Good evening everyone, and welcome to Morgan Stanley Global Healthcare Conference. I'm Sean Laaman, Head of U.S. Mid-Cap Biotech Equity Research at the firm. For important disclosures, please see the Morgan Stanley Research Disclosure 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. Welcome, Ryan, and maybe we kick off by giving us a few minutes on what Denali does.
Great. Great to be here, great to be back at Morgan Stanley. I think this is probably year number eight for us, maybe nine, and it's such an exciting time for Denali, an exciting time in the biotech sector. Roughly 10 years ago, we set out to invent a platform to cross the blood-brain barrier to get large molecules in the brain, such as enzymes and antibodies and oligonucleotides, and it was at a time where most companies were exiting neurodegeneration and neuro more broadly, and so for the first five years, we just buried our heads and invented this platform. The subsequent five years, we proved that it works in a disease known as Hunter syndrome, which we'll discuss in some detail, and have now gone much more broadly.
Our vision for the next five years is catalyzing those initial discoveries and the proof of concept with a large number of blood-brain barrier-enabled therapeutics, and I think along those lines, when you show something works in a disease that's monogenic like Hunter or more broadly in Alzheimer's disease, this is now a field that is very much heating up, and so welcome to see many friends and colleagues and likely friendly competitors to this discussion today, but it's definitely an exciting time to be working on blood-brain barrier technologies and on medicines that are engineered to target tissues.
Fantastic. Thank you for that, Ryan. And maybe to start, I've got a couple of macro-picture questions for most companies or all companies. So with that said, with China's rising biotech innovation, how are you thinking about your competitive position here, and will this influence your R&D or business development strategy?
Yeah, well, I'm a big believer in competition, so it's great to see competition from not only specifically in the platform we're working on, but across countries, and there's no doubt that invention in China is accelerating, generating either best-in-class or fast-follower programs. The neuro space is lagging a little bit behind what we've seen in either metabolic or in cancer, but we're fully aware that there are many companies that are inventing, and for us, we've had great collaborations with companies in China over the last decade. That dynamic has shifted a little bit, especially as we now are preparing for our first launch, but our eye is definitely focused on the competition broadly.
I think importantly for us is the invention of a truly proprietary, unique technology where most that are playing in the blood-brain barrier space are using variations of conventional Fabs, which has been around for now, I think, 30 years. Our approach was to engineer the Fc that I think puts us in a unique IP position. And also not just IP, but the Fc region of an antibody does so much more and is very different than a Fab region of an antibody. And I think that's been our unique platform, and the transport vehicle has allowed us to do things that you can't do with conventional Fabs. But that being said, we're watching closely for the first company that tries to replicate that technology specifically.
Sure. Great. Thank you. And still on the macro topics, how are you currently leveraging AI, if at all, and how do you think about AI as a disruptive technology?
Yeah. And I think we, Denali, of course, being founded a decade ago, wasn't founded on the premise of AI for drug discovery. But just like all of you and your personal lives, and I'm sure many of you in your professional lives, we've embraced AI actually as quickly as possible and at the very beginning. If it isn't from proofreading regulatory documents, generating protocols, analyzing biomarker data, writing algorithms specifically for image analysis, but many, many aspects within the workflow within Denali, we're utilizing AI. And I think in the last year and a half, we've seen real progress in how we utilize it.
And so I think the way we approach it is, here's a problem, especially if it's a repetitive problem where you have a lot of existing data and experience, to be able to actually use AI to simplify that approach and reduce work hours basically and allow your algorithm to solve it, that's where we've invested initially. And we've seen it. We've seen major advances even within Denali using that technology. Where we have not used it yet is to more broadly take on very complex biological questions. I think part of that is that we don't have the data. We don't think the data broadly exists quite yet to be able to train those models. And it's happening in some, and I'm sure at some point we will take advantage of those technologies as well.
Sure. Awesome. Thank you, Ryan. And lastly on the macro, what has been the most impactful to Denali over the last year? Is it on the regulatory side? Is it FDA? Is it MFN? Is it tariffs? How are you thinking about that picture? Sounds like it might be FDA.
