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Technology companies riding a wave of new and very profitable products are like tsunamis. It may appear that these companies are being propelled forward effortlessly, but their dramatic advancements took visionary leadership, years of preparation, and finely focused research and development.

Apple (NASDAQ:AAPL) is a perfect fit to this technology shift / tsunami analogy. The importance of the first iPods can’t be overstated. iPods were the beginning of a wave of new Apple devices that shifted them into an entirely new product category, mobile electronics. The research and development that went into the miniaturization required for making these initial products small and thus portable, coupled with electronics drawing miserly amounts of energy and efficient long lasting batteries, constituted Apple’s seismic shift.

It has enabled the company to move seamlessly from music players (iPods) to smartphones (iPhones) and now producing a small, powerful and beautifully designed computing platform (iPads). The net result was a complete transformation of the mobile communications industry. As the surge of demand for all of these products continues unabated, no one can argue with the tsunami analogy.

If the introduction of the iPod did not produce bells ringing in your head that a seismic shift in this technology sector was happening and you missed the investment opportunity, then take heart as you are about to get a second chance.

Sangamo BioScience (SGMO) is a clinical stage biotech. Their innovative gene editing technology is currently in multiple trials (here) with many more in pre-clinical testing. Before we examine the potential of Sangamo’s therapeutics, it’s important that you understand their basic underlying zinc finger protein (ZFP) technology and why it is such a game changer.

Description: KeyWTumbler

All of us are familiar with common house keys. If you view the tumblers inside of a lock as the DNA target binding site and the Key as the ZFP you will have a good basic understanding of how these agents work. The key will only open the lock if all of the notches that are on the active side of the key shaft, align perfectly with the predefined size of the tumblers inside of the lock.

Depicted below is a segment of DNA. Note that the shape of the key shafts fit their corresponding DNA segments exactly. The actual zinc finger proteins are illustrated above and below their respective keys and function in a very similar way. Their discoverer, Dr. Klug, put it succinctly; “A marvelous modular system where each finger has a different amino acid sequence which can recognize a short sequence of DNA.”

Because there are more than 3164.7 million nucleotide base pairs in the human genome, this level of accuracy is imperative for effective gene editing. Sangamo has unlocked the key step in this process combining powerful, efficient, accurate and safe gene targeting. Zinc Finger Proteins constitute Sangamo’s scientific seismic shift.

Click here for Sigma-Aldrich Video on Zinc Finger Proteins

[click to enlarge]

Description: Description: Description: Macintosh HD:Users:mslattery:Desktop:SangamoWtext.jpg

Once the segment of the DNA has been identified by the ZFP it can be altered in several beneficial and therapeutic ways. In this illustration, the Fok1 enzyme resides at the end of two horizontally opposed ZFP chains. When one Fok1 enzyme aligns opposite from a second Fok1, it will produce a break in the DNA, enzymatically opening the DNA chain like a key opening a lock, resulting in the silencing of the gene.

This allows the scientist to produce changes in any organism at virtually any stage in its life cycle. Allowing them to circumvent disease, treat disease or provide any other desired changes using activation, correction, insertion or disruption as depicted above.

HIV as Proof of Principal: SB-728 HIV is a dauntingly difficult disease to concur and Sangamo has climbed closer to the pinnacle of success than any other company. SB-728 alters the cells that HIV targets by removing a key receptor utilized by the virus to gain entry. There are over 30 drugs that have been approved to date for the treatment of HIV. Here is what makes Sangamo’s approach a dramatic advancement and such a daunting threat for large pharma, potentially decimating entire classes of drugs. Sangamo’s treatment makes all currently approved drugs un-necessary.

In presentations (view Dr. June's presentation here) at the most recent Human Retroviral Conference, CROI 2011, Sangamo presented interim data on 15 individuals at various time points. This data was remarkable because the study participants saw combinations of improvements never before seen: including early indications of virus control; dramatic increases in T-cell counts and normalization of CD4/CD8 T-cell ratios. Taken together, this combination of positive results provides a strong indication that the immune system in these individuals is returning to normal.

If this does not sound dramatic to you, keep this in mind. This kind of result has never been achieved before, with one exception, the Berlin patient. Those treated with SB-728 would still be infected with the HIV virus, but would no longer be required to take antivirals, thus the term “Functional Cure,” was applied by many scientist attending this meeting. This is the very first time that the words “HIV” and “Cure” have been used to describe any clinical result for this infectious disease.

