10-Q 1 dnli-20220331.htm 10-Q dnli-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38311
Denali Therapeutics Inc.
(Exact name of registrant as specified in its charter)
Delaware46-3872213
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
161 Oyster Point Blvd.
South San Francisco, CA, 94080
(Address of principal executive offices and zip code)
(650) 866-8548
(Registrant’s telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareDNLINASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
The number of outstanding shares of the registrant’s common stock as of April 28, 2022 was 122,948,380.




TABLE OF CONTENTS

Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
Denali Therapeutics Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)

March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$104,953 $293,477 
Short-term marketable securities852,569 571,930 
Cost sharing reimbursements due from related party 1,226 
Prepaid expenses and other current assets30,914 30,601 
Total current assets988,436 897,234 
Long-term marketable securities250,268 425,449 
Property and equipment, net37,679 38,865 
Operating lease right-of-use asset30,263 30,743 
Other non-current assets14,212 11,871 
Total assets$1,320,858 $1,404,162 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$3,358 $4,779 
Cost sharing payments due to related party2,713  
Accrued compensation5,844 19,013 
Accrued clinical and other research & development costs19,283 15,887 
Accrued manufacturing costs11,366 9,955 
Other accrued costs and current liabilities2,390 2,857 
Operating lease liability, current5,659 5,453 
Related party contract liability, current290,627 292,386 
Contract liabilities, current 27,915 
Total current liabilities341,240 378,245 
Related party contract liability, less current portion828 1,295 
Contract liabilities, less current portion3,398 3,398 
Operating lease liability, less current portion57,086 58,554 
Other non-current liabilities379 379 
Total liabilities402,931 441,871 
Commitments and contingencies (Note 7)
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 40,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021
  
Common stock, $0.01 par value; 400,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 122,857,908 shares and 122,283,305 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
1,554 1,548 
Additional paid-in capital1,635,840 1,608,238 
Accumulated other comprehensive loss(9,251)(2,499)
Accumulated deficit(710,216)(644,996)
Total stockholders' equity917,927 962,291 
Total liabilities and stockholders’ equity$1,320,858 $1,404,162 
See accompanying notes to unaudited condensed consolidated financial statements.
3

Denali Therapeutics Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands, except share and per share amounts)

Three Months Ended March 31,
20222021
Collaboration revenue:
Collaboration revenue from customers(1)
$42,141 $7,922 
Other collaboration revenue 1 
Total collaboration revenue42,141 7,923 
Operating expenses:
Research and development(2)
86,098 60,207 
General and administrative22,541 18,936 
Total operating expenses108,639 79,143 
Loss from operations(66,498)(71,220)
Interest and other income, net1,278 1,179 
Net loss(65,220)(70,041)
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable securities, net of tax(6,752)13 
Comprehensive loss$(71,972)$(70,028)
Net loss per share, basic and diluted$(0.53)$(0.58)
Weighted average number of shares outstanding, basic and diluted122,673,935120,884,665
__________________________________________________
(1)Includes related party collaboration revenue from a customer of $2.2 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively.
(2)Includes expense for cost sharing payments to a related party of $2.7 million for the three months ended March 31, 2022, and an offset to expense from related party cost sharing reimbursements of $2.5 million for the three months ended March 31, 2021.

See accompanying notes to unaudited condensed consolidated financial statements.
 

4


Denali Therapeutics Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)    
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at December 31, 2021122,283,305 $1,548 $1,608,238 $(2,499)$(644,996)$962,291 
Issuances under equity incentive plans
151,419 2 1,461 — — 1,463 
Vesting of restricted stock units
423,184 4 (4)— —  
Stock-based compensation
— — 26,145 — — 26,145 
Net loss
— — — — (65,220)(65,220)
Other comprehensive loss— — — (6,752)— (6,752)
Balance at March 31, 2022122,857,908 $1,554 $1,635,840 $(9,251)$(710,216)$917,927 
Balance at December 31, 2020120,531,333 $1,531 $1,503,660 $(245)$(354,415)$1,150,531 
Issuances under equity incentive plans334,634 3 3,819 — — 3,822 
Vesting of restricted stock units281,465 3 (3)— —  
Stock-based compensation— — 21,028 — — 21,028 
Net loss— — — — (70,041)(70,041)
Other comprehensive income— — — 13 — 13 
Balance at March 31, 2021121,147,432 $1,537 $1,528,504 $(232)$(424,456)$1,105,353 
See accompanying notes to unaudited condensed consolidated financial statements.
5

