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Xencor, Inc (NASDAQ:XNCR)

Q2 2014 Earnings Conference Call

July 31, 2014 16:30 ET

Executives

Deanne Tockey - Stern, IR

Bassil Dahiyat - President & CEO

John Kuch - VP, Finance

Analysts

Michael Schmidt - Leerink Partners

Christopher Marai - Oppenheimer

David Nierengarten - Wedbush Securities

Operator

Good afternoon and welcome to the Xencor Second Quarter 2014 Financial Results Conference Call. (Operator Instructions). At this time I would like to turn the call over to Deanne Tockey of Stern Investor Relations, please proceed.

Deanne Tockey

Thank you, operator, good afternoon this is Deanne Tockey with Stern Investor Relations and welcome to Xencor’s second quarter 2014 financial results conference call. This afternoon we issued our financial results and business review press release which is available at www.xencor.com. Today on our call Bassil Dahiyat, Ph.D. President and CEO will discuss the company’s business and clinical highlights from the quarter, then John Kuch Vice President of Finance, will review the 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 research and development, future financial and operating results, future market conditions, the plans and objectives of management for future operations and the company’s future product offerings. 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 outcome of the events described in these forward-looking statement is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including but not limited to, those factors contained in the Risk Factors section of it's most recently filed quarterly report on Form 10Q.

With that let me pass the call over to Bassil.

Bassil Dahiyat

Thanks Deanne. Good afternoon everyone and thanks very much for joining us on today’s call. I’m delighted to provide an update on where the company stands today. There are now seven internal and external partnered clinical programs ongoing that utilize our proprietary XmAb as the engineering technology.

In addition our bispecifics program is accelerating as we select the candidate for clinical development this year. So I will start today’s call by updating you on our wholly owned program, XmAb 7195 which is now in Phase I clinical development for the potential treatment of asthma and other atopic diseases. So XmAb 7195 targets IgE, it's a monoclonal antibody whose variable domain hits IgE and it uses our XmAb immune inhibitor Fc domain to target Fc (gamma) R2b on the other end of the molecule resulting in three distinct mechanisms of action for reducing IgE levels which is the goal of this drug. We initiated Phase 1a trial in late May to evaluate the safety PK, pharmacokinetics and immunogenicity of a single ascending dose of XmAb 7195 ultimately in a total of upto 64 subjects.

This study will also evaluate the effect on free IgE and total IgE levels in addition to a variety of immune cell biomarkers in the healthy subjects and in allergic subjects at elevated levels of IgE. So primarily data is anticipated by the end of 2014 and then following successful results from this Phase 1a study, in 2015 we plan to initiate a Phase 1b multiple ascending dose clinical trial in both healthy adult volunteers and in patients with mild to moderate asthma to study safety pharmacokinetics and IgE reduction. In May we also presented very encouraging preclinical data at the American Thoracic Society 2014 International Conference demonstrating rapid IgE clearance by 7195 compared to omalizumab which is also called Xolair.

This rapid clearance is a result of the XmAb Fc demand heightened engagement of the Fc (gamma) R2b receptor which gives us this unique mechanism of action for XmAb 7195. So this study demonstrated that after a single IV dose of either 7195 or Xolair in primates, 7195 reduced IgE to at least 10 fold lower levels in Xolair. In addition 7195 rapidly reduced these free IgE levels to below quantifiably levels and kept them down there until day 10.

It also depleted total IgE below quantifiable levels within an hour. So as we have said before there is a tremendous unmet need for the treatment of severe asthma where there is a significant proportion of patients that are poorly controlled on existing inhaler therapies and/or corticosteroids.

So well Xolair continues to be the standard of care for this patient segment a significant fraction of these individuals do not reach the target IgE levels that you would wish that is also the purpose of Xolair therapy or they have such high IgE levels at the outset that Xolair’s contraindicated.

