Xencor, Inc. (XNCR) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Xencor Incorporated Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference Hannah Deresiewicz with Stern Investor Relations. You may begin.

Thank you. Good afternoon. This is Hannah Deresiewicz with Stern Investor Relations, and welcome to Xencor's fourth quarter and full year 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 highlights, Paul Foster, M.D. Chief Medical Officer will provide an update on the Company’s clinical programs and pipeline progress and John Kuch, Vice President of Finance, will review the financial results from the fourth quarter and full year 2016 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 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 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. 2016 was a busy year for us, we made a lot of progress across our entire business advancing on internal XmAb programs by starting five new clinical trials. I am also pleased to announce today that, that was followed by the sixth new clinical trial since the beginning of 2017, this month with the Phase 1 startup XmAb13676 that makes that the 11th XmAb antibody in clinical testing currently. We are continuing to grow our pipeline with multiple new bispecific oncology antibody as well behind this one. We also entered into a strategic collaboration with Novartis for a biospecific programs with platform last year. Our highlights of 2016 were in March we initiated two Phase 2 clinical trials of XmAb5871, one in IgG4-Related Disease or IgG4-RD and one in systemic lupus erythematosus or SLE. Both diseases have a high unmet need and know of few proved therapies and critically they share a strong rationale for B-Cell inhibition. We were encouraged by the preliminary data from our IgG4-RD trial presented at ACR in November which showed that 82% of patients achieved an initial response to therapy within two weeks of their first dose. With these responses typically deepening overtime. We also initiated a Phase 1 trial testing with subcutaneous delivery of XmAb5871 in 2016. Now in September of last year we initiated clinical trials for two more programs, the first was a Phase 1b trial which evaluates a subcutaneous formulation of XmAb7195, a potential treatment for allergic disease and a second is a Phase 1 trial that evaluates our lead bispecific oncology candidate XmAb14045 in patients with acute myeloid leukaemia or AML as well as other CD123-expressing hematologic malignancies We also expanded our preclinical pipeline last year with the addition of two new bispecific oncology programs, XmAb including XmAb20717 or first drug candidate simultaneously engage two T-Cell checkpoint targets with the goal of activating T-Cell against multiple tumor types. Finally, last June we entered into the collaboration with Novartis under which we will share the costs and collaborate on the developments of XmAb14045 and 13676 on retaining full U.S. commercial rights to both programs. As part of this agreement we received $150 million upfront payment. With this added cash and following an equity offering that netted $119.3 million in December of 2016, we entered 2017 on a strong financial footing with $403.5 million in cash, cash equivalents, and marketable securities. These are sufficient funds that support our development plans beyond 2020. Now our strategy for the last several years has been to build a diverse pipeline of potential best-in-class antibodies, the treatment of autoimmune diseases in cancer all based on our XmAb SG technology. Our goal is to have proof-of-concept clinical data from our four most advanced programs by the end of 2018 and then select the best program or programs to independently advance into late stage development. Now in 2017 we’ll begin to turn over the card on our lead program or we continue to expand our earlier pipeline with new bispecific oncology programs. We expect topline results from our ongoing Phase 2 study of XmAb5871 and IgG4-RD this year and also plan to engage with the FDA to discuss the development plan for XmAb5871 including future trials for potential registration requirements. We also expect to announce topline data for a subcutaneous administration phase 1 study of XmAb7195, and we hope to announce initial data from our Phase 1 study or XmAb14045 depending in alignment with our partner Novartis on the timing of disclosure. Now with that, let me pass the call over to Paul to provide an update on our clinical trial results from last year.

