Precigen: Debt Levels 2.7x Revenue And An Overly-Ambitious Phase1/2a Pipeline, -16% Downside In 2020 (NASDAQ:PGEN)

Precigen, Inc. equity research report

Graphic Source: Precigen, Inc.

Introduction: What is Precigen, Inc.?

Precigen, Inc. (PGEN), formerly Intrexon, is a synthetic biology company transitioning to a self-reliant discovery and clinical-stage corporation advancing next-generation gene/cellular therapies targeting immuno-oncology, autoimmune disorders, and infectious diseases.

Founded in 1998, Precigen has gone through a series of expansions and contractions to define its highest-value operating segments. With ca. 800 employees, Precigen is based in Maryland and operates with several unique subsidiaries, primarily Exemplar Genetics, and Trans Ova Genetics. Precigen looks very different than it did in 2019 with a series of asset/subsidiary sales to rein in over-expansion in what was a massive undertaking covering livestock to natural gas conversion. The company is currently struggling to redefine its operation position and strategic future under leftover debt impairment losses.

The following report will aim to bring investors up-to-date after a tumultuous 2-years with where the new Precigen is operating and the potential it holds in 2020 and thereafter. Initial ambitions of the author were to do an analysis into the science and potential behind the new target pipeline; however, after breaking down the complexity behind the financial situation with subsidiary sales, expansions, and accounting adjustments, this report will primarily focus on simplifying and deepening the financial understanding of Precigen, Inc. for investors. For more information on the science behind the pipeline, please see Precigen’s Q2 2020 Conference Call.

Management & Strategy: After a series of asset sales in 2019-2020, the company has redefined its new strategy as focusing on discovery and clinical development in its priority healthcare business. Three key elements define the company’s future revenues and what investors should expect from this new strategy:

1) Precigen is advancing its lead programs on their UltraCAR-T platform: PRGN-3005, -3006, ActoBiotics platform: AG019, and UltraVector platform: INXN-4001.

2) Precigen is strengthening its preclinical programs to drive long-term value while exercising a rapid “go” and “no go” decision-making style regarding portfolio management.

3) Precigen is using its years of synthetic biology experience/technology to optimize the biological process and surpass competitor products inhibited by “traditional techniques”. This is expected to result in precision medicines manufactured at a lower-cost and more efficiently with superior performance.

Regarding management, Precigen started 2020 with a new CEO, replacing Randal Kirk after 11-years of service with Helen Sabzevari, Ph.D., who joined the company in 2017 and formerly ran the Precigen subsidiary. Her expertise in developing novel gene and cell therapies and Precigen’s transition to a healthcare focus was the estimated reasoning behind the transition with Kirk remaining on as Executive Chairman of the Board. The focus will be continuing to advance Precigen’s pipeline.

Products: Precigen is focusing on advancing four therapeutics:

1) PRGN-3005 is a phase 1 clinical trial therapeutic for advanced ovarian cancer;

2) PRGN-3006 is a phase 1/1b clinical trial therapeutic for replaced or refractory Acute Myeloid Leukemia (“AML”) or for patients with high-risk Myelodysplastic Syndrome (“MDS”);

3) AG019 is a phase 1b/2a therapeutic targeting clinical recent-onset type 1 diabetes (“T1D”);

4) INXN-4001 is a phase 1 therapeutic retrograde coronary sinus infusion in outpatient left ventricular assist device (“VAD”), a key product segment in 2019 for the ventricular assist market.

The current focus of the above clinical studies is evaluating the safety. Precigen has been accepting of independently developing proof-of-concept.

Market potential: Precigen’s new focus is on the healthcare segment and by leveraging their experience and technology from synthetic biology, they aim to target 4 unique patient market segments. In the advanced ovarian cancer segment (PRGN-3005), the expected market size in 2022 ranges from $1-1.5B with a CAGR of 6.2%. In the AML segment, the estimated market size in 2022 will be $1.2B with a CAGR of 14%. For MDS, the estimated market size in 2022 will be $2.4B with a CAGR of 9.7%. For T1D, the estimate for 2022 is $7.6B at a CAGR of 7.9%. Finally, the VAD market holds a potential of $2.4B at an 11.7% CAGR.

All in all, Precigen is targeting a total market sum of approximately $15B (2022) with an average CAGR of 9.9%, a large opportunity for a company looking to revolutionize the efficiency of drug development and the cost-basis.

Financial position: In determining the financial position of Precigen, it wouldn’t be extreme to use the word “struggling.” Anytime an improperly managed conglomerate tries to narrow its vision to a single segment, its share price and financial situation will grapple with the consequences for several years of expected losses, particularly in biotech where revenue is often an investor’s benchmark.

Precigen’s revenue peaked in 2017 at $219M and has since exhibited a -26% CAGR meeting 2019 at $90M (-40% y/y). This has probed the transition to focusing on their pipeline and taking losses on the sale of subsidiaries with accumulated goodwill. The company has not achieved profitability for 10-years and exhibits typical financials of a young-biotech and can be expected to do so for the next few years until their pipeline matures. 2019 showed an EBITDA improvement on 2018 relative to revenue at -$154M. 1H 2020 did show signs of a financial improvement with revenue up 9% 1h/1h and a negative EBITDA representing only 55% of revenue (vs. 130% in 2019), a stark improvement on cash drainage, but as elaborated below is not expected to continue. Analysts expect a 4.0% y/y growth in 2020 with -6.5% y/y growth in 2021. The company did state in Q2 that their liquidity situation ($133M in cash at 1H 2020 | +77% on FYE 19) will cover at minimum the next 12-months, hardly enough time for even a technologically advanced company to garner support for their pipeline of Phase 1/2a therapeutics while under a debt situation of $249M, of which ca. $200M is convertible to common stock adding potential dilutions.

