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Edited Transcript of XON earnings conference call or presentation 9-Nov-17 10:30pm GMT

Q3 2017 Intrexon Corp Earnings Call

Glen Allen Nov 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Intrexon Corp earnings conference call or presentation Thursday, November 9, 2017 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Last

Intrexon Corporation - COO

* Christopher Basta

Intrexon Corporation - VP of IR

* Joel D. Liffmann

Intrexon Corporation - SVP of Finance

* Randal J. Kirk

Intrexon Corporation - Chairman and CEO

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Conference Call Participants

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* Jason Nicholas Butler

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Michael Leonidovich Ryskin

BofA Merrill Lynch, Research Division - Associate

* Robert Paul Breza

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Thomas Shrader

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Intrexon Third 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.

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Christopher Basta, Intrexon Corporation - VP of IR [2]

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Thank you, operator. Good afternoon. I am Chris Basta, Vice President of Investor Relations for Intrexon Corporation. Welcome to our third 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; 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 Third Quarter 2017 Financial Results Conference Call.

During this 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 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 and adjusted EBITDA per share. Reconciliations to GAAP measures are contained in the earnings press release as well as on the Investors section of our website.

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

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Andrew J. Last, Intrexon Corporation - COO [3]

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Thank you, Chris, and good afternoon, everyone. Thank you for joining our third quarter 2017 earnings call. Your support and interest in Intrexon is appreciated.

Earlier today, we issued our earnings press release and filed our Form 10-Q, which we hope you've had a chance to review.

Since our last quarterly call, there've been a number of significant events and advancements in the industries Intrexon serves and within our portfolio, as the engineering of biology continues to expand the reach of biotechnology within human health, agriculture and into new sectors such as energy and environment.

First and foremost, in the world of gene and cell therapy. The FDA has recently granted the first 2 approvals in an emerging class of CD19 CAR-T therapies for select cancer indications. We congratulate the thought leaders involved. These approvals of viral-based CAR-Ts set the stage for our next-generation approach to designing T cells as they near the clinical stage. Our nonviral manufacturing builds upon the success of viral CAR-T therapy with 2 meaningful differentiators: reduced cost and time. The team has been steadfastly improving upon the foundational Sleeping Beauty platform acquired in early 2015. The result is the first CAR-T therapy that can be generated and administered in less than 2 days, or as we and our collaborator, ZIOPHARM, call it, point-of-care CAR-T therapy.

Our first engineered point-of-care motif is a CD19 CAR-T that co-expresses the powerful cytokine IL-15 and a switch for its control that we intend to move into the clinic in 2018. In addition to the manufacturing benefits, this combination of T cell persistence via our membrane-bound IL-15 and its control, viral gene switch, will provide expanded access to these therapies for patients in need and the evolution of CAR-T therapy into an affordable care setting. In addition, the CAR-T therapies for the 2 unnamed targets in our collaboration with Merck Serono also utilize our nonviral platform and capitalize on the benefits of IL-15 in our switches. We continue to advance these important programs towards the clinic in 2018, which is promising to be a pivotal year for our CAR-T platform.

Nonviral Sleeping Beauty is also the basis for the CRADA that Intrexon and ZIOPHARM have with the NCI and Dr. Steve Rosenberg. As disclosed earlier this week by ZIOPHARM, an IND application is expected in the first quarter of 2018.

We've made considerable progress on our goal of establishing precedence as a dedicated gene and cell therapy company by year's end to capitalize on our leading DNA engineering capabilities and advance a broad pipeline of internal and partnered therapeutic programs. Under the guidance of Dr. Helen Sabzevari, the Head of Precigen's R&D, our portfolio of internal, unpartnered targets has expanded to include autoimmunity and infectious disease. Additionally, our partnered immuno-oncology portfolio is expanding with new targets in both hematological and solid tumor indications. The team is focused on innovated, combinatorial approaches using multiple technologies, including the recently acquired GenVec platform. We believe Precigen will be well positioned to attract strategic and financial partners in the future and drive shareholder value.

