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

Good afternoon, everyone. I'm Sean Laaman, head of U.S. Mid-Cap Biotech Equity Research here at Morgan Stanley, and welcome to our Global Healthcare Conference. Before we begin, make you aware of some important disclosures, and for those disclosures, visit our website at www.morganstanley.com/researchdisclosures. If you do have any questions, please reach out to your Morgan Stanley sales representative. For this session, we have the pleasure to host from Denali Therapeutics, their CEO, Ryan Watts. Thank you, and to host you.

Great, great to be here. Yep.

A couple of macro questions to begin with. We were just debating it then, like how's the rise of China-originated innovation changing, if at all, your competitive positioning and your R&D and BD playbook?

Yes, I mean, I think that it's a great question, and it's a relevant question, and it's a question that we ask at really 2 levels. One is a biotech community, and specifically here in the U.S., how do we view China from a competitive perspective, and then, in our case, talking about it around invention and barrier specifically. And I think there's, you know, varying views, and I often refrain from talking too much about my general feelings about either politics or regional considerations, but I will say that my general impression is that competition is almost always considered, in my opinion, a good thing, because it will ultimately lead to the very best medicines for patients and the more competition there is, the more invention there is in order to either stay ahead or to find the next best medicine. And that's ultimately who wins in that category are the patients. Now, as a company, you view it a little differently. You'd love to be on an island and have a technology that no one else in the world has. And that technology is essentially needed and no one else can access it. But that's not how biotech works. We all live in this biotech world and when something shows promise, almost everyone starts pursuing it, from big pharma to mid-size biotech. Even academic labs will start going into it. And that's when I look back 20 years ago, when we started working on blood-brain barrier, there was a lot of work. There was essentially very few or no one working on it. There were a couple academic labs and some obscure companies that were working on blood-brain barrier technologies. And so we picked this up 20 years ago, this is prior to the founding of Denali, and just made everything that was in the patent literature and that had been published and asked, get medicines into the brain. And usually what happens is if there's not a lot of people working on it, what was first published doesn't really work. And people tried the same thing. They made it, it didn't work. That's not where we are today. So with blood-brain barrier technologies, you're now seeing the first FDA-approved medicine in AVLAYAH, which we launched earlier this year. You're seeing exciting data in Alzheimer's disease where you can take a standard antibody and put a blood-brain barrier technology on it and get, you know, 3x faster plaque reduction. And as a reality to that, everyone's going to start pursuing it, including in China. And the question is how to stay ahead, how to continue to invent. But I think importantly, you know, when you're pioneering a field, it's important to really lay that solid foundation with great science, but recognize, you should fear the competition, but if you don't have competition, you're probably going in the wrong direction. My expectation is that China's competition is just going to heat up, including in the blood-brain barrier space, and I think ultimately it should be great for patients.

Sure, thank you, Ryan. Moving on to another macro consideration, AI adoption. So how are you adopting or implementing AI in your business? And is there an example you can give us where it's changed a decision, a cost, a POS on a program?

Yes, so, yes. I mean, it's a timely question as AI starts to take over the world, even in an unmonitored way. We, I think like many, have started to experience the absolute value in efficiency, and in some cases accuracy, but really efficiency of AI. And I think the most important thing is to take repetitive tasks or tasks that may be prone to bias and implement AI in that context. You can do that in the preclinical setting. You can do it in the clinical setting. I know for me personally, I use it all the time in terms of my analysis. I actually sometimes like to compare or even compete with AI to see do I have the ability to still make those independent decisions that maybe my project and Claude couldn't make. And the reality is it's extraordinary. It really accelerates the mundane. I don't know yet if it's going to accelerate the actual fundamental discovery. And part of that is because you need the data to train it, and biology's complexity is such that I don't know if we have enough data to really train to have that independent thought. But that doesn't matter. Like in our world, especially in the world now we have a proven platform and that platform we need to apply. So application with example is a great place to use AI. So we use it in all aspects of our business. In fact, we reward it, we accelerate it, we find any way we can use it. But I think there are areas where it's more advantageous and I think it's really those repetitive tasks where you're looking for consistency.

Sure, and I'm asking these questions across all our companies, but this last one's probably very interesting for you, particularly because Denali's just crossed that threshold from being clinical to commercial stage. So which policy variable, is it FDA, Medicare negotiation, MFN, tariffs, or global pricing matters most to your economics? And what have you changed, if anything, because of it?

