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Summary

  • As of closing April 2, Xencor is trading nearly 30% below the mean target of $16.30 and 20% below its 52wk high of $13.90 in mid-march before the recent disruption.
  • Their bispecific antibody (bAb) leads are very promising, uniquely allowing fine tuning of pharmacokinetic parameters against a given target. bAb are forecast to account for $4.4bn in sales by 2023.
  • Xencor’s diverse and patent protected Fc domains can be simply licensed and will provide a steady stream of revenue with which the company can clinically develop in-house leads.
  • Antibody biologics are on fire, making up 6/20 top-selling drugs and $50bn in 2012. Xencor has a diverse lead portfolio and strong management, promising a piece of the action soon.

What is Xencor? And where is the Value?

Xencor (NASDAQ:XNCR) President and CEO Bassil Dahiyat, PhD, spoke at the BioCentury Annual Future Leaders in the Biotech Industry Conference in New York on March 28. Dr Dahiyat updated us on the company's current research progress, collaborations, and future plans. XNCR is an innovative antibody engineering biotech that has developed the XmAb platform to efficiently effect biological targets. The science stems from the significant insight to modify antibody Fc domains as compared to the Fv domain that targets a molecule. The Fc domains they have developed have the ability to increase antibody performance by increasing immune inhibitory activity, improving cytotoxicity or extending circulating half-life, while typically maintaining over 99.5% identity in structure and sequence to natural antibodies. Why is this significant? Historically pharmaceuticals have focused on biologic targets by taking advantage of academic understanding of pathophysiology. This approach has had success and will not be completely replaced; however, modifying the natural delivery of many of these effects, the antibody molecule was a relatively recent idea. In the early 2000s, Genentech, Medimmune, and Dahiyat's startup Xencor (Founded 1997) began to examine the idea of site selective mutagenesis of specific regions of the Fc domain of the antibody isotype immunoglobulin G (IgG) molecule. After a sort of space race with Xencor landing a Fc domain modifying cytotoxicity of targeted cells first around 2004, Genentech and Medimmune both signed deals to license Xencor developed Fc domains. Since then, over 30 licensing deals have been reported on between the firm and major pharmaceuticals seeking to improve development of their mAbs. In my opinion the biotech's extensive library of patents that allow a drug development team to plug and play antibody functionality provides a steady stream of revenue to develop in house leads and market their brand.

XNCR has developed over 2,000 individual Fc domain variants, has 74 issued and 106 pending patents worldwide and has skillfully developed partnerships ranging from co-development to exclusive rights with 7 large collaborators (Amgen, Morphosys, Merck, Janssen, Alexion, CSL, Boehringer Ingelheim). Their leads are currently under clinical development in autoimmune disease, allergy, asthma, and oncology. In addition they are moving their novel bispecific antibody program to the clinic by mid-2014. I plan on discussing some of the most interesting leads below.

Most Promising Products:

The bispecific leads being applied to oncology applications include CD3 X CD123 and CD3 X CD38 bispecific antibodies. The first will be utilized in an acute myeloid leukemia (AML) context to bind T-cells (CD3) and then the IL-3 receptor (CD123) expressed on leukemic AML blasts at a high. This will help facilitate T-cell mediated depletion of the leukemic cells theoretically stemming the tide of increasingly dividing populations of myeloid blast cells. AML as a therapeutics market did $240m in sales in 2011 and is forecast to grow to ~$730m by 2017. The CD3 X CD38 would be utilized in the context of myeloma and chronic lymphocytic leukemia (CLL). It would allow XNCR to target the fate of the pathologic B-cells in myeloma and CLL. CLL as a market did $440m in sales in 2010 and is expected to grow to ~$2bn by 2020. As is noted by the above bolded points, these leukemia markets are going to demonstrate immense growth in the next 5 or so years. Bispecific antibodies are the next frontier in antibody therapeutics and are forecast to do $4.4bn in sales in 2023. This is an extremely promising area for XNCR as they have developed the ability to modify the potency of their antibodies. No other bispecific currently aim to fine-tune potency as a component of drug efficacy. This is important in developing safe but effective dosing as current regimes are often dose limited by significant toxicity. The area of bispecific antibodies is underdeveloped and a whole antibody with high identity to natural antibody provides many benefits over current smaller constructs such as BiTE, Amgen (NASDAQ:AMGN). Dr Dahiyat confirmed that their first bispecific lead will enter Phase I clinical trials in mid-2014. It is important to note that these molecules are extremely early in development having only been tested in preclinical studies. Even though Dahiyat shows some promising data in those models, Xencor's bispecifics would not be the first time an effective drug didn't translate from rodents or even primates to their human equivalent processes.

