Fate Therapeutics, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Fate is a clinical-stage biopharmaceutical company developing programmed cellular immunotherapies; it had no therapeutic-product sales.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Collaboration revenue | $4.4 million | $2.4 million |
| Research and development expense | $26.5 million | $19.9 million |
| General and administrative expense | $9.9 million | $10.4 million |
| Operating loss | $32.0 million | $27.8 million |
| Net loss | $33.5 million | $30.0 million |
| Net loss per share, basic and diluted | $1.05 | $1.18 |
| Cash used in operating activities | $29.8 million | $18.4 million |
2016 revenue was collaboration revenue, principally from Juno Therapeutics, not product sales. Operating expenses exceeded revenue substantially; a commercial gross margin is not applicable at this pre-commercial stage. Research and development expense increased 33%, mainly due to clinical and research services, added personnel, and laboratory costs. Net loss grew 12%; per-share loss narrowed as the weighted-average share count rose.
At year-end, cash and cash equivalents were $88.6 million and short-term U.S. Treasury investments were $3.5 million, or $92.1 million combined. Working capital was $78.1 million and total assets were $95.0 million. The company reported $10.7 million of debt principal outstanding (about $10.7 million net carrying value, split between current and noncurrent portions); contractual debt payments, including interest and fees, totaled $12.8 million. Debt is secured by substantially all assets other than certain intellectual property and carries operating covenants. Management stated that available cash and investments were expected to fund operations for at least 12 months, while also warning that additional capital would be required to advance development.
Financing provided $57.7 million of cash in 2016, primarily from August and November private placements, partly offset by $7.7 million of debt principal repayments. The November financing included $36.4 million net proceeds from non-voting convertible preferred stock, convertible at five common shares per preferred share subject to conditions. Year-end common shares outstanding were 41.4 million; the preferred shares could convert into approximately 14.1 million common shares.
Fourth quarter: Revenue was $1.0 million, operating expenses were $8.7 million, net loss was $7.9 million, and basic and diluted loss per share was $0.21. In fourth-quarter 2015, revenue was $1.1 million, operating expenses were $8.0 million, net loss was $7.4 million, and loss per share was $0.26.
Business progress and changes
- ProTmune, an investigational programmed graft intended to reduce complications such as acute graft-versus-host disease (GvHD) after allogeneic hematopoietic cell transplantation, entered the Phase 1 stage of the PROTECT Phase 1/2 study; its first subject was enrolled in December 2016. The planned Phase 2 stage is contingent on safety review.
- FATE-NK100 was in development for relapsed or refractory acute myeloid leukemia (AML). After year-end, in February 2017, an investigator-initiated IND took effect for a Phase 1 trial; this was not a 2016 clinical-stage milestone.
- Other programs remained preclinical, including iPSC-derived engineered NK- and T-cell therapies and ToleraCyte for immune regulation. The company expanded collaborations and licensed additional University of Minnesota and Memorial Sloan Kettering intellectual property.
- Research and development spending and operating cash use increased as programs advanced. Cash and investments rose from $64.8 million at the end of 2015 to $92.1 million at the end of 2016, primarily reflecting equity financing.
Outlook, risks, and contingencies
Management expected continued operating losses and higher research and development spending, with no product-sales revenue anticipated until product candidates are developed and approved. The company identified additional financing as necessary over time; the stated 12-month runway is a management estimate based on assumptions, not a guarantee.
- Key risks include clinical failure or delay, patient-enrollment challenges, uncertain regulatory pathways for novel cell therapies, and the need to establish reproducible, compliant manufacturing.
- Fate relies on third parties for manufacturing, clinical-site operations, research, and important supplies. It reported no long-term supply commitments for certain components and no company-owned manufacturing facilities.
- Juno provides research funding, with minimum annual payments of $2 million during the initial term, and could elect to terminate beginning in May 2017 with six months’ notice. Selection fees, milestones, and royalties were contingent; none had been received by year-end.
- Debt covenants, future equity issuance, and preferred-stock conversion create financing and dilution risks. A shelf registration allowed up to $65.5 million in securities, subject to restrictions; shares from 2016 private placements were registered for resale.
- Contractual obligations at year-end included $14.2 million of operating lease payments and $12.8 million of scheduled debt payments. Additional license milestones and royalties may become payable if specified development, regulatory, commercial, or sublicensing events occur; these contingent amounts were not included in the obligation table.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and no substantial doubt about its ability to continue as a going concern. Its independent auditor gave an unqualified opinion on the financial statements; the auditor did not provide an internal-control attestation because of the emerging-growth-company exemption.
Most important facts for investors to verify
- Whether ProTmune’s Phase 1 safety review supports the planned randomized Phase 2 study and whether enrollment and endpoints remain on track.
- FATE-NK100 trial initiation, enrollment, safety, and early clinical results following the February 2017 IND effectiveness.
- Cash burn, financing needs, and actual runway compared with management’s year-end estimate; also monitor debt repayment and covenant compliance.
- The potential dilution and conversion conditions for the 2.82 million preferred shares, which represented approximately 14.1 million potential common shares.
- Juno collaboration continuation, research funding, and any target selections or milestone progress; future contingent payments are not assured.
- Manufacturing readiness, supplier continuity, and regulatory requirements for ProTmune, FATE-NK100, and iPSC-derived candidates.