Precigen Inc (PGEN) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Intrexon First Quarter 2017 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, operator. Good afternoon. I am Chris Basta, Vice President of Investor Relations for Intrexon Corporation. Welcome to our First Quarter 2017 Earnings Conference Call.

Joining me on the call today are Mr. Randal Kirk, Chairman and Chief Executive Officer; Dr. Andrew Last, Chief Operating Officer; Mr. Robert Walsh, Senior Vice President, Energy Sector; and Mr. Joel Liffmann, Senior Vice President, Finance.

Slides that will be presented on the call today can be viewed on the Investors section of our website, dna.com, by clicking on the link for Intrexon Corporation First Quarter 2017 Financial Results Conference Call.

During this conference call, we'll 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 Intrexon's business 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 Intrexon's most recent SEC filings for a more complete description.

The press release references, and our discussion this afternoon may reference, certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations to GAAP measures are contained in the earnings press release as well as on the Investors section on our website.

Now I would like to turn the call over to Andrew Last, Intrexon's Chief Operating Officer. Andy, the floor is yours.

Thank you, Chris. And good afternoon, everybody, and thank you for joining our First Quarter 2017 Earnings Call. We appreciate your support and interest in Intrexon.

Earlier today, we issued our earnings press release and filed our Form 10-Q with the SEC, and we hope you've had the chance to review the reported financial results.

During the first quarter, our dedicated team continued to make solid advancements across our 30-plus collaborations and achieved significant progress with several of Intrexon's platform technologies and programs, which we'll discuss in more detail today.

Our business focus remains steadfast on engineering biology to bring superior and environmentally responsible solutions to the commercial marketplace across 5 verticals: health, energy, food, consumer and the environment.

The construction of biofactories genetically designed by Intrexon to achieve this continues to increase. One such biofactory that has the potential to drive meaningful change in the energy landscape is taking plentiful, inexpensive, natural gas feedstock in creating valuable chemicals and fuels in a more sustainable and efficient manner. You will hear more about that shortly from Bob Walsh, who leads both our Energy sector and our Industrial Products division, where this exciting work is being done. He will provide an important update on our methanotrophic bioconversion platform that represents a new paradigm in gas to liquids technology.

However, before that, I will provide some highlights on our marketable product portfolio and the health sector.

On Slide 5, you'll see several of our biologically engineered products that have received various regulatory clearances, including the Arctic apple, the Friendly Aedes mosquito and the AquAdvantage Salmon. We believe that each of these individual products represents substantial revenue opportunities for the company. And as individual technology platforms, they represent the beginning of what is possible through engineering biology in the much larger commercial markets of agriculture, insect control and aquaculture.

So starting with our nonbrowning fruit platform currently centered on apples. Okanagan Specialty Fruits is approaching the commercial launch of nonbrowning, fresh sliced apples later this year. In the world of healthy and convenient snacks, we see Arctic apples obtaining a leading market position.

Convenience for the consumer is a major driver of value in the growing healthy snack market. There are many examples of convenience driving consumer demand, including the baby fresh-cut carrot, which not only reduced wasted carrots but also substantially increased total carrot consumption.

With the Arctic apple, we have a nonbrowning product that brings benefits to consumers, retailers and producers alike. In our view, the multiple benefits of this unique product will accelerate adoption of fresh-cut sliced apples, increase apple consumption, make a substantial difference in the roughly 40% of apples wasted each year and enable entirely new apple-based products to come to market.

In the U.S., sales of sliced apples are estimated near $500 million annually, even though they are treated with chemical preservatives that inhibit browning. But they also change the texture and taste, which we believe has constrained category growth. The Arctic solution resolves these issues and does not change the apple's texture or taste. And importantly, from a business perspective, we expect the Arctic apple will have a meaningful margin advantage because it eliminates the cost of chemical preservatives.

Having completed the planting of 70,000 trees in 2016, we expect to plant over 250,000 trees this year and over 0.5 million in 2018. By the end of the year 2020, we are planning to have planted close to 4 million Arctic apple trees.

We are looking forward to the initial product launch later this year. Packages will hit the shelves in a limited number of retailers, and we expect to see strong consumer interest. We believe the Arctic apple business can eventually reach $1 billion per year, with attractive margins and return on investment.

Through our nonbrowning platform, apples are just the beginning. We are actively working on additional fruits, including cherries, pears and avocados. Intrexon has also begun development on its first vegetable, lettuce.

Our Oxitec subsidiary continues to gain momentum in 2017. The significantly superior control of the dangerous Aedes aegypti mosquito has attracted the attention of new countries and geographies. Since the start of the year, we have commenced a regulatory trial in India and announced an MOU to bring our solution to Colombia. Additionally, we announced suppression results from CECAP Piracicaba as shown on Slide 9, that illustrates the strength of Oxitec solution. For the second consecutive year, we maintained the excellent level of over 80% suppression of Aedes aegypti in the treated areas versus standard approaches, including pesticides in the control area. We achieved this sustained control in the second year with 60% less mosquitoes, thus demonstrating durability and a cost benefit.

