xncr_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

 

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 


 

Commission file number: 001-36182

 

Xencor, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Delaware

 

20-1622502

(State or Other Jurisdiction of Incorporation

or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

111 West Lemon Avenue, Monrovia, CA

 

91016

(Address of Principal Executive Offices)

 

(Zip Code)

 

(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:

 

 

 

Class

 

Outstanding at April 24, 2015

Common stock, $0.01 par value

 

40,359,140

 

 

 

 

 

 


 

Table of Contents

Xencor, Inc.

 

Quarterly Report on FORM 10-Q for the quarter ended March  31, 2015

 

Table of Contents

 

 

 

 

 

Page

 

 

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

PART I. 

FINANCIAL INFORMATION

Item 1. 

Financial Statements

 

Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014

 

Statements of Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014 (unaudited)

 

Statement of Stockholders’ Equity as of March 31, 2015 (unaudited)

 

Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)

 

Notes to Financial Statements (unaudited)

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

23 

Item 4. 

Controls and Procedures

23 

 

 

 

PART II. 

OTHER INFORMATION

24 

Item 1. 

Legal Proceedings

24 

Item 1A. 

Risk Factors

24 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

48 

Item 6. 

Exhibits

49 

 

 

 

Signatures 

50 

 

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.

 

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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:

 

·

our plans to develop and commercialize our product candidates;

 

·

our ongoing and planned clinical trials;

 

·

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

 

·

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

·

our ability to identify additional products or product candidates with significant commercial potential that are consistent with our business objectives;

 

·

the rate and degree of market acceptance and clinical utility of our products;

 

·

the capabilities and strategy of our suppliers and vendors including key manufacturers of our clinical drug supplies;

 

·

significant competition in our industry;

 

·

costs of litigation and the failure to successfully defend lawsuits and other claims against us;

 

·

our partners’ ability to advance drug candidates into, and successfully complete, clinical trials;

 

·

our ability to receive research funding and achieve anticipated milestones under our collaborations;

 

·

our intellectual property position;

 

·

loss or retirement of key members of management;

 

·

costs of compliance and our failure to comply with new and existing governmental regulations;

 

·

failure to successfully execute our growth strategy, including any delays in our planned future growth; and

 

·

our failure to maintain effective internal controls.

 

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.

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PART I — FINANCIAL INFORMATION

Item1. Financial Statements

 

Xencor, Inc.

Balance Sheets

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

119,048 

 

$

54,649 

 

Marketable securities

 

 

25,187 

 

 

 —

 

Accounts receivable

 

 

411 

 

 

2,966 

 

Prepaid expenses and other current assets

 

 

422 

 

 

134 

 

Total current assets

 

 

145,068 

 

 

57,749 

 

Property and equipment

 

 

 

 

 

 

 

Computers, software and equipment

 

 

4,836 

 

 

4,270 

 

Furniture and fixtures

 

 

102 

 

 

97 

 

Leasehold improvements

 

 

3,090 

 

 

3,086 

 

Less accumulated depreciation and amortization

 

 

(6,653)

 

 

(6,554)

 

Property and equipment, net

 

 

1,375 

 

 

899 

 

Other assets

 

 

 

 

 

 

 

Patents, licenses, and other intangible assets, net

 

 

9,509 

 

 

9,116 

 

Marketable securities - long term

 

 

22,628 

 

 

 —

 

Other assets

 

 

59 

 

 

59 

 

Total other assets

 

 

32,196 

 

 

9,175 

 

Total assets

 

$

178,639 

 

$

67,823 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

2,556 

 

$

1,691 

 

Accrued expenses

 

 

1,686 

 

 

2,251 

 

Current portion of deferred rent

 

 

19 

 

 

 —

 

Current portion of deferred revenue

 

 

2,616 

 

 

2,254 

 

Total current liabilities

 

 

6,877 

 

 

6,196 

 

Deferred rent, less current portion

 

 

576 

 

 

 —

 

Deferred revenue, less current portion

 

 

1,884 

 

 

2,337 

 

Total liabilities

 

 

9,337 

 

 

8,533 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.01 par value: 200,000,000 authorized shares at March 31, 2015 and December 31, 2014; 40,358,140 issued and outstanding at March 31, 2015 and 31,434,272 issued and outstanding at December 31, 2014

 

 

404 

 

 

314 

 

Additional paid-in capital

 

 

419,370 

 

 

302,969 

 

Accumulated other comprehensive income

 

 

(35)

 

 

 —

 

Accumulated deficit

 

 

(250,437)

 

 

(243,993)

 

Total stockholders’ equity

 

 

169,302 

 

 

59,290 

 

Total liabilities and stockholders’ equity

 

$

178,639 

 

$

67,823 

 

 

 

 

See accompanying notes.

