Fate Therapeutics(FATE) - 2022 Q1 - Quarterly Report

Summary of Risk Factors This section provides a high-level overview of the principal risks associated with an investment in Fate Therapeutics. Key risks include the novel and unproven nature of its iPSC-based product candidates, potential for undesirable side effects, difficulties in manufacturing and clinical development, reliance on new technologies like gene-editing, dependence on strategic partnerships, a history of significant losses, and the need for substantial additional funding. Other risks involve intellectual property protection, competition, and potential disruptions from the COVID-19 pandemic and the conflict in Ukraine - The company's product candidates are based on novel therapeutic approaches (iPSC and gene-editing technologies), making development time, cost, and regulatory approval difficult to predict[9] - Manufacturing and distribution of cell product candidates are complex and subject to significant risks, which could limit supply and increase costs[9] - The company has a history of significant losses and anticipates continued losses, requiring substantial additional funding to complete development and potential commercialization[9][11] - Dependence on strategic partnerships (like Janssen and Ono), protection of intellectual property, and competition from other biotechnology companies are critical to success[9][11] - External factors such as the COVID-19 pandemic, the conflict in Ukraine, and general market inflation pose risks to business operations, supply chain, and financial results[9] PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements (unaudited) The unaudited condensed consolidated financial statements for the three months ended March 31, 2022, show an increase in collaboration revenue but also a significant rise in operating expenses, leading to a larger net loss compared to the same period in 2021. The balance sheet reflects a decrease in total assets, primarily due to cash used in operations. The company's financial position is supported by collaboration agreements with Janssen and Ono, and its primary activities remain focused on research and development of its iPSC-derived cell therapies Condensed Consolidated Balance Sheets As of March 31, 2022, total assets were $858.4 million, a decrease from $921.5 million at December 31, 2021, primarily driven by a reduction in cash and cash equivalents. Total liabilities decreased slightly to $224.9 million from $242.6 million. Consequently, total stockholders' equity declined to $633.4 million from $678.8 million over the same period Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $64,741 | $133,583 | | Total current assets | $599,075 | $633,412 | | Total assets | $858,386 | $921,455 | | Liabilities & Equity | | | | Total current liabilities | $77,911 | $81,284 | | Total liabilities | $224,993 | $242,617 | | Total stockholders' equity | $633,393 | $678,838 | | Total liabilities and stockholders' equity | $858,386 | $921,455 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the three months ended March 31, 2022, collaboration revenue increased to $18.4 million from $11.1 million in the prior-year period. However, operating expenses grew significantly, with R&D expenses rising to $72.1 million and G&A expenses to $20.7 million. This resulted in a net loss of $65.7 million, or ($0.68) per share, compared to a net loss of $45.1 million, or ($0.48) per share, for the same period in 2021 Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Collaboration revenue | $18,414 | $11,142 | | Research and development | $72,139 | $44,852 | | General and administrative | $20,742 | $12,500 | | Loss from operations | ($74,467) | ($46,210) | | Net loss | ($65,690) | ($45,089) | | Net loss per common share | ($0.68) | ($0.48) | Condensed Consolidated Statements of Cash Flows For the first three months of 2022, net cash used in operating activities was $64.6 million, a significant increase from $27.1 million in the same period of 2021, driven by a higher net loss and changes in working capital. Net cash used in investing activities was $7.0 million. Net cash provided by financing activities was $2.8 million, primarily from stock plan issuances, compared to $438.1 million in Q1 2021 which included proceeds from a public offering Statement of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($64,613) | ($27,096) | | Net cash used in investing activities | ($7,026) | ($471,888) | | Net cash provided by financing activities | $2,797 | $438,050 | | Net change in cash, cash equivalents and restricted cash | ($68,842) | ($60,934) | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, collaboration agreements, and financial instruments. Key collaborations with Janssen and Ono are the primary sources of revenue. The company recognized $15.9 million from the Janssen agreement and $2.5 million from the Ono agreement in Q1 2022. A significant liability is tied to stock price appreciation milestones with Memorial Sloan Kettering (MSK), which was valued at $15.8 million. The company also details its investments, leases, and equity structure, including a January 2021 public offering that raised net proceeds of $432.4 million - The company's revenues are derived from collaboration agreements. In Q1 2022, it recognized $15.9 million from the Janssen agreement and $2.5 million from the Ono agreement[54][59] - A liability for stock price appreciation milestones