I’ve been puttering around and thinking about several different teaser ads recently, but this one percolated to the top of the pile when I read Alexander Green’s characterization of it as the “Easiest Grand-Slam Stock of the New Year” … so what is it?
Well, the ad is for the basic membership in the Oxford Club, which mostly means you get their Communique newsletter and updates on the various stocks and portfolios they like — it’s not terribly expensive compared to some ($49, the same as an annual membership in the Stock Gumshoe Irregulars), but, of course, we don’t recommend subscribing to a newsletter just to learn about a “secret” stock.
Do I explain my perspective on this too often? Hard to tell, since we have new readers every time. Here’s the short version, feel free to skip ahead if you’re sick of it: Teaser pitches, in addition to being sneaky or over-hyped sometimes, inflame some of the worst behavioral biases most investors suffer from. The most prominent might be “anchoring” and “post-purchase rationalization” — anchoring refers to our tendency to rely too heavily on the first piece of information or “analysis” we hear about a company, so if the first thing is “this will definitely make you as rich as Donald Trump” you’re fighting an uphill battle to consider it rationally; “post-purchase rationalization” is sometimes also understood as “buyer’s Stockholm Syndrome” — once you’ve bought something, your brain goes into overdrive looking for justifications that you’ve made a smart purchase, including, I think, giving great weight to the newsletter report you just bought… “if I paid for it, it must be brilliant, so I should definitely buy the stock they’re talking about.” There are others, of course — most of us have to go no further than the nearest mirror to look at the most negative influence on our portfolios. My thoughts often come across as negative or cynical, which some folks get sick of, but that’s at least partly because I probably go overboard in the other direction a bit to counter those biases a little and get closer to a balanced view… but I’ll get back to the business at hand now.
This Oxford Club pitch is for their regular membership, but it also is advertising their “Forecast issue,” which probably picks out the 10-20 or so favorite ideas they have and guesses at what will happen in the year to come … but there’s one idea that they call the “Grand-Slam Stock” and drop hints about as they sell the idea, so that’s where we’re looking for our answer.
Here’s the intro:
“2016’s Scientific ‘Breakthrough of the Year'”
‘I have seen the future and it is now.’
“That was the reaction of a scientific American writer who witnessed the power of what we believe will be the scientific breakthrough of the year.
“In fact, I’d venture to say it’s bigger than that.
“Really, this may be the biggest scientific breakthrough in at least a decade… and quite possibly a century.”Are you getting our free Daily Update
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See where that anchoring comes in? If someone offers you that, you almost turn off the receptors in your brain that are urging you to ask, “but how much does it cost?” “How much uncertainty is behind that ‘may be?'”
The ad letter, which comes from publisher Julia Guth, goes on to say that the breakthrough is about food — more specifically food waste that makes us use land and water far less efficiently. The “breakthrough” they’re talking about is in synthetic biology, which is, at least in part, designing new foods that don’t spoil, or that grow more efficiently, at least partly as a way to reduce waste. Here’s some more from the ad:
“Synthetic biology is essentially a way to turn our regular foods into “superfoods” impervious to disease, bacteria, spoilage and more.
“For example, in February the Department of Agriculture approved the ‘Article Apple’ – a new type of fruit that does not brown or bruise like other apples. It can last months longer than a traditional golden delicious….
“In November, the FDA approved a new enhanced salmon that grows faster and with less feed by introducing genes from a Chinook salmon to an Atlantic salmon.
“The result is cheaper, healthier fish.
“This new technology… making food safer, more nutritious, and less susceptible to spoilage and disease… is going to save billions of dollars across the globe.”
All I can think is, “how will it taste?” But that is, admittedly, a first world complaint of the first order.
And then we get the quotes from Alexander Green at the Oxford Club that will help us make sure we’ve identified the right stock:
“And one particular stock has his eye, ‘one that bears an uncanny resemblance to taking an early stake in Amazon,’ as Alex put it.
‘Imagine a company that engineers living cells, turning them into microscopic factories that create new products, safer and cheaper foods, and novel therapies to treat deadly diseases,’ he says.
‘Imagine the company is majority-owned by one of the country’s richest individuals, a man with decades of experience turning biotech startups into multibillion-dollar paydays.
‘Imagine further that one of the nation’s top equity managers calls the company ‘the stock of the decade’ and likens it to investing in Apple in the ‘90s.
‘This opportunity does exist. And this month we’re adding it to the Oxford Trading Portfolio.'”
So who is it?
Thinkolator sez that Oxford’s “breakthrough of the year” stock is almost certainly Intrexon (XON)
Who, you ask? This is a decent-sized midcap startup, with a market cap now of about $2 billion, but the stock has not been a headline generator unless you happen to be a biotech-focused investor or a follower of genetically modified food developments.
It is indeed a “synthetic biology” company that’s probably best understood as an outsourced R&D firm for pharmaceutical, agricultural, energy and other businesses. They try to create new stuff, have it commercialized and marketed by partners, and make their living on the research fees from those partners and their fortune, one hopes, from royalties on the hit products that may eventually make it to market. A lot of that hope is based on pharmaceutical products, since big markets like “beat cancer” are much less complex and focused on hyper-specific performance than are mammoth markets like “food,” but they are not just a pharmaceutical R&D company.
