Good afternoon, and welcome to the Xencor Fourth Quarter Full Year 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 the call over to Charles Liles, Associate Director and Head of Corporate Communications and Investor Relations at Xencor. Please proceed.

Thank you, Operator. Good afternoon, a few minutes ago, we issued a press release which outlines the topics we plan to discuss today. The release is available at xencor.com. Today on our call, Bassil Dahiyat, Ph.D., President and Chief Executive Officer will discuss the Company's business highlights; Paul Foster, MD, Senior Vice President and Chief Medical Officer will provide an update on Xencor's clinical programs; and John Kuch, Senior Vice President of Finance and Chief Financial Officer will review the financial results from the fourth quarter and full year. Then we will open up the call to 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, plans and objectives of management for future operations, partnering efforts, capital requirements, future product offerings, the timing and success of clinical trials, and research and development programs. 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 outcomes of the events described in these forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to material differently from the results anticipated by these forward-looking statements, including, but not limited to, those factors contained in the risk factors 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 Charles, and good afternoon everybody. At Xencor we engineer monoclonal antibodies with dramatically enhanced biological functionality and performance versus their natural counterparts. Our proprietary XmAb technology focuses on the constant of an antibody, its Fc domain or the bottom half of the Y-shaped antibody structure. We modify Fc domains with just a few amino acid changes to produce antibodies and now cytokines with improved activity, a longer half-life, or bispecific structure. These XmAb Fc domains can be readily substituted for natural Fc domains and over the last 16 years, we've created a large intellectual property estate around these novel domains, which has enabled us to build a broad and diverse portfolio with 12 XmAb-based candidates currently being evaluated in the clinic, both internally and by our partners. Now, in December, 2018, we were delighted to hear that one of these 12 candidates Alexion's Ultomiris, also known as ALXN1210 was approved by the FDA for marketing in the United States. This is the first XmAb technology containing approved antibody. Ultomiris is a complement inhibitor indicated for the treatment of adult patients with paroxysmal nocturnal hemoglobinuria or PNH, and it incorporates our Xtend Fc technology, which allows for a longer duration of action and less frequent dosing regimens compared to Soliris, the first generation complement inhibitor at Alexion. We congratulate Alexion and their achievement and look forward to subsequent approvals in other geographies and their progress toward expanding the label. Now beyond the Xtend Fc technology used in Ultomiris suite, we have additional XmAb Fc technologies and drug candidates that we have partnered with other companies and we seek to continue to license and partner to maximize their potential. These technologies include our immune inhibitor Fc domain, which provides for us selective immune inhibition and rapid clearance and our cytotoxic Fc domain, which provides for more potent antibody-dependent cell cytotoxicity, ADCC. Now, the bulk of our R&D focus over the last few years, however, has been the expansion and use of our XmAb bispecific Fc platform. Our plug and play approach to engineering enables the rapid design and simplified development of antibodies and other proteins structures that bind two or more different targets simultaneously. Bispecifics are rapidly emerging area of biotherapeutic development, particularly in oncology and we're using our XmAb bispecific Fc domains as a robust scaffold to develop a pipeline of bispecific antibody and cytokine drug candidates. To date, we've created seven drug candidates in oncology using XmAb bispecific Fc domain, which can be grouped into three distinct classes; our CD3 bispecifics, our tumor microenvironment activators, which target two different T-cell checkpoint or agonist receptors and lastly, our cytokines. Now, as you know, XmAb14045 is the lead CD3 bispecific candidate from our oncology pipeline. I'll turn the call over to our Chief Medical Officer, Paul Foster to review our recent clinical developments in the XmAb14045 program.

