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SGMO > SEC Filings for SGMO > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for SANGAMO BIOSCIENCES INC


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analysis, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "continue," and other words of similar import or the negative of those terms or expressions. Such forward-looking statements are subject to known and unknown risks, uncertainties, estimates and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should read the following discussion and analysis along with the financial statements and notes attached to those statements included elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2011 as filed with the SEC.

Overview

We are a clinical stage biopharmaceutical company focused on the research, development and commercialization of engineered DNA-binding proteins for the development of novel therapeutic strategies for unmet medical needs. Our scientific and business development endeavors currently focus on the engineering of novel zinc finger DNA-binding proteins (ZFPs) for the regulation and modification of genes. Our strategy is to develop highly specific ZFP nucleases (ZFNs) and ZFP transcription factors (ZFP TFs) through early stage clinical testing and strategically partner with biopharmaceutical companies to execute late-stage clinical trials and commercial development.

We have incurred net losses since inception and expect to incur losses in the future as we continue our research and development activities. To date, we have funded our operations primarily through the issuance of equity securities, payments from corporate collaborations and research grants.

For the three months ended September 30, 2012, we incurred a consolidated net loss of $5.8 million, or $0.11 per share, compared to a net loss of $9.6 million, or $0.18 per share, for the same period in 2011. As of September 30, 2012, we had cash, cash equivalents, and marketable securities totaling $76.1 million, compared to $84.5 million as of December 31, 2011. As of September 30, 2012, we had an accumulated deficit of $272.0 million.

Our revenues have consisted primarily of revenues from collaboration and partnership agreements related to therapeutic and non-therapeutic applications of our ZFP technology, including upfront, research reimbursement, royalty and milestone payments, as well as research grant funding. We expect revenues will continue to fluctuate from period to period and there can be no assurance that new collaborations or partner funding will continue beyond their initial terms.

In the development of our ZFP technology platform, we are focusing our resources on higher-value ZFP Therapeutic product development and less on our non-therapeutic applications. We are conducting a Phase 2 and two Phase 1/2 clinical trials to evaluate a ZFP Therapeutic for the treatment of HIV/AIDS. Development of novel therapeutic products is costly and is subject to a lengthy and uncertain regulatory process by the FDA. Our future products will be gene-based therapeutics. Adverse events in both our own clinical program and other programs may have a negative impact on regulatory approval, the willingness of potential commercial partners to enter into agreements and the perception of the public.

In January 2012, we entered into a collaboration and license agreement with Shire AG (Shire), pursuant to which we collaborate with Shire to research, develop and commercialize human therapeutics for hemophilia, Huntington's disease and other monogenic diseases based on our ZFP technology.

Critical Accounting Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the related disclosures, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that there have been no significant changes in our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC.


Table of Contents

Results of Operations

Three months and nine months ended September 30, 2012 and 2011

Revenues



                                                      Three months ended September 30,                               Nine months ended September 30,
                                                  (in thousands, except percentage values)                      (in thousands, except percentage values)
                                              2012               2011           Change         %              2012               2011          Change        %
Revenues:
Collaboration agreements                  $      4,190        $      781       $  3,409        436 %     $        9,665       $    2,876       $ 6,789       236 %
Research grants                                    717             1,076           (359 )      (33 %)             3,058            2,685           373        14 %

Total revenues                            $      4,907        $    1,857       $  3,050        164 %     $       12,723       $    5,571       $ 7,162       129 %

Total revenues consist of revenues from collaboration agreements, strategic partnerships and research grants.

Revenues from our corporate collaboration and strategic partnering agreements were $4.2 million for the three months ended September 30, 2012, compared to $0.8 million in the corresponding period in 2011. The increase in collaboration agreement revenue was primarily due to our collaboration and license agreement with Shire, established in January 2012. Pursuant to the agreement, we received an upfront payment of $13.0 million, which is being amortized on a straight-line basis over the initial six-year research term. During the three months ended September 30, 2012, we recognized revenue of $0.5 million related to the upfront payment from Shire. We also recognized revenues of $2.7 million related to research services performed under the Shire agreement. In addition, royalty revenues from our agreement with Sigma increased in the three months ended September 30, 2012 compared to the same period in 2011. Research grant revenues were $0.7 million for the three months ended September 30, 2012, compared to $1.1 million in the corresponding period in 2011. Research grant revenues decreased primarily due to lower revenues related to the California Institute for Regenerative Medicine (CIRM) grant agreement.

