# Denali Therapeutics Inc. (DNLI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Denali Therapeutics Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1714899/000171489923000049/dnli-20221231.htm
Accession: 0001714899-23-000049
Filing date: 2023-02-27
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DNLI/
All MD&A years: /company/DNLI/mda/
Previous year: /company/DNLI/mda/fy2021/ (FY 2021)
Next year: /company/DNLI/mda/fy2023/ (FY 2023)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes to those statements included elsewhere in this report. 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 could 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” and elsewhere in this report.

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.

Our clinical-stage programs are:

•our ETV:IDS program, our lead brain-penetrant ERT, enabled by our ETV, which is designed to restore IDS, and reduce GAGs, both peripherally and in the brain, in patients with MPS II, or Hunter syndrome;

•our recombinant PGRN biotherapeutic enabled by our PTV, being developed in collaboration with Takeda, to address certain types of FTD, especially FTD-GRN caused by PGRN deficiency;

•our novel, selective, high affinity TREM2 antibody, enabled by our ATV, being developed in collaboration with Takeda for the potential treatment of Alzheimer's disease;

•our LRRK2 inhibitor program, being developed in collaboration with Biogen, to address Parkinson’s disease;

•our eIF2B activator program to address diseases such as ALS and FTD;

•our CNS-penetrant RIPK1 inhibitor program, partnered with Sanofi, to address neurological diseases such as ALS, MS and Alzheimer's disease; and

•a second non-CNS penetrant RIPK1 inhibitor, partnered with Sanofi, to address peripheral inflammatory diseases such as CLE and UC.

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The following table summarizes key information about our clinical stage programs:

[[GREPCENT_TABLE]]
[["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","","Parkinson's disease","","Joint with Biogen"],["","","Ph 3"],["eIF2B","","DNL343","","Ph 1b","","ALS","","Denali"],["","","Ph 2/3 (planned)","","ALS","","Joint with Healey Center"],["RIPK1 (CNS-penetrant)","","SAR443820/DNL788","","Ph 2","","ALS","","Sanofi"],["","","Ph 2","","MS","","Sanofi"],["RIPK1 (Peripheral)","","SAR443122/DNL758","","Ph 2","","CLE","","Sanofi"],["","","Ph 2","","UC","","Sanofi"]]
[[/GREPCENT_TABLE]]

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 for the year ended December 31, 2022 and in 2023 to date include:

•ETV:IDS

◦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 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; and

◦In February 2023, at the WORLDSymposiumTM, 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 CSF heparan sulfate to normal healthy levels and improvement in lysosomal function biomarkers. The DNL310 safety profile, with up to two years of treatment, remained consistent with standard of care.

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•PTV:PGRN

◦In January 2022, the 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 March 2022, we initiated a Phase 1/2 Clinical Trial of TAK-594/DNL593 for FTD-GRN; and

◦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. Final data from Part A of the Phase 1/2 study is expected in mid 2023.

•ATV:TREM2

◦In January 2022, we announced that the TAK-920/DNL919 IND application had been placed on clinical hold by the 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 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; and

◦In August 2022, dosing commenced in the Phase 1 single ascending dose study of TAK-920/DNL919 in healthy volunteers in the Netherlands. Data from the Phase 1 single ascending dose study in healthy volunteers is expected by year-end 2023;

•LRRK2

◦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; and

◦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;

•RIPK1

◦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 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;

◦In December 2022, our collaboration partner Sanofi commenced dosing in the Phase 2 study of SAR443122/ DNL758 in patients with UC, triggering a $10.0 million milestone payment, which was received in December 2022; and

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◦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.

•eIF2B

◦In December 2022, we announced DNL343 interim phase 1b data in ALS and entry into the Phase 2/3 HEALEY ALS platform trial. Final data from the 28-day double-blind, placebo-controlled portion of the Phase 1b study is expected in mid-2023. and the initiation of the Phase 2/3 study in the HEALEY ALS Platform Trial is expected to occur in mid-2023.

•Other

◦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 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 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 February 2023, we presented supportive preclinical data at the WORLD Symposium demonstrating that DNL126 reduced heparan sulfate in a dose-dependent manner in brain and CSF in an MPS IIIA model. We anticipate submitting an investigational new drug (IND) application in the first half of 2023, with Phase 1/2 recruitment activities to begin in the second half of 2023.