 

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Xencor, Inc.

Statements of Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

Collaborations, licenses and milestones

 

$

1,491 

 

$

2,184 

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

 

5,205 

 

 

4,228 

 

General and administrative

 

 

2,764 

 

 

1,723 

 

Total operating expenses 

 

 

7,969 

 

 

5,951 

 

Loss from operations 

 

 

(6,478)

 

 

(3,767)

 

Other income (expenses)

 

 

 

 

 

 

 

Interest income

 

 

101 

 

 

18 

 

Interest expense

 

 

(4)

 

 

(2)

 

Other expense

 

 

(63)

 

 

 —

 

Total other income (expense), net 

 

 

34 

 

 

16 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(6,444)

 

 

(3,751)

 

Other comprehensive loss

 

 

 

 

 

 

 

Net unrealized loss on marketable securities

 

 

(35)

 

 

 —

 

Comprehensive loss

 

$

(6,479)

 

$

(3,751)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.19)

 

$

(0.12)

 

Weighted average common shares outstanding used to compute basic and diluted net loss per share

 

 

34,297,782 

 

 

31,360,879 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes. 

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Xencor, Inc.

Statements of Stockholders’ Equity

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid

 

Comprehensive

 

Accumulated

 

Stockholders’

Stockholders’ Equity

 

Shares

 

Amount

 

in-Capital

 

Loss

 

Deficit

 

Equity

Balance, December 31, 2014

 

31,434,272 

 

 

314 

 

 

302,969 

 

 

 —

 

 

(243,993)

 

 

59,290 

Sale of common stock, net of issuance cost of $7.7 million

 

8,625,000 

 

 

86 

 

 

115,118 

 

 

 —

 

 

 —

 

 

115,204 

Issuance of common stock upon exercise and vesting of stock awards

 

298,868 

 

 

 

 

176 

 

 

 —

 

 

 —

 

 

180 

Comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(35)

 

 

(6,444)

 

 

(6,479)

Stock-based compensation

 

 —

 

 

 —

 

 

1,107 

 

 

 —

 

 

 —

 

 

1,107 

Balance, March 31, 2015 (unaudited)

 

40,358,140 

 

$

404 

 

$

419,370 

 

$

(35)

 

$

(250,437)

 

$

169,302 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes. 

 

 

 

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Xencor, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2015

    

2014

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(6,444)

 

$

(3,751)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

240 

 

 

320 

Amortization of premium on marketable securities

 

 

63 

 

 

 —

Stock-based compensation

 

 

1,107 

 

 

278 

Abandonment of capitalized intangible assets

 

 

37 

 

 

10 

Gain on disposal of assets

 

 

(1)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

2,555 

 

 

(452)

Interest receivable

 

 

(146)

 

 

 —

Prepaid expenses and other current assets

 

 

(142)

 

 

(99)

Other assets

 

 

 —

 

 

50 

Accounts payable

 

 

699 

 

 

(529)

Accrued expenses

 

 

(523)

 

 

72 

Deferred rent

 

 

553 

 

 

 —

Deferred revenue

 

 

(91)

 

 

(892)

Net cash used in operating activities

 

 

(2,093)

 

 

(4,993)

Cash flows from investing activities

 

 

 

 

 

 

Purchase of marketable securities

 

 

(47,913)

 

 

 —

Purchase of intangible assets

 

 

(571)

 

 

(382)

Purchase of property and equipment

 

 

(575)

 

 

(66)

Proceeds from sale of property and equipment

 

 

 

 

 —

Net cash used in investing activities

 

 

(49,058)

 

 

(448)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

122,906 

 

 

 —

Proceeds from issuance of common stock upon exercise of stock awards

 

 

180 

 

 

Common stock issuance costs

 

 

(7,536)

 

 

 —

Payments on capital lease obligations

 

 

 —

 

 

(2)

Net cash provided by financing activities

 

 

115,550 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

64,399 

 

 

(5,439)

Cash and cash equivalents, beginning of period

 

 

54,649 

 

 

77,975 

Cash and cash equivalents, end of period

 

$

119,048 

 

$

72,536 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

Net unrealized loss on marketable securities available for sale

 

$

35 

 

$

 —

Common stock issuance costs

 

$

166 

 

$

 —

 

 

 

See accompanying notes. 

 

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Xencor, Inc.

 

Notes to Financial Statements

(unaudited)

 

March 31, 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 Financial Accounting Standards Board (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. The new pronouncement is effective for reporting periods beginning after December 15, 2016 and will replace most of the existing revenue recognition guidance within the United States GAAP. The new pronouncement permits the use of either the retroactive or cumulative effect transition method. Early adoption is not permitted.

