Fate Therapeutics, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company is a clinical-stage biopharmaceutical developer of programmed cellular immunotherapies; it had no therapeutic-product sales and had not achieved profitability.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Collaboration revenue | $1.026 million | None | $1.355 million | None |
| Research and development expense | $5.003 million | $4.080 million | $14.428 million | $12.570 million |
| General and administrative expense | $2.351 million | $1.904 million | $7.797 million | $6.391 million |
| Operating loss | $6.328 million | $5.984 million | $20.870 million | $18.961 million |
| Net loss | $6.886 million | $6.603 million | $22.546 million | $19.650 million |
| Basic and diluted loss per share | $0.24 | $0.32 | $0.92 | $0.96 |
| Cash used in operating activities | Not presented quarterly | Not presented quarterly | $11.427 million | $16.265 million |
Gross margin is not meaningfully reported; the filing presents no product sales or cost-of-revenue line. Q3 revenue was recognized under the Juno collaboration. The nine-month net loss increased year over year, while loss per share declined partly alongside a higher weighted-average share count.
Financial position and liquidity
- At September 30, 2015, cash and cash equivalents were $72.857 million, versus $49.101 million at December 31, 2014. Current assets were $74.185 million and current liabilities were $12.596 million.
- Stockholders’ equity was $44.995 million; accumulated deficit was $134.938 million.
- Debt principal outstanding was $19.389 million; reported net carrying debt was approximately $19.129 million, including current and long-term portions. The loans carry fixed rates of 6.94% and 7.07%, mature in 2018, and are secured by substantially all assets except certain intellectual property.
- Nine-month cash from financing was $36.503 million, including $32.149 million net proceeds from the May public offering and $4.580 million equity proceeds from Juno. Investing activities used $1.320 million.
- Operating cash use fell from $16.265 million to $11.427 million, principally reflecting $7.911 million of deferred revenue from Juno; this should not be read as equivalent improvement in recurring operating performance.
Material changes and collaboration
- In May 2015, Fate sold 6.9 million shares at $5.00 per share, receiving $32.1 million net. Juno separately bought 1.0 million shares at $8.00 per share for $8.0 million; $4.6 million was recorded as equity and the premium as collaboration consideration.
- The Juno agreement includes a $5.0 million nonrefundable upfront payment, a four-year research term with minimum annual research funding of $2.0 million, and a possible two-year extension with minimum annual funding of $4.0 million. Revenue from the upfront payment and share-price premium is recognized over the initial research term.
- Juno-related deferred revenue was $7.9 million at September 30. The filing says no research payments had yet been received, although $0.8 million was recorded in accounts receivable.
- Potential target-selection fees, milestone payments of up to approximately $51 million per product and additional bonus milestones for certain products, and low-single-digit royalties are contingent; none had been received by quarter-end.
- R&D spending growth reflected increased clinical-development and research staffing, external services, and laboratory costs. The company also began leasing additional laboratory space in 2015.
Outlook, risks and other notable matters
- Management expects continued losses for at least several years and higher spending as it advances ProHema trials, pursues ProTmune development, conducts preclinical programs, and performs Juno research. It gave no quantified earnings or revenue guidance.
- Management stated that September 30 cash and cash equivalents should fund projected operating requirements for at least the next 12 months, while warning that estimates depend on uncertain development costs, timelines, regulatory requirements, and financing availability. Additional capital will be needed; future equity financing could dilute shareholders.
- Key risks include clinical failure or delay, uncertain FDA pathways and additional study requirements, manufacturing consistency and regulatory compliance at transplant-center facilities, third-party and cord-blood supply dependence, and the possibility that Juno research yields no commercial products or contingent payments. Juno exclusivity also restricts certain research activities.
- Interim reviews supported continuation of the Phase 2 PUMA study, but the filing cautions that interim data from a limited number of subjects do not predict final outcomes. ProHema had not completed clinical development or received regulatory approval.
- No material legal proceedings were reported. Management concluded disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Juno research funding is received and earned as expected, and how deferred revenue converts to recognized revenue and cash.
- Progress, enrollment, safety, and final results of ProHema studies, and any FDA requirements affecting trial design, formulation, or manufacturing.
- Actual cash burn and runway against management’s at-least-12-month estimate, including development spending and financing needs.
- Debt repayment schedule, collateral and covenant compliance, and potential dilution from the remaining shelf registration capacity, reported as $65.5 million at November 3, 2015.
- Whether Juno selects targets and advances products toward the contingent milestones and royalties described in the agreement.