FATE - Fate Therapeutics: The Future Remains Cloudy

2023-05-23 13:40:20 ET

Summary

• Shares of off-the-shelf cell therapy concern Fate Therapeutics, Inc. have cratered 95% since reaching an all-time high in January 2021, punctuated by the termination of its Johnson & Johnson deal.
• The company has essentially hit the reset button, discontinuing four programs while laying off 60% of its staff.
• With Fate Therapeutics, Inc. trading at approximately $90 million premium to cash with two early-stage clinical programs and another two about ready to enter the clinic, the recent insider buying merited a deeper dive.
• A full investment analysis follows in the paragraphs below.

Life is what happens to us while we are making other plans. " - Allen Saunders.

Today, we revisit Fate Therapeutics, Inc. ( FATE ) . This is a name I have not taken an in-depth look at in years but comes up from time to time on Live Chat. Given the stock's huge decline over the past two years and its large net cash balance, it seems a good time to circle back on this development concern. An analysis follows below.

Company Overview:

Fate Therapeutics, Inc. is a San Diego-based clinical-stage biopharmaceutical concern focused on the development of programmed cellular immunotherapies to fight cancer and autoimmune diseases. After the recent discontinuation of four programs, the company has two compounds undergoing evaluation in Phase 1 studies. Fate was formed in 2007 and went public in 2013, raising net proceeds of $40.5 million at $6 a share. Its stock currently trades around $5.25 a share, translating to an approximate market cap of $515 million.

Recent Operating History

The company operates on the principle that making better cell therapies begins with better cells. Fate leans into its expertise in induced pluripotent stem cells (iPSCs) to develop off-the-shelf cell (or allogeneic) therapies that don't have to be customized to individual patients. Once induced through the expression of certain genes, iPSCs have the unique capacity to be indefinitely expanded and differentiated in culture into any type of human cell, meaning a renewable cell source that can be leveraged to mass produce uniformly engineered cell products in a cost-effective manner.

Fate created natural killer ((NK)) cells and T-cells with this approach, and that attracted Big Pharma. The Janssen division of Johnson & Johnson ( JNJ ) paid Fate $50 million upfront to collaborate on four chimeric antigen receptor [CAR] NK and CAR T-cell therapies that featured $3 billion of potential milestones in 2020. Investors were also initially sold, bidding shares of FATE stock as high as $121.16 in January 2021.

However, owing to some lackluster preclinical and clinical outcomes, JNJ sought unsuccessfully to rework its deal with Fate, finally terminating it effective April 2023. This action compelled the company to reprioritize its programs - resulting in the discontinuation of four - while slashing ~60% of its workforce to conserve cash. The complete cessation of the collaboration came as a bit of a surprise considering J&J authorized Fate to submit an IND for a CAR NK cell product in November 2022 and exercised an option for a second antigen target in December 2022 - both triggering milestone payments. As such, FATE stock sold off 61% in the subsequent trading session (January 6, 2023), but it was already down 91% from its all-time high before the J&J news was made public.

Pipeline

The reset leaves two clinical programs and two more that should enter the clinic in 2023.

FT576

One of the survivors is FT576, an off-the-shelf, iPSC-derived CAR NK cell cancer immunotherapy that is being assessed in conjunction with CD38-targeted monoclonal antibody [MAB] therapy rituximab in the treatment of multiple myeloma [MM]. MM is a blood cancer that afflicts ~100,000 Americans with 35,000 new cases and 13,000 deaths annually. For those eligible, autologous stem cell therapy (i.e., derived from the patient's own stem cells) is the preferred option. Otherwise, chemotherapy, proteasome inhibitors, and immunomodulatory drugs are employed. CAR T-cell and CD38-targeted mAbs have shown promise with relapsed/refractory patients, but most of the afflicted still eventually die from MM.

As for FT576, NK cells express CD16, a receptor that binds to the Fc domain of immunoglobulin G antibodies. Once activated through CD16, NK cells destroy antibody-coated tumor cells and secrete cytokines to amplify the adaptive immune response. FT576 CAR NK cell therapy is engineered with four synthetic controls of cell function, including a CAR that targets B cell maturation antigen ((BCMA)), an Fc receptor modified to promote the just described antibody-dependent cellular cytotoxicity, a cytokine complex designed to enhance NK activity, and complete disruption of CD38 expression to promote persistence and function in high oxidative stress environments.

After demonstrating promise in murine models, FT576 was entered into a dose-finding Phase 1 trial to study its safety and clinical activity both as a monotherapy and in conjunction with rituximab in adults with relapsed/refractory MM. As a monotherapy, in six patients covering two dose cohorts (a single dose of 100 million cells or 300 million cells), the second cohort (n=3) produced one partial response and two stable diseases, with two showing a substantial decrease in levels of soluble BCMA. In combination with rituximab, the first (and only to date) cohort (n=3) produced one partial response and one minor response, with all three demonstrating a significant decrease in soluble BCMA. Next steps are two-dose and three-dose cohorts of 300 million cells covering both regimens. No data timeline has been forwarded.