Denali Therapeutics Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

Three Months Ended
March 31,
20222021
Operating activities
Net loss$(65,220)$(70,041)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,079 2,108 
Stock–based compensation expense26,145 21,028 
Net amortization of premiums on marketable securities1,627 1,161 
Non-cash adjustment to operating lease expense(783)(691)
Other non-cash items (2)
Changes in operating assets and liabilities:
Prepaid expenses and other assets1,242 6,301 
Accounts payable1,248 623 
Accruals and other current liabilities(8,306)(10,804)
Contract liabilities(27,915)969 
Related party contract liability(2,226)(892)
Net cash used in operating activities(72,109)(50,240)
Investing activities
Purchases of marketable securities(364,337)(463,105)
Purchases of property and equipment(4,041)(2,800)
Maturities and sales of marketable securities250,500 440,500 
Net cash used in investing activities(117,878)(25,405)
Financing activities
Proceeds from exercise of awards under equity incentive plans1,463 3,822 
Net cash provided by financing activities1,463 3,822 
Net decrease in cash, cash equivalents and restricted cash(188,524)(71,823)
Cash, cash equivalents and restricted cash at beginning of period294,977 508,644 
Cash, cash equivalents and restricted cash at end of period$106,453 $436,821 
Supplemental disclosures of cash flow information
Property and equipment purchases accrued but not yet paid$114 $ 

See accompanying notes to unaudited condensed consolidated financial statements.
6

Denali Therapeutics Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.    Significant Accounting Policies
Organization and Description of Business

Denali Therapeutics Inc. ("Denali" or the “Company”) is a biopharmaceutical company, incorporated in Delaware, that discovers and develops therapeutics to defeat neurodegenerative diseases. The Company is headquartered in South San Francisco, California.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information.

These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on February 28, 2022 (the "2021 Annual Report on Form 10-K"). The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the audited annual consolidated financial statements as of and for the period then ended. Certain information and footnote disclosures typically included in the Company's annual consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards, if any, discussed below. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

During the three months ended March 31, 2022 there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2021 Annual Report on Form 10-K. For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Significant Accounting Policies," to the Company’s Consolidated Financial Statements included in the 2021 Annual Report on Form 10-K.
Principles of Consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. For the Company and its subsidiaries, the functional currency has been determined to be U.S. dollars. Monetary assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates, non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates, and transactions in foreign currencies are remeasured at average exchange rates. Foreign currency gains and losses resulting from remeasurement are recognized in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to the Condensed Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss.
Reclassifications

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications have not materially affected previously reported amounts.
Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and forward foreign currency exchange contracts. Substantially all of the Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government and its agencies, as well as institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities and issuers of marketable securities to the extent recorded on the Condensed Consolidated Balance Sheets. As of March 31, 2022 and December 31, 2021, the Company had no off-balance sheet concentrations of credit risk.

The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintains strict counterparty credit guidelines and enters into hedges only with financial institutions that are investment grade or better to minimize the Company’s exposure to potential defaults. The Company does not require collateral to be pledged under these agreements.

The Company is subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical testing or clinical trials, its reliance on third parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under any license or collaboration agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability. Further, the company is also subject to broad market risks and uncertainties resulting from recent events, such as the COVID-19 pandemic and the Russian invasion of Ukraine.
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Segments

The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources.
Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash equivalents are reported at fair value.

Cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Statements of Cash Flows is composed of Cash and Cash equivalents reported in the Condensed Consolidated Balance Sheets and $1.5 million of restricted cash for the letter of credit for the Company’s headquarters building lease, which is included within other non-current assets in the Condensed Consolidated Balance Sheets.
Marketable Securities

The Company generally invests its excess cash in money market funds and investment grade short to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities, or long-term marketable securities on the Condensed Consolidated Balance Sheets, are considered available-for-sale, and reported at fair value with net unrealized gains and losses included as a component of stockholders’ equity.

The Company classifies investments in securities with remaining maturities of less than one year, or where its intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments. The Company classifies investments in securities with remaining maturities of over one year as long-term investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Realized gains and losses and declines in value determined to be due to credit losses on marketable securities, if any, are included in interest and other income, net.