Yes, I think, in some ways, I want to say that we had the foresight to do this, but maybe we did, maybe we didn't. But we decided to onshore manufacturing in the U.S. And part of it is... if you look at the cycle of invention and application across biotech, it was the case that we, everyone externalized manufacturing. I mean, why build your own manufacturing? It's expensive, it takes time. And what ended up happening is what used to be inexpensive and super efficient to outsource manufacturing has become extraordinarily expensive because when those are made available, what happens, those companies are trying to really maximize their margins in the way that they interact with biotech. And so we made the decision now 4 years ago to onshore manufacturing. And I think as a result, something like tariffs really matters because you're buying raw material and you want to do, and so you're looking for obviously a paradigm in which you can reduce costs. And it's been great for us. I think the flexibility, the speed, and what we manufacture, which are biologics, which, you know, there are many CDMOs that do this. Ours are actually fusion proteins. They're unique. We end up having to build our own parallel teams for process development for AVLAYAH, our first product launch. It was just much easier for us to bring that in-house, and I think we're at a point where it's an advantage to do your own manufacturing, I think, here in the U.S.

Sure, thank you. And onto Denali-specific questions, but of AVLAYAH, a year ago it was pre-commercial, now it's been launched. And what can you tell investors about, it's the first Transport Vehicle therapy for neurological symptoms in Hunter, but what can you tell us about the differentiation to the standard of care and why you think there will be ultimately a displacement of the standard of care with AVLAYAH?

Yes, so I think it's important first to describe briefly Hunter syndrome and what the standard of care is. Hunter syndrome is one of many mucopolysaccharidoses or MPS diseases. It's a monogenic disease, a loss of enzyme activity, function and what happens is lysosomes become dysfunctional. It's a lysosomal storage disease. And now I think 30 or plus years ago, it was discovered that you can take these lysosomal enzymes, you can manufacture them, and you can inject them systemically and a fraction of what you inject gets taken up into cells. And starts to restore lysosomal function. These are the enzyme replacement therapies. And it's been decades since that was discovered. And this was a really important class of medicines. But the challenge with all of those enzyme replacement therapies is that they cannot access the brain. So of the totality of MPS II patients, 70% of them have some type of neurologic dysfunction. It's probably greater if you include hearing. It might be as high as 95% have some neurologic manifestation. And so the standard of care does not cross the blood-brain barrier. These enzymes don't get into the brain and hence there's this big unmet need. And I'll just give 1 example. So in Hunter syndrome, about 70% of patients upon diagnosis have neuropathic disease. So they have complete enzyme loss of function. And those patients on standard of care will live on average to about age 15. So they'll initially learn how to walk and talk, and then by age 5, 6, 7, 8, they'll lose the ability to walk, or sorry. Ability to talk, some will be able to walk and have other dysfunction, toileting, and that's on the standard of care. And the reason is that the nervous system is degenerating. In the case of Sanfilippo syndrome, which is another disease we're working on, that degeneration is super rapid. It's like Alzheimer's of childhood. It's a very rapid neurodegenerative disease. And there, there's actually no standard of care because basically it's a neurologic disease and the standard enzymes don't get into the brain. And so ultimately what AVLAYAH is engineered to do, it's hitching a ride with an iron transporter. It can treat the whole body, that's important, so we replace the standard of care, but it crosses the blood-brain barrier addressing the neurologic manifestations of disease. And I think the data that supports that was published earlier this year in The New England Journal, and obviously that went into the broader context of the filing with the approval in March and now the launch of AVLAYAH.

Sure, thank you. And maybe talk about when the neurological deficits are associated with Hunter and, you know, the optimal time for intervention. And you mentioned patients living to 50, but I imagine that the earlier the intervention, the better the long-term outcomes. And, you know, that data will play out over time.

Yeah, so I think that's, you nailed it, which is earlier is better. I think our data shows, in fact, we presented data recently that shows neurofilament, which is a marker of neurodegeneration. If you intervene early, the NfL goes down more rapidly. If you intervene later, you still get normalization, but there's a delay in the time before you actually halt the neurodegeneration, probably because there's a lot of neurodegeneration that's happening. But I think, again, without newborn screening, which is really where we have to go, we have to go as a country, newborn screening for all of these diseases, especially have medicines that can really impact. If you're getting diagnosed at age 2, usually it's ear infections, there's changes in skin features and facial features. But the newborn screening is the way to go. And when we think about the AVLAYAH launch, you know, most of our patients right now are switching from standard of care to AVLAYAH, but there are a percentage of patients that are newly diagnosed. And even better if they come out of newborn screening and can start taking this medicine in their really early life and hopefully have a normal life.

Sure. And as the, I guess, newborn screening proliferates, do you think estimates of the epidemiology may go up, or do you think that it's a fairly well-observed disease?

I think it's well-observed, and the reason for that is that eventually patients get diagnosed. Hunter is a very severe disease, and so you'll miss it, but by age 2, 3, and sometimes even 4, and maybe in the attenuated patients a little bit later, but you know, it's diagnosed. And even on standard of care, just restate that at 15 years of age is the average lifespan of someone with severe disease. So that's happening. I don't think you're going to see the numbers go up, but we hope that the prevalence goes up because this medicine will have a big impact on life and other aspects, not just neurologic, which is a big piece of that.

