Denali Therapeutics Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q . This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events coul d differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q. Forward-looking statements include, but are not limited to, statements about: • the progress, success, cost and timing of our development activities, preclinical studies and clinical trials, and in particular the development of our blood-brain barrier (“BBB”) platform technology, programs and biomarkers, including the initiation and completion of studies or trials and related preparatory work, enrollment in such trials, the timing of when data from clinical trials will become available, the advancement of new molecule entities into clinical development and related timing, and the filing of investigational new drug applications or clinical trial applications; • the impact of preclinical findings on our ability to achieve exposures of our product candidates that allow us to explore a robust pharmacodynamic range of these candidates in humans; • the expected potential benefits and potential revenue resulting from strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise; • the timing or likelihood of regulatory filings and approvals; • our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate; • the extent to which any dosing limitations that we have been subject to, and/or may be subject to in the future, may affect the success of our product candidates; • the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology; • the terms and conditions of licenses granted to us and our ability to license and/or acquire additional intellectual property relating to our product candidates and BBB platform technology; • our ability to obtain funding for our operations, including funding necessary to develop and commercialize our current and potential future product candidates; • our plans and ability to establish sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain approval; • future agreements with third parties in connection with the commercialization of our product candidates; • the size and growth potential of the markets for our product candidates, if approved for commercial use, and our ability to serve those markets; 22 Table of Contents • the rate and degree of market acceptance of our product candidates; • existing regulations and regulatory developments in the United States and foreign countries; • potential claims relating to our intellectual property and third-party intellectual property; • our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately; • our potential plans and ability to develop our own manufacturing facilities; • the pricing and reimbursement of our product candidates, if approved and commercialized; • the success of competing products or platform technologies that are or may become available; • our ability to attract and retain key managerial, scientific and medical personnel; • the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; • our ability to enhance operational, financial and information management systems; • the impact of increasing geopolitical uncertainty, rising inflation and increased labor market competition; • the impact of the COVID-19 pandemic, rising interest rates, and global economic and social conditions on our business; and • our financial performance. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors”. In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes. These forward-looking statements reflect our beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We discuss many of these risks in greater detail in the section entitled “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise. Overview Our goal is to discover, develop and deliver therapeutics to defeat degeneration. Our discovery and development strategy is guided by three overarching principles that we believe will significantly increase the probability of success and accelerate the timing to bring effective therapeutics to patients with neurodegenerative diseases: 23 Table of Contents • Degenogene Pathways – each of our programs addresses a molecular target or biological pathway that is genetically validated to cause or increase the risk for neurodegenerative diseases. • BBB Platform Technology – we engineer our product candidates to cross the BBB and act directly in the brain by following a rigorous approach in designing small molecules and by using our proprietary TV platform technology to effectively deliver large therapeutic molecules, such as enzymes, proteins, antibodies, and oligonucleotides, across the BBB after intravenous administration. • Biomarker-Driven Development – we discover, develop and use biomarkers to inform dose selection, assess clinical activity, and to identify patients most likely to respond to our therapies. Ou r clinic al-stage programs are: • our ETV:IDS program, our lead brain-penetrant enzyme replacement therapy ("ERT"), enabled by our 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 recombinant progranulin ("PGRN") biotherapeutic enabled by our protein transport vehicle ("PTV:PGRN"), being developed in collaboration with Takeda, to address certain types of FTD, especially FTD-GRN caused by PGRN deficiency; • our novel, selective, high affinity triggering receptors expressed on myeloid cells 2 ("TREM2") antibody, enabled by our ATV, being developed in collaboration with Takeda for the potential treatment of Alzheimer's disease; • our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, being developed in collaboration with Biogen, to address Parkinson’s disease ("PD"); • our eukaryotic initiation factor 2 B ("eIF2B") activator program to address diseases such as amyotrophic lateral sclerosis ("ALS") and frontotemporal dementia ("FTD"); • our CNS-penetrant receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor program, partnered with Sanofi, to address neurological diseases such as ALS, multiple sclerosis ("MS") and Alzheimer's disease; and • 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"); 24 Table of Contents The following table summarizes key information about our planned and ongoing clinical studies: Program Product Candidate Clinical Study(ies) Indication Operational Control ETV:IDS DNL310 Ph 1/2 Hunter syndrome (MPS II) Denali Ph 2/3 PTV:PGRN TAK-594/DNL593 Ph 1/2 FTD-GRN Joint with Takeda ATV:TREM2 TAK-920/DNL919 Ph 1 Alzheimer's disease Joint with Takeda LRRK2 BIIB122/DNL151 Ph 2b PD Joint with Biogen Ph 3 eIF2B DNL343 Ph 1b ALS Denali RIPK1 (CNS-penetrant) SAR443820/DNL788 Ph 2 ALS Sanofi Ph 2 (planned) MS Sanofi RIPK1 (Peripheral) SAR443122/DNL758 Ph 2 CLE Sanofi Ph 2 (planned) UC Sanofi Collaborations and partnering are central components of our strategy to build, develop and commercialize our portfolio of product candidates. We have numerous arrangements with biopharmaceutical companies, technology companies, academic institutions, foundations, and patient-focused data companies. We currently rely on third-party contract manufacturers to manufacture and supply our preclinical and clinical materials to be used during the development of our product candidates. We currently do not need commercial manufacturing capacity. Since we commenced operations, we have devoted substantially all of our resources to discovering, acquiring and developing product candidates, building our BBB platform technology and assembling our core capabilities in understanding key neurodegenerative disease pathways. Key operational and financing milestones in 2022 to date include: • In January 2022, we announced that Sanofi plans to initiate a Phase 2 trial of SAR443820/ DNL788 in MS, and a Phase 2 trial of SAR443122/ DNL758 in patients with UC; • In 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). 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 payment from Takeda which was received in February 2022. In November 2022, we announced that interim results from Part A of the Phase 1/2 study demonstrated that single doses of TAK-594/DNL593 resulted in substantial increases in CSF progranulin levels suggesting brain delivery of TAK-594/DNL593 was achieved and has the potential to address progranulin deficiency, which drives disease progression in people living with FTD-GRN. Single doses of TAK-594/DNL593 were also generally well tolerated, based on blinded safety analysis. These data support dosing in participants with FTD-GRN in Part B of the study; 25 Table of Contents • 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 SAR443820/DNL788 expected to enroll approximately 260 participants with ALS , triggering a $40.0 million milestone payment, which was received in May 2022; • In May 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; • In May 2022, our collaboration partner Biogen commenced dosing in the global Phase 2b LUMA study to evaluate the efficacy and safety of BIIB122/DNL151, as compared to placebo in approximately 640 participants with early-stage Parkinson’s disease, which triggered a clinical milestone payment of $7.5 million owed to Genentech ; • In August 2022, dosing commenced in the Phase 1 single ascending dose study of TAK-920/DNL919 in healthy volunteers in the Netherlands. In June 2022, the CTA for TAK-920/DNL919 (ATV:TREM2) was approved, triggering a $12.0 million milestone payment from Takeda which was received in July 2022. In January 2022, we announced that the TAK-920/DNL919 Investigational New Drug ("IND") application had been placed on clinical hold by the U.S. Food and Drug Administration ("FDA"). Denali plans to continue to engage with the FDA and regulatory authorities in Europe to define the path forward for the TAK-920/DNL919 clinical program; • In August 2022, we announced that new longer-term interim data from the ongoing Phase 1/2 study for DNL310 (ETV:IDS) continues to show sustained normalization to healthy levels of CSF heparan sulfate and improvements in markers of lysosomal function consistent with durable CNS activity, and the safety profile with up to 85 weeks of dosing remains comparable with standard of care therapy. In addition, 49-week open label data on global impression of change continues to suggest stabilization and/or improvement in MPS II symptoms. The Phase 2/3 COMPASS study continues to enroll up to 54 participants with Hunter syndrome with and without neuronopathic disease; upon completion of the ongoing Phase 1/2 study, and together with data from the global COMPASS study, this combined data package will potentially support registration; • In October 2022, we announced that in September 2022, our collaboration partner Biogen commenced dosing in the global Phase 3 LIGHTHOUSE study to evaluate the efficacy and safety profile of BIIB122/DNL151, as compared to placebo in approximately 400 participants with Parkinson’s disease and a confirmed pathogenic mutation in the leucine-rich repeat kinase 2 (LRRK2) gene, which triggered a clinical milestone payment of $5.0 million owed to Genentech; • In October 2022, we sold 11.9 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 $26.50 per share for aggregate net proceeds of approximately $296.2 million; and • In November 2022, our collaboration partner Sanofi presented Phase 1 healthy volunteer data on SAR443820/DNL788 at the Annual Northeast Amyotrophic Lateral Sclerosis ("NEALS") Meeting demonstrating a safety profile that was well-tolerated after single ascending doses and 14 days of multiple ascending doses taken orally once or twice