Thank you, Bassil. I’ll start today by XmAb5871 our first in class monoclonal antibody in Phase 2 development for IgG4-RD and SLE. XmAb5871 targets CD19 with its variable demand and uses a proprietary XmAb immune inhibitor Fc domain to target Fc gamma receptor R2B, a receptor that inhibits B-cell function. Now at the ACR Annual Meeting in November, Dr. Johnstone the principal investigator presented preliminary data from our ongoing Phase 2 study in IgG4-RD we are very encouraged by these early results which show that 9 of 11 treated patients, or 82% achieved an initial response to therapy of at least a three point reduction in the IgG4-RD responder index within the first two weeks of the first dose. Five patients attaining disease remission or responder index is zero during this study and achievement that was well tolerated with no serious adverse events reported as of a data cut-off of October 31, 2016. As a reminder, this is a single-arm pilot study designed to evaluate the effective every other weak IV administration of XmAb5871 on disease activity in patients with active IgG4-RD. The last of 15 planned patients was enrolled this January. The patients will receive up to 24-weeks of treatment in the primary endpoint is to evaluate the portion of patients with an improvement in the IgG4-RD activity as defined by a decrease in the responder index. We are on track to report topline data from this trial this year and as Bassil noted, plan to engage with the FDA to discuss future development plans including clinical trial design and potential registration requirements in the months ahead. We also continue to progress our Phase 2 randomized double blind placebo control study in SLE and hope to report initial data in 2018. This study is designed to evaluate the ability of XmAb5871 to maintain lower levels of – disease activity following a brief course of inter muscular survey therapy and in the absence of immune suppressive medication. As we described previously, we believe this innovated trial design will enable us to access the effective XmAb5871 on SLE disease activity in less timing with fewer patients compared to standard SLE trials. The trial will enroll approximately 90 SLE patients for up to 24-weeks for the one-to-one randomization of XmAb5871 to placebo. Finally, we expect to report data from a Phase 1 study of the subcutaneous administration of XmAb5871 in the first half of 2017. Now onto XmAb7195 our first in class monoclonal antibody that targets IGE with its variable demand and uses the same XmAb and new inhibitor Fc domain as XmAb5871 to target Fc gamma receptor 2B. XmAb7195 has three distinct mechanisms of action for reducing IG levels, it’s 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 circulation, via high FcγRIIb binding and breakdown in endothelial cells. In the Phase 1a trial presented at the ATS International Conference in May, intravenous administration of XmAb7195 induced a rapid and potent suppression of free IgE below the limit of detection including from single doses and 75% of high IgE subjects. In addition, total IgE, basophil surface-bound IgE and basophil IgE receptor levels showed large and sustained reductions for nearly all subjects. XmAb7195 was generally well tolerated, with transient, asymptomatic thrombocytopenia reported at doses ≥ 2.0 mg/kg. We believe XmAb7195 ability to effectively reduce IgE including in high IgE patients gives XmAb7195 potential in a range of allergic disease including allergic asthma and food allergy. We are currently evaluating a subcutaneously administered formulation of XmAb7195 in a Phase 1b trial and we expect to report topline results this year. Next, I’d like to provide updates on our expanding XmAb by specific oncology portfolio. Our bispecific antibody programs were built on a novel XmAb SE domain which is a scaffold for two or more different antigen binding demands. Result is a single molecule that combine two multiple targets simultaneously. This plug and play demand allows us to rapidly create drug candidates by combining any two binding domains, while also conferring additional benefits, including long [Indiscernible] half life, stability and ease of manufacture. Our lead bispecific programs are tumor-targeted antibodies that contain both a tumor antigen binding domain and a cytotoxic T-cell binding domain. These bispecific antibodies activate T cells for the highly potent and targeted killing of malignant cells. In September 2016, we initiated a Phase 1 trial of our lead bispecific oncology candidate, XmAb14045, in acute myeloid leukaemia and other CD123-expressing hematologic malignancies. XmAb14045 engages the immune system against AML by binding the CD123 of protein on AML cells and to CD3 approaching on cytotoxic T-cells thus activating a targeted T-cell immune response against the cancer cells. In preclinical studies, XmAb14045 showed highly effective and potent depletion of target cells from a well tolerated single IV dose. Our Phase 1 trial is an open-label, multi-dose, dose escalation study designed to evaluate the safety and tolerability of weekly IV administration of XmAb14045 for up to eight weeks in approximately 60 patients. The study is also designed to determine the maximum tolerated dose after the first and subsequent infusions. We hope to announce initial data in 2017 pending alignment with our partner Novartis and the timing. Our second bispecific oncology program, XmAb13676, binds the CD3 on T-cells, but targets CD20 for the treatment of B-cell malignancies. In February 2017 we started a Phase 1 clinical trial for XmAb13676, and expect to announce initial data in 2018, again pending alignment with our partner Novartis. In June we announced two pre-clinical additions to our bispecific oncology pipeline, XmAb18087 and XmAb20717, for which we expect to file INDs in 2017 and 2018 respectively. XmAb18087 targets SSTR2 and CD3 for the treatment of neuroendocrine tumors and XmAb20717, our first candidate to simultaneously engage two T-Cell checkpoint targets PD1 and CTLA4 for potential use in multiple oncology indications. This dual checkpoint bispecific antibody has the potential to improve the selectivity of combination checkpoint inhibitor therapy and eliminate the need for multiple checkpoint antibodies. Now I will turn it back to Bassil.

