By Ivan Deryugin
In medicine, there are certain watershed moments that become an enduring part of medical history, such as the discovery of penicillin, or the eradication of smallpox. Sangamo BioSciences (SGMO) has a chance of joining the ranks of such key medical milestones, as the company is working on one of the greatest unmet needs in medicine - a functional cure for HIV and AIDS. Sangamo is set to report new clinical data regarding its development-stage HIV/AIDS treatment this year, and if all goes well, the stock will soar as the market for an effective treatment remains wide open. The company is well capitalized to continue development of its pipeline, and considering the vast market potential of its lead candidate, shares offer a quality risk/reward, even following SGMO's impressive gains in the last year. Nevertheless, a binary biotechnology event requires risk tolerance, and we include two options strategies for the risk-averse investor.
Sangamo was founded in 1995, and since inception has spent over $270 million on the development of its ZFP technology. ZFP's, known technically as zinc finger binding proteins, are proteins that recognize and bind to a person's DNA. Sangamo uses these to create ZFP transcription factors that are able to turn genes on or off. When these proteins bind to DNA, they can regulate the expression of any gene in any type of cell. In addition, Sangamo has created ZFP nucleases (also known as ZFN's) that can be used in therapeutic gene modification. Sangamo's goal is to disrupt the mechanism of HIV/AIDS (as well as other diseases), and hopefully, find a way to emerge victorious in what many see as medicine's last frontier.
Since going public in 2000, Sangamo has lost over 45% of its value, as setbacks have called into question the company's positioning and strategy. But, shares have risen around 150% in the past year, as Sangamo has renewed hopes that it can triumph in the fight against HIV/AIDS. And if all goes well in 2013, gains should continue.
SB-728-T: A New Approach to HIV/AIDs
Sangamo's lead product is SB-728-T, a ZFN-based therapy whose goal is to be a functional cure for HIV/AIDS, and not just a treatment. Before I delve into the clinical data (and the path forward) for SB-728, a review of HIV/AIDS is in order, as SB-728 has a truly unique mechanism of action. When a person is infected with HIV, the virus destroys their immune cells, specifically their CD4+ T-cells. The HIV virus binds to the surface of CD4+ cells using the viral envelope protein gp120. Once this happens, the HIV virus fuses into its host cell via a fusion peptide, thereby allowing their cellular membranes to fuse. The HIV virus leads to a steady reduction in a patient's CD4+ T-Cells, with 200 cells per microliter being the delineating line between HIV and AIDS (500-1200 in healthy adults). SB-728 targets HIV by targeting CCR5, a co-receptor that HIV uses to enter a person's T-cells. But, if CCR5 is absent from the surface of these T-cells, the HIV virus becomes less efficient. This is where SB-728-T comes in.
It has been discovered that a small subset of the HIV patient population has a natural mutation, known as CCR5Δ32, which renders patients essentially immune to HIV (it is thought that this mutation arose during the Black Death; research has shown that the bubonic plague does not "associate" with the mutation). Studies have shown that patients who have just one allele with the CCR5Δ32 mutation saw a 2-year delay in the onset of AIDS. Sangamo's goal with SB-728 is to replicate this mutation to disrupt the CCR5 gene of HIV patients to make their immune system permanently resistant to HIV. In late 2010, doctors performed a bone marrow transplant on a patient who had both leukemia and AIDS, and saw that the patient no longer had any detectable viral loads, and no longer needed anti-retrovirals. The donor from whom the bone marrow was donated had the CCR5Δ32 mutation, and it "transferred over" to the leukemia/AIDS patient. With SB-728-T, Sangamo hopes to repeat this kind of clinical result in all HIV patients.
What Does the Clinical Data Say?
SB-728-T is currently in Phase II trials, and Sangamo expects to report preliminary data in the first half of 2013, with full data by the end of the year. Sangamo reported early data for SB-728 in March 2012 (further data was reported in September 2012, more on that a bit later). Sangamo broke this trial into 2 arms: a group of 15 patients with CD4+ T-cell counts below 500, designated as Immune Non-Responders, and a group of 6 patients with cell counts above 450, designated as Immune Responders. After a month of treatment with SB-728-T, the Immune Responders group stopped taking antiretrovirals for 12 weeks. Sangamo stated that the viral loads of these 6 patients increased initially, as expected. However, 3 of 6 patients saw a 0.8 to > 2.0-log reduction in their viral loads, and one patient's viral load dropped to undetectable levels. According to Sangamo, this patient already had a CCR5Δ32 mutation. Sangamo stated that "control of HIV-RNA (suppression of VL) correlates significantly (p < 0.05) with calculated levels of circulating CD4+ T-cells that have undergone biallelic modification (i.e. modification of both copies) of the CCR5 gene. In this trial, SB-728-T showed only minor safety concerns, with the only reported symptoms being typical of those associated with infusion injections.
