Item 2. Management’s Discussion and Analysis
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;
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• 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 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 adverse economic conditions such as instability in the financial services sector, rising interest rates, rising inflation, and increased labor market competition;
• the impact of the COVID-19 pandemic, increased geopolitical uncertainty, and related global economic disruptions 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.
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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:
• 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 large molecule programs are:
• our lead enzyme replacement therapy ("ERT") program enabled by our Enzyme Transport Vehicle (“ETV”), ETV:IDS, is designed to cross the BBB and 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 frontotemporal dementia ("FTD"), especially FTD-GRN caused by PGRN deficiency;
• our second most advanced ETV enabled program, which is designed to restore lysosomal activity of N-sulfoglucosamine sulfohydrolase ("SGSH"), an enzyme responsible for degrading heparan sulfates in the lysosome, in patients with MPS IIIA (Sanfilippo syndrome Type A);
Ou r clinic al-stage small molecule programs are:
• 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 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 ulcerative colitis ("UC").
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The following table summarizes key information about our clinical stage programs:
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
ETV:SGSH DNL126 Ph 1/2 (planned)
Sanfilippo syndrome Type A (MPS IIIA) Denali
LRRK2 BIIB122/DNL151 Ph 2b
Parkinson's disease Joint with Biogen
eIF2B DNL343 Ph 1b ALS Denali
Ph 2/3 ALS Joint with Healey Center
RIPK1 (CNS-penetrant) SAR443820/DNL788 Ph 2
ALS
Sanofi
Ph 2
MS
Sanofi
RIPK1 (Peripheral) eclitasertib, or SAR443122/DNL758
Ph 2 (closing)
CLE
Sanofi
Ph 2 UC
Sanofi
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 2023 to date include:
• In January 2023, our collaboration partner Sanofi commenced dosing in the Phase 2 study of SAR443820/ DNL788 in patients with MS , triggering a $25.0 million milestone payment, which was received in January 2023 ;
• In February 2023, at the WORLD Symposium TM , we reported additional interim data from the open-label, single-arm Phase 1/2 study of DNL310. Over 49 weeks of DNL310 treatment in the Phase 1/2 study, positive changes across measures of exploratory clinical outcomes including VABS-II (adaptive behavior) and BSID-III (cognitive capabilities) scores and global impression scales were observed. The data also suggested that DNL310 improved hearing, as assessed by auditory brainstem response testing. Additional biomarker data out to 49 weeks continued to demonstrate that DNL310 enabled rapid and sustained normalization of cerebrospinal fluid ("CSF") heparan sulfate to normal healthy levels and improvement in lysosomal function biomarkers. Reduction in urine heparan sulfate and dermatan sulfate after switch from standard of care to DNL310 suggested additional sustained peripheral activity of DNL310. The DNL310 safety profile, with up to two years of treatment, remained consistent with standard of care;
• In March 2023, a contingent consideration payment of $30.0 million associated with our acquisition of F-star Gamma was triggered upon the achievement of a specified clinical milestone in the ETV:IDS program. This payment fully satisfies our clinical contingent consideration obligations under the Purchase Agreement;
• In March 2023, a $10.0 million milestone payment from Takeda was triggered upon achievement of a specified clinical milestone in the Phase 1/2 study of TAK-594/DNL593 in patients with FTD-GRN, which we received in May 2023;
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• In April 2023, we entered into a new operating lease in Salt Lake City, Utah for a 59,336 square foot laboratory (the "Utah site"), office and warehouse premises, after terminating our previous SLC lease in March 2023, decreasing future lease payments by $6.1 million while increasing the lease term by approximately five and a half years. The Utah site will expand our clinical manufacturing capabilities for biologic therapeutics (large molecules) as we plan to use the premises for the manufacture of materials for toxicology studies and drug substance for early human clinical studies with the goal of increasing flexibility and speed in advancing new investigational therapies into clinical trials;
• In April 2023, our collaboration partner Biogen exercised its option to develop and commercialize our ATV program targeting Amyloid Beta, triggering an option exercise payment of $5.0 million, which we received in May 2023;
