The following discussion and analysis of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes to those statements included elsewhere in this
report. 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" and
elsewhere in this report.
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 blood-brain barrier ("BBB") and act directly in the brain; and


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•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 five 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 five clinical-stage programs are:

•our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, in collaboration with Biogen, to address Parkinson's disease;

•our Eukaryotic initiation factor 2 B ("EIF2B") activator program to address diseases such as amyotrophic lateral sclerosis ("ALS") and Frontotemporal Dementia ("FTD");

•our ETV:IDS program, our most advanced program enabled by our TV 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");

•our receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor program, partnered with Sanofi, to address neurological diseases such as Alzheimer's disease and ALS as well as multiple sclerosis ("MS"); and

•a second non-CNS penetrant RIPK1 inhibitor, partnered with Sanofi, to address peripheral inflammatory diseases such as cutaneous lupus.



The following table summarizes key information about our clinical stage
programs:

Program                         Product Candidate(s)                Clinical Phase                 Indication(s)                       Operational Control
LRRK2                           DNL151 (BIIB122)                    Ph 1 and Ph 1b                 Parkinson's disease                 Joint with Biogen
ETV:IDS                         DNL310                              Ph 1/2                         Hunter syndrome (MPS II)            Denali
EIF2B                           DNL343                              Ph 1                           ALS and FTD                         Denali
RIPK1 (Peripheral)              DNL758 (SAR443122)                  Ph 1b                          Systemic inflammatory               Sanofi
                                                                                                   diseases
RIPK1 (CNS)                     DNL788 (SAR443820)                  Ph 1                           Neurological 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 currently 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.

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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 for the year ended December 31, 2020
and in 2021 to date include:
•LRRK2
•In January 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 (BIIB122) 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;
•In August 2020, we entered into a binding Provisional Collaboration and License
Agreement with Biogen Inc.'s subsidiaries, Biogen MA Inc. ("BIMA") and Biogen
International GmbH ("BIG") (BIMA and BIG, collectively, "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 and excluding small molecules, AAVs
and oligonucleotides. In October 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 "Biogen Collaboration Agreement"). In connection
with the Biogen Collaboration Agreement, we received an equity investment of
$465.0 million in September 2020 and an aggregate of $560.0 million in upfront
payments in October 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;
•In August 2020, we announced, together with our collaboration partner Biogen,
the selection of DNL151 (BIIB122) to progress into late-stage development. We
expect to initiate late-stage clinical development of DNL151 (BIIB122) in
Parkinson's patients in the second half of 2021. Two clinical studies are
planned: one in patients who carry LRRK2 mutations and the other in Parkinson's
patients independent of mutation status;
•In January 2021, we announced completion of the DNL151 (BIIB122) Phase 1b trial
in Parkinson's patients. Target engagement and pathway engagement goals were
met. We are currently completing further dose escalation cohorts in an expanded
Phase 1 trial to define the full therapeutic window of DNL151 (BIIB122);
•ETV:IDS: In August 2020, we commenced dosing in a Phase 1/2 clinical trial of
DNL310 in Hunter syndrome patients. In November 2020, we announced biomarker
proof of concept was achieved in the Phase 1/2 trial after four weekly doses of
DNL310, and in February 2021, we announced additional positive interim results
after three months of dosing. Based on strong proof-of-concept data, we are
expanding our DNL310 development program in the ongoing Phase 1/2 trial, which
will enable further exploration of clinical endpoints related to neuronopathic
manifestations in patients. We plan to initiate a Phase 2/3 trial in the first
half of 2022;
•EIF2B: In February 2020, we initiated a Phase 1 clinical trial for DNL343 in
healthy volunteers. Results from this trial are expected to be available in the
first half of 2021. We plan to initiate a Phase 1b trial of DNL343 in patients
with ALS in the second half of 2021;
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•RIPK1
•In December 2020, our collaboration partner Sanofi commenced dosing of DNL788
(SAR443820), a potent, selective brain-penetrant small molecule inhibitor of
RIPK1, in a Phase 1 clinical trial in healthy volunteers. Earlier in 2020, we
decided, together with our collaboration partner Sanofi, to pause clinical
studies with DNL747 and focus our efforts on accelerating development of DNL788
(SAR443820), the backup molecule, which we believe has superior drug properties
and a more rapid path toward proof-of-concept clinical studies in patients in
multiple neurological indications;
•Separately, in July 2020, Sanofi commenced dosing of DNL758 (SAR443122), a
peripherally-restricted small molecule inhibitor of RIPK1, in a Phase 1b
clinical trial in hospitalized adult patients with severe COVID-19 lung disease.
The Phase 1b trial was completed and DNL758 (SAR443122) was found to be
generally well tolerated and resulted in changes in disease relevant biomarkers
and clinical outcome trends consistent with the proof of mechanism. Based on the
rapidly evolving landscape of treatment and prevention options for COVID-19,
Sanofi has made a sponsor decision to hold further development in COVID-19 at
this time. Sanofi plans to initiate a Phase 2 clinical trial of DNL758
(SAR443122) in patients with cutaneous lupus in the first half of 2021;
•Other
•In January 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;
•In December 2020 and January 2021, GLP toxicology studies were initiated for
PTV:PGRN and ATV:TREM2, respectively, triggering the second preclinical
milestone payments under the Takeda Collaboration Agreement of $8.0 million for
each program. The milestone payment for PTV:PGRN was received in January 2021;
•In January 2021, following achievement of human biomarker proof of concept with
DNL310 for Hunter syndrome, we announced the addition of five new
brain-penetrant enzyme replacement therapy programs in its ETV portfolio
including: (1) ETV:GBA for Gaucher disease and Parkinson's disease; (2) ETV:GAA
for Pompe disease; (3) ETV:IDUA for MPS I; (4) ETV:NAGLU for MPS IIIB; and (5)
ETV:ARSA for Metachromatic Leukodystrophy ("MLD"); 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 in March 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 IPO,
follow-on offering, and payments received from our collaboration agreements with
Takeda, Sanofi and Biogen.
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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. Due to revenue
recognized from our collaboration arrangement with Biogen, we had net income of
$71.1 million for the year ended December 31, 2020. Our net losses were $197.6
million and $88.2 million for the years ended December 31, 2019 and 2018,
respectively. As of December 31, 2020, we had an accumulated deficit of $354.4
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.
License and Collaboration Agreements
Takeda
In January 2018, we entered into the Collaboration Agreement with Takeda
("Takeda Collaboration Agreement") pursuant to which we granted Takeda an option
with respect to three of our programs to develop and commercialize, jointly with
us, certain biologic products that are enabled by our BBB delivery technology
and intended for the treatment of neurodegenerative disorders. The three
programs were our ATV:BACE1/Tau, ATV:TREM2 and PTV:PGRN programs. The Takeda
Collaboration Agreement became effective in February 2018 when the requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") were
satisfied. In February 2019, we amended the Takeda Collaboration Agreement to
replace the ATV:BACE1/Tau program with the ATV:Tau program.

