What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-26 · 192 added, 278 removed, 282 unchanged (63% of the section changed)

3 unchanged sentences

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.

Our goal is to discover and develop therapeutics to defeat degeneration.

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:

3 unchanged sentences

• Engineering Brain Delivery :

We engineer our product candidates to cross the blood-brain barrier ("BBB") and act directly in the brain;

We engineer our product candidates to cross the BBB and act directly in the brain;

• 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.

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 five 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.

1 unchanged sentence

We are currently optimizing and broadening this platform technology.

Ou r five clinic al-stage programs are:

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

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 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”);

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

• 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.

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

LRRK2 BIIB122/DNL151 Ph 1 and Ph 1b complete PD 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 diseases Sanofi

RIPK1 (CNS) DNL788 (SAR443820) Ph 1 Neurological diseases Sanofi

eIF2B DNL343 Ph 1b (in ALS) ALS and FTD Denali

RIPK1 (CNS-penetrant) SAR443820/DNL788 Ph 1 complete Neurological diseases Sanofi

RIPK1 (Peripheral) SAR443122/DNL758 Ph 2 CLE 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.

3 unchanged sentences

Key operational and financing milestones for the year ended December 31, 2021 and in 2022 to date include:

◦ 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);

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;

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;

◦ 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;

◦ 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;

◦ In January 2021, we announced completion of the BIIB122/DNL151 Phase 1b study in Parkinson’s patients.

In March 2021, we completed our Phase 1 study of BIIB122/DNL151.

In May 2021, we presented results from both studies at the International Association of Parkinsonism and Related Disorders Virtual Congress held on May 1-4.

BIIB122/DNL151 was generally well tolerated, and target engagement and pathway engagement biomarker goals were met;

◦ In September 2021, at Biogen’s R&D Day event, we provided a progress update on our collaboration with Biogen to develop BIIB122/DNL151 for PD.

Together with Biogen, we highlighted data supporting the advancement to late-stage clinical development and ongoing start-up activities for BIIB122/DNL151 in preparation to commence PD studies.

As previously announced, two studies are planned:

one in participants with PD who do not carry a LRRK2 mutation and another in PD participants with LRRK2 mutations.

Biogen will lead operationalization and conduct of these studies;

◦ In February 2021, we reported three-month data from Cohort A (n=5) in a Phase 1/2 study of DNL310 in patients with Hunter syndrome.

The data showed that DNL310 treatment resulted in normalization of GAG levels in cerebrospinal fluid ("CSF") and a safety and tolerability profile consistent with standard of care ERT;

◦ In March 2021, we announced that the U.S.

Food and Drug Administration ("FDA") granted Fast Track designation to DNL310 for the treatment of patients with Hunter syndrome;

◦ In July 2021, we reported positive interim data from the Phase 1/2 study of ETV:IDS (DNL310) in patients with Hunter syndrome (MPS II).

The data demonstrated durability of effect with CNS impact, improved peripheral activity after switching from standard of care, and a safety profile consistent with standard of care enzyme replacement therapy.

Furthermore, initial indications of improved clinical symptoms and function, assessed as exploratory endpoints, were reported by investigators and parents in all five patients enrolled in Cohort A.

We also shared data from Cohort B, which is designed to inform dose selection;

exploratory biomarker data demonstrated activity of DNL310 across all dose regimens.

Based on these data, we began enrolling Cohort C in the Phase 1/2 study to further investigate clinical endpoints, and we plan to initiate a pivotal Phase 2/3 study of DNL310 in the first half of 2022;

◦ On February 10, 2022, we reported longer-term and additional patient data across Cohorts A and B in the ongoing Phase 1/2 clinical trial.

Longer-term data in 20 patients show sustained normalization to healthy levels of CSF heparan sulfate and improvements in markers of lysosomal function consistent with durable CNS activity, now with up to one year of intravenous dosing with DNL310.

Across Cohorts A (n=5) and B (n=15), all patients had normalized levels of heparan sulfate in CSF by Week 24 of treatment with DNL310, which were sustained in all 5 patients from Cohort A at Week 49.

