Sangamo Therapeutics: Investability Outlook

| About: Sangamo Therapeutics, (SGMO)

Summary

Sangamo has seen tremendous growth in the last couple of years.

The question is: is there further upside?

This article presents both the bear and the bull case.

Like BioTime (BTX), which we discussed recently, Sangamo (SGMO) is another company that began the wrong way, with a platform, and then, and only recently, moved on to therapeutics. But, oh boy, what a move it has been! The company changed its name from Sangamo Biosciences to Sangamo Therapeutics to emphasize that change in direction after its new CEO Sandy Macrae took over, and within about 24 months, changed from a sleepy lab-oriented laggard to a company with multiple deals and pipeline assets.

SGMO managed to leverage its two-decades of research in Zinc Finger nucleases (ZFN) genome editing technology to start clinical programs in over 10 different indications, and with two blockbuster deals, one with Pfizer (PFE) and the other with Gilead (GILD), the company quadrupled its market cap in the last one year.

The question that we want to ask is: at its current valuation, is the Sangamo story over for investors, or is it just beginning?

The short answer

The short answer to that question is easy. The tremendous potential of the company’s IP has dazzled the market enough that in some of the worst bear years of biotech, this company has managed to perform so well. The company is still years away from a real-world pivotal trial - a trial that will finally test the company’s mettle. So, we have a long way to go - and the market is already so buoyant when it comes to SGMO. So, until that decisive trial takes place, the company will likely keep providing the market with bits and pieces of good news.

This is easy to do because the company has decades of research to back it up. So I expect the market capitalization to keep going up and up for at least a couple of more years based on fresh data the company should continue to provide. The valuation should match the potential of some of the diseases SGMO is targeting - and we have Hemophilia A and B, and we have a number of other high market potential diseases here.

Just the hemophilia market was valued at almost $10bn a couple of years ago, with 4-5 players occupying a prominent space. SGMO is almost a newbie in the clinical trial space, but it is already being valued at $2bn (I wrote this in April for our subscribers; current market cap is $1.6bn). But the question is, is that the end, or just the beginning?

SGMO has 5 programs at the Phase 1/2 stage, and there are at least 5 catalysts per indication, so a total of 25 catalysts in the next 3 years or so. These are Phase 1/2 data for each indication, Phase 3 trial start, completion of enrolment, top line data, NDA submission/acceptance, Adcom, and PDUFA. Admittedly, some of these catalysts may be priced into the current price, but it is difficult to imagine that all these catalysts together will not further bolster the stock.

Moreover, as we have seen recently, its gene editing competitors, the CRISPR companies, have been facing a lot of hurdles recently, with clinical holds, negative research reports and so on. In the long run, that will only be good for a company like SGMO pioneering in a technology that may be a generation older than CRISPR, but is tried and tested.

So I wouldn’t be surprised if the company improves its market cap considerably as it gets towards announcing data from its first pivotal trial over the course of the next couple of years.

After that, things would get interesting.

If the data is good, the valuation will hold steady, maybe marginally increase because by then a lot of it would be priced in. If the data is not so good - and this is not as unexpected as it seems because a lot can happen between the petri dish and the liver - the company will see a valuation drain. Even so, the short answer to that initial question is - buy.

The long answer

The long answer needs to be based on an in-depth comparison of ZFN and CRISPR, TALEN, and the other related technologies, the company’s IP position, competition in the disease areas it is targeting, expectations from the ongoing trials, cash position, current and future dilution risks, and the other little details that make a company investable. Of these, the comparison between the three technologies is critical to understand SGMO's investability. We will take up each of these topics in the sections below.

Genome editing comparison: ZFN, CRISPR, TALEN

ZFN, Sangamo’s proprietary technology which it markets in partnership with Sigma Aldrich, is the older type of genome editing; it is considered more expensive and more difficult to develop than the latest technology, CRISPR/Cas9. However, according to research, it is considered safer, with lower off-target edits, and more specific. The following diagram is from the Investor Presentation:

Moreover, it is the only game in town in so far as market approach is concerned. That puts Sangamo in a critical position - if you want to go into genome editing, you have to get it from Sangamo. That is why Pfizer and now Gilead have developed partnerships with them, as well as Shire (NASDAQ:SHPG), Bioverativ, and others. Calyxt (CLXT), the company (actually, its CSO) that developed TALEN, is not involved in human therapeutics. CRISPR technology companies like Crispr (CRSP) and Editas (EDIT) are not yet in clinical stages - plus they are targeting a different technology altogether. Here’s a table comparing the technologies

Source

As you can see, while ZFN is the first mover here, it is CRISPR that stands out both in ease of development and breadth of scope. The seminal scientific paper in this regard is the April 2013 Cell paper by Ding, Musunuru et al. This paper compares the three genome editing technologies - ZFN, TALEN and CRISPR - and it concludes that there’s simply no match for CRISPR in its efficiency.

I wrote this in April. Since then, however, recent research has cast a lot of doubt on CRISPR efficiency, as I covered in an article yesterday. CRISPR efficiency in the case of double strand breaks, or DSBs, depends on p53 inhibition, and if p53 is active, DSB with CRISPR is highly inefficient, with indel (insertion and deletion) percentages being quite low. If, however, gene disruption is the aim, then this is probably not as bad, according to the research I discussed in yesterday’s article. So, all this helps SGMO.

