Monrovia Aug 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Xencor Inc earnings conference call or presentation Tuesday, August 4, 2020 at 8:30:00pm GMT

Xencor, Inc. - Senior VP & Chief Medical Officer

Xencor, Inc. - Co-Founder, CEO, President & Director

Xencor, Inc. - Associate Director and Head of Corporate Communications & IR

Xencor, Inc. - Senior VP & CFO

Xencor, Inc. - Senior VP of Research & Chief Scientific Officer

SVB Leerink LLC, Research Division - MD of Emerging Oncology & Senior Research Analyst

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

Good afternoon, ladies and gentlemen, and thank you for standing by, and welcome to the Second Quarter 2020 Xencor Conference Call. (Operator Instructions)

Now I would like to turn the call to your speaker today, Charles Liles, Head of Investor Relations.

Charles Liles, Xencor, Inc. - Associate Director and Head of Corporate Communications & IR [2]

Thank you, and good afternoon.

Earlier today, we issued a press release which outlines the topics we plan to discuss today. The press release is available at http://www.xencor.com. Today on our call, Bassil Dahiyat, President and Chief Executive Officer, will provide updates regarding COVID-19 and our partnerships; Allen Yang, Chief Medical Officer, will review recently presented clinical data; John Desjarlais, Chief Scientific Officer, will provide updates from preclinical development; and John Kuch, Chief Financial Officer, will review financial results. And 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, research and development programs and the impacts of the COVID-19 pandemic on these topics. These forward-looking statements are not historical facts, but rather are based on our current expectations and beliefs and are based on information currently available to us. The outcome 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 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.

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Bassil I. Dahiyat, Xencor, Inc. - Co-Founder, CEO, President & Director [3]

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Thanks, Charles, and good afternoon, everyone.

Xencor's approach to creating antibody and cytokine therapeutics is centered around our XmAb protein engineering platform. By making small changes to an antibody's 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 our suite of XmAb Fc domains allows us to engineer nearly any antibody to have improved activity, longer half-life or bispecific structure. This flexibility and portability enables us to take multiple shots on goal simultaneously in the clinic and generate proof-of-concept data to guide which programs will independently advance, which will partner and which will terminate.

We're focusing our R&D on the expansion and use of our XmAb bispecific platform to create antibodies that bind 2 or more different targets simultaneously and also to engineer cytokines with structures optimized for particular therapeutic use. Now we're currently running 6 Phase I clinical studies evaluating such XmAb bispecific antibodies.

Now before I update on some of our partnerships, we want to provide a brief update on the impact of the COVID-19 pandemic on our operation. The pandemic did not significantly disrupt patient enrollment to Xencor's 6 ongoing clinical trials during the second quarter. However, our study initiations for vibecotamab, as we've previously disclosed, have been delayed as many clinical sites have delayed the trial start-up process.

We had modestly slowed enrollment in the CD3 bispecific antibody studies attributable to COVID-19 and no effect on our studies for the 3 tumor microenvironment activator molecules. Now as is still the case today as it was 3 months ago, unfortunately, the situation is very fluid and we'll continue to update it as soon as appropriate.

Now within the company, we've implemented a number of measures to protect the health and safety of our employees and of our community. These include some laboratory operation adjustments, symptom self-assessment guidelines and weekly SARS-CoV-2 virus testing at our facility. We are maintaining a requirement for all non-laboratory employees to work remotely.

Okay. Now on to partnerships. A core part of our business is to complement our internal portfolio of -- internal development portfolio with partnering. These partnerships generate payments from the licensing of XmAb technologies, the clinical advancing of XmAb candidates as well as royalties from sales of approved products. There were no COVID-19 impacts here during the second quarter as we continue to earn revenues from partners like Alexion and Gilead, but we will continue to monitor potential impacts, of course.

Partnerships like these really highlight the plug-and-play nature of the suite of XmAb Fc domains we've created. With the small changes to the Fc structure that we've engineered, we can for nearly any antibody improve the activity, half-life or readily create bispecific structures. We have 11 ongoing partnerships for XmAb technology, which have resulted now in 2 marketed products, 7 clinical stage candidates and more in the earlier stages of development. The most significant recent development among our partners occurred just this past Friday. With the early FDA approval of MorphoSys' tafasitamab, which they licensed from us in 2010, when it was known as XmAb 5574. It's an antibody that we created and put our XmAb cytotoxic Fc domain onto. We also initiated its clinical development, running the Phase I trial. It's trade name is now Monjuvi. It's a CD19-directed cytolytic antibody indicated in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffused large B-cell lymphoma, not otherwise specified, including DLBCL arising from low-grade lymphoma and who are not eligible for autologous stem cell transplant. This approval is the first for second-line treatment of DLBCL from the FDA.

