- The new estimate for cash runway goes to five years.
- Biogen will own 17% of Sangamo, future buyout potential emerges.
- Sangamo's undervalued condition is even more apparent.
The recommendation update
Biogen Inc. (BIIB) and Sangamo's Therapeutics Inc. (NASDAQ:SGMO) agreement have eclipsed my recommendation found in my recent article. Despite adding 24M to 116M outstanding shares, Biogen as the largest shareholder of Sangamo offers a strong hint that the company is, in fact, on the radar of big pharma. Substantial equity ownership by Biogen could serve as a springboard to the acquisition of the company under the right financial circumstances.
A central nervous system (CNS) partnership, which I thought initially would take place in 2021, adds confidence to the investment thesis. Since Biogen is buying shares at $9.21, this is a very comfortable upper limit to be used for accumulation. I expect shares to trade in double digits, even before Pfizer's phase 3 trial or SB-525 updates are publicized.
The deal for Alzheimer's and Parkinson's, plus one not identified target, adds $350M to Sangamo's coffers, which had about $385M at the end of 2019, based on the Q4 release. In the past, the cash runway was expected to last to the end of 2021, and with the new money, I assume, Sangamo can operate until the end of 2023. Pfizer's objective to commercialize an SB-525 program as gene therapy for hemophilia A is expected to deliver $275M in milestones by 2022. Provided milestone payments are coming from Gilead Inc. (GILD) and Sanofi (SNY), which just paid for dosing of a first patient in the sickle cell disease trial, Sangamo appears to be funded for the next five years.
Sangamo's partners, Gilead, Pfizer Inc (PFE), Takeda Pharmaceutical Company Limited (TAK), Sanofi, and now Biogen, paid for collaboration with Sangamo because of the compelling science, offering the best form of validation for retail investors. Still, what is apparent, besides now broken thesis that the company is running out of cash, Sangamo continues to be the most undervalued member of the edit and gene therapy' group of companies (table below).
Adjusted for new shares, Sangamo is just below the market capitalization of Editas (EDIT), a CRISPR gene edit company, which has not dosed a single patient yet, and already discussed in my previous article uniQure (QURE).
Source: Yahoo Finance
The Biogen deal illustrates a deep discount
Biogen purchased a genome regulation platform to produce a cure for a patient population of six million. A page from the gene therapy book on pricing produces, at $1M per treatment, a $6 trillion market opportunity, of course, when the treatment works. Even the middle of the road royalty at 9% would offer Sangamo a mind-boggling $540B in payments. If the application is better than the current standard of care but has limitations, and the condition has reduced the market opportunity by 90%, Sangamo would still receive around $50.4B in royalties.
Sangamo's war chest of possible milestone payments, worth about $6B, does not have a much better understanding. On February 28th, Sangamo's market capitalization neared $1.2B, after I included Biogen shares in the calculation. In this scenario, after the deduction of $605M in cash or equivalents expected by the end of Q2 2020, the $6B associated with partnered programs would be worth only $590M, and those without the partnership, like Fabry or MPS II, would have zero value.
Milestones and partnerships of Sangamo:
The slide below provides an update to the pipeline, and includes the Biogen partnership,
The company held a Q4 call on February 28th. We have learned that the Fabry program will deliver results by the end of 2020 or early 2021. While the company was tight-lipped on details, the entire process appears much more disciplined in the design and preparation of the study. The company has not enrolled patients yet, because the process rejected more patients than anticipated. Bettina M. Cockroft, Senior V.P. & Chief Medical Officer Sangamo, offered following on the Fabry trial:
"So we've initiated six sites in the U.S. and actually participated in the initiation of the seventh site in London on Monday this week. So we're currently screening patients. And it's my priority, above all, to ensure the quality of the study by ascertaining that the right patients are included. And so we have screened several patients, some of whom had borderline exclusion criteria and who are the screen failed. Indeed, we've had more screen failures than we were expecting at the outset of the trial, but other patients continue to be in the screening phase. And just as a reminder, screening can take up to 2 months to complete. So we've also introduced protocol amendments that will optimize the inclusion criteria and will allow us to optimize those as well as address the FDA's recent guideline on - guidance on Fabry disease."
Separately, Pfizer has replaced Sangamo as a sponsor of the phase 2 trial of SB-525 on clincialtrials.gov, and it is recruiting two more patients, mirroring the seven patients' count of BioMarin's phase 2 trial. This specific move helps my belief that Pfizer will take the same approach to BLA as BioMarin. I expect the progression to reach the accelerated review four months sooner than BioMarin, based on the rapid uptake of SB-525. My anticipated date for Pfizer to file BLA is February 2021.
Fellow investor and S.A. author, Marty Chilberg, analyzed the most recent FDA guideline on the sameness of gene therapy. A different vector in the same viral class would be reviewed on a case-by-case basis to determine the condition of unique treatment. Sangamo's adeno-associated virus combination of AAV2/AAV6 is likely differentiated enough from AAV5 used by BioMarin to support such a status. Still, the mechanism of uptake and hopefully durability will be equally speaking for it.
Adrian Woolfson, Head of Research and Development for Sangamo, confirmed Pfizer would be updating on progress in hemophilia A:
"We were in regular contact with Pfizer about the hemophilia A study. They remain incredibly enthusiastic, as do we. Pfizer will provide the next update, and it's probably best if we leave it for them to announce when that happens."
The CEO, Sandy Macrae also commented:
"I know they are eager to share the data when it reaches the important time points because they want to make sure that we are all aware of the advantages of this asset."
I prefer Sangamo focused on delivering work in the clinic instead of a narrative of the possibilities and the giveaway of time for updates. The element of surprise, like the announcement of the Biogen deal, is much healthier, and I favor this approach over the road map of conferences and updates handed to short sellers.
I recommend Sangamo as a buy with $9.21 as an upper limit for accumulation, even though I believe this number is quite conservative. I continue to expect $17 to $18 by the end of the year, based on already described milestones and also including added shares. I still see Fabry adding $1B to the market capitalization. If all pieces fall into the right place, a 2021 target of $25 per share or the market capitalization of $3.5B is very realistic. Also, I feel Sangamo could make another surprise announcement for the pre-clinical program like Colitis or Multiple Sclerosis within the next 12 months; however, I do not expect equity offering as part of it.
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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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