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This report tries to present the technology of Sangamo (NASDAQ:SGMO) in terms that a layman can understand. I have no educational background in molecular biology and this note may not correctly represent all of the complexities of Sangamo’s gene altering technology that is powered by ultra-high powered science. Also, I will not go into clinical trial designs for the three products that are in human trials nor will I attempt to lay out catalysts that might move the stock. These will be the subject of later reports.

I would caution the reader that disruptive biological technologies like Sangamo’s often take many years to bring to commercialization. Some experienced and respected Wall Street investors believe that the timelines for development of its products are just too long to warrant current investment. I understand the caution, but I believe that it behooves investors to be aware of paradigm shifting technologies like Sangamo’s even if the timing for commercialization is uncertain and may be some years away.

In my six year experience of dealing with the company, I have come to respect management. They have done an excellent job of advancing products into clinical trials without unacceptable dilution to shareholders. They have raised significant amounts of capital by skillful partnering of non-pharmaceutical application of their technology and through executing public financings at propitious times. The company recently raised $50 million in an equity offering and has guided investors that it anticipates that it will end 2011 with $85 to $90 million of cash. This should fund operations into 2013 before any partnering fees or milestone payments. They have only 52 million shares outstanding.

While I have stated that this is an introductory report and that I am not yet trying to weave fundamental developments into an investment thesis, the reader does have to be aware that there is always the potential for a takeover of this company. I see a strong parallel with the acquisition of Sirna by Merck (NYSE:MRK) in October 2006 for $1.1 billion. Merck seems to have made this acquisition just for the patent position and research experience which Sirna had in RNA silencing. Sangamo is currently selling at a market capitalization of $300 million. Please don’t take this as a prediction that some company will acquire Sangamo for $1.1 billion, but there is always a possibility that an acquiror would pay a meaningful premium for Sangamo’s technology base and patent portfolio even in the absence of convincing clinical results.

Gene Altering Therapy’s Potential Role in Biotechnology Drug Discovery

The biotechnology industry has come to be viewed as the growth engine of the world pharmaceutical industry and its most creative drug discovery element. There have been two significant drug development technologies that were created by biotechnology. The first was recombinant DNA in which specific genes from humans were implanted into the DNA of bacteria, mammals, plants and insects so that these cells were transformed into production factories for human proteins such as human insulin. Amgen’s success was based on recombinant production of two proteins, erythropoietin (Epogen) and granulocyte colony stimulating factor (Neupogen). More recently, products based on monoclonal antibodies have become the driver of growth in biotechnology. This technology uses the elegance of the human immune system to create molecules that more precisely target and bind to protein targets than small molecules. Monoclonal antibody products were the basis for the success of Genentech.

The therapeutic applications of recombinant technology are limited as there are just so many replacement proteins that can result in a major product. While more elegant and versatile, monoclonal antibodies, like small molecules, target proteins. I would argue that these technologies are evolutionary. Led by entrepreneurial biotechnology companies, the industry is now working on disruptive technologies and Sangamo is certainly in the mix.

The information needed to produce proteins is contained in perhaps 20,000 to 30,000 genes in the human genome. Once activated or upregulated, genes can lead to the production of anywhere from a small number to millions of copies of proteins. Small molecules and monoclonal antibodies try to alter the effect of disease causing proteins after they have been created. This is like locking the barn door after the cows have escaped. New technologies such as that of Sangamo are intended to alter the action of the gene, in effect locking the barn door before the proteins escape.

Another disrupting technology is stem cell therapy. In the body, cells start as largely undifferentiated cells. They then progress through a number of interim cell lineages into the highly differentiated cells that form the tissues and organs of the body. If stem cells can be identified and controlled, it raises the possibility of regenerating diseased or destroyed nerves, muscle tissue and bone. Sangamo’s technology is focused on therapies that alter gene function and is not the gene therapy that has been the basis of most news reports to the public. Initial development efforts suggest that there may be an inter-connection between gene therapy and stem cells. There is some evidence that SB-509, Sangamo’s lead product, mobilizes certain stem cells that can then grow into nerve cells, potentially allowing for the protection and generation of nerve cells. However, this is all very early data and the thought that this could lead to the use of stem cells to grow new nerve cells is very speculative.

There has also been enormous focus on RNA interference, which is a naturally occurring process that silences genes. This new drug development technology has received more attention than Sangamo’s zinc finger technology. However, I believe that zinc finger technology has more versatility. RNA interference blocks messenger RNA from genes before it can be transcribed into a protein. Its mode of action means that it can only silence or down regulate genes. It cannot up regulate genes or alter the actual genes as is the case with zinc finger protein transcription technology.

