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Fate Therapeutics (FATE) made its public debut on Tuesday, October 1. Shares of the clinical-stage biopharmaceutical company ended their first day with gains of 10.3% at $6.62 per share.

The offering of Fate failed completely as the offer price was cut by some 60% from levels to be thought achievable just a few weeks ago. The company issued more shares, already causing real dilution, to raise some meaningful proceeds in the offering.

An "investor" stays out of such offerings, while more opportunistic gamblers may try their long-term chances after the disastrous offering.

The Public Offering

Fate Therapeutics is a biopharmaceutical company engaged in the discovery and development of pharmacologic modulators of adult stem cells. This is aimed to treat orphan diseases, including hematologic malignancies, lysosomal storage disorders and muscular dystrophies.

Its novel approach uses pharmacologic modalities, including small molecules and therapeutic proteins. These target biological mechanisms to enhance the therapeutic potential of adult stem cells.

Fate Therapeutics sold 6.7 million shares for $6 apiece, thereby raising $40 million in gross proceeds. All shares were sold by the company, with no shares being offered by selling shareholders.

Note that just a few weeks ago, Fate aimed to sell 4 million shares for $14-$16 per share. This price guidance has been aggressively lowered to $6-$8 last week, while at the same time the offer size has been increased. Note that Fate ended up selling its shares at the low end of the already lowered range.

Some 41% of the total shares were offered in the public offering. At Tuesday's closing price of $6.62 per share, the firm is valued at $97 million.

The major banks that brought the company public were Cowen and Company, Wedbush PacGrow Life Sciences and BMO Capital Markets.

Valuation

Fate is enthusiastic about adult stem cells which can grow, maintain and repair many human tissues and organ system. As such, stem cells hold considerable therapeutic promise.

Fate has a deep understanding of biological mechanisms which guide the fate of adult stem cells. the company built two platforms monitoring the activity of these cells using techniques which operate both in as well as out of the body.

Fate's HSC platform focuses on optimization of hematopoietic stem cells. HSCs has been used for decades for stem cell transplants with over a million procedures being performed to date, yet Fate believes HSCs have not been optimized yet to improve patients outcomes.

ProHema is the lead candidate from Fate's HSC platform. It is currently in Phase 2 testing for Adult hematologic malignancies. For disorders like LSDs and Pediatric hematologic malignancies, the drug is still in pre-clinical stage. Other pre-clinical programs include Second Generation HSC Therapeutic and Wnt7a Protein Analogs.

For the year 2012, Fate Therapeutics generated annual revenues of $2.7 million, up from $1.2 million the year before. Net losses increased slightly to $14.2 million in the meantime.

For the first six months of this year, Fate reported revenues of merely $0.8 million compared to $1.5 million last year, as net losses increased to $9.1 million.

The company operates with $3.4 million in cash and equivalents and $0.7 million in debt. Factoring in gross proceeds of $40 million from the public offering, and Fate will operate with a net cash position of somewhere around $35 million.

With the equity in the business being valued at $97 million, operating assets are valued around $62 million.

Investment Thesis

As noted above, the offering of Fate Therapeutics was quite a disappointment. The company priced the offering at $6 per share, some 60% below the midpoint of the preliminary offering range from the start of September.

So despite the opening day returns, shares are still trading some 56% below the midpoint of the preliminary offering range on the back of the failed offering.

I cannot argue with the market here as I think the offering is extremely risky. Note that Fate has a collaboration with Becton, Dickinson (BDX) which was entered in 2010, but this partnership ended over the past month. This results in no collaboration revenues from this deal going forward.

Other risks include the large rate of losses, of up to $10 million per six months period at the moment. At the same time, cash balances of around $35 million post-IPO, will last the company less than two years at this point in time.

Fate has initiated a Phase 2 clinical trial for ProHema, targeting hematologic malignancies, in the fourth quarter of 2012. Fate anticipates to get better therapeutic effects from ProHema by adding an improved nutrient-rich formulation, known as NRM. To incorporate this in the medication, Fate submitted an IND amendment to the FDA in August of this year. Full data from this is expected to arrive by mid-2015.

So you can see my concerns. With no partners and limited resources, Fate will most likely run out of cash before more data becomes available, and the uncertainty until that point in time might result in severe dilution for shareholders.

So to summarize, Fate does have a promising candidate, which is a long time from commercialization. Given the lack of resources, the large losses, and the lack of resource-rich partners, an investment in Fate looks not attractive at all.

While investors should not view Fate as an investment, they could consider it for a gamble. Shares are trading with losses of over 50% from the midpoint of the guidance range. The current $100 million valuation is rather modest, even when factoring in reasonable expectations for the drug to succeed, and more dilution for shareholders to come.

As I am personally not in the game for gambling, I remain on the sidelines.

Source: Fate Therapeutics: You Need A Lot Of Faith Investing In This Public Offering