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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 103 added, 149 removed, 195 unchanged (56% of the section changed)

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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 a focused yet diversified portfolio with six clinical programs and more than fifteen programs in the preclinical development stage.

We have also developed a proprietary BBB platform technology, our transport vehicle ("TV"), which enables multiple modality-based platforms to deliver a wide range of large-molecule therapeutics across the BBB, including enzymes, antibodies, proteins and oligonucleotides.

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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, to be developed in collaboration with Biogen, to address Parkinson’s disease;

Ou r clinic al-stage programs are:

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

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

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

• our CNS-penetrant receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor program, partnered with Sanofi, to address neurological diseases such as 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 erythematosus ("CLE").

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 complete Parkinson's disease Joint with Biogen

ETV:IDS DNL310 Ph1/2 Hunter syndrome (MPS II) Denali

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

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

RIPK1 (Peripheral) DNL758 (SAR443122) Ph 2 CLE

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

• a second non-CNS penetrant RIPK1 inhibitor, partnered with Sanofi, to address peripheral inflammatory diseases such as cutaneous lupus erythematosus ("CLE") and ulcerative colitis ("UC");

• our recombinant progranulin ("PGRN") biotherapeutic enabled by our protein transport vehicle ("PTV:PGRN"), to be developed in collaboration with Takeda, to address certain types of FTD, especially FTD-GRN caused by PGRN deficiency.

The following table summarizes key information about our planned and ongoing clinical studies:

Program Product Candidate Clinical Study(ies) Indication Operational Control

LRRK2 BIIB122/DNL151 Ph 2b (planned)

PD Joint with Biogen

Ph 3 (planned)

ETV:IDS DNL310 Ph 1/2

Hunter syndrome (MPS II) Denali

Ph 2/3 (planned)

eIF2B DNL343 Ph 1b ALS Denali

RIPK1 (CNS-penetrant) SAR443820/DNL788 Ph 2

Ph 2 (planned)

RIPK1 (Peripheral) SAR443122/DNL758 Ph 2 CLE

Ph 2 (planned) UC

TAK-594/DNL593 Ph 1/2 FTD-GRN

Joint with Takeda

To complement our internal capabilities, we have entered into arrangements with biopharmaceutical companies, patient-focused data companies, numerous leading academic institutions and foundations to gain access to new product candidates, enable and accelerate the development of our existing programs and deepen our scientific understanding of certain areas of biology.

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Key operational and financing milestones in 2022 to date include:

• In December 2020 and January 2021, GLP toxicology studies were initiated for DNL593 ("PTV:PGRN") and DNL919 ("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 and ATV:TREM2 was received in March 2021;

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

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

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.

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

• 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:GBA for Gaucher disease and Parkinson’s disease;

(2) ETV:GAA for Pompe disease;

(3) ETV:IDUA for MPS I;

(4) ETV:NAGLU for MPS IIIB;

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

• 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 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 June 2021, we announced that our collaboration partner Sanofi commenced dosing in a Phase 2 study of DNL758 (SAR443122), 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 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;

• In August 2021 we entered into a lease for approximately 50,000 square feet of laboratory, office and warehouse premises in Salt Lake City, Utah.

We have initiated the build-out of the Utah site to expand our clinical manufacturing capabilities for biologic therapeutics (large molecules) with the goal of increasing flexibility and speed in advancing new investigational therapies into clinical trials;

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

Together with Biogen, we highlighted data supporting the advancement to late-stage clinical development and ongoing start-up activities for DNL151 (BIIB122) 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 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 October 2021, we announced that our collaboration partner Sanofi advanced development of DNL788 (SAR443820) in ALS and that the U.S.

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

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

Sanofi plans to initiate the Phase 2 study, named HIMALAYA, in the first quarter of 2022.

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

• In January 2022, we announced that the DNL919 (ATV:TREM2) IND application had been placed on clinical hold by the FDA.

We received a formal clinical hold letter and are moving forward to address the FDA’s observations related to the preclinical toxicology assessment and to provide the information requested to initiate clinical studies, including proposed changes to the clinical trial protocol, the informed consent form, and the investigator brochure.

We expect a delay of at least 3 months to our plans to begin dosing in a first-in-human clinical trial of DNL919.

We intend to provide an update in the second half of 2022 once a clear path forward is established;

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

• In February 2022, we presented interim data from the Phase 1/2 clinical trial of DNL310 at the WORLDSymposium™ on lysosomal diseases.

