DENALI THERAPEUTICS INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q.
Forward-looking statements include, but are not limited to, statements about:
•the success, cost and timing of our development activities, preclinical studies
and clinical trials, including the enrollment in such trials, and in particular
the development of our blood-brain barrier ("BBB") platform technology, programs
and biomarkers;
•the extent to which any dosing limitations that we have been subject to, and/or may be subject to in the future, may affect the success of our product candidates;
•the impact of preclinical findings on our ability to achieve exposures of our product candidates that allow us to explore a robust pharmacodynamic range of these candidates in humans; •expectations regarding the transaction with Biogen, including all financial aspects of the collaboration and equity investment, the potential benefits and results of the transaction; •the expected potential benefits and potential revenue resulting from strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise;
•the timing or likelihood of regulatory filings and approvals;
•our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate;
•the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
•the terms and conditions of licenses granted to us and our ability to license and/or acquire additional intellectual property relating to our product candidates and BBB platform technology;
•our ability to obtain funding for our operations, including funding necessary to develop and commercialize our current and potential future product candidates;
•our plans and ability to establish sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain approval;
•future agreements with third parties in connection with the commercialization of our product candidates;
•the size and growth potential of the markets for our product candidates, if approved for commercial use, and our ability to serve those markets;
•the rate and degree of market acceptance of our product candidates;
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•existing regulations and regulatory developments in the United States and
foreign countries;
•potential claims relating to our intellectual property and third-party intellectual property;
•our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;
•our potential plans and ability to develop our own manufacturing facilities;
•the pricing and reimbursement of our product candidates, if approved and commercialized;
•the success of competing products or platform technologies that are or may become available;
•our ability to attract and retain key managerial, scientific and medical personnel;
•the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
•our ability to enhance operational, financial and information management systems;
•our financial performance; and
•our expectations regarding the impact of the COVID -19 pandemic on our business.
These forward-looking statements are subject to a number of risks,
uncertainties, and assumptions, including those described in "Risk Factors". In
some cases, you can identify these statements by terms such as "anticipate,"
"believe," "could," "estimate," "expects," "intend," "may," "plan," "potential,"
"predict," "project," "should," "will," "would" or the negative of those terms,
and similar expressions that convey uncertainty of future events or outcomes.
These forward-looking statements reflect our beliefs and views with respect to
future events and are based on estimates and assumptions as of the date of this
Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We
discuss many of these risks in greater detail in the section entitled "Risk
Factors" included in Part II, Item 1A and elsewhere in this report. Moreover, we
operate in a very competitive and rapidly changing environment. New risks emerge
from time to time. It is not possible to predict all risks, nor can we assess
the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We qualify all of the forward-looking statements in this Quarterly
Report on Form 10-Q by these cautionary statements. Except as required by law,
we assume no obligation to update these forward-looking statements publicly, or
to update the reasons actual results could differ materially from those
anticipated in any forward-looking statements, whether as a result of new
information, future events or otherwise.
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Overview
Our goal is to discover and develop therapeutics to defeat degeneration.
Our strategy is guided by three overarching principles that we believe will significantly increase the probability of success and will accelerate the timing to bring effective therapeutics to patients with neurodegenerative diseases:
•Genetic Pathway Potential: We select our therapeutic targets and disease pathways based on genes that, when mutated, cause, or are major risk factors for, neurodegenerative diseases. We refer to these genes as degenogenes;
•Engineering Brain Delivery: We engineer our product candidates to cross the BBB and act directly in the brain; and
•Biomarker-Driven Development: We discover, develop and utilize biomarkers to select the right patient population and demonstrate target engagement, pathway engagement and impact on disease progression of our product candidates.
We are developing a broad portfolio of targeted therapeutic candidates for neurodegenerative diseases. Our programs are at different stages of clinical and preclinical development, including four programs in clinical studies.
We have also developed a proprietary BBB platform technology, our transport
vehicle ("TV"), which enables multiple modality-based platforms to deliver a
wide range of large-molecule therapeutics across the BBB, including enzymes,
antibodies, proteins and oligonucleotides. This technology is designed to engage
specific BBB transport receptors, which are ubiquitously expressed in brain
capillaries and facilitate transport of proteins into the brain. We are
currently optimizing and broadening this platform technology.
