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

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

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

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

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

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

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

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

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

As far as why some of this could be seen was that Gilead already had telegraphed on its own that it would be looking to augment the Kite acquisition with technology that could expand the range of targets for CAR-Ts, improve safety around neuro-toxicity or by creating universal donor CAR-Ts with gene editing.

Should Gilead have simply tried to acquire Sangamo Therapeutics? Maybe, but that doesn’t mean that the deal would occur. Sangamo has been a public company going all the way back to the year 2000. The company came public with just a 10,000,000-share IPO priced at just $7.25 per share, in what was considered a disappointing price as the tech bubble and valuation bubble had burst in that year.

In this scope, it is also important to keep in mind that Sangamo Therapeutics raised roughly $70 million via a secondary offering in mid-2017 (and also at $7.25 per share). Sangamo said at the time that it intended to use the proceeds from that secondary offering as follows: for working capital and other general corporate purposes, including support for the continuing research and development of its genomic therapy product candidates and research programs, clinical trials, commercialization activities, business development activities and, if opportunities arise, acquisitions of businesses, products, technologies or licenses that are complementary to Sangamo’s business.

Whether Gilead’s decision to collaborate with or to acquire Sangamo was the right move will not be known for years. Gilead could have tried to acquire this company long before this last share price move, but that also assumes that Gilead was using a crystal ball and knew the exact new path it would take. How much it would have cost to just acquire Sangamo may never be known, and Sangamo’s staying power over time might have made management want to hang in there for the ultimate prize at a much higher price.

Another consideration here is that Sangamo shares had rallied at the start of 2018 after announcing a collaboration with pharma giant Pfizer Inc. (NYSE: PFE). And 24/7 Wall St. featured Sangamo as an analyst pick to more than double in May of 2017, even after Janney had predicted Sangamo could double last April.

If you go back to what Sangamo’s ultimate value might be, the consensus analyst target price had been $17.33 last December and November. That consensus (from Thomson Reuters) was roughly $20 at the end of January, and it was last seen at $21.80.

Maybe Gilead got a steal here, or maybe Gilead prevented itself from overpaying for a company in which there are no assurances that the upside will be seen. If the company ends up not delivering, then Gilead’s exposure would have turned out to be so small that the company will look incredibly smart. Maybe this move also lets Sangamo ultimately become worth much more money down the road. Time will be the judge here.

Shares of Sangamo were last seen up about 18.5% at $26.30 on Thursday. Its 52-week trading range is $3.65 to $27.50, but that high was from earlier today.

Gilead shares were last seen trading down 0.9% at $79.95. It has a 52-week range of $64.30 to $89.54 and a consensus price target of $88.77.

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