Xencor, Inc. (XNCR) Q2 2018 Earnings Report, Transcript and Summary

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 investigation of new drug applications for additional tumor microenvironment activators, XmAb22841 and 23104 before year end. Now with that let me begin today's update on our clinical efforts and broader pipeline with our lead program, XmAb5871. 5871 is our first-in-class monoclonal antibody that target CD19 with its variable domain and uses our XmAb immune inhibitor Fc domain to target Fc gamma RIIb, a receptor that inhibits B-cell function. While B-cell in admission is a proven strategy from many autoimmune diseases ranging from rheumatoid arthritis to lupus to IgG4-RD, we believe 5871 is differentiated from existing therapeutics because its highly potent and broad blockade of B-cell activation occurs without depleting or destroying B-cells. This means that the immune system is able to resume naturally once treatment is no longer required, coupled with the fact that we can deliver 5871 subcutaneously, we believe it offers an attractive product profile for patients without immune disease. We're currently evaluating 5871 in 2 indications, IgG4-RD and SLE, both of which have represent areas of high unmet need. IgG4-RD is a newly described, fiber inflammatory autoimmune disease affecting approximately 40,000 people in the U.S. and for which corticosteroids is the current standard of care and there are no approved therapeutic options. IgG4-RD typically affects multiple organs causing tumor-like swelling, a variable degree of fibrosis and potentially irreversible organ damage and is characterized by a lymphoplasmacytic infiltrate in the affected organs rich in IgG4-positive plasma cells, hence the name. Based on positive final date from our Phase II trial in IgG4-RD in which 5871 was well-tolerated and met the primary endpoint of at least a two-point reduction in the IgG4-RD Responder Index in all 12 patients who finished the study, we believe we may be able to provide the first therapy approved specifically for the treatment of this newly defined disease. We plan to initiate a randomized, placebo-controlled, double blinded Phase II study to evaluate the addition of 5871 to standard of care in approximately 200 to 250 patients with IgG4-RD in the second half of this year. Shifting now to SLE. We're currently running a randomized, double-blind, placebo-controlled, multi-dose Phase II trial utilizing a novel design to evaluate the ability of 5871 to maintain the improvement in SLE disease activity after a short course of intramuscular steroid therapy and in the absence of immunosuppressive medication. Now compared to standard SLE trials, we believe this unique design will allow us to assess 5871's effect on SLE with a shorter time to endpoint with fewer patients. We expect to announce top line data in the fourth quarter of 2018, which will inform our next steps in development. Next, I'll update on our bispecific oncology pipeline. Our bispecific antibodies are singular molecules built on our novel Fc domain, which preserves important properties of native antibodies, including their fulling structure, while also providing robust scaffold for two or more different antigen bonding demands. Now our three most advanced bispecific programs are tumor-targeted antibodies that contain a tumor antigen bonding domain on one side and a cytotoxic T-cell bonding domain targeting CD3 on the other side. They work by activating T-cells at the sight of the tumor for highly potent killing of malignant cells. Now we expect to report initial data from our Phase I trial of our lead bispecific XmAb14045, which is a CD123 x CD3 antibody for AML and other CD123 expressing hematologic malignancies. We expect to report data for that program by year end. These results will provide important in the safety and tolerability of the treatment, the dose levels for further development and initial activity data. We also continue to advance clinical development of XmAb13676, a CD20 x CD3 bispecific antibody designed to treat B-cell malignancies and for XmAb18087 and SSTR2 x CD3 bispecific antibody being developed for the treatment of neuroendocrine tumors and gastrointestinal stromal tumors. We expect to report initial data from these two programs -- a Phase I data from these two programs in 2019. Now the next compound -- component of our bispecific pipeline is our suite of tumor microenvironment activators. These candidates can simultaneously engage multiple target such as T-cell checkpoints or agonists with the goal to improve the selectivity of combination therapies for T-cell activation and to eliminate the need for multiple antibodies. Each of our new bispecific molecules tested a distinct mechanism for TME activation. Our first candidate targeting the tumor microenvironment is XmAb20717, PD-1 x by CTLA-4 bispecific antibody for the treatment of multiple oncology indications. In July, we dosed the first patient in DUET-2, a dose escalating Phase I study to determine safety, tolerability, pharmacokinetics and pharmacodynamics, immunogenicity and preliminary antitumor activity of intravenously administered 20717 in advanced solid tumors. Now behind 20717, our XmAb23104, a PD-1 x ICOS bispecific antibody, XmAb22841, a CTLA-4 x LAG-3 dual checkpoint inhibitor, and XmAb24306 in IL15/IL15-receptor alpha bispecific molecule, all for the treatment of multiple oncology indications. We plan to file the IND applications for 23104 and 22841 this year, with Phase I initiations to follow in 2019, we plan to follow the IND for 24306 in 2019. Now turning briefly to XmAb7195, our first-in-class monoclonal antibody that targets IgE with its variable domain, and now similar to 5871, it uses our XmAb immune inhibitor Fc domain to target Fc gamma RIIb. Based on the Phase Ib data reported in November of last year, we believe subcutaneously administered 7195 could offer an improvement over standard of care for patients with asthma allergic disease, but we're currently seeking a development partner. Next, I'd like to turn to our -- a touch on our partnerships. Business development has been a pillar of Xencor's clinical and corporate strategy and it's really enabled by the flexibility of our platform. Success from our partner programs validates the XmAb technology and helps to fund the development of our most promising internal programs. We're proud that eight pharmaceutical companies and the NIH are currently advancing drug candidates either discovered here at Xencor or they rely on our XmAb Fc domains for bispecific structure, higher cytotoxicity or longer half-life. 4 such programs are currently undergoing clinical testing, including MOR208, which is in Phase III development as a combination agent for the treatment of relapse or refractory diffused large B-cell lymphoma. In addition, regulatory submissions have been filed in the U.S. and E.U. for Alexion's eculizumab, which is formally called Alexion 1210, for the treatment of patients with paroxysmal nocturnal hemoglobinuria. I'd also like to thank Ed Baracchini, our Chief Business Officer, who's leaving the company as of August 15, 2018. In his 8 years at Xencor, Ed has contributed to creating this wide range of partnerships and we wish him the best in his next endeavors. Now with that, I'll turn the call over to our CFO, John Kuch, to review our second quarter 2018 financial results.