Thanks Bassil. XmAb14045 is our CD123 x CD3 bispecific antibody that's being developed in collaboration with our partners, Novartis. It's being evaluated in an open label, Phase 1 multiple-dose, dose escalation study to assess its safety, tolerability and preliminary anti-tumor activity in patients with relapsed or refractory acute myeloid leukemia or AML and other CD123-expressing hematologic malignancies. Last week, we announced that the FDA placed a partial clinical hold on the study and while patients currently on treatment and benefiting from treatment may continue treatment on this study, no new patients will be allowed to enroll until the partial clinical hold is lifted by the FDA. The partial hold is related to our recent reports to the FDA of two patient deaths that were considered at least possibly related to treatment. One patient experienced cytokine release syndrome or CRS after their first dose, the treatment of which was complicated by the patient's decision to withdraw care prior to full implementation of standard CRS management. This patient received an infusion of 1.3 micrograms per kilogram. As our ASH presentation with the data cutoff by October 19, 2018, 25 patients were treated at this initial dose or higher. Since then, multiple additional patients have been treated at this initial dose and for subsequent doses at higher levels. Second patient received several doses of XmAb14045. Within a week of their last infusion, the patient developed chest tightness and worsening shortness of breath during a platelet transfusion for the management of thrombocytopenia related to AML. The patient subsequently developed acute pulmonary edema and then died several days later. The partial clinical hold will remain in place pending the FDA's review of additional details regarding these events, safety and efficacy information across the study and satisfactory review of amendments to the study protocol and related…

Thanks Paul. Now before moving onto a review developments in the remainder of our oncology pipeline, I'll speak about obexelimab, which is XmAb5871 and our first-in-class monoclonal antibody that targets CD19 with its variable domain and uses our XmAb immune inhibitor Fc domain to target Fc gamma receptor 2B, a receptor that inhibits B-cell function. B-cell inhibition is a proven strategy for many autoimmune diseases, and we believe obexelimab offers patients and physicians a potentially differentiated therapeutic option, because of its subcutaneous delivery format and it's highly potent and broad blockade of B-cell activation occurs without depleting or destroying B-cells. This means that the natural immune system is able to function normally once treatment is no longer needed. To date, we've conducted Phase II clinical trials in several autoimmune diseases, we've demonstrated the potential disease modifying ability of obexelimab in systemic lupus erythematosus, which we presented last October at the ACR Annual Meeting and in IgG4-related disease. Data from these studies support further development in these indications and show the potential of obexelimab in other autoimmune disorders. Now given obexelimab's potential disease modifying activity observed across multiple diseases, the scale of potential registrational studies and the opportunities provided to us by our novel bispecific Fc technologies, we believe that further development, including potentially pivotal Phase 3 studies, should be conducted with a development partner that has the infrastructure and resources to maximize the potential of this drug candidate in the broadest set of patient populations. To ensure alignment with potential collaborators, without a partner, we will not start the Phase 3 study in IgG4-related disease that we have been planning. I'll shift now to our rapidly growing bispecific oncology pipeline. About six years ago, we began work to create bispecific antibodies that contain Fc domains. We engineered Fc domains that…

Thank you, Bassil. I'd like to briefly touch based on our fourth quarter year-end results for 2018. Our total cash, cash equivalents and marketable securities as of December 31, 2018 totaled $530.5 million compared to $363.3 million on December 31, 2017. The increase reflects net proceeds of $245.5 million from our follow-on public offering in March 2018, partially offset by cash used to fund operating activities in 2018. Before turning to our fourth quarter P&L, I'd like to once again remind everyone that our financial statements reflect the adoption of Accounting Standards Codification Topic 606. The Financial Accounting Standard Boards revised accounting rules on revenue recognition, which went into effect this year. As such, we adapted ASC 606 effective January 1st, this year and have revised revenue reported for the prior period ended December 31, 2017 reflect this new standard. Revenues for our three month ended December 31st, 2018 were $11.6 million compared to $30.1 million for the three months ended December 31st, 2017. Revenue in the fourth quarter of 2018 was primarily milestone revenue received from Alexion, where revenue in the fourth quarter of 2017 included $10 million milestone revenue from Amgen and $20 million of revenue earned from our Novartis collaboration. Total revenues for 2018 were $40.6 million compared to $46 million for 2017. Total 2018 revenue included $20 million of milestone revenue received from Alexion and $20 million of revenue earned from our Novartis collaboration, while 2017 revenues consisted of milestones received from Amgen, MorphoSys and CSL, which totaled $26 million in addition to $20 million earned from our Novartis collaboration. Research and development expenditures for the three months ended December 31st, 2018 were $27.1 million compared to $20.4 million for the same period in 2017. R&D expenditures for the full 12 months in 2018 were $97.5…

[Operator Instructions] And our first question is from Ted Tenthoff from Piper Jaffray. Your line is now open.

