Good afternoon, and thank you for standing by. Welcome to Xencor's First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that this call is going to be recorded at the company's request. Now, I'd like to turn the call to your speaker today, Charles Liles from Head of Corporate Communications and Investor Relations. Go ahead, Charles.

Thank you, and good afternoon. Earlier today, we issued a press release, which outlines the topics we plan to discuss today and is available at www.xencor.com. Providing abbreviated comments on the call is Bassil Dahiyat, President and Chief Executive Officer. Afterwards, we'll open up the call for your questions, and we will be joined by Allen Yang, Chief Medical Officer; John Desjarlais, Chief Scientific Officer; John Kuch, Chief Financial Officer; as well as Nancy Valente, Chief Development Officer. 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, 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; they are based on our current expectations and beliefs and are based on information currently available to us. The outcome of the events described in these forward-looking statements 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 our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q. With that, I'll pass the call over to Bassil.

Thanks, Charles, and good afternoon, everyone. At Xencor, we utilize our array of modular protein engineering tools to create a broad internal development portfolio of antibodies and engineered cytokines in oncology and autoimmune disease. We target novel biologies with our candidate designs, including CD28 cosimulation bispecifics, more tumor-selective CD3 bispecifics, and potency-reduced cytokines. This broad portfolio allows us to take multiple simultaneous shots on goal in the clinic and use the proof of concept data from our early-stage studies to guide which programs we advance, terminate, or partner so that we can allocate our resources to programs with the greatest potential for success and make room in our portfolio for the next wave of XmAb bispecifics and engineered cytokines. We continue to enroll patients in Phase 1 and 2 trials across our wholly owned portfolio of four oncology and one autoimmune XmAb candidates. Last month at AACR, we presented on our preclinical portfolio of XmAb CD28 costimulatory bispecific antibodies, which are the focus of our research now in this exciting new area of immuno-oncology. XmAb CD28 bispecifics are designed to activate T-cells only in the presence of tumor antigen and thereby drive signal 2 activation to amplify and sustain T-cell antitumor cytotoxicity. Our poster highlighted our platform’s rapid candidate generation and the broad opportunity for CD28, using data from five CD28 bispecific antibodies targeting a variety of solid tumor targets, such as CEA, Trop-2, and STIP-1. We've initiated preclinical development of a second internal CD28 program with a plan to file the IND next year. Recall that our lead clinical CD28 program, XmAb808, targets B7-H3 in phase 1. Our next data presentation will be later this quarter when we expect to present data from our regulatory T-cell targeting cytokine XmAb564 at the Congress of Rheumatology in Milan. We plan to present updated biomarker data from the single ascending dose study that we initially presented in November 2022. Lastly, I'd like to welcome a new member of the leadership team at Xencor. Last month we announced the appointment of Nancy Valente as our Chief Development Officer. She'll be responsible for all of Xencor’s clinical activities and will join our CSO, John Desjarlais, and me in the scientific leadership of the company. We're delighted to welcome Nancy to our team and look forward to benefiting from her deep expertise in developing drugs like GAZYVA, POLIVY, VENCLEXTA, and HEMLIBRA. She was in a unique position to see our development programs, technology, and people up close for the last eight months as a member of our Board of Directors, from which she's resigned, and chose to commit to work full time here. Welcome aboard, Nancy. Now, with that, we'll open the call to your questions. Operator?

The first question comes from Mara Goldstein from Mizuho.

This is Supawat on for Mara. Thank you for taking our question. I have a question on XmAb564. Congratulations on getting the slot at EULAR. Just curious, I know there'll be additional biomarker data, but what's more you can guide in terms of what we should pay attention to? And then on XmAb564, I'm just curious if competitors' datasets and development, including Nektar's REZPEG and Amgen's compound, give your positive on this mechanism and why atopic dermatitis and psoriasis are selected as an indication for the mAb study?

Any other questions? That was about four?

Thank you, that's all.

Great, let's get started. The biomarker data we'll present will provide a detailed elaboration on the characteristics of the T-cells, specifically the regulatory T-cells that were amplified in our single ascending dose study presented in November. We aim to characterize these in greater detail. In November, we highlighted that we observed remarkably durable and sustained increases in T-reg over a period of 21 days. We're excited about the potential to extend the dosing interval beyond the standard two-week timeline. We are quite enthusiastic about the mechanism. It's important to consider that the data from the competitor should be viewed in light of their less than ideal selectivity for CD25. John, do you have anything to add?