Under the terms of the Takeda Collaboration Agreement, Takeda paid us a $40.0
million upfront payment, and is obligated to pay us up to an aggregate of $25.0
million with respect to each program under the Takeda Collaboration Agreement
directed to a target and based upon the achievement of certain preclinical
milestone events, up to $75.0 million in total, of which we have earned and
received $15.0 million to date. Takeda is also obligated to pay us a $5.0
million option fee for each target for which Takeda exercises its option, up to
$15.0 million in total.

Pursuant to the terms of the Takeda Collaboration Agreement, we entered into the
Purchase Agreement with Takeda in January 2018, pursuant to which we agreed to
issue and sell, and Takeda agreed to purchase, 4,214,559 shares of our common
stock for an aggregate purchase price of $110.0 million. We closed the sale of
the 4,214,559 shares of our common stock to Takeda on February 23, 2018.

After Takeda exercises its option for a particular target, we and Takeda will
share equally the development and commercialization costs, and, if applicable,
the profits, for each collaboration program. However, for each collaboration
program, we may elect not to continue sharing development and commercialization
costs, or Takeda may elect to terminate our cost-profit sharing rights and
obligations if, following notice from Takeda and a cure period, we fail to
satisfy our cost sharing obligations with respect to the relevant collaboration
program. After such an election by us or termination by Takeda becomes
effective, we will no longer be obligated to share in the development and
commercialization costs for the relevant collaboration program, and we will not
share in any profits from that collaboration program. Instead we will be
entitled to receive tiered royalties. The royalty rates will be in
the low- to mid-teen percentages on net sales, or low- to high-teen percentages
on net sales if we have met a certain co-funding threshold at the time of our
election to opt out of co-development or Takeda's termination of our cost-profit
sharing rights and obligations, and, in each case, these royalty rates will be
subject to certain reductions specified in the Takeda Collaboration Agreement.
Takeda will pay these royalties to us for each biologic product included in the
relevant collaboration program, on a country-by-country basis, until the latest
of (i) the expiration of certain patents covering the relevant biologic product,
(ii) the expiration of all regulatory exclusivity for that biologic product, and
(iii) an agreed period of time after the first commercial sale of that biologic
product in the applicable country, unless biosimilar competition in excess of a
significant level specified in the Takeda Collaboration Agreement occurs
earlier, in which case Takeda's royalty obligations in the applicable country
would terminate.
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In addition, if Takeda exercises its option for all three collaboration
programs, Takeda may be obligated to pay us up to an aggregate of $407.5 million
upon achievement of certain clinical milestone events and up to an aggregate of
$300.0 million in regulatory milestone events relating to receipt of regulatory
approval in the United States, certain European countries and Japan. Takeda may
also be obligated to pay us up to $75.0 million per biologic product upon
achievement of a certain sales-based milestone, or an aggregate of $225.0
million if one biologic product from each program achieves this milestone.
We have recognized collaboration revenue of $27.2 million, $5.9 million and $5.7
million associated with the Takeda Collaboration Agreement in the years ended
December 31, 2020, 2019 and 2018, respectively. We recorded a receivable of $8.0
million from Takeda as of December 31, 2020, payment for which was received in
January 2021, and no receivable as of December 31, 2019. Through December 31,
2020, we have received $15.0 million in preclinical milestone payments from
Takeda and have not recorded any product sales under the Takeda Collaboration
Agreement.
Sanofi

In October 2018, we entered into the Sanofi Collaboration Agreement with Sanofi
pursuant to which certain small molecule CNS and peripheral RIPK1 inhibitors
contributed by Sanofi and by us will be developed and commercialized. The Sanofi
Collaboration Agreement became effective in November 2018 when the HSR
requirements were satisfied. Under the terms of the Collaboration Agreement,
Sanofi paid us a $125.0 million upfront payment. Under the Sanofi Collaboration
Agreement, Sanofi is required to make milestone payments up to approximately
$1.1 billion upon achievement of certain clinical, regulatory and sales
milestone events. Such milestone payments include $215.0 million in clinical
milestone payments and $385.0 million in regulatory milestone payments for CNS
Products, as defined, that are developed and approved in the United States, by
the European Medicines Agency ("EMA") and in Japan for three indications,
including Alzheimer's disease. These milestones also include $120.0 million in
clinical milestone payments, $175.0 million in regulatory milestone payments and
$200.0 million in commercial milestone payments for Peripheral Products, as
defined, that are developed and approved in the United States, by the EMA and in
Japan for three indications. Through December 31, 2020, we have received
milestone payments of $10.0 million under the Sanofi Collaboration Agreement.
We will share profits and losses equally with Sanofi for CNS Products sold in
the United States and China, and receive royalties on net sales for CNS Products
outside of the United States and China and for Peripheral Products sold
worldwide, each as further described below. RIPK1 Inhibitors contributed by
Sanofi and developed and commercialized under the Sanofi Collaboration Agreement
will be subject to lower milestone and royalty payments to us compared to RIPK1
Inhibitors contributed by us. We will also retain responsibility for certain
payment obligations under our agreement with an academic institution which
licensed certain intellectual property to us that we are sublicensing to Sanofi
under the Sanofi Collaboration Agreement.

We and Sanofi will jointly develop CNS Products pursuant to a global development
plan. We will be responsible, at our cost, for the conduct of Phase 1 and Phase
2 trials for CNS Products for Alzheimer's disease and any activities required to
support such clinical trials and specific for Alzheimer's disease. Sanofi will
be responsible, at its cost, for all other Phase 1 and Phase 2 trials for CNS
Products, including for ALS and multiple sclerosis. Sanofi will lead the conduct
of all Phase 3 and later stage development trials for CNS Products, with Sanofi
funding 70% of such costs and us funding 30% of such costs. We have the ability
to opt out of the cost-profit sharing provisions of the Sanofi Collaboration
Agreement, as further described below.
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Sanofi will lead commercialization activities globally for CNS Products. We may
elect to conduct certain co-commercialization activities outside of MS with
respect to each CNS Product in the United States and/or China, provided that the
cost-profit sharing provisions of the Sanofi Collaboration Agreement for the
relevant CNS Product are still in effect, as further described below.