Sangamo reported updated Phase I data for SB-728 at the annual ICAAC (Interscience Conference on Antimicrobial Agents and Chemotherapy) in September 2012. Sangamo reported that its Phase I dose-escalation study demonstrated that SB-728-T was well-tolerated, and resulted in what the company called "significant and sustained increases in CD4+ T-cells above baseline throughout the year-long period reported in the study." The increase in CD4+ T-cells was observed with a p-value of p < 0.038. Notably, 5 of 9 patients enrolled in the study showed CD4+ T-cell counts of greater than 500 cells/mm3, which is seen in the medical community as the threshold for starting HIV patients on highly active antiretroviral therapy (also known as HAART) (while guidelines published by the NIH suggest that even patients with cell counts above 500 begin antiretroviral therapy, they do not take into account the potential use of SB-728-T, and are based on the assumption that eventually, patients with cell counts above 500 will begin to see declines). Further analysis of the data done by Sangamo showed that proliferation of SB-728-T post-infusion was "sustained over the year-long period reported in the study with median modified circulating cell numbers measured to be 2.04-fold relative to input at 7 days, 0.96-fold at 6 months and 1.15-fold at 1 year post-infusion." Sangamo's Phase I data suggests that SB-728-T has the potential to reshape the immune systems of HIV patients, and allow them to fight back against the disease.
On the company's Q3 conference call, Sangamo's executives were pressed about this data, and what it means for the way forward. Wedbush argued that the FDA may not deem the data strong enough for approval given that SB-728-T does not completely wipe out the HIV virus. Analyst Liana Moussatos asked, "Based on the Phase I data, I thought it was very interesting about the treatment resulting in kind of normalizing the immune system in HIV infected patients where the virus had destroyed part of it. Is this, I mean in your discussion with the FDA, if SB-728-T treatment just restored the immune system and, say, reduces the strange cancers that result or the infections but maybe doesn't reduce viral load to nothing. Would that still be a viable treatment that could get approved?" Sangamo CEO Edward Lanphier and Geoff Nichol, the company's Executive Vice President of Research & Development, responded that this is a "hotly contested kind of question," stating that in the HIV/AIDS market, FDA approval has historically been based on viral load, which is the focus of the company's Phase II trials for SB-728-T, and that the company's goal is to render HAART unnecessary by keeping CD4+ T-cell counts above 500.
While SB-728-T does not destroy the HIV virus in every single patient, it has shown promising results, and 2013 will offer investors 2 different catalysts that can drive shares of Sangamo higher. The market for HIV and AIDS treatments is set to reach nearly $22 billion by 2018, therefore Sangamo has a tremendous opportunity to create meaningful value for its investors, as well as offer HIV patients a new treatment option, even if it captures only a minority of the market.
Financials & Pipeline Review
Sangamo ended Q3 2012 with $75.816 million in cash & investments (per its latest 10-Q filing), and expects to end 2012 with around $75 million in cash & investments. Sangamo's operating cash burn for the first 3 quarters of 2012 totaled $8.305 million, and even if Sangamo were to burn $10 million per quarter, the company would still have nearly 2 years of capital left to finance its operations.
While Sangamo is, unsurprisingly, unprofitable, the company does generate revenue ($4.907 million in Q3 2012, up 164.24% year-over-year, and $12.723 million for the first 3 quarters of 2012, up 128.38% from the first 3 quarters of 2011). Sangamo has licensing agreements for its technology in place with Sigma-Aldrich (SIAL), Dow Chemical's (DOW) AgroScience division, and Shire (SHPG). The company's agreement with Sigma-Aldrich involves the use of ZFP technology as a research reagent, while its agreement with Dow involves the use of ZFP technology in plant research. Sangamo's agreement with Shire, struck at the beginning of 2012, is the most crucial of these 3 agreements. Under the terms, Shire paid Sangamo $13 million upfront and received an exclusive worldwide license to ZFP technology for 4 different genes, covering blood clotting Factors VII, VIII, IX, and X. Shire also received rights to 3 other gene targets. Of the 6 pipeline programs (including SB-728-T) that Sangamo is currently working on, Shire owns ZFP technology in Huntington's disease and hemophilia.