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 candidates. We had net losses of $326.0 million and $290.6 million for the years ended December 31, 2022 and 2021, respectively. Due to revenue recognized from our collaboration arrangement with Biogen, we had net income of $71.1 million for the year ended December 31, 2020. As of December 31, 2022, we had an accumulated deficit of $971.0 million. We expect 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.

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.

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License and Collaboration Agreements

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.

Biogen

In August 2020, we entered into the Provisional Biogen Collaboration Agreement with Biogen pursuant to which we granted Biogen a license to co-develop and co-commercialize our LRRK2 Program, an option in respect of two Option Programs, and a right of first negotiation with respect to the ROFN Programs should we decide to seek a collaboration with a third party for such programs. In connection with the Provisional Biogen Collaboration Agreement, we also entered into a common stock purchase agreement with BIMA, pursuant to which we sold 13,310,243 shares of our common stock to BIMA for an aggregate purchase price of $465.0 million. In October 2020, we entered into the LRRK2 Agreement and the ROFN and Option Agreement with Biogen, collectively the "Biogen Collaboration Agreement." Under the terms of the Biogen Collaboration Agreement, we received $560.0 million in upfront payments in October 2020. Further details regarding the terms of the agreements between us and Biogen are included in this Annual Report on Form 10-K in the section titled "Business - Licenses and Collaborations."

In relation to the Biogen Collaboration Agreement, we have recognized related party collaboration revenue of $3.1 million, $3.7 million, and $307.4 million in the years ended December 31, 2022, 2021 and 2020, respectively, related party research and development expense of $8.2 million for cost sharing payments to Biogen in the year ended December 31, 2022, and related party offsets to research and development expense as a result of cost sharing reimbursements from Biogen of $6.5 million and $9.3 million in the years ended December 31, 2021 and 2020, respectively. We have recorded cost sharing payments due to a related party of $4.4 million on the Consolidated Balance Sheet as of December 31, 2022. Through December 31, 2022, we have not received any milestone payments from Biogen and have not recorded any product sales under the Biogen Collaboration Agreement.

Sanofi

In October 2018, we entered into the Sanofi Collaboration Agreement with Sanofi pursuant to which certain small molecule CNS and peripheral RIPK1 inhibitors contributed by Sanofi and by us are being, or will be developed and commercialized. Further details regarding the terms of the agreement between us and Sanofi, and historic payments between the parties under the agreement, are included in this Annual Report on Form 10-K in the section titled "Business - Licenses and Collaborations."

We have recognized collaboration revenue of $53.4 million, $15.0 million and $1.1 million associated with the Sanofi Collaboration Agreement in the years ended December 31, 2022, 2021 and 2020, respectively, and recorded no receivable from Sanofi on the Consolidated Balance Sheets as of December 31, 2022 and 2021. Through December 31, 2022, we had received milestone payments of $75.0 million and we had not recorded any product sales under the Sanofi Collaboration Agreement. We earned and received a further $25.0 million milestone in January 2023 upon commencement of dosing in the Phase 2 study of SAR443820/ DNL788 in patients with MS.

Takeda

In January 2018, we entered into the Takeda Collaboration Agreement pursuant to which we granted Takeda an option to develop and commercialize, jointly with us, our ATV:TREM2, PTV:PGRN and ATV:BACE1/Tau programs, the latter of which was later replaced with our ATV:Tau program. Pursuant to the terms of the Takeda Collaboration Agreement, we also entered into the Purchase Agreement with Takeda in January 2018, pursuant to which we sold 4,214,559 shares of our common stock to Takeda for an aggregate purchase price of $110.0 million.

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In November 2021 and December 2021, Takeda exercised its options for the PTV:PGRN and ATV:TREM2 programs, respectively, subsequent to which we have shared equally in the development costs for the programs. In March 2022, we mutually agreed under the Takeda Collaboration Agreement to terminate activity on the ATV:Tau program. Further details regarding the terms of the agreement between us and Takeda, and historic payments between the parties under the agreements, are included in this Annual Report on Form 10-K in the section titled "Business - Licenses and Collaborations."

We have recognized collaboration revenue of $51.9 million, $29.9 million and $27.2 million associated with the Takeda Collaboration Agreement in the years ended December 31, 2022, 2021 and 2020, respectively, and offsets to research and development expense for cost sharing reimbursements of $18.2 million and $13.7 million in the years ended December 31, 2022 and 2021, respectively. We recorded a receivable of $5.0 million and $13.7 million from Takeda as of December 31, 2022 and 2021, respectively. Through December 31, 2022, we have received $55.0 million in preclinical milestone payments and $10.0 million of option exercise fees from Takeda, and we have not recorded any product sales under the Takeda Collaboration Agreement.