The Precigen team has worked hard on our innovative cardiac disease gene therapy, and we are pleased to announce that an IND has been filed for Xogenex leading clinical candidate, INXN-4001. An industry first, this multi-gene therapy expresses proteins to target 3 components of cardiac disease and is exemplary of what is possible with our platform. Cardiac disease represents a significant unmet need that places a massive burden on the U.S. health care system. More than 5 million people are afflicted and over 600,000 people die in the U.S. each year.

The substantial potential of gene therapy in heart disease has been limited to date by approaches that focus on only one cause of heart disease. By targeting 3 at the same time, we believe this pioneering multi-genic approach has the potential to deliver meaningful benefit to patients in need. Our promising preclinical data in rat models showed the reversal of established disease after single treatment of our multi-gene therapy. Furthermore, in large animal models, our GLP toxicology study demonstrated our approach is safe, with no adverse effects and efficacious. We will provide further updates on this important program when appropriate.

With respect to our joint venture with T1D Partners, we anticipate filing an IND for our type 1 diabetes therapy in early 2018. T1D is a significant and growing health problem affecting over 1 million children and adults in the U.S., and the treatment market is expected to expand to $14 billion by 2023. This chronic condition is characterized by autoimmune destruction of the insulin-producing beta cells in the pancreas. Currently, there is no therapy approved to address the underlying cause of disease. Therefore, lifelong injection of insulin is the first-line treatment.

Our antigen-specific immunotherapy represents a unique therapeutic approach for T1D to prevent, retard or reverse the destruction of the beta cells. This therapy is intended for early-stage T1D patients before they become insulin-dependent, yet see applicability also in late-stage patients. In the early-stage diabetes setting, our approach in animal models has shown very high remission rates of 80% to 90% in new onset diabetic mice.

Separately, we have decided not to move forward on the wet AMD program with our JV partner, Sun Pharma, given the results from additional preclinical work undertaken this year.

We continue to be encouraged with the expansion of our partner gene and cell therapy programs into the clinical stage, and we expect to see further collaborator progress on this front in the months ahead. In particular, we are very encouraged to see ZIOPHARM moving their controlled IL-12 gene therapy for recurrent brain cancer into a pivotal trial, as well as initiating a Phase I trial in combination with a checkpoint inhibitor by year-end.

In Food, we have had some exciting developments as we tap the potential of engineered biology in high-value fruits and vegetables as well as in eco-friendly crop protection, both have meaningful drivers underpinning potential commercial success.

With respect to fruits and vegetables, browning plays a key role in the troubling FAO statistic that 45% are wasted each year. Our optic nonbrowning solution is unique in helping to reduce this significant waste by driving value across the entire supply chain from producers to shippers to stores and most importantly, to consumers.

Our first commercial launch in the fruit category utilizing our nonbrowning platform is underway, with Arctic Golden slices hitting the market in roughly 400 stores across the Midwest and other regions. By eliminating the need for chemicals that alter taste and texture, we are providing a superior product that we will anticipate will not only grab significant share in the $500 million U.S. sliced apple category, but also expand the market overall. Consumer feedback has been encouraging, and consumer research over 90% of those who tried Arctic apples said they would buy them when available.

We have undertaken one of the most ambitious apple-growing campaigns to position the company with available supply to become the leading player in this market. By 2020, we expect to have 4 million Arctic trees in the ground. The return on our upfront investment to plant trees increases as they mature and yield increasingly more fruit over time.

As previously detailed, we expect our sales from just apple slices alone to reach $20 million in 2020; $100 million in 2022; and $500 million in 2026, representing a CAGR of 70% during that time frame. Much of this rapid growth comes from the increase in fruit yield I just referred to, and we expect to reach greater than 50% gross margin by 2022.