Moreover, in this area, where Oxitec solution is being deployed the longest, public support for our genetically engineered solution is exceptionally favorable. The CW 7 Market Research institute survey shows 93% of citizens in Piracicaba support its use. We expect to add additional geographies and countries in 2017, including a regulatory trial in the U.S. upon receipt of final clearance from the FDA. Oxitec is investing in personnel as well as additional production capacity in order to meet anticipated demand in both existing and new geographic regions.

Finally, under our marketable products is the AquAdvantage Salmon. We believe that sustainably farmed fish that can be produced in half the time and one quarter less feed and do not require vaccines or antibiotics like other farmed fish are positioned well for success. AquAdvantage Salmon is the only approved fish that delivers these advantages.

During the first quarter, AquaBounty listed on the Nasdaq Stock Exchange, broadening its exposure to the U.S. market.

In the $150 billion aquaculture industry fits faster, better land-based farming solution is initially targeting the $2 billion Atlantic salmon product category in the U.S.

We are also working on other high-value targets with AquaBounty, including tilapia, in which we have achieved a 50% increase in fillet weight. We look forward to seeing continued progress at AquaBounty through the remainder of 2017, including movement on their plans to increase production capacity.

Moving on to our development portfolio. We will focus the remainder of our update today on our Health and Energy sectors before turning the call over to Joel for financial comments.

With respect to our Health sector, during the first quarter, we announced the formation of Precigen, a wholly-owned subsidiary to consolidate all of our health-related assets. The formation of a dedicated health company focused on gene and cell therapy is a significant step to increase the focus and inherent value in our platform technologies and programs, which are advancing in clinical development. We're actively evaluating a number of strategic and structural alternatives to maximize shareholder value. Additionally, we've been fortunate to attract several highly qualified candidates to lead Precigen and expect to provide an update in the near future.

The clinical development outlook for 2017 is detailed on Slide 14. We continue to believe this will be a breakout year for our health sector, given the number of programs entering the clinic in 2017, with additional programs from our broad pipeline following the same path in 2018 and beyond.

As shown in these tables, we have 4 active clinical trials utilizing our gene and cell therapy platforms today and expect that number could increase to as many as 14 by year-end.

In the oncology space, we recently provided an update on the development of the next-generation CAR-T therapy in our strategic collaboration with the biopharmaceutical division of Merck KGaA and ZIOPHARM Oncology. As detailed, the therapeutic candidates for the 2 CAR-T targets selected by Merck in mid-2014 -- '15, sorry, will utilize the nonviral Sleeping Beauty system to generate CARs that co-express membrane-bound IL-15 under the control of our RheoSwitch platform to regulate in vivo expression.

Additionally, it was disclosed the 2 CAR targets are expressed in a wide range of tumor types, which has positive implications for potential commercial milestones and royalties. We anticipate entering the clinic in 2018 with this controlled CAR-T approach.

During the first quarter, Intrexon and ZIOPHARM also announced a CRADA with the NCI and Dr. Steven Rosenberg, a pioneer in immunotherapy. The CRADA is for the use of Sleeping Beauty to genetically modify autologous PBLs to express TCRs targeting neoantigens for patients with advanced cancers. This taps into Sleeping Beauty's potential to target unique neoantigens found in solid tumors, thereby enabling personalized immunotherapy for cancer patients.

Additionally, ZIOPHARM has been working to reduce the time and high costs associated with manufacturing and delivery of CAR-T cells, with the goal of making them a bedside or point-of-care option for cancer patients.

ZIOPHARM's Q1 conference call last week covered this potentially game-changing approach. We are enthusiastic about their plans to bring this platform to the clinic and expect to hear more as the year progresses.

Slide 19 provides a brief overview of the 4 active clinical trials utilizing our technologies. During the first quarter, ZIOPHARM reported a successful end of Phase II meeting with the FDA for the IL-12 RheoSwitch program for recurrent glioblastoma. They will be progressing to a Phase III trial this year, and there will be an update on this program at ASCO next month.

ZIOPHARM also improved production times in its ongoing Phase I trial of second-generation Sleeping Beauty CD19 CAR-T cells for lymphoid malignancies, with T-cells manufactured in as little as 2 weeks.

Subsequent to the quarter, ZIOPHARM announced FDA acceptance of the IND application for a Phase I trial for CD33 CAR-T therapy that incorporates a kill switch for relapsed or refractory AML. These unmet needs are amongst the most challenging scenarios in the management of AML. The first patient is expected to begin treatment in the third quarter.