Sure, thank you. And, you know, so far we've seen a Q2 revenue, I think, was about $3.6 million. You've guided to Q3 at $10 to $12 million. Of that $10 to $12 million, you know, are you able to tell us how many patients are new starts versus reimbursement conversions, if that question makes sense. And what particular, a rare disease, I imagine you have a pretty good hold on how the revenue's going to look for quarter to quarter as you get to the end of the quarter, if that makes sense.

Yeah, let me just, I'll ask a question just to make sure I get it exactly right. So new starts, meaning also including switches from ELAPRASE versus those that convert from the Phase 1/2 trial. Correct.

Yes, okay.

I mean, right now, the vast majority of our patients are all new starts. Our goal is by end of year to switch patients on the Phase 1/2 trial to commercial. So that's going to happen over time. But really out of the gates, it's new starts. And so I don't really have a percentage on that. And we did something a little bit unusual. We guided to revenue on a quarter basis. Of all the different, you know, metrics that are useful. And it's a little complicated in Hunter syndrome because there's, it's weight-based dosing. Obviously we have a dose escalation. And the simplest thing is that we just, to take away that mystery, we guided towards what we think will be revenue in Q3. We'll likely do the same in Q4, and then we'll reassess what we're going to do for 2027, but obviously this is a great starting point for us. I think really importantly here is this is not a single product story. It's really the platform that has been validated by this product, AVLAYAH, and it's now application across many disease areas. We think that the commercial execution is critically important, and we can build an enzyme franchise that will create a lot of value for patients, and obviously for Denali, and hopefully for shareholders. But in reality, those these numbers don't really matter today, it's can we execute? And I think for us what's been really exciting is to see that commercial team execute. It doesn't have to be a big team. It's an ultra-rare disease. And certainly, you know, with the label the way that it is, we're in, I think, a really strong place in the initial launch of this medicine.

Sure. How should we think about the shape of the launch into 2027 without drawing on specific numbers? But do you think it's going to be kind of a rapid conversion of a prevalent pool or a sort of slower ramp over sort of 4 to 6 quarters?

Yes, we don't, it's actually early innings, so we don't know how that's going to look. I'll tell you what our dream is. Our dream is to try to hit a plateau as fast as possible.

Sure.

We want to get as many patients in the U.S. onto medicine. We then want to work on the next 1/3 of patients outside the U.S. that can benefit from, I think, this transformative medicine, the final 1/3 is probably going to be unlocked with our COMPASS trial as we think about Europe in particular, you know, and I think there that's as much about reimbursement as anything. And so our goal, the S-shaped launch in part is not the patient starts as much as it is, you know, dose escalation and growth and as you see a broader range of weights on drug.

Sure, thank you. And maybe think about some of the prescribing dynamics behind AVLAYAH, and I think there's more than 50% of commercial lives and 14 state Medicare programs now have coverage. What's the typical timeframe for from treatment to first infusion? Where does the access still break down, if at all?

Yes, so the short answer is it's variable, obviously from state to state and from clinic to clinic. And I think the 2 most, I mean there's really 3 components. One is everything we can do to assess, but there's a limit to that. It's really the physician and the families that drive. And that's been probably the most inspiring thing to see in this community, is the drive to get these young patients, these young boys on medicine, driven by their families and the physicians. And so we don't like, again, early innings, we don't have, and I don't even know if it's relevant, the revenue is ultimately what we calculate, but it's been exciting and inspiring to see that level of motivation to get access to medicine.

Sure. And I think you've mentioned 375 eligible U.S. pediatric patients, out of a potential of 500. So where's that other 25% and what's the realistic addressability of the market?

I mean, the other 25%, and 95% is essentially adult. And if you think about the prevalence of the 500 patients, the long-term, you start to see that shift from 70% neuropathic to 30% attenuated to then about 50-50 because the attenuated patients live much longer. So that's where the other portion of patients and they're obviously they're not covered by label a lot of interest from that community and there we hope to unlock that with the COMPASS trial data. So I think the conversion from ELAPRASE, I mean.

Sure, and maybe talk us through the conversion from ELAPRASE. How does that dialogue go?

You go back into the clinic. That's the process as you go through the dose escalation process. The 47 patients that were on the Phase 1/2 trial, you know, those patients eventually are now at home infused, and that's the goal, so you go back to the clinic. And that, we had assumed, would probably be a barrier, but the motivation, again, from families and physicians to see the benefit that ELAPRASE can offer treating the neurologic manifestations. And part of that is just making sure we get to the optimal dose. And we just haven't seen that as a big barrier. Now, there are probably going to be some patients that are less severe or families are not as motivated as they've kind of hit, you know, a comfortable position of where they are. And that's, I think, where there'll be work to be done.