Yeah. Well, it's a little bit of, well, actually, frankly, it's almost all regulatory. Part of that is because we just filed our first BLA for accelerated approval. So the dynamic of changes at the FDA are directly impactful to Denali. This is an area that we follow very closely. Of course, MFN is probably in the future for us as we think about pricing outside of the U.S. I hold strong opinions about that, but are not relevant today for Denali. Then in terms of tariffs, we've onshored a fair amount of our own manufacturing now. That was actually prior to even the concept of tariffs being something we talk about on a daily basis. Back to regulatory, it's been interesting. If you look at Denali, two years ago, there was a lot of inconsistency about our path to approval.
And we were regulated under CDER, one of the centers separate from CBER that had historically a more conservative approach in rare disease. And in the last year and a half, there was an alignment of these two centers around what we were doing. And I think most notably is even last week, guidance from the FDA on rare disease evidence principles or these are basically RDEP, but I don't know if we're going to give them a nickname, but really impactful to Denali. And I think around single-arm studies likely being sufficient, monogenic diseases, patient populations less than 1,000, that basically defines Hunter and Sanfilippo and a number of indications that we have in our enzyme portfolio. Obviously, we're interested in Alzheimer's and other programs using the transport vehicle technology. But these changes at the FDA we see could be very positive.
Positive for patients, but also when you think about the investment in rare disease, this type of guidance is really important and an alignment of CDER and CBER using these principles, I think, will be key.
Cool. Thank you, Ryan. To bring it straight back onto Denali's DNL310 or tividenofusp alfa, so the rolling BLA submissions being completed under the accelerated approval pathway, but what are the next regulatory milestones?
Yeah. So we completed the filing in May and very shortly thereafter, actually the typical 60 days, in our case, it was 57 days, but who was counting? We got our PDUFA date of January 5th and a priority review. And so this was obviously very big for us. And right after receiving that, we've had a constant engagement with the FDA on the clinical side, pharmacology side, manufacturing side. And I think when Commissioner Califf mentions that the review bodies are intact, we can tell you they are. And we've had a lot of great engagement and day 74 letter where we were alerted there's no adcom for this particular program. And then more recently, the mid-cycle review. And so it's an exciting time. It's also all hands on deck at Denali as we prepare for their decision.
Awesome. And what part did you expect to support conversion to full approval?
That's a good question. Actually, one of the biggest questions about last week's guidance is what does it actually mean? Does it mean that if you follow this new guidance on Rare Disease Evidence Principles, is that for accelerated approval or is that actually for full approval? And what does confirmatory trials actually need to be? And so actually, if you read it, it's not entirely clear, but it's very hopeful for us. We're running the COMPASS trial. So we'd already started a trial that is an active comparator control, which I'd say in rare disease, it's debatable if you should have a control. Certainly, placebo is less ideal in these patient populations where the decline is very rapid and there's no return. And I think that's been a long-standing issue.
So in Sanfilippo, where we have a program, it's very likely that our confirmatory trial will be a single-arm study without a placebo, which would make a lot of sense. And so we think if we stay sort of grandfathered into the way that the FDA has historically been, it would be the COMPASS trial would be the data that would convert the accelerated approval to full approval. But I think right now, it's a bit of a moving target. And our focus obviously is accelerated approval by January for tividenofusp alfa.
Sure. Thank you. And maybe just to remind people what Hunter syndrome is, just to contextualize the next question. But beyond heparan sulfate normalization, what sort of patient clinical benefits and caregiver benefits might you hope to demonstrate through the approval?
Yeah. So I often tell people, ask, what do you do? Okay, we invent medicines for what? I say Hunter syndrome. Most people think that's Huntington's disease because it's neurodegenerative. But obviously, Hunter syndrome is. I categorize it as a rare disease, about 500 patients in the U.S., 2,000 worldwide, monogenic disease, a mutation in a gene known as iduronate-2-sulfatase or IDS. And for 19 years, there's been an approved enzyme replacement therapy, idursulfase or Elaprase. And that medicine can treat the body, but does not cross the blood-brain barrier. It doesn't effectively get into the brain. And so what we've done is we've engineered this enzyme through an Fc fusion that binds to transferrin receptor to allow it to distribute more broadly throughout the body, the whole body, but also to cross the blood-brain barrier.