related to the MSK license agreement was valued at $15.8 million as of March 31, 2022. A change in its fair value resulted in an $8.4 million non-operating income for the quarter[63] - In January 2021, the company completed a public offering of common stock and pre-funded warrants, raising net proceeds of $432.4 million[28] - Stock-based compensation expense was $19.3 million for Q1 2022, a significant increase from $13.0 million in Q1 2021[83] - Subsequent to the quarter's end, in April 2022, the company achieved a $3.0 million research milestone under the Janssen Agreement[86] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q1 2022, highlighting a 65% increase in collaboration revenue to $18.4 million, primarily from the Janssen agreement. Operating expenses rose substantially, with R&D expenses increasing by $27.3 million and G&A by $8.2 million, driven by higher employee compensation, stock-based compensation, and increased laboratory and clinical trial activities. The company ended the quarter with $641.7 million in cash and investments, which management believes is sufficient to fund operations for at least the next twelve months. The discussion also reiterates the company's focus on advancing its pipeline of iPSC-derived NK and T-cell cancer immunotherapies and the financial implications of its key collaborations Comparison of Operating Results (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Increase / (Decrease) | | :--- | :--- | :--- | :--- | | Collaboration revenue | $18,414 | $11,142 | $7,272 | | Research and development expense | $72,139 | $44,852 | $27,287 | | General and administrative expense | $20,742 | $12,500 | $8,242 | - The increase in R&D expenses was primarily due to an $11.8 million increase in employee compensation (including $4.1 million in stock-based compensation), a $7.6 million increase in laboratory materials and supplies, and a $3.9 million increase in third-party professional and clinical trial costs[108] - The increase in G&A expenses was mainly driven by a $5.0 million increase in employee compensation (including $2.2 million in stock-based compensation) and a $1.1 million increase in facility-related expenses[108] - As of March 31, 2022, the company had $641.7 million in cash, cash equivalents, and investments, which is believed to be sufficient to fund operations for at least the next twelve months[121][127] - The company continues to experience impacts from the COVID-19 pandemic, including slower clinical site activation and patient enrollment, and delays in obtaining equipment and materials[93] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk primarily from changes in interest rates affecting its cash and investment portfolio. However, due to the low-risk profile of its investments (U.S. treasuries, corporate debt, etc.), a 10% change in interest rates is not expected to have a material impact. A more significant risk is stock price sensitivity related to the Amended MSK License Agreement, where future milestone payments are contingent on the company's stock price. The fair value of this liability was $15.8 million as of March 31, 2022, and is subject to significant fluctuation with changes in the stock price - The primary market risk is interest rate sensitivity on the company's cash and investment portfolio, but this is considered low-risk and not material[132] - The company has significant stock price sensitivity risk due to milestone payments owed to MSK, which are contingent on the company's common stock price. The estimated fair value of this liability was $15.8 million as of March 31, 2022[133] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2022. There were no material changes in internal controls over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[135] - No changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[136] PART II. OTHER INFORMATION Legal Proceedings The company reports that it is not a party to any material legal proceedings at this time. It acknowledges that it may be subject to various claims in the ordinary course of business, but does not expect any current matters to have a material adverse effect - As of the report date, Fate Therapeutics is not a party to any material legal proceedings[138] Risk Factors This section details the numerous risks facing the company. These are categorized into risks related to product discovery and development, reliance on third parties, intellectual property, commercialization, financial condition, and general business risks. Key themes include the unproven nature of its iPSC platform, the complexities of manufacturing and clinical trials, dependence on collaborators like Janssen and Ono, the need for substantial future funding, a history of net losses, and intense competition in the biopharmaceutical industry Risks Related to Discovery, Development and Regulation The company's product candidates are based on novel iPSC and gene-editing technologies, which have no approved precedent, making the development and regulatory pathway uncertain and risky. Key risks include potential failure in clinical trials, manufacturing complexities, delays in patient enrollment, and the possibility that interim data may not predict final results. The COVID-19 pandemic continues to pose a risk of delays to clinical trials and supply chains - All product candidates are in research or early clinical development, and there is a high risk of failure to demonstrate the required