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Sangamo Biosciences (SGMO) is a drug development company working on novel gene modulating therapies. The current clinical focus is the company's two ongoing phase II trials in HIV (heterozygous and cyclophosphamide). There has been significant attention on this program and the upcoming interim results, which SGMO has recently guided to a presentation at the American Society of Gene and Cell Therapy, May 15-18, 2013. This forthcoming data has also generated enthusiasm among numerous sell-side analysts that have put a buy rating on the stock with lofty price targets (Lazard has a $16 PT, Piper Jaffray has an $18 PT and Burrill & Co. has a $28 PT).

Given the lofty expectations and concurrent run up in shares, it appears that expectations have gone too far. SGMO shares have more than doubled in the past several months and trade over $9.00 (roughly a $500M market capitalization company). The key to Sangamo's long-term value, however, is its monogenic disease platform, but this is still pre-clinical. While the idea of a functional cure is exciting, the odds of success are very low. The most likely scenario is that the phase II trials will not meet the raised expectations and cause a revaluation of the company. Perhaps the best valuation analogue (a platform technology company with a large number of pre-clinical drugs) would be Regulus (RGLS, $6, $210M market cap), which would put a fair value of SGMO at $200M (approximately $4/share). So what about the data makes me place a lower probability of success than the current market capitalization implies?

Dr. Rafick-Pierre Sekaly of the Vector and Gene Therapy Center (Port St. Lucie , FL) presented Phase I data last week at CROI. This data supposedly provides evidence of the ability of SB-728 to reconstitute the immune system but the data do not quite back up that claim.

For instance, slide #4 notes that "a single SB-728T infusion led to a sustained increase in CD4 count above baseline in all N=9 patients. Median increase was 103 cells/microliter at month 12." Current clinical practice generally states that patients are at risk when their CD4 count drops below 500 cells/microliter, where normal adults have CD4 counts of over 1,200 cells/microliter. With most patients in the study below 500 cells/microliter is a 103 cells/microliter increase in CD4 clinically meaningful? While one could certainly argue that this is a "reconstitution" in terms of simply increasing CD4 counts, it is not as clear the effect this would have on the functioning of the immune system. Also, keep in mind that the 103 cells/microliter was the median, which means that half of the patients had a smaller increase.

In addition, slide #5 shows that the four patients classified as high responders (note that only 44% had a high response) had a median increase of 227 cells/microliter. One of these high CD4 responder started with 500 cells/microliter and increased to over 1250 cells/microliter at month 12, essentially elevating them into the normal range. While obviously important, what this implies is that only one out of nine patients actually had a normalization of their CD4 levels. How much probability of success to the program can one attach, when the early immune response rate is only 11%? I think it is fair to say that these results provide a hint of an effect but nothing near strong enough to justify the lofty expectations and valuation.

Of course, the effect on the immune system is secondary to what investors (and the FDA) are really interested in and that is viral loads. The upcoming data will certainly provide a more definitive picture of the effect but the structured treatment interruptions (STI) of previous trials do not provide robust evidence of efficacy. SGMO has already released viral load data for the SB-728 phase 1 Penn study (data most recently presented at the 2011 ICAAC conference) in which immune responders on HAART had an STI. The results created some excitement because "a 0.8 to >2.0-log reduction in VL from peak during TI was observed in the 3 of 6 subjects with the highest estimated circulating levels of cells with biallelic modification." In addition, one patient (#205), who was a CCR5 heterozygote with twice the estimated percentage of biallelically modified cells versus the other wild type patients, had his viral load decrease to undetectable levels. This effect on viral loads looks quite promising but the key to any analysis is the comparison group. This was an open label, single group study, so there is not a natural control group outside of "historic controls." In other words, what would have happened if a group of patients had an STI without receiving SB-728? Intuitively it seems like the viral loads would not have come down but the fact is the body's immune system would react to a spike in the viral load. So rather than assume that the viral loads would remain elevated, there needs to be a more robust comparison group. Garcia et al (CROI 2000) previously examined the effect of STIs on viral loads and the title itself is illuminating (emphasis added): "Structured Cyclic Antiretroviral Therapy Interruption in Chronic Infection May Induce Immune Responses Against HIV-1 Antigens Associated with Spontaneous Drop in Viral Load."