Thanks Paul. I will just have a quick comment on our ongoing partnerships. We are proud that eight pharmaceutical companies and the NIH continue to advance novel drug candidates to use our Fc technology for bispecific structure, for higher cytoxicity, long half life and improved stability. Now seven of these programs are undergoing clinical testing, including a Phase 1 clinical trial initiated by the NIH in January 2016 and a Phase 2-3 trial initiated by Morphosys, which began dosing in September 2016. Also in December of 2016, Alexion initiated a phase 3 clinical trial for an undisclosed program under our license agreement for our Xtend technology, and then will receive a milestone payment of $5 million. Now with that, John will review our fourth quarter and full year year-end financial results.

Thank you, Bassil. In this afternoon’s press release, we reported and cash and cash equivalents and marketable securities $403.5 million as of December 31, 2016, compared to $193.3 million on December 31, 2015. This increase reflects the net proceeds of $119.3 million received from the completion of our follow-on offering in the fourth quarter, in addition to the upfront payment of $150 million received in connection with our Novartis collaboration and other milestone revenue received from partners during 2016. Revenues for the fourth quarter of 2016 were $6.4 million, compared to $21.8 million in the same period of 2015. Revenues for the full year 2016 were $87.5 million compared to $27.8 million in 2015. Revenues are earned from technology licensing fees and milestone payments from Xencor's partners for the license of its drug candidates and use of its proprietary XmAb antibody engineering technologies. Revenue for the fourth quarter of 2016 related primarily to a milestone received from Alexion, while revenue for the same period in 2015 included milestone and option payments from Alexion and revenue earned from our Amgen collaboration. Total revenues earned in 2016 were higher than 2015 due to the revenue earned from our Novartis Collaboration. Research and development expenditures for the fourth quarter of 2016 were $13.4 million, compared to $10.9 million for the same period in 2015. Total R&D expenses for the full year 2016 were $59.1 million compared to $34.1 million in 2015. R&D spending in the fourth quarter and for the full year ended December 31, 2016 was greater than expenditures incurred over comparable periods in 2015 due to increased spending on our clinical programs including our Xmab5871 and XmAb7195 programs and also development of our pipeline of bispecific clinical candidates. General and administrative expenses in the fourth quarter of 2016 were $3.1 million, compared to $3.4 million for the same period in 2015. Total G&A expenses for the full year 2016 were $13.1 million compared to $12 million in 2015. Additional spending on G&A for the full year ended December 31, 2016 over the comparable period in 2015 reflects increased staffing costs and compliance costs related to SEC filing obligations. Non-cash, share based compensation for the full year of 2016 was $7.8 million, compared to $4.9 million in 2015. Net loss for the fourth quarter of 2016 was $9.1 million compared to net income of $7.8 million for the same period in 2015. The net loss incurred in the fourth quarter of 2016 reflects spending on operations in excess of the Alexion milestone for the period. For the full year of 2016, net income was $23.6 million on a fully diluted per share basis, compared to net loss of $17.6 million, or $0.45 on a fully diluted per share basis for the full year 2015. The net income earned for the full year 2016 over the loss incurred in 2015 is primarily due to revenue earned from our Novartis collaboration. As of December 31, 2016, the total share outstanding was 46,567,978 compared to 39,015,131 total shares outstanding as of December 31, 2015. The increase in total shares outstanding reflects the additional shares issued in our December 2016 financing. Based on our current operating plans, we expect to have cash to fund research and development programs and operations beyond the end of 2020. We expect to end 2017 with approximately $340 million in cash and cash equivalents. With that, we would now like to open the call up for your questions. Operator?

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

Hi guys, and thanks for taking my questions. I had one regarding the 14045 study, the AML trial for the lead bispecific antibody, I was just wondering if you could provide some more information regarding the dose escalation schedule for this study, and I am just asking because it seems some of the other competitor bispecific antibody programs have taken quite some time to generate the clinical data, a couple of years in some cases, I'm just wondering how fast can you dose escalate in these studies and how confident are you that you are not moving too fast actually? Thanks.

I will let Paul take it on the details, but remember the design of the molecule XmAb14045 was based on the premise that by having a potency that is significantly lower than earlier bispecific technologies like the BiTE technology that Amgen acquired with Micromet in the order of 100 times more or less potent. You still have a molecule that is fantastically potent say in the range of a 1000 times more potent than are rituxans, but not 100,000 times more potent, but we compensate for this by having a dramatically longer – we hope in humans dramatically longer half life. We certainly showed this in pre-clinical models because of our Fc technology. And so that is the premise is that we will have something that is inherently less potent and hopefully more tolerable, and so we went with a standard approach for dose escalation and dosing in the format – maybe Paul can touch on the schedule and the way we dose it.

Well, we haven't disclosed the actual dose levels or the increments in change, but based on our preclinical program, we have selected what we thought was a safe starting dose and we are increasing those doses between cohorts in a manner that we think is prudent and safe.