Congratulations on an exciting year of lot of progress coming and I'll let if you can update on the clinical. One quick question, if I may. With respect to Ultomiris, how will you be recognizing those royalties? Is it a light period, you will be breaking out the line or maybe you can just tell us in terms of that. Thank you.

Yes. And is most likely the reporting under the agreement is going to be after the period. So we're not going to know until later. And as far as breaking it out, we'll have to see how the numbers - come down the pike, really before we start making that kind of decision and we'll have to see how they specifically break it out because they haven't given much guidance at what point they're going to separate the Ultomiris from the Soliris sales. So I think that's going to play out over the next two to three quarters we ask with you Ted.

We'll keep our eyes open for that. And then just with respect to the data readouts, when do you think it's most likely - which medical meetings, could we get some updates from the bispecific that are advancing to Phase I. Thanks very much.

So I would say, without having a fore knowledge of medical meetings, schedules and abstract submission deadline, I would just say late in the year. I don't want to commit to any specific conferences before we make those decisions on what submissions to make, but late in the year.

Our next question is from Alethia Young from Cantor Fitzgerald. Your line is now open.

Thanks for taking my questions. Just two of them, if I may. I just want you to talk a little bit more about the partial hold and maybe the second case where I know that you've mentioned the couple, seemed like the persons who had AML was getting platelets and was the edema, like how related to drug was it I guess is the question. It seems like there were a lot of things kind of going on in this patient. So just a little bit more color there. And on the second question, I mean obviously you're going to have posted probably $600 million potentially in cash, and I just wanted to talk a little bit about how you - that starts to frame and change the Company's strategy as far as like kind of being able to commercialize assets. It seems like it would be in oncology. Are there any kind of particular areas where you really think you can grow and build a commercial operation there. Thanks.

Yes, so I'll just - the second one first. So the cash balance gives us the optionality to pursue multiple different programs and that's the strategy we've been laying out for the last few years to access multiple different biologies using our Fc technology, particularly the bispecific technology to go down - to go down different avenues because biology risk is inherently the largest risk in drug development, we don't know biology until we try things in the clinic. So with that, we do have ambitions one day to hopefully be a fully integrated company. I think we're a ways off from being able to give specific guidance on that, because we need to progress multiple programs forward, see which ones have the data that supports their advancement, see which ones have the characteristics that support go it alone for Xencor or at least go it alone in the U.S., like for example with our Novartis partner program. So I think you're right about where we want our ultimate trajectory to be. I think it's too early to commit to anything, I think it is very important to have a strong balance sheet to be able to carry forward a broad platform sort of driven strategy of making a number of different biological bets in the clinic. Now with that, I'll turn the - to your first question regarding, I guess you were asking about causality vis-a-vis the patient that had the pulmonary edema.

Yes, so the sequence of events. As we've reported, that's about the extent that we want to share at this point, we continue to work with the investigators and with the agency to gather more data and do analysis and hopefully get to more information about causality in this particular case the investigator considered it possibly related, and as such, it's our requirement to report this event.

And just a follow-up to that, do you guys have any kind of thought on potential timeline around revolution of the partial hold?

Well, we're going to be submitting responses in the small number of weeks as we gather data together. And then there is a 30-day window for the FDA to respond, but that respond can be - response can be anything. If you mean more questions, and so I think that what we plan on doing is, when we resolve the hold, we'll certainly - we'll certainly immediately announce that, but we're working very hard and very quickly with our investigators and staying close to the FDA.

Our next question is from Arlinda Lee from CG. Your line is now open.

I guess I had a couple of questions on 24306 and when we might hear more about your extensive combination trials that you've planned and what kind of the data flow timelines for hearing about when you might start, when the Phase 1s might read out sufficiently that you can start the combinations. And then secondly, on 509, have you disclosed what the target in prostate cancer is 'or Amgen?

