Precigen Inc (PGEN) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to the Intrexon second quarter and first half 2014 financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Chris Basta, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome. I am Chris Basta, Vice President of Investor Relations for Intrexon. Welcome to our second quarter 2014 earnings conference call. Joining me today on the call are Mr. R. J. Kirk, Chairman and Chief Executive Officer, and Mr. Krish Krishnan, Chief Operating Officer. During this conference call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of Intrexon Corporation are based on current expectations, and are subject to risks and uncertainties.

A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the earnings press release which was released earlier today, and is also available on our website under the investors link, as well as in Intrexon's most recent SEC filings for a more complete description. The press release references, and our discussions this afternoon may reference certain non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA earnings per share, and pro forma adjusted EBITDA earnings per share. Reconciliations to GAAP measures are contained in the earnings press release, as well as on the investors section on our website at www.DNA.com. Now I would like to turn the call over to Krish Krishnan, our Chief Operating Officer. Krish, the floor is yours.

Thank you, Chris. Good afternoon, and thank you for joining the call today for a discussion of our 2014 first-half and second quarter financial results. I hope you have had the opportunity to read our press release, and the 10-Q that were released earlier. During today's call, I will provide an overview of the progress we have made since the beginning of the year, and provide a general business update.

As many of you know, our plan is to become the leader in the second-generation of biotechnology. Our strategy consists of developing and expanding collaborations with leading companies in health, food, energy, environment, and consumer sectors where we believe we can have significant impact. We have made notable progress towards this goal during the first half of the year, with all the development progress of the product-enabling activities within our existing channel collaborations, the formation of new exclusive channel collaborations, and expansion of our existing partnerships. We also recently took advantage of the unique opportunity to acquire a world leader in a growing market. I will touch upon each of these, and provide commentary around the progress we are making on our business plan.

That said, I would like to provide a brief overview of our recent acquisition in the food sector of Trans Ova Genetics. They are the largest producer and supplier of bovine embryos in the United States, and have a toolkit that places them at the forefront of the bovine reproductive industry. We will look to build upon their success, and expand their offering geographically to permit resourceful high-quality food production that will help meet the rising worldwide demand for food and protein. Together with our broad technology platform in both food and animal health, Trans Ova is well-positioned to move forward the science of genetic improvement in animals, enabling unparalleled productivity advancements, in not only the dairy and beef industries, but eventually the pork industry as well.

Moving on to the health sector, we recently announced the expansion of our immuno oncology program with ZIOPHARM Oncology. This expansion includes research and development in support of chimeric antigen receptor T-cell therapy and other cellular-based products, which are emerging as powerful immunological therapies that can target and destroy cancer cells that display personalized fingerprints. However, current approaches feature challenges associated with toxicity, off-target effects, and uneconomical manufacturing. Our platforms help overcome these challenges, and hold the promise to fully realize the potential of CAR-T and other cell therapies. In particular, the utilization of our proprietary RheoSwitch platform may be especially advantageous in CAR-T treatments, and we also see increased application of our technology in other targeted oncology products.

Also of significance within the health sector is that Fibrocell Science, one of our ECC's in June received Orphan Drug Designation for a genetically-modified autologous human fibroblasts. These genetically-enhanced fibroblasts combine Fibrocell's targeted fibroblast technology with Intrexon's UltraVector synthetic platform to treat a devastating, debilitating genetic disease that causes severe blistering and areas of missing skin. The two companies are working together to get the product into the clinic in 2015, to try to help these patients in need as soon as possible. Additionally through our collaboration with Fibrocell, we have also identified an excellent product opportunity for the treatment of linear scleroderma, a rare devastating and chronic autoimmune disease. As we start to make development progress, we will look to share more details.

Moving up -- excuse me -- moving on to the energy sector, we are pleased with the progress that our team has achieved with Intrexon Energy Partner, our joint venture in which Intrexon owns 50% of the JV, and was established to optimize and scale up our proprietary gas-to-liquid bioconversion platform for the production of fuels and lubricants. The biofuel industry has had an inherent problem, where the cost to produce has exceeded the price of products for sale in end markets. The cost side of the equation is most impacted by feedstock in the biofuel industry, and we find ourselves in a real good position utilizing natural gas, given that it is the cheapest source of carbon outside of coal. Through the input of natural gas and the new potential that exceeds yeast and sugar models by a wide degree, we believe our methane bioconversion platform holds the potential to transform the gas-to-liquid industry.

