Denali Therapeutics Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results. Denali is an early-stage biopharmaceutical company developing treatments for neurodegenerative diseases; it had no approved products and no product-sales revenue.
Financial performance and position
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Collaboration revenue | $4.2 million | $8.4 million |
| Research and development expense | $51.9 million | $89.3 million |
| General and administrative expense | $15.1 million | $24.4 million |
| Operating loss | $62.8 million | $105.3 million |
| Net loss | $58.3 million | $97.3 million |
| Basic and diluted net loss per share | $0.61 | $1.02 |
| Net cash used in operating activities | Six-month amount: $73.5 million |
At June 30, cash and cash equivalents were $62.9 million, short-term marketable securities $415.7 million, and long-term marketable securities $55.8 million: $534.4 million combined. Current assets were $496.0 million versus current liabilities of $46.5 million. Stockholders’ equity was $475.2 million; accumulated deficit was $325.3 million. No debt balance is shown. Operating lease liabilities totaled $72.9 million, including current and non-current portions. Management said available cash, equivalents, and securities were expected to fund projected operations for at least 12 months, subject to assumptions.
No meaningful product gross margin is presented because the company had no product sales. Collaboration revenue was the only reported revenue source.
Material changes versus prior-year periods
- Q2 collaboration revenue rose 155% to $4.2 million, primarily due to Sanofi collaboration services; six-month revenue rose 267% to $8.4 million. Sanofi contributed $7.0 million in the first half, while Takeda revenue declined year over year.
- Q2 R&D expense was nearly flat year over year, as lower F-star/BBB-platform costs largely offset increased spending across programs, headcount, and facilities. First-half R&D expense increased 22%, to $89.3 million.
- G&A expense rose 119% in Q2 and 96% in the first half, largely reflecting higher personnel costs, stock-based compensation, and headquarters costs.
- Net loss increased 7% in Q2 and 24% for the first half. First-half operating cash use increased to $73.5 million from $8.2 million in 2018; the prior-year comparison benefited from a $58.3 million increase in Takeda-related contract liabilities.
- Cash, cash equivalents, and restricted cash declined $14.2 million during the first half. Marketable-security maturities and purchases drove investing cash flows; these portfolio transactions are not operating cash generation.
Outlook, developments, and risks
- Management expects significant operating losses and R&D spending to continue and said substantial additional funding will eventually be needed. No specific revenue, earnings, or cash-flow guidance was provided.
- Clinical-stage programs included DNL201 and DNL151 for Parkinson’s disease and DNL747 in Phase 1b studies for ALS and Alzheimer’s disease. Denali planned a Phase 1/2 DNL310 Hunter syndrome study for mid-2020 and a DNL343 Phase 1 study in the first half of 2020.
- After quarter-end, Sanofi began a Phase 1 study of DNL758 in July 2019, triggering a $10 million milestone that Denali expected to receive in August. It was not reported as revenue for the quarter ended June 30.
- Denali recorded $1.5 million of R&D expense for a F-star preclinical milestone during the quarter. The F-star arrangement could require up to $447 million of future contingent payments upon specified milestones.
- Sanofi and Takeda collaborations provide potential milestones and other economics, but future payments depend on development progress and other conditions. Sanofi had paid a $125 million upfront payment; Takeda had paid $55 million in upfront and milestone payments through June 30, 2019. Contract liabilities included $63.5 million for Takeda and $3.7 million for Sanofi.
- The new headquarters lease resulted in a $34.6 million right-of-use asset and $72.9 million of lease liabilities at June 30. The ten-year lease had a 9.0% discount rate; the company subleased part of the premises.
- Principal risks include early-stage clinical and regulatory uncertainty, possible safety findings or trial delays, dependence on collaborators and contract manufacturers, intellectual-property protection, and the need for future financing. The filing notes prior liver-test abnormalities that led to discontinuation of DNL104; high-dose toxicities were observed in nonclinical studies for DNL201, DNL747, and DNL151. Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting. No material litigation was reported.
Important facts for investors to verify
- Progress, safety, enrollment, and timing for DNL201, DNL151, DNL747, and planned DNL310 and DNL343 studies.
- Receipt and accounting treatment of the $10 million DNL758 milestone expected after quarter-end.
- Cash-burn trajectory and the assumptions underlying management’s at-least-12-month liquidity estimate.
- Conditions, timing, and potential obligations under the Takeda, Sanofi, F-star, and Lonza arrangements, including contingent milestone payments and manufacturing commitments.
- Lease cash costs, sublease receipts, and the effect of increased personnel, facilities, and stock-based compensation expense.