Good afternoon, and welcome to the Xencor Second Quarter 2018 Financial Results Conference Call. [Operator Instructions]. Please be advised that this call is being recorded at the company's request. At this time, I would like to turn it over to Josh Rappaport of Stern Investor Relations. Please proceed.

Thank you, Operator. Good afternoon. This is Josh Rappaport with Stern Investor Relations. Welcome to the Xencor's Second Quarter 2018 Financial Results Conference Call. Earlier this afternoon we issued a press release, which outlines the topics we plan to discuss today. The release is available at www.xencor.com. Today on our call, Bassil Dahiyat, PhD President and Chief Executive Officer, will discuss the company's business highlights and provide an update on Xencor's clinical programs and pipeline progress; and John Kusch, Senior Vice President of Finance and Chief Financial Officer, will review the financial results for the second quarter of 2018. Then we will open up the call for 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, the company's partnering efforts, the company's capital requirements, the company's future product offerings and the company's research and development programs. These forward-looking statements are not historical facts but rather 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 statement 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 Factor sections of Xencor's 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, Josh, and good afternoon, everyone. The core of Xencor's approach exceeding antibody therapeutic is our XmAb antibody engineering platform. By making small changes to an antibody structure, specifically in its Fc domain, we can improve its natural functions and performance. The plug-and-play nature of the small suite of XmAb Fc domain that we've created allows us to engineer nearly any antibody to have improved potency, longer half-life or bispecific structure. This flexibility and portability enables us to simultaneously advance multiple programs to proof of concept data and create options to choose which programs to independently advance and which we will look to partner. Our recent pipeline progress and upcoming clinical plans demonstrate this strategy, and our continued execution against the objectives we laid out at the beginning of the year. We now have 11 XmAb base programs in clinical developed internally and with partners for a wide range of serious and life-threatening diseases. Year-to-date, we've initiated clinical trials for 2 new bispecific programs in oncology. XmAb18087, our SSTR2 x CD3 antibody for neuroendocrine tumors and gastrointestinal stromal tumors. And in July, XmAb20717, our PD-1 x CTLA-4 bispecific antibody per solid tumors. We're particularly excited to have initiated these trials, our first and solid tumors and for 2717, our first tumor microenvironment activator. Now looking ahead to the second half of 2018, we remain on track to announce initial data from our two ongoing trials -- from two of our ongoing trials, I should say. [Technical Difficulty] our Phase II trial of XmAb5871 systemic lupus erythematous or SLE and the Phase I trial of our first bispecific oncology candidate, XmAb14045 and acute myeloid leukemia or AML. We also plan to initiate our first Phase II trial of XmAb5871 in IgG4-Related Disease or IgG4-RD, and we plan to file 2 more…

Thank you, Bassil. Xencor continues to operate from a position of financial strength. In this afternoon's press release, we reported cash, cash equivalents and marketable securities totaling $555.4 million as of June 30, 2018, compared to $363 million on December 31, 2017. This increase reflects net proceeds of $245.5 million from our underwritten, public offering in March 2018, offset by cash use to fund operating activities in the first half 2018. Before turning to our second quarter P&L, I'd once again like to remind everyone of Accounting Standards Codification ASC topic 606, the Financial Accounting Standard Boards new accounting rules regarding revenue recognition, which went into effect this year. Our revenues are earned from technology licensing fees and milestone payments from our partners for license of our drug candidates and use of our proprietary XmAb antibody engineering technologies. As such, we have adopted ASC 606, effective January 1, 2018. And we have revised revenue report for three and six months ended June 30, 2017, to reflect this new standard. New revenues were reported for three and six months ended June 30, 2018, compared to $12.5 million and $16 million when it can report for same period in 2017. Revenue in the three and six months period ended June 30, 2017, were primarily from milestones received from the company's CSL and more [indiscernible] collaborations. Revenue reported for both periods was affected by adoption of new revenue recognition standard. Under historic revenue recognition methods, Xencor would've recognized $0.6 million and $13.3 million of revenue for the three months ended June 30, 2018, and '17. And $7.5 million and $17.7 million of revenue for the six months period ended June 30, 2018, and 2017. Research and development expenditures for three months ended June 30, 2018, were $23.3 million, compared to $16.9 million for…

[Operator Instructions]. Our first question is from Ted Tenthoff from Piper Jaffray.

Great. I want to get a sense for the first 2 bispecific, CD20, CD123, really get a sense for pace of enrollment and how many patients you may be able to report data on for 123 in the back half and CD20 in 2019?

