Intrexon's Risky Revenue Machine

A lot has been said about the industry-leading technology portfolio of engineered-biology conglomerate Intrexon (PGEN -2.86%). Talk-show hosts on CNBC can't seem to get enough, while presentations at major gatherings such as the annual J.P. Morgan Healthcare Conference are usually accompanied by big announcements from management. The company has grown revenue in hockey-stick fashion since 2013, even if the past two quarters have witnessed a small pullback.

After coming under fire last month for relying on complex operations, Intrexon has increasingly turned the focus of investors to its answer to the Zika virus and its partnerships with blue-chip companies. While mosquito vector control may well be nearing approval and adoption in several countries, the latter boast doesn't quite hold up after a little digging into SEC filings. It turns out the company's revenue machine is a little riskier than investors might realize.

By the numbers

Intrexon breaks down its revenue into three segments: (1) products, (2) services, and (3) collaborations and licensing. Here's how total revenue was distributed in 2015:

*Other revenue totaled $982,000 in 2015. Data source: SEC filing.

Essentially all of the company's product revenue and service revenue -- representing nearly half of all 2015 revenue -- is derived from its Trans Ova subsidiary, a cattle breeding and genomics company that Intrexon acquired in summer 2014. The products and services segments reported flat revenue in Q1 2016 compared with the year-ago period. The remaining revenue is derived from exclusive channel collaborations, or ECCs, formed with companies across healthcare, energy, food, and other industries.

However, most of Intrexon's collaboration and licensing revenue is sourced from obscure micro-cap companies or Intrexon-formed LLCs with opaque financial transactions, which is a concern I raised after its IPO in 2013. Here's how the company reported its collaborations for 2015:

*OvaXon is a joint venture with OvaScience. Data sources: SEC filings, Google Finance.

In Intrexon's SEC filings, these totals are further broken down between (1) upfront and milestone payments and (2) R&D services. In addition to sporting tiny market caps, many of the companies listed are still reporting data from animal studies and pre-clinical tests, hardly stoking the flames of confidence in investors. Others, such as Genopaver and Persea Bio, were formed with outside capital companies solely for the purpose of entering into an ECC with Intrexon. Few of these companies have any significant revenue to report, which jeopardizes their ability to continue paying Intrexon for R&D.

Another oddity for investors: Intrexon separately reports $266,000 of revenue from Thrive Agrobiotics in SEC filings for 2015, but it reported over $19.5 million as a segment sub-category labeled "Other." What ECCs contribute to "Other," and how important are they to Intrexon? Investors have no way of knowing.

In all, using reported figures, companies with a market cap under $1 billion comprise 34% of Intrexon's total 2015 revenue. "Other" amounts to 11% of total revenue and 22% of collaboration and licensing revenue from last year. This information represents a considerable risk for investors to consider.

Blue-chip absence or complex dealings?

So what about big companies with deep pockets that see the value of Intrexon's platform technologies? The scoreboard never lies.

Image source: Intrexon.

While Intrexon touts partnerships with blue-chip companies such as Sun Pharmaceuticals, Merck KGaA, and Dominion Resources, these partners contribute very little to the top line. Sun Pharmaceuticals, through S & I Ophthalmic, represented only 2.3% of total revenue in 2015. Merck KGaA, through Ares Trading, represented just 2.7% of total revenue in 2015 -- and only $795,000 was for R&D, with the remainder logged as an upfront payment.

Meanwhile, it doesn't appear that Dominion Resources is contributing in any significant way to Intrexon's top line. Last August, the natural-gas leader signed an exclusive agreement to use Intrexon Energy Partners' methane-to-isobutanol platform, a 50/50 joint venture between Intrexon and outside capital companies, to help commercialize the technology. That's years away, however, as a pilot facility only became operational in recent months.

The monetary contributions of other known ECCs with blue-chip companies such as Elanco and Johnson & Johnson have yet to be discussed in detail in SEC filings. In all, using reported figures, companies with a market cap exceeding $1 billion comprise just 5% of Intrexon's total 2015 revenue.

What does it mean for investors?

Intrexon's risky revenue machine generated 34% of its total revenue in 2015 from collaborators with market caps under $1 billion. Only 5% of revenue last year was sourced from companies worth more than $1 billion. These figures represent a significant risk for investors, especially considering other top organism engineering companies, though privately held, generate nearly all revenue from companies with large market caps. Intrexon's numbers are not what investors should expect from a technology leader.

While it's possible acquired platforms can be scaled and commercialized under Intrexon, many technologies are still years away from hitting the market. I want to see management be more transparent about its dealings and reduce the complexity of its business. You should, too.