We continue with the development of additional fruits and vegetables, and today our nonbrowning pipeline includes avocados, cherries, pears and lettuce. Each of these face the same challenge of high waste and represent significant addressable markets that can be expanded with our nonbrowning solution.

Shifting in Food from its production to protection, increasing resistance to chemical insecticides and GM crops in agricultural pests is driving a need for new solutions. Intrexon Crop Protection delivers just that and has had some meaningful developments over the past few months. Most recently, ICP achieved a key milestone in our collaboration with a leading agricultural company on our fall armyworm solution, along with the receipt of a milestone payment and the continued advancement of this important program.

Native to the Americas, the fall armyworm invaded Africa in early 2016, and has now spread to 28 countries with another 9 currently awaiting confirmation. During this short time frame, this pest has cost roughly $14 billion in estimated losses to several important crops, including corn. Our pioneering solution prevents fall armyworm from reaching adulthood and can help counter the increasing resistance of this devastating pest to chemical insecticides and transgenic crops. We look forward to providing further updates as we make additional scientific advancements and progress towards commercialization.

Additionally, during Q3, we announced our innovative SLI, or self-limiting insect solution, to suppress the diamondback moth began field trials in New York following the finding of no significant impact issued by the USDA. The diamondback moth costs farmers over $4 billion annually and is considered one of the most difficult ag pests to control due to its resistance to dozens of insecticides as well as its resistance to Bt proteins in the field. This groundbreaking trial concluded in October, and we expect to provide preliminary reports on field data during the first quarter of 2018.

The issue of rising pest resistance to chemical insecticides and GM crops is a serious one. Today, worldwide spending annually on pesticides is upward of $30 billion, and yet we still lose roughly 30% of crops to ag pests and fungi. The enormous challenge facing us is not only the significant loss of crops today but the increasing ineffectiveness of conventional methods. In numerous trials, our solution has shown elimination of a variety of damaging pests, and we believe our pipeline of SLI products will play a major role in insect pest management practices, without damaging the environment or ecosystem in which they are deployed. Validation for Intrexon Crop Protection's SLI approach from a large agricultural company bodes well as we strive to penetrate this large market opportunity.

Shifting to environment. We announced regulatory jurisdiction for our friendly Aedes mosquito has been transferred to the EPA as a pesticide product based on new FDA guidance. Simply put, having the product viewed as a pesticide is a welcome situation, and we are making the final preparations to submit an application to the EPA.

Outside the U.S., we announced our second multiyear revenue contract in the state of Minas Gerais, Brazil. In India, we expect results from our regulatory cage studies in the fourth quarter, and pending positive effect look forward to taking next steps to make our solution available in this country, battling multiple other virus outbreaks, including dengue and chikungunya.

In Energy, our methanotroph bioconversion platform is a powerful example of the engineering of biology to expand biotechnology's reach into new sectors. Our proprietary toolbox has allowed us to successfully unlock this biofactories potential to produce higher-value products through cost-effective fermentation. So far, we have produced 6 fuels and chemicals, and we believe MBP has the potential to change the gas to liquids landscape.

During the quarter, we continued to make solid progress on our lead candidate, 2,3-butanediol, 2,3-BDO yield increased by 15%, reaching over 60% of our targeted yield. The commercial robustness of the strain was also demonstrated with continuous production runs exceeding 400 hours. Additionally, the 2,3-BDO produced in the 500-liter pilot plant had a purity exceeding 99%.

We also increased our yield in our isobutanol strain by 78%. While encouraging to see this level of improvement, we continue to work on correcting the specific pathway bottleneck on isobutanol production previously highlighted. On status result, we expect even more substantial improvements in yield.

With our bankers, our engagement with energy and chemical companies continues, and we will announce further developments as appropriate.

Now I will turn the call over to Joel.

