Denali(DNLI) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, cash flows, and accompanying notes Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Assets | | | | | Total Assets | $602,978 | $661,984 | $(58,006) | | Long-term marketable securities | $23,534 | $147,881 | $(124,347) | | Operating lease right-of-use asset | $34,344 | $— | $34,344 | | Liabilities and Stockholders' Equity | | | | | Total Liabilities | $164,781 | $115,139 | $49,642 | | Operating lease liability, less current portion | $69,915 | $— | $69,915 | | Total Stockholders' Equity | $438,197 | $546,845 | $(108,648) | Condensed Consolidated Statements of Operations and Comprehensive Loss This statement details the company's revenues, expenses, and net loss over specific reporting periods | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | Change (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Collaboration revenue | $13,604 | $1,195 | $12,409 | $22,006 | $3,484 | $18,522 | | Research and development expenses | $52,544 | $30,321 | $22,223 | $141,831 | $103,274 | $38,557 | | General and administrative expenses | $11,215 | $8,838 | $2,377 | $35,601 | $21,304 | $14,297 | | Total operating expenses | $63,759 | $39,159 | $24,600 | $177,432 | $124,578 | $52,854 | | Net loss | $(46,260) | $(35,371) | $(10,889) | $(143,589) | $(113,773) | $(29,816) | | Net loss per share, basic and diluted | $(0.48) | $(0.38) | $(0.10) | $(1.50) | $(1.24) | $(0.26) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts, including net loss and stock-based compensation, over time | Metric | Dec 31, 2018 (in thousands) | Sep 30, 2019 (in thousands) | Change (in thousands) | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity | $546,845 | $438,197 | $(108,648) | | Net loss (9 months ended Sep 30, 2019) | N/A | $(143,589) | N/A | | Stock-based compensation (9 months ended Sep 30, 2019) | N/A | $29,489 | N/A | | Issuances under equity incentive plans (9 months ended Sep 30, 2019) | N/A | $4,156 | N/A | Condensed Consolidated Statements of Cash Flows This statement reports the cash generated and used by the company's operating, investing, and financing activities | Cash Flow Activity | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Net cash used in operating activities | $(103,933) | $(43,069) | $(60,864) | | Net cash provided by (used in) investing activities | $105,327 | $(226,019) | $331,346 | | Net cash provided by financing activities | $4,156 | $95,329 | $(91,173) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $5,550 | $(173,759) | $179,309 | | Cash, cash equivalents and restricted cash at end of period | $84,173 | $45,151 | $39,022 | Notes to Condensed Consolidated Financial Statements This section provides additional information and explanations for the figures presented in the financial statements 1. Significant Accounting Policies This note describes the key accounting principles and methods used in preparing the financial statements - Denali Therapeutics Inc. is a biopharmaceutical company focused on discovering and developing therapeutics for neurodegenerative diseases[25] - The company adopted ASU No. 2016-02, Leases, as of January 1, 2019, recognizing a Right-of-Use (ROU) asset of $46.1 million and an operating lease liability of $71.3 million, with no material impact on the statements of operations or stockholders' equity[59] - Revenue recognition for collaboration arrangements follows ASC 808 and Topic 606, with revenue recognized as performance obligations are satisfied[43][44][46] - Basic and diluted net loss per share are identical due to the company being in a net loss position, making all potentially dilutive securities anti-dilutive[56] 2. Fair Value Measurements This note provides information on the valuation techniques and inputs used for assets and liabilities measured at fair value | Category | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :---------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | Assets (Sep 30, 2019) | | | | | | Cash equivalents | $53,491 | $— | $— | $53,491 | | Short-term marketable securities | $287,366 | $109,351 | $— | $396,717 | | Long-term marketable securities | $17,744 | $5,790 | $— | $23,534 | | Foreign currency derivative contracts | $— | $14 | $— | $14 | | Total Assets | $358,601 | $115,155 | $— | $473,756 | | Liabilities (Sep 30, 2019) | | | | | | Foreign currency derivative contracts | $— | $229 | $— | $229 | | Total Liabilities | $— | $229 | $— | $229 | - Level 2 securities are valued using third-party pricing sources and industry standard valuation models with observable inputs[62] - There were no transfers of assets or liabilities between fair value measurement levels during the three and nine months ended September 30, 2019 or 2018[64] 3. Cash and Marketable Securities This note details the composition of cash, cash equivalents, restricted cash, and marketable securities | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $82,673 | $77,123 | | Restricted cash included within