Rapid response was observed in most patients after 4 to 6 weekly intravenous doses of DNL310, including in patients on lower dose regimens of DNL310.

Furthermore, the observed decline in urine and serum heparan sulfate was consistent with improved peripheral activity with DNL310.

These results are consistent with robust and efficient crossing of the BBB by DNL310 and durable activity in the CNS.

Furthermore, the observed decline in urine heparan and dermatan sulfate, as well as CSF dermatan sulfate, was consistent with increased peripheral and central activity with DNL310 compared to standard-of-care, respectively.

Exploratory lysosomal lipid biomarker data showed further reductions with longer duration of treatment with DNL310, consistent with improved lysosomal function.

Exploratory clinical outcomes data at Week 24 from Cohort A (n=5), and now including Cohort B (n=12;

3 of 15 total patients had not reached Week 24 at the time of the data cut in September 2021), suggest improved clinical symptoms and function in the majority of patients as reported by investigators and parents/caregivers.

The safety profile of DNL310, which included data up to Weeks 56 and 39 from Cohorts A and B, respectively, remained consistent with standard-of-care enzyme replacement therapy.

The safety profile of DNL310, which now includes data up to Weeks 56 and 39 from Cohorts A and B, respectively, remains consistent with standard-of-care enzyme replacement therapy.

DNL310 was generally well tolerated with the most common treatment-emergent adverse events being infusion-related reactions ("IRRs").

IRRs occurred in 15 of 20 (75%) patients;

◦ In October 2021, we presented results from a Phase 1 healthy volunteer study demonstrating that DNL343 met safety and biomarker goals.

The Phase 1 data supported initiation of a Phase 1b study in participants with ALS, which commenced dosing in August 2021;

◦ In June 2021, we announced that our collaboration partner Sanofi commenced dosing in a Phase 2 study of SAR443122/DNL758, a peripherally-restricted small molecule inhibitor of RIPK1, in patients with CLE, triggering a $15.0 million milestone which was received in July 2021;

◦ In October 2021, we announced that our collaboration partner Sanofi advanced development of SAR443820/DNL788 in ALS and that the U.S.

FDA granted SAR443820/DNL788 Fast Track designation for the potential treatment of ALS.

Results from a Phase 1 study of SAR443820/DNL788 in healthy volunteers demonstrated robust target engagement at doses that were generally well tolerated.

Sanofi plans to initiate the Phase 2 study in ALS, named HIMALAYA, in Q1 2022;

◦ In January 2022, we announced that Sanofi also plans to initiate a Phase 2 trial of SAR443820/ DNL788 in multiple sclerosis, and a Phase 2 trial of SAR443122/ DNL758 in patients with ulcerative colitis;

• PTV:PGRN and ATV:TREM2

◦ In January 2021, GLP toxicology studies were initiated for DNL919 (ATV:TREM2), triggering the second preclinical milestone payment under the Takeda Collaboration Agreement of $8.0 million, which was received in March 2021;

◦ In November 2021 and January 2022 we announced that Takeda exercised its options, pursuant to our existing collaboration agreement to co-develop and co-commercialize DNL593 (PTV:PGRN) and DNL919 (ATV:TREM2), respectively, triggering option exercise fees of $5.0 million for each program, which were both received in December 2021;

◦ On January 13, 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 once a clear path forward is established;

◦ In January 2022, the CTA for DNL593 was approved by the MHRA, t riggering a $12.0 million milestone from Takeda which was received in February 2022 .

We expect to commence dosing of DNL593 in healthy volunteers in a Phase 1/2 clinical trial in Q1 2022.

Pending initial clinical data from the Phase 1/2 study, we expect to begin dosing participants with FTD-GRN in the second half of 2022;

◦ 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 ERT programs in our ETV portfolio including:

(1) ETV:Gcase for Gaucher disease and Parkinson’s disease;

(2) ETV:GAA for Pompe disease;

2 unchanged sentences

and (5) ETV:ARSA for metachromatic leukodystrophy ("MLD");

◦ 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.