XmAb7195 is the company's answer to Omalizumab or Xolair (Roche (OTCQX:RHHBY) and Novartis (NYSE:NVS)), a popular monoclonal antibody against IgE used in the treatment of severe asthma. Xolair blocks IgE from interacting from downstream immunologic effectors of airway constriction leading to difficulty breathing, wheezing and potential respiratory failure. However its use is contraindicated in large patients or those with the highest IgE levels. In addition ~50% of patients fail to achieve target IgE reduction which limits its efficacy. XmAb7195 reduces levels of IgE producing B-cells, targets IgE for disposal in the liver sinusoids, and binds IgE in the typical manner to block binding partners (like Xolair), all within 1 hour post injection in animal models. Xolair had $1.2bn in sales in 2012 and close to $1.5bn in 2013. The human study starts Q1 of 2014 and will consist of a Phase 1a trial in asthmatic/allergic subjects with high IgE levels to test safety and IgE reduction and a Phase 1b for patients with mild to moderate asthma to test safety. Although this drug is early in development, it is in a relatively more tested area than bispecifics. As a result I do not think XmAb7195 carries as much risk, especially since Xencor's Fc domains offer so much flexibility in pharmacokinetic and pharmacodynamics. In fact I suspect this drug will do quite well in trial as it attacks the IgE problem from so many fronts. In addition, it is being developed in house so all of the profits will be for Xencor to keep. One thing to mention is that although they do have flexibility, it is not trivial to recover from poor performance in clinical trials and stopping this trial early due to toxicity would be a multi-year setback (as it is for any would be treatment). Results of their Phase 1a/1b trials are anticipated by end of year 2014.

XmAb5871 is currently in a Phase 1b/2a clinical trial examining its B-cell inhibiting effects in rheumatoid arthritis (RA). XmAb5871 pairs a target of CD19, a surface molecule specific to mature B-cells with the inhibitory Fc domain (specifically targeting FcgRIIIA). It has been shown in animal studies that inhibition of B-cells occurs without depletion, crucial for maintaining immunity and disrupting the disease. Previous drugs such as Rituximab or Rituxan (Biogen (NASDAQ:BIIB) and Roche/Genentech) have also targeted B-cells in RA but have safety issues due to excessive B-cell depletion. However, it is important to note that Rituxan did ~$7.5bn in sales in 2013 across all franchises. Its use is growing extremely rapidly as Roche investigates off label indications and transitions from secondary to primary indications in on label uses. More specifically to Xencor's current indication is the $11.1bn in sales RA market, it is forecast to grow to $15.2bn by 2021. The Phase 1b/2a study results will be released by the end of the year. Phase 1b completed enrollment in 2013 and 2a is currently finishing the enrollment of a few more patients. Following results of this trial, a larger Phase 2b multicenter clinical trial is being planned as a proof of concept trial. This trial will enroll ~200 patients, is expected to start in early 2015 and observe patients for 24 weeks of therapy. Amgen has an option to exclusively license this drug following the proof of concept trial. This trial will be a significant test for the company and is very promising if the pre-defined milestones are met with the cost to exercise the "take over" option for Amgen listed at $75m up front and up to $439m in total milestones with additional high single digit to high teen tiered royalties. All current indications are that this drug acts primarily via inhibition of B-cells without B-Cell depletion and should give a better toxicity profile compared with traditional mAbs.

In addition XmAb5574/MOR208 was licensed and is currently being aggressively developed by Morphosys AG (MOR: Xetra) for the treatment of B cell malignancies and autoimmune diseases. XmAb5871 pairs a target of CD19, a surface molecule specific to mature B-cells with the inhibitory Fc domain (specifically targeting FcgRIIB). It has shown in a Phase 1/2a trial "encouraging signs of preliminary anti-tumor activity and an acceptable safety and tolerability profile in patients with high-risk, heavily pretreated chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL)." As a result it is being actively investigated in 3 Phase 2 clinical trials in B-cell acute lymphoblastic leukemia (B-ALL), CLL, and non-Hodgkin's Lymphoma. I am not sure how critical this lead is since the Morphosys in-license deal details were not made public. However, the potential of this deal is likely a bit smaller than XmAb5871 since Morphosys has taken over development and is currently seeking indications in the oncology franchise with relatively smaller market size; however, one that is projected to have very strong growth in the next 10 years.

