e10vq
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-30171
SANGAMO BIOSCIENCES, INC.
(exact name of small business issuer as specified in its charter)
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Delaware
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68-0359556 |
(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.) |
501 Canal Blvd, Suite A100
Richmond, California 94804
(Address of principal executive offices)
(510) 970-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ No o
As of August 8, 2005, 25,415,849 shares of the issuers common stock, par value $0.01 per
share, were outstanding.
INDEX
SANGAMO BIOSCIENCES, INC.
Some statements contained in this report are forward-looking with respect to our operations,
economic performance and financial condition. Statements that are forward-looking in nature should
be read with caution because they involve risks and uncertainties, which are included, for example,
in specific and general discussions about:
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our strategy; |
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sufficiency of our cash resources; |
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product development and commercialization of our products; |
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clinical trials; |
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revenues from existing and new collaborations; |
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our research and development and other expenses; |
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our operational and legal risks; and |
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our plans, objectives, expectations and intentions and any other statements that are not historical facts. |
Various terms and expressions similar to them are intended to identify these cautionary
statements. These terms include: anticipates, believes, continues, could, estimates,
expects, intends, may, plans, seeks, should and will. Actual results may differ
materially from those expressed or implied in those statements. Factors that could cause these
differences include, but are not limited to, those discussed under Risks Related to Our Business
and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Sangamo undertakes no obligation to publicly release any revisions to forward-looking statements to
reflect events or circumstances arising after the date of this report. Readers are cautioned not to
place undue reliance on the forward-looking statements, which speak only as of the date of this
Quarterly Report.
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SANGAMO BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2005 |
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2004 (1) |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
7,708 |
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$ |
8,626 |
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Marketable securities |
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18,099 |
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24,634 |
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Interest receivable |
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227 |
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260 |
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Accounts receivable, net |
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227 |
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569 |
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Prepaid expenses |
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671 |
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287 |
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Total current assets |
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26,932 |
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34,376 |
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Property and equipment, net |
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349 |
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318 |
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Other assets |
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66 |
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31 |
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Total assets |
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$ |
27,347 |
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$ |
34,725 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
462 |
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$ |
906 |
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Accrued compensation and employee benefits |
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475 |
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657 |
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Deferred revenue |
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479 |
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785 |
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Total current liabilities |
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1,416 |
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2,348 |
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Stockholders equity: |
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Common stock, $0.01 par value; 80,000,000
shares authorized, 25,414,943 and 25,271,059
shares issued and outstanding at June 30,
2005 and December 31, 2004, respectively |
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129,906 |
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129,482 |
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Accumulated deficit |
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(104,048 |
) |
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(97,115 |
) |
Accumulated other comprehensive income |
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73 |
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10 |
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Total stockholders equity |
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25,931 |
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32,377 |
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Total liabilities and stockholders equity |
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$ |
27,347 |
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$ |
34,725 |
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(1) |
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Amounts derived from Audited Consolidated Statements dated December 31, 2004 filed as a part
of Form 10-K. |
See accompanying notes.
3
SANGAMO BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenues: |
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Collaboration agreements |
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$ |
353 |
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$ |
34 |
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$ |
533 |
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$ |
768 |
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Federal government research grants |
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65 |
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98 |
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141 |
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175 |
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Total revenues |
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418 |
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132 |
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674 |
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943 |
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Operating expenses: |
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Research and development
(excludes $85 and $161 of stock-based
compensation expense for the three
months ended June 30, 2005 and 2004,
respectively, and $185 and $343 of
stock-based compensation expense for
the six months ended June 30, 2005 and
2004, respectively) |
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2,726 |
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2,268 |
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5,321 |
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5,079 |
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General and administrative (excludes
$1 and $0 of stock-based compensation
expense for the six months ended June
30, 2005 and 2004, respectively) |
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1,063 |
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1,100 |
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2,203 |
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2,097 |
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Stock-based compensation expense |
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85 |
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161 |
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186 |
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343 |
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Total operating expenses |
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3,874 |
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3,529 |
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7,710 |
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7,519 |
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Loss from operations |
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(3,456 |
) |
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(3,397 |
) |
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(7,036 |
) |
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(6,576 |
) |
Interest and other income, net |
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76 |
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135 |
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103 |
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372 |
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Net loss |
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$ |
(3,380 |
) |
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$ |
(3,262 |
) |
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$ |
(6,933 |
) |
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$ |
(6,204 |
) |
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Basic and diluted net loss per share |
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$ |
(0.13 |
) |
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$ |
(0.13 |
) |
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$ |
(0.27 |
) |
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$ |
(0.25 |
) |
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Shares used in computing basic and
diluted net loss per share |
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25,391 |
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25,128 |
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25,364 |
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25,052 |
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See accompanying notes.
4
SANGAMO BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended |
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June 30, |
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2005 |
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2004 |
Operating Activities: |
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Net loss |
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$ |
(6,933 |
) |
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$ |
(6,204 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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149 |
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383 |
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Amortization of premium / discount on investment, net |
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191 |
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571 |
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Realized loss on investment |
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41 |
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7 |
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Issuance of common stock in connection with license agreement |
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234 |
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Stock-based compensation |
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186 |
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343 |
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Changes in operating assets and liabilities: |
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Interest receivable |
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33 |
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78 |
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Accounts receivable |
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342 |
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324 |
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Prepaid expenses and other assets |
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(419 |
) |
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(351 |
) |
Accounts payable and accrued liabilities |
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(444 |
) |
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(293 |
) |
Accrued compensation and employee benefits |
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(182 |
) |
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(168 |
) |
Deferred revenue |
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(306 |
) |
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(68 |
) |
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Net cash used in operating activities |
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(7,342 |
) |
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(5,144 |
) |
Investing Activities: |
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Purchases of investments |
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(8,852 |
) |
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(9,081 |
) |
Maturities of investments |
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15,218 |
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11,824 |
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Purchases of property and equipment |
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(181 |
) |
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(10 |
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Net cash provided by investing activities |
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6,185 |
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2,733 |
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Financing Activities: |
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Proceeds from issuance of common stock |
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239 |
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392 |
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Net cash provided by financing activities |
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239 |
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|
392 |
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Net decrease in cash and cash equivalents |
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(918 |
) |
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(2,019 |
) |
Cash and cash equivalents, beginning of period |
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8,626 |
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9,803 |
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Cash and cash equivalents, end of period |
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$ |
7,708 |
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$ |
7,784 |
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See accompanying notes.
5
SANGAMO BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2005
NOTE 1-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Sangamo Biosciences,
Inc. (Sangamo or the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. The
condensed consolidated financial statements include the accounts of Sangamo and its wholly-owned
subsidiary, Gendaq Limited, after elimination of all material intercompany balances and
transactions. Operating results for the six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2005. These
financial statements should be read in conjunction with the financial statements and footnotes
thereto for the year ended December 31, 2004, included in Sangamos Form 10-K as filed with the
SEC.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and the accompanying notes. Actual results could differ from those
estimates.
FOREIGN CURRENCY TRANSLATION
The Company records foreign currency transactions at the exchange rate prevailing at the date
of the transaction. Monetary assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the exchange rates in effect at the balance sheet date. All currency
translation adjustments arising from foreign currency transactions are recorded through profit and
loss.
REVENUE RECOGNITION
In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, revenue from
research activities made under strategic partnering agreements is recognized as the services are
provided when there is persuasive evidence that an arrangement exists, delivery has occurred, the
price is fixed or determinable, and collectibility is reasonably assured. Amounts received under
such agreements are deferred until the above criteria are met and the research services are
performed. Sangamos federal government research grants are typically multi-year agreements and
provide for the reimbursement of qualified expenses for research and development as defined under
the terms of the grant agreement. Revenue under grant agreements is recognized when the related
research expenses are incurred. Grant reimbursements are typically received on a quarterly basis
and are subject to the issuing agencys right of audit.
Sangamo recognizes revenue from its Universal GeneTools® agreements when ZFP TFs are delivered
to the Universal GeneTools® collaborators, persuasive evidence of an agreement exists, there are no
unfulfilled obligations, the price is fixed and determinable, and collectibility is reasonably
assured. Generally, Sangamo receives partial payments from these collaborations prior to the
delivery of ZFP TFs and the recognition of these revenues is deferred until the ZFP TFs are
delivered, the risk of ownership has passed to the collaborator and all performance obligations
have been satisfied. Upfront or signature payments received upon the signing of a Universal
GeneTools® agreement are generally recognized ratably over the applicable period of the agreement
or as ZFP TFs are delivered.
Milestone payments under research, partnering, or licensing agreements are recognized as
revenue upon the achievement of mutually agreed upon milestones, provided that (i) the milestone
event is substantive and its achievement is not reasonably assured at the inception of the
agreement, and (ii) there are no further significant performance obligations associated with the
milestone payment.
6
In accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables, revenue arrangements entered into after June 15, 2003, that include
multiple deliverables, are divided into separate units of accounting if the deliverables meet
certain criteria, including whether the fair value of the delivered items can be determined and
whether there is evidence of fair value of the undelivered items. In addition, the consideration is
allocated among the separate units of accounting based on their fair values, and the applicable
revenue recognition criterion is considered separately for each of the separate units of
accounting.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for Company-sponsored as well as
collaborative research and development activities. These costs include direct and research-related
overhead expenses, which include salaries and other personnel-related expenses, facility costs,
supplies and depreciation of facilities and laboratory equipment, as well as the cost of funding
research at universities and other research institutions, and are expensed as incurred. Costs to
acquire technologies that are utilized in research and development and that have no alternative
future use are expensed as incurred.