◦ In August 2021, we entered into a lease for approximately 65,000 square feet of laboratory, office and warehouse premises in Salt Lake City, Utah ("SLC lease").

The build-out of the Utah site to expand our clinical manufacturing capabilities for biologic therapeutics (large molecules) has been initiated.

We plan to use the premises for the manufacture of materials for toxicology studies and drug substance for early human clinical studies with the goal of increasing flexibility and speed in advancing new investigational therapies into 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.

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.

We had net losses of $290.6 million and $197.6 million for the years ended December 31, 2021 and 2019, respectively.

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, 2021, we had an accumulated deficit of $645.0 million.

9 unchanged sentences

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.

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 of the three programs 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 $31.0 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.

Option fees of $10.0 million were triggered in the year ended December 31, 2021 as a result of Takeda's opt-ins on the PTV:PGRN and ATV:TREM2 programs.

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.

8 unchanged sentences

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.

We have recognized collaboration revenue of $29.9 million, $27.2 million and $5.9 million associated with the Takeda Collaboration Agreement in the years ended December 31, 2021, 2020 and 2019, respectively, and an offset to research and development expense for cost sharing reimbursements of $13.7 million in the year ended December 31, 2021.

We recorded a receivable of $13.7 million and $8.0 million from Takeda as of December 31, 2021 and 2020, respectively.

Through December 31, 2021, we have received $31.0 million in preclinical milestone payments and $10.0 million of option exercise fees from Takeda and have not recorded any product sales under the Takeda Collaboration Agreement.

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.

5 unchanged sentences

Through December 31, 2021, we have received milestone payments of $25.0 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.

We will share profits and losses equally with Sanofi for CNS Products sold in the United States and China, and receive variable royalties on net sales for CNS Products sold 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.

1 unchanged sentence

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 will be responsible, at our cost, for conducting Phase 1 and Phase 2 trials for CNS Products in Alzheimer’s disease and any activities required to support such clinical trials and specific for Alzheimer’s disease ("Denali CNS Development Activities").

Sanofi is 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 and us funding 70% and 30% of such costs, respectively.

We have the ability to opt out of the cost-profit sharing provisions of the Sanofi Collaboration Agreement, as further described below.

9 unchanged sentences

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.

We have recognized collaboration revenue of $15.0 million, $1.1 million and $20.8 million associated with the Sanofi Collaboration Agreement in the years ended December 31, 2021, 2020 and 2019, respectively, and recorded no receivable from Sanofi, and a receivable of $44,303 on the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.

Through December 31, 2021, we have received milestone payments of $25.0 million and have not recorded any product sales under the Sanofi Collaboration Agreement.

3 unchanged sentences

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.

The LRRK2 Agreement includes our LRRK2 Products that penetrate the BBB, including DNL201 and BIIB122/DNL151, as well as those that do not penetrate the BBB.

Based on the totality of preclinical and clinical data to date, both DNL201 and BIIB122/DNL151 (two chemically distinct LRRK2 inhibitors) have met our requirements to proceed into further late-stage clinical testing, however, BIIB122/DNL151 has been selected to proceed due to pharmacokinetic properties that provide additional dosing regimen flexibility.

Under the terms of the LRRK2 Agreement, Biogen paid us a $400.0 million upfront payment in October 2020.

3 unchanged sentences

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 and Biogen are jointly developing LRRK2 Products pursuant to a clinical development plan set forth within the LRRK2 Agreement.

We and Biogen will share responsibility and costs for global development of LRRK2 Products pursuant to a mutually agreed development plan and budget " LRRK2 Development Activities"), 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.

1 unchanged sentence

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 may opt out of development cost sharing worldwide and upon such election, from any 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).

After such an opt out, we will no longer be obligated to share in the development and commercialization costs for, or be entitled to share in the applicable revenues from, such LRRK2 Program (or from the Peripheral LRRK2 Products) for such country, as applicable.

If we choose to exercise our opt out rights, 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.

