Avoid The Intrexon Hype
Avoid The Intrexon Hype
Sept. 20, 2019 6:32 PM ETIntrexon Corporation (XON)13 Comments
Intrexon Corporation (XON) has been on an interesting ride this year.
The CEO of the biotechnology company went on a big insider buying spree earlier this year before the stock had a massive run up.
XON has given back much of its gains and is sitting just over $6 / share today.
Intrexon Corporation (XON) has been on an interesting ride this year, starting the year in the $7/share range before dropping massively to $4-5/share, recovering back to the $8 range after an insider buying spree from the CEO during late spring/early summer, and now dropping again to the near-$6/share level it sits at today. To say the least, investors have been taken on quite the rollercoaster ride YTD in 2019. Let's take a closer look at the assets, fundamentals, and intrinsic value of the company.
A Look at Business Fundamentals
XON and its bulls talk a big game about its therapeutics in the clinical pipeline as well as a "methane bioconversion platform" that is associated with a massive market size. The company has two operating units - Intrexon Health and Intrexon Bioengineering, and at its core is a bioengineering company. The stock has built quite a following among retail and institutional shareholders alike, and I am not arguing the company does not have equity value.
At $1 billion market capitalization, though, with a great deal of marketing and hype without the full substance to back it up, the company does not fit in my investment portfolio. Unlike other therapeutic companies, XON is not focused specifically on advancing clinical therapeutics. There are too many distractions in my view that stem from the broad agenda and variety of assets that the corporate parent is trying to advance. With nearly 1000 employees, dwindling cash balances, accumulating debt, and just over $100m in sales to support the significant capital expenditures of the company, I am not sure this is a company from which I would expect outsize prospective equity returns.
Importantly, revenue from three of XON's four categories (on the income statement) - collaboration & licensing, product, and service - all fell for the first half of 2019 on a year-over-year basis. "Other" revenues increased on a YoY basis but this comprises the small minority of the company's revenue. Bull might claim the company is in "investing" mode for the future, but until the results are demonstrated in the financials, I am not a believer.
Intrexon also splits itself into two businesses: Intrexon Health and Intrexon Bioengineering. Intrexon Health has a number of therapeutic candidates in its pipeline, but all are quite early stage. Only a handful are in the clinic:
The remainder of Intrexon Health's subsidiary therapeutic candidates are all preclinical. The company discusses spinning off its Precigen subsidiary for an IPO once there is good clinical data, but I would ascribe too much value to this as clinical development is highly risky - especially at the earlier stages - and there exists a substantial possibility that the Health unit continues to destroy shareholder value into perpetuity.
With respect to Intrexon Bioengineering, there are actually some very interesting projects going on in that unit of the company:
Strategic partnerships have been inked across many of the Intrexon Bioengineering projects and I ascribe much more value to the business lines in this unit of the company. Keep an eye on each of these to see how much revenue the various partnerships and revenue streams are generating over upcoming quarters.
Of course, this "thesis to avoid" the company could be completely mistaken if management is able to execute on its clinical programs further. CEO Randal Kirk could go on more insider buying sprees in advance of positive data, causing a run up in the stock. However, in the long run, all stocks revert to fundamental value and I am not convinced the company is an attractive long investment.
The risk of acquisition also exists; given the company's diversified portfolio of assets and IP, the company could be a prospective M&A target for a larger strategic or financial buyer. However, I think the probability of this is also relatively low given the complexity of the business lines, the lack of fundamental developments to substantiate the company's current valuation including a control premium, and the complicated diligence process that would be a requirement for any serious buyer.
While there has been a fair amount of hype around XON, investors should probably avoid it for their portfolios until some more fundamental data emerges around the technology products the company is developing. Partnerships for partnerships' sake and press releases are probably not fundamental developments upon which to make an investment until there is execution.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.