Executive Summary / Key Takeaways

• Xencor has executed a decisive strategic pivot toward T-cell engager bispecifics for solid tumors, terminating lower-potential programs like XmAb104 and deprioritizing cytokine investments to concentrate resources where management sees the greatest probability of success.
• A masterful $215 million royalty monetization to OMERS in late 2023 provides cash runway into 2028 while retaining meaningful upside through capped structures, giving the company precious time and flexibility in a challenging equity market.
• Early clinical data for XmAb819 in renal cell carcinoma and XmAb541 in ovarian cancer demonstrate the potential of the XmAb 2+1 format to achieve tumor selectivity, but these remain early-stage programs in a field littered with solid tumor failures.
• Material weaknesses in internal controls have triggered restatements of 2023 and 2024 financials, creating a near-term governance overhang that could weigh on the stock until remediation is complete.
• Trading at 5.8x EV/Revenue with $634 million in cash, Xencor offers an asymmetric risk/reward profile: downside protection from its balance sheet and partner royalties, with upside tied to clinical validation of its T-cell engager thesis in notoriously difficult solid tumors.

Setting the Scene: A Clinical-Stage Engineer at an Inflection Point

Xencor, Inc. reincorporated in Delaware in 2004 (originally founded in California in 1997) operates as a clinical-stage biopharmaceutical company singularly focused on discovering and developing engineered antibody therapeutics for cancer and autoimmune diseases. The company generates revenue through a partner-dependent model: upfront license payments, development milestones, and royalties on commercialized products. This structure means Xencor's financial performance is inherently lumpy, driven by the timing of partner achievements rather than recurring product sales.

The bispecific antibody market represents a $70 billion opportunity by 2032, but solid tumors have historically been a graveyard for T-cell engagers. Xencor's strategic positioning rests on its XmAb protein engineering platform, which modifies Fc domains to improve half-life, effector function, and stability. Unlike integrated competitors like Regeneron (REGN) or Amgen (AMGN) that develop and commercialize internally, Xencor functions as a technology enabler, licensing its platform to partners while advancing its own pipeline. This model provides validation and non-dilutive funding but creates dependency on partners' execution and priorities.

In late 2023, Xencor reached an inflection point. Confronted with a "very challenging" equity cost of capital, management made a series of hard choices: terminating XmAb104 after it failed to meet pre-specified efficacy criteria in colorectal cancer, closing vudalimab gynecologic tumor cohorts due to a rapidly changing competitive environment, and reducing investment in cytokine programs. These decisions freed resources to focus on T-cell engagers, which management identified as having "significant potential in solid tumors." The $215 million OMERS royalty sale provided the financial foundation for this pivot, transforming non-core assets into development capital while retaining economic upside through cleverly structured caps.

Technology Differentiation: The XmAb 2+1 Format's Selectivity Promise

Xencor's core technological advantage lies in its XmAb 2+1 bispecific antibody format , which employs multivalent binding to achieve avidity-dependent tumor selectivity. Traditional T-cell engagers bind tumor antigens indiscriminately, risking on-target, off-tumor toxicity. The 2+1 format uses two tumor-binding arms and one CD3 arm, creating a threshold effect: only cells expressing high antigen density (typical of tumor cells) are killed, while normal cells with lower expression are spared. Solid tumors pose unique challenges due to antigen heterogeneity and normal tissue expression, which have derailed countless prior programs.

The company's CD28 platform employs a similar logic, using reduced-potency CD28 binding to expand the therapeutic window of co-stimulatory activation. XmAb808, a B7-H3 x CD28 bispecific, aims to provide conditional T-cell stimulation only when bound to tumor cells, avoiding systemic immune activation. This approach directly addresses the dose-limiting toxicities that have plagued CD28 agonists in the past.

