These are the kinds of plainspoken and unreserved words that were peppered throughout Bassil Dahiyat’s chronicle of the genesis of his biopharma company, Xencor. This impromptu history lesson was spurred by my initial interview question about how the now publicly traded biotech lasted for more than 20 years without bringing a new therapeutic to market. Although that’s not an uncommon scenario for a small biotech, Xencor’s story seems riddled with more than your average share of challenges, hurdles, and outright roadblocks.
But it’s the outcome of that story — a growing company now valued at roughly $1.8 billion (as of this writing) with nine drugs in the clinic and 150 employees — that truly make’s Xencor’s journey so compelling.
LET’S START A COMPANY
To understand how Xencor got to the point of being the successful biotech it is today, you need to go back to 1997, when Dahiyat was finishing grad school at Caltech and pondering his next move. He and his doctoral program advisor, Steve Mayo, Ph.D., had been working on technology that could manipulate protein sequences. “These computational tools allowed us to pick which amino acids to change, and we could see how those changes fiddled with a protein’s stability,” explains Dahiyat. The two felt that their computer- generated design technology would enable them to be faster and more efficient than existing methods, and if they started a company, the burgeoning biotech industry would be ripe for the picking. Their hubris was further fueled by the fact that Mayo had previously helped cofound a software company, so he already was familiar with the intricacies of starting a business. “The extent of our plan was to simply refine our new science, offer it to biotechs, and see what would come next. We were pretty naïve, but the bar was different back then; there wasn’t the incredible sophistication about therapeutic areas and the competitive landscape that you see today,” says Dahiyat.
REALITY SETS IN
Still a grad student, Dahiyat began donning his best suitcoat and attending mini conferences around Caltech intended for entrepreneurs and those seeking financing. At one of these events, he ran into a friend who had completed his Ph.D. a few years earlier and had started a DNA diagnostics company with some funding from a wealthy family in Chicago. The friend suggested Dahiyat speak with his investors about funding for Xencor. Dahiyat eventually met with those potential investors, as well as multiple Vcs. In the end, the private family investors gave the best terms. “Going with the family was the luckiest decision I ever made; the Vcs would have fired me in a week,” he laughs.
His funding victory, though, would quickly be overshadowed by his realization that his business model “was completely wrongheaded right out of the gate.” The plan was to use their new computer technology to make proteins more stable and easily purified. It was a goal they knew they could accomplish, and they predicted that they would simply need a few computers, an office, and some smart people to generate a bunch of sequences. “During this time, companies like Eli Lilly, Genentech, and Novo Nordisk each had teams working on proteins, so we thought we could easily sell to them, and everything would be great,” Dahiyat recalls. But everything wasn’t great, and he soon realized that those sequences that Xencor was creating were not what the industry wanted, after all. “The pharma companies were seeking proteins that were more potent, more selective, or had longer half-lives so they could be dosed less frequently. This was in the days of Neupogen and Epogen, and as there were no Humiras and Avastins yet, what we were doing was irrelevant.” What the pharma companies did say they were interested in was purchasing molecules, which would require Xencor to have a lab, or at least the monies to build one. “We had neither,” laments Dahiyat.
LUCK WITH FUNDING
Without a lab, Xencor was destined to fail in the long run. The company needed to start making money, and fast, so Dahiyat began investigating alternate revenue- generating opportunities. Turns out, industrial enzyme companies were engineering proteins, and they were willing to pay right away, though he notes they didn’t pay much. “We did a few deals with companies like DOW Chemical, Novartis Agribusiness [now Syngenta], and Aventis Research & Technologies [now Sanofi]. It wasn’t enough to pay the bills, but it did make our investors feel a little better.”
Capitalizing on that small bit of progress, Dahiyat once again began seeking additional funding. But this time he had a different message: The company was changing its business model and wanted to make molecules that could maybe become relevant drugs. To do so, it needed more specialized staff and more equipment. Again, luck played a role, as this was during the year 2000, when the markets seemed to be going in only one direction — up — and investors had money burning holes in their pockets. “We set out to raise $12 to $15 million, and in three months, came home with $50 million,” he says. The funding deal was closed just a few weeks before the dotcom bubble burst.
