Xencor Inc Q3 FY2021 Earnings Call

Good day and thank you for joining us. Welcome to the Third Quarter 2021 Xencor Conference Call. I will now pass the call to Charles Liles, Head of Corporate Communications and Investor Relations. Please proceed.

Thank you, and good afternoon. Earlier today, we issued a press release which outlines the topics we plan to discuss today. The press is available at www.xencor.com. With me on the call today are Bassil Dahiyat, President and Chief Executive Officer; Allen Yang, Chief Medical Officer; John Desjarlais, Chief Scientific Officer; and John Kuch, Chief Financial Officer. After the remarks, we'll 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, 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 on information currently available to us. The outcomes 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.

Thanks, Charles, and good afternoon, everyone. We've used our array of modular protein engineering tools to create our internal development portfolio in oncology and autoimmune diseases, which currently includes six bispecific antibodies in either Phase 1 or Phase 2 studies and two cytokines in Phase 1. Our portfolio approach allows us to take multiple, simultaneous shots on goal in the clinic, and the proof-of-concept data we generate guides us on which programs we advance, terminate, or partner. Today, we've announced data from the first of our cytokine programs, XmAb306, a reduced potency, long-acting IL-15-Fc fusion protein in co-development with Genentech, which Allen will touch on momentarily. But first, a quick update on our collaborations. Last month, we entered a global collaboration license agreement with Janssen to advance plamotamab, our CD20 x CD3 bi-specific antibody, aimed at creating novel CD28 bi-specific antibodies against malignant B cells to combine plamotamab and potentially other CD3 bispecifics in lymphoma. The HSR waiting period expired last week, and the agreement is closed. We're delighted to expand our ongoing CD28 work with the Janssen team and to plan plamotamab’s development together. We believe collaborating with Janssen is the best way to broaden and accelerate our efforts in lymphoma and to maximize the opportunity for plamotamab to bring benefit to patients in a very promising and crowded field. Just a few other updates across our partners’ programs, which incorporate our plug-and-play XmAb Fc domains. Now in August, tafasitamab, which was created and initially developed by us, was granted conditional marketing authorization by the European Commission in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma who were not eligible for autologous stem cell transplantation. In the EU, tafasitamab is marketed by Incyte as Minjuvi, while in the U.S., it’s co-marketed by Incyte and MorphoSys as Monjuvi. We're also pleased that our partners, Vir and GSK, continue to receive emergency or temporary authorizations for sotrovimab, their investigational SARS-CoV-2 antibody that incorporates our Xtend technology in countries across the globe for the treatment of mild-to-moderate COVID-19 in high-risk adults and pediatric patients. So, with these two products, Monjuvi and sotrovimab, along with Ultomiris from the Alexion unit of AstraZeneca, our partnerships have resulted in three marketed XmAb medicines, which are available to treat patients with a range of serious illnesses. Now, with that, we'll turn to Allen Yang, our Chief Medical Officer, who will review our recent clinical highlights and upcoming plans. Allen?

