Charles Duncan - JMP Securities Joseph Pantginis - Canaccord Adams John Sullivan - Leerink Swann Liana Moussatos - Pacific Growth Equities Tom Shrader - Rodman Pamela Bassett - Cantor Fitzgerald Brian Rye - Janney Montgomery Alastair Mackay - GARP Research

Good afternoon and welcome, everyone, to the Sangamo BioSciences quarterly teleconference. Today's call is being recorded. I will now pass your conference over to the coordinator of this event, Dr. Elizabeth Wolffe, Director of Corporate Communications. Please go ahead.

Thank you. Good afternoon and thank you for joining Sangamo's management team on our conference call to discuss the company's second quarter 2008 financial results. Also present during this call are several members of Sangamo's senior management, including Edward Lanphier, President and Chief Executive Officer; Ward Wolff, Executive Vice President and Chief Financial Officer; and Dr. Dale Ando, Vice President of Therapeutic Development and Chief Medical Officer. Following this introduction, Edward will review second quarter activities, highlighting Sangamo's recent events. Ward will briefly review second quarter financial results, and finally Dale and Edward will provide more detail on our developments in several of our ZFP Therapeutics clinical programs and our goals for 2008. Following that, we'll open the call up for questions. As we begin, I'd like to remind everyone that the projections and forward-looking statements that we discuss during this conference call are based upon the information that we currently have available. This information will likely change over time. By discussing our current perception of the market and the future performance of Sangamo with you today, we are not undertaking an obligation to provide updates in the future. Actual results may differ substantially from what we discuss today, and no one should assume at a later date that our comments from today are still valid. We alert you to be aware of risks that are detailed in documents that the company files with the Securities and Exchange Commission, specifically our quarterly reports on Form 10-Q and our Annual Report on Form 10-K. These documents include important factors that could cause the actual results of the company's operations to differ materially from those contained in our projections or forward-looking statements. Now, I'd like to turn the call over to Edward.

Thank you, Liz, and thank you for joining us for our 2008 second quarter conference call. The last few months have been some of the busiest and most productive in Sangamo's history, from both a business and a clinical development perspective. I am very pleased to report that we have accomplished a number of important milestones in both of these areas. In June, Dow AgroSciences announced that they had exercised their option for a commercial license to our ZFP technology platform for use in plant agriculture. While we had anticipated that they would take the license, this event occurred four months earlier than expected. To quote Jerome Peribere, CEO of DAS, there is no time to waste. DAS wants to be begin using and sublicensing the technology immediately. They are clearly ready to do just that, as evidenced by the unveiling of their new trademark for ZFPs, EXZACT Precision Traits. As part of the early option exercise, Sangamo receives a license fee of $6 million and a balance of the outstanding research milestone payments of approximately $2.3 million. Ward will have more to say about the accounting treatment of these sums later in the call. Bear in mind that we are also eligible to receive development and commercial milestones and royalties on product sales from any products that Dow develops as well as a 25% share of any revenue that DAS generates through sublicensing. Dow's early exercise was a very big step in what has been and continues to be an outstandingly successful partnership. I strongly encourage anyone who has not already done so to watch the webcast replay of the press conference that DAS hosted. The link can be found on the Investor page of our website under Events and Presentations. In early June, one of our clinical collaborators,…

Thank you, Edward, and good afternoon, everyone. As you know, after the close of the market today, we released our financial results for the second quarter ended June 30, 2008, and I am pleased to review the highlights of those results. Revenues in the second quarter of 2008 were approximately $2.8 million compared to $2.6 million for the 2007 quarter. The second quarter 2008 revenues were primarily comprised of revenue recognition from our collaboration agreements with Dow AgroSciences and Sigma-Aldrich, enabling technology agreements in protein production, as well as research grants including grants from the Juvenile Diabetes Research Foundation and the Michael J. Fox Foundation. The revenue recognized for the second quarter of 2008 consists of $2.4 million in collaboration agreements and $464,000 in research grants. As Edward noted and as previously reported, Dow AgroSciences exercised its option for a commercial license during the quarter. As provided in our agreement with Dow, this exercise triggers the payment of the commercial license of $6 million as well as the remaining research milestones of $2.3 million. With respect to revenue recognition of the $8.3 million, we will be recognizing this revenue ratably over the period from option exercise through September 30, 2009, which reflects the estimated timing over which the technology transfer will occur as well as the period over which Sangamo will be compensated by Dow for additional research services. Total operating expenses for the second quarter of 2008 were $10.8 million compared to $8.4 million for the same period in 2007. Included in operating expenses were non-cash employee stock-based compensation expenses of $1.3 million in the 2008 quarter compared to $500,000 in the 2007 quarter, with the increase between years due to increased grant activity, higher stock grant prices and a lower estimated forfeiture rate as primary contributors. Research and…