 

The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures.

 

 

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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 March 31, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

    

Total

    

    

 

 

 

 

    

Total

    

    

 

 

 

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Fair Value

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

2,040 

 

$

2,040 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Corporate Securities

 

 

32,007 

 

 

 —

 

 

32,007 

 

 

 —

 

 

 —

 

 

 —

Government Securities

 

 

15,808 

 

 

 —

 

 

15,808 

 

 

 —

 

 

 —

 

 

 —

 

 

$

49,855 

 

$

2,040 

 

$

47,815 

 

$

 —

 

$

 —

 

$

 —

 

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 ended March 31, 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2015

    

2014

 

 

(in thousands, except

 

 

per share data)

Basic and diluted numerator:

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(6,444)

 

$

(3,751)

Denominator:

 

 

 

 

 

 

Weighted-average common shares outstanding used in computing basic and diluted net loss

 

 

34,297,782 

 

 

31,360,879 

Basic and diluted net loss per common share

 

$

(0.19)

 

$

(0.12)

 

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.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2015

    

2014

 

    

 

 

(in thousands)

 

 

Employee stock purchase plan shares

 

54 

 

45 

 

 

Options to purchase common stock

 

3,248 

 

2,488 

 

 

 

 

3,302 

 

2,533 

 

 

 

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 ended March 31, 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 ended March 31, 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 ended March 31, 2015.

 

 

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5. Marketable Securities

 

The Company’s marketable securities held as of March 31, 2015 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

2,040 

 

$

 —

 

$

 —

 

$

2,040 

Corporate Securities

 

 

32,040 

 

 

 

 

(36)

 

 

32,007 

Government Securities

 

 

15,810 

 

 

 

 

(3)

 

 

15,808 

 

 

$

49,890 

 

$

 

$

(39)

 

$

49,855 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

2,040 

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

47,815 

Total investments

 

 

 

 

 

 

 

 

 

 

$

49,855 

 

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

 

 

 

 

 

 

 

 

 

Amortized

    

Estimated

 

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

25,210 

 

$

25,187 

    Mature after one year through five years

 

 

22,640 

 

 

22,628 

 

 

$

47,850 

 

$

47,815 

 

 

 

 

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 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 March 31, 2015, the total number of shares of common stock available for issuance under the 2013 Plan was 6,368,483, which includes 2,662,065 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 March 31, 2015 a total of 1,783,750 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. We have reserved a total of 517,422 shares of common stock

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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 March 31, 2015, we have issued a total of 63,864 shares of common stock under the ESPP.

 

Total employee, director and non-employee stock-based compensation expense recognized for the three months ended March 31, 2015 and 2014 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

 

General and administrative

 

$

514 

 

$

128 

 

Research and development

 

 

593 

 

 

150 

 

 

 

$

1,107 

 

$

278 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

 

 

Number of

 

Exercise

 

Remaining

 

Aggregate

 

 

Shares subject

 

Price

 

Contractual

 

Intrinsic

 

 

to outstanding

 

(Per

 

Term

 

Value

 

 

options

 

Share)

 

(in years)

 

(in thousands)

Balances at December 31, 2014

 

2,826,794 

 

$

5.12 

 

 

 

 

 

 

Options granted

 

720,250 

 

$

15.70 

 

 

 

 

 

 

Options exercised

 

(298,868)

 

$

0.60 

 

 

 

 

 

 

Balance at March 31, 2015

 

3,248,176 

 

$

7.88 

 

 

7.55 

 

$

24,429 

Exercisable

 

1,316,093 

 

$

2.63 

 

 

5.06 

 

$

16,699 

 

We calculate the intrinsic value as the difference between the exercise price of the options and the closing price of common stock of $15.32 per share as of March 31, 2015.

 

Weighted average fair value of options granted during the three-month period ended March 31, 2015 and 2014 was $10.54 and $7.44 per share, respectively.  There were 700,500 options granted during the period ended March 31, 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 nine months ended March 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

    

Expected term (years)

 

6.0 

 

6.0 

 

Expected volatility

 

76.6 

%

75.2 

%

Risk-free interest rate

 

1.61 

%

2.01 

%

Expected dividend yield

 

 —

%  

 —

%  

 

 

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ESPP

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

    

Expected term (years)

 

0.5 - 2.0

 

0.5 - 2.0

 

Expected volatility

 

70.6 - 71.8

%

70.6 

%

Risk-free interest rate

 

.06% - .46

%

.07% - .46

%

Expected dividend yield

 

 —

%

 —

%

 

At March 31, 2015, the Company had $11.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over the next 3.6 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):

