koto_feja Shares of next-generation cell therapy pioneer Fate Therapeutics (NASDAQ:FATE) have lost over 80% of their value during the past 12 months. 3-year performance is slightly less painful at -41%. Personally, I’ve had two highly divergent experiences with this small cap biotechnology company. On the one hand, I prudently exited a very large position in January 2021 after it provided me a 450% gain and optimism turned into peak euphoria. On the other hand, I reentered way too early in the second half of 2022 and sold year end at $16 for a 68% loss. From those levels, it’s hard to believe share price fell another ~40% in part due to ARK-induced selling pressure (names that famed investor Cathie Wood owns are highly exposed to being targeted by short sellers) as well as a lackluster showing at ASH for the company’s early-stage multiple myeloma programs. Recently, it was disclosed that ARKK sold the majority of its position including 3.4M share sale on January 3rd. With that headwind increasingly removed, I wanted to revisit this promising cell therapy play ahead of an important Q1 R&D Day event. Chart Figure 1: FATE weekly chart (Source: Finviz)When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels and get a feel for what’s going on. In the daily chart above, we can see share price steadily decline from highs in the $40s and trade in a range in the $20s for part of Q3 to Q4. Unfortunately, sell-off intensified after the ASH annual meeting in December along with several other peers in the space. Recent blow out in part seems due to ARKK-induced selling pressure, but the silver lining is with Cathie Wood exiting her position shares appear poised for a near term rebound. Overview Founded in 2007 with headquarters in San Diego (545 employees), Fate Therapeutics currently sports enterprise value of ~$700M EV and Q3 cash position of $519M providing them operational runway for just over a year. There are ~96M shares outstanding out of 250M authorized (in addition 257,310 pre-funded warrants and 2.79M convertible preferred shares) I also imagine 10% to 15% dilution via secondary offering can be expected within the next quarter or so to extend operational runway in these tough times. Taking an abbreviated look at Fate’s overall approach and pipeline, the company can simplistically be described as developing “better cell therapies that start with better cells”. The approach is referred to as cell programming, where they start with human induced pluripotent stem cells (iPSCs) to generate a clonal master iPSC line possessing desired biological properties. Master cell lines are used as the backbone for each cell therapy product candidate and manufacturing process is streamlined (unlike autologous cell therapy) in a manner similar to how monoclonal antibodies are produced. It’s hard to understate just how revolutionary this process could potentially be, allowing for mass production at ultra-low cost enabling off-the shelf delivery to treat as many patients as possible (particularly combining with standards of care in frontline therapy). Multi-faceted pipeline is divided between Fate’s hematology-directed programs and those pursuing perhaps more lucrative solid tumor indications. Collaborations have been forged with leading researchers and top medical centers, including Dr. Michel Sadelain (renowned T-cell biologist and founder of CAR T-cell therapy). Likewise, recognizing there is only so much the company can take on its own, Fate has decided to selectively share its iPSC platform with industry-leading partners such as Janssen (Johnson & Johnson) and Ono Pharmaceutical. Janssen agreement was inked in 2020 with $100M upfront received ($50M equity investment) and Fate is eligible to receive up to ~$900M in milestone payments and up to $460M for each additional collaboration candidate. They also managed to retain option to co-commercialize and profit share in the US while remaining eligible for double-digit tiered royalties up to mid-teens on net sales for candidates commercialized by Janssen. Ono deal involves CAR T-cell candidates using iPSC technology where Ono gets Asia rights and Fate retains them for the rest of the world for first candidate (co-develop 2nd candidate in US and Europe). Starting with heme pipeline, refractory cancers could provide faster path to market including going after patients who are refractory to currently approved autologous CAR-T treatments (diseases such as ALL, DLBCL and multiple myeloma). Ultimate end game would be to expand to earlier lines of therapy via combinations with standard of care (upending the current paradigm that cumbersome autologous cell therapy is reserved for patients who’ve exhausted other options). Figure 2: Heme pipeline (Source: corporate presentation)FT516 is the company’s most basic heme candidate and is engineered to express a novel CD16 (hnCD16) Fc receptor that incorporates two unique features designed to augment the anti-tumor activity of FT516: a high-affinity homozygous 158V variant to promote high binding affinity and a modification