Longer-term data in 20 patients with MPS II continued to show sustained normalization of CSF heparan sulfate, consistent with durable CNS activity, with up to one year of intravenous dosing with DNL310.

DNL310 remained generally well tolerated with a safety profile consistent with standard-of-care enzyme replacement therapy;

• In March 2022, we announced the initiation of a Phase 1/2 Clinical Trial of TAK-594/DNL593 for Frontotemporal Dementia-Granulin (FTD-GRN).

Pending initial clinical data from the Phase 1 healthy volunteer portion of the clinical trial, we expect to begin dosing individuals with FTD-GRN in the second half of 2022;

• In March 2022, we mutually agreed under the Takeda Collaboration Agreement to terminate activity on the ATV:Tau program over which Takeda had an option to develop and commercialize jointly with the Company;

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

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

We do not have any products approved for sale and have not generated any product revenue since our inception.

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Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candida tes.

Our net losses wer e $84.6 million and $215.3 million for the three and nine months ended September 30, 2021 , respectively, and $58.2 million and $173.7 million for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021, we had an accumulated deficit o f $569.7 million.

Our net losses wer e $65.2 million and $70.0 million for the three months ended March 31, 2022 and 2021 , respectively.

As of March 31, 2022, we had an accumulated deficit o f $710.2 million.

We e xpect to continue to incur significant expenses and operating losses as we advance our current clinical stage programs through healthy volunteer and patient trials;

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All revenue recognized to date has been collaboration and license revenue from our collaboration agreements with Takeda, Sanofi and Biogen.

In the future, we will continue to recognize revenue from the Takeda Collaboration Agreement, Sanofi Collaboration Agreement, and Biogen Collaboration Agreement, and may generate revenue from product sales or milestones, royalties and cost reimbursement from other collaboration agreements, strategic alliances and licensing arrangements.

We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of license fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized.

In the future, we may continue to recognize revenue from the Takeda Collaboration Agreement, Sanofi Collaboration Agreement, and Biogen Collaboration Agreement, and may generate revenue from product sales or milestones, royalties and cost reimbursement from other collaboration agreements, strategic alliances and licensing arrangements.

We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of license fees, option exercise fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized.

If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

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We also track external expenses associated with our TV platform.

These expenses include those incurred by us relating to our Takeda Collaboration Agreement, Sanofi Collaboration Agreement a nd Biogen Collaboration Agreement.

These expenses include external expenses incurred by us relating to our Takeda Collaboration Agreement, Sanofi Collaboration Agreement a nd Biogen Collaboration Agreement.

Al l external costs associated with earlier stage programs, or that benefit the entire portfolio, are tracked as a group.

We do not track personnel or other operating expenses incurred for our research and development programs on a program-specific basis.

We also incur personnel and other operating expenses for our research and development programs which are presented in aggregate.

These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses including rent and depreciation, and lab consumables.

Where we share costs with our collaboration partners, such as in our Biogen Collaboration Agreement, 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.

It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates.

This is made more challenging by events outside of our control, such as the recent COVID-19 pandemic.

This is made more challenging by events outside of our control, such as the COVID-19 pandemic and the Russian invasion of Ukraine.

We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates.

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Results of Operations

Comparison of the three and nine months ended September 30, 2021 and 2020

Comparison of the three months ended March 31, 2022 and 2021

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

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

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1,278 1,179 99 8

Loss before income taxes (84,588) (58,172) (26,416) 45

Income tax expense — (56) 56 (100)

Net loss $ (65,220) $ (70,041) $ 4,821 (7) %

Nine Months Ended September 30, Change

__________________________________________________

Collaboration revenue:

Collaboration revenue from customers

$ 36,143 $ 18,751 $ 17,392 93 %

Other collaboration revenue

4 93 (89) (96)

Total collaboration revenue

36,147 18,844 17,303 92

Operating expenses:

Research and development

197,477 157,872 39,605 25

General and administrative

57,300 42,332 14,968 35

Total operating expenses

254,777 200,204 54,573 27

Loss from operations (218,630) (181,360) (37,270) 21

Interest and other income, net

3,310 7,611 (4,301) (57)

Loss before income taxes (215,320) (173,749) (41,571) 24

Net loss $ (215,320) $ (173,749) $ (41,571) 24 %

* Percentage is not meaningful.

Collaboration revenue.

