Intrexon Corp

Last modified by Asif Farooqui on 2020/01/22 07:35

Overview

Intrexon (XON) is a leader in the field of synthetic biology, focusing on programming biological systems to alleviate disease, remediate environmental challenges, and provide sustainable food and industrial chemicals. Synthetic biology involves the tightly controlled expression of natural and engineered genes (DNA segments) in a variety of animal, plant and microorganismal hosts. The company's historical approach primarily involved an exclusive channel collaboration, or ECC, model in which the company served principally as the technology engine for a partner experienced in a given commercial arena. As its experience has deepened, Intrexon has moved toward more joint ventures, or JVs, and the self-development of projects the company view as particularly compelling and within its increasing areas of expertise.¹

Synthetic biology is a rapidly evolving discipline that applies engineering principles to biological systems to enable rational, design-based control of cellular function for a specific purpose. Using its suite of proprietary and complementary technologies, the company design, build and regulate gene programs, which are DNA sequences that consist of key genetic components. A single gene program or a complex, multi-genic program is fabricated and stored within a DNA vector. Vectors are segments of DNA used as a vehicle to transmit genetic information. DNA vectors can, in turn, be introduced into cells in order to generate a simple or complex cellular system, which are the basic and complex cellular activities that take place within a cell and the interaction of those systems in the greater cellular environment. It is these genetically modified cell systems that can be used to produce biological effector molecules, or be employed directly to enable the development of new and improved products and manufacturing processes across a variety of end markets, including health, food, energy, environment, and consumer. The company's synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.

The company believe its technologies are broadly applicable across many diverse end markets, including some end markets that have failed to recognize the applicability of synthetic biology or failed to efficiently utilize biologically-based processes to produce products. To enable it to maximize the number of these markets the company could address, the company devised a strategy that allowed it to focus on its core expertise in synthetic biology while developing many different commercial product candidates via collaborations in a broad range of industries or end markets. Historically, the company built its business model primarily around the formation of ECCs. An ECC is an agreement with a collaborator to develop products based on technologies in a specifically defined field. Intrexon has sought collaborators with expertise within a specific industry sector and the commitment to provide resources for the commercialization of products within that industry sector. Through its ECCs, the company provide expertise in the engineering of gene programs and cellular systems, and its collaborators are responsible for providing market and product development expertise, as well as sales and marketing capabilities. In addition, Intrexon has sometimes executed a research collaboration to develop an early-stage program pursuant to which the company received reimbursement for its development costs but the exclusive commercial rights, and related access fees, were deferred until completion of an initial research program.

This ECC strategy has allowed it to leverage its capabilities and capital across numerous product development programs and a broader landscape of end markets than the company would have been capable of addressing on its own. The strategy has also allowed it to participate in the potential upside from products that are enabled by its technologies across an extensive range of industries, without the need for it to invest considerable resources in bringing individual products to market. The company presently are party to a number of these collaborations, which are in varying stages from research and development of product candidates to monitoring the progress of its collaborator in their further development and, the company expect, commercialization of product candidates enabled through its collaborations.

Over time, its strategy has evolved away from ECC-type collaborations to relationships and structures that provide it with more control and ownership over the development process and commercialization path. In these new relationships and structures, the company bear more of the responsibility to fund the projects and execute on product candidate development.

First, in certain strategic circumstances, the company may enter into a JV with a third party collaborator whereby the company may contribute access to its technology, cash or both into the JV which the company will jointly control with its collaborator. Pursuant to a JV agreement, the company may be required to contribute additional capital to the JV, and the company may be able to receive a higher financial return than the company would normally receive from an ECC to the extent that the company and its collaborator are successful in developing one or more products. For a discussion of its JVs, see the "Notes to the Consolidated Financial Statements (Unaudited) - Note 4" appearing elsewhere in this Quarterly Report on Form 10-Q. Second, Intrexon is increasing the resources Intrexon is expending internally on early-stage proof of concept programs where the company can leverage its competitive edge in gene program creation and host cell and genome expertise. Intrexon is also seeking to partner more mature programs and capabilities or later-stage assets. In this way, the company endeavor to leverage its capital resources and ultimately hope to realize significant value from its mature assets.