Thanks, Ward. As you heard, we remain in a position to end 2008 with at least $55 million which, as Ward said, enables us to fund our existing therapeutic development pipeline through 2010, independent of any new corporate partnerships or financings. Having said this, it remains our strategy to partner both the non-therapeutic aspects of our technology, as we have done with Dow AgroSciences, Sigma-Aldrich, Genentech and Pfizer; and to establish collaborations around individual therapeutic programs at points of significant value inflection. As it relates to our most advanced therapeutic program, SB-509, positive Phase 2 data will represent such a point of value inflection. As we have said in the past, post-Phase 2 data, we plan to seek a focused, strategic partnership to aggressively move this program into and through pivotal clinical studies and rapidly into the market. Turning to our clinical development activities, I've asked Dale to update you on our recent progress in our lead therapeutic program in diabetic neuropathy, including the data we recently presented at ADA, the expansion of our Phase 2 SB-509-701 trial and the status of our double-blind Phase 2 repeat dosing trial, SB-509-601. Dale?

So, thank you, Edward. In early June, the 100-day follow-up data from our Phase 1b clinical trial of SB-509 for diabetic neuropathy were presented at the American Diabetes Association meeting in an oral presentation given by Dr. Mark Kipnes, the lead investigator on this study. The data were very positive. NISLL and QST scores, both quantitative measures of nerve health, achieved statistical significance, which was somewhat unexpected, although very encouraging given that this trial was designed primarily to be a safety study and not powered to achieve statistical significance for efficacy endpoints. In brief six-month, follow-up data on 24 subjects, all with mild to moderate diabetic neuropathy, were presented. 12 of the subjects received one treatment of 60 milligrams of SB-509, 30 milligrams administered to each leg. And 12 other subjects received the placebo. The data collected and presented include assessments of changes in the neurological status of these subjects using quantitative measurements, including quantitative sensory testing or QST, which measures perception of vibration; and nerve conduction velocity or NCV, the rate at which a nerve transmits an applied electrical signal. Improvements in the neurologic impairment score for the lower limbs or NISLL, a quantitative measure of the neurological exam, were also presented. As I said, the data were very encouraging. Improvement in neurological evaluation as measured by NISLL in SB-509-treated subjects was measured as a statistically significant, clinically relevant improvement of 1.9 points change from baseline levels compared to a 0.7 point worsening in placebo group. This represents a delta in the NISLL of 2.6 points with a p-value of 0.043. A 1 point improvement is considered clinically relevant. Additionally, we observed a 25% improvement in detection of mechanical sensation compared to a baseline as measured by QST testing in SB-509 treated patients compared to a 5% worsening in…

