Fate Therapeutics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Fate is a clinical-stage biopharmaceutical company developing programmed cellular immunotherapies. It had no therapeutic-product sales; revenue came from collaborations and grants.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Collaboration revenue | $5.5 million | $2.8 million | $8.0 million | $5.4 million |
| Research and development expense | $26.7 million | $21.6 million | $55.9 million | $39.4 million |
| General and administrative expense | $7.5 million | $5.3 million | $15.2 million | $10.6 million |
| Net loss | $28.1 million | $23.5 million | $61.6 million | $43.2 million |
| Basic and diluted loss per share | $0.35 | $0.36 | $0.79 | $0.66 |
Q2 revenue increased about 94% year over year, reflecting collaboration revenue from Janssen and Ono. Higher R&D spending reflected employee costs, clinical development and manufacturing activity, and facility costs. No gross-margin figure is reported; given the development-stage business and absence of product sales, product margins are not meaningful.
For the first six months, operating cash flow was positive $12.2 million, versus cash used of $37.8 million in 2019. This primarily reflected $66.0 million from the Janssen upfront payment and equity premium, including an equity premium classified as operating cash flow; it should not be read as evidence of operating profitability. Investing activities provided $59.1 million, while financing activities provided $277.0 million.
Balance sheet, financing and liquidity
- At June 30, 2020, cash and cash equivalents were $433.1 million and short-term investments were $100.3 million; together, cash and investments totaled $533.4 million. Restricted cash of $15.2 million is reported separately and includes a $15.0 million lease letter-of-credit deposit.
- Total assets were $653.6 million, stockholders’ equity $474.1 million, and accumulated deficit $445.1 million. No debt was outstanding; the Silicon Valley Bank facility was repaid in November 2019.
- Fate raised net proceeds of approximately $188.8 million in a June public offering, $50.0 million in a JJDC private placement, and $33.9 million from JJDC’s April stock purchase, in addition to the Janssen collaboration cash payment. Common shares outstanding rose from 75.7 million at year-end 2019 to 86.8 million at June 30, 2020.
- Operating lease liabilities totaled $81.0 million, against $195.1 million of undiscounted future lease payments. The new San Diego headquarters lease has a 15-year term beginning with rent in 2021; the company expects to move in around mid-2021.
- Management stated existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least the next 12 months. Management also concluded there was no substantial doubt about going concern for at least 12 months from issuance.
Material changes and agreements
- In April 2020, Fate entered a Janssen collaboration to develop iPSC-derived CAR NK and CAR T-cell candidates for up to four cancer targets. Fate received a $50.0 million upfront payment and JJDC invested $50.0 million in stock; accounting included a $16.0 million equity premium in the collaboration transaction price. Fate recognized $3.5 million of Janssen revenue in Q2 and reported $64.2 million of related deferred revenue at quarter-end. Additional research funding, milestones and tiered royalties are contingent; no milestone or royalty payments had been received by June 30.
- Ono collaboration revenue was $2.0 million in Q2 and $4.5 million for the six months. Related deferred revenue was $5.1 million at quarter-end. The Juno agreement ended in May 2019, eliminating that prior-period revenue source.
- R&D expense increased 42% for the first half, while G&A expense increased 43%. Stock-based compensation was $14.1 million for the first half, up from $8.3 million.
Outlook, risks and contingencies
- Fate expects operating losses and increased R&D spending as it advances clinical trials, manufacturing capabilities and collaborations. It anticipates no product-sales revenue unless and until a candidate is developed and approved, which may take years.
- COVID-19 had delayed or disrupted some research activities and clinical-trial initiation and conduct. The duration and financial and operational effects were uncertain, with potential further effects on enrollment, sites, manufacturing, supply chains and access to capital.
- Key risks include early-stage clinical and regulatory uncertainty, patient recruitment, complex cell-therapy manufacturing and scale-up, reliance on third-party suppliers and processing facilities, collaboration partner decisions, and the need for future capital. The company warned future financing may be unavailable or dilutive.
- The $4.0 million CIRM award is recorded as a liability. Fate may elect repayment under specified terms or, if not elected as a loan within 10 years, owe royalties on FT516 commercial sales until payments reach nine times the award.
- Undiscounted lease commitments and the $30.0 million potential early-termination fee for the new headquarters are notable fixed commitments. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether COVID-19 effects, trial enrollment and clinical timelines have changed since the filing.
- Actual cash use and runway relative to management’s at-least-12-month estimate, excluding collaboration advances and financing proceeds.
- Progress and economics under Janssen and Ono, including funding, candidate selection, options, milestones and termination rights.
- Clinical and manufacturing progress, especially reproducibility, scale-up, third-party capacity and regulatory requirements.
- Future dilution and long-term obligations, including equity compensation, lease commitments and the CIRM award’s repayment or royalty terms.