Denali Therapeutics Inc. (DNLI) Earnings Call Transcript & Summary

Ready to get going. Welcome, everyone. I'm Josh Schimmer from the Cantor Fitzgerald Equity Research team. Pleased to introduce Alex Schuth, a Co-Founder, Chief Operating Officer of Denali Therapeutics. Some great recent updates for the company.

Alex, maybe you could give us a quick snapshot of Denali and what we should be looking for over the next 12 to 18 months?

Yes. Well, Josh, so good to see you again, and thanks so much for the invitation to the fantastic conference. It is amazing times at Denali. When we started almost 10 years ago now, and you've been following us for the vast majority of those 10 years, we set out to open up the brain for large molecule therapy to enable a whole new range of treatment opportunities for patients with neurodegenerative and lysosomal storage diseases. And we have, along the way, we feel we're now at the point where we truly validated what we call the transport vehicle, the platform and understand it in the sense, how much drug do we get into brain and can we safely deliver the drug. The big inflection point now is that with our most advanced program, DNL310, the Hunter syndrome program, we've recently had conversations with the FDA, which enable a direct path to accelerated approval. So with this path to accelerated approval, we now feel it opens up the rest of the portfolio. We look at our portfolio, as you may know, in sort of 2 peaks: peak 1 and peak 2. As a company with a mountain name, we have a lot of mountain references. So peak 1, those are our clinical stage programs right now, and we have 3 large molecule programs based on the transport vehicle and 3 small molecules. And then we have a second wave of programs, what we call peak 2, which are preclinically where we also intend to use our blood-brain barrier technology to go after larger indications such as Alzheimer's and Parkinson's.

Maybe -- we'll spend a lot of time on peak 1, but peak 2 can be quite enormous. How are you thinking about prioritizing and the types of indications you'll pursue with the platform?

Yes. So we think a lot about prioritization, and we have a broad and diversified portfolio, which is by intent from a resource allocation perspective, but also from a risk perspective. Within peak 2, we feel we are well prioritized now. So we do have -- there are a total of 5 programs in peak 2, all enabled by the transport vehicle. Three are for large neurodegenerative indications. So 2 for Alzheimer's, which is a tau ASO and then Abeta antibody and then an alpha-synuclein ASO and additional two for enzyme replacement therapy. So we continue to see the enzyme replacement therapy franchise as a very solid core business where we have a high degree of confidence. The biology is well understood. And based on that confidence, we feel we can then tackle Alzheimer's and Parkinson's, which, by the way, if you look at data in tau and Abeta are not as daunting and as risky as they were years ago. So much has happened in the field, which, of course, is very exciting.

Why don't we move to 310 and a recent update that you've got a path to accelerated approval with the FDA. Terrific for patients, for the company and nice to see the FDA finally come around to being amenable to that data. A couple of questions on that. Number one, it seems very much like the FDA's receptiveness to accelerated approval is based more on the glycosaminoglycans as opposed to the neurofilament levels. So we've kind of talked about this for some time, like [indiscernible] while neurofilament perhaps a much more robust indicator of clinical benefit than glycosaminoglycans. Why do you think the FDA focused on the GAGs and not the neurofilament level as the basis for the accelerated approval?

Yes. This is -- I mean it's -- we've had this conversation for a long time. And let me put it this way, but maybe for context just really quickly, right? So in Hunter syndrome, the IDS enzyme is missing or defected, which leads to accumulation of these GAGs, specifically heparan sulfate. And heparan sulfate is just the very direct consequence of an enzyme defect. The FDA is very familiar with heparan sulfate. The field is very familiar with heparan sulfate if you speak with, and I know you speak with investigators next week. Heparan sulfate is something that clinical -- physicians in clinical practice use for treating -- for considering -- for monitoring treatment effect. So it's something that has just been around for very long. Neurofilament, on the other hand, is new, right? Neurofilament is not something that this division of the agency has a lot of experience with. Other divisions do. Of course, neurofilament is well established in MS and ALS and SMA, but not so yet in lysosomal storage diseases. We have a very active dialogue with the FDA on neurofilament. The FDA is very interested in neurofilament. They have asked us about neurofilament a few times. We have shared the data. We have discussed the data. But ultimately, I think the field is going with what it is very familiar with for now and looking at heparan sulfate. And heparan sulfate, the data are just so convincing. We normalize heparan sulfate after a few weekly doses and in all patients after 24 weeks, and that normalization sustains for longer than 2 years. And we then -- what is exciting, what we then see is that the reduction in neurofilament (sic) [ heparan sulfate ] is then subsequently followed by a reduction in neurofilament. Reduction in heparan sulfate leads to a reduction in neurofilament and should lead to an improvement in clinical benefit.

