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

Josh Schimmer from the Cantor Equity Biotech Research team. On the main stage with Denali Therapeutics and for good reason, I'm joined by Ryan Watts, President and Chief Executive Officer. Congrats on the hard work that culminated in the approval of AVLAYAH, off to a good launch start.

Maybe just initially frame where Denali is and the evolution of the company and maybe some aspects of Denali that you think investors should be paying more attention to but aren't.

Yes. Okay. Great to be here. Thanks, Josh, and I appreciate the opportunity to take the stage with you and to discuss an exciting time at Denali. I think the best way to frame Denali right now is that there are really 4 major aspects. The first is that we have our first product in AVLAYAH. As you pointed out, it's been a very exciting year to launch our first medicine. That product ends up, for us, validating the platform. So we have product and then platform. And that platform has now led to a broad portfolio. And we're going to get into some details. And I think the simplest way to view our portfolio is the enzyme replacement therapies, and then we have Alzheimer's as well and a number of key readouts coming in 2027. The fourth point, so we have product, platform, pipeline, and the fourth point is having the capital now to execute into 2029. So about $1.1 billion in cash. And obviously, we're spending a significant amount of our resources on the portfolio. And we have, of course, early signs of a strong launch with AVLAYAH. But I think what's probably not appreciated as you pose that question is the fact that this platform has the ability to deliver now a number of products, and we have 5 additional clinical stage programs with a lot of data coming out in 2027. And so it's clearly an exciting time. Obviously, we launched this product ourselves as a company to go from discovery to development and now to delivering medicines to patients. And I think, Josh, as we were just commenting before the fireside chat, it's really rewarding to be part of the patient community and actually delivering a medicine.

Always a little awkward to turn patients into numbers, but that is kind of what we do and need to do. As we think about kind of the current indication and launch of AVLAYAH and the addressable patient population, the kind of revenue numbers that, that may support. Maybe you can help frame that for us.

Right. So if you look at the label, it's essentially pediatric patients. And the key term in the label, which really differentiates it, I think, from obviously, the standard of care is neurologic manifestations. So this doesn't mean neuronopathic and non-neuronopathic, it means that the medicine is really approved for neurologic manifestations, which represents essentially all Hunter patients. For example, even attenuated patients have hearing loss is, as I think, one of the probably more powerful pieces of data that was published in our New England Journal article earlier this year. And so we're seeing benefit in hearing, obviously, cognition, behavior, and it's using cerebrospinal fluid heparan sulfate as the biomarker for this accelerated approval, but a lot of data supporting the fact that, that was predictive of clinical benefit. So if you look at the pediatric population, it's about 375 of the 500 patients. But importantly, every year, there's about 30 new Hunter patients. This is all just U.S. So worldwide, there's 2,000 worldwide, but we're just talking about U.S. numbers here with the U.S. accelerated approval. And so you can think about what that spectrum looks like. There's the newly diagnosed. There's the patients that are eagerly awaiting. There are those that are just about to become adult. There are many patients that have been on, for example, intrathecal delivery and who have been also eagerly awaiting, there are older patients. And so that's how really to frame the total patient population, about 375 patients today, the prevalent population that are eligible for AVLAYAH.

I guess almost by definition, because they're pediatric patients, they will also be lower weight?

That's right. So there's a complexity, and I think this is where -- what we basically -- in our first quarter, we described, obviously, the revenue, and then we've given a revenue target for the next quarter and likely for the fourth quarter as well early on. And part of that is because it's really complex, right? It's weight-based dosing. You have very small, young pediatric newly diagnosed 10 kilogram, you have -- and then all the way up to like 16-year-olds. And so that's exactly right. And it's weight-based dosing and there's a pretty broad spectrum.

And the dose is also, I guess, ramped up to a steady state. But as we think about the performance in the second quarter, a very good start, $3.6 million, guiding to $10 million to $12 million and now in the third quarter. So is that primarily kind of the continuation of the patients to a higher dose in the full quarter? Or did you incorporate a meaningful number of new patients coming on to therapy?