In rare diseases, collaborator Fibrocell Science received fast track designation for its orphan drug FCX-007 to treat a devastating skin blistering disorder known as RDEB. The first patient in the trial was dosed in February, and earlier this week, Fibrocell reported the Data Safety Monitoring Board has recommended the continuation of the trial. Data from multiple patients are expected in the third quarter.

In cardiac disease, our majority owned subsidiary, Xogenex, is developing a groundbreaking 3-gene therapy approach to heart failure. We are of the belief cardiac disease is caused by multiple genes that we're targeting simultaneously with this pioneering approach.

Echocardiographic measurements in preclinical animal studies have demonstrated reversal of established ADM cardiomyopathy for congestive heart failure after a single treatment. Nuclear localization of the PHH3 mitotic marker has also confirmed cardiomyocyte regeneration. We intend to file an IND on this groundbreaking program by year-end.

In addition to maintaining forward progress in all our health programs, we are also continuously strengthening our technology capabilities for our current and prospective partners. To that end, in the first quarter, Intrexon entered into an agreement to acquire GenVec to develop a viral platform with significantly higher payload capacity of over 30 kilobytes, both 3x greater than current viral delivery systems. We expect to close on this transaction following approval by GenVec's stockholders.

At this point, I'd like to turn the call over to Bob Walsh, Senior Vice President and Head of Intrexon's Energy Sector.

Thanks, Andy. It's a pleasure to be on the call today.

As head of the Energy sector, the majority of my time is spent managing the extremely talented team of over 140 employees in the Industrial Products division. This is where we execute Intrexon's pioneering work to crack the genetic code of what we believe can be the most valuable industrial fermentation platform, our methanotrophic bioconversion platform, or MPB.

Intrexon's disruptive MBP technology designed to enable a highly profitable use of low-cost natural gas to replace oil as the feedstock for the manufacture of high-value industrial products. I would like to point out just how plentiful natural gas is.

North America has over 300 trillion cubic feet, which equates to over 100 years of proven reserves. Other parts of the world have equally ample supplies. Developing engineered biology solution that is environmentally friendly and also economical to capitalize on this plentiful supply would be a game-changer in the gas to liquids industry, and we believe Intrexon has done just that.

At the center of our proprietary gas to liquids conversion platform is the methanotroph bacteria. This unique organism consumes inexpensive methane as its energy source, and since 2013, Intrexon has harnessed this capability through bioengineering to grow the number of valuable fuels and chemicals.

Slide 25 shows the valuable molecules we have achieved to date with our MBP platform technology. Isobutanol, farnesene, 1, 4-butanediol, isoprene, isobutyraldehyde and 2,3-butanediol. All 6 molecules have been obtained via single-step fermentation, utilizing our heterologous pathways, and to the best of our knowledge, all 6 represent world firsts.

The total addressable market opportunity for the molecules the product achieved to date is very significant. And the 4 molecules actively under development represent a total addressable market exceeding $100 billion per year.

Today, we're excited to report that for 2 of these products, isbobutyraldehyde and 2,3-butanediol, we've attained the yields necessary for the site selection of initial Intrexon facilities. Additionally, we've had a greater than 30% increase in 2,3-butanediol yields during the first quarter 2017, which places this valuable chemical commodity in the money based on current natural gas prices.

While we are highly encouraged by this progress, we remember -- we remain vigilant in anticipating and mitigating risks associated with these programs. These include potential scientific risks and possible scale-up risks, which could create delays that push out our time lines and could alter our economic model of these projects.

With that said, this rapid achievement in 2,3-butanediol and its implications have led Intrexon to retain Moelis & Company to advise us on strategic and financial options with respect to our platform and/or specific products from it.

From a commercial perspective, the successful progress in 2,3-butanediol is noteworthy because these molecule is converted easily to 1, 3-butadiene. Butadiene is utilized in the synthetic rubber industry as well as other areas, with annual worldwide sales estimated near $22 billion. To put the value of our platform in further perspective, butadiene sells for between $2,000 and $3,000 a ton, whereas our projected COGS are sub-$1,000 per ton.

Similarly, continued success of isbobutyraldehyde opens another significant near-term opportunity, as it is the main precursor to methyl methacrylate or commonly called MMA. MMA is used in the acrylic industry with the largest applications being automotive parts and lighting for LED and flat panels. MMA represents a $7 billion market opportunity, with prices ranging from $1,600 to $2,200 per metric ton. Our projected COGS for this valuable product are also sub-$1,000 a ton.

From an operational perspective, we've begun site selection activities involving North America and other low-cost natural gas zones worldwide. The next step in scale-up will be to produce 2,3-butanediol in our pilot facility this summer for engineering data and final product quality testing. This effort puts us on track to secure a site by year-end and kick off detailed design for a small-scale facility that could break ground in 2018.

