What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 114 added, 155 removed, 413 unchanged (39% of the section changed)

3 unchanged sentences

(In thousands, except share amounts)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Current assets:

12 unchanged sentences

Accounts payable $ 3,358 $ 4,779

Cost sharing payments due to related party 2,713 —

Accrued compensation 5,844 19,013

Accrued manufacturing costs 13,142 7,140

Accrued clinical and other research & development costs 19,283 15,887

Accrued manufacturing costs 11,366 9,955

Other accrued costs and current liabilities 2,390 2,857

11 unchanged sentences

Convertible preferred stock, $ 0.01 par value;

40,000,000 shares authorized as of September 30, 2021 and December 31, 2020;

0 shares issued and outstanding as of September 30, 2021 and December 31, 2020

40,000,000 shares authorized as of March 31, 2022 and December 31, 2021;

0 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Common stock, $ 0.01 par value;

400,000,000 shares authorized as of September 30, 2021 and December 31, 2020;

122,011,151 shares and 120,531,333 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

400,000,000 shares authorized as of March 31, 2022 and December 31, 2021;

122,857,908 shares and 122,283,305 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 1,635,840 1,608,238

7 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Collaboration revenue:

10 unchanged sentences

Interest and other income, net 1,278 1,179

Loss before income taxes ( 84,588 ) ( 58,172 ) ( 215,320 ) ( 173,749 )

Income tax expense — ( 56 ) — —

Net loss ( 65,220 ) ( 70,041 )

Other comprehensive loss:

Net unrealized loss on marketable securities, net of tax ( 153 ) ( 540 ) ( 276 ) ( 339 )

Other comprehensive income (loss):

Net unrealized gain (loss) on marketable securities, net of tax ( 6,752 ) 13

Comprehensive loss $ ( 71,972 ) $ ( 70,028 )

2 unchanged sentences

__________________________________________________

(1) Includes related party collaboration revenue from a customer of $ 0.9 million and $ 2.5 million for the three and nine months ended September 30, 2021, respectively.

(2) Includes an offset to expense from related party cost reimbursement of $ 1.2 million and $ 5.3 million for the three and nine months ended September 30, 2021, respectively.

(1) Includes related party collaboration revenue from a customer of $ 2.2 million and $ 0.9 million for the three months ended March 31, 2022 and 2021, respectively.

(2) Includes expense for cost sharing payments to a related party of $ 2.7 million for the three months ended March 31, 2022, and an offset to expense from related party cost sharing reimbursements of $ 2.5 million for the three months ended March 31, 2021.

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except share amounts)

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity

Shares Amount

8 unchanged sentences

Other comprehensive loss — — — ( 6,752 ) — ( 6,752 )

Balance at September 30, 2021 122,011,151 $ 1,545 $ 1,580,988 $ ( 521 ) $ ( 569,735 ) $ 1,012,277

Balance at June 30, 2021 121,531,952 $ 1,541 $ 1,556,679 $ ( 368 ) $ ( 485,147 ) $ 1,072,705

Issuances under equity incentive plans 228,048 2 3,313 — — 3,315

Vesting of restricted stock units 251,151 2 ( 2 ) — — —

Stock-based compensation — — 20,998 — — 20,998

Net loss — — — — ( 84,588 ) ( 84,588 )

Other comprehensive loss — — — ( 153 ) — ( 153 )

Balance at September 30, 2021 122,011,151 $ 1,545 $ 1,580,988 $ ( 521 ) $ ( 569,735 ) $ 1,012,277

Balance at March 31, 2022 122,857,908 $ 1,554 $ 1,635,840 $ ( 9,251 ) $ ( 710,216 ) $ 917,927

Balance at December 31, 2020 120,531,333 $ 1,531 $ 1,503,660 $ ( 245 ) $ ( 354,415 ) $ 1,150,531

