Good afternoon and welcome to the Xencor Third Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open the call up for your questions. Please be advised that this call is being recorded at the company's request. At this time, I would like to pass the call to Charles Liles, Associate Director and Head of Corporate Communications and Investor Relations at Xencor. Please proceed.

Thank you, operator, and good afternoon. Welcome to Xencor's third quarter 2019 financial results conference call. Earlier this afternoon, we issued a press release, which outlines the topics we plan to discuss today. The press release is available at www.xencor.com. Today, on our call Bassil Dahiyat, President and Chief Executive Officer will provide a business overview and review our pipeline and licensing partnerships; and John Kuch, Senior Vice President of Finance and Chief Financial Officer will review the financial results from the third quarter and first nine months of 2019, then we will open up the call 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, the company's partnering efforts, capital requirements, future product offerings, and research and development programs. These forward-looking statements are not historical facts, but rather are based on our current expectations and beliefs, and are based upon 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 our 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, and thanks everyone for joining us this afternoon. The core of Xencor's approach to creating antibody and cytokine therapeutics is our XmAb engineering platform. By making small changes to an antibody structure, specifically in its Fc domain, we can improve its natural functions and performance and create new mechanisms of therapeutic action. The plug and play nature of the suite of XmAb Fc domains we've created allows us to engineer nearly any antibody to have improved potency, longer half-life or bispecific structure. This flexibility and portability enable us to take multiple shots on goal simultaneously, and generate proof-of-concept data to guide, which programs will independently advance or partner or terminate. Now, in the past few years, we focused our R&D efforts on the expansion and use of our bispecific XmAb platform to create new drug candidates that bind two or more different targets simultaneously. Since 2016, we've initiated six Phase 1 clinical studies evaluating XmAb bispecific antibodies. Our plug and play approach to engineering enables the rapid design and simplified development of antibodies and other protein structures like cytokines. Bispecifics are very rapidly emerging area of therapeutic development, particularly on oncology and in order to stay at the forefront of innovation in this space, we use our engineered heterodimeric Fc domain as a robust scaffold to rapidly develop new candidates that we group into three different classes; T cell engager bispecifics, tumor microenvironment activator bispecifics and cytokines. So, first and most advanced class is the T cell engager class. These are tumor targeted bispecifics antibodies that contain both the tumor antigen binding domain and the cytotoxic T-cell binding domain specifically a CD3 binding domain. They activate T cells at the site of the tumor in order to potently kill malignant cells. XmAb14045 is our CD123 by CD3 bispecific antibody…

Thank you, Bassil. During the third quarter, Xencor's financial position benefited from milestones that were earned from several of our partnerships and collaborations. The company continues to operate from a strong financial position to allow us to continue to advance our pipeline of bispecific and cytokine candidates, as well as our early research programs. In this afternoon's press release, we reported cash, cash equivalents and marketable securities totaling $620.5 million as of September 30, 2019 compared to $530.5 million at December 31, 2018. The increase reflects upfront payments and milestones received in 2019 from Genentech, Astellas and Alexion offset by cash used to fund the operating activities in the first nine months of 2019. The total revenue for the third quarter ended September 30, 2019 was $21.8 million, which was primarily milestone revenue recognized from our Novartis, Alexion and Amgen collaborations. Total revenue for the nine months ended September 30, 2019 was $153.2 million and includes revenue earned from our Genentech and Astellas collaborations and the milestone revenue recognized from Novartis, Alexion and Amgen. Total revenue for the three months and nine months ended September 30, 2018 was $29 million, and includes collaboration revenue earned from our Novartis and milestone revenue earned from Alexion. Research and development expenses for the third quarter of 2019 were $29.8 million, compared to $21 million for the same period in 2018. Total R&D expenses for the nine months ended September 30, 2019 were $91.3 million, compared to $70.4 million for the same period in 2018. Increased R&D spending for the three months and nine months ended September 30, 2019 over the same periods in 2018 reflects increased stock-based compensation expense and additional spending on the company's CD3 bispecific antibody and cytokine development candidates and technologies. General and administrative expenses for the third quarter 2019…

Thank you. [Operator Instructions] Our first question comes from Alethia Young of Cantor Fitzgerald. Your line is open.

Hey, guys. Thanks for taking my question and congrats on all the progress. Maybe a couple for me. One, I was just curious on what kind of other studies you might be done with your CD123, if you've talked about any particular indication. Can you remind us at ASH like how much data we should expect for the CD3 program and kind of what that trajectory looks like over the rest of 2020? And then, the last question is just kind of high level. It seems like there's a lot of kind of different readouts programs in 2020, they're expected here. And I guess where are you kind of thinking about where there's the most confidence or potential differentiation in program? Thanks.