STOCK-BASED COMPENSATION
Sangamo accounts for employee and director stock options using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and has adopted the disclosure-only alternative of FAS No. 123, Accounting
for Stock-Based Compensation. Stock options granted to non-employees, including Scientific
Advisory Board Members, are accounted for in accordance with Emerging Issues Task Force Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services, which requires the value of such options to be
measured and compensation expenses to be recorded as they vest over a performance period. The fair
value of such options is determined using the Black-Scholes model. The following table illustrates,
pursuant to FAS No. 123, as amended by FAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, the effect on net loss and related net loss per share had
compensation cost for stock-based employee compensation plans been determined based upon the fair
value method prescribed under FAS No. 123:
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss: |
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As reported |
|
$ |
(3,380 |
) |
|
$ |
(3,262 |
) |
|
$ |
(6,933 |
) |
|
$ |
(6,204 |
) |
Add: stock-based employee
compensation included in reported
net loss |
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|
|
|
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|
1 |
|
Less: stock-based employee
compensation expense determined
under the fair value based method |
|
|
(371 |
) |
|
|
(865 |
) |
|
|
(579 |
) |
|
|
(1,049 |
) |
|
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|
|
|
|
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|
|
|
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|
Pro forma net loss |
|
$ |
(3,751 |
) |
|
$ |
(4,127 |
) |
|
$ |
(7,512 |
) |
|
$ |
(7,252 |
) |
|
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Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Pro forma |
|
$ |
(0.15 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.29 |
) |
|
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|
The above pro forma effects may not be representative of that to be expected in future
periods, due to subsequent events including additional grants and related vesting. The fair values
for all options granted in the three-month and six-month periods ended June 30, 2005 and 2004 were
estimated at the date of grant using the Black-Scholes method with the following weighted-average
assumptions:
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|
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|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Risk-free interest rate |
|
|
3.7 |
% |
|
|
3.9 |
% |
|
|
3.8 |
% |
|
|
3.7 |
% |
Expected life of option |
|
5.0 years |
|
|
5.0 years |
|
|
4.5 years |
|
|
5.0 years |
|
Expected dividend yield of stock |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
7
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share Based Payment (SFAS 123R). This statement is a revision to SFAS 123, supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. SFAS 123R requires a public entity to expense the cost of employee services received
in exchange for an award of equity instruments. SFAS 123R also provides guidance on valuing and
expensing these awards, as well as disclosure requirements of these equity arrangements. SFAS 123R
is effective for the fiscal years beginning after June 15, 2005. The Company will be required to
adopt SFAS 123R at the beginning of the first quarter of 2006. SFAS 123R permits public companies
to choose between the following two adoption methods:
|
1. |
|
A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of SFAS 123R that remain unvested
on the effective date; or |
|
|
2. |
|
A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption. |
As permitted by SFAS 123, the Company currently accounts for share-based payments to employees
using APB Opinion No. 25s intrinsic value method and, as such, the Company generally recognizes no
compensation cost for employee stock options. The impact of the adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, valuation of employee stock options under SFAS 123R is similar to SFAS 123, with
minor exceptions. The impact on the results of operations and earnings per share had the Company
adopted SFAS 123 is described in the stock-based compensation section above. Accordingly, the
adoption of SFAS 123Rs fair value method will have a significant impact on the Companys results
of operations, although it will have no impact on the Companys overall financial position. SFAS
123R also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company has not yet completed the analysis of the ultimate
impact that this new pronouncement will have on the results of operations, nor the method of
adoption for this new standard.
NOTE 2-BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the weighted-average number of
shares of common stock outstanding during the period. Weighted-average shares outstanding used to
calculate the reported net loss per common share was equal to shares used to compute basic and
diluted net loss per common share.
NOTE 3-COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other
comprehensive loss includes certain changes in stockholders equity that are excluded from net
loss, which includes unrealized gains and losses on our available-for-sale securities and foreign
currency translation adjustments. Comprehensive loss and its components are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss |
|
$ |
(3,380 |
) |
|
$ |
(3,262 |
) |
|
$ |
(6,933 |
) |
|
$ |
(6,204 |
) |
Changes in
unrealized gain
(loss) on
securities
available-for-sale |
|
|
5 |
|
|
|
(159 |
) |
|
|
63 |
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(3,375 |
) |
|
$ |
(3,421 |
) |
|
$ |
(6,870 |
) |
|
$ |
(6,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NOTE 4-MAJOR CUSTOMERS, PARTNERSHIPS AND STRATEGIC ALLIANCES
Strategic Partnership with Edwards Lifesciences Corporation
In January 2000, we announced a therapeutic product development collaboration with Edwards
Lifesciences Corporation. Under the agreement, we have licensed to Edwards, on a worldwide,
exclusive basis, ZFP Therapeutics for use in the activation of VEGFs and VEGF receptors in ischemic
cardiovascular and vascular diseases. Edwards purchased a $5.0 million note that converted,
together with accrued interest, into 333,333 shares of common stock at the time of our initial
public offering (IPO) at the IPO price. In March 2000, Edwards purchased a $7.5 million convertible
note in exchange for a right of first refusal for three years to negotiate a license for additional
ZFP Therapeutics in cardiovascular and peripheral vascular diseases. That right of first refusal
was not exercised and terminated in March 2003. Together with accrued interest, this note converted
into common stock at the time of our initial public offering at the IPO price. Through 2001, we
received $2 million in research funding from Edwards and a $1.4 million milestone payment for
delivery of a lead ZFP Therapeutic product candidate. In November 2002, Edwards signed an amendment
to the original agreement and agreed to provide up to $3.5 million in research and development
funding, including $2.95 million for research and development activities performed in 2002 and
2003. The filing of the IND for PAD in 2004, and the achievement of other research-related
milestones in 2003, triggered a total of $1.0 million in milestone payments from Edwards
Lifesciences in the first quarter of 2004. There were no revenues attributable to milestone
achievement and collaborative research and development performed under the Edwards agreements for
both the three-month and six-month periods ended June 30, 3005. Revenues attributable to milestone
achievement and collaborative research and development performed under the Edwards agreements were
approximately $8,000 for the three-month period ended June 30, 2004. Revenues attributable to
milestone achievement and collaborative research and development performed under the Edwards
agreements were approximately $608,000 for the six-month period ended June 30, 2004, representing
approximately sixty-four percent of total revenues earned by Sangamo for that period.
Our License Agreement with Edwards Lifesciences provides Edwards with exclusive rights for
the activation of VEGF and VEGF receptors for the treatment and prevention of ischemic
cardiovascular and vascular disease in humans. We have retained all rights to use our technology
for all therapeutic applications of VEGF activation outside of ischemic cardiovascular and vascular
diseases, including use in wound healing and neurological disorders. Edwards has stated that their
rights may include diabetic neuropathy. We believe diabetic neuropathy is a neurological disease
and not an ischemic vascular disease and therefore is outside the scope of the Edwards License.
The Company and Edwards are in discussions regarding this issue.
In the future, Sangamo may receive milestone payments and royalties under this agreement. We
have received $2.5 million in milestone payments to date and we could receive $27.0 million in
additional milestone payments under the agreement if all future milestones are met for the first
product developed under the agreement. Any subsequent products developed under the agreement may
generate up to $15.0 million in milestone payments each. We would also receive royalties on any
sales of products generated under the agreement and these royalty obligations would continue until
the expiration of the last-to-expire patent covering products developed under the agreement on a
country-by-country basis. Based on currently issued patents, these royalty obligations would last
through January 12, 2019. The development of any products is subject to numerous risks and no
assurance can be given that any products will successfully be developed under this agreement. See
Risks Related to our Business Our gene regulation technology is relatively new, and if we are
unable to use this technology in all our intended applications, it would limit our revenue
opportunities.
Under the Sangamo-Edwards agreement, we were responsible for advancing product candidates into
preclinical animal testing. Edwards had responsibility for preclinical development, regulatory
affairs, clinical development, and the sales and marketing of ZFP Therapeutic products developed
under the agreement. Sangamo may receive milestone payments in connection with the development and
commercialization of the first product under this agreement and may also receive royalties on
product sales. As part of the November 2002 amendment to our original agreement, Edwards
Lifesciences also entered into a joint collaboration with us to evaluate ZFP TFs for the regulation
of a second therapeutic gene target, phospholamban (PLN), for the treatment of congestive heart
failure. Under the amended agreement, Sangamo granted Edwards a right of first refusal to Sangamos
ZFP TFs for the regulation of PLN. This right of first refusal terminated on June 30, 2004. On
August 14, 2003 Edwards and Sangamo entered into a Third Amendment to the original license
agreement. Under this amendment, Sangamo received payment for research and development milestones
associated with the VEGF and PLN programs.
There is no assurance that the companies will achieve the development and commercialization
milestones anticipated in these agreements. Edwards has the right to terminate the agreement at any
time upon 90 days written notice. In the event of termination, we retain all payments previously
received as well as the right to develop and commercialize all related products.
9
Enabling Technology Agreements for Pharmaceutical Protein Production
In January 2005, we announced a research collaboration agreement with Pfizer Inc to develop
enhanced cell lines for protein pharmaceutical production. Under the terms of the agreement, Pfizer
is funding research at Sangamo and Sangamo will provide our proprietary ZFP technology for Pfizer
to assess its feasibility for use in mammalian cell-based protein production. We will generate
novel cell lines and vector systems for enhanced protein production as well as novel technology for
rapid creation of new production cell lines. Revenues attributable to collaborative research and
development performed under the Pfizer agreement were $298,000 for the three-month period ended
June 30, 2005, representing 71% of total revenues earned by Sangamo during that period. Revenues
attributable to collaborative research and development performed under the Pfizer agreement were
$423,000 for the six-month period ended June 30, 2005, representing 63% of total revenues earned by
Sangamo during that period. As of June 30, 2005 accounts receivable from Pfizer represented 66% of
our total accounts receivable balance.
