The therapeutic qualities of living cells have tremendous potential to improve patient outcomes for a broad range of ailments, from cancers to autoimmune diseases. Engineering cell therapies isn't easy, and there's much left to understand and quantify when it comes to the complexity of biology, but the payoff for a successful immunotherapy is too great to ignore. 

Take Fate Therapeutics (NASDAQ:FATE) as an attractive example. The early stage company has one of the most ambitious cell therapy pipelines in the industry, both in scale (counting 13 pipeline programs) and scope (spanning multiple cell types and cancers). Although investors have limited clinical data available, a recent multi-billion dollar collaboration with Johnson & Johnson (NYSE:JNJ) subsidiary Janssen might lower some of the risk involved. 

Is this high-risk, high-reward pharma stock a buy?

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The case for Fate Therapeutics

Fate Therapeutics is developing off-the-shelf, induced pluripotent stem cell (iPSC) derived cancer immunotherapies. What exactly does that mean? 

The company's scientists engineer immune cells in the lab and administer them to patients to treat cancer ("cancer immunotherapy"). Whereas first-generation immunotherapies require immune cells to be harvested from patients, Fate Therapeutics grows them from specific types of stem cells ("iPSC-derived"). Cellular medicines created without the difficult, expensive, and error-prone harvesting process can be manufactured at larger scale in centralized facilities, allowing them to be available on-demand ("off-the-shelf"). 

Specifically, the company is developing immunotherapies based on natural killer (NK) cells and T-cells to treat solid tumor cancers and hematologic malignancies (blood cancers). Cell therapies based on NK cells have yet to earn regulatory approval, but they offer several advantages over T-cells including the ability to be dosed multiple times, a reduced risk of triggering drug resistant mutations in cancer cells, and avoiding the potentially fatal side effect of cytokine release syndrome (CRS).

Fate Therapeutics has also licensed a novel CRISPR gene-editing tool from Inscripta to engineer iPSC-derived cells. The genetic engineering toolbox relies on the MAD7 enzyme, which has demonstrated superiority on key engineering metrics compared to the more commonly discussed Cas family of enzymes. 

Taken together, the company thinks its unique approach to cellular medicine could drop the cost of developing immunotherapies from $425,000 per dose to just $2,500 per dose. That confidence and strong technical foundation help to make Fate Therapeutics an intriguing biotech stock. It also helped to land a collaboration with Johnson & Johnson subsidiary Janssen in early April.

The partnership will leverage the iPSC technology platform of Fate Therapeutics and the chimeric antigen receptor (CAR) toolbox of Janssen to develop immunotherapy candidates based on NK cells and T-cells. Fate Therapeutics will receive a $50 million upfront payment and a $50 million equity investment. The early stage company is also eligible to receive up to $1.8 billion in development and regulatory milestone payments, $1.2 billion in commercial milestone payments, and double-digit royalties. 

There's no denying the collaboration helps to de-risk an investment in Fate Therapeutics, but investors might not want to get too carried away just yet.

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The case against Fate Therapeutics

Investors drawn to Fate Therapeutics have to rely heavily on potential right now. The development-stage biopharma has progressed only three of its 13 pipeline programs into clinical trials. Despite an intriguing technical roadmap, there's little to no data for investors to digest. 

Financially speaking, the business is relatively well-positioned. Fate Therapeutics reported a cash balance of $221 million at the end of 2019, while the Janssen collaboration will add $100 million to the balance sheet. But developing the company's ambitious pipeline will require hundreds of millions of dollars. 

Although it's true that the Janssen collaboration can help to de-risk development by providing a potential source of non-dilutive funding, investors should remain grounded. As with most drug development deals, investors should assume the $1.8 billion in potential development and regulatory milestone payments are weighted to later stages of development. That suggests Fate Therapeutics has a long way to go before collecting meaningful payouts. 

It's also worth bluntly pointing out that there's relatively little risk involved for Janssen. There are countless examples of deep-pocketed pharmaceutical companies walking away from development deals with small, unproven companies when early clinical results fail to impress. The point is that the $3 billion value of the collaboration is impressive, but far from guaranteed. Investors would certainly feel more confident in the deal with more data in hand.

Is this cell therapy stock a buy?

Fate Therapeutics is a high-risk, high-reward stock. That's not uncommon for an early stage biopharma, but investors could argue that the risk-reward balance falls in their favor. The cell therapy pioneer has built a strong technical foundation for its iPSC-derived immunotherapy platform. Those efforts have allowed the company to begin advancing assets into clinical trials in the last year. 

While investors have little to no clinical data to interpret in early 2020, an ambitious collaboration with Johnson & Johnson subsidiary Janssen helps to instill confidence in the early stage company's approach and vision. At market valuation of just $2.2 billion, investors with a long-term mindset should consider Fate Therapeutics stock a buy.