(This article was written by guest contributor Steve Bulwa.)
The current market correction has taken the air out of some of the most polarizing momentum biotech stocks. One of the hardest hit is synthetic biology pioneer Intrexon (XON).
Given the meteoric rise in the shares to start to the year and the resulting $7 billion market valuation, the shares may have gotten ahead of themselves. Now that much of the momentum in biotech stocks has unwound and Intrexon's shares suffered a 40% decline, it's time to take a closer look.
Intrexon (XON) on August 4, 2015
I have always been impressed with Intrexon's technology, stellar management and the possibility that synthetic biology could truly be a disruptive technology. With diverse applications across many large markets like health care, energy and food, even the $7 billion market valuation from a few weeks ago was small relative to its long-term potential value. My caution towards buying its shares at those levels was strictly due to its short-term parabolic rise. Now that the shares have shed more than a third of their value, this seems like a good time to scale in and build a core long-term position.
Intrexon (XON) on August 26, 2015
The Opportunity for Synthetic Biology
Intrexon is leading the way in the new paradigm of synthetic biology. The company believes this is the foundation upon which the bioindustrial revolution will be built. Through a deep understanding of DNA, the company is able to design and construct its own genetic programs, effectively re-engineering biology to deliver specified results. The company harnesses the power of software and data mining with its UltraVector platform to analyze and efficiently engineer complex assemblies of DNA for multiple solutions on multiple scales.
From the company's website:
UltraVector has captured a wealth of data over iterative experiments in the design, build, and testing of DNA components, driving more proficient manufacturing of biological systems providing our collaborators with multiple options for optimizing DNA-based solution.
Intrexon applies a broad suite of technologies to approach different biological challenges. For example, its RheoSwitch technology is the first clinically-evaluated gene switch, enabling regulation of gene expression and therapeutic effect through the timing and dose of an oral activator ligand. This technology has shown great promise in early trials of cell therapies with its oncology-focused exclusive channel collaboration partner Ziopharm (ZIOP). Here is a list of the company's various technology solutions from its corporate presentation:
Multiple Approaches to Growth
Intrexon is growing rapidly, even at this very early stage, through a four-pronged approach: licensing, joint venture, internal development and acquisition. Even at this very early stage, next year's revenues are pegged at more than $200 million, 30% higher than 2015 when growth was more than 100%. The company's joint ventures include (from the company's website):
- S & I Ophthalmic is a joint venture between Sun Pharmaceutical Industries Ltd., an international specialty pharmaceutical company focused on chronic diseases, and Intrexon to develop gene-based therapies utilizing the RheoSwitch platform for the treatment of ocular diseases.
- OvaXon is a joint venture between OvaScience, Inc., a life sciences company focused on the discovery, development and commercialization of new treatments for infertility, and Intrexon to develop cutting-edge improvements for improving human and animal health.
- Intrexon Energy Partners is a joint venture with a select group of external investors to optimize and scale-up Intrexon's methane bioconversion platform to generate high-value fuels and lubricants from natural gas.
The company is also growing through acquisition, adding wholly owned subsidiaries in a variety of markets including food and agriculture/pest control (from the company's website):
- Trans Ova Genetics - A wholly owned subsidiary of Intrexon, Trans Ova is internationally recognized as a provider of industry-leading bovine reproductive technologies.
- Okanagan Specialty Fruits (OSF) - A wholly owned subsidiary of Intrexon, OSF is the pioneering agricultural company behind the non-browning Arctic apple.
- AquaBounty Technologies, Inc. - A majority owned subsidiary of Intrexon, AquaBounty is a pioneer utilizing modern molecular biology to improve aquaculture in an environmentally sustainable manner.
- Biological & Popular Culture, Inc. (BioPop) - A majority owned subsidiary of Intrexon, BioPop focuses on developing "living art" concepts.
The company announced its newest subsidiary on Aug. 10 with the $160 million acquisition of Oxitec, a leader in novel approaches to pest control for agriculture and disease management.
Does XON Meet My 4 Tenets of Investing?
Strong Indication(s) for Technology
Intrexon is inarguably a leader in synthetic biology, with fascinating technology in many multi-billion-dollar markets, including biotechnology, energy, food, and agriculture. Today's leaders in all of these spaces command market caps exceeding $100 billion, so with successful execution, there is tremendous opportunity for appreciation in the company's shares over current levels. The biotech market opportunity alone merits consideration, making every other market exposure XON offers a free option on higher valuations. Here are five Biotechnology companies with market capitalization of $50 billion or greater. If you believe in XON's technology and leadership then you must consider these valuations (10x higher than current XON market valuation) as attainable.
Gilead (GILD) - $151 Billion.
Amgen (AMGN) - $113 Billion.
Celgene (CELG) - $90 Billion.
Biogen (BIIB) - $67 Billion.
Regeneron (REGN) -$54 Billion.
Exceptional Science, Management and Partners
I think this point is credibly established. Synthetic biology is a potentially disruptive new technology with explosive growth prospects and XON is a leader. Chairman and CEO Randal .J Kirk is a mythical figure in biotech with a tremendously successful pedigree. The company has numerous impressive partnerships and affiliations including Johnson & Johnson (JNJ) and Sanofi (SNY).
Positive Insider or Hedge Fund/Institutional Activity
Kirk and other executives have continued to purchase shares of Intrexon at market prices. High-profile investors like Bill Miller and Dan Loeb have invested in Intrexon as well. Bill Miller said he believes XON could be the investment of the decade. You should be impressed by the very knowledgeable and successful investors that have endorsed the XON investment thesis.
A Definable Catalyst Not Reflected in the Current Market Capitalization
Many catalysts are at work to move XON higher. The company has many drugs in development with its channel partners that will yield a steady stream of actionable news. Partners like Ovasciences (OVAS) posted news related to product development. Product introductions from wholly-owned subsidiaries like the Arctic Apple from Okanagan Specialty Fruits and AquAdvantage Salmon from AquaBounty are coming to market (as is a potential Nasdaq IPO of AquaBounty). XON's stock is down and, like the rest of the market, is oversold. That, in itself, is a definable catalyst for at least a short-term move higher.
Intrexon is a leader in synthetic biology. With exposure to a variety of multi-billion dollar markets the growth opportunity for this company is extraordinary. Management's approach to growth is appealing as it has limited losses by spreading expenses and risk among its partners. I believe Intrexon is an attractive investment and a core technology holding for any portfolio.
Now that it is 40% less expensive than a few weeks ago and the market is oversold, I think it time to take advantage of the sale. It is important to recognize that most momentum biotech stocks have taken similar losses in recent weeks. Last quarter's perceived earnings disappointment was just an opportunity to sell the news and unwind short-term momentum positions.