We really can't disclose any details of the trial, including the number of patients that have been enrolled. I think one thing I can guide on is that for the XmAb14045 CD123 trial later this year, we do feel like that the unmet need is very high in this indication, and that's consistent that we're going to be able to have a robust look at the kind of data on safety and dose and initial efficacy. So without being specific though, I really can't say, but restrictions from our Novartis collaboration on disclosures as well as disclosure of details like that, we're not doing.

Our next question is from David Ruch from Leerink Partners.

This is David dialing in for Jonathan Chang. I was just wondering if you could provide any additional context on the study population in the DUET-2 trial? And any context you're thinking about benchmarks moving forward in those indications?

Sure. So the study population is advanced solid tumors and, I believe, it's actually in our clinical trials, the gov entry. These are tumor types that have had some history of responsiveness to immune checkpoint therapy, to immune checkpoint inhibition, whether they're labeled for that, whether these indications have a labeled immune checkpoint inhibitor or whether there's just been observations reported in the clinical trials. We thought that was the most fruitful way to go. So you can imagine things like head and neck, non-small cell lung, bladder. You -- I think we know the list without trying to be exhaustive on the call, without looking at them. So we did that because we anticipate the mechanism of action of this is immune checkpoint inhibition and having two at once in a single molecule and with the design of the molecule tuned so that we would favor binding to double positive cells, that is cells that bind with a PD-1 and CTLA-4, we think that selectivity could create advantages as well. So that's the study population. And I think your second question is what are the benchmarks, right?

Yes.

And so I think there's two ways to think about the 20717 program which is our PD-1 CTLA-4 inhibitor. One is on, as we go forward, obviously, first data looks are going to be initial patient sets, dose escalation, establishing safety getting to a dose, so without promising what might occur in our first data release . But overall, the kind of metrics we're looking against our responsiveness in these tumor types of PD-1 against PD-1 therapy is one set. And then the sort of still not well-characterized but emerging metrics for what happens in PD-1 resistant or that is populations that have seen PD-1 therapies and have progressed or advanced subsequent to that. So I think there's 2 sort of different metrics on efficacy. And of course, there's the safety side where this molecule has CTLA-4 combination therapy seems to have accentuated toxicity over just PD-1 therapy certainly. And I think there's metrics that have emerged out of the combination trials for ipilimumab and nivolumab in places like melanoma, in RCC, in lung. So those are the two metrics we're looking at, both the safety side and the activity side.

Our next question is from Arlinda Lee from Canaccord.

Maybe I could go back to the 20717, did you say that you were going to do specific cohorts of I-O refractory patients? And then can you maybe comment on your -- the dose escalation schemes for your older T-cell-engaging bispecifics versus your I-O I-O, your newer ones, and if there's any difference in that in terms of the dose escalation process?

Sure. So I guess, for your first question, no, we haven't disclosed anything about specific cohorts. We're still in dose escalation. And we've expressly put together the trial design in a way that gives us flexibility, where if we establish a safe dose and we see enough activity to encourage us, we could expand into multiple expansion cohorts, each with a given indication in it as well as a choice of whether they're post PD-1 therapy or whether they're naive to PD-1 therapy or immunotherapy. We're able to enroll either type in a trial, and we'll just have to see what kind of patients come in the door, obviously. So that sort of that question, it's just too early to say what we might expand into, whether that would be PD-1 refractory or PD-1 naive. Though we do anticipate the majority of patients to be PD-1 -- post PD-1 that we're going to see certainly during dose escalation at least, because that's just the world we live in today in those indications. Your second question related to the criteria and the nature of dose escalation for these dual immune checkpoint inhibitors or our tumor microenvironment activators. First is the earlier set of CD3 bispecifics, is that right?

Basically, if you had to start at particularly lower doses with the T-cell engagement, if that's also the case for the -- yes.

There's nothing specific about any kind of modality or type of molecule for what dose you started. It all depends on the mechanistic data you have from in vitro, in vivo work on human cells and in animal models. I will say that we've found, and I think many other companies would say this, that for pure T-cell activation, like people see with CD3 bispecifics, there's a heightened awareness of Cytokine Release Syndrome that people have seen that with the CAR Ts, obviously, and with CD3 bispecifics like blinatumomab. And so there's a lot of attention paid to that. And these are very potent molecules, and they have biological activity that can be detected in a very potent way. So that's the criteria you use to set your initial dose. They consider things like no adverse event levels in your tox study as well as the FDA considers the minimum biologically active dose that's expected. And so they use those criteria, and there's obviously flexibility and judgment they apply. But because the CD3 bispecifics are so potent, you do tend to be lower in where you can start your dose. The immune checkpoint inhibitors, both -- there's ample experience with immune checkpoint inhibitors, PD-1s and CTLA-4s, et cetera, of which I think -- which helps the understanding of what initial starting dose might be and, I think, probably gives comfort to regulators, though I couldn't say for sure, as well as they're just fundamentally less potent molecules because their mechanism isn't. So that would tend to have you start higher. They're all 3-plus-3 designs. I mean those are some of the considerations that go into it. But I think, again, you mirror bispecific CD3 engagers or you can think of them as just T-cell engagers, activators of them directly, whereas the tumor microenvironment molecules tend to be less of a high-potency effect.

