MF3d
Summary
Creativity is not my strength so I am reusing the title from an article that I wrote a few months back about Vyne Therapeutics, another dermatology company. The shares of Vyne have fallen 60% since then. The story is at Forte is essentially the same and all too common in biotech. Vyne and Forte both experienced setbacks, institutional investors sold and long term investors have fared poorly. Most importantly, for both companies, there is a suboptimal plan to move forward that exposes investors to a high degree of clinical risk, requires hundreds of millions of capital and has a low chance of rewarding investors in a manner commensurate with this outsized risk. I will outline a few reasons I rate Forte Biosciences (NASDAQ:FBRX) a SELL
Institutional Investors
Major institutional investors have sold and cut their losses. Forte Biosciences had an enviable roster of professional investors including BVF, Orbimed and Perceptive Advisors. These are seasoned investors with a staff of PhD/MDs who are highly capable of assessing the future likelihood of success. All three funds sold their entire stake in the company. This is not always the case after a clinical failure. There are many cases where institutional investors increase their stake at a low price. Three institutional investors selling their entire stake strongly suggests these professionals do not see a bright future.
For an unprofitable biotech company, institutional investors are an important source of capital. Funding an unprofitable biotech in the capital markets is very challenging currently. It is not clear Forte will be able to obtain future funding and if they do, terms will likely be unfavorable. What is clear is they have very limited cash ($38.5 m currently) and they will need hundreds of million to develop the new molecule. In fact, they have a shelf registration in place. Investors should expect substantial dilution.
The Plan Forward
The asset the company intends to move forward after the failure of FB-401 in atopic dermatitis is FB-102. Given this asset is in the very early stages of testing, prudence dictates an assessment as to whether the risk is worth the potential reward. This molecule may enter the clinic for testing as late as 2024.
The company’s presentation noted development plans in graft versus host disease (GvHD), vitiligo and alopecia areata which represent combined markets of over $6 billion. Each indication will require separate clinical trials to prove safety and efficacy adding substantially to the cost of development. Each of these indications has standard of care treatments.
The company notes an unmet medical need. GvHD is a disease where there is a legitimate unmet need but there are other companies much further along in testing including Seres Therapeutics (MCRB) and MaaT Pharma. The unmet need may be satisfied by these entrants and MaaT has already produced favorable safety and efficacy data.
Alopecia and vitiligo have very effective treatments currently-JAK inhibitors. The company noted the safety profile of JAK inhibitors. Opzelura is a topical JAK and most Doctors consider the safety profile of the cream to be of no concern whatsoever. In alopecia, where oral JAKS are approved, the safety and efficacy data for all 3 JAK inhibitors (Pfizer, Lilly and Concert) has been favorable but there is a black box warning. From an efficacy standpoint, there is no unmet need. From a safety standpoint, the mechanism of action and side effect profile are related. The JAK inhibitors work in vitiligo and alopecia areata by suppressing the immune system. There is nothing to suggest FB-102 can achieve the suppression of the immune system required for efficacy without the same safety issues.
Investors are going to spend hundreds of million dollars developing treatments in indications where there are either treatments approved or assets years ahead of Forte’s molecule, FB-102. Investors are taking on a huge amount of risk to enter crowded markets with little assurance of any competitive advantage. Of course, there is also the possibility the molecule does not show efficacy or adequate safety and needs to abandoned leaving Forte with no assets.
To make development of FB-102 worthwhile, it would have to offer a benefit over existing treatments. The company presentation does not include the mechanism of action of FB-102 making it impossible to ascertain whether the “proprietary molecule” that involves “antagonism of a pathway for autoimmune disease” has any advantages or is even likely to work.
The company cites infrequent dosing as a potential benefit of the treatment. This is an extraordinarily poor reason to spend hundreds of millions to develop a treatment. Dosing is a very unimportant issue in diseases such as GvHD which can be fatal. Vitiligo and alopecia areata are diseases where patients have skin discolorations or baldness and patients are highly motivated to take their medicine.
The company cites preclinical proof of concept but provides no actual data proving anything in my view. The management team is attempting to raise funding (from investors) but do not provide investors with any indication of how the drug works, what the preclinical data showed or why it may be an improvement over existing treatments. In fact, it is unclear if substantial pre-clinical testing has even been completed given the 2024 date for entry to the clinic. This is blind gambling for investors.
Management
The management team has a poor track record for communication with their investors. They had a promising asset, FB-401, but it failed in a clinical trial. This is biotech and legitimate companies have disappointing results regularly. It is simply a tough business. The company issued a PR that the study did not meet the endpoint. When FB-401 failed, the company offered no explanation and left investors with no understanding of why this may have happened. Remaining silent month after month while investors are left with a lack of clarity is poor form.
Conclusions
In biotech, cash burn and lots of risk is the nature of the game. But there has to be a clear reward and a reason to believe the company may be successful to justify taking the risk. This is a single asset company with a very concentrated bet on a very early stage asset for which there is no data to suggest it has any advantage over existing treatments. Management has little to lose to continue on. Management gets paid a salary and are granted options but assume little risk. This often leads them to keep going even when the odds are extraordinarily low and the best course of action for shareholders is to simply fold and return whatever capital remains.
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