Issuance of common stock upon public offering, net of issuance costs of $ 632

9,000,000 90 193,858 — — 193,948

Issuance of common stock in connection with the Biogen Stock Purchase Agreement 13,310,243 133 420,013 — — 420,146

Issuances under equity incentive plans 334,634 3 3,819 — — 3,822

2 unchanged sentences

Net loss — — — — ( 70,041 ) ( 70,041 )

Other comprehensive loss — — — ( 339 ) — ( 339 )

Balance at September 30, 2020 119,795,216 $ 1,524 $ 1,480,315 $ 11 $ ( 599,300 ) $ 882,550

Balance at June 30, 2020 105,897,872 $ 1,385 $ 1,041,303 $ 551 $ ( 541,072 ) $ 502,167

Issuance of common stock in connection with the Biogen Stock Purchase Agreement 13,310,243 133 420,013 — — 420,146

Issuances under equity incentive plans

412,389 4 5,749 — — 5,753

Vesting of restricted stock units 174,712 2 ( 2 ) — — —

Stock-based compensation

— — 13,252 — — 13,252

— — — — ( 58,228 ) ( 58,228 )

Other comprehensive loss — — — ( 540 ) — ( 540 )

Balance at September 30, 2020 119,795,216 $ 1,524 $ 1,480,315 $ 11 $ ( 599,300 ) $ 882,550

Other comprehensive income — — — 13 — 13

Balance at March 31, 2021 121,147,432 $ 1,537 $ 1,528,504 $ ( 232 ) $ ( 424,456 ) $ 1,105,353

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

3 unchanged sentences

Stock–based compensation expense 26,145 21,028

Net amortization of premiums (discounts) on marketable securities 6,316 ( 1,074 )

Net amortization of premiums on marketable securities 1,627 1,161

Non-cash adjustment to operating lease expense ( 783 ) ( 691 )

11 unchanged sentences

Maturities and sales of marketable securities 250,500 440,500

Net cash provided by (used in) investing activities 19,124 ( 255,866 )

Net cash used in investing activities ( 117,878 ) ( 25,405 )

Financing activities

Proceeds from issuance of common stock in connection with Collaboration Agreements — 420,146

Proceeds from public offering of common stock, net of issuance costs — 193,948

Proceeds from exercise of awards under equity incentive plans 1,463 3,822

Net cash provided by financing activities 1,463 3,822

Net increase (decrease) in cash, cash equivalents and restricted cash ( 112,591 ) 271,598

Net decrease in cash, cash equivalents and restricted cash ( 188,524 ) ( 71,823 )

Cash, cash equivalents and restricted cash at beginning of period 294,977 508,644

19 unchanged sentences

These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

During the nine months ended September 30, 2021, except as discussed below in the section titled "Recently Adopted Accounting Pronouncement," there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2020 Annual Report on Form 10-K.

During the three months ended March 31, 2022 there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2021 Annual Report on Form 10-K.

For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Significant Accounting Policies," to the Company’s Consolidated Financial Statements included in the 2021 Annual Report on Form 10-K.

3 unchanged sentences

For the Company and its subsidiaries, the functional currency has been determined to be U.S.

Monetary assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates.

Non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates.

Foreign currency transaction gains and losses resulting from remeasurement are recognized in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Monetary assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates, non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates, and transactions in foreign currencies are remeasured at average exchange rates.

Foreign currency gains and losses resulting from remeasurement are recognized in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Use of Estimates

11 unchanged sentences

The Company’s investment policy limits investments to certain types of securities issued by the U.S.

government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer.

government and its agencies, as well as institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer.

The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities and issuers of marketable securities to the extent recorded on the Condensed Consolidated Balance Sheets.

As of September 30, 2021 and December 31, 2020, the Company had no off balance sheet concentrations of credit risk.

As of March 31, 2022 and December 31, 2021, the Company had no off-balance sheet concentrations of credit risk.

The Company is exposed to counterparty credit risk on all of its derivative financial instruments.