• In April 2023, we presented final data from the 28-day treatment period of the Phase 1b study of DNL343 in participants with ALS at the 75 th Annual Meeting of the American Academy of Neurology ("AAN"). The results continued to demonstrate that once-daily oral dosing with DNL343 for 28 days was generally well tolerated and demonstrated extensive CSF penetration. In addition, robust inhibition of biomarkers associated with the ISR pathway was observed in blood samples from study participants;
• In May 2023, the first patient was dosed with DNL343 in the Phase 2/3 HEALEY ALS Platform Trial. Recruitment of participants continues for this trial;
• In June 2023, in conjunction with Biogen, and based on review of portfolio timelines and resource prioritization, we announced plans to revise the clinical development program for BIIB122/DNL151. Prior to the planned revisions, the BIIB122 clinical development program encompassed two global late-stage clinical trials: the Phase 2b LUMA study in participants with early-stage Parkinson’s disease, which commenced in May 2022; and the Phase 3 LIGHTHOUSE study in participants with Parkinson’s disease related to LRRK2 mutations, which commenced in September 2022. In consideration of the LIGHTHOUSE study’s complexity, including the long timeline with anticipated study completion in 2031, Biogen and we plan to refocus our efforts to enable a timely readout on efficacy in idiopathic early-stage Parkinson’s disease while gaining further clinical data in Parkinson’s disease with and without a LRRK2 mutation. The planned revisions to the BIIB122 clinical development program are not based on any safety or efficacy data from studies of BIIB122. Biogen and we plan to modify the LUMA study’s enrollment criteria to allow for inclusion of eligible participants with Parkinson’s disease and a confirmed pathogenic variant of LRRK2, in addition to continuing to enroll eligible participants with idiopathic early-stage Parkinson’s disease. Collectively, data from the LUMA study will inform next steps for the development of BIIB122 in Parkinson’s disease;
• In June 2023, we announced a robust reduction in Neurofilament Light ("NfL") with DNL310 treatment in MPS II (Hunter syndrome). Interim results demonstrated average reduction of 64% (p <0.001) from baseline in serum NfL after two years of dosing with DNL310 in the Phase 1/2 study. The FDA has recommended assessment of NfL, a marker of neuroaxonal damage, as a possible biomarker in MPS II;
• In July 2023, we presented additional healthy volunteer data from Part A of the Phase 1/2 study of TAK-594/DNL593 at the Alzheimer's Association International Conference, which continued to demonstrate that single doses of TAK-594/DNL593 resulted in substantial increases in CSF PGRN levels and were generally well tolerated. Recruitment of participants with symptomatic FTD-GRN loss of function mutations in Part B (ascending multiple doses) of the Phase 1/2 study is ongoing;
• In August 2023, we announced that Sanofi had completed enrollment in the Phase 2 HIMALAYA study in July; primary completion of the study is estimated to be January 2024. Further, in November 2023 we announced that Sanofi has completed enrollment of both the global Phase 2 HIMALAYA study in ALS and the Phase 2 study in MS;
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• In August 2023, we announced that Sanofi completed a Phase 2 study of eclitasertib, also known as SAR443122/DNL758, in patients with CLE in June. In October, Sanofi announced that the development of eclitasertib in CLE is being discontinued because the Phase 2 proof-of-concept study did not meet its primary endpoint (percent change from baseline in CLASI-A at week 12). Eclitasertib was found to be generally well-tolerated. Sanofi continues to recruit the Phase 2 study of eclitasertib in patients with UC;
• In August 2023 we announced that, in agreement with Takeda, the companies will discontinue clinical development of TAK-920/DNL919 in Alzheimer’s disease. This is a strategic decision based on the totality of clinical data emerging from the single ascending dose Phase 1 study of TAK-920/DNL919 in healthy volunteers and in consideration of the rapidly evolving treatment landscape for Alzheimer's disease whereby an understanding of drug combinations with newly approved therapies will be important. A preliminary analysis of Phase 1 data indicates robust target engagement and effects on microglial biomarkers (e.g., CSF1R, SPP1, IL1RA, IP10, MIP1b, MCP-1), which were consistent with preclinical studies that demonstrate that ATV:TREM2 induces robust changes to a responsive microglial cell state (van Lengerich B, et al. Nat Neurosci. 2023). In the Phase 1 study, TAK-920/DNL919 was clinically well tolerated at doses with demonstrated changes in CSF biomarkers and there were no serious adverse events or severe treatment emergent adverse events; however, safety signals of moderate, reversible hematologic effects were observed at the highest dose tested, suggesting a narrow therapeutic window for the Alzheimer’s disease patient population. The Phase 1 safety findings are believed to be specific to properties of TAK-920/DNL919 and TREM2 biology. Denali and Takeda will continue to focus research efforts on back-up molecules in preclinical development, including exploration of potential combination therapy given recent new drug approvals in Alzheimer's disease;