So maybe just to jump ahead for one quick second, right? And part of the reason for asking about the FDA's thought process behind 310 is to anticipate what they might want to see from the MPS-IIIA program for which we're going to have some data, I think, by the end of this year. Is heparan sulfate for that program sufficient? Do you think you're going to have to show neurofilament effect or even some of the clinical benefits that you're able to show with 310?

Yes. So MPS IIIA Sanfilippo syndrome is very closely related to Hunter syndrome. It is a different enzyme is defected or missing, but the same substrate, heparan sulfate is elevated. A difference in the disease is that it is predominantly a CNS disease, which is also the reason why there is no standard of care because in the past, there was no point in developing a traditional enzyme replacement therapy that wouldn't cross the blood-brain barrier. So we see a lot of similarities between the 2 diseases. It's also treated by the same physicians, which we think will be very important for us as we can use the same relationships and the infrastructure that we have built. So we do think that it is a good example or path how we and the FDA will look at approval. So as you will know, we are recently selected by the FDA into what's called the START program. The START program is a new pilot program at the FDA, which was modeled after Operation Warp Speed. It was Peter Marks who ran Warp Speed. He wanted to do the same for rare diseases, and we're 1 of 3 programs that has been selected into that. The initial conversations are very -- the tone is very positive. This is now -- we're on the same side with the FDA, how do we work together to get a drug to patients as quickly as possible where there are no treatment options. So we feel good. We feel confident that the experience we have with 310 will translate rather directly to 126 with the exception that we hope to be much quicker with the second time around.

What in your mind is kind of that data set that could trigger an accelerated approval filing for MPS III?

We think -- the discussion that we have on Hunter syndrome is all around heparan sulfate reduction, right? So now the question is really just how much data. And what we're considering with 126 is to potentially expand the Phase I/II in such a way that it really enables accelerated approval. Up until the recent shift at the FDA, our base case was we do a very small Phase I/II and then we go into a larger Phase II/III as quickly as possible. Now with that shift, we're sort of turning that paradigm around. So that's the discussion that we have with the FDA.

Maybe coming back to 310, what did we learn at the SSIM meeting?

Yes. So as you know, we present data essentially twice a year at SSIEM in the fall and then at the World meeting in the spring. At the fall, longer-term data, sustained strong reduction in heparan sulfate, sustained and even longer reduction in neurofilament. And what we broke up for the first time here is that neurofilament normalized -- normalized in all age groups of patients. And this is something that -- I mean, it's also fascinating about how the biology works. You have this lag between the reduction of heparan sulfate and the reduction of neurofilament. But if you treat long enough, then you will see -- and normalization of neurofilament essentially means that neurodegeneration is stopped in these patients. The neurons in the brains of these young boys do not die anymore. And then we can correlate that with severity of disease at baseline. So we have a very nice relationship that high degrees of neurofilament also are associated with severity of disease. And we do see improvements in clinical manifestations. The most objective is hearing, of course, which is an objective endpoint, and we see in a treatment duration dependent way an improvement in hearing.

Yes. The neurofilament data was quite astonishingly good. And do you expect to be able to file for approvals ex-U.S. based on the data set? Or might you need to wait for the full Phase II/III for global approval?

Yes, it's a great question. So we are in discussions with the EMA. The base case probably has to be full approval, but we went into the U.S. with the same mindset, right? And in the end, we are successful in changing the paradigm. The community is very closely linked. The patient advocacy community is also very powerful. And our goal would be to accelerate the path in Europe, and that's what we're discussing with them right now.

Maybe you can talk a little bit about the Phase II/III design. It has, I believe, co-primary endpoints, but at different time points, right? Give us a snapshot of that program and what you're measuring and when we expect to see those data?

