Shares of synthetic biology conglomerate Intrexon (NYSE:XON) were crushed following the release of third-quarter 2017 earnings last week. Although missing Wall Street's revenue expectations played a role in the 26% decline during the next trading day, there were several other factors at play.

Vague discussions of important healthcare programs heading to the clinic, the loss of one of the few blue-chip partners, the end of an important financial arrangement, and delays in the gas-to-chemicals platform were likely contributing factors for the stock's drop as well. The operational trajectory of the self-proclaimed synthetic biology leader does appear to be making analysts increasingly skittish. Here's what investors need to know.

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Image source: Getty Images.

By the numbers

The year-over-year numbers reported in the third quarter of 2017 are shown below. 

Metric

Q3 2017

Q3 2016

% Difference

Collaboration and licensing revenue

$28.1 million

$30.6 million

(8.2%)

Services revenue

$7.7 million

$9.3 million

(17.2%)

Product revenue

$9.9 million

$8.7 million

13.8%

Total revenue

$46.0 million

$48.9 million

(6%)

Total operating expense

$90.7 million

$77.8 million

16.6%

Operating loss

$44.7 million

$28.8 million

N/A

Data source: Intrexon.

While this is one of the only times that year-over-year quarterly revenue comparisons didn't result in growth, that in itself isn't necessarily worrying for investors. That's especially true for a company such as Intrexon that derives much of its market value from future potential, not actual performance. It's also worth noting that it reported $154 million in total revenue through the first nine months of 2017, compared to $145 million in the year-ago period.

Then again, as I've explained in previous quarters, the quality of revenue is what really matters. The least risky sources of revenue -- services and products -- have reported nearly flat year-over-year performance through the first nine months of 2017. The riskiest sources of revenue -- collaborations and licensing -- have been fueling growth this year.

Consider how the latter revenue category looks when broken down into its main components, which I've previously explained in detail

Collaboration and Licensing Revenue Source

First Nine Months, 2017

First Nine Months, 2016

% Change

$ Change

Blue-chip partners

$9.2 million

$13.3 million

(30.5%)

($4.0 million)

Intrexon-created funds

$15.7 million

$16.5 million

(4.6%)

($0.8 million)

Ziopharm

$31.3 million

$24.4 million

28.5%

$6.9 million

Small- and micro-cap partners

$14.3 million

$14.4 million

(0.7%)

($0.1 million)

Harvest start-ups

$11.8 million

$2.7 million

343.9%

$9.2 million

Total

$89.4 million

$82.1 million

8.9%

$7.3 million

Data source: Intrexon.

Remember, Intrexon has committed to collecting rents (through collaboration and licensing revenue) on its technology portfolio in recent years to grow revenue today while it waits for more reliable sources of revenue (through services and products) to be commercialized tomorrow. But it hasn't been able to execute this strategy by courting many blue-chip partners. Instead, it relies on risky micro- and small-cap biopharma companies, some of which are completely dependent on the conglomerate's technology. That is a red flag.

There is impressive potential for sliced apple products in the consumer market, apple trees sold to farmers, protein for animal feed, and biological controls for agricultural pests in the United States. But how quickly they become meaningful contributors and whether they only replace falling revenue totals from collaboration and licensing sources are questions that investors shouldn't overlook.

Numbers aside

There were other updates -- and non-updates -- that Intrexon investors should consider as well for their vagueness, implications, or both.

Cardiac disease: The company's majority-owned healthcare company, Xogenex, filed an Investigational New Drug (IND) application with the U.S. Food and Drug Administration. While the therapeutic candidate was touted as the world's first multigenic drug candidate, there's a good reason for that distinction: Affecting multiple genes at once with a single gene therapy is considered to be incredibly difficult given current biologic tools and understanding. Intrexon says the therapy is "complex," although I'm not sure investors should consider that to be an advantage. 

Harvest start-ups: The company's 10-Q shows that an important financial arrangement with Harvest Capital Strategies was terminated at the end of September. This was not mentioned in the press release or on the conference call. No analysts asked questions about it. Yet, it may just be the most important update from the most recent quarter. Why?

The arrangement resulted in the funding of several start-ups, simply referred to as the "Harvest start-up entities," which were formed to use Intrexon's technology to then pay Intrexon for research and development services. While the termination does not affect the already formed start-ups, it does mean the arrangement came up woefully short of management's original ambitions that called for "up to 10 new start-ups to be formed per year." That was in 2015. Only six Harvest start-ups were ever formed. 

Additionally, considering that Harvest start-ups have been the most important source of revenue growth in 2017, the termination significantly reduces this growth avenue.

Gas to chemicals: Intrexon has yet to partner its natural gas-to-chemicals platform despite management touting that it's "in the money," a vague term considering the complexity and uncertainty of scale-up. The platform was originally expected to begin producing commercial quantities of product by 2018. 

Blue-chip partner: Intrexon and Sun Pharmaceutical, which formed a joint venture in 2013, decided not to move forward with a program aimed at developing a gene therapy for age-related macular degeneration. The pair is presumably working on at least two additional programs for eye diseases, but Sun Pharmaceutical has only generated $751,000 in revenue for the first nine months of 2017, compared to $6.3 million in the year-ago period. That does not appear to be a big vote of confidence in the technology platform from one of Intrexon's only blue-chip partners. 

What does it mean for investors?

Given the complexity of a conglomerate such as Intrexon, investors should continue to evaluate the company's projects and platforms on a case-by-case basis. The collaboration and licensing revenue segment should keep giving investors pause about its long-term sustainability, which was called into question in the third quarter of 2017. In my opinion, that many leading experts in the field (academics, entrepreneurs, and knowledgeable venture capitalists) scoff at the idea that the company is a synthetic biology leader also should not be taken lightly by investors.

That said, there's more concrete long-term potential in the services and products segments that Intrexon acquired in recent years. I would be more skeptical of the gas-to-chemicals platform, which is being developed in-house. Although commercializing biotech products is never straightforward, easy, or inexpensive, these platforms will ultimately determine Intrexon's future level of success. They cannot be commercialized quickly enough.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.