XNCR - Xencor: A Mid-Stage Clinical Company With Falling Losses

2023-10-20 23:02:01 ET

Summary

• Xencor, Inc. is a biotech company focused on the development and commercialization of anticancer medications.
• They have successful partnerships and licensing agreements for approved molecules in hematologic cancers and blood disorders.
• Xencor's pipeline includes promising drugs like vudalimab, a bispecific antibody, but timing and toxicity concerns may impact their valuation.

Topline Summary

Xencor, Inc ( XNCR ) is a biotechnology company mainly focused on the development and commercialization of anticancer medications. Through various successful partnerships, they already have substantial revenues thanks to licensing agreements pertaining to approved molecules a hematologic cancers and other blood disorders. This gives them a favorable position of strength to continue their growth trajectory as they look to get their own drug approved.

Pipeline Overview

XNCR has outlicensed 2 approved molecules to other pharma companies. The first is tafasitamab, a treatment option for patients with previously treated diffuse large B-cell lymphoma. The second is ravulizumab, a treatment for several rare blood disorders. I won't dive too deeply into these, other than to say that follow-up data provide confirmatory evidence that these agents are helping in their approved indications, which means no slowed growth of sales (which we'll cover later).

XNCR has also partnered out a number of other agents, most notably obexelimab for the treatment of IgG4-related disease, although the partner for this agent, Zenas BioPharma, recently outlicensed some of the rights to this agent themselves. A phase 3 study has been ongoing with obexelimab since January 2023.

In this article, I want to touch on some of the more intermediate-stage developmental products that XNCR still owns, since this could represent the biggest step forward in taking the company to the next level in terms of valuation.

Vudalimab

Vudalimab is a "bispecific" antibody that simultaneously targets both CTLA-4 and PD-1, which are the targets of drugs like ipilimumab and pembrolizumab, respectively. The data we've seen so far have been limited to " preliminary clinical experience " reporting out of SITC 2022, which showed 12-month PFS and OS rates of 18.3% and 64.6%, respectively, among the 110 patients with different solid tumors enrolled in the study. It is worth noting that the strongest signals of activity were found in the cohorts of patients with renal cell carcinoma (kidney cancer) and castration-resistant prostate cancer, whereas very little, if any, activity was observed in patients with melanoma and lung cancer.

Perhaps most important for this drug is the toxicity, given how limiting the tolerability profile for approved CTLA-4 drugs can be. There did not appear to be a particularly high rate of grade 3 or 4 adverse events, or at least nothing that physicians who use these drugs wouldn't expect. It's not really possible to say whether it's higher than something like nivolumab plus ipilimumab. There were 2 deaths from toxicity, which could be a point of concern moving forward for vudalimab. In the total population, 35% of patients discontinued due to an adverse event.

Now, there are multiple phase 2 studies ongoing with vudalimab, one in prostate cancer , and another in patients with advanced gynecologic or genitourinary malignancies . At ASCO 2023, researchers from UPenn also presented a planned phase 2 trial in advanced biliary tract cancers.

So what to make of vudalimab? It's hard to say so far. They have a pretty promising early signal of activity where I mentioned, but it's very odd to see little to no activity in melanoma, since both PD-1 and CTLA-4 inhibition are established standard of care options in that setting. It might be due to prior checkpoint inhibitor treatment, since 11 of 20 patients had 2 or more prior lines of checkpoint blockade. But it's still a bit odd, since the kidney cancer cohort had patients with prior checkpoint inhibitors, too.

This is a project well worth watching, though with some caution.

Other Pipeline Projects in Phase 1

Not to belabor the pipeline too much, XNCR has a wide range of projects still in phase 1. The one with the near-term event (in my mind) is XmAb808, a bispecific antibody targeting B7-H3. The company will be presenting the results of a phase 1 study using this agent in advanced solid tumors at SITC 2023 in early November. Given that it's a poster presentation, we're unlikely to see anything groundbreaking, but it does speak to where the company is putting their resources, and B7-H3 is an interesting, though mysterious and unproven target, with the most evidence for activity so far established in small cell lung cancer .

Beyond that, there are many other bispecific molecules swimming in the primordial clinical soup at XNCR, and it will be worth watching how they develop, without getting too fixated on any one of these projects in particular until the company shows their hand.

Financial Overview

At the end of Q2 2023, XNCR held $34.7 million in cash and equivalents, with another $516.7 million in marketable debt and equity securities. Total current assets reached $593.6 million.

Meanwhile, the total operating expenses for the company came to $71.5 million, driven mostly by the $60.1 million in R&D expenditures. Revenue from their collaborations, milestone payments, and royalty payments was $45.5 million, up from $30.2 million in Q2 2022.

After interest income and other factors, the net loss in Q2 2023 was $22.0 million, down from $34.0 million in Q2 2022. This is impressive, given that R&D expenses have grown rapidly in the same time period.

At the current burn rate, XNCR has around 1 quarter of cash on hand to fund, but tapping into their marketable securities gives them between 5 and 6 years of funding runway. This assumes that revenues do not grow substantially, or that new partners are not brought into the fold.

Strengths and Risks

For a company with no marketed products of their own, it's rare for me to feel like the cash runway they have is such a small risk. Jumping in today would mean that dilution is next to a non-factor, and they've clearly managed their costs well. The high R&D expenses are really no surprise, given the number of different projects they're running simultaneously.

The real risk for this company is down to timing. If you jump in today, how long might it take for their valuation to continue to push further above the $1 billion they have today? They're in a profoundly better position than a lot of developmental biotechs, but there's still quite some time before they could see to market a drug of their own.

And that's before bringing up my reservations about their most advanced product candidate...the toxicity we've seen so far might end up being a real problem. It's tough to say from these early data, but I wouldn't be shocked to find that's a limiter. After that, it's phase 1 all the way down the pipeline.

Opportunity cost may be what hurts you if you buy into XNCR today. Their next approval is years out, if it ever comes. Something could very well drive the hype train for these drugs, but it won't be an approval, not for at least another 2 years, I'd wager.

Bottom-Line Summary

XNCR has a bright future, though it's one I would caution against buying into with too much enthusiasm in late 2023. The decline we've seen in share price over the course of 2023 is a good tell that the market is not excited about what's coming in the near term. At some point that means XNCR will be flying under the radar, but it's impossible to say what that point is. At the time of writing, the share price of ~$18 is a steep discount from their highs, but there's plenty of room to fall.

Would that be justified? I don't think so, but the market punishes biotech companies that are viewed as a bit boring, and unfortunately XNCR's pipeline might appear to be boring for the near term. I think this will be an opportunity, so my rating is "buy," but with the plan of dividing your buy plan so you can potentially average down. XNCR isn't going away, not with that cash runway, but there is no guarantee they're going to go crazy, either.

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