Xencor Inc

1. Organization and Summary of Significant Accounting Policies

Organization

Xencor, Inc. (the “Company”) was incorporated in California in 1997 and reincorporated in Delaware in September 2004. The Company is a clinical-stage biopharmaceutical company focused on discovering and developing engineered antibody therapeutics to treat patients with cancer and autoimmune diseases, who have unmet medical needs. The Company leverages its protein engineering capabilities to design new technologies and XmAb® drug candidates with improved properties. These candidates are advanced into clinical-stage development, where the Company is conducting Phase 1 studies across a broad portfolio of programs. Based on the results of these studies, the Company determines which programs to advance into later-stage development and potential commercialization, which to partner in order to access complementary resources, and which to discontinue.

Consolidation and Basis of Presentation

The interim consolidated financial statements of Xencor, Inc. are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated.

Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted from the accompanying interim consolidated financial statements and related notes. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 for more complete descriptions and discussions. Operating results and cash flows for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2025.

The interim consolidated financial statements include the accounts of Xencor, Inc. and Gale Therapeutics Inc. (“Gale”), a variable interest entity for which the Company is the primary beneficiary. Up through January 20, 2025, the Company owned or was exposed to less than 100% of the economics and accordingly, the Company recorded net loss attributable to noncontrolling interests in its consolidated statements of operations and comprehensive loss equal to the percentage of the economic or ownership interests retained in such entity by the respective noncontrolling party. On January 20, 2025, the Company obtained 100% of the economic interests in Gale and no longer recognizes a noncontrolling interest in its consolidated financial statements as of March 31, 2025. Effective April 29, 2025, Gale was merged into the Company, and as a result, the Company assumed all of Gale’s liabilities and obligations.

Income Tax

The Company recorded $0.4 million of income tax expense for the three months ended March 31, 2025. There isno income tax provision for the three months ended March 31, 2024. As of March 31, 2025, the Company’s deferred income tax assets, consisting primarily of capitalized R&D under IRC Section 174, net operating loss and research and development tax credit carryforwards, have been fully offset by a valuation allowance.

Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Recent Accounting Pronouncements

The Company does not expect any recently issued accounting standards, other than those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024, to have a material impact on its financial results.

2. Collaboration and Licensing Agreements

The following table provides a summary of revenue recognized:

The following table presents a disaggregation of revenue recognized during the periods indicated:

Alexion Pharmaceuticals, Inc. (“Alexion”)

In January 2013, the Company entered into an Option and License Agreement (the “Alexion Agreement”) with Alexion. Under the terms of the Alexion Agreement, the Company granted to Alexion an exclusive research license, with limited sublicensing rights, to make and use the Company’s Xtend technology to evaluate and advance compounds. Alexion exercised its rights toone target program, ALXN1210, which is now marketed as Ultomiris®.

Under the Alexion Agreement, no further milestone payments are expected. The Company is entitled to receive royalties based on a percentage of net sales of Ultomiris sold by Alexion, its affiliates or its sublicensees, which percentage is in the low single digits. Alexion’s royalty obligations continue on a product-by-product and country-by-country basis until the expiration of the last-to-expire valid claim in a licensed patent covering the applicable product in such country.

On November 3, 2023, the Company entered into a royalty sale agreement (the “Ultomiris Royalty Sale Agreement”) with OCM Life Sciences Portfolio LP (“OMERS”), under which OMERS acquired the rights to certain royalties associated with the existing license relating to Ultomiris.

Under the Alexion Agreement, the Company recognized $15.5 million and $12.6 million of non-cash royalty revenue during the three months ended March 31, 2025 and 2024, respectively. As of March 31, 2025, the Company recorded $15.9 million in accounts receivable based on estimated royalties due under the arrangement andno deferred revenue. Payment of this receivable will be made directly to OMERS. See Note 6.

Incyte Corporation (“Incyte”)

In June 2010, the Company entered into a Collaboration and License Agreement (the “MorphoSys Agreement”) with MorphoSys AG (“MorphoSys”). Under the MorphoSys Agreement, the Company granted MorphoSys an exclusive worldwide license to its patents and know-how to research, develop and commercialize the XmAb5574 product candidate (subsequently renamed MOR208 and tafasitamab) with the right to sublicense under certain conditions. In February 2024, Incyte assumed all of MorphoSys’ right, title and interest in the MorphoSys Agreement and acquired exclusive global development and commercialization rights to tafasitamab. If certain developmental, regulatory and sales milestones are achieved, the Company is eligible to receive future milestone payments and royalties from Incyte.

