EQUITY RESEARCH
February 6, 2008
Pacific Growth Equities, LLC
Sangamo BioSciences, Inc.
SGMO: NASDAQ
Buy
2007 Financials: Cash runway through major 2008 clinical catalysts and beyond.
INVESTMENT SUMMARY
?? Sangamo reported Q4/FY:07 financials with revenues of $2.8/$9.1 million inline with our and consensus estimates of $2.7/$2.8 million, respectively. Q4/FY:07 adjusted EPS was $(0.17)/$(0.58) which was lower than our and consensus estimates of $(0.13)/$(0.53) due to higher operating expenses.
?? The Company ended the quarter with $81.4 million in cash. We calculated 2007 burn at about $26 million and Management previously guided that 2008 burn should be somewhat higher and YE:08 cash should be at least $55 million. We estimate cash should sustain operations through Phase 2 trials of SB-509 for diabetic neuropathy in mid-late 2008 with runway potential into mid-2010.
?? With what we believe are significant value drivers in 2008 and SGMO trading with about 125% upside to our fair value estimate, we reiterate our Buy rating.
CONCLUSION
We estimate Sangamo has at least enough cash runway to get through what we believe are the most dramatic 2008 value drivers: Phase 2 trial testing SB-509 treatment of patients with mild-to-moderate and also severe (blocked nerve) diabetic neuropathy. Based on Phase Ib data showing maximal effects at about 60 days but still meaningful at 6 months, we believe the Phase II diabetic neuropathy results are likely to be statistically significant. Management reiterated that the mild-to-moderate data is likely to be released in H2:08 at the Society for Neuroscience annual meeting (SfN 11/15-19/2008 Washington, DC).
However, Management also indicated potential to release interim blocked nerve data in June. With positive Phase 2 data, a potential therapeutic partnership may also be announced by YE:08. Other major value drivers in 2008 include release of Phase I results testing a ZFP/VEGF-A stimulator in severe PAD patients with critical limb ischemia (CLI) and potential exercise of the commercial option by DAS in H2:08 (triggering a $6 million milestone payment).
The Company reported Q4/FY:07 revenues slightly higher than our $2.7/$9 millon estimates. Revenues were from collaborative deals and grants associated the Company’s ZFP technology platform including Dow AgroSciences (DOW:NYSE; Not Rated), Sigma- Aldrich (SIAL:Nasdaq; Not Rated), private foundation research grants, and enabling technology agreements. R&D expenses and general & administrative costs were slightly higher than our estimates, coming in at $7.9/25.6 million and $2.5/$8.3 million, respectively. R&D expenses were largely associated with research-associated costs for the advancement of its SB- 509 program in diabetic neuropathy, preparation to initiate Phase 2 trials for stem cell mobilization and ALS, and preparation for Phase 1 trials testing ZFPs to treat HIV/AIDS and glioblastoma.
EPS came in below our and consensus $(0.13) at $(0.17) due to higher expenses. We believe Sangamo has made more research progress than we or consensus originally estimated.
The Company had guided to end 2007 with about $80 million in cash and actually ended 2007 with $81.4 million--which we estimate should last to about mid-2010 and includes major 2008 catalysts of Phase II data releases for SB-509 in diabetic neuropathy. Management guided that Sangamo should end 2008 with at least $55 million in cash. We have made revisions to our FY:08 estimates and beyond after factoring in Q4:07 financial results and Management’s 2008 year end cash guidance of at least $55 million. We have increased our 2008 operations expense estimate due to expansion of clinical and preclinical activities. In addition, we have added a $6 million milestone payment from Dow Agrosciences (DOW:NYSE; Not Rated) in Q4:08 as we believe they are likely to execute the commercial option.
OUTLOOK
We believe the major catalysts for 2008 are data releases for the two Phase II SB-509 treatment of diabetic neuropathy expected as early as June 2008 (SB-509-701) and in November 2008. We estimate SGMO could more than double with positive data from these two trials. With positive results, we anticipate Sangamo’s first potential therapeutic partnership could also occur in Q4:08. In addition, we believe DAS exercise of the commercial option to use ZFP technology for maize and canola product development could trigger +$0.97/share upside or a loss of -$0.23/share if not exercised. We believe the DAS option may be exercised before the October 1, 2008 deadline based on recent positive comments from their Management.