FINDING THEIR “KILLER APP”
To change the company’s business model, Dahiyat says two things needed to happen. “First, we needed to develop a technology that clearly had an impact on making better drugs. And second, we needed to be making money to invest in building our own pipeline.”
Xencor sought opportunities to collaborate with other companies to fine-tune its tech and make money. These included a few small deals with companies such as Eli Lilly and PDL where Xencor helped build better proteins. But then Dahiyat says they stumbled across their version of a “killer app.” It had to do with their technology approach to protein engineering, which basically was engineering the “bottom half” of antibodies (see sidebar: “How Xencor Stumbled Across Its Killer App”).
Following a suggestion, Dahiyat and his team read a paper explaining why Rituxan (a new drug in 2003) was going gangbusters on non-Hodgkin’s Lymphoma. “It basically stated that the bottom half was engaging with these immune cells, and those immune cells were killing the tumor,” he says. “But there was another paper saying there’s a receptor that sticks to the bottom half of the antibody, and that’s what’s driving those immune cells.” They spoke to academics, and they confirmed it was the latter. A patent search showed that although Genentech had worked on such a project a few years previously, they seemed to have lost interest. “We thought not only could we design the scaffold, but it was a perfect fit for the toolkit we had spent the previous six years constructing.”
Soon the company was getting data showing its approach worked better (i.e., created more potent antibodies), and companies like Genentech, Chugai and Roche were eager to do deals. Xencor was finally making money — but it still wasn’t enough to begin developing its own drugs. So, two more successful rounds of fundraising took place in 2006 and 2007; then the financial crisis hit. “There’s nothing worse than an investor who doesn’t have any more money, because they want to liquidate you to save their own skin,” Dahiyat asserts. “We were trapped and had to stick to the service and licensing model for another five years just to pay the bills.”
10 HELLISH DAYS END WITH AN IPO
For Xencor, 2008 to 2013 was like purgatory. “We were stuck with weakened and dead Vcs who didn’t want to let us raise money,” shares Dahiyat. “It was getting harder and harder to keep the doors open, so it seemed the only way to escape was to somehow go public.” That was easier said than done, though, because back then, there was virtually no IPO market for small biotechs. Dahiyat’s first inclination was to pursue a complex reverse merger, but then, in 2013, everything changed. There was a sudden boom of biotech IPOs, 16 of which happened in the first half of the year. With interest high for anything biotech-related, Dahiyat began talking with bankers and investors in San Francisco in mid-July about Xencor going public.
"We were stuck with weakened and dead VCs who didn't want to let us raise money."
One banker told him that the IPO preparation process typically takes about five months, which would have had Xencor launching around Christmas. Dahiyat knew they’d need to be faster than that, as most companies don’t press for IPOs in December. “Once we managed to convince three banks to work with us, everything felt like a fire drill,” he recalls. When he immediately tried to set up the organizational meeting that would include all of the banks and the armies of lawyers and accountants, he was told it would take at least two weeks to coordinate. He remembered some great advice a friend had given him on how to deal with bankers. “Don’t worry if it’s inconvenient for them,” his friend said. “They work for you, and if they want their commission, they’ll make it happen.”
Dahiyat continued to push for a fast pace regarding all of the formalities, and in 28 days, with only a two-person accounting staff (and one hired consultant), they got their SEC Form S1 filed. To keep racing forward required multiple 120-hour work weeks, but before he knew it, the IPO market collapsed. “We were in Boston in the middle of our road show and everything is looking like it’s going to happen, and then poof — the IPO market collapses. Those next 10 days were hellish.”
As they tried to price their deal (i.e., calling investors to put in their orders), they were able to procure only $60 million of the needed $80 million. The lead investment bank backed out and said to try again the following year. But the number-two bank thought they could bring it together, and ultimately Xencor raised the $80 million. “That was an important lesson,” Dahiyat says. “Big investment banks couldn’t care less, as they are onto the next deal. But smaller banks are scrappy. They need you to succeed, because they don’t have 100 other clients waiting in the wings.” The Xencor team continued to pursue any and all investors for the next two weeks, but the longer it took, the more the IPO share price started to dip.