No. I mean, just based on in vitro comparisons looking at various molecules and what's been available in various posters, we like our selectivity profile better. Ours is a little bit more surgically engineered to have preferential binding to CD25 positive Tregs and very carefully potency reduced to maximize the pharmacokinetic and pharmacodynamic effects. So we're still quite enthusiastic about the potential of the mechanism of action. I think it's really about making sure you've engineered what you think is the right molecule to attack that MOA. Now you asked about our indication selection in our Phase 1b multiple ascending dose study, we also started treating patients in November of last year. We picked atopic dermatitis and psoriasis, and there are two goals of that study. One is to rapidly determine a good dose and schedule with multi-dose, and we wanted to pick indications that we could rapidly enroll and that we could also directly view clinical outcomes quite easily. So the skin autoimmune diseases allow you to do that—look at actual clinical responses and correlate that to Tregs and your safety profile. We think, in particular, for atopic dermatitis, there remains a strong opportunity for good agents that can have long dosing intervals and good safety.

The next question comes from the line of Edward Tenthoff from Piper Sandler.

So I apologize if I missed this. But what if anything are you guys going to be showing at ASCO, and when should we get the next modality update?

We're not presenting any new data at ASCO this year. As you recall, our tempo of presentation has usually fallen towards the late-year conferences, and we'll guide on that—specifies on that as we get a little further on into the year and closer to whatever data updates we're going to do. We're not guiding full-year data; we're really doing a little closer, like we did just now for XmAb564.

The next question comes from the line of Brian Cheng from JPMorgan.

Maybe just one question on 564, IL2-Fc. So you previously mentioned that psoriasis is a great starting point for you to get some proof of concept. As we look forward to some data, early data in psoriasis early next year, I'm just wondering how do you think about the market opportunity for this molecule, given that this may not be the ultimate market for you to move forward with 564? And any guidance on just from an analyst standpoint, how should we think about the total addressable market here for 564?

I'm sorry, how should we think about the what for 564? I missed that word.

The total addressable market for 564.

So I think we made a point of adding atopic dermatitis into the Phase 1b mix, and we will be dosing patients in cohorts there as we step up a little bit in dose, because we do think AD has still a significant unmet need, both for just the breadth of the number of severe patients as well as the need for longer-acting agents. We know that there's a lot of excitement about Lebrikizumab coming on with a monthly, which is better than vudalimab, which is every two weeks and is really bound by the target-mediated clearance there. So we think there's—we try to be thoughtful about adding things that can both have proof of concept as well as a meaningful potential for differentiation into our Phase 1b. But remember, as for your total addressable market, there's a wide range of indications that you could potentially reach with a broad autoimmune drug. We know that some of our competitors are developing ulcerative colitis; there's development going on in other kinds of diseases like type 1 diabetes, like just a wide range. So as for total addressable market, I think you could consider it as incredibly broad right now or you could wait to see how we define it further as we pick additional indications as we come out of this Phase 1 later, say in 2024.

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

I just had a quick one on the claudin-6 CD3, just with the way the ovarian cancer market is evolving, kind of where you would see it slot in potentially? I know, it's early stages, but I was curious on that.

I think it's a market in flux. But still, even with the agents that are coming on, even the response rates are still not that dramatic and people relapse fairly quickly, we think with a distinct target that you would be aiming to be the first time patients see anything hitting this target, I think you're going to start with the later line in the clinic but try to move forward pretty aggressively; there's nothing that certainly slam the door. And I think that a cytotoxic agent like this could have a lot of potential. And I know that there's a competitive landscape with ADCs with other CD3s, but I still think there's a wide—a big unmet need.

And I'll add with a completely different mechanism of action than some of those other molecules. I don't think there's any emerging resistance against those therapies that will really read too much on the CD3.

Could you remind me at least maybe not all of us on the phone, but is there a differential or a requirement or likely requirements for testing of expression here, or is it broadly expressed? I just can't remember off the top of my head.

We think it's definitely going to be prudent to very closely monitor for—on this discussion. There's definitely some heterogeneity.

The next question comes to the line of Dane Leone of Raymond James.

Can you just give us an update on where you see the CTLA-4 bispecific program getting to?

Dane, you were choppy. Where we see the CTLA-4, did you say CTLA-4 PD-1?

Yes, CTLA-4 or PD-1 bispecific this year in terms of the global updates and progress?

