What happened
Shares of Intrexon (XON +0.13%) jumped 58% in June, according to data provided by S&P Global Market Intelligence, after the biotech announced a $100 million deal with Surterra Wellness, a privately held medical cannabis company that will use Intrexon's yeast fermentation technology to produce cannabinoids.
So what
The deal expands on a partnership between Intrexon and Surterra Wellness in which the companies are using Intrexon's plant propagation technology, which it calls Botticelli, to improve cannabis crop yield and quality.
Producing cannabinoids, the active ingredients in cannabis, in yeast instead of the plant has a lot of potential advantages, including lower cost and improved quality control. And it's substantially easier to genetically manipulate yeast to produce rare cannabinoids in large quantities. Intrexon has a goal of getting the cost of goods to produce pure cannabinoids below $1,000 per kilogram.
Through the deal, Intrexon gets $25 million as a technology access fee, including $10 million in up-front cash and $15 million in Surterra common shares. Surterra will also pay approximately $20 million for research and development expenses over the next five years. The rest of the $100 million will come from undisclosed developmental milestones on each cannabinoid developed as well as royalties on the ones that are commercialized.
Image source: Getty Images.
Now what
The deal with Surterra will help Intrexon fund its internal pipeline of therapeutics, but the company really needs to do another deal or two to help build its capital runway, which stood at $181.6 million at the end of the first quarter. Unfortunately, development deals like this are typically back end-loaded without much up-front cash. Investors should be looking for a licensing deal for a later-stage clinical asset or two -- or perhaps selling off a division -- which would have a larger impact on the balance sheet.
