Time To Book Profit In Fate Therapeutics Stock After A 5x Rally?
After a stellar 5x rise since the March 23 levels of last year, at the current price of around $114 per share we believe Fate Therapeutics stock (NASDAQ: FATE), a biopharmaceuticals company focused on oncology and immunology treatments based on natural killer T-Cell programs, has reached its near-term potential. FATE stock has rallied from $22 to $114, significantly outperforming the S&P which moved 70% over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The outperformance of FATE can be attributed to positive findings from early clinical trials of FT500 and FT516 treatments. FATE stock is also up a massive 18x from levels of $6 seen in early 2018, three years ago.
Most of the 18x rise of the last 3 years can be attributed to expansion of its P/S multiple, as the company does not have any marketable product yet. Fate’s revenue did grow a solid 160% from $4.1 million in 2017 to $10.7 million in 2019. However, the company saw a 62% growth in total shares outstanding due to share issuances, resulting in only a 61% growth in revenue per share to $0.16 in 2019, compared to $0.10 in 2017. We believe the stock has rallied meaningfully and it is likely to see downside after the recent uptick. Our dashboard, ‘What Factors Drove 1771% Change in Fate Therapeutics Stock between 2017 end and now?, has the underlying numbers.
So what’s the likely trigger and timing for downside?
Fate has been focused on the oncology and immunology pipeline for multiple cancer types including myeloid leukemia, B-cell lymphoma, and multiple myeloma among others. Given that the company does not have any marketable products currently, it generates revenues primarily from collaboration with other pharmaceutical companies. The revenues are expected to see a sharp jump of over 90% to $20.4 million in 2020, due to collaboration agreements with Janssen and Ono.
Fate is working toward a class of treatment that is based on NK cells. While the usual process is to create a different batch for each patient from their own stem cells, Fate is intending for mass production of such treatment. The company is currently working on multiple programs, including FT516 for the treatment of acute myeloid leukemia and B-cell lymphoma, FT596 to treat B-cell lymphoma, FT538 to treat AML and multiple myeloma, FT576 to treat multiple myeloma, FT500, FT516, FT-ONO2, and FATE-NK100 for the treatment of advanced solid tumors. It has seen positive findings from early trials for FT500, preventing disease progression for 11 out of 15 patients, something that has kept the stock price buzzing of late. It does make sense given oncology is a high value market and a single drug approval in this space would mean a significant growth in the company’s sales from the $20 million currently. That said, the treatment is still in the very early stages of clinical trials, implying there is still some time before the drug can even move to late stage trials, let alone file for approval subject to a positive outcome of the upcoming studies. And the recent stock price growth means that some of the positives are already priced in at the current price of $114.
Going by the consensus revenue estimate of $20.4 million in 2020, FATE stock is trading at 456x its RPS of $0.25, which appears to be very high. However, looking at the P/S for Fate is not helpful given the company doesn’t have any marketable product yet, and it is more of a story of exciting products in the pipeline. Now that the stock has seen a strong run up over the recent months, and given that the company is far away from any significant revenue growth, we believe that it is vulnerable to downside risk. However, any positive outcome on the trials related to the company’s solid tumor treatment candidates will likely result in stock price growth.
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While FATE stock may be overvalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Pfizer vs Merck.
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