Enabling Technology Agreements for Regenerative Medicine
In September 2004, Sangamo announced that it had entered into an agreement with LifeScan,
Inc., a Johnson & Johnson company. The agreement provides LifeScan with Sangamos ZFP TFs for use
in a program to develop therapeutic cell lines as a potential treatment for diabetes. In December
2004, this agreement was expanded to include additional targets important in diabetes. The
agreements represented Sangamos first collaboration in the field of regenerative medicine. During
the three-month period ended June 30, 2005, revenues attributable to collaborative research and
development performed under the LifeScan agreement were approximately $55,000, representing 13% of
total revenues earned by Sangamo during that period. Revenues attributable to collaborative
research and development performed under the LifeScan agreement were $110,000 for the six-month
period ended June 30, 2005, representing 16% of total revenues earned by Sangamo during that
period.
10
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion in Managements 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. Actual results could differ materially from those set forth in
such forward-looking statements as a result of, but not limited to, the Risks Related to Our
Business described below. You should read the following discussion and analysis along with the
Selected Financial Data and the financial statements and notes attached to those statements
included elsewhere in this report.
Overview
We were incorporated in June 1995. From our inception through June 30, 2005, our activities
related primarily to establishing and operating a biotechnology research and development
organization and developing relationships with our corporate collaborators. 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. 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, borrowings, payments from federal government research grants and from corporate
collaborators and strategic partners. As of June 30, 2005, we had an accumulated deficit of $104
million.
Our revenues have consisted primarily of revenues from our corporate partners for ZFP TFs,
contractual payments from strategic partners for research programs and research milestones, and
Federal government 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 fundings will
continue beyond their initial terms.
During 2004, we began placing more emphasis on higher-value therapeutic product development
and related strategic partnerships and less emphasis on our Universal GeneTools® collaborations. We
believe this shift in emphasis has the potential to increase the return on investment to our
stockholders by allocating capital resources to higher value, therapeutic product development
activities. At the same time, it may reduce our revenues over the next several years and it
increases our financial risk by increasing expenses associated with product development. During the
first quarter of 2005, we filed an Investigational New Drug (IND) application with the U.S. Food
and Drug Administration (FDA) and have now initiated our own Phase I clinical trial of a ZFP
Therapeutic in patients with diabetic neuropathy. Development of novel therapeutic products is
costly and is subject to a lengthy and uncertain regulatory process by the FDA. Our future products
are gene-based therapeutics. Adverse events in both our own clinical program and other programs in
gene therapy may have a negative impact on regulatory approval, the willingness of potential
commercial partners to enter into agreements and the perception of the public.
Research and development expenses consist primarily of salaries and related personnel
expenses, laboratory supplies, allocated facilities costs, subcontracted research expenses, and
expenses for patent prosecution, trademark registration and technology licenses. Research and
development costs incurred in connection with collaborator-funded activities are expensed as
incurred. We believe that continued investment in research and development is critical to attaining
our strategic objectives. We expect these expenses will increase significantly as we focus
increasingly on development of ZFP Therapeutics. The Company is also developing zinc finger
nucleases (ZFNs) for therapeutic gene correction and therapeutic gene modification as a treatment
and possible cure for certain monogenic and infectious diseases. Additionally, in order to develop
ZFP TFs as commercially relevant therapeutics, we expect to expend additional resources for
expertise in the manufacturing, regulatory affairs and clinical research aspects of biotherapeutic
development.
General and administrative expenses consist primarily of salaries and related personnel
expenses for executive, finance and administrative personnel, professional fees, allocated
facilities costs and other general corporate expenses. As we pursue commercial development of our
therapeutic leads we expect the business aspects of the Company to become more complex. We may be
required in the future to add personnel and incur additional costs related to the maturity of our
business.
11
Enabling Technology Programs
We began marketing our Enabling Technologies to the pharmaceutical and biotechnology industry
in 1998. Our Enabling Technology Agreements are based upon the delivery of an engineered ZFP TF
that is capable of regulating the expression of a gene for which it is specifically designed and
targeted. These agreements typically involve non-exclusive rights to use one or more ZFP TFs for
internal research purposes or limited commercial applications.
As the emphasis of our pharmaceutical research and development has shifted away from target
validation to the downstream bottlenecks of the drug discovery process, we have refocused our
Enabling Technology products and services on two principal areas: supplying our partners with our
ZFP technology to enhance the production of pharmaceutical proteins, and providing ZFP TFs or
ZFP-engineered cells which over-express a gene of interest for use in development of products for
regenerative medicine or in the generation of cell lines for high-throughput compound screening. In
the latter case, typically, pharmaceutical company researchers will use a cDNA encoding the drug
target of interest to create these cell-based drug screens. However, if a third party holds a
patent covering that cDNA, the pharmaceutical company might be prevented from using it for this
purpose. Use of the ZFP-engineered cell-based system allows our partners to screen against drug
targets whose gene and/or cDNA sequence is covered by competitor intellectual property, without
infringing that intellectual property.
Plant Agriculture
Sangamo scientists and collaborators have shown that ZFP TFs can be used to regulate the
expression of endogenous genes in plants with similar efficacy as has been shown in various
mammalian cells and organisms. The ability to identify and subsequently regulate gene expression
with engineered ZFP TFs may lead to the creation of new plants that increase crop yields; lower
production costs; are more resistant to herbicides, pesticides, and plant pathogens; and permit the
development of branded agricultural products with unique nutritional and processing
characteristics. In addition, ZFNs can be used to facilitate the efficient and reproducible
production of transgenic plants. To commercialize ZFP TFs and ZFNs in agricultural biotechnology,
we intend to seek strategic relationships with corporate partners having capabilities in the
research, development, and commercialization of agricultural products.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Sangamo believes the following
critical accounting policies have significant effect in the preparation of our consolidated
financial statements.
Revenue Recognition
In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, revenue from
research activities made under strategic partnering agreements is recognized as the services are
provided when there is persuasive evidence that an arrangement exists, delivery has occurred, the
price is fixed or determinable, and collectibility is reasonably assured. Amounts received under
such agreements are deferred until the above criteria are met and the research services are
performed. Sangamos federal government research grants are typically multi-year agreements and
provide for the reimbursement of qualified expenses for research and development as defined under
the terms of the grant agreement. Revenue under grant agreements is recognized when the related
research expenses are incurred. Grant reimbursements are typically received on a quarterly basis
and are subject to the issuing agencys right of audit.
Sangamo recognizes revenue from its Universal GeneTools® agreements when ZFP TFs are delivered
to the Universal GeneTools® collaborators, persuasive evidence of an agreement exists, there are no
unfulfilled obligations, the price is fixed and determinable, and collectibility is reasonably
assured. Generally, Sangamo receives partial payments from these collaborations prior to the
delivery of ZFP TFs and the recognition of these revenues is deferred until the ZFP TFs are
delivered, the risk of ownership has passed to the collaborator and all performance obligations
have been satisfied. Upfront or signature payments received upon the signing of a Universal
GeneTools® agreement are generally recognized ratably over the applicable period of the agreement
or as ZFP TFs are delivered.
Milestone payments under research, partnering, or licensing agreements are recognized as
revenue upon the achievement of mutually agreed upon milestones, provided that (i) the milestone
event is substantive and its achievement is not reasonably assured at the inception of the
agreement, and (ii) there are no further significant performance obligations associated with the
milestone payment.
12
In accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables, revenue arrangements entered into after June 15, 2003, that include
multiple deliverables, are divided into separate units of accounting if the deliverables meet
certain criteria, including whether the fair value of the delivered items can be determined and
whether there is evidence of fair value of the undelivered items. In addition, the consideration is
allocated among the separate units of accounting based on their fair values, and the applicable
revenue recognition criterion is considered separately for each of the separate units of
accounting.
Stock-Based Compensation
Sangamo accounts for employee and director stock options using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and has adopted the disclosure-only alternative of Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). Stock
options granted to non-employees, including Scientific Advisory Board Members, are accounted for in
accordance with Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, which requires the value of such options to be measured and compensation expense to be
recorded as they vest over a performance period. The fair value of such options is determined using
the Black-Scholes model. Pursuant to FAS 123, as amended by FAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure, the effect on net loss and related net loss per share
has been calculated, had compensation cost for stock-based compensation plans been determined based
upon the fair value method prescribed under FAS 123 (See Note 1 Organization and Summary of
Significant Accounting Policies).
13
RESULTS OF OPERATIONS
Three months ended June 30, 2005 and 2004
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
(in thousands, except percentage values) |
|
(in thousands, except percentage values) |
|
|
2005 |
|
2004 |
|
Change |
|
% |
|
2005 |
|
2004 |
|
Change |
|
% |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration agreements |
|
$ |
353 |
|
|
$ |
34 |
|
|
$ |
319 |
|
|
|
938 |
% |
|
$ |
533 |
|
|
$ |
768 |
|
|
$ |
(235 |
) |
|
|
(31 |
)% |
Federal government research grants |
|
|
65 |
|
|
|
98 |
|
|
|
(33 |
) |
|
|
(34 |
)% |
|
|
141 |
|
|
|
175 |
|
|
|
(34 |
) |
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
418 |
|
|
$ |
132 |
|
|
$ |
286 |
|
|
|
216 |
% |
|
$ |
674 |
|
|
$ |
943 |
|
|
$ |
(269 |
) |
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are increasing the emphasis of our research and development activities on ZFP Therapeutics
and are moving away from our historic emphasis on Enabling Technology agreements. Over the next
several years, this change in resource allocation will reduce our revenues.
