AvailableForSaleSecuritiesGrossUnrealizeLoss

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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FORM 10-Q

 

 

(Mark One)

 

 

For the quarterly period ended September 30, 2015

 

or

 

 

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Commission file number: 001-36182

 

Xencor, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

(626) 305-5900

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☒   Non-accelerated filer ☐   Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes ☐  No ☒

 

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

 

Xencor, Inc.

 

Quarterly Report on FORM 10-Q for the quarter ended September  30, 2015

 

Table of Contents

 

 

In this report, unless otherwise stated or the context otherwise indicates, references to “Xencor,” “the Company,” “we,” “us,” “our” and similar references refer to Xencor, Inc.  The Xencor logo is a registered trademark of Xencor, Inc.  This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements can often be identified by the use of terminology such as “subject to”, “believe”, “anticipate”, “plan”, “expect”, “intend”, “estimate”, “project”, “may”, “will”, “should”, “would”, “could”, “can”, the negatives thereof, variations thereon and similar expressions, or by discussions of strategy.

 

All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations, and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements. The following uncertainties and factors, among others (including those set forth under “Risk Factors”), could affect future performance and cause actual results to differ materially from those matters expressed in or implied by forward-looking statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The factors, risks and uncertainties referred to above and others are more fully described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December, 31, 2014, as amended, as updated from time to time in Current Reports on Form 8-K. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.

PART I — FINANCIAL INFORMATION

Item1. Financial Statements

 

Xencor, Inc.

Balance Sheets

(In thousands, except share amounts)

 

 

 

 

See accompanying notes.

 

Xencor, Inc.

Statements of Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes. 

Xencor, Inc.

Statement of Stockholders’ Equity

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes. 

 

 

 

Xencor, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

 

See accompanying notes. 

 

Xencor, Inc.

 

Notes to Financial Statements

(unaudited)

 

September 30, 2015

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim financial statements for Xencor, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of the Company believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of the results expected for the full fiscal year or for any subsequent interim period.

 

The accompanying unaudited interim financial statements and related notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 23, 2015, as amended.

 

Marketable Securities

 

The Company has an investment policy that includes guidelines on acceptable investment securities, minimum credit quality, maturity parameters and concentration and diversification. The Company invests its excess cash primarily in marketable securities issued by investment grade institutions. The Company considers its marketable securities to be “available-for-sale”, as defined by authoritative guidance issued by the Financial Accounting Standards Board (FASB). These assets are carried at fair value and the unrealized gains and losses are included in accumulated other comprehensive income (loss). If a decline in the value of a marketable security in the Company’s investment portfolio is deemed to be other-than-temporary, the Company writes down the security to its current fair value and recognizes a loss as a charge against income. The Company reviews its portfolio of marketable securities, using both quantitative and qualitative factors, to determine if declines in fair value below cost are other-than-temporary.

 

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s 2014 Annual Report on Form 10-K, as amended.

 

Sale of Additional Common Stock

 

In March 2015, we completed the sale of 8,625,000 shares of common stock which included shares we issued pursuant to our underwriters’ exercise of their over-allotment option pursuant to a follow-on offering. We received net proceeds of $115.2 million, after underwriting discounts, commissions and estimated offering expenses.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which establishes principles for reporting revenue and cash flows arising from an entity’s contracts with customers. This new revenue recognition standard will replace most of the recognition guidance within the United States GAAP. In July 2015, the FASB announced that the new pronouncement will be effective for reporting periods beginning after December 15, 2017. The new pronouncement permits the use of either the retroactive or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures.

 

 

2. Fair Value of Financial Instruments

 

The fair values of the financial instruments included in the financial statements, which include cash equivalents, money markets, US government and corporate securities approximate their carrying values at September 30, 2015 due to their short term maturities. Our financial instruments also include accounts receivable, accounts payable and accrued expenses. Marketable securities and cash equivalents are carried at fair value.

 

The Company accounts for recurring and non-recurring fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosure about fair value measurements.  The ASC 820 hierarchy ranks the quality of reliable inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

 

Level 1—Fair Value is determined by using unadjusted quoted prices that are available in active markets for identical assets or liabilities.

 

Level 2—Fair Value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets that are not active. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

 

Level 3—Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by the reporting entity –e.g. determining an appropriate discount factor for illiquidity associated with a given security.

 

The Company measures the fair value of financial assets using the highest level of inputs that are reasonably available as of the measurement date. The assets recorded at fair value are classified within the hierarchy as follows for the periods reported (in thousands):

 

 

 

Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value.  During the three months and nine months ended September 30, 2015, there were no transfers between Level 1 and Level 2. The Company does not have any Level 3 assets or liabilities.

 

3. Net Loss Per Share 

 

We compute net loss per common share by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Potentially dilutive securities consisting of stock issuable under options and our 2013 Employee Stock Purchase Plan (ESPP) are not included in the diluted net loss per common share calculation where the inclusion of such shares would have had an antidilutive effect.

 

Basic and diluted (loss) per common share is computed as follows (in thousands except share and per share data)

 

 

 

The following shares of outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as the effect of including such securities would have been antidilutive.

 

 

 

In March 2015, the Company issued 8,625,000 shares of common stock in a follow-on stock offering. The issuance of these shares resulted in a significant increase in the Company’s weighted average shares outstanding for the three months and nine months ended September 30, 2015 when compared to the comparable prior year period and is expected to continue to impact the year-over-year comparability of the Company’s income (loss) per share calculations for the remainder of 2015.

