Sangamo Therapeutics Inc (SGMO) 2002 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Sangamo BioSciences first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period.

I will now turn the call over to Dr. Elizabeth Wolffe. Dr. Wolffe, you may begin your conference.

Thank you. Good afternoon, and thank you for joining us at the Sangamo's quarterly teleconference. Today we will be discussing our first quarter results, which we released today at approximately 1 pm pacific daylight time.

Joining me are several members of Sangamo's senior management team, including Edward Lanphier, our President and Chief Executive Officer. Edward will begin today's discussion by reviewing recent progress at Sangamo. He will then summarize our financial results and discuss some of the exciting scientific and commercial opportunities that are enabled by our ZFP transcription factor technology platform. After our prepared remarks we will have a time for questions.

As we begin I'd like to remind everyone that the projections and forward-looking statements we discuss during this conference call are based upon the information we currently have available. This information will likely change over time. By discussing our current perception of the market and the future performance of Sangamo with you today, we are not undertaking an obligation to provide updates in the future. Actual results may differ substantially from what we discuss today, and no one should assume that at a later date that our comments from today are still valid. We alert you to be aware of risks that are contained in documents that the company filed through the Securities and Exchange Commission, specifically our quarterly reports on Form 10Q and our annual report on Form 10K. These documents detail important factors that could cause the actual results of the company's operations to differ materially from those contained in our projections and forward looking statements.

Now I'd like to introduce Edward.

Thank you Liz. Hello and welcome to our first quarter conference call. On our last call in February we outlined a set of ambitious but achievable goals for 2002. They included advancement of our existing therapeutics programs with Edwards Lifesciences, Onyx Pharmaceuticals and Medarex, as well as several internal therapeutics initiatives in cardiovascular disease, cancer and infectious diseases. Establishment of new corporate collaborations in gene tools, small molecule discovery and protein production, pursuit of larger value initiatives such as joint ventures, broader strategic collaborations and significant government grants. Release of new scientific data in high impact peer review journals, and of major scientific meetings to broaden the appreciation for the breadth and differential advantages of our technology. And continued growth in revenues and preservation of the strength of our balance sheet.

Today I will give you an update on the efforts that we are making in all of these areas, and will reaffirm our confidence in reaching these aggressive but important objectives.

We started 2002 literally as front-page news. An article co-authored by scientists from PHISA and Sangamo was chosen to be the cover story for the January 1 issue of Genes and Development. The publication described the use of our ZFP transcription factors to specifically identify the variant of the gene responsible for fat cell or [difosite] differentiation.

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While the scientific details of the work were very well received, the real value for us, and I think for you, was a rare opportunity for the outside world to get a glimpse of how our gene regulation technology is being used by the pharmaceutical and genomics industry to surgically dissect the role or function of individual genes, and even individual splice variants of individual genes. This very precise control of gene expression simply cannot be achieved by alternative methods such as [anti-sense], dominant negative mutants, liposomes or RNAI.

The importance of these findings, and of the key role played by our technology in establishing this research, was underscored by the journal's inclusion of a very favorable commentary on our contributions. In addition the publication sparked significant interest in the popular media, with coverage and news outlets including the Wall Street Journal, Dow Jones, New York News Day, Writers Help, The Times of London, and the BBC news. I am pleased to say that Sangamo and our ZFP transcription factor technology were prominently mentioned in each of these publications.

In the same vein, since the year, Sangamo scientists have published a total of six scientific papers including two articles I the Journal of Biological Chemistry, one on ZFP design and the other identifying a regulatory element that is important in the up-regulation of VEGF.

Additionally scientists from Sangamo presented at four separate keystone symposia this past quarter, and were invited speakers at the recent AACR meeting in San Francisco. These publications and presentations emphasize our interest in understanding the underlying science involved in both zinc finger proteins that we are working on, and the target genes that we are regulating.

There are also tangible evidence of the extremely high quality science underway at Sangamo, under the direction of Carl Pabo our Chief Scientific Officer.