Our four clinical-stage programs are:
•our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, partnered with
Biogen, to address Parkinson's disease;
•our eukaryotic translation initiation factor 2B ("EIF2B") activator program to address diseases such as ALS and frontotemporal dementia ("FTD");
•our ETV:IDS program, our most advanced program enabled by our enzyme transport
vehicle ("ETV") technology, which is designed to restore iduronate 2-sulfatase
("IDS"), and reduce glycosaminoglycans, both peripherally and in the brain, in
patients with mucopolysaccharidosis II ("MPS II", or "Hunter syndrome"); and
•our receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor
program, partnered with Sanofi, to address peripheral inflammatory diseases such
as cutaneous lupus and COVID-19.
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--------------------------------------------------------------------------------Table of Contents Program Product Candidate(s) Clinical Phase Indication(s) Operational Control LRRK2 DNL151 Ph 1 and Ph 1b Parkinson's disease Joint with Biogen EIF2B DNL343 Ph 1 ALS and FTD Denali ETV:IDS DNL310 Ph 1/2 Hunter syndrome (MPS II) Denali RIPK1 (Peripheral) DNL758 Ph 1b Systemic inflammatory diseases Sanofi To complement our internal capabilities, we have entered into arrangements with biopharmaceutical companies, patient-focused data companies, numerous leading academic institutions and foundations to gain access to new product candidates, enable and accelerate the development of our existing programs and deepen our scientific understanding of certain areas of biology. We rely on third-party contract manufacturers to manufacture and supply our preclinical and clinical materials to be used during the development of our product candidates. We currently do not need commercial manufacturing capacity.
Since we commenced operations, we have devoted substantially all of our resources to discovering, acquiring and developing product candidates, building our BBB platform technology and assembling our core capabilities in understanding key neurodegenerative disease pathways.
Key operational and financing milestones in 2020 to date include:
•InJanuary 2020 , we announced positive results from our LRRK2 program. Phase 1b results with DNL201 in patients with Parkinson's disease demonstrated high levels of target and pathway engagement and improvement of lysosomal biomarkers. Interim Phase 1 results with DNL151 in more than 150 healthy volunteers also met all safety and biomarker goals. Both clinical trials showed dose-dependent target engagement, improvement in biomarkers of lysosomal function and demonstrated safety profiles supporting progression to further development; •InJanuary 2020 , we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$23.00 per share for aggregate net proceeds of$193.9 million ; •InFebruary 2020 , we initiated a Phase 1 clinical trial for DNL343 (EIF2B) in healthy volunteers; •InJune 2020 , we announced the results from Phase 1b clinical studies with small molecule RIPK1 inhibitor DNL747 in Alzheimer's disease and ALS, and provided a broad RIPK1 program update including CNS compound DNL788 and peripherally-restricted compound DNL758. Safety endpoints were met in the Phase 1b patient studies with DNL747 in ALS and Alzheimer's disease, however further dose escalation to achieve higher levels of target inhibition may be limited by preclinical chronic safety data. As such, we announced, together with our collaboration partner Sanofi, that we have decided to pause clinical studies with DNL747 and focus our efforts on accelerating development of DNL788, which we believe has superior drug properties and a more rapid path toward proof-of-concept clinical studies in patients in multiple neurological indications; 35 -------------------------------------------------------------------------------- Table of Contents •InJuly 2020 , we announced that our collaboration partner Sanofi has commenced dosing of DNL758, a peripherally-restricted small molecule inhibitor of RIPK1, in a Phase 1b clinical study in hospitalized adult patients with severe COVID-19 lung disease. In October, we provided an update that enrollment in the Phase 1b COVID-19 study is complete. Separately, Sanofi plans to initiate a Phase 2 clinical study of DNL758 in cutaneous lupus first half of 2021;
•In
