XNCR

Business Context and Reporting Period

Xencor, Inc. is a clinical-stage biopharmaceutical company focused on discovering and developing engineered antibody therapeutics (XmAb) for cancer and autoimmune diseases. This Form 10-K covers the fiscal year ended December 31, 2024. The company operates as a single reportable segment and relies on a portfolio of wholly-owned drug candidates and strategic partnerships to generate revenue through licensing, milestones, and royalties.

Key Financial Metrics

Note: Revenue includes significant non-cash royalty revenue ($66.9 million) recognized under royalty sale agreements with OMERS.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by $64.1 million (37%) primarily due to a $54.0 million decrease in milestone revenue and the absence of research collaboration revenue recognized in 2023. Royalty revenue increased by $11.7 million, driven by Alexion (Ultomiris).
• Increased Net Loss: Net loss attributable to Xencor increased by $99.4 million, driven by higher non-cash interest expense related to royalty sale agreements and a $20.4 million impairment charge on equity securities (Zenas BioPharma).
• R&D Optimization: R&D expenses decreased by $25.9 million, largely due to a $54.0 million reduction in wind-down costs for terminated programs, partially offset by increased spending on XmAb942, XmAb819, and XmAb657.
• Capital Raise: In September 2024, the company completed an underwritten public offering, raising gross proceeds of $201.3 million.

Guidance, Outlook, and Risks

Outlook and Guidance

Management estimates that existing cash, cash equivalents, marketable securities, and expected milestone/royalty payments will be sufficient to fund operations into 2028. The company is prioritizing its pipeline, focusing on T-cell engaging bispecific antibodies for solid tumors and autoimmune diseases.

Management Commentary

• Pipeline Progress: Initiated first-in-human studies for XmAb541 (ovarian cancer) and XmAb942 (IBD). Announced initial anti-tumor activity for XmAb819 (renal cell carcinoma). Regained exclusive worldwide rights to plamotamab from J&J in June 2024.
• Portfolio Rationalization: Paused development of vudalimab and concluded Phase 1 studies for cytokine programs XmAb564 and XmAb662 to reallocate resources.

Risks and Contingencies

• Internal Control Material Weaknesses: The company identified material weaknesses in internal controls over financial reporting related to the accounting treatment of non-routine transactions (royalty sales) and tax legislation. This led to the restatement of 2023 financials and Q1-Q3 2024 financials. Management concluded disclosure controls were not effective as of December 31, 2024.
• Patent Litigation: Merus N.V. filed a patent infringement lawsuit in August 2024 alleging infringement of three patents related to bispecific antibodies. Xencor has filed a motion to dismiss citing the "safe harbor" provision and initiated inter partes review proceedings.
• Equity Impairment: Recorded a $20.4 million impairment charge on its investment in Zenas BioPharma preferred stock.

Investor Verification Checklist

• Restatement Impact: Verify the specific adjustments made to the restated 2023 and 2024 interim financial statements due to internal control failures.
• Royalty Sale Accounting: Review the assumptions used to calculate non-cash interest expense and the effective interest rates (21.1% for Ultomiris, 17.5% for Monjuvi) under the OMERS agreements.
• Cash Runway: Confirm the $706.7 million cash balance and the validity of the projection to fund operations through 2028 given the current burn rate.
• Merus Litigation: Monitor the status of the motion to dismiss and inter partes review regarding the patent infringement claims.
• Non-Cash Revenue: Distinguish between cash and non-cash revenue components, noting that a significant portion of 2024 revenue ($66.9 million) was non-cash royalty revenue.