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Expert Financial Analysis and Reporting

Sangamo: Paradigm Shifting Approach to Gene Altering Leads to Unique Product Opportunities (SGMO, $9.56)

I have followed the progress of Sangamo for over seven years. I listened to a presentation by Edward Lanphier, CEO of Sangamo, during the JP Morgan conference in San Francisco in early January and then met with Edward and Liz Wolffe, Director of Corporate Communications. This note summarizes my key takeaways for 2013.

Sangamo is one of the best managed early stage biotechnology companies with which I have been involved. It has a virtual lock on the intellectual property governing the use of zinc finger nucleases and zinc finger transcription factors; these are broadly referred to as zinc finger proteins or ZFPs). Most disease states are caused by the over production or under production of proteins by one or more genes and current therapy aims to block or enhance the amount of protein after it is produced by the gene. Sangamo’s disruptive technology alters the genes involved either causing them not to produce a protein that causes a disease or to enhance the production of a disease that is caused by insufficient amounts of the protein, whichever the case may be. There is much science yet to be done before this technology is successfully commercialized for human therapeutics, but it has been successfully commercialized for clinical assay applications and clinical development has moved steadily forward in agroscience. For a more in-depth overview of the technology refer to my report of August 10, 2011, An Introduction to Sangamo’s Gene Altering Technology (SGMO, $4.50).

So often, companies with long development timelines that are inevitably required for paradigm shifting new technologies like “zinc finger proteins” (ZFPs) find themselves in financial binds. After a period of initial infatuation, investors lose interest because of the lack of near term catalysts. The stocks drift down, cash dwindles and the companies are forced to raise money at ever lower stock prices. This can too often lead to enormous numbers of shares outstanding, a low stock price and bulletin board status. This has been a major deterrent to investing in companies that are pushing the envelope on technology.

Sangamo has done a magnificent job of retaining balance sheet strength in part by partnering non-human applications of its technology to Dow for agroscience and Sigma-Aldrich for research purposes to the extent that the payments and milestones associated with these two partnerships have brought in over $90 million and there is more to come. This has been complemented by well-timed equity offerings that have been done at times of management’s choosing and without accompanying warrants.

Sangamo has shown exceptional cash management. It ended 2008 with $65 million of cash and ended 2012 with about $75 million of cash. It has given guidance that, without new partnerships (which are likely) and without equity offerings, it will end 2015 with $40 to $45 million of cash. This is extremely important as the company is not likely to have any human drug on the market until 2017 or beyond so that the stock catalysts will be based primarily on clinical developments. Investors often anticipate that companies will do a financing immediately after the announcement of positive trial data with the result that the stock often does not respond to favorable news. Sangamo’s strong balance sheet should allow investors to focus on the importance of the news flow and not duck and cover in anticipation of an imminent equity offering.

In 2013, there will be phase II data on the company’s program focused on developing a “functional cure” for HIV by using zinc finger nucleases to remove the gene that produces the CCR5 receptor on CD4 cells. It is through this receptor that the HIV virus infects CD4 cells so that through blocking entry of the virus this potentially promises to be a cure for HIV. The treatment involves removing CD4 cells from the body and then using zinc finger nucleases to delete the gene that gives rise to CCR5 receptors on the CD4 cells, thus making the cells resistant to HIV infection. They are then reinfused into the body and provide a reservoir of protected immune cells available to fight off HIV and opportunistic infections. If this trial is successful, the company will use it as the basis to prepare a phase III trial, almost certainly in collaboration with a partner.

A major pharmaceutical partnership with Shire (SHPGY) that was announced on February 1, 2012 is developing treatments for diseases caused by dysfunctions of single genes and promises to be the big focus of the company over the next five years. The companies will be submitting up to seven INDs by the end of 2015 for the treatment of hemophilia and lysosomal storage diseases such as Gaucher’s and Pompe’s disease. News on the HIV phase II trials and the partnering deal that would result will probably be the primary factors affecting the stock price this year. With success, I would look for a dramatic upside move, but I don’t see a significant decline in the event of disappointing data given the strong cash position and the promise of the Shire relationship.

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