•InAugust 2020 , we entered into a binding Provisional Collaboration and License Agreement with Biogen to co-develop and co-commercialize our small molecule inhibitors of LRRK2 for Parkinson's disease. Under the Provisional Collaboration and License Agreement, Biogen also received rights to opt into two programs and a right of first negotiation for two additional programs, in each case for neurodegenerative diseases leveraging our TV technology platform to cross the BBB. InOctober 2020 , the Provisional Collaboration and License Agreement expired upon the execution of the Definitive LRRK2 Collaboration and License Agreement and Right of First Negotiation, Option and License Agreement with Biogen (collectively the "The Biogen Collaboration Agreement"). In connection with the Biogen Collaboration Agreement, we received an equity investment of$465.0 million inSeptember 2020 and an aggregate of$560.0 million in upfront payments inOctober 2020 . We may be eligible to receive up to$1.1 billion in potential milestone payments plus profit sharing and royalties for the LRRK2 program; •InAugust 2020 , we announced the selection of DNL151 to progress into late stage clinical studies in Parkinson's disease patients with a kinase-activating mutation in LRRK2 and in sporadic Parkinson's disease patients. Patient enrollment is planned to commence in 2021 in collaboration with Biogen; •InOctober 2020 , our collaboration partner Sanofi submitted an IND application for DNL788 (SAR443820 ), a potent, selective brain-penetrant small molecule inhibitor of RIPK1. First-in-human dosing is planned to begin in late 2020 or early 2021; and •To address risks posed by the COVID-19 pandemic, we have implemented policies that enable some of our employees to work remotely. For all on-site personnel, we have implemented several safety protocols, including regular, mandatory COVID-19 testing procedures and compliance measures for social distancing and use of personal protective equipment. After initial COVID-19 pandemic shutdown restrictions were put into place inMarch 2020 , we experienced a pause in patient recruitment in several clinical trials. Recruitment has since resumed for all affected clinical trials. We do not have any products approved for sale and have not generated any product revenue since our inception. We have funded our operations primarily from the issuance and sale of convertible preferred stock, and the proceeds from our initial public offering ("IPO"), follow-on offering, and payments received from our collaboration agreements withTakeda , Sanofi and Biogen. We have incurred significant operating losses to date and expect to continue to incur operating losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were$58.2 million and$173.7 million for the three and nine months endedSeptember 30, 2020 , respectively, and$46.3 million and$143.6 million for the three and nine months endedSeptember 30, 2019 , respectively. As ofSeptember 30, 2020 , we had an accumulated deficit of$599.3 million . We expect to continue to incur significant expenses and operating losses as we advance our current clinical stage programs through healthy volunteer and patient trials; broaden and improve our BBB platform technology; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. 36 -------------------------------------------------------------------------------- Table of Contents Components of Operating Results Collaboration Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been collaboration revenue from our collaboration agreements withTakeda and Sanofi. In the future, we will continue to recognize revenue from theTakeda Collaboration Agreement and Sanofi Collaboration Agreement, and commence revenue recognition from the Biogen Collaboration Agreement, and may generate revenue from product sales or milestones, royalties and cost reimbursement from other collaboration agreements, strategic alliances and licensing arrangements. We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of license fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Operating Expenses
Research and Development
Research and development activities account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses incurred by us for the discovery and development of our product candidates and BBB platform technology include:
•external research and development expenses, including:
-expenses incurred under arrangements with third parties, such as contract
research organizations ("CROs"), preclinical testing organizations, contract
development and manufacturing organizations ("CDMOs"), academic and non-profit
institutions and consultants;
-expenses to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use;
-fees related to our license and collaboration agreements;
•personnel related expenses, including salaries, benefits and stock-based compensation expense; and
•other expenses, which include direct and allocated expenses for laboratory, facilities and other costs.
A portion of our research and development expenses are direct external expenses, which we track on a program-specific basis once a program has commenced late-stage IND-enabling studies.
Program expenses include expenses associated with our most advanced product
candidates and the discovery and development of backup or next-generation
molecules. We also track external expenses associated with our TV platform.
These expenses include those incurred by us relating to our Takeda Collaboration
Agreement, Sanofi Collaboration Agreement and Biogen Collaboration Agreement.