 

 

 

 

 

 

 

    

 

 

 

 

Operating

Years ending December 31,

 

Leases

For the remainder of the fiscal year

 

$

409 

2016

 

 

679 

2017

 

 

699 

2018

 

 

602 

2019

 

 

581 

Thereafter

 

 

299 

Total

 

$

3,269 

 

Net rent expense for the three months ended March 31, 2015 and 2014 was $129,000 and $137,000 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 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 on behalf of certain minority holders of the Company’s convertible preferred stock before its initial public offering (“IPO”).  In general, the complaint alleges that the directors breached their fiduciary duties to these minority stockholders in connection with a recapitalization of the Company that took place prior to its IPO.  The complaint also claims that certain director and stockholder written consents connected with the recapitalization are invalid.  The complaint has been brought as a purported class action and seeks unspecified monetary damages and other relief.  The Company believes

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that the class action lawsuit is without merit and intends to vigorously defend the action. Based on the preliminary nature of the claim, the Company believes that is it not possible to estimate a potential loss related to the claim.

 

 

8. Collaboration and Licensing Agreements

 

Following is a summary description of the arrangements that generated revenue in the three-months ended March 31, 2015 and 2014.

 

Amgen, Inc.

 

In December 2010, we entered into a Collaboration and Option Agreement (Collaboration Agreement) with Amgen, Inc. (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. During development and through completion of the POC trial, we would continue to own and would control and pay for all development activities. 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. In addition to the option fee, upon exercise of the option we would be eligible to receive $437 million in future development, regulatory and sales milestones as Amgen advanced XmAb5871 into later stages of 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. We were also eligible to receive an additional $12 million in pre-option payments upon continued development of XmAb5871 through completion of the Phase 2 POC trial and delivery of the clinical study reports to Amgen. 

 

In October 2014, we entered into an agreement with Amgen to terminate the Collaboration 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 Collaboration 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.

 

The Company has evaluated the termination agreement with Amgen and determined that the termination results in a cancellation of all our obligations to Amgen under the Collaboration Agreement. We have evaluated the ROFN and determine that its value is de minimis because Amgen’s rights are limited. 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.

 

During the three months ended March 31 2015 and 2014 we recognized $0 and $0.6 million of revenue under this arrangement, respectively. As of March 31, 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

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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 months ended March 31, 2015 and 2014 we recognized $25,000 and $0.5 million of revenue respectively under this arrangement. As of March 31, 2015, there is $0.1 million 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. The upfront payment 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 months ended March 31, 2015 and 2014 we recognized $0.8 million and $0.3 million of revenue respectively under this arrangement. As of March 31, 2015, we have deferred revenue related to this arrangement of $1.8 million.

 

CSL Limited

 

In February 2009, we entered into a Research License and Commercialization Agreement (February 2009 Agreement) with CSL Limited (CSL). Under the agreement, we provided CSL with a research license to one of our technologies 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 February 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 options are considered to be substantive and contingent and we did not allocate any of the proceeds received in the amendment to the options. The amendment proceeds were recognized into income over the remaining period of the research term.

 

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During the three months ended March 31, 2015 and 2014, we recognized zero and $0.7 million of revenue respectively under this arrangement. As of March 31, 2015, we have no deferred revenue related to this arrangement.

 

In March 2013, we entered into a license agreement (March 2013 License 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. We determined that the deliverables under this agreement were the non-exclusive commercial license. We determined that the future milestones and related payments were substantive and contingent and we did not allocate any of the upfront consideration to the milestone.

 

In March 2015, CSL notified us that they were terminating the March 2013 License Agreement. We have no remaining obligations under the agreement. For the periods ended March 31, 2015 and 2014, we did not recognize any revenue related to this arrangement. As of March 31, 2015 there is no remaining deferred revenue under this 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 months ended March 31, 2015, we recognized $0.7 million of revenue related to the arrangement and as of March 31, 2015, we have $2.6 million in deferred revenue related to this arrangement.

 

 

 

 

 

 

 

 

 

 

 

 

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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.

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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. 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 March 31, 2015, combined with collaboration payments that we anticipate receiving, will enable us to fund operations, including  clinical development of XmAb5871, XmAb7195, XmAb14045 and an additional bispecific clinical candidate through 2019

 

We have incurred losses in each year since our inception. Our net losses were $6.4 million and $3.7 million for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, we had an accumulated deficit of $250 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 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 trials. 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 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. Three ACR70 responses (20%) and six ACR50 responses (40%) occurred in the XmAb5871 group compared to zero and one (13%) respectively in the placebo group.  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 activityBiweekly 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.  We continue to conduct an analysis of safety, pharmacokinetics, immunogenicity and efficacy data and full study results are expected to be presented at a medical conference in 2015

 

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We plan to start a clinical trial with XmAb5871 in IgG4-related disease later this year and will be exploring other indications in 2015. IgG4-related disease is a rare fibro-inflammatory autoimmune disorder that impacts approximately 10,000-20,000 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. 