daily, with favorable pharmacokinetic properties and excellent CNS penetrance. These data further support the ongoing global Phase 2 HIMALAYA study in participants with ALS. 26 Table of Contents We do not have any products approved for sale and have not generated any product revenue since our inception. We have funded our operations primarily from the issuance and sale of convertible preferred stock, the sale of common stock in public offerings, and payments received from our collaboration agreements with Takeda, Sanofi and Biogen. We have incurred significant operating losses to date and expect to continue to incur operating losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candida tes. Our net losses wer e $103.3 million and $227.3 million for the three and nine months ended September 30, 2022, respectively, and $84.6 million and $215.3 million for three and nine months ended September 30, 2021 , respectively. As of September 30, 2022, we had an accumulated deficit o f $872.3 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; broaden and improve our BBB platform technology; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. Components of Operating Results Collaboration Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been collaboration and license revenue from our collaboration agreements with Takeda, Sanofi and Biogen. In the future, we may continue to recognize revenue from the Takeda Collaboration Agreement, Sanofi Collaboration Agreement, and Biogen Collaboration Agreement, and may generate revenue from product sales or milestone payments, 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, milestone payments, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected. Operating Expenses Research and Development Research and development activities account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses incurred by us for the discovery and development of our product candidates and BBB platform technology include: • external research and development expenses, including: – expenses incurred under arrangements with third parties, such as contract research organizations ("CROs"), preclinical testing organizations, contract development and manufacturing organizations ("CDMOs"), academic and non-profit institutions and consultants; – expenses to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use; – fees related to our license and collaboration agreements; 27 Table of Contents • personnel related expenses, including salaries, benefits and stock-based compensation expense; and • other expenses, which include direct and allocated expenses for laboratory, facilities and other costs. A portion of our research and development expenses are direct external expenses, which we track on a program-specific basis once a program has commenced late-stage IND-enabling studies. Program expenses include expenses associated with our most advanced product candidates and the discovery and development of backup or next-generation molecules. We also track external expenses associated with our TV platform. These expenses include external expenses incurred by us relating to our Takeda Collaboration Agreement, Sanofi Collaboration Agreement 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 also incur personnel and other operating expenses for our research and development programs which are presented in aggregate. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses including rent and depreciation, and lab consumables. Where we share costs with our collaboration partners, such as in our Biogen Collaboration Agreement and Takeda Collaboration Agreement , research and development expenses may include cost sharing reimbursements from, or payments to, our partner. It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. This is made more challenging by events outside of our control, such as the COVID-19 pandemic and the Russian invasion of Ukraine. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of: • our ability to add and retain key research and development personnel; • our ability to establish an appropriate safety profile with IND-enabling toxicology studies; • our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates; • our successful enrollment in and completion of clinical trials; • the costs associated with the development of any additional product candidates we identify in-house or acquire through collaborations; • our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our molecules; • our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved; • the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder; • our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved; • our receipt of marketing approvals from applicable regulatory authorities; 28 Table of Contents • our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and • the continued acceptable safety profiles of the product candidates following approval. A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, access and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. General and Administrative General and administrative expenses include personnel related expenses, such as salaries, benefits, travel and stock-based compensation expense, expenses for outside professional services and allocated expenses. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent, depreciation and other expenses related to our office and research and development facility not otherwise included in research and development expenses. We expect to increase our administrative headcount as we advance our product candidates through clinical development, which will increase our general and administrative expenses. Interest and Other Income, Net Interest and other income, net , consists pr imarily of interest income and investment income earned on our cash, cash equivalents, and marketable securities, gains and losses on foreign currency hedges, and sublease income. 