Images

Source: Steve Jurvetson/Flickr.

First impressions may not be everything after all.

At the JP Morgan Healthcare Conference in January 2014, biotech investor R.J. Kirk came off as arrogant and overly bullish, according to several audience members. Kirk owns more than 60% of synthetic biology upstart Intrexon (NYSE:XON), which accounts for nearly half of his $4.3 billion net worth. The company had gone public the year before -- adding 50% on its first trading day -- so perhaps his excitement got the best of him.

In his second appearance representing a publicly traded Intrexon at the flagship healthcare conference earlier this year, Kirk announced an oncology partnership that signaled the company's entrance into one of the biopharmaceutical industry's fiercest arms races. The stock popped 30% that day. The momentum continued this week as two Wall Street analysts raised price targets and CNBC's Bill Miller said Intrexon could be "the best stock of the decade," likening the nearly $4 billion company to Apple (yes, that Apple) in the 1990s.  

The bullish sentiment pushed shares up 14% that day. After all, who wouldn't want a second chance to purchase the world's largest company at a 99.6% discount?

Of course, basing your investment decisions on a two-minute segment on a talk show is not a practice I would subscribe to. I'll bet that many people reading this still don't have any clue what Intrexon does or what "synthetic biology" means, which makes blindly believing Bill Miller potentially dangerous. Let's take a few steps back, review the basics, and discuss the potential investment opportunity the way it's supposed to be done.

What does Intrexon do?
Intrexon is a leader in the emerging field of synthetic biology, which aims to make biology as easy to engineer and as predictable as more traditional engineering disciplines. The company owns armies of robots that automate the process of organism design and cell engineering, in addition to proprietary genetic and genomic technologies that allow it to engineer living things in predictable ways. While Intrexon doesn't neatly fit into any single category, sector, or industry, investors see that as a good thing.

The synthetic biology pioneer enters into research and development deals with partners to develop biotech products across energy, healthcare, food, and environmental applications. The partnerships spread risk associated with development and commercialization and allow for a robust pipeline full of potential opportunities, which is a critical part of the business strategy.

G

Chart source: Intrexon presentation.

Why? It gives Intrexon many shots on goal. That means one or five or 10 product failures won't necessarily be the death knell for the company, since there will be five or 10 or more products in development. That will keep the most important investor storyline perpetually intact: potential opportunity. What long-term investor doesn't like the sound of that?

What are some notable partnerships?
As demonstrated by the graph above, Intrexon is currently heavily focused on healthcare applications for its platform. But that can be attributed to the long product development cycles (up to 10 years or more) and revenue potential (blockbusters can reel in billions in annual sales for over 10 years) for human therapeutics, rather than a presumed lack of opportunity in other fields.

The partnership currently tickling investors silly is with the University of Texas MD Anderson Cancer Center and Ziopharm. The trio will develop novel CAR-T therapeutics that have demonstrated promising results for other biopharma companies -- even curing several patients of their cancer in early clinical trials. While that sounds awesome, it's important to remember a few things.

First, the trio has yet to begin a single clinical trial, although several should begin in 2015. That means the first marketable product in the partnership capable of generating revenue won't be available until next decade -- and that's if it beats the odds and survives a gauntlet of clinical trials. Second, experts question the potential for a successful outcome, as the technology that was licensed from MD Anderson wasn't nearly as successful in preclinical trials as competing CAR-T platforms. So I wouldn't get too excited just yet.

Of course, healthcare is only the beginning. Intrexon owns a majority stake in AquaBounty, which is developing genetically modified fish and seafood. The infamous first product, AquAdvantage Salmon, grows twice as quickly as wild salmon, which could allow fish farms to keep pace with growing global demand. It remains the company's closest product to commercialization despite severe regulatory delays (nearly two decades) and violations for not keeping GM fish facilities up to code.  

Another promising collaboration with Intrexon Energy Partners is engineering bacteria to convert methane in natural gas to valuable chemicals such as isobutanol and farnesene. The latter could step on the toes of fellow synthetic biology pioneer Amyris and its partner Total SA, which are developing jet fuel and diesel derivatives from farnesene. The chemical can also be converted into high-value cosmetics, fragrances, lubricants, and more. However, Intrexon's in-house energy platform is still years away from launching at commercial scale.