We also have two new manuscripts submitted for publication, including new VEGF animal studies being conducted at Yale University School of Medicine and from other internal therapeutic programs. Once again these publications will highlight the progress we are making and the significant differential technical advantages of our ZFP transcription factor technology over other therapeutic approaches. Sangamo scientists and collaborators will also present some of this work as well as other new data at the upcoming American Society of Gene Therapy Meeting in Boston in early June. At this meeting we plan to publicly discuss for the first time, data from our ongoing collaboration with Onyx Pharmaceuticals. This partnership combines the therapeutic anti-cancer virus developed by Onyx with our ZFP gene activation technology. The idea here is to give the virus, which selectively kill cancer cells, an added advantage.

Our new therapeutic is designed so that once the virus infects the tumour it will immediately express a ZFP transcription factor capable of activating the endogenous gene encoding [granulasite, macraphase] colony stimulating factor, or GM-CSF. This should lead to the stimulation of an active immune response against the tumour specific antigens and potentiate an anti-tumour antibody response to metastatic cancer. The data we plan to present show that we can stimulate the production of GM-CSF in a wide variety of tumour cells, and in the presence of the replicating adenovirus.

We will also use the ASGT meeting to present progress on our lead ZFP therapeutic, a ZFP transcription factor that activates the endogenous ZF gene. This program which we are developing in collaboration with Edwards Lifesciences is our number one therapeutic priority and we remain on track to file our first IND in the second half of next year.

While both of these ZFP therapeutic programs rely on the activation of endogenous genes inside the patient, we have of course extensively applied our ZFP transcription factors to cell in culture. Our success in significantly increasing the expression of a target gene led to a new commercial opportunity for Sangamo. In January we announced a collaboration with Medarex to use our ZFP gene activation technology to increase the expression of genes including human monochromal antibodies in the [million] production cell line. As I have discussed before, the limited capacities and expense of producing protein pharmaceuticals is a significant issue for the biotechnology industry. And even a modest increase in the expression of a gene and thus its protein, can translate into a significant effect on production efficiency and cost of goods. Medarex will have a non-exclusive right to use these novel cell lines to manufacture antibody products. Under the terms of this agreement Medarex will provide research funding to Sangamo over a two-year period and we will be entitled to milestone payments and royalties on sales of any products produced in these engineered cell lines. Additionally, and perhaps most importantly, this agreement in non-exclusive, and we expect to leverage our progress in this area through addition collaborations later this year.

While we continue to monetize our technology value through strategic partnerships, we have also been working hard to take advantage of other significant sources of non-diluted funding, specifically, Federal Research Grants. Over the past few months we have filed several grant applications for funding to develop ZFP therapeutics for use in wound healing, haemostasis and stem cell differentiation. While we cannot be certain about the outcome of these applications, the proposals serve as a basis for not only potential non-diluted funding, but also as a starting point for future therapeutic corporate partnering discussions.

Finally, during this quarter, the granting of a second UK patent further strengthened our already significant intellectual property portfolio. The patent claims methods for the design and synthesis of ZFP's that can specifically bind to DNA target sequences within any gene. This issuance further reinforces Sangamo's position as the worldwide leader in the design, engineering and use of zinc finger DNA-binding proteins.

Having reviewed some of the events from the first quarter, let me turn briefly to the financial results that we released earlier this afternoon. In the first quarter of this year, our consolidated core net loss was $3.1 million or 13 cents per share, compared with a core net loss of $1.3 million or 6 cents in the first quarter of 2001. Revenues in the 2002 first quarter were $501,000 and consisted primarily of income from Gene Tools collaborations and Therapeutics and Plant Agriculture agreements.

As we have previously noted, and certainly experienced this quarter, we fully expect our revenues to fluctuate significantly from quarter to quarter. However, our balance sheet and our ability to monetize our technology value continue to be a major priority of this company. Cash and cash equivalents at the end of this quarter were $59 million. And, as I indicated on the fourth quarter call, we expect to end this year with revenues in the 7 to $8 million and approximately $50 million in cash.

While the first quarter revenues were modest, we are confident in our ability to grow and operate the company in a fiscally responsible manner. One of the reasons we remain optimistic about achieving these financial objectives is our progress in negotiating broader strategic alliances that would provide significant new funding for Sangamo. I am pleased to say that we are making important progress in this regard and I look forward to providing you with much more detail later this year.