FT819

The other survivor in the clinic is FT819, an off-the-shelf, iPSC-derived CAR T-cell cancer immunotherapy incorporating two synthetic controls of cell function: a specific (1XX) CAR construct that is inserted into the T-cell receptor alpha constant [TRAC] locus that targets CD19; and elimination of T-cell receptor expression to prevent GvHD. It is undergoing evaluation as a monotherapy in the treatment of B-cell Lymphoma [BCL] and Chronic Lymphocytic Leukemia ((CLL)).

The former is the most common subtype of non-Hodgkin lymphoma ((NHL)), a blood cancer that actuates in the lymphatic system and results in abnormal B-cell growth that form tumors throughout the body. There are over ~70,000 new BCL cases and nearly 20,000 deaths annually. It is treated with chemo and CD20-targeted mAbs, but more than 30,000 patients require later lines of therapy annually. For those relapsed/refractory patients autologous CAR T-cell therapies have had some success but owing to their logistically complex and costly manufacturing process, treatment availability is limited. New CLL diagnoses top 20,000 annually, with more than 4,000 dying from this blood cancer that originates in the bone marrow.

FT819 is being studied in a dose-finding Phase 1 study in adults with relapsed/refractory (3 to 7 lines) BCL and CLL. Patients to date have received one of three regimens: a single dose of FT819 monotherapy ranging from 90 million to 360 million cells; a single dose of FT819 in conjunction with IL-2 cytokine support; and three fractional doses of FT819 at days 1, 3, and 5. To date, of a total of ten patients covering the three treatment groups, the single dose (n=8) produced two complete responses (one at 90 million and one at 360 million cells) and one stable disease. No responses were observed in the fractional dose group (n=2). Its safety profile to date has been favorable. Dose escalation is currently ongoing.

Preclinic Assets

The company also owns one preclinical asset and licenses another. Both should enter the clinic in 2023.

FT825

FT825 is an off-the-shelf, iPSC-derived CAR T-cell compound designed to target solid tumors and is being developed in a collaborative effort with Ono Pharmaceutical Co., Ltd. ( OPHLF ) . In return for the global rights to FT825, Fate is eligible to receive clinical, regulatory, and commercial milestones totaling $843 million, as well as mid-single digit to low-double digit royalties. The milestones are subject to a 50% haircut if Fate elects to co-develop and co-commercialize FT825 in the U.S. and Europe.

FT522

The company's other program expected to reach the clinic in 2023 is FT522, an off-the-shelf, iPSC-derived CAR NK compound designed to target BCL and autoimmune disorders.

Balance Sheet & Analyst Commentary:

The draconian measures taken by Fate Therapeutics, Inc. in response to its split with J&J were designed to extend its operating runway. Fortunately, the company conducted a secondary offering of common stock and pre-funded warrants when optimism was elevated in January 2021, raising net proceeds of $432.4 million at $85.50 a share. At the end of the first quarter, Fate held cash , investments, and milestone receivables of $426 million, providing a cash runway well into FY25. The company recorded $59 million worth of revenue in the first quarter. This consisted of $52.3 million associated with the termination of its collaboration with Janssen and $6.7 million was derived from its ongoing collaboration with ONO.

One-third of the outstanding float in the shares is currently held short. Since first quarter results were posted, six analyst firms including Morgan Stanley and Stifel Nicolaus have maintained Hold/Neutral ratings on the stock. Price target proffered range from $5 to $8 a share. Barclays ($12 price target), SVB Securities ($11 price target) and Mizuho Securities ($12 price target) have reissued Buy ratings on the equity.

Beneficial owner Redmile Group, represented on the board by Michael Lee, demonstrated some positivity on April 20th and 21st, adding 276,639 shares at an average price of $6.17, upping its ownership interest in Fate to 13%.

Verdict:

With no definitive timetables for any of its clinical or preclinical programs, Fate will likely trade at a small premium to cash as more data is collected and released for public consumption. FT819's complete responses in relapsed/refractory patients to multiple lines is a good start; however, the duration of those responses will be key to its clinical advancement. Furthermore, the 2022 FDA approval of J&J's BCMA targeted autologous bispecific CAR T-cell therapy Tecvayli and the likely approval of Pfizer's elranatamab in 2023 means FT576 will have to achieve close to similar results in the clinic against MM and ride its differentiated value and convenience propositions to market share gain. At this juncture, that journey appears to be a long shot.

Fate Therapeutics, Inc.'s iPSC approach could have significant positive ramifications down the road, but its therapies have to demonstrate meaningful improvement in patient outcomes and that information is still a long ways off. As such, Fate Therapeutics, Inc. stock is likely dead money for now and should be avoided.

Amor Fati - "Love Your Fate," which is in fact your life ."- Friedrich Nietzsche.

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