3 unchanged sentences

If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability.

The COVID-19 pandemic has caused increased risk and uncertainty for the Company.

Credit risk associated with investments in securities may increase if any institution with which the Company has an investment is significantly impacted by the COVID-19 pandemic.

As of September 30, 2021, the Company has not realized any losses on its cash deposits or investments.

COVID-19 may impact the timelines and progress of the Company's preclinical activities and clinical trials, and may impact its ability to raise capital in the near term.

Further, the company is also subject to broad market risks and uncertainties resulting from recent events, such as the COVID-19 pandemic and the Russian invasion of Ukraine.

The Company has one operating segment.

18 unchanged sentences

Derivatives and Hedging Activities

The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within Prepaid expenses and other current assets and Other accruals and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets.

The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within prepaid expenses and other current assets and other accrued costs and current liabilities, respectively, on the Condensed Consolidated Balance Sheets.

Derivatives are adjusted to fair value through interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

11 unchanged sentences

Revenue Recognition

License and Collaboration Revenue

License, Option and Collaboration Revenue

The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities.

3 unchanged sentences

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:

The terms of license, option and collaboration agreements entered into typically include payment of one or more of the following:

non-refundable, up-front license fees;

option exercise fees;

development, regulatory and commercial milestone payments;

11 unchanged sentences

Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Condensed Consolidated Balance Sheets.

If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities.

If the related performance obligation is expected to be satisfied within the next 12 months this will be classified in current liabilities.

Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's Condensed Consolidated Balance Sheets.

If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets.

If the Company expects to have an unconditional right to receive the consideration in the next 12 months, this will be classified in current assets.

A net contract asset or liability is presented for each contract with a customer.

20 unchanged sentences

Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented.

Recently Adopted Accounting Pronouncement

In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No.

2019-12 , Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.

2019-12 modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation.

The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted, and is required to be adopted prospectively, with the exception of certain specific amendments, which were not applicable to the Company.

The Company adopted this standard as of January 1, 2021 using a prospective approach.

Adoption of the standard did not have a material impact on its Condensed Consolidated Financial Statements.

Fair Value Measurements

Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands):

September 30, 2021

March 31, 2022

Level 1 Level 2 Level 3 Total

2 unchanged sentences

government treasuries 10,013 — — 10,013

Commercial paper — 29,985 — 29,985

Short-term marketable securities:

government treasuries 699,296 — — 699,296

government agency securities — 15,003 — 15,003

Corporate debt securities — 72,141 — 72,141

10 unchanged sentences

Money market funds $ 265,294 $ — $ — $ 265,294

government treasuries 149,997 — — 149,997

Short-term marketable securities:

government treasuries 450,436 — — 450,436

government agency securities — 25,217 — 25,217

Corporate debt securities — 70,009 — 70,009

3 unchanged sentences

Corporate debt securities — 15,302 — 15,302

Foreign currency derivative contracts — 185 — 185

Total $ 1,125,877 $ 136,796 $ — $ 1,262,673

1 unchanged sentence

Total $ — $ 111 $ — $ 111

The carrying amounts of cost sharing reimbursements due from related party, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values due to their short-term maturities.

The carrying amounts of prepaid expenses and other current assets, accounts payable, cost sharing payments due to or from a related party and accrued liabilities approximate their fair values due to their short-term maturities.

The Company’s Level 2 securities are valued using third-party pricing sources.

2 unchanged sentences

Marketable Securities

All marketable securities were considered available-for-sale at September 30, 2021 and December 31, 2020.

All marketable securities were considered available-for-sale at March 31, 2022 and December 31, 2021.

On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements".

The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):

September 30, 2021

March 31, 2022

Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value

2 unchanged sentences

$ 703,031 $ — $ ( 3,735 ) $ 699,296

government agency securities

15,003 — — 15,003

Corporate debt securities (2)

22 unchanged sentences

$ 450,689 $ — $ ( 253 ) $ 450,436

government agency securities (2)

25,214 5 ( 2 ) 25,217

Corporate debt securities (2)

15 unchanged sentences

(2) Unrealized holding losses on 16 securities with an aggregate fair value of $ 68.5 million.

