As is usually the case, engineered-biology conglomerate Intrexon (XON 0.76%) had a busy first three months of the year. It listed 16 business developments at the top of its press release announcing first-quarter 2017 financial results -- on par with past updates. All but one were already known to investors, and all but two were related to projects that have yet to generate product revenue for the company.
While investors have been largely content with waiting for the potential represented by a robust product pipeline to be converted into real growth in the top and bottom lines, results from the most recent quarter hint that future growth may be completely dependent on selling products. The good news is that meaningful product revenue could be right around the corner.
Aquaculture may be Intrexon's next big opportunity. Image source: Getty Images.
By the numbers
The early-stage business model of Intrexon hinges on two things:
- The ability to offset costs associated with expensive R&D projects by collecting fees from partners and customers.
- The ability to collect rent on wholly owned technology licensed to partners developing products in collaborations with Intrexon and others.
This approach allows the company to preserve cash for otherwise expensive projects, increase the number of applications it can pursue simultaneously, and spread risk across diverse and unrelated industries. On paper, this business model is working. However, as I've pointed out numerous times in the past, it's only working because of unsustainable partnerships with small and microcap collaborators and Intrexon-created entities.
Therefore, while collaboration and licensing revenue continues to fuel the company's growth, it represents a substantial risk to investors. Here's a quick glimpse at important first-quarter 2017 financial metrics.
|
Metric |
Q1 2017 |
Q1 2016 |
% Change (YOY) |
|---|---|---|---|
|
Collaboration and licensing revenue |
$33.1 million |
$24.1 million |
37.3% |
|
Service revenue |
$12.0 million |
$10.7 million |
12.1% |
|
Product revenue |
$8.1 million |
$8.6 million |
(5%) |
|
Total revenue |
$53.7 million |
$43.4 million |
23.7% |
|
R&D expenses |
$34.2 million |
$25.9 million |
32.2% |
|
Selling, general, and administrative expenses |
$35.1 million |
$42.9 million |
(18.1%) |
|
Total operating expenses |
$85.1 million |
$83.9 million |
1.4% |
|
Operating income |
($31.4 million) |
($40.5 million) |
N/A |
|
EPS |
($0.26) |
($0.55) |
N/A |
Data source: Intrexon. YOY = year-over-year.
Quarterly revenue was well ahead of that from the year-ago period, but only slightly above all-time quarterly revenue achieved in the second quarter of 2016. That may seem like a picky observation, but revenue from the past four quarters has fluctuated between $46 million and $54 million. In the past, quarter-over-quarter revenue growth was a certainty.
This bobbing trend in quarterly revenue is likely due to several subsequent decreases in product revenue and a lack of diversified collaboration and licensing revenue in the past year. The partner mix hasn't changed much, and no new significant partnerships have been announced.
To really reach the next level of growth, Intrexon needs to bring in more revenue from blue chip partners or significantly grow product revenue (preferably both). The good news is that the latter seems possible in the next several quarters and years.
Intrexon has made steady progress in two of its commercialized product portfolios, which also happen to be among the most promising technology platforms owned by the company. Non-browning Arctic apples will launch as its first consumer-focused products later this year, while sales to farmers have increased significantly. The opportunity to quickly upend the apple industry is profound and represents a significant growth opportunity for investors.
Image used with permission from Okanagan Specialty Fruits.
Meanwhile, the company's wholly owned subsidiary, Oxitec, has made significant progress deploying its mosquito-control tool in South America. In addition to reporting progress in the first commercial use of the product in Brazil, it announced a new agreement with the municipality of Santiago de Cali, Colombia, and field trials recently began in population-dense India. Field trials in the U.S. are still progressing slowly through regulatory channels.
Perhaps more exciting than both of those platforms on investors' radars, this week Intrexon and its partner Darling Ingredients (DAR +1.42%) announced a long-awaited development for their EnviroFlight joint venture. The pair will begin building a commercial-scale production facility for black soldier fly larvae this month, which is currently expected to begin initial production in the first quarter of 2018. Black soldier fly larvae will be processed into high-protein feed for animal, aquaculture, and pet-food applications.
It's a high-margin, high-growth opportunity for investors. Better yet, the modular design of the production process should make scale-up relatively straightforward, and early indications from aquaculture companies hint that there's a significant growth opportunity available immediately. Darling Ingredients, the world's largest producer of natural ingredients from bionutrients, offers all the muscle needed to distribute, market, and grow the products from the flagship facility. It's a win-win for investors.
What does all of it mean for investors?
While the three opportunities to achieve significant product revenue growth are still at least one year away from contributing to the top line, I think a story stock like Intrexon will benefit from even the first trickle of revenue from these technology platforms. Even the announcement of construction of a major production facility with Darling Ingredients, which will begin this month and commence production in the first quarter of 2018, marks a major milestone.
Of course, the risk of relying too heavily on collaboration and services revenue from small and microcap partners remains front and center for investors. This dependence does not appear to be subsiding anytime soon, but the promise of product revenue on the horizon could buy Intrexon the benefit of the doubt for at least a few quarters longer.