So to your first question on XmAb24306 or IL-15 program, the first lead asset with our Genentech collaboration, we expect to support Genentech's filing of the IND, because we've already obviously done and almost all of the preclinical work manufacturing et cetera. We support that filing in the second half of this year and try to get patients on as soon as possible, and that could be very late this year, early next year. After initial monotherapy dose escalation as is customary with combination agents you would then go into combinations. I wouldn't expect any of that to happen until the second half of 2020. And then readouts from that I think again it's starting to get far enough out that it's impossible to say, it is a very extensive strategy across different indications, different combination agents, we of course have our own trials that we would like to pursue. But with our own combination agents, but that's partnering off of that, we'll have ample chances to guide you on that as we go forward. Now regarding AMG 509, the newly announced agent for prostate cancer that's a bispecific antibody, they have not released any details on the targets for that agent. And so we can't say.

And then I guess lastly on Ultomiris, can you talk about, you mentioned that $8 million in regulatory milestones remain, are those fairly near-term, are they on additional approvals and maybe a little bit further out. And then can you...

I would say, it's fair to say they're relatively near term.

And then on the sales milestones, are those set up to be fairly near-term? Are those also...

I think that's one we're going to have to get a feel for the launch trajectory before we can comment on that.

Our next question is from Jonathan Chang from CVB Leerink. Your line is now open.

Jonathan Chang from SVB Leerink. First question, can you provide more color on the decision to not start late-stage development for obexelimab until securing a partnership, what triggered this change from past guidance? And how should we be thinking about the type of partnership that you're looking for?

Yes, I think what's really the change is, as we've been looking at our various partnering opportunities, as we're looking at the kind of trial that we can start in particular the inherent uncertainty in a brand new disease where we're making sure you can build enough data to show the clinically meaningful benefit that is how patient feels functions or survives, how that ties to the readily measurable endpoints. I think that - with that uncertainty, and how you would best go about doing that it seems, putting the cart before the horse to initiate before understanding exactly what the potential partner you might end up with would want to do. I think the kind of partnership that we would like to pursue is one first and foremost with a partner that can aggressively pursue the development of the asset broadly because we've shown disease modifying activity now and in three indications RA, lupus, IgG4-related disease, it's clearly an agent that has good tolerability and we've got a subcu format. And I think that for us now, it's the best way to maximize the value in autoimmune disease, where clinical development is long and arduous and expensive, it's is to focus solely on partnerings, that really emerged over the last, really few weeks as we've narrowed down what our thinking is on how to proceed with both the trial and is our thinking about partnering has matured. And what kind of partnership would be structure wise beyond what I just said, I think there's a variety of opportunities, we would like some opportunity to participate - potentially participate commercially, I don't necessarily know if that's an absolute for this program, because as we shift to our oncology focus, the kind of deal structures that we've been able to achieve with regard to U.S. commercial rights to partial U.S. promotion rights, I think are attractive, I don't think - I think we've got more flexibility around this program, because again it's not feeling the same gravitational pull as the rest of our portfolio is in the oncology area.

Just one other question from me, a broader question. How should investors be thinking about the risk of cytokine release syndrome seen CD3 bispecific antibodies development both at Xencore and other companies.

Well, I think cytokine release syndrome is a consequence of the inherent activity of turning T-cells onto kill tumors. I think it's ultimately not separable, I think that it's a question of manageability and severity and incidence and we've seen this progression from the very first generation CD3 bispecific like blinatumomab where they are profoundly potent hundreds of times more potent than the kinds of molecules that are Fc structure based like ours or like some of our competitors. And I think that dropping in potency inherently built based on this Fc structure that - sorry that inherently occurs based on the flexibility that happens from attaching bind domain on an Fc structure. I think that's helpful and allowing now people to do short infusion administration, get a bunch of drug on board as opposed to having a dribble then solely with infusion pumps and so I think the field has progressed to give tools to make the whole situation a lot more manageable. And I think this is important is the maturing of how people manage CRS early on is happening. We've all learned a lot from the CAR-T therapeutic efforts and are now learning a lot from the bispecific. But I think it's not separable, I think it's a question of how much more manageable we make it with further refinements in design, things like adjusting the potencies of your molecule with other levers like affinity and further refinements of how we do dosing schedules, want to all the things planned, but it's not going to be separable. It's a question of who figured out how to make it the most manageable.