By Thanksgiving, the company’s book was filled and the pricing set. Still, it had only $3 million in the bank, and there remained the possibility it could break issue (i.e., shares trade below the original offering price). But on the day of Xencor’s opening, the stock (NASDAQ: XNCR) immediately went up 50 percent. While not happy they had to drop the price to get the deal done, Dahiyat said it felt awesome just to survive.
WHAT’S NEXT? BISPECIFICS
Since the IPO netted Xencor approximately $72.4 million, the company has grown from 28 employees to about 145. But one of its biggest changes has been its focus on bispecific antibodies (bispecifics). Antibodies — Y-shaped proteins — containing two different antigen (e.g., virus, toxin)-binding sites in one molecule are called bispecific. “The concept is to have each site bind with something different,” explains Dahiyat. “For example, maybe have one side bind to a cytotoxic cell, like a T-cell, and the other bind to the tumor cell, so I can really kill that tumor good.”
Bispecifics have been around since the 1960s, but their use has been limited, since they last in the body for only minutes instead of days or weeks like a regular antibody. This is because they don’t have the Fc domain (i.e., the scaffold) that makes antibodies have pharmaceutic properties. In addition to Xencor, a few companies such as Regeneron and Roche have kept trying to develop bispecifics in recent years. “With bispecifics, we were able to show that we could kill tough tumors in a fantastic way; but because these antibodies would fall apart in the body so fast, we’d have to pump them into a patient’s body for a month at a time.”
The Xencor team wanted to figure out if the process of creating a bispecific could be done in a way where it automatically happens inside a cell. It took three years to come up with a solution. “Then, we wondered if we could make an antibody that sticks to two cells at once by tinkering with how the two halves fit together,” Dahiyat says. So, Xencor began working on that problem with the help of some of its outsourcing partners.
Dahiyat believed that bispecifics could be the next big thing, but the Xencor board wasn’t as enthused. So, he had to convince them that this path would lead to the company making drug candidates. He explained that the current stage of bispecific antibody development is analogous to where regular antibodies were in the late 1990s and early 2000s. “Back then, similar to now, the challenge was making the antibodies so that the patient didn’t reject them shortly after being injected. But then suddenly, the market exploded, and we saw the arrival of Rituxan , Herceptin , Humira , and Avastin , all billion-dollar drugs.”
Today, of Xencor’s current drug development pipeline, seven of its nine programs are bispecifics. Dahiyat notes that companies not currently in the bispecifics space are now frequently seeking to gain access. For example, in 2015, Xencor brokered a strategic collaboration with Amgen, receiving $45 million up front, and the potential of up to $1.7 billion in milestone payments. Less than one year later, the company struck a bispecific deal with Novartis, receiving $150 million up front and up to $2.41 billion in milestones (though a deal restructuring was announced this past January). This past February, Xencor inked a $120 million up-front research and licensing deal with Roche’s Genentech. This program could pay an additional $160 million in milestones, plus Xencor could see 45 percent of any revenue generated and also holds an option to copromote in the U.S. “Right now, we have over $500 million in the bank to spend on developing bispecifics,” he concludes. “Now it’s just a foot race to see who gets there first,” something he anticipates happening within the next four to five years. And maybe with a little luck, it will be Xencor crossing that finish line first.
"WE WERE A TECHNOLOGY HAMMER LOOKING FOR A GOOD NAIL TO DRIVE," says Bassil Dahiyat, Ph.D., president and CEO of Xencor, the biotech he founded right out of grad school in 1997. Presently, the company creates XmAb antibody engineering platforms by altering the Fc domain (i.e., the stem of the antibody structure) to significantly enhance natural functions and performance, and in some cases, creating entirely new therapeutic mechanisms of action. But such wasn’t always the case.