In addition to the LRRK2 Program, Biogen also received an exclusive option to license two preclinical programs enabled by 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.

Further, Biogen will have the right of first negotiation on two additional TV-enabled therapeutics within 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 or 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.

1 unchanged sentence

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.

With respect to the options granted by us to Biogen, if exercised, 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 $325.0 million upon first commercial sale, and up to $290.0 million of net sales-based 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.

3 unchanged sentences

The sale of the Shares closed, and payment was received, in September 2020.

We have recognized related party collaboration revenue o f $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.

In relation to the Biogen Collaboration Agreement, we have recognized related party collaboration revenue of $3.7 million and $307.4 million and a related party offset to research and development expense of $6.5 million and $9.3 million in the years ended December 31, 2021 and 2020, respectively.

We have recorded cost sharing reimbursements due from Biogen of $1.2 million on the consolidated balance sheet as of December 31, 2021.

3 unchanged sentences

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 connection with the entry into the F-star Collaboration Agreement, we also purchased an option for an upfront option fee of $0.5 million (the "buy-out-option"), to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement (the "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”).

2 unchanged sentences

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.

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 as of the date of acquisition 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.

6 unchanged sentences

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 reco gnized 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 did not identify a third Fcab Target.

We recognized $1.5 million of consideration as research and development expense in the year ended December 31, 2019, after which $19.8 million of total consideration was recognized, which remains unchanged through December 31, 2021.

No research and development expense was recognized for consideration under the F-star Purchase Agreement in the years ended December 31, 2021.

We recognized an additional $0.1 million, $1.2 million and $1.1 million of research and development expense related to the funding of F-star research costs for the years ended December 31, 2021, 2020 and 2019 , respectively.

In July 2021, we executed a side letter to our agreements with F-star which confirmed the completion of the research services performed by F-star Ltd that were funded by us.

In June 2016, we entered into an Exclusive License Agreement with Genentech.

35 unchanged sentences

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.

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, 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.

21 unchanged sentences

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.

4 unchanged sentences

The following table sets forth the significant components of our results of operations (in thousands):

Year Ended December 31,

2021 2020 $ %

1 unchanged sentence

Collaboration revenue from customers 48,657 335,561 (286,904) (85) %

335,561 26,320 309,241 *

Other collaboration revenue 4 98 (94) (96)

7 unchanged sentences

Income (loss) before income taxes (291,156) 71,959 (363,115) *

Income tax (expense) benefit (823) 351 (1,174) *

Income tax benefit (expense) 575 (823) 1,398 *

Net income (loss) $ (290,581) $ 71,136 $ (361,717) * %

3 unchanged sentences

Collaboration revenue was $48.7 million for the year ended December 31, 2021 compared to $335.7 million recognized for the year ended December 31, 2020.

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.

The decrease of $287.0 million was primarily due to $307.4 million of revenue recognized under our Biogen Collaboration Agreement in the year ended December 31, 2020 compared with $3.7 million recognized in the year ended December 31, 2021.

This decrease of $303.7 million was partially offset by increases in revenue recognized under our Takeda Collaboration Agreement and Sanofi Collaboration Agreement of $2.8 million and $13.9 million, respectively.

Research and development expenses.

1 unchanged sentence

The following table summarizes our research and development expenses by program and category (in thousands):

Year Ended December 31,

2021 2020 $ %

LRRK2 program external expenses (1)

LRRK2 program external expense

$ 13,066 $ 28,928 $ (15,862) (55) %

1 unchanged sentence

ETV:IDS program external expenses 31,061 16,331 14,730 90

TV platform and other program external expenses

TV platform and other program specific external expenses

38,722 18,668 20,054 *

5 unchanged sentences

35,896 33,018 2,878 9

Cost sharing reimbursements (2)

(20,240) (9,260) (10,980) *

Total research and development expenses $ 265,353 $ 212,615 $ 52,738 25 %

_________________________________________________

(1) Includes an offset to expense due to related party cost reimbursement of $9.3 million.

* Percentage is not meaningful.