I think what's important when you look at our data is not only are we achieving normalization of key biomarkers in cerebrospinal fluid, which is reflective of what's happening in brain, so normalization of the substrate for the enzyme, normalization of NFL, which is a marker of neurodegeneration, but we also see on the peripheral endpoints, better reduction in urine heparan sulfate, improvement in hearing, behavior, cognition, and so ultimately, the goal is if you can get on enzyme early enough, you'd have a normal trajectory of development because these young boys at about age two or three fall off the developmental curve, and I mentioned boys, it's an X-linked disease affecting young boys in the case of Hunter syndrome, so our goal is to have a normal life through these infusions.
I think our data is showing that, as not surprisingly, the earlier you intervene, the higher likelihood that that can be achieved, including height and all sorts of activities of daily living are key.
Wonderful. And what are you looking for on the label?
That's a good question. So with accelerated approval, often the label is around the biomarker. That's the focus and safety. And I think most importantly, our phase one two trial included a very large group of patients across a broad age range, including not just overtly neuronopathic, but also attenuated patients are included in that phase one two trial. So for us, ideal situation would be a broad label. And I think a part of that is some of these peripheral endpoints where we're seeing benefit outside of the brain.
Sure. Thank you. And can you talk about, Ryan, the commercial launch preparations? How do you get to the patients for those less familiar? What plans have you got in place?
I'll talk about operational and then the action that we're taking for a commercial launch. So we recently hired our entire field team, patient services, payers team, small but focused team, which also, by the way, can launch in Sanfilippo. So it'll be the same prescribers for both Sanfilippo and Hunter. And that team kicked off in August. So that's on the operational side. I think the key for us is that the data needs to be understood. And there's a high amount of awareness of these blood-brain barrier crossing technologies. But I think immediately you think this drug treats the brain. And some people even think, so I need to take standard of care plus this drug so I can treat the body and then separately treat the brain. But the reality is that we replace standard of care.
Because we've really pushed dose, this has been a really important point. A lot of enzyme replacement therapies are actually underdosed. I think historically, part of it is cost of goods. It's very expensive to manufacture enzymes without the FC fusion. With the FC fusion, they express better. They're easier to purify. For us, it's easier to manufacture these medicines using the FC fusion. That's, I think, a key point is basically having the data awareness that regardless of if you're neuronopathic or if you're attenuated, you'll benefit from this medicine because you'll be able to treat peripheral disease, including the brain.
Sure. Thank you. And what about outsourcing or in-housing of commercial supply? I can't imagine it's large demands, but.
Yeah, so we've had an interesting path around manufacturing. We've worked with some of the world's best manufacturing organizations, Lonza, WuXi Biologics. They've been fantastic over the years. I mean, really good, but also pretty expensive, and so we made the decision to build our own manufacturing facility to then essentially onshore our manufacturing. In the case of Tivi, we will continue to work with Lonza. They will produce our commercial supply. We have no immediate plans to do anything but to work with Lonza. Notably, we've been manufacturing in Switzerland. We made the decision, by the way, independent of tariffs to onshore that manufacturing, mainly because we want to scale. We want to go from the 2,000 liter to 6,000 liter, and that just gives us further improves our COGS. So at this point, in terms of Tivi, we'll continue to work with Lonza.
But the future portfolio for Denali, at least the clinical stage portfolio, will be manufactured in our own facility here in the U.S.
Wonderful. Might push forward to DNL126, but can you give us an overview of the program for Sanfilippo syndrome type A?
Yeah. So similar to Hunter syndrome, Sanfilippo is a mucopolysaccharidosis disease or an MPS disease. I think generally called lysosomal storage disease, which includes other enzyme loss of function. What's interesting about Sanfilippo is it's much more of a brain disease than Hunter. Hunter is 70% of patients at diagnosis are clearly going to be neuronopathic because of the severity of the mutation. Sanfilippo is characterized by neurological defects. There are some peripheral defects, but they're minor. There's no standard of care. There's no enzyme replacement therapy that's been approved for this. But then all the biomarkers are the same: heparan sulfate, NFL, downstream of heparan sulfate, lysosomal biomarkers, GM2, GM3, glucosylsphingosine. So we've established these biomarkers and the treating physicians are the same. And so now we basically take this enzyme, which happens to be a dimer.