The Company periodically evaluates the need for an allowance for credit losses. This evaluation includes consideration of several qualitative and quantitative factors, including whether it has plans to sell the security, whether it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis, and if the entity has the ability and intent to hold the security to maturity, and the portion of any unrealized loss that is the result of a credit loss. Factors considered in making these evaluations include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, expected cash flows from securities, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and the Company's strategy and intentions for holding the marketable security.
Accounts Receivable

Accounts receivable are included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The accounts receivable balance represents amounts receivable from the Company's collaboration partners, excluding related parties, net of an allowance for credit losses, if required.
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Derivatives and Hedging Activities
The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within prepaid expenses and other current assets and other accrued costs and current liabilities, respectively, on the Condensed Consolidated Balance Sheets. Derivatives are adjusted to fair value through interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Leases

The Company leases real estate, and certain equipment for use in its operations. A determination is made as to whether an arrangement is a lease at inception. A right-of-use (“ROU”) asset and operating lease liability is recognized for identified operating leases in the Condensed Consolidated Balance Sheets. The changes in operating lease ROU assets and operating lease liabilities are presented net within non-cash adjustment to operating lease expense in the Condensed Consolidated Statements of Cash Flows.

ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease 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, the Company uses its incremental borrowing rate on the date of lease commencement, or the rate implicit in the lease, if known. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed by management to be reasonably certain at lease inception.

Leases with an initial term of 12 months or less are not recorded on the balance sheet, unless they include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes lease expenses on a straight-line basis over the lease term. The Company has leases with lease and non-lease components, which the Company has elected to account for as a single lease component.
Revenue Recognition

License, Option and Collaboration Revenue

The Company analyzes its 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, the Company first determines 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. 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.
10

The terms of license, option and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front license fees; option exercise 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. The Company 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.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Condensed Consolidated Balance Sheets. If the related performance obligation is expected to be satisfied within the next 12 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 the Company's Condensed Consolidated Balance Sheets. If the Company expects to have an unconditional right to receive the consideration in the next 12 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, the Company assesses the goods or services promised in a contract with a customer and identifies 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.

The Company considers the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects 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, the Company uses its best estimate of the SSP for the deliverable.

Revenue is recognized when, or as, the Company satisfies 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. The Company recognizes revenue over time by measuring the progress toward 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.
11

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.

Management 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.
Comprehensive Loss

Comprehensive loss is composed of net loss and certain changes in stockholders’ equity that are excluded from net loss, primarily unrealized gains or losses on the Company’s marketable securities.
Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented.
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2.    Fair Value Measurements
Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands):
March 31, 2022
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$53,888 $ $ $53,888 
U.S. government treasuries10,013   10,013 
Commercial paper 29,985  29,985 
Short-term marketable securities:
U.S. government treasuries699,296   699,296 
Corporate debt securities 72,141  72,141 
Commercial paper 81,132  81,132 
Long-term marketable securities:
U.S. government treasuries223,055   223,055 
Corporate debt securities 27,213  27,213 
Total$986,252 $210,471 $ $1,196,723 
Liabilities:
Foreign currency derivative contracts$ $44 $ $44 
Total$ $44 $ $44 
December 31, 2021
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$265,294 $ $ $265,294 
Short-term marketable securities:
U.S. government treasuries450,436   450,436 
Corporate debt securities 70,009  70,009 
Commercial paper 51,485  51,485 
Long-term marketable securities:
U.S. government treasuries410,147   410,147 
Corporate debt securities 15,302  15,302 
Total$1,125,877 $136,796 $ $1,262,673 
Liabilities:
Foreign currency derivative contracts$ $111 $ $111 
Total$ $111 $ $111 
The carrying amounts of prepaid expenses and other current assets, accounts payable, cost sharing payments due to or from a related party and accrued liabilities approximate their fair values due to their short-term maturities.

The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly.
The Company has not transferred any assets or liabilities between the fair value measurement levels.
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3.    Marketable Securities
All marketable securities were considered available-for-sale at March 31, 2022 and December 31, 2021. On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements". The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):
March 31, 2022
Amortized CostUnrealized Holding GainsUnrealized Holding LossesAggregate Fair Value
Short-term marketable securities:
U.S. government treasuries(1)
$703,031 $ $(3,735)$699,296 
Corporate debt securities(2)
72,422  (281)72,141 
Commercial paper
81,132   81,132 
Total short-term marketable securities
856,585  (4,016)852,569 
Long-term marketable securities:
U.S. government treasuries(3)
227,708  (4,653)223,055 
Corporate debt securities(4)
27,443  (230)27,213 
Total long-term marketable securities
255,151  (4,883)250,268 
Total
$1,111,736 $ $(8,899)$1,102,837 
__________________________________________________
(1)Unrealized holding losses on 43 securities with an aggregate fair value of $699.3 million.
(2)Unrealized holding losses on 19 securities with an aggregate fair value of $68.6 million.
(3)Unrealized holding losses on 18 securities with an aggregate fair value of $223.1 million.
(4)Unrealized holding losses on 5 securities with an aggregate fair value of $27.2 million.

