July 16, 2016 - 8:49am EST by
2016 2017
Price: 24.55 EPS 0 0
Shares Out. (in M): 118 P/E 0 0
Market Cap (in $M): 2,900 P/FCF 0 0
Net Debt (in $M): -300 EBIT 0 0
TEV (in $M): 2,600 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Intrexon is a biotechnology firm specialising in 'synthetic biology', a somewhat poorly defined field involving genetic engineering.  The firm's $2.6b EV is supported by several 'exclusive channel collaborations' with various partners in fields ranging from cellular therapy to biofermentation of natural gas.  The stock is a short because these collaborations comprise an unrelated series of buzzword-laced programmes with little evidence of any underlying scientific rationale and come nowhere close to justifying the current valuation.  The most valuable partnership recently stumbled when the lead programme reported some patients deaths that may be related to treatment, which will lead to increased scrutiny on the firm and its technology, a loss of confidence in management, and a decline in the share price.

Some background on the firm is  helpful here. Intrexon was founded in 1998 by Thomas Reed, a PhD in molecular genetics.  The firm languished in relative obscurity until 2005, when Randal (R.J.) Kirk acquired the firm (changing the name from Genomix to Intrexon) and began the firm's rapid expansion.  Kirk was (and is) a billionaire as a result of two acts of value creation - he founded New River Pharmaceuticals and sold it to Shire $2.6b in 2007 (the acquisition turned out extremely well for Shire, for what it's worth).  Part of the proceeds he invested into a firm called Clinical Data, where he assumed the chairman role and was instrumental in re-focusing the firm on drug development, leading to a $1.2b sale to Forest (now Allergan).  There's nothing to suggest any impropriety with either of these two firms.  Intrexon is Kirk's third big bet (he owns half the company), and his history of success has created a lot of excitement.  A post on VIC from 2013 encouraged people to go long based largely on his credentials.  A great article on Forbes is worth reading for the following quote, if nothing else:

“I’ve been a biotech investor for 27 years, and Intrexon is by far the best thing I’ve ever seen,” says Kirk, 56, who raises falcons and composes electronic music on a 7,200-acre cattle farm in rural Pulaski County, Va. He likens Intrexon to “the Google of the life sciences” and predicts that in a decade it could become “the largest, most significant company” in its burgeoning field.

Kirk is fairly promotional and this type of language has inflated the stock price for some time.  When one digs into the company's actual assets, however, three things become apparent. Firstly, the value of the firm's assets is nowhere near the firm's current EV. Secondly, there's very little evidence of any superior technology relating to sythetic biology or anything else.  Thirdly, there are multiple related-party transactions that don't seem to have clear economic purpose.


Ziopharm collaboration

Ziopharm is Intrexon's most important partnership.  Ziopharm is a $650m market cap biotech firm developing a fairly broad series of immunotherapies for cancer indications.  The most advanced programme is a somewhat bizarre gene therapy which targets breast and brain cancers. I won't go into the clinical details, but this programme never looked that promising and is now probably dead after last week's announcement that some patient deaths were being investigated.   The firm is also developing a series of cellular therapies (primarily CAR-T therapies similar to those of Juno and Kite - note Juno also recently had a temporary halt on their trial relating to patient deaths), as well as most recently a microbiome-related approach to treating graft-versus-host disease (microbiome based approaches are very hyped right now).  The main thing to note is that there have been no clinical efficacy data of note for any Ziopharm products in the firm's history. To be clear, I don't think there's anything fraudulent or deceptive in Ziopharm - it's just a biotech stock that was always a high-risk bet and one that now looks very unlikely to pay off.

More importantly, there is little evidence that the technology that Ziopharm licensed from Intrexon has led to anything useful.  Intrexon claim their technology allows development to proceed extremely rapidly, but Ziopharm lags behind market leaders like Juno and Kite in development.  Ziopharm had to further license additional technology from MD Anderson (in a complex structure with Intrexon involved) in 2015 to progress their development programme.

Intrexon began working with Ziopharm in 2011, when it made a substantial investment and licensed certain technologies to Ziopharm for a 50% profit share on all future income.  Part of this investment is then returned to Intrexon as ongoing 'licensing fees'.  Ziopharm paid Intrexon $19m in licensing fees in 2015, approximately 10% of Intrexon's revenue (the remainder is primarily similar licensing fees from other partners, often funded via Intrexon investments).  This deal was recently revised - last month, Intrexon announced that it had decreased their profit-share to 20% in exchange for $120m in preferred shares yielding a 1% monthly dividend. It's not really clear what the purpose of this transaction is beyond Intrexon decreasing their risk - Ziopharm is still pre-revenue.


Other collaborations

There are a lot of other programmes, and none are anywhere near as material as Ziopharm.  A handful are listed below.

Intrexon Energy Partners  - A 50:50 joint venture between Intrexon and a group of private investors (including entities affiliated with Kirk) which is developing biofermentation approaches to convert natural gas to higher-value liquid fuels.  A good comparison is Gevo, a $50m listed firm which was similarly previously hyped to great extent.  The JV is working with Dominion Energy on a pilot programme (Dominion have never referred to this programme as far as I can tell, suggesting it's not particularly important to them), but have yet to produce any concrete results.

Oxitec - A company which developed a genetically engineered mosquito which can be used to control mosquito populations (see description).  Intrexon acquired the company for $80m in 2015, and the mosquitos were developed without using any of Intrexon's technologies.  Kirk has been on news shows recently promising that this mosquito is key to battling the spread of Zika virus, and this will be a huge commercial opportunity.  The commercial opportunity is actually fairly limited, and the Oxitec solution is probably many years away from viability (a decent and fairly balanced review is here).

Aquabounty - A genetically modified salmon, which can be bred faster to increase aquaculture efficiency.  The product seems to work fine, but the commercial opportunity is fairly limited and after the fish were approved by the FDA, US legislators quickly banned the importation of the product after public backlash about frankenstein fish.  Intrexon acquired this technology by buying a majority stake in AquaBounty for roughly ~$25m. None of Intrexon's special technologies were used to make the product.

BioPop - A maker of glow-in-the-dark toys, which glow due to the presence of single-celled eukaryotes.  You can buy one for $60 here. Intrexon acquired a majority stake in this company in 2013 for $1.3m.

There are numerous others, but they all follow the same pattern - the commercial opportunity is a either very small or a huge long-shot, the venture doesn't seem to benefit from any special Intrexon technologies, and the products seem chosen more for their buzzword content and hype-worthiness than for any alignment with a coherent strategy.

Why now?

I think now is a good time to short because the biotech market has clearly cooled meaningfully, while Intrexon shares have remarkably held up fairly well thanks to the Zika hype and RJ Kirk's great narrative.  The strong chance of a failure at Ziopharm will cause investors to re-evaluate Intrexon's technologies and its prospects, which will lead to a rapid revaluation of the equity.  The firm raised capital in 2015 (good timing) and now has $300m in net cash, so involvency probably isn't on the cards, but the multiple related party transactions suggest shareholders may not have claims on all this cash anyway.  Given recent events in biotechnology, the window for future capital raises is probably closed for some time now, and the Ziopharm deal amendments suggest the firm is already looking to decrease risk and increase its cash extraction from affiliates.  I think the current stock price has a lot of downside, while the hype seems mostly exhausted after a fairly extensive run.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


-Negative developments at Ziopharm

-Zika panic subsiding

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