F-star

In August 2016, we entered into the F-star Collaboration Agreement with the F-star entities. The goal of the collaboration was the development of Fcabs to enhance delivery of therapeutics across the BBB into the brain. In connection with the entry into the F-star Collaboration Agreement, we also purchased an option to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement. In May 2018, we exercised such buy-out option and entered into the F-star Purchase Agreement with the shareholders of F-star Gamma and Shareholder Representative Services LLC, pursuant to which we acquired all of the outstanding shares of F-star Gamma. As a result of the Acquisition, F-star Gamma became our wholly-owned subsidiary and the entity's name was changed to Denali BBB Holding Limited. In addition, we became a direct licensee of certain intellectual property of F-star Ltd by way of our assumption of F-star Gamma’s license agreement with F-star Ltd, dated August 24, 2016. Further details regarding the terms of the arrangements between us and the F-star entities, and historic payments between the parties under the agreements, are included in this Annual Report on Form 10-K in the section titled "Business - Licenses and Collaborations."

Through December 31, 2022 we have recognized consideration under the F-star Purchase Agreement of $19.8 million as research and development expenses, with no research and development expense recognized in the years ended December 31, 2022, 2021, or 2020. We recognized $0.1 million and $1.2 million of research and development expense related to the funding of F-star research costs for the years ended December 31, 2021 and 2020, respectively. No research and development expense related to the funding of F-star research costs were recognized for the year ended December 31, 2022.

Genentech

In June 2016, we entered into an exclusive license agreement with Genentech. The agreement gives us access to Genentech’s LRRK2 inhibitor program. Our collaboration partner in the LRRK2 program, Biogen, is responsible for 50% of any payment obligation to Genentech under the Biogen Collaboration Agreement.

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As consideration to date, we have paid Genentech $25.0 million in the aggregate, including an upfront fee, a technology transfer fee and three clinical milestone payments, with $18.8 million of this recorded as research and development expense as incurred, after cost sharing reimbursements from Biogen. Included within this amount, in the year ended December 31, 2022, we paid Genentech a $7.5 million clinical milestone payment triggered upon the commencement of dosing in the global Phase 2b LUMA study to evaluate the efficacy and safety of BIIB122/DNL151 by Biogen, and a further $5.0 million clinical milestone payment triggered upon the commencement of dosing in the global Phase 3 LIGHTHOUSE study to evaluate the efficacy and safety profile of BIIB122/DNL151 by Biogen. Of these milestones, we recognized $6.3 million as research and development expense as incurred after cost sharing reimbursements from Biogen in the year ended December 31, 2022. There were no expenses recognized under this agreement in the years ended December 31, 2021 or 2020.

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 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;

•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 and Biogen Collaboration Agreement. All 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 ongoing 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 primarily of interest income and investment income earned on our cash, cash equivalents, and marketable securities, and sublease income.

Results of Operations

Comparison of the years ended December 31, 2022 and 2021

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","$","","%"],["Collaboration revenue:"],["Collaboration revenue from customers","105,065","","","48,657","","","56,408","","","*","%"],["Other collaboration revenue","3,398","","","4","","","3,394","","","*"],["Total collaboration revenue","108,463","","","48,661","","","59,802","","","*"],["Operating expenses:"],["Research and development","358,732","","","265,353","","","93,379","","","35"],["General and administrative","90,475","","","79,059","","","11,416","","","14"],["Total operating expenses","449,207","","","344,412","","","104,795","","","30"],["Loss from operations","(340,744)","","","(295,751)","","","(44,993)","","","15"],["Interest and other income, net","14,774","","","4,595","","","10,179","","","*"],["Loss before income taxes","(325,970)","","","(291,156)","","","(34,814)","","","12"],["Income tax benefit (expense)","(21)","","","575","","","(596)","","","*"],["Net loss","$","(325,991)","","","$","(290,581)","","","$","(35,410)","","","12","","%"]]
[[/GREPCENT_TABLE]]
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*Percentage is not meaningful.

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Collaboration revenue. Collaboration revenue was $108.5 million for the year ended December 31, 2022 compared to $48.7 million for the year ended December 31, 2021. The increase of $59.8 million was primarily due to increases in revenue related to our collaborations with Takeda and Sanofi of $22.0 million and $38.4 million, respectively. Takeda revenue increased for the year ended December 31, 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 ATV:Tau program. Sanofi revenue increased for the year ended December 31, 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, and a $10.0 million milestone earned in December 2022 upon first patient dosed in a Phase 2 study of SAR443122/DNL758 in individuals with UC, 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 2022. This increase was partially offset by a decrease of $0.6 million in revenue recognized under our Biogen Collaboration Agreement.

