Third Quarter 2026 Financial Results and Business Highlights - DENALI THERAPEUTICS INC

Financial Performance:

• Avalaya generated $17.8 million in net product revenue for Q3 2026, a nearly five-fold increase from $3.6 million in the previous full quarter.
• Year-to-date (YTD) Avalaya revenue reached $21.4 million as of Q3 2026.
• Q3 2026 reported a net income of $70.1 million, primarily driven by a one-time gross proceeds of $195 million from the sale of the Priority Review Voucher (PRV).
• Operating expenses for Q3 and YTD remained essentially flat compared to the prior year, reflecting increased capital efficiency despite commercial build-out.
• The company ended September 2026 with approximately $1.01 billion in cash, cash equivalents, and marketable securities.
• Q4 2026 revenue guidance is set between $30 million and $32 million, representing >65% growth over Q3.
• Commercial coverage expanded from 50% to 70% of commercial lives, and Medicaid coverage increased to 20 state programs.

Guidance and Future Outlook:

• Q4 2026 revenue is guided at $30–$32 million.
• The commercial launch trajectory follows an S-curve; management expects the inflection point to occur sooner than previously anticipated due to accelerated payer coverage and patient transitions.
• The company aims to achieve "D3 by 3" goals by 2028: build two growing commercial brands, establish five clinical proofs of concept, and advance four to six additional programs into the clinic.
• Management anticipates reaching approximately 2,000 MPS II patients in commercially accessible geographies outside the U.S. over time.
• Future revenue guidance (annual) has not yet been confirmed but may be considered as the launch evolves.
• Revenue growth is expected to continue steadily as new patients are treated and access processes improve, driven by the chronic nature of the disease and patient persistence.

Business Segments and Product Lines:

• Avalaya (MPS II/Hunter Syndrome): First FDA-approved therapy in 20 years designed to cross the blood-brain barrier; currently the only commercial product; revenue growth driven by rapid payer coverage expansion and accelerated transition of Phase 1-2 patients to commercial treatment.
• Zephyrnifus alpha (MPS3A/Sanfilippo): Phase 1-2 study completed treatment duration for primary endpoint; analyzing data to support a Biologics License Application (BLA) submission in 2027; strong biomarker data showing 80% mean CSF heparan sulfate reduction.
• Alzheimer's Pipeline: Two programs (DNL628 targeting Tau and DNL921 targeting Amyloid) are in the clinic; initial data expected in the first half of 2027 for both.
• Other Pipeline: DNL593 (FTD-Gravin) and DNL952 (Pompe disease) programs progressing; DNL593 received orphan drug designation.
• COMPASS Study: Phase 2-3 global study for Avalaya enrollment completed (65 participants); designed to support full U.S. approval and potential adult label expansion; expected to complete end of 2027 with data in first half 2028.
• Manufacturing: Built own facility to manufacture Zephyrnifus alpha to optimize COGS; first product to be launched self-manufactured.

Market and Competitive Landscape:

• Avalaya is positioned to become the standard of care and market leader for Hunter Syndrome in the U.S.
• Target eligible U.S. pediatric population is ~375 patients; commercial coverage now extends to >70% of commercial lives and 20 Medicaid states.
• The ERT market (conventional) is >$9 billion; Denali aims to expand this via brain-penetrant delivery.
• In Alzheimer's, Denali highlights differentiation of DNL921 (anti-amyloid antibody) via its unique effector function on/off switch (minimizing hematological findings when bound to TFR) compared to competitor shuttle architectures.
• Competitors in the Tau space (e.g., Biogen) are seen as context for the field, but Denali focuses on systemic delivery and robust biomarker reduction.
• Takeda's Elaprase saw a 9% decline; Denali provided no comment on switching dynamics but noted no specific impact on their guidance.

Risks and Challenges:

• Regulatory Uncertainty: BLA timing for Zephyrnifus alpha is dependent on Module 3 (manufacturing); approval timing for FTD-Gravin will depend on NFL biomarker reduction thresholds and regulatory precedent.
• Access and Reimbursement: While improving, time-to-infusion varies significantly based on insurance plans and hospital logistics; no standardized metrics yet available.
• Safety and Tolerability: Infusion-related reactions (IRR) and anti-drug antibodies (ADAs) are common in ERTs; requires tolerance-building protocols.
• Clinical Trial Design: Determining the specific threshold of biomarker reduction (e.g., NFL for FTD, Tau for Alzheimer's) required for accelerated approval remains a key developmental variable.
• Market Competition: Crowded space in Alzheimer's and ERT; need to demonstrate clear differentiation in tolerability and efficacy.

Management Commentary and Tone:

• Tone is highly confident and optimistic, describing the quarter as "defining" and highlighting strong execution on the Avalaya launch.
• Management emphasizes "patient-first" purpose and the "totality of evidence" approach for regulatory submissions.
• Confidence in the transport vehicle platform is high, with a clear ambition to replicate success across the pipeline.
• Management declined to provide specific patient counts (starts/commercial), preferring to guide based on revenue as the most reliable metric of launch progress.
• Emphasis placed on capital efficiency and self-sufficiency in manufacturing and commercialization.

Analyst Questions and Answers:

• Revenue Trajectory: Confirmed the Q3 revenue jump was driven by rapid payer expansion and faster-than-expected commercial transition of Phase 1-2 patients; advised against interpreting the step-up as a run rate.
• J-Code Impact: The new J-code (effective Oct 1) simplifies reimbursement and is factored into Q4 guidance, aiding the smooth execution of access.
• Sanfilippo (Zephyrnifus) Data: Final BLA package will include full 20-patient cohort data; FDA alignment on CSF HS as a surrogate endpoint for accelerated approval remains in place.
• FTD-Grubin (DNL593): Focus shifted to Neurofilament Light (NFL) as the primary endpoint; target reduction is not yet fixed but must be "robust"; potential to leverage ALS precedent for accelerated approval.
• Alzheimer's Differentiation: DNL921 expected to have lower immunogenicity and no hematological findings compared to shuttle antibodies; sub-Q formulation is being explored for convenience.
• Payer Coverage: Current coverage stands at >70% of commercial lives and 20 Medicaid states; goal is to treat all eligible patients.
• Pricing/Cost: Average cost estimated at ~$811,000/year for a 30kg patient; patients start at lower doses and escalate, creating revenue variability.
• Safety: No new safety signals in Zephyrnifus beyond typical ERT IRRs; ADAs are expected and managed via dosing.

Other Key Points:

• The company has full ownership and control of the FTD-Gravin program.
• DNL921 (Alzheimer's A-beta) utilizes an integrated transferrin receptor binding domain within the Fc, distinct from competitor shuttle architectures.
• The "D3 by 3" strategy links commercial growth (Avalaya) with pipeline milestones (Alzheimer's) to drive long-term value.
• Management highlighted the critical role of patient advocacy and family trust in the launch success.
• The COMPASS study will utilize a "totality of evidence" approach, combining Phase 1-2, COMPAS, and open-label data for regulatory submissions.
• No specific annual revenue guidance is planned for the immediate future, with quarterly updates remaining the primary metric.