Total revenues increased to $418,000 for the three months ended June 30, 2005 from $132,000 in
the corresponding period in 2004. The increase of $286,000 for the three months ended June 30,
2005 was principally due to revenue in connection with the Companys Enabling Technology Agreement
with Pfizer, Inc of $298,000. The decrease for the six months ended June 30, 2005 of $269,000 was
principally due to a decrease in revenue from Edwards Lifesciences of $608,000 related primarily to
a $600,000 milestone payment in the quarter ended March 31, 2004. This was partially offset by
revenue in connection with the Companys Enabling Technology Agreement with Pfizer, Inc. of
$423,000. We anticipate continued revenues from collaboration agreements through the end of 2005,
and we have applied for, and plan to continue to apply for, federal government research grants in
the future to support the development of applications of our technology platform. Although we have
negotiated collaboration agreements and received federal government research grants in the past, we
cannot assure you that these efforts will be successful in the future.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
(in thousands, except percentage values) |
|
(in thousands, except percentage values) |
|
|
2005 |
|
2004 |
|
Change |
|
% |
|
2005 |
|
2004 |
|
Change |
|
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
2,726 |
|
|
$ |
2,268 |
|
|
$ |
458 |
|
|
|
20 |
% |
|
$ |
5,321 |
|
|
$ |
5,079 |
|
|
$ |
242 |
|
|
|
5 |
% |
General and administrative |
|
|
1,063 |
|
|
|
1,100 |
|
|
|
(37 |
) |
|
|
(3) |
% |
|
|
2,203 |
|
|
|
2,097 |
|
|
|
106 |
|
|
|
5 |
% |
Stock-based compensation |
|
|
85 |
|
|
|
161 |
|
|
|
(76 |
) |
|
|
(47 |
)% |
|
|
186 |
|
|
|
343 |
|
|
|
(157 |
) |
|
|
(46 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
3,874 |
|
|
$ |
3,529 |
|
|
$ |
345 |
|
|
|
10 |
% |
|
$ |
7,710 |
|
|
$ |
7,519 |
|
|
$ |
191 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
Research and development expenses have consisted primarily of salaries and related personnel
expenses, laboratory supplies, allocated facilities costs, subcontracted research expenses, and
expenses for patent prosecution, trademark registration and technology licenses. We expect to
continue to devote substantial resources to research and development in the future and expect
research and development expenses to increase in the next several years if we are successful in
advancing our ZFP Therapeutic product candidates into clinical trials. To the extent we collaborate
with others with respect to clinical trials, increases in research and development expenses may be
reduced or avoided.
Research and development expenses for the second quarter of 2005 increased to $2.7 million compared
to $2.3 million for the second quarter of 2004. The increase in research and development expenses
for the three months ended June 30, 2005 was primarily attributable to increased expenses in
connection with manufacturing and development efforts of $301,000, primarily associated with our
diabetic neuropathy program, and increased expenses related to patent prosecution and trademark
licenses of approximately $176,000. Research and development expenses for the six months ended
June 30, 2005 increased to $5.3 million compared to $5.1 million in the comparable period of 2004.
The increase in research and development expenses for the six-month period ended June 30, 2005 of
$242,000 was primarily attributable to increased expenses in connection with manufacturing and
development efforts of
14
$448,000, primarily associated with our diabetic neuropathy program, and increased expenses
associated with laboratory supplies of $211,000. This was partially offset by decreased licensing
expenses of approximately $198,000, primarily attributable to the acquisition of certain assets and
intellectual property rights from Stell, Inc. in the first quarter of 2004, and decreased
facility-related expenses of $142,000.
General and administrative
General and administrative expenses consist primarily of salaries and related personnel
expenses for executive, finance and administrative personnel, professional fees, allocated
facilities costs and other general corporate expenses. As we pursue commercial development of our
therapeutic leads, we expect the business aspects of the Company to become more complex. We may be
required in the future to add personnel and incur additional costs related to the maturity of our
business.
General and administrative expenses were $1.1 million in the three months ended June 30, 2005 and
2004, respectively. General and administrative expenses were $2.2 million in the six-month period
ended June 30, 2005 compared to $2.1 million during the same period of 2004. The increase during
the six-month period ended June 30, 2005 is primarily related to higher expenses associated with
professional services in connection with compliance with Section 404 of the Sarbanes-Oxley Act of
2002.
Stock-based compensation
Sangamo accounts for employee and director stock options using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and has adopted the disclosure-only alternative of Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). Stock
options granted to non-employees, including Scientific Advisory Board Members, are accounted for in
accordance with Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, which requires the value of such options to be measured and compensation expense to be
recorded as they vest over a performance period. The fair value of such options is determined using
the Black-Scholes model.
Stock-based compensation expense for the quarter-ended June 30, 2005 was $85,000 compared to
$161,000 for the comparable quarter in 2004. The decrease was primarily attributable to lower
non-employee stock-based compensation expense. This was partially offset by higher amortization
expense related to deferred compensation for stock options issued prior to the Companys initial
public offering in 2000. Stock-based compensation expense for the six-month period ended June 30,
2005 was $186,000 compared to $343,000 for the comparable period in 2004. The decrease was
attributable to higher non-employee stock-based compensation expense partially offset by lower
amortization expense related to deferred compensation for stock options issued prior to the
Companys initial public offering in 2000.
Interest income, net
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Three months ended June 30, |
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Six months ended June 30, |
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(in thousands, except percentage values) |
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(in thousands, except percentage values) |
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2005 |
|
2004 |
|
Change |
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% |
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2005 |
|
2004 |
|
Change |
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% |
Interest and other income, net
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$ |
76 |
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|
$ |
135 |
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|
$ |
(59 |
) |
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(44 |
)% |
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$ |
103 |
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$ |
372 |
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$ |
(269 |
) |
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(72 |
)% |
Interest and other income, net, decreased to $76,000 for the three months ended June 30, 2005 from
$135,000 in the corresponding period in 2004. The decrease of $59,000 was primarily related to a
larger foreign currency translation loss of approximately $102,000 during the second quarter-ended
June 30, 2005. Interest and other income, net, decreased to $103,000 for the six months ended June
30, 2005 from $372,000 in the corresponding period in 2004. The decrease of $269,000 primarily
resulted from a foreign currency translation loss of approximately $221,000 during the six-months
ended June 30, 2005 versus a foreign currency translation gain of approximately $49,000 during the
six months ended June 30, 2004.
15
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale of equity
securities, payments from corporate collaborators, federal government research grants and financing
activities such as a bank line of credit. As of June 30, 2005, we had cash, cash equivalents,
investments and interest receivable totaling $26.0 million.
Net cash used for operating activities was $7.3 million for the six months ended June 30,
2005. Net cash used consisted primarily of the net loss for the three-month period of $6.9 million
and a net change of $976,000 in operating assets and liabilities. This was partially offset by
amortization of premium / discount on investment of $191,000, other stock-based compensation
charges of $186,000, depreciation of $149,000 and realized losses on investments of $41,000. For
the six months ended June 30, 2004, net cash used for operating activities was $5.1 million. Net
cash used consisted primarily of the net loss of $6.2 million and a net change of $478,000 in
operating assets and liabilities. This was partially offset by amortization of premium / discount
on investment of $571,000, depreciation of $383,000, other stock-based compensation charges of
$342,000 and the issuance of common stock in connection with a license agreement of $234,000.
Net cash provided by investing activities was $6.2 million for the six months ended June 30,
2005 and was primarily comprised of proceeds associated with maturities of investments of $15.2
million partially offset by cash used to purchase investments of $8.9 million. For the six months
ended June 30, 2004, net cash provided by investing activities was $2.7 and was primarily comprised
of proceeds associated with maturities of investments of $11.8 million partially offset by cash
used to purchase investments of $9.1 million.
Net cash provided by financing activities for the six-month periods ended June 30, 2005 and
2004 was $239,000 and $392,000, respectively. Proceeds from both six month periods were solely
related to the issuance of common stock.
While we expect our rate of cash usage to increase in the future, in particular, in support of
our product development endeavors, we believe that the available cash resources, funds received
from corporate collaborators, strategic partners and federal government research grants will be
sufficient to finance our operations at least through 2006.
16
RISKS FACTORS
RISKS RELATED TO OUR BUSINESS
We have increased the focus of our research and development programs on human therapeutics, which
may increase operating expenditures and the uncertainty of our business. We are increasing the
emphasis and focus of our research and development activities on ZFP Therapeutics and have fewer
resources invested in our Enabling Technology programs. In the short term, this change in resource
allocation may reduce our revenues and increase operating expenditures due to larger financial
outlays to fund preclinical studies, manufacturing, and clinical research. The transition will also
increase the visibility of our lead therapeutic programs and the potential impact on the stock
price of news releases relating to these programs.
We are conducting proprietary research to discover ZFP Therapeutic product candidates. These
programs increase our financial risk of product failure, may significantly increase our research
expenditures, and may involve conflicts with our collaborators and strategic partners. Our
proprietary research programs consist of research which is funded solely by the Company and where
the Company retains exclusive rights to therapeutic products generated by the research. This is in
contrast to certain of our research programs that may be funded by corporate partners and in which
we may share rights to any resulting products. We have conducted proprietary research since
inception, however, in the past year, our strategy has shifted toward placing greater emphasis on
proprietary research and therapeutic development and we expect this trend will continue in 2005 as
we initiate our first human clinical trial. Conducting proprietary research programs may not
generate corresponding revenue and may create conflicts with our collaborators or strategic
partners. The implementation of this strategy will involve substantially greater business risks,
the expenditure of significantly greater funds than our historic research activities and will
require substantial commitments of time from our management and staff.
In addition, disagreements with our collaborators or strategic partners could develop over rights
to our intellectual property with respect to our proprietary research activities. Any conflict with
our collaborators or strategic partners could reduce our ability to enter into future collaboration
or strategic partnering agreements and negatively impact our relationship with existing
collaborators and strategic partners, which could reduce our revenue and delay or terminate our
product development.
