"Complexity" is one of the most adequate words that can be used to describe synthetic biology conglomerate Intrexon (NASDAQ:XON). The company's management team, Wall Street analysts, and even individual investors often consider it to be a major long-term advantage. Who needs to understand the ins and outs of a company that stretches into biopharma, energy, livestock, agriculture, public health, and even pet cloning? Surely there are big wins in there somewhere, right?
But complexity works both ways. In rare cases, it can hide dangerous transactions (see: Valeant Pharmaceuticals, Ocwen Financial, SunEdison). More commonly, complexity can be used as an excuse when faced with difficult questions, to which the answer is always something related to "we're building something truly disruptive that no one understands!" Surely, the company saying that will be led by intelligent experts who do understand it, right?
Here's the problem. When investors begin to accept management's complexity excuse, they may stop asking serious questions or looking into red flags hiding in plain sight. It can happen to individual investors and the world's most successful investors (see: Valeant Pharmaceuticals, Ocwen Financial, SunEdison). It's an Achilles' heel that Ritholtz Wealth Management CEO Josh Brown calls "a love of complexity for complexity's sake."
Intrexon is beginning to rely on the complexity excuse a little too much. It's one of the simple reasons I won't buy the stock -- and you shouldn't, either.
The complexity excuse
Intrexon's billionaire CEO, Randal Kirk, ended the second-quarter 2017 conference call by telling shareholders that although he didn't feel the need to make an apology for the stock's performance, he was sympathetic to shareholders. It may have been what investors wanted to hear, but Kirk's long and confusing explanation at the end of the call essentially amounted to the complexity excuse.
For instance, he attempted to explain away the stock performance with the "they just don't understand" excuse: "Look, a company that is based on doing world-first instance things can't expect, in a world that that loves conventionality, and only likes novelty if it's being done by someone who is 90% conventional. You know, like we're General Motors and we made a new car that's better than the old car, but it's a car still."
In other words, Intrexon's technology platform is so novel and unconventional that it's being overlooked. ("They just don't get it!") If a more conventional major pharmaceutical company were doing the same thing, then the world would love it.
Kirk also noted that investors should really focus on intrinsic value, which is at "an all-time high" for Intrexon. He followed by stating:
I'm very comforted when I look at companies like Amazon and Netscape. And I see that these companies, their share prices really didn't do well for the first three or four years after their IPOs, either. We built this company to be potentially one of the greatest companies in the world.
It's awfully convenient to use intrinsic value -- any number you want! -- and to compare your business to two of the world's most transformative companies, but Intrexon isn't quite close to transforming the world. In the first half of 2017, the conglomerate depended on one small-cap customer for 58% of its revenue growth compared to the year-ago period. Tiny start-ups created by the conglomerate that then pay it licensing fees accounted for another 54% of revenue growth during that span.
Kirk mentioned that the pharmaceutical industry was beginning to "get it" and that various companies are retooling their R&D budgets to focus more on the potential of synthetic biology. That was supposed to imply that Intrexon would benefit thanks to its leadership position in the field, but it's more of a self-appointed ranking.
Intrexon has not developed a single technology from scratch and brought it to the market, let alone demonstrated it had value as an R&D tool. In the first half of 2017, blue-chip partners accounted for just $6.5 million, or 6%, of total revenue. Kirk may be suggesting that's about to change, but there's a long way to go between signing new collaborations and commercializing a game-changing technology.
What's really going on?
I'm not suggesting that Intrexon is the next Valeant Pharmaceuticals. Whether or not the incredible level of dependence on small- and micro-cap partners is hiding more dangerous red flags, there are real parts to the business that promise to pick up over time. The company really does own Oxitec's self-limiting mosquito and insect platform. And non-browning apples and fruits. And insect proteins being developed for animal feed markets with Darling Ingredients.
That said, it's a little too convenient to dismiss the concerns of every critic by saying that they simply don't "get it." Not all of the company's struggles are derived from the rest of the technology ecosystem overlooking the novelty of Intrexon's technology platforms. Kirk could build a pretty successful conglomerate that specializes in buying mostly de-risked technology platforms and bringing them over the finish line, but whether or not that's truly transformative or results in one of the world's most valuable companies is a separate debate.
Long story short, investors shouldn't stop asking questions about Intrexon -- just as they would with any other investment -- by giving into the idea that smart people at the helm will lead you to greatness. Complexity for complexity's sake is rarely the best way to long-term returns. And right now, the numbers aren't adding up with the company's storytelling.