Forte Biosciences (FBRX) – Lots of clinical risks ahead and a dubious business plan
Creativity is not my strength so I am reusing the title of an article I wrote a few months ago on Vyne Therapeutics, another dermatology company. Shares of Vyne have fallen 60% since then. The story is in Forte is basically the same and all too common in biotechnology. Vyne and Forte both suffered setbacks, institutional investors sold and long-term investors fared poorly. More importantly, for both companies, there is a suboptimal plan moving forward that exposes investors to a high degree of clinical risk, requires hundreds of millions in capital, and is unlikely to reward investors. in a manner proportionate to this disproportionate risk. I will lay out a few reasons why I am reviewing Forte Biosciences (NASDAQ: FBRX) a SALE
Large institutional investors sold and cut their losses. Forte Biosciences had an enviable list of professional investors, including BVF, Orbimed and Perceptive Advisors. They are seasoned investors with a team of doctors/physicians who are highly capable of assessing the chances of future success. All three funds sold their entire stake in the company. This is not always the case after clinical failure. There are many cases where institutional investors increase their stake at low cost. Three institutional investors selling their entire stake strongly suggest that these professionals don’t see a bright future.
For an unprofitable biotech company, institutional investors are an important source of capital. Financing unprofitable biotechnology on the capital markets is currently very difficult. It is not clear that Forte will be able to secure future financing and if they do, the terms will likely be unfavorable. What is clear is that they have very limited cash (currently $38.5 million) and will need hundreds of millions to develop the new molecule. In fact, they have a shelf recording in place. Investors should expect substantial dilution.
The future plan
The active that the company intends to advance after the failure of FB-401 in atopic dermatitis is FB-102. Since this asset is in the very early stages of testing, caution dictates an assessment of whether the risk is worth the potential reward. This molecule could enter the clinic for testing until 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, which will significantly increase the cost of development. Each of these indications has standard treatments of care.
The company recognizes an unmet medical need. GvHD is a disease for which there is a legitimate unmet need, but there are other companies that are much more advanced in testing, including Seres Therapeutics (MCRB) and MaaT Pharma. The unmet need can be met by these entrants and MaaT has already produced favorable safety and efficacy data.
Alopecia and vitiligo currently have very effective treatments – JAK inhibitors. The company noted the safety profile of JAK inhibitors. Opzelura is a topical JAK and most physicians consider the cream’s safety profile to be ok. In alopecia, where oral JAKS are approved, safety and efficacy data for all 3 JAK inhibitors (Pfizer, Lilly and Concert) have been favorable, but there is a black box warning. From an efficiency perspective, there is no unmet need. From a safety perspective, the mechanism of action and the side effect profile are linked. JAK inhibitors act on vitiligo and alopecia areata by suppressing the immune system. There is no suggestion that FB-102 can achieve the immune system suppression necessary for efficacy without the same safety concerns.
Investors will spend hundreds of millions of dollars developing treatments in indications where there are either approved treatments or assets years before Forte’s molecule, FB-102. Investors take enormous risks to enter crowded markets with little assurance of competitive advantage. Of course, it is also possible that the molecule will not show adequate efficacy or safety and will have to be discontinued, leaving Forte without actives.
For FB-102 to be worth developing, it should offer an advantage over existing treatments. The company’s presentation does not include the mechanism of action of FB-102, making it impossible to determine whether the “proprietary molecule” that involves the “antagonism of an autoimmune disease pathway” has any benefits or is even likely to work.
The company cites infrequent dosing as a potential benefit of the treatment. This is an extraordinarily small reason to spend hundreds of millions to develop a treatment. Dosage is a very unimportant issue in diseases such as GvHD which can be fatal. Vitiligo and alopecia areata are diseases in which patients experience skin discolorations or baldness and patients are highly motivated to take their medications.
The company cites preclinical proof of concept but provides no actual data to prove anything in my opinion. The management team is trying to raise funds (from investors) but provides investors with no guidance on how the drug works, what the preclinical data has shown, or why it may be an improvement over previous existing treatments. In fact, it’s unclear if substantial preclinical testing has even been done given the clinical entry date of 2024. It’s blind game for investors.
The management team has a poor track record of communicating with its investors. They had a promising asset, FB-401, but it failed in a clinical trial. It’s all about biotechnology, and legitimate companies regularly have disappointing results. It is simply a difficult business. The company issued a PR stating that the study did not meet the endpoint. When FB-401 failed, the company offered no explanation and left investors wondering why it could have happened. To remain silent month after month as investors are left with a lack of clarity is bad form.
In biotech, big money and lots of risk are the nature of the game. But there has to be a clear reward and a reason to believe the company can succeed to justify taking the risk. This is a unique asset company with a very focused bet on a very early stage asset for which there is no data to suggest it has an advantage over existing treatments. Management has little to lose to continue. Management receives a salary and is granted options, but bears little risk. This often causes them to continue even when the odds are extraordinarily low and the best course of action for shareholders is to simply fold and return the remaining capital.