Our partner, Edwards Lifesciences, has initiated a Phase I clinical testing in our lead ZFP
Therapeutic program, and ZFP Therapeutics have never before been tested in humans. If our lead ZFP
Therapeutic fails its initial safety study, it could reduce our ability to attract new investors
and corporate partners. Edwards Lifesciences filed an investigational new drug (IND) application
with the U.S. Food and Drug Administration (FDA) on February 10, 2004 and initiated a Phase I
clinical trial in humans in August, 2004. The Phase I study of our lead therapeutic will be a
highly visible test of the Companys ZFP Therapeutic approach. Since we have increased our focus on
ZFP Therapeutic research and development, investors will increasingly assess the value of the
Companys technology based on the continued progress of ZFP Therapeutic products into and through
clinical trials. If the initial safety study of our lead therapeutic was halted due to safety
concerns, this would negatively affect the value of the Companys stock.
Our collaborators may control aspects of our clinical trials, which could result in delays and
other obstacles in the commercialization of our proposed products. For some programs we are
dependent on third party collaborators to design and conduct our clinical trials. As a result, we
may not be able to conduct these programs in the manner or on the time schedule we currently
contemplate. In addition, if any of these collaborative partners withdraw support for our programs
or proposed products or otherwise impair their development, our business could be negatively
affected.
We have limited experience in conducting clinical trials, and we may encounter unanticipated
toxicity or adverse events or fail to demonstrate the efficacy or safety that cause us to delay,
suspend or terminate the development of our ZFP Therapeutics. Our ZFP Therapeutics may fail to show
the desired safety and efficacy in initial clinical trials. Even if we successfully complete Phase
I trials, the FDA will require additional Phase II and Phase III clinical testing which involves
significantly greater resources, commitments and expertise that may require us to enter into a
collaborative relationship with a pharmaceutical company that would assume responsibility for
late-stage development and commercialization.
Our potential therapeutic products are subject to a lengthy and uncertain regulatory process, and
if these potential products are not approved, we will not be able to commercialize those products.
The FDA must approve any human therapeutic products before they can be marketed in the United
States. The process for receiving regulatory approval is long and uncertain, and a potential
product may not withstand the rigors of testing under the regulatory approval processes.
Before commencing clinical trials in humans we, or our commercial partner, must submit an
Investigational New Drug (IND) application to the FDA. The FDA has 30 days to comment on the IND.
If the FDA does not comment on the IND we, or our commercial partner, may begin clinical trials.
17
Clinical trials are subject to oversight by institutional review boards and the FDA. In addition,
our proposed clinical studies will require review from the Recombinant DNA Advisory Committee, or
RAC, which is the advisory board to the National Institutes of Health, or NIH, focusing on clinical
trials involving gene transfer. We will typically submit a proposed clinical protocol and other
product-related information to the RAC three to six months prior to the expected IND filing date.
Clinical trials:
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must be conducted in conformance with the FDAs good clinical practices and other applicable regulations; |
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must meet requirements for institutional review board oversight; |
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must follow Institutional Biosafety Committee (IBC) and NIH RAC guidelines; |
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must meet requirements for informed consent; |
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are subject to continuing FDA oversight; |
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may require large numbers of test subjects; and |
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May be suspended by our commercial partner, the FDA, or us at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable health risks or if the FDA
finds deficiencies in the IND or the conduct of these trials. |
Clinical trials are lengthy and are typically conducted in three sequential phases, but the phases
may overlap or be combined. Each trial must be reviewed and approved by an independent ethics
committee or institutional review board before it can begin. Phase I usually involves the initial
introduction of the investigational drug into healthy volunteers or patients to evaluate certain
factors, including its safety, dosage tolerance and, if possible, to gain an early indication of
its effectiveness. Phase II usually involves trials in a limited patient population to evaluate
dosage tolerance and appropriate dosage, identify possible adverse effects and safety risks, and
evaluate preliminarily the efficacy of the drug for specific indications. Phase III trials usually
further evaluate clinical efficacy and test further for safety by using the drug in its final form
in an expanded patient population. Later clinical trials may fail to support the findings of
earlier trials, which would delay, limit or prevent regulatory approvals.
While we have stated our intention to file IND applications during the next several years, this is
only a statement of intent, and we may not be able to do so because the associated product
candidates may not meet the necessary preclinical requirements. In addition, there can be no
assurance that, once filed, an IND application will result in the actual initiation of clinical
trials.
We may not be able to find acceptable patients or may experience delays in enrolling patients for
our clinical trials. The FDA or we may suspend our clinical trials at any time if either believes
that we are exposing the subjects participating in these trials to unacceptable health risks. The
FDA or institutional review boards and/or institutional biosafety committees at the medical
institutions and healthcare facilities where we sponsor clinical trials may suspend any trial
indefinitely if they find deficiencies in the conduct of these trials. The FDA and institutional
review boards may also require large numbers of patients, and the FDA may require that we repeat a
clinical trial.
The results of early Phase I trials are based on a small number of patients over a short period of
time, and our success may not be indicative of results in a large number of patients or of
long-term efficacy. The results in early phases of clinical testing are based upon limited numbers
of patients and a limited follow-up period. For example, the results from the Phase I clinical
trial, of our ZFP Therapeutic, SB-509 product, are expected to be available in the first half of
2006. The primary end point of the trial is clinical and laboratory safety, however we expect to be
able to collect some preliminary efficacy data. Typically, our Phase I clinical trials for
indications of safety enroll less than 50 patients. We anticipate that our Phase II clinical trials
for efficacy would typically enroll approximately 100 patients. Actual results with more data
points may not confirm favorable results from our earlier stage trials. A number of companies in
the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage
clinical trials even after achieving promising results in earlier stage clinical trials. In
addition, we do not yet know if early results will have a lasting effect. If a larger population of
patients does not experience positive results, or if these results do not have a lasting effect,
our products may not receive approval from the FDA. Failure to demonstrate the safety and
effectiveness of our gene based products in larger patient populations could have a material
adverse effect on our business that would cause our stock price to decline significantly.
18
We cannot predict whether or when we will obtain regulatory approval to commercialize our product
candidates, therefore we cannot predict the timing of any future revenue from these product
candidates. We cannot commercialize any of our product candidates to generate revenue until the
appropriate regulatory authorities have reviewed and approved the applications for the product
candidates. We cannot assure you that the regulatory agencies will complete their review processes
in a timely manner or that we will obtain regulatory approval for any product candidate that we, or
our collaborators, develop. Satisfaction of regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product and requires the expenditure of
substantial resources. Regulatory approval processes outside the United States include all of the
risks associated with the FDA approval process. In addition, we may experience delays or rejections
based upon additional government regulation from future legislation or administrative action or
changes in FDA policy during the period of product development, clinical trials and FDA regulatory
review.
Our gene regulation and gene modification technology is relatively new, and if we are unable to use
this technology in all our intended applications, it would limit our revenue opportunities. Our
technology involves a relatively new approach to gene regulation and gene modification. Although we
have generated ZFP TFs for hundreds of gene sequences, we have not created ZFP TFs for all gene
sequences and may not be able do so, which could limit the usefulness of our technology. In
addition, while we have demonstrated the function of engineered ZFP TFs in mammalian cell culture,
yeast, insects, plants, and animals, we have not yet done so in humans, and the failure to do so
could restrict our ability to develop commercially viable products. If we, and our collaborators or
strategic partners, are unable to extend our results to new commercially important genes,
experimental animal models, and human clinical studies, we may be unable to use our technology in
all its intended applications. Also, delivery of ZFP TFs and ZFNs into cells and organisms,
including humans, in these and other environments is limited by a number of technical hurdles,
which we may be unable to surmount. This is a particular challenge for therapeutic applications of
our technology that will require the use of gene transfer systems that may not be effective for the
delivery of our ZFP TFs or ZFNs in a particular therapeutic application.
The expected value and utility of our ZFP TFs and ZFNs is in part based on our belief that the
targeted or specific regulation of gene expression and targeted gene modification may enable us to
develop a new therapeutic approach as well as to help scientists better understand the role of
human, animal, and other genes in disease and to aid their efforts in drug discovery and
development. We also believe that the regulation of gene expression and targeted gene insertion
will have utility in agricultural applications. There is only a limited understanding of the role
of specific genes in all these fields. Life sciences companies have developed or commercialized
only a few products in any of these fields based on results from genomic research or the ability to
regulate gene expression. We, our collaborators, or our strategic partners may not be able to use
our technology to identify and validate drug targets or to develop commercial products in the
intended markets.
We are currently engaged in the research and development of a new application of our technology
platform: ZFP-mediated gene modification using ZFNs to effect either gene correction or gene
disruption. Using this technique, Sangamo scientists have engineered gene-specific ZFPs to cut DNA
at a specific site within a target gene, and to then to either correct the adjacent sequences with
newly synthesized DNA copied from an introduced DNA template, gene correction, or to rejoin the two
ends of the break which frequently results in the disruption of the genes function. In so doing,
we are attempting to correct an abnormal or disease-related mutation or DNA sequence or to
disrupt a gene that is involved in disease pathology. ZFP-mediated gene modification is at an early
stage of development. Our scientists have shown ZFP-mediated gene modification to work in isolated
cells; however, a significant amount of additional research will be needed before this technique
can be evaluated in animals or plants and subsequently tested for applications in human healthcare
and plant agriculture.
