Sangamo Therapeutics: Deciphering Valuation In The Face Of Key De-Risking Events
- Sangamo shares appear to be undervalued based on a summary of it's peer group.
- There's a case to be made for significant undervaluation based on a conservative, albeit simplistic but fitting sum-of-the-parts analysis.
- Mid year de-risking events will have out-sized implications on valuation and share price.
Sangamo Therapeutics (NASDAQ:SGMO) is a pure-play gene therapy company, whose researchers have worked for the last 20 years on perfecting a zinc finger gene editing platform. 2018 will mark a monumental year for Sangamo, with the initiation of several new clinical stage programs and 3 data readouts expect in mid-2018. Based on a presumptive sum-of-the-parts analysis, a platform validation catalyst (in the form of phase I/II data) would have large implications on share price and platform value.
In the early days of the aforementioned gene editing platform, the consequent technology was met with speculation, as a 2% targeting editing and a 6 month time frame to target a nucleotide on the genome wasn't very practical. Looking forward to today, however, the firm has improved it's accuracy to an impressive 99.5%, and can target any nucleotide in the genome in a matter of 10 days (8 if worked through the weekend). CRISPR is a new technology, and it's disruptive potential deserves attention. However, issues with off-target editing are a concern, and most firms are years away from taking their therapies to the clinic. With CRISPR becoming almost synonymous with gene editing, I believe that Sangamo's refined zinc finger program and robust partnered pipeline are not given as much credit as they deserve.
Given the disruptive economic implications of one-time, effectively curative treatments, it's difficult to value Sangamo and it's peers. However, with Novartis (NVS) purchasing Avexis (AVXS) for $8.7b, a conceived multiple of 3.5x peak sales, there now exists M&A precedent to base a value for the firm on. This method would constitute an M&A price target, and I'll be covering current pricing, in addition to providing a price projection in the case the firm reports positive phase I/II data later this year.
Looking at a peer group comparable, the maturity and superiority of Sangamo's business becomes apparent. They own a robust gene therapy/editing pipeline, with twice the number of clinical stage assets than all of their peers combined. Net cash of $342 million provides a significant margin of safety when considering quarterly cash burn and total potential milestone payments and royalty revenues. Many of Sangamo's peers in gene editing are several years away from entering the clinic, and carry a definitively high level of uncertainty as safety issues will need to be worked out as the coverage to their respective "commitments" wanes.
Before we attempt to break down the valuation of Sangamo piece by piece, it's important to note that topics of gene editing are subject to unusual levels of investor excitement. Given the disparity in relative valuation metrics and multiples between these firms, it's quite possible the market is in a euphoric state when valuing, pricing, these novel platforms. We do believe that Sangamo shares are attractive on a standalone basis, but its important to keep in mind that a re-valuation of it's peer group in the short term could have implications on Sangamo's share value in the short term.
When investing in biotech, we attempt to make intricate, bottom-up models that accurately project cash burn based on clinical programs, and revenue based on treatment cost, market share, and epidemiology data. However, given the shifting economic paradigm of gene therapy treatments, it's nearly impossible to project peak sales, market share, and insurance coverage. Instead, we opted for a sum-of-the-parts analysis of Sangamo's clinical stage pipeline. This not only breaks down the valuation in a straightforward way, it takes into account the robust nature of Sangamo's clinical program.
Although reference data is difficult to come by, recent acquisition of Avexis (AVXS) by Novartis (NVS) for $8.7 billion gives precedent for valuation. Avexis's SMA gene therapy was projected to arrive at $2.5 billion in peak sales, representing a buyout multiple of 3.5x. Remaining conservative and taking into account premiums paid for Novartis's in-house manufacturing facility, I'll be applying a 2.5x multiple on the present value of each individual clinical stage program. Additionally, this takeover implies the given importance of owning a comprehensive gene editing platform to a larger firm. For example, Novartis paid a hefty premium for Avexis, likely with the intent to leverage their knowledge and manufacturing facilities to build out a robust gene editing portfolio. Furthermore, Sangamo offers two decades of accumulated knowledge and experience, in addition to a robust pipeline of clinical, and pre-clinical indications to target.