So the actual structure is different than Tivi, but it's a very similar path. Our goal there is to be able to run substantially smaller trials. Hunter was the flagship program. It had to prove the transport vehicle technology. It had to prove the transferrin receptor path to the brain, which has now unlocked many people's efforts in this field. But now with Sanfilippo, it's how do we do this faster and use all the experience that we have for Hunter to enable that.
Sure. Wonderful, Ryan. The FDA start engagement, how do you trial design endpoints and timelines for 126 and Sanfilippo? Just give us some insights into that.
Yeah. So we were selected for start. I think in total, there are about seven programs that were selected. I believe maybe three in CDER and four in CBER. That's been fantastic for us. It's quarterly engagement with the FDA. Our first focus with the FDA was designing the phase 3 trial, which is very interesting considering this recent guidance from the FDA last week on evidence principles around rare disease. And the reason I think it's interesting is that a lot of this is our single-arm trial is sufficient. And we've been discussing both with EMA and FDA, what do we do in Sanfilippo where there's no standard of care. In parallel, we've been enrolling our phase 1/2 trial. At the end of last year, we announced 24-week data that we were able to have a robust reduction in heparan sulfate.
And then, more recently, we announced that that is sustained. And we also announced the expansion of the trial. Now we've agreed with the FDA that in general, 20 patients will be sufficient, which is less than half of what we have in the filing for the Hunter program. And we're looking at 49 weeks of data. We're nearly complete enrolling that phase 1/2. And that will basically be all the patients that will be required for that accelerated approval. And in parallel, we've now begun work on the phase 3 and kickoff of the phase 3 study.
Cool. Thank you, Ryan. And there's been a slight delay from a competitor launch. Meanwhile, you've aligned on Aβ closely narrowing the gap. Can you talk about the competitive positioning and how do you frame the value proposition of Denali's product versus others?
Yeah. I think I've learned over a decade to be careful about what I say about competitors because they're also many of them are good friends. Because we work in a space that there's a huge unmet need and it's such a small community in the rare disease space and a lot of respect across companies. What we've learned is that many gene therapy treated patients will need an enzyme replacement therapy. It's definitely the case in Hunter syndrome where gene therapy is delivered directly to the brain, but doesn't treat the body, and Hunter is clearly like every patient, if they're neuronopathic, they have severe defects in liver and spleen and peripheral bone structure and height, and so all of those patients will either have gene therapy plus standard of care or gene therapy plus DNL310, which we hope someday becomes the standard of care.
In fact, that's, I think, the goal, so we view this a little bit differently, and I think part of it is gene therapy has more heterogeneity, has some challenges around durability. Obviously, tolerability has been a longstanding question around liver tox and associated need for immunosuppression, but we see ourselves, in fact, even our phase one study in Hunter, we have patients that were previously on gene therapy that had continued elevated CSF heparan sulfate. We treat them, we're able to normalize, and so we see that as the future is needing enzyme replacement therapy.
Wonderful. Thank you. That's all I have on 126. But moving forward again, we saw some exciting preclinical data in science using engineered ATV to remove A beta while also removing risk of ARIA. Can you comment on the breakthrough and what it might mean for technology in this area?
When we launched Denali a decade ago, I think everyone's like, "All right, the neurodegeneration company, the Alzheimer's company." It's certainly a goal of ours was to focus on eventually Alzheimer's and Parkinson's. And what the last 10 years has been extraordinarily interesting in the Alzheimer's space with successes, but mainly a bunch of failures has always been the case in Alzheimer's. But now several approved medicines that target amyloid. And the great debate is how much efficacy do you really get? How much benefit for patient do you get when you remove plaque? And I think the challenge is that most of those trials, these patients have some mild cognitive impairment. So they have a decade or more of plaque formation before you're actually removing plaque and obviously some mild cognitive impairment.
The other issue is that you actually see breakdown of the blood-brain barrier through what was formerly called vasogenic edema, now termed ARIA. So amyloid-related imaging abnormalities are what is sort of one of the dose-limiting effects, although you can dose and then pull back the dose and then start dosing again. It was generally believed. It's actually really fascinating. It was generally believed that ARIA was inseparable from plaque removal. And what you see in the most recent data with Roche's blood-brain barrier technology is that you can get very rapid plaque reduction and substantially less ARIA. There are also other antibodies for Alzheimer's that have caused ARIA but do not remove plaque. It's a different mechanism, modulating microglia. So we now know that these are separable, that you can actually remove plaque, and it doesn't mean that you're immediately going to have this vasogenic edema.
