DNLI - Denali Therapeutics: Intriguing Yet Expensive Technology Awaits 'Buy' Signal

2023-07-17 00:45:27 ET

Summary

• Denali Therapeutics reported Q1 2023 losses of $109.8 million, up from $65.2 million in Q1 2022, with reduced revenue from partnerships with Takeda and Biogen.
• The company's Phase 1/2 trial for DNL310, a treatment for Hunter syndrome, showed a significant mean reduction of 64% in serum neurofilament light, a disease biomarker.
• As an investor, I would consider Denali as a "Hold". This cautious approach accounts for the exciting potential in their MPS II treatment and strong growth prospects while acknowledging risks.

Introduction

Denali Therapeutics ( DNLI ) is a clinical-stage biopharmaceutical company that pioneers treatments for neurodegenerative and lysosomal storage diseases. Using their proprietary "Transport Vehicle" [TV] technology, Denali is designing medications capable of crossing the blood-brain barrier to improve drug delivery. Their portfolio consists of seven products in clinical development and numerous preclinical candidates. Key achievements include creating a diverse array of clinical-stage programs, filing 10 investigational new drug applications, forming strategic collaborations worth billions, and gaining over 90 patents. They're currently conducting late-stage trials for treatments of Parkinson's, ALS, and Hunter syndrome, along with other promising research.

Recent developments: Denali Therapeutics, in collaboration with Biogen, has decided to halt a Phase 3 trial for Parkinson’s disease candidate BIIB122, not due to safety or efficacy concerns, but as a result of portfolio timeline reviews and resource allocation. In other news, Denali revealed new data from its Phase 1/2 trial for DNL310, a treatment for the rare genetic disorder, Hunter syndrome. Preliminary results show a significant mean reduction of 64% in serum neurofilament light, a disease biomarker, in patients who received the therapy. Further interim data from the trial will be shared at an upcoming medical event in Israel.

Q1 2023 Earnings

Let's first review last quarter's earnings. Denali Therapeutics reported Q1 2023 financial results, with net losses of $109.8 million, up from $65.2 million in Q1 2022. Collaboration revenue fell to $35.1 million from $42.1 million due to reduced revenue from partnerships with Takeda and Biogen, partly offset by a $25 million milestone achieved with Sanofi. Research and development expenses rose to $128.8 million, up from $86.1 million, driven by higher costs related to the DNL310 program, increased facility costs, and personnel-related expenses. General and administrative expenses were $27.1 million, up from $22.5 million, mainly due to higher personnel costs and professional service expenses. The company had approximately $1.29 billion in cash and equivalents as of March 31, 2023.

DNLI Stock Assessment

Per Seeking Alpha DATA, DNLI presents a mixed picture. On the earnings front, the company is projected to continue posting losses through 2025, with EPS expected to decrease by 22.73% in 2023, 6.1% in 2024, and rise by 14.59% in 2025. However, sales are anticipated to grow positively, increasing by 31.57% in 2024 and 73.75% in 2025. The company's earnings revisions have been relatively balanced, with 8 upwards and 6 downwards revisions.

Denali's valuation seems challenging with a high EV/Sales ratio of 27.43 and a Price/Book ratio of 4.15. Earnings-based valuation metrics are not meaningful due to the company's lack of profitability.

The company demonstrates strong growth, with revenue growth YoY of 22.42% and a 3-year CAGR of 57.28%. However, profitability remains a concern, with a high negative gross profit margin of -295.66% and a negative return on equity of -39.32%.

Denali's stock has shown moderate momentum, rising 18.7% over the past 3 months but decreasing 12.97% YoY.

The company has a solid capital structure with a market cap of $4.01B, minimal debt of $57.09M, and substantial cash reserves of $1.29B.

Promising Results for Denali's Groundbreaking MPS II Therapy

Denali Therapeutics has released promising interim results from its Phase 1/2 trial for DNL310. DNL310 is a groundbreaking investigational therapy, specifically designed to cross the blood-brain barrier and address both the behavioral and physical symptoms associated with Hunter syndrome, also known as MPS II.

MPS II is a rare genetic condition predominantly affecting males, with around 2,000 known cases worldwide. It manifests in behavioral, cognitive, and physical symptoms that can severely impact quality of life and lifespan. MPS II patients suffer from a deficiency of the IDS enzyme due to mutations in the IDS gene, leading to a buildup of glycosaminoglycans (GAGs) that cause the varied symptoms. The current standard treatment only partially addresses physical symptoms and fails to treat cognitive and behavioral symptoms, making DNL310's promise to address both highly significant.

Denali's study revealed that MPS II patients who received DNL310 showed a mean reduction of 64% in serum neurofilament light (NfL), a marker of neuroaxonal damage, after two years of treatment. This is particularly significant given that the FDA has suggested NfL as a potential biomarker for assessing MPS II.

These promising results, combined with DNL310's potential to normalize CSF heparan sulfate - a key factor linked with neurodegeneration in MPS disorders - indicate a robust therapeutic response. Denali plans to present additional interim data at the SSIEM Annual Symposium in Jerusalem later this year.

The market potential for DNL310 is significant given the lack of comprehensive treatments for MPS II. The ongoing Phase 2/3 COMPASS study of DNL310 further underlines Denali's commitment to this therapy. The next steps involve continual engagement with the FDA, the MPS community, and potential leveraging of the fast-track designation granted by the FDA and the Priority Medicines designation from the European Medicines Agency, aiming to bring this promising treatment to MPS II patients as swiftly as possible.

My Analysis & Recommendation

To conclude, Denali Therapeutics is a compelling investment opportunity with several noteworthy elements. It stands out in the biopharmaceutical sector due to its robust development pipeline, numerous collaborations, and unique proprietary technology. In particular, the company's ongoing work on MPS II treatment shows substantial promise and the potential market for a holistic MPS II treatment could be highly lucrative.

Yet, like many other clinical-stage biopharmaceuticals, Denali is currently facing significant losses and is expected to do so in the near future. Despite the optimism surrounding projected revenue growth, primarily tied to its collaborations, the current absence of profitability and anticipated increase in losses introduces an element of risk. Denali's stock does have moderate momentum and the company maintains a healthy cash position, providing some stability. However, the company's future success largely depends on positive research outcomes and the successful progression of its pipeline candidates from clinical trials to the marketplace, particularly DNL310.

As an investor, my assessment would lean towards a "Hold" recommendation for Denali. This cautious stance considers both the potential of their MPS II treatment and promising growth prospects, while acknowledging the inherent financial and clinical trial risks. Investors should closely monitor the progress of Denali's late-stage trials, particularly the Phase 2/3 COMPASS study. Additionally, attention should be given to how the company handles its finances amidst substantial operating expenses.

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