So, while some scientists believe that CRISPR is the genome editing technology of the future, there are doubts around that claim that have to be resolved over the years ahead. Meanwhile, SGMO will come to market sooner, which is why the market seems excited about SGMO. This is especially true because there’s a lot of fight over IP in the CRISPR domain, the domain is not properly organized, and it is spread out between the competing claims of Zhang, Doudna and Charpentier. Therefore, Sangamo’s technology, offering as it does an alternative to the IP war and the scientific doubts centering around CRISPR, is a worthy investment.

Pipeline and market

Sangamo’s pipeline looks like this:

Source - Corporate Presentation

From their 10-K:

“We have an ongoing Phase 1/2 clinical trial evaluating SB-525, a gene therapy for the treatment of hemophilia A, a bleeding disorder. We have ongoing Phase 1/2 clinical trials evaluating three product candidates using our proprietary in vivo genome editing approach: SB- FIX, for the treatment of hemophilia B, a bleeding disorder, SB-318, for the treatment of Mucopolysaccharidosis Type I, or MPS I, and SB- 913 for the treatment of Mucopolysaccharidosis Type II, or MPS II. MPS I and MPS II are rare lysosomal storage disorders, or LSDs. We are also initiating a Phase 1/2 clinical trial evaluating ST-400, developed using our proprietary ZFN-mediated ex vivo cell therapy platform, for the treatment of beta-thalassemia, a blood disorder. In addition, we have proprietary preclinical and discovery stage programs in other LSDs and monogenic diseases, including certain central nervous system disorders, cancer immunotherapy, immunology and infectious disease.”

There are over 20,000 US males afflicted with hemophilia A and B together. Current treatment options include the expensive “replacement of the defective clotting factor with regular infusion of recombinant clotting factors or plasma concentrates” which can also produce antibodies in the body, thus hampering treatment benefit. SB-525 is a gene therapy that carries a clotting factor gene, and in preclinical studies have been shown to produce good amounts of human Factor VIII clotting protein, or hFVIII, lack of which causes hemophilia A. Its other product, SB-FIX, for hemophilia B, has demonstrated production of therapeutic levels of Factor IX in preclinical studies.

Lysosomal Storage Disorders or LSDs are a heterogeneous group of rare inherited disorders including: MPS I, MPS II, Fabry disease, Gaucher disease. There are about 1500 MPS I and II patients in the US and another 2200 Fabry disease patients. Hematopoietic stem cell transplantation, or HSCT is a treatment option available for MPS I, and enzyme replacement therapy, or ERT, is available for MPS I, MPS II and Fabry disease.

However, HSCT has inherent risks that produce a high mortality rate, and ERT is cumbersome, needing hours of treatment every week. SGMO’s gene therapy products SB- 318, 913 and 920 target these three diseases respectively. They are easier to take, and preclinical models have shown robust levels of enzyme expression in the liver.

Overall, although early days, this pipeline is off to a good start, and we do not observe any tell-tale signs of future trial trouble at this time.

Financial issues and risks

The company has cash of around $50mn, while its cash burn last year would be about $55mn. So, while the company's marketable securities of $250mn is about 5x the cash balance, I would expect some funds to be raised within the year.

I wrote the above paragraph in April, and since then, SGMO has launched a $200mn shelf offering. This came at a bad timing when the stock was down considerably from its Feb-March highs, and the stock fell further.

On the other hand, the Kite-Gilead deal will land SGMO $150mn in upfront payment, and another almost $3bn in research and sales milestone payments. The two Pfizer deals have already produced $82mn in upfront payments, and may produce another $625mn in various milestone payments. The Bioverativ and Shire deals also produced around $32mn in upfront payments, and may produce another $60mn and single-digit royalties, etc.

Of these numbers, the $150mn upfront from Gilead, based on developing "engineered ex vivo using selected ZFNs and AAVs developed under the research program, to express CARs, TCRs or NKRs directed to candidate targets" may become available to the company in the immediate time frame, say around 1 year. Meanwhile, the company does have over 860 issued patients, with 600 more pending, so there's a lot of IP it possesses that could be similarly licensed. So, while there can be some dilution by early 2019, the company has the IP and marketable securities strength to back it up.

Investment thesis

Sangamo’s technology is time-tested, having years of research behind it. So, unlike CRISPR, about which we are hearing quite a bit of negatives every other month, ZFN is more robust - or so it appears after CRISPR’s recent debacle. While some of the issues surrounding the CRISPR cancer problems may also happen with ZFN, since they also involve strand breaks, we have found no negative indication so far. Moreover, SGMO is at least a few years ahead of CRISPR in terms of the market.

That doesn’t only mean first-to-market opportunities; it also means the technology has crossed more hurdles and is more tried and tested than CRISPR. The company now also has a decent amount of cash, and the stock is quite depressed after the latest secondary. As such, it presents a decent buying opportunity for investors with a 3-year outlook.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.