Thanks, Bassil. Today, we'll be touching on recent updates across several clinical-stage programs starting with XmAb306. Today, we have announced encouraging initial dose-escalation data from our first clinical-stage cytokine, XmAb306, which is co-developed in collaboration with Genentech, a member of the Roche Group. Exceptional NK cell expansion of 40- to 100-fold increases compared to baseline has been observed, and with good tolerability to date. As we continue to escalate, we are now observing signs of effector T cell proliferation in the periphery. XmAb306's safety profile, biological activity, and preliminary signs of anti-tumor activity at this early stage provide initial validation for our reduced-potency approach to engineering XmAb cytokine therapeutics, and we are considering new trials to study combinations with a range of NK and T-cell recruiting therapies. Shifting to plamotamab, as you probably saw, we announced an abstract was accepted for presentation at the American Society of Hematology Annual Meeting in December. In a few weeks, we'll present updated clinical results from the Phase 1 study in patients with non-Hodgkin's lymphoma. We identified a dose regimen, 50 milligrams flat dosing every two weeks after step-up dosing, that is much higher than we have previously reported by weight-based dosing. And due to our new step-up schedule, it’s generally well-tolerated with encouraging monotherapy activity. We believe that the best opportunities for patients require a focus on setting unique combinations of plamotamab with chemotherapy-free partners and we are working to initiate our randomized Phase 2 combination study with tafasitamab and lenalidomide, a highly active regimen now approved in relapsed lymphoma with a label in second line and later. Plamotamab targets CD20 and redirects T-cells to tumors while tafasitamab’s targeting of CD19 enhances ADCC tumor killing, combining distinct immune pathways and tumor-associated antigens. We think the combination is a differentiated approach for treating patients with lymphoma. This study should be initiated in late 2021 or early 2022. Going forward alongside Janssen, we look forward to investigating additional mechanisms that avoid the downsides of systemic chemotherapy, such as novel CD28 bispecifics that are anticipated under our collaboration. Moving on to Vudalimab, which was formerly known as XmAb717, we have started dosing patients in a Phase 2 study of the PD-1 CTLA-4 dual checkpoint bi-specific antibody. The study is enrolling patients with metastatic castrate-resistant prostate cancer that we classify by molecular subtype as a monotherapy or in combination, depending on the subtype. This is an indication with a high unmet need and is currently without much checkpoint inhibitor use beyond MSI high tumors. But earlier studies suggest that PD-1 and CTLA-4 inhibition has promise in prostate cancer. Therefore, dual targeting of PD-1 and CTLA-4, with a potentially differentiated tolerability profile, could meet an important unmet clinical need. At the same time, we're initiating a second Phase 2 study in patients with advanced pelvic tumors, including gynecological malignancies, which represent another opportunity for dual targeting of PD-1 and CTLA-4 to address an unmet need. In addition, this study includes a cohort of clinically defined high-risk, metastatic, castrate-resistant, prostate cancer, which will allow us to study the Vudalimab monotherapy in a specific population of aggressive prostate cancer, independent of molecular profiling data. Later this week at SITC, we will present mature data from the ongoing Phase 1 study’s expansion cohorts with a focus on patients with prostate cancer, renal cancer, and a basket cohort of tumors without approved checkpoint therapies. These cohorts are those for where the data we're still immature at SITC 2020. Next, Tidutamab is our CD3 bi-specific that targets SSTR2. Last week, we presented additional follow-up from the Phase 1 study in patients with neuroendocrine tumors. The poster is available on our website. The results from the study indicate that Tidutamab was generally well tolerated with a low incidence and severity of cytokine release syndrome, and it induced meaningful T-cell activation in the challenging disease setting. We've begun dosing patients in the Phase 2 study in patients with Merkel cell carcinoma and small cell lung cancer, which are SSTR2-expressing tumor types known to be responsive to immunotherapies. Finally, as we noted in our press release, we do not intend to develop additional internal resources to further the development of vibecotamab, the CD123 x CD3 bi-specific antibody. In addition, Novartis is terminating its right to vibecotamab, which will be effective early next year. This decision reflects our broad portfolio development strategy, which requires us to make difficult decisions like these. So we can dedicate resources to our most promising programs and allow room for exciting new drug candidates to be tested in the clinic. So moving on, I'd like to turn the call over to John Desjarlais, our CSO. John?