We may opt out of the cost-profit sharing provisions of the Sanofi Collaboration
Agreement for CNS Products in the United States and China on a CNS
Product-by-CNS Product and country-by-country basis. Sanofi may also terminate
our cost-profit sharing provisions of the Sanofi Collaboration Agreement in its
entirety if, following notice from Sanofi and a cure period, we fail to satisfy
our cost-sharing obligations. After such an opt out by us or termination by
Sanofi, we will no longer be obligated to share in the development and
commercialization costs for the applicable CNS Products and we will not share in
the applicable profits from such CNS Products. Instead, we will be entitled to
receive tiered royalties on net sales of the applicable CNS Products in the
relevant country (or countries). The royalty rates will be a percentage in the
low double digits to mid-teens, but may increase to the mid-teens to
low-twenties percentages for all countries in which Sanofi is paying royalties
on the applicable CNS products, if we have met certain co-funding thresholds at
the time of our election or Sanofi's termination of our cost-profit sharing
rights and obligations.

Sanofi will be responsible, at its cost, for conducting activities relating to
the development and commercialization of all Peripheral Products. Sanofi will
lead commercialization activities globally for Peripheral Products. We will be
entitled to receive tiered royalties in the low- to mid- teen percentages on net
sales of Peripheral Products.

We have recognized collaboration revenue of $1.1 million, $20.8 million and
$123.5 million associated with the Sanofi Collaboration Agreement in the years
ended December 31, 2020, 2019 and 2018, respectively, and recorded a receivable
from Sanofi of $44,303 and $1.2 million on the Consolidated Balance Sheets as of
December 31, 2020 and 2019, respectively. Through December 31, 2020, we have
received milestone payments of $10.0 million and have not recorded any product
sales under the Sanofi Collaboration Agreement.

Biogen



In August 2020, we entered into the Provisional Biogen Collaboration Agreement
with Biogen pursuant to which we granted Biogen a license to co-develop and
co-commercialize our LRRK2 Program, an option in respect of two Option Programs,
and a right of first negotiation with respect to the ROFN Programs should we
decide to seek a collaboration with a third party for such programs. In October
2020, we entered into the LRRK2 Agreement and the ROFN and Option Agreement with
Biogen. The material terms of the LRRK2 Agreement and the ROFN and Option
Agreement were consistent with, and superseded, the Provisional Biogen
Collaboration Agreement.

The LRRK2 Agreement



The LRRK2 Agreement includes our LRRK2 Products that penetrate the BBB,
including DNL201 and DNL151 (BIIB122), as well as those that do not penetrate
the BBB. Based on the totality of preclinical and clinical data to date, both
DNL201 and DNL151 (BIIB122) (two chemically distinct LRRK2 inhibitors) have met
our requirements to proceed into further late-stage clinical testing, however,
DNL151 (BIIB122) has been selected to proceed due to pharmacokinetic properties
that provide additional dosing regimen flexibility.
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Under the terms of the LRRK2 Agreement, Biogen paid us a $400 million upfront
payment in October 2020. With respect to the LRRK2 Program, Biogen is required
to make milestone payments up to approximately $1.125 billion upon achievement
of certain development and sales milestone events. Such milestone payments
include $375.0 million in development, $375.0 million upon first commercial
sale, and $375.0 million in net sales-based milestones. We will share profits
and losses equally with Biogen for LRRK2 Products in the United States and will
share profits and losses in China with Biogen sharing 60% of such profits and
losses and us sharing 40% of such profits and losses. We will be entitled to
receive royalties in the high teens to low twenties percentages on net sales for
LRRK2 Products outside of the United States and China.
We and Biogen will jointly develop LRRK2 Products pursuant to a clinical
development plan set forth in the LRRK2 Agreement. We and Biogen will share
responsibility and costs for global development of LRRK2 Products, with Biogen
funding 60% of such costs and us funding 40% of such costs. We have the ability
to opt out of the development cost sharing arrangement, as further described
below. Biogen will lead commercialization activities globally for LRRK2
Products. We will co-commercialize the LRRK2 Products with Biogen in the United
States and China, provided that the profit-sharing arrangement for the LRRK2
Products is still in effect, as further described below.

We may opt out of development cost sharing worldwide and upon such election, of
all further profit sharing from the LRRK2 Program. We also have the right to
opt-out of the profit-sharing arrangement for the LRRK2 Program or for only
those LRRK2 Products that do not penetrate the BBB ("Peripheral LRRK2
Products"), in each of the United States and China. After such an opt out, we
will no longer be obligated to share in the development and commercialization
costs for, and we will not share in the applicable revenues from, such LRRK2
Program (or from the Peripheral LRRK2 Products) in such country, as applicable.
In such cases, we will be entitled to receive tiered royalties on net sales of
the applicable LRRK2 Program in the relevant country (or countries). The royalty
rates for the applicable LRRK2 Program will be a percentage in the high teens to
low twenties, but may increase to the low twenties to mid-twenties, if we have
met certain co-funding thresholds or there has been a first commercial sale at
the time of our election.

The ROFN and Option Agreement

In addition to the LRRK2 Program, Biogen also received an exclusive option to
license two preclinical programs from our TV technology platform, including our
ATV:Abeta program and a second program utilizing our TV technology for an
unnamed target, excluding small molecules, AAVs and oligonucleotides. Biogen's
option may be triggered up to initiation of IND-enabling studies for each
program and continues for each program until a specified period of time after
delivery of an option data package or 30 business days after the 5th anniversary
of the effective date of the Provisional Biogen Collaboration Agreement,
whichever is earlier.

Further, Biogen will have the right of first negotiation on two additional
TV-enabled therapeutics in the field of Alzheimer's disease, Parkinson's
disease, ALS or multiple sclerosis should we decide to seek a collaboration with
a third party for such programs, but this does not include any of our small
molecule, AAVs and oligonucleotide programs. The ROFN period continues until
seven years after the effective date of the Provisional Biogen Collaboration
Agreement or the date on which we have offered Biogen two ROFN Programs and for
which Biogen has agreed to trigger a ROFN for such program, whichever is
earlier. However, if we do not execute an agreement with a third party with
respect to a particular ROFN Program offered to Biogen within a specified amount
of time, then Biogen will have one additional right to exercise the ROFN again
with respect to such ROFN Program.

Under the ROFN and Option Agreement, Biogen paid us a $160 million upfront
payment in October 2020. With respect to the options granted by us to Biogen,
Biogen is obligated to pay to us an aggregate of up to $270 million in option
exercise and development milestone payments and an aggregate of up to $615
million in commercial milestone payments, following the achievement of certain
prespecified milestone events and if Biogen exercises both of its options.
Furthermore, Biogen is obligated to pay us royalties in the mid-single digit to
mid-teens percentages, depending on the program for which Biogen exercises its
option and upon the achievement of certain sales thresholds.
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In addition, if Biogen exercises its ROFN with respect to an eligible Denali
program, the parties are obligated to negotiate in good faith for a specified
period of time regarding the financial and other terms of an agreement pursuant
to which Biogen would obtain rights to such program.
Common Stock Purchase Agreement

In August 2020, in connection with the Provisional Biogen Collaboration
Agreement, we entered into a common stock purchase agreement (the "Stock
Purchase Agreement") with BIMA, pursuant to which we agreed to issue and sell,
and BIMA agreed to purchase, 13,310,243 shares of our common stock (the
"Shares") for an aggregate purchase price of $465.0 million pursuant to the
terms and conditions thereof. The sale of the Shares closed, and payment was
received, in September 2020.

