The Fate Therapeutics Thesis: How Does It Hold Up To Scrutiny?


When CAR-T cells got approved, it naturally led to questions about next frontiers. Clearly, the big players in the space like Juno Therapeutics (JUNO), Gilead (NASDAQ:GILD), and Novartis (NYSE:NVS) have established a firm proof of concept for cell-based immunotherapies in cancer, particularly in hematologic malignancies like leukemia and lymphoma.

The next step is where Fate Therapeutics (FATE) hopes to find themselves. While they have a fairly diverse pipeline of oncology drugs in development, I’d like to take a look today at their most advanced programs, as well as the overall outlook for the company in the near term, in my opinion.


We will be covering four major topics regarding FATE today:

Clinical development and ongoing trials Cash position and runway Risk and reward

So let’s gaze into the crystal ball for FATE!

Clinical development and ongoing trials

As I stated earlier, FATE has a number of research programs ongoing. However, only two have made it to clinic so far: Fate-NK100, and ProTmune. FATE-NK100 is the company’s flagship anticancer technique, which comprises natural killers expanded using a glycogen synthase kinase-3 inhibitor. These cells are expanded from the patient’s own peripheral blood, and when re-infused into the patient, the hope is that the natural killer cells will overcome the tumor cell’s acquired resistance to immunity.


Source: FATE’s AACR 2017 poster presentation

FATE-NK100 was cleared for first-in-human studies earlier this year, with a clinical trial opening up for patients with acute myeloid leukemia, a form of leukemia that remains a huge unmet need. Subsequent trials in solid tumors, including ovarian cancer, have been initiated. The first patient in the APOLLO study (FATE-NK100 in women with platinum-resistant ovarian cancer) was recently dosed in this study.


Initial findings from the VOYAGE study in AML patients were presented at the 2017 SITC Annual Meeting. In the second dosing cohort of patients, who received 2×10^7 cells/kg, one patient achieved a morphologic leukemia-free state at day 14 of treatment, although this was not sustained with a single dose. The patient in the smaller dose cohort saw a 50% reduction in leukemic blasts after two weeks.

Importantly, the data outlined no dose-limiting toxicities. This is critical because it is not known at this time what kinds of safety concerns may be present in NK cell-based therapy. This offers some favorable news that the therapy is not exceedingly toxic, and that patients appear to gain some benefit from therapy.


On the other end of the oncology spectrum is supportive care, where ProTmune is being studied. Specifically, ProTmune is a method of improving the safety of allogeneic (non-self) bone marrow transplants, which remain a critical component of treatment for leukemia and lymphoma. In particular, the risk for complications like graft-versus-host disease looms large over patients, and they can lead to treatment-related disability or death.

ProTmune works by taking a donor’s peripheral blood and “reprogramming” the cell components using a proprietary medium. This is hypothesized to maintain the “graft versus leukemia” effect while minimizing graft-versus-host disease. The phase 1/2 PROTECT study was initiated back in September, and initial findings were presented at ASH 2017 on December 11. Of the first seven patients enrolled, all remained relapse free after 100 days post-transplant. Three of the seven patients experienced acute graft-versus-host disease of grade 2 or 3 severity, which was manageable with standard approaches.


In the phase 2 portion of this study, patients are being randomized to receive either ProTmune or conventional allogeneic transplant, in order to assess the cumulative incidence of acute graft-versus-host disease.

At this point, it is a bit difficult to tell how strong these data are. 3 out of 7 patients tracks along the historic 40%-80% rate of graft-versus-host disease after transplant. However, this is not easily managed in something like half of those patients, whereas acute disease was resolved in this study.

The key point is that it is a bit early to tell, but these are encouraging early results for ProTmune!


Cash position and runway

According to FATE’s latest SEC filing, they maintain total cash and short-term investments totaling nearly $68 million, with roughly $45 million in cash itself. The company operates at a fairly robust $11.4 million in expenses, the strong majority of which goes to R&D. Considering this is a cell therapy company, that high expense is not extremely surprising to me.

Furthermore, this expense is offset a little bit by a collaborative agreement started with Juno Therapeutics in 2015. This is a bit of a far-ranging agreement where the companies seek small molecules together, and JUNO can gain access to licensing rights, with potential milestones of licensing one molecule of up to $51 million.


At this time, FATE has consistently recognized about $1 million in revenue per quarter from this arrangement for several years, which brings the total quarterly burn rate down to $10.3 million. At present, this would mean the company has at least one year’s worth of funds left for operation, and optimistically they may be able to extend that another 2 or 3 quarters if they keep costs low and tap their short-term investments.

However, a recently announced public offering of stock will seek to sell 9.525 million common shares, with expected gross proceedings of around $40 million. This would secure nearly an extra year’s worth of runway, although I’m sure current shareholders are not pleased with the dilution. For those considering a new position in FATE, this would place them in a more solid position with respect to working capital, nearly two years worth.


Risk and reward

The ever-constant question I get is “so should I buy?” I wish I could tell you for sure, as my training does not grant me a crystal ball. Assuming the company succeeds in their public offering of stock, I see the following strengths, and the corresponding weaknesses for FATE moving forward in the next year:

Strength – Novel approach to immunotherapy is demonstrating some early efficacy data, and safety looks solid for FATE-NK100 so far.

Weakness – “So far” is the operative phrase. FATE-NK100 is still very, very early in clinical trials, and even if they show mind-blowing clinical data around mid-2018, it will still be a few more years before we see approval. CAR-T cell therapy demonstrated mind-blowing efficacy, and it took from around 2014 to 2017 to get approved. ProTmune is another story that is much too early to judge.


Strength – FATE has a stronger balance sheet heading into 2018, with around two years of cash on hand after their proposed dilutive funding. The partnership they have with JUNO could yield even more runway and possibly solve all of their clinical-stage biotech money needs. If they demonstrate good results in 2018/2019, I fully expect they’ll be an attractive target for bigger partnerships or full-on takeover.

Weakness – I hate to be the pessimist, but I don’t personally feel that FATE has enough money on hand to fund their research and development all the way to approval, even in the best case scenario with fast tracking and accelerated approval from the FDA. And the partnership with JUNO may not be as solid as we hope, since JUNO is itself trying very hard to establish its own marketed therapy. Without the resources of a Novartis or Gilead, I wonder what kind of commitment JUNO will be able to make going forward. It very well could pan out, but JUNO is not the absolute most reliable partner at this time, in my opinion. I think investors should watch out for a JUNO CAR-T cell approval to see where their resources might be positioned for a bigger partnership or potential buyout in the future.


Conclusions

FATE presents an interesting risk/benefit analysis. It’s very difficult from the scientific perspective to predict the feasibility of their current tack in oncology, because utilizing NK cells in this way has not been tried before, to my knowledge. If it works, it could be a game changer for hematology. If it doesn’t work, it will join a large graveyard of “promising” immunotherapy strategies.

However, once they execute this round of funding through stock sale, the near-term risk of dilution will be gone, allowing shareholders to anticipate data. I like that, taking the risk all on the science side and not the management/financial side. I think you should seriously consider a good look and a deeper dive into FATE’s technology.


You will notice I did not cover their other preclinical programs. And that was on purpose, as I don’t anticipate these developments will have a near-term impact on their bottom line. I think for now investors should contend with the most advanced programs and make a decision based on that, because this is the main driver of success or failure between now and the 2019/2020 time frame.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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