Denali Therapeutics Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Denali is an early-stage biopharmaceutical company developing treatments for neurodegenerative diseases. It reported no approved products and no product-sale revenue; reported revenue came from collaborations.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Collaboration revenue | $13.6m | $1.2m | $22.0m | $3.5m |
| Research and development expense | $52.5m | $30.3m | $141.8m | $103.3m |
| General and administrative expense | $11.2m | $8.8m | $35.6m | $21.3m |
| Loss from operations | $(50.2)m | $(38.0)m | $(155.4)m | $(121.1)m |
| Net loss | $(46.3)m | $(35.4)m | $(143.6)m | $(113.8)m |
| Basic and diluted loss per share | $(0.48) | $(0.38) | $(1.50) | $(1.24) |
- Liquidity: Cash, cash equivalents and marketable securities totaled $502.9m at September 30, 2019. Cash and cash equivalents alone were $82.7m; short- and long-term marketable securities were $396.7m and $23.5m. Management said existing resources were expected to fund projected operations for at least 12 months, subject to assumptions and spending changes.
- Cash flow: Nine-month operating cash use was $103.9m, versus $43.1m in 2018. Investing activities provided $105.3m, primarily from marketable-security maturities, while financing provided $4.2m, mainly from equity-plan proceeds. Cash, cash equivalents and restricted cash ended at $84.2m.
- Balance sheet: Total assets were $603.0m, total liabilities $164.8m and stockholders’ equity $438.2m. No borrowings or debt balance is reported in the supplied financial statements. The company had an accumulated deficit of $371.5m.
- Margins: Denali remained loss-making, with operating expenses substantially exceeding collaboration revenue; a product gross margin is not applicable because it had no product sales.
Changes versus the prior comparable period
- Q3 collaboration revenue increased $12.4m year over year, largely because Sanofi’s DNL758 Phase 1 trial start triggered a $10.0m milestone recognized in revenue. Nine-month revenue rose $18.5m, including the same milestone and other Sanofi collaboration revenue.
- Operating expenses rose 63% in Q3 and 42% for the nine-month period. Management cited expanded pipeline activity, higher research and development headcount and stock-based compensation, and increased facilities costs following the headquarters move.
- Net loss increased by $10.9m in Q3 and $29.8m for the nine-month period. Higher collaboration revenue partly offset the higher costs.
- Operating cash use increased from 2018; the prior-year period benefited from a $57.1m increase in Takeda-related contract liabilities. Investing cash flow changed to a source of cash in 2019 as marketable securities matured.
Outlook, commentary and risks
- Management expected research and development costs and operating losses to rise as programs advance, including clinical work, new first-in-human studies and continued development of the blood-brain barrier platform. The company anticipated needing substantial additional funding; additional capital was not committed and might not be available on acceptable terms.
- At the time of the filing, clinical programs included LRRK2 candidates DNL201 and DNL151 for Parkinson’s disease; partnered RIPK1 candidate DNL747 for ALS and Alzheimer’s disease; and Sanofi’s peripheral RIPK1 candidate DNL758. The company planned to start clinical development of ETV:IDS/DNL310 in 2020 and an EIF2B program in the first half of 2020.
- Management’s November 2019 update, included in the filing after quarter-end, said the timing of decisions on further RIPK1 clinical testing had shifted to mid-2020 while Denali and Sanofi evaluated clinical and preclinical data.
- Key risks include early-stage clinical uncertainty, safety or efficacy setbacks, trial enrollment and timing, regulatory approval, manufacturing dependence on third parties, collaboration execution, intellectual-property protection and the need for future financing. The filing notes prior liver-test abnormalities that led to discontinuation of DNL104 and reports that DNL201, DNL747 and DNL151 had shown toxicities at high doses in animal studies; it says the candidates had been well tolerated in trials to date.
- Notable commitments include a 10-year headquarters lease, with $73.2m of recorded operating lease liabilities, and Lonza development and manufacturing purchase orders of $22.7m, including $8.8m in non-refundable commitments. F-star agreements could require up to $447.0m in contingent milestone payments, dependent on specified achievements.
- No material litigation was reported. Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Clinical trial progress, safety, enrollment and the mid-2020 RIPK1 program decision timing.
- Cash burn, forecast assumptions underlying the stated 12-month runway and timing or terms of any future financing.
- How much future collaboration revenue depends on milestone events, cost reimbursements and performance obligations, rather than product sales.
- Development and manufacturing commitments, lease obligations and potential contingent payments under the F-star agreement.
- Whether the planned 2020 program starts and the company’s third-party manufacturing and intellectual-property arrangements remain on track.