Thanks, Dale. As I hope is quite apparent, this has been a very busy and productive quarter for us. We are advancing the technology on many fronts, internally in the therapeutic arena and through our partnerships in plant agriculture, research reagents, transgenic animal models and cell engineering. Our collaboration with Dow AgroSciences is now in its commercial phase. As I mentioned earlier, DAS hosted a very informative press conference, and I encourage you to watch the webcast, which is archived on our website, and hear directly from the DAS management of their enthusiasm for our ZFP technology and their plans to develop EXZACT Precision Traits, both internally and under sublicenses. Our partner, Sigma-Aldrich, now has a website for researchers to request ZFP reagents and plan a full-blown launch of the technology this fall. More recently, we signed an agreement with Hoffmann-La Roche to provide them with non-exclusive rights for the use of ZFN to generate transgenic animals, modified in a specific gene in a specific species. Roche has an option to purchase an exclusive commercial license to use these animals in the production of therapeutic and diagnostic products. While the payments in the initial research phase of the agreements are modest, if Roche elects to take out a commercial license, we will receive a license fee, additional payments upon the achievement of certain clinical development events and downstream commercial payments. Remember, this is a single gene in a single species. We believe that our ZFN technology will make the efficient generation of transgenics in any gene in any species a reality, opening the way for a wider range of animal models for human disease research and drug development and significant potential commercial value. In conclusion, the first half of 2008 has seen substantive and exciting progress on the research, clinical and business fronts, and our aim is to continue in the same vein for the foreseeable future. Our principal deliverables for the remainder of the year will be the presentation of Phase 2 data from our SB-509 clinical program, both SB-509-601 and 701; initiation of a Phase 2 trial with SB-509 in ALS; as well as the filing of INDs for our first two ZFN-based therapeutics. We also expect continued progress in non-therapeutic areas, the official launch of the ZFP products by Sigma-Aldrich and additional commercial interest in our ZFP technology for cell line engineering and transgenic animals. We will, as always, continue to carefully manage our expenses. Finally, before we open up the call for your questions, we will be providing additional updates on our progress at the Bank of Montreal Focus on Healthcare Conference and the Canaccord Adams Global Growth Conference in August and the UBS Global Life Sciences Conference in September. We will make all of these presentations available on the Investor section of our website. This completes our prepared comments. So, we'd now like to open the call for your questions.

(Operator instructions) And we'll go first to Charles Duncan with JMP Securities.

Good afternoon, folks, and congratulations on a very productive quarter.

Thanks, Charles.

I had one quick question on DAS and one on 509. With regard to Dow Ag Sciences, can you give us any additional color on some of the sublicensing activities there?

Charles, not much beyond what Dow has already said. And if you go back to the press conference in San Diego where Jerome Peribere spoke about the rationale for the early exercise of the license and the presentation of the EXZACT Precision Traits trademark, I think his exact quote was, "There is no time to waste", that they want to move forward in the sublicensing arena. At this point, I will leave it to Dow to announce those. But it's clear from everything they've said publicly that it's a high priority for them.

That makes sense to me. Are you folks involved in making the actual presentations or is it pretty much their business development people?

It's a team effort. From the business perspective, they are doing the sublicensing.

Okay. Moving on to 509, first of all, with regard to 601, you've mentioned the dosing regimen. Is there any way there is a difference between the placebo and the drug in terms of its effect on the patient and whether or not that could unblind the trial? Is it painful to inject? Is it equivalent with the placebo?

Yes, Charles, this is Dale. Basically, there is mild reversible pain with the injections. And between placebo and the SB-509, there is virtually no difference. It's most likely related to the needle. And basically the plasma DNA solution and the control solutions are essentially equivalent.

Okay. And then with regard to the interim results that you intend to present on September 15th, congratulations for getting them accepted. Can you give us some additional color on the session type and the number of patients, et cetera, that you expect to present on?

I think we'll have more to say on both of those subjects when we announce the data at the meeting, Charles. I don't want to run too far in front of that.

Okay. Thanks.

Thanks, Charles.

Your next question will come from Joe Pantginis with Canaccord Adams.

Hi, guys, good afternoon. Guys, I just have one question about your diabetic neuropathy program. You're running your DN studies under the auspices and advice of key physician in the field obviously. Diabetic neuropathy is an unmet medical need with nothing to treat the actual disease, and you have clearly identified the important clinical endpoints for diabetic neuropathy as well. So, I guess a bit of a thought question. With that said, what is your impression as to why there is potential debate regarding clinical endpoints in the diabetic neuropathy space other than being at the cutting edge of addressing this disease? Thanks a lot.

Well, maybe I'll take a shot, Joe, and then certainly ask Dale to comment. I am not sure there is a lot of controversy, if that was the word that you used, in the --.

Or debate.

Debate, controversy, in the medical or regulatory community. I think actually this is a pretty well plowed path for non-analgesic neuroprotective endpoints. And certainly, Dale covered those in the script, and we can go into them in more detail. But as I say, I think from a regulatory and clinical perspective, it's a well plowed path in terms of measurements and primary and secondary endpoints that have been used in these studies. Dale, do you want to elaborate on that?

Yes, I would agree. Basically, these are the tools of neurologists. So, it's a neurological exam, and then quantitative sensory testing, which is a way to evaluate the sensation of the patients, and then finally nerve conduction velocity, which is a standard electrophysiologic test looking at nerves. So, from a medical perspective, there is nothing controversial or new about these endpoints. These are the standard tools of neurologists in neuropathies or nerve injuries of any particular type.