The United States Food and Drug Administration (FDA) accepted Incyte’s submission of a supplemental biologics license application in February 2025, triggering a $12.5 million milestone payment to the Company which was paid in the second quarter of 2025. There wasno deferred revenue related to this agreement as of March 31, 2025.

Under the MorphoSys Agreement, the Company is eligible to receive up to $123.0 million in developmental, regulatory and sales milestones, as well as royalties on net sales, subject to the terms and conditions of the agreement.

On November 3, 2023, the Company entered into a royalty sale agreement (the “Monjuvi Royalty Sale Agreement”) with OMERS, under which OMERS acquired the rights to certain royalties associated with the existing license relating to Incyte.

Under the MorphoSys Agreement, the Company recognized $2.8 million and $2.9 million of non-cash royalty revenue during the three months ended March 31, 2025 and 2024, respectively. As of March 31, 2025, the Company recorded $2.6 million in accounts receivable based on estimated royalties due under the arrangement andno deferred revenue. Payment of this receivable will be made directly to OMERS. See Note 6.

Vega Therapeutics, Inc. (“Vega”)

In October 2021, the Company entered into a Technology License Agreement (the “Vega Agreement”) with Vega, granting Vega a non-exclusive license to its Xtend Fc technology. In March 2024, Vega initiated a Phase 1 study, triggering a $0.5 million milestone payment, which was recognized as revenue.

No revenue was recognized under the Vega Agreement for the three months ended March 31, 2025.

Under the Vega Agreement, the Company is eligible to receive up to $30.0 million in developmental, regulatory and sales milestones, as well as royalties on net sales, subject to the terms and conditions of the agreement.

Vir Biotechnology, Inc. (“Vir Bio”)

In 2019, the Company entered into a Patent License Agreement (the “Vir Bio Agreement”) with Vir Bio, granting a non-exclusive license to its Xtend technology for up totwo targets. In March 2025, Vir Bio initiated a Phase 3 study for tobevibart, triggering a $2.0 million milestone payment to the Company, which was recorded as a receivable as of March 31, 2025.

In March 2020, the Company entered into a second Patent License Agreement (the “Second Vir Bio Agreement”) with Vir Bio, granting a non-exclusive license to its Xtend technology to extend the half-life of novel antibodies Vir Bio developed as potential treatments for patients with COVID-19, including sotrovimab. Under the terms of the Second Vir Bio Agreement, Vir Bio is responsible for all research, development, regulatory and commercial activities for the antibodies, and the Company is eligible to receive royalties on the net sales of approved products in the mid-single digit percentage range. Vir Bio and its marketing partner, GSK, began recording sales for sotrovimab beginning in June 2021.

The Company recognized nominal amounts of royalty revenue for the three months ended March 31, 2024, and there isno deferred revenue related to the Vir Bio or Second Vir Bio Agreements.

Under the Vir Bio Agreement, the Company is eligible to receive up to $152.0 million in developmental, regulatory and sales milestones, as well as royalties on net sales, subject to the terms and conditions of the agreement.

3. Marketable Debt and Equity Securities

Marketable Debt Securities

The Company’s marketable debt securities consisted of the following:

The following table summarizes the contract maturities of the Company’s marketable debt securities as of March 31, 2025:

The Company did not record any impairment losses on its marketable debt securities during the three months ended March 31, 2025 and 2024.

Marketable Equity Securities

The Company’s marketable equity securities consisted of the following:

Net unrealized gains on marketable equity securities, recognized in other income (expense) in the consolidated statements of operations, were $0.9 million and $2.3 million for the three months ended March 31, 2025 and 2024, respectively.

No impairment losses on marketable equity securities were recognized for the three months ended March 31, 2025. An impairment loss of $20.7 million was recorded for the three months ended March 31, 2024, based on an analysis performed under the measurement alternative for a security without a readily determinable fair value.

4. Fair Value of Measurements

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company’s valuation techniques and inputs used to measure fair value and the definition of the three levels (Level 1, Level 2, and Level 3) of the fair value hierarchy are disclosed in Note 1 - Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements of Part II, “Item 8. Consolidated Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the year ended December 31, 2024.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. As of March 31, 2025 and December 31, 2024, the Company did not have any financial assets or financial liabilities based on Level 3 measurements.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company:

5. Balance Sheet Accounts

Property and Equipment

The following table summarizes the Company’s major classes of property and equipment:

Depreciation and amortization expense for property and equipment for the three months ended March 31, 2025 and 2024 was $2.4 million and $2.7 million, respectively.