 

 

 

4. Comprehensive loss

 

Comprehensive loss is comprised of net loss and other comprehensive loss. For the three months and nine months ended September 30, 2015, the only component of other comprehensive loss is net unrealized gains and losses on marketable securities. There were no material reclassifications out of accumulated other comprehensive loss during the three months and nine months ended September 30, 2015.

5. Marketable Securities

 

The Company’s marketable securities held as of September 30, 2015 are summarized below:

 

 

The maturities of the Company’s marketable securities are as follows:

 

 

6. Stock Based Compensation

 

Our Board of Directors and the requisite stockholders previously approved the Amended and Restated 2000 Stock Incentive Plan (the 2000 Plan), and the 2010 Equity Incentive Plan (the 2010 Plan, and collectively with the 2000 Plan the Prior Plans). The 2000 Plan terminated August 2010 and no further awards may be issued under the plan. In October 2013, our Board of Directors approved the 2013 Equity Incentive plan (the 2013 Plan) and in November 2013 our stockholders approved the 2013 Plan. The 2013 Plan became effective as of December 3, 2013, the date of the Company’s Initial Public Offering (IPO).  As of December 2, 2013, we suspended the 2010 Plan and no additional awards may be granted under the 2010 Plan. Any shares of common stock covered by awards granted under the Prior Plans that terminate after December 2, 2013 by expiration, forfeiture, cancellation or other means without the issuance of such shares will be added to the 2013 Plan reserve.

 

As of September 30, 2015 the total number of shares of common stock available for issuance under the 2013 Plan is 6,335,940, which includes 2,684,456 of common stock that were available for issuance under the Prior Plans as of the effective date of the 2013 Plan. Unless otherwise determined by the Board, beginning January 1, 2014, and continuing until the expiration of the 2013 Plan, the total number of shares of common stock available for issuance under the 2013 Plan will automatically increase annually on January 1 of each year by 4% of the total number of issued and outstanding shares of common stock as of December 31 of the immediate preceding year. As of September 30, 2015 a total of 1,994,750 options had been issued under the 2013 Plan.

 

In November 2013, our Board of Directors and stockholders approved the 2013 Employee Stock Purchase Plan (ESPP), which became effective as of December 5, 2013. As of September 30, 2015, a total of 581,286 shares of common stock have been reserved for issuance under the ESPP. Unless otherwise determined by our Board, beginning on January 1, 2014, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or

(ii) 621,814 shares of common stock. As of September 30, 2015, we have issued a total of 111,852 shares of common stock under the ESPP.

 

Total employee, director and non-employee stock-based compensation expense recognized for the three months and nine months ended September 30, 2015 and 2014 are as follows (in thousands):

 

 

 

The following table summarizes option activity under our stock plans and related information:

 

 

We calculate the intrinsic value as the difference between the exercise price of the options and the closing price of common stock of $12.23 per share as of September 30, 2015.

 

Weighted average fair value of options granted during the nine-month period ended September 30, 2015 and 2014 was $10.73 and $7.11 per share, respectively.  There were 1,019,021 options granted during the period ended September 30, 2014. We estimated the fair value of each stock option using the Black-Scholes option-pricing model based on the date of grant of such stock option with the following weighted average assumptions for the three months and nine months ended September 30, 2015 and 2014:

 

 

 

 

 

At September 30, 2015, the Company had $11.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options and shares issued under our ESPP that will be recognized over the next 3.0 years.

 

7. Commitments and Contingencies

 

Operating Leases

 

The Company leases office and laboratory space in Monrovia, CA. In January 2015, we entered into a new lease agreement for the property. The new lease replaces the previous lease and extends our lease term to June 2020 with an option to renew for an additional five years. The new lease is a non-cancelable operating lease.

 

The Company also leases office space in San Diego, CA. In February 2015, we entered into an amended lease agreement for the San Diego property. The amended lease replaces the previous lease and provides for additional space in a building located in the same multi-building development. The amended lease expires in April 2018 and includes an option to renew for a period of one year.

 

Future minimum payments under the non-cancelable operating leases consist of the following (in thousands):

 

 

 

Net rent expense for the nine months ended September 30, 2015 and 2014 was $415,000 and $441,800 respectively.

 

Contingencies

 

From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company does not believe it is currently subject to any material matters where there is at least a reasonable possibility that a material loss may be incurred.

 

On March 3, 2015, a verified class action complaint, captioned DePinto v. John S. Stafford, et al., C.A. No. 10742, was filed in the Court of Chancery of the State of Delaware against certain of the Company’s current and former directors alleging cause of action for Breach of Fiduciary Duty and Invalidity of Director and Stockholder Consents.  In general, the complaint alleged that the plaintiff and the class he seeks to represent were shareholders of the Company during the recapitalization and certain related transactions that the Company underwent in 2013 and that the defendants breached their fiduciary duties in the course of approving that series of transactions. It also challenged as invalid certain corporate acts taken in the 2013 time period.