other non-current assets | $1,500 | $1,500 | | Total cash, cash equivalents, and restricted cash | $84,173 | $78,623 | | Security Type | Amortized Cost (in thousands) | Unrealized Holding Gains (in thousands) | Unrealized Holding Losses (in thousands) | Aggregate Fair Value (in thousands) | | :---------------------------------- | :---------------------------- | :-------------------------------------- | :--------------------------------------- | :---------------------------------- | | Short-term marketable securities (Sep 30, 2019) | | | | | | U.S. government treasuries | $286,712 | $655 | $(1) | $287,366 | | U.S. government agency securities | $11,989 | $4 | $— | $11,993 | | Corporate debt securities | $64,208 | $136 | $— | $64,344 | | Commercial paper | $33,014 | $— | $— | $33,014 | | Total short-term marketable securities | $395,923 | $795 | $(1) | $396,717 | | Long-term marketable securities (Sep 30, 2019) | | | | | | U.S. government treasuries | $17,589 | $156 | $(1) | $17,744 | | Corporate debt securities | $5,751 | $39 | $— | $5,790 | | Total long-term marketable securities | $23,340 | $195 | $(1) | $23,534 | | Total Marketable Securities | $419,263 | $990 | $(2) | $420,251 | - All marketable securities were considered available-for-sale and had an effective maturity of less than two years as of September 30, 2019[66][70] 4. Derivative Financial Instruments This note describes the company's use of derivative instruments to manage foreign currency exchange rate risks - The company uses forward foreign currency exchange contracts to hedge operational exposures from potential changes in foreign currency exchange rates, primarily Euro, British Pound, and Swiss Franc[71] | Foreign Exchange Contracts | Number of Contracts | Aggregate Notional Foreign Currency Amount (in thousands) | Maturity | | :------------------------- | :------------------ | :-------------------------------------------------------- | :--------- | | Euros | 21 | 2,976 | Oct 2019 - Aug 2020 | | British Pounds | 19 | 2,944 | Oct 2019 - Jun 2020 | | Swiss Francs | 19 | 506 | Oct 2019 - Aug 2020 | | Total | 59 | 6,426 | | - A derivative liability balance of $0.2 million was recorded in Other current liabilities as of September 30, 2019, with a net loss of $0.1 million recognized in interest and other income, net, for both the three and nine months ended September 30, 2019[74] 5. Acquisition This note provides details on the acquisition of F-star Gamma Limited and related contingent payments - In May 2018, Denali acquired F-star Gamma Limited, which was accounted for as an asset purchase rather than a business combination[76][79] - Initial exercise payments totaled $17.8 million, and the company is required to make future contingent payments up to $447.0 million upon achievement of certain preclinical, clinical, regulatory, and commercial milestones[77] | Expense Type | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Contingent consideration (R&D expense) | $1,500 | $— | | Upfront consideration (R&D expense) | $— | $18,300 | | Funding of F-star Ltd activities (R&D expense) | $800 | $800 | 6. Collaboration Agreements This note outlines the terms and financial impact of the company's collaboration agreements with Sanofi and Takeda - The Sanofi Collaboration Agreement, effective November 2018, involved an upfront payment of $125.0 million and potential milestone payments up to approximately $1.1 billion for CNS and peripheral RIPK1 inhibitors[81] - In July 2019, Sanofi commenced a DNL758 Phase 1 clinical trial, triggering a $10.0 million milestone payment, which was recognized in collaboration revenue for the three and nine months ended September 30, 2019[92] - The Takeda Collaboration Agreement, effective February 2018, included an upfront payment of $40.0 million and potential preclinical milestones up to $75.0 million, with additional clinical, regulatory, and sales milestones up to $932.5 million[95][100] - Takeda also purchased $110.0 million of Denali's common stock, with a $15.6 million premium credited to contract liability[102] | Collaboration Agreement | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :---------------------------------- | :--------------------------------------------- | :-------------------------------------------- | | Takeda Collaboration Agreement | $1,085 | $2,507 | | Sanofi Collaboration Agreement | $12,519 | $19,499 | | Total Collaboration Revenue | $13,604 | $22,006 | 7. License Agreements This note describes the company's exclusive license agreement with Genentech for its LRRK2 inhibitor program - In June 2016, Denali entered into an exclusive license agreement with Genentech for its LRRK2 inhibitor small molecule program for Parkinson's disease[117] - The company may owe Genentech up to $315.0 million in development, regulatory, and commercial milestones, plus low to high single-digit royalties on net sales[118] - To date, $12.5 million has been paid to Genentech (upfront, technology transfer, clinical