December 31, 2021
Amortized CostUnrealized Holding GainsUnrealized Holding LossesAggregate Fair Value
Short-term marketable securities:
U.S. government treasuries(1)
$450,689 $ $(253)$450,436 
Corporate debt securities(2)
70,076 1 (68)70,009 
Commercial paper
51,485   51,485 
Total short-term marketable securities
572,250 1 (321)571,930 
Long-term marketable securities:
U.S. government treasuries(3)
411,904  (1,757)410,147 
Corporate debt securities(4)
15,373  (71)15,302 
Total long-term marketable securities
427,277  (1,828)425,449 
Total
$999,527 $1 $(2,149)$997,379 
__________________________________________________
(1)Unrealized holding losses on 19 securities with an aggregate fair value of $450.4 million.
(2)Unrealized holding losses on 16 securities with an aggregate fair value of $68.5 million.
(3)Unrealized holding losses on 16 securities with an aggregate fair value of $410.1 million.
(4)Unrealized holding losses on 6 security with an aggregate fair value of $15.3 million.

As of March 31, 2022 and December 31, 2021, some of the Company's marketable securities were in an unrealized loss position. The Company has not recognized an allowance for credit losses as of March 31, 2022 or December 31, 2021. The Company determined that it had the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery. Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions. All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than 12 months or the loss is not material.
14


All of the Company’s marketable securities have an effective maturity of less than two years.
4.    Derivative Financial Instruments
Foreign Currency Exchange Rate Exposure

The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portions of the Company’s forecasted cash flows being denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in interest and other income, net, on the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss.

The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.
The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of March 31, 2022 and December 31, 2021, respectively (notional amounts in thousands):
Foreign Exchange ContractsNumber of Contracts
Aggregate Notional(1) Amount in Foreign Currency
Maturity
Euros
3 150 Apr 2022 - Jun 2022
British Pounds
3 300 Apr 2022 - Jun 2022
Total at March 31, 2022
6 
Euros
7 800 Jan 2022 - Jun 2022
British Pounds
6 900 Jan 2022 - Jun 2022
Total at December 31, 2021
13 
_________________________________________________
(1) The notional amount represents the net amount of foreign currency that will be received upon maturity of the forward contracts.
5.    Collaboration Agreements
Biogen

In August 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Biogen Collaboration Agreement”) with Biogen Inc.’s subsidiaries, Biogen MA Inc. (“BIMA”) and Biogen International GmbH (“BIG”) (BIMA and BIG, collectively, “Biogen”), which expired in October 2020 upon the execution of a Definitive LRRK2 Collaboration and License Agreement (“LRRK2 Agreement”) with Biogen on October 4, 2020 and a Right of First Negotiation, Option and License Agreement (the “ROFN and Option Agreement”) on October 6, 2020 (collectively, the "Biogen Collaboration Agreement"). The details of the Provisional Biogen Collaboration Agreement and the Biogen Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Biogen, and no change in the transaction price for the Biogen Collaboration Agreement has been recorded during the three months ended March 31, 2022.
15

A related party contract liability of $291.5 million and $293.7 million was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. Approximately $288.9 million of the March 31, 2022 contract liability relates to the revenue allocated to the material right for an option under the ROFN and Option Agreement which is being deferred until resolution of the option, which is expected to be within one year of the balance sheet date, and $2.6 million of this contract liability relates to the portion of the Option Research Services performance obligation yet to be satisfied, with such amount to be recognized over the estimated period of the services, which is expected to be more than one year. Expenses for cost sharing payments for LRRK2 Development Activities of $2.7 million were recorded as research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, with the same amount recorded as cost sharing payments due to related party on the Condensed Consolidated Balance Sheets as of March 31, 2022. The Company recorded $2.5 million of cost sharing reimbursements for LRRK2 Development Activities as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2021, and $1.2 million was recorded as cost sharing reimbursements due from related party on the Condensed Consolidated Balance Sheets as of December 31, 2021.