We have recognized related party collaboration revenue of $307.4 million and a
related party offset to research and development expense of $9.3 million in the
year ended December 31, 2020 associated with the Biogen Collaboration Agreement.
We have recorded cost sharing reimbursements due from Biogen of $5.7 million on
the consolidated balance sheet as of December 31, 2020. Through December 31,
2020, we have not received any milestone payments from Biogen and have not
recorded any product sales under the Biogen Collaboration Agreement.
F-star
In August 2016, we entered into a License and Collaboration Agreement ("F-star
Collaboration Agreement") with F-star Gamma Limited ("F-star
Gamma"), F-star Biotechnologische Forschungs-und Entwicklungsges m.b.H ("F-star
GmbH") and F-star Biotechnology Limited ("F-star Ltd") (collectively, "F-star").
The goal of the collaboration is the development of Fcabs to enhance delivery of
therapeutics across the BBB into the brain. The collaboration leverages F-star's
modular antibody technology and our expertise in the development of therapies
for neurodegenerative diseases. In connection with the entry into the F-star
Collaboration Agreement, we also purchased an option for an upfront option fee
of $0.5 million, or the buy-out option, to acquire all of the outstanding shares
of F-star Gamma pursuant to a pre-negotiated buy-out option agreement ("Option
Agreement").

In May 2018, we exercised such buy-out option and entered into a Share Purchase
Agreement (the "Purchase Agreement") with the shareholders of F-star Gamma and
Shareholder Representative Services LLC, pursuant to which we acquired all of
the outstanding shares of F-star Gamma (the "Acquisition").

As a result of the Acquisition, F-star Gamma became our wholly-owned subsidiary
and the entity's name was changed to Denali BBB Holding Limited. In addition, we
became a direct licensee of certain intellectual property of F-star Ltd by way
of our assumption of F-star Gamma's license agreement with F-star Ltd, dated
August 24, 2016, (the "F-star Gamma License"). We made initial exercise payments
of $18.0 million in aggregate under the Purchase Agreement and the F-star Gamma
License, less the net liabilities of F-star Gamma, which were approximately $0.2
million. In addition, we are required to make future contingent payments, to
F-star Ltd and the former shareholders of F-star Gamma, up to a maximum amount
of $447.0 million in the aggregate upon the achievement of certain defined
preclinical, clinical, regulatory and commercial milestones. These include up to
$27.0 million in preclinical contingent payments, $50.0 million in clinical
contingent payments, $120.0 million in regulatory contingent payments and $250.0
million in commercial contingent payments. The amount of the contingent payments
will vary based on whether F-star delivers an Fcab (constant Fc-domains with
antigen-binding activity) that meets pre-defined criteria and whether the Fcab
has been identified solely by us or solely by F-star Ltd. or jointly by us and
F-star Ltd. In June 2019, we made a payment of $1.5 million to F-star Ltd upon
the achievement of a specified preclinical milestone in our ETV:IDS program.
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Under the terms of the original F-star Collaboration Agreement, we could
nominate up to three Fcab targets ("Accepted Fcab Targets") within the first
three years of the date of the F-star Collaboration Agreement. Upon entering
into the F-star Collaboration Agreement, we selected transferrin receptor
("TfR") as the first Accepted Fcab Target and paid F-star Gamma an upfront fee
of $5.5 million, which included selection of the first Accepted Fcab Target. In
May 2018, we exercised our right to nominate two additional Fcab Targets and
identified a second Accepted Fcab Target. We made a one-time payment for the two
additional Accepted Fcab Targets of $6.0 million in the aggregate and extended
the time period for our selection of the third Accepted Fcab Target until
approximately the fourth anniversary of the date of the original F-star
Collaboration Agreement, or August 2020. We have not identified a third Fcab
Target.

We did not recognize any contingent consideration on the acquisition date. We
recognized $1.5 million and $18.3 million of consideration as research and
development expense in the years ended December 31, 2019 and 2018, respectively.
No research and development expense was recognized for consideration under the
F-star Purchase Agreement in the year ended December 31, 2020. $6.0 million for
the nomination of two additional Accepted Fcab Targets under the F-star
Collaboration Agreement was recognized as research and development expense in
the year ended December 31, 2018, along with the upfront option fee of $0.5
million previously included within other non-current assets. We recognized an
additional $1.2 million, $1.1 million and $0.8 million of research and
development expense related to the funding of F-star research costs for the
years ended December 31, 2020, 2019 and 2018, respectively.
Genentech

In June 2016, we entered into an Exclusive License Agreement with Genentech. The
agreement gives us access to Genentech's LRRK2 inhibitor program. As
consideration to date, we have paid Genentech $12.5 million in the aggregate,
including an upfront fee, a technology transfer fee and a clinical milestone
payment, all of which was recorded as research and development expense as
incurred. No amounts were recorded in the years ended December 31, 2020 or 2019.
The first clinical milestone payment of $12.5 million was recorded as research
and development expense during the year ended December 31, 2017.

We may owe Genentech milestone payments upon the achievement of certain
development, regulatory, and commercial milestones, up to a maximum of $315.0
million in the aggregate. These milestones include up to $37.5 million in
clinical milestone payments, $102.5 million in regulatory milestone payments and
$175.0 million in commercial milestone payments. In addition, we may owe
royalties on net sales of licensed products ranging from low to high
single-digit percentages, with the exact royalty rate dependent on various
factors, including (i) whether the compound incorporated in the relevant
licensed product is a Genentech-provided compound or a compound acquired or
developed by us, (ii) the date a compound was first discovered, derived or
optimized by us, (iii) the existence of patent rights covering the relevant
licensed product in the relevant country, (iv) the existence of orphan drug
exclusivity covering a licensed product that is a Genentech-provided compound
and (v) the level of annual net sales of the relevant licensed product. We also
have the right to credit a certain amount of third-party royalty and milestone
payments against royalty and milestone payments owed to Genentech, up to a
maximum reduction of fifty percent. Under the terms of our LRRK2 Agreement with
Biogen, Biogen is responsible for 50% of any payment obligation to Genentech
under this agreement accruing after October 2020.
Unless earlier terminated, the agreement with Genentech will continue in effect
until all of our royalty and milestone payment obligations to Genentech expire.
Following expiration of the agreement, we will retain the licenses under the
intellectual property Genentech licensed to us on a non-exclusive, royalty-free
basis.
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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 and license revenue from our
collaboration agreements with Takeda, Sanofi and Biogen.