(1) Personnel-related expenses include stock-based compensation expense of $50.0 million and $29.0 million for the years ended December 31, 2021 and 2020, respectively, reflecting an increase of $21.0 million.

(2) Cost sharing reimbursements include $6.5 million and $9.3 million from Biogen during the years ended December 31, 2021 and 2020, respectively, which relate to LRRK2 program external expenses and LRRK2 program internal expenses which are included within Personnel-related expenses, and $13.7 million from Takeda during the year ended December 31, 2021, which relates to PTV:PGRN and ATV:TREM2 program external and internal expenses, which are included within TV platform and other program external expenses, and Personnel related expenses, respectively.

The increase in research and development expenses of approximately $52.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 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;

• $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.

• an increase of $31.4 million in personnel-related expenses, consisting of a $21.0 million increase in stock-based compensation expense primarily attributable to additional equity award grants, and an $10.4 million increase in salaries and related expenses attributable to an increase in our research and development headcount;

• increases of $14.7 million and $6.4 million in ETV:IDS and eIF2B program external expenses, respectively, reflecting the progress of these programs in clinical trials during 2021;

• increases of $20.1 million and $4.1 million in TV platform and other program specific external expenses, and other (non-program specific) external research and development expenses, respectively, reflecting the progress in our TV platform PTV:PGRN and ATV:TREM2 programs as well our continued investment in developing a robust pipeline;

• $2.9 million of increased other unallocated research and development expenses, primarily due to a $1.6 million increase in lab consumable expenses and $1.5 million of increases in general IT and infrastructure costs associated with supporting a growing workforce.

These increases were partially offset by a decrease of $15.9 million in the LRRK2 program external expenses primarily due to completion of the phase 1 and 1b trials of BIIB122/DNL151 and an $11.0 million increase in cost sharing reimbursements from collaboration partners, which are recognized as an offset to research and development expenses.

General and administrative expenses .

1 unchanged sentence

The increase of $18.8 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;

• $16.9 million of increased personnel-related expenses, driven by higher general and administrative headcount and stock-based compensation expense associated with additional equity award grants;

• $2.9 million of increased other general costs, primarily attributable to insurance, tax and IT related expenses;

• $0.4 million of increased facilities related expenses, including increased rent expense associated with the new headquarters lease.

• $0.5 million of increased facilities related expenses, including depreciation expense.

These increases were partially offset by a decrease of $1.5 million in legal and other professional services expenses due to costs incurred in 2020 associated with the execution of the Biogen Collaboration Agreement.

Interest and other income, net.

Interest and other income, net was $4.6 million for the year ended December 31, 2021 compared to $9.2 million for the year ended December 31, 2020.

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 .

The decrease of $4.6 million was primarily due to decreased income earned on our investments due to declining interest rates.

Comparison of the years ended December 31, 2020 and 2019

3 unchanged sentences

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 paym ents of $13.7 million f or 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.

We fund our operations primarily with the proceeds from public offerings of our common stock, and payments received from our collaboration agreements with Takeda, Sanofi and Biogen.

In our January 2020 follow-on offering, 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 our collaboration agreements with Takeda, Sanofi and Biogen, through December 31, 2021 we have received upfront, option and milestone payments of $81.0 million , $150.0 million , and $560.0 million , respectively.

Pursuant to our collaboration agreements with Biogen and Sanofi, we have also received $14.5 million and $11.4 million of cost sharing reimbursements and reimbursements for performance of Retained Activities, respectively, through December 31, 2021.

Further, under associated stock purchase agreements with Takeda and Biogen, through December 31, 2021 we have received $110.0 million and $465.0 million, respectively, for the sale and issuance of shares of our common stock to collaboration partners.

As of December 31, 2021, we had cash, cash equivalent s and marketable securities in the amount of $1.3 billion .

Future Funding Requirements

Future Funding Requirements and Commitments

To date, we have not generated any product revenue.

16 unchanged sentences

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:

In the longer term, we anticipate that we will need substantial additional resources to fund our operations and meet future commitments.