As we said earlier, we're not guiding specifically on data timing until we get a little closer to events. We've traditionally updated on that program late in the year, but we're not saying anything definitive yet. We are enrolling well in both of our Phase IIs, our combination chemo, Phase II as well as our monotherapy Phase II, the first being in prostate only, the second in prostate as well as gyn tumors. So we'll update—we'll give guidance on data timing a little bit later.

The next question comes from a line of Kaveri Pohlman from BTIG.

So for IL-12, how do you think about this field given that they have been some disappointment in this space? Can you tell us about your approach and how it could be different from others? And my second question is regarding vudalimab. If you could provide more color on your trial amendments for chemo combinations for CRPC? And you're enrolling 20 patients per cohort for different subtypes. Can you tell us what you would like to see from these cohorts as we move forward?

So maybe for the IL-12 question, John, if you want to address their differentiation there?

First of all, I mean, in terms of the disappointments, all we have is something about assets being moved around. We actually don't have any of the data from that study yet. So it's really hard to interpret what that means. But our molecule is very different; it was specifically designed—following off of what we learned from IL-15 and IL-2 programs, it was designed to have reduced potency to the tune of around 100-fold reduced potency. And what we've seen in our preclinical studies, very similar to what we've seen in the human studies for the IL-15 and IL-2 programs, is that potency reduction actually gives you a dramatic improvement in pharmacokinetics, seems to also impact tolerability, and we hope it'll positively impact therapeutic index. We've definitely seen evidence in the non-human primates that we have a much more gradual dose response of the pharmacodynamic activity with IL-12 compared to, for instance, a wild type IL-12-Fc. So we think we'll have a lot more flexibility in phase one to really zero in on the best dose that gives you the highest therapeutic index. And I'll note there's a lot of noise around other programs that weren't actually engineered cytokines being injected systemically, things that are very complex like oncolytic viruses and localized delivery programs. I just don't think those are relevant comparatives; I don't think those teach you anything. Now onto your vudalimab question, number two, about more on the trial amendment to the chemo, as well as what we think the bar for success is roughly. Maybe Allen, if you want to touch on it?

So just to remind people on the 704 study, the design. Remember, we had several groups in there; we had an aggressive variant group, we had a PARP-naive homologous recombination deficient group, homologous recombination deficient PARP treated group, MSI high group, and then a biomarker negative group. So it's really dependent on the group. Now several of the groups have chemotherapy. And depending on the chemotherapy regimen, you'd expect a response rate of about 40% to 50%. So for most regimens, you would want to see numbers above that. However, some regimens like the aggressive variant or the PARP-experienced group, the bar will be much lower.

Our next question comes from the line of Charles Zhu of Guggenheim.

This is Edward on for Charles. Just a question on 564, please. So how strong is the mechanistic link between sort of inducing T-reg levels as you've shown pretty clearly to actually having sort of a beneficial effect on the disease?

There are two sets of data that read on that. One fairly recent, coming from actually one of our competitors, the REZPEG program that Lilly presented last year, showing clear and convincing activity at reducing psoriasis as well as atopic dermatitis signs and symptoms and in particular, a really profound durability post end of treatment. I'd say the other line of evidence comes from really the last 1.5 decades of work with low-dose IL-2, wild-type IL-2, which mimics a CD25 selective molecule because of the high expression density and selectivity for Tregs for very low doses of modest selectivity. And there's efficacy that's been shown in prior intractable autoimmune diseases like ulcerative colitis, type 1 diabetes, RA, lupus, among others. So those are the two threads of evidence.

Yes. And I'll add, just going back to real basics, remember there's that disease IPEX, where patients have a defect of the FOXP3 gene, which is critical for producing Tregs, and they have an array of various autoimmune diseases stemming from that defect. So from a very basic perspective, Tregs are critical for preventing autoimmunity.

Great. And maybe just a follow-up, if I can, on the 104, the PD-1 x ICOS. I think you mentioned in the press release that you were going forward with the colorectal MSS expansion. Just wondering, are you also considering other potential expansion cohorts and kind of what pushed you to focus on that one, at least for now?

Right now, we're focusing on the MSS colorectal cancer, really looking for a larger number of patients than we had in our expansion cohorts to see if we have the kind of activity that would suggest a relevant path forward in MSS CRC. You know, so we don't have other indications right now; we're focusing on the CRC. We’ll disclose specifics later, but we saw in our expansion cohorts, signs that suggested MSS might be viable for this age, and in particular, in combination with ipilimumab, which is how the study is designed in these additional sets of patients. And so we're eager to enroll it and gather data and see.

The next question comes from the line of Gregory Renza from RBC Capital Markets.

