Xencor, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. Xencor is a clinical-stage biopharmaceutical company developing engineered antibodies using its XmAb platform. It had no approved products or product-sales revenue.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Collaboration, license and milestone revenue | $0.848 | $3.162 | $3.856 | $8.428 |
| Research and development expense | $4.953 | $4.163 | $13.464 | $12.857 |
| General and administrative expense | $2.182 | $0.842 | $5.499 | $2.381 |
| Operating loss | $(6.287) | $(1.843) | $(15.107) | $(6.810) |
| Net loss | $(6.278) | $(1.835) | $(15.073) | $(56.556) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(15.487) | $(1.305) |
- Revenue fell about 73% in Q3 and 54% for the nine-month period year over year, mainly reflecting fewer milestone and licensing revenues compared with 2013.
- Nine-month 2014 operating expenses rose $3.7 million year over year, including higher R&D spending on XmAb7195 and bispecific programs and higher public-company and personnel costs in G&A.
- The 2013 nine-month net loss included a $48.6 million loss on exchanging convertible notes for preferred stock. This nonrecurring item explains why reported net loss was lower in 2014 despite a larger operating loss.
- At September 30, 2014, cash was $60.923 million, total assets $70.866 million, and total liabilities $11.157 million. Cash declined $17.052 million from year-end 2013. The filing reports no material debt; capital lease obligations were approximately $2,000 current and none long-term.
- Gross margin is not applicable to the reported business: the company had no product sales and reported collaboration, license and milestone revenue.
Material changes and business developments
- In October 2014, Amgen and Xencor terminated their XmAb5871 collaboration, returning worldwide rights to Xencor and ending Amgen’s option and future payment obligations. Xencor granted Amgen a right of first negotiation for a possible future license.
- The termination eliminated Xencor’s remaining obligations under the Amgen agreement. The $5.2 million of related deferred revenue at September 30 was expected to be recognized in Q4 2014; this is a subsequent event, not Q3 revenue.
- Xencor said it would not pursue the planned XmAb5871 rheumatoid arthritis Phase 2 proof-of-concept program and instead planned to develop the candidate initially for IgG4-related disease, with a trial planned for 2015. Other autoimmune indications were under consideration.
- Alexion initiated a Phase 1 trial in Q3 with an undisclosed molecule using Xencor’s Xtend technology. Merck’s Phase 1 initiation earlier in 2014 triggered a $0.5 million milestone.
- Xencor designated its CD3 x CD123 bispecific candidate, XmAb14045, as its lead development candidate and planned manufacturing and IND-enabling work in 2015.
Outlook, risks and unusual items
- Management estimated existing cash and certain potential milestone and contingent payments would fund operating expenses and capital needs through the end of 2016. The estimate depends on assumptions that may prove inaccurate; the company said it would need additional financing to complete development and commercialization of its candidates.
- Management expected R&D costs to increase as clinical and preclinical programs advance. It expected preliminary XmAb7195 Phase 1a data in January 2015, trial completion in 2015, and a Phase 1b trial in 2015.
- Contractual commitments included estimated manufacturing campaigns of approximately $1.6 million for XmAb7195 and $3.5 million for XmAb14045 over the next 18 months, with potential cancellation penalties if work was cancelled before starting.
- Key risks include clinical and regulatory uncertainty, dependence on collaboration partners and third-party manufacturers, uncertain milestone revenue, need for future financing, competition, intellectual-property claims, and potential adverse effects or trial delays. Revenue was concentrated among a small number of partners.
- The company reported that a material weakness in revenue-recognition controls identified in connection with its 2013 Form 10-K had been remediated through added personnel and contract-review procedures. Management concluded disclosure controls were effective at a reasonable-assurance level for this quarter.
Important facts for investors to verify
- Whether the Amgen termination revenue was recognized in Q4 as anticipated, and the practical impact of Amgen’s right of first negotiation.
- Updated clinical timelines, trial progress and safety data for XmAb5871, XmAb7195 and XmAb14045, including whether planned 2015 studies proceeded.
- Cash burn, partner payments and financing needs relative to management’s end-2016 runway estimate.
- Manufacturing progress, costs and cancellation exposure under the Catalent and KBI arrangements.
- Whether revenue-recognition control remediation remained effective and whether any new control deficiencies or restatements arose.