Denali Therapeutics Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 12, 2019. The company is an early-stage biotechnology business developing treatments for neurodegenerative diseases. It had no approved products and no product sales; reported revenue came from collaborations.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Collaboration revenue | $129.2 million | None |
| Research and development expense | $143.2 million | $74.5 million |
| General and administrative expense | $32.3 million | $15.7 million |
| Operating loss | $46.4 million | $90.1 million |
| Net loss | $36.2 million | $88.2 million |
| Net loss per share, basic and diluted | $0.39 | $5.89 |
| Cash, cash equivalents and marketable securities at year-end | $612.2 million | $467.0 million |
| Working capital at year-end | $448.1 million | $395.4 million |
- FY 2018 collaboration revenue comprised $123.5 million recognized under the Sanofi agreement and $5.7 million under the Takeda agreement. The filing reports no product revenue.
- Annual research and development spending rose 92%, reflecting increased investment in the BBB platform, pipeline, staffing and clinical programs; general and administrative expenses rose 106%.
- Net cash provided by operating activities was $50.1 million, versus $76.6 million used in FY 2017. This reflected, in significant part, a $68.8 million increase in collaboration contract liabilities, as well as noncash expenses; it should not be interpreted as recurring operating profitability.
- Investing activities used $287.4 million, primarily for purchases of marketable securities. Financing activities provided $97.0 million, mainly from the Takeda share issuance. Cash, cash equivalents and restricted cash at year-end were $78.6 million; the larger $612.2 million liquidity figure also includes marketable securities.
- The balance sheet reports no borrowings or other debt. Total liabilities were $115.1 million, including collaboration contract liabilities and lease-related balances. The company disclosed $105.1 million of future minimum operating lease payments.
- Annual operating margin was negative; a conventional gross margin is not meaningful for this development-stage company with no product sales.
Quarterly result and unusual items
In the quarter ended December 31, 2018, Denali recorded collaboration revenue of $125.7 million, operating income of $74.7 million and net income of $77.5 million, or $0.82 per basic share and $0.79 diluted. The sharp contrast with earlier 2018 quarters reflected recognition of collaboration-related revenue, principally Sanofi program licenses—not product sales or evidence of sustained operating profitability. For the full year, Denali remained loss-making.
Sanofi paid a $125.0 million upfront fee in November 2018. The company recognized $123.5 million of Sanofi collaboration revenue during the year under its accounting allocation among licenses and services. Takeda paid a $40.0 million upfront fee and milestone payments; the related agreements also produced a $15.6 million premium over fair value on shares sold to Takeda, credited to contract liability. These upfront and milestone amounts are not equivalent to recurring product revenue.
Denali acquired F-star Gamma in 2018, recording $17.8 million of purchase consideration, the $6.0 million payment for additional target nominations and related costs as research and development expense. The agreement also provides for up to $447.0 million of contingent milestone payments, whose timing and likelihood the company said it could not estimate.
Business progress, outlook and risks
- Clinical programs: DNL201 entered a Phase 1b Parkinson’s disease study in December 2018; DNL747 entered Phase 1b studies for ALS in December 2018 and Alzheimer’s disease in February 2019. DNL151 remained in a Phase 1 healthy-volunteer study. Healthy-volunteer studies for DNL201 and DNL747 reported tolerability and target/pathway engagement, but patient efficacy has not been established.
- Platform and pipeline outlook: Management planned to file an IND or CTA for DNL310 (ETV:IDS, Hunter syndrome) in late 2019 and anticipated further platform-enabled candidates entering clinical development in 2019–2020. ATV:aSyn was targeted for an IND or CTA in 2020; ATV:TREM2 and ATV:Tau were targeted for 2021. These are forward-looking plans, not assured outcomes.
- Collaboration economics: Sanofi may owe up to approximately $1.1 billion in contingent milestones. Denali shares U.S. and China CNS product profits and losses equally with Sanofi, with specified development-cost responsibilities; Sanofi funds development and commercialization of peripheral products, for which Denali is eligible for royalties. Takeda may owe up to $707.5 million in clinical and regulatory milestones if it opts into all three programs. These contingent amounts depend on future milestones and are not guaranteed revenue.
- Funding outlook: Management said available cash, cash equivalents and marketable securities were expected to fund projected operations through at least the next 12 months, while noting the estimate depends on assumptions and that additional capital may be needed. Denali expected continued substantial spending and losses and had no committed source of additional capital.
- Key risks and contingencies: All candidates remain early-stage, and clinical, regulatory, manufacturing and commercialization outcomes are uncertain. The filing notes a prior partial clinical hold for DNL201, lifted in December 2017, and discontinuation of DNL104 after liver test abnormalities in healthy volunteers. Toxicities were observed for clinical candidates in animal studies at high doses. Denali relies on third-party manufacturers and collaborators and disclosed material intellectual-property and development risks.
- Other commitments: The company relies on contract manufacturers, including Lonza; disclosed non-cancellable purchase commitments under its manufacturing agreement totaled $14.0 million at year-end. The new headquarters lease carries substantial long-term obligations. No material litigation was reported.
Important facts for investors to verify
- How much of reported collaboration revenue was recognized upfront versus over time, and how contract liabilities will be recognized in future periods.
- Whether DNL201, DNL747 and DNL151 patient or clinical results confirm safety, target engagement and meaningful therapeutic benefit.
- Whether planned DNL310 and other BBB-platform IND/CTA filings occur on schedule and whether platform results translate from animal models to humans.
- The timing and probability of Takeda and Sanofi option exercises and milestone payments, alongside Denali’s potential cost-sharing obligations and the F-star contingent payments.
- Whether the stated cash runway remains adequate as research and development spending increases, considering lease and manufacturing commitments.