POTENTIAL UPCOMING EVENTS AND MILESTONES (*OUR ESTIMATES)
Q1:08 Initiate Phase 2 trial for SB-509 for Stem Cell Mobilization (DN)
Q2/H2:08 Phase 2 SB-509-701 data in moderate-to-severe DN (potential interim at ADA June 6-10, 2008)
H1:08 Initiate Phase 2 trial for SB-509 in ALS
H1:08 Initiate Phase 1 trial for SB-313 treatment of Glioblastoma
H2:08 Initiate Phase 1 trial for SB-728 treatment of CCR5/HIV
H2:08 Phase 2 SB-509-601 data in mild-to-moderate DN (SfN Nov15-19)
H2:08 Additional potential therapeutic (H2:08*) and other partnerships
H2:08 Complete accrual and treatment in SB-509 Phase 2 stem cell mobilization / PK
2008 Phase 1 data for EW-A-401 treatment of Critical Limb Ischemia (PAD) (midyear)
2008 Complete accrual and treatment in EW-A-401 Phase 1 for Intermittent Claudication (PAD)
2008 Publication of Phase 1b data for SB-509 treatment of DN
2008 Potential partnership milestones (DAS commercial option 10/1/08 or earlier* + $6 million; Sigma milestones with undisclosed revenues.)
2009 Phase 1 data for SB-313 treatment of glioblastoma and SB-728 treatment of CCR5/HIV*
WE BELIEVE SGMO IS TRADING AT AN ATTRACTIVE VALUATION.
We calculate our $26.72/SGMO share fair value based on a 30% annual discount from potential peak sales for each product candidate and a 1-10x multiple based on clinical/regulatory stage of development. We include clinical stage candidates: SB-509’s potential peak sales in diabetic neuropathy ($11.43/SGMO share), severe DN or blocked nerve ($9.22/SGMO share), and PAD ($6.07/SGMO share). We view the remainder of Sangamo’s extensive pipeline as upside. In addition, we believe the multiproduct pipeline, potential licensing revenues, and extensive patent portfolio is likely to make Sangamo an attractive acquisition target. We estimate full-year profitability in 2011.
RISKS TO OUR ESTIMATES
Clinical risks:
• Potential unforeseen safety risks from novel technology platform. Although no treatment-related severe adverse events have occurred to date, ZFP technology is relatively new as a clinical treatment and there is the potential for unforeseen adverse events. A potential safety concern is likely to delay potential approval, additional partnerships and increase finance risk.
• Subsequent clinical trial data may not support Phase 1 results for SB-509 treatment of patients with diabetic neuropathy and blocked nerve and increase clinical, regulatory and financial risk.
• Delivery of DNA encoding ZFP TFs or ZFNs currently has technical limitations for systemic therapeutic applications.
Market risks:
• There is negative public sentiment, especially in Europe, toward genetically modified organisms (GMOs) which could potentially put our future revenue estimates at risk if restrictive laws are enacted or they public boycotts GMO products.
• Physicians may not be amenable to ZFP delivery methods. At this time, multiple injections are required at the site of disease for administration of ZFP therapeutics.
• Sangamo is dependent third parties to develop gene transfer mechanisms and may not be able to license new gene delivery methods.
• Sangamo is dependent on third party manufacturers and on third parties for commercialization of the products developed with ZFP technologies.
• Adverse events occurring in other gene therapy treatments may negatively impact regulatory approval, physician/patient perception, and SGMO valuation.
• Competition from other product classes addressing the same indications could potentially put our future revenue estimates at risk. These include small molecules, antibodies, synthesized proteins and peptides, cDNA-based gene therapy, antisense, siRNA, gene amplification, meganucleases, insulator technology, mini-chromosomes, and mutagenesis.
• Other groups have filed applications and have issued patents relating to ZFP technology which may lead to lawsuits upon regulatory approval and/or commercial sale. In 2005, the European Patent Office revoked EP 682,699 and Sangamo has filed an appeal. If they are unsuccessful at appealing this decision, they may not be able to block certain competition in Europe. However, we believe Sangamo has freedom-to-operate from the most extensive patent and licensed patent estate covering ZFP technologies.