As most of you are aware, the genomics industry continues to evolve. Two years ago our bread and butter came from functional genomics or gene tools collaborations. While we continue to see demand for our technology in this area, as evidenced by the announcement of our 24th Universal GeneTools agreement with Wyeth the pharmaceutical division of American Home Products in January, and inclusion inside the front cover of Merck's new annual report under the heading, `T Merck License Agreements, Arrangement for Cutting Edge Research Technologies'. We are also seeing a very clear evolution toward applying the information garnered from experimental models to therapeutic product discovery. In a recent New York Times article on the dearth of new drugs coming out of the pharmaceutical industry, an Eli Lilly research executive was quoted as saying, the new industry mantra is now `it's the pipeline stupid'.

Well, as many of you have heard me say, I believe Sangamo is uniquely positioned to create and capture value in this evolving environment. Today I would like to focus on one of the most important and near-term applications of our ZFP gene regulation technology in the area of small molecule drug discovery. To that end I would like introduce Eric Rhodes, our Senior Director of Corporate Development. Eric has been the point person on virtually all of our GeneTools agreements, and recently led a thorough analysis of this market opportunity with the consulting firm LEK during which they interviewed over 20 pharmaceutical companies.

Thanks Edward. I'd like to take just a few minutes to speak with you about emerging opportunities that we believe will come to have a significant impact on Sangamo in both the near term as well as the long term. The subject area is one in which you've seen some hints of activity from us in the past. I'm referring to our ability to generate ZFP engineered cell lines for high throughput screening. And the agreements that we put in place with Johnson and Johnson in 2000 and with Pharmacea last fall.

The primary driving forces behind these deals is two-fold. Our ability to build ZFP's that can significantly and specifically activate a therapeutically important gene, and Sangamo's ability to provide freedom to operate on the regulation of a gene that may be covered by gene patent.

Over my past three years at Sangamo I have had literally hundreds of interactions with our gene tools collaborators. Through these relationships we have become increasingly aware of the evolution in genomics research from target discovery to target validation, and now small molecule discovery. Right in the middle of all of this research is the intellectual property on gene patents and the reciprocal need within the industry for so-called work-around solutions to the problem of patents on genes.

Just to briefly explain how this patent situation affects the company's ability to discover and develop new drugs to gene targets, let me offer a brief background. Most of today's new small molecule drugs come from cell-based screening efforts where immense libraries of the millions of small molecule compounds are tested against specialized cells to determine whether or not they can interact with a given gene product. The target may be for instance, a cell surface receptor in iron channel or an enzyme within a cell. The most common way of creating such a screen involves transferring a cloned sequence of DNA encoding the specific gene target into a cell in order to produce large amounts of the target gene and its resulting protein.

In recent years, primarily as a result of the human genome project, there has been a flurry - actually more like an avalanche - of gene sequence patent applications. If one generates the necessary data on the genes, including the exact sequence and data on a function or a utility, one can obtain patent claims that restrict the ability of other parties to physically manipulate a piece of DNA having a given sequence. Therefore, from a legal perspective, only the owner of the cDNA patent may create small molecule screening assays like I described a few moment ago. For every other company interested in this specific gene, this presents a seemingly insurmountable problem. No matter how valid a target may appear to be, no matter how relevant its role in a disease, if a company doesn't have access to the cDNA patents there are very few ways for creating effective screens.

Our recent analysis of this market with LEK confirmed several important issues. The current landscape surrounding gene patents is very crowded and complex. As companies look to move new gene targets into therapeutic development they confront the patent issue at an early stage, and are becoming increasingly frustrated by what they find. Access to new validated gene targets is becoming more restricted, and pharmaceutical companies are finding themselves forced to drop otherwise promising projects for lack of clarity on patents. Over the next five years the problem will be increasing as more and more gene patents issue, driving an even greater need for a work-around solution.

So, how does Sangamo address this need and provide freedom to operate on any gene? We have a very unique and I think clever approach to this problem of overcoming gene patents. Our engineered ZFP transcription factors function by up-regulating the endogenous or naturally existing genes, and don't rely on the cloning of any DNA from the target gene. By turning on the naturally occurring gene that's already inside the cell, we don't infringe cDNA patents. This is not just our point of view, we have an independent legal opinion confirming this position, and it has been reviewed and validated by many of our corporate collaborators.