As of March 31, 2022, the Company had not achieved any milestones or recorded any product sales under the Biogen Collaboration Agreement.
Sanofi

In October 2018, the Company entered into a Collaboration and License Agreement ("Sanofi Collaboration Agreement") with Genzyme Corporation, a wholly owned subsidiary of Sanofi S.A. ("Sanofi"). The details of the Sanofi Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Sanofi, and the transaction price of the Sanofi Collaboration Agreement did not change during the three months ended March 31, 2022 or 2021.

A contract liability of $3.4 million was recorded on the Condensed Consolidated Balance Sheets as of both March 31, 2022 and December 31, 2021. This contract liability relates to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years. The Company recorded no receivable associated with the Sanofi Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. In April 2022, Sanofi commenced dosing in a Phase 2 study of SAR3820/DNL788 in patients with ALS, triggering a $40.0 million milestone which is due in May 2022.

As of March 31, 2022, the Company had earned milestone payments of $25.0 million and had not recorded any product sales under the Sanofi Collaboration Agreement.
Takeda
Takeda Collaboration Agreement

In January 2018, the Company entered into a Collaboration and Option Agreement ("Takeda Collaboration Agreement") with Takeda Pharmaceutical Company Limited ("Takeda"). The details of the Takeda Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. In March 2022, Takeda and the Company agreed to terminate activity on the ATV:Tau program over which Takeda had an option to develop and commercialize jointly with the Company. As a result of this decision, total preclinical milestone payments that Takeda may owe was reduced to $55.0 million, of which $43.0 million has been received as of March 31, 2022.
16

A contract liability of $27.9 million was recorded on the Condensed Consolidated Balance Sheets as of December 31, 2021 relating to the remaining Tau program services. As a result of the decision to terminate the ATV:Tau program, the performance obligation related to ATV:Tau was considered fully satisfied, and the contract liability was recognized in its entirety within collaboration revenue from customers in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022.

The transaction price of the Takeda Collaboration Agreement increased by $12.0 million during the three months ended March 31, 2022, due to a preclinical milestone being unconstrained. This milestone was triggered by the January 2022 approval of the clinical trial application for TAK-594/DNL593 ("PTV:PGRN") by the Medicines and Healthcare products Regulatory Agency in the UK, and the milestone payment was received in February 2022. There was no contract liability or receivable associated with the Takeda Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no receivable as of December 31, 2021. The Company has no remaining performance obligations under the Takeda Collaboration Agreement, and accordingly the $12.0 million was recorded as collaboration revenue from customers in the three months ended March 31, 2022.

PTV:PGRN and ATV:TREM2 Collaboration Agreements
Opt-in by Takeda on the PTV:PGRN and ATV:TREM2 programs represented two new contracts with a customer for accounting purposes (the "PTV:PGRN Collaboration Agreement" and the "ATV:TREM2 Collaboration Agreement"), both effective in December 2021. The details of the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
During the first quarter of 2022, there were no changes to the terms of either the PTV:PGRN Collaboration Agreement or the ATV:TREM2 Collaboration Agreement, and there was no change in the transaction price of either agreement during the three months ended March 31, 2022. Under the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement, Takeda may be obligated to pay the Company up to an aggregate of $280.0 million upon achievement of certain clinical milestone events and up to an aggregate of $200.0 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 the Company up to $75.0 million per biologic product upon achievement of a certain sales-based milestone, or an aggregate of $150.0 million if one biologic product from each program achieves this milestone.
The Company recorded $2.9 million and $2.1 million of cost sharing reimbursements for PTV:PGRN and ATV:TREM2 Development Activities, respectively, as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, the entirety of which is also recorded as a receivable within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet as of March 31, 2022.