As the company consider the broad potential applications of its synthetic biology technologies, and consistent with the evolution of its business strategy, Intrexon has acquired a number of ventures that are already enabling products that benefit from the application of synthetic biology. The company's strategy contemplates the continued acquisition of product-focused companies that the company believe may leverage its technologies and expertise in order to expand their respective product applications. The company believe that the acquisition of these types of companies allows it to develop and commercialize innovative products and create significant value.

Markets

Synthetic biology has applicability across many diverse end markets. The company's goal is to be a leader in the application of synthetic biology for products currently utilizing biologically-based processes, and a leader in the replacement of conventional processes and products with biologically-based substitutes. Through the application of its suite of proprietary and complementary technologies, the company believe the company can create optimized biological processes and create substitutes for traditional industrial techniques, leading to improved products that are developed and manufactured faster and more cost-effectively.

Human and Animal Health

It is estimated that the global biopharmaceuticals market is over $175 billion and is projected to reach greater than $290 billion by 2021. Additionally, the global animal health market was valued at more than $30 billion in 2015 and is expected to grow to over $50 billion by 2025. The company believe that the unreliable, costly discovery and development process for new medicines is being replaced by the engineering of biology at the genetic, molecular, and cellular level. The company's ability to regulate complex gene programs and cellular systems by applying the principles of science, engineering, and computational bioinformatics with proprietary technologies is being utilized to design new therapies for humans and animals. Intrexon is applying its approach to develop targeted gene therapy applications and novel solutions within oncology, rare diseases, active pharmaceutical ingredients, ocular diseases, human infertility, infectious diseases, and animal health, as well as autoimmune, metabolic, and gastrointestinal disorders. All of its human therapeutic product candidates are in the drug discovery, preclinical, or clinical stages of development.

Food and Agriculture

The Food and Agriculture Organization of the United Nations predicts that by 2050 the world's population will grow to almost 10 billion, global demand for food and other agricultural products is expected to increase 50 percent, and global demand for livestock products will increase by 70 percent. Intrexon is focused on enabling efficient, high-quality food production that sustainably supports the necessities of its growing population. By applying its suite of technologies, the company aim to facilitate development of agricultural, livestock and aquaculture resources that deliver innovative approaches and superior production yields in an environmentally responsible manner.

Energy and Chemicals

Biological production via precise enzymatic conversion represents a promising approach for the efficient production of important energy products. Despite this promise, current attempts to produce "clean" energy are expensive to implement and operate at near break-even yields despite government assistance. Additionally, many alternative energy initiatives start from food sources such as corn and sugarcane. As a result, these low efficiency processes also compete for arable land and water with the agriculture industry. Using its cellular engineering experience and suite of technologies, Intrexon has developed microbial cell lines for bioconversion of methane to higher carbon content compounds. The company believe this proprietary platform holds the potential to modernize the existing gas-to-liquids industry by generating important fuels and chemicals at a fraction of the cost of traditional conversion methods. The company's bioconversion approach also is being designed to reach an overall balance between sustainable productive yields and attractive economic returns.

To date Intrexon has proven biological production of six valuable and large market fuel and chemical products. These products are isobutanol for gasoline blending, 2,3 Butanediol and isoprene for conversion to synthetic rubber, 1,4 Butanediol for polyester, farnesene for diesel fuel and lubricants and isobutyraldehyde for acrylics. In aggregate, the company estimate that these products represent greater than a $100 billion market opportunity.

Environment

As a result of industrialization and rapidly growing global populations, chemicals, heavy metals, and various other contaminants of concern are pervasive in the environment. These pollutants result in poor quality of drinking water, loss of water supply, contaminated ground water and soil, high clean-up costs, and potential health problems. In addition, increased globalization has facilitated the spread of pests that affect human and environmental health by carrying disease and damaging crops. The company seek to engineer biological solutions that are designed to protect, preserve or restore the environment and promote sustainability of natural resources. These biological approaches may replace products that present an environmental hazard. Examples include toxin-free, species-specific insect control methods that do not persist in the environment and microbial-based strategies for bioremediation of soil and water contamination.