(3) Unrealized holding losses on 16 securities with an aggregate fair value of $ 410.1 million.

(4) Unrealized holding losses on 6 security with an aggregate fair value of $ 15.3 million.

As of September 30, 2021 and December 31, 2020, some of the Company's marketable securities were in an unrealized loss position.

The Company has no t recognized an allowance for credit losses as of September 30, 2021 or December 31, 2020.

As of March 31, 2022 and December 31, 2021, some of the Company's marketable securities were in an unrealized loss position.

The Company has no t recognized an allowance for credit losses as of March 31, 2022 or December 31, 2021.

The Company determined that it had the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery.

Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions.

All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than twelve months or the loss is not material.

All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than 12 months or the loss is not material.

All of the Company’s marketable securities have an effective maturity of less than two years .

7 unchanged sentences

Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.

The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of September 30, 2021 and December 31, 2020, respectively (notional amounts in thousands):

The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of March 31, 2022 and December 31, 2021, respectively (notional amounts in thousands):

Foreign Exchange Contracts Number of Contracts Aggregate Notional (1) Amount in Foreign Currency

12 1,700 Oct 2021 - Jun 2022

3 150 Apr 2022 - Jun 2022

British Pounds

11 1,725 Oct 2021 - Jun 2022

Total at September 30, 2021

26 3,855 Jan 2021 - Nov 2021

3 300 Apr 2022 - Jun 2022

Total at March 31, 2022

7 800 Jan 2022 - Jun 2022

British Pounds

21 2,658 Jan 2021 - Nov 2021

6 900 Jan 2022 - Jun 2022

Total at December 31, 2021

2 unchanged sentences

Collaboration Agreements

On August 5, 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Biogen Collaboration Agreement”) with Biogen Inc.’s subsidiaries, Biogen MA Inc.

In August 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Biogen Collaboration Agreement”) with Biogen Inc.’s subsidiaries, Biogen MA Inc.

(“BIMA”) and Biogen International GmbH (“BIG”) (BIMA and BIG, collectively, “Biogen”), which expired in October 2020 upon the execution of a Definitive LRRK2 Collaboration and License Agreement (“LRRK2 Agreement”) with Biogen on October 4, 2020 and a Right of First Negotiation, Option and License Agreement (the “ROFN and Option Agreement”) on October 6, 2020 (collectively, the "Biogen Collaboration Agreement").

The details of the Provisional Biogen Collaboration Agreement and the Biogen Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K.

During the third quarter of 2021, there were no changes to the terms of the Company’s collaboration agreement with Biogen, and no change in the transaction price for the Biogen Collaboration Agreement has been recorded during the three and nine months ended September 30, 2021.

A related party contract liability of $ 294.9 million was recorded on the Consolidated Balance Sheet as of September 30, 2021.

Approximately $ 288.9 million of this contract liability relates to the revenue allocated to the material right for an option under the ROFN and Option Agreement which is being deferred until resolution of the option, which is expected to be at least a year from the balance sheet date, and $ 6.0 million of this contract liability relates to the portion of the Option Research Services performance obligation yet to be satisfied, with such amount to be recognized over the estimated period of the services, which is expected to be several years.

The Company recorded $ 1.2 million and $ 5.3 million of cost sharing reimbursements for LRRK2 Development Activities as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021, respectively.

The Company recorded cost sharing reimbursements due from related party on the Condensed Consolidated Balance Sheet as of September 30, 2021 and December 31, 2020 of $ 1.2 million and $ 5.7 million, respectively.

As of September 30, 2021, the Company had no t achieved any milestones or recorded any product sales under the Biogen Collaboration Agreement.