Yes. So the Phase II/III called COMPASS is a randomized controlled trial. Just under 50 patients will be enrolled in that trial. It does have a co-primary endpoint, which is heparan sulfate reduction at 24 weeks, so a very quick endpoint. And then a clinical endpoint, the VABS, the Vineland adaptive behavior score at 2 years. And we feel, of course, very good about the heparan sulfate reduction after 24 weeks. And we also feel very encouraged about the open-label Phase I/II data that we see on the VABS and other clinical scales. In these patients, you would typically not expect that children gain additional skills after diagnosis. So the tragic arc of that disease is typically children develop normally until around age 3 or 4, then they plateau and then they regress. So the fact that in the open-label study, we do see in all patients and again, in a treatment duration-dependent matter that we see improvement gives us encouragement here.

Do you think you need to show stat sig on the VABS-III primary endpoint functional scale? Or would a trend be...

We don't know.

It's such a small trend.

It is. I mean, if you look in the history of -- in rare diseases, there might be a different perspective on exactly how those endpoints. But the heparan sulfate endpoint, that's a very strong one.

Maybe we can talk a little bit about the unmet need and the patient populations. So we look at ELAPRASE, U.S. sales a little under $200 million a year; Europe, Canada, a little over $200 million; and then rest of the world is actually even bigger at $350 million. So that's very spread out patient population. How do you think about your ability to address in some of the major markets and beyond?

Yes. So you're exactly right. So ELAPRASE sells about $700 million a year worldwide. And here, the U.S. is not the dominating country. The way we plan to do this is to commercialize in the U.S. and the 5 big European countries and then most likely work with distributors in the rest of the world. We are building a team in Europe. We have a small office in Zurich, which is currently running our clinical trials in Europe, and that will be the hub for our commercialization in Europe. And then in the rare diseases, especially in Hunter syndrome, an advantage here is that all patients are essentially known, right? So there are about 2,000 patients which are on drug worldwide right now. They are mostly treated in a few large centers, which we have relationships with. So from a commercial perspective, this is not the challenge of finding -- not the primary challenge of finding all the patients. In addition, there is -- newborn screening is coming online in the U.S. now very slowly, but it's coming. There are 2 states now, 2 additional states that have just instituted newborn screening. So we think that, that will also potentially increase the patient population.

Are there any patients who are not on ELAPRASE who could be candidates for 310?

Yes. There are some anecdotal reports that some patients with neuronopathic disease are not on ELAPRASE because patients or parents feel that standard enzyme replacement therapy does not cross through the blood-brain barrier and therefore, does not have an effect for their patients. So we don't know exactly how many of those are, but there might be an opportunity to grow the overall.

You think the latest assessments around 70% of patients are neuronopathic. Do you expect 310 to be relegated to that subset? Or is there a reason to think it should be used in the other 30%, too?

Yes. So we absolutely intend to make a drug for all patients with Hunter syndrome. And the data that we're collecting in the trial, which includes neuronopathic and non-neuronopathic, we expect that it will support such. Further, speaking with investigators, the distinction does not seem to be very clear between neuronopathic and non-neuronopathic. If you really look closer into the clinical assessments, there is some degree of CNS involvement in all patients, which from a biology perspective makes sense because the enzyme is lacking, is missing everywhere in the body and not just restricted to the periphery.

ELAPRASE is already one of the most expensive drugs in the world, but 3x looks like it offers a very substantial incremental benefit. Do you think there's any room to price higher and reflect that advantage?

Yes. It's honestly too soon to speak about the price. ELAPRASE has been on the market since 2006 and ultimately, we will price the drug based on the clinical benefit and the economic considerations that are around that, but too soon at this point, but stay tuned.

Enzyme replacements can be difficult or expensive to manufacture. And that's, to some extent, been a gating step towards filing. Maybe you can talk about the manufacturing progress you've made and whether there are ways to improve the product margins with maybe more modern technology, manufacturing enzyme replacement?

Yes. It's a very good point. Very substantial part of our clinical development costs are actually the manufacturing costs. On 310, we work with Lonza and this has worked very well from a quality perspective, but it was expensive. So once we gained -- a few years ago, once we gained confidence in the transport vehicle and especially the enzyme part of the transport vehicle, we made the decision to build our own clinical manufacturing facility in Utah. We hope that this facility will come online in the next 6 to 12 months, and that will significantly help with the cost. We have -- in-house, we have a very strong team on process development, which we think will be a core asset. As we think about the enzyme franchise as a franchise in itself, COGS will, of course, be very important. And with that plant, we can work on that.