All right, so I'll try to start that at the top. Other studies for 14045, we are planning on focusing on continuing to focus on AML. And I think, there is, a number of slices of that treatment algorithm that have significant unmet need. I think those are -- and of course relapsed and refractory disease where we did our dose escalation. And there is, various niches of that. But as well there's a place in consolidation, where I think a good monoclonal antibody could really play a role that's post induction to try to increase the number of people that have a deep CR to get them to either ultimately transplant or just maintain it. So I think those are important niches. And I think we're going to be able to guide more on that, as we and our partner Novartis finalized plans. And hopefully be able to announce those in the first half of next year. Now for the data we plan on presenting at ASH for XmAb13676 our CD20/CD3 bispecific. That's going to be presenting our initial dose escalation data. So we did dose escalation data. And I will say we are continuing to escalate dose in that study. But that said, we do expect to be able to show data that looks at efficacy, safety, and tolerability of the agent, as we've progressed in our dose escalation. And we should be able to triangulate how that looks and how we hope -- where we hope to get with further dose escalation. So we're excited by that data, though it's initial dose escalation it -- again it should be -- it should provide a look at the activity of the molecule as well. And on your last question, you've seen, there is, various readouts in 2020. I would say that, all of the programs are just getting to the cusp of really engaging in the most important studies which we deliver true proof of concept. And so, our whole strategy is around advancing multiple programs, whether it's our CD123 or CD20 CD3s, our first solid tumor programs or 18087 which is our SSTR2 by CD3, or our first checkpoint bispecific which is our XmAb20717. All of those we really need to advance them into the right kinds of studies. So for the latter two that would be -- we're still relatively early in dose escalation for 18087. That would be beyond that, expansion cohorts for our 20717. We've already built in expansion cohorts in multiple tumor types after dose escalation and we'll of course announce after we get through dose escalation for our CD20 what the next steps are. So I think it's really the next step studies that give us that read. And in the meantime, we'll continue driving them forward and updating on data as we progress.

Great, thank you.

Thank you. Our next question comes from Michael Schmidt with Guggenheim Securities. Your line is open.

Great, this is Etzer filling in for Michael. Had a couple of quick questions really on -- first the 18037 here. To what extent do you see, as a competitive benchmark, given the radiopharmaceutical that, have the additional logistical requirements? And just to try to get a sense of what you think the relative importance of the different clinical endpoints are for 18087? And given characteristics of the disease if high, initial objective response translates into prolonged survival or maybe sort of the reverse could be indicative of a shorter PFS, wanted to kind of get some comments from you there? Thanks.

Right. So, I guess, yeah, Lutathera is a good benchmark. It's a very dense treatment landscape, because people have this disease – the neuroendocrine tumor type for a long time, a progressive multiple therapies, they're all on a somatostatin analogue initially, and often forever. And then they progress through a variety of different therapies, whether it's different kinds of chemo and now Lutathera, the radio conjugate. I would say that, it's a good benchmark in that, it provides us some clarity on what would be needed to be seen in this disease, which is consistent with what was – what was uses endpoints in the past, you really need duration, it's PFS in its overall survival duration that are going to drive it not objective response rate. We saw of Lutathera, an agent that move the needle on PFS and OS, a very modest objective response rate, I think in the low-teens percent. So I think what that does for earlier phase development to get a read on your asset and how it's doing and that's -- is that you need to avail yourself of the various tools we have in imaging, where imaging radioisotope labeled Somatostatin analogues are giving people a read on how a tumor might be responding, even if the objective response criteria of resist are too murky in this tumor type. So I think, I hope that answers your question. I think ultimately, I don't really want to speculate on the differences that might emerge, if you look at different response rates and how that could play into differening durations from differening mechanisms of cytotoxic action. I don't think anybody knows enough to talk about that yet.

Thanks for taking the question.

Thank you. Our next question comes from Shanshan Xu of Berenberg -- excuse me, Berenberg Capital Market. Your line is open.

Hi, good afternoon. So for your IL-15 alpha bispecific, theoretically, one of the reasons that IL-15, the mechanism action might be superior to IL-2 is that it doesn't really activate T-reg. So could you please confirm that from your preclinical data, it showed the minimal T-reg activation? And for your combination trials, what kind of mechanism action do you think makes the most sense to be combined with your IL-15 – IL-15 alpha bispecific? And I have a follow-up.