Intrexon has formed 2 partnerships with financial investors: Intrexon Energy Partners focused on fuels and lubricants, including isobutanol; and IEP 2, or Intrexon Energy Partners 2, focused on 1,4-butanediol. With respect to isobutanol, as noted in our last conference call, we continue to work around a technical hurdle on the program and expect to provide an update on our progress later this year.

With respect to 1,4-butanediol, it remains on track.

For the remaining products, as previously disclosed, we had initiated partnership discussions for at least one of these targets and will announce further developments as appropriate.

Now I will turn the call over to Joel Liffmann to discuss financials.

Thank you, Bob.

Today, we reported first quarter revenues of $53.7 million, an increase of 24% over the same period last year. Collaboration and licensing revenues were 62% of our total revenue and increased by $9 million or 37% over year-over-year.

Product and service revenues increased by approximately 5%, as our Trans Ova subsidiaries saw an uptick in demand for certain services, along with scientist stabilization in the cattle industry. As a reminder, Trans Ova provides industry-leading reproductive technologies to cattle breeders, and we continue to invest in new technologies to capture additional revenues in this business.

Deferred revenues, which will be recognized in future periods, as we perform under our ECC and joint venture agreements, were $297 million at March 31.

Our first quarter SG&A expense was $35.1 million, a decrease of $7.7 million from a year ago. The decrease was driven by a reversal of previously recognized stock-based compensation expense and litigation expense that was recorded in the year-ago period. We are also continuing to invest in our platform technologies, and research and development expense in the first quarter increased by 32% to $34.2 million.

First quarter adjusted EBITDA was a loss of $7.1 million compared with the prior year loss of $11.7 million. We once again hit our cost recovery target and had cash receipts from research and development services that were over 50% of our cash operating costs, when excluding operating expenses of consolidated subsidiaries.

Total consideration received from all operating sources were 64% of consolidated cash operating expenses.

At the end of the first quarter, we had consolidated cash and liquid investments of $205 million, and we also held equity securities and preferred stock in our ECC partners valued at approximately $156 million.

More detail regarding our results can be found in the 10-Q filed with the SEC earlier today.

I'll now turn the call to R.J. Kirk for some comments.

Well, first, let me say that everybody around this table is pretty happy today.

The results that Bob Walsh disclosed a few minutes ago represent the achievement of what I personally believe is probably the most valuable biotechnology in history.

You heard Bob mention that we've hired an eminent banker to assist us, so let me say why we've done that. When I reported these data that we're actually -- the hard data that Bob didn't fully disclose -- to our board, I told them that it's time for us to be very, very smart, and the first smart idea I've had is to realize that we're not smart enough to deal adequately with an opportunity of this magnitude.

So we're pretty excited, and we're going to get smart fast. Bob and I, were in Texas yesterday, and I've spent 3 weeks in the Gulf so far this year. We'll be coming up to speed pretty quickly, and we've got very, very good help. But first, I just want to congratulate Bob and his team and the Industrial Products division for this stunning achievement.

We can go to Q&A.

(Operator Instructions) The first question will come from Jason Butler with JMP Securities.

First question for me, can you just talk about the Xogenex program a little bit? And if you can give us any color on the delivery technology or delivery approach you're using there for a 3-gene therapy.

Yes. Thanks, Jason. So I don't know if we've disclosed the delivery vector, but let me mention -- you asked for color first, so let me provide some. So if you look at that -- and this has been explained to me by people who actually know a great deal more about this than I do so I'm relying on experts here. But let me say I have looked at some of these papers. But if you look at the 25-year history of gene therapy in the heart, what you find consistently is that these therapies have pursued -- have been operative on 3 different axes. But like almost all, I think, really, all of the gene therapy companies with little AAVs and a CMV promoter and a single protein that -- it's a single gene. In order to really move the dial to really restore heart function, improve ejection fraction in a meaningful way, you really have to be operative on all 3 axes. So the 25-year history, as I said, have -- what they've basically shown is very weak efficacy. Safety's good, but very weak efficacy. It's not really moving the dial. So the data that Andy reported here today, these were pig data, I think, as well as murine, but were really quite remarkable because we are well assisted in this area by people who've really been involved in cardiac gene therapy throughout the 20-some years that it's been done. And so these preclinical data are highly significant and extremely promising. So we're very excited about this program, and as Andy mentioned, we expect to file our IND by year-end.

Okay, great. And then my follow-up is just on the GenVec acquisition. Can you talk a little bit about what attracted you to their technology and where you think you can leverage it with your other technologies?