During the second quarter, we took a big step in defining our bioconversion approach, as a real platform technology where we also achieved farnesene in the lab. Farnesene is the second product utilizing this platform, following isobutanol which Intrexon has created from natural gas by employing its unique cellular engineering capabilities. We believe we are the first to achieve the production of each of these molecules using [methanotroph] as the industrial host. IEP is well-funded to reach commercialization, and the combination of both sound economics and science provides the foundation for the very promising future. With respect to the remaining sectors, I will just mention that we have made good progress in the environmental space with Rentokil, and are also pleased with our ongoing efforts in the consumer sector.

Lastly, I would like to comment on our acquisition of [a lab in] Budapest, Hungary that happened earlier this year. There were two assets that came with that deal, a state-of-the-art laboratory, which strengthened our fermentation process, optimization and scale-up capabilities, and we acquired a seasoned scientific team. The acquisition of the Budapest assets supports several partner research programs such as the collaboration with Johnson & Johnson, Amneal, and the Intrexon Energy partner initiative. It's location in Budapest is also enhanced that ability to sell in to international markets.

I am going to take a minute or two to briefly talk about the financials that you saw in the press release. During the second quarter, our revenue totaled about $11.8 million, an increase of 76% over the second quarter of 2013. Net loss was $52 million including non-cash charges of $43 million, attributable to Intrexon, at a loss of $0.53 per share. Adjusted EBITDA was a loss of $10.4 million or a loss of $0.11 per share. It is important to know that cash considerations received for research and development services covered 49% of cash operating expense, which is exclusive of the operating expense of the majority-owned consolidated subsidiaries.

I want to point out that a central theme within our strategy, is to grow our business in a cost-efficient manner. This means being prudent managers of capital, and maintaining our financial flexibility. During the first half of the year, we demonstrated our ability to achieve this objective, as our cash receipts exceeded our cash operating expenses. Total consideration receipts for technology access fee and reimbursement of research and development expenses covered 130% of cash operating expense in the first half, and again, that's exclusive of the operating expense of the majority-owned consolidated subsidiaries.

In summary, our goal, one we have been working towards for several years is that shareholder capital is preserved, while we built a vast portfolio of [backend] economics across many significant products, spanning multiple industries and sectors. Thank you. We will now open the call for Q&A.

(Operator Instructions)

Our first question comes from Daryl Weber of Wells Fargo.

Thank you. First off, I would like to thank you for allowing the investor community the opportunity to greater understand the amazing platform. We welcome the transparency. I have a series of questions on the CAR therapy. First, could you elaborate on Ultra CAR-T programs specifically? How is Intrexon's technology differentiated from some competitors like Kite Pharma and Bluebird Bio and General Therapeutics? And secondly, when will Intrexon's ZIOPHARM share with the Street how these programs will proceed?

Thanks, Daryl, and thanks for joining. So this is R. J. by the way.

Thank you, R. J.

Well, first of all, we are not going to comment on the product candidates of other companies. But I will observe, as we noted in the press release and was even amplified by Krish in his comments, that there are known drawbacks to the CAR-T therapies that have reported results, the most notable of which is the off-target toxicity. So a T-cell is after all, a ubiquitous killer. So if it hits a single receptor in a single cell, it is going to kill that cell. So these are -- these have become major management issues for the -- and only the major cancer centers can actually practice these things so far. And they have [become] major patient management issues, as you know the toxicities have been quite high. Even in liquid tumors, where they are targeting of CD-19, which is basically not supposed to be expressed in other types of cells. And yet it must be, because the toxicity -- the off-target effects leading to toxicities are quite pronounced.