Sure. So with IL-15, just to be clear, IL-15 does activate T-regs and our engineered IL-15 has some T-reg activating activity as well. What it doesn't do, what IL-15 doesn't do is bind the receptor CD25, which is also known as IL-2 receptor alpha that receptor is what makes IL-2 biased to more potently activate T-regs versus T-effector cell. So IL-2 is naturally, a hyper potent T-reg activator that also activates T-effector cells at higher doses. IL-15 has essentially identical activation of T-regs and T-effector cells, because of course, both of those cell types have the IL-2 receptors beta and gamma and IL-2 and IL-15 signal through these beta gamma chains essentially at equivalent presence on both T-regs and T-effectors. So IL-15 naturally starts out without a T-reg bias, which you want to avoid. You don't have to go through a lot of effort to avoid that. Now, our preclinical data shows very rapid and sustained expansions of T-effector cells as well as natural killer cells in non-human primates. And so I think that points to the kind of combination agents, you could use being very varied. But I think, we don't want to forget natural killer cell driven agents such as your traditional anti-tumor antibodies as well as the T-cell driven agents like CD3 bispecifics like checkpoint and agonist therapeutics as well. And then there is -- you can always keep going on and on in a number of -- if you see good activity and you are convinced your drug has a good therapeutic index, you can try out all sorts of different things like vaccines and new epitope therapies, et cetera. But I think, first, we need to establish it in the basics of the checkpoint space and the NK cell driven therapies.

Great. And for your 2+1 [ph] bispecific antibody. So I guess, valency is another parameter beyond binding affinity to tune down the CRS, do you believe 2+1 is the most optimized modality for CD3 bispecifics in solid tumors?

I wouldn't say that it's the most optimized modality for solid tumors that's going to be utterly target dependent. And I think, it's going to depend on the expression level of the target, its differening expression levels in non-target healthy tissue where solid tumor-associated antigens are very often expressed on non-target tissue, heme malignancy is much more forgiving there. I don't know if valency per se drops down your CRS, it's really the potency of the molecule driven by its affinity of binding CD3 as well as antigen that modulates the CRS. This is in our hands, as well as other companies. Valency gives you a selectivity for higher expressing -- higher expression levels on particular cell types, which can often let you play with affinity and dial things down and be more selective and by hitting fewer cells you can manifest less CRS, so all those factors kind of interplay. I don't think that it's necessarily optimal for solid tumor. I do think however that many solid tumor antigen share this feature of being expressed at differing densities on healthy tissue, but tend to be bright on tumor tissue. That's why they are picked as tumor-associated antigens and that feature plays very well to the 2+1 format, where you can use a lower affinity on each individual arm that binds the tumor antigen, but the two of them together zip up when you have high expression. So optimal that's going way too far, but highly useful for many solid tumor antigens. I think absolutely and it's going to -- you're going to see this kind of format and other higher valency formats used more and more.

Perfect. Thank you for your time.

Thank you. Our next question comes from Mara Goldstein of Mizuho. Your line is open.

Thanks, so much for taking my question. Just a follow-up on XmAb13676. Are you able to share with us sort of what we should anticipate in terms of number of patients that you might be reporting data on? And I was hoping maybe you can provide some color on XmAb717, just regarding what we should think about or you would think about as a benchmark for success in advancement given how the market for checkpoint and combination therapies is evolving? And then I just had a financial question in that, I'm just curious about the comment about decreased spending on personnel expenses and what that relates to?

Okay. You want to take that one first, John?

Yeah, there was a change in senior management over the in 2018 and 2019 that resulted in the change in compensation expense for the period. It was just one senior management person transitioned.

Yeah. He retired and so that resulted in recognition of lot of stock-based compensation.

Okay.