Other notable collaborations include:

Collaboration Partner

Field of Research

Project Goal

Johnson & Johnson

Consumer Products

Develop new skin and hair products with enhanced function.

Sanofi

Healthcare

Develop new production processes for developing pharmaceutical ingredients.

None/Unnamed

Agriculture

Develop products to combat agricultural pests.

Ova Genetics (owned by Intrexon)

Livestock

Develop technologies for GM and cloned cattle and pigs to enhance breeding programs.

Source: Intrexon.

It may seem that Intrexon lacks focus by chasing too many seemingly unrelated opportunities, but that's simply not the case. All living things are controlled by the same simple set of chemicals that comprise DNA. By better understanding molecular processes at the most basic level, we can develop tools to engineer any living thing (or create new life forms) with more precision and specificity than ever before. It opens fascinating opportunities that could lead to better cancer drugs, faster-growing fish, better-breeding cattle, superior industrial microorganisms, and much more.

How does Intrexon make money?
While partnerships and collaborations are great, the long-term goal for Intrexon is to commercialize as many biotech products as possible. But generating revenue and generating profits are two different things, especially for the company's unique business model.

Investors can think of Intrexon as an external R&D department. Let's say a chemical manufacturer is looking for a way to make a chemical more sustainably, at lower cost, with enhanced functionality, or all of the above. It may not have the expertise or capabilities required to engineer an industrial microbe that could produce the chemical, but it could tap Intrexon to do the dirty work. The chemical company pays Intrexon service fees, which partially cover R&D costs, and agrees to pay royalties on future production if Intrexon successfully develops the product.

It should be noted that Intrexon likes to take ownership stakes in smaller partners or acquire them outright, which would give the company more or full control of potential product sales in the future than a revenue stream based on royalties alone.

Currently the company only generates revenue from these R&D fees, as no products have been commercialized to date. Nonetheless, quarterly revenue and the amount of R&D costs covered by collaborations have been trending in the right direction.

Images

Chart source: Intrexon.

However, Intrexon is far from covering companywide operating expenses. Through the first nine months of 2014 investors witnessed an operating loss of $51 million, a 28% increase from the same period of 2013. The company's net loss swelled 122% to $100 million during the same comparable periods. Given the youth of the product development pipeline, investors should expect losses to continue for the foreseeable future.

Is there competition?
Some investors may not care that Intrexon loses money today or will likely do so for years, arguing that the potential for growth and future earnings is too great to ignore. Even Bill Miller acknowledged that investors are still in the early days, although, once again, some would argue that is a big positive. But while Intrexon wields an exciting platform, it isn't alone. As a publicly traded company, it's simply the most visible to investors.

For starters, there's this guy named J. Craig Venter. After racing the federal government to complete the Human Genome Project, he went on to create the first self-replicating synthetic cell (among other discoveries) and to found several companies. One of those companies is Synthetic Genomics, which has a business model very similar to Intrexon's.

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Algae for foods and fuels. Image source: Steve Jurvetson/Flickr.

Current collaborations include a $600 million fuel partnership with ExxonMobil, production of food ingredients with Archer Daniels Midland, and a platform attempting to grow human organs in engineered pigs with United Therapeutics. Synthetic Genomics is also more vertically integrated than Intrexon, as it owns companies that make hardware, DNA, and lab reagents. It would easily be worth more on the open market than Intrexon -- and for good reason.

There are other privately owned organism companies that compete with Intrexon for biotech product development, including Ginkgo Bioworks, Zymergen, Synthace, and more. There's certainly room for more than one leader in the new industry, but Intrexon is not the leader.  

Is Intrexon the best stock of the next decade?
I think Intrexon has the potential to deliver above-average returns for investors in the long run, but don't trick yourself into believing that it will one day be the world's most valuable company, as Bill Miller seemed to imply. It seems unlikely that the company will deliver many products to the market in the next 10 years (remember, healthcare is a major focus), which will limit product revenue and earnings potential in that span. In the near term, the current euphoria over the recent cancer drug partnership should subside, bringing the stock price down from recent highs in the process.

Then again, the promise of potential growth has carried Intrexon to a nearly $4 billion market cap as of this writing. Who can predict for how long Mr. Market will fall in love with that storyline?

Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, CAPS page, previous writing for The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.

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