safety and efficacy for regulatory approval[141] - The company's iPSC platform and genome editing technologies are novel and unproven, with no iPSC-derived therapies currently approved worldwide, creating significant technological and regulatory uncertainty[160][170] - Manufacturing and distributing iPSC-derived cell therapies is complex, costly, and subject to risks of scale-up, reproducibility, and regulatory compliance[148] - The ongoing COVID-19 pandemic could seriously impact research and development by causing delays in clinical trials, material shortages, and disruptions to site operations[157] Risks Related to Reliance on Third Parties The company's business model relies heavily on third parties for manufacturing, research, and clinical trial execution. It is also dependent on strategic collaborations with Janssen and Ono for the development and commercialization of certain product candidates. Failure by these partners or suppliers to perform, or termination of these agreements, could significantly harm development timelines and financial results. The company also relies on sole-source suppliers for critical materials, posing a supply chain risk - The company depends on third-party manufacturers (CMOs) for its product candidates, creating risks related to regulatory compliance, quality assurance, and supply continuity[185] - Strategic partnerships with Janssen and Ono are critical for the development and commercialization of key pipeline candidates. Unsuccessful collaborations or termination of these agreements would materially harm operations[188] - The company relies on third-party suppliers, including sole-source suppliers, for reagents and materials, making it vulnerable to supply chain disruptions[191] Risks Related to Intellectual Property The company's success depends on its ability to obtain and maintain robust patent protection for its product candidates and iPSC technology. This is challenging due to the complex and uncertain nature of biotech patents. The company relies on licensors (like MSK) to prosecute and maintain key patents and could lose rights if it fails to comply with license obligations. There is also a risk of litigation, infringement claims from third parties, and challenges to the inventorship or validity of its patents - The company's commercial success depends on obtaining and maintaining patent protection, which is uncertain in the complex and evolving field of biotechnology[195] - The company depends on licensors to prosecute and maintain key patents. Failure by licensors to do so could adversely affect the business[196] - Failure to comply with obligations under license agreements, such as the one with MSK which includes stock-price-based milestone payments, could result in the loss of rights to key technologies[199] Risks Related to Commercialization Even if products are approved, the company faces significant commercialization hurdles. It has no experience in marketing or sales and would need to build these capabilities or partner effectively. Success depends on market acceptance by physicians and payors, which is uncertain. The company faces significant pricing pressure and uncertainty regarding insurance coverage and reimbursement for its novel, high-cost cell therapies. The target patient populations for its rare disease candidates are small, requiring high market penetration for profitability - The company has no experience in marketing, sales, or distribution and may be unable to successfully commercialize its products if they are approved[216] - Commercial success is dependent on market acceptance and securing adequate pricing and reimbursement from third-party payors, which is highly uncertain for novel cell therapies[217][219][221] - The company focuses on rare diseases with small patient populations, requiring it to capture a significant market share to achieve profitability[222] Risks Related to Financial Condition and Ownership The company has a history of significant losses and expects them to continue, requiring substantial additional funding to advance its pipeline. Failure to raise capital could force it to curtail operations. The stock price is highly volatile. A significant percentage of stock is owned by principal stockholders and management, allowing them to exercise significant control over the company. Future equity sales to raise capital will be dilutive to existing stockholders - The company has a limited operating history, a history of significant losses ($834.8 million accumulated deficit as of March 31, 2022), and anticipates continued losses for the foreseeable future[258] - Substantial additional funding is required to complete clinical development and obtain regulatory approval for product candidates[255] - As of April 28, 2022, executive officers, directors, and 5% stockholders beneficially own approximately 42.4% of the company's voting stock, giving them significant control[262] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None Mine Safety Disclosures This item is not applicable to the company - Not applicable Other Information There is no other information to report for the period - None Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's articles of incorporation, bylaws, officer certifications (pursuant to Sarbanes-Oxley Act Sections 302 and 906), and XBRL data files - Exhibits filed include corporate governance documents, officer certifications, and interactive data files (XBRL)[287]