In October, Sangamo and Shire presented the first set of pre-clinical data for their experimental treatment for Huntington's disease. The disease is caused by a mutation in a person's HTT gene, which is inherited from their parents. The HTT gene is responsible for encoding a protein also known as HTT. The mutation consists of a repeated stretch of DNA, known as a "CAG repeat." Under normal circumstances, a person's HTT gene has 10-29 of these CAG repeats. Patients with Huntington's disease, however, usually have more than 39. The more CAG repeats, the earlier the onset of symptoms, which include muscle and nerve degeneration, and loss of memory and cognitive control. Patients usually die within 10-20 years of symptom onset. Preclinical testing in animals has shown that lowering levels of HTT protein can slow, and potentially reverse the progression of Huntington's disease. Sangamo's pre-clinical data showed that the production of mutated HTT messenger RNA fell by more than 90%, all while leaving normal HTT cells and RNA untouched. The company expects to see this program in clinical trials by 2015. The companies' hemophilia program is also set to move into clinical testing.
Options Strategy, Takeover Prospects, and Conclusions
For Sangamo investors, gains or losses in 2013 will be driven by new data regarding SB-728-T. Fortunately, Sangamo has listed options, and they allow more conservative investors to mitigate some risk while preserving upside potential (prices are accurate as of the close of trading on Monday, January 14).
Sangamo Options Strategies, August 17, 2013 Expiration Date
|$7 Put||$8 Put||$7 Put & $11 Call|
|Cost of Protective Put||$0.95||$1.50||$0.95|
|Proceeds from Sale of Covered Call||N/A||N/A||-$0.50|
|Net Cost per Share||$9.15||$9.70||$8.65|
|% Change Needed to Break Even||+11.59%||+18.29%||+5.49%|
The August 17 expiration date is used because it encapsulates the first half of 2013, thereby allowing Sangamo investors to be protected through the company's first data release of SB-728-T, as well as giving them a chance to hold through the second data release. Of the options strategies listed above, the purchase of an $8 put is the most sensible. It caps losses at under 18% and requires a move of under 19% to be profitable, easily doable should Sangamo report positive data for SB-728-T. However, the 3 options strategies listed assume that investors have also purchased Sangamo stock outright. There is also another options strategy that I would like to highlight: the strangle. This strangle, also utilizing the August 17 options, involves purchasing the $2 call for $6.40 (giving an entry point of $8.40 per share, just 2.44% above where Sangamo is currently trading), as well as the $7 put for $0.95. The net cost is $7.35 per strangle, and it offers a similar level of protection as the options strategy outlined above, but with a smaller capital investment.
While there has been nothing substantial in the way of takeover rumors regarding Sangamo, there is always a possibility that a deal will occur given the company's cheap valuation in relation to the market that it targets. Just as GlaxoSmithKline (NYSE:GSK) did with Human Genome Sciences, Shire could move to take full control of Sangamo's pipeline. Alternatively, Gilead Sciences (NASDAQ:GILD) could strike a deal, although it would be motivated by different reasons. Gilead has delivered enormous profits to its investors by pioneering the treatment of HIV/AIDS; since going public in 1992, Gilead has returned almost 90,000% (Gilead has also helped enhance the lives of millions of patients). However, the fact that there is no cure for HIV/AIDS, and the fact that patients need continuous antiretroviral therapy to hold it at bay means that Gilead has much more stability than its biotechnology peers. However, should Sangamo and SB-728-T remove the need for such therapy, Gilead's business could be threatened. It is not unreasonable to assume that Gilead may make an offer Sangamo cannot refuse in order to protect its business. And with a market capitalization of less than $400 million, Sangamo is digestible for Gilead, even with a size-able premium. 2013 is poised to be a revolutionary year for Sangamo BioSciences, its investors, and HIV/AIDS patients.
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