In the future, we will continue to recognize revenue from the Takeda
Collaboration Agreement, Sanofi Collaboration Agreement, and 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.

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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.

Where we share costs with our collaboration partners, such as in our Biogen
Collaboration Agreement, research and development expenses may include cost
sharing reimbursements from or payments to our partner, respectively.
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.


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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.
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 expect to increase our
administrative headcount as we advance our product candidates through clinical
development, which will 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 years ended December 31, 2020 and 2019
The following table sets forth the significant components of our results of
operations (in thousands):
                                                      Year Ended
                                                     December 31,                  Change
                                                 2020           2019             $           %
    Collaboration revenue:
       Collaboration revenue from customers    335,561          26,320        309,241           *
    Other collaboration revenue                     98             358

(260) (73)


    Total Collaboration revenue                335,659          26,678        308,981           *

Operating expenses:


    Research and development                   212,615         193,382

19,233 10


    General and administrative                  60,326          46,480

13,846 30


    Total operating expenses                   272,941         239,862

33,079 14


    Income (loss) from operations               62,718        (213,184)       275,902           *
    Interest and other income, net               9,241          15,219

(5,978) (39)


    Income (loss) before income taxes           71,959        (197,965)       269,924           *
    Income tax (expense) benefit                  (823)            351     

   (1,174)          *
    Net income (loss)                         $ 71,136      $ (197,614)     $ 268,750           *  %

__________________________________________________


*   Percentage is not meaningful.
Collaboration revenue. Collaboration revenue was $335.7 million for the year
ended December 31, 2020 compared to $26.7 million recognized for the year ended
December 31, 2019. The increase of $309.0 million was primarily due to $307.4
million of revenue recognized under our Biogen Collaboration Agreement in 2020.
There was also an increase in revenue from our collaboration with Takeda of
$21.2 million driven by increased costs incurred in the programs partnered with
Takeda, partially offset by a decrease of $19.6 million in revenue from our
collaboration with Sanofi driven by a $10.0 million milestone recognized in the
year ended December 30, 2019 related to the Peripheral program and the winding
down of revenue for retained activities as activities are transferred to Sanofi.
Research and development expenses. Research and development expenses were $212.6
million for the year ended December 31, 2020 compared to $193.4 million for the
year ended December 31, 2019.
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The following table summarizes our research and development expenses by program
and category (in thousands):
                                                          Year Ended
                                                         December 31,                             Change
                                                    2020               2019                $                  %
LRRK2 program external expenses(1)              $  19,668          $  32,498          $ (12,830)              (39)     %
EIF2B program external expenses                     9,424              5,411              4,013                74
ETV:IDS program external expenses                  16,331             14,144              2,187                15
TV platform and other program external expenses    18,668             16,087              2,581                16
Other external research and development
expenses                                           26,509             30,011             (3,502)              (12)
Personnel related expenses(2)                      88,997             62,527             26,470                42
Other unallocated research and development
expenses                                           33,018             32,704                314                 1

Total research and development expenses $ 212,615 $ 193,382 $ 19,233

                10      %

__________________________________________________


(1)Includes an offset to expense due to related party cost reimbursement of $9.3
million.
(2)Personnel-related expenses include stock-based compensation expense of $29.0
million and $19.3 million for the years ended December 31, 2020 and 2019,
respectively, reflecting an increase of $ 9.7 million.

The increase in research and development expenses of approximately $19.2 million
for the year ended December 31, 2020 compared to the year ended December 31,
2019 was primarily attributable to the following:
•an increase of $26.4 million in personnel-related expenses, consisting of a
$16.7 million increase in salaries and related expenses attributable to an
increase in our research and development headcount, and a $9.7 million increase
in stock-based compensation expense primarily attributable to additional equity
award grants and our increasing market price;
•increases of $4.0 million and $2.2 million in EIF2B and ETV:IDS program
external expenses, respectively, reflecting the progress of these programs in
clinical trials during 2020;
•$2.6 million of increased TV platform and other program external expenses,
reflecting our increased investment in our pipeline, including the progress in
our PTV:PGRN and ATV:Trem2 programs as well our continued investment in
developing a deep pipeline; and
•$0.3 million of increased other unallocated research and development expenses,
which was primarily due to an increase in facilities-related expenses of $1.7
million resulting from increased rent expense associated with the new
headquarters lease, partially offset by a $0.7 million decrease in lab
consumable expenses, and a $0.7 million decrease in other general costs, such as
travel and IT related expenses attributable to our research and development
departments, both due to the impact of the COVID-19 pandemic.
These increases were partially offset by a decrease of $12.8 million in the
LRRK2 program external expenses primarily due to cost sharing reimbursements
from Biogen, and a $3.5 million decrease in other external research and
development expenses.
General and administrative expenses. General and administrative expenses were
$60.3 million for the year ended December 31, 2020 compared to $46.5 million for
the year ended December 31, 2019. The increase of $13.8 million was primarily
attributable to the following:
•$8.5 million of increased personnel-related expenses, driven by higher general
and administrative headcount and stock-based compensation expense associated
with additional equity award grants and our increasing market price;
• $3.4 million of increased legal and other professional services expenses,
primarily associated with the execution of the Biogen Collaboration Agreement;
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•$1.5 million of increased other general costs, primarily attributable to
insurance, tax and IT related expenses; and
• $0.4 million of increased facilities related expenses, including increased
rent expense associated with the new headquarters lease.

Interest and other income, net. Interest and other income, net was $9.2 million
for the year ended December 31, 2020 compared to $15.2 million for the year
ended December 31, 2019. The decrease of $6.0 million was primarily due to a
$7.0 million decrease in interest income earned on our investments due to
declining interest rates, partially offset by an increase of $1.0 million in
sublease income received in the year ended December 31, 2020 compared to the
year ended December 31, 2019.