So with the biology and the lawyers on our side, what is this worth? There are about 85 companies worldwide seriously engaged in high-throughput small molecule screening. Together they currently screen somewhere in the order of 1600 targets per year. Historically approximately 65 percent of these targets were either owned by the company or had no issued patents blocking them. The remaining 35 percent of the targets have some kind of patent position that requires the company to either license the patent or try to find a way to work around the patent. This percentage of restricted targets is projected to increase significantly in the coming five years as more and more gene patents issue.

Further, as more is known about the therapeutic importance of specific genes, licenses to these valuable gene patents will be unavailable and are likely to remain that way as biotech and genomic companies endeavour to develop their own pipeline of drugs. At present virtually all pharmaceutical companies employ internally generated work-around solutions. The most common internal work-around strategies include searching for native cell lines which express large amounts of the gene targets; screening offshore in countries where the patent restrictions may not exist; or manipulating the gene sequence so that it is changed enough to fall outside the patent claims.

All three solutions are inadequate and suffer from significant limitations. Suitable native cell lines are difficult to find and can require a year or more of effort to generate. This approach also has a low success rate and can prove costly as efforts stretch out over longer time periods. Offshore screening requires a large capital outlay and duplication of effort and precious chemical resources. More informed patent writing and international patent cooperation is reducing the number of loopholes that permit this type of offshore activity. And alterations to the native gene that attempt to avoid patents often result in a target that is significantly different from the native protein and may therefore be useless in the screening process to find true hits.

All pharmaceutical companies are faced with these challenges, and most are beginning to look outside their own labs for a solution. Currently only about 2 percent of all work-arounds are sought through external sources. This is due primarily to the perception that there are no truly viable external options that currently exist. We at Sangamo are changing that perception.

The recent research with LEK indicates that the percentage of targets for which external solutions will be sought will exceed 30 percent in the next five years. We believe this percentage could go much higher as our ZFP gene activation platform becomes more widely adopted and researchers become familiar with the approach and come to appreciate the advantages that it provides. Our goal is to make Sangamo the gold standard for small molecule drug discovery in the post genomics era.

In addition to the intellectual property advantages we can provide by virtue of our ability to regulate the endogenous genes, our approach also provide a number of significant technical advantages that researchers find appealing. Among the most compelling biological features is our unique gene activation approach which so closely mimics nature's own regulatory system. Researchers feel that by using a system that so closely resembles the natural cellular environment in which the drugs will need to act, they will be able to select better and more efficacious lead candidates.

The ability to control the absolute level of expression is another element that screeners find useful. Conventional systems tend to overwhelm the cells with gene product and the sensitivity of the assays may be misleading. By having the ability to control the level of gene expression, researchers feel they can choose expression levels that are most appropriate to the biology of the disease being investigated.

With the data we've already generated internally, and examples from our existing collaborations, we are confident in our ability to establish Sangamo as the gold standard. Once we have made companies aware of how our technology platform will open new avenues of discovery that were previously thought close to them, we anticipate a significant year over year growth rate in this area.

What about the economics? Our business strategy calls for the establishment of broad-based, non-exclusive access to our technology for this application. Under our standard terms companies will pay up-front licensing fees for delivery of the engineered ZFP cell line. Then we'll then receive downstream milestone payments based on pre-clinical and clinical development of the small molecule drugs, and royalties on product sales. By structuring these agreements as non-exclusive, our goal is to leverage our successes over and over again.

I hope I have conveyed at least some of the enthusiasm that we have here at Sangamo for this additional therapeutic application of our ZFP technology. We are confident in both the size and breadth of this growing market and find ourselves in a unique position to establish ourselves as the provider of engineered cell lines for high-throughput small molecule screening.

Thanks Eric. Needless to say we are in the process of generating the kind of data we will need to go out and intellectual property in this very important emerging market. We can and have also employed this exact same approach both scientifically and intellectual property freedom to operate, to create cell lines that can be used from monochromal antibody discovery. You may recall we announced a 50/50 collaboration with Medarex along these lines last year.

So, the first quarter of 2002 saw important progress for your company. Over the next several months you should expect to see continued progress on our 2002 objective and I look forward to keeping you apprised. This concludes our prepared remarks, and now we'd like to open it up for questions.

Rushmi Senhar [phonetic] of William Blair.

Hi, I have a couple of questions. First of all regarding revenues for this past quarter, I was just wondering if that included a milestone payment from [Rennison] as well?