We may be unable to license gene transfer technologies that we may need to commercialize our ZFP TF
technology. In order to regulate a gene in a cell, the ZFP TF or ZFN must be efficiently delivered
to the cell. We have licensed certain gene transfer technologies for use with our Enabling
Technologies, which are ZFP TFs and ZFNs used in pharmaceutical discovery research and protein
production. We are evaluating these systems and other technologies which may need to be used in the
delivery of ZFP TFs or ZFNs into cells for in vitro and in vivo applications, including ZFP
Therapeutics. However, we may not be able to license the gene transfer technologies required to
develop and commercialize our ZFP Therapeutics. We have not developed our own gene transfer
technologies, and we rely on our ability to enter into license agreements to provide us with rights
to the necessary gene transfer technology. The inability to obtain a license to use gene transfer
technologies with entities which own such technology on reasonable commercial terms, if at all,
could delay or prevent the preclinical evaluation, clinical testing, and/or commercialization of
our therapeutic product candidates.
We do not currently have the infrastructure or capability to manufacture therapeutic products on a
commercial scale. In order for us to commercialize these products directly, we would need to
develop, or obtain through outsourcing arrangements, the capability to execute all of these
functions. If we are unable to develop or otherwise obtain the requisite preclinical, clinical,
regulatory, manufacturing, marketing, and sales capabilities, we would be unable to directly
commercialize our therapeutics products which would limit our future growth.
19
Even if our technology proves to be effective, it still may not lead to commercially viable
products. Even if our collaborators or strategic partners are successful in using our ZFP
technology in drug discovery, protein production, therapeutic development, or plant agriculture,
they may not be able to commercialize the resulting products or may decide to use other methods
competitive with our technology. To date, no company has received marketing approval or has
developed or commercialized any therapeutic or agricultural products based on our technology. The
failure of our technology to provide safe, effective, useful, or commercially viable approaches to
the discovery and development of these products would significantly limit our business and future
growth and would adversely affect our value.
Even if our product development efforts are successful and even if the requisite regulatory
approvals are obtained, our ZFP Therapeutics may not gain market acceptance among physicians,
patients, healthcare payers and the medical community. A number of additional factors may limit the
market acceptance of products including the following:
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rate of adoption by healthcare practitioners; |
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rate of a products acceptance by the target population; |
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timing of market entry relative to competitive products; |
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availability of alternative therapies; |
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price of our product relative to alternative therapies; |
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availability of third-party reimbursement; |
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extent of marketing efforts by us and third-party distributors or agents retained by us; and |
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side effects or unfavorable publicity concerning our products or similar products. |
Adverse events in the field of gene therapy may negatively impact regulatory approval or public
perception of our potential products. Our potential therapeutic products are delivered to patients
as gene-based drugs, or gene therapy. The clinical and commercial success of our potential products
will depend in part on public acceptance of the use of gene therapy for the prevention or treatment
of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and,
consequently, our products may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy in general could result in greater government regulation
and stricter labeling requirements of gene therapy products, including any of our products, and
could cause a decrease in the demand for any products we may develop.
Our stock price is also influenced by public perception. Reports of serious adverse events in a
retroviral gene transfer trial for infants with X-linked severe combined immunodeficiency (X-linked
SCID) in France and subsequent FDA actions putting related trials on hold in the United States had
a significant negative impact on the public perception and stock price of certain companies
involved in gene therapy. Stock prices of these companies declined whether or not the specific
company was involved with retroviral gene transfer for the treatment of infants with SCID, or
whether the specific companys clinical trials were placed on hold in connection with these events.
Other potential adverse events in the field of gene therapy may occur in the future that could
result in greater governmental regulation of our potential products and potential regulatory delays
relating to the testing or approval of our potential products.
We are at the development phase of operations and may not succeed or become profitable. We began
operations in 1995 and are in the early phases of ZFP Therapeutic product development. We have
incurred significant losses and our net losses to date and our revenues have been generated from
Enabling Technology agreements, strategic partners, and federal government research grants. Since
2004, we have placed more emphasis on higher-value therapeutic product development and related
strategic partnerships. This shift in emphasis has the potential to increase the return on
investment to our stockholders by allocating capital resources to higher value, therapeutic product
development activities. At the same time, it increases our financial risk by increasing expenses
associated with product development. In addition, the preclinical or clinical failure of any single
product may have a significant effect on the actual or perceived value of our shares. Our business
is subject to all of the risks inherent in the development of a new technology, which include the
need to:
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attract and retain qualified scientific and technical staff and management, particularly scientific
staff with expertise to develop our early-stage technology into therapeutic products; |
20
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obtain sufficient capital to support the expense of developing our technology platform and
developing, testing, and commercializing products; |
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develop a market for our products; |
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successfully transition from a company with a research focus to a company capable of supporting
commercial activities; and |
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attract and enter into research collaborations with research and academic institutions and scientists. |
Commercialization of our technologies will depend, in part, on strategic partnering with other
companies. If we are not able to find strategic partners in the future or our strategic partners do
not diligently pursue product development efforts, we may not be able to develop our technologies
or products, which could slow our growth and decrease our value. We expect to rely, to some extent,
on our strategic partners to provide funding in support of our research and to perform independent
research and preclinical and clinical testing. Our technology is broad based, and we do not
currently possess the resources necessary to fully develop and commercialize potential products
that may result from our technologies or the resources or capabilities to complete the lengthy
marketing approval processes that may be required for the products. Therefore, we plan to rely on
strategic partnerships to help us develop and commercialize ZFP Therapeutic products. If those
partners are unable or unwilling to advance our programs, or if they do not diligently pursue
product approval, this may slow our progress and defer our revenues. Our partners may sublicense or
abandon development programs or we may have disagreements with our partners, which would cause
associated product development to slow or cease. There can be no assurance that we will be able to
establish additional strategic collaborations for ZFP Therapeutic product development. We may
require significant time to secure additional collaborations or strategic partners because we need
to effectively market the benefits of our technology to these future collaborators and strategic
partners, which use the time and efforts of research and development personnel and our management.
Further, each collaboration or strategic partnering arrangement will involve the negotiation of
terms that may be unique to each collaborator or strategic partner. These business development
efforts may not result in a collaboration or strategic partnership.
The loss of our current or any future strategic partnering agreements would not only delay or
terminate the potential development or commercialization of products we may derive from our
technologies, but it may also delay or terminate our ability to test ZFP TFs for specific genes. If
any strategic partner fails to conduct the collaborative activities successfully and in a timely
manner, the preclinical or clinical development or commercialization of the affected product
candidates or research programs could be delayed or terminated.
Our existing strategic partnering agreements are based on the achievement of milestones. Under the
strategic partnering agreements, we expect to receive revenue for the research and development of a
ZFP Therapeutic product and based on achievement of specific milestones. Achieving these milestones
will depend, in part, on the efforts of our strategic partner as well as our own. In contrast, our
historic Enabling Technology agreements only pay us to supply ZFP TFs for the collaborators
independent use, rather than for future results of the collaborators efforts. If we, or any
strategic partner, fail to meet specific milestones, then the strategic partnership may be
terminated, which could decrease our revenues.
21
If our competitors develop, acquire, or market technologies or products that are more effective
than ours, this would reduce or eliminate our commercial opportunity. Any products that we or our
collaborators or strategic partners develop by using our ZFP technology platform will enter into
highly competitive markets. Even if we are able to generate ZFP Therapeutics that are safe and
effective for their intended use, competing technologies may prove to be more effective or less
expensive, which, to the extent these competing technologies achieve market acceptance, will limit
our revenue opportunities. In some cases, competing technologies have proven to be satisfactorily
effective and less expensive, as has been the case with technologies competitive with our Enabling
Technology®. The effectiveness of these competing products has reduced the revenues generated by
our Enabling Technology. Competing technologies may include other methods of regulating gene
expression or modifying genes. ZFP TFs and ZFNs have broad application in the life sciences and
compete with a broad array of new technologies and approaches being applied to genetic research by
many companies. Competing proprietary technologies with our product development focus include:
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small molecule drugs |
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monoclonal antibodies |
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recombinant proteins |
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antisense |
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siRNA approaches |
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For our Enabling Technology Applications: |
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For target validation: antisense, siRNA |
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For protein production: gene amplification, meganucleases, insulator technology |
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For high throughput screening: cDNA, naturally occurring cell lines, gene amplification |
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In addition to possessing competing technologies, our competitors include biotechnology companies with: |
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substantially greater capital resources than ours; |
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larger research and development staffs and facilities than ours; |
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greater experience in product development and in obtaining regulatory
approvals and patent protection; and |
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These organizations also compete with us to: |
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attract qualified personnel; |
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attract parties for acquisitions, joint ventures or other collaborations; and |
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license the proprietary technologies of academic and research institutions
that are competitive with our technology, which may preclude us from
pursuing similar opportunities. |
Accordingly, our competitors may succeed in obtaining patent protection or commercializing products
before us. In addition, any products that we develop may compete with existing products or services
that are well established in the marketplace.
22
Our collaborators or strategic partners may decide to adopt alternative technologies or may be
unable to develop commercially viable products with our technology, which would negatively impact
our revenues and our strategy to develop these products. Our collaborators or strategic partners
may adopt alternative technologies, which could decrease the marketability of ZFP technology.
Additionally, because many of our collaborators or strategic partners are likely to be working on
more than one development project, they could choose to shift their resources to projects other
than those they are working on with us. If they do so, that would delay our ability to test our
technology and would delay or terminate the development of potential products based on our ZFP
technology. Further, our collaborators and strategic partners may elect not to develop products
arising out of our collaborative and strategic partnering arrangements or to devote sufficient
resources to the development, manufacturing, marketing, or sale of these products. If any of these
events occur, we may not be able to develop our technologies or commercialize our products.