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Joel D. Liffmann, Intrexon Corporation - SVP of Finance [4]

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Thank you, Andy. Our third quarter financial results reflect an ongoing shift for several wholly-owned programs to the commercialization stage. As Andy just described, we are investing in opportunities such as gene therapies, nonbrowning apples, self-limiting insects as well as fuels and chemicals. In each case, we do so with the expectation of substantial revenues and profits.

At the same time, we are seeing an increasing number of our collaborators enter the clinical stage with gene therapy candidates that Intrexon's research and development team has helped to develop. This success is, of course, welcome and an important precursor to potential milestone and royalty revenues, yet it should be noted that the scope of our work and the associated cost recovery revenue decline as a result. In short, we have evolved our business model from predominantly early-stage programs to include full ownership of a portfolio of products and business enterprises with large commercial potential.

Accordingly, metrics such as cost recovery ratios have become less relevant as the bulk of the investments being made are in unpartnered internal assets. As we have previously stated, we are actively pursuing collaborations with some of our more mature assets in large markets. The investment banking engagement on the methanotroph bioconversion process is but one example of several engagements we have underway.

Now onto the quarterly numbers. Today, we reported third quarter revenues of $46 million, representing a decrease of 6% year-over-year. Collaboration and licensing revenues were 61% of total revenue versus 62.5% a year ago. Product and service revenues, which primarily reflect our Trans Ova business, decreased by 1.8% versus last year's third quarter.

SG&A expense was $39.3 million, an increase of $5.5 million from a year ago, reflecting headcount growth, employee compensation and benefit cost increases and stock-based compensation expense. Research and development expense increased by 26% to $36.5 million, and we are continuing to invest in our multiple platform technologies and internal development capabilities.

Our increased investments in general and administrative expense and research and development reflect the ongoing shift in our business mix that I mentioned a moment ago. Adjusted EBITDA for the quarter was a negative $16.4 million compared with the prior year loss of $3.75 million.

At the end of the third quarter, deferred revenues were $276 million, and we had consolidated cash and liquid investment position of $108 million. We also held equity securities and preferred stock in our ECC partners valued at $175.4 million.

After the quarter, we entered into a $100 million preferred stock equity facility that Intrexon can access at its discretion. We have not drawn down on that facility and have no intention to do so for the foreseeable future. More detail regarding our results can be found in the 10-Q filed with the SEC today.

I'd now like to ask the operator to open the call for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I'll start with the Energy business. I know Isobutane yields increased to 78% in the quarter. Does that mean you've overcome the technical hurdle that you talked about in the past? And maybe if you could just update us on site selection time lines. Is that still on track by year-end?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [3]

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Yes. So -- Tycho, R.J. here. So we are still, as mentioned by Andy, we're still working on a technical hurdle on isobutanol. You should bear in mind, I think you remember because you were involved at the time when this thing was nothing more than a bioinformatic model that we had created. As a matter of fact, I know you should remember that because you were involved way back then, 4 years ago, at the time of our IPO. So when we are talking about targeted commercial yield, it's informed by those models. And so that's what we think is -- that's what we think the potential is. So without getting into whether or not we are in the money today on isobutanol, the truth is, as Bob Walsh has explained to me, look, if you built a plant based on the characteristics of a particular organism at a particular point in time and then later improved that organism, you'd find that you had built the plant incorrectly. So it's very important for us that we get out of the genetic engineering of the organism everything that we can, so that we can fully optimize and realize -- fully optimize the production and yield to realize the maximum benefit of the technology. So the site selection that we referred to is -- does not -- that does not pertain to isobutanol at this time. That's focused on 2,3-BDO which is 1 step away from 1,3-butadiene.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay. And then for a follow-up on Oxitec, there have -- there's been some developments on the competitive front with EPA approving, I guess, MosquitoMate. And Verily's had some news. Just any update on your perspective on how the competitive environment has evolved?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [5]

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Well, we're very happy to not be regulated by the FDA. It was always a bit strained since we don't really have -- to judge our product on the basis of safety and efficacy in the mosquito. I'm not sure how that even works under the Federal Food, Drug, & Cosmetic Act. So in any event, this has been rectified by the government under the coordinated framework. We were consulted, and we're very happy that we were, and we're very happy with the result. So as Andy mentioned, we'll be moving forward now with our applications at the EPA.

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Operator [6]

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The next question comes from Tom Shrader with Stifel.

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Thomas Shrader, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7]

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The 2,3-BDO comment about 60% of target yield, is that the same as in-the-money? Or why are those numbers not the same, the target yield and the in-the-money yield?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [8]

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Yes. That was the point I was just trying -- Tom, R.J. here, I was try to get to with Tycho. So we're very much in the money on 2,3-BDO, right? But we're at 60% of where we think we can go. I personally have been frustrated by this because I'm thrilled to be so far in the money, so I go to Bob Walsh. And I say, "Bob, let's go build this plant, let's get going." And he says, "How much water do you want to boil?" Right? It's ridiculous. If we continue to improve the strain on the path we're on, he explains to me, right, then we'll find that that's not the plant we want. We'll want another plant. So the genomic engineering is actually a lot less expensive than building a lot of hardware. And I think he's right, especially given the progress they're making. They're proving to us that he was right, okay? So when we say 60% of target yield, that means that was the yield that was predicted by our model, which has been holding up quite well. So look, we have a lot of computational biology. You've been to our lab in South San Francisco, I think. You know, we have a lot of computational biology and bioinformaticians there. The models that they've constructed have been holding up quite well, as I said, and so we have a lot of -- we attach a lot of credibility to their work. And so we're going to continue to improve this yield while we talk with partners -- potential partners, on 2,3-BDO and on isobutyraldehyde. So did that answer your question?

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Thomas Shrader, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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I think you're not going to answer this question, but does your model tell you when you're going to get to this yield?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [10]

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No. It does not. I will answer it. When you're doing a world-first-instance thing, you just don't know, Tom. You can't [itorize] it. Look, if you could, it wouldn't be so high-value, to be honest with you. We're doing something -- we've already achieved so many things with regard to this platform that are -- that were previously undreamed-of. And we know that from the conversations we're having all over the world with very major players. This is very potentially the biggest thing that's ever happened in natural gas upgrading. I think if we're right on this thing, this could be the most valuable biotechnology to date. And on the numbers, it certainly is -- it certainly seems to be shaping up that way. So you're doing something new, never been done before. When are you going to get complete? When are you going to complete? I don't think anybody knows. But like I said, we are tracking well. And we have 3 quarters in a row of steady improvement. If it stays on that pace, it won't take long. So we're really confident and really hopeful.

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Thomas Shrader, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Okay. And you quote the apple market as $500 million. Is that in little bags to consumers? Or there's also some big potential corporate customers there? What's that $500 million?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [12]

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We want to stay in the little bags to customers, Tom, because that's the huge margin. That's the huge margin opportunity.

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Andrew J. Last, Intrexon Corporation - COO [13]

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That's the sliced apple market.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [14]

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Yes, absolutely.

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Andrew J. Last, Intrexon Corporation - COO [15]

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That's current market size.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [16]

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I like the way Neal Carter puts it, a whole apple is just too much of a commitment for a modern consumer. It's more than he wants, you know?

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Thomas Shrader, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [17]

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But so $500 million is the little bag market?

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Andrew J. Last, Intrexon Corporation - COO [18]

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Yes. Yes, sir.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [19]

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Well, that's the present. If you think about it, the present market for presliced apples is actually estimated to be $600 million. We think that because this -- we think that this technology is so appealing and so favored by consumers that we will see the segment grow on account of it.

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Andrew J. Last, Intrexon Corporation - COO [20]

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We do. We do.

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Thomas Shrader, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [21]

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Well, okay. And the last question, it might be a Cooper question, but your first trial with the IL-15 CAR-T, would that be a trial where you don't grow cells ex vivo? And you do -- would it be a 2-day trial? Or would the first trial be a more conventional 21 days to grow cells to show the cells work, and then you'd move to a 2-day trial? Can you talk about what the first trial would look like?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [22]

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I agree with you, that is an L.C. question. I'm looking forward to not doing cell expansion, as are you. And that's the reason -- it -- to my mind, that's the reason for the membrane-bound IL-15 and the work we've done there. So to make this truly point-of-care, you need to get away from both virus and ex vivo cell expansion. That should also remove the potential for cytokine release syndrome, that could get you into not requiring lympho depletion, which means this technology could become safe. It could be practicable just about anywhere. It could be used first-line. We're tremendously excited. I want to make just a short digression here. This is the fourth anniversary of our first Q, the first Q we filed as a public company. And since our share price is about the same as it was then, I had -- I decided to go look back at that one just to see how much has changed. And by the way, I invite any -- all of the listeners to do the same because it was a real eye-opener even for me even though I lived it 24 hours a day, 7 days a week. Just to see how far we've come and how much success we've achieved over these 4 years, but I just want to mention something about CAR-T. Go back and look at our S-1, all right, and look at what we said about CAR-T. The truth is, 90% of what we predicted was going to happen in CAR-T has, in fact, occurred. In other words, we knew that those things were going to be proven. We knew that they were going to work. We knew that they really represented the biggest therapeutic motif to come along since the mAb, okay? So we have one more thing because that was the whole point of what we called ultra CAR-T in our S-1. We have one more thing to do, which is solve the 4 problems that we said that needed to be solved for this technology to actually mean, really, much at all in the world. And if we can solve all 4 of them, and then we'll soon see if we have done that, this is going to be very big indeed. So we're very, very excited.

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Operator [23]

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(Operator Instructions) The next question comes from Jason Butler with JMP Securities.

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Jason Nicholas Butler, JMP Securities LLC, Research Division - MD and Senior Research Analyst [24]

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First one on the wet AMD program. Can you give us any more color on the no-go decision there? And specifically, any learnings that are applicable to other programs that use the RTS system?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [25]

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Sure, Jason. First of all, this is in the category of hits and misses, and what we wanted to do is tell you we don't hit on everything. This was a miss. We're not going to say why we missed or what we missed, there are people -- there others out practicing what we -- I'll put it that -- there are others out practicing in the field, so competitively we're just not going to report what the technical deficits were, but we think they're significant, and we don't see a clear way forward in that category at the present time.

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Jason Nicholas Butler, JMP Securities LLC, Research Division - MD and Senior Research Analyst [26]

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Okay, great. And then in terms of the Oxitec's cage trial in India. Can you just explain to us or walk us through the design of the trial versus the field trials you're running in Brazil? And just help us understand how you define success there versus the percent reductions that you're seeing in the field trials in Brazil?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [27]

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Yes, Jason, that's a great question. And I wish any of the people at this table knew the answer. We do not know the -- we do not know that study design, but Chris will get back to you on that.

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Christopher Basta, Intrexon Corporation - VP of IR [28]

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Yes.

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Operator [29]

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

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [30]

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It's actually Mike Ryskin on for Derik. Just had a quick question following up on your comment in terms of collaboration revenues and how you're phasing out some of the earlier projects that you're developing more internally. How should we expect that to proceed over the coming quarters and years? Sort of looping that into the comments in terms of the preferred equity offering to Third Security, you said -- I think you said that you don't expect to draw on that in the near future, and yet your cash and cash equivalents burn over the last quarter to support the increased R&D. Are you expecting sort of to control some of that extra OpEx? Or where is the gap in the cash coming from?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [31]

