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Intrexon: Back-End Economics Could Generate Huge Upside

Summary

Partnership-based business model allows Intrexon to mitigate risk.

The company faces opportunities in every sector to grow their channel partners and joint ventures.

Back-end economics could generate massive earnings per share.

"I think the biggest innovations of the 21st century will be at the intersection of biology and technology. A new era is beginning." --Steve Jobs

As an investor important characteristics of a company lie in the product or service they provide and the ability to scale and grow their production while maintaining healthy margins. In saying this, I want to bring investors' attention to Intrexon (NYSE:XON). Intrexon is a synthetic biology company focusing on cell engineering in essentially every sector where cells are present. Although this sounds like a bold claim, I want to show investors that there are early signs that their technology suite is the real deal. Intrexon's goal is to license their technology suite to exclusive channel partners (ECCs) and joint ventures (JVs). Currently Intrexon has 28 ECCs & JVs as some are shown below.

One can see the majority of these partners are ECCs with the average front end economics ranging from $1M-$3M. These up front costs help to cover as of the recent quarter close to ~60% of OpEx, the additional OpEx is covered by XON. In addition, many of the partnerships consist of reimbursements by the partnering company. The most important thing I want you to get out of this business model is that the backend economics for each deal is extremely attractive. For instance on average XON receives royalties in the high-single digit to low double digit range on each products net sales. In some cases such as Ziopharm (NASDAQ:ZIOP), XON receives a royalty of 50% of net profits. XON has more than ample cash after the recent public offering on January 20th, 2014. XON raised another $150M in cash bringing them to around $250M currently. I believe they did the offering as a "in good faith" offering to show potential future partners that they have more than enough cash to run the business for three years.

Valuation:

Rather than doing a pro forma income statement, I feel it is easier to go about showing sensitivity analysis based upon the number of ECCs signed. Modeling for Intrexon is nearly impossible as to why I believe not many analysts cover it actively. In my analysis I have provided a sensitivity analysis to see...


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