Wednesday, 1 February 2012

Shire and Sangamo Collaboration Makes SGMO An Extremely Strong Buyout Target


Richmond, California, February 1, 2012 - NASDAQ News Reports that Sangamo BioSciences, Inc. (NASDAQ: SGMO), a leader in genome-editing technology, increased 21% on heavy volume on Wednesday as the company signed an extremely lucrative agreement with Shire PLC to collaborate in the development of therapeutics for hemophilia and other monogenic diseases based on Sangamo's zinc finger DNA-binding protein (ZFP) technology.

While the news was received with great excitement, the 21% increase in stock price is not nearly reflective of the true value of the deal as the release did not fully explain its entire potential worth. The full details are available on SGMO's Form 8-K filed today:

"Under the Agreement, Sangamo will receive an upfront license fee of $13.0 million. In addition, for each gene target, Sangamo is eligible to receive milestone payments upon the achievement of specified research, regulatory, clinical development, commercialization and sales milestones. The total amount of potential milestone payments for each of the seven gene targets, assuming the achievement of all specified milestones in the Agreement, is $213.5 million. The milestone payments for each gene target through the acceptance of an IND or CTA submission total $8.5 million. Sangamo will also receive royalty payments that are a tiered double-digit percentage of net sales of products developed under the collaboration."

The company is to get a $213.5M payment for each successful gene target for up to 7 targets, as well as the upfront license fee of $13M. That makes the deal worth a potential $1.5B for the company while the market cap sits just under $220M. If the company was to reach just one milestone per year they would get a yearly revenue of the $213.5M exclusive of any additional revenue from the double digit sales royalty.

If we were to assume a 50% margin on this payment, they would earn $107M a year. Using a Price to Earnings metric of 25 to 1 their enterprise value for this deal alone would be $2.67B. Adding the current cash reserves of $84.5M as well as the $13M upfront payment leads to a market cap of $2.766B or a price per share target of $52.72 if you assign no value to any other parts of their business.

The market currently values this deal at well less than 10% chance of success as the current market price of SGMO is $4.19, with $1.86 of that being their cash per share. Chances are that Shire PLC know a little bit more than the general market. They would not sign this deal if they didn't feel that Sangamo had a realistic shot at reaching those milestones. Something well above 10%.

It's much more likely that the market was unaware of the extent of this deal as the $213.5M payment per gene target milestone reached was not discussed in the press release. It is very unusual to see such a positive detail left out of the news. Usually the Forms are used to disclose bad news that companies do not want to become widely known.

There might be a good reason for this oversight in the press release. If it was wide spread, SGMO would immediately increase to several times its current stock price. Shire is valued at over $18B in market cap and has consistent cash flow. As SGMO nears success with one or more of the gene targets, it would be much more prudent for Shire to buy the company out rather than pay these milestone payments in addition to the royalties. The way the agreement is set up pretty much guarantees SGMO will be bought out at any hint of success. One milestone met would pay out almost the entire company's market cap. A lack of publicity on the $213.5M payout per milestone met would help to ensure SGMO stays undervalued.

Given the current market cap of $220M vs. Shire's potential obligation of $1.5B, it is very easy to see Shire buying the company out for half of their total obligation of $750M, especially since they'd get nearly $100M in cash from SGMO's coiffures in return including the $13M that Shire is to pay. A $750M market cap would make SGMO's worth $14.29 per share.

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