Fate Therapeutics(FATE) - 2018 Q4 - Annual Report

Part I Business Fate Therapeutics is a clinical-stage biopharmaceutical company developing programmed cellular immunotherapies for cancer and immune disorders General Description and Strategy The company develops first-in-class cellular immunotherapies using cell programming and iPSC technology, focusing on allogeneic therapies and strategic collaborations - Fate Therapeutics is a clinical-stage biopharmaceutical company developing programmed cellular immunotherapies for cancer and immune disorders[9] - The company's therapeutic approach involves 'cell programming' using either pharmacologic modulators on donor cells or generating therapies from clonal master induced pluripotent stem cell (iPSC) lines[9][13] - The business strategy focuses on developing allogeneic therapies to improve consistency and reduce costs, leveraging its iPSC platform for off-the-shelf products, and forming strategic partnerships to accelerate clinical translation[15] Product Pipeline & Partnerships The company's pipeline includes Immuno-Oncology and Immuno-Regulation programs, featuring donor and iPSC-derived cell therapies, supported by strategic partnerships Development Pipeline Summary | Product Candidate | Cell Type | Stage of Development | Therapeutic Area | Commercial Rights | | :--- | :--- | :--- | :--- | :--- | | Immuno-Oncology | | | | | | FATE-NK100 | Donor NK | Phase 1 | AML, Ovarian Cancer, Solid Tumors | Worldwide | | FT500 | iPSC-NK | IND Allowed | Advanced Solid Tumors | Worldwide | | FT516 | iPSC-NK | IND Allowed | Hematologic Malignancies | Worldwide | | FT596 | iPSC-NK | Preclinical | Hematologic Malignancies | Worldwide | | FT538 | iPSC NK | Preclinical | Hematologic Malignancies | Worldwide | | FT819 | iPSC-T | Preclinical | Hematologic Malignancies | Worldwide | | Immuno-Regulation | | | | | | ProTmune™ | Donor cell graft | Phase 2 | Prevention of Acute GvHD | Worldwide | | FT301 | iPSC-MDSC | Preclinical | Immune Disorders | Worldwide | - FATE-NK100 is in three Phase 1 trials for AML, ovarian cancer, and advanced solid tumors, showing some anti-leukemic activity and disease control[23][26][27] - The FDA cleared IND applications for FT500 and FT516, the first iPSC-derived cell therapies to enter clinical investigation in the U.S., for solid tumors and hematologic malignancies respectively[17][30][34] - ProTmune™ is in a randomized, controlled Phase 2 trial (PROTECT study) for preventing acute GvHD in HCT patients, with Phase 1 data showing good tolerability and no graft failure or cancer relapse[41][44] - A key partnership with Ono Pharmaceutical for iPSC-derived CAR T-cell candidates involved a $10 million upfront payment and up to $20 million in R&D fees[46][48] Intellectual Property and License Agreements The company's extensive IP portfolio, comprising over 300 patents and applications, is bolstered by key exclusive license agreements with academic institutions - The company's intellectual property portfolio consists of over 200 licensed and over 100 owned issued patents or pending applications, covering its product candidates and platform technologies[53] - Key IP relates to programming hematopoietic and immune cells (patents expiring 2027-2039) and iPSC technology, including generation, engineering, and differentiation (patents expiring 2024-2038)[56][57][59] - The company has material exclusive license agreements with several institutions, including Children's Medical Center, University of Minnesota, Memorial Sloan Kettering, Whitehead Institute, and The Scripps Research Institute, crucial for product development[61][64][65] - These license agreements obligate the company to pay annual maintenance fees, development and commercial milestones (e.g., up to $5.0 million per product to CMCC, $12.5 million per product to MSK), and royalties on net sales[61][66] Manufacturing, Competition, and Regulation The company manages manufacturing through third parties and its own GMP facility, faces intense competition, and navigates complex FDA regulations for its cell therapies - Manufacturing for ProTmune and FATE-NK100 is performed at clinical cell processing facilities affiliated with trial sites[73][74] - The manufacturing of iPSC-derived products is a three-stage process, utilizing CMOs and the company's own developing GMP facility[76] - The company faces significant competition from numerous large and small biopharmaceutical companies in the cellular immunotherapy space, including Allogene, Atara, bluebird bio, Celgene, Gilead, and Novartis[96] - Biological products are regulated by the FDA under the FDCA and PHS Act, requiring rigorous nonclinical testing, an effective IND, well-controlled clinical trials, and an approved Biologics License