Management describes the XmAb technology as "plug-and-play," enabling rapid customization of affinity and format for tumor selectivity. This modularity allows Xencor to iterate quickly and license the platform to partners like Amgen (AMGN) and Janssen (JNJ), who validate the technology in their own programs. Partner programs like Amgen's xaluritamig (STEAP1 x CD3) provide external validation and milestone payments. The 2+1 format could unlock solid tumor targets previously considered undruggable due to safety concerns, expanding Xencor's addressable market beyond what traditional bispecifics can capture.

Financial Performance: Lumpy Revenue, Controlled Burn, and Strategic Flexibility

Xencor's financial results exemplify the clinical-stage biotech model: revenue volatility driven by milestone timing, coupled with disciplined cash management. For the three months ended September 30, 2025, total revenue increased 18% year-over-year to $21.0 million, while nine-month revenue surged 69% to $97.3 million, entirely due to milestone achievements from Incyte (INCY) and Alexion (AZN). This lumpiness is not a bug but a feature of the business model, and investors must focus on the underlying drivers rather than quarterly fluctuations.

Royalty revenue, the most sustainable income stream, grew 18% to $21.0 million in Q3 2025, driven by Ultomiris ($18.7 million) and tafasitamab ($2.3 million). The OMERS royalty sale structure is crucial: Xencor sold 100% of Ultomiris royalties through 2025, up to $35 million annually from 2026-2028, and up to $12 million annually thereafter, with excess reverting to Xencor. For Monjuvi, OMERS receives up to $29.3 million in royalties, with excess also reverting. This means Xencor traded near-term certainty for long-term optionality, retaining upside if these drugs exceed sales expectations. The $37.5 million in tafasitamab milestones received in 2025 are not subject to the Monjuvi royalty sale, providing pure upside.

Research and development expenses decreased $3.9 million in Q3 2025 and $2.0 million year-to-date, reflecting the strategic program terminations. These reductions demonstrate management's cost discipline: as programs are cut, burn rate declines, extending runway. General and administrative expenses remained consistent, suggesting overhead is controlled. Cash used in operations was $83.4 million for the nine months, but this was offset by $68.8 million from investing activities and the company's $634 million cash position.

Management's guidance that existing resources fund operations "into 2028" provides a clear timeline for clinical catalysts to materialize before dilution becomes necessary. The substantial cash reserves offer significant liquidity, supporting ongoing development without immediate financing pressures.

Outlook, Guidance, and Execution Risk

Management's outlook centers on executing the T-cell engager strategy while preserving capital. The company expects to continue increasing operating expenses for ongoing clinical development, but the royalty sale and program terminations have created a more efficient R&D profile. The key execution milestones are clear: advance XmAb819 and XmAb541 through dose escalation, generate proof-of-concept data in solid tumors, and select the next IND candidate from discovery-stage CD3 and CD28 programs.

For vudalimab, the frontline non-small cell lung cancer study initiated in 2024 represents a high-risk, high-reward bet. The study design includes an early safety and efficacy look before randomizing against standard-of-care pembrolizumab plus chemotherapy. This design offers Xencor an opportunity to fail fast if the combination doesn't show superiority, preserving resources for more promising programs. The prostate cancer monotherapy data—35% RECIST response rate and 25% PSA90 reduction in heavily pretreated patients—provides a baseline, but the real test is whether these responses translate into survival benefits and whether the non-overlapping toxicity profile with PLUVICTO enables combination strategies.

The timeline is tight but realistic: XmAb819 and XmAb808 dose-escalation data are expected to inform development paths, while XmAb541's Phase 1 study could yield early efficacy signals. Partner catalysts include Amgen's xaluritamig Phase 3 Xalience study in prostate cancer and Incyte's tafasitamab commercial expansion. Xencor has multiple shots on goal: internal programs offer direct upside, while partner programs provide non-dilutive funding and validation.

Risks and Asymmetries: What Can Break the Thesis

The most immediate risk is the material weakness in internal controls related to accounting for royalty sales and tax legislation evaluation. This led to restatements of 2023 and 2024 financials, creating a governance overhang that could pressure the stock and complicate future financing. Management is implementing remediation, including third-party advisors and enhanced review processes, but the risk of further accounting issues remains until the weakness is resolved.