On June 10, 2015, the Company filed a Verified Petition for Relief under Del. C. Section 205 (the 205 Petition) related to the corporate acts challenged in the complaint. The defendants filed an answer to the class action complaint on June 22, 2015. On July 9, 2015, the Court consolidated the 205 Petition with the class action, joined the Company as a defendant and ordered it to file the claims in the 205 Petition as counter-claims in the class action, which the Company has done.  On August 11, 2015, the Company filed a Motion for Leave to File an Amended Counter-Claim, along with the proposed Amended Counter-Claim and related documents. On October 5, the parties filed a Stipulation of Partial Settlement and related documents disclosing a settlement of the invalidity claims addressed in the complaint, the counter-claim and the proposed amended counter-claim including a request by plaintiff’s counsel for reimbursement of legal fees up to $950,000. On October 7, 2015, Xencor filed the Amended Counter-Claim and related documents. A settlement hearing is scheduled for December 10, 2015.  The Company intends to vigorously defend against the request to pay legal fees. Based on the nature of the claim, the Company believes that it is not possible to estimate a potential loss related to the claim; accordingly, no amount for any loss has been accrued at September 30, 2015.  

 

 

8. Collaboration and Licensing Agreements

 

Following is a summary description of the arrangements that generated revenue in the nine months ended September 30, 2015 and 2014.

 

Amgen, Inc.

 

2015 Agreement

 

In September 2015, the Company entered into a research and license agreement (the 2015 Agreement) with Amgen, Inc. (Amgen) to develop and commercialize bispecific antibody product candidates using the Company’s proprietary XmAb® bispecific Fc technology. Under the 2015 Agreement, the Company granted an exclusive license to Amgen to develop and commercialize bispecific drug candidates from the Company’s preclinical program that bind the CD38 antigen and the cytotoxic T-cell binding domain CD3, (the CD38 Program). The Company will also apply its bispecific technology to five previously identified Amgen provided targets (each a Discovery Program). The Company received a $45.0 million upfront payment from Amgen and is eligible to receive up to $1.7 billion in future development, regulatory and sales milestones in total for all six programs and is eligible to receive royalties on any global net sales of products.

 

Following the Company’s transfer of the DNA sequences, constructs and preclinical data related to its CD38 Program to Amgen, Amgen will assume full responsibility for the further development and commercialization of product candidates under the CD38 Program. Assuming successful development and commercialization of a product, the Company could receive up to $355 million in milestones payments which include $55 million in development milestones, $70 million in regulatory milestones and, $230 million in sales milestones. If commercialized, the Company is eligible to receive from high single-digit up to low double-digit royalties on global net sales of approved products under the CD38 Program.

 

Under the 2015 Agreement, for each of the five Discovery Programs the Company will apply its bispecific technology to antibody molecules provided by Amgen that bind Discovery Program Targets and return the bispecific product candidates to Amgen for further testing, development and commercialization. Amgen has the right to substitute up to three of the previously identified targets during the research term provided that Amgen has not initiated non-human primate studies with the Xencor provided bispecific candidate. The initial research term is three years from the date of the agreement but Amgen, at its option, may request an extension of one year if Xencor has not completed delivery of all five Discovery Program bispecific candidates to Amgen.

 

Amgen will assume full responsibility for development and commercialization of product candidates under each of the Discovery Programs. Assuming successful development and commercialization of each Discovery Program compound, the Company could receive up to $260.5 million in milestones for each compound which include $35.5 million in development milestones, $55.0 million in regulatory milestones and $170.0 million in sales milestones. If commercialized, the Company is eligible to receive mid to high single-digit royalties on global net sales of approved products.

 

The Company evaluated the 2015 Agreement with Amgen and determined that it is a revenue arrangement with multiple deliverables or performance obligations. The Company’s substantive performance obligations under the 2015 Agreement include delivery of the DNA sequences, constructs and preclinical data related to its CD38 Program and application of its bispecific technology to five Amgen provided targets and delivery of the five bispecific product candidates. The Company evaluated the 2015 Agreement with Amgen and determined that the CD38 Program and each of the five Discovery Programs represent separate units of accounting.

 

The $45 million upfront payment represents the total initial consideration and was allocated to each of the deliverables using the relative selling price method. After identifying each of the deliverables included in the arrangement, the Company determined its best estimate of selling price for each of the deliverables. In order to determine the best estimate of selling price for the CD38 Program, the Company determined the value of the CD38 Program by calculating a risk-adjusted present value of the potential revenue from the future development and regulatory milestones under the 2015 Agreement. This amount represents the value that a third party would be willing to pay as an upfront fee to license the Company’s CD38 Program.

 

The Company determined the value of each of the Discovery Programs by calculating a risk-adjusted net present value of the potential revenue from future development and regulatory milestones reduced by the estimated cost of the Company’s efforts to apply its bispecific technology to the Amgen targets and deliver the five bispecific product candidates. These amounts represent the value that a third party would be willing to pay as an upfront for access to the Company’s bispecific technology and capabilities.

The total allocable consideration of $45 million was allocated to the deliverables based on the relative selling price method as follows:

 

$13.75 million to the CD38 Program and,

$6.25 million to each of the five Discovery Programs

 

The Company will recognize as collaboration revenue the amount of the total allocable consideration allocated to the CD38 Program upon delivery of the CD38 DNA sequences, constructs and preclinical data to Amgen. At the time that each bispecific Discovery Program is accepted by Amgen, the Company will recognize as collaboration revenue $6.25 million for each program. Since Amgen has substitution rights for up to three targets, revenue recognition may be delayed until the earlier that Amgen initiates non-human primate studies for a delivered bispecific Discovery Program or the right to substitute the target lapses.