Application (BLA)[78][80][81] - The FDA offers expedited programs such as Fast Track, priority review, accelerated approval, and breakthrough therapy designation, with ProTmune having received Fast Track designation[88][44] Risk Factors The company faces substantial risks including clinical trial failures, manufacturing complexities, funding needs, intense competition, and intellectual property and commercialization challenges - Development & Regulatory Risks: The company may face delays or failures in clinical trials due to difficulties in patient enrollment, unexpected safety issues, or regulatory hurdles for its novel cell therapies, potentially requiring additional unanticipated studies[105][108][113] - Manufacturing & Supply Risks: Manufacturing of cell therapies, particularly iPSC-derived products, is complex, costly, and subject to risks of failure or inconsistency, with reliance on third-party manufacturers and suppliers for critical materials[117][120][140] - Financial & Operational Risks: The company has a history of losses and will require substantial additional funding to complete development and commercialization, facing intense competition from better-funded companies and reliance on key personnel[109][178][191] - Third-Party & IP Risks: The business depends on strategic collaborations (e.g., Ono, Juno), and their failure could harm product development; the company must also obtain, maintain, and defend its intellectual property rights and could face infringement claims[136][147][152] - Commercialization Risks: The commercial success of its products depends on market acceptance by physicians and payers, favorable pricing, and adequate reimbursement, all of which are uncertain for novel cell therapies[164][165][167] Properties The company leases approximately 48,000 square feet of office and laboratory space in San Diego, California, with an additional 24,000 square feet leased in January 2019 - The company leases approximately 48,000 square feet of office and laboratory space in San Diego, CA under a lease through December 2028[207] - In January 2019, the company expanded its leased space by an additional 24,000 square feet[207] Legal Proceedings The company is not currently a party to any material legal proceedings and does not anticipate any significant adverse effects from potential future claims - As of the report date, the company is not a party to any material legal proceedings[209] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'FATE', has never paid dividends, and made no share repurchases in 2018 - The company's common stock is traded on The NASDAQ Global Market under the ticker symbol "FATE"[213] - The company has never paid dividends and does not plan to in the foreseeable future[217] - No equity securities were repurchased by the company in the year ended December 31, 2018[220] Selected Financial Data In 2018, the company reported $4.7 million in revenue and a $66.6 million net loss, with total assets increasing to $213.0 million Selected Consolidated Financial Data (in thousands, except per share data) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Collaboration Revenue | $4,740 | $4,106 | | Research and development | $56,024 | $34,358 | | General and administrative | $15,808 | $11,873 | | Loss from operations | $(67,092) | $(42,125) | | Net loss | $(66,598) | $(42,952) | | Net loss per common share | $(1.19) | $(1.02) | | Balance Sheet Data | | | | Cash and cash equivalents | $190,514 | $88,952 | | Total assets | $213,032 | $105,292 | | Total stockholders' equity | $160,469 | $77,189 | Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2018 net loss increased to $66.6 million due to higher R&D and G&A expenses, while liquidity improved to $201.0 million from a public offering Results of Operations In 2018, collaboration revenue slightly increased to $4.7 million, while R&D expenses surged by $21.7 million and G&A expenses by $3.9 million Comparison of Operations (Years Ended Dec 31, in thousands) | Item | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Collaboration revenue | $4,740 | $4,106 | $634 | | Research and development expenses | $56,024 | $34,358 | $21,666 | | General and administrative expenses | $15,808 | $11,873 | $3,935 | - The $21.7 million increase in R&D expenses in 2018 was driven by higher costs for third-party services ($7.8 million), licensing ($6.7 million), employee compensation ($4.3 million), and lab supplies ($2.5 million)[250] - The $3.9 million increase in G&A expenses in 2018 was mainly due to higher employee compensation ($2.2 million) and increased advisory and consulting fees ($1.3 million)[250] Liquidity and Capital Resources As of December 31, 2018, the company held $201.0 million in cash and investments, significantly