Xencor Inc 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Form 10-Q/A and the financial statements and accompanying notes thereto for the fiscal year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K/A for the year ended December 31, 2023. See also “Special Note Regarding Forward-Looking Statements” included in this Form 10-Q/A. Company Overview We are a clinical-stage biopharmaceutical company focused on discovering and developing engineered antibody therapeutics to treat patients with cancer and other serious diseases, who have unmet medical needs. We are advancing a broad portfolio of clinical-stage XmAb® drug candidates from our proprietary Fc technology platforms. We also use our protein engineering capabilities to increase our understanding of protein structure and interactions and to design new Fc technologies and XmAb development candidates with improved properties. In addition to engineering protein-target interactions, our approach to protein design includes engineering Fc domains, the parts of antibodies that interact with multiple segments of the immune system and control antibody structure. The Fc domain is constant and interchangeable among antibodies, and our engineered Fc domains can be readily substituted for natural Fc domains. Our protein engineering capabilities and Fc technologies enable us and our partners to develop XmAb antibodies and other types of biotherapeutic drug candidates with improved properties and functionality, which can provide innovative approaches to treating disease and potential clinical advantage over other treatment options. For example, we developed an antibody scaffold to rapidly create novel multi-specific antibodies that bind two or more different targets simultaneously, creating entirely new biological mechanisms. Other applications of our protein engineering technologies enhance antibody performance by increasing immune inhibitory activity, improving cytotoxicity, extending circulating half-life and stabilizing novel protein structures, such as engineered cytokines. Three marketed XmAb medicines have been developed with our protein engineering technologies. Refer to Part I, Item 1, "XmAb Bispecific Fc Domain and New Multi-Specific Antibody Formats" and "Other XmAb Fc Domains" in the description of our business included in our Annual Report on Form 10-K/A for the year ended December 31, 2023 for a discussion of our core Fc technology platforms. Clinical-Stage XmAb Drug Candidates Our modular XmAb bispecific technology and protein engineering capabilities enable us to rapidly advance multiple drug candidates into clinical development. We and our partners are currently enrolling Phase 1 or Phase 2 studies for five wholly-owned or co-development candidates to treat patients with many different types of cancer and autoimmune diseases, 28 Table of Contents Vudalimab (PD-1 x CTLA-4): Vudalimab is a bispecific antibody that targets PD-1 and CTLA-4, two immune checkpoint receptors, to selectively activate the tumor microenvironment, and it is being developed for patients with metastatic castration-resistant prostate cancer (mCRPC) and patients with locally advanced or metastatic non-small cell lung cancer. Data from a Phase 1 study that enrolled heavily pretreated patients with multiple solid tumor types indicated that vudalimab was generally well-tolerated with encouraging clinical activity. We are conducting a Phase 2 study of vudalimab in patients with mCRPC, as a monotherapy or in combination with chemotherapy for patients with aggressive variant prostate cancer, as these patients represent a high unmet medical need. We are also conducting a second Phase 2 study in patients with clinically-defined high-risk mCRPC, in which initial data indicates that vudalimab monotherapy has been generally well tolerated and associated with response to treatment in multiple patients who have visceral or lymph node metastases. In March 2024, we disclosed additional clinical data showing characteristics of patients with clinical response (n=5/12) and per label rates of immune-mediated hepatitis for ipilimumab (anti-CTLA-4; 1 mg/kg) + nivolumab (anti-PD-1; 3 mg/kg) combination treatment, as generally comparable to the rate of all hepatobiliary disorder adverse events including immune-mediated hepatitis for vudalimab among all patients treated at doses greater than or equal to 10 mg/kg. We are also conducting a Phase 1b/2 study evaluating vudalimab as a first-line treatment in patients with locally advanced or metastatic non-small cell lung cancer. XmAb819 (ENPP3 x CD3) : XmAb819 is a bispecific antibody that targets ENPP3 and CD3. ENPP3 is a tumor-associated antigen in renal cell carcinoma (RCC). The XmAb 2+1 multivalent format used in XmAb819 enables greater selectivity for ENPP3 expressing tumor cells compared to normal cells, which also express ENPP3 at lower levels. We are currently