Abstract The protein-tyrosine phosphatase SHP2, encoded by PTPN11, is a known oncogenic driver in a subset of cancers and a central signaling node in the RTK-RAS-MAPK pathway. Genetic and pharmacologic evidence supports a role for SHP2 in driving the proliferation of cancer cells dependent upon a range of activated RTKs, certain RAS and BRAF mutations, and NF1 loss of function mutations. In contrast, a role for SHP2 in antitumor immunity is not well established. SHP2 binds to phosphorylated ITIM and ITAM domains on regulatory receptors in immune cells and multiple reports have demonstrated a SHP2/PD-1 physical interaction. Recently it has been proposed that SHP2 transduces the PD-1 inhibitory checkpoint signal by direct de-phosphorylation of CD28. In this study we show that a peptide comprising two tyrosine phosphorylated 9-mers sequences from the PD-1 ITAM (connected by a PEG8 linker) can activate purified SHP2 enzyme. We also demonstrate that, like checkpoint inhibitors, allosteric inhibition of SHP2 activates NFAT-mediated gene expression in a reporter gene PD-1/PD-L1 bioassay. Based on these findings, we evaluated the impact of SHP2 inhibition on murine host immune cells and the tumor immune microenvironment in vivo using RMC-4550, a novel small-molecule allosteric inhibitor of SHP2. Oral daily administration of RMC-4550 significantly inhibited tumor growth in three syngeneic tumor models sensitive to checkpoint blockade. The inhibitory activity was comparable, and in some cases superior, to checkpoint inhibition. RMC-4550 did not inhibit growth in any of these cancer cell lines in vitro, suggesting that activity was not due to a tumor cell intrinsic antiproliferative effect. Rather, antitumor activity in vivo reflected modulation of murine host immune cell function. First, RMC-4550 did not inhibit tumor growth in immunocompromised Rag-2-deficient mice. Second, efficacy was significantly attenuated when CD8+T-cells were depleted in immunocompetent mice, suggesting that CD8+T-cells were important for tumor growth inhibition. Third, Shp2 inhibition had additive activity in combination with anti-CTLA4 or anti-PD-L1 treatment, resulting in complete tumor regression in some mice. Rechallenge studies also demonstrated the presence of immunologic memory induced by combination therapy. The additive activity with checkpoint blockade suggests an additional mechanism of action beyond inhibition of the checkpoint signal. Fourth, analysis of the immune landscape in the tumor microenvironment indeed revealed modulation of both adaptive and innate immune mechanisms. Similar to checkpoint blockade, RMC-4550 increased the frequency of CD8+T-cell infiltrates in tumors with a corresponding decrease in their PD-1 expression. In addition, Shp2 inhibition significantly shifted polarized macrophage populations by markedly increasing M1 and decreasing M2, effects not seen with anti-CTLA4 or anti-PD-L1. Collectively, these results suggest that SHP2 inhibition is not identical to that of checkpoint blockade and represents a novel investigational strategy that could leverage two antitumor mechanisms simultaneously: direct inhibition of cancer cell growth and modulation of the tumor microenvironment. Tumors that harbor oncogenic driver mutations sensitive to SHP2 and with established clinical sensitivity to checkpoint inhibitors could be of particular interest. Citation Format: Elsa Quintana, Kasia Mordec, Robert J. Nichols, David Wildes, Chris J. Schulze, Darienne R. Myers, Mallika Singh, Elena Koltun, Adrian Gill, Stephen Kelsey, Mark A Goldsmith, Jan A.M. Smith. Allosteric inhibition of SHP2 induces antitumor immunity in PD-1-sensitive tumors through modulation of both innate and adaptive mechanisms [abstract]. In: Proceedings of the Fourth CRI-CIMT-EATI-AACR International Cancer Immunotherapy Conference: Translating Science into Survival; Sept 30-Oct 3, 2018; New York, NY. Philadelphia (PA): AACR; Cancer Immunol Res 2019;7(2 Suppl):Abstract nr A103.