Thanks, Allen. We've dedicated a lot of effort and research years to using the full range of our protein engineering tools to turn native cytokines into therapeutics. Our approach seeks to create drug candidates with a long duration of therapeutic activity that remain under the threshold for toxicities that have historically limited the clinical use of cytokines. First, we make small changes in the cytokines to selectively reduce binding affinity to their receptors, which lowers their potency. This alone creates better tolerated, longer acting, and far more sustained immune-stimulating activity in clinical models. We take further steps to enhance stability in pharmacokinetics by fusing the cytokine to an XmAb bispecific Fc domain, which includes our extend mutations to further enhance persistence. We're beginning to see clinical data that is now validating our approach as reviewed by Allen with XmAb306. Our second cytokine program, designed with the same principles as XmAb564, is our wholly owned IL2-Fc fusion engineered to selectively activate regulatory T cells or T-regs for the treatment of autoimmune diseases. The Phase 1 study for XmAb564 is ongoing. At our next cytokine program scheduled at the end of the clinic is XmAb662, our preclinical IL12-Fc program. IL12 is a potent pro-inflammatory cytokine that promotes high levels of interferon gamma secretion from T-cells and NK cells, increasing their cytotoxicity and the immunogenicity of the tumor microenvironment by making tumor antigens more visible to the immune system. It's previously been demonstrated that IL12 can have anti-tumor activity, but this has been the case across therapeutic cytokine development historically. It has a narrow therapeutic index that limits its utility. We believe that XmAb662, which was designed with our cytokine engineering methodology to lower potency and prolong the duration of action, could be a significant advancement toward IL12 that could be therapeutically dosed. We anticipate submitting an IND for XmAb662 in 2022. Shifting to our antibody work, we have two bispecific antibody candidates that we anticipate will advance to the clinic before that: XmAb819 and XmAb808. Later this year, we are submitting the IND for XmAb819, our ENPP3 x CD3 bispecific for renal cell cancer. That's our first internal program engineered with reduced potency CD3 binding combined with a multivalent 2+1 bispecific antibody format. Using two antigen-binding domains to the tumor target provides for more selective binding to cells with high ENPP3 density, like tumor cells compared to lower density that may be found on normal cells. We believe the XmAb 2+1 format opens up a wide range of potential solid tumor targets for T-cell redirection. For example, we've incorporated a 2+1 format into our most advanced wholly owned lead CD28 bispecific candidate, XmAb808, which targets B7-H3. We intend to develop the candidate for potentially broad solid tumor use, including in prostate cancer, where B7-H3 is highly expressed. We anticipate a 2022 IND submission for XmAb808. Finally, I'd just like to mention that we're presenting four preclinical programs at SITC this week: XmAb662, the IL12 program we discussed; our PD-L1 by CD28 bispecific antibody program; a poster on our TGF-beta platform; and our initial disclosure of the NK cell engager platform. These programs show the power of our platform to create XmAb drug candidates that access new biologies and continually supply our clinical pipeline with differentiated molecules. With that, I'd like to hand the call over to John Kuch, our CFO, to review our third-quarter financials. John?

Thank you, John. A critical part of our business is leveraging our protein engineering capabilities through partnerships and collaborations for XmAb drug candidates and technologies, which generate multiple revenue streams. As Bassil mentioned, there are now three marketed products that have been developed for the XmAb technology from which we earn royalties. Additionally, our second collaboration will generate a significant upfront payment, potential milestones, and royalties, and the opportunity to share development costs for our plamotamab program with our partner Janssen. Revenues from these and other partnerships allow us to maintain a strong balance sheet to support our broad portfolio of bispecific antibody and cytokine programs. Cash, cash equivalents, receivables, and marketable debt securities totaled $537.9 million at September 30, 2021, compared to $610.2 million at December 31, 2020. The decrease reflects cash used upon 2021 operating activities offset by proceeds from royalties, milestone payments, and the sale of an investment security. The September 30 balance excludes payments due to us under our second Janssen collaboration, which includes a $100 million upfront payment and a $25 million payment for the sale of Xencor common stock, which we expect to receive before year end. Based on current operating plans, we expect to have cash to fund research and development programs and operations into 2025. We currently estimate we'll end 2021 with between $575 million to $625 million in cash, cash equivalents, receivables, and marketable debt securities. Now I'll review our third-quarter and nine-month financials. Revenue for the quarter ended September 30, 2021 was $19.7 million compared to $35.4 million for the same period in 2020. Revenues in the third quarter were primarily related to revenue earned from our first collaboration and royalty revenue. Compared revenues from the same period in 2020, which was primarily a milestone payment for MorphoSys. Total revenue for the nine months ended September 30, 2021, was $121.1 million compared to $80.8 million for the same period in 2020. Revenues for the nine months were primarily earned from research collaborations with Janssen, Genentech, and Novartis; milestone revenue for MorphoSys; and royalty revenue compared to the same period in 2020, which is primarily milestone revenue for MorphoSys and licensing revenue from Gilead and Aimmune. Research and development expenses for the third quarter were $50.6 million compared to $44.5 million for the same period in 2020. Total R&D expenses for the nine-month period were $141.5 million compared to $121.9 million for the same period in 2020. Increased R&D expenses for the third quarter and nine-month period over the same amounts for the same periods in 2020 were primarily due to additional spending on our IL-15 drug candidate programs and other early stage programs. Additional spending on XmAb819, our ENPP3 x CD3 candidate also contributed to increased R&D expenses during the third quarter. General and administrative expenses for the third quarter were $10.4 million compared to $7.6 million for the same period in 2020. Total G&A expenses for the nine-month period were $27.5 million compared to $22.1 million for the same period in 2020. Increased G&A expense for the third quarter and nine-month period over the same amounts for the same periods in 2020 were required due to increased staffing, spending on professional services, and facility costs. Total other income for the third quarter was $1.1 million compared to $4.2 million in the same period in 2020. Other income for the nine-month period was $57.5 million compared to $7.5 million in the same period in 2020. Other income for the nine-month period includes realized gains on a sale of investment equity security and an increase in unrealized gains on the company's marketable equity investments. Net loss for the third quarter was $40.2 million or $0.69 on a fully diluted per share basis compared to net loss of $12.6 million or $0.22 on a fully diluted per share basis for the same period in 2020. The increased net loss reported for the third quarter compared to the same period in 2020 is primarily due to lower milestone revenue and higher operating expenses in 2021. For the nine-month period ended, net income was $9.6 million or $0.16 on a fully diluted per share basis, compared to net loss of $55.6 million or $0.97 on a fully diluted per share basis for the same period in 2020. Net income reported for the nine-month period compared to net loss reported for the same period in 2020 is primarily due to higher collaboration revenues and realized and unrealized gains from equity investment securities in 2021 compared to 2020. Non-cash stock-based compensation expense for the nine-month period was $26.6 million compared to $23.1 million for the same period in 2020. Total shares outstanding were 58.5 million as of September 30, 2021, compared to 57.4 million as of September 30, 2020. With that, we would now like to open up the call for your questions. Operator?