 

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 the trial  show 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 continue to enroll patients in Part 2 of the study.

 

Bispecific programs: We continue to advance our XmAb® bispecific pipeline which allows us to create dual-antigen targeting molecules. 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 2016.  Additional development candidates against additional tumor targets are in discovery.

 

 

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

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combining multiple Xencor XmAb technologies. In March 2015, CSL notified us that they were terminating the March 2013 License Agreement. 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 March 31, 2015 and 2014

 

The following table summarizes our results of operations for the three months ended March 31, 2015 and 2014 (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

    

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Research collaboration

 

$

0.4 

 

$

0.7 

 

$

(0.3)

 

Licensing

 

 

0.6 

 

 

1.0 

 

 

(0.4)

 

Milestone

 

 

0.5 

 

 

0.5 

 

 

 —

 

Total revenues

 

$

1.5 

 

$

2.2 

 

$

(0.7)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5.2 

 

 

4.2 

 

 

1.0 

 

General and administrative

 

 

2.8 

 

 

1.7 

 

 

1.1 

 

Total operating expenses

 

 

8.0 

 

 

5.9 

 

 

2.1 

 

Other income (expense), net

 

 

0.1 

 

 

 —

 

 

0.1 

 

Net loss

 

$

(6.4)

 

$

(3.7)

 

$

(2.7)

 

 

Research Collaboration Revenues

 

Research collaboration revenues were $0.4 million and $0.7 million for the three months ended March 31, 2015 and 2014 respectively. The $0.3 million decrease in revenue reflects the revenue earned under our agreement with Novo Nordisk in 2015 compared with the revenue earned from our Amgen collaboration in 2014 which terminated in the fourth quarter of 2014.

 

Licensing Revenues

 

Licensing revenues were $0.million and $1.0  million for the three months ended March 31, 2015 and 2014 respectively. The lower licensing revenue of $0.4 million in 2015 over 2014 amounts reflects the additional revenue earned under our agreement with CSL in 2014.

 

Milestone Revenues

 

Milestone and contingent payments for the three months ended March 31, 2015 and 2014 were $0.5 million each from Alexion and Merck respectively.

 

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Research and Development Expenses

 

The following table summarizes our research and development expenses for the three months ended March 31, 2015 and 2014, (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

    

Change

 

Product programs:

 

 

 

 

 

 

 

 

 

 

XmAb5871

 

$

1.2 

 

$

1.3 

 

$

(0.1)

 

XmAb7195

 

 

1.4 

 

 

1.3 

 

 

0.1 

 

Bi-specific

 

 

2.0 

 

 

0.7 

 

 

1.3 

 

Early research and discovery

 

 

0.6 

 

 

0.9 

 

 

(0.3)

 

Total research and development expenses

 

$

5.2 

 

$

4.2 

 

$

1.0 

 

 

Research and development expenses were $5.2 million for the three months ended March 31, 2015 compared to $4.2 million for the same period in 2014, an increase of $1.0 million. Spending on the XmAb5871and early research and discovery programs decreased during the three months ended March 31, 2015 compared to the same period in 2014, while spending on the bispecific program and the XmAb 7195 program increased during the same periods. The $0.1  million decrease in spending associated with the XmAb5871 program is primarily due to a decrease in manufacturing costs for the drug product and lower clinical expenses as the Phase 1b/Phase 2a trial neared completion. There was an increase in spending of approximately $0.1  million on the XmAb7195 program related to initiation of the clinical trial in 2014 and there was an increase in spending of $1.3  million in the three months ended March 31, 2015 on our bispecific program as we advanced our initial bispecific candidate, XmAb14045 into IND enabling studies and manufacturing of drug product and conducted additional work on our bispecific programs.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended March 31, 2015 and 2014 (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

    

Change

 

General and administrative

 

$

2.8 

 

$

1.7 

 

$

1.1 

 

 

General and administrative expenses were $2.million and $1.7 million for the three months ended March 31, 2015 and 2014, respectively, an increase of $1.million. The increase is primarily due to an increase in staffing of legal and accounting personnel and compensation costs of approximately $0.7 million and an increase in costs related to being a publicly traded company of $0.4  million in 2015.