 

During the three and nine months ended September 30, 2015, we did not recognize any revenue under this arrangement. As of September 30, 2015 there was $45 million in deferred revenue related to the arrangement.

 

2010 Agreement

 

In December 2010, we entered into a Collaboration and Option Agreement (the 2010 Agreement) with Amgen, pursuant to which we agreed to collaborate with Amgen on development of XmAb5871 in rheumatoid arthritis (RA) through completion of a Phase 2 proof-of-concept (POC) trial. After completion of the POC trial, we would deliver a data package to Amgen and they would have 90 days to review and decide whether to exercise an option to obtain worldwide rights to XmAb5871. Upon exercise of the option and payment of a $50 million option fee, Amgen would own all rights to the compound and be responsible for further development.

 

We received a nonrefundable upfront payment of $11 million upon execution of the Collaboration Agreement and a $2 million milestone in January 2013 upon the initiation of a Phase 1b clinical trial.

 

In October 2014, we entered into an agreement with Amgen to terminate the 2010 Agreement pursuant to which all worldwide rights to develop and commercialize XmAb5871 reverted back to us. Our obligations to continue development of XmAb5871 under the terms of the 2010 Agreement terminated effective as of the date of the termination agreement. As a result of and effective as of the date of the termination agreement, all of Amgen’s rights to XmAb5871 terminated including the right to exercise an exclusive option to acquire the worldwide rights to XmAb5871. Amgen’s obligations to make any further payments to us are also terminated. In connection with the termination, we granted

Amgen a right of first negotiation (ROFN) to obtain an exclusive license to develop and commercialize any XmAb5871 product.

 

As a result of the termination, we recognized the remaining balance in deferred revenue as revenue in the period of the termination, October 2014. There is no remaining revenue or obligations to be reported under this agreement.

 

There were no revenues recognized during the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2014 we recognized $0.6 million and $1.7 million of revenue under this arrangement, respectively. As of September 30, 2015, there is no remaining deferred revenue under this agreement.

 

Merck Sharp & Dohme Corporation

 

In July 2013, we entered into a License Agreement with Merck Sharp & Dohme Corp (Merck). Under the terms of the agreement, we provided Merck with a non-exclusive commercial license to certain patent rights to our Fc domains to apply to one of their compounds. We also provided Merck with contingent options to take additional non-exclusive commercial licenses. The contingent options provide Merck an opportunity to take non-exclusive commercial licenses at an amount less than the amount paid for the original license. The agreement provided for an upfront payment of $1.0 million and annual maintenance fees totaling $0.5 million. We are also eligible to receive future milestones and royalties as Merck advances the compound into clinical development.

 

We determined that the deliverables under this agreement were the non-exclusive commercial license and the options. The options are considered substantive and contingent and no amount of the upfront payment was allocated to these options. We also determined that the future milestones and related payments were substantive and contingent and did not allocate any of the upfront payment to the milestones.

 

In the first quarter of 2014, Merck initiated a Phase 1 clinical trial which triggered a $0.5 million milestone payment to us. During the three and nine months ended September 30, 2015 we recognized $25,000 and $75,000 of revenue respectively. During the three and nine months ended September 30, 2014 we recognized $25,000 and $0.5 million of revenue respectively. As of September 30, 2015, there is $75,000 of deferred revenue related to this arrangement.

 

Alexion Pharmaceuticals, Inc.

 

In January 2013, we entered into an option and license agreement with Alexion Pharmaceuticals, Inc. (Alexion). Under the terms of the agreement, we granted to Alexion an exclusive research license, with limited sublicensing rights, to make and use our Xtend technology to evaluate and advance compounds against six different target programs during a five-year research term under the agreement, up to completion of the first multi-dose human clinical trial for each target compound. Alexion may extend the research term for an additional three years upon written notice to us and payment of an extension fee of $2.0 million. Alexion is responsible for conducting all research and development activities under the agreement at its own expense.

 

In addition, we granted to Alexion an exclusive option, on a target-by-target basis, to obtain an exclusive commercial, worldwide, royalty-bearing license, with sublicensing rights, under our Xtend technology to develop and commercialize products that contain the target for which the option is exercised. In order to exercise this option, Alexion must pay a $4.0 million option fee with respect to each target for which the option is exercised. Alexion may exercise this option at any time during the research term. An option must be exercised for any compound that is advanced into development after the first multi-ascending dose trial is initiated.

 

Under the agreement, we received an upfront payment of $3.0 million. Alexion is also required to pay an annual maintenance fee of $0.5 million during the research term of the agreement and $1.0 million during any extension of the research term. We determined that $2.5 million of the upfront fee was allocated to the license and is being recognized into income over the initial research term of five years. 

 

In the third quarter of 2014, Alexion initiated a Phase 1 clinical trial with an undisclosed molecule to be used against an undisclosed target. It is the first human clinical trial with a molecule incorporating our Xtend Fc Domain

technology.  We received a milestone related to this trial in March 2015 upon issuance of certain patents related to our Xtend technology.

 

During the three and nine months ended September 30, 2015 we recognized $0.3 million and $1.3 million of revenue respectively. During the three and nine months ended September 30, 2014 we recognized $0.2 million and $0.8 million of revenue respectively. As of September 30, 2015, we have deferred revenue related to this arrangement of $1.3 million.