Patents, Licenses, and Other Intangible Assets

The following table summarizes the Company’s patents, licenses, and other intangible assets:

Patents, licenses and other intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Amortization expense was $0.3 million for each of the three months ended March 31, 2025 and 2024. None of these assets with definite useful lives are anticipated to have a residual value.

Patents, licenses and other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. The Company recorded the asset impairment charges of $4.9 million during the three months ended March 31, 2025, related to its decision in the first quarter of 2025 to pause further development of certain programs and prioritize resources toward advancing other pipeline programs. As a result, associated patents related to the paused programs were impaired. No such charges were recorded during the same period in 2024.

The following table presents the estimated future amortization expense related to definite-lived assets as of March 31, 2025:

Accrued Expense

Accrued expenses consist of the following:

6. Liabilities Related to the Sales of Future Royalties

Ultomiris Royalty Sale Agreement

On November 3, 2023, the Company and OMERS entered into the Ultomiris Royalty Sale Agreement. Pursuant to the Ultomiris Royalty Sale Agreement, OMERS acquired the rights to a portion of royalties and milestones earned after July 1, 2023 associated with the existing license relating to Ultomiris® (ravulizumab-cwvz) in exchange for an upfront payment of $192.5 million. Pursuant to the Ultomiris Royalty Sale Agreement and subject to the Company’s existing license with Alexion, OMERS acquired the right to receive: (i)100% of royalties payable on past and future sales related to Ultomiris that occur from July 1, 2023 through December 31, 2025; (ii) up to $35.0 million annually in royalties on future sales related to Ultomiris that occur from January 1, 2026 through December 31, 2028, with any royalties in excess of $35.0 million reverting to the Company; (iii) up to $12.0 million annually in royalties on future sales related to Ultomiris that occur from and after January 1, 2029, with any royalties in excess of $12.0 million reverting to the Company; and (iv) $18.0 million of a certain future sales based milestone payment pursuant to the existing license with Alexion.

Monjuvi Royalty Sale Agreement

On November 3, 2023, the Company and OMERS entered into the Monjuvi Royalty Sale Agreement. Pursuant to the Monjuvi Royalty Sale Agreement, OMERS acquired the rights to a portion of royalties earned after July 1, 2023 associated with the existing license relating to Monjuvi®/Minjuvi® (tafasitamab-cxix) in exchange for an upfront payment of $22.5 million. Pursuant to the Monjuvi Royalty Sale Agreement and subject to the Company’s existing license with Incyte, OMERS acquired the right to receive up to $29.3 million in royalties earned after July 1, 2023 related to sales of Monjuvi/Minjuvi, with any royalties in excess of $29.3 million paid to OMERS reverting to the Company.

The Company has evaluated the terms of both Ultomiris and Monjuvi Royalty Sale Agreements and concluded, in accordance with the relevant accounting guidance, that the Company accounted for both transactions as debt and the proceeds recorded as liabilities related to the sale of future royalties on its consolidated balance sheets.

The Company records the obligations at their carrying value using the effective interest method. In order to amortize the liabilities related to the sale of future royalties, the Company utilizes the prospective method to estimate the future royalties to be paid by the Company to the counterparty over the life of the arrangement. Under the prospective method, a new effective interest rate is determined based on the revised estimate of remaining cash flows. The new rate is the discount rate that equates the present value of the revised estimate of remaining cash flows with the carrying amount of the debt, and it will be used to recognize non-cash interest expense for the remaining periods. The Company periodically assesses the amount and the timing of expected royalty payments using a combination of internal projections and forecasts from external sources. The estimates of future net product sales (and resulting royalty payments) are based on key assumptions such as future sales forecasts and other significant events. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is different than its original estimates, the Company will prospectively adjust the amortization of the royalty financing obligations and the effective interest rate. As of March 31, 2025, the estimated effective interest rates were 23.0% and 17.5% for Ultomiris and Monjuvi Royalty Sale Agreements, respectively.

The following table presents the activities with respect to the liabilities related to the sales of future royalties:

7. Commitments and Contingencies

Litigation

From time to time, the Company may be subject to claims and legal proceedings arising in the ordinary course of business. The Company evaluates each matter and assesses its potential financial exposure. If the potential loss from a legal proceeding is considered probable and the amount can be reasonably estimated, the Company records an accrual for the estimated loss. Because the outcome of legal proceedings is inherently uncertain, significant judgment is required in assessing the likelihood of a loss and whether the amount is reasonably estimable. The Company’s assessments and any recorded accruals are based on information available at the time of evaluation. As additional information becomes available, the Company re-evaluates its estimates and may adjust recorded liabilities accordingly.

