Most development-stage biopharmaceutical companies pin their hopes on a single clinical hypothesis evaluated with a handful of drug candidates at best. Fate Therapeutics (NASDAQ:FATE) is not most early stage companies.

The cellular therapy pioneer is developing 13 unique pipeline programs. That may give the impression that Fate Therapeutics is throwing everything at the wall and seeing what sticks, but a closer look shows there's been a rational build-out of the pipeline. That doesn't necessarily mean all of the hypotheses will work -- development-stage biopharmas are inherently risky investments -- but if the lead clinical programs report promising data in 2020 from the next wave of major trials, investors might begin to see the value of the company's vision. 

Here's why this pharma stock is my top buy in March.

A hand building stairs out of rectangular blocks.

Image source: Getty Images.

A different approach to cellular therapy

Fate Therapeutics has staked its future on the general idea that first-generation immunotherapies leave much room for improvement. It's not wrong. The successful development of chimeric antigen receptor (CAR) T cells put cellular therapy on the map a few years ago, but there are inherent limitations to their production and use.

Take Yescarta as an example. In the second half of 2017, it became the second CAR-T drug to earn approval from the U.S. Food and Drug Administration (FDA). It's a personalized medicine used to treat certain cancers of white blood cells. To make a dose, immune cells are harvested from a patient, isolated, genetically engineered to attack the patient's cancer, multiplied in the lab, and then administered back into the patient. 

The immunotherapy is highly effective. In a large post-approval study involving 533 individuals, Yescarta achieved an overall response rate of 84% and a complete response rate of 66%. That means 84% of individuals responded to treatment and 66% of individuals had no evidence of disease after six months. The study proved why Gilead Sciences was wise to acquire Kite Pharma, which developed Yescarta and pioneered CAR-T therapies. 

But first-generation immunotherapies such as Yescarta have limitations. Using donor- or patient-derived cells increases the complexity of treatment, which increases costs and the potential for errors. Manufacturing a dose of a patient-derived CAR-T therapy can take two to three weeks and cost $425,000. Hospitals administering CAR-T therapies can charge as much as $1.5 million to ensure they aren't losing money while adhering to stringent protocols. 

CAR-T therapies can also cause severe side effects including cytokine release syndrome (CRS) and neurotoxicities (Yescarta comes with a boxed warning for these side effects). They can only be dosed once. And engineering them with first-generation gene editing tools such as CRISPR/Cas9 has been found to be error-prone. Fate Therapeutics thinks there's a better way. 

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Image source: Getty Images.

What makes Fate Therapeutics unique?

Fate Therapeutics is developing cellular therapies that address most of the concerns of first-generation CAR-T therapies. 

Rather than rely on cells derived from each individual patient, the company engineers cells from a master clonal cell line. That allows for an off-the-shelf drug product that can be easily reproduced, confidently characterized for quality control, and efficiently manufactured in batches. The company estimates its manufacturing cost is less than $2,500 per dose. Individuals can also receive treatment in an outpatient setting and avoid racking up massive hospital bills. 

The development-stage biopharma is also relying mostly on natural killer (NK) cells, which have several advantages compared to CAR-T cells. NK cells shouldn't be accompanied by severe side effects such as CRS or neurotoxicities, can rally the rest of an individual's immune system to attack tumors, and can be dosed multiple times to extend the duration of response. It's also possible to combine NK cells with other drugs, especially monoclonal antibodies, which could provide unique synergies to improve patient outcomes.

Fate Therapeutics has also tapped Inscripta's novel CRISPR gene-editing tool, which uses a novel cutting enzyme that has been shown to be more efficient than Cas9. That's important for ensuring all cells used for a drug product are homogeneous, rather than a distribution of cells with varying genetic profiles and levels of activity. 

On paper, the company's approach stacks up favorably against a general first-generation cellular therapy. 

Metric

First-Generation Cellular Therapy

Fate Therapeutics

Starting material

Cells derived from patient

Cells derived from master clonal cell line (nine of 13 clinical programs)

Manufacturing process

Complex process required to make a single dose

Manufactured in batches (many doses from one production run)

Manufacturing time and cost

2-3 weeks and $450,000

Available off the shelf and less than $2,500

Engineering tools

Error-prone first-generation CRISPR/Cas9 tools

Next-generation CRISPR tool using MAD7 enzyme is more efficient than Cas9 (first drug candidate could begin trials in 2020)

Cell type and dosing

CAR-T cells that can be dosed only once

Mostly NK cells that can be dosed multiple times (eight of 13 clinical programs)

Side effects

CRS and neurotoxicities

No cases of CRS reported in early studies of NK cells

Data source: Fate Therapeutics.

The benefits on paper are nice, but investors will be more concerned with how the approach stacks up in the real world -- and 2020 might be the year they get an answer.

Can 2020 become a breakout year?

Fate Therapeutics is developing cellular therapies against a range of solid tumor cancers and blood cancers. The company made six presentations at the American Society of Hematology (ASH) annual meeting in December, which provided investors with the first real glimpse of the pipeline's potential. 

The takeaways were mostly positive and certainly raised the level of intrigue on Wall Street, as evidenced by a rising stock price. Fate Therapeutics notched several industry firsts (such as with FT500, which became the first off-the-shelf derived NK cell therapy to begin a clinical trial) while setting the stage for more important data readouts in 2020. 

Drug Candidate, Cell Type

Indication

Last Update

FT516 (monotherapy), NK cell

Acute myeloid leukemia (AML)

First patient received one cycle of three once-weekly doses, had no evidence of disease in bone marrow at Day 42.

FT516 (combination therapy), NK cell + monoclonal antibody

B-cell lymphoma

First patient received one cycle of three once-weekly doses, no data reported.

FT500 (monotherapy or combination), NK cell or NK cell + checkpoint inhibitor

Advanced solid tumors in individuals who failed prior checkpoint inhibitor therapy

12 patients total, six of 11 evaluable patients achieved stable disease after first cycle, no cases of CRS or neurotoxicity in 62 total doses.

Data source: Fate Therapeutics Press releases.

Fate Therapeutics also plans to initiate new studies in 2020. A combination therapy comprising a FT596 (an NK cell drug candidate) and rituximab (a monoclonal antibody) is expected to begin a phase 1 study in lymphoma in early 2020. Meanwhile, the company expects to submit investigational new drug (IND) applications for its first off-the-shelf CAR-T cell product, FT819, and first CRISPR-edited product, FT538, in the second quarter of this year. 

A risky stock, but one that could pay off

Fate Therapeutics began the year with $261 million in cash, which means investors and Wall Street analysts will be solely focused on clinical results and the continued buildout of the pipeline in 2020. 

While all development-stage biopharma stocks are inherently risky, the number of shots on goal insulates investors from a single failure. In fact, each drug candidate is genetically engineered against unique molecular targets, or used in specific combinations, which means any single clinical failure can't be extrapolated across the entire pipeline. 

Fate Therapeutics still needs to generate clinical results demonstrating its next-generation approach to cellular therapy can lead to robust clinical benefits for patients, but Wall Street and deep-pocketed industry leaders might coalesce around the development-stage company if early and mid-stage studies continue to impress. That could make its current $2.3 billion market valuation a bargain for investors with a long-term mindset -- and with an appetite for above-average risk.