As of March 31, 2022, the Company had earned $53.0 million in preclinical milestone and option fee payments from Takeda, and had not recorded any product sales under the Takeda Collaboration Agreement.
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Collaboration Revenue
Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands):
Three Months Ended March 31,
20222021
Takeda Collaboration Agreement:
Takeda Collaboration Agreement Services(1)
$39,916 $7,030 
Total Takeda Collaboration Revenue39,916 7,030 
Sanofi Collaboration Agreement
   Alzheimer's Disease Services(2)
 1 
Total Sanofi Collaboration Revenue 1 
Biogen Collaboration Agreement
Option Research Services(2)
2,225 892 
Total Biogen Collaboration Revenue2,225 892 
Total Collaboration Revenue$42,141 $7,923 
_________________________________________________
(1)$27.9 million and $5.7 million of revenue for the three months ended March 31, 2022 and March 31, 2021, respectively, was included in the contract liability balance at the beginning of the period.
(2)Revenue for the three months ended March 31, 2022 and March 31, 2021 represent amounts that were included in the contract liability balance at the beginning of the respective period.
6.     License Agreements
Genentech
In June 2016, the Company entered into an Exclusive License Agreement with Genentech, Inc. (“Genentech License Agreement”). The details of the Genentech License Agreement are further described in Note 7, License Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. No expenses were recorded associated with the Genentech License Agreement in the three months ended March 31, 2022 or 2021.
7.    Commitments and Contingencies
Lease Obligations
In May 2018, the Company entered into an operating lease for its corporate headquarters in South San Francisco (the "Headquarters Lease"), and in August 2021, the Company entered into an operating lease for laboratory, office and warehouse premises in Salt Lake City, Utah (“SLC Lease”). The details of both leases are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of either lease. Further, for accounting purposes, the SLC lease has not yet commenced as the landlord has not yet made the underlying asset available for use by Denali, and as such, no lease liability or ROU asset is recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no operating lease expense has been recorded for the three months ended March 31, 2022.
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Management exercised judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for the headquarters lease, the discount rate used to determine the measurement of the lease liability. The discount rate of our headquarters lease is an approximation of the Company's incremental borrowing rate and is dependent upon the term and economics of the agreement. To estimate the incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the headquarters lease agreement that may be indicative of the rate implicit in the lease.
The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating lease for the periods presented (in thousands):
Three Months Ended March 31,
20222021
Operating lease cost (1)
$2,863 $2,789 
Cash paid for amounts included in measurement of lease liability$2,618 $2,536 
As of March 31,
20222021
Weighted average remaining lease term7.1 years8.1 years
Weighted average discount rate9 %9 %
__________________________________________________
(1)Including variable and short-term lease costs
The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liability recorded in the Condensed Consolidated Balance Sheet as of March 31, 2022 (in thousands):
Year Ended December 31:
2022 (nine months)8,084 
202311,053 
202411,417 
202511,793 
202612,182 
Thereafter29,966 
Total undiscounted lease payments84,495 
Present value adjustment(21,750)
Net operating lease liabilities$62,745 
Sublease
In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") for space in the corporate headquarters. The details of the Sublease Agreement are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Sublease Agreement. Total sublease income, including rent and variable sublease cost reimbursements, was $1.0 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively.
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The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of March 31, 2022 (in thousands):
Year Ended December 31:
2022 (nine months)2,272 
20233,096 
2024876 
2025 and thereafter 
Total undiscounted sublease receipts$6,244 
Indemnification
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Loss, or Condensed Consolidated Statements of Cash Flows.
Commitments
Effective September 2017, the Company 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, the Company will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of the Company's 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 the later of September 6, 2022 or when all development and manufacturing services are completed.
As of March 31, 2022 and December 31, 2021, the Company had open purchase orders for biological product development and manufacturing costs totaling $44.6 million and $35.8 million, respectively. The activities under these purchase orders are expected to be completed by December 2025. As of March 31, 2022 and December 31, 2021, the Company had total non-cancellable purchase commitments under the DMSA of $35.2 million and $28.3 million, respectively.
During the three months ended March 31, 2022 and 2021, the Company incurred costs of $10.0 million and $5.2 million, respectively, and made payments of $8.7 million and $0.7 million, respectively, for the development and manufacturing services rendered under the DMSA.
Contingencies
From time to time, the Company may be involved in lawsuits, arbitration, claims, investigations and proceedings consisting of intellectual property, employment and other matters which arise in the ordinary course of business. The Company records accruals for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated.
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8.    Stock-Based Awards
The Company has issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 10, "Stock-Based Awards" to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
Stock Option Activity
The following table summarizes stock option activity for the three months ended March 31, 2022:
Number of Options
Weighted-Average
Exercise Price
Balance at December 31, 202113,686,386 $24.33 
Granted
1,830,168 46.67 
Exercised
(151,419)9.66 
Forfeited
(67,087)44.04 
Balance at March 31, 202215,298,048 $27.06 
Vested and expected to vest at March 31, 2022
13,562,353 $30.43 
Exercisable at March 31, 20229,017,879 $19.19 

The estimated fair value of stock options granted to employees were calculated using the Black-Scholes option-pricing model using the following assumptions:

Three Months Ended March 31,
20222021
Expected term (in years)
6.08
6.08
Volatility
65.5% - 66.1%
62.2% - 63.4%
Risk-free interest rate
1.5% - 1.8%
0.5% - 1.0%
Dividend yield
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Restricted Stock Activity
The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2022:
Number of RSU sharesWeighted-Average Fair Value at Date of Grant per Share
Unvested at December 31, 20212,629,980 $43.97 
Granted779,843 46.55 
Vested and released(423,184)43.80 
Forfeited(35,140)45.87 
Unvested at March 31, 20222,951,499 $44.65 
Expected to vest at March 31, 20222,951,499 $44.65 
Stock-Based Compensation Expense
The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands):
Three Months Ended March 31,
20222021
Research and development
$15,556 $12,314 
General and administrative
10,589 8,714 
Total
$26,145 $21,028 
9.    Net Loss Per Share
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
Three Months Ended March 31,
20222021
Options issued and outstanding and ESPP shares issuable
15,447,944 14,323,256 
Restricted shares subject to future vesting
2,951,499 2,699,107 
Total
18,399,443 17,022,363 
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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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;

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;

existing regulations and regulatory developments in the United States and foreign countries;

potential claims relating to our intellectual property and third-party intellectual property;
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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.
Overview

Our goal is to discover, develop and deliver 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;
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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. 

By executing this strategy with a team of experienced and passionately dedicated scientists and drug developers, we believe we can succeed in a field that has seen limited progress over the past several decades. We have a focused yet diversified portfolio with six clinical programs and more than fifteen programs in the preclinical development stage.

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 clinical-stage programs are:
our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, to be developed in collaboration with Biogen, to address Parkinson’s disease ("PD");

our ETV:IDS program, our lead brain-penetrant enzyme replacement therapy ("ERT"), enabled by our enzyme transport vehicle ("ETV"), which is designed to restore iduronate 2-sulfatase ("IDS"), and reduce glycosaminoglycans ("GAGs"), both peripherally and in the brain, in patients with mucopolysaccharidosis II ("MPS II", or "Hunter syndrome");

our eukaryotic initiation factor 2 B ("eIF2B") activator program to address diseases such as amyotrophic lateral sclerosis ("ALS") and frontotemporal dementia ("FTD");

our CNS-penetrant receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor program, partnered with Sanofi, to address neurological diseases such as ALS, multiple sclerosis ("MS") and Alzheimer's disease;
a second non-CNS penetrant RIPK1 inhibitor, partnered with Sanofi, to address peripheral inflammatory diseases such as cutaneous lupus erythematosus ("CLE") and ulcerative colitis ("UC"); and
our recombinant progranulin ("PGRN") biotherapeutic enabled by our protein transport vehicle ("PTV:PGRN"), to be developed in collaboration with Takeda, to address certain types of FTD, especially FTD-GRN caused by PGRN deficiency.

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The following table summarizes key information about our planned and ongoing clinical studies:
ProgramProduct CandidateClinical Study(ies)IndicationOperational Control
LRRK2BIIB122/DNL151
Ph 2b (planned)
PD
Joint with Biogen
Ph 3 (planned)
ETV:IDSDNL310
Ph 1/2
Hunter syndrome (MPS II)Denali
Ph 2/3 (planned)
eIF2BDNL343Ph 1bALSDenali
RIPK1 (CNS-penetrant)SAR443820/DNL788
Ph 2
ALS
Sanofi
Ph 2 (planned)
MS
Sanofi
RIPK1 (Peripheral)SAR443122/DNL758Ph 2
CLE
Sanofi
Ph 2 (planned)
UC
Sanofi
PTV:PGRN
TAK-594/DNL593Ph 1/2
FTD-GRN
Joint with Takeda
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.
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 2022 to date include:

In January 2022, we announced that Sanofi plans to initiate a Phase 2 trial of SAR443820/ DNL788 in MS, and a Phase 2 trial of SAR443122/ DNL758 in patients with UC;

In January 2022, we announced that the DNL919 (ATV:TREM2) IND application had been placed on clinical hold by the FDA. We received a formal clinical hold letter and are moving forward to address the FDA’s observations related to the preclinical toxicology assessment and to provide the information requested to initiate clinical studies, including proposed changes to the clinical trial protocol, the informed consent form, and the investigator brochure. We expect a delay of at least 3 months to our plans to begin dosing in a first-in-human clinical trial of DNL919. We intend to provide an update in the second half of 2022 once a clear path forward is established;