to block its cleavage and down-regulation upon NK cell activation. FT516 is the first-ever engineered iPSC-derived cell therapy cleared for clinical studies in the US and phase 1 study is assessing a range of dose levels in AML as well as advanced B-cell lymphoma or BCL. FT596 is a bit more advanced and incorporates three anti-tumor functional modalities, including proprietary CAR targeting B-cell antigen CD19 and an IL-15/IL-15 receptor fusion (cytokine complex that promotes survival, proliferation and trans-activation of NK cells and CD8 T cells). The principal idea here is that multi-antigen targeting, improved ADCC and enhanced cell persistence will result in superior outcomes. The drug candidate is being evaluated in phase 1 study consisting patients with relapsed/refractory B-cell malignancies (B-cell lymphoma, follicular lymphoma and chronic lymphocytic leukemia or CLL). Both monotherapy as well as combinations with standard of care (i.e., obinutuzumab for FL, rituximab for BCL, etc.) are being explored. Fate also has a stable of early-stage candidates for multiple myeloma, which is a particularly crowded arena given novel BCMA CAR-T agents approved and moving up to earlier lines of therapy as well as other emerging targets like GPRC5D. FT538 incorporates non-cleavable CD16 Fc receptor, IL-15/IL-15 receptor fusion and the complete elimination of CD38 expression to mitigate the potential for NK cell fratricide. Multiple dose levels are being explored in phase 1 studies for MM as well as AML (monotherapy and combination with daratumumab). Not to jump too far ahead, but phase 1 study is also evaluating FT538 in patients with advanced solid tumors in combination with four monoclonal antibodies (targeting EGFR, HER2, PDL1, PD1). FT576 is a more advanced candidate that also incorporates CAR targeting BCMA and is being evaluated in phase 1 study at various doses (very early going so far) both as monotherapy and combination with daratumumab. To round it out, the company has a CAR NK cell candidate going after the highly crowded target of CD19 (sports complete elimination of TCR expression and the novel 1XX CAR targeting CD19 inserted into the TRAC locus). Moving on to solid tumor efforts, early data was presented at SITC in November last year but expectations were (deservedly) very low given the update consisted of only low doses with limited follow up. Figure 3: Solid tumor pipeline (Source: corporate presentation)FT536 is a highly interesting candidate targeting MICA/MICAB proteins which are induced by cellular stress, damage or transformation and have been reportedly expressed on many tumor types. High serum concentrations of shed MICA/B are associated with disease progression in a variety of solid tumors. The objective here is to overcome this prominent evasion mechanism as a means of restoring anti-tumor immunity in patients with solid tumors. Other early-stage candidates are just entering or ready to enter the clinic including FT573 (targeting B7-H3 which is aberrantly overexpressed in many cancers with limited expression in normal tissues and is often associated with poor prognosis). Select Recent Developments On November 7th the company announced that ONO Pharmaceutical exercised its option to FT825/ONO-8250 (multiplexed-engineered, iPSC-derived CAR-T candidate targeting EGFR2-expressing solid tumors). FATE receives milestone payment and both will jointly develop and commercialize in the US and EU (ONO has rights for rest of world while FATE receives tiered royalties). IND submission is planned for 2023. November 11th update at SITC showed 1 of 8 responses for FT538 and 0 of 3 responses for FT536. However, keep in mind this is the lowest dose at 100M cells per dose (higher doses in larger number of patients should do better next year). On December 10th, the company announced interim clinical data from its ongoing phase 1 study of FT819 for patients with relapsed/refractory B-cell lymphoma (BCL). This is a landmark study as it’s using the first-ever T-cell product derived from an IPSC line allowing for greater consistency, off-the-shelf availability and greater patient access not to mention redosing. FT819 incorporates novel features such as CD19-targeted 1XX chimeric antigen receptor construct into the T-cell receptor alpha constant (TRAC) locus in order to promote uniform CAR expression, enhance T-cell potency and prevent graft-versus-host disease. Despite the very low dose used, initial data showed activity in heavily-pretreated patients including those not eligible for or having received & failed autologous CD19-targeted CAR T -cell therapy. The gamechanger here is the ability to quickly redose upon first signs of disease recurrence, which is a factor I don’t believe the market gets yet. 50% response rate (1 of 2) was observed in patients naive to CAR-T therapy at 90M cell dose to 360M dose, while 2 of 6 (30%) patients previously treated with CAR T-cell therapy achieved objective response (1 CR, 1 PR). Of note, the complete response was in a DLBCL patient who failed 7 prior