Our existing commitments primarily relate to our obligations under existing lease agreements and the DMSA with Lonza Sales AG ("Lonza") for the development and manufacture of biologic products.

As of December 31, 2021, operating lease liabilities were $64.0 million .

Under the SLC lease which has not yet commenced, we have future undiscounted lease payments totaling approximately $12.5 million.

Under the DMSA with Lonza, we had total non-refundable purchase commitments of $28.3 million as of December 31, 2021, with certain amounts subject to cost sharing with Takeda.

Further, in the normal course of business, we enter into various firm purchase commitments primarily related to research and development activities.

We had contractual obligations under other development and manufacturing agreements of $11.5 million as of December 31, 2021, with certain amounts subject to cost sharing with Takeda.

In addition, we had firm purchase commitments related to manufacturing equipment for the SLC Facility of $8.0 million and other commitments of $1.7 million as of December 31, 2021.

While the lease obligations span multiple years, the vast majority of the purchase commitments with Lonza and other obligations are due within 12 months.

These commitments are more fully described in Note 9, "Commitments and Contingencies" to the consolidated financial statements included in Item 8.

of this Annual Report on Form 10-K.

Our future funding requirements, including changes to and new commitments, will depend on many factors, including:

• the timing and progress of preclinical and clinical development activities;

16 unchanged sentences

Net increase (decrease) in cash, cash equivalents and restricted cash $ (213,667) $ 427,695 $ 2,326

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 Operating Activities

During the year ended December 31, 2021, cash used in operating activities was $211.4 million, which consisted of a net loss of $290.6 million, adjusted by non-cash items primarily related to stock-based compensation, net amortization of premiums on marketable securities and depreciation.

Cash used in operating activities was also driven by changes in our operating assets and liabilities.

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.

During the year ended December 31, 2021, cash used in investing activities was $21.6 million, which primarily consisted of $1,422.9 million of purchases of marketable securities partially offset by $1,409.8 million in proceeds from the maturity of marketable securities.

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.

During the year ended December 31, 2021, cash provided by financing activities was $19.3 million, which consisted entirely of the proceeds from the exercise of options to purchase common stock and issuance of shares pursuant to our employee stock purchase plan ("ESPP").

Years ended December 31, 2020 and 2019

1 unchanged sentence

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our 2020 Annual Report on Form 10-K for a discussion of the cash flows for the years ended December 31, 2020 and 2019.

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.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Total Less Than

1-3 Years 3-5 Years More Than

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, w e 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.

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

Critical Accounting 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.

2 unchanged sentences

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.

Our significant accounting policies are described in detail in the notes to our consolidated financial statements included elsewhere in this report.

We believe that the following accounting estimates involve a significant level of estimation uncertainty which could have a material impact on our financial condition or results of operations.

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.

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.

We recognize revenue associated with our collaboration arrangements, which may require us to exercise considerable judgment in estimating revenue to be recognized, including judgments made on day one accounting and judgments associated with the amount of revenue to be recognized over time as performance obligations are satisfied.

Significant judgment is required to apply the authoritative accounting guidance at the outset of a collaboration arrangement, and over time, as detailed below:

• Identification of performance obligations - there is judgment involved in identifying the promised goods or services in the collaboration agreement, determining whether these are distinct in the context of the contract, and determining if these represent a performance obligation to a customer.

These determinations are highly subjective and can differ between arrangement based on specific contractual terms.

The identified performance obligations will impact most significantly the timing of revenue recognition, and is a point-in-time assessment performed at the outset of a collaboration arrangement.

• Measurement of the transaction price - determining the transaction price includes varying levels of judgment.

Where amounts are fixed and paid, such as upfront payments, estimation is not required.

However, other elements of the transaction price do require estimation or assumptions by management.

The calculation of a share issuance premium requires the use of a valuation model for purposes of determining the fair value of the shares for financial reporting purposes, with any resulting premium impacting the transaction price.

An assumption needs to be made regarding whether future variable consideration, such as milestone payments, are constrained, which also requires management judgment.

The measurement of transaction price impacts the measurement of revenue, and is performed both at the outset of a collaboration arrangement and at each reporting period.