All external costs associated with earlier stage programs, or that benefit the
entire portfolio, are tracked as a group. We do not track personnel or other
operating expenses incurred for our research and development programs on a
program-specific basis. These expenses primarily relate to salaries and
benefits, stock-based compensation, facility expenses including rent and
depreciation, and lab consumables.
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It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. This is made more challenging by events outside of our control, such as the recent COVID-19 pandemic. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
•our ability to add and retain key research and development personnel;
•our ability to establish an appropriate safety profile with IND-enabling toxicology studies;
•our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
•our successful enrollment in and completion of clinical trials;
•the costs associated with the development of any additional product candidates we identify in-house or acquire through collaborations;
•our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our molecules;
•our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
•the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
•our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
•our receipt of marketing approvals from applicable regulatory authorities;
•our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and
•the continued acceptable safety profiles of the product candidates following approval.
A change in any of these variables with respect to the development of any of our
product candidates would significantly change the costs, timing and viability
associated with the development of that product candidate. We expect our
research and development expenses to increase at least over the next several
years as we continue to implement our business strategy, advance our current
programs, expand our research and development efforts, seek regulatory approvals
for any product candidates that successfully complete clinical trials, access
and develop additional product candidates and incur expenses associated with
hiring additional personnel to support our research and development efforts. In
addition, product candidates in later stages of clinical development generally
incur higher development costs than those in earlier stages of clinical
development, primarily due to the increased size and duration of later-stage
clinical trials.
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General and Administrative
General and administrative expenses include personnel-related expenses, such as
salaries, benefits, travel and stock-based compensation expense, expenses for
outside professional services and allocated expenses. Outside professional
services consist of legal, accounting and audit services and other consulting
fees. Allocated expenses consist of rent, depreciation and other expenses
related to our office and research and development facility not otherwise
included in research and development expenses.
We expect to continue to incur certain expenses as a result of operating as a
public company, including expenses related to compliance with the rules and
regulations of the SEC and those of any national securities exchange on which
our securities are traded, insurance expenses, investor relations activities and
other administrative and professional services. We also expect to increase our
administrative headcount as we advance our product candidates through clinical
development, which will also increase our general and administrative expenses.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest income and investment income earned on our cash, cash equivalents, and marketable securities, gains and losses on foreign currency hedges, and sublease income.
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Results of Operations
Comparison of the three and nine months ended September 30, 2020 and 2019
The following table sets forth the significant components of our results of
operations (in thousands):
Three Months Ended September 30, Change
2020 2019 $ %
Collaboration revenue:
Collaboration revenue from customers $ 9,388 $ 13,508 $ (4,120) (31) %
Other collaboration revenue 5 96 (91) (95)
Total collaboration revenue 9,393 13,604 (4,211) (31)
Operating expenses:
Research and development 53,704 52,544 1,160 2
General and administrative 15,805 11,215 4,590 41
Total operating expenses 69,509 63,759 5,750 9
Loss from operations (60,116) (50,155) (9,961) 20
Interest and other income, net 1,944 3,782 (1,838) (49)
Loss before income taxes (58,172) (46,373) (11,799) 25
Income tax benefit (provision) (56) 113 (169) (150)
Net loss $ (58,228) $ (46,260) $ (11,968) 26 %
Nine Months Ended September 30, Change
2020 2019 $ %
Collaboration revenue:
Collaboration revenue from customers $ 18,751 $ 21,717 $ (2,966) (14) %
Other collaboration revenue 93 289 (196) (68)
Total collaboration revenue 18,844 22,006 (3,162) (14)
Operating expenses:
Research and development 157,872 141,831 16,041 11
General and administrative 42,332 35,601 6,731 19
Total operating expenses 200,204 177,432 22,772 13
Loss from operations (181,360) (155,426) (25,934) 17
Interest and other income, net 7,611 11,411 (3,800) (33)
Loss before income taxes (173,749) (144,015) (29,734) 21
Income tax benefit - 426 (426) (100)
Net loss $ (173,749) $ (143,589) $ (30,160) 21 %
Collaboration revenue
Collaboration revenue was $9.4 million and $18.8 million for the three and nine
months ended September 30, 2020 , respectively, and $13.6 million and $22.0
million for the three and nine months ended September 30, 2019 , respectively.