lines of therapy and did not respond to auto CAR-T. As of September 8th cutoff, additional 5 patients with r/r BCL were treated. One patient with Grade 3a FL (5 prior lines of therapy including CAR-T) achieved complete response at Day 30, while 4 patients with Richter’s Transformation did not respond to therapy at Day 30. To be fair, these latter 4 patients were treated at 180M cell dose as I understand it. Importantly, in regard to safety profile, there were no Grade 3 or greater FT819-related adverse events. I just see 3 patients (20%) with Grade 2 cytokine release syndrome or CRS all of which resolved with supportive care. There were no cases of ICANS or GvHD. Lastly, the highlighted case study demonstrates the value-add of this approach in terms of being able to redose as well as safety for these old, frail patients. 73 year old female with DLBCL was previously treated with 4 lines of therapy including commercially approved CAR-T. She achieved partial response at Day 30 on JUST a single dose of FT819 at the very low 90M cell dose. Disease progressed at Day 72, at which time patient was given a 2nd dose and again achieved PR with 61% reduction in size of target lesions. Both treatment cycles were well tolerated with no Grade 3 or greater FT819-related AEs. It merits being pointed out that ongoing dosing in Regimen A uses a single dose of 360M cells while Regimen B is using 3 fractionated doses of 60M cells per dose. Fate also amended study protocol to allow use of bendamustine at 90 mg/m2 for 2 days instead of Cy/Flu conditioning therapy. Moving on to FT-578 BCMA-targeted candidate, I won’t spend much time here as the data is VERY early. Key takeaway is that safety profile remains quite good (allowing for administration in outpatient setting) and there are initial signs of activity at low doses in patients with relapsed/refractory multiple myeloma. In the second dose of Regimen A (300M cells) a triple-refractory patient with 5 prior lines of therapy achieved very good partial response (two others had stable disease). In Regimen B (only the first dose cohort at 100M cells), one patient achieved partial response and one with minor response (out of 3). As for safety, there were no dose limiting toxicities of any grade (the usual like CRS, ICANS or GvHD). However, there were was one patient with Grade 3 diarrhea and another with two episodes of Grade 3-4 neutropenia and 3 episodes of Grade 3 anemia (all resolved). Note that the next high value target of interest in multiple myeloma, GPRC5D, is advancing via partnered CAR NK program with Janssen (find it encouraging that JNJ is relying on FATE to follow up on their BCMA efforts). Separately, I thought the preclinical data presented by GT Biopharma (GTBP) was interesting as it highlighted the potential of dual antigen targeting approach for treating AML via combination of GTBP’s tri-specific killer engager with iPSC platform from FATE. For FATE and GTBP, it’s still early as such efforts are still a ways from actually entering the clinic (initially targeting MICA/B via iPSC product and combining it with anti-CD33 TriKE to improve anti-leukemic activity). Other Information For the third quarter, the company reported cash of $519M as compared to R&D expenses of nearly $80M and G&A of 21.6M. Cash runway is just over 1 year, so I expect financing in the near term. Looking at quarterly numbers in the image below, it’s clear that Fate needs to do a better job in controlling its costs during the biotech bear market where capital is hard to come by (net loss nearly doubled year over year from $43M to $83M). Similarly, accumulated deficit was a whopping $994M and shows no signs of slowing down. Figure 4: Quarterly losses rising significantly (Source: 10-Q filing)FT596+R (rituximab) phase 1 study (dose and dose schedule optimization) is ongoing in relapsed/refractory BCL. 3 dose escalation cohort is at 1.8B cells, 2 dose cohorts at 900M and 1.8B cells per dose. Community site activation is ongoing for FT596+R-CHOP in first-line aggressive BCL (this would be the biggest market opportunity representing multi-billion dollar potential with the promise of bringing off-the-shelf cell therapy to frontline). FT819 enrollment is ongoing in single and multi-dose escalation cohorts with interim phase 1 data to be presented at ASH (keep in mind this is the first-ever T-cell product candidate manufactured from a clonal master iPSC line to be evaluated in the clinic). As for multiple myeloma franchise, FT576 phase 1 study (single and multi-dose escalation) is ongoing evaluating both monotherapy and combo with daratumumab for relapsed/refractory myeloma. As for FT538 in AML, monotherapy is enrolling patients at 4th dose level (1.5B cells) and investigator-initiated study is evaluating combo with daratumumab (also enrolling patients at 1.5B cells per dose). Collaborations are progressing nicely, including JNJ IND candidate FT555 (GPRC5D for multiple myeloma). JNJ also exercised its option for a second hematologic malignancy product candidate (submit IND application