Research and development expenses. Research and development expenses were $358.7 million for the year ended December 31, 2022 compared to $265.3 million for the year ended December 31, 2021.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2022","","2021","","$","","%"],["ETV:IDS program external expenses","$","60,872","","","$","31,061","","","29,811","","","96","","%"],["PTV:PGRN program external expenses","18,464","","","13,531","","","4,933","","","36"],["ATV:TREM2 program external expenses","8,855","","","13,408","","","(4,553)","","","(34)"],["TV platform and other program external expenses","28,032","","","11,783","","","16,249","","","*"],["LRRK2 program external expenses","20,024","","","13,066","","","6,958","","","53"],["eIF2B program external expenses","14,843","","","15,872","","","(1,029)","","","(6)"],["Other external research and development expenses","33,971","","","30,594","","","3,377","","","11"],["Personnel related expenses(1)","144,017","","","120,382","","","23,635","","","20"],["Other unallocated research and development expenses","39,697","","","35,896","","","3,801","","","11"],["Net cost sharing payments (reimbursements)(2)","(10,043)","","","(20,240)","","","10,197","","","(50)"],["Total research and development expenses","$","358,732","","","$","265,353","","","$","93,379","","","35","","%"]]
[[/GREPCENT_TABLE]]
_________________________________________________

*Percentage is not meaningful.

(1)Personnel-related expenses include stock-based compensation expense of $60.2 million and $50.0 million for the years ended December 31, 2022 and 2021, respectively, reflecting an increase of $10.2 million.

(2)Net cost sharing reimbursements of $10.0 million includes reimbursements from Takeda for the PTV:PGRN program (included within PTV:PGRN program external program expenses and Personnel related expenses) of $11.3 million, and reimbursements from Takeda for the ATV:TREM2 program (included within ATV:TREM2 program external expenses and Personnel related expenses) of $6.9 million. Cost sharing reimbursements were partially offset by cost sharing payments of $8.2 million to Biogen. For the year ended December 31, 2021, cost sharing reimbursements from Biogen were $6.5 million for the LRRK2 program, and cost sharing reimbursements from Takeda were $7.7 million and $6.0 million relating to the PTV:PGRN and ATV:TREM2 programs, respectively.

The increase in research and development expenses of approximately $93.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily attributable to the following:

•An increase of $29.8 million in ETV:IDS program external expenses reflecting the 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;

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•Increases of $16.2 million and $4.9 million in TV platform and other program external expenses, and PTV:PGRN program external expenses, respectively, reflecting our continued investment in developing our TV platform and associated programs, as well as the progress in our Phase 1/2 study in PTV:PGRN;

•An increase in external expenses related to the LRRK2 program of $7.0 million primarily due to $12.5 million in clinical milestone payments owed to Genentech in the year ended December 31, 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;

•Increases of $3.8 million and $3.4 million in other unallocated research and development expenses, and other external research and development expenses, respectively, due to our continued investment in developing our robust pipeline;

•An increase of $23.6 million in personnel-related expenses, consisting of $13.4 million in employee compensation and $10.2 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

•A decrease of $10.2 million in cost sharing reimbursements from collaboration partners due to the transition of LRRK2 clinical activities to Biogen, resulting in cost sharing reimbursements flipping to payments in 2022.

These increases were partially offset by a decrease of $4.6 million in ATV:TREM2 program external expenses, primarily due to the timing of activities year over year.

General and administrative expenses. General and administrative expenses were $90.5 million for the year ended December 31, 2022 compared to $79.1 million for the year ended December 31, 2021. The increase of $11.4 million was primarily attributable to the following:

•An increase of $7.1 million of 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;

•An increase of $2.8 million of other costs, including general corporate services, IT services and subscriptions, taxes, and travel related expenses required to support our growing business;

•An increase of $0.8 million in consulting service expenses related to investment in IT system implementation and market research for our key programs; and

•An increase of $0.7 million in facilities related expenses, including outside services, utilities, and depreciation expense reflecting our growing infrastructure.