In January 2022, the clinical trial application ("CTA") for TAK-594/DNL593 (PTV:PGRN) was approved by the MHRA, triggering a $12.0 million milestone from Takeda which was received in February 2022;

In February 2022, we presented interim data from the Phase 1/2 clinical trial of DNL310 at the WORLDSymposium™ on lysosomal diseases. Longer-term data in 20 patients with MPS II continued to show sustained normalization of CSF heparan sulfate, consistent with durable CNS activity, with up to one year of intravenous dosing with DNL310. DNL310 remained generally well tolerated with a safety profile consistent with standard-of-care enzyme replacement therapy;

In March 2022, we announced the initiation of a Phase 1/2 Clinical Trial of TAK-594/DNL593 for Frontotemporal Dementia-Granulin (FTD-GRN). Pending initial clinical data from the Phase 1 healthy volunteer portion of the clinical trial, we expect to begin dosing individuals with FTD-GRN in the second half of 2022;
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In March 2022, we mutually agreed under the Takeda Collaboration Agreement to terminate activity on the ATV:Tau program over which Takeda had an option to develop and commercialize jointly with the Company;

In April 2022, our collaboration partner Sanofi commenced dosing in the HIMALAYA Phase 2 study of SAR3820/DNL788 expected to enroll approximately 260 participants with ALS, triggering a $40.0 million milestone which is due in May 2022; and

Effective May 1, 2022, Steve Krognes transitioned from his role as Chief Financial Officer to join the Company’s Board of Directors, and Alexander Schuth, M.D., former Chief Operating Officer and Secretary of the Company, added the Chief Financial Officer role to his responsibilities, becoming Denali’s Chief Operating and Financial Officer.

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, the sale of common stock in public offerings, and payments received from our collaboration agreements with Takeda, 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 $65.2 million and $70.0 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $710.2 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.
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 may 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, option exercise 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:
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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 external expenses 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 also incur personnel and other operating expenses for our research and development programs which are presented in aggregate. 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 and Takeda Collaboration Agreement, research and development expenses may include cost sharing reimbursements from or payments to our partner.

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 COVID-19 pandemic and the Russian invasion of Ukraine. 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;

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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.
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 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 three months ended March 31, 2022 and 2021

The following table sets forth the significant components of our results of operations (in thousands):
Three Months Ended March 31,Change
20222021$%
Collaboration revenue:
Collaboration revenue from customers
$42,141 $7,922 $34,219 *%
Other collaboration revenue
— (1)(100)
Total collaboration revenue
42,141 7,923 34,218 *
Operating expenses:
Research and development
86,098 60,207 25,891 43 
General and administrative
22,541 18,936 3,605 19 
Total operating expenses
108,639 79,143 29,496 37 
Loss from operations(66,498)(71,220)4,722 (7)
Interest and other income, net
1,278 1,179 99 
Net loss$(65,220)$(70,041)$4,821 (7)%
__________________________________________________
*Percentage is not meaningful.

Collaboration revenue. Collaboration revenue was $42.1 million and $7.9 million for the three months ended March 31, 2022 and 2021, respectively. The increase in collaboration revenue of $34.2 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to an increase in revenue from our collaborations with Takeda and Biogen of $32.9 million and $1.3 million, respectively. Takeda revenue for the three months ended March 31, 2022 is composed of $27.9 million recognized due to the performance obligation satisfaction associated with termination of the Tau program, and $12.0 million related to the milestone earned for approval of the CTA for TAK-594/DNL593 (PTV:PGRN).

Research and development expenses. Research and development expenses were $86.1 million and $60.2 million for the three months ended March 31, 2022 and 2021, respectively.

The following table summarizes our research and development expenses by program and category (in thousands):
Three Months Ended March 31,
20222021
LRRK2 program external expenses
$1,196 $2,376 
ETV:IDS program external expenses17,890 6,886 
eIF2B program external expenses3,935 4,340 
PTV program external expenses4,143 2,608 
TV platform and other program external expenses
8,489 4,875 
Other external research and development expenses
7,506 5,479 
Personnel related expenses(1)
36,064 27,767 
Other unallocated research and development expenses
9,148 8,387 
Net cost sharing payments (reimbursements)(2)
(2,273)(2,511)
Total research and development expenses
$86,098 $60,207 
__________________________________________________

(1)Personnel related expenses include stock-based compensation expense of $15.6 million and $12.3 million for the three months ended March 31, 2022 and 2021, respectively, reflecting an increase of $3.3 million.
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