Income tax (expense) benefit. There was $0.8 million income tax expense for the
year ended December 31, 2020 due to taxable income resulting from the Biogen
Collaboration Agreement, compared to $0.4 million income tax benefit for the
year ended December 31, 2019 associated with an unrealized gain on marketable
securities in other comprehensive income for the year ended December 31, 2019.
Comparison of the years ended December 31, 2019 and 2018
Refer to "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Results of Operations" in our 2019 Annual Report on
Form 10-K for a discussion of the results of operations for the year ended
December 31, 2019 compared to the year ended December 31, 2018.
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 with Takeda,
Sanofi and Biogen. On December 7, 2017, we completed our IPO pursuant to which
we issued 15,972,221 shares of our common stock, including 2,083,333 shares sold
pursuant the underwriters' full exercise of their option to purchase additional
shares, at a price of $18.00 per share. We received net proceeds of $264.3
million from our IPO in December 2017, net of underwriting discounts and
commissions, and offering expenses incurred by us.
Pursuant to the Takeda Collaboration Agreement, we have received $55.0 million
related to upfront and milestone payments through December 31, 2020. Further,
under the associated Purchase Agreement we received $110.0 million in February
2018 for the sale and issuance of 4,214,559 shares of our common stock.
Pursuant to the Sanofi Collaboration Agreement, we received an upfront payment
of $125.0 million in November 2018, and a milestone payment of $10.0 million in
August 2019, which was triggered by the commencement of a DNL758 (SAR443122)
Phase 1 clinical trial in healthy volunteers. We have received further payments
of $13.7 million for performance of Retained Activities through December 31,
2020.
In January 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 approximately $193.9 million.
Pursuant to the common stock purchase agreement between us and BIMA (the "Biogen
Stock Purchase Agreement"), we received $465.0 million on September 22, 2020 for
the sale and issuance of 13,310,243 shares of our common stock. In October 2020,
we received $560.0 million from Biogen in upfront payments associated with the
Biogen Collaboration Agreement. In December 2020, we received $3.6 million of
cost sharing reimbursements from Biogen.
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As of December 31, 2020, we had cash, cash equivalents and marketable securities
in the amount of $1.5 billion.
Future Funding Requirements
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.
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.
We have incurred significant net losses in every year since our inception until
the year ended December 31, 2020, including net losses $197.6 million, and $36.2
million for the years ended December 31, 2019 and 2018, respectively. We had net
income of $71.1 million for the year ended December 31, 2020, as a result of
revenue recognized associated with our collaboration arrangement with Biogen. We
have also experienced negative cash flow from operations in every year since our
inception, excluding the years ended December 31, 2020 and 2018, in which we
received significant cash inflows from collaboration partners. As of December
31, 2020, we had an accumulated deficit of $354.4 million. 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 the 12 months following the filing
date of this Form 10-K. 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;


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•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 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.
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):

                                                                      Year

Ended December 31,


                                                            2020               2019                2018

Net cash provided by (used in) operating activities $ 416,152 $ (151,576) $ 50,116 Net cash provided by (used in) investing activities (623,206)

            147,712            (287,422)
Net cash provided by financing activities                 634,749               6,190              97,019

Net increase (decrease) in cash, cash equivalents and restricted cash

$ 427,695

$ 2,326 $ (140,287)




Net Cash Provided By Operating Activities
During the year ended December 31, 2020, cash provided by operating activities
was $416.2 million, which consisted of net income of $71.1 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 most significantly an
increase in related party contract liability of $297.4 million associated with
the Biogen Collaboration Agreement.
Net Cash Used In Investing Activities
During the year ended December 31, 2020, cash used in investing activities was
$623.2 million, which primarily consisted of $1.3 billion of purchases of
marketable securities partially offset by $665.4 million in proceeds from the
maturity of marketable securities.
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Net Cash Provided By Financing Activities
During the year ended December 31, 2020, cash provided by financing activities
was $634.7 million, which consisted of $420.1 million associated with the
issuance of 13,310,243 shares of our common stock to BIMA in September 2020
under the Biogen Stock Purchase Agreement, $193.9 million in net cash proceeds
from our follow-on offering completed in January 2020, and $20.7 million the
proceeds from the exercise of options to purchase common stock and issuance of
shares pursuant to our employee stock purchase plan ("ESPP") shares.
Years ended December 31, 2019 and 2018
Refer to "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" in our 2019 Annual
Report on Form 10-K for a discussion of the cash flows for the years ended
December 31, 2019 and 2018.
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Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. Prior to our
acquisition of all of the outstanding shares of F-star Gamma, our F-star
Collaboration Agreement represented a variable interest in a variable interest
entity, or VIE, F-star Gamma. However, we did not consolidate F-star Gamma in
our consolidated financial statements because we had determined that we were not
considered to be its primary beneficiary.
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31,
2020 (in thousands):
                                                                      Less Than                                                                                More Than
                                              Total                    1 Year                         1-3 Years                       3-5 Years                 5 Years
Operating lease obligations (1)            $  97,726          $               10,391          $               21,814          $               23,271          $  42,250
Obligations under license and other
contractual agreements (2)                    31,953                          30,815                             348                             210                580
Total contractual obligations (3)          $ 129,679          $               41,206          $               22,162          $               23,481

$ 42,830

__________________________________________________


(1)Represents future minimum lease payments under our headquarters lease. The
minimum lease payments above do not include any related common area maintenance
charges or real estate taxes.
(2)Represents non-cancellable fees due in connection with license and other
contractual agreements, including those under the Lonza DMSA.
(3)We enter into contracts in the normal course of business, primarily with CROs
for preclinical research studies and clinical trials, or for other services or
supplies related to research and development activities. These contracts
generally provide for termination on notice, and no arrangements include
material stipulated commitment payments.

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 Sheet as of December 31, 2020. 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 December 31, 2020 and 2019, we had open purchase orders for biological
product development and manufacturing costs totaling $33.0 million and $21.2
million, respectively. The activities under these purchase orders are expected
to be completed by February 2028. As of December 31, 2020 and 2019, we had total
non-refundable purchase commitments of $27.1 million and $11.2 million,
respectively, under the DMSA.
During the years ended December 31, 2020 and 2019, we incurred costs of $10.8
million and $12.7 million, and made payments of $7.3 million and $12.5 million,
respectively, for the development and manufacturing services rendered under the
DMSA.
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Pursuant to certain license agreements, including our agreement with Genentech,
we have obligations to make future milestone and royalty payments to other
parties. Additionally, we have certain contingent payments to F-star and former
shareholders of F-star Gamma related to the acquisition of F-star Gamma, up to a
maximum amount of $447.0 million in the aggregate, as well as liabilities
associated with income taxes. However, we are unable to estimate the timing or
likelihood of these payments and, therefore, they are not included in the
estimates detailed above.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these 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 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. While our significant accounting policies are
described in more detail in the notes to our consolidated financial statements
included elsewhere in this report, we believe that the following accounting
policies are critical to understanding our historical and future performance, as
these policies relate to the more significant areas involving management's
judgments and estimates.
Revenue Recognition
License and Collaboration Revenue

We analyze our collaboration arrangements to assess whether they are within the
scope of ASC 808, Collaborative Arrangements ("ASC 808") to determine whether
such arrangements involve joint operating activities performed by parties that
are both active participants in the activities and exposed to significant risks
and rewards dependent on the commercial success of such activities. This
assessment is performed throughout the life of the arrangement based on changes
in the responsibilities of all parties in the arrangement. For collaboration
arrangements within the scope of ASC 808 that contain multiple elements, we
first determine which elements of the collaboration are deemed to be within the
scope of ASC 808 and those that are more reflective of a vendor-customer
relationship and, therefore, within the scope of Topic 606 Revenue from
Contracts with Customers ("Topic 606"). For elements of collaboration
arrangements that are accounted for pursuant to ASC 808, an appropriate
recognition method is determined and applied consistently, generally by analogy
to Topic 606. The accounting treatment pursuant to Topic 606 is outlined below.