Now we couldn't be happier here at Xencor as this approval expands the options for patients with this difficult-to-treat blood cancer. Monjuvi will be co-commercialized in the U.S. by MorphoSys and Incyte, and the European marketing authorization application for tafasitamab is currently under review by the EMA.

Now from time to time, we enter into research collaborations that include the creation of novel XmAb bispecific antibodies to be advanced by partners. Amgen's a prime example. AMG 509 is Amgen's STEAP1 x CD3 XmAb 2+1 bispecific antibody. Now that was developed under our collaboration with them. They're developing AMG 509 for patients with prostate cancer and Ewing sarcoma, and a Phase I study is currently recruiting for patients with advanced prostate cancer.

Now the first bispecific antibody that Amgen developed under this collaboration is AMG 424, a CD38 x CD3 bispecific antibody that they evaluated in a Phase I study in patients with multiple myeloma. Amgen terminated the program in the second quarter and indicated the program was stopped for adverse events that were likely CD38 target-related. Under the terms of the agreement, the rights to the CD38 program, including AMG 424, revert to Xencor and the company is currently assessing the asset's potential for further development, including treating different patient populations and applying mitigating treatments for the adverse events.

Now the plug-and-play nature of our XmAb technologies enables additional partners like Alexion and Vir to advance their programs, needing very little resources directly from us. Our strategy is to selectively license access to our XmAb technologies for creating and developing antibodies with improved properties. Alexion's ULTOMIRIS, a C5 complement inhibitor uses Xtend technology for longer half-life. The program continues to receive marketing authorizations worldwide, the last of which was the European approval for adult and children with atypical hemolytic uremic syndrome, this June. In addition to evaluating ULTOMIRIS in a broad late stage development program, Alexion is currently conducting a randomized controlled Phase III study in hospitalized patients with advanced COVID-19.

Our partnership with Vir Biotech shows the broad applicability of our technology in areas such as viral infectious disease. Vir has non-exclusive access to our Xtend Fc technology to extend the half-life of VIR-7831 and VIR-7832, both novel antibodies that they're investigating as potential treatments for patients with COVID-19. They plan to submit an IND for VIR-7831 and commence a Phase II/III clinical trial program in August, and they plan to initiate a study evaluating VIR-7832 later this year.

I'll now turn it over to John Desjarlais, who will provide an update on some of our preclinical programs and our new discovery and development collaboration with Atreca. John?

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John R. Desjarlais, Xencor, Inc. - Senior VP of Research & Chief Scientific Officer [4]

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Yes. Thanks, Bassil.

Yes, and Xencor's XmAb bispecific Fc domains were specifically created to enable the rapid design and simplified development of bispecific antibodies to combine 2 or more different targets. First-in-class that we have developed were CD3 bispecific antibodies that contain 1 anti-tumor binding domain and 1 CD3 binding domain. Engagement of CD3 on T cells promotes recruitment and activation of T cells against the tumor cells. The activator receptor on T cells doesn't have to be limited to CD3, though. For example, we are also investigating bispecific antibodies that target CD28, a key co-stimulatory receptor on T cells. Importantly, we designed these CD28 engagers to activate only when bound to tumor cells, with the goal of avoiding the superagonism that led to the disastrous clinical experience of other companies targeting CD28 nearly 15 years ago.

More near term, however, we have developed a mixed valency format, our XmAb 2+1 bispecific antibody with 2 domains that bind a tumor target and a single domain that binds CD3. These antibodies may preferentially kill tumor cells with high target expression and may potentially avoid low-expressing normal cells, taking advantage of a property called avidity. We believe these properties will be particularly important for many solid tumor targets.

We presented preclinical data from 3 internally developed 2+1 bispecifics at the second session of the AACR meeting in late June. Preclinical models show strong selective tumor killing from 2+1 programs that target PSMA mesothelin and ENPP3, the last of which is an underexplored tumor antigen overexpressed on renal cell carcinomas. These targets, although they tend to be strongly expressed on prostate cancer, ovarian cancer and kidney cancer, respectively, can also have some normal tissue expression, suggesting there are good applications for this new format.

The ENPP3 program, XmAb30819, is the most advanced of these. Preclinical data indicate that XmAb30819 binds preferentially to tumor cells compared to normal cells and effectively recruits T cells to kill tumor cells selectively. It demonstrates strong reversal tumor growth in tumor xenograft models, and it was well tolerated with expected pharmacodynamics in an antibody-like half-life in nonhuman primates. We are planning to file an IND for XmAb30819 in 2021.

