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Sangamo, With a Lock on Genetic Switch Technology, Seeks to Morph Into Drugmaker

Xconomy San Francisco — 

Quite a few biotech entrepreneurs would be happy to trade places with Sangamo Biosciences founder and CEO Ed Lanphier. His company has a hammerlock on the intellectual property for a leading-edge genetic technology that a lot of academic scientists love to write about in top peer-reviewed journals like Nature. Big partners like Dow Chemical and Sigma-Aldrich are shelling out cash to get licenses.

And while Richmond, CA-based Sangamo hasn’t yet proven that it can turn this technology into the basis for a drug company, it is about a year or so away from finding out if it has created a first-of-its-kind treatment for a common complication of diabetes, one of the biggest markets in the pharmaceutical business.

So what do investors think of all this? The stock chart (NASDAQ: SGMO) tells a pretty grim story. Sangamo has been on a steady downhill slide, falling from a 52-week high of $7.45 to $3.92 at last week’s close.

Lanphier, who founded the company 15 years ago, shrugs.

“There are things I know something about, and things I know little about. The stock market is one of the latter,” Lanphier says.

Of course, Lanphier does have some ideas about what’s going on. Many of the general-interest, diversified fund managers on Wall Street just don’t have the same appetite for biotechnology that they did when the Human Genome Project was all over the news. Even the mainstay biotech funds, with PhDs on staff comfortable with researching a company like Sangamo, have turned cautious in the downturn, placing safer bets on drugs and technologies that have already passed their critical experiments. Other companies with reputations for innovative science, like South San Francisco-based Exelixis (NASDAQ: EXEL), have also seen investors’ patience run thin.

Ed Lanphier

Ed Lanphier

So what does Sangamo have that’s interesting, yet hard to pin down with a quantitative value? It’s called zinc finger protein (ZFP) technology. The goal at the company, founded 15 years ago with science from MIT, Johns Hopkins University, Johnson & Johnson, is to develop biologic molecules that can specifically turn on, or turn off, certain genes through a biological mechanism that’s found in everything from yeast to worms to mice to human beings. This technology has a different way of working than RNA interference or viral-based gene therapies, which are more widely publicized for their potential to alter disease at the very specific, fundamental level of DNA or RNA. It may not make as many mainstream headlines, but punch “zinc finger protein” into the NIH’s PubMed database, and you’ll see what I mean about the scientific interest, as more than 12,000 publications pop up.

Sangamo went public in 2000, and while it still hasn’t yet turned zinc finger protein technology into a marketed drug, it has gotten some traction with laboratory uses. Sigma-Aldrich (NASDAQ: SIAL), the giant chemical supplier, has a license to market the Sangamo technology to life sciences and pharmaceutical labs that use them to turn on or off certain genes. Dow Chemical’s agriscience operation uses the technology to alter genetics of plants.

Those deals have brought in $75 million combined to Sangamo over the past five years, Lanphier says. It has given his company enough financial stability that it has never burned more than $25 million in cash in a year’s time, even though it has about 80 employees, and has completed about four mid-stage clinical trials, Lanphier says. In biotech, where companies burn lots of cash for many years before ever hoping to generate revenue from an actual product, that looks downright prudent. The company had $69 million in cash as of its most recent quarterly report, and expects to end the year with $60 million in the bank.

So the technology has some whiz-bang potential for academic labs, and there’s some cash flow from big partners to keep the house financially stable. But where’s the home-run potential for Sangamo’s investors? The company will have to make the transition from being thought of mainly as a technology provider into a drug company, Lanphier says.

The most important opportunity at the moment to do that comes from a drug called SB-509. Sangamo has developed this drug to have a novel mechanism, stimulating the growth of neurons and blood vessels for patients suffering from diabetic neuropathy—a numbing and tingling in the extremities that affects people with Type 2 diabetes. There is no other drug on the market that’s supposed to modify the underlying condition. Type 2 diabetes, in which people lose the ability to control blood sugar, currently effects an estimated 25 million people in the U.S., and its incidence is expected to boom over the next two decades now that an estimated two-thirds of people in the U.S. are overweight or obese.

Sangamo presented some results from a mid-stage trial in June at the American Diabetes Association. The trial, among patients with mild to moderate diabetic neuropathy, showed that the Sangamo drug could improve nerve regrowth and blood vessel growth after doctors took a biopsy from the patient. Patients also showed an improvement in nerve conduction velocity, a key measurement of nerve damage. “Within the diabetic neuropathy community, there’s an incredible amount of enthusiasm,” Lanphier says.

This is the kind of data that doctors will want to see—a connection between what’s happening at the molecular level and an improvement in clinical symptoms of disease. But before anyone jumps for joy, Sangamo needs to generate data from an ongoing study of 150 patients that compares SB-509 directly to a placebo, after six months. That study, enrolling patients with moderate to severe diabetic neuropathy, is expected to provide some answers in the second half of 2011, Lanphier says.

Sangamo hasn’t bet the whole company on diabetic neuropathy. It is expected to release some data from a treatment for amyotrophic lateral sclerosis (Lou Gehrig’s disease) next month at The Society for Neuroscience meeting. Sangamo also has an experimental HIV treatment it is developing with researchers at UCLA and the University of Pennsylvania, supported by a $14.5 million grant from the California Institute of Regenerative Medicine.

Not many on the Street are likely to pay much attention to these programs, even if they show promise at an early stage. More cash and credibility from big-name partners wouldn’t hurt, but that still probably won’t propel Sangamo to the top of the big fund managers’ radar screens. To hear Lanphier, true rewards will come when Sangamo generates the kind of compelling evidence from late-stage clinical trials that shows his company really owns a blockbuster drug. That doesn’t happen overnight, and all he can do for now is keep focused on the fundamentals he thinks it takes to get there.

“I don’t get up in the morning and say ‘Gosh, the stock’s here, what do I do?’ I ask things like ‘Are we working on the right things? Do we have the right people? Do we have the capital to get there?’ That’s day-to-day, hour-to-hour,” Lanphier says. “You don’t go into Sangamo for quarter-to-quarter earnings reports.”

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