Thank you. We have our first question from Ted Tenthoff of Piper Sandler. Your line is now open.

Great, thank you very much. And first on the IL-15 data: can you share a little bit more in terms of where you and Genentech intend to take tests? And also remind us, do you guys have the ability to do studies on your own? Thank you.

Yes, thanks, Ted. I'll address the second part of your question first. We can conduct studies independently under our agreement with Genentech. However, we must meet certain criteria, such as ensuring that the agents we plan to use are appropriate. We also have to collaborate with Genentech to keep everyone informed about our activities. So, in short, we can indeed run our own studies, both using our existing compounds and other molecules that we don’t own. Regarding our direction, we can't disclose Genentech's specific plans as they lead the collaborative efforts. They have significant expertise and connections with potential partners in their portfolio. We're focusing on our interests, but we’re not ready to share specifics yet. There are various opportunities in both NK cell and T-cell therapies that we could explore. NK cells play an important role in the ADCC function of drugs such as Rituxan, Monjuvi, Erbitux, and daratumumab in myeloma. There’s strong scientific reasoning behind developing an agent that increases NK cell numbers and activates them or enhances their maturity, such as with IL-15. We believe pursuing NK cell strategies makes sense, alongside identifying the best T-cell therapies to complement this agent if the outcomes from our Phase 1 trials continue to show promise.

Yes, that makes sense. I'm looking forward to all the data.

Thank you.

Our next question comes from the line of Mara Goldstein of Mizuho. Your line is now open.

Great. Thanks. Just continuing along the same line of questioning regarding Ted's question. I'm curious about, so you've reached the point in which you have administered a therapeutically active dose or, and so I'm curious how you would have us think about benchmarking results seen to date relative to other agents in the space. What, I guess, should we think about from a quantitative perspective that would allow us to see the potential activity that you're observing so far?

Right. So I think there's two pieces to consider. As we continue to escalate, by the way, we're not done escalating, just to be clear. While you maintain – if you can keep a tolerability profile that's acceptable, and we feel good about the tolerability profile we've seen to date. What you look at are the effector cell populations and the amplification of them, how that's sustained, particularly NK cells and CD T-cells. So that's one metric, the levels, and the durability through the subtypes. The other metric is when you get into combination studies, what kind of efficacy you see? Now at this early stage, we feel that the magnitude of increases in NK cells is clearly active. We're starting to see T-cell proliferation signals, and we think that the initial anti-tumor activity we’re observing, although they are unconfirmed responses, suggests immunological activity at the tumor site, which is what you want to see. So I think the presence of that is encouraging. That is one benchmark. However, you can’t really extrapolate beyond there. Do you see something happening in the tumor? And the magnitude and durability of the effector cell populations, such as NKs or T-cells.

Okay. All right. Thanks. I appreciate it.

Our next question comes from the line of David Nierengarten of Wedbush Securities. Our line is now open.

Well, continuing on the NK cell therapy enhancement question theme here. I was curious if you had any thoughts or ways to benchmark the activity or the enhancement of NK cell activity in patients compared to engineered NK cells, especially of course, those with IL-15 engineered to essentially be constituently active in those cell therapies? I'm obviously curious about that. Thanks.