Great.

And largely cover the universe of the endpoints that have been used as primary and secondary endpoints in pivotal trial. So, to the extent there is debate or controversy, I think it's outside of the medical or regulatory communities.

Superb. Thanks a lot, guys.

1 Thank you.

And we go next to John Sullivan with Leerink Swann.

Hi, guys, good afternoon and congratulations on continued progress.

Thanks, John.

I just wanted to get a little bit into an area that we didn't talk about specifically this afternoon, but I get asked about frequently, these protein production agreements that the company has entered into over the last several years. I think of them as providing several benefits for the company, including potentially opening up the company to therapeutics partners and getting those partners comfortable with the technology. Can you tell us whether those partnerships are yielding the sort of benefits that you had hoped for? And can you tell us what we should expect in the future regarding the economic benefits of those protein production partnerships?

Sure, John. I mean I think the premise of the question is accurate. There are several good examples. I'll throw out one, just because it's easy, in Pfizer. We've been working with them for quite a long time. We've had quite a bit of success, as evidenced by joint publications in this space and so on. And of course, success in one area translates to introductions and knowledge in others. And so, the premise of the question is an accurate one and is a very positive one. In terms of economics, the economics and the structures really remain the same. These are non-exclusive collaborations, meaning a specific gene for ZFN in a manufacturing cell line, that company would have initially research; and then with commercial rights, to use cells modified with ZFNs to that specific gene. We receive a relatively modest upfront fee for that non-exclusive license, ongoing annual maintenance fees, milestones for any therapeutic product that is manufactured in that cell line and then royalties/commercial milestones or commercial payments for any product that is commercialized on those cell lines. So, it's a highly leveragable business. With the expansion of the Genentech relationship, and I think we've guided to more of these coming this year, you're going to see more.

Okay, great. That's helpful. Thanks. And then maybe you could detail to the extent that you're comfortable doing so the steps that need to be undertaken regarding the SB-721 ZFN candidate and entering clinical study?

Let me pause. CCR5, John?

That's correct.

Okay. Sure. Let me ask Dale and/or Philip to comment on that.

So, basically we're in the final processes of evaluating the SB-728 modified T-cells in animal models. And as shown by the paper, we've successfully developed ZFN, achieved high levels of modification in human T-cells and can actually protect and expand these cells when they're modified. And then the third piece is that we're doing the required good manufacturing practices, development of the final T-cell process. Success of that process has already been presented, but there is a series of repeat runs and engineering runs that need to be done and tested before they are compiled into the final IND, as they say, a full dossier, for the Phase 1 trial. So, these are the required sort of FDA types of studies that are done to show a good manufacturing process.

What are the fundamental hurdles around the concept of ZFN as opposed to ZFP that had to be undertaken with regulators, and do you feel like you're past that point? Can you comment on that?

Well, the zinc finger nuclease is our new technology that actually can modify DNA by putting a double-strand cut into the DNA. And what we're doing is actually inactivating a very, very important receptor for CCR5. So, naturally, from a regulatory perspective, we have to go through the fairly standard safety analyses of these modified cells. For example, put them into animals and make sure that there is no transformation of these cells, et cetera. So, these are not unusual for these types of T-cell modifications, but it does take some time to evaluate.

Thanks, John.

Thanks very much.

And our next question will come from Liana Moussatos with Pacific Growth Equities.

Ward, can you repeat how you're recognizing the $6 million payment from DAS? And with the interim data in September, is it going to be a poster or oral session and when are the abstracts available?

I guess I'll start out on the revenue recognition question, Liana. Thanks. Good question. Just to clarify again, the total payments that we're receiving from Dow are $8.3 million. And as is typical in situations like this, there is some coordination as the license is able to be fully utilized, et cetera. And we are estimating right now that that period will run essentially over the next five quarters. So one way to look at this is basically take the $8 million, divide it by 5. That's $1.6 million per quarter through Q3 '09 next year. And the accounting literature under GAAP, Generally Accepted Accounting Principles, is fairly arcane and detailed in this area. But that is our current expectation as to how we will be recognizing this revenue, essentially over the next five quarters.

Thank you.

Okay.