Yes. And it's a standard 3.3 oncology Phase 1 dose escalation design and that's it, and we're moving forward, we're enrolling, we will be getting updates as we get more information.

Yes. And maybe can you elaborate a little bit more on your affinity titration I guess of your products and whether you think and you might be able to decouple some of the toxicities that are I guess are on target for the cancer therapy from the activity that is desirable?

Yes. And I think the key there is the format that we use which is based on having your tumor antigen binding domain and your T-cell binding domain, you see three binding demand, that format has both of those domains attached to an Fc just like they would be attached in a regular antibody. One domain on one, half of the Fc, the other domain on the other half of the Fc. And so, that arrangement inherently gives you this dramatically lower potency than first generation by specific antibodies. What those two binding remains literally stitched right to each other with say a peptide link or a disulphide bond. And so that much more flexible arrangement with these things are mobile relative to each other, seems to inherently give you at least a couple order remanded or at least a 100 fold lower potency. That's built in the design. Now, for certain programs, we've tested various affinities of both antigen binding and T-cell binding domain. So, to tune those affinities down, and we did that by examining the performance of these molecules in non-human primates to look at destruction of the target cell and the cytokine release that you get. For FORTUNE and 45, we went with a mid-single digit in animal or CD3 binding demand as we showed in a post release in our couple -- last couple of years ago and a similar affinity for the CD123 domain. I think this give us a pretty good set of properties in the primates for being able to give a simple infusion that gave long lasting depletion of the target cells and manageable tolerability. For us, it's now 13676 program, the CD20 CD3 program, the lower CD20 affinity because that gave us the best mix of properties. So, it's an empirical exercise, we're trying to decouple this sort of steady state T-cell killing activity from that initial pulse that happens usually within hours of in the dose, that initial pulse of cytokine release from the T-cells that can cause a lot of immune toxicities, cytokine release syndrome. So, usually about kinetics and intensity of that initial pulse that you tune down, would have a much longer half-life so that your activities can still go on and on. So, it's that balancing act between potency and half-life.

Okay, thanks. Very interesting. And then a question on 5871, actually regarding the subcue formulation and obviously desires to take that into pivotal studies as opposed with the IV. And maybe can you share if the Phase 1 PKPD study, whether that is enough, you only has to show bioequivalence to the IV to take that forward that's additional work that might be necessary before starting a pivotal study with a subcue formulation?

I think given that we've -- we have this pilot state to have been able to study IgG4-Related Disease. Really, it's really a judgment call of hours based on how reliable we think the performance of the formulation is in the context of that bioequivalent study to go forward. We think that given that we have not yet started any large randomized studies, that we have a lot of flexibility on determining what we want to do there. It's not like we're switching in the middle of a large pivotal study and maybe having additional requirements. Because we're prior to that beginning of any kind of large study. Kind of up to us, and we just have to look at our data and have confidence in it. And we'll be guiding on that in the first half on how we're going to go forward on the results of that bioequivalent study, the PKPD study.

All right, yes. Great, thanks a lot and congrats on the progress.

Thank you, very much.

Thank you. And our next question comes from Arlinda Lee with Canaccord Genuity. Your line is now open.

Hi, guys. Back to the subcue results. That was supposed to be in the first half, did you say?

Yes.

And probably 7195 as well?

5871 is the first half, 7195 will be sometime during this year.

And then can you remind us of the thrombocytopenia that you saw with 7195 and what you think was the cause of that and whether this subcue might be able to help address that? Thanks.

Well I guess in terms of what we saw in the single dose study maybe Paul can touch on the results we presented in ATS last year.

Yes, so we saw a dose dependent affect on platelet count, that was transient after single-dose it raises [Indiscernible] by 24 hours and by 48 hours after the dose recovery was already occurring. And it doses at 2mg per kg above it got below 150,000 which would be the definition of thrombocytopenia. We don’t have a known mechanism for that as of yet, and when we talk about the results of the subcutaneous study, we can guide them whether we see that formulation as well.

So you will be looking for that in the subcue trial as well?

That’s a little say standard safety measure to be looking at pilot accounts.

Okay, fantastic. Thank you very much.

Thank you. [Operator Instructions] And at this time I am showing no further questions. I would now like to turn the call back over to Bassil Dahiyat for closing remarks.

Thank you very much. 2017 will be an exciting and busy year for Xencor as we continue to expand our -- expand and advance our XmAb pipeline. Now based on our current operating plans, we have a strong financial position that was bolstered by partnership and our recent financing, and which will support operations through key data readout and milestones from multiple internal and partnered programs. Finally, I like to thank the entire Xencor team for incredibly productive year in 2016 and I really look forward to updating everybody on our progress as we move forward. Thanks again for your time. Bye, bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day