Markets Are Focusing On The Wrong Side of This Biotech

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biotech

Biotech has been hot for the past four years or so. ETFs in the space have gained as much as 500% in some instances and both incumbent and development stage companies have mirrored these gains in valuation. IPOs are at their highest ever rate, and billion dollar acquisitions and partnerships have come thick and fast. There have, however, been a few companies that have not been quite so lucky. A number of companies are down this year, having reached highs during 2014 or around the turn of 2015. One such example, and one for which the 2015 decline in its market capitalization seems unfounded, is Sangamo Biosciences Inc. (NASDAQ:SGMO).

Having hit highs just ahead of $18 a share during March 2015, Sangamo has lost nearly 65% of its value to where it currently trades at $6. At a glance, the decline looks to have arisen from a number of quarterly revenue misses and net losses. However, the company is a development stage biotech, and it is not unusual to see consecutive periods of loss in the run-up to a new drug application filing. The only reason Sangamo is generating revenues (and in turn, attracts analyst estimates) is through a couple of collaborations with larger companies, which see it able to report milestone payments as forward revenues. All else aside, the company’s fundamentals are strong, and its pipeline has the potential to expose it to a huge market. Further, we’ve got a large number of potential upside drivers throughout the latter half of this year and the beginning of next, meaning we could not just see a turnaround in Sangamo, but a recuperation of much of the loss seen this year – assuming things come out as expected. So, with this said, let’s look at what we can expect over the coming few quarters, and the implications of these expectations on Sangamo’s market capitalization.

First up, let’s address earnings to support our previous statement. For the second quarter of 2015, the company reported revenues of $8.4 million. As we have said, these revenues derived from partnerships with larger biotech organizations – namely Shire plc (NASDAQ:SHPG) and Biogen Inc. (NASDAQ:BIIB). $3.9 million came from research expenses associated with the Shire agreement, and $1.7 million came from research services associated with the collaboration with Biogen. Additionally, the company recognized $0.5 million from an upfront payment by Shire and $1.5 million from an upfront payment by Biogen. It is these two latter recognitions that markets seem to have overlooked or misinterpreted. While there are $0.5 million and $1.5 million respectively, they are recognized on a straight line and amortization basis – meaning they are actually small chunks of much larger upfront payments. Specifically, $13 million from Shire and $20 million from Biogen. Each quarter the company recognizes an equivalent portion of these upfront payments (received in 2012 and 2014 respectively) as revenues. Additionally, the company has no debt, more than $200 million cash and cash equivalents, and a burn rate of just $8-10 million.

So what are the potential upside drivers we expect to see over the coming quarters? Well, the company uses a type of DNA binding protein called a zinc finger nuclease (ZFN) to target monogenic and infectious diseases. To simplify, the company inserts a ZFN into the gene of the patient, and the replacement stimulates the production of a therapeutic protein that replaces the enzyme that causes symptoms for whatever is being treated. The company’s lead candidate is SB-728-T, targeting HIV/AIDS, for which we got updated results earlier this year. However, the real market moving release associated with SB-728-T will be the preliminary data introduction – slated for early 2016.

Perhaps more impactful, however, will be the upcoming INDs filed as part of both its in-house programs and its partnerships with the aforementioned Shire and Biogen. The company has preclinical, promising candidates targeting Hunter and Hurler syndromes with ZFN therapy, both indications for which it expects to file INDs before the end of 2015. The preclinical data associated with this filing could attract the attention of larger potential collaborators, and an allocation in anticipation of further partnerships might be a nice exposure.

Looking beyond that, the company expects at least three further INDs next year, but potentially as many as six before H2 2016. These include a beta thalassemia, in-house during the first half of next year, and a sickle cell disease indication during the second half in association with Biogen.

Looking near-term, we’ve got an update on Sangamo’s HIV study (SB-728-1101) slated for the ICAAC conference on September 17. Decent results could prove a turning point for the company, and many initiate the shift in focus from revenue misses to forward potential.

What’s the takeaway? That markets seem to have been unjustly discounted Sangamo over the past couple of quarters based on missed earnings, despite the company being a development stage biotech. Financially the company is in sound standing, and the combination of a strong in house pipeline with promising external development partnerships makes it an attractive turnaround allocation.

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