Sorry, there were questions for me. Sorry, Mara. So we're certainly not going to able to guide on the number of patients specifically in 13676 studies until at the abstract cut-off, when the abstract gets released and are ultimately when we have our materials presented at the conference itself, well of course tell you specifically there. I will say that, we are guiding to be able to triangulate on as we progress through dose escalation. We're not done, but as we progress to looking at some safety and activity and how they interplay with each other and given that CD3 bispecific are generally dosed initially at very low doses and its first in human study because of FDA safety requirements, that's going to involve a number of patients because you're going to have to have a -- had a number of cohorts. So hopefully that helps because we are getting up to cohorts that, that we are going to able to look at activity and safety, right. You're actually starting to see things move, but the T-cells are starting to do stuff. For XmAb20717, that's our PD-1 by CTLA-4 bispecific that we engineered so that it favors the repression of cells that express both of those checkpoints rather than just one. And therefore, we hope focus is more on the more activated T-cells that were in the tumor. And what we hope to show there, because you're right, it's a very crowded space. And I think from our dose escalation studies, we want to show; one, that we can have a blockade of CTLA-4 and in combination with PD-1 and have the right biomarkers move, so you want to have peripheral T-cells move, certainly if we're able in the initial study with relatively small numbers to see tumor T-cells, we would like to see that if we were able to access the biopsy samples enough. And you'll be able to couple that kind of activation of the T-cells with the safety profile that suggests our selective tuning could offer a broader way of using a PD-1 CTLA-4 combination blockade than some of the safety challenges that have occurred with the combination blockade in other studies or with other agents, right, when you're using two different antibodies. And then of course looking at initial anti-tumor activity is going to be as well something though early on and in particular, given that you're going to be treating patients that have almost certainly all experienced anti-PD-1 therapy. You're going to have to compare yourself to those kinds of prior studies in your mind, rather than looking at what happens against naive patients. But I think just from the biomarkers and safety and some initial activity data, we should be able to really get a feel for where the molecules going to go.

Okay. All right, thank you. I appreciate it.

Thank you. [Operator Instructions] Our next question comes from Jonathan Chang of SVB Leerink. Your line is open.

Hey guys, this is David Ruch on for Jonathan. Thanks for taking my questions and congratulations on the progress. Wanted to start with another quick follow-up on 13676, could you just give some context to how you view this program is differentiated from some of the other CD3 and CD20 bispecifics in the space? Is there anything you observed so far that might suggest a unique combination approach from what Regeneron and Roche have been guiding towards? And then second, any additional -- I know, we've talked about expectations for the conference, but any additional color on the abstract in terms of which cohorts might be presented there given the timing of the abstract submission? Thank you.

I really can't provide any additional color on the abstract front, we talked about today. Let's go back to your other questions, we engineered this molecule and we used non-human primate studies to study cytokine release syndrome. We engineered it relative to other candidates we had in our lead series to have lower cytokine release and we did that by fiddling with the affinity in particular, in this case on the CD20 arm, lower cytokine release that would allow us to dose larger absolute amounts of the molecule and thereby get longer, longer duration of exposure and longer and deeper depletion of B-cells without the profound, without as profound as cytokine release syndrome as the other members of lead series. So, that was how it was engineered. How that differentiates? I can't say exactly because the individual molecules have not been compared head to head. I'd say in general, we're going after having a very potent cytotoxic modality CD3 in a manageable package, but I think the differences in the clinical data are going to have to be used to try to assess that in more detail. But our goal was something that could be a tolerable way to have highly potent CD3 killing and hopefully overcome the wonderful 20 year success story of Rituxan with NK cell mediated killing. As the unique combinations, I don't know if I can offer our specific combination strategy yet, but I think there are a number of approaches that I think merit pursued once we can establish a therapeutic window and those could be anywhere from combination with other antibodies that maybe target different B-cell targets to all the way to chemo, right. So there is a whole range of things, we'll be able to guide on that soon, but not yet.

Great. Thank you for the color. That's helpful. Just another one, if you could comment on the status of the partnership discussions for IgG4 and what are you looking for in a potential partner in terms of developing this program moving forward and potentially be on the IgG4 indication?

Yes. So we are still in discussions around partnering and we are still looking for a partner that can advance the molecule across different indications, perhaps not in immediately at the start of the collaboration. But over time because autoimmune molecules that have these kind of broad immune modulating functions need to be developed broadly in order to have -- have their both their risk reduced and their maximum potential reach. So, not just in IgG4-related disease, but there is other autoimmune diseases. Of course, we've shown data in lupus. There's other diseases where B-cell inhibition is shown to be very active. So ongoing discussions and a key driver is how -- how broadly a partner can pursue the assets. And you had another question, I'm sorry, you had a fourth one?

No that was -- that was it. Thank you.

I'm sorry. Okay, thanks.

Thank you. Appreciate it.

Thank you. Our next question comes from Arlinda Lee of Canaccord Genuity. Your line is open.

Hi guys, thanks for taking my questions. I had a couple for John on the collaborations. With Alexion, are there anymore regulatory milestones remaining? And then on MorphoSys, can you -- can you talk maybe a little bit about what development milestones or how the development milestones are structured. And then lastly on 13,676, can you guys talk about if you -- you mentioned there was a dose escalation and -- do you have any dose expansion data that might be forthcoming. And how early, I'm wondering, with the patients that were treated with 13676 and given your CRS signal in 14,045, how much of those measures were put into place for the 13,676 patients? Thanks.