During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Biogen, and no change in the transaction price for the Biogen Collaboration Agreement has been recorded during the three months ended March 31, 2022.

A related party contract liability of $ 291.5 million and $ 293.7 million was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively.

Approximately $ 288.9 million of the March 31, 2022 contract liability relates to the revenue allocated to the material right for an option under the ROFN and Option Agreement which is being deferred until resolution of the option, which is expected to be within one year of the balance sheet date, and $ 2.6 million of this contract liability relates to the portion of the Option Research Services performance obligation yet to be satisfied, with such amount to be recognized over the estimated period of the services, which is expected to be more than one year .

Expenses for cost sharing payments for LRRK2 Development Activities of $ 2.7 million were recorded as research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, with the same amount recorded as cost sharing payments due to related party on the Condensed Consolidated Balance Sheets as of March 31, 2022.

The Company recorded $ 2.5 million of cost sharing reimbursements for LRRK2 Development Activities as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2021, and $ 1.2 million was recorded as cost sharing reimbursements due from related party on the Condensed Consolidated Balance Sheets as of December 31, 2021.

As of March 31, 2022, the Company had no t achieved any milestones or recorded any product sales under the Biogen Collaboration Agreement.

In October 2018, the Company entered into a Collaboration and License Agreement ("Sanofi Collaboration Agreement") with Genzyme Corporation, a wholly owned subsidiary of Sanofi S.A.

The details of the Sanofi Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

During the third quarter of 2021, there were no changes to the terms of the Company’s collaboration agreement with Sanofi.

The transaction price of the Sanofi Collaboration Agreement did no t change in the three months ended September 30, 2021, and increased by $ 15.0 million in the nine months ended September 30, 2021.

This increase related to the $ 15.0 million milestone triggered in June 2021 upon first patient in a Phase 2 study of DNL758 (SAR443122) in patients with cutaneous lupus erythematosus.

The transaction price increased by $ 0.1 million and $ 0.9 million for the three and nine months ended September 30, 2020, respectively, related to costs incurred for Retained Activities that were no longer constrained.

A contract liability of $ 3.4 million was recorded on the Condensed Consolidated Balance Sheets as of both September 30, 2021 and December 31, 2020.

During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Sanofi, and the transaction price of the Sanofi Collaboration Agreement did no t change during the three months ended March 31, 2022 or 2021.

A contract liability of $ 3.4 million was recorded on the Condensed Consolidated Balance Sheets as of both March 31, 2022 and December 31, 2021.

This contract liability relates to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years.

The Company recorded no receivable and a receivable of $ 44,303 associated with the Sanofi Collaboration Agreement on the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively.

Through September 30, 2021, the Company has earned milestone payments of $ 25.0 million, and the Company has no t recorded any product sales under the Sanofi Collaboration Agreement.

The Company recorded no receivable associated with the Sanofi Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively.

In April 2022, Sanofi commenced dosing in a Phase 2 study of SAR3820/DNL788 in patients with ALS, triggering a $ 40.0 million milestone which is due in May 2022.

As of March 31, 2022, the Company had earned milestone payments of $ 25.0 million and had no t recorded any product sales under the Sanofi Collaboration Agreement.

Takeda Collaboration Agreement

In January 2018, the Company entered into a Collaboration and Option Agreement ("Takeda Collaboration Agreement") with Takeda Pharmaceutical Company Limited ("Takeda").

The details of the Takeda Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K.

During the third quarter of 2021, there were no changes to the terms of the Company’s collaboration agreement with Takeda, and no change in the transaction price for the Takeda Collaboration Agreement has been recorded during the three and nine months ended September 30, 2021.

Revenue is recognized under the Takeda Collaboration Agreement when, or as, the Company satisfies its performance obligations by transferring the promised services to Takeda.

Revenue is being recognized over time using the input method, based on costs incurred to perform the research services, since the level of costs incurred over time is thought to best reflect the transfer of services to Takeda.