So we believe that XmAb 7195 has the potential to provide really a first in class mechanism for treating severe asthma by reducing IgE and doing so in a way that it will address the full spectrum of severe asthmatics including the hardest to treat population with high IgE levels.

So our next internally developed program XmAb 5871 is actually our most advanced antibody containing our XmAb immune inhibitor Fc domain and it's targeting autoimmune disorders where it's has a potential to suppress B cell activity in these disorders. So as a result of the engagement of Fc (gamma) R2b on B cells by this immune inhibitor Fc domain, 5871 has shown potent yet reversible inhibition of B cell function in Phase 1 testing and now the current development focus in rheumatoid arthritis and lupus. We do remain on track to report top line data from the ongoing Phase 2a clinical study in RA in patients with moderate to severe rheumatoid arthritis even though on a stable dose of a non-biologic DMARD and we plan to report that out in the second half of this year. With positive data we plan on initiating a Phase 2b study in RA and we’re also exploring the potential for future development of 5871 in a variety of autoimmune diseases involved B-cell pathology.

So as we have mentioned before our partner Amgen has an option to acquire exclusive worldwide license after Phase 2b proof of concept but in the meantime we’re driving the clinical development of this molecule.

Now I will turn to MOR208 which is also known as XmAb 5574. This drug candidate target CD19 and has our high cytotoxicity XmAb Fc domain. We parted this molecule MorphoSys in 2010 and currently they are conducting Phase 2 clinical trials to test more 2a as a monotherapy in B-cell Acute Lymphoblastic Leukemia or ALL as well as non-Hodgkin's lymphoma or NHL. In addition there is an investigator sponsor Phase 2 study in chronic lymphocytic leukemia or CLL in combination with lenalidomide also called Revlimid found again in January of this year, the other two trial started in Q2 of 2013.

Recently MorphoSys stated on it's second quarter earnings call that it intends to present first results in the ongoing NHL study before the end of this year at a major medical conference.

So now I want shift gears and talk about our preclinical programs and particularly our bispecific antibody platform in the programs that are coming from it. This is the newest element of our XmAb Fc technology. It uses a novel Fc domain that we engineered to serve as a scaffold for antibodies with two different antigen binding domain. So creating molecule to combine two different target simultaneously hence the name bispecific antibody.

So by using a plug and play Fc domain at the basis for our bispecific structure we hope to have a flexible approach that let’s us create candidates combining any two binding domains we would like or need any two molecules ultimately. So right now the whole field of bispecifics is at the start of a resurgence and because there is a real opportunity that overcomes historic challenges of stability, dosing and manufacturing that have (indiscernible) I think there is going to be -- it’s a significant opportunity for growth for Xencor in this area.

So the potential of our XmAb approach for meeting these challenges I just mentioned has motivated substantial research effort to using our Fc domain to build new bispecific candidates.

So our first application of this new tool is developing bispecific antibodies that direct the immune response specifically cytotoxic T-cells, two tumor cells by simultaneously binding a T-cell antigen and a tumor antigen. By using an Fc domain as an integral part of the molecule we believe we can maintain the advantages of natural antibodies potentially enabling us to retain their long circulating half-life, the use of standard antibody manufacturing approaches and allows the flexibility to modulate the potency of the molecules to potentially avoid toxicity’s.

Our goal is bispecific T-cell engaging antibodies that can be dosed and produced just like a regular antibody. So at the moment we have produced several promising preclinical candidates with the potential to redirect T-cell to tumors. These include to-date a CD3 by CD38 that’s meaning a bispecific molecule upon CD3 which is a T-cell antigen on one side and CD38 which is an antigen for potentially use in multi-myeloma.

We had a CD3 by CD123 for use in acute myeloid leukemia and a CD3 by CD20 for use in B-cell cancers. So all of these are now in the midst of -- all three of these in the midst of pharmacology studies that are examining the activity of the molecule from simple bolus dosing and we’re also examining our, rather I should say we’re also producing manufacturing cell lines and developing such cell lines for all three of these candidates.