milestone), recorded as research and development expense[119] 8. Commitments and Contingencies This note details the company's lease obligations, purchase commitments, and other potential liabilities - The company's headquarters lease amendment, effective April 1, 2019 (legal commencement), has a 10-year term with escalating monthly base rent and a tenant improvement allowance of up to $25.9 million[121][122] | Lease Metric | Amount (in thousands) | | :------------------------------------------ | :-------------------- | | ROU asset (Sep 30, 2019) | $34,300 | | Current lease liabilities (Sep 30, 2019) | $3,300 | | Non-current lease liabilities (Sep 30, 2019) | $69,900 | | Weighted average remaining lease term (Sep 30, 2019) | 9.6 years | | Weighted average discount rate (Sep 30, 2019) | 9.0% | - A sublease agreement for a portion of the new premises, commenced April 12, 2019, generated $0.9 million and $1.7 million in income for the three and nine months ended September 30, 2019, respectively[128] - Under the Development and Manufacturing Services Agreement (DMSA) with Lonza, the company had $22.7 million in open non-cancellable purchase orders and $8.8 million in total non-refundable purchase commitments as of September 30, 2019[133] 9. Stock-Based Awards This note provides information on the company's equity incentive plan and stock-based compensation expense - The 2017 Equity Incentive Plan automatically increased shares available for issuance by approximately 4.8 million in January 2019, with approximately 3.5 million shares remaining available as of September 30, 2019[135][140] | Stock Option Activity | Number of Options | | :------------------------------------------ | :------------------ | | Balance at December 31, 2018 | 9,612,652 | | Options granted (9 months ended Sep 30, 2019) | 3,520,585 | | Options exercised (9 months ended Sep 30, 2019) | (699,238) | | Options forfeited (9 months ended Sep 30, 2019) | (670,577) | | Balance at September 30, 2019 | 11,763,422 | | Stock-Based Compensation Expense (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $4,923 | $2,907 | $14,200 | $7,179 | | General and administrative | $3,978 | $2,603 | $15,289 | $5,966 | | Total | $8,901 | $5,510 | $29,489 | $13,145 | - As of September 30, 2019, total unamortized stock-based compensation expense was $84.7 million, to be recognized over approximately 2.9 years[156] 10. Net Loss Per Share This note explains the calculation of basic and diluted net loss per share and the impact of potentially dilutive securities - Basic net loss per share is the same as diluted net loss per share for all periods presented because the company was in a loss position, making the effects of potentially dilutive securities anti-dilutive[157] | Potentially Dilutive Securities | Sep 30, 2019 | Sep 30, 2018 | | :------------------------------------------ | :----------- | :----------- | | Options issued and outstanding and ESPP shares issuable | 11,981,119 | 9,644,444 | | Restricted shares subject to future vesting | 826,511 | 910,452 | | Early exercised common stock subject to future vesting | 10,423 | 182,299 | | Total | 12,818,053 | 10,737,195 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting its strategic focus and performance Overview This section outlines Denali's strategic principles, clinical programs, key operational milestones, and financial performance - Denali's strategy is guided by three principles: selecting therapeutic targets based on degenogenes, engineering product candidates to cross the blood-brain barrier (BBB), and utilizing biomarkers for development[165] - The company has three clinical programs: LRRK2 (DNL201, DNL151 for Parkinson's), RIPK1 CNS (DNL747 for Alzheimer's/ALS), and RIPK1 Peripheral (DNL758 for systemic inflammatory diseases)[168] - Key 2019 operational milestones include the first patient dosed in Phase 1b studies for DNL747 (ALS/Alzheimer's) and DNL151 (Parkinson's), orphan drug designation for DNL310 (ETV:IDS), and a $10.0 million milestone payment from Sanofi for DNL758's Phase 1 commencement[171][173] - The company has incurred significant operating losses ($46.3 million for three months and $143.6 million for nine months ended September 30, 2019) and expects to continue incurring losses as it advances its pipeline[175] Components of Operating Results This section explains the nature and drivers of collaboration revenue, research and development expenses, and general and administrative expenses - Collaboration revenue is currently the sole source of revenue, expected to fluctuate based on the timing and amount of license fees, milestones, and cost reimbursements from agreements with Takeda and Sanofi[177][178] - Research and development expenses, a significant portion of operating costs, are recorded as incurred and include external expenses (CROs, CMOs, license fees), personnel, and allocated facility costs[179] - R&D expenses are expected to increase over the next several years due to advancing