Our next question is from Christopher Marai from Nomura. Your line is now open.

This is Jackson Harvey on for Christopher Marai. Thank you for taking my question. For the SSTR CD3 bispecific antibody, what kind of toxicity are you expecting given expression of SSTR 2 on pancreatic islet cells perhaps there is some insight from your prior studies in monkeys that may have read through the humans?

Sure, so I guess the sort of question you asked is sort of a salient one for generally speaking going after solid tumor targets with a CD3 bispecific, or really with any kind of cytotoxic modality, where with solid tumors in particular it's very unusual, I don't know if I can think of an example, where your tumor target is really, really restricted to the tumor. I mean it's not a logic malignancies, it's a much simpler situation, where even if you have healthy tissue expression usually like in the case of the CD-20 antibody that healthy tissues expression is on a cell population that a patient can survive without. With regard to SSTR2, so that's an example yeah you do have healthy tissue expression of somatostatin receptor 2 in a variety of tissues like in islet cells. I think it's a question again of the balancing act of the potency against your tumor cell versus potency against your healthy tissues. And we've certainly seen and I think there's reports of it, if you hit SSTR2 you can induce - you can induce various effects like glucose intolerance if you hit too hard, you'll get all sorts of - any kind of tissue that expresses that you're going to expect to have damage to. And I think it's a question of tuning that effect, so that you mostly hit the tumor cells. But it's a general question that the whole field is looking at as we go into solid tumors new approaches using Fc containing bispecific such as going to higher valences of buying, and we can use avidity effects to steer your agent toward cells that have more higher density advantage and all these kinds of things are starting to be tried. So that gives us a feel for the kind of toxicities to look for, obviously.

And then I just have one follow-up on the CD-123 bispecific, were you able to look for PDL-1 up regulation in the patients or is it too early for that kind of data?

It's too early just yet,. It's a very interesting thing to look for, I agree

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

Thanks for taking my question and - might be a little, I'm after 2.5 years, but I recall a discussion around your Analyst Day about tuning CD3 binding domain, down tuning it to avoid CRS or other side effects. As I recall that 123 by CD3 that you have. I don't think the CD3 domain was different or down tuned down - how you want to term it, are there any other clinical candidates of reflection memory modified in any way on the CD3 domain. Are they all the same? Thanks.

So of the three clinical candidates, we have for CD3 - the CD3 category, the 14045, CD123, CD20 and SSTR2, they all have what I would call them moderately high sort of single-digit nanomolar affinity for CD3 so not - very high like many antibodies can be, so they all shared the same one. I will point out though that for our CD20, CD3 we went to - and I think that the Analyst Day that you're talking about, we went through a fairly detailed exercise of looking at both CD3. But more importantly, it turns out in the case that the CD20 molecule looking at CD20 affinities that are lower, see how that impacts cytokine release and half-life of the molecule and tolerability versus depletion of the target cell and we didn't exercise in our non-human primate preclinical models that showed that in the case of the CD20, CD3 bispecific tuning the CD20 side seemed to have the most, the best effect in balancing the reduction of cytokine release with maintaining activity against the target cell. So we're always looking at tuning for the first three programs, you're correct about the CD3 affinities we reported those. I think there - there's often more toward than that. And I would say the Amgen program AMG 424, the CD38 x CD3 they published very nice data about a year ago, showing that using our tool kit of differing affinities against CD3 and CD38 in that instance, trying a lot of different combinations of reduced affinity to thread the needle in a very challenging target CD38, which is expressed broadly off of tumor. So there is a definite point and you're right. Yeah, the first three had shared that I would moderately high affinity-single-digit nanomolar CD3. Definitely a lot of activity yield looking at those parameters.

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

Thanks very much, operator. We expect a very busy year pursuing and expanding our pipeline and feel that we have a platform, partners and balance sheet to really help facilitate that. With that, I would like to thank you all for joining today's call.

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