The recent paper that you're highlighting in Science that we published is the mechanism we believe is behind this reduction in ARIA, but still robust removal of plaque. And it's largely around the biodistribution. Using the transport vehicle technology and TfR enabled technologies, you deliver through the capillary beds, and you don't get high concentration of drug in these perivascular spaces where you're breaking down amyloid and causing vasogenic edema. And so we have preclinical data that supports that. And of course, what's in the clinic so far with blood-brain barrier technologies also supports that particular mechanism. Now, what we've done is that was a proof of concept. We've created a clinical candidate with our own A beta arms and are now advancing that into clinical studies. We're in IND-enabling studies, and next year we'll be starting studies basically with that molecule.
Fascinating. Thank you. And for clinical differentiation, what matters most? Is it the antibody being transported? Is it the transport vehicle itself and its specificity? And what's the trade-off between increasing brain bioavailability and tox?
Yeah, so I think that was one of the biggest fears is you use these blood-brain barrier technologies, and now you get way faster plaque removal, and you're going to have worse ARIA, worse vasogenic edema, and the reverse is true, and that's the mechanism we just talked about. Notably, the only real clinical experiment that's been run, there was a, I'd say, below average anti-amyloid antibody in terms of its ability to remove plaque. You then put that on a blood-brain barrier technology, and it's now the most rapidly reducing plaque antibody out there, and so I think that by far the enabling technology or the blood-brain barrier technology is what differentiates. I do think, however, the A beta arms matter, and they matter in the sense that there's a preference against just binding monomeric A beta and maybe a preference towards some aggregated oligomeric and fibrillar A beta.
I do think there's still a lot of skepticism around plaque removal and clinical benefit, but the two things that are going to matter: better safety profile and early intervention, frankly, prevention. And we're going to start seeing some trials read out on prevention, but the ideal situation is if this BBB platform allows you to have a safer profile, then you can go in a prevention setting. That's the future. We'll all be measured blood-based biomarkers on the plaque. If we confirm that, we'll have an amyloid imaging. We'll remove our amyloid at age 60, and then Alzheimer's will be delayed maybe forever, but certainly for a decade or more.
Great. Thank you. Moving forward onto other programs, can you comment on the LRRK2 program including updates to enrollment and which helped to accelerate the top line results due next year?
LRRK2 was one of the first targets we started working on at Denali again about 10 years ago. This was in the first peak, the first wave of medicines that we invented using small molecules. Now, the vast majority of what we do is large molecule engineering to cross the blood-brain barrier. But we have a LRRK2 inhibitor that inhibits the kinase activity. Mutations in LRRK2 that are associated with Parkinson's disease substantially increase kinase activity. The most common mutation is the G2019S mutation and is known to be in the kinase domain, activates the kinase. It's one of two of the major genetic risk factors in Parkinson's, the other one being GBA, where we also have a program, a GCase enzyme replacement therapy.
This is a field we've been very involved with for actually now probably almost 16, 17 years prior to even prior to founding Denali when we worked on these LRRK2 inhibitors. We actually licensed them from Genentech. We're now at the point where 640 patients are being treated or are on placebo control, and that study will complete around May of next year. Biogen is running the LUMA study. It's patients that have been diagnosed within two years. The endpoint is UPDRS. It's actually a functional endpoint. It's asking a very important and big question: does LRRK2 inhibition provide a benefit in Parkinson's disease? It is the experiment to run. In parallel, we're running what's called the Beacon study, which is just patients with LRRK2 mutations.
We're focused on the biomarkers around LRRK2 and around neurodegeneration because that is a more specific question and more specific experimental paradigm where it's how about inhibiting LRRK2 in just the patient population that has a mutation. The idea is that it would be brilliant to work in idiopathic Parkinson's and there's some evidence that LRRK2 is generally activated, but you also get a real insight into the LRRK2 component of this disease.
Sure. And I guess those, let's say, you mentioned looking at functional endpoints, but just remind us what those functional endpoints might be, and what would you set as the bar for success?
Yeah. So the study is powered to be significant on UPDRS, which is essentially motor function analysis by physician, and otherwise it's well-established Parkinson's disease rating scale.