We anticipate continuing to incur operating losses for the next several years. If material losses
continue for a significant period, we may be unable to continue our operations. We have generated
operating losses since we began operations in 1995. The extent of our future losses and the timing
of profitability are uncertain, and we expect to incur losses for the foreseeable future. We have
been engaged in developing our ZFP TF technology since inception, which has and will continue to
require significant research and development expenditures. To date, we have generated our revenues
from Universal GeneTools® collaboration agreements, strategic partnering agreements, and federal
government research grants. As of June 30, 2005, we had an accumulated deficit of approximately
$104 million. We expect to incur losses for the foreseeable future. These losses will increase as
we expand and extend our research and development activities into human therapeutic product
development. If the time required to generate significant product revenues and achieve
profitability is longer than we currently anticipate, we may not be able to sustain our operations.
We may be unable to raise additional capital, which would harm our ability to develop our
technology and products. We have incurred significant operating losses and negative operating cash
flows since inception and have not achieved profitability. We expect capital outlays and operating
expenditures to increase over the next several years as we expand our infrastructure and research
and ZFP Therapeutic product development activities. While we believe our financial resources will
be adequate to sustain our current operations at least through 2006, we may seek additional sources
of capital through equity or debt financing. In addition, as we focus our efforts on proprietary
human therapeutics, we will need to seek FDA approval of potential products, a process that could
cost in excess of $100 million per product. We cannot be certain that we will be able to obtain
financing on terms acceptable to us, or at all. If adequate funds are not available, our business
and our ability to develop our technology and ZFP Therapeutic products would be harmed.
Our stock price has been volatile and may continue to be volatile, which could result in
substantial losses for investors. During the past two years, our common stock price has fluctuated
significantly. Volatility in our common stock could cause stockholders to incur substantial
losses. An active public market for our common stock may not be sustained, and the market price of
our common stock may continue to be highly volatile. The market price of our common stock has
fluctuated significantly in response to the following factors, some of which are beyond our
control:
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changes in market valuations of similar companies; |
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deviations in our results of operations from the guidance given by us or estimates of securities analysts; |
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announcements by us or our competitors of new or enhanced products, technologies or services or
significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; |
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regulatory developments; |
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additions or departures of key personnel; |
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announcements by us or our partners providing updates on the progress or development status of ZFP
Therapeutics; |
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future sales of our common stock or other securities by the company,
management or directors, liquidation of institutional funds that
comprised large holdings of Sangamo stock; and |
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decreases in our cash balances. |
23
Our common stock is thinly traded, which means large transactions in our common stock may be
difficult to conduct in a short time frame. We have a low volume of daily trades in our common
stock on the Nasdaq National Market. For example, the average daily trading volume in our common
stock on the Nasdaq National Market over the ten-day trading period prior to August 9, 2005 was
less than 54,000 shares per day. Any large transactions in our common stock may be difficult to
conduct and may cause significant fluctuations in the price of our common stock.
Failure to attract, retain, and motivate skilled personnel and cultivate key academic
collaborations will delay our product development programs and our research and development
efforts. We are a small company with 54 full-time employees as of July 29, 2005, and our success
depends on our continued ability to attract, retain, and motivate highly qualified management and
scientific personnel and our ability to develop and maintain important relationships with leading
research and academic institutions and scientists. Competition for personnel and academic and other
research collaborations is intense. The success of our technology development programs depends on
our ability to attract and retain highly trained personnel and we have experienced a rate of
employee turnover that we believe is typical of emerging biotechnology companies. If we lose the
services of personnel with the necessary skills, it could significantly impede the achievement of
our research and development objectives. We are not presently aware of any plans of specific
employees to retire or otherwise leave the company. If we fail to negotiate additional acceptable
collaborations with academic and other research institutions and scientists, or if our existing
collaborations are unsuccessful, our ZFP Therapeutic development programs may be delayed or may not
succeed.
If conflicts arise between us and our collaborators, strategic partners, scientific advisors, or
directors, these parties may act in their self-interest, which may limit our ability to implement
our strategies. If conflicts arise between our corporate or academic collaborators, strategic
partners, or scientific advisors or directors and us, the other party may act in its self-interest,
which may limit our ability to implement our strategies. Some of our academic collaborators and
strategic partners are conducting multiple product development efforts within each area that is the
subject of the collaboration with us. Our collaborators or strategic partners, however, may
develop, either alone or with others, products in related fields that are competitive with the
products or potential products that are the subject of these collaborations. Competing products,
either developed by the collaborators or strategic partners or to which the collaborators or
strategic partners have rights, may result in the withdrawal of partner support for our product
candidates.
Some of our collaborators or strategic partners could also become competitors in the future. Our
collaborators or strategic partners could develop competing products, preclude us from entering
into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate
their agreements with us prematurely, or fail to devote sufficient resources to the development and
commercialization of products. Any of these developments could harm our product development
efforts.
Because it is difficult and costly to protect our proprietary rights, and third parties have filed
patent applications that are similar to ours, we cannot ensure the proprietary protection of our
technologies and products. Our commercial success will depend in part on obtaining patent
protection of our technology and successfully defending any of our patents which may be challenged.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and can
involve complex legal and factual questions. No consistent policy regarding the breadth of claims
allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in patents we own or license.
We are a party to various license agreements that give us rights under specified patents and patent
applications. Our current licenses, as our future licenses frequently will, contain performance
obligations. If we fail to meet those obligations, the licenses could be terminated. If we are
unable to continue to license these technologies on commercially reasonable terms, or at all, we
may be forced to delay or terminate our product development and research activities. With respect
to our present and any future sublicenses, since our rights derive from those granted to our
sublicensor, we are subject to the risk that our sublicensor may fail to perform its obligations
under the master license or fail to inform us of useful improvements in, or additions to, the
underlying intellectual property owned by the original licensor.
24
We are unable to exercise the same degree of control over intellectual property that we license
from third parties as we exercise over our internally developed intellectual property. We generally
do not control the prosecution of patent applications that we license from third parties;
therefore, the patent applications may not be prosecuted in a timely manner.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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we or our licensors were the first to make the inventions covered by each of our pending patent applications; |
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we or our licensors were the first to file patent applications for these inventions; |
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the patents of others will not have an adverse effect on our ability to do business; |
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others will not independently develop similar or alternative technologies or reverse engineer any of our
products, processes or technologies; |
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any of our pending patent applications will result in issued patents; |
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any patents issued or licensed to us or our collaborators or strategic partners will provide a basis for
commercially viable products or will provide us with any competitive advantages; |
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any patents issued or licensed to us will not be challenged and invalidated by third parties; or |
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we will develop additional products, processes or technologies that are patentable. |
Others have filed and in the future are likely to file patent applications that are similar to
ours. We are aware that there are academic groups and other companies that are attempting to
develop technology that is based on the use of zinc finger and other DNA binding proteins, and that
these groups and companies have filed patent applications. Several patents have been issued,
although we have no current plans to use the associated inventions. If these or other patents
issue, it is possible that the holder of any patent or patents granted on these applications may
bring an infringement action against our collaborators, strategic partners, or us claiming damages
and seeking to enjoin commercial activities relating to the affected products and processes. The
costs of litigating the claim could be substantial. Moreover, we cannot predict whether we, our
collaborators, or strategic partners would prevail in any actions. In addition, if the relevant
patent claims were upheld as valid and enforceable and our products or processes were found to
infringe the patent or patents, we could be prevented from making, using, or selling the relevant
product or process unless we could obtain a license or were able to design around the patent
claims. We can give no assurance that such a license would be available on commercially reasonable
terms, or at all, or that we would be able to successfully design around the relevant patent
claims. There may be significant litigation in the genomics industry regarding patent and other
intellectual property rights, which could subject us to litigation. If we become involved in
litigation, it could consume a substantial portion of our managerial and financial resources.
We cannot guarantee that third parties will not challenge our intellectual property. One of our
licensed patents, European Patent No. 0 682 699, entitled Functional Domains in Flavobacterium
okeanokoites Restriction Endonuclease was granted on May 7, 2003 and forms the basis of Regional
Phase patents in France, Germany, Great Britain, Ireland and Switzerland. The granted claims of the
patent cover technologies used in our programs in targeted recombination and gene correction. On
February 6, 2004, a Notice of Opposition to the European Patent was filed on behalf of Cellectis, a
French company. We cannot predict the outcome of these Opposition proceedings. If the claims of
this European patent were to be invalidated, it would not affect our ability to practice our
targeted recombination and gene correction programs in Europe. It would, however, limit our ability
to exclude potential competitors in the field of targeted recombination and gene correction in
Europe.
Moreover, we also hold licenses to six US patents to the technology covered by the opposed European
patent, and hold licenses to related applications pending in Canada and Japan. Accordingly, any
effects of the opposition, up to and including invalidation of the European patent, would be
restricted to Europe and would have little, if any, material adverse effect on our business.
We rely on trade secrets to protect technology where we believe patent protection is not
appropriate or obtainable. Trade secrets, however, are difficult to protect. While we require
employees, academic collaborators, and consultants to enter into confidentiality agreements, we may
not be able to adequately protect our trade secrets or other proprietary information or enforce
these confidentiality agreements.
Our collaborators, strategic partners, and scientific advisors have rights to publish data and
information in which we may have rights. If we cannot maintain the confidentiality of our
technology and other confidential information in connection with our collaborations and strategic
partnerships, then we may not be able to receive patent protection or protect our proprietary
information.
25
Regulatory approval, if granted, may be limited to specific uses or geographic areas, which could
limit our ability to generate revenues. Regulatory approval will be limited to the indicated use
for which we can market a product. Further, once regulatory approval for a product is obtained, the
product and its manufacturer are subject to continual review. Discovery of previously unknown
problems with a product or manufacturer may result in restrictions on the product, manufacturer,
and manufacturing facility, including withdrawal of the product from the market. In Japan and
Europe, regulatory agencies also set or approve prices.
