Denali Therapeutics Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. Denali is an early-stage biopharmaceutical company developing therapies for neurodegenerative diseases. It had no approved products and no product sales. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Collaboration revenue | $0.6 million | None |
| Research and development expense | $20.8 million | $18.5 million |
| General and administrative expense | $5.6 million | $3.3 million |
| Total operating expenses | $26.4 million | $21.7 million |
| Operating loss | $25.7 million | $21.7 million |
| Interest income, net | $2.1 million | $0.4 million |
| Net loss | $23.7 million | $21.3 million |
| Basic and diluted net loss per share | $0.26 | $2.36 |
There is no meaningful product margin to assess because the company had no product sales. The larger 2018 weighted-average share count, following its December 2017 IPO, materially affects the per-share comparison.
- Cash and investments: Cash and cash equivalents were $44.0 million; short- and long-term marketable securities totaled $548.8 million. Combined cash, cash equivalents and marketable securities were $592.8 million, versus $467.0 million at December 31, 2017.
- Cash flows: Operating activities provided $33.6 million, compared with $18.8 million used in Q1 2017. The 2018 inflow was largely driven by a $60.0 million increase in Takeda-related contract liability, not operating profitability. Investing activities used $301.3 million, mainly reflecting purchases of marketable securities; financing activities provided $93.2 million, primarily from Takeda’s share purchase. Cash, cash equivalents and restricted cash declined $174.5 million to $44.5 million.
- Balance sheet: Total assets were $614.0 million and total liabilities were $74.9 million. The filing reports no borrowings or debt balance. Accumulated deficit was $215.4 million.
Material changes and business developments
- Operating expenses increased 21% year over year. R&D rose 13%, mainly from higher personnel and stock-based compensation and broader pipeline investment; lower external spending on LRRK2 and RIPK1 partly offset those increases. G&A rose 70%, reflecting stock compensation, public-company professional costs and additional personnel.
- On February 23, 2018, Takeda purchased 4,214,559 shares for $110.0 million. The shares’ reported fair value at issuance was $94.4 million; the $15.6 million premium was recorded as contract liability in the combined collaboration arrangement.
- Under the Takeda collaboration, Denali received a $40.0 million upfront payment and a $5.0 million preclinical milestone. Takeda has options on three BBB-delivery biologic programs. Further payments depend on option exercises and achievement of development, regulatory and commercial milestones; future cost and profit sharing or royalties may apply.
- Denali recognized $0.6 million in collaboration revenue in the quarter. Approximately $60.0 million remained in contract liability at March 31, expected to be recognized over several years as research services are performed.
- Denali reported 13 programs: seven core and six seed. DNL201 and DNL151, LRRK2 inhibitors for Parkinson’s disease, were in Phase 1 trials; DNL747, a RIPK1 inhibitor for ALS and Alzheimer’s disease, entered a Phase 1 trial in the Netherlands in March 2018. Management planned for multiple BBB-platform candidates to enter clinical development in 2019 and 2020.
Outlook, risks and unusual items
- Management expected significant ongoing losses and increasing R&D spending as it advanced clinical programs, expanded its BBB platform and developed the pipeline. It believed existing cash, cash equivalents and marketable securities would fund projected operations for at least 12 months, while noting that estimates depend on assumptions and additional capital may be needed.
- Key risks include early-stage clinical and preclinical uncertainty, safety and efficacy outcomes, regulatory delays, reliance on third-party manufacturers and research organizations, execution of the BBB platform, intellectual-property protection, collaboration performance and potential future financing or dilution. DNL201 had previously been subject to a partial clinical hold, removed in December 2017; a prior RIPK1 candidate, DNL104, was discontinued after liver test abnormalities in trial participants.
- Subsequent event: on May 2, 2018, Denali amended its headquarters lease to move to a larger, 148,020-square-foot facility for a ten-year term beginning no earlier than February 1, 2019. Base rent is scheduled to rise to approximately $0.8 million monthly after the first year, with annual increases; the lease includes a tenant-improvement allowance of up to $25.9 million and additional operating expenses.
- Denali adopted the new revenue standard on January 1, 2018; adoption had no impact on the financial statements. It expected the new lease standard, planned for adoption in 2019, to add a right-of-use asset and lease liability to the balance sheet.
- Management stated that disclosure controls and procedures were effective at a reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter. The filing reports no material pending legal proceeding.
Important facts for investors to verify
- Whether Takeda exercises options and whether milestone, collaboration revenue or future cost-sharing/royalty terms change as programs progress.
- How much of the reported operating cash inflow reflects contract-liability timing rather than recurring operations, and the pace of cash use excluding collaboration receipts.
- Clinical progress, safety findings and timelines for DNL201, DNL151 and DNL747, as well as evidence supporting the BBB delivery platform.
- The full financial and occupancy implications of the expanded headquarters lease, including tenant-improvement spending and operating costs.
- Potential share dilution: Takeda’s 4.2 million-share investment and the filing’s disclosure that substantial IPO-restricted shares could become saleable beginning as early as June 6, 2018.