Intrexon: Living Better Through Synthetic Biology?

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Analysts have dropped their profit estimates for synthetic biotechnology firm Intrexon, and investors seem to be taking it in stride.

Intrexon ( XON ) stock has soared this year, mainly on investor hopes of better results to come later from royalties as collaborators using its technology eventually bring products to market.

Analysts don't expect the Germantown, Md.-based firm to post an annual profit until 2015. They had earlier predicted it would be profitable this year.


In the week ending Jan. 17, the consensus for 2014 fell from a forecast loss of 6 cents a share to a loss of 29 cents, according to a poll from Thomson Reuters. Yet Intrexon stock jumped 23% that week, continuing a stunning climb that began at the end of last year.

Shares have since dipped -- biotechs are notoriously volatile -- but with Tuesday's 7% intraday rise, Intrexon is still up 47% this year.

The recent bout of investor enthusiasm began after Intrexon announced Dec. 30 that it had entered into a research-and-development collaboration withJohnson & Johnson 's ( JNJ ) consumer and personal products division for advancing new skin and hair care products.

"Clearly it was one of the most important deals they've done," said Keith Markey, an analyst at Griffin Securities. "Obviously the market is thrilled.

"J&J not only validates that Intrexon is capable of getting a deal with a large blue chip company, but it also validates the technology."

Deft With DNA

As a leading player in the nascent field of synthetic biology, Intrexon designs, builds and regulates genes and cellular systems.

It applies engineering principles to biological systems to enable DNA-based control over the function and output of living cells.

Its proprietary technology helps other companies develop products and processes in several fields, including health care, food, energy and the environment.

Now with J&J, consumer products are part of the mix.

Mizuho Securities analyst Peter Lawson compares Intrexon to semiconductor companiesIntel ( INTL ) orARM Holdings ( ARMH ) in that its chief product is really access to its technology. Partners take on the commercialization risk.

So far, Intrexon's collaborators have not brought one product to market. So Intrexon has not received any royalties.

But it generates revenue from upfront licensing fees, cost reimbursements and milestones. Revenue in 2013 is expected to hit $26 million, double that of 2012, and is seen growing to $59 million this year.

"We're talking about a technology that is still in its early stage. In terms of commercializing products, it will take a few years for that to happen," said analyst Ying Huang of Barclays.

Analysts expect the first commercialized product will likely be genetically modified salmon through Intrexon's collaboration with AquaBounty Technologies, which aims to cut farming time in half.

AquaBounty's submission of a new animal drug application to the Food and Drug Administration has faced long delays. But analysts say approval could come this year.

Even with approval in the U.S., analysts expect sales to be slow going in the early years until consumers warm to the idea of eating genetically modified fish.

Products to treat medical conditions are seen as more promising revenue generators. Investors are "anticipating more contracts in the medical field," said Markey, based in part on CEO Randal Kirk's background and interests.

Experience At The Helm

A seasoned biotech entrepreneur, Kirk is revered in some circles as a biotech guru. He was named chairman of Intrexon in 2008, 10 years after Intrexon's founding. He became CEO a year later.

Kirk previously was chairman of New River Pharmaceuticals, a biopharma company he founded in 1996 and sold in 2007 toShire ( SHPG ) for $2.6 billion.

He also was chairman of the board of biotech firm Clinical Data from 2004 until its sale toForest Laboratories (FRX) in 2011 for $1.2 billion.

Despite Kirk's penchant for exits, "I don't think the near-term business plan is to sell Intrexon," Huang said. "He brought it public in 2013 and probably wants to develop the business for the next three to five years."

Of Intrexon's 13 exclusive channel collaborations, several are in health and medicine, including one withZiopharm Oncology (ZIOP). One of Ziopharm's clinical trials is for a DNA-based candidate to treat advanced melanoma.

Another key collaboration is withFibrocell Science (FCSC), which is focused on treating a rare, genetically based blistering disorder. Others includeSynthetic Biologics (SYN) for infectious diseases andOragenics (OGEN) for antibiotics and probiotics. Kirk is a stakeholder in all of those small biotech outfits.

"It's difficult to say which one will be first to get to market, but if pushed I'd probably say either Synthetic or Oragenics," Markey said, noting that antibiotics usually have faster approval times than other drugs. "Any of these could be very large royalty generators."

Appeal Across Industries

Consumer products under the helm of J&J will be easier to commercialize than new drugs for complex therapies for cancer and rare diseases, since they don't have to go through a long approval process, Markey says.

Energy is another potentially big area for Intrexon. Through genetic engineering of living organisms, work is being done to convert natural gas into liquid fuel for industrial uses and transportation.

Intrexon has been in active talks with energy companies for some time, says Huang.

He noted that management "has been working hard to get a deal done in the near future."

It would be Intrexon's first collaboration with an energy company.

Four of Intrexon's exclusive channel collaborations were forged since its August IPO, as were two joint partnerships. Besides the J&J deal, Intrexon has inked one with Rentokil, one of the world's largest pest control and biological cleaning product companies.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ARMH , INTL , JNJ , SHPG , XON

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