Xencor, Inc. (XNCR) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Xencor Incorporated Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce your host for today’s conference Hannah Deresiewicz. You may begin your conference.

Thank you. Good afternoon. This is Hannah Deresiewicz with Stern Investor Relations, and welcome to Xencor's third 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 business and clinical highlights. John Kuch, Vice President of Finance, will review the financial results from the third quarter and then we will open 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 pans 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 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.

Thanks, Hannah, and good afternoon everyone. In the third quarter we advanced a key 2016 goal of expanding the clinical trials across our internal XmAb pipeline. We enrolled the first patients in Phase 1 studies for subcutaneously administered XmAb’s 5871 and 7195 and started clinical testing of XmAb14045, our lead immune oncology bispecific candidate in the first-in-human testing. Together with our ongoing Phase 2 studies of XmAb5871 and IgG4-Related Disease, and in systemic lupus erythematosus, which we dose started both in March, we expect multiple clinical data readouts in 2017 and beyond. Now also in July, we received the $150 million upfront payment from our bispecific antibody collaboration with Novartis. As we said previously, this added cash enables us to grow as an independent company for a number of years while allowing us the flexibility to expand our clinical development and cash runway. Now based on current operating plans, we are sufficiently funded beyond the end of 2019. Now I’ll start today by reviewing XmAb5871. That’s our first-in-class monoclonal antibody to target CD19 with its variable domain and uses our proprietary XmAb immune inhibitor Fc domain to target Fc gamma Rib, a receptor that inhibits B-cell function. We are currently evaluating 5871 in Phase 2 clinical studies of XmAb5871 for the treatment of IgG4-Related Disease or IgG4-RD and systemic lupus erythematosus or SLE. Either two diseases with a strong rationale for B-Cell inhibition and significant unmet need and where we believe we can be at the forefront of providing a treatment option. Now we have recently announced that Dr. John Stone, the principal investigator on our open-label Phase 2 clinical trial of XmAb5871 in IgG4-RD will be presenting preliminary data from the ongoing study at the American College of Rheumatology Meeting on November 13. And the abstract for his talk is available online at the ACR Abstracts website. As a reminder, this is a single-arm pilot study designed to evaluate the effective 5871 on disease activity in patients with IgG4-RD with every other weak IV administration. We expect this trial to enroll approximately 15 subjects or up to 24 weeks of treatment and the primary endpoint is to evaluate the proportionate patients with an improvement in the IgG4-RD responder index as defined – sorry – with an improvement in the IgG4-RD responder index. We expect to report additional data from this study in 2017. And we also continue to progress our Phase 2 randomized double-blind placebo-controlled study in SLE. We do expect to report initial data from this study in 2018. It’s designed to evaluate the ability of 5871 to maintain improvement in SLE disease activity after a brief course of intra-muscular steroid therapy and in the absence of immunosuppressive medication. We believe this novel trial design is going to enable us to assess the effect of XmAb5871 on SLE disease activity with a shorter time to input and with fewer patients compared to standard SLE trials. This trial will enroll approximately 90 SLE patients or up to 24 weeks with a one-to-one randomization of XmAb5871 to placebo. Now to wrap up on 5871, in July, we initiated a Phase 1 study dosing subjects in a bioavailability trial of subcutaneous administration of XmAb5871. This successful – this trial validated simpler and more flexible delivery route for patients and doctors. We expect to announce initial data from this trial in 2017. Now moving on to XmAb7195, now that’s our first-in-class monoclonal antibody that targets IgE with its variable domain and uses an identical XmAb Immune Inhibitor Fc domain, it’s 5871to target Fc gamma R2B. 7195 has three distinct mechanisms of action for reducing IgE levels. First it sequesters free IgE by – to block IgE signaling, second it suppresses B-cell differentiation into IgE secreting plasma cells and third, it enables the rapid clearance of IgE from the circulation, via high FcγRIIb binding and breakdown in endothelial cells. Now in our Phase 1a trial with IgE administration, 7195 showed a rapid reduction of serum IgE and high IgE atopic patients and potent suppression of free IgE below the level of detection. We believe its ability to effectively reduce IgE gives 7195’s potential in a range of diseases including allergic asthma and food allergy. In September of 2016, we initiated a Phase 1 b trial to evaluate the safety tolerability and immunogenicity of subcutaneous 7195 in healthy volunteers and atopic subjects. We expect to announce initial data in 2017. Next I’d like to provide updates on our growing XMAB bispecific oncology pipeline. As we discussed before, our bispecific programs are built on a novel XMAB FC domain, which a scaffold for two or more different antigen binding domain. The result of the single molecule that combine a multiple target simultaneously. This plug and play domain enables a uniquely flexible approach and lets us rapidly create drug candidates by combining any two binding domains while also maintaining important full length antibody properties and avoiding the manufacturing and delivery challenges that have historically limited the viability of bispecific antibodies. Our initial bispecific programs are tumor-targeted antibodies that contain both the tumor antigen binding domain and a cytotoxic T-cell binding domain. These bispecific antibodies activate T-cells that are highly potent and targeted killing the malignant cells. In September, we initiated a Phase 1 trial of our lead bispecific oncology candidate XmAb14045 in acute myeloid leukemia and other CD123-expressing hematologic malignancies XmAb14045 engages the immune system against AML by binding CD123, approaching on AML cells and CD3 approaching on cytotoxic T-cells thus activating a targeted immune response against these cancer cells. In preclinical studies, 14045 showed a highly effective and potent depletion of target cells from a well tolerated single IV dosing primate. Our Phase 1 trial is an open-label multi-dose study designed to evaluate the safety and tolerability of weekly IV administration of 14045 for up to eight weeks in approximately 60 patients. The study is also designed from a maximum tolerated dose after the first and subsequent infusions. We expect initial data in 2017. Now our second bispecific oncology program is XmAb13676, which also binds the T-cell CD3 on T-cell, but it targets CD20 on the other side for the treatment of B-cell malignancies. We expect to dose the first patient in the Phase 1 clinical trial for 13676 by early 2017. We are developing both 14045 and 13676 in collaboration with Novartis with Xencor keeping US commercial rights for both candidates and Novartis having commercial rights in the rest of the world. Our next bispecific oncology programs were XmAb18087 and 20717. XmAb18087 targets SSTR2 and CD3 for the treatment of neuroendocrine tumors and XmAb20717 is our first candidate to simultaneously engage two T-Cell checkpoint targets. In this case, PD1 and CTLA4 for particularly used in multiple oncology indications. We expect to file on INDs for these compounds in 2017 and 2018 respectively and plan to continue expanding this bispecific oncology pipeline. Now turning to our pipeline of partnered programs, currently nine pharmaceutical companies and the NIH are advancing novel drug candidates use our Fc technology for bispecific structure, higher cell toxicity, longer half life and improved stability. Together with our partners, we expect to have 13 wholly-owned or partnered XmAb programs in the clinic by 2018. Now with that, I will pass it over to John for the financial update.