Investment thesis: Precigen was a promising synthetic biology play that was on the cutting-edge of molecular biology and genomics, but has since hit hard times. After a weak-profitability overexpansion realization in 2018, then CEO, Randal Kirk, and his board realized a narrower focus was needed. Taking their synthetic biological techniques and expertise, they set their sights on therapeutics in 4 popular segments hoping to revolutionize the pace and efficiency of the industry. This turned out to be a shift away from investor value. Trying to focus on a phase 1 pipeline of four products 3-5 years out from approval with a net debt position of -116M will require more thorough expertise than ambition and lateral-technological knowhow. What could be promising for risk-seeking long-term investors is a dilution likely high-risk play with a potentially large downside. The author concludes that Precigen is a “sell” with an FYE price target of $3.01 per share (-16% downside).

Financial Position (expanded)

Precigen Opearting history, financial position, revenue, cagr , averageTable Source: Self Created | Data Source: Seeking Alpha – PGEN

Revenue/cash flow: With a -26% 3-year CAGR, it becomes clear PGEN has struggled over the past few years, primarily stemming from a string of less-than profitable ventures in advanced sciences. The company has since transitioned into a more narrow therapeutic focus, with hopes of developing 4 therapies. The revenue situation of 2015-2019 is not cohesive towards understanding 2020 and beyond due to the many subsidiary sales and deconsolidations witnessed in 2019-1H 2020. As we can see below, 1H 2020 already started to reflect the changes in revenue.

Table Source: Self Created | Data Source: Seeking Alpha – PGEN

What can be seen above is a 9% 1h/1h gain which is likely not repeatable due to the nature of the $14.6M (24% of 1H 20′ revenue) collaboration/licensing revenue received from Fibrocell Science Inc. This, in reality, is attributed to the accelerated recognition of previously deferred revenue after the “mutual termination” (Feb. 2020) of the collaboration with Fibrocell. In regards to repeatable revenue, Trans Ova, a provider of industry-leading bovine reproductive technologies, has sales that are likely repeatable and to experience reasonable growth while the pipeline is still developing through its clinical trials, but from a low basis.

Additionally, the Exemplar subsidiary, a developer of MiniSwine Yucatan miniature pig research models and services, should also continue to perform, although together, they still represent a small portion of the 2019 revenue and looking forward excluding the revenues previously attained, a -10 to -18% loss would potentially be expected excluding any other revenue sources brought in from deferred or attained through licensing. Analysts have made these adjustments and have concluded an average analyst estimate for $36M in revenue for 2H 2020 (4% y/y). 2021 is estimated at $91M (-6.5% y/y).

Balance sheet composition

Balance Sheet Precigen Analysis 2020 - 2021Table Source: Self Created | Data Source: Seeking Alpha – PGEN

As seen above, the balance sheet presents an increased level of risk as debt greatly expanded in 2018 (+$204M) and has not returned to more sustainable levels reflecting the new operating position. On a share basis, the book value per share declined from $2.27 in 2018 to $0.29/share at 1H 2020 (-87% loss of value). TTM interest expense has reached its highest level yet at -$18.2M. With no relevant profitability metric to compare it to, interest as a portion of 2019 revenue reflects an astonishing 20%; however, the company did state in Q2 that their liquidity situation ($133M in cash at 1H 2020 | +77% on FYE 19) will cover at least the next 12-months, but the looming debt situation of $249M, of which ca. $200M is convertible to common stock, is still concerning either on a dilution basis or on a solvency basis (the latter being a pessimistic scenario given net debt is ca. $116M). Investors should be aware of the changing debt situation as either one of two events occurs: 1) the company utilizes dilution-based financing in an equity raise, or 2) the company sacrifices growth in the short term to enable a more liquid financial situation (neither being very optimistic).

Valuation

Precigen Analysis ValuationTable Source: Self Created | Data Source: Seeking Alpha – PGEN

In regards to valuing a company under such uncertain circumstances, investors will be hard-pressed to find an accurate basis for PGEN’s valuation, but what becomes apparent is that average analyst revenue forecasts are optimistic and EV/revenue multiples may experience contractions or expansions following clinical trial results and the pending liquidity situation. The model above incorporates analyst expectations as a benchmark for investors to understand what is baked into the pricing of Precigen in today’s environment. With limited resources already, Precigen has made clear that its focus is on its Phase 1/2a based pipeline of 4 products while ignoring the 2 ailing subsidiaries generating the lifeline revenue. There are few partnerships in sight and by closing down existing partnerships through their subsidiary sales and health-refocusing, it becomes likely that an independent Precigen will underperform in 2020 and 2021, highlighting a bear case of -16% return.

ChartData by YCharts

Additional catalysts to watch for 2020-2021

  • PRGN-3005 UltraCar-T (ovarian cancer) initial data readout in 2H 2020
  • PRGN-3006 UltraCar-T (“AML”) initial data readout in 2H 2020

Conclusion

To conclude, what seemed to be a promising play on synthetic biology turned out to be a struggling therapeutics biotech reaching for ambitions outside of its historical scope. A new CEO may catalyze the pipeline’s progress, but Precigen is 3-5 years away from any results and already cash-dry. An overburdening debt position and minimal cash-generating subsidiaries to manage the interest make 12-months of life seem far too long without shareholder dilution.

For the risk-seeking investor, the discount Precigen has may potentially be an exciting long-term turnaround play, but for the average investor, PGEN is a “sell” with a low price target of $3.01 (-16% downside).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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