Yes. So it's definitely a meaningful number of new patients coming on, but it's also the dose escalation. And it's exactly the reason why I think, sort of, we took the unusual step of just guiding towards a revenue because of that complexity, like in the question itself, sort of, highlights the complexity. I think, importantly, the patients -- the vast majority of patients who've started are not crossing over from our clinical trials. So that will -- by end of year, most of the patients that are in the Phase I/II will have crossed over to commercial product. But this first real set of revenue is coming majority from new patient starts. And most of those are switches. Most of those are patients who have been on ELAPRASE and are switching to AVLAYAH.

Right. So if you're targeting the 370-500 Hunter syndrome patients, are they essentially all on ELAPRASE? Would a patient not be on ELAPRASE for some reason come on to AVLAYAH?

So it's actually 90% to 95%. So almost all of them are on ELAPRASE. I think the exception is usually, sort of, end of life. So if you think of how this disease progresses, even with standard of care, you have different severities of mutations. And the mutations that are the most severe, even on standard of care, the average lifespan is between 15 and 20 years of age. And so there are some patients that are no longer on treatment because they're, sort of, palliative care at that point.

Okay. Got it. You mentioned clinical trial patients moving to commercial over time. How many in the U.S. would you anticipate that contribute?

Right. I don't think we've ever articulated exactly the split of the 47 patients that were in the Phase I/II, but there's a substantial U.S. as well as ex-U.S. I think, as we've gone to COMPASS, we've gone more global. So COMPASS is our Phase III study, but there's definitely a split between U.S. and ex-U.S. and even in the 47 patients as well.

Was there any contribution from Medicaid patients in the second quarter? How do you expect that to evolve over time?

Yes. So actually, yes. And I think if you look at what ultimately the payer coverage will look like, it's about half and half in terms of private versus Medicaid. And right now, we have payer policies for Medicaid in 14 states, which is great. So that's actually probably the most important part of the early momentum of the launch is the operations and getting payer coverage and managed Medicaid as well. And so I think ultimately, you'll see about a 50-50 split as this product evolves.

Okay. You've suggested that the prevalence pool may increase as patients live longer. What is typically the cause of premature mortality in this condition? And what gives you the confidence that AVLAYAH can actually address that?

Yes. So I mean, obviously, there's a severe neurologic component. But often, what you're seeing is cardiovascular or cardiac effects. And we published some of these data, but what we see is with AVLAYAH, one of the key factors is that we really push dose. So the Fc portion of AVLAYAH allows us to manufacture; our cost of goods is substantially lower, and we're pushing dose because we need better penetration throughout tissue. And so one of the examples is we looked at, like, cochlear changes, bone changes in the ear, we thought that hearing is both processing in the brain, but also the structure itself. And in our animal studies, we saw a really robust effect as we sort of push dose with AVLAYAH. And so I think the key is that we're seeing benefits on peripheral endpoints in addition to CNS. So I think cardiac is one of the main reasons for death in these patients.

Okay. Now is that something you'd expect AVLAYAH to...

We hope so.

Benefit relative to ELAPRASE? Can you prove that with data? And if so, in what form?

Yes. So I think the data -- it's probably going to end up being mainly real-world data because you think of how you run that study. I mean, it's a very long multiyear study, but that would be -- the ultimate goal is to shift the prevalent population to 'this is a disease that you can live with.' And because you have a drug that treats both brain and is given at doses that have better effects in the periphery, you can live much longer.

Where do you anticipate perhaps seeing more stickiness for ELAPRASE in patients who may not necessarily want to move over to AVLAYAH?