Okay. I will go first and address the financial questions. On Alexion, we've received all the development milestones. We still have $30 million in sales milestones. They were eligible for. With respect to MorphoSys, there are regulatory milestones on submission and approval. These are in the tens of millions of dollars. So, those are the ones in the near term.

Thank you.

Bassil?

And on the 13676, we're just going to be presenting our ongoing dose escalation data at ASH. We expect to have expansion cohorts start after we've completed dose escalation, which we're still in the midst of. So, we'll guide on that later on, probably next year. And then, as for any kind of crossover from the 14045 protocol for management of CRS in 13676, I'll say that just because a clinical protocol is an immensely detailed thing. You don't just port exactly things over. We certainly took learnings from that and how we practice the clinical trial and how we've managed our ongoing amendments to the 13676 protocol. So, there are learnings crossing over, but I wouldn't want to make -- until I get some kind of one-to-one mapping.

Okay. Thank you.

Thank you. Next question comes from Dane Leone of RJA. Your line is open.

Sweet. How is it going? Thanks for taking the questions. So just kind of a high-level question here. You guys have a lot of stuff on the bispecific pipeline merging into 2020. Given you guys are a protein engineering company, I would still kind of expect to see more stuff percolating in the deeper discovery pipeline. Do you just have something philosophically about how you're thinking between bispecifics, and then more forward engineering of monoclonal antibodies at this point?

When you say, other engineering of monoclonal antibodies, you mean mono specific antibody engineering?

Right, right. In terms of the pipeline. As you guys -- as you sit down and think about, where you want to focus your resources?

Yeah. I mean, we kind of think about them essentially equal in our minds. As we look at new programs, we want to go after and whether it's new biology that's emerging that we want to sort of -- see if we can exploit or whether it's initial data that's emerged from other parties with other molecules, where we say, while we can do better than that with X, Y or Z engineering. And where we've come to for the most part in the last few years has been all these new tricks and tools we have with our bispecifics has led us in that direction. It's not really kind of a philosophical sort of move just towards bispecifics. It's come because of all the new things you can do with the science that we're just learning about. So we are open-minded about that. I will say that our next set of molecules we're going to want to advance in the clinic, because you're right, we have a very broad and active discovery portfolio. The next of them will very likely be bispecifics and cytokines. And we're looking at both, figuring out, making sure that we're using the right valency format and the right affinities for our CD3 bispecifics. For example, and we hope to have more of those coming forward in the near future, as well as continuing to look at how cytokines behave and how you can tune that behavior to be more therapeutic like as opposed to -- that sort of massive initial spike of activity most cytokines give followed by a fade out. So, it's not a philosophy about going to one modality or other. It's just where can we do the best most innovative science and it's just kind of leading us to the bispecific right now.

Okay, great. And then just one follow-up, I guess that might be a two-parter. In terms of setting the table, you've talked a bit about 13676 that's going to be at ASH. From your perspective, clinical scientists' perspective, what do you think The Street should be kind of looking for in terms of takeaways, like where would you set the table in terms of limits of expectations of what we can understand from the dose escalation cohort wherever that's kind of landed at current levels? And what insights, do you think people could be reasonably comparing to some of the other efforts? And then the second part of that which I guess is a separate question, is it reasonable to not expect clinical data from 24306 in 2020, but translational data?

Okay, got you. And so going to the first 13676, given that we're progressing in dose escalation, we're not where we expect to get and where we believe we're going to get, relatively shortly in terms of how high the doses are, we're still moving through the cohorts. We think that we should look at this as an interim look at -- when we're looking at, for example, the number of responses we might or might not have when we're looking at the nature of the 100% profile we might about have. We should think of this as a work in progress that we have to keep our minds open about what might happen as we advance further in doses and as we have patients on study for longer. So, I think it's that sort of snapshot as you're getting to where you're going to go rather than this is what we imagine is going to be the final story for our dose escalation. So, that's the magnitude dose and the biology that we see. For 24306 data in 2020, that is really going to be something Genentech and we have to discuss. And I don't understand fully, how they think about data disclosure for early phase trials, but I would imagine that they would be not interested in releasing biomarker data terribly early on, it would not suit their -- their needs, and we have to work in conjunction with them. So, I would not guide towards 24306 data, the IL-15 compounds in 2020 without knowing anything else beyond that I would as a baseline not guide to that.

Great. Thank you so much.

Thank you.

Thank you. I'm showing no further question at this time. I'd like to turn the conference back over to Bassil Dahiyat for any closing remarks.

Thanks very much, operator and thank you all for joining us today. We look forward to updating you again as we continue our progress. Good afternoon.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.