This is Ying Wang for Greg. Congrats on the progress, and thanks for taking our questions. Maybe just on a high level, just with your current cash position. Wondering how are you thinking about business development as we have seen M&A heating up in the space, and how would you balance internal innovation and capital preservation in this cash-constrained macro environment?

We really do try to focus on having a high bar for putting molecules into the clinic because the clinic is where the spend really hits you, right? Our research is incredibly efficient on both a cost and people basis, and that's what's been able to drive so many partnerships and license agreements over the years. But right now, it's about being stringent about the molecules we put in the clinic and then getting even better, more aggressive and faster about making quick decisions from our early clinical data to either advance quickly or stop the spend by partnering. I think you can see from our Plamotamab deal a year ago, that program is still progressing but now that's really in Janssen's hands. So we try to balance that, holding on to commercial rights for molecules of our own so we can build the value of the company with the spend and we just want to be as fast and as nimble and as quick about the decisions we make. Because it is, as you're right, a capital-constrained environment. And partnerships have sustained us over many years, but partnerships require another party involved, and so that's unpredictable. So I think we're being doubly stringent and strict about advancing programs and the design of our studies to be really efficient.

The next question comes from the line of Zhiqiang Shu from Berenberg.

Maybe we'll go to the next question and see if we can circle back with him later.

The next line to be brought up on stage is going to be Jonathan Chang from SVB Leerink.

This is Matt Cowper on for Jonathan. I suppose just to piggyback on that last question on cash. I noticed that your R&D burn was a little higher this quarter. I was just wondering if that's something we could expect going forward as you sort of launch these early-stage programs? And then second question is just, I was wondering if you could provide any mechanistic rationale for the development of XmAb306 in multiple myeloma?

Maybe, John, do you want to talk about the mechanistic rationale of 306 in myeloma?

I mean, there's actually two components. It's extraordinarily good, as we disclosed about a year ago, at expanding natural killer cells. And so the combination with daratumumab, turns out that daratumumab actually takes out some of the NK cells as its working. And so it was sort of a natural idea on Genentech's part to try to explore the combination with XmAb306 to expand the NK cells further to sort of mitigate that fratricide effect. Hopefully, it'll go beyond that and even further potentially daratumumab.

And then the other combination with the CD3 engager, cevostamab, that's also just motivated by some of our preclinical work. So recall, natural killer cells are generally more sensitive to IL-15 because they express higher amounts of IL-2 receptor beta. But it turns out we also have seen preclinically that when you activate T-cells, such as with a T-cell engager, you also upregulate IL-2 receptor beta, and so it's really a natural question. We admire the fact that Genentech wants to explore 306 with multiple different kinds of modalities to see where it has the most utility. And maybe on the cost question, I wouldn't read too much into the quarterly fluctuations of the reported R&D spend. I mean, John, can you guide on our cash use this year?

It’s just pretty consistent. To address your question, it can be lumpy, the early-stage R&D. I mean, there are preclinical studies but it's not going to be consistently increased quarter-to-quarter to the extent that it was over the previous year.

Our next question comes from the line of Boris Peaker from TD Cowen.

This is Nick on Boris. I just have a quick one on Ultomiris. So you guys mentioned in the press release that AstraZeneca announced the Phase 3 study initiation. So I was wondering if you guys are expecting potential milestone payments from this phase 3, like whether it comes to the end or whatnot? And then also, will you potentially receive royalties from this additional indication if it is approved?

We receive royalties on any indication from any country that has valid patent claims worldwide, regardless of the mode of administration, IV or subcutaneous. And what was your first question on their Phase 3? I missed that?

If you would potentially receive any milestone payments on the Phase 3?

No, there are no more clinical milestones left; there's only a sales milestone left, which we could get this year. We'll see.

The next question comes from the line of Michael King of EF Hutton.

Most of my specific asset questions have been answered. I just wondered John might give us his thoughts on CD28 versus CD3 bispecifics, especially as applies to solid tumors, and whether the odds of success in solid tumors are going to be greater for one or the other. Is there no real biology to predict what might succeed and what might not?