So if you consider -- and here, I can't comment on what we have in development, and it certainly would be able to behoove us, and frankly we wouldn't do it anyway, to get out ahead of our partner, ZIOPHARM, with regard to any disclosure of developmental disclosures. But I will say, given the data that ZIOPHARM has previously presented on use of the [Rheo] therapeutic switch in their own clinical trials, you see that the switch is both useful to induce and regulate protein expression. They have established that they can have absolutely zero protein expression, or express of a lot depending on the dose of the activator ligand, the small molecule activator ligand that is delivered to the patient. They have shown that they can turn it on, turn it off, turn it on again, and they can dial it up and down.

So when you consider that off-target toxicities of something like CAR-T, I will say, it is not a big stretch to imagine that you could use the Rheo gene therapeutic switch with good effect in this area, because it should enable -- you could put it this way, if you could tune T-cell killing effect -- and all right, so I am not going to comment further on that -- but if you can tune T-cell killing effect, it could provide therapeutic windows for therapeutic CAR-T and other examples of synthetic immunology, meaning other engineered cell-based therapies. That could enable us to target, not only with liquid tumors, but pretty much all tumors including solid tumors.

In today's press release, you talked about the potential partners with Intrexon. Could you share with us areas of interest with respect to the five divisions, and if possible maybe the order of interest, healthcare, energy, consumer et cetera, et cetera?

Yes, we have ongoing dialogues across every one of these sectors. And so, anybody we are having such a dialogue with would be under a confidential disclosure. So obviously, I am not going to comment on the identities of these parties. But I think, Daryl, we have made disclosures in the past, and we have actually done -- we have had announcements in the past that are sufficient to inform the sorts of areas in which you can expect to see our -- at least some of our partnering going forward.

Frankly, some of it will be in areas -- I think we probably surprised you all with the Trans Ova deal, for example. So some of it, maybe you haven't thought of. But some of it, I am pretty sure you have. So for example, even on our S-1, we highlighted that we thought we could contribute significantly in immuno oncology, so wouldn't be surprised to see transactions there. You have seen us do transactions in the area of API, meaning in our case, engineering cell lines to produce active pharmaceutical ingredients. So again, as I think any investor, would be reasonable to expect that we will continue to advance and do more partnering in the area of API, that we think is a very attractive area.

In food, you have seen from what we have done, with where we are with the AquAdvantage salmon, and now with Trans Ova, I think it should be clear that we are particularly interested in -- and I am not saying to the point of exclusivity -- but that we are particularly interested in animal proteins.

With respect to the energy partnership, can you share with us the anticipated ramp-up in production of isobutanol, for instance, from ounces to gallons, how long do you think that will take?

Yes. I don't know if that has been disclosed -- I don't think we have disclosed that, so I can't share numbers with you. I will say that we are very, very pleased with the progress that is being made under Bob Walsh and his team. Certainly, the Intrexon Energy Partners investors were pleased, and I personally am pleased, and Krish is pleased. So we love this program, I don't mind telling you. It is -- it's an immensely ambitious program.

It's one that, if successful could really dwarf a lot of other things that we are doing in the Company, in terms of ultimate value realization. Because [etrol] -- liquid fuels, I think that's around $3 trillion per annum in worldwide revenues. So there is a lot of potential here. We like everything we are seeing, as -- just bear in mind, that the essential motif is that to the engineer and that is what we have done, is to engineer the methanotroph, which is a bacterium that naturally consumes methane, which is the principal component of natural gas, of course.

We like the pricing of natural gas on a per pound -- on a per pound of carbon basis. It's really the cheapest readily available carbon source, and it is a small fraction of the cost of carbon that could be derived from say, sugar or other such feedstock. So we are very -- we find this very attractive for a number of reasons. If we are successful, it should be a very low CapEx in relation to the quantity of value that would be produced, a very low CapEx, and also low OpEx type of investment opportunity. Which it basically allows us to take a low-margin fossil extraction industry, and turn it into a high-margin biotech industry. So we are very, very excited.