Finally, last month, we formalized a collaboration with Atreca to research, develop and commercialize CD3 engaging bispecific antibodies to novel targets. Atreca's unique discovery platform complements our protein engineering capabilities by providing novel tumor-selective antibodies and targets to couple with our CD3 bispecific platform. Up to 2 joint programs will be mutually selected for further development and commercialization with each partner sharing costs and profits equally. Each company will lead one of the joint programs. The agreement also allows for each partner to pursue up to 2 programs independently. This collaboration offers both Xencor and Atreca with several opportunities to advance novel first-in-class CD3 bispecific antibodies for the potential treatment of patients with cancer.

With that, Allen Yang will review our clinical portfolio. Allen?

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Allen S. Yang, Xencor, Inc. - Senior VP & Chief Medical Officer [5]

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Thanks, John.

In May, we provided initial dose escalation data from our ongoing Phase I study evaluating XmAb20717 in patients with advanced solid tumors. XmAb20717 is a dual PD-1, CTLA-4 checkpoint-inhibiting bispecific antibody. We have tuned the antibodies affinities for PD-1 and CTLA-4 for selective engagement of T cells expressing both targets, which distinguishes it from combination therapy and most bispecific checkpoint inhibitors.

T cells that have multiple checkpoint expression are typically found more in the tumor microenvironment than in the periphery. All of our tumor microenvironment activators, as we call them, seek to more effectively reactivate these tumor-reactive T cells than existing therapies. This design is meant to drive improved tolerability at higher doses compared to the dosing of separate anti-CTLA-4 and anti PD-1 antibodies, for example, which has delivered better responses at the cost of tolerability.

In our first 6 dose escalation cohorts, we observed that XmAb20717 to be generally well tolerated in heavily pretreated patients. Consistent with our hypothesis of inhibiting both PD-1 and CTLA-4, we observed robust dose-dependent increases in biomarkers of T cell activation and pharmacodynamic activity consistent with blockade of both receptors. It was also encouraging to observe cases of clinical activity as we moved into the higher doses cohorts, which we detailed in the press release in May. Based on these data, we opened expansion cohorts in several tumor types at 10 milligrams per kilogram as well as additional dose escalation cohorts starting at 15 milligrams per kilogram as we did not reach the maximum tolerated dose. Expansion cohorts for patients with melanoma and advanced non-small cell lung cancer are fully enrolled. We look forward to sharing continued progress from the 20717 program as well as our other tumor microenvironment targeting bispecific antibody programs in Phase I studies.

XmAb2314 targets PD-1 and the co-stimulatory receptor, ICOS, and XmAb22841, which targets the checkpoint CTLA-4 and LAG-3, the latter which has begun dosing patients in combination with pembrolizumab.

Moving on to our clinical stage T cell engagers. These are tumor-targeted bispecific antibodies that contain both the tumor antigen binding domain and the cytotoxic T cell binding domain, specifically CD3 binding domain. These CD3 bispecifics activate T cells at the site of the tumor in order to potentially kill malignant cells. We continue to dose patients in our Phase I studies of vibecotamab, which targets CD123 and acute myeloid leukemia and plamotamab which targets CD20 in B-cell malignancies. And as we have previously disclosed, we plan to initiate additional clinical programs, subject to impacts from the COVID-19 pandemic, likely next year.

We also continue to dose patients in the Phase I study of tidutamab, which targets the somatostatin receptor 2, and we expect that we will present initial data from these ongoing -- this ongoing study in patients with neuroendocrine tumors in the second half of this year.

Finally, we're developing a suite of cytokines, which are immune signaling protein that are built on the XmAb bispecific Fc domain and incorporate the Xtend technology. Using our Fc domain and tuning the potencies enabled cytokines with improved drug like properties, such as slower receptor mediated clearance and longer half-life and potentially superior tolerability. Our first cytokine program and lead in our collaboration with Genentech is XmAb24306, which they call RG6323. It's an IL-15/IL-15 receptor alpha complex fused with our bispecific Fc domain. It targets the expansion and activation of T cells and natural killer cells.

Genentech is currently enrolling patients in a Phase I study evaluating XmAb24306 and quickly moving in combination with atezolizumab their anti-PD-L1 antibody. We plan to explore a number of our own combination studies pending completion of the initial dose escalation study. We also look forward to keeping you informed about all our clinical programs as they progress.

Now I'll hand the call over to John Kuch who will review the second quarter and first 6 months financial results. John?

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John J. Kuch, Xencor, Inc. - Senior VP & CFO [6]

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Thank you, Allen.

