The Deal With Biogen Boosts The Recommendation To Buy Sangamo Shares
Summary
- 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:
Source: Sangamo
The slide below provides an update to the pipeline, and includes the Biogen partnership,
Source: Sangamo
Other updates
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.
Conclusion
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.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (32)
SGMO has made it clear they dont want a buyout which is why its stock price suffers as it awaits data..as you noted its still below share purchase price despite good news
I am hoping there is a reconsideration of this stance moving forward.
Any of these giants could have and probably would have bought them for $3B+ if they wanted
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The EDIT I mentioned, just dosed a single patient. The company is worth $1.2B versus Sangamo $1.194B, including Biogen Equity. EDITs trial is for a condition in which there is a gene therapy approved already, Luxurna from Spark.
Biogen deal with only two indications covers a population of 6 million patients. After I deduct the $605M cash at the end of Q2, everything including Biogen is worth $533M. Editas is going into the same space with CRISPR Thera, where they are having a zero competitive edge, the same technology, and the lawsuits. Their full pipeline is worth $800M, $300M more than Sangamo's. CRSP is worth $3.3B, with two patients dosed out of 90. No other data has been provided. A few statements I read they selectively presented data to look good. Vertex has sold half the shares, after this "success," why?The Sangamo stock is selling off.
I think Wall Street is not going to pay attention to Sangamo's successes, perhaps until the company will afford to buy its shares from the market or gets acquired.
Watching what is happening now, I feel now even stellar results for SB-525 could be ignored. Biogen is a great deal, half costs, manufacturing paid by Biogen, new targets.17% equity, that is an issue? Equity buys were considered a prelude to acquisitions. This is not?
I am not a conspiracy theorist, but what we are witnessing is genuinely beyond logic. Good luck to those who can accumulate.
Probably due to attention that NTLA is the "cheap" CRSPR stock..
SGMO in the meantime had nearly abandoned in vivo gene editing...no peep on MPS II recently at all
Otherwise they shouldn't have diluted 17% at such a low price given the cash they already had on hand
I think there will be another deal for MS, but the strategy here, contrary to some who think Sangamo is giving shares away, is to partner MS, perhaps next year, after SB-525 is delivered into BLA.
I also think cash is needed for marketing Fabry and PKU. They will own it, and Pfizer wanted GT, but they had genome regulation on the block. Hence Pfizer left.
They do not want to be bothered looking for money with such poor stock performance in the middle of the commercialization process. I think the only time they will sell more shares if Biogen wants to buy during MS partnership. No more secondaries. At that point, Sangamo could be bought at $40.
And if you listen to their conference calls they keep hinting at willingness to purchase/license outside delivery tech and "other" delivery options..
I guess we will see :)
Anything is possible.
I should add manufacturing costs are probably the highest piece of each treatment. They need to do Fabry, CNS now, TX200 and MPS II. I think the MPS II could be the most costly based on complexity and Fabry on quantity. This is why I think commercialization efforts including manufacturing are the upfront cost and reason for a big sale of equity.
$550B for Alzheimer's and $53B for Parkinson's per year in the US alone.
The potential of gene regulation curing at $1M per patient does not appear to be a big stretch if 10 or more years of illness can be eliminated. Biogen is also present in MS, a program covered by Sangamo's cell edit therapy. I am pretty certain Biogen is also interested in this program. It could be that Sangamo is negotiating another deal for this. I would imagine they would break it up the timeline, at least to wait for the price to go up. Another $100M in equity, for example, would be great at level of $18 by the end of this year. An increase in ownership by Biogen would only signal an appetite to get Sangamo.
I wrote about uniQUre, a company in p 3 for hemophilia B. $2.3B today. No partners but running own phase 3. Sangamo is half of it today with $725M in cash.
Sanofi doing SCD a huge potential since fetal hemoglobin production was already enough in BT patients. I think Sanofi will take this indication to phase 3, which strategically makes sense since bluebird has not started phase 3 yet. This will come at least with $100M in milestones.Lastly 10K, Sangamo is looking for HIV collaboration, which is very much aiming at Gilead. A second agreement here would produce a lot of competition with Biogen.
Now it is much clearer Pfizer moving on is because of no interest in cell therapy or gene regulation, but focus on gene therapy. I am very confident to think Sangamo will do Fabry and PKU by themselves. The only way they sell those off if they hit big in cell therapy.
EDIT not having anyone dosed, and being exactly were SGMO market cap is. SGMO managed to fall already and learn from the fall for MPS II. Seems Sanofi will do better in SCD learning from BT trial. HIV learning is on agenda to find another BP collaboration. Too bad organized manipulation seems to dominate the stock of this company. Hopefully, in time eyes will open wide here.
There is about $1.2B in milestone potential.
Biogen's investment in SGMO at $225M, in my opinion, indicates interest in SGMO, and not just the deal. I imagine if stock price was $15, Biogen will likely still buy $225M of the stock. Gilead made a much smaller investment of $50M but gave an upfront payment of $150M.