Excellent. Maybe coming back to 126. The relative prevalence or incidence of MPS IIIA compared to Hunter is comparable in size, bigger, smaller?

Yes, it's not as well understood as Hunter syndrome is, but it's generally thought to be about the same size, maybe a bit smaller.

Okay. And then in terms of the disease characteristics, at least on the CNS side, do you see kind of similar neurofilament elevation and heparan sulfate elevation in CSF as you've seen with Hunter?

Yes. So we have no clinical data on neurofilament yet. So...

Even baseline?

We -- no. Nothing that we have discussed. But generally, again, we think those 2 conditions are very closely related. We do see heparan sulfate reduction significantly at baseline. So the primary focus will be on heparan sulfate reduction in the clinical trial. As you know, neurofilament will take time until we...

Exactly, yes.

We don't want to be too quick with that.

So maybe you can share some of the trial design elements and what specifically we should be looking for at this upcoming update?

Yes. So the Phase I/II, it is an open-label study. What we look for in the first data cut is primarily heparan sulfate reduction in addition, of course, to safety.

How many patients? What doses are you looking at?

So we have not spoken about the actual dose levels, but it is a dose ranging, dose finding study, which we have experienced from Hunter that it matters, so the careful dose titration. At this point, we have 8 patients in this study. But we are -- again, we are considering to expand the Phase I/II to make it more suitable for a potential accelerated approval path.

Is the dose escalation in individual patients so that each one will step up in dose or different cohorts?

Yes, we have not discussed have not discussed that.

And then any granularity on time lines for that data?

The second half of this year, which we're in, but no further granularity on that.

How are you thinking you might announce it? Basic press release, call, event?

We have not decided on that exactly.

As you think about the platform and technology indicated in some of the areas you're pursuing, some of the larger unmet medical need indications. Maybe if we stick on genetic diseases, how are you thinking of evolving that portfolio?

Yes. So we see following the genetics, of course, as one of the key principles of how we go about this, about neuro-degeneration. Our peak 1 indications, all 3 of those, based on the transport vehicle are genetic indications, right? So the two enzymes plus progranulin FTD or small molecules also have a direct genetic link. As we look into peak 2, we still want to absolutely follow the genetics, but we think we can take -- now that we have confidence in the transport vehicle, now that the transporter is validated, we feel that we can take on some more risk on those indications. So in peak 2, we have Abeta, tau and alpha-synuclein and you can argue about how strong the genetically there is. But here, we feel very confident that we can deliver substantial amounts of drug safely to the brain and then test the hypothesis of clinical efficacy.

So you've validated transferrin receptor of Hunter. You're exploring CD98 receptor, kind of for some of the larger indications. As you're learning about CD28, how do you think about choosing which to advance with transferrin versus which to hold back and pursue [ 98 ].

Yes. So blood-brain barrier biology is a core part of our -- of who we are essentially, and we want to continue to invent in this field. We feel blood-brain barrier transport, I mentioned we think that it will be a class of drugs that are enabled to cross through the blood brain barrier. Transferrin receptor is most validated from others and from us, but there are other transporters, which are expressed on the blood-brain barrier with different properties, different properties with respect to transport capacity, but especially with respect to things like internalization into cells and different safety profiles. So CD98 differs from transferrin receptor in such a way that it does not internalize into cells. So it is actually very suitable for targets that are cell surface targets. It's not suitable for targets that are intracellular. So for the ASOs, CD98 will not be ideal. Transferrin receptor is the way to go. But at the same time, CD98 is not expressed on reticulocytes, which means we can really dial in effector function, which, again, for some targets, you can think about Abeta, but even if we think about way down the road, if you think about oncology targets, if you really want the effector function, CD98 could be a good transporter. So we have a blood-brain barrier biology team. We continue to invent. We want to characterize these and find -- and at some point, we will have the optimal indication to use CD98.

And you alluded to the ability to get oligos into the brain. You recently had some really interesting animal data proving that concept. What might we expect from the portfolio, specifically on the oligo front?