Xencor continues to maintain its strong financial position, which enables us to support our portfolio of clinical research stage bispecific antibody and cytokine drug programs. Our diversified portfolio of partnerships and collaborations continue to provide us with upfront payments, milestones and royalties, important sources of nondiluted capital. With the FDA approval of MorphoSys Monjuvi last Friday, we will receive a $25 million milestone payment which we will recognize as revenue in the third quarter. As a reminder, we are also eligible to receive royalties on worldwide net sales in the high single to low double-digit percent range and additional development, regulatory and sales milestone payments.

At June 30, 2020, our cash, cash equivalents, marketable and equity securities totaled $587.4 million compared to $601.3 million at December 31, 2019. The decrease reflects cash used to fund operating activities in the first 6 months of 2020, offset by upfront payments, milestone payments and royalties from our partnership and licensing arrangements.

For the second quarter of 2020, revenues were $13.1 million compared to $19.5 million for the same period in 2019. These revenues include royalty revenue from Alexion and licensing revenue from Gilead compared to the same period in 2019

where revenues primarily reflect research collaboration revenue from Genentech and Astellas and milestone revenue from Alexion.

For the first 6 months of 2020, revenues were $45.5 million compared to $131.4 million for the same period in 2019. Our revenues in 2020 include royalty revenue from Alexion, milestone revenue from MorphoSys and licensing revenue from our Gilead and Aimmune collaborations compared to licensing and collaboration revenue earned from Genentech and Astellas in 2019.

Research and development expenditures for the second quarter of 2020 were $43.5 million compared to $33.3 million for the same period in 2019. After the first 6 months in 2020, they were $77.4 million compared to $61.5 million for the same period in 2019. The increases in R&D is primarily due to increased spending on our plamotamab and XmAb20717 clinical programs as well as our preclinical IL-2 cytokine program, XmAb27564 and our preclinical ENPP3 x CD3 2+1 bispecific antibody program, XmAb30819, both of which we have advanced into IND-enabling activities. We note that there was lower spending in 2020 on our XmAb24306 and obexelimab programs.

General and administrative expenses for the second quarter of 2020 were $7.2 million compared to $5.8 million in the same period in 2019. For the first 6 months in 2020, G&A expenses were $14.4 million compared $11.3 million for the same period in 2019. Additional spending here is primarily due to increased staffing and spending on professional fees.

The net loss for the second quarter of 2020 was $35 million or $0.61 on a fully diluted per share basis compared to a net loss of $16 million or $0.28 on a fully diluted per share basis for the same period in 2019. The higher net loss reported in 2020 is primarily due to lower partnership and collaboration revenue and higher R&D expenses in 2020.

For the first 6 months in 2020, net loss was $43.1 million or $0.76 on a fully diluted per share basis compared to net income of $64 million or $1.10 on a fully diluted per share basis for the same period in 2019.

Our net loss for the first 6 months of 2020 compared to the net income reported for same period in 2019 is primarily due to revenue recognition from our Genentech collaboration 2019.

Noncash stock-based compensation expense for the first 6 months of 2020 was $14.7 million compared to $15.2 million for the same period in 2019. Total shares outstanding were 57.2 million as of June 30, 2020, compared to 56.5 million as of June 30, 2019.

Based on current operating plans, Xencor expects to have cash to fund research and development programs and operations into 2024. Xencor expects to end 2020 with between $525 million and $575 million in cash, cash equivalents, marketable securities and equity securities.

With that, we'd now like to open up the call for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question is from Ted Tenthoff with Piper Sandler.

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Edward Andrew Tenthoff, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2]

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So congratulations on the tafasitamab approval. I'm wondering -- give us a sense of what the royalties are and whether there are other future milestones beyond the approval milestone for other indications and things like that.

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Bassil I. Dahiyat, Xencor, Inc. - Co-Founder, CEO, President & Director [3]

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Sure. Thanks. And I hope you're staying safe, Ted, out with that tropical storm in New York along with all the other new Yorkers.

So the royalties are high single to low double digit, and they're tiered. That's the most detail we're allowed to share at this point. They're worldwide royalty, so you can see they're worldwide sales, regardless of whether the company selling is Incyte or MorphoSys and, of course, Incyte is ex U.S. commercial rights. There are significant milestones for both developments in other indications within oncology as well as non oncology, though there's no development going on for that at the moment that we're aware of. So there's other oncology indication, regulatory -- development regulatory milestones and there are sales milestones.

John, do you want to give a little bit of granularity on the magnitude of those?

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John J. Kuch, Xencor, Inc. - Senior VP & CFO [4]

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Yes. The sales milestones are $50 million, and the other development, regulatory are anywhere in the $50 million, $75 million range.

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Bassil I. Dahiyat, Xencor, Inc. - Co-Founder, CEO, President & Director [5]

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Yes, depending on which ones we...

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John J. Kuch, Xencor, Inc. - Senior VP & CFO [6]

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