Merriman "Time To Get Back In; News Flow to Drive Stock in 2009; Upgrading to Buy from Neutral. Should trade in $7.50-$8.50 range"
MERRIMAN CURHAN FORD
Biotechnology—Life Sciences
February 5, 2009
Sangamo BioSciences, Inc. (SGMO)
Buy
Time To Get Back In; News Flow to Drive Stock in 2009; Upgrading to Buy from Neutral
INVESTMENT CONCLUSION
We believe Sangamo has the potential to be the leader in zinc finger applications both in the therapeutic arena and applications outside of the clinic. While the company’s diabetic neuropathy program is currently in question, we still believe in the therapeutic potential for the zinc finger platform.
Additionally, partnerships with Dow Agro- Sciences and Sigma-Aldrich have the potential to provide Sangamo with future royalty streams and milestone payments. We believe SGMO shares should trade to a range of $7.50-8.50.
Summary
Year end results; Looking at productive year; Upgrading to Buy from Neutral. Sangamo is in a position to deliver a very productive year in 2009 across the entire zinc finger platform, in our view. We believe the anticipated
news items will result in multiple incremental boosts to the stock price in 2009.
•Our upgrade is based on the anticipated news flow for clinical data and non-therapeutic alliances as well as important changes to our valuation metrics. Key news flow that we anticipate in 2009 includes an IND for SB-313 for
glioblastoma, key SB-509 updates for diabetic neuropathy and a potential corporate partnership, and moving the HIV Phase I program forward on the clinical front. On the non-therapeutic front, we expect milestones and potential sublicenses from the Dow AgroSciences collaboration. For Sigma-Aldrich, which has launched the CompoZr line of products, we expect milestones and royalties from this program to start to grow.
•SB-509 updates expected this year. While we still remain cautious on the outcome of the Phase II ‘701 study in moderate-to severe diabetic neuropathy patients, Sangamo has posted interesting new clinical data showing better efficacy of SB-509 in more severe patients, which could potentially bode well for the study.
•Financial results for FY08. Sangamo posted FY08 EPS of ($0.60) vs. our estimate of ($0.65) and the consensus estimate of ($0.68). The company ended FY08 with $65M in cash, which is sufficient to fund current operations into 2011. Sangamo expects to end 2009 with approximately $45M in cash.
•Valuation. We value Sangamo through a sum of the parts analysis using our probability-weighted clinical net present value (NPV) model and a DCF of the anticipated royalties and licensing revenue from Dow AgroScience and Sigma-
Aldrich. We believe SGMO shares should trade to a range of $7.50-8.50.
Catalysts and Valuation Drive Our Upgrade
Our upgrade of Sangamo from Neutral to Buy is based on:
• Anticipated newsflow in 2009 across the entire platform.
• Adjusting our clinical NPV valuation model to account for incremental changes in the clinical stage products (discussed below).
• Including a conservative DCF valuation of anticipated royalty and licensing revenue from the Dow Agro Sciences and Sigma Aldrich partnerships going forward.
• Anticipation of new collaborations, both non-therapeutic and potentially therapeutic.
We see 2009 being a very fruitful year for Sangamo across both the therapeutic and non-therapeutic zinc finger franchises. We have identified the following key milestones and catalysts expected in 2009, which we also see potentially boosting the stock price:
• File SB-313 IND for glioblastoma Phase I—1H09
• SB-509 data presentations—1H09
• SB-509 corporate partnership—2009
• Dow AgroSciences commercial sublicenses and milestones—2009
• Sigma Aldrich milestones and royalties—2009
• Additional cell line engineering agreements—2009
SB-509—Diabetic Neuropathy
SB-509 remains the lead clinical program at Sangamo for diabetic neuropathy (DN) as well as other studies in ALS and stem cell mobilization. We still remain cautious on the outcome of the SB-509-701 Phase II study (in moderate to severe patients);however, we highlight the following data which has lent incremental support to the study, as well as laying out what we see to be the scenarios around the study. While Sangamo does not provide further guidance as to the timing of data from the SB-509 diabetic neuropathy program, we believe that the company will again present data at the American Diabetes Association meeting in early June. This is where data from the DN programs have been presented for the last couple of years and we believe the company will continue the trend.
Disease severity appears to be important to clinical outcomes. After taking important clinical looks at the data to date from the Phase Ib study, the Phase II mild-to-moderate ‘601 study and the Phase II moderate- to-severe ‘701 study, it appears that the severity of the disease appears to impact clinical outcomes.
This is somewhat counterintuitive when dealing with various inflammatory disorders. pecifically, it has been shown in multiple clinical studies in inflammatory indications, such as cardiovascular or Alzheimer’s, that the more severe the disease the less response to therapy. The analyses to date at Sangamo appear to counter that argument, which incrementally increases the chance of success for the Phase II ‘701 study. What has been observed is that in the ‘601 Phase II (mild to moderate patients), which failed the primary endpoint, most patients in the study were identified to be in the “mild” category. After performing a subgroup analysis it was shown that:
• Subjects with more advanced disease showed measurable improvements in NCV and NIS-LL.