The decreases in collaboration revenue of $4.2 million and $3.2 million for the
three and nine months ended September 30, 2020 , respectively, compared to the
comparative period in the prior year were due to a decrease in revenue from our
collaboration with Sanofi driven by a $10.0 million milestone recognized in the
three and nine months ended September 30, 2019 related to the Peripheral
program, and the winding down of revenue for retained activities as activities
are transferred to Sanofi. These decreases are partially offset by an increase
in revenue from our collaboration with Takeda , driven by increased costs
incurred in the programs partnered with Takeda .
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Research and development expenses
Research and development expenses were $53.7 million and $157.9 million for the
three and nine months ended September 30, 2020 , compared to $52.5 million and
$141.8 million for the three and nine months ended September 30, 2019 .
The following table summarizes our research and development expenses by program and category (in thousands):
Three Months Ended September
30, Nine Months Ended
2020 2019 2020 2019
LRRK2 program external expenses $ 6,497 $ 8,920 $ 22,263 $ 21,536
EIF2B program external expenses 3,433 1,538 6,739 3,739
ETV:IDS program external expenses 2,786 4,045 11,136 12,058
TV platform and other program external
expenses 5,902 3,911 12,088 11,180
Other external research and development
expenses 5,638 8,868 20,812 23,476
Personnel-related expenses (1) 21,176 16,423 60,298 45,413
Other unallocated research and development
expenses 8,272 8,839 24,536 24,429
Total research and development expenses
__________________________________________________
(1)Personnel-related expenses include stock-based compensation expense of$7.8 million and$21.0 million for the three and nine months endedSeptember 30, 2020 , respectively, and$4.9 million and$14.2 million for the three and nine months endedSeptember 30, 2019 , respectively, reflecting an increase of$2.9 million and$6.8 million , respectively. There was an increase in total research and development expenses of$1.2 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This increase was a result of a$4.8 million increase in personnel-related expenses, consisting of a$1.9 million increase in salaries and related expenses attributable to an increase in our research and development headcount, and a$2.9 million increase in stock-based compensation expense primarily attributable to new equity award grants. Additionally, there were increases in external expenses related to progression of our portfolio, including an increase of$1.9 million in EIF2B program external expenses reflecting the cost of the Phase 1 clinical trial, and an increase of$2.0 million in TV platform and other program external expenses. These increases were partially offset by a$3.2 million decrease in other external research and development expenses, primarily attributable to a decrease in DNL747 costs after completion of the Phase 1b trials, a$2.4 million decrease in LRRK2 program expenses, reflecting completion of DNL201 clinical activities, a$1.3 million decrease in ETV:IDS program external expenses primarily due to significant CMC activity in 2019, and a decrease in other unallocated research and development expenses of$0.6 million primarily attributable to decreased lab consumables costs and reductions in associated expenses related to COVID-19. There was an increase in total research and development expenses of$16.0 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was a result of a$14.9 million increase in personnel-related expenses, consisting of a$8.1 million increase in salaries and related expenses attributable to an increase in our research and development headcount, and a$6.8 million increase in stock-based compensation expense primarily attributable to new equity award grants. Additionally, there were increases in external expenses related to progression of our portfolio, including an increase of$3.0 million in EIF2B program external expenses reflecting the cost of the Phase 1 clinical trial, an increase of$0.9 million in TV platform and other program external expenses, an increase of$0.7 million in LRRK2 program external expenses driven by DNL151 progress in the clinic, and an increase in other unallocated research and development expenses of$0.1 million . These increases were partially offset by a decrease of$0.9 million in ETV:IDS program external expenses due to the$1.5 million contingent consideration payment to F-star and significant CMC activity, both in 2019, and a$2.7 million decrease in other external research and development expenses, primarily attributable to a decrease in DNL747 costs after completion of the Phase 1b trials. 41 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses General and administrative expenses were$15.8 million for the three months endedSeptember 30, 2020 compared to$11.2 million for the three months endedSeptember 30, 2019 . The increase of approximately$4.6 million was primarily attributable to a$2.0 million increase in personnel-related expenses, primarily driven by higher stock-based compensation expense in the three months endedSeptember 30, 2019 primarily attributable to new equity award grants. Additionally, there was an increase of$2.0 million in professional services costs, primarily due to costs associated with the execution of the Biogen Collaboration Agreement, an increase of$0.5 million in other general and administrative costs related to other miscellaneous costs such as insurance and taxes, and a$0.1 million increase in facilities-related expenses. General and administrative expenses were$42.3 million for the nine months endedSeptember 30, 2020 compared to$35.6 million for the nine months endedSeptember 30, 2019 . The increase of approximately$6.7 million was primarily attributable to increases of$3.0 million in personnel-related expenses primarily driven by higher headcount,$2.8 million in professional services costs, primarily due to costs associated with the execution of the Biogen Collaboration Agreement,$0.6 million in other general and administrative costs related to other miscellaneous costs such as insurance and taxes, and$0.3 million in facilities-related expenses.