Collaboration revenue was $5.3 million and $36.1 million for the three and nine months ended September 30, 2021, respectively, and $9.4 million and $18.8 million for the three and nine months ended September 30, 2020, respectively.

The decrease in collaboration revenue of $4.1 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to a decrease in revenue from our collaboration with Takeda driven by decreased costs incurred in the underlying partnered programs.

The increase of $17.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to the recognition of a $15.0 million milestone payment in June 2021 under our collaboration with Sanofi related to the initiation of the Phase 2 study of DNL758 (SAR443122) and revenue of $2.5 million from our collaboration with Biogen.

Collaboration revenue was $42.1 million and $7.9 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in collaboration revenue of $34.2 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to an increase in revenue from our collaborations with Takeda and Biogen of $32.9 million and $1.3 million, respectively.

Takeda revenue for the three months ended March 31, 2022 is composed of $27.9 million recognized due to the performance obligation satisfaction associated with termination of the Tau program, and $12.0 million related to the milestone earned for approval of the CTA for TAK-594/DNL593 (PTV:PGRN).

Research and development expen ses.

Research and development expenses were $71.6 million and $197.5 million for the three and nine months ended September 30, 2021, compared to $53.7 million and $157.9 million for the three and nine months ended September 30, 2020, respectively.

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

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

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

2021 2020 2021 2020

Three Months Ended March 31,

LRRK2 program external expenses

$ 1,196 $ 2,376

eIF2B program external expenses 3,531 3,433 12,623 6,739

ETV:IDS program external expenses 17,890 6,886

eIF2B program external expenses 3,935 4,340

PTV program external expenses 4,143 2,608

TV platform and other program external expenses

10,388 5,902 25,530 12,088

Other external research and development expenses

8,988 5,638 22,222 20,812

Personnel related expenses (1)

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Other unallocated research and development expenses

9,412 8,272 26,916 24,536

Cost sharing reimbursements from related party (2)

Net cost sharing payments (reimbursements) (2)

(2,273) (2,511)

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(1) Personnel-related expenses include stock-based compensation expense of $12.2 million and $37.0 million for the three and nine months ended September 30, 2021, respectively, and $7.8 million and $21.0 million for the three and nine months ended September 30, 2020, respectively, reflecting an increase of $4.4 million and $16.0 million, respectively.

(2) Cost sharing reimbursements from Biogen during the three and nine months ended September 30, 2021 are for LRRK2 program external expenses and LRRK2 program internal expenses which are included within Personnel-related expenses.

The increase in research and development expenses of approximately $17.9 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, was primarily attributable to the following:

• An increase of $7.8 million in personnel-related expenses, consisting of a $4.4 million increase in stock-based compensation expense primarily attributable to additional equity award grants, and a $3.4 million increase in salaries and related expenses attributable to an increase in our research and development headcount;

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

(2) There were $2.3 million and $2.5 million in net cost sharing reimbursements during the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, net cost sharing reimbursements includes $2.9 million of reimbursements from Takeda for the PTV:PGRN program (included within PTV program external program expenses and Personnel related expenses) and $2.1 million of reimbursements from Takeda for the ATV:TREM2 program (included within TV platform and other program external expenses and Personnel related expenses).

These cost sharing reimbursements were partially offset by cost sharing payments of $2.7 million to Biogen for LRRK2 program external expenses and program internal expenses (included within Personnel related expenses).

For the three months ended March 31, 2021, the entire amount represents cost sharing reimbursements from Biogen.

The increase in research and development expenses of approximately $25.9 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, was primarily attributable to the following:

• An increase of $11.0 million in ETV:IDS program external expenses reflecting the continued progress of this program in clinical trials during 2022;

• Increases of $4.5 million and $3.4 million in TV platform and other program external expenses, and other 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;

• An increase of $1.1 million in other unallocated research and development expenses, primarily due to an increase of $0.8 million in lab consumable expenses, an increase in facilities-related expenses of $0.3 million including depreciation expense, both due to our increased research and development headcount.

These increases were partially offset by a decrease in external expenses related to the LRRK2 program primarily due to completion of the phase 1 and 1b trials of DNL151 (BIIB122) of $3.3 million and by cost sharing reimbursements under our collaboration with Biogen of $1.2 million.

