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Denali Therapeutics Inc. (NASDAQ:DNLI) is a clinical-stage biotechnology company developing therapies for neurodegenerative diseases. The company's primary value driver is its brain delivery platform, which uses a biomarker-driven approach to drug development. DNLI's proprietary Transport Vehicle (TV) technology overcomes the typical limitations of drug delivery through the blood-brain barrier (BBB). In this way, DNLI can deliver therapeutic molecules to the brain for conditions such as MPS II, Alzheimer's, Parkinson's and other neurodegenerative diseases. This is valuable IP that uniquely positions DNLI for neurodegenerative disease applications. We believe DNLI has sufficient resources to ultimately gain FDA approval for at least one drug candidate. Therefore, we view this as a DCA “Buy” for investors who understand the inherent risks of biotech.
Biotechnology Delivery Platform: Business Overview
Founded in 2015, Denali Therapeutics Inc. is a biotechnology company based in South San Francisco, California. DNLI develops treatments for neurodegenerative diseases using three strategies: 1) brain delivery, 2) harnessing genetic pathway potential, and 3) biomarker-driven drug development. DNLI focuses on genetic pathways for chronic neurodegenerative diseases to develop targeted molecular therapies. The company achieves this through its proprietary TV platform.
Source: Company presentation. August 2024.
Therefore, DNLI's brain delivery strategy uses an intravenous TV platform that delivers large therapeutic molecules such as antibodies, enzymes, and oligonucleotides across the blood-brain barrier (BBB), a protective barrier that prevents most substances from entering the brain. DNLI's TV technology transports a variety of therapeutic molecules, including enzymes, antibodies, and oligonucleotides, across the BBB to provide therapeutic benefits for neurodegenerative diseases. The Fc domain molecules then bind to specific transport receptors on the BBB and travel from the bloodstream to the brain.
Source: Company presentation. August 2024.
What makes DNLI unique is its ability to effectively deliver engineered molecules across the BBB and into the brain. In this way, DNLI can target key disease pathways such as lysosomal function, glial biology, and cellular homeostasis. Additionally, DNLI uses biomarkers for initial research, patient selection, and dosing decisions. Biomarkers are important because they help classify patients into phenotypes and ensure optimal patient populations for testing. In this way, DNLI maximizes the chances of meeting clinical endpoints essential for regulatory approval.
Potential product candidates
One of DNLI's leading drug candidates is DNL343 for ALS. It is worth noting that the ALS market is projected to reach $1.3 billion by 2029, mainly due to early diagnosis and intervention. ALS is a progressive neurodegenerative disease that affects motor neurons, causing muscle weakness and paralysis. There are currently six approved treatments for ALS, the most recent being Biogen's (BIIB) Qalsody, which costs $14,230 per dose. That said, DNLI's DNL343 is a promising small molecule that activates eIF2B. This activation regulates cellular protein synthesis, reduces cellular stress, and slows the death of motor neurons in ALS.
In theory, DNLI could carve out a niche in ALS. Its mechanism of action is different from Biogen's Qalsody, which targets the SOD1 gene rather than eIF2B. DNLI estimates that DNL343 for ALS could reach peak sales of $1 billion to $5 billion, but I'm a bit skeptical. First, the ALS market doesn't seem that big, and DNL343 isn't the only treatment. For example, AbbVie's (ABBV) ABBV-CLS-7262 also targets eIF2B and is a much better-capitalized competitor.
Source: Company presentation. August 2024.
However, a company presentation by DNLI in August 2024 highlighted that DNL343 is not one of the promising new drug candidates. The clinical-stage drug portfolio also includes DNL151 for Parkinson's disease (PD), which is estimated to have peak sales of over $5 billion if successfully developed and commercialized. Similarly, DNL788 targets multiple sclerosis (MS), with peak sales forecasted to be around $1 billion to $5 billion. Finally, DNL310 for MPS II, DNL126 for MPS IIIA, and DNL593 for FTD-GRN could each generate sales of up to $1 billion.
Value Driver: Transportation Technology
Yet, what these drug candidates have in common is that they leverage DNLI's delivery technology. In fact, DNLI has secured partnerships using its proprietary platform. For example, SAR443820 (DNL788) is in mid-stage clinical development with Sanofi. DNL788 acts as a receptor-interacting protein kinase 1 (RIPK1) inhibitor to address inflammatory and neurodegenerative diseases such as MS. MS is a chronic autoimmune disease in which the immune system attacks the myelin sheath of the nerves, causing neuronal damage. By inhibiting RIPK1, DNL788 reduces inflammation, protects neurons, and halts the progression of MS.
Source: Company presentation. August 2024.