Comparison of the years ended December 31, 2021 and 2020

Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in our 2021 Annual Report on Form 10-K for a discussion of the results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2022, we had cash, cash equivalents and marketable securities in the amount of $1.3 billion. We fund our operations primarily with the proceeds from public offerings of our common stock, 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 December 31, 2022 we have received upfront, option and milestone payments of $105.0 million, $200.0 million, and $560.0 million, respectively, and have also received $26.9 million and $16.2 million of gross cost sharing reimbursements from Takeda and Biogen, respectively, and $13.7 million in 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 December 31, 2022 we have received $110.0 million and $465.0 million, respectively, for the sale and issuance of shares of our common stock to collaboration partners.

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.

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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.

We have incurred significant net losses in every year since our inception until the year ended December 31, 2022, including net losses $326.0 million and $290.6 million for the years ended December 31, 2022 and 2021 respectively. We had net income of $71.1 million for the year ended December 31, 2020, as a result of revenue recognized associated with our collaboration arrangement with Biogen. We have also experienced negative cash flow from operations in every year since our inception, except in certain years in which we received significant cash inflows from collaboration partners which were recognized as revenue. As of December 31, 2022, we had an accumulated deficit of $971.0 million. 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 Form 10-K, 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 the DMSA with Lonza Sales AG ("Lonza") for the development and manufacture of biologic products. As of December 31, 2022, operating lease liabilities were $60.4 million. Under the SLC lease which has not yet commenced, we have future undiscounted lease payments totaling approximately $19.5 million. Under the DMSA with Lonza, we had total non-refundable purchase commitments of $32.3 million as of December 31, 2022, with certain amounts subject to cost sharing with Takeda. Further, in the normal course of business, we enter into various firm purchase commitments primarily related to research and development activities. We had contractual obligations under other development and manufacturing agreements of $9.6 million as of December 31, 2022, with certain amounts subject to cost sharing with Takeda. In addition, we had firm purchase commitments related to manufacturing equipment for the SLC Facility of $5.6 million and other commitments of $1.6 million as of December 31, 2022. 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 8, "Commitments and Contingencies" to the consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.

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;

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•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):

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[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net cash (used in) provided by operating activities","$","(244,716)","","","$","(211,389)","","","$","416,152"],["Net cash used in investing activities","(141,387)","","","(21,626)","","","(623,206)"],["Net cash provided by financing activities","310,670","","","19,348","","","634,749"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","(75,433)","","","$","(213,667)","","","$","427,695"]]
[[/GREPCENT_TABLE]]

Net Cash (Used In) Provided by Operating Activities

During the year ended December 31, 2022, net cash used in operating activities was $244.7 million, which consisted of a net loss of $326.0 million, adjusted by non-cash items primarily related to stock-based compensation expense, depreciation and amortization, net amortization of premiums and (discounts) on marketable securities and non-cash adjustment to operating lease expenses. Net cash used in operating activities was also driven by changes in our operating assets and liabilities, including most significantly a decrease in contract liabilities of $31.3 million primarily associated with the Takeda Collaboration Agreement.

Net Cash Used In Investing Activities

During the year ended December 31, 2022, net cash used in investing activities was $141.4 million, which primarily consisted of $1.1 billion of purchases of marketable securities and $17.8 million capital expenditures to purchase property and equipment, partially offset by $991.5 million in proceeds from the maturities of marketable securities.

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Net Cash Provided By Financing Activities

During the year ended December 31, 2022, net cash provided by financing activities was $310.7 million, which consisted of $296.2 million in net cash proceeds from our follow-on offering completed in October 2022 and $14.5 million in proceeds from the exercise of options to purchase common stock and issuance of shares pursuant to our employee stock purchase plan.

Years ended December 31, 2021 and 2020

Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our 2021 Annual Report on Form 10-K for a discussion of the cash flows for the years ended December 31, 2021 and 2020.

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. We believe that the following accounting estimates involve a significant level of estimation uncertainty which could have a material impact on our financial condition or results of operations.

Revenue Recognition

We recognize revenue associated with our collaboration arrangements, which may require us to exercise considerable judgment in estimating revenue to be recognized, including judgments made on day one accounting and judgments associated with the amount of revenue to be recognized over time as performance obligations are satisfied.

Significant judgment is required to apply the authoritative accounting guidance at the outset of a collaboration arrangement, and over time, as detailed below:

•Identification of performance obligations - there is judgment involved in identifying the promised goods or services in the collaboration agreement, determining whether these are distinct in the context of the contract, and determining if these represent a performance obligation to a customer. These determinations are highly subjective and can differ between arrangement based on specific contractual terms. The identified performance obligations will impact most significantly the timing of revenue recognition, and is a point-in-time assessment performed at the outset of a collaboration arrangement.

