Should Gilead Just Have Tried to Acquire Sangamo Rather Than a Collaboration Pact?

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When it comes to mid-cap and small-cap biotech stocks, there are two ways shareholders get rewarded ahead of or after big drug development news. One is that the company grows and grows into its own monster, and the other way to rewards is that the company gets acquired by a large pharmaceutical or biotech company.

There is a third way that a company can reward its shareholders with a key drug or from its drug development pipeline — this is the category of partnerships and collaborations. Sangamo Therapeutics Inc. (NASDAQ: SGMO) has seen its shares surge after reporting that it entered into a worldwide partnership Kite Pharma. Kite is now a subsidiary of Gilead Sciences Inc. (NASDAQ: GILD) after its multibillion acquisition last year.

There is something that can always come into play years ahead. Sometimes larger pharma and biotechs get to score a huge coup and get to almost steal a drug (or class of drugs). And other times this collaboration keeps a company from overspending for an outfit if the drug flops, because all the open-ended payments never come due.

One issue that investors should consider in the case of the Sangamo and Gilead collaboration is whether Sangamo should have just been acquired by Gilead. The headlines for long-term benefits after a $150 million up-front payment indicate that Sangamo can receive up to $3.01 billion in potential payments down the road. The problem there is that it is aggregated amount, and it is spread out over 10 or more products utilizing Sangamo’s technology.

This might not be the end of line for how much Sangamo can receive over time. The press release noted that Sangamo is also eligible to receive tiered royalties on sales of potential future products under the collaboration. Kite (Gilead) will be responsible for all development, manufacturing and commercialization of products under the collaboration. Kite also will be responsible to pay for agreed on expenses incurred by Sangamo.

All this can add up to an unspecified (and almost impossible to calculate) amount, into even more billions of dollars if the development program turns out to be a home run. It turns out that even after a 19% gain on the news, Sangamo has a market cap of $2.25 billion. If these products work out, some investors might just ask why Gilead did not just acquire Sangamo.

In this particular deal, Kite/Gilead is collaborating with Sangamo’s zinc finger nuclease (ZFN) technology platform for the development of next-generation ex vivo cell therapies. Sangamo’s ZFN technology will be used to modify genes to develop next-generation cell therapies for autologous and allogeneic use in treating different cancers. As far as what that really means, allogeneic cell therapies from healthy donor cells or from renewable stem cells would provide a potential treatment option that can be accessed directly within the oncology infusion center. The end result is a faster infusion time for patients.

It was just on February 13 that Wells Fargo reiterated its Outperform rating with a $30 target for Sangamo. And guess what the analyst said in the report for that valuation:

With potential best-in-class capabilities to do multiple gene edits in a single step, and with significant improvements in editing efficiency to a 99.5% level, we believe that SGMO technology should be of interest to potential large cell therapy partners, including companies like Gilead (GILD) that have recently highlighted the need for gene editing capabilities in pursuit of next-generation cell therapies.