during Q4). The companies are doing preclinical development for two solid tumor antigen programs as well (KLK2 for prostate cancer, the other undisclosed). As for the call, here are a few nuggets: In terms to getting to market as efficiently as possible, CEO notes active discussions with the FDA are focused on the post-CAR T cell setting in patients with aggressive B-cell lymphoma. They believe that a single arm study in relatively small number of patients with ORR as endpoint would be sufficient, given that response rates in this population are generally low in the teens range. Progression free survival benchmark is 2 to 3 months for this population, so they would look to achieve 6 months PFS. In multiple myeloma, they believe a similar strategy can evolve where they develop combination therapy with daratumumab in patients that have progressed or failed CAR-T cell therapy via FT516 or FT596. Additionally, as with lymphoma, the idea would be that instead of competing with autologous, to move into frontline setting and take advantage of the off-the-shelf profile and differentiated safety profile by combining it with monoclonal antibody regimens in the community setting (reaching patients earlier). This is where the largest opportunity for the company lies, one that Wall Street does not seem to see or buy into as of yet. As for the aforementioned prospects of near-term dilution, I note that January 2021 offering wisely took advantage of euphoric highs to raise $400M at $85.50 price point (including pre-funded warrants). It’s a shame that the company will likely dilute here at levels 80% lower than prior offering. Moving on to competition, I prefer to more comprehensively address this aspect of the story later on when the company actually has programs in pivotal studies. That said, they certainly have their work cut out for them going up against the likes of Novartis and Kite Pharma with approved auto CAR-T therapies in relapsed/refractory ALL and DLBCL. Similarly in multiple myeloma, auto CAR-T products like Abecma from Bristol Myers Squibb and Johnson & Johnson’s Carvykti are approved for later lines of therapy with studies ongoing to move into earlier lines including front-line study pitting Carvykti against transplant (quite ambitious). For the latter, I note that JNJ thinks it could ultimately achieve $5 billion or more in peak sales as they aggressively invest in manufacturing capacity. This is just the tip of the iceberg when thinking of BCMA bispecifics, GPCR5D starting with JNJ’s talquetemab and the list of novel therapies in development goes on! As for institutional investors of note, Cathie Woods’ ARK Investment Management prior owned over 10M shares or 10% stake in the company but is now steadily selling it down (at just 3M shares at last check). Generalist funds Vanguard and BlackRock (BLK) both own 7% to 8% stakes, but otherwise it could be considered a red flag that I don’t see better known specialist biotech hedge funds in this name. It is encouraging that CEO Scott Wolchko has some skin in the game with ownership of over 430,000 shares. However, history of insider selling over the past year does not inspire confidence. As for relevant leadership experience, Chief Medical Officer Wayne Chu led early clinical development at Genentech for multiple therapeutic platforms including ADCs, checkpoint inhibitors and bispecific antibodies. Chief Financial Officer Edward Dulac served prior as VP Business Development at Celgene, while Chief Technical Officer Mark Plasvic served prior as Head of Product Biosafety at Sanofi/Genzyme. Relatively new hire & Chief Commercial Officer Brian Powl served prior in a highly relevant role at Celgene as VP Global Commercial CAR T lead. Moving on to executive compensation, cash portion of salaries appears in the normal range for a company this size. Stock and options awards seem a bit on the high side, especially given that shares have fallen by over 80% during the past 12 months and what that implies in terms of management execution including with failing to trim expenses sufficiently. Figure 5: Compensation table (Source: Proxy filing)Moving onto useful nuggets from members of the ROTY community, I note that during the past week multiple veterans have reentered this name now that Cathie Wood’s ARK has sold much of its position. Member Aa stated that with ARK close to being out, FATE is a “no brainer long term investment now” and is in the process of patiently buying dips. As for IP, this is one aspect of the story I think is significantly underappreciated given the company’s lead in the iPSC space and just how vast its protection is with 400 issued patents and 150 applications. They own over 20 patent families directed to programming the fate of somatic cells ex vivo as well as related to their platform for industrial-scale iPSC generation and applications related to differentiation of iPSCs into specialized cells with therapeutic potential. These also cover novel reprogramming factors and methods of reprogramming to obtain iPSCs. IP portfolio also