The terms of licensing and collaboration agreements entered into typically
include payment of one or more of the following: non-refundable, up-front
license fees; development, regulatory and commercial milestone payments;
payments for manufacturing supply and research and development services; and
royalties on net sales of licensed products. Each of these payments results in
license, collaboration and other revenue, except for revenues from royalties on
net sales of licensed products, which are classified as royalty revenue. The
core principle of Topic 606 is to recognize revenue when promised goods or
services are transferred to customers in an amount that reflects the
consideration that is expected to be received in exchange for those goods or
services. We may also receive reimbursement or make payments to a collaboration
partner to satisfy cost sharing requirements. These payments are accounted for
pursuant to ASC 808 and are recorded as an offset or increase to research and
development expenses, respectively.

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In determining the appropriate amount of revenue to be recognized as we fulfill
our obligations under each of our agreements, we perform the following steps:
(i) identify the promised goods or services in the contract; (ii) determine
whether the promised goods or services are performance obligations including
whether they are distinct in the context of the contract; (iii) measure the
transaction price, including the constraint on variable consideration; (iv)
allocate the transaction price to the performance obligations based on estimated
selling prices; and (v) recognize revenue when (or as) we satisfy each
performance obligation.

We record amounts received prior to satisfying the revenue recognition criteria
as contract liabilities in our Consolidated Balance Sheets. If the related
performance obligation is expected to be satisfied within the next twelve months
this will be classified in current liabilities. Amounts recognized as revenue
prior to the Company having an unconditional right (other than a right that is
conditioned only on the passage of time) to receipt are recorded as contract
assets in our Consolidated Balance Sheets. If we expect to have an unconditional
right to receive the consideration in the next twelve months, this will be
classified in current assets. A net contract asset or liability is presented for
each contract with a customer.

At contract inception, we assess the goods or services promised in a contract
with a customer and identify those distinct goods and services that represent a
performance obligation. A promised good or service may not be identified as a
performance obligation if it is immaterial in the context of the contract with
the customer, if it is not separately identifiable from other promises in the
contract (either because it is not capable of being separated or because it is
not separable in the context of the contract), or if the promised good or
service does not provide the customer with a material right.

We consider the terms of the contract to determine the transaction price. The
transaction price is the amount of consideration to which we expect to be
entitled in exchange for transferring promised goods or services to a customer.
The consideration promised in a contract with a customer may include fixed
amounts, variable amounts, or both. Variable consideration will only be included
in the transaction price when it is not considered constrained, which is when it
is probable that a significant reversal in the amount of cumulative revenue
recognized will not occur.

If it is determined that multiple performance obligations exist, the transaction
price is allocated at the inception of the agreement to all identified
performance obligations based on the relative standalone selling prices ("SSP").
The relative SSP for each deliverable is estimated using external sourced
evidence if it is available. If external sourced evidence is not available, we
use our best estimate of the SSP for the deliverable.

Revenue is recognized when, or as, we satisfy a performance obligation by
transferring a promised good or service to a customer. An asset is transferred
when, or as, the customer obtains control of that asset, which for a service is
considered to be as the services are received and used. We recognize revenue
over time by measuring the progress toward our complete satisfaction of the
relevant performance obligation using an appropriate input or output method
based on the nature of the service promised to the customer.

After contract inception, the transaction price is reassessed at every period
end and updated for changes such as resolution of uncertain events. Any change
in the transaction price is allocated to the performance obligations on the same
basis as at contract inception, or to a single performance obligation as
applicable.

We may be required to exercise considerable judgment in estimating revenue to be
recognized. Judgment is required in identifying performance obligations,
estimating the transaction price, estimating the SSP of identified performance
obligations, which may include forecasted revenue, development timelines,
reimbursement rates for personnel costs, discount rates and probabilities of
technical and regulatory success, and estimating the progress towards
satisfaction of performance obligations.
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Research and Development Expenses
We record research and development expenses to operations as incurred. Research
and development expenses represent costs incurred by us for the discovery and
development of our product candidates and the development of our BBB platform
technology and include: employee-related expenses, including salaries, benefits,
travel and non-cash stock-based compensation expense; external research and
development expenses incurred under arrangements with third parties, such as
CROs, preclinical testing organizations, CDMOs, academic and non-profit
institutions and consultants; costs to acquire technologies to be used in
research and development that have not reached technological feasibility and
have no alternative future use; license fees; and other expenses, which include
direct and allocated expenses for laboratory, facilities and other costs. Where
we share costs with our collaboration partners, such as in our Biogen
Collaboration Agreement, research and development expenses may include cost
sharing reimbursements from or payments to our partner, respectively.
As part of the process of preparing financial statements, we are required to
estimate and accrue expenses. A portion of our research and development expenses
are external costs, which we track on a program-specific basis once a program
has commenced a late-stage IND-enabling study. We record the estimated expenses
of research and development activities conducted by third-party service
providers based upon the estimated amount of services provided within research
and development expense in the statements of operations and comprehensive loss.
These services include the conduct of preclinical studies and clinical trials,
contract manufacturing activities and consulting services. If the costs have
been prepaid, this expense reduces the prepaid expenses in the balance sheets,
and if not yet invoiced, the costs are included in accrued liabilities in the
balance sheets. These costs are a significant component of our research and
development expenses. We record amortization of prepaid expenses or accrued
expenses for these costs based on the estimated amount of work completed and in
accordance with agreements established with these third parties.
Costs for certain research and development activities are recognized based on an
evaluation of the progress to completion of specific tasks. We estimate the
amount of work completed through discussions with internal personnel and
external service providers as to the progress or stage of completion of the
services and the agreed-upon fee to be paid for such services. We make
significant judgments and estimates in determining the accrued balance in each
reporting period. As actual costs become known, we adjust our accrued estimates.
Although we do not expect our estimates to be materially different from amounts
actually incurred, our understanding of the status and timing of services
performed may vary from our estimates and could result in us reporting amounts
that are too high or too low in any particular period. Our accrued expenses are
dependent, in part, upon the receipt of timely and accurate reporting from
external clinical research organizations and other third-party service
providers. To date, we have not experienced material differences between our
accrued expenses and actual expenses. However, due to the nature of estimates,
we cannot assure you that we will not make changes to our estimates in the
future as we become aware of additional information about the status or conduct
of our clinical trials and other research activities.
Stock-Based Compensation
We have granted stock-based awards, consisting of stock options, restricted
stock units, restricted stock awards, and shares issued under its employee stock
purchase plan to our employees, certain non-employee consultants and certain
members of our board of directors. We measure compensation expense for all
stock-based awards at the grant date based on the fair value measurement of the
award, which for non-employee stock-based awards became effective subsequent to
the adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting on September 30, 2018. We recognize
the corresponding compensation expense of awards over the requisite service
period, which is generally the vesting period of the respective award, and we
adjust for actual forfeitures as they occur.
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We estimate the fair value of stock options granted to our employees and
directors and rights to acquire stock granted under our ESPP, and the resulting
stock-based compensation expense, using the Black-Scholes option-pricing model.
We use the fair value of our common stock to determine the fair value of
restricted stock awards.
The Black-Scholes option-pricing model requires the use of highly subjective
assumptions which determine the fair value of stock-based awards. These
assumptions include:

•Expected Term. Our expected term represents the period that our stock-based
awards are expected to be outstanding and is determined using the simplified
method (based on the mid-point between the vesting date and the end of the
contractual term), as we do not have sufficient historical data to use any other
method to estimate expected term.

•Expected Volatility. As we have very limited trading history of our common
stock, the expected volatility is estimated based on the average volatility for
comparable publicly traded biopharmaceutical companies over a period equal to
the expected term of the stock option grants. The comparable companies are
chosen based on their similar size, stage in the life cycle or area of
specialty.

•Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.



•Expected Dividend. We have never paid dividends on our common stock and have no
plans to pay dividends on our common stock. Therefore, we use an expected
dividend yield of zero.
Determination of the estimated fair value of our common stock on grant dates
prior to our IPO
As there was no public market for our common stock prior to our IPO, the
estimated fair value of our common stock was determined by our board of
directors, with input from management, considering our most recently available
third-party valuations of common stock and our board of directors' assessment of
additional objective and subjective factors that it believed were relevant, and
factors that may have changed from the date of the most recent valuation through
the date of the grant.
We periodically determined the estimated fair value of our common stock at
various dates using contemporaneous valuations performed in accordance with the
guidance outlined in the American Institute of Certified Public Accountants'
Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity
Securities Issued as Compensation ("Practice Aid"). In accordance with the
Practice Aid, our board of directors considered the Current Value Method, the
Option-Pricing Method, and the Probability-Weighted Expected Return Method in
estimating the fair value of our common stock.
Our board of directors and management developed best estimates based on
application of these approaches and the assumptions underlying these valuations,
giving careful consideration to the advice from our third-party valuation
expert. Such estimates involve inherent uncertainties and the application of
significant judgment. As a result, if factors or expected outcomes change and we
use significantly different assumptions or estimates, our equity-based
compensation could be materially different.
Determination of the fair value of our common stock on grant dates following our
IPO
The fair value of each share of underlying common stock is based on the closing
price of our common stock as reported by The NASDAQ Global Select Market on the
date of grant.
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In the past, we granted stock options that vest in conjunction with certain
performance and market conditions to certain key employees. These awards have
two separate market triggers for vesting based upon either (i) the successful
achievement of stepped target closing prices on a national securities exchange
for 90 consecutive trading days later than 180 days after the Company's initial
public offering for its common stock, or (ii) stepped target prices for a change
in control transaction. In the event that neither of these market triggers are
achieved by the specified timelines, such awards will terminate with respect to
that portion of the shares. Expense is recognized using the accelerated
attribution method and is recognized over the derived service period. We used a
lattice model with a Monte Carlo simulation to value these performance and
market contingent stock-based option awards. This valuation methodology utilized
the estimated fair value of our common stock on grant date and several key
assumptions, including expected volatility of our stock price based on
comparable public companies, risk-free rates of return and expected dividend
yield.
Stock-based compensation expense was $50.4 million, $38.4 million and $18.8
million for the years ended December 31, 2020, 2019, and 2018, respectively. As
of December 31, 2020, we had $125.4 million of total unrecognized stock-based
compensation expenses which we expect to recognize over a weighted-average
period of 2.8 years.
We have not recognized, and we do not expect to recognize in the near future,
any tax benefit related to employee stock-based compensation expense as a result
of the full valuation allowance on our deferred tax assets including deferred
tax assets related to our net operating loss carryforwards.

Leases


Effective January 1, 2019, we adopted Accounting Standards Codification ("ASC"),
Topic 842, Leases ("Topic 842"), applying the optional transition method such
that we are not required to adjust prior period presentations. ASU 2016-02 has
impacted our Consolidated Balance Sheets as we have certain operating lease
arrangements for which we are the lessee and one operating lease arrangement for
which we are the lessor. We have no financing leases. We elected the package of
practical expedients permitted under the transition guidance within the new
standard, which among other things, allows us to carryforward the historical
lease classification. The impact of adoption of the standard is that as of
January 1, 2019 we recognized a ROU asset of $46.1 million and operating lease
liability of $71.3 million. The standard did not have a material impact on our
Consolidated Statements of Operations and Comprehensive Loss, Consolidated
Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), or
Consolidated Statements of Cash Flows.
We make a determination as to whether an arrangement is a lease at inception. We
recognize a right-of-use ("ROU") asset and operating lease liability for
identified operating leases in the Consolidated Balance Sheets.

ROU assets represent our right to use the underlying assets for the lease term
and lease liabilities represent our obligation to make lease payments arising
from the lease. We recognize operating lease ROU assets and liabilities at
commencement date based on the present value of lease payments due over the
lease term, with the ROU assets adjusted for lease incentives received. When
determining the present value of lease payments, we use our incremental
borrowing rate ("IBR") on the date of lease commencement, or the rate implicit
in the lease, if known. We do not assume renewals or early terminations in our
determination of the lease term unless it is reasonably certain at lease
inception to exercise these options.

We do not include leases with an initial term of 12 months or less on the
balance sheet, unless they include an option to purchase the underlying asset
which is reasonably certain of exercise. We recognize lease expenses on a
straight-line basis over the lease term. We have leases with lease and non-lease
components, which we have elected to account for as a single lease component.
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Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in Part II, Item 8,
"Financial Statements and Supplementary Data," of this Annual Report on Form
10-K for a description of recent accounting pronouncements applicable to our
business.

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