Yes, 2 things should be pretty obvious. They've got a great library of adenoviruses that we want to go to work on to improve further. And the second thing is they've got a great team, really terrific scientific team, and we are looking forward to their joining our team. So the motivation is quite obvious. I think, on the last quarterly call, we showed our latest technology, which is proprietary to Intrexon and which we moved over very large, complex gene programs into human primary T-cells and made them work according to design. So this was RTS membrane-bound IL-15 CAR. I don't think we specified the CAR, nor should we here, I guess. They're shaking their heads no. So -- and I think those vectors were over 12 kb in size. That simply can't be done by anyone else on the planet. That was done -- I'm just still talking about last quarter's call now. That was done with something like 95% transduction efficiency and 100% fidelity. So that -- we feel that, that plus Sleeping Beauty, we're very, very well served if the cell is outside the body. But once you go in vivo, now, okay, so a minute ago, I was probably slamming these little AAV companies, and I could do the same with the lentiviral companies as well because we -- what we really want to do is get to multigenic gene programs that have switches and an ability to control really providing just what we've always -- conditional and spatial and temporal control over whatever program you install. Viruses are probably a pretty good way to go in vivo. But the existing industrial viruses, being AAV and lenti, are extremely limited bandwidth. Their transduction efficiency is inadequate for our purposes. So we are really attracted by the opportunity to work on this library. And we think this gives us a wonderful complement our capabilities in human health.

The next question will come from Derik De Bruin with Bank of America Merrill Lynch.

It's Mike Ryskin on for Derik, actually. Just a couple of quick questions for you. First off, on the Oxitec subsidiary, you talked about some progress OUS, and you showcased the new data out of Brazil with the second round. Any update on the field trials in the U.S. and what you're looking at there, whether it's in Florida or potentially, like you said, expanding to other counties also in the U.S.? Anything in the queue for 2017 there?

There's plenty in the queue, Derik. But let me say it would be inappropriate for us to comment on this at the present time. But let me mention that our call is being hosted today in our nation's capital, that we are engaged on a more or less constant basis upon these issues. We think, fundamentally, this technology and here, I mean, our -- the Oxitec technology itself, what did they call it?

Self-limiting insect.

Self-limiting insect, SLI.

Frankly, our favorite acronym, yes.

The SLI technology, we think, is extremely compelling. The OX513A mosquito to us still represents the most field-proven economic, effective, environmentally safe solution to the problem, all the problems surrounding these arboviruses, Zika, dengue, chikungunya, yellow fever and so forth. We feel very confident, more confident than we ever have about this asset. So we're continuing to marshal it through. We -- you saw in this quarter, we have -- we have deployment now coming up in Colombia. We're continuing to roll out in Cayman in Brazil. We didn't mention it in the press release because we have already said previously, but we're continuing to expand our production in Brazil and our use in that country. And I'm still very much on track to exhaust our manufacturing capacity in Brazil by year-end. So we'll be expanding that, as Andy mentioned during his remarks.

And the regulatory trial in the U.S. is pending FDA approval, which we have to do this year.

That's right.

Got it. I appreciate the color. And then a quick follow-up. You mentioned in the prepared remarks the R&D jump in 1Q to support ongoing activity. I'm wondering if you could provide some color in terms of where in the portfolio that was, if there was a particular segment or industry where the R&D spending came from?

Even without our CFO sitting here or my even having to look at Joel Liffmann just to my left, I know that the answer to that is no, we can't provide that color. And let me tell you why, once we start to do that, okay, then our auditors want us to segment forever thereafter. And it will just be a lot more work for our accountants to do. But I will tell you this, given what we reported to you, you should be able to figure it out.

The next question comes from Thomas Shrader with Stifel.

This is Alex Schwartz on for Tom. I have a few questions with energy. Maybe they're best for you, Mr. Kirk or Mr. Walsh. So first off, congrats on achieving site selection for isobutyraldehyde and 2,3-BDO. Great progress. So you've talked about the business model and commercialization process of the isobutanol plants, what it looked like, just in terms of placement near nat gas, resources and tolling contracts. With these 2 molecules, what will the commercialization process and business model look like? Will it be in a similar format? Or kind of how should we think about it going forward?

It really could vary. So you're right to remember, and I congratulate you for remembering our talking about toll processing with regard to isobutanol, for example. And that was a business model that I still think if we were only successful on that one molecule, that would actually be probably the right one. But now that Bob's team has taken us into such a high-yielding territory on 2,3-BDO and on the precursor to MMA, we're going to take a moment to talk with other -- talk with people in the industry and take the advice of Moelis & Company. We've really enjoyed our engagement with them, and they're absolutely first-rate. Because it could change and so I just -- what I'm telling you is, okay, the toll processing probably makes sense for isobutanol if that's all you have. But now clearly, this successes that Bob and his team have generated on these 2 molecules greatly, in our view, increase the probability of success on all of them. So if you think about it, I mean, I've only gone to school on this in the last few months, but -- so I won't hold it against anybody on the call for not being an expert. I'm far from an expert, and Bob actually is an expert. But as usual, I think I can speak it in country -- from country lawyer perspective on this thing. This is the biggest thing, if this thing proves out in the way that it looks like it is, and actually has been already done on 2-molecules, This greatly improves our probability of success on anything that we -- that our bioinformatic model will inform, that we should be able to engineer this organism to do. And given the toolset that Bob and his team have created, they're really able to move fast now. So this is a platform, and we should talk to the world about this because as a platform that is applicable to natural gas, historically, if this thing is what we think it is and earnestly think it is, this is the most significant technology to ever be brought to bear on natural gas in terms of its (inaudible) input feedstock, as Bob would call it, but the lowest cost -- you think about it, you just count the carbon atoms, it's the lowest-cost source of carbon that is industrially available on this planet. And you can pretty much bet on that as a planning value going out another 50 to 100 years with a very high degree of confidence. So this is very big. And so we don't hold us to anything we've said previously about a business model is what I'm saying.