 

CSL Limited

 

2009 Agreement

 

In February 2009, we entered into a Research License and Commercialization Agreement (the 2009 Agreement) with CSL Limited (CSL). Under the agreement, we provided CSL with a research license to our Fc Cytotoxic technology and up to five commercial options. The upfront payment of $0.75 million received at inception and the annual research license renewal payments are being recognized as revenue ratably over the five-year term of the research license. 

 

In May 2013, we entered into an amendment to the 2009 Agreement with CSL, which eliminated a contingent milestone payment requirement and reduced the royalty rate on net sales for the licensed product CSL362. The amendment provided for a payment upon signing of $2.5 million. We determined that the amendment was a material modification to the original agreement and evaluated the remaining deliverables at the date of the amendment. We determined that the remaining deliverables were the research license which expired in February 2014 and four additional options to take commercial licenses through the term of the research period. The amendment proceeds were recognized into income over the remaining period of the research term.

 

In 2013 CSL sublicensed CSL362 (now called JNJ-56022473) to Janssen Biotech Inc. (Janssen Biotech). In August 2015, CSL, through its sublicensee, Janssen Biotech, initiated a Phase 2 clinical trial for CSL362. As a result of the Phase 2 clinical trial initiation, we received a milestone payment of $2.5 million.  

 

During the three and nine months ended September 30, 2015, we recognized $2.5 million of revenue under the arrangement. During the three and nine months ended September 30, 2014, we recognized zero and $0.7 million of revenue respectively. As of September 30, 2015, we have no deferred revenue related to this arrangement.

 

2013 Agreement

 

In March 2013, we entered into a license agreement (the 2013 Agreement) with CSL. Under the terms of the agreement, we provided CSL with a non-exclusive commercial license to apply our technology to one of their compounds. The agreement provided for an upfront payment of $0.5 million and we were eligible to receive future milestones as CSL advanced the compound into clinical development.

 

In March 2015, CSL notified us that they were terminating the 2013 Agreement. We have no remaining obligations under the agreement. We did not recognize any revenue under this agreement for the three and nine months ended September 30, 2015 and did not recognize any revenue for the three and nine months ended September 30, 2014. As of September 30, 2015 there is no remaining deferred revenue under the 2013 Agreement.   

 

Novo Nordisk A/S

 

In December 2014, we entered into a collaboration and license agreement with Novo Nordisk A/S (Novo). Under the terms of the agreement we granted Novo a research license to use certain Xencor technologies including our bispecific, Immune Inhibitor, Xtend and other technologies during a two-year research term. We will provide research support for four FTE’s in collaboration with Novo to apply our technologies to Novo provided targets to identify compounds with improved properties. Novo has an option to extend the research term for another twelve months upon written notice to us and payment of another year of research funding. At the end of the research term, Novo will have a commercial license to develop and commercialize any new targets identified during the research term.

 

The agreement provided for an upfront payment of $2.5 million and research funding of $1.6 million per year over the research term. We are also eligible to receive $2.0 million in milestone payments upon the successful completion of certain projects during the research term. In addition, if Novo identifies a compound from the collaboration to advance into clinical development, we are eligible to receive future development, regulatory and commercial milestone payments and royalties.

 

We determined that the deliverables under the arrangement were the research license to our technologies and the research support. We believe that the research support and the technologies are integral to each other and are not separate units of accounting. The commercial license did not have standalone value at inception of the agreement due to the uncertainty of identifying a commercial target. We are recognizing the $2.5 million upfront payment as income over the two year research term. The research funding is being recognized into income over the period that the services are being provided.

 

During the three and nine months ended September 30, 2015, we recognized $0.7 million and $2.1 million of revenue respectively. As of September 30, 2015, we have $1.9 million in deferred revenue related to this arrangement.

 

 

 

9. Income Taxes

 

No provision for U.S. income taxes has been made, net of the valuation allowance, with the exception of the minimum statutory amounts, because the Company has incurred losses since its inception. The Company has deferred tax assets consisting primarily of net operating loss and tax credit carryforwards that have been fully offset by a valuation allowance.

 

 

 

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 Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto for the fiscal year ended December 31, 2014 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 for the year ended December 31, 2014, as amended. This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements, which represent our intent, belief, or current expectations, involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements may include, but are not limited to, statements concerning: (i) the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials, including our expected timeline for nominating clinical development candidates under our strategic alliances and our expected timeline for filing applications with regulatory authorities;(ii) our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate; (iii) our ability to obtain funding for our operations; (iv) our plans to research, develop and commercialize our future product candidates; (v) our ability to attract collaborators with development, regulatory and commercialization expertise; (vi) our ability to obtain and maintain intellectual property protection for our technology; (vii) the size and growth potential of the markets for our technology and future product candidates, and our ability to serve those markets; (viii) our ability to successfully commercialize our technology and our future product candidates; (ix) our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators; (x) regulatory developments in the United States and foreign countries; and (xi) the performance of our collaboration partners, licensees, third-party suppliers and manufacturers.  Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, including without limitation those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We

undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

 

Company Overview

 

We are a clinical-stage biopharmaceutical company focused on discovering and developing engineered monoclonal antibodies to treat severe and life-threatening diseases with unmet medical needs. We use our proprietary XmAb technology platform to create next-generation antibody product candidates designed to treat autoimmune and allergic diseases, cancer and other conditions. In contrast to conventional approaches to antibody design, which focus on the portion of antibodies that interact with target antigens, we focus on the portion of the antibody that interacts with multiple segments of the immune system. This portion, referred to as the Fc domain, is constant and interchangeable among antibodies. Our engineered Fc domains, the XmAb technology, can be readily substituted for natural Fc domains. We believe our Fc domains enhance antibody performance by, for example, increasing immune inhibitory activity, improving cytotoxicity or extending circulating half-life, while maintaining 99.5% identity in structure and sequence to natural antibodies. By improving over natural antibody function, we believe that our XmAb-engineered antibodies offer innovative approaches to treating disease and potential clinical advantages over other treatments.