Consumer Products

Despite its size and the number of products that can be achieved through biological means, the consumer market has experienced limited impact from synthetic biology. Intrexon is committed to developing biologically-based processes that displace petroleum-derived ingredients and polymers. Additionally, Intrexon is focused on reducing the wasteful practices associated with extracting compounds that occur in limiting amounts in plants and animals. Through its synthetic biology capabilities, the company plan to utilize innovative biologically-based applications for the development of products, such as personal care items and decorative arts, to improve the lives of consumers every day.

Business Strategy

This ECC strategy allowed it to leverage its capabilities and capital across numerous product development programs and a broader landscape of end markets than the company would have been capable of addressing on its own. The strategy also allowed it to participate in the potential upside from products that are enabled by its technologies across an extensive range of industries, without the need for it to invest considerable resources in bringing individual products to market. The company presently are party to a number of these collaborations, which are in varying stages from research and development of product candidates to monitoring the progress of its collaborator in their further development and, the company expect, commercialization of product candidates enabled through its collaboration.

First, in certain strategic circumstances, the company may enter into a JV with a third party collaborator whereby the company may contribute access to its technology, cash or both into the JV which the company will jointly control with its collaborator. Pursuant to a JV agreement, the company may be required to contribute additional capital to the JV, and the company may be able to receive a higher financial return than the company would normally receive from an ECC to the extent that the company and its collaborator are successful in developing one or more products. Second, Intrexon is increasing the resources Intrexon is expending internally on early-stage proof of concept programs where the company can leverage its competitive edge in gene program creation and host cell and genome expertise and are seeking to partner with more mature programs and capabilities, some of which may be through ECCs. In this way, the company endeavor to leverage of its capital resources and ultimately hope to realize significant value from its mature assets. The company's gas-to-liquid platform for bioconversion of methane to higher carbon content compounds, which the company refer to as its methane bioconversion platform, or MBP, is an example of its implementation of a JV approach. Based on its internally developed work on its MBP technology, Intrexon has executed two JV arrangements with related parties for specific end products.

Consistent with the ongoing evolution of its strategy, from principally utilizing ECCs to seeking a more diverse approach to leverage its technology assets, the company routinely consider ways to organize its business and the grouping of its assets to facilitate strategic opportunities. For example, effective January 1, 2018, the company transferred substantially all of its gene and cell therapy assets for human health under a newly-formed wholly owned subsidiary, Precigen, Inc., or Precigen, and the company consolidated therapeutic applications of its proprietary ActoBiotics platform under ActoBio Therapeutics, Inc., or ActoBio, another wholly owned subsidiary. Additionally, the company may look to partner later-stage assets in the future.

ECCs

Although its strategy has evolved away from a focus primarily on ECCs, the company remain party to a number of such collaborations, and the company may, in the future, elect to enter into additional ECCs, or expand one or more of its existing ECCs. An ECC is an agreement with a collaborator to develop products based on its technologies in one or more specifically defined fields. These fields may be narrowly defined (representing, for example, a specific therapeutic approach for a single indication) or may be broad (representing, for example, an entire class of related products). In each case, the company and the collaborator precisely define the field based on factors such as the expertise of the collaborator, the relative markets for the prospective products, the collaborator's resources available to commit to the ECC and its expectations as to other prospective ECCs in related areas. Regardless of the size of the field, under each ECC the company grant the collaborator exclusive rights to its services and certain of its platform technologies to commercialize products within the field.

The company may realize four general categories of revenue under its ECCs: information technology access fees upon signing; (ii) reimbursements of costs incurred by it for its research and development and/or manufacturing efforts related to specific applications provided for in the collaboration; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration. The company may receive equity in lieu of cash for technology access fees and milestones and also may participate in capital raises to allow earlier-stage collaborators to focus their resources on product development. When such a collaborator develops greater operational or financial resources, however, its shares become a financial asset within Intrexon that is independent of its operational or collaborative purposes.