There were no material changes in estimates during the three and nine months ended September 30, 2021 or September 30, 2020.

A contract liability of $ 29.2 million and $ 39.8 million was recorded on the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively.

This contract liability relates to the three performance obligations identified, with such amounts to be recognized over the estimated period of the pre-IND research services, which is expected to be up to several years.

There was no receivable as of September 30, 2021 and a receivable of $ 8.0 million for a preclinical milestone as of December 31, 2020.

Through September 30, 2021, the Company has earned $ 31.0 million in preclinical milestone payments from Takeda, and has no t recorded any product sales under the Takeda Collaboration Agreement.

The details of the Takeda Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

In March 2022, Takeda and the Company agreed to terminate activity on the ATV:Tau program over which Takeda had an option to develop and commercialize jointly with the Company.

As a result of this decision, total preclinical milestone payments that Takeda may owe was reduced to $ 55.0 million, of which $ 43.0 million has been received as of March 31, 2022.

A contract liability of $ 27.9 million was recorded on the Condensed Consolidated Balance Sheets as of December 31, 2021 relating to the remaining Tau program services.

As a result of the decision to terminate the ATV:Tau program, the performance obligation related to ATV:Tau was considered fully satisfied, and the contract liability was recognized in its entirety within collaboration revenue from customers in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022.

The transaction price of the Takeda Collaboration Agreement increased by $ 12.0 million during the three months ended March 31, 2022, due to a preclinical milestone being unconstrained.

This milestone was triggered by the January 2022 approval of the clinical trial application for TAK-594/DNL593 ("PTV:PGRN") by the Medicines and Healthcare products Regulatory Agency in the UK, and the milestone payment was received in February 2022.

There was no contract liability or receivable associated with the Takeda Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no receivable as of December 31, 2021.

The Company has no remaining performance obligations under the Takeda Collaboration Agreement, and accordingly the $ 12.0 million was recorded as collaboration revenue from customers in the three months ended March 31, 2022.

PTV:PGRN and ATV:TREM2 Collaboration Agreements

Opt-in by Takeda on the PTV:PGRN and ATV:TREM2 programs represented two new contracts with a customer for accounting purposes (the "PTV:PGRN Collaboration Agreement" and the "ATV:TREM2 Collaboration Agreement"), both effective in December 2021.

The details of the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

During the first quarter of 2022, there were no changes to the terms of either the PTV:PGRN Collaboration Agreement or the ATV:TREM2 Collaboration Agreement, and there was no change in the transaction price of either agreement during the three months ended March 31, 2022.

Under the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement, Takeda may be obligated to pay the Company up to an aggregate of $ 280.0 million upon achievement of certain clinical milestone events and up to an aggregate of $ 200.0 million in regulatory milestone events relating to receipt of regulatory approval in the United States, certain European countries and Japan.

Takeda may also be obligated to pay the Company up to $ 75.0 million per biologic product upon achievement of a certain sales-based milestone, or an aggregate of $ 150.0 million if one biologic product from each program achieves this milestone.

The Company recorded $ 2.9 million and $ 2.1 million of cost sharing reimbursements for PTV:PGRN and ATV:TREM2 Development Activities, respectively, as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, the entirety of which is also recorded as a receivable within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet as of March 31, 2022.

As of March 31, 2022, the Company had earned $ 53.0 million in preclinical milestone and option fee payments from Takeda, and had no t recorded any product sales under the Takeda Collaboration Agreement.

Collaboration Revenue

Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Takeda Collaboration Agreement:

Takeda Collaboration Agreement Services (1)

$ 39,916 $ 7,030

Total Takeda Collaboration Revenue 39,916 7,030

Sanofi Collaboration Agreement

Peripheral Program License — — 15,000 —

Retained Activities — 117 — 925

Alzheimer's Disease Services (2)

2 unchanged sentences

Option Research Services (2)

860 — 2,546 —

Total Biogen Collaboration Revenue 2,225 892

1 unchanged sentence

_________________________________________________

(1) $ 15.6 million of revenue for the nine months ended September 30, 2021 was included in the contract liability balance at the beginning of the period.