 

Our business strategy is based on the plug-and-play nature of the XmAb technology platform to modify features of natural antibodies and create numerous differentiated antibody product candidates. We have internally generated a pipeline that has allowed us to selectively partner certain development programs while maintaining full ownership of other programs. We also have a number of technology licenses under which we have licensed the XmAb technology platform to pharmaceutical and biotechnology companies for use in a limited number of programs, providing potential revenue streams that require no further resources from Xencor. There are currently eight antibody product candidates in clinical trials that have been engineered with XmAb technology, including six candidates being advanced by licensees and development partners. We have several U.S. patents and U.S patent applications, in addition to foreign counterparts, on file to protect our XmAb technology platform.

 

We were founded in 1997 based on protein engineering technology developed by our co-founders Bassil Dahiyat, Ph.D. and Stephen Mayo, Ph.D. at the California Institute of Technology. We began our first therapeutic monoclonal antibody engineering and discovery programs in 2002 and entered into our first XmAb technology license in 2004.

 

Since we commenced active operations in 1998, we have devoted substantially all of our resources to staffing our company, business planning, raising capital, developing our technology platforms, identifying potential product candidates, undertaking pre-clinical and IND enabling studies and conducting clinical trials. We have no products approved for commercial sale and have not generated any revenues from 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 convertible promissory notes and through payments generated from our product development partnership and licensing arrangements. We raised $80.5 million ($72.5 million net of expenses) in December 2013 through the sale of common stock in connection with our Initial Public Offering (IPO) and full exercise by the underwriters of their over-allotment.  We raised an additional $122.9 million ($115.2 million net of expenses) through a follow-on public offering of our common stock and full exercise by the underwriters of their over-allotment in March 2015. In September 2015 we received a $45 million upfront payment from Amgen in connection with the 2015Amgen Agreement. Although it is difficult to predict our funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents and related marketable securities as of September 30, 2015, combined with collaboration payments that we anticipate receiving, will enable us to fund operations, including clinical development of XmAb5871, XmAb7195, XmAb14045 and XmAb 13676, our second bispecific clinical candidate, through 2019. 

 

We have incurred losses in each year since our inception. Our net losses were $25.3  million and $15.1 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, we had an accumulated deficit of $269 million. Substantially all of our operating losses resulted from expenses incurred in connection with our product candidate development programs, our research activities and general and administrative costs associated with our operations. 

 

Company Programs

 

XmAb5871.  XmAb5871 uses our XmAb Immune Inhibitor Fc Domain and targets B cells, an important component of the immune system.  In December 2010, we entered into the Collaboration Agreement with Amgen for an option for the acquisition by Amgen of exclusive rights to our XmAb5871 product candidate. In October 2014, pursuant to a request by us, Amgen agreed to terminate the Collaboration Agreement for convenience, provided we grant them a right of first negotiation (ROFN) to obtain an exclusive license to develop and commercialize any future XmAb5871 product. 

 

In January 2015, we announced top line data from our Phase 1b/2a clinical trial. In addition to the study’s primary objective characterizing safety and tolerability, the data showed promising activity in patients with rheumatoid arthritis (RA), including multiple DAS28_CRP remissions and ACR50 and ACR70 responses. The Phase 1b part of the trial was a multiple ascending dose trial involving 29 patients.  In the Phase 2a cohort of the trial, 15 XmAb5871 treated patients and eight placebo treated patients were evaluable for RA disease activity at the protocol specified disease activity assessment time point of two weeks following the sixth biweekly infusion. 33% of patients (5 of 15) that received all six biweekly doses of XmAb5871 achieved DAS28-CRP remission or low disease activity versus zero on placebo. This difference was also seen when evaluating across both parts of the study; 41.7% of patients who received any dose of XmAb5871 in Phase 1b or Phase 2a parts of the trial had low disease activity or remission on Day 85 (16.7% low and 25.0% remission) as compared to only 6.7% of patients in the placebo group (0% low and 6.7% remission). ACR responses were also enhanced in XmAb5871 treated patients.  In the Phase 2a part of the trial, 86.7%, 40.0% and 20.0% of patients in the XmAb5871 treated group achieved an ACR20, ACR50 and ACR70 response, respectively, compared to 62.5%, 12.5% and 0% for the placebo group. Over the entire Phase 1b/2a trial, there were increased numbers of ACR20, ACR50 and ACR70 responders in the XmAb5871 treated cohorts compared to placebo (77.8% vs. 46.7%, 33.3% vs. 13.3% and 13.9% vs. 0.  ACR70 and ACR50 responses refer, respectively to 70% and 50% reductions in the American College of Rheumatology rheumatoid arthritis symptom scale, a common measure of RA disease activity, and each is considered evidence of a substantial improvement in a patient’s disease.  An ACR20 score represents at least a 20% improvement in these criteria and is considered a modest improvement in a patient's disease..