Thank you, Bassil. In this afternoon’s press release, we reported cash equivalents and marketable securities totaling $301.9 million as of September 30, 2016, compared to $193.3 million as of December 31, 2015. This increase reflects the $150 million upfront payment we received from Novartis in July 2016, net of spending for the nine months ended September 30, 2016. Revenues for the third quarter of 2016 were $7.8 million, compared to $3.5 million in the same period of 2015. Revenues for the nine months ended September 30, 2016 were $81.1 million compared to $6 million in the same period of 2015. The increased revenues for the three and nine month period ended September 30, 2016 or the same periods in 2015 are primarily due to our Novartis and Amgen collaborations compared to revenues for the same period in 2015 which were earned primarily from our Novo Nordisk, Alexion and CSL collaborations. Research and development expenditures for the third quarter 2016 were $14.1 million, compared to $10.6 million for the same period in 2015. Total R&D expenses for the nine-months ended September 30, 2016 were $38.5 million, compared to $23.3 million in the same period of 2015. The increased R&D spending in the three and nine months ended September 30, 2016 is primarily due to additional spending in our XmAb5871 clinical programs and bispecific technologies, including our initial bispecific oncology clinical candidates, XmAb14045 and XmAb13676. General and administrative expenses in the third quarter 2016 were $3 million compared to $3.2 million for the same period in 2015. Total G&A expenses for the nine months ended September 30 2016 were $10 million, compared to $8.5 million in the same period of 2015. The decreased spending on G&A for the three months ended September 30, 2016 compared to the same period in 2015 is due to lower stock-based compensation charges in the quarter. The increased spending on G&A for the nine months ended September 30, 2016 over the same period in 2015 reflects additional legal and accounting fees for compliance-related activities and additional stock-based compensation charges. Non-cash, share-based compensation for the first nine months of 2016 was $5.9 million, compared to $3.4 million for the first nine months of 2015. The net loss for the third quarter 2016 was $8.1 million, or $0.20 on a fully diluted per share basis, compared to a net loss of $10.0 million, or $0.25 on a fully diluted per share basis, for the same period in 2015. For the nine months ended September 30, 2016, net income was $32.7 million or $0.78 on a fully diluted per share basis, compared to a net loss of $25.3 million, or $0.66 on a fully diluted per share basis for the first nine months of 2015. The lower loss for the three months ended September 30, 2016 over the loss reported for the same period in 2015 is primarily due to revenue earned from our Amgen collaboration, while the income earned for the nine months ended September 30, 2016 over the same period in 2015 is primarily due to revenue from our Novartis collaboration. The total shares outstanding was 41,138,851 as of September 30, 2016, compared to 40,477,003 shares outstanding as of September 30, 2015. Based on our current operating plans, we expect to have cash to fund research and development programs and operations beyond the end of 2019. With that, we would now like to open the call up for your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Michael Schmidt of Leerink Partners. Your line is open.