 

Cash Flows

 

The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):

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Three Months Ended March 31,

 

    

2015

    

2014

    

Change

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(2,093)

 

$

(4,993)

 

$

2,900 

Investing activities

 

 

(49,058)

 

 

(448)

 

 

(48,610)

Financing activities

 

 

115,550 

 

 

 

 

115,548 

Net increase (decrease) in cash

 

$

64,399 

 

$

(5,439)

 

$

69,838 

 

Operating Activities

 

Cash used in operating activities for the three months ended March 31, 2015 was $2.0 million compared to $5.0 million for the three months ended March 30, 2014 a decrease of $3.0 million. The decrease in cash used is primarily due to a decrease in our accounts receivable balances of $3.0 million.

 

Investing Activities

 

Investing activities consist primarily of investments in marketable securities, purchases of intangible assets, capitalization of patent and licensing costs and, purchases of property and equipment. Net cash used in investing activities was $49.0 million and $0.4 million for the three months ended March 31, 2015 and March 31, 2014, respectively. We purchased $0.6 million of intangible assets for the three months ended March 31, 2015 compared to $0.4 million for the same period in 2014. We purchased $48 million of marketable securities for the three months ended March 31, 2015. We purchased $0.5  million of capital equipment for the three months ended March 31, 2015 compared to $66,000 for the same period in 2014. This increase is primarily related to additional capital spending on laboratory and office equipment.

 

Financing Activities

 

Net cash provided by financing activities consist primarily of net proceeds of $115.2 million from the sale of common stock and $180,000 from the issuance of common stock upon exercise of stock awards during the three months ended March 31, 2015.  

 

Liquidity and Capital Resources

 

We have financed our operations primarily through private placements of our equity and convertible notes, the public offerings of our common stock, and payments received under our product development partnerships and licensing arrangements. 

 

On March 3, 2015, we finalized the sale of 8,625,000 shares of common stock at an offering price of $14.25 per share, resulting in net proceeds of approximately $115.2 million, after deducting underwriting discounts, commissions and offering expenses.

 

At March 31, 2015, we had $166.9 million of cash, cash equivalents and marketable securities. We expect to continue to receive additional payments from our collaborators for research and development services rendered, additional milestone, contingent payments, opt-in and annual license maintenance payments. Our ability to receive milestone payments and contingent payments from our partners is dependent upon either our ability or our partners’ abilities to achieve certain levels of research and development activities and is therefore uncertain at this time.

 

Funding Requirements

 

We have not generated any revenue from product sales to date and do not expect to do so until such time as we obtain regulatory approval of and commercialize one or more of our product candidates. As we are currently in clinical stage of development, it will be some time before we expect to achieve this and it is uncertain that we ever will. We expect that we will continue to increase our operating expenses in connection with ongoing as well as additional clinical and pre-clinical development of product candidates in our pipeline.

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Although it is difficult to predict our funding requirements, we expect that our existing cash, cash equivalents and marketable securities and certain potential milestone and contingent contractual payments will fund our operating expenses and capital expenditure requirements through 2019. We have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress in these trials is uncertain. Because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability.

 

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements.

 

 

ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

 

Our primary objective when considering our investment activities is to preserve capital in order to fund our operations. As of March 31, 2015, we had cash of $166.9 million which was invested in interest-bearing accounts and marketable securities. Our primary exposure to market risk is related to changes in interest rates and our current investment policy is to invest principally in deposits in interest-bearing accounts. We do not believe that our cash has significant risk.

 

ITEM 4.Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of March 31, 2015, the Company’s  disclosure controls and procedures were effective at the reasonable assurance level. 

 

Changes in Internal Control

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

On March 3, 2015, a 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 on behalf of certain minority holders of the Company’s convertible preferred stock before its initial public offering (“IPO”).  In general, the complaint alleges that the directors breached their fiduciary duties to these minority stockholders in connection with a recapitalization of the Company that took place prior to its IPO.  The complaint also claims that certain director and stockholder written consents connected with the recapitalization are invalid.  The complaint has been brought as a purported class action and seeks unspecified monetary damages and other relief.  The company believes that the class action lawsuit is without merit and intends to vigorously defend the action.    

 

 

Item 1A.Risk Factors

 

Our business and results of operations are subject to numerous risks, uncertainties and other factors that you should be aware of, some of which are described below. The risks, uncertainties and other factors described below are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations.

 

The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Item 1A. of our annual report on Form 10-K for the year ended December 31, 2014, as amended. Any of the risks, uncertainties and other factors could have a materially adverse effect on our business, financial condition or results of operations and could cause the trading price of our common stock to decline substantially.