29 Table of Contents Results of Operations Comparison of the three and nine months ended September 30, 2022 and 2021 The following table sets forth the significant components of our results of operations (in thousands): Three Months Ended September 30, Change 2022 2021 $ % Collaboration revenue: Collaboration revenue from customers $ 184 $ 5,285 $ (5,101) (97) % Other collaboration revenue 3,375 — 3,375 * Total collaboration revenue 3,559 5,285 (1,726) (33) Operating expenses: Research and development 87,786 71,559 16,227 23 General and administrative 23,259 19,319 3,940 20 Total operating expenses 111,045 90,878 20,167 22 Loss from operations (107,486) (85,593) (21,893) (26) Interest and other income, net 4,187 1,005 3,182 * Loss before income taxes (103,299) (84,588) (18,711) (22) Net loss $ (103,299) $ (84,588) $ (18,711) (22) % __________________________________________________ * Percentage is not meaningful. Nine Months Ended September 30, Change 2022 2021 $ % Collaboration revenue: Collaboration revenue from customers $ 94,805 $ 36,143 $ 58,662 * % Other collaboration revenue 3,375 4 3,371 * Total collaboration revenue 98,180 36,147 62,033 * Operating expenses: Research and development 266,621 197,477 69,144 35 General and administrative 66,959 57,300 9,659 17 Total operating expenses 333,580 254,777 78,803 31 Loss from operations (235,400) (218,630) (16,770) (8) Interest and other income, net 8,114 3,310 4,804 * Loss before income taxes (227,286) (215,320) (11,966) (6) Income tax expense (27) — (27) * Net loss $ (227,313) $ (215,320) $ (11,993) (6) % __________________________________________________ * Percentage is not meaningful. 30 Table of Contents Collaboration revenue. Collaboration revenue was $3.6 million and $98.2 million for the three and nine months ended September 30, 2022, respectively, and $5.3 million and $36.1 million for the three and nine months ended September 30, 2021. The decrease in collaboration revenue of $1.7 million for the three months ended September 30, 2022, compared to the comparative period in the prior year, was primarily due to a decrease in revenue from our collaboration with Takeda as the preclinical performance obligations are now satisfied under the Takeda Collaboration Agreement, partially offset by an increase in revenue from our collaboration with Sanofi pertaining to Alzheimer's Disease service performance. The increase in collaboration revenue of $62.1 million for the nine months ended September 30, 2022, compared to the comparative period in the prior year was primarily due to our collaborations with Takeda and Sanofi. Takeda revenue increased for the nine months ended September 30, 2022 primarily due to preclinical milestone payments of $24.0 million earned for CTA approvals of TAK-920/DNL919 and TAK-594/DNL593, as well as $27.9 million recognized for the performance obligation satisfaction associated with termination of the Tau program. Sanofi revenue increased for the nine months ended September 30, 2022 primarily due to a $40.0 million milestone payment earned in April 2022 upon dosing the first patient in a Phase 2 study of SAR443820/DNL788 in individuals with ALS, compared with a $15.0 million milestone payment recognized in the comparable period related to the initiation of a Phase 2 study of SAR443122/DNL758 as well as revenue earned for performance of Alzheimer's Disease services in the third quarter of 2022. Research and development expen ses. Research and development expenses were $87.8 million and $266.6 million for the three and nine months ended September 30, 2022, compared to $71.6 million and $197.5 million for the three and nine months ended September 30, 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, 2022 2021 2022 2021 ETV:IDS program external expenses $ 12,610 $ 8,272 $ 47,743 $ 22,025 PTV:PGRN program external expenses 3,838 2,668 12,632 9,426 ATV:TREM2 program external expenses 1,936 4,026 6,637 10,355 TV platform and other program external expenses 6,102 3,694 19,252 5,749 LRRK2 program external expenses 7,099 3,231 17,387 8,383 eIF2B program external expenses 4,415 3,531 11,174 12,623 Other external research and development expenses 8,314 8,988 26,182 22,222 Personnel related expenses (1) 35,967 28,931 107,111 85,050 Other unallocated research and development expenses 9,967 9,412 27,963 26,916 Net cost sharing payments (reimbursements) (2) (2,462) (1,194) (9,460) (5,272) Total research and development expenses $ 87,786 $ 71,559 $ 266,621 $ 197,477 __________________________________________________ (1) Personnel related expenses include stock-based compensation expense of $14.7 million and $45.1 million for the three and nine months ended September 30, 2022, respectively, and $12.2 million and $37.0 million for the three and nine months ended September 30, 2021, respectively, reflecting an increase of $2.5 million and $8.1 million, respectively. (2) For the three and nine months ended September 30, 2022, net cost sharing reimbursements includes reimbursements from Takeda for the PTV:PGRN program (included within PTV:PGRN program external program expenses and Personnel related expenses) of $2.3 million and $8.0 million, respectively, and reimbursements from Takeda for the ATV:TREM2 program (included within ATV:TREM2 program external expenses and Personnel related expenses) of $1.6 million and $5.2 million, respectively. For the three and nine months ended September 30, 2022, cost sharing reimbursements were partially offset by cost sharing payments of $1.4 million and $3.8 million, respectively, owed to