And in case you’re checking the rest of those clues, yes, the company has a billionaire controlling shareholder in R.J. Kirk… and “one of the nation’s top equity managers” did call it maybe “the stock of the decade” and liken it to Apple 20+ years ago — that was Bill Miller, who provided that endorsement on CNBC about a year ago. It was a hot IPO about 2-1/2 years ago, then cooled off a bit before making a big run in the first half of 2015, when biotech bulls were again let loose — it went from about $25 to $70 from January to August last year, and now it’s right back down where it was trading after the August 2013 IPO, in the low $20s. So far today, due in large part to the Oxford Club enthusiasm, I’m sure (it’s a big newsletter), the shares are up a quick 10%. They also are in the press for other things, of course — they presented at the JP Morgan Healthcare conference yesterday, as did their partner and fellow R.J. Kirk investee Ziopharm (ZIOP) — but nothing else seems likely to have caused that kind of move.
I know next to nothing about XON, only what I’ve read so far today after identifying the company — but there is a lot of interest from other investing pundits, someone at TheStreet wrote a fairly detailed piece on them (and the hot opportunity after it fell from $65 to $45) last Fall here, a Motley Fool author had another longish piece on them a year ago here when they were riding high on last year’s JP Morgan conference presentation, and StreetAuthority also got excited about it last Winter (the price was still in the high $20s back then, before the big spike). It has come up in the biotech discussions that Dr. KSS moderates for Stock Gumshoe, though mostly because of its connection to drug developers (like ZioPharm or Oragenics) with whom XON is collaborating.
So there you have it — a stock being touted by Alexander Green at Oxford Club with what seems like a “stock of the year” imprimatur, though they don’t use that phrasing. I am not going to be able to become an expert in synthetic biologics for you in the few minutes I have today, so I’ll just tell you that the financials are, of course, not compelling (they never will be for an early stage company that’s at least 5-10 years from the big financial opportunities that most people see for them — pharma royalties). They do have plenty of cash, thanks to the IPO and a big secondary offering back in August at $41.
On the business side, they are certainly growing — much of their revenue comes from the Ziopharm (ZIOP) collaboration, which seems to be their most advanced with one drug in Phase II (Ad-RTS-IL-12 for breast cancer), and they have 30 current collaborations going including what they call Exclusive Channel Collaborator (ECC) partnerships. This is all from their JP Morgan presentation yesterday, you can see the powerpoint here.
My only qualms about the stock, other than the fact that it will take massive revenue growth to make the market cap justifiable and that means you’re projecting out to when they can earn real royalties, not just the R&D and technology fees from their collaborators that are currently sustaining the business. The income statement is not as bad as I would have thought for a company of this kind, they do actually earn meaningful technology fees and they have been getting closer to breaking even, but I don’t think it’s possible for them to become the company investors are hoping for without the “kicker” of royalties. And for the most part, that probably means pharmaceutical royalties since that’s the focus of most of their work, which means they’re probably at least 3-5 years away from that big step up in revenue (since the most advanced drug on which they presumably have a royalty agreement is still in Phase 2… they also have several drugs in Phase 1 and a bunch of earlier stage research collaborations).
They do have lots of other projects in energy and agriculture, including that Arctic Apple and the Aquabounty hybrid salmon that was approved a few months ago, and some fuel and chemical programs, among others, but those don’t move the needle just yet on the revenue side and seem unlikely to generate rapid revenue growth — their general corporate presentation includes more on those (they didn’t talk about them at the healthcare conference, naturally), but no real numbers or commercialization milestones that caught my eye. They do have meaningful revenue from the Trans Ova business they bought a year ago, which is in the cattle genetics/in vitro fertilization business, and that acquisition was the source of about half of their revenue growth on the year and accounts for more than a third of revenues, but I have no idea how fast that business itself can grow. I might be missing something, but the financial/growth focus seems to be squarely on the pharma opportunities.
If I were to look into investing in this one, the first thing I’d want to wrap my head around is how unique or competitive XON is in the landscape of other synthetic biologics companies and/or breakthroughs. There are other companies that do similar things in genetic manipulation and R&D, though I have no idea what advantages or proprietary technology any of them might have… and, of course, researchers both at XON and elsewhere are looking for and trying to identify or build the next big thing every day.
I like the business model — having their partners cover most of the operating expenses with technology fees and R&D reimbursement and getting back-end royalties or joint venture revenue if the products come to fruition — but, given that there’s competition in a lot of these areas and they don’t seem close to meaningful royalty revenue yet, I’d need to have more than that generic “like the model” feeling before the $2+ billion market cap makes sense. In the short term, they are in fine shape as far as their balance sheet goes (lots of cash, no debt, can easily cover a couple years of work with their cash on hand) so the risk is likely that they trade with the biotech sector, and more specifically could easily take a big hit if Ziopharm has a setback in their clinical trials (maybe they already have, I haven’t looked at those details), or if they make an acquisition with that cash that turns out badly.
So that’s my quick take on Intrexon — cool technology, lots of moving parts, nice business model, I have no sense after my quick read as to whether it should be worth $2 billion or $10 billion or $500 million. I’ll hand it over to you now, dear readers — what do you think?