Financial risks:
• We believe Sangamo is likely to conduct multiple financings before we estimate profitability in 2011
(In thousands except per share data)
FY:06A Q1A Q2A Q3A Q4A FY:07E Q1 Q2 Q3 Q4 FY:08E FY:09E FY:10E FY:11E
Revenues:
Net Product Sales - 0 0 0 0 0 0 0 0 0 0 0 0 0
Collaborative Agreements 6,625 1,150 1,461 1,915 2,267 6,793 2,290 2,313 2,336 2,359 9,297 9,674 10,067 10,476
Research Grants 1,260 272 1,123 410 500 2,305 500 500 500 500 2,000 2,000 2,000 2,000
Licensing and Royalty Revenue - - - 0 0 0 0 0 0 6,000 6,000 0 0 131,929
Total Revenues $ 7,885 $ 1,422 $ 2,584 $ 2,325 $ 2,767 $ 9,098 $ 2,790 $ 2,813 $ 2,836 $ 8,859 $ 17,297 $ 11,674 $ 12,067 $ 144,405
Consensus Revenues $65.120 $95.350 $201.200
Cost and Expenses:
Cost of Goods - - - - - - - - - - - - - -
R&D 21,527 5,430 6,309 5,916 7,904 25,559 8,378 8,965 9,323 9,696 36,362 39,764 41,379 43,059
Sales & Marketing - - - - - - - - - - - - - -
General and Administrative 7,087 1,999 2,113 1,728 2,470 8,310 2,495 2,520 2,545 2,570 10,129 10,541 10,969 11,414
Other - - - - - - - - - - - - 43,871
Total Operating Expenses 28,614 7,429 8,422 7,644 10,374 33,869 10,873 11,484 11,868 12,267 46,492 50,305 52,348 98,344
Operating Income (Loss) (20,729) (6,007) (5,838) (5,319) (7,607) (24,771) (8,083) (8,672) (9,032) (3,407) (29,195) (38,631) (40,280) 46,061
Net Interest Income (Expense)/Other
Income 2,411 648 657 1,051 935 3,291 935 935 935 935 3,740 3,740 3,740 3,740
Other Income (Expense) 454 - - - - - - - - -
Income Before Income Taxes (17,864) (5,359) (5,181) (4,268) (6,672) (21,480) (7,148) (7,737) (8,097) (2,472) (25,455) (34,891) (36,540) 49,801
Provision for Income Taxes - - - - - - - - - - - - - 8,000
Net Income (Loss) $ (17,864) $ (5,359) $ (5,181) $ (4,268) $ (6,672) $ (21,480) $ (7,148) $ (7,737) $ (8,097) $ (2,472) $ (25,455) $ (34,891) $ (36,540) $ 41,801
sFAS 123 2,016 543 531 566 636 2,276 662 694 714 735 2,806 3,016 3,138 3,266
One-Time Charges 0 0 0 0 0 0 0 0 0 0 0 0 0
EPS (Basic) (0.55) (0.15) (0.15) (0.11) (0.17) (0.58) (0.18) (0.19) (0.20) (0.06) (0.63) (0.86) (0.90) 1.23
EPS (Taxed, Fully Diluted) (0.55) (0.15) (0.15) (0.11) (0.17) (0.58) (0.18) (0.19) (0.20) (0.06) (0.63) (0.86) (0.90) 1.03
GAAP EPS (Taxed, Fully Diluted) (0.55) (0.15) (0.15) (0.11) (0.17) (0.58) (0.18) (0.19) (0.20) (0.06) (0.63) (0.86) (0.90) 1.03
Weighted Shares Outstanding (Basic) 32,502 35,057 35,136 38,925 40,226 37,355 40,251 40,276 40,301 40,326 40,289 40,389 40,489 40,589
Total Shares Outstanding (Diluted) 32,502 35,057 35,136 38,925 40,226 37,355 40,251 40,276 40,301 40,326 40,289 40,389 40,489 40,589
Historical and Projected Balance Sheet
Net Cash $ 53,920 Net Cash $ 81,412 $ 55,095 $ 19,692 $ (17,091) $ 24,594
Cash Burn $ 13,941 Cash Burn $ 26,170 $ 26,317 $ 35,403 $ 36,783 $ (41,686)
2006A 2007A 2008E 2009E 2010E 2011E
Sources: Sangamo Biosciences and Pacific Growth Equities, LLC.