It seems inevitable to me that zinc finger technology, RNA interference, stem cell therapy and other disruptive technologies will transform drug development. In comparison, small molecule and monoclonal antibodies will eventually seem crude and inexact. Gene altering therapy promises to be much more specific and capable of achieving therapeutic effects that small molecules and monoclonal antibodies are not capable of.

The Opportunity Addressed By Sangamo

I am not alone in believing that the manipulation and alteration of the function of genes in humans, animals, plants and other living organisms is one of huge commercial opportunities in the 21st century. It has the potential to be societal changing, perhaps more so than the Internet. In essence this is an effort to understand and control the underlying process of life. The possible applications in healthcare, food production and energy generation have the potential to change how societies function. The major question is when this occurs. The complexities are such that it may take decades to develop this technology sector.

Even though Sangamo is a small company, it is a leading player in the “gene game” through its pioneering research efforts on transcription factors. Its zinc finger protein transcription factors (ZFP TF) and zinc finger nucleases (ZFN) alter the functioning of genes. If successfully developed, they could represent a major leap forward allowing the treatment of diseases that can’t be targeted with existing drug technologies as well as improving on existing drugs. The technology also has broad applications in plant genetics, research assays and biological manufacturing. Sangamo has shown that its technology works in pre-clinical cell culture and animal models. Phase I and II trials with its lead compound SB-509 in treating diabetic neuropathy have been encouraging in that it has a therapeutic effect but are still short of establishing proof of concept.

Strong Patent Position

The company strongly maintains and it appears as best I can tell to be the case that they have a commanding position on intellectual property that will make it very hard for other companies to operate in the ZFP TF and ZFN spaces without a license. Thus far, Sangamo has retained all rights to human drug development while licensing its technology for use in other applications to sophisticated third parties: Dow (NYSE:DOW) for agriculture); Sigma-Aldrich (NASDAQ:SIAL) for laboratory reagents and transgenic animals for research; and to Genentech and Pfizer (NYSE:PFE) for improving productivity of manufacturing cell lines used for producing proteins. This has been viewed by most investors as a validation of the technology.

Genes and Life

The human genome carries genes that contain hereditary information and also the information necessary to manufacture proteins that are involved in the basic biochemical processes that maintain daily life. In Greek, the word genome means “I am born or to come into being." The genome is based on DNA that is comprised of some 3 billion nucleotide base pairs in which there are sequences of DNA nucleotide sequences that function as genes and long stretches that are not involved with gene activities.

Genes are life’s software. In maintaining life, the purpose of genes is to store the information needed to perform the manufacturing process leading to protein production. This begins with reading the information contained in one or a number of genes in a process called transcription. The genetic information from the DNA segment of a gene containing the information is transcribed into RNA which is then translated into amino acid building blocks that are used to create proteins.

The human body is organized into tissues and organs that are made up of specialized cells that perform different functions resulting from the actions of proteins. All cells except for red blood cells contain the same set of genes. However, genes are expressed differently or not at all in the cells of different tissues and organs and only certain genes are expressed at any given time. The expression of genes comes as a response to stimuli and developmental signals. The pattern of gene expression determines the structure and biological function of cells, tissues and organisms. Incorrect expression of genes can lead to disease.

The Role of Transcription Factors in Gene Expression

Genes are activated or repressed by several mechanisms in the body, one of the most important of which is transcription factors. These are proteins that are comprised of two principal domains. One is a targeting mechanism that recognizes and binds to a particular region of DNA within or adjacent to a gene. The second domain is a functional domain that once delivered to the proximity of the gene, causes the gene to be expressed (turned on) or repressed (turned off). Transcription factors perform this function alone or in combination with other proteins in a complex process.

Sangamo’s Technology Platform

Sangamo’s ZFP TF technology is based on a class of transcription factors called zinc finger DNA-binding proteins (ZFP TF). This is the largest class of naturally occurring transcription factors in organisms from yeast to humans. The targeting portion of the ZFP TF which binds to DNA is comprised of three or more zinc fingers. Each zinc finger recognizes and binds to a small section of DNA (3 to 4 bases pairs). By hooking multiple fingers together that recognize longer sequential segments of DNA, specificity can be improved. Remember that DNA is comprised of over 3 billion nucleotide base pairs and that identical sequences of DNA can appear at different locations in the genome. Sangamo selects genomically unique DNA sequences near or within the gene of interest and engineers a combination of zinc fingers that bind to these pre-selected DNA sequences.