includes gene editing compositions and methods of genetic engineering, as well as methods of directing the fate of cells to obtain homogenous cell populations in the hematopoietic lineage, including CD34+ cells, T cells and NK cells. Expected expiration dates are in the range of 2031 to 2042 and again patents mentioned above are just the tip of the iceberg. For example, IP licensed from Memorial Sloan-Kettering Cancer center covers production and composition of iPSC-derived T cells and their use in cellular immunotherapy (also includes two patent families covering novel CAR constructs as well as off-the-shelf CAR T cells). Exclusive rights licensed from Mal Delbruck Center for Molecular Medicine cover IP directed to novel humanized antibody fragments, antigen-binding domains and CAR constructs that uniquely target and specifically bind B-cell Maturation Antigen (BCMA) with expirations of 2033 to 2037. Final Thoughts To conclude, with market capitalization of $1.1B and EV of $700M, I think that valuation for this iPSC cell therapy pioneer is reaching attractive levels especially for investors who have a long-term timeframe. Continued improvements and optimization of the technology should lead to better candidates as Fate continues to improve the backbone used for each indication (adding novel features as fits the disease being pursued). On the other hand, bears and skeptics argue that the durability of NK cell therapies appears inferior to currently approved autologous CAR-T and the improved safety profile is not sufficient to overcome this issue. Proponents of the Fate’s approach point out that repeated dosing is a built-in feature of the technology allowing for ease of use and thus these NK candidates should be thought of more as monoclonal antibodies instead of compared to auto CAR-T. Still, the competition is increasingly intense in certain indications being pursued, not only from CAR-T but also from other novel therapies including bispecific antibodies where durability is looking increasingly impressive (such as Roche’s glofitamab with durable complete responses in relapsed/refractory B-cell lymphoma). For glofitamab at ASH as an example, median duration of CR was not reached with CR ongoing at 12 months in 78% of 61 patients with CR! Again, comparing this to NK cell therapy in my opinion is akin to comparing apples to fruit loops as they are vastly distinct modalities. However, this is clearly a hurdle to overcome in terms of Wall Street’s perception of Fate’s therapies and this might not occur until phase 3 data is in hand. For readers who are interested in the story and have done their due diligence, at current levels Fate is a Buy appropriate for long-term investors only. A prudent strategy could be to purchase pilot position presently, then await secondary offering to clear the dilution overhang before accumulating more exposure ahead of solid tumor updates later in the year. I do think the comprehensive R&D update in Q1 could be a needle-mover, but the burden of proof is on management to show they are making the transition from science project to being on the path toward pivotal studies. As for risk rating (1=low, 5= high), I will err on the side of caution and assign Fate a 4 given that management to my eyes has failed to curb costs in an increasingly difficult environment and thus near-term dilution is an issue (last time they raised at $85/share!). “Sell the news” reaction to comprehensive R&D update in Q1 is also a possibility, a situation where the data is quite promising but not enough to overcome the expected dilution overhang. Another risk is that the company’s efforts in the clinic are not appreciated by Wall Street until pivotal data sets emerge providing a clear path to market. Another concern, while less likely, is that partners elect not to move forward with development candidates using Fate’s iPSC technology (majority of development options including all of Janssen’s have been exercised that I’m aware of). Increasingly crowded targets like CD19 or BCMA may never yield fruit as more advanced bispecifics make their way into late-stage studies and CAR-T candidates move into earlier lines of therapy. Going up against industry giants such as Johnson & Johnson, Gilead, Roche and Bristol-Myers Squibb is a tough ask for any small cap biotechnology enterprise. Whatever the indication, the company needs to show promising data that truly separates it from cell therapy competition and the rest of the field. Lastly, as for my personal clinical-stage portfolio, I’m more likely to err on the side of caution and revisit after secondary offering or closer to next solid tumor update to accumulate a position. Author’s Note: I greatly appreciate you taking the time to read my work and hope you found it useful. While I post research on many companies that interest me, in ROTY (clinical stage) and Core Biotech (commercial stage) portfolios I own just 15 or fewer names in order to focus on stories that are highest conviction for me.

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