Stock MktCap Upside Consensus
SGMO Clinical Stage Products Fair Value: $26.72 $1,072,477 125%
1: in preclinical testing 6: in Phase 3 Full Pipeline Fair Value: $28.39 $1,139,566 139%
2: passed preclinical 7: positive Phase 3 Cash: $2.09 $83,939
3: IND filing 8: regulatory review Total: $30.48 $1,223,505 157%
4: in Phase 1 9: approved Current: $11.87 $476,480
5: in Phase 2 10: launched Total Pipeline Annual Peak Sales Potential: $82.18 $3,298,785 592%
Product Indication
Eligible # Annual
US Treatments
Pricing
$/Unit/Year
Net Peak Revs
US ($000)
Peak
Penetration Multiple Est/Actual Launch
Annual Discount
Rate
MktCap Fair
Value (000)
Stock Fair
Value
Diabetic
Neuropathy 13,520,000 $10,000 $746,600 5% 5 1/31/2011 30% $458,944 $11.43
DN: Blocked
Nerve 4,160,000 $10,000 $686,400 15% 5 8/1/2011 30% $370,065 $9.22
PAD: Intermittent
Claudication 3,200,000 $10,000 $352,000 10% 4 12/1/2011 30% $139,125 $3.47
PAD: Critical
Limb Ischemia 1,600,000 $10,000 $264,000 15% 4 12/1/2011 30% $104,343 $2.60
ZFN-CCR5 HIV 1,000,000 $5,000 $120,000 15% 2 12/1/2013 30% $14,022 $0.35
ZFN-GR Zetakine Glioblastoma 20,000 $20,000 $3,600 15% 2 6/1/2013 30% $480 $0.01
ZFP TF VEGF-A Peripheral
Neuropathy 1,000,000 $5,000 $45,000 15% 2 12/1/2012 30% $6,836 $0.17
ZFP TF VEGF-A ALS 30,000 $20,000 $5,400 15% 2 12/1/2012 30% $820 $0.02
ZFP TF VEGF-A Ischemic Heart
Disease 1,000,000 $5,000 $30,000 10% 1 12/1/2013 30% $1,753 $0.04
ZFP TF VEGF-A Nerve Regeneration
(Nerve Crush/SCI) 1,000,000 $20,000 $180,000 15% 1 12/1/2014 30% $8,090 $0.20
ZFP TF
Phospholamban CHF 5,000,000 $5,000 $150,000 10% 1 12/1/2013 30% $8,764 $0.22
ZFP TF PEDF AMD 2,400,000 $5,000 $108,000 15% 1 12/1/2014 30% $4,854 $0.12
ZFP TF PEDF Oncology Vaccines 1,000,000 $10,000 $90,000 15% 1 12/1/2014 30% $4,045 $0.10
ZFP TF GDNF Parkinson's Disease 1,000,000 $20,000 $180,950 15% 1 12/1/2014 30% $8,132 $0.20
ZFP-13 Agriculture 12,500,000 $1,000 $300,150 33% 1 1/31/2012 30% $7,645 $0.19
ZFP-14 Biologics
Manufacturing 5,000 $1,000 $1,095 15% 1 12/1/2014 30% $49 $0.00
ZFP-15 Research Tools 10,000 $1,000 $35,590 15% 1 12/1/2014 30% $1,600 $0.04
ZFP TF Cancer Neuropathic
Pain 1,000,000 $5,000 $45,000 15% 1 12/1/2013 30% $2,629 $0.07
We use multiples to account for clinical and
regulatory risk at various stages of development.
EQUITY RESEARCH
Appendix A
Required Disclosures
06-Feb-2008 08:34:24 AM |