To date, we have not recognized any adjustments to revenue as a result of an adjustment to variable consideration constraint.

• Allocation of the transaction price to the performance obligations - there is significant judgment required to allocate the transaction price to performance obligations.

Generally, this is done by estimating the standalone selling price of identified performance obligations, and allocating on a relative value basis.

The estimate of standalone selling price includes several assumptions that cannot be observed, which may include forecasted revenue (for products not yet on the market), development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

The standalone selling price of performance obligations can be very sensitive to many of these underlying assumptions, which are based on management estimates since they cannot be observed.

This is a point-in-time assessment performed at the outset of a collaboration arrangement.

• Recognition of revenue when (or as) we satisfy each performance obligation - determining the timing of revenue recognition includes varying levels of judgment.

For revenue types recognized at a point in time, such as functional IP, there can be some judgment as to when the performance obligation has been satisfied.

For revenue recognized over time, this is often based on an underlying measure deemed to approximate the progress towards satisfaction of performance obligations.

These underlying measures, such as costs incurred to date compared with total forecasted costs for a service, may include inherent estimates, which in turn can impact the timing of revenue recognition.

The satisfaction of performance obligations assessment is performed at each reporting period.

To date, there have been no material true ups to revenue as a result of changes in the satisfaction of performance obligations.

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.

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.

A significant portion of our research and development expenses in the statements of operations and comprehensive loss are external costs, which we track on a program-specific basis once a program has commenced a late-stage IND-enabling study.

These research and development expenses include the conduct of preclinical studies and clinical trials, contract manufacturing activities and consulting services.

The measurement of these research and development expenses can impact the measurement of research and development expenses in the statements of operations and comprehensive loss, and of prepaid assets and accrued liabilities on the balance sheet.

The level of judgment required to estimate research and development expenses varies based on the nature of the services being performed and the underlying support obtained.

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 C ompensation (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.

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.

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.

W e 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.

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.

Although we do not expect our estimates to be materially different from amounts actually incurred, incomplete or inaccurate data from vendors could impact our understanding of the status and timing of services performed which could result in us reporting expenses that are too high or too low in any particular period.

We do not need to make significant estimates where costs incurred are supported by invoices or reports of costs incurred are obtained from a vendor that is directly performing the underlying services, such as a consultant or contract manufacturing organization.

In some cases, however, expense is recorded using an underlying assumption of the progress to completion of specific activities.

For example, costs may be recognized based on the passage of time for activities that span reporting periods.

If the provision of services is not linear then this assumption could impact the amount of expense recognized.

For other activities, such as for certain clinical trials, expense is recorded based on information obtained from vendors as an intermediary to those performing the underlying services, such as contract research organizations.

These estimates are inherently more judgmental since the quality and availability of the underlying data may vary.

To date, there have been no material true ups from estimated to actual external research and development expenses.

However, w e expect that the level of judgment in estimating research and development expenses may increase over time as we enter later stage, more extensive, clinical trials.

Research and development expenses also include reimbursements owed or owing to a collaboration partner to satisfy cost sharing requirements.

These reimbursement amounts are estimated based, in part, on data received from our collaboration partner, which may include a certain level of estimation or judgments made by that partner.

They also reflect our estimates of research and development expense as discussed above.

As such, a change in estimates or judgments by either our partner or us can result in a change to a reimbursement amount.

To date, there have been no material true ups from estimated to actual reimbursements owed or owing.

Management exercises judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease, the type of lease in an arrangement, whether there are separate lease components, the lease consideration, and the commencement date of the lease.

Further, there is significant judgment in determining the discount rate to use in estimating the lease right of use ("ROU") asset and lease liability.

The discount rate is estimated using the rate implicit in the lease, if known, or alternatively is based on an estimate of our incremental borrowing rate on the date of lease commencement.

A change in these assumptions could result in changes in the timing and measurement of rent expense, ROU asset and lease liability.

To date, there have been no material changes to estimates relating to lease arrangements.

Recent Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis