Wunderlich-The Spotlight Has Faded: 90-Page Report Lacks Substance. Successful partnerships overlooked. conjecture of the reports has little to no factual basis. Buy dip $50 target.
Technology: Enterprise Software
INTREXON CORPORATION (XON: $27.24) Rating: Buy
April 28, 2016 Price Target: $50.00
Rob Breza •Ryan MacDonald •
Wunderlich Securities, Inc.
1255 Battery StreetSuite 425 San Francisco, CA 94111
The Spotlight Has Faded: 90-Page Report Lacks Substance
o Summary. After reading through the follow-up report by Spotlight Research posted on Seeking Alpha, we break down what we believe to be Spotlight's major inaccuracies in each section. We remain confident in the multi-vertical growth prospects for Intrexon and would use any weakness as a buying opportunity in XON shares, all else being equal.
o Part 2 – The related party business model. XON’s ECC business model was established in earnest in 2011, designed to create focused investments while diversifying risks and leveraging XON’s technology across the different verticals. Spotlight Research claims a mismatch in reported revenue, which is fully disclosed in XON’s footnotes and does match if an interested party were to take the time to read the footnotes to understand that fees are often deferred to the balance sheet for many years. We believe the company's accounting policies are proper and adjusted EBITDA is a key metric to judge the company as revenues are deferred. PwC, a very well respected accounting firm, is XON’s auditor.
o Successful partnerships overlooked. The Spotlight Research report points out many negative partnerships. However, it fails to mention XON’s approximate $53M investment in Ziopharm, which resulted in an approximate $172M special dividend that has been distributed to investors, while they still retain a 50% royalty stream going forward.
Clearly, a 3.25x return for investors was a positive outcome and more returns are likely given the future revenue stream.
n Part 3 – biofuels are a pipe dream. We were able to speak to an investor who recently toured XON’s Isobutanol facility in South San Francisco and was able to independently verify that the pilot facility exists. We were not able to ascertain any production or engineering characteristics. However, the facility looks very similar to the Spotlight Research picture on page 22 of their report. We believe XON remains on track to achieve commercial revenue in early 2018.
o Part 4 – value of Trans Ova. Based on Spotlight’s research, Trans Ova was a good acquisition as XON only paid 1.8x forward revenues for the company. However, Spotlight claims that Trans Ova is now worth 20x revenues. We would not make the same interpretations regarding the value paid for Trans Ova to today’s market cap as Spotlight’s analysis in this area ignores the other revenue-generating segments of XON’s business, as well as future growth opportunities - but it has been considered a good acquisition.
o Part 5, 6, 7, & 8 – "google of life sciences." The conjecture in this part of the reports has little to no factual basis, in our opinion.