Revenues from our corporate collaboration and strategic partnering agreements were $9.7 million for the nine months ended September 30, 2012, compared to $2.9 million in the corresponding period in 2011. The increase in collaboration agreement revenues was primarily attributable to our agreement with Shire, including $1.4 million in revenues from the amortization of the upfront license fee and $4.7 million related to research services performed under the agreement. In addition, collaboration agreement revenue increased during the nine months ended September 30, 2012 compared to the same period in 2011 due to the achievement of a commercial milestone under the agreement with Sigma. Research grant revenues were $3.1 million for the nine months ended September 30, 2012, compared to $2.7 million in the corresponding period in 2011. The increase in research grant revenues was primarily due to $0.8 million in revenues related to the two final milestones achieved in 2012, pursuant to the agreement with Juvenile Diabetes Research Foundation International, as well as $0.4 million in increased revenues from CHDI Foundation. This was partially offset by decreased revenues from the Michael J. Fox Foundation for Parkinson's Research (MJFF) and CIRM research grants of $0.8 million.

Operating Expenses



                                                     Three months ended September 30,                              Nine months ended September 30,
                                                 (in thousands, except percentage values)                     (in thousands, except percentage values)
                                             2012               2011           Change         %            2012              2011          Change         %
Operating expenses:
Research and development                 $       7,570       $     7,839       $  (269 )       (3 %)    $    22,427       $    24,220     $ (1,793 )       (7 %)
General and administrative                       3,139             3,592          (453 )      (13 %)          9,125            10,807       (1,682 )      (16 %)

Total expenses                           $      10,709       $    11,431       $  (722 )       (6 %)    $    31,552       $    35,027     $ (3,475 )      (10 %)

Research and Development

Research and development expenses consist primarily of salaries and personnel related expenses, including stock-based compensation, laboratory supplies, pre-clinical and clinical studies, manufacturing expenses, allocated facilities expenses, subcontracted research expenses and expenses for trademark registration and technology licenses. We expect to continue to devote substantial resources to research and development in the future, and we expect research and development expenses to increase in the next several years if we are successful in advancing our HIV/AIDS program in the clinic and if we are able to advance our earlier stage ZFP Therapeutic product candidates into late-staged clinical trials. We also expect that expenses related to research performed under our collaboration and license agreement with Shire will increase during the term of the agreement. Pursuant to the terms of the agreement with Shire, future expenses related to research activities related to the collaboration will be reimbursed by Shire, including employee and external research costs related to the programs. The reimbursement funds received from Shire will be recognized as revenue as the costs are incurred and collection is assured.


Table of Contents

Research and development expenses were $7.6 million for the three months ended September 30, 2012, compared to $7.8 million in the corresponding period in 2011. The decrease in research and development expenses was primarily due to a decrease of $1.5 million in clinical and manufacturing costs related to our HIV/AIDS program and terminated SB-509 diabetic neuropathy program, as well as $0.2 million in lower stock-based compensation expenses and lower consulting fees of $0.1 million. These decreases were partially offset by higher external research-stage expenses of $1.0 million, higher lab supply expenses of $0.3 million and higher license fee expense of $0.3 million.

Research and development expenses were $22.4 million for the nine months ended September 30, 2012, compared to $24.2 million in the corresponding period in 2011. The decrease in research and development expenses was primarily due to a decrease of $3.7 million in clinical and manufacturing costs related to our HIV/AIDS program and our terminated SB-509 diabetic neuropathy program, as well as $0.6 million in lower stock-based compensation expenses and $0.4 million in lower consulting fees. These decreases were partially offset by higher external research-stage expenses of $1.4 million, higher employee compensation costs of $0.5 million, higher lab supply expense of $0.5 million and higher license fee expense of $0.4 million.

General and Administrative

General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expenses, professional fees, allocated facilities expenses, patent prosecution expenses and other general corporate expenses. As we pursue commercial development of our therapeutic leads, we expect our business operation to become more complex, which may require us in the future to add personnel and incur additional costs related to the maturity of our business.

General and administrative expenses were $3.1 million for the three month period ended September 30, 2012 and $3.6 million for the corresponding period in 2011. The decrease was primarily the result of lower stock-based compensation expenses of $0.4 million as well as lower expenses related to professional services of $0.1 million.

General and administrative expenses were $9.1 million for the nine month period ended September 30, 2012 and $10.8 million for the corresponding period in 2011. The decrease was primarily the result of lower stock-based compensation expenses of $1.4 million as well as lower expenses related to professional services of $0.8 million, partially offset by higher employee compensation costs of $0.5 million.