“We actually stumbled across this idea as an opportunity in 2003,” he admits. They were interviewing a job candidate, during which this person complimented Xencor on the quality of the protein engineering they were doing at the time. Then they added, “The guy across the hall at my post doc is working on Fc domains for antibodies, but he’s not getting very far. He could do a way better job with your tools.” The team looked at some papers and determined this to be a promising idea.
When working on Fc domains for antibodies, Xencor discovered it had layers. “There are ways you can make it kill more cells, quiet down cells, have the antibody last longer, or even have bispecific antibody structures,” Dahiyat relates. Each one took a couple years to develop, and after seven or eight years, Xencor had a really broad platform, leading to eight or nine deals. “We developed the Fc domain in Alexion’s drug, ULTOMIRIS,” he shares as an example. “If you develop it once, you can use it again and again, without altering.” This enabled Xencor to develop a software- like licensing model (i.e., modular plug and play). “You don’t have to do any additional work or commit FTEs to a deal, which in my opinion are usually a bad idea for biotechs,” he states. “Plus, you can get paid for it right away and get long-term royalties if the drug gets approved.” That modularity and plug and play is what led Xencor to grow its business, along with its own pipeline.
The Xencor Culture – Forged In The Fires Of Just Trying To Survive
Although Bassil Dahiyat, Ph.D., founded Xencor in 1997, it wasn’t until about 10 years ago that he started to really think about the company’s culture. Dahiyat, Xencor’s president and CEO, admits to initially being a bit naïve in the world of business when first launching the company. Looking back now, he recognizes how he could have been much more proactive in crafting the company’s culture. Instead, the executive shares, “Our culture was forged in the fires of just trying to survive.”
Indeed, throughout the years, as the company struggled to find its next source of funding, there were times when good people had to be let go, leaving just a core group to weather the storm until the next bit of money came through the door. Today, though, Dahiyat says they are actively preserving and adapting the culture to the company’s new circumstances.
“A lot of the Xencor culture comes from those who are the most vocal leaders,” he explains. “But when you’re bigger, all of that can get diluted, so you need proactive ways to encourage and disseminate the company’s evolving culture, so it gets repeated and reflected back.” To do so, the company uses lunch-and-learn trainings and holds events where employees can interact and meet. He admits that their approach to maintaining the culture is more informal, “because we’re too busy to be having structured seminars or training sessions all the time.” Though when done, these culture strategies do tend to have a huge, positive impact, especially on new employees. For example, when new people join Xencor, an effort is made to introduce them to those people who invented whatever it is the new person will be working on. Dahiyat remembers a new employee asking, “Why do we call our lead asset XmAb5871?” So, he explained, “The 5871 indicates that it is the 5,871st clone of an antibody we’ve produced in the lab, one at a time, by those six people over there,” pointing in their direction. “Sometimes just the simplest communication can help encourage and nurture the culture,” he says.
One of the key contributors to Xencor’s culture was its early reliance on partnerships just to keep the doors open. “As a growing company some 15 years ago, we tended to apply a fairly standard partnership that a small biotech could do with a pharmaceutical company,” he elaborates. “We’re going to make new drugs for you, you’re going to pay our people to do it, and then if they succeed, we’re going to get milestones and royalties.” This also included some money up front to make it worthwhile to lock some of Xencor’s people to a project. Dahiyat says the company tried one or two of those before discovering these tended to be money losers. “You’re so invested in making it work that you always end up spending more time and effort and using more people than they are actually paying you for,” he shares. Dahiyat believes these so-called full-time equivalent (FTE) deals to be a very bad way to try to build a business. “In the early days when we were poor, we didn’t have much of a choice,” he states. “But when it comes to doing deals today, we’re very selective, because the value comes from us building our own pipeline.” Xencor remains interested in licensing its technology and/or partnering on molecules being worked on in the clinic, though a component of today’s deals includes being able to participate in the drug’s eventual commercialization. “We’d rather put up some of our own money to be part of a partnership as a coequal than to have an asset go totally away,” he says. Dahiyat feels this approach to partnering to be better aligned with the company’s strategy. “In the old way, we were just trying to move things along, while if we have a vested interest, it is more synergized with reaching our own goals,” he contends.