And Liana, in terms of the ISCT meeting, it is an oral presentation and I don't know when exactly the abstracts will be available. And just to reiterate, it's the 701 trial interim data.

And we take our next question from Tom Shrader with Rodman.

Hi, good afternoon. Thanks for taking the question. Given that you're getting close to a Phase 2 ALS trial, can you talk about the dosing in that trial? How would you do that? Is that systemic exposure? Just talk a little bit about what you're thinking there.

The dosing basically is very similar to what we're doing in a diabetic neuropathy trial. So this is a regional intramuscular dosing with the idea that by injecting into the affected muscles that are most commonly affected by ALS, we can improve basically neurological health of all the nerves in that particular region. To give you an example from diabetic neuropathy, a lot of our endpoints, we measure on the toe or the top of the foot. Our injections are into the muscle of the patient with diabetes. So despite the fact that our injections are into the muscle, we're achieving regional improvement in the nerves throughout the whole leg and foot. So that's sort of the pharmacological premise. And we basically are attacking the muscles that are most common in ALS, which are more central versus peripheral.

So it would be in the neck, is that what we're talking about? I don't know what part of the body the disease hits first. Is that the same in all patients or would it be patient by patient?

It's variable. So it's patient by patient. But what we can target are, what are called, levels of the nerves in the spine. So C2 to C6.

Okay.

We're injecting into the muscles that are drained into those specific nerve roots and then the upper thoracic nerve roots and then the lower lumbar.

And what would the readout be? Would it be nerve conduction velocity or --?

No. So, there is ALS rating scale that is classically used, which combines measurements and functional ability. And the electrophysiologic equivalent of NCV in ALS is called a motor unit test. It's an electrical measurement or quantification of the activity in motor units in affected muscles.

And, Tom, we're going to have more to say probably more comprehensively when we announce the initiation of the trial.

Okay. And then I have kind of a question on the Roche deal, which I don't really understand. So, I understand what Sigma and you do when it's a reagent that somebody buys. But when it's a license to a large company like Roche, what's Sigma's role there? What do they do in a deal like that?

Sure. Good question. So the relationship with Sigma is exclusively focused in research. And so anything that's being done by a company is purely a relationship with Sigma. To the extent that a company wants to use anything that comes out of that research for commercial purposes, Sangamo owns all of that. So, for instance, in the cell engineering space for protein manufacturing, we own all of the commercial rights there. To the extent that they want to be using transgenic animal models beyond a research application, we have the commercial rights there. So what we jointly announced with Sigma for the Roche agreement was a non-exclusive research license, but Sangamo granted an option to an exclusive commercial license to a single gene in a single species. Hopefully, that clarifies it.

But the point is Sigma is not physically doing anything in this deal. They're simply part of the chain of licensing? Is that right?

Without speaking specifically about this deal, in a typical situation, Sigma will be generating the zinc finger reagent; the zinc finger nuclease, the zinc finger transcription factor, whatever it happens to be. The company who is using that will use that for research purposes. If they then want to go forward and use the product generated by using the zinc finger, from a commercial perspective, they would need a license from us. And that's what Roche anticipated and received an option for this commercial license.

So, if I think about this deal, is it like the deal has sort of an FTE component, but that person would be at Sigma? Is that kind of what's going on?

So, Sigma has the rights to provide this for research purposes. They have a pricing structure. You go to their website and they'll be doing a larger launch on this. They will be selling zinc finger reagents to companies, to universities, to scientists around the world. And people will use those for research purposes. If an entity wants to then go forward and use that in a commercial fashion, they would need a license from us.

Okay. Yes, I get what you're saying now. Okay. Thank you.

Sure. Thanks, Tom.

And we take our next question from Pamela Bassett with Cantor Fitzgerald.

Thanks for taking my call. Congratulations.

Thanks, Pamela.

Staying with Sigma-Aldrich for a moment, can you talk about what milestone payments and revenue we should expect to be recognized with their launch in '08 and also going into '09?

A couple of things. There are no specific payments associated with the launch itself.

Okay.