Hi, this is Jonathan Chang stepping in for Michael. Thanks for taking my questions. First, can you provide any context or benchmarks in terms of how we should be thinking about the upcoming IgG4-RD data, given that it’s a relatively new disorder? Should we be thinking about the data in the context of steroids Rituximab or another way?

Well, I think, first we are – this trial to recap as we’ve said previously is a trial that is a monotherapy trial where if patients are coming into the trial on steroid therapy which is the only, which is the standard of care, they will be rapidly tapered over a period of several weeks. And so, we really view it as can you reduce disease activity as measured by the IgG4-RD responder index as the right metric. Can you actually move that needle? It’s a small study, I think the goal of it was to understand the biology of what our drug is doing and to see if we can hit that disease activity and that is making benchmark comparisons I think it’s difficult with small numbers. There is published data of course of Rituximab B-cell ablating antibody that I think certainly helps support the thesis that B-Cell activity is important in this disease and of course where B-Cell targeting agent. But, I think, given the particularly the partial nature of the data, the study is not complete by any means. We only started in March which was eight months ago and the treatment period is six months. So, a partial data look makes it hard to benchmark against what’s known. But we do will have the full dataset out sometime in 2017.

Great. Thanks. Could you also provide any color on the earlier than expected IgG4 data presentation which I believe was originally expected in the first half of 2017?

Well, I think, there was just a decision made in particularly in conjunction with our investigator John Stone from Massachusetts General to update the clinical community on the disease at ACR. I mean, there is certain times during the year when the major medical conferences where this disease is of high interest occur, the ACR Meeting is probably the number one of those conferences. And I think you felt like there would be enough data to give people a reasonable picture about what’s going on. Really, I think, from the point of view of the investigator community, these trials are about informing everybody about what’s happening and sometimes partial data can be indicative of that. If you look at the abstract, it’s clear that in June, it was a very preliminary data cut. We will certainly have significantly more information, but again, the great majority of patients aren’t even done with their treatment periods. So, I think it’s just a sign that there is a lot of activity and lot of work and hard effort taking place at MGH and at Xencor to move the program forward.

Great. Thanks. And just one last one if I may. Could you talk about what you’ll be looking to see with the 7195 subcutaneous formulation with initial data expected in the first half of next year and how you are thinking about this asset from a business development perspective? Thanks.

Sure. What we are hoping to find is, with a completely different route of administration subcutaneous versus IV, what the – with the PKPD profile that’s like with IV administration of the short infusion we saw very rapid and very pronounced depletion of IgE from the blood. So free and total IgE undetectable in many, many subjects even with high IgE subjects which is the hardest situation to deal with obviously and that was sustained for a multiple days to weeks depending on dose. What we are hoping to see is, with the subcutaneous administration, obviously much slower absorption into the body, what happens to that IgE reduction, how long is it, what happens to the dose construction profile in the drug, the only way this drug we believe would be attractive commercially is with its subcue formulation. The other critical thing we are looking at it at doses where we have sustained and pronounced depletion of IgE with this new administration route, what do we see as our AE profile as we’ve said previously, we had at our 3mg per kg dose in the IV trial, we had thrombocytopenia in all the dose subjects and at lower doses we had, evidence of platelet reduction. We would like to see what the profile is of activity reducing platelets with this new formulation and see if that gives us more room to dose higher or potentially have a longer duration of action of the drug with subcue. We do note that, at doses where we did not see – we did not see significant platelet reduction, we had complete ablation of IgE in high IgE subjects. So we think there is room there, but you have to demonstrate that and what you think is going to be your commercial administration route that’s what, it’s that balancing access and how high can be the dose, how long can we suppress IgE, the target really is by weekly versus what kind of AE profile and extent of thrombocytopenia or perhaps other AEs we see.