These are critical activities now at early development and we are enthusiastic to see how these turn out. Now really we’re most encouraged by how rapidly we have been able to move three programs to this stage less than a year after completing the engineering of our bispecific Fc domain. So from the point where we have Fc domain that enables this, it's now having three programs that Prime A [ph] pharmacology and the initiation of manufacturing cell line development. I think it really speaks to the potential for plug and play utility of this Fc domain.

Now today we’re in the final process of selecting one of these programs is a lead candidate behind enabling development and we’re currently considering in addition of course to the scientific data the business aspects of how these different molecules and their indications could what they can mean for Xencor. And we do remain on track to make this and make an announcement of that decision this year. Also we’re planning on presenting our preclinical data at a scientific conference later this year.

Now shifting gears to discuss the people at Xencor, earlier this month we were fortunate to announce the appointment of Kurt Gustafson to our Board of Directors and the Chairman of our Audit Committee. Kurt has over 20 years of industry experience and currently serves as Executive VP, CFO and Principal Accounting Officer at Spectrum Pharmaceuticals. We’re very happy to have Kurt on Board to help guide us as a public company.

Now with that I will turn the call over to John to review our financials.

John Kuch

Thank you Bassil. Revenues for the second quarter of 2014 were 0.8 million compared to 3.9 million in the same period of 2013. Revenues for the six month period ended June 30, 2014 were 3 million compared to 5.3 million for the same period in 2013. The reduction of revenue for the three and six month periods in 2014 relates primarily to the 3 million in milestone revenue received under our MorphoSys collaboration in the second quarter of 2013.

Research and development expenditures for the second quarter of 2014 were 4.3 million compared to 4.1 million for the same period in 2013. R&D expenses for the six month period ended June 30, 2014 were 8.5 million compared to 8.7 million for the same period in 2013. During the second quarter of 2014, increased spending in our bispecific program offset a reduction in spending in our XmAb 5871 program and early discovery programs and the net results was event [ph] decrease in R&D spending of 0.2 million over the amount spent in the second quarter of 2013.

For the six months period ended June 30, 2014 increases in spending on our bispecific program and XmAb 7195 program were offset by lower spending in our XmAb 5871 and XmAb 5574 more 2a programs within that result of 0.2 million and lower R&D development spending compared to the six months ended June 30, 2013.

General and administrative expenses for the second quarter of 2014 were 1.6 million compared to 0.8 million for the same period in 2013. G&A expenses for the six month period ended June 30, 2014 were 3.3 million compared to 1.5 million for the same period in 2013. The increases in G&A expenses in 2014 reflect increased compensation expenses, professional fees and the cost associated with being a public company.

The net loss for the second quarter of 2014 was 5 million or $0.16 on a fully diluted per share basis compared to a net loss of 50.1 million or $3.88 on a fully diluted per share basis for the same period in 2013. For the six months ended June 30, 2014 the net loss was 8.8 million or $0.28 on a fully diluted per share basis compared to a net loss of 54.7 million or $4.35 on a fully diluted per share basis for the same period in 2013.

The lower loss on a per share basis in the three and six months ended June 30, 2014 compared to 2013 are primarily due to a non-cash expense of 48.6 million related to the loss on the settlement of convertible notes as reflected in the 2013 net losses and additional shares reflected in the 2014 per share calculation as a result of our IPO in December 2013.

In this afternoon’s press release we reported cash balances totaling 66.2 million as of June 30, 2014.

Based on current operating plans we expect to have sufficient cash to fund research and development programs and operations through 2016 and we estimate that our 2014 year on cash and cash equivalents will be approximately 54 million.

We will now open up the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Schmidt of Leerink. Your line is open.

Michael Schmidt - Leerink Partners

I have a question on the asthma product, I was wondering what are your thoughts are in evaluating indications or opportunities outside asthma for the IgE antibody. I think there maybe couple of indicators on Xolair, was tested by -- had limited efficacy because of it's weak binding affinity and I was wondering what your thoughts are on additional indications later on and secondly I was wondering with regards to the bispecific molecules so all three of those are really addressing targets where other therapies are being developed, a fairly busy market so to speak and I was wondering based on what factors you will decide which one to move forward? Thank you.