Interest and other income, net
Interest and other income, net was$1.9 million for the three months endedSeptember 30, 2020 compared to$3.8 million for the three months endedSeptember 30, 2019 . The decrease of$1.9 million was primarily due to decreased interest income earned on our investments due to declining interest rates. Interest and other income, net was$7.6 million for the nine months endedSeptember 30, 2020 compared to$11.4 million for the nine months endedSeptember 30, 2019 . The decrease of$3.8 million was primarily due to a$5.0 million decrease in interest income earned on our investments due to declining interest rates, partially offset by an increase of$1.2 million in sublease income and reimbursements received in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Income tax benefit (provision) Income tax provision associated with a decrease in unrealized gains on marketable securities in other comprehensive income was$0.1 million for the three months endedSeptember 30, 2020 compared to an income tax benefit of$0.1 million for the three months endedSeptember 30, 2019 associated with unrealized gains on marketable securities in other comprehensive income. There was no income tax benefit associated with an unrealized gain on marketable securities in other comprehensive income for the nine months endedSeptember 30, 2020 compared to$0.4 million for the nine months endedSeptember 30, 2019 . Comparison of the three and nine months endedSeptember 30, 2019 and 2018 Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" in our Form 10-Q for the three and nine months endedSeptember 30, 2019 for a discussion of the results of operations for the three and nine months endedSeptember 30, 2019 compared to the three and nine months endedSeptember 30, 2018 . 42 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of Liquidity We fund our operations primarily with the proceeds from our IPO, our follow-on offering, and payments received from our collaboration agreements withTakeda , Sanofi, and Biogen. We received net proceeds of$264.3 million from our IPO inDecember 2017 . InJanuary 2020 , we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$23.00 per share for aggregate net proceeds of$193.9 million . Pursuant to the Takeda Collaboration Agreement, we have received$55.0 million related to upfront and milestone payments throughSeptember 30, 2020 . Further, under the associated Stock Purchase Agreement we received$110.0 million inFebruary 2018 for the sale and issuance of 4,214,559 shares of our common stock. Pursuant to the Sanofi Collaboration Agreement, we have received$135.0 million related to upfront and milestone payments, and further payments of$11.2 million for performance of Retained Activities throughSeptember 30, 2020 . Pursuant to the common stock purchase agreement between Denali and Biogen (the "Biogen Stock Purchase Agreement"), we received$465.0 million inSeptember 2020 for the sale and issuance of 13,310,243 shares of our common stock. InOctober 2020 , we received$560.0 million from Biogen in upfront payments associated with the Biogen Collaboration Agreement.
As of
To date, we have not generated any product revenue. We do not expect to generate
any product revenue unless and until we obtain regulatory approval of and
commercialize any of our product candidates, and we do not know when, or if,
either will occur.
We expect to continue to incur significant losses for the foreseeable future,
and we expect the losses to increase as we expand our research and development
activities and continue the development of, and seek regulatory approvals for,
our product candidates, and begin to commercialize any approved products.
Further, we expect general and administrative expenses to increase as we
continue to incur additional costs associated with supporting our growing
operations. We are subject to all of the risks typically related to the
development of new product candidates, and we may encounter unforeseen expenses,
difficulties, complications, delays and other unknown factors that may adversely
affect our business. We anticipate that we will need substantial additional
funding in connection with our continuing operations.