The engineered binding domain is linked to a functional domain that affects gene function when it is brought into the proximity of the gene of interest. The goal for the functional domain is to activate or repress the target gene. For example, the lead therapeutic product, SB-509 is designed to activate the vascular endothelial growth factor-A (VEGF-A) gene. VEGF-A promotes the growth of blood vessels which has a protective and regenerative effect on nerve tissue. By activating this gene, it is hoped that damaged nerve tissue can be repaired.

A second therapeutic application is based on zinc finger nucleases (ZFN) which combine the targeting domain with a functional domain that is a restriction endonuclease, an enzyme that cuts DNA. By using a pair of ZFNs correctly spaced and oriented, a section of DNA can be clipped out of a gene. This break in the DNA triggers a natural repair mechanism that can be taken advantage of to create therapeutic effects. By just allowing the two ends of the broken DNA to rejoin, a small amount of genetic material is lost and that changes the original DNA sequence. This can disrupt the gene and result in the production of a non-functional protein. One example of this is the disruption of the CCR5 gene on CD4 T-cells that gives rise to a unique new approach to treating HIV infection. I touch on this later.

It may also be possible to use ZFNs to introduce new genetic information into the gene to correct its function or to add new functionality. An example would be to clip out an abnormal section of the gene and to replace it with the correct gene sequence to correct a genetic disease. A modification of the gene can then be achieved by allowing the gene to repair itself with a desired allele (an allele is one of a number of viable DNA codings for the same gene). This technique can be used to replace a specific, mutated DNA sequence within a gene that causes disease and restoring normal function.

The ability to place a gene-sized segment of DNA specifically into a pre-determined location in the genome eliminates the insertion mutagenesis concerns associated with traditional gene replacement approaches and broadens the range of mutations of a gene that can be corrected in a single step.

Sangamo has two ZFN based products in clinical trials. Both of these require the removal from the body of cells. The targeted genes are altered and the cells containing these altered genes are grown to large quantities in cell cultures. They are then re-infused into the body. Importantly, Sangamo has just published a paper describing the effective systemic delivery into the bloodstream that corrected human Factor IX clotting factor and restored normal clotting time in a mouse model of hemophilia.

Sangamo’s Research Pipeline Aimed at Difficult Diseases

Sangamo’s drug development effort is focused on diseases that are not addressed or are inadequately controlled by conventional drugs. In drug parlance, these are “undruggable” targets. Early pre-clinical and clinical trial results for Sangamo’s first product, SB-509, suggest that it can both protect and possibly regenerate nerve cells that have been damaged as a consequence of diabetes, a condition called diabetic neuropathy.

Pre-clinical studies in cell cultures and animal models also indicate that SB-509 may be useful to treat nerve damage that occurs with brain trauma, spinal cord injury and amyotrophic lateral sclerosis (Lou Gehrig’s disease). Until recently, it was generally believed that damaged nerve cells could not be regenerated. SB-509 is now being tested in moderately severe diabetic neuropathy in which nerve cells are still functioning. A phase IIb trial will read out in Q4, 2011. This trial was designed based on data generated in earlier phase II trials in severe and mild to moderate diabetic neuropathy.

Behind SB-509 in development are two products which use its zinc finger nuclease technology to actually delete or alter gene function. The first of these products, SB-728, is now in phase I/II trials. It deletes the gene that codes for CCR5 receptors on CD4 T-cells. HIV usually infects T-cells by binding to CCR5 receptors on the membrane of the CD4 T cells and then entering the cell. It has been established that patients with mutated genes that cannot produce CCR5 receptors are immune to HIV. Sangamo is removing T-cells from the body and altering the gene that produces this CCR5 receptor and preventing the production of this receptor. The altered cells are grown to large numbers outside the body and then re-infused into the body. The hypothesis is that these altered CD4 T-cells will be immune to the virus. This holds the promise of long time control of HIV in the same way that insulin controls diabetes.

A second ZFN product, SB-313 is in phase I testing. Sangamo is collaborating with City of Hope Hospital in Los Angeles on a treatment for glioblastoma multiforme, the most malignant type of brain cancer. City of Hope has developed a technology that attaches a cytotoxic killing agent specific to glioblastoma cancer cells on to T-cells. This acts as a targeted delivery system for this cytotoxic agent because it is the natural function of T-cells to seek out and destroy glioblastoma cells. However, this approach was initially thwarted because steroids must be given to glioblastoma patients before and after surgery to reduce swelling caused by the tumor and surgery. Steroids have the unwanted effect of suppressing T-cells through binding to a receptor on T-cells rendering them inactive. Using Sangamo technology, City of Hope researchers have removed this steroid receptor from T-cells so that they can remain active in the presence of steroids.

Source: Sangamo: An Introduction to Its Gene Altering Technology