Relevant XNCR Financials YE2013:

Xencor's financials are fairly typical of an early stage biotech. Simply put, they are losing money due to the extent of support in researching and developing across their diverse portfolio of preclinical and clinical leads and the general running of the company. They completed their IPO in December of 2013 yielding a net of ~$72.5m. They had cash on hand of around $78m year end 2013 on yearly revenue of $10.2m up from $9.5m in 2012. R&D was up to $17m from $12.7m in 2012 demonstrating the increase in development of major leads (XmAb7195 and XmAb5871). Net loss for the year was $60.3m compared with $8.6m in 2012. This large increase includes the settlement of convertible notes in the amount of $48.6m, interest of $1.2m, and the increase in R&D of $4.3m. XNCR expects to end 2014 with $54.5m in cash and expects to have sufficient cash to fund current research and development programs and general operations through 2016.

I am slightly concerned with the relatively large increase in R&D relative to revenue since I would expect aggressive licensing strategies with such strong science to be an easy sell and a seemingly ample stream of back-up revenue to preserve and extend funds from shareholders in the IPO. However I understand the expense of preclinical and clinical support and the leads do hold promise.

Conclusions:

XNCR has strong and competent leadership in President and CEO Bassil Dahiyat, PhD, and will continue to develop its naïve technology; increasing the number and diversity of in-house leads as well as further license agreements to strengthen their bottom line. Independent analyses from Credit Suisse's Jason Kantor, PhD, Leerink Swan's Michael Schmidt, PhD, and Wedbush Pac Grow Life Sciences' Christopher Marai, PhD have converged on a consensus target price of $16.30 and ratings of 1 outperform and 2 buy. As of Wednesday's close, XNCR is trading 30% below the mean consensus target and 20% below its 52wk high of $13.90 in mid-march before the current biotech selloff.

I believe the current day to day variation reflects significant variation in perceived risk associated with development of very novel compounds in a small cap environment interacting with external market conditions and volatility. Also many have questioned whether biotechs as a whole can continue to be generously priced in an environment of investor amnesia with respect to risks and costs of clinical development after nearly 4 years of relatively uninterrupted strong growth. In addition, XNCR is in early development of many of its leads with its most advanced program currently enrolling in a Phase II Clinical Trial. Specific to the leads that will impact XNCR's balance sheet, I think there is a strong chance XmAb7195 will perform well in Phase II and III trials because of the variety of ways it should minimize IgE and the relatively more straight forward pathophysiology of asthma and allergy symptoms compared with CLL, NHL, and AML. I am commensurately less certain about XmAb5574/MOR208 but Morphosys is very aggressively pursuing approval and has strong preclinical and early clinical safety data. In addition the deal is relatively smaller in magnitude than the Amgen partnership. Bispecifics demonstrate enormous potential for Xencor in the mid-term future, perhaps 5 years or so depending on licensing/early clinical data/FDA fast track breakthrough therapy track. I am less certain about the bispecific leads as an additional degree of freedom in protein structure makes potential cross reactivity more difficult to analyze; however, Xencor has a strong preclinical record with these drugs thus far. In addition there is always the possibility that a larger firm will acquire Xencor for their many/diverse leads and extensive patent portfolio. I believe XNCR is a significantly undervalued equity based on excellent science and has steep upside to the investor willing to hold through early/mid-2015 for the results of many of the in house and partner clinical trials to be published.

References:

Chillemi A, et al. Anti-CD38 Antibody Therapy: Windows of Opportunity Yielded by the Functional Characteristics of the Target Molecule. Mol Med, 19(1):99-108, 2013.

Dahiyat, B. Antibodies by Design: XmAb Antibody Therapeutics. BioCentury Annual Future Leaders in the Biotech Industry Conference. New York, March 28th, 2014.

Rollins-Raval, M, et al. CD123 Immunohistochemical Expression in Acute Myeloid Leukemia is Associated with Underlying FLT3-ITD and NPM1 Mutations. Appl Immunohistochem Mol Morphol, 21(3):212-217, 2013.

Testa U, et al. CD123 is a Membrane Biomarker and a Therapeutic Target in Hematologic Malignancies. Biomark Res, 2:4, 2014.

Xencor, Inc. Xencor Reports Fourth Quarter and Full Year 2013 Financial Results [Press Release]. http://investors.xencor.com/releasedetail.cfm?ReleaseID=834052, March 1

Source: Xencor Inc.: Current Biotech Uncertainty Is An Opportunity