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Until we can generate a sufficient amount of revenue from the commercialization
of our product candidates or from our existing collaboration agreements, or
future agreements with other third parties, if ever, we expect to finance our
future cash needs through public or private equity or debt financings.
Additional capital may not be available on reasonable terms, if at all. If we
are unable to raise additional capital in sufficient amounts or on terms
acceptable to us, we may have to significantly delay, scale back or discontinue
the development or commercialization of one or more of our product candidates.
If we raise additional funds through the issuance of additional debt or equity
securities, it could result in dilution to our existing stockholders, increased
fixed payment obligations and the existence of securities with rights that may
be senior to those of our common stock. If we incur indebtedness, we could
become subject to covenants that would restrict our operations and potentially
impair our competitiveness, such as limitations on our ability to incur
additional debt, limitations on our ability to acquire, sell or license
intellectual property rights and other operating restrictions that could
adversely impact our ability to conduct our business. Additionally, any future
collaborations we enter into with third parties may provide capital in the near
term but limit our potential cash flow and revenue in the future. Any of the
foregoing could significantly harm our business, financial condition and
prospects.
Since our inception, we have incurred significant losses and negative cash flows
from operations. We have an accumulated deficit of $599.3 million through
September 30, 2020 . We expect to incur substantial additional losses in the
future as we conduct and expand our research and development activities. We
believe that our existing cash, cash equivalents and marketable securities will
be sufficient to enable us to fund our projected operations through at least 12
months from the filling date of this Form 10-Q. We have based this estimate on
assumptions that may prove to be wrong, and we could utilize our available
capital resources sooner than we currently expect. Our future funding
requirements will depend on many factors, including:
•the timing and progress of preclinical and clinical development activities;
•the number and scope of preclinical and clinical programs we decide to pursue;
•the progress of the development efforts of third parties with whom we have entered into license and collaboration agreements;
•our ability to maintain our current research and development programs and to establish new research and development, license or collaboration arrangements;
•our ability and success in securing manufacturing relationships with third parties or, in the future, in establishing and operating a manufacturing facility;
•the costs involved in prosecuting, defending and enforcing patent claims and other intellectual property claims;
•the cost and timing of regulatory approvals;
•our efforts to enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates; and
•the costs and ongoing investments to in-license and/or acquire additional technologies.
A change in the outcome of any of these or other variables with respect to the
development of any of our product candidates could significantly change the
costs and timing associated with the development of that product candidate.
Furthermore, our operating plans may change in the future, and we may need
additional funds to meet operational needs and capital requirements associated
with such operating plans.
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Cash Flows
The following table sets forth a summary of the primary sources and uses of cash for each of the periods presented below (in thousands):
Nine Months
Ended
2020 2019
Net cash used in operating activities $ (97,763)$ (103,933) Net cash provided by (used in) investing activities (255,866) 105,327 Net cash provided by financing activities 625,227 4,156 Net increase in cash, cash equivalents and restricted cash $ 271,598
$ 5,550
During the nine months endedSeptember 30, 2020 , cash used in operating activities was$97.8 million , which consisted of a net loss of$173.7 million , adjusted by non-cash items primarily related to stock-based compensation and depreciation, partially offset by net amortization of discounts on marketable securities and non-cash rent expenses. Cash used in operating activities was also driven by changes in our operating assets and liabilities, including an increase in related party contract liability associated with the Biogen Collaboration Agreement.
Net Cash Provided By (Used In) Investing Activities
During the nine months endedSeptember 30, 2020 , cash used in investing activities was$255.9 million , which consisted of$687.5 million of purchases of marketable securities and$1.9 million of capital expenditures to purchase property and equipment, partially offset by$433.6 million in proceeds from the maturity of marketable securities.