Great, thank you.

Thank you. Our next question comes from the line of Ted Tenthoff of Piper Jaffray. Your line is open.

Great. Thank you very much. With respect to the antibodies, the bispecifics partnered with Novartis, understanding that it all depends somewhat on the enrollment, what do you think we could get first data reads from those programs?

We think in 2017, we’ve started dosing subjects in 14045. It’s a dose escalation study. It is an immunologically active antibody and it’s typical for those kinds of molecules. We do have an element of conservatism and establishing that starting dose at the FDA has guided to follow on. So, as we dose escalate through and start to get the doses where we are seeing biological activity and hopefully evidence of activity against disease, we would report that out again, it’s going to be targeting medical conferences in 2017 and I think the earliest would be mid-year and I certainly hope by the end of the year. And for 13676, we have not yet dosed our first subject. The trial is now open and we’ve got the INDs open and so we are hoping to get those first subjects going in that trial very shortly. So that would be much more likely to report in 2018. Yes, for the CD20 antibody.

That’s helpful. Excellent, looking for the continued progress.

Thank you very much.

Our next question comes from the line of David Nierengarten of Wedbush Securities.

Hi, thanks for taking the question. Just a quick question on the differences or any initial thoughts on your bispecific CD3 targeted bispecifics compared to J&J, so they had to put their CD3 123 bispecific on clinical hold. Are there things we can point to and in our preclinical studies, maybe the other side of the target the non-CD3 and the other end of the target making a difference here just – I am curious as to where you see the differences in your bispecific program versus that one?

Right, so, we of course had very limited information about the J&J molecule. We know it made the dual body technology. There was a poster presented earlier in the year that gave nearly, I would say a very limited amount of preclinical data on the molecule some mouse data, some in vitro data and no primary data for example. So it’s all speculation. I think that what we do know about the two targets that you go after with, say our 14045 or what the J&J molecule was going after, first on the CD123, there is actually a growing bio-clinical experience targeting this molecule for AML. I can point to you for example the advances of the program that’s called CSL362, but it’s now a different J&J numbered program that’s just a traditional antibody with a high ADCC Fc domain targeting CD123 and that’s actually a Xencor license of CD. Putting that aside, that molecule is now in a Phase II 3 study. They’re been – they’ve dose escalated it, they presented data, I can’t read what their top doses were. I think they didn’t see anything on toward, I think other companies have bispecific antibodies targeting CD123 and CD3 albeit it’s short acting ones that have been in the clinic for a couple of years and we’ve not heard reports or seen anything about holder SAEs and there has been even toxin conjugates that target that target. So, I think CD123 clinically has been established as a target, a hematologic target that can be hit with cytotoxic therapies and how good the efficacy is, we will see, but, I think that initial clinicl experience suggests that it should be amenable to hitting of it with a cytotoxic therapy. Now, on the CD3 side, we of course know that having very high doses of antibodies that engage CD3 will activate T-Cells very – those potently and effectively and that activation leads to release of cytokines like IO6 in – that can be toxic in high amounts and the more antibody you get by these CD3 the more cytokines you release and the more toxic it gets. That’s the therapeutic window challenge of bispecific antibodies that target CD3. For example, we marketed Blinatumomab compound with ample published data showed that very low doses, it delivered in the continuous infusion fashion to reduce peak Cmaxes where necessary to make that drug tolerable. We’ve of course extensively engineered our molecule to have somewhat reduced potency, so very potent molecules, but somewhat reduced potency and we published data at ASH two years ago in primates which we think is a pretty good model given the similarities in how our molecule engages immune cells between primate in humans where we had – for example, one and ten mg per micro gram, I should say one and ten microgram per kilogram doses in monkeys, giving tolerable but meaningful increases in cytokine level. And so, without stating what our starting dose is, which we don’t disclose. We are very mindful of that and mindful of giving ourselves a window to understand the safety profile as we went toward efficacy. I can’t speak as to what the cytokine release was with the J&J molecule, but I think that, given what we know about these two targets, I think being very vigilant about how much you activate the immune system and how quickly is key. So rather than maybe focus on the differences and the details of the molecules, which we just can’t say, not knowing enough about theirs. We were very cautious and in designing it and doing our primate pharmacology work and designing the clinical study and we are still moving forward. Things are still so progressing.