Bassil Dahiyat

So regarding your first question, other indications that are driven by IgE, IgE mediated diseases. Absolutely we’re very eager to explore those probably in parallel with asthma but all of that’s going to fall after we complete the Phase 1a and Phase 1b program which of course are critical to establish the tolerability profile, safety profile of the drug PK dosing et cetera. I think an advantage of targeting IgE and with the monoclonal antibody is that you have such a clear dynamic relationships between the IgE levels and how that level drives disease at least in asthma and I think you can use that indicator of IgE to help you design your future studies in terms of dosing frequency and required dose to knock down the IgE levels you’ve got.

So it really does facilitate. We think that there is ample opportunity outside of asthma for example in dermatology particularly (indiscernible) but atopic dermatitis where I think there was more difficulty in catching up to all the IgE that’s there that Xolair had. I think there is opportunities even in more rare diseases that are driven by IgE such as some of the proliferative disorders that cause high IgE levels or high sensitivity to IgE like mastocytosis all of these are things we’re considering but certainly after we complete the 1a and 1b studies. There is certainly opportunity outside of asthma though.

So shifting to your second question on the bispecifics, yes the three targets that we mentioned in the areas that we’re talking about have other entrants going after them, the CD20, the CD123 and the CD38 indicate markets you know B-cell malignancy and/or myeloma and they do have differing levels I would argue of competitive intensity at the moment. So I think they also have differing levels of validation not just for the targets in treating the diseases but also in just successful clinical development within those indications. AMLs [ph] of course has been particularly difficult. Historically though we haven't had tools like bispecifics before.

So the factors that we’re going to consider of course are going to be what we can do scientifically from our preclinical studies in terms of the potency and tolerability and activity of the molecules as well as what we view as the competitive landscape and in particular the most important point for us is whether our approach and the benefits it confers particularly simplicity of manufacture, and hopefully simplicity of dosing and long duration of action.

We want to see whether those can really be differentiators and I think that’s going to help us drive our decision the most, those are going to really help drive adoption of our drugs, more differentiator you can be with an advantage, the better.

Operator

Thank you. Our next question comes from Christopher Marai of Oppenheimer. Your line is open.

Christopher Marai – Oppenheimer

First just going back to 7195 and your IgE targeted antibody, just with respect to measuring success you’re again the year-end read out. I guess you’re measuring free IgE and total IgE levels, would there be any good references for assessing the potential activity here in healthy’s for 7195 perhaps measures of IgE and early Xolair studies, can you point us to that?

Bassil Dahiyat

Yes I think that in the healthy volunteers depending on what their IgE levels turn out to be because of the broad range of IgE levels, the healthy’s that have high IgE sometimes but if they fall within the most common range those IgE levels are low enough that Xolair ought to be able to catch up to them and therefore it's going to be hard to differentiate purely on degree of differentiation from Xolair because the assays that are available today don’t measure IgE to low enough levels and for low IgE subjects even Xolair can knock down IgE to around the level of limited detection. So in the lower IgE subjects if that’s where the healthier volunteers are being, it's probably going to be hard to differentiate on degree of drop of IgE. So I think that -- if you’re looking at IgE level as a real differentiator, this is amazing we’re talking about differentiating in our first (indiscernible) dose study.

Again it's a testament to the unique aspect of IgE that it offers. So I think seeing reductions in high IgE subjects, subjects that are for example off the Xolair dosing table where the dosing table defines the parameters quite nicely for IgE level and body weight. I think seeing that for service that re off the dosing table which -- clear that Xolair is demonstrated from an efficacy standpoint though I can’t off the top of my head mention references for you for IgE measurements that clearly Xolair leaves a lot to be desired there and I think when we have data from people with high IgE it's really going to help drive the differentiation edge.