So I know John wants to have a few things to say about that. John Desjarlais, our CSO. I think two parameters: count how many cells are there? And are they the right subtype or the active?

Yes. I'm trying to remember. I did that back-of-the-envelope calculation, and I was comparing to one of the NK therapies, because they state how many NKs they actually engraft into the human. I think we are at about 100-fold higher. So basically, you could think of the NKs as they sort of the mile of late and then they replace the NKs that were there with their engineered NKs. We're taking the NKs that exist and expanding – expand those hundredfold higher.

And so that's – it's about 100-fold more cells than you see with the allogeneic approaches reported to date from, again, our back-of-the-envelope estimate. It's a lot more cells, and we're certainly seeing the mature phenotypes, which have characteristic markers like CD16 on them. So imply they're active and can do the job. Beyond that, it's going to be – how do things go as we start doing the clinical trials in combination?

And you touched on this before, but I wanted to be a little bit more explicit with Genentech. Do you need Genentech to sign off on you doing a study with this in an NK cell engager, for example? Or can you pursue that without their say-so?

We can pursue studies with any third-party agents that we want as long as we don't create undue safety risks to drug supply or we can't duplicate something going on within the collaboration. For example, we couldn't do our own study in combo with atezolizumab, right? We simply can't do that. But outside of that, as long as we check basic governance boxes, and we're responsible, then we have a lot of flexibility.

Cool. Okay. Thank you.

Our next question comes from the line of Kaveri Pohlman of BTIG. Our line is now open.

Yes. Good afternoon. Thanks for the updates, and thanks for taking my questions? My third question is regarding vudalimab. Your last readout showed a couple of responses in patients pretreated with PD-1 combinations. But do you know what's driving a response there? Is it that the higher doses allow you to push the buttons harder safely?

Gosh, I'll let Allen take that one, but this is delving into the realms of the unknown.

Yes. So I think what you're asking is why we see responses with vudalimab, formerly known as XmAb717, in patients who had previously been treated with other checkpoint inhibitors, either PD-1 or ipilimumab in combination. The answer is we don't know for certain, but one aspect we do know is that the way this molecule was designed was to favor PD-1 binding and to diminish CTLA-4 binding. In other words, you only get CTLA-4 being employed after PD-1 binds, and we believe that minimizes toxicity but encourages dual activity. One of the possibilities is that it could be more tolerable and allow you to push more doses in. More specifically, you could be recruiting T-cells that are both PD-1 and CTLA-4 expressing. So the ones that are enriched in the tumor, and so that dual targeting in a single molecule may have a molecular advantage over giving the agents independently. I don't know if you want to add anything, John, or...

No, I think you covered it. I mean, you're potentially zeroing in on the most tumor-reactive T-cell population.

Got it. Thanks. And for the Tidutamab study, how much do you think that the recent data is an indication of the limitation of the approach? Because you have a very cold tumor, but you're dragging T-cells there. Do you think that tells us that the approach is unlikely to be useful in really cold tumors? Do you need some neoantigens or perhaps some priming cytokines like IL-12?

That's an interesting question. I think the one thing I will say that we are seeing the biomarkers we reported for the Tidutamab study were in the periphery. There was a lot of increase in T-cells in the periphery, a lot of activation of them. You raised a good point. We don't know what's happening. There’s very limited biopsy data in the tumor. Could that be enhanced by other therapies that change how the T-cells behave, help them home or migrate, or become more pro-immunogenic? Quite possibly. I mean, that's part of the driver for us going into small cell lung cancer and Merkel cell carcinoma, which are hotter tumors for immunotherapy. However, your question there that we don’t have a perfect answer for is why we have reagents that we're building to make our next programs come along.

Yes. I’d also like to add, we mentioned our XmAb808 program, or B7-H3 x CD28 bispecific. One of the whole points of interrogating the CD28 bispecific antibodies is they could potentiate CD3s, particularly in the cold tumor setting because CD28 causes a much stronger proliferative signal.