Similarly, DNLI's peripheral inflammatory disease program includes SAR443122 or DNL758. DNL758 is a RIPK1 inhibitor co-developed with Sanofi that also targets the inflammatory process in UC. UC is a chronic intestinal disease that causes inflammation and ulcers in the colon and rectum. Thus, DNL758 seeks to reduce the damage caused by UC. Similarly, DNL151 was developed in collaboration with Biogen as a leucine-rich repeat kinase 2 (LRRK2) inhibitor. DNL151 inhibits the LRRK2 protein, which is associated with the degeneration of dopamine neurons, and therefore is applicable to PD.
DNLI's proprietary platform is also effective in rare genetic diseases. For example, DNL126 is an early-stage drug for Mucopolysaccharidosis IIIA (MPS IIIA), also known as Sanfilippo syndrome type A. Here, DNLI uses Enzyme Transporter (ETV) technology to deliver the deficient enzyme N-sulfoglucosamine sulfohydrolase (SGSH) directly to the brain. Meanwhile, DNL593 targets Frontotemporal Dementia (FTD) by increasing progranulin levels to slow disease progression. DNL593 uses the company's Protein Transporter (PTV) technology to deliver therapeutic proteins across the BBB. Similarly, DNLI also has variations of its transporter technology, such as DNL622, which targets the beta-amyloid (Abeta) protein, which is responsible for plaque formation in AD patients. DNL622 targets the beta-amyloid protein associated with plaque formation in AD. DNL622 may also be potentially useful as it targets alpha-synuclein in AD and PD.
Fair Evaluation: Evaluation Analysis
From a valuation perspective, DNLI is trading at $3.3B, making it a mid-sized biotech company in the sector. The balance sheet lists $74.7M in cash and cash equivalents and $821.4M in short-term investments. This gives it a total of $896M in available short-term liquidity, no financial debt, and only $115.5M in total debt. With a book value of $1.4B, the company has a P/B multiple of 2.4x, which is in line with the sector's median P/B of 2.4x.
Additionally, I estimate DNLI's latest quarterly cash burn to be $96 million, combining CFO and net CAPEX, which indicates a relatively healthy cash runway of 2.3 years. It's worth noting that Q2 2024 was not an exceptional quarter, and DNLI has been burning cash at a similar rate consistently over the past few quarters. Clearly, DNLI is investing aggressively to advance its research.
Source: Company presentation. August 2024.
In my view, DNLI's advanced delivery technology is flexible and applicable to a wide range of potential indications. This flexibility paves the way for collaborations and potential revenue through royalties and milestone payments. While the technology is promising, even under the most optimistic assumptions, drug approval will take more than a year. Thus, DNLI is certainly in a race against time, but a reasonable valuation and unique disruptive TV platform make me bullish on the stock.
Investment Note: Risk Analysis
We believe that DNLI's investment thesis hinges primarily on the potential of its platform. If the company cannot convince regulators of its safety and efficacy, most of its IP will be compromised. Furthermore, even if one of its candidates is approved, it will still face significant competition. For example, DNL310 for MPS II is one of DNLI's leading candidates, with promising early data. And because standard MPS II enzyme replacement therapies do not cross the BBB, DNL310 has a relatively solid competitive position.
However, REGENXBIO (RGNX) has an adeno-associated virus (AAV) vector in clinical trials that could compete with DNL310. While the prospects for DNL310 are likely excellent, the bottom line is that it is unlikely to become a new standard of care anytime soon. Unfortunately, we cannot ignore the fact that clinical-stage biotechs are often in a race against time, including running out of cash reserves. At the same time, DNLI's platform is clearly applicable to several potential CNS indications.
Source: TradingView.
This makes pricing DNLI difficult because, on the one hand, it has a potentially disruptive biotechnology platform with broad applications; on the other hand, it has no product sales yet and cash burn remains relatively high. That said, I lean toward a bullish valuation given its unique technology platform, especially the $500 million funding round, which confirms institutional investors' confidence in the technology. With such significant backing, DNLI has ample resources to prove research on at least one of several promising drug candidates. I believe approval of one drug would also validate the entire platform, significantly reducing the risk for DNLI.
DCA Purchase: Conclusion
Overall, DNLI is primarily a bet on a promising TV platform. However, I believe DNLI is not a short-term bet and will likely fall multiple times until it has an approved drug. Therefore, I do not recommend buying a position all at once. Instead, I suggest a cautious DCA strategy for DNLI. Over time, I believe the company's research will pay off, but investors should be prepared for difficult times, mainly due to the relatively high cash burn. Thus, the DCA approach allows investors to invest in the upside potential without overcommitting to a stock that may plateau until it has a clear path to approval of one of its multiple drug candidates. However, if DNLI does gain approval for one of its candidates, it could completely change its risk profile and validate its technology. I believe DNLI has sufficient resources to do this, so I think it is reasonable to rate it a “Buy” with a DCA for investors who understand the inherent biotech risks.