 

Risks Relating to Our Business and to the Discovery, Development and Regulatory Approval of Our Product Candidates

 

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.*

 

We are a clinical-stage biopharmaceutical company. To date, we have financed our operations primarily through equity and debt financings and our research and licensing agreements and have incurred significant operating losses since our inception in 1997. Our net losses for the three months ended March 31, 2015 and 2014 were $6.4 million and $3.7 million, respectively. As of March 31, 2015, we had an accumulated deficit of $250 million. Such losses are expected to increase in the future as we execute our plan to continue our discovery, research and development activities, including the ongoing and planned clinical development of our antibody product candidates, and incur the additional costs of operating as a public company. We are unable to predict the extent of any future losses or when we will become profitable, if ever. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis which would adversely affect our business, prospects, financial condition and results of operations.

 

Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of uncertainty. We have never generated any revenue from product sales and may never be profitable.

 

We have devoted substantially all of our financial resources and efforts to developing our proprietary XmAb technology platform, identifying potential product candidates and conducting preclinical studies and clinical trials. We and our partners are still in the early stages of developing our product candidates, and we have not completed development of any products. Our revenue to date has been primarily revenue from the license of our proprietary XmAb technology platform for the development of product candidates by others or revenue from our partners. Our ability to generate revenue and achieve profitability depends in large part on our ability, alone or with partners, to achieve milestones and to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize, product candidates. We do not anticipate generating revenues from sales of products for the foreseeable future. Our ability to generate future revenues from product sales depends heavily on our and our partners’ success in:

 

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·

completing clinical trials through all phases of clinical development of our current product candidates, XmAb5871 and XmAb7195, as well as the product candidates that are being developed by our partners and licensees;

 

·

seeking and obtaining marketing approvals for product candidates that successfully complete clinical trials;

 

·

launching and commercializing product candidates for which we obtain marketing approval, with a partner or, if launched independently, successfully establishing a sales force, marketing and distribution infrastructure;

 

·

identifying and developing new XmAb-engineered therapeutic antibody candidates;

 

·

establishing and maintaining supply and manufacturing relationships with third parties;

 

·

obtaining additional licensing and partnering opportunities, similar to our partnership with MorphoSys for XmAb5574/MOR208, with leading pharmaceutical and biotechnology companies;

 

·

achieving the milestones set forth in our agreements with our partners;

 

·

conducting further research into the function and application of antibody Fc domains in order to expand the scope of our proprietary XmAb technology platform;

 

·

maintaining, protecting, expanding and enforcing our intellectual property; and

 

·

attracting, hiring and retaining qualified personnel.

 

Because of the numerous risks and uncertainties associated with biologic product development, we are unable to predict the timing or amount of increased expenses and when we will be able to achieve or maintain profitability, if ever. In addition, our expenses could increase beyond expectations if we are required by the U.S. Food and Drug Administration (FDA), or foreign regulatory agencies, to perform studies and trials in addition to those that we currently anticipate, or if there are any delays in our or our partners completing clinical trials or the development of any of our product candidates. If one or more of the product candidates that we independently develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing such product candidates. Even if we or our partners are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations, which may not be available to us on favorable terms, if at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

 

We will require additional financing and may be unable to raise sufficient capital, which could lead us to delay, reduce or abandon research and development programs or commercialization.*

 

We expect our expenses to increase in in connection with our ongoing development activities, including additional clinical trials of XmAb5871 and XmAb 7195 and continued development of our bispecific drug candidates including our initial development candidate, XmAb14045 and other research activities.  Identifying potential product candidates and conducting preclinical testing and clinical trials are time-consuming, expensive and uncertain processes that take years to complete, and we or our partners may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success.

 

Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing

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operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

 

We believe our existing cash, together with interest thereon, will be sufficient to fund our operations through the end of 2019. However, changing circumstances or inaccurate estimates by us may cause us to use capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For example, our clinical trials for XmAb5871, XmAb 7195 or clinical trials for other drug candidates may encounter technical, enrollment or other issues that could cause our development costs to increase more than we expect. We do not have sufficient cash to complete the clinical development of any of our product candidates and will require additional funding in order to complete the development activities required for regulatory approval of either XmAb5871 or XmAb7195 or XmAb14045 or any future product candidates that we develop independently. Because successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to complete research and development and commercialize our product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations; even if we believe we have sufficient funds for our current or future operating plans. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

 

The development and commercialization of biologic products is subject to extensive regulation, and we may not obtain regulatory approvals for any of our product candidates.

 

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, import, marketing and distribution and other possible activities relating to XmAb5871, XmAb7195 and our bispecific candidates, our current lead internal antibody product candidates, as well as any other antibody product candidate that we may develop in the future, are subject to extensive regulation in the United States as biologics. Biologics require the submission of a Biologics License Application (BLA) to the FDA and we are not permitted to market any product candidate in the United States until we obtain approval from the FDA of a BLA for that product. A BLA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls (CMC) sufficient to demonstrate the safety, purity, potency and effectiveness of the applicable product candidate to the satisfaction of the FDA.