current programs, expanding R&D efforts, seeking regulatory approvals, and hiring additional personnel[184] - General and administrative expenses, including personnel, professional services, and allocated facility costs, are also expected to increase as the company operates as a public entity and expands its administrative headcount[186][187] Results of Operations This section provides a comparative analysis of the company's financial performance for the specified periods, detailing changes in key revenue and expense items | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | Change (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | Change (in thousands) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Collaboration Revenue | $13,604 | $1,195 | $12,409 | $22,006 | $3,484 | $18,522 | | Research and development expenses | $52,544 | $30,321 | $22,223 | $141,831 | $103,274 | $38,557 | | General and administrative expenses | $11,215 | $8,838 | $2,377 | $35,601 | $21,304 | $14,297 | | Interest and other income, net | $3,782 | $2,593 | $1,189 | $11,411 | $7,321 | $4,090 | | Income tax benefit | $113 | $— | $113 | $426 | $— | $426 | | Net loss | $(46,260) | $(35,371) | $(10,889) | $(143,589) | $(113,773) | $(29,816) | - The increase in collaboration revenue for both periods was primarily due to $12.5 million (three months) and $19.5 million (nine months) recognized under the Sanofi Collaboration Agreement, including a $10.0 million milestone for DNL758's Phase I clinical trial[192][193] - Research and development expenses increased by $22.2 million (three months) and $38.5 million (nine months), driven by higher external expenses across LRRK2, ETV, and other BBB programs, as well as increased personnel-related and facilities-related expenses[195][197] - Interest and other income, net, increased by $1.2 million (three months) and $4.1 million (nine months), partly due to sublease income ($0.9 million and $1.7 million, respectively) and higher interest rates on marketable securities[200][201] Liquidity and Capital Resources This section discusses the company's sources of funding, current cash position, and future capital requirements - The company's operations have been funded primarily by convertible preferred stock, IPO proceeds ($264.3 million), and payments from collaboration agreements with Takeda ($55.0 million upfront/milestone + $110.0 million stock sale) and Sanofi ($125.0 million upfront + $10.0 million milestone)[203][204][205] - As of September 30, 2019, cash, cash equivalents, and marketable securities totaled $502.9 million, which is expected to fund projected operations for at least the next 12 months[205][210] - The company anticipates needing substantial additional funding for continued research and development, regulatory approvals, and commercialization, which may involve public/private equity or debt financings, or future collaboration agreements[207][208] | Cash Flow Activity | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(103,933) | $(43,069) | | Net cash provided by (used in) investing activities | $105,327 | $(226,019) | | Net cash provided by financing activities | $4,156 | $95,329 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $5,550 | $(173,759) | Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements that could materially impact the company's financial position - The company has not entered into any off-balance sheet arrangements[221] Contractual Obligations and Commitments This section outlines the company's significant contractual obligations, including lease agreements and purchase commitments - The company's contractual obligations include a 10-year headquarters lease amendment (commenced April 1, 2019) with escalating monthly base rent and a tenant improvement allowance[222] - Under the Development and Manufacturing Services Agreement (DMSA) with Lonza, the company had $22.7 million in open non-cancellable purchase orders and $8.8 million in total non-refundable purchase commitments as of September 30, 2019[224] Critical Accounting Policies and Significant Judgments and Estimates This section highlights the accounting policies that require significant management judgment and estimates, including recent updates - There have been no material changes to the company's critical accounting policies and estimates during the nine months ended September 30, 2019, other than the updated leases accounting policy[229] - The leases accounting policy involves determining if an arrangement is a lease, recognizing ROU assets and operating lease liabilities, and using the incremental borrowing rate for present value calculations[230][231][232] Recent Accounting Pronouncements This section discusses the impact of new or recently adopted accounting pronouncements on the company's financial statements - No new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2019, are of significance or potential significance, other than those described in Note 1[233] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily related to interest rate and foreign currency fluctuations, and mitigation strategies Interest Rate Sensitivity This section assesses the company's exposure to interest rate fluctuations on its cash and marketable securities - The company is exposed to interest rate risk on its $502.9 million in cash, cash equivalents, and marketable securities as of September 30, 2019[236] - Its investment strategy focuses on preserving capital and maximizing income from high-credit quality, short-term fixed income securities[237] - A hypothetical 10% relative change in interest rates would not have a material impact on the condensed consolidated financial statements[237] Foreign Currency Sensitivity This section evaluates the company's exposure to foreign exchange risk and its hedging strategies - The company is subject to foreign exchange risk from transactions denominated in non-U.S. dollars, primarily the Euro, British Pound, and Swiss Franc[238] - Forward foreign currency exchange contracts are used to hedge operational exposures, with changes in fair value generally offset by the corresponding gains and losses on the hedged transactions[239] - As of September 30, 2019, the company had $7.6 million in notional amounts of open forward foreign currency exchange contracts[241] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the design and operation of the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2019[243][244] Changes in Internal Control over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the period - No material changes in internal control over financial reporting were identified during the quarter ended September 30, 2019[245] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that the company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - The company is not currently a party to any litigation or legal proceedings that, in the opinion of management, are likely to have a material adverse effect on its business[248] Item 1A. Risk Factors This section details the significant risks associated with investing in the company's common stock, covering its early clinical stage, financial condition, and drug development uncertainties - The company is an early clinical-stage biopharmaceutical company with a limited operating history and no products approved for commercial sale, making future success and viability highly uncertain[251] - The company has incurred significant net losses ($46.3 million for three months and $143.6 million for nine months ended September 30, 2019) and anticipates continued losses, with an accumulated deficit of $371.5 million as of September 30, 2019[253] - Drug development is a highly uncertain undertaking, with risks including failure to complete preclinical/clinical trials, harmful side effects (e.g., DNL104 discontinuation), and inability to obtain regulatory approval or achieve market acceptance[274][280][305] - The company faces significant competition from major pharmaceutical and biotechnology companies with greater financial resources and expertise, potentially impacting its ability to successfully commercialize product candidates[311][313] - Reliance on third-party manufacturers for complex biologic products carries risks of production difficulties, failure to meet regulatory standards (cGMPs), and supply disruptions, which could delay development or commercialization[316][317][319] - The company's ability to obtain and maintain patent protection for its BBB platform technology and product candidates is crucial, but faces risks of patent applications not issuing, challenges to validity/enforceability, and third-party infringement claims[429][430][438] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered sales of equity securities and details the use of proceeds from the company's initial public offering - There were no unregistered sales of equity securities[551] - The company's IPO in December 2017 generated net proceeds of approximately $264.3 million, which were invested in short-term, interest-bearing investment-grade and government securities[552][553] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - Not applicable; there are no defaults upon senior securities[556] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - Not applicable; there are no mine safety disclosures[557] Item 5. Other Information This section indicates that there is no other information to disclose - None; there is no other information to disclose[558] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various certifications and XBRL documents - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and various Inline XBRL Taxonomy Extension Documents[560] Signatures This section contains the signatures of the company's principal executive and financial officers, certifying the report - The report was signed by Ryan J. Watts, Ph.D., President and Chief Executive Officer, and Steve E. Krognes, Chief Financial Officer and Treasurer, on November 6, 2019[564][565]