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Yes. So as reported, Derik, we have multiple mature programs and platforms that currently are being discussed with potential partners. So it's always been our desire, we've made -- we've certainly made no secret of it. It's been always our desire and plan to evolve to a company in which we would not partner early-stage programs. We would only partner late-stage programs. The benefits of partnering in late stage are many. I mean, for one thing, the basis of the partnership changes from a financial partnership to a technical one. It changes to one in which each party is putting in, even the nonmonetary inputs can be quite significant. Because an established commercial partner, for example, already has a lot of infrastructure that we would have to create if we were trying to market ourselves. So as I said, the entire basis of those partnerships changes, their dollar value becomes more certain, more calculable and, frankly, they're just more significant, okay? So it was always our desire to get to the point that we're at today, in which we have many mature -- several mature programs that are relevant for partnering discussions and in which we are, in fact, engaged with potential partners. So the short answer to your question is, look, we have a demonstrated track record of being very adverse (sic) [averse] to dilution. You compare Intrexon to any other company in the peer group, let's say, class of 2013, IPO-ed 2014, et cetera, again I did -- I -- this was brought back to me because I actually looked at the Q from 4 years ago. Let me tell you what our dilution is over those 4 years: 24%. I compared that to the dilution of the one-hit-wonder binary risks out there that trade for multiple billions of dollars and so forth, where you're still betting on that same binary risk, and the dilution has been on the order, typically, of 100% over those 4 years. So we're just -- I'm not criticizing them. That's exactly what they should be doing. But I just want you to know, we are opposed to dilution. We try to be capital-efficient. What Joel was telling you wasn't that we are suddenly -- I don't think -- I didn't hear Joel say we're no longer even going to try to be capital-efficient. What he told you was it's not going to be as simple on a quarter-to-quarter basis as showing you that we've got 50% cost recovery from our partners and we've got exactly 50% in deal money, and that we would gauge our growth rate based on that. Now we see the opportunity to finally be getting the kind of revenue that we have always aspired to. The other thing that, I think, everyone should bear in mind is these revenues that we are reporting today, these are not the target revenues that -- these are not the revenues that we want. I don't mean in quantity, I mean in kind, right? The revenues that we want are profitable revenues from products and participation in those. That's always been our objective. And so what -- in our view, those days are getting close and our opportunity to partner on those kinds of opportunities are even closer. And I think that those 2 capabilities combined are going to give us an ability to, as I said in the press release, to actually grow our investment in early-stage programs.

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Joel D. Liffmann, Intrexon Corporation - SVP of Finance [32]

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Let me just add one comment. The winding down of cost recovery revenues from our early-stage ECC partners is the precursor to milestone and royalty revenues as those products move through clinical trials. So it's just the gap between stopping some of the inflow of cost recovery revenues and cashing in on the larger opportunity that comes from the programs that we designed over the last 4 years with these companies.

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [33]

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Okay. That's -- actually, that's really helpful. And then right along those lines, a quick follow-up, I saw on your press release on this a few weeks ago and again in the slide deck, you commented on the fall armyworm solution, you achieved a key milestone. Could you discuss what the milestone was? Was it something technical? Or some were moving along in terms of preparing to deploy? Just any details on that.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [34]

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Yes. We're not at liberty to do so. Because as you referenced, we have a partner who has a vested interest in the entire field. And so we're not able to talk about it. I can tell you it was a technical achievement, but I can't tell you what it was. We're feeling very good about the fall armyworm solution. And let me just mention because I was at the -- I was in Des Moines at the World Food Prize the week that we issued that press release, and what I thought was, maybe the rest of the world didn't notice that we issued a press release that we have -- we think we have a very plausible, workable solution to fall armyworm. But everyone there did, and there we had multinational agencies, NGOs, the top food companies in the world, the people who really care about feeding people in Africa, for example. And we were the hit of the party. So it just happens to coincide with -- as Andy mentioned, this is really getting to be a devastating problem and suddenly, we're very popular on account of our possession of this -- having developed this asset.

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Operator [35]

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The next question comes from Robert Breza with Northland Capital Markets.

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Robert Paul Breza, Northland Capital Markets, Research Division - MD & Senior Research Analyst [36]

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R.J., maybe as you step back and look at the energy program and some of the milestones you hit today -- or I should say over the quarter. When you step back and speak to your adviser, Moelis & Company, what are -- maybe how should we be thinking about the bigger picture as it relates to the energy program?

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [37]

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Yes. It's a really good question. So as we think about it, there are really 3 ways to play, and what we're trying to do, we'll see if we succeed on this. It just depends on how we come out in the partnering discussions. But there are really 3 ways to play this. There are parties who have a lot of gas or who have completely unmarket -- gas that has no current market or stranded gas, or what have you. And similarly, there are parties who have a lot of infrastructure investment, right, and who move gas, pipeline companies and so forth. These parties are probably agnostic with respect to the molecule or how to play. In other words, I think they -- I think such parties would do toll processing agreements until the cows come home, if you'll pay them a CapEx recovery rate that they deem satisfactory and buy their gas, okay? That's at the lowest tier. And I'll just say we feel extremely confident that we could book those deals all day long. Above that, there are chemical companies that have very significant, here I'm starting to feel like my background in pharmaceuticals actually could help us, right, because the people we're talking to on these single molecules are the chemical companies that have major market share already in that very chemical. So they have the most reason to care. And so the possibility there, that 1 tier up from the first one I described, is that we could contemplate doing a deal, an exclusive deal on a single molecule, with a single worldwide player. Then above that, if you ascribe value to the sheer optionality, if you think, "gosh, maybe we will really succeed big time on isobutanol," maybe we'll finally go back to work on farnesene, a C15. We've shown that we can make farnesene, we just have not spent any significant budget to see what the -- what our potential yield on that thing could be. But that's the $1 trillion a year, farnesene, right. So that's sort of wrath-of-God money. If the international oil companies can think about something that is that landscape-shifting, then the 1 tier above that, which was -- I will say it's our aspirational goal, would be to partner with an international oil company on a global basis across the entire platform. So that's how we're thinking about it.

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Operator [38]

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This concludes our question-and-answer session. I would like to turn the conference back over to Chairman and CEO, R.J. Kirk, for any closing remarks.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [39]

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You know, I don't have a lot to say today. I want to -- as always, I want to give gratitude to our team. We have now, Andy, it's slightly over 1,000?

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Andrew J. Last, Intrexon Corporation - COO [40]

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Yes.

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Randal J. Kirk, Intrexon Corporation - Chairman and CEO [41]

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Slightly over 1,000 souls, absolutely, work diligently every day in this company. I want to tell them this is not for the investors on the call. I want to tell them that the share price has absolutely nothing to do with the work that they're doing or the success that they're achieving. I think we know why the share price is what it is, and we as a management team know what we need to do in order to correct that. We are saying that we'll do our job, but first I just want to give thanks to the 1,000-plus folks in this company who work so hard to make all this happen.

We firmly believe, and I will say more so than ever, except I've been always pretty confident about it, I think we all have, that's why we're here, that we're onto the biggest industrial vector of all time, and we further are fortunate to be situated in a company that looks to us like it can lead the entire space. And frankly, if you had of asked me 4 years ago what my #1 wish would have been at that time, it would be to be able to say what I just said. Because in order for that to be true, it would have meant that some of those early-stage things that we were doing, like the methanotroph bioconversion platform, which was just a model at that time, would have had to have actually demonstrated success. So we did have a miss that we reported. They're bound to happen. We are not going to bat 1,000, but if we can achieve in cancer, if we can achieve against infectious targets using the same motifs in autoimmune and energy and the self-limiting insect I think is just an astonishingly productive platform, we'll do very well indeed. So we're -- yes. Share price notwithstanding, I'll tell you, we're very gratified. Very gratified to be here. We're grateful. Grateful to have the opportunity and grateful to have your interest and support. Thanks.

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Operator [42]

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