Denali(DNLI) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited financial statements show a higher net loss and significant cash outflow from operations year-over-year Condensed Consolidated Financial Statements Financial statements reflect a net loss of $39.0 million and a $30.3 million use of cash in operating activities Condensed Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $39,661 | $77,123 | | Total current assets | $499,533 | $480,836 | | Total assets | $676,596 | $661,984 | | Liabilities & Equity | | | | Total current liabilities | $43,244 | $32,786 | | Total liabilities | $159,948 | $115,139 | | Total stockholders' equity | $516,648 | $546,845 | Condensed Consolidated Statement of Operations (in thousands) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Collaboration revenue | $4,205 | $641 | | Research and development | $37,403 | $20,819 | | General and administrative | $9,310 | $5,570 | | Loss from operations | ($42,508) | ($25,748) | | Net loss | ($38,992) | ($23,678) | | Net loss per share | ($0.41) | ($0.26) | Condensed Consolidated Statement of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($30,323) | $33,577 | | Net cash used in investing activities | ($8,047) | ($301,274) | | Net cash provided by financing activities | $908 | $93,239 | | Net decrease in cash, cash equivalents and restricted cash | ($37,462) | ($174,458) | Notes to Condensed Consolidated Financial Statements Notes detail the adoption of a new lease standard and terms of major collaboration and manufacturing agreements - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, recognizing a net Right-of-Use (ROU) asset of $46.1 million and an operating lease liability of approximately $71.3 million[34] - The Sanofi collaboration, effective November 2018, included a $125.0 million upfront payment and eligibility for up to $1.1 billion in milestone payments[51] - The Takeda collaboration included a $40.0 million upfront payment, a $110.0 million equity investment, and $15.0 million in preclinical milestone payments received as of March 31, 2019[56][60][62] - As of March 31, 2019, the company had non-cancellable purchase orders with Lonza for biologic manufacturing totaling $25.4 million[72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations R&D expenses rose significantly due to clinical program progression, while collaboration revenue increased - The company's strategy targets genes linked to neurodegenerative diseases (degenogenes), engineers product candidates to cross the blood-brain barrier (BBB), and uses biomarkers to drive development[96] - Key clinical programs include DNL201 (LRRK2 inhibitor) for Parkinson's disease and DNL747 (RIPK1 inhibitor) for ALS and Alzheimer's disease[98] - Net loss for Q1 2019 was $39.0 million, compared to $23.7 million for Q1 2018, primarily due to increased R&D expenses[100] - As of March 31, 2019, the company had $583.0 million in cash, cash equivalents, and marketable securities, expected to fund operations for at least 12 months[115][118] Results of Operations Collaboration revenue grew due to the Sanofi agreement, while operating expenses rose 77% led by an 80% R&D increase Comparison of Operating Results (in thousands) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Collaboration revenue | $4,205 | $641 | $3,564 | * | | Research and development | $37,403 | $20,819 | $16,584 | 80% | | General and administrative | $9,310 | $5,570 | $3,740 | 67% | | Total operating expenses | $46,713 | $26,389 | $20,324 | 77% | | Loss from operations | ($42,508) | ($25,748) | ($16,760) | 65% | - The $16.6 million increase in R&D expenses was driven by a $5.3 million rise in personnel costs, a $5.9 million increase in external R&D, and a $3.3 million increase in unallocated expenses[113] Liquidity and Capital Resources Liquidity is primarily sourced from its IPO and collaboration payments, with $583.0 million in cash and securities - Primary funding sources include the December 2017 IPO (net proceeds of $264.3M), the Takeda collaboration, and the Sanofi collaboration ($125.0M upfront payment)[115] - Cash used in operating activities in Q1 2019 was $30.3 million, consisting of a $39.0 million net loss adjusted for non-cash items and working capital changes[121] - Cash provided by financing activities in Q1 2018 was $93.2 million, primarily from the market value of shares issued to Takeda[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on its investment portfolio and foreign currency exchange risk - The company's primary market risks are interest rate sensitivity on its $583.0 million investment portfolio and foreign currency exchange rate fluctuations[133][134] - To mitigate foreign currency risk, the company uses forward contracts, which had a notional value of $8.6 million as of March 31, 2019[134][135] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management concluded that as of March 31, 2019, the company's disclosure controls and procedures were effective at a reasonable assurance level[137] - No material changes to the company's internal control over financial reporting were identified during the quarter ended March 31, 2019[138] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently involved in any material legal proceedings[141] Item 1A. Risk Factors Key risks include its early clinical stage, history of losses, and dependence on its novel BBB platform technology - The company is an early clinical-stage biopharmaceutical firm with a limited operating history, significant net losses, and no approved products[143][144] - Success is heavily dependent on the successful development of its blood-brain barrier (BBB) platform technology and core product candidates[157] - The company faces significant competition from major pharmaceutical and biotechnology companies with greater financial resources[176][177] - Reliance on third parties for conducting clinical trials and manufacturing introduces risks related to performance and supply chain continuity[230][233] - The ability to obtain and maintain patent protection for its technology and product candidates is crucial but uncertain[238][269] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were sold, and the use of IPO proceeds remains unchanged from the prospectus - There were no sales of unregistered securities in the three months ended March 31, 2019[316] - The net proceeds of approximately $264.3 million from the December 2017 IPO are being used as planned, with no material changes[317] Item 3. Defaults Upon Senior Securities This section is not applicable as the company has no senior securities Item 4. Mine Safety Disclosures This section is not applicable to the company's operations Item 5. Other Information No other information was required to be disclosed during the period Item 6. Exhibits This section lists exhibits filed with the report, including officer certifications and XBRL data files - The exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906[323] - Interactive data files (XBRL documents) are also included as exhibits[323]