• In August 2023, we announced that the Investigational New Drug ("IND") application for DNL126 in MPS IIIA has been accepted and start-up activities for the Phase 1/2 study are ongoing;
• In August 2023, we presented new interim data from the Phase 1/2 study of DNL310 in MPS II in an oral presentation at the Society for the Study of Inborn Errors of Metabolism ("SSIEM") Annual Symposium 2023. The interim clinical outcomes data, safety profile, and biomarker effects, including normalization of CSF heparan sulfate and reduction in NfL, continue to support development of DNL310 in MPS II. Recruitment is ongoing in the global Phase 2/3 COMPASS study of DNL310 in neuronopathic and non-neuronopathic MPS II; and
• In August 2023, we executed an amendment to the Definitive LRRK2 Collaboration and License Agreement and Waiver of and Amendment to Right of First Negotiation (ROFN), Option, and License Agreement. As part of the amendment, certain milestone criteria were changed while the total amount of development, regulatory, and commercial milestones across all indications remains the same. In addition, Biogen agreed to waive the remaining option and rights of first negotiation under the ROFN and Option Agreement.
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.
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We have incurred significant operating losses to date and expect to continue to incur operating losses for the foreseeable future. We had net losses of $99.4 million and $25.8 million for the three and nine months ended September 30, 2023, respectively. Our net losses were $103.3 million and $227.3 million for the three and nine months ended September 30, 2022 , respectively. As of September 30, 2023, we had an accumulated deficit o f $996.7 million. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candida tes. 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.
Future revenue may be recognized from the Takeda Collaboration Agreement, Sanofi Collaboration Agreement, and Biogen Collaboration Agreement, and may be generated from product sales or milestone payments, royalties and profit sharing 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, profit sharing reimbursement, 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;
• 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.
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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 collaboration partners.
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 increased geopolitical uncertainty. 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;
• 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.
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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, and sublease income.
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Results of Operations
Comparison of the three and nine months ended September 30, 2023 and 2022
The following table sets forth the significant components of our results of operations (in thousands):
Three Months Ended September 30, Change
2023 2022 $ %
Collaboration revenue:
Collaboration revenue from customers
$ 1,267 $ 184 $ 1,083 * %
Other collaboration revenue
— 3,375 (3,375) *
Total collaboration revenue
1,267 3,559 (2,292) (64)
Operating expenses:
Research and development
89,737 87,786 1,951 2
General and administrative
25,325 23,259 2,066 9
Total operating expenses
115,062 111,045 4,017 4
Loss from operations (113,795) (107,486) (6,309) 6
Interest and other income, net
14,442 4,187 10,255 *
Loss before income taxes (99,353) (103,299) 3,946 (4)
Net loss $ (99,353) $ (103,299) $ 3,946 (4) %
__________________________________________________
* Percentage is not meaningful.
Nine Months Ended September 30, Change
2023 2022 $ %
Collaboration revenue:
Collaboration revenue from customers
$ 330,531 $ 94,805 $ 235,726 * %
Other collaboration revenue
— 3,375 (3,375) *
Total collaboration revenue
330,531 98,180 232,351 *
Operating expenses:
Research and development
316,073 266,621 49,452 19
General and administrative
78,585 66,959 11,626 17
Total operating expenses
394,658 333,580 61,078 18
Loss from operations
(64,127) (235,400) 171,273 (73)
Interest and other income, net
38,376 8,114 30,262 *
Loss before income taxes
(25,751) (227,286) 201,535 (89)
Income tax expense
— (27) 27 *
Net loss
$ (25,751) $ (227,313) $ 201,562 (89) %
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* Percentage is not meaningful.