 

Regulatory approval of a BLA is not guaranteed, and the approval process is an expensive and uncertain process that may take several years. The FDA and foreign regulatory entities also have substantial discretion in the approval process. The number and types of preclinical studies and clinical trials that will be required for BLA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical studies and clinical trials, failure can occur at any stage, and we could encounter problems that require us to repeat or perform additional preclinical studies or clinical trials or generate additional CMC data. The FDA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:

 

·

may not deem our product candidate to be adequately safe and effective;

 

·

may not find the data from our preclinical studies and clinical trials or CMC data to be sufficient to support a claim of safety and efficacy;

 

·

may not approve the manufacturing processes or facilities associated with our product candidate;

 

·

may conclude that we have not sufficiently demonstrated long-term stability of the formulation of the drug product for which we are seeking marketing approval;

 

·

may change approval policies or adopt new regulations; or

 

·

may not accept a submission due to, among other reasons, the content or formatting of the submission.

 

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Generally, public concern regarding the safety of drug and biologic products could delay or limit our ability to obtain regulatory approval, result in the inclusion of unfavorable information in our labeling, or require us to undertake other activities that may entail additional costs.

 

We have not submitted an application for approval or obtained FDA approval for any product. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for our product candidates.

 

To market any biologics outside of the United States, we and current or future collaborators must comply with numerous and varying regulatory and compliance related requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, including obtaining reimbursement and pricing approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others, including the risk that our product candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed. Certain countries have a very difficult reimbursement environment and we may not obtain reimbursement or pricing approval, if required, in all countries where we expect to market a product, or we may obtain reimbursement approval at a level that would make marketing a product in certain countries not viable.

 

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired which would adversely affect our business, prospects, financial condition and results of operations.

 

Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

 

Any regulatory approvals that we or our partners receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices (cGMPs), and current good clinical practices (cGCPs), for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, undesirable side effects caused by the product, problems encountered by our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, either before or after product approval, may result in, among other things:

 

·

restrictions on the marketing or manufacturing of the product;

 

·

requirements to include additional warnings on the label;

 

·

requirements to create a medication guide outlining the risks to patients;

 

·

withdrawal of the product from the market;

 

·

voluntary or mandatory product recalls;

 

·

requirements to change the way the product is administered or for us to conduct additional clinical trials;

 

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·

fines, warning letters or holds on clinical trials;

 

·

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners, or suspension or revocation of product license approvals;

 

·

product seizure or detention, or refusal to permit the import or export of products;

 

·

injunctions or the imposition of civil or criminal penalties; and

 

·

harm to our reputation.

 

Additionally if any of our product candidates receives marketing approval, the FDA could require us to adopt a Risk Evaluation and Mitigation Strategy (REMS) to ensure that the benefits of the therapy outweigh its risks, which may include, among other things, a medication guide outlining the risks for distribution to patients and a communication plan to health care practitioners.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the product or the particular product candidate at issue and could significantly harm our business, prospects, financial condition and results of operations.

 

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

 

If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

 

We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. In addition, some of our competitors have ongoing clinical trials for product candidates that treat the same indications as our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.

 

Patient enrollment is affected by other factors including:

 

·

the severity of the disease under investigation;

 

·

the patient eligibility criteria for the study in question;

 

·

the perceived risks and benefits of the product candidate under study;

 

·

our payments for conducting clinical trials;

 

·

the patient referral practices of physicians;

 

·

the ability to monitor patients adequately during and after treatment; and

 

·

the proximity and availability of clinical trial sites for prospective patients.

 

For example, in our Phase 1a clinical trial of XmAb5871, which we completed in December 2012, delays in patient enrollment that were outside our control caused several weeks of delay that we did not predict at the outset of that clinical trial. Our inability to enroll a sufficient number of patients for any of our clinical trials could result in significant

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delays and could require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates and in delays to commercially launching our product candidates, if approved, which would cause the value of our company to decline and limit our ability to obtain additional financing.

 

The manufacture of biopharmaceutical products, including XmAb-engineered antibodies, is complex and manufacturers often encounter difficulties in production. If we or any of our third-party manufacturers encounter any loss of our master cell banks or if any of our third-party manufacturers encounter other difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide product candidates for clinical trials or our products to patients, once approved, the development or commercialization of our product candidates could be delayed or stopped.

 

The manufacture of biopharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We and our contract manufacturers must comply with cGMP regulations and guidelines. Manufacturers of biopharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the conta