overactive B-cells and immune disorders? Thanks.

Yes. I mean, when we established our programs in IgG4-RD in lupus. We definitely have looked in a lot of other opportunities. And there is many where the biology makes a lot of sense. We thought these the best to attack. First, because of the unmet need and because there was a really direct and clear and feasible next clinical trial to do that was manageable for us on our scale. I think that it’s always reassuring to have activity at impacting disease progress in an autoimmune disease to give you confidence, about other autoimmune diseases. But of course as we know from ample - example across many different drug classes, success in one autoimmune disease doesn’t necessarily translate into other autoimmune disease. There are mechanisms which are always somewhat unrelated. Great example of that is the tremendous success of the IL-17 pathway blockers have had in psoriasis and somewhat limited success in some other diseases, I think like in rheumatoid arthritis. So it’s hard to extrapolate it in indication to indication. I think we are very keenly looking at other indications and thinking about how as these trials progress for IgG4-RD in lupus we might add others to the mix. I think it’s more driven I think by opportunity and understanding of the clinical space, understanding of the patient journey in investigators for those indications, more than any particular scientific readouts from these trials. Again, the extrapolation of indication to indication is tricky.

Okay, thanks for that. And we’ll see the data next year then?

I’m looking forward to it. Thank you.

Thanks.

[Operator Instructions] And at this time, I’m showing no further questions.

Well, thank you very much everybody for joining us. I want to wrap up by saying that the team here at Xencor remains focused on advancing our internal XmAb programs. Now, the overall XmAb pipeline continues to grow and we now expect to have a total of 13 either wholly-owned or partnered XmAb antibodies in the clinic by 2018, including four bispecific oncology candidates. Our strength in balance sheet to support this internal research and development and our operations through key data readouts, and milestones across both our internal and external programs is something that we are very happy to have achieved over the last quarter. And we do remain on track for multiple data announcements in 2017. So the next year will be very busy for us. I do look forward to updating everybody on our progress in the future. And thank you again for your time.

Ladies and gentlemen, this concludes the program. You may now disconnect. Everyone have a great day.