Biweekly intravenous administration of XmAb5871 for 12 weeks was generally well tolerated. The most common XmAb5871 treatment related adverse events (AEs) observed were predominantly mild to moderate gastrointestinal toxicities (nausea, vomiting, diarrhea) occurring during the first infusion of XmAb5871. These gastrointestinal AEs did not typically recur on subsequent infusions and no infusions were discontinued due to these AEs. Treatment related serious adverse events (SAEs) occurred in two patients that received XmAb5871: infusion related reaction and venous thrombosis. Two patients in the placebo treated group also reported SAEs.  In June 2015 we presented full study results at the European League Against Rheumatism (EULAR) 2015 Annual Meeting.

 

We plan to file an investigational new drug application (IND) this year for XmAb5871 in IgG4-Related Disease (IgG4-RD) and initiate enrollment in a Phase 2 open-label, pilot study in early 2016. We also plan to initiate clinical development of XmAb5871 in an additional autoimmune disease in 2016. 

 

IgG4-RD is a rare fibro-inflammatory autoimmune disorder that impacts approximately 10,000-40,000 patients in the United States. IgG4-Related Disease affects multiple organ systems and is characterized by the distinct microscopic appearance of disease organs, including dense presence of IgG4-positive plasma cells that is required for diagnosis. This objective diagnostic criterion is atypical for autoimmune diseases and offers advantages for accurately identifying patients. There are currently no approved therapies for this newly recognized disorder and corticosteroids are the current standard of care. The initial IgG4-RD trial is planned to be an open-label pilot trial and will enroll approximately 15 subjects with scheduled treatment for up to 24 weeks. The recently reported IgG4-RD Responder Index will be used to assess treatment activity (Carruthers 2012, International Journal of Rheumatology). We plan to report preliminary data from the IgG4-RD trial by the end of 2016.    

   

 

XmAb7195.    XmAb7195 is our wholly-owned program being developed for the treatment of severe asthma and allergic diseases. It uses our XmAb Immune Inhibitor Fc Domain and is designed to reduce blood serum levels of IgE, which mediates allergic responses and allergic disease. In January 2015, we reported that interim data from Part 1 of the Phase 1 trial, where healthy subjects in consecutive dose cohorts received a single intraveneous dose of XmAb7195 or placebo, showed rapid reduction of circulating free IgE levels to below the limit of detection at the end of the

XmAb7195 infusion in 90% of XmAb7195 treated subjects that had detectable free IgE pre-dose, including those at the lowest dose evaluated of 0.3 mg/kg. Total IgE levels were also reduced in a parallel fashion. Two subjects with high pre-dose IgE levels (above 400 IU/mL) were treated with XmAb7195, one each at 0.75 mg/kg and 3.0 mg/kg doses, and both had reduction of free IgE levels to below the limit of detection lasting for at least one week.   A dose limiting toxicity of transient, asymptomatic thrombocytopenia (low blood platelet count) was observed at the 3.0 mg/kg dose. The decrease in platelet count was transient with a minimum by 24 hours post-dose, recovery starting by 48 hours post-dose and near full platelet count recovery by study Day 8 in all cases, at which time serum drug concentrations still exceeded levels that eliminate detectable IgE. No evidence of thrombocytopenia has been observed in any of the clinical trials of XmAb5871, an anti-CD19 antibody with the identical XmAb Immune Inhibitor Fc domain as that of XmAb7195. Moderate urticaria (hives) was reported in a total of seven XmAb7195 treated subjects with an apparent correlation of dose with frequency of occurrence. In all cases regardless of dose, the signs/symptoms of urticaria were mild, non-diffuse and easily treated with oral antihistamine, and the study drug infusions were continued to completion without worsening of symptoms. Otherwise, there were no other adverse events that occurred in more than two XmAb7195 treated subjects. There were no serious adverse events reported and no subject discontinued Part 1 of the trial early.  We continue to conduct an analysis of safety, pharmacokinetics, immunogenicity and efficacy data of Part 1 of the Phase 1a study and have finished enrolling patients in Part 2 of the study, where otherwise healthy subjects with a history of allergic rhinitis and/or allergic conjunctivitis and/or atopic dermatitis and serum IgE levels greater than 300 IU/ml are enrolled in consecutive dose cohorts and given a single intravenous dose of XmAb7195 or placebo.  In June 2015 we announced commencement of an expansion of the Phase 1 trial of XmAb7195, in which subjects will receive two doses of XmAb7195. This new part of the trial will allow the Company to examine IgE reduction and the safety profile of XmAb7195 after a second infusion. Data from this trial is expected in the first half of 2016. Additionally, we are planning a clinical trial with a subcutaneous formulation of XmAb7195 in 2016.

 

Bispecific programs: We continue to advance our XmAb® bispecific pipeline which allows us to create dual-antigen targeting molecules. The core of our bispecific programs is a novel Fc domain that is a scaffold for two, or potentially more, different antigen binding domains, creating a single molecule that can bind to two or more targets simultaneously. Our Fc domain technology is designed to maintain full-length antibody properties in a bispecific antibody, potentially enabling stable molecules with favorable in vivo half-life and allowing for the use of standard antibody production methods.  These bispecific Fc domains are used to generate a broad array of novel drug candidates.  For example, we can readily create bispecific antibodies that bind both CD3 and a tumor antigen in order to recruit cytotoxic T cells to the tumor cell. Because of the Fc domain, these bispecific antibodies retain the long half-life and ease of production typical of standard antibodies. We have generated a number of bispecific antibody discovery programs using our XmAb heterodimer Fc domains and have demonstrated that several bispecific antibodies built on these Fc domains are highly active in primate models.