All revenue for the three months ended September 30, 2021 and the three and nine months ended September 30, 2020 was included in the contract liability balance at the beginning of the period.

(2) Revenue for the three and nine months ended September 30, 2021 and September 30, 2020, where applicable, represent amounts that were included in the contract liability balance at the beginning of the respective period.

(1) $ 27.9 million and $ 5.7 million of revenue for the three months ended March 31, 2022 and March 31, 2021, respectively, was included in the contract liability balance at the beginning of the period.

(2) Revenue for the three months ended March 31, 2022 and March 31, 2021 represent amounts that were included in the contract liability balance at the beginning of the respective period.

License Agreements

In June 2016, the Company entered into an Exclusive License Agreement with Genentech, Inc.

(“Genentech”).

(“Genentech License Agreement”).

The details of the Genentech License Agreement are further described in Note 7, License Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

No expenses were recorded associated with the Genentech License Agreement in the three and nine months ended September 30, 2021 or 2020.

No expenses were recorded associated with the Genentech License Agreement in the three months ended March 31, 2022 or 2021.

Commitments and Contingencies

Lease Obligations

In May 2018, the Company entered into an operating lease for its corporate headquarters in South San Francisco (the "Headquarters Lease").

The details of the Headquarters Lease are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K.

During the third quarter of 2021, there were no changes to the terms of the Headquarters Lease.

In August 2021, the Company entered into an operating lease for approximately 50,000 square feet of laboratory, office and warehouse premises in Salt Lake City, Utah (“SLC Lease”), with a contractual term of approximately 8.4 years which will commence upon completion of certain improvements by the landlord and the Company, and future undiscounted lease payments totaling approximately $ 12.5 million.

For accounting purposes, the lease has not yet commenced as the landlord has not yet made the underlying asset available for use by Denali, and as such, no lease liability or ROU asset is recorded on the condensed consolidated balance sheet as of September 30, 2021, and no operating lease expense has been recorded for the three and nine months ended September 30, 2021.

In May 2018, the Company entered into an operating lease for its corporate headquarters in South San Francisco (the "Headquarters Lease"), and in August 2021, the Company entered into an operating lease for laboratory, office and warehouse premises in Salt Lake City, Utah (“SLC Lease”).

The details of both leases are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

During the first quarter of 2022, there were no changes to the terms of either lease.

Further, for accounting purposes, the SLC lease has not yet commenced as the landlord has not yet made the underlying asset available for use by Denali, and as such, no lease liability or ROU asset is recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no operating lease expense has been recorded for the three months ended March 31, 2022.

Management exercised judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for the headquarters lease, the discount rate used to determine the measurement of the lease liability.

1 unchanged sentence

To estimate the incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the headquarters lease agreement that may be indicative of the rate implicit in the lease.

The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases for the periods presented (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating lease for the periods presented (in thousands):

Three Months Ended March 31,

Operating lease cost (1)

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Cash paid for amounts included in measurement of lease liability $ 2,618 $ 2,536

As of September 30,

As of March 31,

Weighted average remaining lease term 7.1 years 8.1 years

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(1) Including variable and short-term lease costs

The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liability recorded in the Condensed Consolidated Balance Sheet as of September 30, 2021 (in thousands):

Year Ended December 31:

2021 (three months) $ 2,618

2022 (nine months) 8,084

Thereafter 29,966

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The details of the Sublease Agreement are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.

During the third quarter of 2021, there were no changes to the terms of the Sublease Agreement.

Total sublease income, including rent and variable sublease cost reimbursements, was $ 1.0 million and $ 0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $ 2.9 million and $ 2.8 million for the nine months ended September 30, 2021 and 2020, respectively.