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Collaboration revenue. Collaboration revenue was $1.3 million and $330.5 million for the three and nine months ended September 30, 2023, respectively, and $3.6 million and $98.2 million for the three and nine months ended September 30, 2022. The decrease in revenue of $2.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was due to a decrease of revenue earned under the Sanofi Collaboration of $3.4 million, partially offset by an increase of $1.1 million in revenue earned under the Biogen Collaboration Agreement due to the August 2023 amendment which resulted in the satisfaction of the only remaining performance obligation for the second option program. The increase in collaboration revenue of $232.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to $293.9 million in revenue recognized in April 2023 under the Biogen Collaboration Agreement as a result of Biogen exercising its option to license our ATV:Abeta program, partially offset by a decrease of $41.9 million in revenue earned under the Takeda Collaboration Agreement, as well as a decrease of $18.4 million in milestone revenue earned under the Sanofi Collaboration Agreement. The decreases in revenues from the Sanofi and Takeda Collaboration Agreements are due to the timing of underlying activities and achievement of milestones under the collaboration agreements.
Research and development expen ses. Research and development expenses were $89.7 million and $316.1 million for the three and nine months ended September 30, 2023, compared to $87.8 million and $266.6 million for the three and nine months ended September 30, 2022, 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,
2023 2022 2023 2022
ETV:IDS program external expenses $ 20,388 $ 12,610 $ 87,674 $ 47,743
PTV:PGRN program external expenses 1,889 3,838 8,107 12,632
TV platform and other program external expenses
3,836 8,038 18,090 25,889
LRRK2 program external expenses 1,049 7,099 3,867 17,387
eIF2B program external expenses 4,971 4,415 14,866 11,174
Other external research and development expenses
6,512 8,314 20,031 26,182
Personnel related expenses (1)
39,578 35,967 119,640 107,111
Other unallocated research and development expenses
10,931 9,967 38,693 27,963
Net cost sharing payments (reimbursements) (2)
583 (2,462) 5,105 (9,460)
Total research and development expenses
$ 89,737 $ 87,786 $ 316,073 $ 266,621
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(1) Personnel related expenses include stock-based compensation expense of $15.8 million and $47.8 million for the three and nine months ended September 30, 2023, respectively, and $14.7 million and $45.1 million for the three and nine months ended September 30, 2022, respectively, reflecting an increase of $1.1 million and $2.7 million, respectively.
(2) There were $0.6 million and $5.1 million in net cost sharing payments during the three and nine months ended September 30, 2023, respectively, consisting of $3.4 million and $14.5 million, respectively, owed to Biogen for LRRK2 program external expenses and program internal expenses (included within Personnel related expenses), partially offset by $1.7 million and $5.1 million, respectively, of reimbursements from Takeda for the PTV:PGRN program (included within PTV program external program expenses and Personnel related expenses), and $1.1 million and $4.3 million respectively, of reimbursements from Takeda for the ATV:TREM2 program (included within TV platform and other program external expenses and Personnel related expenses). 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 TV Platform and other 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.
The increase in research and development expenses of approximately $1.9 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, was primarily attributable to the following:
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• An increase of $7.8 million in ETV:IDS program external expenses reflecting the continued progress of this program in clinical trials during 2023, including costs related to our ongoing Phase 1/2 study and our potentially registrational Phase 2/3 study;
• An increase of $0.6 million in eIF2B program external expenses reflecting the continued progress of this program in clinical trials during 2023;
• An increase of $3.6 million in personnel related expenses, consisting of $2.5 million in employee compensation and $1.1 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; and
• An increase of $3.0 million in net cost sharing payments due to the transition of LRRK2 clinical activities to Biogen, resulting in cost sharing reimbursements flipping to payments.
These increases were partially offset by decreases of $6.1 million in LRRK2 program external expenses due to the transition of LRRK2 clinical activities to Biogen, $4.2 million in TV platform and other program external expenses as a result of discontinuation of development of DNL919, $1.9 million in PTV:PGRN program external expenses due to the timing of significant external research and manufacturing related activities year over year, and $1.8 million in other external research and development expenses.