 

In November 2014, we announced preclinical data from three programs using our XmAb bispecific Fc technology showing that bispecific antibodies targeting CD123, CD20 and CD38 antigens each activated T-cells to rapidly kill target cells from a single dose IV bolus in cynomolgus monkeys and demonstrated prolonged half-life of approximately one week in mice.  Our initial bispecific programs are tumor-targeted antibodies that contain both a tumor antigen binding domain (CD123, CD20, or CD38) and a cytotoxic T-cell binding domain (CD3). We have selected our lead anti-CD123xCD3 bispecific antibody, XmAb14045, for IND-enabling studies and cGMP process development and manufacturing.  We plan to initiate clinical trials in acute myeloid leukemia with XmAb14045 in the first half of 2016.  In June we announced that we have selected XmAb13676 as our second bispecific candidate for clinical development. XmAb13676 is an anti-CD20xCD3 bispecific antibody that targets B-cell malignancies. We plan on initiating clinical trials for this candidate in the second half of 2016. Additional bispecific development candidates against additional tumor targets are also in discovery.

 

In September 2015 we entered into the 2015 Agreement with Amgen to develop bispecific product candidates with our bispecific technology. Under the 2015 Agreement and upon delivery by us of the DNA sequences, constructs and preclinical data that we have generated for the CD38 Program, Amgen will assume all future development of our CD38 x CD3 preclinical program.  Subsequent to execution of the 2015 Agreement, we have delivered the DNA sequences, constructs and related CD38 preclinical data to Amgen. As part of the 2015 Agreement, Amgen will also provide five predetermined targets to us and we will apply our bispecific technology to Amgen-provided molecules against the targets and return the bispecific product candidates to Amgen for further testing and development. Amgen will assume all future development of these bispecific product candidates. The Amgen transaction highlights the plug-and-play nature of our bispecific platform and the ability to apply it to multiple targets in an efficient manner.

 

Licensing Partnerships: We currently have seven licensing partnerships for the licensing of our XmAb technology. These arrangements provide upfront payments and annual licensing fees in addition to potential milestones and contractual payments as our partners advance compounds that incorporate our technology into clinical development. In the first quarter of 2014, Merck initiated a Phase 1 clinical trial with an undisclosed product with our Fc optimization technology which triggered a milestone payment. In the third quarter of 2014, Alexion initiated a Phase 1 clinical trial with an undisclosed product incorporating our Xtend technology. In December 2014, we announced a discovery collaboration with Novo Nordisk to jointly discover novel biologic drug candidates for an undisclosed target by combining multiple Xencor XmAb technologies. In March 2015, CSL notified us that they were terminating the 2013 Agreement. In August 2015, CSL, through its sublicensee, Janssen, initiated a Phase 2 clinical trial with JNJ-56022473 which incorporates our Cytotoxic Fc Domain. The Phase 2 trial initiation triggered a $2.5 million milestone payment to us. There are currently six compounds in clinical development from our partners that have incorporated our XmAb technology.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2015 and 2014

 

The following table summarizes our results of operations for the three months ended September 30, 2015 and 2014 (in millions):

 

Research Collaboration Revenues

 

Research collaboration revenues were $0.7 million and $0.6 million for the three months ended September 30, 2015 and 2014 respectively. The $0.1 million increase in revenue reflects the revenue earned under our agreement with Novo Nordisk in 2015 compared with the revenue earned in 2014 from Amgen under the 2010 Agreement which terminated in the fourth quarter of 2014.

 

Licensing Revenues

 

Licensing revenues were $0.3 million and $0.2 million for the three months ended September 30, 2015 and 2014 respectively. The licensing revenue in each three-month period reflects revenue earned under our agreement with Alexion.

 

Milestone Revenues

 

Milestone and contingent payments were $2.5 million and zero for the three months ended September 30, 2015 and 2014 respectively. The milestone revenue of $2.5 million in 2015 reflects revenue earned under the 2009 Agreement with CSL.

 

 

Research and Development Expenses

 

The following table summarizes our research and development expenses for the three months ended September 30, 2015 and 2014, (in millions):

 

 

Research and development expenses were $10.6 million for the three months ended September 30, 2015 compared to $4.9 million for the same period in 2014, an increase of $5.7 million. Spending on the XmAb5871and bispecific programs increased during the three months ended September 30, 2015 compared to the same period in 2014, while spending on the XmAb 7195 decreased during the same periods. The $1.4 million increase in spending associated with the XmAb5871 program is primarily due to expenses related to the development and planned clinical trial in IgG4-RD. There was an increase in spending of $4.1 million in the three months ended September 30, 2015 on our bispecific program as we advanced our initial bispecific candidates, XmAb14045 and XmAb13676, into IND enabling studies and manufacturing of drug supply and conducted additional work on our bispecific platform and other preclinical programs.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended September 30, 2015 and 2014 (in millions):

 

 

General and administrative expenses were $3.2 million and $2.2 million for the three months ended September 30, 2015 and 2014, respectively, an increase of $1.0 million. The increase is primarily due to an increase in professional fees and stock based compensation costs.

 

Comparison of the Nine Months Ended September 30, 2015 and 2014

 

The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014 (in millions):