And I would add along those lines. There’s been a lot of investigator interest in combining Tidutamab with either a PD-1 within our portfolio or later on with the CD28. And I think there's a lot of interesting science there. However, immediately we're going to test small cell lung cancer and Merkel cell cancer. That Phase 2 has started enrolling and addresses an important scientific question that you're asking: is it the seed or the soil hypothesis, which is an ongoing debate in oncology. But clearly, Amgen has seen responses with their AMG 757. So we're very excited about our Phase 2. If we see responses, I think that will add a lot of information for the field.

That's helpful. Thank you.

Sure.

Our next question comes from the line of Charles Zhu of Guggenheim Securities. Our line is now open.

Hey guys. Thanks for taking my question. Congrats on the early XmAb306 data. You obviously have considerable expansion of the NK cells with this drug. And on that note, I was wondering, to what extent are the peripheral effector T cells potentially driving any early signs of efficacy that you're observing? And any potential color you can also provide around things like peripheral versus intratumoral presence of these cells?

Yes, I don't believe we have data on intratumoral biomarkers or cells yet. I think maybe, John, if you want to go through the mechanistic mystery of T-cells in the periphery and what do they do?

Yes. It is a big mystery. I mean, it's – I don't think anybody knows if you need a particular level of T-cell expansion in the periphery to promote antitumor activity. Really, the big question is what's going on in the tumor. Again, we don't have any data on that yet. There are lots of hypotheses for why you would see more activity in the tumor T-cells than the peripheral ones. We had shown early on in preclinical data that when you stimulate a T-cell, say, through CD3 engagement or TCR engagement, it actually upregulates the IL-2 receptors, which, of course, are the same receptors that IL-15 works through. You can imagine those intratumoral T-cells being more responsive to IL-15 than the peripheral T-cells.

Yes. But I guess to really get at the point of what might be going on in the tumor, if you can observe tumor shrinkage, whether it's combination with a checkpoint inhibitor like atezolizumab, or even in monotherapy, I think that in a sense and a marker of what's happening in the tumor immunologically, right? Because these are immunotherapies. These are in very advanced solid tumor patients who've exhausted all prior therapies. Many of them would have seen checkpoint inhibitors in the past and progressed on those or not responded to those. So I think that's an important piece of the pull when you put it together with the biomarker data you're seeing and the kind of increases in cell counts in the periphery. We don't know exactly what's going on in the tumor yet. We're eager to see that biopsy data as it starts coming in, but obviously much harder to obtain than the blood itself.

Got it. Got it. Thanks for that color. And maybe just one more big picture question for me on this front. So you have multiple different approaches to engage the immune system through multiple different means, whether it's recruiting T-cells, recruiting NK cells, and now it looks like you're also going to be able to make them proliferate as well. And a lot of your combination partnership strategies seem to have been more external facing, I guess to what extent are really more internal combinations on your mind? And what are your thoughts on potentially realizing synergy of something like an NK cell and tumor-specific NK cell engager with an NK cell expansion agent? And also, what are your thoughts on potential for synergistic toxicity as well?

Regarding the toxicity question, it's hard to say, of course. We know that NK cell mediated agents like classic antibodies Rituxan or Gazyva, or Tidutamab tend to be fairly well tolerated regarding their immune stimulation. I think from a potential of internal combinations, that's really why we're making these agents for combination. Of course, the nearer-term opportunity might be with marketed agents, but we want to create an internal pipeline that has the best combination partners, say with the best checkpoint inhibitor. We hope we can establish vudalimab as an important option because it has a differentiated profile for both PD-1 and CTLA-4 inhibition. We think our CD28 bispecifics as well as the cytokines we're testing are giving us those tools to figure it out. It's an experiment to determine which combinations work best. I think we mentioned Monjuvi as a potential partner for NK cell expansion. Recall, we created that molecule, and we still have a significant economic stake in it. While not internal, it's very important to us. We are discussing some of our NK cell engaging novel molecules at SITC this week. So that's really the big driver for it, where the short-term piece is to do combinations with external parties.

Got it. Thanks.

Our next question comes from the line of Gregory Renza of RBC Capital Markets. Your line is now open.

Hi, this is someone on for Greg. Thank you for taking our questions and congratulations on the progress. My first question is about XmAb808. Can you remind us why you chose B7-H3 as your first target for the CD28 platform instead of a more tumor-specific approach? Additionally, how does your design methodology ensure a safety profile that can mitigate some of the concerns raised by past programs? Thank you.