Hi Rushmi, how are you? No it did not include any milestone payments from Rennison, that was made up of the research funding from the Therapeutic collaboration with Medarex, from the ongoing Rennison collaboration and from gene tools collaborations.

Okay, do you have any visibility on when you might expect a milestone payment from them?

We did receive a milestone payment from Rennison last year, and we haven't given any new guidance on the Rennison milestones yet this year.

Okay, that's fine. And moving to more detail regarding your collaboration, specifically with Onyx Pharmaceuticals, could you give us a little bit more idea as far as where you are with that if you've already engineered the ZFP that's been delivered to Onyx? What's going on there?

Sure, I think I've given you some color on it in my comments. We've internally been quite successful in engineering a ZFP that can significantly up-regulate the endogenous GMCSF gene. We've tested that in several tumour cell lines and seen significant increases in GMCSF expression. We've also shown that the zinc finger and GMCSF can be increased in the presence of the replicating vector.

Okay. And I know we would still expect a joint go/no go type decision mid year?

Before the end of the year, yes.

Okay. And then also if you can also provide a little bit more detail regarding Medarex? Do you have a little bit more color on that as well?

Okay, so we have two agreements with Medarex, the first one we announced was the agreement I referred to or referenced just at the end of my comments. That's the 50/50 agreement where we're using our ability to up-regulate endogenous GPCR's to create cell lines that they're going to be using for vaccination of mice. And that program is going well, we're still in the process of building those cell lines here, and we hope to deliver engineering cell lines to them in the second half of this year.

Okay, great. And after that point you would expect it to undergo the T12 development program, is that right?

That's both of our hopes, yes.

Okay, thanks.

Ryan Hogg of Dresdner Kleinwort Wasserstein.

Good afternoon, congratulation on a nice quarter. I had a couple of questions in terms of some of the work that you are doing internally on potential ZFP Therapeutic candidates. I know you had about a half dozen angiogenesis targets, some tumor suppressor targets, HIV and HBV targets, how is progress going there?

As a macro example Ryan, I don't think we'll go through every one of them on this call. But I think as you know, as we have really become much, much more efficient at engineering and creating the ZFP transcription factors, we've been able to turn more of our attention internally to proprietary therapeutic targets. So we have, again round numbers, about a half a dozen cardiovascular targets - I wouldn't characterize them all as angiogenesis targets - under development at various levels. We also, as you pointed out, have a couple of cancer targets, probably the most mature of that is the GMCSF Onyx collaboration which I highlighted. And we do have active interest in antivirals, and I will tell you that one of the areas that we have quite a bit of interest in are potentially looking at pathogens, and we've done some work in terms of several grant filings in that area.

One new area that I gave a brief mention to on the prepared remarks is the ability to use our engineered transcription factors to regulate genes in more primitive cells and stem cells and potentially use that to direct the differentiation of stem cells towards more differentiated cells. So that's something that we have a very active interest in and are continuing to look at targets where we thing our approach could have some strong technical advantages.

Okay, thank you.

Matt Dorence [phonetic] of COB Investment Advisors.

Hi guys, two questions for you. The first one for Eric. I believe that you mentioned that currently 2 percent of the work-arounds in APS are being outsourced, is that correct?

That's correct.

Now could you maybe give us a little color on what those -- what the solutions are that people were offering that -- outsourcing what types of solutions they're using?

Really there are only two outsourcing options for folks in pharma right now. Sangamo is one of those, and it has not been really a primary focus of ours until now. And the other group that you will find that has served this area somewhat has been Athersys, they're a small biotech company that has a technology approach very different from ours.

Okay, Athersys, okay. Second question that I have probably for Edward, and you may have mentioned this, I might have missed it. You said -- talked a little bit about the grants that you have filed for. Are those announcable events when you find out if you've received those grants, and when do you expect to know on those?

They are announcable, it would be -- the size of the grants that we filed are -- would be certainly material, so we would announce those if we were to be granted those. And the timelines will be second half of the year.

Okay, all right, great, that's all I have, thank you.

Thanks Matt.

At this time there are no further questions.

We'd like to thank you for joining us and we look forward to speaking with you again when we release our second quarter results. We will be available later today if there any follow-up questions. Thank you very much.