The goal of the Garcia et al study was to see how the immune system responded to three consecutive STI. The trial enrolled ten patients, although one was lost to follow up. The abstract highlights how the viral loads reacted to these STI (emphasis added):

"A rebound in plasma viral load was detected in all cases with a mean [SE] doubling time of 2.23 [0.32], 3.38 [1] and 3.25 [0.38] days (1st, 2nd, and 3rd stop, respectively) (p=0.05, for the comparison between DT 1st vs. 3rd stop). At 2nd stop, in 4 of the 9 patients, viral load rebounded to similar levels of baseline (week -52) and dropped spontaneously thereafter (0.8, 0.8, 1.3, and 2.09 log{10}, respectively). These 4 patients developed strong and broad HIV=1 specific CTL responses and a strong CD4+ lymphocyte proliferative response to HIV-1 antigens. After the 1st, 2nd stop, and 3rd stop, known mutations associated with resistance to reverse transcriptase or protease inhibitors were not detected. After 3rd stop, spontaneous drop in VL and recover of specific CD4+ lymphocyte proliferative response was detected in first 3 out of 3 and 3 out of 5 evaluable patients, respectively."

Outside of the Garcia et al, there are other publications (Llano et al 2013 and Macho et al 2012 as well) that document HAART interruptions and spontaneous viral reductions and some even resulted in viral loads dropping below the limit of detection. Given the previous work on viral loads after an STI, one cannot reasonably use "viral loads stay up and never come down" as the proper comparison group. What is most troubling is that the viral load data presented by SGMO demonstrated a 0.8 to 2 log reduction in viral load, which is strikingly similar to the spontaneous reductions reported by Garcia et al. As such, the effect on the viral loads seen in the early studies does not appear meaningfully different from what would likely be the control group in a double blinded placebo controlled study. Ultimately, then, it is difficult, based on current data, to justify the valuation that the market is placing on SB-728. In fact, the data are more consistent with future failure than likely successes.

Of course, SGMO is more than the monogenic disease program and SB-728 as it receives royalties from Sigma Aldrich (SIAL) and Dow AgroSciences (DOW) for their use of the ZFN technology. In its recent 4Q12 and YE conference call, SGMO has guided to roughly $21M in 2013 revenues from royalties and given the cash burn is around $50M/year, this would leave SGMO with $50-55M in YE13 cash ($1/share). Unfortunately, this royalty revenue is not as secure as many investors believe as extensive competitive forces from alternate gene editing technologies are likely to penetrate into SGMO's royalty stream. For instance, researchers can use TALNS at almost no cost versus getting a ZFN from SIAL for $20k. Given NIH budget cuts as well as general R&D spending sensitivities, it seems plausible that researchers will explore other specific gene editing technologies to save costs. Even beyond TALNS and ZFNs there is a new highly specific and efficient gene editing platform called CRISPR (see article).

The utility (and competitive threat) of the CRISPR technology is best illustrated by Cong et al (2013), although Sawyer does a good job summarizing the technology:

"The key is that CRISPR works by cutting DNA using a CRISPR RNA as a guide. It is incredibly easy to produce RNA that binds to a given DNA sequence, since DNA and RNA share the same nucleic acid language: G pairs with C, and A pairs with T and U. It is in contrast very hard to produce a protein that binds to a given DNA sequence, since proteins have a completely different language than DNA. Our best tools are zinc fingers (which are in clinical trials for HIV) and TALENs. Zinc fingers do not have any sort of "code," where zinc finger units correspond to DNA units. TALENs, on the other hand, do, but it isn't perfect. Plus, the large size of TALEN proteins might turn out to be a liability… The elegance and simplicity of the CRISPR approach makes it an intriguing tool for gene therapy and genetic modification in general"

The key, in some respects, is the last sentence highlighting the ease of use. Given that this technology will be available to researchers and labs for no fee, it is possible that the ZFN royalty revenues have peaked or will peak soon. Depending on the speed at which these erode, the YE13 cash guidance of $55M might be aggressive and increase the possibility of a secondary this year.

In general, SGMO has an intriguing pre-clinical monogenic disease program that one could be fairly value at around $4/share. The vast bulk of the recent increase in share price, however, has been related to overly optimistic views on the HIV program, which has little evidence to support a claim of efficacy. Add in the erosion of the royalty revenues and it appears that SGMO is clearly overvalued.

Source: Sangamo Bioscience: The Impending Failure In HIV