Janney Montgomery Scott
Sangamo BioSciences (SGMO-$11.87)
Sangamo Reports 4Q07 Financial Results; 2008 Shaping Up To Be Another Eventful Year
INVESTMENT CONCLUSION: We are maintaining our BUY rating on shares of SGMO. Sangamo’s proprietary zinc-finger protein technology platform provides the company with what we believe to be unparalleled potential in the area of gene regulation/modification. In our opinion, Sangamo’s management team has thus far done an admirable job in its efforts to take full advantage of this potentially powerful platform by both (i) working to develop a promising therapeutic product pipeline and (ii) entering into collaborations with established leaders in various fields to maximize the commercial potential of the ZFP/ZFN platform. It will likely be several years before the fruits of these initial labors are truly realized, but for those long-term oriented, risk-tolerant investors looking to latch on to a potentially paradigm-changing technology platform, we submit that SGMO deserves a close look.
KEY POINTS:
• Last night, Sangamo reported a fourth quarter loss of ($0.17) per share, which compares to our estimate of a loss of ($0.11) and the consensus estimate of a loss of ($0.13). Given the company’s status as a development stage biopharmaceutical company, we do not attach any meaningful degree of significance to these near-term quarterly results.
• Sangamo ended the year with no debt and a balance of cash & securities totaling $81.4 million. Management reiterated its previously disclosed target of a year-end 2008 cash balance of at least $55 million, and we estimate that the company has adequate funding to last through the end of 2009 and into 2010.
• On the call, management reiterated its key clinical objectives for 2008: data from both Phase II, repeatdosing studies (“601” and “701”) evaluating the company’s lead product candidate SB-509 in mild-to moderate and moderate-to-severe diabetic neuropathy patients later this year, along with IND filings and Phase I initiations for new product candidates SB-313 (glioblastoma) and SB-728 (HIV). Additionally, we also expect to see another Phase II trial commence with SB-509 in patients with ALS, and we remind investors of the ongoing pharmacokinetic study evaluating SB-509’s ability to mobilize stem cells in mild-to moderate DN patients.
• Regarding business development activities, we expect the much-anticipated partnership discussions for SB- 509 to heat up only AFTER positive Phase II data in the diabetic neuropathy setting is released. In terms of current agreements, management indicated that revenues from its research reagents collaboration with Sigma- Aldrich should begin rolling in this year, and we continue to expect Dow AgroSciences to exercise its option to take a commercial license in/around October, triggering a $6 million cash payment to Sangamo and providing continuing evidence of DAS’ interest in this platform’s potential. Management indicated on the call last night that it expects additional agreements in 2008 that are similar to the cell-line improvement deal inked with Genentech in 2007.
• We remain comfortable with our BUY rating and $17 fair value estimate. CEO Edward Lanphier stated on last night’s call that he has never entered a year with a greater sense of “optimism and enthusiasm” than he has heading into 2008, and while we of course will let the planned events play themselves out before concurring with such an assessment, we absolutely agree that this will be an important and pivotal year for Sangamo and its shareholders.
VALUATION SUMMARY: Attempting to pinpoint an accurate “fair value” for a company such as Sangamo is nothing more than an academic exercise during this phase of the company’s life. Given the early-stage nature of its innovative compounds and the difficult-to-treat diseases being initially targeted, one could legitimately argue against prematurely rewarding the company with any meaningful level of technology value at this time. On the other hand, relative to the $1.1 billion in cash that Merck recently shelled out for RNA-interference company Sirna (whose potential long-term prospects we believe pale in comparison to Sangamo’s), shares of SGMO still have a long way to climb. We arrive at our $17 fair value estimate via a subjective, probability-adjusted revenue analysis of the company’s proprietary drug candidates and various collaborations. Risks that could preclude shares of Sangamo from reaching our fair value estimate include unexpected clinical or regulatory disappointments, partnership terminations, competitive threats, and various geopolitical or socioeconomic issues that can affect broader equity valuations for “high-beta” sectors.
INVESTMENT RISKS
Zinc-Finger Technology, While Unequivocally Promising, Remains Unproven from a Clinical/Regulatory Standpoint. The biotech landscape is littered with specific drug candidates and technology platforms that initially appeared wonderful on paper but failed to live up to the hype when evaluated clinically. Sangamo’s ZFP/ZFN technology has produced exciting preclinical and, in the case of its lead drug candidate, early clinical data. With that said, we believe it is prudent to remind investors that numerous clinical and regulatory hurdles stand in the way of Sangamo realizing the platform’s commercial potential.
Corporate Partners May Not Support Development of ZFP-Related Programs With Appropriate Levels of Resources. To be clear, the partnerships signed by Sangamo with likes of Genentech, Sigma-Aldrich, and Dow AgroSciences are unequivocally positive developments. Having said that, we note that these large companies have entered into many collaborative agreements with numerous partners, and they may one day be forced to prioritize programs in such a manner that is not favorable to Sangamo. Thus, there are by no means any guarantees that these companies will be able to utilize Sangamo’s zinc-finger technology in a commercially viable manner, if at all. Balance Sheet Is Relatively Strong, But Additional Financings Will Likely Be Necessary Before Sangamo Becomes Consistently Cash-Flow Positive. Sangamo’s management team has done an admirable job of funding the company’s operations in a simple, straightforward manner that we analysts love—no warrants, no potentially troublesome converts, etc. Moreover, we believe management has also been prudent in its efforts to return to the market at opportune time and to build a solid base of institutional shareholders. With that said, we believe it will be several years before the company is becomes truly self-funding, and when additional cash becomes necessary, there can be no assurances that management will be able to access the capital markets in a desired manner.
COMPANY DESCRIPTION: Sangamo Biosciences, headquartered in Richmond, California, is a worldwide leader in the design and development of engineered zinc-finger DNA-binding proteins for gene regulation (ZFPs) and gene modification (ZFNs). The company's most advanced therapeutic product candidate, SB-509, is undergoing Phase II testing in diabetic neuropathy and blocked nerve regeneration, while additional programs are either undergoing or preparing to enter earlier-stage clinical testing in a variety of disease settings. Additionally, Sangamo has entered into broad-based, "enabling technology" collaborations with the likes of Dow AgroSciences, Sigma-Aldrich and Genentech.
Company Statistics
Price: $11.87
Market Capitalization (M): $476
Average Daily Volume (1-month): 391,354
Dividend: $0.00
Yield: 0.0%
Rating: BUY
EPS Growth Rate: NM
Financials
FYE Dec 2006A 2007A 2008E
EPS: -$0.55 -$0.58 -$0.84
Prior EPS: -- -$0.52 -$0.63
Quarterly EPS: Q1 -$0.09 -$0.15 -$0.19
Q2 -$0.11 -$0.15 -$0.20
Q3 -$0.08 -$0.11 -$0.22
Q4 -$0.24 -$0.17 -$0.23
P/E Ratio: NM NM NM |
