Analyzing the
Business and Technology
of Stem Cells

A First Look at Fate Therapeutics

A fresh idea for the stem cell therapeutics industry, but not without fresh risks

October 3, 2013

With the recent pricing of its IPO, San Diego-based Fate Therapeutics became the 17th component of the SCSI Stem Cell Stock Index of publicly-traded U.S. stem cell-focused companies.

Fate’s technical approach to the development of stem cell-related therapeutics is unique among stem cell companies in general (and SCSI companies in particular) in that it does not develop stem cells themselves as therapies. Rather, its development program is more conventionally ‘pharma-like’ in focusing on the development of chemical drugs -- in Fate’s case, drugs that influence the performance of a patient’s own stem cells.

Taking this unique drug-based route brings both advantages and uncertainties to Fate’s quest. On the plus side, the strategy benefits from more than 50 years of accumulated understanding of how to develop small molecules as understanding sadly lacking among companies that attempt to develop stem cells themselves as therapeutics, which is such a new approach, historically speaking, that it is fair to say that the companies pursuing it are still making things up as they go along. Chemical drugs can be discovered via a cost-effective pre-clinical screening process whereby thousands or even millions of chemical compounds are tested for efficacy in simple assays, and only the best performers are advanced through the company’s pipeline. These ‘candidate’ compounds can then be chemically modified to further improve their performance and safety, yielding (hopefully improved) new candidates, only the best one of which is ultimately advanced to human trials. Perhaps most importantly of all from a business perspective, chemical drugs can be patented (so-called ‘composition of matter’ patents) with near-perfect confidence that those patents will bar competition.

In contrast, developing a stem cell itself as a therapeutic doesn’t permit much pre-clinical screening of candidates. Instead, a cell-focused company starts out by taking an educated guess regarding which of a limited number of cell types might prove effective against a particular medical indication, then attempts to secure the rights to that cell, then takes that cell into clinical trials to determine whether the company guessed right. That cell is what it is -- cells are too complex, and we understand their mechanisms too poorly, to permit us to easily modify them the way simple chemical compounds can be modified by chemists. In effect, a cell-focused company takes one candidate cell and then attempts, through a series of clinical trials, to find a medical condition the cell can treat. Call this screening by trials: screen one cell against a number of medical indications in human trials. The problem with that approach, as many a stem cell therapeutics company has learned, is that clinical trials are brutally expensive to conduct and agonizingly slow to yield results. By the time a cell-focused company learns from its human trial data that its cell is ineffective, it’s usually too late. Cell-focused companies roll the dice and see what happens, and if they come up snake-eyes the company may well be busted. Pre-clinical screening of chemical compounds enables a chemical-focused company like Fate to “fail early and often” (and relatively inexpensively) before the company goes into clinical trials, thus increasing its odds of survival and, ultimately, success. Cell-focused companies, in contrast, get only one or two shots at grabbing the brass ring before they go bust.

But this advantage of Fate’s strategy also comes with its own price. While we can’t yet say for sure that stem cell-based therapeutics are effective -- the jury is still out in hundreds of clinical trials now underway -- we can at least say with ever-growing confidence that candidate stem cell therapeutics are, at least, quite generally safe: thousands of patients have been treated with a variety of stem cells in such trials, and not one has died or experienced a serious (life-threatening) adverse event directly related to treatment. The same can seldom be said for trials of chemical drugs, where so-called ‘off-target’ effects are all too common. It’s simply a fact of life that when you swallow a chemical unexpected things can, and often will, happen. Here too, pre-clinical testing can help: certain types of undesirable effects can be tested for in bench studies and animal trials, and if any are found there’s always the possibility of modifying the chemical compound to prevent those effects. But no bench test or animal study can predict with certainty how a human will respond to a chemical drug, and thus many drug trials fail because the compounds unexpectedly prove toxic in humans. Thus, Fate’s more conventional drug discovery strategy reduces its risk (relative to cell-focused companies) of advancing an ineffective candidate into expensive clinical trials, while increasing its risk of unintentionally advancing a candidate that may prove unacceptably toxic in such trials.

Perhaps with this very tradeoff in mind, Fate wisely chose a novel strategy for its first clinical candidate, ProHema (protaglandin E2, or PGE2). PGE2 is a well-known biological molecule that is already used in a number of clinical settings (most notably to induce labor in pregnancy). It thus seems relatively unlikely to demonstrate unexpected toxicity. Better still, ProHema is not administered to the patient himself. Rather, Fate uses it to treat a stored unit of umbilical cord blood prior to the transfusion of that cord blood unit into a patient. Cord blood transplants are a well-established means of reconstituting a leukemia patient’s immune system after so-called myeloablative conditioning (intentional destruction of the patient’s own immune system to stop the cancer). But the stem cells present in that cord blood unit take time...usually measured in establish themselves in the patient and begin producing new infection-fighting immune system cells, time during which the patient is dangerously susceptible to life-threatening infections. By treating the cord blood unit with ProHema prior to transfusion, Fate intends to stimulate its stem cells and thus reduce that time-to-reconstitution. In short, ProHema is a well-understood drug, and isn’t directly administered to the patient himself, so in its particular case the risk of unexpected toxicity seems low (an assumption which seems to be borne out by Fate’s current clinical trials).

But ProHema alone can’t build Fate into a successful company. According to the New York Blood Center’s National Cord Blood Program there were just over 15,000 cord blood transplants performed worldwide through 2009; it’s a rather modest business opportunity. Fate will need to develop additional drugs for additional indications if it is to be successful and build shareholder value. It’s already hard at work at that, with its pre-clinical (laboratory research stage) program to develop yet another biological molecule, Wnt7A, to reverse the muscle damage caused by muscular dystrophy. But here Fate is treading on more uncertain ground. While there’s good pre-clinical (academic research) evidence that Wnt7A can stimulate stem cells resident in muscle to form new muscle cells, there is no sufficient track record of administration of Wnt7A to humans from which we can feel completely confident that it won’t prove to have unanticipated toxic effects in some clinical settings. And, unlike ProHema, Wnt7A will almost certainly need to be directly administered to the patient himself, further heightening the risk. So Fate’s Wnt7A program is a much more risky bet than ProHema.

Fate’s novel strategy of developing stem cell-modulating drugs, rather than stem cells themselves, as therapeutics presents a much needed alternative approach in the ongoing effort to harness stem cells to treat and cure disease, in a young industry very much in need of fresh ideas. Whether or not it’s the right idea and, if so, whether Fate is the company that can make it work, remains to be seen. Investors in Fate’s IPO and post-IPO investors alike need to assess those risks and make their own judgments. Nonetheless, Fate’s entry into the public capital market for stem cell therapeutics is a welcome and encouraging development.