In terms of progress, I can tell you what the next milestone would be. So as investor, what I would look out for, is when we pull the trigger on building our demo plant, that probably means we think we are in the money. So just to review, and I think we talked about this before -- while we are very pleased with the optimization that is going on now in our engineered methanotroph, we do not yet believe that we are in the money in terms of yield. But we believe that we are rapidly approaching that status. Once we are in the money, meaning we believe that a demo plant would demonstrate economics that would be attractive for -- to induce others to bring them online, bring other such plants online then -- then I think that is why as investor, I would look out for that as the next milestone, when you see us building that demo plant somewhere.

Lastly, the farnesene opportunity. How large is that opportunity, and does that fall under the IEP partnership? Thank you.

The second half of your question is yes. The answer to your second half of the question is yes. It does -- it is within the Intrexon Energy Partners partnership, and what was the first part? What was the first part of your question?

How large is the farnesene opportunity?

It is like isobutanol, Daryl, in that a lot of these substances get -- have pretty steep elasticity of demand curves. So that if you lower the price, you find the volumes go up considerably. So it's a large product, this is used a lubricant, it is used in -- it has a myriad of industrial uses today. To be honest with you, I don't think that we actually know what the elasticity curve of that product looks like, but I know that it ramps highly. So meaning that the volumes would go up quite substantially if we could bring the cost down.

Thank you very much. Great work, great job.

Thanks, Daryl. Let's go to Chris Guttilla.

Your next question comes from Chris Guttilla at Deutsche Bank.

Hello, how are you.

Hello, I am sitting here looking at the terminal, and saw you were up next Chris. (Laughter).

Congratulations on your one year anniversary as a public company, first of all.

Thank you.

And could you talk about Beyond Bio? Could you give us some color on that, how you anticipate rolling out that business, is it a new business? Just give us as investors some information about Beyond Bio? Thanks.

Thanks for that question. That's a great question. That shows how long you have been familiar with the Company, because this is the kind of news item that may not excite investors as much as it does the management team, and I will tell you why. For us to administer one of our ECC's today, is a fairly lengthy process that involves a lot of ETF hours on all sides.

So our scientific team will meet with our ECC partner's scientific team, often for an entire day, sometimes two days on a periodic basis. They go to dinner, they travel around. Then notes are prepared, then those are circulated, and people comment on the notes. And then our team goes to work, armed with what they believe to be the design intent, for what it is we are supposed to do, that was covered in those notes. Then our team will go to work on that, and maybe produce something -- and maybe they are on --all of the same mind, and maybe they are not. My point is, there are coordinating and complexities involved in every one of these ECC relationships.

So I have to say that, this is something that really Krish initiated about a year ago. And the reason is while today we have I think around 30 ECCs, with around 20 partners something in the neighborhood. It has always been our intention to see this Company achieve great scale, at least on a horizontal dimension. And to do that, that means we need the capability to expand from dozens of ECC relationships to hundreds, and hopefully at some point in the future even thousands. That probably is not achievable under the regime in which we operate at ECC interfaces today. So Krish, being among other things -- and he is an engineer, and was previously in the software industry at one point in his career, before he and I started working together at least -- actually we worked a little bit in software.

Yes.

Saw the need and the opportunity to push our toolset, really in a very, very meaningful way, in a very useful way, out to the scientific teams of our partners. So what if our partners could, from their own sites really have full access to everything that we can do for them -- and hear that I am not just talking about people in general. This is not going to be a public domain product or something, but I mean our ECC partners. Okay? What if their scientific teams really learned our entire toolset, and could think in the same way that our designers think, and we can make this tools available to them, so they can operate under the same expert system that our designers operate under.

And so, looked at Beyond Bio, where it says, to be clear it does not mean that this thing is ready for a large scale roll-out, but it means that we have our first beta test user. We will be pushing it out to another large company that has a beta test user soon. And with proper development and maturity, we think this can really be the platform that will enable us to scale.

Do you retain backend economics like your --?

Oh yes, this doesn't change -- good question, Chris. This does not change our business model at all, and maybe we could of been clearer about that in the release, if there was any such suggestion. This would only be made available to our ECC partners.

Great. Well, thank you very much.

Thanks, Chris. Next question.

The next question comes from [Tejas Savant] at JPMorgan.

Hello, thanks for hosting the call and taking my questions.

Thank you.