The increase in research and development expenses of approximately $39.6 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily attributable to the following:

• An increase of $24.8 million in personnel-related expenses, consisting of a $16.0 million increase in stock-based compensation expense primarily attributable to additional equity award grants and our increased market price, and a $8.8 million increase in salaries and related expenses attributable to an increase in our research and development headcount;

• An increase of $13.4 million in 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 as our continued investment in developing a robust pipeline;

• Increases of $5.9 million and $10.9 million in eIF2B and ETV:IDS program external expenses, respectively, reflecting the progress of these programs in clinical trials during 2021;

• An increase of $2.4 million in other unallocated research and development expenses, which is primarily due to an increase in facilities-related expenses of $1.3 million including depreciation expense and certain costs associated with COVID-19 safety protocols and an increase in lab consumable expenses of $1.3 million, partially offset by a $0.2 million decrease in other general costs, primarily due to a decrease in travel related expenses attributable to our research and development departments due to the COVID-19 pandemic;

• An increase of $1.4 million in other external research and development expenses primarily due to increased investment in our pipeline.

These increases were partially offset by a decrease in external expenses related to the LRRK2 program primarily due to completion of the phase 1 and 1b trials of DNL151 (BIIB122) of $13.9 million, cost sharing reimbursements under our collaboration with Biogen of $5.3 million.

• An increase of $8.4 million in personnel related expenses, consisting of a $3.3 million increase in stock-based compensation expense primarily attributable to additional equity award grants, and a $5.1 million increase in salaries and related expenses attributable to an increase in our research and development headcount;

• Increases of $1.5 million, $3.6 million and $2.0 million in PTV program external expenses, TV platform and other program external expenses, and other external research and development expenses, respectively, reflecting the progress in our PTV:PGRN and ATV:TREM2 programs as well as our continued investment in developing a robust pipeline;

• An increase of $0.8 million in other unallocated research and development expenses, primarily due to an increase of $0.4 million in lab consumable expenses, an increase in facilities-related expenses of $0.2 million including depreciation expense, both due to our increased research and development headcount, and $0.2 million in other research costs;

• A decrease of $0.2 million in cost sharing reimbursements, as discussed above.

These increases were partially offset by a decrease in external expenses related to the LRRK2 program of $1.2 million primarily due to the transition of clinical activities to Biogen, and a decrease of $0.4 million in eIF2B program external expenses.

General and administrative expenses.

General and administrative expenses were $19.3 million for the three months ended September 30, 2021 compared to $15.8 million for the three months ended September 30, 2020.

General and administrative expenses were $22.5 million for the three months ended March 31, 2022 compared to $18.9 million for the three months ended March 31, 2021.

The increase of $3.6 million was primarily attributable to the following:

• $3.4 million of increased personnel related expenses, driven by higher general and administrative headcount and stock-based compensation expense associated with additional equity award grants;

• $0.5 million of increased other general costs, including insurance, tax and IT related expenses;

• $0.4 million of increased other general costs, including software subscriptions, insurance, and travel related expenses;

• $0.1 million of increased facilities related expenses, including depreciation expense.

These increases were partially offset by a decrease of $1.7 million in legal and other professional services expenses due to costs incurred in 2020 associated with the execution of the Biogen Collaboration Agreement.

General and administrative expenses were $57.3 million for the nine months ended September 30, 2021 compared to $42.3 million for the nine months ended September 30, 2020.

The increase of $15.0 million was primarily attributable to the following:

• $13.5 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 increased market price;

• $2.2 million of increased other general costs, including insurance, tax and IT related expenses;

• $0.5 million of increased facilities related expenses, including depreciation expense and certain costs associated with COVID-19 safety protocols.

These increases were partially offset by a decrease of $1.2 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 $1.0 million and $3.3 million for the three and nine months ended September 30, 2021, compared to $1.9 million and $7.6 million for the three and nine months ended September 30, 2020, respectively.

The decreases of $0.9 million and $4.3 million, respectively, were primarily due to decreased interest income earned on our investments due to declining interest rates.

Income tax expense.

There was an income tax expense of $0.1 million for the three months ended September 30, 2020 associated with a decrease in unrealized gains on marketable securities in other comprehensive income.

There was no income tax expense for the nine months ended September 30, 2020 or for the three and nine months ended September 30, 2021.

These increases were partially offset by a decrease of $0.3 million in legal and other professional services expenses due to accounting and tax fees incurred in 2021 associated with assessment of the Biogen Collaboration Agreement.

Liquidity and Capital Resources

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

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 Takeda Collaboration Agreement, we have received $71.0 million related to upfront and milestone payments through September 30, 2021 .

Further, under the associated Stock 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 have received $150.0 million related to upfront and milestone payments through September 30, 2021 .