Clinical execution risk is paramount. T-cell engagers have a checkered history in solid tumors, with many programs failing due to toxicity or insufficient efficacy. XmAb819's 25% partial response rate in renal cell carcinoma and XmAb541's early responses in ovarian cancer are encouraging but based on small patient numbers. If expansion cohorts fail to replicate these signals, the entire T-cell engager thesis could collapse, leaving Xencor with a depleted pipeline and limited options.

Partner concentration creates vulnerability. Over 80% of royalty revenue comes from Ultomiris and tafasitamab, and milestone payments are tied to Incyte's and Amgen's development decisions. If Incyte deprioritizes tafasitamab or Amgen's xaluritamig fails, Xencor's revenue stream would dry up. The company has limited control over partner timelines and priorities.

Patent litigation with Merus N.V. (MRUS) adds uncertainty. While Xencor's motion to dismiss was granted and inter partes review was instituted on two Merus patents, the litigation could drag on for years, creating legal expenses and potential royalty obligations if Xencor ultimately loses. Even a small probability of adverse outcome must be priced into the investment case, given Xencor's limited cash generation.

Valuation Context: Premium for Optionality

At $17.30 per share, Xencor trades at a market capitalization of $1.24 billion and enterprise value of $967 million, representing 5.8x trailing twelve-month revenue of $110.5 million. This multiple sits at a premium to clinical-stage peer MacroGenics (MGNX) (0.69x EV/Revenue) but a slight discount to AnaptysBio (ANAB) (7.32x), reflecting Xencor's stronger balance sheet and more diversified pipeline. Unlike profitable peers Regeneron (REGN) (5.34x P/S) and Amgen (AMGN) (4.94x P/S), Xencor's negative margins make revenue multiples the only meaningful valuation anchor.

The company's $634 million cash position provides substantial downside protection, representing 51% of market cap and funding operations into 2028 based on current burn rates. This gives Xencor over three years to generate clinical proof-of-concept before requiring dilutive financing. Net cash per share is approximately $5.60, meaning the market values the pipeline at roughly $11.70 per share.

Comparing unit economics, Xencor's R&D efficiency appears superior to peers: quarterly R&D spend of ~$50-60 million supports over 20 programs, while MacroGenics burns similar cash on a narrower pipeline. Xencor's platform approach spreads risk across multiple shots on goal, justifying a higher valuation multiple than single-asset peers. However, the stock trades at a discount to larger bispecific players like Regeneron and Amgen, which have proven commercialization capabilities and positive cash flow, reflecting the execution risk inherent in Xencor's clinical-stage status.

Conclusion: A Calculated Bet on Engineering Advantage

Xencor's investment thesis hinges on whether its XmAb 2+1 format can solve the solid tumor selectivity problem that has defeated countless prior T-cell engagers. The company has made a calculated bet, sacrificing near-term revenue from cytokine programs and monetizing royalties to fund a focused assault on this challenge. This capital allocation discipline is rare in clinical-stage biotech and creates a more efficient path to value creation.

The asymmetry is clear: downside is cushioned by $634 million in cash and ongoing royalties from approved drugs, while upside is levered to clinical catalysts in renal cell carcinoma, ovarian cancer, and prostate cancer. If XmAb819 or XmAb541 demonstrate durable responses in expansion cohorts, Xencor's valuation could re-rate toward peer levels, implying 50-100% upside. If they fail, the company still has partner milestones and a platform to pivot toward new targets.

The central variable for investors is execution velocity: can Xencor generate compelling Phase 2 data before its cash runway expires? The 2028 funding timeline provides a clear window, but solid tumor trials are notoriously slow. For investors willing to tolerate clinical risk and near-term governance concerns, Xencor offers a unique combination of downside protection and upside optionality in the hottest area of oncology innovation.