The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of September 30, 2021 (in thousands):

During the first quarter of 2022, there were no changes to the terms of the Sublease Agreement.

Total sublease income, including rent and variable sublease cost reimbursements, was $ 1.0 million and $ 0.9 million for the three months ended March 31, 2022 and 2021, respectively.

The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of March 31, 2022 (in thousands):

Year Ended December 31:

2021 (three months) $ 737

2022 (nine months) 2,272

2025 and thereafter —

Total undiscounted sublease receipts $ 6,244

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Under the DMSA, the Company will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of the Company's antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan.

Unless earlier terminated, the DMSA will expire on September 6, 2022.

As of September 30, 2021 and December 31, 2020, the Company had open purchase orders for biological product development and manufacturing costs totaling $ 42.0 million and $ 33.0 million, respectively.

The activities under these purchase orders are expected to be completed by July 2027.

As of September 30, 2021 and December 31, 2020, the Company had total non-cancellable purchase commitments under the DMSA of $ 27.6 million and $ 27.1 million, respectively, under the DMSA.

During the three months ended September 30, 2021 and 2020, the Company incurred costs of $ 5.8 million and $ 1.4 million, respectively, and made payments of $ 4.0 million and $ 0.8 million, respectively, for the development and manufacturing services rendered under the DMSA.

During the nine months ended September 30, 2021 and 2020, the Company incurred costs of $ 14.2 million and $ 6.2 million, respectively, and made payments of $ 10.4 million and $ 6.0 million, respectively, for the development and manufacturing services rendered under the DMSA.

Unless earlier terminated, the DMSA will expire on the later of September 6, 2022 or when all development and manufacturing services are completed.

As of March 31, 2022 and December 31, 2021, the Company had open purchase orders for biological product development and manufacturing costs totaling $ 44.6 million and $ 35.8 million, respectively.

The activities under these purchase orders are expected to be completed by December 2025.

As of March 31, 2022 and December 31, 2021, the Company had total non-cancellable purchase commitments under the DMSA of $ 35.2 million and $ 28.3 million, respectively.

During the three months ended March 31, 2022 and 2021, the Company incurred costs of $ 10.0 million and $ 5.2 million, respectively, and made payments of $ 8.7 million and $ 0.7 million, respectively, for the development and manufacturing services rendered under the DMSA.

Contingencies

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Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2021:

The following table summarizes stock option activity for the three months ended March 31, 2022:

Number of Options

5 unchanged sentences

( 67,087 ) 44.04

Balance at September 30, 2021 13,814,376 $ 24.11

Vested and expected to vest at September 30, 2021

Balance at March 31, 2022 15,298,048 $ 27.06

Vested and expected to vest at March 31, 2022

13,562,353 $ 30.43

Exercisable at September 30, 2021 7,856,046 $ 15.22

Exercisable at March 31, 2022 9,017,879 $ 19.19

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

Nine Months Ended September 30,

Three Months Ended March 31,

Expected term (in years)

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Restricted Stock Activity

The following table summarizes restricted stock unit ("RSU") activity for the nine months ended September 30, 2021:

The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2022:

Number of RSU shares Weighted-Average Fair Value at Date of Grant per Share

3 unchanged sentences

Forfeited ( 35,140 ) 45.87

Unvested at September 30, 2021 2,621,853 $ 43.83

Expected to vest at September 30, 2021 2,621,853 $ 43.83

Unvested at March 31, 2022 2,951,499 $ 44.65

Expected to vest at March 31, 2022 2,951,499 $ 44.65

Stock-Based Compensation Expense

The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Research and development

2 unchanged sentences

$ 26,145 $ 21,028

$ 20,998 $ 13,252 $ 63,162 $ 36,521

Net Loss Per Share

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Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Three and Nine Months Ended September 30,

Three Months Ended March 31,

Options issued and outstanding and ESPP shares issuable

4 unchanged sentences

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-Q

Item 1. Financial Statements