Generally, each of its ECCs is designed to continue in perpetuity unless terminated. Each of its collaborators, however, retains the right to terminate the ECC for any reason by providing it written notice a certain period of time prior to such termination, generally ninety days. The ECC is also terminable by either party upon the other party's breach of material provisions of the ECC. The failure of its collaborator to exercise diligent efforts to develop products within the field of the ECC constitutes such a breach.

In the event one of its ECCs terminates, Intrexon is entitled to immediately pursue a collaboration with a different counterparty within the field of the terminated ECC. Moreover, technologies and product candidates in a relatively early stage of development revert to it, along with data, materials and the rights to applicable regulatory filings related to the reverted products, enabling it to develop those product candidates itself or incorporate them into a future collaboration. Product candidates that are at a more advanced stage of development, such as those already generating revenue or being considered for approval by an applicable regulatory body at the time of the ECC's termination are retained by the former collaborator. The collaborator has the right to commercialize such retained products although Intrexon is entitled to the royalties or other compensation to which the company would be entitled as if the ECC were still in effect. Upon termination, the company generally retain any technology access fees or other payments to which Intrexon is entitled through the date of termination.

In its ECCs, the company retain rights to its existing intellectual property and generally any intellectual property developed using, or otherwise incorporating, its technologies. In addition, Intrexon is generally responsible for controlling the prosecution and enforcement of this intellectual property with the exception of the enforcement of patents directed solely and specifically to products developed within the field of each ECC.

Each of its ECCs requires the collaborator to indemnify it for all liability related to products produced pursuant to the ECC and to obtain insurance coverage related to product liability.

Oerating subsidiaries

To derive value from the broad potential applications of its synthetic biology technologies, and consistent with the evolution of its business strategy, the company routinely consider ways to organize its business to facilitate strategic opportunities. For example, effective January 1, 2018, the company transferred substantially all of its gene and cell therapy assets for human health under a newly-formed wholly owned subsidiary, Precigen, Inc., or Precigen, and the company consolidated therapeutic applications of its proprietary ActoBiotics platform under ActoBio Therapeutics, Inc., or ActoBio. In addition, Intrexon has acquired a number of ventures that are already enabling products that benefit from the application of synthetic biology and that the company now operate as subsidiaries. The company's strategy contemplates the continued formation and acquisition of such operating subsidiaries. As these enterprises develop, the company will determine whether to maintain full ownership, introduce investors via either private or public financing, or seek strategic options to partner or divest the businesses.

Primary wholly owned operating subsidiaries

Precigen, Inc.

Precigen is a fully-integrated gene and cell therapy company committed to delivering precision medicines through innovation that puts patients first. Utilizing platform technologies owned by Precigen or licensed from Intrexon for programming and engineering genetic code, Precigen is developing and investigating next-generation therapeutics to enable patient-focused, cost-effective treatments to address unmet medical needs in the areas of immuno-oncology, autoimmune conditions, and infectious diseases. Precigen is designing investigational therapies intended to be controllable and targeted, with a broad pipeline of internal and partnered programs, all of which are at the preclinical or clinical stages.

ActoBio Therapeutics, Inc.

ActoBio is pioneering a new class of microbe-based ActoBiotics biopharmaceuticals that enable expression and local delivery of disease-modifying therapeutics. The ActoBiotics platform produces biologics through oral or topical administration with treatment applications across many diseases including oral, gastrointestinal, and autoimmune/allergic disorders. The company believe this cost-effective approach to development will provide safer and more efficacious treatments than injectable biologics. ActoBio, which is party to a number of its ECC agreements, has a strong research and development pipeline with the latest stage candidate in Phase 2b clinical trials and an extensive portfolio of candidates ready for clinical development across a number of potential indications.

Trans Ova Genetics, L.C.

Trans Ova Genetics, L.C., or Trans Ova, is internationally recognized as a provider of industry-leading bovine reproductive technologies. Intrexon and Trans Ova are building upon Trans Ova's original platform with a goal of achieving higher levels of delivered value to dairy and beef cattle producers. Progentus, L.C., or Progentus, a wholly owned subsidiary of Trans Ova, is a provider of bovine embryos. ViaGen, L.C., or ViaGen, a wholly owned subsidiary of Trans Ova, is a provider of cloning technology for non-primate species. Exemplar Genetics, LLC, or Exemplar, a wholly owned subsidiary through the combined ownership of Trans Ova, ViaGen and it, is committed to enabling the study of life-threatening human diseases through the development of miniswine research models and services.

Okanagan Specialty Fruits, Inc.

Okanagan Specialty Fruits, Inc. and its affiliates, or Okanagan, is the pioneering agricultural company behind the world's first non-browning apple without the use of any flavor altering chemical or antioxidant additives. Okanagan is scaling up its commercial supplies of non-browning apples and developing new commercial tree fruit varieties intended to provide benefits to the entire supply chain, from growers to consumers.

Oxitec Limited

Oxitec Limited, or Oxitec, is a pioneering company in biological insect control solutions. Oxitec is developing products that use genetic engineering to control insect pests that spread disease and damage crops. Among the applications of its platform which uses advanced genetics and molecular biology, Oxitec has developed a new and innovative solution to controlling Aedes aegypti, a mosquito that is a known vector for the transmission of infectious disease including dengue fever, chikungunya, and Zika. This genetically engineered, self-limiting line of the Aedes aegypti mosquito, or OX513A, has been approved by Brazil's National Biosafety Committee for unrestricted releases throughout the country. Additionally, open field trials of these mosquitoes have been conducted in Brazil, the Cayman Islands, Panama, and Malaysia under relevant permits or approvals. Further approvals will be required for commercial production and use.

Primary majority-owned operating subsidiary

AquaBounty Technologies, Inc.

AquaBounty Technologies, Inc., or AquaBounty, of which the company owned approximately 58 percent as of December 31, 2017, is focusing on improving productivity in commercial aquaculture, including the development of the AquAdvantage Salmon, an Atlantic salmon that has been genetically enhanced to reach market size in less time than conventionally farmed Atlantic salmon and approved by the Food and Drug Administration. In January 2018, AquaBounty raised $12.0 million through an underwritten public offering, in which the company participated by investing $5 million. As a result of this transaction, its ownership decreased to approximately 53 percent. In the future, its ownership stake in AquaBounty may drop below 50 percent, which may result in it deconsolidating AquaBounty.

Mergers, acquisitions, and technology in-licensing

The company may augment its suite of proprietary technologies through mergers or acquisitions of technologies which then become available to new or existing ventures, including operating subsidiaries, JVs, and collaborations. Among other things, the company may pursue technologies that the company believe will be generally complementary to its existing technologies and also meet its desired return on investment and other economic criteria. In certain cases, such technologies may already be applied in the production of products or services and in these cases the company may seek to expand the breadth or efficacy of such products or services through the use of its technologies. There have been no mergers, acquisitions or significant technology in-licensing activities in 2018. For a discussion of its 2017 acquisition, see "Notes to the Consolidated Financial Statements (Unaudited) - Note 3" appearing elsewhere in this Quarterly Report on Form 10-Q.

Financial overview

Intrexon has incurred significant losses since its inception. The company anticipate that the company may continue to incur significant losses for the foreseeable future, and the company may never achieve or maintain profitability. Outside of collaboration and license fee payments, which vary over time, Intrexon has not generated significant revenues, including revenues or royalties from product sales by it or its collaborators. Certain of its consolidated subsidiaries require regulatory approval and/or commercial scale-up before they may commence significant product sales and operating profits.

The company expect its future capital requirements will be substantial, particularly as the company continue to develop its business and expand its synthetic biology technology platform. In January 2018, the company closed a public offering of 6,900,000 shares of its common stock, including 1,000,000 shares of common stock purchased by affiliates of Third Security, LLC, or Third Security, the net proceeds of which were $82.4 million, after deducting underwriting discounts and commissions and offering expenses paid by it. Additionally, Intrexon has a Preferred Stock Equity Facility, or Preferred Stock Facility, with an affiliate of Third Security, which will terminate no later than April 30, 2019. The company's Chairman and Chief Executive Officer, or CEO, also serves as the Senior Managing Director and CEO of Third Security and owns all of the outstanding equity interests of Third Security. Under the Preferred Stock Facility, the company may, at its sole and exclusive option, issue and sell to the affiliate of Third Security, up to $100 million of newly issued Series A Redeemable Preferred Stock, or Series A Preferred Stock. The company believe that its existing cash and cash equivalents, short-term investments, cash expected to be received from its current collaborators and for sales of products and services provided by its consolidated subsidiaries, cash received in its January 2018 offering, and any issuances of Series A Preferred Stock under the Preferred Stock Facility will enable it to fund its operating expenses and capital expenditure requirements for at least the next 12 months.

Sources of revenue

Historically, Intrexon has derived its collaboration and licensing revenues through agreements with counterparties for the development and commercialization of products enabled by its technologies. Generally, the terms of these collaborations provide that the company receive some or all of the following: information technology access fees upon signing; (ii) reimbursements of costs incurred by it for its research and development and/or manufacturing efforts related to specific applications provided for in the collaboration; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration.

The company's technology access fees and milestone payments may be in the form of cash or securities of the collaborator. The company's collaborations contain multiple arrangements and the company typically defer revenues from the technology access fees and milestone payments received and recognize such revenues in the future over the anticipated performance period. Intrexon is also entitled to sublicensing revenues in those situations where its collaborators choose to license its technologies to other parties.

From time to time, the company and certain collaborators may cancel the agreements, relieving it of any further performance obligations under the agreement. When no further performance obligations are required of it under an agreement, the company may recognize any remaining deferred revenue.

The company generate product and service revenues primarily through sales of products or services that are created from technologies developed or owned by it. The company's primary current offerings include sales of advanced reproductive technologies, including its bovine embryo transfer and in vitro fertilization processes and from genetic preservation and sexed semen processes and applications of such processes to other livestock, as well as sales of livestock and embryos produced using these processes and used in production. The company recognize revenue when the customer takes ownership of the promised product or when the promised service is completed.

In future periods, its revenues will depend in part on its ability to partner its more mature programs and capabilities, the number of collaborations to which Intrexon is party, the advancement and creation of programs within its collaborations and the extent to which its collaborators bring products enabled by its technologies to market. The company's revenues will also depend upon its ability to maintain or improve the volume and pricing of its current product and service offerings and to develop and scale up production of new offerings from the various technologies of its subsidiaries. The company's future revenues may also include additional revenue streams the company may acquire through mergers and acquisitions. In light of its limited operating history and experience, there can be no assurance as to the timing, magnitude and predictability of revenues to which the company might be entitled.

Research and development expenses

Research and development expenses increased $3.1 million, or 9 percent, over the three months ended March 31, 2017. The increase is due primarily to increases in information salaries, benefits and other personnel costs for research and development employees and (ii) depreciation and amortization. Salaries, benefits and other personnel costs increased $1.5 million due to an increase in research and development headcount necessary to invest in current or expanding platforms and increased compensation expenses related to performance and retention incentives for research and development employees. Depreciation and amortization increased $1.2 million primarily as a result of information the amortization of developed technology acquired from GenVec, Inc., or GenVec, in June 2017, and (ii) additional research and development assets placed in service in 2017 at Oxitec.

Employees

As of December 31, 2017, the company had 906 full-time and 100 part-time employees. The company consider its employee relations to be good. The company had 230 production employees. The company's primary domestic production facilities, including approximately 380 acres of land, are located in Sioux Center, Iowa. The land and facilities are primarily used for its embryo transfer and in vitro fertilization processes, as well as housing livestock used in such processes. The company also lease or own regional production facilities and land in California, Maryland, Missouri, New York, Oklahoma, South Dakota, Texas, and Washington for these purposes. Additionally, Intrexon has commenced initial scale up of commercial production of its non-browning apples in Washington, its AAS salmon in Canada, and its GE mosquitoes in Piracicaba, Brazil, in anticipation of generating future revenues from each of these product lines.