Net Cash Provided By Financing Activities
During the nine months endedSeptember 30, 2020 , cash provided by financing activities was$625.2 million , which consisted of$420.1 million associated with the issuance of 13,310,243 shares of our common stock to Biogen inSeptember 2020 under the Biogen Stock Purchase Agreement,$193.9 million in net cash proceeds from our follow-on offering completed inJanuary 2020 , and$11.1 million in proceeds from the exercise of options to purchase common stock and issuance of ESPP shares. Discussion of the nine months endedSeptember 30, 2019 Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in our Form 10-Q for the nine months endedSeptember 30, 2019 for a discussion of the cash flows for that period. Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
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Contractual Obligations and Commitments
In May 2018 , we entered into an amendment to our operating lease for our former
corporate headquarters in South San Francisco (the "Headquarters Lease
Amendment") to relocate and expand our headquarters to 148,020 rentable square
feet in a building in South San Francisco, California (the "New Premises"). The
Headquarters Lease Amendment has a contractual term of ten years from the legal
commencement date, which was April 1, 2019 when the building was ready for
occupancy. For accounting purposes, the lease commencement date was determined
to be August 1, 2018 , which was the date at which we were deemed to have
obtained control over the property. We have an option to extend the lease term
for a period of ten years by giving the landlord written notice of the election
to exercise the option at least nine months, but not more than twelve months,
prior to the expiration of the Headquarters Lease Amendment lease term. We
determined that this renewal was not reasonably certain at lease inception.
The Headquarters Lease Amendment provides for monthly base rent amounts
escalating over the term of the lease. In addition, the Headquarters Lease
Amendment provided a tenant improvement allowance ("TIA") of up to $25.9
million , which was fully utilized, of which $4.4 million will be repaid to the
landlord in the form of additional monthly rent. This is recorded as leasehold
improvement assets and an offset to the lease ROU asset on the Consolidated
Balance Sheets as of September 30, 2020 and December 31, 2019 . We are also
required to pay the operating expenses for the New Premises, such as taxes and
insurance, which are treated as variable lease payments.
Effective September 2017 , we entered into a Development and Manufacturing
Services Agreement, as amended ("DMSA") with Lonza Sales AG ("Lonza") for the
development and manufacture of biologic products. Under the DMSA, we will
execute purchase orders based on project plans authorizing Lonza to provide
development and manufacturing services with respect to certain of our antibody
and enzyme products, and will pay for the services provided and batches
delivered in accordance with the DMSA and project plan. Unless earlier
terminated, the DMSA will expire on September 6, 2022 .
As of September 30, 2020 and December 31, 2019 , we had open non-cancellable
purchase orders for biological product development and manufacturing costs
totaling $17.6 million and $21.2 million , respectively. The activities under
these purchase orders are expected to be completed by May 2027 . As of September
30, 2020 and December 31, 2019 , we had total non-cancellable purchase
commitments, under the DMSA of $12.0 million and $11.2 million , respectively.
During the three months ended September 30, 2020 and 2019, we incurred costs of
$1.4 million and $3.0 million , respectively, and made payments of $0.8 million
and $2.5 million , respectively, for the development and manufacturing services
rendered under the DMSA. During the nine months ended September 30, 2020 and
2019, we incurred costs of $6.2 million and $9.7 million , respectively, and made
payments of $6.0 million and $9.0 million , respectively, for the development and
manufacturing services rendered under the DMSA.
Other than those detailed above, there have been no other material changes from
the contractual obligations and commitments previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2019 , as filed with the SEC
on February 27, 2020 .
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Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of
operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these
condensed consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements, as well as the reported revenues recognized
and expenses incurred during the reporting periods. Our estimates are based on
our historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and
estimates during the nine months ended September 30, 2020 from those described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our Annual Report on Form 10-K for the year ended
December 31, 2019 , as filed with the SEC on February 27, 2020 .
Recent Accounting Pronouncements
Except as described in Note 1 to the condensed consolidated financial statements
under the headings "Recently Issued Accounting Pronouncement" and "Recently
Adopted Accounting Pronouncement," there have been no new accounting
pronouncements or changes to accounting pronouncements during the nine months
ended September 30, 2020 , as compared to the recent accounting pronouncements
described in our Annual Report on Form 10-K for the year ended December 31,
2019 , as filed with the SEC on February 27, 2020 , that are of significance or
potential significance to us.
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