But let me go back to where we were. So, there are $4 million in research and development milestones that we can obtain. And we're working towards those, and we'll announce those when we achieve those. Sorry, $5 million in research and development milestones. And then there is another, I believe, $20 million in commercial milestones that are based upon actual product sales by Sigma. And we will announce those as appropriate and recognize those as appropriate. So, I think the two answers that I can give you, Pamela, is no direct milestone payment that's attributable to the launch, but we will get milestones based upon research and development, accomplishments and then commercial accomplishments by them. We also receive, in addition to all of that, a 10%-plus royalty on all product sales by Sigma; and in the first two years of the license, 50% of any revenues generated from sublicensing of the technology in the research field; and post that period, 25% of any revenues generated from sublicenses.

Okay. So, is the R&D portion of the relationship an ongoing activity? Will there be continuous innovation and continuous potentially product launches?

We'll break those apart. There is an ongoing research component to the collaboration. It's a three-year component largely focused on generating high-throughput generation and characterization of zinc fingers and zinc finger nucleases and then the transfer of that to Sigma. The product development components is really in the Sigma hands, although our scientists interact with them quite a bit in this area and have quite a bit of experience, because they've been working in this for so long. But our deliverables are really the high-throughput generation, characterization of zinc fingers and zinc finger nucleases. Sigma is the commercial Pfizer and marketer and developer of the product side of things. And I think one of the things, and we'll announce this is September when they do the worldwide launch of this product line, is there will be a website and you'll have a lot more visibility into the product spectrum of what they are offering, both on the off-the-shelf basis as well as the custom basis.

Okay. I mean clearly, they're offering products shortly. We might expect some royalty revenue this year then, it sounds like, maybe.

It's not specifically guided to revenues on any of these things, Pamela, but that is certainly the expectation in terms of the structure of the agreement that product sales generate royalties to us.

Okay.

And I think Sigma-Aldrich has been quite vocal or clear about their intent and expectation to rapidly commercialize the technology.

Okay, great. Are the PAD trials or critical ischemic trials moving forward this year or is there still a more data analysis that we might expect?

Not this year, no, Pamela. The real focus of the data has been presented from the critical ischemia trial. That's the complete dataset there. And really the PAD program is dependent upon or is a function of what we're doing in the stem cell mobilization space. And we look really much more carefully at those data before moving into additional PAD trials.

Okay. So, we're going to hear about 701. We're going to hear about interim data on September 15th?

Correct.

And what about the final Phase 2 mild to moderate data? Is that still --?

Again, we've guided to presenting the 180-day data from that trial in the fourth quarter of this year.

Okay, great. Thank you very much.

Thank you, Pamela.

And we take our next question from Brian Rye with Janney Montgomery.

Good afternoon, guys. Most of my questions have been answered. I did just have one other one. You talked about some of the things that you all still needed to do before starting the CCR5 and glioblastoma programs. I'm wondering on the Phase 2 study planned in ALS for SB-509, if there are any other rate limiting steps or if it's just a function of dotting the i's and crossing the t's for some of the investigators?

In ALS, Brian?

Yes.

We're very, very, very far along in that process. So, I don't think there are any gating items at this point that are material.

Great. That's all I had. Thanks.

Great. Thank you.

(Operator Instructions) We move now to Alastair Mackay of GARP Research.

Good afternoon. Just one kind of backwards-looking question, which is that the SB-509 data from Phase 1a, at the time, it was surprising to see effects of injecting the ZFP in one leg seemed to be affecting the other. You've gotten a little more visibility on SB-509 data. And it's just an open-ended question; any further thoughts on that seeming contralateral effect?

We're looking at that in more detail in some of our Phase 2 studies by looking at, for instance, nerve conduction velocities in the upper arms to see whether or not there is more systemic effect. One of the importance of the stem cell study is that the mobilization of stem cells could actually improve DN, and there are animal studies showing that infusion of stem cells have caused improvement in the DN animal model. So, there is a potential for this regional injection to have more systemic effects than we thought of. And that's why the stem cell study is very important and interesting for us.

So, is NCV in the upper arm one of the secondary endpoints for the stem cell study?

We're actually looking at that in the blocked nerve study.

Got it. Okay. Thanks.

Thanks, Alastair.

And that would conclude our question-and-answer session. At this time, I'd like to turn the program back to our speakers for any additional or closing comments.

Thank you. We'd like to thank you for joining us, and we look forward to speaking with you again when we release our third quarter financial information. We will be available later today if you have any follow-up questions. Thank you.

Thank you, everyone, for your participation on today's program. And you may disconnect at this time.