Denali: Need Patient Data To Justify High Valuation (NASDAQ:DNLI)

I have been covering Denali Therapeutics Inc. (NASDAQ:DNLI) for a few years now. Denali has three things going for it – one, its management and assets constitute almost entirely of former Roche/Genentech material; two, it has a transport vehicle technology that allows large small molecules cross the blood-brain barrier; and three, after a couple of excellent dealmaking, the company is flush with cash.

On the flipside, DNL310, its Hunter Syndrome program, produced some confusing data last year, and there was a clinical hold placed on DNL919, an early stage, pre-IND Alzheimer’s Disease program. The biggest drawback here is that despite its high valuation, Denali is yet to complete a pivotal trial.

The problem with the Hunter Syndrome data was that it saw high variability in neurofilament in CSF. Data saw heparan sulfate and dermatan sulfate normalized in patients, which were primary and a key secondary endpoints, respectively. Nfl was an exploratory endpoint, and as the company tried to explain in August after producing additional data, it didn’t matter:

We feel there’s not really a clear predictive ability of neurofilaments for clinical outcomes or a really clear understanding at this point.

What mattered was hitting the primary endpoint, where they scored a homerun. The company will explore with the FDA whether they can file for an accelerated approval:

“CDER has been quite clear up until now that they want randomized study data with a clinical outcome, which is why we designed our Phase II/III study as such,” [Chief Medical Officer Carole] Ho said. “Now, that being said, we will absolutely evaluate and work with the agency to see whether a biomarker outcome could be used for accelerated approval.”

The problem with companies like Denali is that they have such high valuations at pre-approval, pre-pivotal trial stages that it becomes difficult to buy shares early. Denali once had a market cap of $10bn, and after multiple corrections, is now down to $4bn. One wonders if there will be further corrections.

A trial mishap can dent such stocks, making investors lose portfolio value. It is more prudent to invest in such companies when they are very strongly de-risked. This is only my [conservative] opinion, formed after years of experience seeing early stage, overhyped stocks make value go down the drain. Often, they will not even produce an approval-ready asset; sometimes, even when they do, so much value is already factored into their market cap early on, that the actual approval is not able to boost the stock up at all.

Last year, when I covered the company, they said that they plan to advance DNL151 and DNL310 into potentially registrational trials for Parkinson’s disease and MPS II (Hunter syndrome), respectively. They also plan to get DNL788 into a Phase 2 trial for ALS. Other programs include a new Transport Vehicle program into the clinic, DNL593 for FTD-GRN. They also planned to produce initial clinical data from their novel eIF2B activator, DNL343, in ALS.

By March, they had DNL593 in the clinic in partnership with Takeda (TAK). Frontotemporal dementia (FTD) caused by mutations in the granulin gene (GRN) is the indication here, where FTD is the most common type of dementia for people under 60. FTD is a small (<$300mn) but rapidly growing market. There are no approved treatments. This is the second transport vehicle technology in the clinic. In November, interim results from the Part A study in healthy volunteers demonstrated dose-dependent increases in CSF progranulin levels, which showed robust brain delivery of DNL593.

By May, delivering on a second promise, they – or rather, partner Sanofi (SNY) – had DNL788 in a phase 2 trial for ALS. On commencing dosing, the company received $40mn in milestone payment from Sanofi. DNL788 is a CNS-penetrant RIPK1 inhibitor, and a phase 1 trial showed “robust target engagement” and clean safety profile. The two companies will share profits equally in the US and China, and in other geographies, Denali will receive royalties. The same asset will also target Alzheimer’s and Multiple Sclerosis in future trials.

Also by May, Biogen (BIIB) began the global Phase 2b LUMA study to evaluate the efficacy and safety of DNL151, as compared to placebo in approximately 640 participants with early-stage Parkinson’s disease. DNL151 targets the LRRK2 mutation, a known pathogenic factor in the development of Parkinson’s Disease, which affects more than 10 million people worldwide. According to cited research, “mutations in leucine-rich repeat kinase 2 (LRRK2) account for 4-5% of familial and 1-2% of sporadic Parkinson’s disease.” Besides this Luma study, the company planned to initiate a phase 3 LIGHTHOUSE study also in 2022. This was done in October.

Financials

DNLI has a market cap of $3.95bn and a cash balance of $1.11bn as of September 2022. In October last year, Denali raised $316mn from a secondary offering. Total research and development expenses were $87.8 million for the three months ended September 30, 2022, while general and administrative expenses were $23.3 million. At that rate, the company has cash for more than 12 quarters.

Bottom Line

While Denali Therapeutics Inc. is advancing its programs rapidly, the market cap is just too high for my comfort at this stage in their game. I need to see patient data before I sign in. I will continue to watch Denali Therapeutics Inc. from the sidelines.

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