The Company is currently a party to an action initiated by Merus N.V. (“Merus”) in the District of Delaware alleging that the Company’s manufacture, use, offer for sale, sale and/or importation of common light chain antibodies and heterodimeric antibodies infringes certain claims of three Merus patents. Merus filed its complaint against the Company on August 5, 2024. Merus asserted claims of U.S. Patent Nos. 9,944,695, 9,358,286 and 11,926,859 (collectively, the Asserted Patents). Merus seeks a judgment of patent infringement, an order enjoining the Company from infringing the Asserted Patents, a damages award (together with interest), a declaration of willful infringement, and a finding that this case is exceptional. On October 10, 2024, the Company filed a motion to dismiss the Merus complaint with prejudice under Rule 12(b)(6), in which the Company argued that all of the activities accused of infringement are covered by the 35 U.S.C.§ 271(e)(1) safe harbor. Merus filed its response to the Company’s motion on October 31, 2024, and the Company replied to Merus’ response on November 14, 2024. Both Merus and the Company requested a hearing for the motion to dismiss. On February 11, 2025, the Company filed for inter partes review of Merus’ U.S. Patent Nos. 9,358,286 and 11,926,859 before the U.S. Patent and Trademark Appeal Board seeking a finding that certain claims of those patents are unpatentable. The Company believes it has strong defenses to Merus’ claims, including defenses of invalidity and/or non-infringement, but there is no guarantee that the Company will prevail.

Commitments

The Company is party to certain license agreements that obligate it to make future payments to third parties, which may include sublicense fees, royalties and milestone payments contingent upon the achievement of specified development and commercialization events. Because the occurrence, timing and amounts of these potential payments are not currently probable or reasonably estimable, they have not been recorded on the Company’s balance sheets as of March 31, 2025 and December 31, 2024.

In addition, the Company has entered into agreements with various third-party vendors for research, development and manufacturing services. These agreements generally provide for future payments contingent upon the vendors’ delivery of goods or performance of services. Such commitments are not recorded until the related goods or services are received.

8. Stockholders’ Equity

The following table summarizes the Company’s shares of common stock and preferred stock:

On February 27, 2023, the Company filed an automatic universal shelf registration statement on Form S-3 (File No. 333-270030) as a well-known seasoned issuer as defined in Rule 405 under the Securities Act of 1933, as amended, which became effective upon filing (the "Shelf Registration Statement"). The Shelf Registration Statement allows the Company to offer an indeterminate amount of securities, including equity securities, debt securities, warrants, rights, units and depositary shares, from time to time as described in the Shelf Registration Statement. The specific terms of any offering under the Shelf Registration Statement will be established at the time of such offering. The Shelf Registration Statement will expire on February 27, 2026.

On February 27, 2023, the Company entered into a sales agreement (the “Sales Agreement”) with SVB Securities LLC (the “Agent”), pursuant to which the Company may offer and sell, from time to time through the Agent (the “ATM Offering”), shares of its common stock having an aggregate offering price of up to $200.0 million (the “ATM Shares”). Any ATM Shares offered and sold in the ATM Offering will be issued pursuant to the Company’s Shelf Registration Statement and the prospectus supplement filed pursuant to Rule 424(b) relating to the ATM Offering, dated February 27, 2023. As of March 31, 2025, no shares have been issued under the Sales Agreement.

On September 12, 2024, the Company completed an underwritten public offering pursuant to the Company’s Shelf Registration Statement. In the offering, the Company sold pre-funded warrants to purchase up to 3,088,888 shares of common stock at a purchase price of $17.99 per pre-funded warrant, for an aggregate value of approximately $55.6 million. The outstanding pre-funded warrants are exercisable at any time and do not have an expiration date.

9. Leases

Monrovia, California: The Company leases office and laboratory space in Monrovia, California, which lease expires in December 2025. The lease contains an option to renew for one additional five-year term. The Company has assessed that it is unlikely to exercise this option to renew and therefore, it is not included in right-of-use assets and liabilities as of March 31, 2025.

Pasadena, California: In June 2021, the Company entered into a lease agreement for laboratory and office space in Pasadena, California, with a lease term through July 2035 and no renewal option. The lease includestwo phases: Phase 1 commenced on August 1, 2022, and Phase 2 commenced on December 1, 2022.

