Denali Stock: Leveraging Transport Vehicle Technology For Neurological Gains (NASDAQ:DNLI)

Strategic Shifts and Scientific Strides: Analyzing Denali’s Latest Moves

Shares of Denali Therapeutics (NASDAQ:DNLI) have been flat since my last update in October.

Which is especially disappointing because the biotechnology sector (XBI) is up some 20% in the same time period. The company reported earnings last month and highlighted some key events to look forward to. Moreover, Denali raised $500 million in a private placement [PIPE] led by a “U.S.-based healthcare-focused investor.” The PIPE raised their cash & investments to approximately $1.5 billion.

Last month, Denali’s partner, Sanofi (SNY), reported its ALS trial did not meet its goal. The drug tested, DNL788, is also undergoing a trial in multiple sclerosis. The ALS failure put pressure on Denali’s stock, as the drug is a part of their pipeline.

Notably, ALS is incredibly difficult to prove efficacy for, and DNL788 is one of their small-molecule drugs.

What I, and most investors and analysts, am interested in is their transport vehicle programs. Their TVs aim to cross the blood-brain-barrier, which is a key hindrance to many therapeutics that are unable to break it.

Crossing the BBB is particularly relevant for indications like MPS (Hunter syndrome) and frontotemporal dementia, in which the disease processes are predominately within the brain.

On this front, Denali continues to enroll MPS patients in the Phase 2/3 COMPASS study. They anticipate finishing the study later this year. I touched upon their MPS pursuits in my last article. The data to date is quite promising. According to Data Bridge Market Research, the MPS market is expected to reach $1.7 billion in 2030. Beyond merely addressing complications, current treatments for MPS involve weekly enzyme replacement therapies [ERT] for those with moderate-to-severe disease. One such ERT, idursulfase, is the active drug in Denali’s DNL310. Through Denali’s innovative TV technology, the goal is to improve the delivery of idursulfase and improve patient outcomes. So, Denali’s therapeutic is being tested against just idursulfase.

Denali’s Phase 1/2 work in frontotemporal dementia has been “voluntarily paused to implement protocol modifications, and is expected to resume this year.”

In an interesting twist, Denali announced its intention to “spin out the company’s preclinical small molecule portfolio” in efforts to prioritize their TV-enabled platforms. Obviously, I am a fan of this decision, as their TV technology is what differentiates Denali.

Financial Health

Turning to Denali’s balance sheet, after incorporating the recent $500 million PIPE, the combined total of cash, cash equivalents, and marketable securities adjusts to approximately $1.53 billion. This adjustment significantly strengthens the company’s liquidity position. The current liabilities amount to $77.98 million, resulting in a current ratio (total current assets divided by total current liabilities) of roughly 20.77, indicating a highly liquid state.

With a net cash used in operating activities of $357.99 million over the last year, the monthly cash burn rate calculates to about $29.83 million. Given the updated liquid assets, the cash runway is extended, demonstrating a considerable operational runway before additional financing may be required. It is important to remember that these calculations are based on historical data, which may not perfectly predict future performance.

Denali’s cash flow activities, characterized by a significant operational cash burn, are counterbalanced by successful financing efforts, notably the recent substantial capital infusion through a PIPE. This strategic financial maneuver substantially enhances the company’s cash reserves, suggesting a proactive approach to financial management amidst its cash burn scenario. The probability of needing further financing within the next 12 months is minimal, considering the bolstered cash position.

Market Sentiment

According to Seeking Alpha data, DNLI’s market capitalization stands at $2.88 billion, reflecting a moderate size within its sector. Growth prospects appear robust, with analysts projecting a significant revenue jump from $70.95 million in 2024 to $218.15 million by 2026, indicating a strong future revenue stream. Stock momentum, however, trails the SPY across all timeframes, with DNLI down -25.71% over the last year compared to SPY’s +26.98%, highlighting underperformance.

Per Fintel, short interest is notable at 9.07% of the float, suggesting a considerable bearish sentiment. Institutional ownership is high at 80.60%, with significant activity observed: 38 new positions opened and 24 positions sold out, featuring major players like Baillie Gifford & Co., Blackrock, and Vanguard. Insider trades over the past year show a slight net sell trend, with net activity at -10,573 shares, indicating a cautious stance from insiders. Given these factors, DNLI’s market sentiment is classified as “adequate.”

My Analysis and Recommendation

In wrapping up, Denali stands at the forefront with its TV technology. Their Phase 2/3 COMPASS study in MPS advances, signaling momentum. Concurrently, efforts in frontotemporal dementia are set to recommence. With $1.53 billion in cash reserves, Denali boasts formidable financial stability and an extended runway for operations. This fiscal health, paired with a strategic shift towards TV-enabled platforms, signals potential expansive growth.

Yet, risks loom. Clinical trials and market adoption harbor unpredictable challenges. Volatility shadows the biotech sector. The recent ALS trial hiccup with Sanofi underscores the unpredictable nature of drug development. Despite these hurdles, Denali’s interesting technology and solid financial base support a “buy” stance. Investors should closely monitor the company’s journey through clinical and regulatory milestones.