enrolling a Phase 1 study to evaluate XmAb819 in patients with advanced clear cell RCC. XmAb808 (B7-H3 x CD28): XmAb808 is a tumor-selective, co-stimulatory XmAb 2+1 bispecific antibody designed to bind to the broadly expressed tumor antigen B7-H3 and selectively to the CD28 T-cell co-receptor only when bound to tumor cells. We are conducting a Phase 1 study to evaluate XmAb808 in combination with pembrolizumab in patients with advanced solid tumors. XmAb541 (CLDN6 x CD3): XmAb541 is a bispecific antibody that targets Claudin-6 (CLDN6) and CD3. CLDN6 is a tumor-associated antigen in ovarian cancer and other solid tumors. The XmAb 2+1 multivalent format used in XmAb541 enables greater selectivity for CLDN6 over similar Claudin family members, such as CLDN9, CLDN3 and CLDN4. We are currently enrolling a Phase 1 study to evaluate XmAb541 in patients with ovarian cancer and other CLDN6 expressing tumor types. The first patient was dosed in April 2024. XmAb564 (IL2-Fc Cytokine): XmAb564 is a wholly-owned, monovalent, interleukin-2 Fc (IL-2-Fc) fusion protein engineered to selectively activate and expand regulatory T cells (Tregs) for the potential treatment of patients with autoimmune diseases. We have been conducting a randomized, double-blind, placebo-controlled Phase 1b clinical study to evaluate the safety and tolerability of multiple ascending doses of XmAb564, administered subcutaneously in patients with atopic dermatitis or psoriasis. As previously disclosed, we plan to conclude the Phase 1b study in the first half of 2024 and pause further development of XmAb564 until after assessment of future data from competitor programs in this class and review of safety and biomarker data in the Phase 1b study. XmAb662 (IL12-Fc Cytokine): XmAb662 is a potency-reduced interleukin-12 Fc (IL12-Fc) fusion protein engineered to increase anti-tumor activity and immunogenicity in the tumor microenvironment by promoting high levels of interferon gamma secretion from T cells and NK cells. We have been conducting a Phase 1 study to evaluate XmAb662 in patients with advanced solid tumors. As previously disclosed, we plan to conclude the Phase 1 study in the first half of 2024 and pause further development of XmAb662 until after assessment of future data from competitor programs in this class and review of safety and biomarker data in the Phase 1 study. Candidates Co-Developed with Partners Plamotamab (CD20 x CD3): Plamotamab is a bispecific antibody that targets CD20, an antigen on B-cell tumors, and CD3, an activating receptor on T cells, and we are co-developing the program in collaboration with J&J. Results from the expansion portion of a Phase 1 study in patients with refractory non-Hodgkin lymphoma indicate that intravenous plamotamab monotherapy was well tolerated and demonstrated encouraging clinical activity in heavily pretreated patients at the recommended Phase 2 intravenous dose. In 2023, we completed patient enrollment in subcutaneous dose escalation cohorts of this study. 29 Table of Contents Efbalropendekin alfa (IL15/IL15Rα-Fc Cytokine): Efbalropendekin alfa (XmAb306/RG6323) is a reduced-potency IL15/IL15Rα-Fc fusion protein that incorporates our Xtend extended half-life technology, and we are co-developing this program in collaboration with Genentech, a member of the Roche Group. Genentech is conducting a Phase 1 study of efbalropendekin as a single agent and in combination with atezolizumab in patients with advanced solid tumors and is also conducting Phase 1 studies, evaluating efbalropendekin in patients with relapsed/refractory multiple myeloma, either in combination with daratumumab (anti-CD38 antibody) or in combination with cevostamab (FcRH5 x CD3 bispecific antibody). In the fourth quarter of 2023, we agreed with Genentech to convert our current development cost and profit-sharing arrangement into a royalty and milestone payment-based arrangement. Pursuant to the terms of the amended agreement with Genentech, effective June 1, 2024, Genentech will assume sole responsibility over all clinical, regulatory and commercial activities. We will be eligible for up to $600.0 million in milestones and tiered royalties on approved sales from low double-digit to mid-teen percentages range. Advancements Expanding XmAb Bispecific Platforms We conduct further research into the function and application of antibody components in order to expand the scope of our XmAb technology platforms and identify additional XmAb drug candidates. We use the modularity of our XmAb bispecific Fc technology to build antibody-based therapeutics in a variety of formats, such as T cell engaging bispecific antibodies of a mixed valency format, the XmAb 2+1 bispecific antibody. XmAb 2+1 bispecific antibodies may preferentially kill tumor cells with high target expression, which may be especially beneficial in designing antibodies that target solid tumors. This