The lease provides tenant improvement allowances of up to $17.0 million for Phase 1 and $3.3 million for Phase 2. In August 2022, the lease was amended to provide an additional $5.0 million in Phase 1 improvement allowance in exchange for an increase in rent.

San Diego, California: In August 2023, the Company entered into a sublease agreement for office space in San Diego, California, with a lease term from September 2023 through December 2027. As part of the sublease, the Company issued a $0.4 million letter of credit to the landlord, secured by a cash collateral account classified as restricted cash on the consolidated balance sheets. The amount of the letter of credit will decrease over the lease term.

The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The components of lease assets and liabilities along with their classification on the Company’s consolidated balance sheets were as follows:

The following table presents maturities of operating lease liabilities on an undiscounted basis as of March 31, 2025:

The following table presents lease costs, supplemental cash flow and other information:

10. Stock Based Compensation

In June 2023, the Company’s Board of Directors (the “Board”) and stockholders approved the 2023 Equity Incentive Plan (the “2023 Plan”), which became effective on June 14, 2023, and replaced the 2013 Equity Incentive Plan (the “2013 Plan”). No additional awards may be granted under the 2013 Plan.

The 2023 Plan reserves 3,000,000 shares of common stock, plus any remaining shares available under the 2013 Plan as of the effective date. In addition, shares subject to outstanding awards under the 2013 Plan that expire, are forfeited, or otherwise terminate without being issued after June 14, 2023, will be added to the 2023 Plan share reserve. The 2023 Plan does not include an automatic annual share increase (an evergreen provision). As of March 31, 2025, the total number of shares of common stock reserved for issuance under the 2023 Plan is 17,486,579.

In addition, the Company’s Board and stockholders approved the Employee Stock Purchase Plan (the “ESPP”), which became effective on December 5, 2013. As of March 31, 2025, the total number of shares of common stock available for issuance under the ESPP is 945,106.

The following table presents a summary of awards outstanding:

The following table summarizes stock-based compensation expenses included in operating expenses:

Stock Option Awards

The following table presents a summary of the stock option activity for the three months ended March 31, 2025:

The aggregate intrinsic values represent the amount by which the market price of the underlying stock exceeds the exercise price of the option. The total intrinsic value of the options exercised during the three months ended March 31, 2025 and 2024 was $0.5 million and $1.3 million, respectively.

As of March 31, 2025, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $50.9 million will be recognized in the Company’s results of operations over a weighted average period of 2.6 years.

The following table provides the assumptions used in the calculation of grant date fair values of these stock options based on the Black-Scholes option pricing model:

(1) The computation of expected term was determined based on the option holders’ past exercise patterns.

(2) Volatility is estimated based on volatility average of the Company’s common stock price.

(3) The risk-free interest rate is based on that of the U.S. Treasury yields with equivalent terms in effect at the time of the grant.

(4) The dividend yield is zero as the Company currently does not pay a dividend.

Restricted Stock Units (“RSUs”)

The following table summarizes the activity of the Company’s RSUs:

The fair value of RSUs was determined based on the closing price of the Company’s common stock on the grant date, with consideration given to the probability of achieving service and/or performance conditions for awards.

As of March 31, 2025, there was $34.9 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.2 years.

Employee Stock Purchase Plan

The following table provides the assumptions used in the calculation of grant date fair values of these shares issued under the Company’s ESPP based on the Black-Scholes option pricing model:

As of March 31, 2025, the pre-tax compensation expense for all outstanding shares issued under the Company’s ESPP in the amount of $0.7 million will be recognized in the Company’s results of operations over a weighted average period of 0.7 years.

11. Net Loss Per Share

The following table presents the computation of basic and diluted net loss per share.

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive.

12. Segment Reporting

The Company operates as a single reportable segment focused on discovering and developing engineered antibody therapeutics to treat patients with cancer and autoimmune diseases who have unmet medical needs. Segment profit or loss is measured as the net loss reported in the Company’s consolidated statements of operations and comprehensive loss. Segment revenue consists of royalties and milestone payments derived from collaboration and licensing agreements. See Note 2. Segment assets is represented by total assets as reported on the Company’s consolidated balance sheets.

The Company’s Chief Executive Officer serves as the Chief Operating Decision Maker (CODM). The CODM evaluates performance, allocates resources and conducts planning and forecasting using financial information as presented in the consolidated statements of operations. In addition, the CODM reviews research and development expenses by program.

The table below details the Company’s revenues and expenses and reconciles those amounts to the Company’s consolidated net loss as computed under U.S. GAAP in the consolidated statements of operations and comprehensive loss: