Intrexon Bruised by Blind Short-Seller Report

 | Apr 25, 2016 | 11:25 AM EDT
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It's not often that a company publicly responds to negative reports on financial blog sites, but sometimes an attack is so vicious it requires a response. Intrexon (XON) found itself in this position Friday morning.

On Thursday, Seeking Alpha published a 28-page report entitled "Intrexon: The Public Markets' Theranos Part 1 - Zika Virus Hype Is Nonsensical."  Intrexon is a company in the field of synthetic biology, which is an interdisciplinary field that mixes biology and engineering to build biological systems to create more effective, cost-efficient, and sustainable solutions. The field has applications in agriculture, energy and medicine.

The Seeking Alpha report was the first of what the site said would be an eight-part series. There is very little known about the author of the report other than it is now going by the name "Spotlight Research." Shares of Intrexon fell nearly 30% to $27.09 Thursday based on the report and only gained back 7% Friday.

Intrexon is fighting back.

In a statement released Friday, Intrexon said the "materially false and misleading" report appears to be part of a hedge fund campaign to manipulate the company's stock and damage the reputation of the company and its CEO. Intrexon did not reveal the name of the hedge fund it believes is behind the report. It said it sought the advice of counsel and is taking "appropriate steps."

"Understand that there is nothing wrong in attempting to move a stock price down through short sales if you legitimately believe it is overvalued," John C. Coffee Jr., a securities regulation professor at Columbia Law School, told Real Money via email Friday.  "The cases in which liability is possible are those in which false rumors are spread (so-called pump and dump schemes) and these usually require that the manipulator control a significant percentage of the stock."

Intrexon has been something of a battleground stock since its IPO in August 2013. The stock's IPO price was $16 and it rose as high as $66 in July 2015 before embarking on a choppy decline to the $30-range over the last eight months. The company has garnered attention recently due to its work with Oxitec, a U.K.-based biotechnology firm that is developing genetically modified mosquitos to combat the Zika virus. (This collaboration was one the subjects of the report that appeared on Seeking Alpha.)

Thursday's report stirs up the ongoing bull vs. bear argument circling Intrexon, but it also raises questions about blind allegations being made about the a company, its officers and its stock. The Securities and Exchange Commission declined to comment on this instance. The SEC's enforcement division does investigate manipulation, which is what Intrexon said it believes was the purpose of the report that was posted on Seeking Alpha.

"Early on when I started TheStreet I said no to blind pieces -- no authors -- because how could we hold anyone accountable?" Jim Cramer told Real Money. "How could we tell our readers that we aren't going to let you know who wrote this because it didn't matter. We held firm on this because the possibility of manipulation is much greater if the writer doesn't reveal his name. I was schooled to believe that hidden writers do not have the credibility necessary to appear in our pages even as many freelancers wanted to do it."

Thursday's report was written by an entity calling itself "Spotlight Research," which disclosed that it is short Intrexon. The entity previously went by the name "Forensic Research Analyst." The entity has posted to Seeking Alpha six times over the last few years, but little else is known about them. Seeking Alpha has long maintained a policy of posting pieces by anonymous and pseudonymous authors. It argues that the "author is ultimately less important than the ideas conveyed" and that Seeking Alpha maintains a database of the true identity of its authors. (More details of Seeking Alpha's policy on anonymous writers can be found here and here.)

When Real Money asked Seeking Alpha if it would post the rest of Spotlight Research's eight-part series, Seeking Alpha said: "Provided they all meet our standards for publishing, yes." (Seeking Alpha's publishing standards can be found here and here.)

Still, while Seeking Alpha's policy may allow the posting of anonymous reports, there is a broader question Intrexon raised about potential market manipulation.

"The law and the facts on short-selling market manipulation are always murky," Donald Langevoort, a securities regulation professor at Georgetown Law, told Real Money in a phone interview Monday. He explained the concern that short-sellers will sometimes plant rumors but he acknowledged the sometimes those rumors turn out to be true.

"The company always says the motivation -- which is the test for the law -- for these short sellers is simply to drive the down the price because they've taken a short position," Langevoort added.

Shares of Intrexon fell nearly 7% at Monday's market open, erasing most of Friday's market gains and further illustrates how the stock has become a battleground play. The company has four Buy ratings, three Hold ratings and zero Sell ratings, according to analysts surveyed by Bloomberg. But nearly 35% of Intrexon's shares are held short.

The bulls have a very powerful ally: Bill Miller, the chairman and CEO of LMM, a division of Legg Mason. Miller has been a long-time supporter of Intrexon, and is an investor usually known for making value plays. In an interview with CNBC in February, Miller said that Intrexon is the second-largest position in his portfolio. His bullishness is driven not only by the company's work to fight the Zika virus, but also the potential of synthetic biologics, saying "theoretically, any disease can be cured by synthetics."

Of Intrexon's CEO, Miller said he was an "authentic business genius" on par with Amazon (AMZN) founder and CEO Jeff Bezos.

The bears take issue with Intrexon on a number of points. For starters, they call out CEO Randal Kirk's background: he was lawyer by trade and not a doctor or scientist. The bears also say that it is not clear that Intrexon actually produces anything. The company has acquired companies that produce products and it has partnerships, known as exclusive channel collaborations, with several other biopharma companies but bears aren't sure if Intrexon itself contributes anything tangible under those arrangements.

Andrew Left, the short-seller behind Citron Research actually took a long position on the company in August 2015. But in a statement released Friday, Citron said it after doing further analysis, it found that none of the company's businesses have "imminent viability."

To be sure, there is a difference between saying a company's businesses lack "imminent viability" and calling it the next Theranos, as the report in Seeking Alpha did. (Remember, Theranos is currently subject to a criminal investigation.)

The Seeking Alpha report questioned the rally of the company's stock over the last three months. The report argues that the use of genetically-modified mosquitoes to fight the Zika virus won't work and is also too expensive. Further the report casts suspicion about the recent resignation of Intrexon's COO, arguing that it is odd for an executive to leave just before the company is poised to have major breakthrough.

While there may be valid concerns about Intrexon's business, there are also concerns about an unknown entity blindly comparing a company to one that is subject to criminal investigation. 

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