• Neurologic Exam improvements (NIS-LL) were seen in patients with sural NCV of <47.5 m/s (p=0.08).
• PK analysis showed dose/kg response in NCV.
A key observation from these subgroup analyses appears to be that patient stratification is important and that SB-509 appears to be more effective in patients with more severe disease.
Scenarios
Previously Sangamo released a small amount of interim data from the ‘701 blocked nerve Phase II showing very encouraging restoration of NCV. We believe that much skepticism remains on the data readout later in the year, and should a negative outcome ensue, the stock could retreat back to the $2-3 range. However, the significant amount of newsflow expected this year could help buffer any downside from a failed ’701 study as we believe the market has already greatly (if not completely) discounted the diabetic neuropathy program.
From an upside perspective, we put forth the following scenario. If the important subset analyses hold to be true in the ’701 study, it might be easier to show a positive outcome. This may be a result of the fact that patients in this study have essentially an unmeasurable NCV. Therefore we believe that any change in NCV from “zero” would be of much higher magnitude from a statistical standpoint than the healthier patients in the ’601 study. If the study comes back positive, we believe the stock could see 25-35% upside.
Following a potential positive data outcome from the ’701 study, we feel Sangamo would then need to meet with the FDA in order to define a potential registration path for SB-509 and what the approvable clinical endpoints would be for a pivotal study.
Dow AgroSciences (DAS)
We expect to see a significant increase in activity from Dow AgroSciences in moving the agricultural products forward. While Sangamo will still receive milestone payments from DAS, we also expect that DAS will be sublicensing the technology this year as well. Sangamo would receive 25% of any sublicensing revenue that DAS receives and we expect these sublicenses to start being signed in 2009. We believe that DAS could see its first products on the market in the 2012-2014 timeframe, from which Sangamo would receive a royalty on sales. Specifically, we believe Sangamo is eligible for a royalty in the 1-2% range per trait introduced into the plant. To illustrate, DAS is currently working on a product in conjunction with Monsanto that has 8 traits modified (trait stacking).
Sigma-Aldrich (SIAS) Now that Sigma has launched its product line(s) using Sangamo’s zinc finger technology for research reagents and diagnostics, we expect Sangamo to continue to receive milestones from SIAS. We now also expect Sangamo to start receiving royalties on sales of SIAS services. We believe that general pricing ranges for the CompoZr platform are in the range of $25,000 for academic institutions and $100,000 for corporations.
Valuation
We value Sangamo through a sum of the parts analysis using our probability-weighted clinical net present value (NPV) model and a DCF of the anticipated royalties and licensing revenue from DAS and SIAL. First, we value the clinical stage products using our clinical NPV model, which we believe is the appropriate method of capturing the value of the clinical pipeline. Moreover, it allows a simple method of flexing assumptions to assess the impact on the company’s valuation. We apply this method for all of the biotechnology companies in our research coverage universe. Based on our clinical NPV valuation model, we see the contribution to valuation being in the $6-7 range.
In adjusting our NPV model, we have increased the chance of success for the SB-509 program in DN from 5% to 10% based on the subset data. We have also increased the chance of success for the HIV program now that it has entered the clinic from 5% to 10%. We still believe that these chances of success could be conservative.
Sangamo Clinical NPV Valuation Model
Source: Merriman Curhan Ford estimates
In the past we have not assigned value, despite clear potential, to Sangamo’s non-therapeutic franchise. In 2009, we believe the visibility around the DAS and SIAL programs should greatly increase. Below is a DCF of what we consider to be a conservative assessment of the royalty and licensing revenue potential from the two programs. We conservatively believe the per share contribution from the two programs is in the range of $1.50-2.50.
DCF of DAS and SIAL Royalty and Licensing Revenue
Source: Merriman Curhan Ford estimates
Potential upside to valuation. As discussed above, we currently value Sangamo on the clinical platform and now the royalty and licensing revenue potential from DAS and SIAL. We believe our assumptions to be quite conservative and see clear upside from the following:
• Clinical data for the company’s programs could increase the chance of success for these products. We still remain cautious on the DN program and should positive data be released, the increased chance of success would positively impact our valuation. Additionally, increasing the chance of success for the other products based on clinical data readout would have a significant impact on our valuation.
• As the clinical products move closer to commercialization, our peak sales estimates could increase as we further assess the market potential for the products, which would significantly impact our valuation.
• We believe that our royalty revenue estimates are conservative, and as we gain further visibility as to the product launch potential at DAS and market penetration for SIAL products, these could significantly impact our valuation.
Potential downside to valuation. As with all companies in clinical development, there always exists the risk of failed or inconclusive clinical trials, which could lead to downward pressure on the stock. We believe that Sangamo helps mitigate this risk by having a broad, though early-stage, therapeutic pipeline in multiple indications.
Sangamo BioSciences is focused on the research and commercialization of engineered DNA-binding proteins for the regulation of gene expression and for gene modification. The basis for the technology is the engineering of naturally occurring transcription factors called zinc finger DNAbinding proteins (ZFPs). The technology is then employed to modulate disease related genes. |