Yes, understood. Well, I look forward to future updates on those 2 molecules. But if I can ask a follow-up on the energy platform. Just with isobutanol, you mentioned you're working around a technical issue and will update us later this year. Just -- I'm just trying to think, if the update later this year is site selection, kind of what does that mean? What goals have you hit? Does that mean you've seen a -- you see a pathway of profitability or you've hit it? I'm just wondering what isobutanol site selection might mean.

Let me just clarify something we've already said, and then I'll ask Bob to comment. The site selection stage to which we alluded pertains to 2,3-BDO, which is one catalytic step from 1,3-butanediol and pertains to the precursor and then MMA as well and through the same kind of means, not to isobutanol or 1,4-BDO. We're not yet to site selection stage on isobutanol. So the technical issue, to which Bob alluded, on isobutanol is one that is in our lab.

Yes. And to build on that a little bit, it is the one in our lab. It's something you know how to solve in other organisms, as you know, this is a new-to-industry organism. So it's not surprising to have a few technical hurdles to overcome. But once we overcome that, this will -- when we go overcome this, we potentially will be at the same level site selection. So building on that standpoint, Alex, it's that would be the next step as we go through that hurdle to improve this (inaudible)

The next question will be from Robert Breza with Northland Capital Markets.

Maybe one question for Joe and then maybe one for Bob. As you think about the commercial launch later this year for the apple, when you think about that from a model perspective, I know you said 4 million by the end of 2020 in terms of trees, but how should we think about that hitting the P&L from a revenue perspective? And maybe kind of a similar question, just for modeling purposes, as you think about the 2,3-BDO site selection, obviously, it takes time to build a facility, et cetera, and move forward. So is that more like a 2019, 2020 revenue driver. Or how do we think about the site selection for 2,3-BDO? And how do we think about the apple launch later this year?

Yes, sure. This is Andy. On the apple, as you could probably well appreciate, there's a cycle of plants and the maturation of the trees to generate material yield to put into a sliced product. So the early plantings will start to yield usable crop this year. And so the actual revenue generated in the first commercial launch is, I'd say, largely not significant overall. The way to think about this is that we're sequentially increasing the plantings, and those plantings will sequentially increase their yield. The lifetime of an apple tree is, productivity is 25, 30 years. They really start to produce at material level after -- it's like 5 years after you first kind of ordered the tree, 4 to 5 years. So you start to get an exponential growth a few years after you've gotten to market, and that continues for quite some time. So without getting into very specific details, that's the way to think about it.

And on the 2,3-BDO and breaking ground and revenue, as we said, we have the potential to break ground in 2018. The facilities we're building are similar to an ethanol plant. So if you looked at corn ethanol. It's roughly a 18 month construction cycle, and then you have a startup cycle after that. And so that's kind of the timing on those plants from a (inaudible) perspective.

And I would just add what'll you see from a modeling point of view, of course, is the expense now and the revenue's beginning to build later. So you're already seen that in our financial reports.

Pertaining to the apple?

If pertaining to the apple?

That's correct.

Yes.

Our next question comes from Tycho Peterson with JPMorgan.

It's Tejas Savant on for Tycho. One quick questions here on Precigen. Can you give us an update, R.J., on your CEO search there? And has the announcement had any impact on the tenor of your conversations with new health care customers or perhaps, employee departures or things like that?

Departures? No, but interesting question, Tejas. It definitely has, I think, improved our ability to recruit because we plan on Precigen holding our products longer, developing them and possibly bringing them all the way to market. It has been just a little frustrating for our team to view the vastness of our health sector portfolio in relation to companies that are in therapeutics and look at the breadth and depth of our technology, the fact that we're the only company that has ever shown the ability to induce and regulate plus and minus, a protein being expressed in man through -- from a gene program. We're the only company as far as we know to ever show that we can induce and regulate multiple genes from the same -- from one switch. We have, I think, many claims to fame. I mentioned a few moments ago our pseudo AttSites technology allows us to put very, very large gene programs into place with absolute fidelity and 95% transaction efficiency. And so when I compare these capabilities and then I look at our product portfolio, which ranges from eye disease to rare disease and certainly, everything we have going on in cancer at ZIOPHARM, we think, is really going to win out. It has been a little frustrating for us to realize that, that portion of our business is really not getting the respect or valuation that it deserves. And furthermore, to your point about recruitment, although you stated it in inverse terms, which always makes me think you're sort of the leader of our shorts, but I think that there's no question that our announcement around Precigen has enabled us to attract a higher caliber of potential leadership for the enterprise. And as Andy mentioned, we'll be announcing something, we believe, in the near future around that, but thanks for your question.