Right. So I think one of the concerns around the launch has been that these patients go back into the clinic. And essentially, ELAPRASE was given at home. And AVLAYAH will also be given at home. There'll be at-home infusions over time. But to go back as you start on AVLAYAH and you go through the dose escalation protocol, it's 3 months to 6 months before you go back to at-home infusions. And so that's been the question mark is will patients want to go back in the clinic, especially those that are, I'd say, categorically attenuated that seem to be relatively well treated. That's not what we're seeing right now. We're seeing interest across the spectrum. And part of that is, I think, just the fact that it's recognized that there are neurologic manifestations even in attenuated patients, if it's brain fog, if it's hearing, even visual. And as a result, there's motivation to go back and go to the clinic and get these infusions. So I think that's the dynamic. So if there were -- as this launch continues to evolve, the stickiness would be those that are probably the most attenuated.

You've kind of framed the market in a very helpful way around like 1/3 of the patients that -- global population that are unlocked now with the U.S. launch, then another 1/3 coming on in 2027, 2028. Is that -- when we're characterizing 1/3, is that patient number or dollar amount? And is that likely to be different as you expand to the next 1/3 of the global population?

Yes, it's a great question. I don't think I have the granularity to say -- I mean, it's really -- I think what's being asked is what do we expect the price of AVLAYAH to be outside of the U.S....

UK is incorporated?

Yes, and I think we just, let's say, stay tuned. But if you look -- I'll just give one -- I'll say one general comment in these ultra-rare diseases and enzyme replacement therapies, there isn't such a big difference across global prices.

And which are the primary countries contributing to that kind of next wave of...

I think the best way to look at it is the final 1/3 is the big European countries that are going to wait for the COMPASS readout essentially. And so everyone in between are, sort of, like, France and Germany and et cetera, would be the final 1/3 where we would file based on the COMPASS data.

Okay. Well, why don't we get to COMPASS then? Because that seems to be a very important clinical trial. Just remind us the design, the endpoints and the timing.

Right. So COMPASS is fully enrolled. There are about 65 patients, 44 of which are in Cohort A, which is, I think, sort of, categorically neuronopathic. So these would be patients that are younger ages 2 to 6 that have severe mutations sort of categorized by both mutation status, but also an external panel that will determine if they would be like neuronopathic. The others are put in, sort of, an attenuated bucket, less severe mutations up to age 26. I think one of the key points with COMPASS is our goal to expand the label to include adult as well. And so really Cohort A is a 2-year endpoint co-primary endpoint based on 2 things: CSF heparan sulfate and the other is the Vineland, which we've shared data at various conferences, but basically a behavioral scale and then a key secondary endpoint will be Bayley, which is a cognitive scale. And our -- the study design is really based on our experience both with the Phase I/II, but also just looking at as much natural history data that we can get from, for example, the intrathecal trial, which ends up having a significant number of patients where you can kind of look at that rate of decline. I think our confidence in this trial is knowing that between ages 2 and 6, it's where you see a real separation in patients, especially age 3, 4 and 5, where if you have neuronopathic disease, you start to see a significant separation in terms of cognitive and behavioral performance.

So it is a small cohort of neuronopathic, which means you're not powered to detect a subtle benefit; it really does need to be substantial.

That's right.

What gives you that confidence that across the trials, open-label type setting converting into a placebo-controlled setting that, that magnitude of effect will be seen?

I think it's a balance of what's a practical study design with what is an ideal study design. So as we engage with the FDA, I mean, obviously, for many of these, it would be great to power them with hundreds of patients. They don't even actually exist. And so you have to do partly what's practical. But I think what -- I'll go back to my original point, which is there is a point in time where you start to really see that separation. And so enriching in 2- to 4-year-old, sort of, population is where you have the highest probability of seeing that separation over a 2-year period. And I think that combined with our Phase I/II data, I think what's been really compelling is to look at a number of our sibling pairs where you start treatment at age 2 versus age 6. And we shared this at, for example, our R&D Day. And it's pretty dramatic to see those patients treated over 2 years, 3 years, 4 years, the separation in the sibling pair. So I think that's -- we're confident in the efficacy, but you have a good point; it's a blinded study. We -- the readout will ultimately tell us.

Do we need to be flexible as we interpret the data, particularly on the p-value? It feels like it's so binary around p of 0.05, but that may not be the best way to approach the data set given how small the population is. And if you're not, if you've got a powerful trend, is that good enough?