Denali Therapeutics Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Denali is a clinical-stage biopharmaceutical company developing treatments for neurodegenerative diseases; it had no approved products and no product sales.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Collaboration revenue | $9.4m | $13.6m | $18.8m | $22.0m |
| Research and development expense | $53.7m | $52.5m | $157.9m | $141.8m |
| General and administrative expense | $15.8m | $11.2m | $42.3m | $35.6m |
| Operating loss | $60.1m | $50.2m | $181.4m | $155.4m |
| Net loss | $58.2m | $46.3m | $173.7m | $143.6m |
| Basic and diluted net loss per share | $0.54 | $0.48 | $1.65 | $1.50 |
At September 30, cash and cash equivalents were $351.0m, short-term marketable securities $610.2m, and long-term marketable securities $20.3m: $981.5m in total cash, cash equivalents and marketable securities. Total assets were $1,070.3m; total liabilities $187.8m; accumulated deficit $599.3m. No borrowings or debt balance was disclosed. Operating lease liabilities totaled $69.9m.
For the first nine months, operating cash use was $97.8m, investing cash use $255.9m, and financing cash provided $625.2m. Cash, cash equivalents and restricted cash increased $271.6m to $352.5m. The filing reports no product-sales gross margin; operating margins are not meaningful for this pre-commercial company.
Changes versus the prior comparable period
- Q3 collaboration revenue fell 31% and nine-month revenue fell 14%, primarily because the prior-year periods included a $10.0m Sanofi milestone and Sanofi retained-activity revenue was winding down. Higher Takeda collaboration revenue partly offset the declines.
- Net loss increased 26% in Q3 and 21% for the nine-month period. Nine-month R&D expense rose 11%, mainly from increased personnel costs and EIF2B clinical development; G&A rose 19%, including Biogen transaction-related professional fees.
- Denali raised capital through a January follow-on offering with $193.9m net proceeds and a September Biogen stock sale. The September agreement had a $465.0m purchase price; the filing estimated $420.1m as the fair value of shares issued and recorded the $44.9m premium as a related-party contract liability.
Outlook, developments and risks
- Management expected significant operating losses and expenses to continue and R&D spending to increase as programs advance. It believed existing cash, cash equivalents and marketable securities would fund projected operations for at least 12 months from the filing date; this estimate depends on assumptions and spending could exceed expectations.
- In October 2020, after quarter-end, Denali executed definitive Biogen agreements and received $560.0m in upfront payments. The LRRK2 collaboration provides for up to approximately $1.1bn in milestones, profit-and-loss sharing in the U.S. and China, and ex-U.S./China royalties. Biogen also received options on two transport-vehicle-enabled programs; potential option-related milestones and royalties depend on exercise and achievement of specified events. These October payments were not Q3 revenue.
- Clinical and business updates: DNL151 was selected for later-stage Parkinson’s studies, with patient enrollment planned for 2021; DNL310 entered a Phase 1/2 Hunter syndrome study, with early biomarker data planned by year-end 2020. DNL747 clinical work was paused over chronic preclinical toxicity concerns, with development efforts redirected to DNL788. Sanofi planned a Phase 2 DNL758 cutaneous-lupus study in the first half of 2021.
- COVID-19 had paused recruitment in several studies, but recruitment had resumed. Further delays to trials, preclinical work, suppliers or manufacturing remained possible. Denali reported sufficient drug supply for ongoing trials and expected supply to support planned trials well into 2021.
- A shareholder derivative action filed in September challenged director compensation. The case was at an early stage; Denali could not estimate potential loss and recorded no liability, while stating it did not expect an unfavorable resolution to materially harm the company.
- Other significant execution risks include clinical efficacy and safety, regulatory approval, reliance on third-party manufacturers and trial providers, collaboration terms and cost-sharing obligations, and intellectual-property protection. Denali disclosed potential F-star contingent payments of up to $447.0m upon specified milestones; these were not recorded as a liability at acquisition.
Key facts for investors to verify
- Whether the October Biogen upfront payment and definitive agreement accounting are reflected in subsequent financial statements, and how the $44.9m related-party contract liability is recognized.
- Progress, safety findings, enrollment and biomarker results for DNL151, DNL343 and DNL310, and the development timelines for DNL788 and DNL758.
- Cash burn and runway relative to management’s estimate, including the impact of Biogen-related development cost sharing and planned R&D expansion.
- COVID-19 effects on clinical timelines and manufacturing supply, and any material developments in the director-compensation litigation or other contingencies.