Again, if I can ask a quick follow-up. In terms of Arctic apple, I know you said the production cost advantage is about 40%. Is that comparable to what you expect on other fruits and lettuce as well? And have you -- can you share any insights on sort of the pricing paradigm for these products relative to those, just the regular kind of, like, status quo?

It's a great question. So first, let me mention that anybody who thought about it from that perspective alone would really be missing the point. The main point of the Arctic apple is this apple has a feature that we believe consumers want. We don't know yet how we'll be pricing the product, so it's not possible for us to tell you what in this particular field of agriculture. It's called the trade premium. But there's no doubt in any of our minds that this product will command a significant trade premium. Just can't really talk to you about what the exact margins will be until we know what that is, but we do know that the with the broad consumer testing that we'll be doing based on the fall harvest this year, we'll be in very good position to know what that trade value will be. I can tell you, we've modeled on a very conservative basis. My personal view is that the actual trade premium is more valuable than the basis upon which we've modeled. And yet, on this very conservative modeling, we have, and our board has approved, the most ambitious, aggressive apple-growing campaign in the history of the world. So we're very confident of success here. The number to which you alluded is simply the amount of waste that occurs in the apple industry. And obviously, as we move to making -- as we provide the technology, and we have the technology and it's approved technology, that makes apples fit more in the way that consumers really like. I mean, think about -- I mean, how many foods do we buy that we, I mean, we hold in our hand? It's like 25x a mouthful, right? And we have to hold in our hand and jam it into our mouths. When you think from that perspective and you think about how demanding consumers are today, it's very easy to understand why the apple industry has been in decline for 17 years. Despite the fact that an apple is a wonderful item when freshly harvested and when sliced. So our technology, as Andy mentioned, we think it's genuinely enabling to the category. We think it will be a $1 billion business. But also, as Andy just mentioned in response to another question, this is going to take a few years to happen. We're very confident in it. It's going to grow geometrically. That's the good news. But it just takes a few years to grow some apples. And it works -- it's a two-edged sword. As I view this business, this is a 100-year business. And I don't plan on living long enough to see the back-end of it. But I will say, as an investor and as someone involved in helping to build this company, I love having 100-year products, and that's what I think we're talking about here.

The next question will come from Keith Markey with Griffin Securities.

I was just wondering if you might comment on the selection of patients that Kite used in their recent trial that resulted in at least one death and how you might see that playing out for ZIOPHARM in future clinical trials.

So we're certainly not going to comment on the clinical trial results of any competitor. I can say I know Arie Belldegrun and I like him. But we have made no secret of the fact that we are on a completely different track. So everything that you saw Dr. Cooper present, not everything, because he showed you specificity, and he showed you data, so I won't say everything. But I'll say what he showed you last week is in line with what we said in our S1 once again. It's just amazing how many times I -- we have to repeat to public shareholders and analysts what we've disclosed in our S1. But anyway, we said in our S1 that we think that cell-based therapies, in particular, cell-based cancer therapies are going to be eclipsing in the future, but only if certain technical issues can be overcome. We identified what those technical issues were, and frankly, still are. It has been amazing to us to see paper-after-paper and report-after-report come out that is confirming what everything we've said in 2013. I'm not saying we repressed him because, really, the data is there in 2013. So these are very manual, nonscalable, highly variable, viral transduction -- virally transduced autologous CAR-T approaches. In order to do them, you have to then expand the culture. Every biologist of my acquaintance who has ever expanded a cell culture has informed me that it's always highly variable. I don't know how this ever becomes GMP, but be that as it may, and maybe they'll -- maybe it is GMP for all I know, I'm just saying the results are going to be variable, and the data are certainly showing it is variable. Third, it's very expensive, okay? Its orders of magnitude, more expensive than it should be in order for this ever to be a first-line therapy. And for it to be a first-line therapy, a couple of other issues need to be solved as well. One is you can't be expanding to an enormous cell population ex vivo and then hitting with these patients with these vast quantity of cells. If you do, you will get cytokine release syndrome. The method of dealing by the players who are supposedly the leaders in this industry, the method of dealing with cytokine release is patient management. They'll produce the cytokine release syndrome and then rely on the staff of these few dozen hospitals, they can actually manage these cases to manage the side effects. We don't think that the cytokine release syndrome is necessary. We think that we can expand the cell population in vivo rather than ex vivo. So you can start off, quite modestly. We think that as Dr. Cooper has disclosed, we think we can control the cell proliferation in vivo in order to give the clinician what clinicians in oncology almost always have in other cases, which is an ability to dose to effect, to find the therapeutic window for that patient that is short of intolerability but yet well within the range of efficacy. So this is no secret. This is not new. We've been saying this since our S1 in 2013, that this is what needs to be done. What Dr. Cooper showed last week on his call is that we as -- we, in partnership with ZIOPHARM, have nearly done it. What he showed was that we have a model-a automobile in design, in the shop, and we have tested its various components. Some of them on the road, some of them on the road in combination, but having it put all of them together -- and by all of them, clearly, what I mean is a point of care RTS membrane-bound IL-15 CAR-T. We haven't put all of those together in a point-of-care setting using Sleeping Beauty or our pseudo AttSites in order to perform the transduction. If you put all of that together, this should actually, in our view, solve the problems that persist in this type of therapy and that are being encountered by others. And so we're very excited about that. We've been very solidly on this track, and we're going to continue on this track. But we're very, very encouraged by all of the data that we've seen today.

