Business Context and Reporting Period
The filing is Intrexon Corporation’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. The request metadata identifies Precigen, Inc., but the supplied filing is for Intrexon Corporation, whose wholly owned subsidiary Precigen is a clinical-stage biopharmaceutical business.
Intrexon applied synthetic biology across human health, food and agriculture, energy and chemicals, and environmental applications. Its strategy shifted from primarily licensing and exclusive channel collaborations toward greater ownership and control of development and commercialization through subsidiaries, joint ventures, reacquired rights, and internally funded programs.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $160.6 million | $231.0 million | Down 30.5% |
| Collaboration and licensing revenue | $76.9 million | $145.6 million | Down 47.2% |
| Product revenue | $28.5 million | $33.6 million | Down 15.1% |
| Service revenue | $52.4 million | $50.6 million | Up 3.6% |
| Operating loss | $505.6 million | $137.9 million | Materially higher loss |
| Net loss | $514.7 million | $126.8 million | Materially higher loss |
| Net loss attributable to Intrexon | $509.3 million | $117.0 million | Materially higher loss |
| Loss per share | $3.93 | $0.98 | Higher loss per share |
| Operating cash flow | $(124.2) million | $(103.7) million | Higher cash use |
| Cash, cash equivalents and short-term investments | $222.5 million | $74.4 million | Higher balance |
| Long-term debt | $211.8 million | $8.0 million | Substantially higher |
Operating expenses increased to $666.2 million from $368.9 million. Research and development expense rose to $404.6 million from $143.2 million, including $236.7 million of expense for reacquired in-process research and development. A $60.5 million impairment charge was also recorded.
Approximate operating margin was negative 314.8% for 2018, compared with negative 59.7% in 2017. Approximate net margin was negative 320.5% in 2018, compared with negative 54.9% in 2017.
For the fourth quarter of 2018, revenue was $43.2 million, operating loss was $336.9 million, net loss was $341.7 million, and net loss attributable to Intrexon was $340.5 million, or $2.59 per share. The unusually large fourth-quarter loss reflected reacquired in-process research and development, impairment and abandonment charges, and recognition of deferred revenue from terminated collaborations.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $102.8 million, restricted cash was $7.4 million including restricted cash in other assets, and short-term investments were $119.7 million at December 31, 2018.
- Net cash used in operating activities was $124.2 million. Investing activities used $151.2 million, including $112.7 million for net purchases of short-term investments, $41.6 million for property and equipment, and $16.6 million for investments in joint ventures.
- Financing activities provided $309.8 million, including $219.9 million of net long-term debt proceeds and $88.0 million from public financings.
- The company issued $200.0 million of 3.50% convertible senior notes due 2023, with a December 31, 2018 carrying value of $148.1 million and principal balance of $200.0 million. Total long-term debt was $211.8 million.
- Contractual obligations totaled $391.7 million, including $255.3 million of convertible debt, $31.5 million of related cash interest, $77.9 million of operating leases, and $20.1 million of purchase commitments.
- Management and the auditors disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The company stated that additional financing, asset monetization, collaborations, or expense reductions would be required.
Material Changes Versus the Prior Comparable Period
- Collaboration and licensing revenue declined $68.7 million, primarily because of reduced research and development services, terminated or replaced collaborations, and the shift toward internally controlled programs.
- Effective January 1, 2018, the company adopted ASC 606 using the modified retrospective method. The adoption produced a cumulative adjustment that reduced deferred revenue by $26.5 million and increased accumulated deficit by $26.6 million. A related material weakness in revenue controls was identified during 2018, restated interim financial information, and management reported remediation as of December 31, 2018.
- In October 2018, Precigen entered into a new license agreement with ZIOPHARM that replaced the prior collaboration, returned ZIOPHARM preferred stock valued at $158.4 million, and gave Intrexon greater development and commercialization control over certain CAR-T and related technologies.
- In December 2018, Intrexon reacquired rights previously licensed to Ares Trading, issuing 20.6 million Intrexon shares valued at $140.4 million and recording $108.5 million of reacquired in-process research and development expense.
- Intrexon acquired full ownership of certain Harvest-related entities and Intrexon T1D Partners, recording additional in-process research and development expense. Total 2018 expense for reacquired in-process research and development was $236.7 million.
- Oxitec-related strategy changes resulted in a $60.5 million impairment charge. The company also recorded a $16.0 million loss on abandonment of certain developed technologies and a $5.1 million loss on disposal of assets related to a Brazil facility closure.
- Shares issued and outstanding increased to 160.0 million at year-end from 122.1 million, primarily due to public financing, shares issued for reacquired rights, and other transactions.
Guidance, Outlook, Commentary and Risks
Management did not provide conventional quantitative revenue or earnings guidance. It expected operating losses, negative operating cash flow, and substantial capital requirements to continue as it developed proprietary programs, scaled commercial operations, and pursued regulatory approvals.
Management indicated that collaboration revenue would decrease considerably as rights were reacquired and the company stopped receiving certain research and development reimbursements. Future revenue depends on product and service demand, commercialization of subsidiary products, strategic transactions, royalties, milestones, and the ability to scale production.
- Going-concern risk is significant because the company has recurring losses, an accumulated deficit of approximately $1.3 billion, negative operating cash flow, and debt service obligations.
- Additional equity or convertible financing could dilute shareholders; additional debt could impose restrictive covenants and increase liquidity risk.
- Most human therapeutic candidates remained in discovery, preclinical, or clinical development, with substantial regulatory, clinical, manufacturing, enrollment, and commercialization uncertainty.
- Products involving genetically engineered organisms, salmon, apples, insects, microbes, and gene or cell therapies face extensive regulatory scrutiny, public acceptance risks, labeling requirements, and potential litigation.
- Collaboration and joint-venture revenue depends on third parties’ funding, performance, regulatory progress, and willingness to continue agreements. Many agreements can be terminated on notice.
- Intellectual-property disputes remain a risk. Two patent infringement claims against Trans Ova remained pending, following prior litigation involving XY, LLC and an ongoing royalty obligation.
- The company is exposed to fair-value volatility in collaborator securities, foreign currency movements, acquisition integration risk, impairment risk, product liability, cybersecurity risk, and dependence on key personnel.
- AquaBounty’s AquAdvantage Salmon remained subject to import restrictions and continuing regulatory requirements, while commercial scale-up of salmon and non-browning apples was still in progress.
Most Important Facts for Investors to Verify
- Verify that the filing entity is Intrexon Corporation rather than Precigen, Inc., and determine which subsidiary-level financial and operating data are relevant to the investment analysis.
- Review the going-concern disclosures, projected cash needs, available financing sources, and the company’s ability to service the 2023 convertible notes and other debt.
- Assess the sustainability and composition of revenue, particularly the decline in collaboration revenue and the reliance on product and service revenue that remained comparatively modest.
- Separate recurring operating costs from the $236.7 million reacquired in-process research and development expense, the $60.5 million impairment charge, and other unusual fourth-quarter items.
- Evaluate the strategic and economic consequences of the ZIOPHARM and Ares Trading transactions, including returned preferred stock, issued shares, royalty obligations, and reacquired development rights.
- Review the ASC 606 adoption effects, interim-period restatement, remediation of the revenue-control material weakness, and the judgments supporting deferred revenue recognition.
- Confirm outstanding debt principal, conversion terms, potential cash settlement requirements, contractual commitments, joint-venture capital commitments of $14.9 million, and research and development commitments of $11.9 million.
- Evaluate regulatory status, clinical progress, commercialization plans, and market acceptance for the company’s gene and cell therapy, agricultural, aquaculture, and insect-control programs.