Christopher Marai – Oppenheimer

And just maybe with respect to (indiscernible) for this compound and partnering, certainly asthma is a large market opportunity that maybe then Kora wouldn’t want to address on their own but then in light of some of the newer indications and more rare indications you had looked at, how would you potentially address this from a partnering standpoint? Have you thought about that yet?

Bassil Dahiyat

Not really. It's little early to think about that. Our thought right now is that even for severe refractory asthma, Phase 3 registration studies are quite large and we would imagine wanting to partner the compound before the outset of Phase 3.

Yes there are indications that can potentially have a smaller patient foot print needed and if those are ones that as we drive into Phase 2 we pick up the thread on and they can proceed quickly and we get to a later stage development faster with those. We would certainly consider holding onto the compound longer. I think I wouldn’t want to guide that we’re considering indication splitting in our partnering strategy that’s probably not something that we consider at the outset of our thinking because indication splitting has been historically challenging. So it's really early days, our guidance right now is we’re going to for asthma we would certainly partner before Phase 3. If things change you know watch this space.

Operator

Thank you. And our next question comes from David Nierengarten of Wedbush Securities. Your line is open.

David Nierengarten - Wedbush Securities

So just dig a little bit deeper into what you can or maybe reporting on 7195 when you give out the data I mean is it just setting expectations? I mean would you just expect to be able to knock say all of the healthy volunteers down to below the limit of detection for IgE or is that too much to ask, just kind of where do you think the natural variability here in healthy’s on IgE levels corresponds to potential read out of efficacy or knock down by 7195.

Bassil Dahiyat

So anecdotally people have absorbed and this includes Xencor that anywhere from 10% to 15% heathy’s walking around have IgE levels that would be on the high-end if not off the Xolair dosing table just because IgE varies like any other blood parameter you measure there is a range of variation. We would expect that at maybe not the bottom doses for 7195 but we would expect to be able to knock down the limits of detection IgE levels across the healthy volunteer cohort. Again the caveat being if you get a real odd ball coming in you will look at that and you will be able to explain why if somebody comes in with some 100 fold higher IgE level, you got to look at that but our expectation right now is that the majority if not all the healthy’s we would expect to get to the limited detection which again because Xolair can often do that for healthy’s is more a testament to the challenges of measuring the naturally very low levels of IgE that are there because IgE even in high-IgE subjects is still not a hugely abundant molecule in your blood. So assay challenges are sort of give you the bottom end there.

David Nierengarten - Wedbush Securities

And then you mentioned a couple of medical meetings, are there any specific ones you’re thinking of in the future for any of your compounds on presenting data?

Bassil Dahiyat

We’re not guiding on specific meetings right now. I think that for the oncology compounds we’re going to obviously target the ones that have large audiences where there is the most folks who can hear about what we do and it all depends on timing, these conferences have their timelines and our data is going to have it's own timelines. So we’re just going to see how it matches up. We surely want to get out there as soon as we can.

Operator

Thank you. And we have a follow-up question from Michael Schmidt of Leerink. Your line is open, sir.

Michael Schmidt - Leerink Partners

I was just wondering how many patients worth of data will you be able to present on 7195 this year?

Bassil Dahiyat

We plan on presenting from our healthier volunteers group at least which would be over 30 patients we would expect based on the number of cohorts and numbers of subjects per cohort.

Operator

(Operator Instructions). At this time I see no other questions. I would like to turn the call back over to you Mr. Dahiyat.

Bassil Dahiyat

Thanks very much. So to sum-up I would like to say that by the end of this year we expect to have data announcements from our two lead programs XmAb 7195 and 5871 and also have selected lead candidate for our bispecific program for IND-enabling development. So we expect the second half of this year to be a news filled and exciting time for Xencor. Thanks again everybody who participated for your time and we look forward to updating you again soon. Bye.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your program. You may all disconnect. Everyone have a great day.

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