W e have also received $13.7 million for performance of Retained Activities.

Pursuant to the common stock purchase agreement between us and BIMA (the "Biogen Stock Purchase Agreement"), we received $465.0 million in September 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.

We have received cost sharing reimbursements of $13.3 million from Biogen through September 30, 2021.

As of September 30, 2021, we had cash, cash equivalents and marketable securities in the amount of $1.36 billion.

Future Funding Requirements

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.

In February 2022, we established a registered “at-the-market” facility for the sale of up to $400.0 million of shares of common stock from time to time by entering into an equity distribution agreement with Goldman Sachs & Co.

LLC, SVB Securities LLC and Cantor Fitzgerald & Co.

as sales agents.

We have not yet issued any shares under the facility.

Pursuant to our collaboration agreements with Takeda, Sanofi and Biogen, through March 31, 2022 we have received upfront, option and milestone payments of $93.0 million , $150.0 million, and $560.0 million, respectively, and have also received $13.7 million and $15.8 million of cost sharing reimbursements from Takeda and Biogen, respectively, and have received $13.7 million of reimbursement from Sanofi for the Phase 1b trial for DNL747 for ALS and associated activities.

Further, under associated stock purchase agreements with Takeda and Biogen, through March 31, 2022 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 March 31, 2022, we had cash, cash equivalents and marketable securities in the amount of $1.2 billion.

Future Funding Requirements and Commitments

To date, we have not generated any product revenue.

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Since our inception, we have incurred significant losses and negative cash flows from operations.

We have an accumulated deficit of $569.7 million through September 30, 2021.

We have an accumulated deficit of $710.2 million through March 31, 2022.

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 filling date of this Form 10-Q.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Our future funding requirements will depend on many factors, including:

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 March 31, 2022, operating lease liabilities were $62.7 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 $35.2 million as of March 31, 2022, 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.

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 1.

of our Annual Report on Form 10-K and have not materially changed during the three months ended March 31, 2022.

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;

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The following table sets forth a summary of the primary sources and uses of cash for each of the periods presented below (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (72,109) $ (50,240)

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

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

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)

Net Cash Used In Operating Activities

During the nine months ended September 30, 2021, cash used in operating activities was $145.9 million, which consisted of a net loss of $215.3 million, adjusted by non-cash items primarily related to stock-based compensation and depreciation, net amortization of discounts on marketable securities and non-cash rent expenses.

During the three months ended March 31, 2022, cash used in operating activities was $72.1 million, which consisted of a net loss of $65.2 million, adjusted by non-cash items primarily related to stock-based compensation and depreciation, 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.

Net Cash Provided By Investing Activities

During the nine months ended September 30, 2021, cash provided by investing activities was $19.1 million, which consisted of $1.22 billion in proceeds from the maturity of marketable securities, partially offset by $1.19 billion of purchases of marketable securities and $5.4 million of capital expenditures to purchase property and equipment.

Net Cash Used In Investing Activities

During the three months ended March 31, 2022, cash used in investing activities was $117.9 million, which consisted of $364.3 million of purchases of marketable securities and $4.1 million of capital expenditures to purchase property and equipment, partially offset by $250.5 million in proceeds from maturities of marketable securities.

Net Cash Provided By Financing Activities

During the nine months ended September 30, 2021, cash provided by financing activities was $14.2 million in proceeds from the exercise of options to purchase common stock and the purchase of ESPP shares.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Contractual Obligations and Commitments

Except as discussed in Note 7, Commitments and Contingencies, in the notes to condensed consolidated financial statements, there have been no material changes to our contractual obligations and commitments as included in our 2020 Annual Report on Form 10-K, which was filed with the SEC on February 26, 2021.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S.

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods.

During the three months ended March 31, 2022, cash provided by financing activities was $1.5 million in proceeds from the exercise of options to purchase common stock.

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.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2021 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 26, 2021 .

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

In our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022, we described the accounting estimates that we believe involve a significant level of estimation uncertainty which could have a material impact on our financial condition or results of operations.

There have been no material changes to these critical accounting estimates during the three months ended March 31, 2022.

Recent Accounting Pronouncements

Except as described in Note 1 to the Condensed Consolidated Financial Statements under the heading "Recently Adopted Accounting Pronouncement," there have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2021 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 26, 2021, that are of significance or potential significance to us.

There have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended March 31, 2022 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022, that are of significance or potential significance to us.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis