Fate Therapeutics Trims Chemistry Staff, Bets on Biotech Drugs

7/7/11Follow @xconomy

Fate Therapeutics, the high-profile stem cell startup in San Diego, has made some limited job cuts in recent months and changed strategy to focus on biotech drugs—instead of conventional small molecules—to coax stem cells into becoming a useful therapies.

The company, founded by leading scientists at Harvard University, Stanford University, and the University of Washington, has reduced its staff to about 25 people as it eliminated jobs of a “handful” of small molecule chemists, according to executive chairman John Mendlein. That’s down from about 40 employees a year ago, according to a Fate spokeswoman at the time, although Mendlein says the company headcount was only about 31 at its highest, because some people have been indirectly supported through company-sponsored research grants. Fate’s internal cuts, which came in February, were partially offset by hiring some new people with skills in making biologic molecules, Mendlein says. By dropping the small molecule work, Fate shelved two drug development programs that sought to alter a cell-growth pathway known as hedgehog. The strategic changes all came around the time when CEO Paul Grayson left the company.

“It’s a reshaping from a headcount perspective,” Mendlein says. “We want to emphasize biologics more than small molecules.” He added that Fate may still form partnerships with Big Pharma companies that want to work on small molecules, but the biologics work is considered the higher priority within Fate at the moment. “Biologics are not redundant with what other people are working on. Biologics are proprietary,” Mendlein says.

Fate’s strategic moves are closely watched in the stem cell field, as the company has generated lots of attention since its founding in 2007. It has raised more than $50 million from top venture capitalists and Big Pharma investors seeking to take advantage of stem cell biology to develop new therapies, or to use the new knowledge to enhance drug development. Fate made big news in October 2009 when one of its scientific founders, Sheng Ding, showed in Nature Methods that he could induce ordinary adult cells into a stem-cell-like “pluripotent” state through a combination of cheap, efficient small molecule chemical compounds. The discovery, the company said at the time, was thought to be a key to advancing the field by paving the way for a low-cost, efficient “industrialized” process for making cells with potential to differentiate into other cells.

So far, Fate hasn’t yet secured any lucrative partnerships with Big Pharma companies looking to incorporate its methods for making pluripotent cells for drug development, or to co-develop regenerative medicines. Fate has a secured a distribution partnership with Franklin Lakes, NJ-based Becton Dickinson (NYSE: BDX) in which Becton could end up distributing chemical reagents or Fate’s induced pluripotent stem cells for research.

There is a scientific reason for the shift to biologics, Mendlein says. Conventional small molecule compounds have an advantage in that they can be cheaply and easily synthesized in a lab, but they often bind with lots of similar protein targets rather than exclusively nail just one target of interest. Biologic drugs, made through genetic engineering techniques, can be expensive to make, but they can be designed to hit a specific target, he says.

“We think there’s an opportunity to create small molecules that modulate cell fate,” Mendlein says. “However, small molecule chemistry potentially creates additional complications in interpreting data. They often have off-target effects, and they have a distribution pattern that’s more broad across more tissues. We want to ask more specific questions, which you can with biologics. We can design biologics to manipulate the fate of cells for therapeutic benefit.” He adds that biologic molecules should offer “a more linear path” through clinical development, which is important, he says, “given how complex the biology is in stem cell arena.”

Even while the shift is on toward biologics, Fate’s lead drug candidate remains a conventional small molecule known as FT1050. What makes this program different from other small molecules, Mendlein says, is that it is designed to work through a controlled process in the lab. In this case, umbilical cord blood is treated in a lab to increase the odds that a bone marrow transplant will be successful for lymphoma or leukemia patients.

Fate likes this particular use of a small molecule, Mendlein says, because it doesn’t have to be directly injected into the body, where some of those off-target effects can occur.

The company presented some preliminary results from the first clinical trial of FT1050 at a February meeting of the American Society for Blood and Marrow Transplantation in Honolulu, HI. Adding the experimental compound to the transplant regimen didn’t appear to raise any safety issues in the first 15 patients who enrolled, researchers said. Among six patients who were treated with a modified protocol to assess the effectiveness of the Fate drug, the study showed a successful engraftment of their transplants in an average of 18.5 days, compared with a historical average of 21 days, the company said in a statement. One patient developed a mild-to-moderate case of acute graft-versus-host-disease, a potentially dangerous complication of transplants. Ten of the first 15 patients were alive and disease-free at the time of presentation.

Fate hopes to present more detailed results from this trial later in the year at the American Society of Hematology meeting, Mendlein said in an interview late last month at the Biotechnology Industry Organization’s convention in Washington, D.C.

Cash, like with all startup biotechs, is always a critical issue. The company last raised a big amount of cash with its $30 million Series B financing in November 2009, which chief financial officer Scott Wolchko said at the time was enough to run the company for at least two years, without counting on government grants or pharma partnership dollars, Mendlein says.

Since then, Fate took on $1 million in debt, according to an April filing with the Securities & Exchange Commission. Fate also expanded the Series B equity round to $36 million, according to a separate regulatory filing that month. About a month later, the company identified Takeda Ventures, the investing unit of Japan-based Takeda Pharmaceuticals, as a new strategic investor. Fate has also secured investments from Astellas Venture Management, Genzyme Ventures, and one other unnamed pharmaceutical venture entity, along with its syndicate of traditional VC backers—Arch Venture Partners, Polaris Venture Partners, Venrock, and OVP Venture Partners.

There are no plans at the moment to raise another equity round, and the company is “always looking to be thrifty” in how it does its science, Mendlein says. Fate isn’t looking to hire a permanent CEO, which means that Mendlein is essentially the acting chief executive, through his capacity as half-time executive chairman. The company has brought in some more non-dilutive financing, through a contract with the U.S. Department of Defense to work on a regenerative medicine for combat injuries. The company currently has roughly enough cash on hand to last through late 2012, and it could extend its runway further with more non-dilutive financing and partnership dollars.

A company like Fate faces some definite headwinds. Big Pharma companies—most notably Pfizer and Roche—have been cutting back on R&D spending, not looking for adventurous and risky new areas of biology to explore. Some pharma companies have seen fit to try to develop their own induced pluripotent stem cell lines in house, Mendlein says.

While Fate has talked in the past about licensing out its induced pluripotent stem cell technology, Mendlein says the emphasis has long been on using either small molecules or biotech drugs to put adult stem cells in the body into a desired state, so that they act like a regenerative medicine. The company’s current pipeline, besides FT1050, consists of biologic molecules for cardiovascular disease, metabolic disease, and muscle regeneration. All of those biologics are at the discovery stage—a long way from entering clinical trials.

Cutting the small molecule drug programs was partly based on the need to prioritize, Mendlein says. “It’s difficult to focus on all these things at once. To build up everything at once, or to try to do things in stepwise manner, are two different strategies. We were probably working on a number of programs that needed more capital and more focus to really make them work,” he says.

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