Awesome. Thank you. You expect to accelerate at least one program a year into the clinic over the next three years in areas like Pompe and Parkinson's, Gaucher's. When could we expect to hear more?
Yeah. So we hope by end of this year, we'll announce at least two more molecules entering the clinic. And then obviously, I'd already mentioned that ATV:Abeta has been selected and we'll be moving that in next year, probably a third. So one to two programs per year is the guidance, but we're aiming a little bit more towards two. Now is the time to execute on the transport vehicle technology.
Sure. There's a lot going on at the company. You're just in front of your first commercial launch. How should investors think about capital allocation and the runway of funding?
Yeah, so we recently reported $977 million that we have lasting into 2028. One of the things that we've focused a lot on in the last year and a half is acceleration and expansion, but when I say expansion, I mean expansion of the number of programs, not necessarily in the spend, and so we're going to be spending less per program than we have historically, and I think the reason for that is we had to prove that this technology works. We had to invest, and the Hunter program is a great example, just enormous amount of data, both clinical data, but biomarker data, and then with Sanfilippo, everything we've learned from Hunter, we can apply to Sanfilippo and run smaller trials, move faster, and we see that for all the subsequent enzymes.
The same will be true for the oligonucleotide transport, getting basically ASOs and siRNAs across the blood-brain barrier. Very soon, we'll have our first program moving in the clinic using the OTV, and the same thing as that program will unlock the future of the OTVs.
Sure. Just generalizing here, but it has been a fairly tough time in biotech and uncertainty on rates. M&A has been pretty quiet. Certainly, uncertainty on the regulatory front, but who knows on rates, but it looks a little bit more promising. We're starting to hear in the background more pickup on a greater pickup in M&A. And it seems, and particularly listening to Marty Makary at the lunch, that maybe the regulatory piece is sort of falling more into play and fears were overdone. But with that as a backdrop, do you think there's, and you've discussed a lot today on your company, what do you think there might be that investors could be missing that really could see Denali outperform?
Yeah. So I think you're looking for over, and I'm thinking about the last two or three decades, the technologies or the drug targets that became transformative in the field, right? If it's more recently, but also a long history of GLP-1, PD-1, immunotherapies, a lot of modulation of the immune system, there is no doubt that transferrin receptor-enabled molecules are in that category. Okay. Because it's not going to be just Alzheimer's or just enzyme replacement therapy, but many, many programs will create best-in-class molecules by using these transferrin receptor technologies. Better delivery to bone, better delivery to muscle, obviously enabling delivery to brain. Before that, there was no delivery to brain. Basically, you had to give intrathecal enzyme or intrathecal oligonucleotide. And so to me, that's where the value is. And that's also why the competition in the last three years has shifted.
And the large number of deals that you've seen over the last two years are around these transferrin receptor-enabled programs. We, without any question, when founding Denali, we wanted to invent a platform to enable our medicines. We wanted to be a company that invented medicines that we would bring to patients as opposed to becoming a platform company that enables everyone else's medicines. And not that that's not a good approach, but it's just not the approach that we took. The approach we took is that if we had a very unique platform, and in this case, FC engineered, which is different than the conventional Fab approaches, we can enable an entire portfolio of medicines. And actually, the only thing that's rate limiting to really capture this value is capital.
We're at the point now that we could do two dozen programs in scale, but that capital ideally will come from our own commercial launches. And if you look at the survivorship analysis of companies that eventually become great, there are sometimes these incremental victories early on that establish that. And part of it is you also learn as an organization, institutional knowledge of how to succeed, and then you can start going after bigger and bigger and bigger indications using this technology. So I think the question is, when do you get in on these technologies? And who do you get in with? I mean, there are a lot of technologies out there. And the question today is very different than the question we got nine years ago.
Today is like, "Tell us why you're different from all these other transferrin receptor-enabled programs." And nine years ago, it was like, "I thought transferrin receptor, what does this do?" I mean, we've kind of been around, but does it actually deliver medicines to the brain? So I think that's the key. And we recognize that we'll have competitors. We want to have competitors. It means that you're working in a space that is working.
Wonderful. We're just on time. With that, it's been wonderful to host you, Ryan. Thanks for coming to our conference.
Thank you.
Yeah.