What is the potential HIV market? Currently, the HIV market represents a pie of about 8 billion dollars annually, split by all existing HIV drug manufacturers. This number is predicted to grow to 10.7 billion over the next few years. Would you prefer to have Sangamo’s treatment, effectively ending your need for any treatment, while returning your immune system to normal or continue on the soup of toxic drugs now required? It seems pretty evident that Sangamo will take a good portion of this yearly income, while at the same time effectively killing off large income streams to the other companies in this market. This makes Sangamo a huge risk to every company in the HIV segment today and all other markets in the future.

SB-509 - What is the potential neuropathy market? The other indication they have in phase two studies is SB-509, a treatment for mild to moderate diabetic neuropathy. This treatment is an angiogenic (promotes blood vessel growth) and neuroregenerative (repairs damaged nerves) therapy as it up-regulates the gene for vascular endothelial growth factor. 26 million individuals are living with diabetes according to the American Diabetes Association. Approximately 50% of these individuals will develop neuropathy over the course of their disease. As it progresses, it becomes a very painful, debilitating problem and often leads to amputation in order to prevent the individual from developing life-threatening infections.

Even though something less than 30% of these individuals would be defined as having mild to moderate neuropathy, it will be at the doctors’ prescribing discretion if the patient will receive this treatment once it is approved. There are few treatments of limited utility to treat diabetic neuropathy and safety does not seem to be an issue. With limited liability issues, that implies to me that no one suffering with neuropathy will be denied this treatment. This market is estimated to be up to 6 billion dollars annually and I find that amazingly conservative, as there are many diseases that cause neuropathies. (See list here.)

Peripheral neuropathies that could potentially benefit from this treatment are often caused by nerve degeneration secondary to vascular damage, just as in diabetes. Will they receive this treatment off label? I believe that where there is even a small chance of benefit, they will. Remember that all of these people are suffering with various stages of discomfort through intense pain without any good treatment options.

With a clinical trial in Amyotrophic Lateral Sclerosis (ALS), and potential utility in spinal cord injury; traumatic brain injury; strokes and traumas like accidental limb amputations and gunshot wounds to the head, the profit potential definitely seems to be dramatically understated for SB-509.

All biotechs have risk. There are multiple risks in investing in any Biotech that currently has no FDA approved therapeutics in the market generating income. Almost all pure biotechs have constraints on their finances, limiting their ability to pursue multiple clinical targets simultaneously. This means they must get their one, best, most promising drug through the clinical trials process, approved by the FDA and into the market in order to survive.

Many of these ventures simply run out of money before they clear all of the hurdles. Secondary stock issues, early clinical stage failures, manufacturing problems and safer more efficacious drugs obtaining approval by their competitors’ can hurt the company and their investors. Finally, when every obstacle has been overcome and it looks like the company has succeeded, they still risk being blocked from the US market by the FDA for what can appear as arbitrary and inconsistent decisions. See "Is the FDA changing and the perils of the FDA approval process" here.

The risks are many, varied and always changing. I once had a prominent professor of oncology tell me that a drug that was completely useless would completely cure one person in a million. There was another side to this issue, however. A drug that was completely safe and totally void of side effects would kill about the same number, one in a million. I included this little tidbit of professorial knowledge to underscore the almost unlimited variables and dramatic risk in any drug development program.

There are no certainties, lots of unknowns and thus no drug development or investment in a biotech is without risk. It does not matter how good a company looks, or how promising their underlying technology may appear or how compelling the need of the patients they intend to treat, these risk still apply. They are unavoidable.

Is Sangamo an exception? No, but they are unusual for the following reasons. Most emerging biotechs are financial black holes burning through hundreds of millions of dollars without any chance of recouping these funds if they don’t make it into the market. Even minor setbacks can be life threatening to these thinly financed companies. There are many small biotechs that have gone after an orphan drug status, indication and obtained their drug approval and have not yet seen $100 million in income. Sangamo has already booked close to $100 million in research collaborations and licensing deals (Existing Sangamo Partnerships), (Sangamo Research Collaborations) including, but not limited to, Dow AgroSciences, Sigma-Aldrich (NASDAQ:SIAL), Genentech, Hoffmann–La Roche Ltd and Open Monoclonal Technology, Inc.