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 the three months ended June 30, 2017. Total R&D expenditures for six months ended June 30, 2018, were $49.4 million compared to $32 million for the six month ended June 30, 2017. The increased R&D spending for the three and six months ended June 30, 2018, over R&D spending in the same period 2018 reflects additional spending in Xencor's pipeline of bispecific oncology candidates. General and administrative expenses for the three months ended June 30, 2018, were $5 million compared to $4.1 million for the same period in 2017. Total G&A expenses for the six months ended June 30, 2018, were $9.5 million, compared to $8.9 million for the six months ended June 30, 2017. The increased spending in G&A in the three and six months ended June 30, 2018, over G&A spending in the same period in 2017 reflects additional facility cost, resulting from the expansion of space under lease at Xencor's Monrovia and San Diego locations and increased stock-based compensation charges. Noncash, share-based compensation expense for the second quarter ended June 30, 2018, was $9.4 million compared to $6.6 million for the same period in 2017. Net loss for the three months ended June 30, 2018, was $25.9 million or $0.46 on a fully diluted per share basis compared to a net loss of $7.7 million or $0.17 on a fully diluted per share basis for the same period in 2017. Net loss for the six month ended June 30, 2018, was $55.4 million or $1.07 on a fully diluted per share basis compared to a net loss of $23.2 million or $0.50 on a fully diluted per share basis for same period in 2017. Increased loss for the three and six months ended June 30, 2018, over the same period in 2017 is primarily due to lower revenue and increased R&D expenses in 2018 period. The total shares outstanding were 55,821,310 as of June 30, 2018, compared to 46,854,762 as of June 30, 2017. The initial shares outstanding at June 30, 2018, reflect the 8,395,000 shares sold in Xencor's March 2018 financing. Based on our current offering plan, we expect to have cash to fund research and development programs and operations into 2023 and to end 2018 with approximately $500 million in cash, cash equivalents and marketable securities. With that, we'd now like to open the call up for your questions. Operator?

[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.