Yes. So ASOs are fantastic drugs, right, the ability to modulate gene expression they've been validated in the periphery, but they don't cross the blood-brain barrier. Attempts right now are to do intrathecal administration. There are at least 2 drugs that are on the market that use that. We know that intrathecal administration is suboptimal from a distribution perspective. Putting drug into the spinal tract will not fully distribute in the CNS. The advantage that using the transport vehicle has is because the brain is so highly vascularized that we have this almost perfect distribution throughout all regions of the brain. So we are very excited about the potential to use a transport vehicle with ASOs. We disclosed 2 lead programs, which are an IND-enabling studies. One is to reduce tau for Alzheimer's disease and one is to reduce alpha-synuclein for Parkinson's disease. So INDs for those are on the horizon.

So you indicate you get coverage throughout the brain. What about the spinal cord. Could you [indiscernible] genetic indications that affect some of those neurons, spinal muscular atrophy?

Yes, absolutely can. So you get -- in fact, you get perfect distribution everywhere. So the spinal cord is not out. The reason why I mentioned that is that direct delivery into the spinal cord may actually work if you have a disease where the pathology is located into the spinal cord. So if you take SMA, spinal muscular atrophy, or maybe even ALS with a significant motor component direct delivery may. And we see it with existing drugs, for SMA and ALS, it may work. So we see the biggest advantage, the biggest differentiation is really for those disease where you have to get into the higher regions of the CNS.

Okay. Maybe we can turn to the 343 ALS program. The, I think, [ Healey Part-G ] trial enrollment completed in May. Maybe just kind of review this trial design and endpoints and really the question that I have on it, is 6 months enough to really see a meaningful benefit. Like there's been all this effort in creating this kind of trial, but it feels in many ways suboptimal and really giving drugs a chance to show what they can do?

Yes. So now completely switching to 2 small molecules and not the transport vehicle now. So DNL343 is a small molecule activator of eiF2B, which is really fascinating biology around the integrated stress response, which is linked to stress granules, which are a key pathology in ALS. So what we've seen preclinically is that an eiF2B activator can dissolve stress granules. It's actually quite striking how those emerges. We are working with the Healey Center at Mass General on the platform trial. As you mentioned, it is a randomized controlled trial, 240 patients. The primary endpoint is ALSFRS at 6 months. Now the reason for the 6-month endpoint is primarily the desire for patients not to be on a placebo-controlled trial for longer than 6 months. That is the history how the 6-month time point came about. Your question is a very good one. Is 6 months long enough to see a benefit on ALSFRS. Tofersen, maybe provides some indications that it may or may not be long enough. Now there is an open-label extension. There is a crossover period, where patients that have been -- where they are treated longer essentially with drug.

What might you then be looking for? I guess, given the limitations of that trial, I guess, first, could it serve for regulatory filings? And if not, how do you kind of follow up on this with your own trial?

Yes. So the -- Healey specifically designed the program to enable regulatory filings. So the trial at 240 patients is powered in such a way -- at certain effect size assumptions is powered to enable registration. We think, however, that, that registration would be limited to the U.S. So in any case, even if there is a path in the U.S., we do expect that there would have to be a second trial to enable global approval.

It's a trial evaluating neurofilament? And how important would it be to see a signal on that biomarker?

The trial is evaluating neurofilament and neurofilament plays a key role in as we feel, and I know you feel the same way, is a very strong indicator of neuronal health. So reducing neurofilament would be a strong signal.

Maybe last quick question. The cash and the burn rate, you burn a lot. On the other hand, you have a lot to burn on?

Yes. Yes. That's a good -- that's exactly the way to put it. So we had $1.35 billion of cash at the end of Q2. Last year, we spent about $310 million net cash. For this year, our intention was to keep that roughly at the same level. Now with the accelerated path for 310 and with some expansion in the portfolio, we'll have to look at that if we stay close to it. But yes, we have enormous opportunities ahead of us, especially with respect to the transport vehicle. We made the decision to discontinue preclinical small molecules, which also helps with the burn. So we're very focused on OpEx.

Excellent. We're just scratching the surface of that and thanks so much for joining. Thanks, everyone.

Excellent. Thanks so much, Josh.