Yes, sure. I mean, really, it was a pragmatic decision to select B7-H3. First of all, there's very broad and high-density expression of B7-H3 across multiple solid tumor histologies. I wanted a one-size-fits-all solution that could potentially couple with PD-1 inhibitors or other checkpoint inhibitors as well as CD3 bispecifics. The justification for going with a broadly tumor-expressed antigen was that CD28 engagement by itself, and we've shown this in all of our preclinical studies, isn’t expected to do anything unless there’s also signal 1 coming from a TCR recognition of a tumor cell or in combination with the CD3 bispecific. We also thought some of the drug conjugate programs that are out there seemed to be safely targeting such a broadly expressed antigen. So, all those pieces combined led us to that as our first target. But of course, we are considering more tumor-specific markers as well.

Great. Thank you. And then maybe just another one on the IL-2 program. When should we expect to learn data from that program? And what's your development strategy ultimately considering the recent pharma interest as well as your strategy with other autoimmune programs?

For XmAb564, we anticipate having initial data from the single ascending dose trial in healthy volunteers next year. This trial is currently underway. Regarding our development strategy, we recognize that this new modality, which is in early-phase development by several parties for Treg expansion and stimulation, remains an unproven therapeutic hypothesis. As we move into Phase 2 and gain validation, we want to pursue two avenues. One will focus on smaller or rarer indications that have a significant unmet need, allowing us to explore this new mechanism. The other will involve larger indications using potentially established mechanisms of action, which will enable us to quickly assess whether we are affecting the disease due to clear endpoints and markers. We aim to cover both aspects: pioneering to accelerate development opportunities and seeking to answer the scientific questions clearly and effectively.

Great. Thank you.

Our next question comes from the line of Peter Lawson of Barclays. Your line is now open.

Hey, thanks for taking the questions. Thanks for the update as well on TrisJust around that. The responses you've seen for three, do you think they relate with the CD16 isotype, the high-affinity CD16 on NK cells? Just your thoughts there. And then what kind of CD8 T-cell expansion do you think you’d want to see if that's a relevant question here?

Yes, we have no idea whether the CD16 phenotype is the highest affinity-variant 158 or the lower affinity-variant phenalanine. I mean it's unclear what the underlying mechanisms are that are driving responses. Even though you again are seeing just the beginnings of T-cell proliferation markers in the periphery, that doesn't tell us what's happening with the T-cells in the tumor. The NK cells, I think, are very much underappreciated, across all oncology indications because they're part of driving immune responses more broadly than just maybe the obvious ADCC function. We don’t have any correlation or understanding on that. And what number of T-cells increase do you need to see in the periphery? I think we talked about that earlier. There is no clarity there, right? I think you'd certainly want to see activation markers just to let you know that your molecule is doing what it ought to do, and we're certainly seeing activation and proliferation markers of T-cells in addition to this really encouraging and dramatic NK cell expansion that can play in a lot of different ways. But mechanistic understanding, I think, is still ways off.

And does that T-cell – sorry, does the NK cell expansion correlate with activity or is that too simplistic?

Too few patients and too few data points now to understand that. Whether it correlates with activity, I couldn’t tell you. I do think that within the realm of ADCC-driven antibodies like, for example, Rituxan, there is growing literature validating that NK cell counts in patients, high NKs vs. low NKs correlate with response or likelihood of benefit. I think even not just response, but actual clinical benefit like OS, so that’s pretty clearly established. More NKs are better for ADCC antibodies, particularly Rituxan has been well documented, and I think suggestions of that for several other antibodies. For T-cell-mediated therapies like checkpoint inhibitors, nobody knows the role of NKs. But there's a lot of opportunities, we think, in NK cell-driven therapies. The current generation, we think there's going to be a lot more on the horizon with the right tools, as these cytokines to generate more NKs when you want.

Yes. There's also a school of thought that with a lot of patients under a lot of different checkpoint therapies in various T-cell therapies, NK cell tools are going to be more important over time as the MHC status of those patients changes due to selective pressure.

Got you. Thank you. And then the recent Novartis or yourself kind of moved away from your CD-123 construct, any details there would be great. And then is that a target you would pursue with your CD28 construct as well?