selectivity potentially empowers T cell engaging bispecifics (e.g., CD3, CD28) to address an expanded set of tumor antigens. Five clinical-stage programs utilize our XmAb 2+1 format: XmAb819, XmAb808, XmAb541, xaluritamig and ASP2138. Additionally, we have engineered CD28 bispecific antibodies to provide conditional CD28 co-stimulation of T cells, activating them when bound to tumor cells. Targeted CD28 bispecific antibodies may provide conditional co-stimulation of T cells, for example, to T cells recognizing neoantigens or in concert with CD3 T-cell engaging bispecific antibodies. In addition to our first clinical-stage CD28 program, XmAb808, our CD28 platform is the subject of two collaborations with J&J. JNJ-9401 and JNJ-1493 are clinical-stage XmAb bispecific antibodies that J&J is developing in prostate cancer and B-cell malignancies, respectively, and both entered clinical development during the fourth quarter of 2023. In the first quarter of 2024, we amended the MorphoSys Agreement, which included releasing us from certain exclusivity obligations relating to CD19. Progress Across Partnerships A key part of our business strategy is to leverage our protein engineering capabilities, XmAb Fc domains and drug candidates with partnerships, collaborations and licenses. Through these arrangements we generate revenues in the form of upfront payments, milestone payments and royalties. For partnerships for our drug candidates, we aim to retain a major economic interest in the form of keeping major geographic commercial rights; profit-sharing; co-development options; and the right to conduct studies with drug candidates developed in the collaboration. The types of arrangements that we have entered into with partners include product licenses, novel bispecific antibody collaborations, technology licensing agreements and strategic collaborations. Product Licenses Product licenses are arrangements in which we have internally developed drug candidates and, based on a strategic review, licensed partial or full rights to third parties to continue development and potential commercialization. We seek partners that can provide infrastructure and resources to successfully develop our drug candidates, have a track record of successfully developing and commercializing medicines, or have a portfolio of development-stage candidates and commercialized medicines that could potentially be developed in rational combinations with our drug candidates. The FDA approved Monjuvi® (tafasitamab-cxix) under accelerated approval in July 2020. Monjuvi is a CD19-directed cytolytic antibody indicated in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) not otherwise specified, including DLBCL arising from low grade lymphoma, and who are not eligible for autologous stem cell transplant (ASCT). This indication is approved under accelerated approval based on overall response rate. Continued approval for this indication may be contingent upon 30 Table of Contents verification and description of clinical benefit in a confirmatory trial(s). In August 2021, the European Commission granted conditional marketing authorization for Minjuvi® (tafasitamab) in combination with lenalidomide, followed by tafasitamab monotherapy, for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) who are not eligible for autologous stem cell transplantation (ASCT). Tafasitamab was created and initially developed by us. Tafasitamab is marketed by Incyte Corporation under the brand name Monjuvi in the U.S. and under the brand name Minjuvi in Europe and Canada. Incyte has exclusive commercialization rights to tafasitamab outside the U.S. Monjuvi® and Minjuvi® are registered trademarks of Incyte. In February 2024, Incyte acquired exclusive global development and commercialization rights to tafasitamab from MorphoSys AG. We earned $2.9 million in estimated non-cash royalties from MorphoSys for the three months ended March 31, 2024. Technology License Agreements We enter into technology licensing agreements in which we license access to one or more of our XmAb Fc domains on a restricted basis, typically to an XmAb Cytotoxic Fc Domain and/or the Xtend Fc Domain. Our partners are responsible for all research, development, and commercialization activities of the drug candidates. The plug-and-play nature of XmAb technologies allows us to license access to our platforms with limited or no internal research and development activities. Alexion’s Ultomiris® uses Xtend Fc technology for longer half-life. Ultomiris has received marketing authorizations in global markets for the treatment of patients with paroxysmal nocturnal hemoglobinuria (PNH), for certain patients with atypical hemolytic uremic syndrome (aHUS), for certain patients with generalized myasthenia gravis (gMG) and for certain patients with neuromyelitis optica spectrum disorder (NMOSD). Ultomiris was approved in the U.S. for the