The $100 Million Platform Intrexon Investors Forgot

Image source: Alejandra Pales/Flickr.

Whether it's difficult to keep track of all the opportunities or easy to focus on the ones that grab the headlines (or both), investors in engineered-biology conglomerate Intrexon (XON +7.32%) seem to be forgetting about a big opportunity that could begin generating significant revenue in the next few years. When Intrexon agreed to acquire Okanagan Specialty Fruits in February 2015, it snagged a portfolio of fruit products that could be worth hundreds of millions of dollars in annual revenue. The company paid just $10 million in cash and an additional $31 million in stock. Not bad.

The acquisition gave Intrexon possession of a broad portfolio of biotech fruits that includes Arctic apples, which are engineered (with genetic parts from other apple varieties) to not turn brown when cut or bruised. I get it. Apples aren't really that exciting. It may sound like a novelty, but there's tremendous value in non-browning apples across the supply chain.

Producers and packers will save money from discarding less bruised fruit, reduce food waste, and enjoy higher sales from shipping higher-value, high-quality grade fruits. Apple processors -- which account for nearly $900 million of the annual apple crop in the United States -- could create new products more consumers want, such as apple juice that's green (the way it should be) or sliced apple products that maintain their fresh appearance without antioxidant treatments. That could boost foot traffic and sales for retailers, too, considering that several studies have shown apple consumption soars up to 71% when sliced varieties are available. Better yet, 62% of consumers said they were likely to purchase the non-browning apples. 

That bodes well for the success of Arctic apples, but there's a catch. While Intrexon is creating value along the value chain, it won't generate sales from the supermarket, unless it launches a consumer brand. Instead, the company will generate revenue from supplying Arctic apple trees to orchards -- par for the course in the industry. Management hasn't offered much insight into its expectations, but we can use industry statistics to estimate the total addressable market and revenue potential.

How 'bout dem apples?

To calculate the total addressable market, we need to know:

• The selling price per apple tree.
• The number of apple trees that can be planted in one acre of land.
• The number of acres growing apples.
• The lifespan of an apple tree, since, unlike grain crops, trees survive multiple harvests.

After a little digging, I found that conventional dwarf apple trees cost about $30 each to commercial orchards, and that one acre can accommodate a density between 500 and 1,000 dwarf trees depending on spacing. The United States and Canada -- where Arctic apples are approved and regulated -- combine for approximately 378,000 acres of conventionally grown apples (certified organic acreage is off limits to Arctic apples). That means the combined value of trees in production today is somewhere between $5.6 billion and $11.3 billion. However, since a dwarf apple tree has a lifespan of about 15 years, the total addressable market for dwarf apple tree sales to commercial orchards is between $376 million and $752 million annually. 

With that, here are several estimates for annual revenue potential at $30 per tree:

*Combined U.S. and Canada, 2015. Source: Estimates by author. 

These are only estimates. Arctic apple trees could sell for more than $30 each (very likely), or could face problems in scaling production, or could even come up against another positive or negative unknown. The important to thing to remember is that Intrexon is hoping to capture market share and grow the market over time, which means it's best for investors to think of revenue potential in terms of acres. That's the metric Intrexon is likely to provide in the upcoming quarters.

What does it mean for investors?

It takes two to three years from the time an Arctic apple tree is planted (which has already occurred on multiple orchards) to the time it begins bearing fruit. After that, it will take years to capture market share and generate sales, but with 62% of consumers saying they would purchase non-browning apples, the future is bright. That's especially true considering Okanagan Specialty Fruits has non-browning cherries and pears, virus-resistant peaches, and taste- and nutritionally enhanced peach and cherry products making their way through the pipeline. Arctic apples are the biggest opportunity of the fruity bunch, but the total opportunity could add up to hundreds of millions of dollars in annual revenue for Intrexon within the next decade.

As this demonstrates, Intrexon remains a complex investment. The company relies a little too heavily on hype and selling its vision, which distracts investors from the real-world obstacles facing some of its technology platforms. I encourage investors to take a more nuanced view of the opportunities ahead and evaluate each on a case-by-case basis. Some technology platforms will be commercial duds, while others have great potential to be significant contributors to the top and bottom lines. I would place Arctic apples in the latter category.