Even if regulatory clearance of a product is granted, this clearance is limited to those specific
states and conditions for which the product is useful, as demonstrated through clinical trials. We
cannot ensure that any ZFP Therapeutic product developed by us, alone or with others, will prove to
be safe and effective in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance in a given country.
Outside the United States, our ability to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities, so we cannot predict whether or when we
would be permitted to commercialize our product. These foreign regulatory approval processes
include all of the risks associated with FDA clearance described above.
Our collaborations with outside scientists may be subject to change, which could limit our access
to their expertise. We work with scientific advisors and collaborators at academic research
institutions. These scientists are not our employees and may have other commitments that would
limit their availability to us. Although our scientific advisors generally agree not to do
competing work, if a conflict of interest between their work for us and their work for another
entity arises, we may lose their services. Although our scientific advisors and academic
collaborators sign agreements not to disclose our confidential information, it is possible that
some of our valuable proprietary knowledge may become publicly known through them.
Laws or public sentiment may limit the production of genetically modified agricultural products in
the future, and these laws could reduce our ability to sell these products. Genetically modified
products are currently subject to public debate and heightened regulatory scrutiny, either of which
could prevent or delay production of agricultural products. We may develop genetically modified
agricultural products for ourselves or with our strategic partners. The field-testing, production,
and marketing of genetically modified plants and plant products are subject to federal, state,
local, and foreign governmental regulation. Regulatory agencies administering existing or future
regulations or legislation may not allow production and marketing of our genetically modified
products in a timely manner or under technically or commercially feasible conditions. In addition,
regulatory action or private litigation could result in expenses, delays, or other impediments to
our product development programs or the commercialization of resulting products.
The FDA currently applies the same regulatory standards to foods developed through genetic
engineering as those applied to foods developed through traditional plant breeding. Genetically
engineered food products, however, will be subject to pre-market review if these products raise
safety questions or are deemed to be food additives. Governmental authorities could also, for
social or other purposes, limit the use of genetically modified products created with our gene
regulation technology.
Even if we are able to obtain regulatory approval for genetically modified products, our success
will also depend on public acceptance of the use of genetically modified products including drugs,
plants, and plant products. Claims that genetically modified products are unsafe for consumption or
pose a danger to the environment may influence public attitudes. Our genetically modified products
may not gain public acceptance. The subject of genetically modified organisms has received negative
publicity in the United States and particularly in Europe, and such publicity has aroused public
debate. The adverse publicity in Europe could lead to greater regulation and trade restrictions on
imports of genetically altered products. Similar adverse public reaction in the United States to
genetic research and its resulting products could result in greater domestic regulation and could
decrease the demand for our technology and products.
If we use biological and hazardous materials in a manner that causes injury or violates laws, we
may be liable for damages. Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials, chemicals, and various
radioactive compounds typically employed in molecular and cellular biology. We routinely use cells
in culture and gene delivery vectors, and we employ small amounts of radioisotopes in trace
experiments. Although we maintain up-to-date licensing and training programs, we cannot completely
eliminate the risk of accidental contamination or injury from the use, storage, handling, or
disposal of these materials. In the event of contamination or injury, we could be held liable for
damages that result, and any liability could exceed our resources. We currently carry insurance
covering claims arising from our use of these materials. However, if we are unable to maintain our
insurance coverage at a reasonable cost and with adequate coverage, our insurance may not cover any
liability that may arise. We are subject to federal, state, and local laws and regulations
governing the use, storage, handling, and disposal of these materials and specified waste products.
To date, we have not experienced significant costs in complying with regulations regarding the use
of these materials.
26
Anti-takeover provisions in our certificate of incorporation and Delaware law could make an
acquisition of the Company more difficult and could prevent attempts by our stockholders to remove
or replace current management. Anti-takeover provisions of Delaware law, our certificate of
incorporation and our bylaws and may discourage, delay or prevent a change in control of our
company, even if a change in control would be beneficial to our stockholders. In addition, these
provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders to replace members of our board of
directors. In particular, under our certificate of incorporation our board of directors may issue
up to 5,000,000 shares of preferred stock with rights and privileges that might be senior to our
common stock, without the consent of the holders of the common stock. Moreover, without any further
vote or action on the part of the stockholders, the board of directors would have the authority to
determine the price, rights, preferences, privileges, and restrictions of the preferred stock. This
preferred stock, if it is ever issued, may have preference over, and harm the rights of, the
holders of common stock. Although the issuance of this preferred stock would provide us with
flexibility in connection with possible acquisitions and other corporate purposes, this issuance
may make it more difficult for a third party to acquire a majority of our outstanding voting stock.
Similarly, our authorized but unissued common stock is available for future issuance without
stockholder approval.
In addition, our certificate of incorporation:
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states that stockholders may not act by written consent but only at a stockholders meeting; |
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establishes advance notice requirements for nominations for election to the board of
directors or proposing matters that can be acted upon at stockholders meetings; and |
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limits who may call a special meeting of stockholders. |
We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject
to certain exceptions, that if a person acquires 15% of our voting stock, the person is an
interested stockholder and may not engage in business combinations with us for a period of
three years from the time the person acquired 15% or more or our voting stock.
Insiders have substantial control over Sangamo and could delay or prevent a change in corporate
control. The interest of management could conflict with the interest of our other stockholders. Our
executive officers and directors beneficially own, in the aggregate, approximately 29% of our
outstanding common stock. As a result, these stockholders, if they choose to act together, will be
able to have a material impact on all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This could have the
effect of delaying or preventing a change of control of Sangamo, which in turn could reduce the
market price of our stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents
and investments. The investments are available-for-sale. We do not use derivative financial
instruments in our investment portfolio. We attempt to ensure the safety and preservation of our
invested funds by limiting default and market risks. Our cash and investments policy emphasizes
liquidity and preservation of principal over other portfolio considerations. We select investments
that maximize interest income to the extent possible within these guidelines. We satisfy liquidity
requirements by investing excess cash in securities with different maturities to match projected
cash needs and limit concentration of credit risk by diversifying our investments among a variety
of high credit-quality issuers. We mitigate default risk by investing in only investment-grade
securities. The portfolio includes marketable securities with active secondary or resale markets
to ensure portfolio liquidity. All investments have a fixed interest rate and are carried at
market value, which approximates cost.
The following table represents the fair value balance of our cash, cash equivalents and
marketable securities by year of expected maturity that are subject to interest rate risk as of
June 30, 2005 (in thousands, except for interest rates):
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2005 |
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2006 |
Cash and cash equivalents |
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$ |
7,708 |
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$ |
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Average interest rates |
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2.41 |
% |
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% |
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Marketable securities |
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$ |
14,307 |
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$ |
3,792 |
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Average interest rates |
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2.31 |
% |
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3.12 |
% |
27
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and
Principal Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Principal Financial Officer concluded that the Companys disclosure controls
and procedures as of the end of the period covered by this report have been designed and are
functioning effectively to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
(b) Change in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting occurred during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not party to any material litigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The effective date of our first Registration Statement on Form S-1 filed under the Securities
Act of 1933, as amended, relating to the initial public offering of our common stock was April 6,
2000. On the same date, we signed an underwriting agreement with Lehman Brothers, Chase H&Q, ING
Barings LLC, and William Blair & Co., the managing underwriters for the initial public offering and
the representatives of the underwriters named in the underwriting agreement, for the initial public
offering of 3,500,000 shares of our common stock at an initial public offering price of $15 per
share. The offering commenced on April 6, 2000 and was closed on April 11, 2000. The initial public
offering resulted in gross proceeds of $52.5 million. We received net proceeds of $48.8 million
after deducting underwriting discounts of $3.7 million. Expenses related to the offering totaled
approximately $1.4 million. None of Sangamos net proceeds from the initial public offering were
paid directly or indirectly to any director, officer, general partner of Sangamo or their
associates, persons owning 10% or more of any class of equity securities of Sangamo, or an
affiliate.
From the time of receipt through June 30, 2005, Sangamo has used the net proceeds from its
initial public offering of common stock to invest in short-term and long-term, interest bearing,
investment-grade securities and has used its existing cash balances to fund general operations. The
proceeds are being used for general corporate purposes, including working capital and product
development. A portion of the net proceeds will also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies. Sangamo has no
agreements or commitments with respect to any such acquisition and is not currently engaged in any
material negotiations with respect to any such transaction.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on June 6, 2005. Two matters were voted on and each was
approved. The results are as follows:
PROPOSAL I
The following directors were elected at the meeting to serve until our annual meeting following the
end of fiscal year 2005 or until their successors are duly elected and qualified:
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NOMINEE |
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VOTES FOR |
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VOTES WITHHELD |
Edward O. Lanphier, II
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22,227,701 |
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43,392 |
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William G. Gerber
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22,034,934 |
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236,159 |
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Jon E. M. Jacoby
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22,031,881 |
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239,212 |
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John W. Larson
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20,345,107 |
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1,925,986 |
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Margaret A. Liu
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22,224,654 |
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46,439 |
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Steven J. Mento
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22,223,379 |
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47,714 |
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Michael C. Wood
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22,149,585 |
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121,508 |
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PROPOSAL II
The proposal to ratify the selection of Ernst & Young LLP as the Companys independent registered
public accounting firm for the fiscal year ending December 31, 2005 was approved.
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FOR |
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AGAINST |
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ABSTAINED |
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NON VOTES |
22,052,402
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204,146 |
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14,545 |
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0 |
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ITEM 6. EXHIBITS
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31.1
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Form of Rule 13a 14(a) Certification |
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31.2
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Form of Rule 13a 14(a) Certification |
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350. |
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SANGAMO BIOSCIENCES, INC. Dated: August 9, 2005
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/s/ Greg S. Zante |
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Greg S. Zante |
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Senior Director, Finance and Administration |
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(Principal Financial and Accounting Officer) |
30