You asked me my favorite question. In fact, I almost anticipated that this morning thinking about it. But you know, the easy, the glib answer is we don't really know yet, because there haven't been enough CD3s versus CD28s, and there certainly hasn't been any sort of head to head studies against the same tumor-associated antigen. There's nice validation of CD3s in solid tumors in a couple of different programs and there is really nice validation, recent validation for CD28s in solid tumors. But really to answer your question, the way I think of it, how differences might emerge. So a CD3 engager is basically going to—it's going to take any T-cell that it can find either in the periphery or the scene of the tumor; we don't know if those T-cells are tumor-reactive; they could just be bystander T-cells, that it's going to utilize those and it takes advantage of having all those T-cells around. CD28 really has to build off that existing signal 1. And so if you're doing a combination with, say, a checkpoint inhibitor with a CD28, the signal one actually comes from the T-cell receptor recognizing neoantigen peptide—MHC complexes on the tumor cell. I’m guessing—and it's just pure speculation—that CD28s would have potential for longer durability of response, just because you're actually building up a memory T-cell response; you're specifically expanding those tumor-reactive T-cells.

Our next question comes from the line of Peter Lawson from Barclays.

This is Jay on for Peter. So just quickly, first, about vudalimab. So for the second study in the gynecologic tumors and high-risk prostate, could you maybe speak to a little bit whether you're thinking of just pursuing monotherapy or is this also going to be ultimately combo therapy? And for 808, the B7-H3 bispecific, could you maybe speak to where you see the highest chance of success in solid tumors and whether that might be prostate-based on peer data and how you might see that fitting into such a competitive space?

So I think with vudalimab, we expressly ran the Stage II monotherapy because we think there could be potential monotherapy in those gyn indications and in that slice of CRPC. I think Allen can address some of the data we got in expansion cohorts about why we believe that.

Yes. I was just going to add that—so remember, this is the 717-05 study. So it's our second shot on prostate as a monotherapy. We define the high-risk prostate group clinically as opposed to with molecular markers. And then we're looking at gyn signals had an early marker in the expansion. The one thing is that we're looking at cervical, endometrial, as well as ovarian cancer, which is an unmet need, and checkpoint inhibitors have shown activity; and there hasn't been a lot of activity. I will also add one of the neat things about the 05 studies, it studies a better dose and schedule. So we're doing a flat dose and every 3-week schedule post every 2 weeks. And then the other question was around B7-H3.

So it's a great question about B7-H3 for XmAb808 with solid tumor indications we’re most excited about. Prostate for sure is right at the top. There's certainly nice validation targeting B7-H3 in prostate cancer, and of course, we've got nice validation of CD28 bispecifics actually working on prostate cancer. Other histologies that we would certainly think about would be small cell lung cancer based on some proof of concept data, targeting B7-H3. But B7-H3 is expressed across a lot of solid tumors, and we're going to want to take a look at a lot of it.

The next question comes from the line of Zhiqiang Shu from Berenberg.

I also want to ask a question around your CD28 portfolio. Obviously, you presented some clinical preclinical data at AACR. I wonder your criteria in terms of selecting the other targets for your future molecules and also how you decide to move one or more targets into the clinic?

So the criteria is really based on where we think CD28 could have the biggest impact. We think that's in tumors that have been cold to immune checkpoint therapy. We think the example given by the PSMA CD28 data presented by Regeneron last year suggests that the CD28 pathway could turn on tumors that would be cold. They did that in prostate cancer, albeit in a very small number of patients. And so there's a huge unmet need, and a lot of patients would be ecstatic if you could turn on tumors that are nominally pretty cold, like small cell lung cancer, colorectal cancer, ovarian cancer, etc. So we're focusing on targets where that's a big, big delta possible, right? It looks cold to checkpoints and where you could really maybe change the landscape, but also where you could clearly see a signal early in clinical development if you start seeing response. And I think that's important because we don't want to get lost in a sort of a swamp of trying to deduce whether it's the checkpoint or it's the combination agent, or our CD28 driving the activity like you might be if you were enrolling patients in melanoma or RCC, which are pretty warm tumors.

And just a quick follow-up on the technology side of things. It appears all your CD28 and CD23 bispecifics are using the two plus one format. I guess, is the two plus one your preferred format to go into other targets as well for CD23 and 28?

I would say, you know, the two plus one is a tool; it’s just one of the tools in our toolkit. Every target is different, right? There are all kinds of different considerations, like density, how different is the expression on tumor cells versus normal cells. We like the two plus one for the CD3s because it gives us a little bit more, we believe, room to design in the therapeutic index to preferentially kill tumor cells versus normal cells. CD28s are a little bit different. And so where we think we want or need the two plus one, we’ll utilize that, but one plus ones are also on the table for the CD28s.

Thank you for your questions. I would now like to turn it over to Bassil Dahiyat for closing remarks.

Thanks very much. And thanks everybody for joining us this afternoon. We look forward to provide further updates later in the year.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.