Denali Therapeutics Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. 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 liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Collaboration revenue | $1.2 million | None | $3.5 million | None |
| Research and development expense | $30.3 million | $18.5 million | $103.3 million | $56.0 million |
| General and administrative expense | $8.8 million | $3.8 million | $21.3 million | $10.6 million |
| Net loss | $35.4 million | $21.8 million | $113.8 million | $65.3 million |
| Basic and diluted loss per share | $0.38 | $2.14 | $1.24 | $6.77 |
| Net cash used in operating activities | Not stated for quarter | Not stated for quarter | $43.1 million | $58.3 million |
Operating margins are not meaningful given the company’s development-stage operations and minimal collaboration revenue. Loss per share is not directly comparable year over year because the weighted-average share count increased substantially following the 2017 IPO.
- Balance sheet at September 30, 2018: Cash and cash equivalents of $43.7 million; marketable securities of $473.5 million; combined cash, cash equivalents and marketable securities of $517.1 million. Total assets were $544.5 million and stockholders’ equity was $461.2 million.
- Debt and liquidity: The filing reports no borrowings or interest-bearing debt. Current liabilities were $31.6 million, including $12.7 million of current contract liabilities. Accumulated deficit was $305.5 million.
- Cash flow: Investing activities used $226.0 million, primarily reflecting purchases of marketable securities. Financing activities provided $95.3 million, principally from Takeda’s common-stock purchase, recorded at $94.4 million fair value. The $40 million Takeda upfront fee and $5 million milestone were collaboration cash receipts, not financing proceeds.
Changes versus the prior comparable periods
- Nine-month net loss increased $48.5 million, or 74%, while operating expenses rose $58.0 million, or 87%. R&D expense increased chiefly from F-star acquisition and target-nomination costs, higher personnel and stock-based compensation, and broader pipeline investment.
- Q3 net loss increased $13.5 million, or 62%. Higher personnel, facilities, clinical-trial and other R&D costs, as well as public-company and personnel costs in G&A, drove the increase.
- Collaboration revenue began in 2018 under the Takeda agreement. Takeda-related contract liabilities reached $57.1 million at September 30, with revenue recognized over the multi-year research period.
- Cash used in operations declined from $58.3 million to $43.1 million for the nine-month period, helped by the $57.1 million increase in Takeda contract liabilities; this working-capital benefit should not be read as a reduction in underlying operating losses.
Outlook, management commentary and risks
- Management expected existing cash, cash equivalents and marketable securities to fund projected operations for at least the next 12 months, while cautioning that spending or development needs could exceed assumptions. No formal earnings or revenue guidance was provided; management expected significant losses and higher R&D spending for the foreseeable future.
- The portfolio comprised 13 programs, including eight core and five seed programs. DNL201 and DNL151 (LRRK2) and DNL747 (RIPK1) were in early clinical development. The company reported positive DNL201 Phase 1 healthy-volunteer results and expected first dosing in a Parkinson’s disease Phase 1b study in late 2018. The BBB delivery platform remained under development.
- Subsequent event: On October 29, 2018, Denali announced a Sanofi collaboration for RIPK1 programs, including a $125 million upfront payment and potential milestone payments exceeding $1 billion. The agreement remained subject to Hart-Scott-Rodino clearance; these funds were not included in September 30 cash. Cost-sharing and royalty arrangements differ by product and territory.
- Key risks: Clinical and regulatory outcomes are uncertain; all candidates were early-stage, and prior candidate DNL104 was discontinued after liver-test abnormalities. The company relies on third-party manufacturers and research partners, faces intellectual-property and financing risks, and may need additional capital. Management cited potential failure, delay, safety, enrollment, manufacturing and collaboration risks.
- Commitments and unusual items: The F-star acquisition was accounted for as an asset purchase, with $17.8 million plus the prior $0.5 million option fee charged to R&D; contingent payments could total up to $447 million upon milestones. Headquarters minimum lease payments were $105.8 million. Lonza purchase orders totaled $13.0 million, including $7.7 million of non-refundable commitments at quarter-end. A new headquarters lease and later sublease were also disclosed.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company reported no legal proceedings likely to have a material adverse effect.
Important facts for investors to verify
- Confirm the status, timing and outcomes of DNL201, DNL151 and DNL747 trials, including safety findings and the planned DNL201 Phase 1b study.
- Track Sanofi agreement effectiveness, receipt and accounting for the $125 million upfront payment, and subsequent program and cost-sharing decisions.
- Assess cash runway against operating cash use, planned R&D expansion, lease costs and manufacturing commitments; distinguish collaboration cash receipts from recurring revenue.
- Review potential F-star milestone liabilities, Takeda option and milestone progress, and the terms and conditions attached to each collaboration.
- Monitor clinical, regulatory, manufacturing, intellectual-property and financing risks, as well as any updates to the company’s stated 12-month liquidity outlook.