Denali Therapeutics Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Denali is a clinical-stage biopharmaceutical company developing therapies for neurodegenerative diseases. It has no products approved for sale and reported no product revenue; collaboration and license arrangements are its revenue source.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Collaboration revenue | $3.6 million | $5.3 million | $98.2 million | $36.1 million |
| Research and development expense | $87.8 million | $71.6 million | $266.6 million | $197.5 million |
| General and administrative expense | $23.3 million | $19.3 million | $67.0 million | $57.3 million |
| Net loss | $103.3 million | $84.6 million | $227.3 million | $215.3 million |
| Basic and diluted loss per share | $0.84 | $0.69 | $1.85 | $1.77 |
| Net cash used in operating activities | Not separately stated | Not separately stated | $172.1 million | $145.9 million |
At September 30, 2022, cash and cash equivalents were $118.6 million and short-term marketable securities were $987.4 million; together with cash equivalents, the company reported approximately $1.11 billion in cash, cash equivalents and marketable securities. Total assets were $1.23 billion, total liabilities $416.3 million, and stockholders’ equity $811.3 million. Accumulated deficit was $872.3 million.
Cash, cash equivalents and restricted cash declined by $174.9 million in the first nine months. Investing activities used $13.8 million, including $13.0 million in property and equipment purchases; financing activities provided $11.0 million, primarily from equity-plan exercises. The filing reports no borrowings or debt. Operating lease liabilities totaled $62.0 million; a Utah lease not yet commenced carried approximately $19.5 million of future undiscounted payments.
Gross margin is not a meaningful operating measure in this development-stage business: revenue is collaboration-based and operating expenses substantially exceeded revenue. Marketable securities had $11.5 million of unrealized losses at September 30; the company recorded no credit-loss allowance and said it intended and was able to hold the securities until maturity or recovery.
Material changes versus the prior comparable periods
- Q3 collaboration revenue decreased 33% to $3.6 million, principally because Takeda preclinical service obligations were largely completed; Sanofi Alzheimer’s disease service revenue partly offset the decline.
- Nine-month collaboration revenue rose to $98.2 million, mainly reflecting $40.0 million from a Sanofi ALS Phase 2 milestone, $24.0 million of Takeda clinical-trial-application milestones, and $27.9 million of Takeda revenue recognized following termination of the Tau program.
- Q3 operating expenses increased 22% and nine-month expenses increased 31%, driven by clinical and platform investment, higher personnel costs and stock-based compensation. Nine-month R&D expense rose 35%.
- Q3 net loss widened to $103.3 million; nine-month net loss widened to $227.3 million. Higher interest and other income partly offset the operating loss year over year.
Outlook, management commentary and risks
- Management expects significant operating losses and expenses to continue, with R&D expenses expected to increase as programs advance, the blood-brain-barrier platform is developed, and staffing expands. No specific revenue, earnings or expense guidance is provided.
- Management stated that existing cash, cash equivalents and marketable securities were expected to fund projected operations through at least 12 months following the filing date, while noting that assumptions could prove inaccurate and substantial longer-term funding will be needed.
- In October 2022, after quarter-end, Denali sold 11.9 million shares at $26.50 per share for approximately $296.2 million in net proceeds. It also had a $400 million at-the-market facility, with no shares issued under it as of the filing.
- Clinical and operational updates included continued enrollment in the DNL310 Phase 2/3 COMPASS study; Biogen’s BIIB122/DNL151 Phase 2b LUMA study and subsequent Phase 3 LIGHTHOUSE study; and initiation of a Phase 1 study of Takeda’s TAK-920/DNL919 in the Netherlands. The FDA had placed the DNL919 investigational application on clinical hold; Denali said it would continue discussions with U.S. and European regulators.
- Principal risks include clinical-trial failure or delay, regulatory holds, uncertain safety and efficacy, reliance on collaborators and contract manufacturers, manufacturing and supply constraints, competition, intellectual-property challenges, and the need for future financing. The company also cited inflation, rising interest rates, geopolitical uncertainty, COVID-19 and supply-chain or labor disruptions.
- Lonza non-cancellable manufacturing purchase commitments were $36.0 million at September 30, 2022. The company reported no litigation likely to have a material adverse effect and said disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether key trials produce confirmatory data and proceed on expected timelines, particularly DNL310, DNL593, BIIB122/DNL151 and Sanofi’s RIPK1 programs.
- The FDA’s requested information and the regulatory path for TAK-920/DNL919, including whether the clinical hold is resolved.
- Cash burn, program spending and the assumptions behind management’s stated funding runway; also assess the effect of the October offering and potential future equity issuance.
- Future milestone and collaboration revenue timing, including remaining obligations and the potential effects of partner decisions.
- Manufacturing capacity, Lonza commitments and the timing and cost of the Utah facility build-out.