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•Measurement of the transaction price - determining the transaction price includes varying levels of judgment. Where amounts are fixed and paid, such as upfront payments, estimation is not required. However, other elements of the transaction price do require estimation or assumptions by management. The calculation of a share issuance premium requires the use of a valuation model for purposes of determining the fair value of the shares for financial reporting purposes, with any resulting premium impacting the transaction price. An assumption needs to be made regarding whether future variable consideration, such as milestone payments, are constrained, which also requires management judgment. The measurement of transaction price impacts the measurement of revenue, and is performed both at the outset of a collaboration arrangement and at each reporting period. To date, we have not recognized any adjustments to revenue as a result of an adjustment to variable consideration constraint.

•Allocation of the transaction price to the performance obligations - there is significant judgment required to allocate the transaction price to performance obligations. Generally, this is done by estimating the standalone selling price of identified performance obligations, and allocating on a relative value basis. The estimate of standalone selling price includes several assumptions that cannot be observed, which may include forecasted revenue (for products not yet on the market), development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The standalone selling price of performance obligations can be very sensitive to many of these underlying assumptions, which are based on management estimates since they cannot be observed. This is a point-in-time assessment performed at the outset of a collaboration arrangement.

•Recognition of revenue when (or as) we satisfy each performance obligation - determining the timing of revenue recognition includes varying levels of judgment. For revenue types recognized at a point in time, such as functional IP, there can be some judgment as to when the performance obligation has been satisfied. For revenue recognized over time, this is often based on an underlying measure deemed to approximate the progress towards satisfaction of performance obligations. These underlying measures, such as costs incurred to date compared with total forecasted costs for a service, may include inherent estimates, which in turn can impact the timing of revenue recognition. The satisfaction of performance obligations assessment is performed at each reporting period. To date, there have been no material true ups to revenue as a result of changes in the satisfaction of performance obligations.

Research and Development Expenses

A significant portion of our research and development expenses in the statements of operations and comprehensive income (loss) are external costs, which we track on a program-specific basis once a program has commenced a late-stage IND-enabling study. These research and development expenses include the conduct of preclinical studies and clinical trials, contract manufacturing activities and consulting services. The measurement of these research and development expenses can impact the measurement of research and development expenses in the statements of operations and comprehensive income (loss), and of prepaid assets and accrued liabilities on the Consolidated Balance Sheets.

The level of judgment required to estimate research and development expenses varies based on the nature of the services being performed and the underlying support obtained. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, incomplete or inaccurate data from vendors could impact our understanding of the status and timing of services performed which could result in us reporting expenses that are too high or too low in any particular period.

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We do not need to make significant estimates where costs incurred are supported by invoices or reports of costs incurred are obtained from a vendor that is directly performing the underlying services, such as a consultant or contract manufacturing organization. In some cases, however, expense is recorded using an underlying assumption of the progress to completion of specific activities. For example, costs may be recognized based on the passage of time for activities that span reporting periods. If the provision of services is not linear then this assumption could impact the amount of expense recognized. For other activities, such as for certain clinical trials, expense is recorded based on information obtained from vendors as an intermediary to those performing the underlying services, such as contract research organizations. These estimates are inherently more judgmental since the quality and availability of the underlying data may vary. To date, there have been no material true ups from estimated to actual external research and development expenses. However, we expect that the level of judgment in estimating research and development expenses may increase over time as we are entering later stage, more extensive, clinical trials.

Research and development expenses also include reimbursements owed or owing to a collaboration partner to satisfy cost sharing requirements. These reimbursement amounts are estimated based, in part, on data received from our collaboration partner, which may include a certain level of estimation or judgments made by that partner. They also reflect our estimates of research and development expense as discussed above. As such, a change in estimates or judgments by either our partner or us can result in a change to a reimbursement amount. To date, there have been no material true ups from estimated to actual reimbursements owed or owing.

Leases

Management exercises judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease, the type of lease in an arrangement, whether there are separate lease components, the lease consideration, and the commencement date of the lease. Further, there is significant judgment in determining the discount rate to use in estimating the lease right of use ("ROU") asset and lease liability. The discount rate is estimated using the rate implicit in the lease, if known, or alternatively is based on an estimate of our incremental borrowing rate on the date of lease commencement. A change in these assumptions could result in changes in the timing and measurement of rent expense, ROU asset and lease liability or a change in future commitment disclosures. To date, there have been no material changes to estimates relating to lease arrangements.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.