So, I'll answer the first one, and John can talk about the CD28 construct concept. So, the landscape in AML has gotten, I think, a lot more challenging as venetoclax has become more entrenched with earlier lines, and now we’ve been a later line. So that's changed the landscape to make it more challenging and the opportunities, I think, have shrunk. Additionally, CD123 is a difficult target with a very narrow therapeutic window and challenges in PK dosing frequency. In spite of the encouraging early complete remissions we've had and continuing additional activity we've seen, all those pieces make the product profile and competitive landscape tough, really tough for us to want to pursue, and our partner, Novartis, agrees. There's certainly investigator interest in niches, and we're very supportive of trying to help patients when sophisticated investigators think there could be a role for the agent in trials. Maybe the CD28 combination with CD123 is intriguing, but...

Yes. But again, due to the competitive landscape, I’m not sure that's where we want to put our efforts.

Got you. Okay, thanks so much. Thanks for the updates.

Thank you.

Our next question comes from the line of Arlinda Lee of Canaccord Genuity.

Hey guys, it's Ben on for Arlinda. Thanks for taking my question. Congratulations on your Janssen partnership. I just wanted to dovetail on the most recent comments you made about CD28. Does the Janssen partnership give you flexibility to pursue collaborations with other partners in CD28 combinations? And is there an appetite for it?

The Janssen collaboration is very narrow to within B-cell malignancies. So, B-cell malignancy targets, combined with CD28, and it has a time limit on it. Targets that we don't advance to certain development stages within the two-year collaboration period are out. So, we like to control things. It would be a very limited number of just B-cell targets. So, we could go and partner with whomever. I think now that we’ve got the ball rolling with XmAb808, which is a broad tumor marker, and now that Janssen is pushing hard in prostate cancer and is going to really work with us on plamotamab to accelerate that program, we think it might not be – now is the time to pull in and focus on internal work for CD28, not really look at partnering around the CD28 platform now and wait until we've really built up a data set and understand its full potential and value after we've been in the clinic.

Okay. That makes a lot of sense. Regarding the Janssen partnership itself, can you give us an idea of what the next term milestones will be after you get the stock purchase on this quarter?

Let's see. That would be, I mean, of course, as part of the collaboration, we're going to start our tafasitamab lenalidomide trial either late this year or early next year. We would expect to get the subcutaneous formulation of plamotamab into the clinic in 2022 as well. We're well on our way in manufacturing it and having a formulation we think is quite promising to use in humans next year. With the earlier collaboration, our collaboration around prostate cancer, with a CD28 bispecific, the next milestones, we can't guide exactly on timing because it's up to them, but would be taking a candidate into full development and IND-enabling development. We've been making rapid progress on that collaboration. It's been less than a year now, and we’ve gotten along the way.

Great. That's very helpful. Thank you very much.

Our next question comes from the line of Alethia Young of Cantor Fitzgerald.

Hi, thanks for taking my question and congrats on all the progress this quarter. This is Nina for Alethia. We were curious if you could speak more on your CD28 program with Janssen. And how it differentiates in the competitive landscape? And also, if you think at ASH, if you'll get high enough doses that we may be able to make any conclusions around efficacy? Thanks.

I guess on the first one on the differentiation, I think we believe we have a good monotherapy step-up and up to a much higher dose we had before now, 50 milligrams. We're very encouraged by both the tolerability profile there as well as the efficacy we're seeing in admittedly a small number of patients at that dose. But I think the real differentiation is about the development strategy. Allen, do you want to speak to that?

Yes, I think biologically, it will be hard to distinguish these antibodies from each other. But the development strategy is key here. So, we've sort of gone for this chemotherapy-free strategy combined with tafasitamab and lenalidomide, the CD19 versus CD20 targeting, the ADCC versus T-cell engaging and the potential that lenalidomide could potentiate both. Another chemo-free strategy would be combining with a B-cell CD28 directed modality, and that's our partnership with Janssen as well. We think that the molecules look fairly similar early on, and the data to date has shown good activity, and we will be reporting additional activity. We've spent a lot of time figuring out our dose and schedule to optimize much higher doses than previously reported with a very good step-up strategy, which minimizes CRS. So, we're excited to move to the next phase, which is our randomized Phase 2 in combination with tafasitamab and lenalidomide.

To be clear, that additional data will be presented at ASH with still a small, yet growing number of patients, giving us a clear picture of where we are on efficacy and safety with this new step-up regimen.

Thank you.

There are no further questions at this time. I'm now turning the call back to Bassil Dahiyat, President and Chief Executive Officer. Thank you.

Thank you very much, operator. And thanks, everybody, for joining us today. We look forward to updating you again over the coming weeks. Have a terrific evening. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.