So I would like to dig a little bit deeper into the Trans Ova deal. Can you gove some comments around the relative sizes of the four services they offer? Is the majority of the $[63] million in revenue from embryo transfer and IVF? And then, I know you have said, that revenues doubled over the last five years. So is a mid teens to 20% sort of growth rate what we should expect going forward from Trans Ova?

Yes. We are not providing forward guidance, but that's a great question. But I can say that our chief interest in this company obviously, is in the delivery of frozen bovine embryos. This is a terrific company with just a great skill set. And I think the opportunity to marry really the best in that kind of know-how with our entire technology platform, was just absolutely a dream come true. I don't mind telling you -- for those of you, I have a new piece of art. It's a little neon sign that, out in the lobby, out in front of this conference room, that is literally -- that says I dream of cows.

And that's because as soon as we identified -- actually before we identified this particular opportunity, when we went looking for this opportunity, this was something that I started quote -- it actually comes from a Gore Vidal novel for those of you with a literary bent. (Laughter). But anyway, we think we are very, very happy with this deal. And we are very -- just to get to your question, which I would say we wouldn't give forward guidance, but I will tell you we are very, very ambitious about what we think we can do with this platform.

Okay. And then, can you at least qualitative -- qualitatively comment on any investments that you need to make in the business to grow it? I know they have talked about some international expansion as one of their priorities. And then, how does that impact OpEx for you? I mean, should we still think of that $20 million to $30 million run rate, or will it now sort of tick higher after the deal?

We are very careful about how -- as Krish mentioned, we are very careful about how we manage his business, and it's our intention -- although you could see the -- the run rate growing, and we expect that -- I will come back to that point later. But we are going to manage growth, so that we are covering all of our OpEx -- this is our intention at least -- all of our cash OpEx with revenues from third-parties, partners and customers. So we will be managing that growth. Clearly with the addition of technology, however, if we don't believe that we will see linear growth in that business between inputs and outputs, in other words, we are expecting to see higher rates of return as we grow that platform.

Okay. Great. Thank you.

Our next question comes from Keith Markey of Griffin Securities.

Thank you for taking my questions. I was just wondering if you might be able to tell us a little bit about how quickly you might be able to advance the Trans Ova business into foreign markets, or possibly into the pork area that you had mentioned, Krish?

Yes, well, with respect to foreign markets, it should be borne in mind that Trans Ova already is penetrating foreign markets, and they have made good initial inroads there. And so, I think they had plenty of ambition about that before we met them. So I won't be -- you shouldn't be surprised to see geographic expansion occurring there.

With regard to porcine, participating in pork genetics, we have not really talked about this yet. But I will mention that a couple of assets that came with Trans Ova, and some of the skill sets are really quite remarkable. Although porcine genetics has not been a big part of their business, they own 100% of ViaGen, which is a Company that is really all about propagating porcine genetics. And in addition, they own the majority interest in a company called Exemplar Genetics, which is a company that is devoted to research animal models based on porcine species.

We are interested in both of these areas, although we have not really finalized our plans, and we haven't actually discussed this in detail with the Trans Ova team yet, so definitely don't want to get ahead of ourselves. I think the only reason we mentioned it is, because we want you to be aware that the Trans Ova team does contain expertise that lends itself to participating in the pork genetics industry as well. And that we fully intend to exploit that.

Thank you. And then I was wondering if you might be able to give us a little bit of information about the status of your active pharmaceutical ingredients program? For instance, how soon might we hear of the first product commercialized? It seemed to me like that might be a relatively early entry into the marketplace?

Yes, it is one of the things we like best about the field, frankly, but you are right. The answer to time to market is, regulatory can be very quick, because once -- most of these APIs, of course, probably all of them are monographed somewhere. So if you hit the specifications, and if the manufacturer meets the requirements that for a GMP or GLP or whatever the necessary standard is for that level of process, then you are in business. However, the time to get -- the time to get to that point, varies from project to project based on its complexity.