We calculated the value of each pipeline asset by taking the total market size for the indication and multiplying this by the percentage of the market we expect to transition to gene therapy as a standard of care. This has implications based on current treatment options, and economic access. Next, dependent on current competition, we determined the market share we expect Sangamo to capture from the applicable portion of the total market to determine peak sales projections. This is multiplied by the 2.5x peak sales multiple used to value the program, and weighted by a probability of success (POS). Finally, shares are discounted back from when they are expected to be commercialized. Milestones are weighted by POS as well. Keep in mind that these figures reflect personal sentiment to some extent, and are not necessarily a proxy for fair value of the equity.
The entirety of the hemophilia market will reach $14-15 billion, leading us to our market estimates of $7.5 billion per indication. Due to clotting factor infusions being a standard of care, we expect only 25% of the market to look towards gene therapy as their standard of care. Many physicians will recommend their patients to wait as long term safety and efficacy data developments continue. The assigned probability of success is higher, as data from Spark Therapeutics (ONCE) and BioMarin (BMRN) have proven hemophilia to be a valid gene therapy target. These firms will also be competitive with Sangamo (though we feel there will be room for competition within this market without becoming saturated), which is why we only assigned a 30% market share for this disease.
It is estimated that 2,000 patients have been diagnosed with Hunter Syndrome in the world, from which we estimate there to be a $2 billion market opportunity (based on a $1 million treatment cost). A lack of proper treatments for the disease leaves uncertainty regarding market size, though this method seemed the most logical. Probability of success remains at a conservative level, at 20%.
Beta Thalassemia and Sickle Cell Disease are rare blood disorders, each representing a $2.29 billion and $1.49 billion market respectively. The last program, with a high level of clinical need, is Huntington's Disease, representing a $1.3 billion market.
Let me emphasize that the market size of many rare diseases will grow rapidly once a viable treatment is introduced in the form of gene therapy. Market size is highly elastic, and current figures are likely representative of a lack of current treatment options rather than an accurate reference for market demand. This is subject to change, but we believe that these estimates lean towards the conservative side, in any case. From this pricing analysis, we have yielded a price target of $29.27 for shares of Sangamo Therapeutics, or 42% upside from current prices.
Mid-Year Inflection Point
42% perceived upside is typically enough to justify purchasing shares of a stock, though a greater valuation is conceivable with positive readouts from several key de-risking events expected mid-2018. Positive phase I/II data in MPS and Hemophilia will have the effect of validating Sangamo's entire platform, and appreciating the significance of the shares' value.
With positive data, we have increased the POS for Hemophilia A & B, as well as Hunter Syndrome (MPS II) to 60% (from 40% and 20% respectively). This kind of platform validation would have clear implications on the market sentiment of other clinical stage programs. As a result, we have raised our POS to 40% for all other programs.
Based on the above "de-risking" event and method of valuation, we have derived a price target of $50.29. While this may seem outlandish, this would represent a $5.9 billion enterprise value for a firm with 10 pipeline indications, 6 clinical stage gene therapy programs, and a partnership with Gilead (GILD) in developing allogenic CAR-T therapies for, again, 10 separate indications. Taking into consideration the hefty $8.7 billion value Novartis placed on Avexis, it's platform and single lead drug, this price isn't too inconceivable. We acquiesce to the fact that this valuation method represents an M&A "scenario-ed" price target with a comparable multiple method. However, market sentiment and reaction to clinical data will be the major determinants of valuation at this stage.
An investment in Sangamo is subject to a high level of risk, as gene therapy is still a speculative technology without any large-scale human trials. For those interesting in gaining exposure to the gene therapy space, we best summarize Sangamo Therapeutics as an optimal investment to do so on a risk-adjusted basis with the possibility for near as well as long term price appreciation.
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Analyst’s Disclosure: I am/we are long SGMO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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