bolstered by $140.8 million from financing activities, primarily a public stock offering Summary of Cash Flow Activity (in thousands) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(38,650) | $(36,817) | | Net cash used in investing activities | $(463) | $(10,196) | | Net cash provided by financing activities | $140,780 | $47,356 | - As of December 31, 2018, the company had $201.0 million in cash, cash equivalents, and short-term investments[263] - In September 2018, the company raised net proceeds of $134.9 million from a public offering of common stock[265] - The company believes its existing cash and investments are sufficient to fund projected operating requirements for at least the next twelve months[275] Contractual Obligations As of December 31, 2018, total contractual obligations were $59.7 million, comprising $18.5 million in debt and $41.2 million in operating lease obligations Contractual Obligations at December 31, 2018 (in thousands) | Obligation | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt (including interest and fees) | $18,480 | $3,720 | $13,131 | $1,629 | $— | | Operating lease obligations | $41,221 | $3,019 | $7,634 | $8,098 | $22,470 | | Total | $59,701 | $6,739 | $20,765 | $9,727 | $22,470 | - The company has additional obligations for potential milestone payments and royalties under its license agreements, which are not quantified due to uncertainty of timing and occurrence[277] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity on its cash and investments, with a 10% rate change not expected to materially impact financial results - The company's primary market risk is interest rate sensitivity on its cash, cash equivalents, and short-term investments[281] - Due to the short-term nature of its investments and the capped interest rate on its debt, a 10% change in market interest rates is not expected to materially impact financial results[281] Financial Statements and Supplementary Data The 2018 consolidated financial statements show total assets of $213.0 million, a net loss of $66.6 million, and $190.5 million in cash, reflecting increased R&D and G&A spending Consolidated Balance Sheets As of December 31, 2018, total assets reached $213.0 million, driven by increased cash to $190.5 million, with total liabilities at $52.6 million and equity at $160.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $190,514 | $88,952 | | Total current assets | $205,196 | $102,596 | | Total assets | $213,032 | $105,292 | | Total current liabilities | $27,263 | $11,049 | | Total liabilities | $52,563 | $28,103 | | Total stockholders' equity | $160,469 | $77,189 | Consolidated Statements of Operations For 2018, the company reported a net loss of $66.6 million on $4.7 million in revenue, an increased loss primarily due to higher operating expenses Consolidated Statement of Operations Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Collaboration revenue | $4,740 | $4,106 | $4,402 | | Research and development | $56,024 | $34,358 | $26,452 | | General and administrative | $15,808 | $11,873 | $9,913 | | Loss from operations | $(67,092) | $(42,125) | $(31,963) | | Net loss | $(66,598) | $(42,952) | $(33,462) | | Net loss per share | $(1.19) | $(1.02) | $(1.05) | Consolidated Statements of Cash Flows In 2018, net cash used in operations was $38.7 million, offset by $140.8 million from financing activities, resulting in a $101.7 million increase in cash Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(38,650) | $(36,817) | | Net cash used in investing activities | $(463) | $(10,196) | | Net cash provided by financing activities | $140,780 | $47,356 | | Net increase in cash, cash equivalents and restricted cash | $101,667 | $343 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, affirmed by an unqualified audit opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[399] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, a conclusion audited and supported by an unqualified opinion from Ernst & Young LLP[399][402] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the registrant's definitive proxy statement to be filed with the SEC[409] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the registrant's definitive proxy statement[410] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the registrant's definitive proxy statement[411] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the registrant's definitive proxy statement[412] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the registrant's definitive proxy statement[413] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, with financial statements starting on page 74 - This section contains the index to the company's financial statements and a list of all exhibits filed with the report[416][417]