I agree. It's a really phenomenal development of work that you and Dr. Cooper have succeeded in doing. If I could ask one little question related to that. You've shown already that you're expanding capacity in the orchards that you're planting in the preparations that are underway for site and building of a plant for the energy/chemical group and other -- and in the food area where AquaBounty is expanding capacity, perhaps, this year and with your -- in your relationship with Darling for feed. I was wondering if you might tell us a little bit about plans for expanding -- or if you have any at this point, for expanding capacity for producing the Sleeping Beauty vectors or Sleeping Beauty gene -- genes that will be used for therapeutics purposes such as...

As I mentioned, and if you go back and look at the slides in connection with our last call, Keith, we have a new technology, which is we refer to as pseudo AttSites, it's based on our proprietary recombinases that has produced stunning, stunning results, we think, in terms of the ability to provide 100% fidelity, 95% transduction efficiency of very, very large gene programs. So no, we don't have any immediate plans to work on Sleeping Beauty per se. I think once this particular tool is fully developed and we have a clinical proof of its efficacy, we will transition to this platform.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Randal Kirk for any closing remarks.

Thank you. I won't be long today. I think Bob Walsh was the star of today's show. And again, thanks to Bob, and congratulations to his team. I want to mention that the work that Bob reported on, it came as the result of nearly 5 years of effort by some very, very brilliant and confident people. This was not rewarded, as a matter of fact, it may have come as a surprise that we were actually reporting success on this call because this is not one of the FAQs that we get, is it Chris? We get hassled to death about all of our -- many other partnerships and many other lines of work, many other projects that Intrexon has ongoing. This has always been a very significant one, and yet we receive very few comments about it. So let me say this, the work is absolutely first rate and obviously, we think it's world-changing in the energy industry. But I think that the achievement is actually not only -- I think the achievement is illustrative, and I think that Bob's team is illustrative out of the kind of teams that we have in Intrexon. They will work patiently for years as scientists are want to do toward an object. And to succeed requires a lot of determination, a lot of successful iteration. You heard Bob comment on the technical hurdle that he's facing on isobutanol, but what you couldn't see was what we saw here, which is he's very confident of success. And I know that his team is confident of success. Well, why are they? It's not just because they think they're so brilliant even though they happen to be brilliant. It's because their experience has taught them that this is a solvable problem. From our perspective, just looking in from somewhat from the outside, what we've seen is that this has been the progress of this project from inception to date, meaning, when you're doing world first instance work, what will happen is you'll have a big leap forward, but guess what your limiter is at that point? You've just discovered a new problem that man has never seen before. Now you have to go work on this problem. We have a lot of teams at Intrexon who are doing work like that. We've sung their praises from time to time. Some of this work is going to turn into, we think, very significant realization -- I think that's the word I used in the press release, realizations in the world. I think that plants themselves grow technology that our team in Davis has created. That could really enable urban farming. If you think about that technology and what -- and the way -- I think we told them on the last call. Hey, you think about the application of that thing, one of the things we're thinking about is why isn't this the ultimate urban farming company? Because this looks to us like the genuinely differentiating asset that could really enable that whole category. So I just want to cite that as an example. But my real point is we have dozens and dozens of these projects going on in Intrexon. There are very good people working on all of them. Everybody's sitting at this table, including Bob, he's a chemical engineer, and Andy's, I guess, originally a scientist. So he's the only one here with that kind of background at least. But let me tell you what our jobs are. Our jobs are to turn the work of these brilliant scientists into things that really matter in the world. And we're very confident that Intrexon is doing that. So again, I thank everybody, for their patience and support. And I think I can genuinely promise personally that the balance of 2017 is really going to be a great year.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Take care.