Some of these projects are actually quite complex, and will require a few years. But I think you are right, some of them could actually occur in 18 to 24 months, start to finish. So we are very intrigued by this area. We believe that in this vast area -- and you could extend beyond APIs, or really think in terms of the [defined] chemicals generally. We think that probably two-thirds of these, certainly two-thirds of API -- we will put it this way, I think 99% of these things are made through principally -- either through other botanical extraction or organic synthesis today. And we think probably two-thirds of them could be more efficiently produced in an engineered cell line.

So the opportunity is terrific. It is really a terrific combination of the technologies we have between UltraVector, than the strained engineering and optimization capabilities that we have in our -- that our lab in San Carlos that is recently enhanced by the acquisition of our lab in Budapest. Our ability to swap out many genes at one time, so that we can get through the permutative part quickly, really gives us an inherent advantage. A lot of the tools that we built, a lot of the DNA mods that we built that are unique, that we can plug into one of these microorganisms, we have found a lot of them are useful, and we are making great progress there.

To answer your point directly, I don't want to give a date for an ongoing project. So you may note, Keith, here, you may recall that our first API project that we undertook was with Genopaver. That was a company that was actually created in order to support this one project, and I am not sure if the target is disclosed. Was the target disclosed? Keith, do you do remember what the target is at Genopaver? If you do, then I will comment.

Off hand, no, I don't. I'm sorry.

All right. Well, that was going very well. And yes, anyway thanks very much then, for your question.

Okay. I would think that -- well, I have a question that you probably -- I think I know the answer to, but I will throw it out anyway. I was just wondering, in terms of approaching the different participants that are in the methane or energy sector, I was wondering if you have considered -- or have maybe already approached any of the electric utilities that use natural gas for their electricity generation? Because in the past, those -- some of those utilities have been very interested in getting into some nonregulated but related businesses. And it just seems to me that if you have methane going into a large plant, that they could easily flop it out and put it into something with a higher value?

Yes, you are right, And some of those companies have already diversified and actually have become leading players, working from for example, the Marcellus shale, for example. And some of them are already actually exporters of natural gas and so forth. So the answer to your question is yes. We have considered them, and we know them, and we have ongoing dialogues with several of them.

All right. Thank you very much.

This concludes today's question-and-answer session. I would like to turn the conference back over to R. J. Kirk for any closing remarks.

Okay, thanks. I just want to -- this is really just for the Intrexon team. I don't know how meaningful it is to the shareholders, but I will tell you it is a big thing to us. So when we were still a private company, we targeted, and we imposed on our team -- we targeted the goal of 50% cost recovery. Meaning let's hit, guys, as a matter financial discipline, let's hit 50% of our cash OpEx expense through the cost recovery mechanism alone.

Now the reason we chose that target, is because we thought that we could rely on deal money, at least over a larger periods of time like a year. We could rely on deal money to make-up the other half. And what -- and essentially what we want to do, is continue to build the tremendous value in the back-end economics of these future products, without allocating shareholder capital, our own shareholder capital to those development projects.

And so, an important part of that -- other than the deals which are know you are all interested in -- I think we are going very well on that. But a very, very important part of that, and really Krish has been instrumental in driving this, was to impose this discipline to get us to that 50% mark. So we have longed -- and that is the reason I think it [that it is impressive], that we can even say it, is that we have striven for years on this, is absolutely true. And now we have attained that objective. So I would just like to congratulate our team, for the terrific effort around that.

So the deal we made with our team was, that once we get to that 50% -- if you think about it, that means that every incremental dollar that they bring in has cost recovery, we are going to allow them to spend two. And the reason for that is to enable them to develop more of concepts, Build more platform capabilities and the like, just -- and that's really what we began with. So we have had a very stringent discipline in place to allow us to hit this mark. And so, once we did hit it -- obviously, we recommenced some rather significant hiring. So we have been building our scientific teams I will say, over the last few weeks at a rate that we have been keeping ourselves from doing, for the last few years.

And so, it is just -- again, I will just congratulate our team. I don't mean to sound self-congratulatory, really, I had nothing to do with this. But anyway, we are very, very pleased with the progress that we are making. Obviously, we enjoy -- we think some of the finest shareholders -- we do see our shareholder list, and we are very pleased with the quality of the shareholders we have. And we are going to do our best to really make this an enterprise that you all will be proud of. So thanks very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.