Denali Therapeutics Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Denali is an early-stage biopharmaceutical company developing treatments for neurodegenerative diseases. It had no approved products and generated no product sales; collaboration revenue came from Takeda.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Collaboration revenue | $1.6 million | $2.3 million | None reported |
| Research and development expense | $52.1 million | $73.0 million | $19.0 million / $37.5 million |
| General and administrative expense | $6.9 million | $12.5 million | $3.6 million / $6.8 million |
| Net loss | $54.7 million | $78.4 million | $22.1 million / $43.5 million |
| Basic and diluted loss per share | $0.59 | $0.86 | $2.29 / $4.65 |
| Net cash used in operations | Not stated for quarter | $8.2 million | $36.4 million |
Amounts are in U.S. dollars; comparable-period figures are shown in Q2 / six-month order where applicable. The lower reported loss per share versus 2017 reflects a substantially larger share count following the 2017 IPO and 2018 Takeda stock issuance, not improved profitability. No meaningful operating margin comparison is provided for this pre-revenue business.
At June 30, 2018, cash and cash equivalents were $33.1 million and marketable securities totaled $518.2 million, for cash, cash equivalents and marketable securities of $551.3 million. Total current assets were $377.4 million; current liabilities were $31.0 million. Total liabilities were $81.8 million, including contract liabilities, and stockholders’ equity was $490.3 million. The filing reports no debt balance. Six-month operating cash use was supported by a $58.3 million increase in Takeda-related contract liabilities; it should not be read as a recurring cash-burn rate.
Changes and material events
- Q2 net loss increased 147% year over year, while six-month net loss increased 80%. R&D expense rose 174% in Q2 and 95% for the six-month period; G&A rose 93% and 82%, respectively.
- R&D growth reflected substantial BBB-platform spending, including $17.8 million of F-star Gamma acquisition consideration and a $6.0 million payment for additional Fcab target nominations, as well as increased clinical, personnel and pipeline investment. Q2 2018 also included $1.9 million in F-star transaction costs.
- Under the Takeda agreement, Denali received a $40.0 million upfront payment and a $5.0 million preclinical milestone, and Takeda separately purchased 4,214,559 Denali shares for $110.0 million. The stock’s fair value at issuance was $94.4 million; the $15.6 million premium was recorded as contract liability. Denali recognized $1.6 million of Takeda collaboration revenue in Q2 and $2.3 million for the first half.
- Denali acquired F-star Gamma in May for initial payments of approximately $18.0 million, net of estimated acquired liabilities. Further contingent payments could total up to $447.0 million upon specified milestones. The company also took on a $6.0 million payment for additional target nominations.
- Assets increased to $572.1 million from $486.7 million at year-end, principally reflecting marketable securities and financing proceeds. Cash and cash equivalents declined from $218.4 million to $33.1 million, largely as funds were invested in marketable securities.
Outlook, commentary and risks
- Management said existing cash, cash equivalents and marketable securities should fund projected operations for at least 12 months, while cautioning that assumptions may prove inaccurate and additional funding will be needed for continued development. No specific revenue or earnings guidance was provided.
- Denali expects R&D spending and operating losses to increase as it advances clinical programs, expands its BBB platform, develops pipeline programs and hires personnel. It had an accumulated deficit of $270.1 million.
- The portfolio comprised 13 programs: eight core and five seed. DNL201 and DNL151 were in Phase 1 trials for Parkinson’s disease; DNL747 was in a Phase 1 trial for ALS and Alzheimer’s disease. The filing reported that DNL201 would advance to a Phase 1b study in Parkinson’s patients in 2018 following positive Phase 1 results announced August 1, after quarter-end. Denali also reported in-vivo proof of concept for its ETV:IDS program in a mouse model.
- Takeda may exercise options on three programs; future development and commercialization milestones and sales-based payments are contingent, not assured. If options are exercised, the parties generally share development costs and profits, subject to the agreement’s terms.
- Key risks include early-stage clinical and preclinical uncertainty, safety or efficacy failures, the technical and commercial viability of BBB delivery, regulatory delays, competition, dependence on external manufacturers and collaborators, intellectual-property protection, and the need for future financing. Denali noted prior liver test abnormalities that led it to discontinue DNL104; it also disclosed earlier preclinical toxicity findings for current candidates at high doses and a prior partial clinical hold on DNL201, removed in December 2017.
- Longer-term commitments include future minimum lease payments of $106.4 million under the headquarters lease and amendment, and $6.3 million of non-refundable Lonza purchase commitments. The expanded headquarters lease has a ten-year term, with commencement expected no earlier than February 2019 subject to occupancy readiness.
Important facts for investors to verify
- Whether DNL201’s Phase 1b study and the other clinical programs advance on schedule, with acceptable safety and meaningful biomarker or efficacy results.
- How quickly the $551.3 million liquidity balance is consumed as R&D spending grows, and whether additional capital will be required sooner than management expects.
- Takeda’s option decisions, milestone conditions, revenue recognition and the extent of future cost-sharing or royalty economics.
- Potential F-star contingent payments of up to $447.0 million and the obligations associated with the expanded lease and manufacturing commitments.
- Whether the BBB platform and Denali’s patent and licensing position can support viable products and withstand technical, regulatory and competitive risks.