Most of these companies have extended and broadened the scope of their licensing agreements after proving to themselves that the technology lived up to all of Sangamo’s claims. These agreements cover everything outside of direct applications for human therapeutics, such as pharmaceutical protein production, transgenic animals, transgenic plants, specialized cell lines, novel e-coli expression systems, bio-fuel generating algae and diagnostic tests. Income from this side of their business should continue to grow exponentially as the products produced from these licenses emerge into their respective markets and the royalty streams attached to them starts to contribute to their bottom line.

For instance, Sigma-Aldrich (Agreement details) gained access to the ZFP technology by paying Sangamo $15 million up front and agreeing to purchase $5 million worth of their stock at $7.86 a share. Sangamo is eligible to earn additional contingent commercial license fees of up to $5 million based on certain conditions and thereafter a royalty based upon a percentage of net sales and sublicensing revenue. Sangamo is also eligible to receive commercial milestone payments ranging from $2 million to $10 million, up to a total of $25 million, based upon cumulative product sales. And that’s just an example of one of their licensing agreements.

Sangamo has distributed their risk exposures across multiple Phase I and II programs enabling them to survive a therapeutic failure or rejection by the FDA. With a $60 million current cash position, Sangamo’s risk / reward equation is as good as it gets for a clinical stage biotech with no approved therapies.

Unlimited targets and future potential. Sangamo’s ZFP is a platform technology, enabling the creation of multiple products with the ability to address multiple diseases by modifying the underlying ZFP platforms foundation. There are over 12,000 disease categories listed on the World Health Organization website. There are between 1,500 and 6,000 diseases with a genetic basis for their cause. There are approximately 30,000 genes contained within each cell in a human being. To my knowledge no companies “platform” has ever been as broad or with as much potential to effectively treat so many disease indications as Sangamos’, simply because Sangamo has the ability to address or even prevent each and every disease affecting all plants, animals, insects and humans, in a way that was completely unknown just a few years ago.

Sangamo also has the potential to create entirely new markets such as skin color changing cosmetics, eliminating male pattern baldness or changing your gray hair to any color you desire. Anti-ageing drugs impacting the telomerase enzyme could easily be produced and should offer treatment insights into cancer at the same time. These examples are just a few of the multi-billion dollar market opportunities that could be transformed by Sangamo’s entry into them. If this all seems like irrational exuberance or so much speculation keep this in mind. The limiting factor to achieve these goals, is now and has always been, the ability to accurately, effectively and safely target and alter a specific gene. That is exactly what lies at the heart of Sangamo’s scientific achievements. Independent validation of achieving this ability stems from their licensing agreement renewals and extensions and current clinical trial results.

Sangamo has stated that they want to stay independent. They have licensed and patented themselves behind a high wall that prevents, or at a minimum, delays for many years any serious competition. That head start may prove insurmountable. They have entered into a lot of strategic alliances, licensing agreements, and co-development deals. Their articles of incorporation contain a very potent poison pill. All of which may enable them to realize their tsunami of products and income that Apple currently enjoys.

Small biotechs are accustomed to taking large risks and large pharmaceuticals are used to avoiding them. Sangamo has shifted a new risk onto the backs of all pharmaceuticals. They now risk losing entire drug franchises if they don’t own Sangamo. With the total market value of Sangamo currently less than 400 million, (the approximate cost of one clinical drug development program) someone will pounce and it will be much sooner than anyone is currently predicting.

A few years back, Hoffmann–La Roche obtained a 50% stake in Genentech all the while guaranteeing management that they would retain their complete independence. In March of 2009, Roche paid $95.00 a share, for all outstanding shares, effectively absorbing Genentech and their independence. Roche may want to see history repeat itself here, but with so much potential and so much risk for the pharmaceuticals who get left behind, the first bid will only be the starting gun of a wild and fierce bidding war for the keys to the worlds genetic kingdom.

When a slogan like “Sangamo, the Key to Curing Disease” could easily become a viable and realistic claim, it’s time to take control of not only when the music stops, but just as importantly, who winds up getting a chair. What is this music that all of the pharmaceutical companies are hearing? It's the warbling, piercing, penetrating sound of a tsunami siren. Yes, there’s another one coming and this time you’ve been warned.

Disclosure: I am long AAPL, SGMO.

Source: Sangamo Biosciences' Game Changing Technology