The increase in research and development expenses of approximately $49.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily attributable to the following:
• An increase of $39.9 million in ETV:IDS program external expenses primarily due to the contingent consideration payment of $30.0 million recorded in the first quarter of 2023 related to the acquisition of F-star Gamma, which was triggered in March 2023 upon the achievement of a specified clinical milestone in the ETV:IDS program;
• An increase of $10.7 million in other unallocated research and development expenses primarily due to increased facility costs as a result of accelerated depreciation on leasehold improvements associated with the termination of the SLC Lease as well as other general research costs;
• An increase of $3.7 million in eIF2B program external expenses reflecting the continued progress of this program in clinical trials during 2023;
• An increase of $12.5 million in personnel related expenses, consisting of $9.8 million in employee compensation and $2.7 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; and
• An increase of $14.6 million in net cost sharing payments primarily due to the transition of LRRK2 clinical activities to Biogen, resulting in cost sharing reimbursements flipping to payments.
These increases were partially offset by decreases of $13.5 million in LRRK2 program external expenses due to the transition of LRRK2 clinical activities to Biogen, $7.8 million in TV platform and other program external expenses as a result of discontinuation of development of DNL919, $6.1 million in other external research and development expenses and $4.5 million in PTV:PGRN program external expenses due to the timing of significant external research and manufacturing related activities year over year.
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General and administrative expenses. General and administrative expenses were $25.3 million for the three months ended September 30, 2023 compared to $23.3 million for the three months ended September 30, 2022. The increase of $2.0 million was primarily attributable to a $3.0 million increase in 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, partially offset by a $1.0 million decrease in professional services and other corporate costs.
General and administrative expenses were $78.6 million for the nine months ended September 30, 2023 compared to $67.0 million for the nine months ended September 30, 2022. The increase of $11.6 million was primarily attributable to the following:
• $8.0 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
• $3.6 million of combined increases in professional services, facilities and other corporate costs.
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. To date, no shares have been sold under the equity distribution agreement.
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, 2023 we have received upfront, option and milestone payments of $115.0 million , $225.0 million, and $565.0 million, respectively, and have also received $38.5 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, 2023 we have received $110.0 million and $465.0 million, respectively, for the sale and issuance of shares of our common stock to these collaboration partners.
As of September 30, 2023, we had cash, cash equivalents and marketable securities in the amount of $1.12 billion.
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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 $996.7 million through September 30, 2023. 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 twelve 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.
Our existing commitments primarily relate to our obligations under existing lease agreements, and certain clinical and manufacturing agreements, including the DMSA with Lonza Sales AG ("Lonza") for the development and manufacture of biologic products. As of September 30, 2023, operating lease liabilities were $53.9 million. Under the SLC lease which was executed in April 2023, we have future undiscounted lease payments totaling approximately $13.4 million. Under the DMSA with Lonza, and certain other clinical and manufacturing agreements, we had total non-refundable purchase commitments as of September 30, 2023 of $87.7 million, with certain amounts subject to cost sharing with Takeda. While the lease obligations span multiple years, the majority of the purchase commitments with Lonza and other clinical and manufacturing agreements are due within twelve months, with some spanning several years. These commitments are more fully described in Note 7 - Commitments and Contingencies of our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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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.
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,
2023 2022
Net cash used in operating activities $ (259,334) $ (172,053)
Net cash provided by (used in) investing activities 176,261 (13,828)
Net cash provided by financing activities 13,115 11,019
Net decrease in cash, cash equivalents and restricted cash $ (69,958) $ (174,862)
Net Cash Used In Operating Activities
During the nine months ended September 30, 2023, net cash used in operating activities was $259.3 million, which consisted of a net loss of $25.8 million, adjusted by non-cash items primarily related to stock-based compensation, depreciation and amortization, 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 such as the reduction in our related-party contract liability as a result of Biogen's option exercise during the second quarter of 2023, as well as $30.0 million in contingent consideration payments to F-star during the nine months ended September 30, 2023.
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Net Cash Provided By (Used In) Investing Activities
During the nine months ended September 30, 2023, net cash provided by investing activities was $176.3 million, which consisted of $1.6 billion in proceeds from maturities and sales of marketable securities, partially offset by $1.4 billion of purchases of marketable securities, and $10.7 million of capital expenditures to purchase property and equipment.
Net Cash Provided By Financing Activities
During the nine months ended September 30, 2023, cash provided by financing activities was $13.1 million which consisted of proceeds from the exercise of options to purchase common stock and purchases 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, 2022, as filed with the SEC on February 27, 2023, 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, 2023.
Recent Accounting Pronouncements
There have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2023 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023, that are of significance or potential significance to us.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.