treatment of adult patients with anti-aquaporin-4 antibody-positive NMOSD in March 2024. Alexion is also evaluating Ultomiris in a broad development program across additional hematology and neurology indications. We earned a total of $12.6 million in estimated non-cash royalties from Alexion for the three months ended March 31, 2024. Refer to Part I, Item 1, Note 10, Collaboration and Licensing Agreements of the Notes to Financial Statements included in this Form 10-Q/A for a description of the key terms of our arrangements. We have over 1,500 issued and pending patents worldwide to protect our XmAb technology platform and XmAb drug candidates. Since we commenced active operations in 1998, we have devoted substantially all our resources to staffing our Company, business planning, raising capital, developing our technology platforms, identifying potential product candidates, undertaking preclinical and IND-enabling studies, and conducting clinical trials. We have no internally developed products approved for commercial sale and have not generated any revenues from our own product sales, and we continue to incur significant research and development expenses and other expenses related to our ongoing operations. To date, we have funded our operations primarily through the sale of stock and from payments generated from our product development partnerships and licensing arrangements. As of March 31, 2024, we had an accumulated deficit of $544.9 million. Substantially all of the operating losses that we have incurred resulted from expenses incurred in connection with our product candidate development programs, our research activities and general and administrative costs associated with our operations. 31 Table of Contents Results of Operations Comparison of the Three Months Ended March 31, 2024 and 2023 The following table summarizes our results of operations for the three months ended March 31, 2024 and 2023 (in millions): Three Months Ended March 31, 2024 2023 Change (As Restated) Revenues: Research collaboration $ — $ 0.2 $ (0.2) Milestone 0.5 5.0 (4.5) Royalties 15.5 13.8 1.7 Total revenues 16.0 19.0 (3.0) Operating expenses: Research and development 56.9 65.6 (8.7) General and administrative 13.8 14.2 (0.4) Total operating expenses 70.7 79.8 (9.1) Other expense, net (19.4) — (19.4) Net loss (74.1) (60.8) (13.3) Net loss attributable to non-controlling interest (0.7) — (0.7) Net loss attributable to Xencor, Inc. $ (73.4) $ (60.8) $ (12.6) Revenues Revenues for the three months ended March 31, 2024 are primarily from non-cash royalty revenue from Alexion and MorphoSys. Revenues for the three months ended March 31, 2023 are primarily from royalty revenue from Alexion and milestone revenue from J&J. 32 Table of Contents Research and Development Expenses The following tables summarize our research and development expenses for the three months ended March 31, 2024 and 2023 (in millions): Three Months Ended March 31, 2024 2023 Change Product programs: Bispecific programs: CD3 programs: Plamotamab* $ 2.1 $ 5.7 $ (3.6) XmAb819 (ENPP3 x CD3) 6.3 4.5 1.8 XmAb541 (CLDN6 X CD3) 2.5 4.6 (2.1) Total CD3 programs 10.9 14.8 (3.9) XmAb808 (B7-H3 x CD28) 5.3 3.9 1.4 Tumor micro environment (TME) activator programs: Vudalimab 11.5 7.7 3.8 XmAb104 2.5 7.2 (4.7) Total TME activators programs 14.0 14.9 (0.9) Subtotal bispecific programs 30.2 33.6 (3.4) Cytokine programs: XmAb306/RG6323 programs* 5.5 4.9 0.6 XmAb564 4.4 6.7 (2.3) XmAb662 (IL-12-Fc) 2.9 3.3 (0.4) Total cytokine programs 12.8 14.9 (2.1) Other, research and early stage programs 13.3 14.0 (0.7) Wind down costs of terminated programs (1) 0.6 3.1 (2.5) Total research and development expenses $ 56.9 $ 65.6 $ (8.7) *Includes net reimbursements to and from our partners pursuant to agreements that include cost-sharing arrangements. (1) Research and development expenses include wind down costs of programs that terminated in prior periods including the vibecotamab, tidutamab, and XmAb841 programs. 33 Table of Contents Three Months Ended March 31, 2024 2023 Change External research and development expenses $ 25.8 $ 28.9 $ (3.1) Internal research and development expenses 24.4 28.4 (4.0) Stock based compensation 6.7 8.3 (1.6) Total research and development expenses $ 56.9 $ 65.6 $ (8.7) Research and development expenses decreased by $8.7 million for the three months ended March 31, 2024 over the same period in 2023 primarily due to decreased spending on our plamotamab, XmAb541, XmAb104, XmAb564, and wind down costs on terminated programs, partially offset by increased spending on our XmAb819, XmAb808, and vudalimab programs. General and Administrative Expenses The following table summarizes our general and administrative expenses for the three months ended March 31, 2024 and 2023 (in millions): Three Months Ended March 31, 2024 2023 Change General and administrative $ 13.8 $ 14.2 $ (0.4) General