Our next question is from David Nierengarten from Wedbush Securities.

Maybe just going back to the lupus study which is coming out at the end of the year. Are there any particular readouts, cell markers and things like that, that you're looking for that, in addition to the lupus result, might point to or support that's used in IgG4-RD?

No, not really. There isn't really pretty much crossover. The characterization of plasmablasts circulation for IgG4-RD, which is a promising direction for having a cellular correlate to activity, but certainly not fully validated, I don't -- I'm not aware of any kind of marker like that on lupus. So I think, looking for biomarkers in lupus has obviously been something the world's wanted for a long time. The crossover between the two indications, I -- we don't have any handle on that.

Just checking if there's something out there I missed.

[Operator Instructions]. Our next question is from Christopher Marai from Nomura Instinet.

Just wondering if you could confirm, did you guys and your partners, Novartis, submit an abstract to ASH given you, and to be pretty clear, that you're going to present data later this year? Second, you highlighted the potential to see some activity that, from the molecule, in addition to safety data. So one, will you have maximum tolerated dose data? And two, is there going to be any ability to compare this data to other CD3 targeted bispecific or CAR T approaches? And I have one follow-up.

So let me keep track of -- there's a bunch of points there. You said, did we submit an abstract for the upcoming ASH conference? We don't comment on abstract submissions, only on their publications. Your second question was on what kind of -- the nature of the kind of data we would release, like in all kinds of first in human cancer studies, your inpatients . And as you dose escalate, if you get to active doses and you see activity, you'd certainly report that, I think that's pretty standard. And you can report on what kind -- what are, if any, kind of biomarker data you've moved, whether you've got responses to therapy, you can talk about initial rates and things. And it just depends on the data you read out in the trial. So this is a very typical cancer trial. Just because it's a bispecific doesn't mean it's any different there. Very typical cancer trial, I mean, if -- to the extent we have activity data, we would certainly report it. Then you asked about would we report on sort of MTD type data. Certainly, the primary outcome measure for this trial is safety, tolerability and determining the tolerable dose levels to go forward. So absolutely, we would hope to have a data on that. And of course, we would characterize how much dose escalation we've done, what kind of doses we've gotten to, and what the tolerability was at those doses , absolutely. Did I miss anything on those. I think, I got all those -- the questions you asked.

Yes. And I think that was pretty clear, and thanks for the extra color. And then just secondarily, sort of, you -- Ed Baracchini moving on, I was curious how that might impact some of your plans. I think you've discussed previously that if data from the lupus study were to be positive, that might be a program you'd want to partner. And then secondarily, how might that impact any potential partnering plans with respect to the IgE. He's pretty instrumental in the BDE process at Xencor. And that's it.

Sure. Yes, business development is such a team effort. It's, of course, always driven fundamentally by the science and whatever data you have that can drive a deal and how you can engage the scientific peer sets of the 2 companies to engage that interest. That's so critical. Then there's the deal structuring and the negotiation, also very critical. All those pieces have to come together. It's a team effort. Many have -- Xencor have been very familiar with for many years. We've done a lot of deals. So I feel really confident going forward that we'll be able to continue the kind of dealmaking that makes sense. Ed's departure will certainly be noted, and we wish him really well. And we've had quite a run the last 8 years with deals that, I think, we're all very proud of. Any more questions?

And with respect to lupus -- sorry, with respect to the lupus program, would that still be the plan after the compelling data, you'd look for a partner? And then, how do you think about that relative to the IgG4-related opportunity?

Very likely. I mean if the lupus trial looks -- suggests that it would be very promising to proceed into later phase development that it could really help meet the unmet need in a differentiated way then I think that expands the immediate opportunity for 5871 substantially, but it also requires the kind of development resources and commercialization resources beyond that of a small newly described indication like IgG4-related disease. So I think we would certainly view a partnership as something potentially really beneficial for the program and would probably prefer that path, all things being equal. But it all depends on the details.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bassil Dahiyat for closing remarks.

Thanks very much, operator, and I want to thank you all for joining today's call. We look forward to updating you on Xencor's progress in the coming months. Have a good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.