Biogen. For the three and nine months ended September 30, 2021, the entire amount represents cost sharing reimbursements from Biogen. The increase in research and development expenses of approximately $16.2 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, was primarily attributable to the following: 31 Table of Contents • An increase of $4.3 million in ETV:IDS program external expenses reflecting the continued progress of this program in clinical trials during 2022, including costs related to our ongoing Phase 1/2 study and our potentially registrational Phase 2/3 study; • An increase in external expenses related to the LRRK2 program of $3.9 million primarily due to a $5.0 million clinical milestone payment owed to Genentech which was triggered upon the commencement of dosing in the global Phase 3 LIGHTHOUSE study to evaluate the efficacy and safety of BIIB122/DNL151 by our collaboration partner Biogen, partially offset by decreases in costs due to the transition of clinical activities to Biogen; • Increases of $2.4 million and $1.2 million in TV platform and other program external expenses and PTV:PGRN program external expenses, respectively, reflecting the progress in our continued investment in developing our TV platform and associated programs; and • An increase of $7.0 million in personnel related expenses, consisting of $4.5 million in employee compensation and $2.5 million in stock-based compensation expense pertaining to additional salaries, related expenses, and equity award grants driven by an increase in our research and development headcount. These increases were partially offset by a decrease of $2.1 million in ATV:TREM2 program external expenses due to the timing of significant clinical related activities year over year and an increase of $1.3 million in cost sharing reimbursements primarily due to the commencement of cost sharing in the Takeda collaboration, as discussed above. The increase in research and development expenses of approximately $69.1 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, was primarily attributable to the following: • An increase of $25.7 million in ETV:IDS program external expenses reflecting the continued progress of this program in clinical trials during 2022, including costs related to our ongoing Phase 1/2 study and our potentially registrational Phase 2/3 study; • Increases of $13.5 million, $4.0 million and $3.2 million, in TV platform and other program external expenses, other external research and development expenses, and PTV:PGRN program external expenses, respectively, reflecting the progress in our PTV:PGRN program as well as our continued investment in developing our robust pipeline; • An increase in external expenses related to the LRRK2 program of $9.0 million primarily due to $12.5 million in clinical milestone payments owed to Genentech in the nine months ended September 30, 2022 triggered upon commencement of dosing in the global Phase 2b LUMA study and the global Phase 3 LIGHTHOUSE study to evaluate the efficacy and safety of BIIB122/DNL151 by our collaboration partner Biogen, partially offset by decreases in costs due to the transition of clinical activities to Biogen; and • An increase of $22.1 million in personnel related expenses, consisting of increases of $14.0 million in employee compensation and $8.1 million in stock-based compensation expense pertaining to additional salaries, related expenses, and equity award grants driven by an increase in our research and development headcount. These increases were partially offset by decreases of $3.7 million and $1.4 million in ATV:TREM2 program external expenses and eIF2B program external expenses due to the timing of significant clinical related activities year over year, and an increase of $4.2 million in cost sharing reimbursements primarily due to the commencement of cost sharing in the Takeda collaboration, as discussed above. 32 Table of Contents General and administrative expenses. General and administrative expenses were $23.3 million for the three months ended September 30, 2022 compared to $19.3 million for the three months ended September 30, 2021. The increase of $4.0 million was primarily attributable to the following: • $1.9 million of increased personnel-related expenses consisting of employee compensation and stock-based compensation expense associated with additional salary expenses and equity award grants driven by higher general and administrative headcount; • $1.2 million of increased other costs, including general corporate services, IT services and subscriptions, taxes, and travel-related expenses required to support our growing business; and • $0.9 million of increased consulting and legal professional service expenses, with specific increases in consulting expenses related to investment in IT system implementation and market research for our key programs. General and administrative expenses. General and administrative expenses were $67.0 million for the nine months ended September 30, 2022 compared to $57.3 million for the nine months ended September 30, 2021. The increase of $9.7 million was primarily attributable to the following: • $6.9 million of increased personnel-related expenses consisting of employee compensation and stock-based compensation expense associated with additional salary expenses and equity award grants driven by higher general and administrative headcount; and • $2.5 million of increased other costs, including general corporate services, IT services and subscriptions, taxes, and travel related expenses required to support our growing business. Liquidity and Capital Resources Sources of Liquidity 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 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. In October 2022, we sold 11.9 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 $26.50 per share for aggregate net proceeds of approximately $296.2 million. Pursuant to our collaboration agreements with Takeda, Sanofi and Biogen, through September 30, 2022 we have received upfront, option and milestone payments of $105.0 million , $190.0 million, and $560.0 million, respectively, and have also received $23.0 million and $16.2 million of gross cost sharing reimbursements from Takeda and Biogen, respectively, and 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 September 30, 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. 