Great, thank you.

Thank you. [Operator Instructions] Our next question comes from [Indiscernible]

Hi guys it’s actually Arlinda. Would you maybe comment on – since you guys just started your bispecific 14045 in the clinic, if you can comment on – I know you don’t disclose the actual doses, but is there, maybe interactions with FDA if there has been any concerns about your products and maybe having to start at an even lower dose than you had originally intended? And then maybe a follow-up after that, thanks.

We don’t disclose as a matter of policy, the details of our regulatory interactions except to say that of course, we had an open IND and we progressed. We based our starring dose on the guidance that’s out there for – forget bispecific antibodies, just antibodies in cancer and our detailed tox studies I think designing a molecule with the cross reacted in a way that we think is relatively similar to human in primates. I think it was very important getting very clear data dose response data on both toxin and targets of depletion, set our starting dose and so, I think we had a really constructive engagement with the FDA. It was a straightforward for an IND and we based it on data. Right, so when you have solid data and particularly that primate data that we made sure we engineered our molecules to be able to generate. We had a constructive discussion and proceeded. I think, to be clear, where you start and exactly how low you start, that’s always a judgment call, we always like to make sure that we have room to deserve very carefully the details of the patients’ response but immunologically and clinically.

Okay, great. And then, maybe, given that Alexion has announced that they have started the registration on to our patent studies, can you comment on any milestones that might be forthcoming?

We don’t disclose what programs we are on – we’ve licensed our technology for extending anybody have led to Alexion are, so we really can’t comment.

Okay, then maybe a third question, if you don’t mind, on the CTLA 4 PD1 bispecific, can you maybe talk about – you’ve mentioned about tweaking the potency being able to do that on your bispecifics, can you maybe talk specifically about that compound and what your philosophy was on that? Thanks.

Sure, yes, so, in targeting two checkpoint inhibitors at once, we took the thesis based on – I think a lot of published data that the T-cells you want to activate the most are the ones that are tumor infiltrating, the so-called tumor infiltrating lymphocytes or TILs and there is a ample body of data that shows that those TILs can express more checkpoints than say personal T-Cells. So the idea being we want to target that T-Cells that are most important, the ones in the tumor and ones that are likely to have been able to recognize tumor, but then we are down regulated the results. So, we designed our molecule to bind only the cells that have both PD1 and CTLA4 on them by using all stick in the book in antibody engineering tune the affinity against your ligand, in this case, two ligands, so that you need the cooperative effect of the presence of both ligands on the target cell meaning your antibody can stick with both hooks to stick to that target and thereby hopefully de-repress it as opposed to the affinity being low enough that when there is only one target on that cell, say just PD1 on a cell. You won’t stick to it. You won’t inhibit it enough to make a difference. And so, we chose to go after what we think are the double – we chose to go after only double positives we think with engineered molecule we can do that, and we believe the double positives based on literature are one over-represented in tumors are underrepresented in the periphery and the cells most likely to have been able to recognize tumors. Sorry, tumor cells to begin with.

Thank you.

Thank you and I am showing no further questions in the queue. I would like to turn the call back to Bassil for closing comments.

Thanks very much. We had a very – we have a very busy year ahead in 2017. We continue to grow in advance our XmAb pipeline and based on our current operating plans, and supported of course by the partnerships for both our technology and pipeline candidates that it brought in more than $150 million this year we’re sufficiently funded to support operations and get key data readouts on this growing pipeline over the next few years. We look forward to reporting initial data from IgG4-RD trial at ACR in November and more complete data in 2017 and we also look forward in 2017 to announcing clinical data from the ongoing 5871 trial in addition, sorry, to the one the IgG4-RD update, the trials in 7195 and trials of 14045 also continuing to expand the clinical stage pipeline with more bispecific oncology candidates. So I look forward to updating everybody on our continued progress in the future and thank you very much for your time.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the conference. You may now disconnect. Everyone have a wonderful day.