Liquidity and Capital Resources

Liquidity

Since inception, we have incurred significant annual net losses and we have funded our operations primarily through the issuance of equity securities, payments from corporate collaborators and strategic partners and research grants. As of September 30, 2012, we had cash, cash equivalents, marketable securities and interest receivable totaling $76.1 million, compared to $84.5 million as of December 31, 2011. The decrease was primarily attributable to capital required to fund our continuing operations, including the advancement of our ZFP Therapeutic programs, and was partially offset by a $13.0 million upfront payment received in February 2012 from Shire pursuant to the collaboration and license agreement entered into on January 31, 2012. Our most significant use of capital pertains to salaries and benefits for our employees and external development expenses, such as manufacturing and clinical trial activity, related to our ZFP Therapeutic programs.

Under the terms of the agreement with Shire, we collaborate to research, develop and commercialize certain gene targets in human therapeutics and diagnostics for hemophilia, Huntington's disease, and other monogenic diseases based on our ZFP technology. Under the agreement with Shire, we received an upfront license fee in the amount of $13.0 million and will receive reimbursement for research services to be performed. We are also 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 gene target, assuming the achievement of all specified milestones, is $213.5 million. The milestone payments for each gene target through the acceptance of an IND or CTA submission total $8.5 million. We are also eligible to receive royalty payments that are a tiered double-digit percentage of net sales of products developed under the collaboration.

Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of U.S. government agencies, U.S. treasury debt securities, corporate debt securities and money market funds. Cash in excess of immediate requirements is invested in accordance with our investment policy with a goal of capital preservation and liquidity.


Table of Contents

Cash Flow

Net cash used in operating activities for the nine months ended September 30, 2012 and 2011 was $8.3 million and $25.9 million, respectively. Net cash used in operating activities for the nine months ended September 30, 2012 primarily reflects the net loss for the period, partially offset by an increase in deferred revenues related to our collaboration agreement with Shire, as well as stock-based compensation and other non-cash expenses included in net loss. Net cash used in operating activities for the nine months ended September 30, 2011 primarily reflects the net loss for the period as well as a decrease in accounts payable and accrued liabilities, partially offset by stock-based compensation and other non-cash expenses included in net loss.

Net cash provided by investing activities was $4.2 million for the nine months ended September 30, 2012. Net cash used by investing activities was $14.9 million for the nine months ended September 30, 2011. Cash flows from investing activities for both periods primarily related to purchases and maturities of investments.

Net cash provided by financing activities for the nine months ended September 30, 2012 and 2011 was $1.0 million and $51.7 million, respectively. Net cash provided by financing activity for the nine month period ended September 30, 2012 was attributable to proceeds from the issuance of common stock upon exercise of stock options. Net cash provided by financing activity for the nine month period ended September 30, 2011 was primarily attributable to an underwritten public offering of the Company's stock completed in April 2011. The Company sold an aggregate of 6,700,000 shares of its common stock at a public offering price of $7.70 per share. The net proceeds to Sangamo from the sale of shares in this offering, after deducting underwriting discounts and commissions and other estimated offering expenses, were approximately $50.2 million.

Operating Capital and Capital Expenditure Requirements

We anticipate continuing to incur operating losses for at least the next several years. While we expect our rate of cash usage to increase in the future, in particular to support our product development endeavors, we believe that the available cash resources as well as funds received from corporate collaborators, strategic partners and research grants will enable us to maintain our currently planned operations at least through the end of 2013. Future capital requirements will be substantial and if our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital to fund our operations, including ZFP Therapeutic development activities, through equity or debt financing. Additional capital may not be available on terms acceptable to us, or at all. If adequate funds are not available, or if the terms of potential funding sources are unfavorable, our business and our ability to develop our technology and our ZFP Therapeutic products would be harmed. Furthermore, any sales of additional equity securities may result in dilutions to our stockholders.

Our future capital requirements will depend on many forward-looking factors, including but are not limited to the following:

the initiation, progress, timing and completion of clinical trials for our product candidates;

the outcome, timing and cost of regulatory approvals;

delays that may be caused by changing regulatory requirements;

the number of product candidates that we pursue;

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

the timing and terms of future in-licensing and out-licensing transactions;

the cost of procuring clinical and commercial supplies of our product candidates;

the extent to which we acquire or invest in businesses, products or technologies;

the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities; and

the costs of litigation.

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