and administrative expenses decreased by $0.4 million for the three months ended March 31, 2024 over the same period in 2023 primarily due to decreased spending on professional fees. Other Expense, Net Other expense, net was $19.4 million for the three months ended March 31, 2024, which consists of an impairment charge on equity investments and non-cash interest expense from the Ultomiris and Monjuvi Royalty Sale Agreements, partially offset by interest income earned on investments and unrealized gain on equity investments. Other expense, net for the three months ended March 31, 2023 consists of unrealized loss recognized from the change in fair value of our equity investments, offset by interest income earned on investments. Cash Flows The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands): Three Months Ended March 31, 2024 2023 Change (As Restated) Net cash provided by (used in): Operating activities $ (56,859) $ (30,614) $ (26,245) Investing activities $ 32,318 $ 48,144 $ (15,826) Financing activities $ 1,787 $ 922 $ 865 Net increase (decrease) in cash $ (22,754) $ 18,452 $ (41,206) Operating Activities Cash used in operating activities for the three months ended March 31, 2024 and 2023 was $56.9 million and $30.6 million, respectively. The increase in cash used in operating activities in the three months ended March 31, 2024 is 34 Table of Contents primarily due to the decrease in royalty revenue received as a result of the sale of future royalties under the Ultomiris and Monjuvi Royalty Sale Agreements in 2023. Investing Activities Investing activities consist primarily of investments in marketable debt securities available-for-sale, purchases of intangible assets, capitalization of patent and licensing costs and purchases of property and equipment. Financing Activities Net cash provided by financing activities for the three months ended March 31, 2024 increased from net cash provided by financing activities for the three months ended March 31, 2023 due to increased net proceeds from the exercise of stock options. Liquidity and Capital Resources We have financed our operations primarily through private placements of our equity securities, the issuance of convertible notes, public offerings of our common stock, and payments received under our product development partnerships and licensing arrangements. As of March 31, 2024, we had $646.7 million of cash, cash equivalents, restricted cash, and marketable debt securities compared to $697.4 million as of December 31, 2023. The investments in marketable debt securities are further described above in Note 6, Marketable Debt and Equity Securities , of Notes to Financial Statements included in this Form 10-Q/A. We expect to continue to receive additional payments from our collaborators for research and development services rendered, additional milestone, opt-in and contingent payments, and royalties. Our ability to receive additional milestone payments and contingent payments from our partners is dependent upon either our ability or our partners’ abilities to achieve certain levels of research and development activities and is therefore uncertain at this time. Funding Requirements We have not generated any revenue from the sale of products developed by us to date and do not expect to do so until we obtain regulatory approval of and commercialize one or more of our internal product development candidates. As we are currently in the clinical stage of development, it will be some time before we expect to achieve this, and it is uncertain that we ever will commercialize one or more of our internal product development candidates. We expect that we will continue to increase our operating expenses in connection with ongoing as well as additional clinical and preclinical development of product candidates in our pipeline and also development candidates that we are co-developing with our partners. Although it is difficult to predict our funding requirements, based upon our current operating plan, we expect that our existing cash, cash equivalents, marketable securities, and certain potential milestone payments will fund our operating expenses and capital expenditure requirements into 2027. We have based these estimates on assumptions that may prove to be wrong which would cause us to use our capital resources sooner than we currently expect. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements. Contractual Obligations and Commitments There were no material changes outside of the ordinary course of business to our specific contractual obligations during the three months ended March 31, 2024. Critical Accounting Policies For a discussion of our material changes in critical accounting policies, see “Recent Accounting Pronouncements” in Note 1, Summary of Significant Accounting Policies , of the Notes to Financial Statements included in this Form 10-Q/A. 35 Table of Contents