33 Table of Contents As of September 30, 2022, we had cash, cash equivalents and marketable securities in the amount of $1.11 billion. Future Funding Requirements and Commitments To date, we have not generated any product revenue. We do not expect to generate any product revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates, and we do not know when, or if, either will occur. We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we expand our research and development activities and continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Further, we expect general and administrative expenses to increase as we continue to incur additional costs associated with supporting our growing operations. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. Until we can generate a sufficient amount of revenue from the commercialization of our product candidates or from our existing collaboration agreements, or future agreements with other third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additionally, any future collaborations we enter into with third parties may provide capital in the near term but limit our potential cash flow and revenue in the future. Any of the foregoing could significantly harm our business, financial condition and prospects. Since our inception, we have incurred significant losses and negative cash flows from operations. We have an accumulated deficit of $872.3 million through September 30, 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 filing date of this Quarterly Report on Form 10-Q, including our existing commitments as outlined below. 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. In the longer term, we anticipate that we will need substantial additional resources to fund our operations and meet future commitments. 34 Table of Contents 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 September 30, 2022, operating lease liabilities were $62.0 million. Under other leases which have not yet commenced, such as the SLC lease, we have future undiscounted lease payments totaling approximately $19.5 million. Under the DMSA with Lonza, we had total non-refundable purchase commitments of $36.0 million as of September 30, 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 nine months ended September 30, 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; • the number and scope of preclinical and clinical programs we decide to pursue; • the progress of the development efforts of third parties with whom we have entered into license and collaboration agreements; • our ability to maintain our current research and development programs and to establish new research and development, license or collaboration arrangements; • our ability and success in securing manufacturing relationships with third parties or in establishing and operating a manufacturing facility; • the costs involved in prosecuting, defending and enforcing patent claims and other intellectual property claims; • the cost and timing of regulatory approvals; • our efforts to enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates; and • the costs and ongoing investments to in-license and/or acquire additional technologies. A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. 35 Table of Contents Cash Flows The following table sets forth a summary of the primary sources and uses of cash for each of the periods presented below (in thousands): Nine Months Ended September 30, 2022 2021 Net cash used in operating activities $ (172,053) $ (145,895) Net cash (used in) provided by investing activities (13,828) 19,124 Net cash provided by financing activities 11,019 14,180 Net decrease in cash, cash equivalents and restricted cash $ (174,862) $ (112,591) Net Cash Used In Operating Activities During the nine months ended September 30, 2022, net cash used in operating activities was $172.1 million, which consisted of a net loss of $227.3 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. Cash used in operating activities was also driven by changes in our operating assets and liabilities. Net Cash (Used In) Provided By Investing Activities During the nine months ended September 30, 2022, net cash used in investing activities was $13.8 million, which consisted of $628.3 million of purchases of marketable securities and $13.0 million of capital expenditures to purchase property and equipment, partially offset by $627.5 million in proceeds from maturities of marketable securities. Net Cash Provided By Financing Activities During the nine months ended September 30, 2022, cash provided by financing activities was $11.0 million in proceeds from the exercise of options to purchase common stock as well as the purchase of ESPP shares. 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. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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 nine months ended September 30, 2022. 36 Table of Contents Recent Accounting Pronouncements There have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 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. 37 Table of Contents