Precigen, Inc. (PGEN) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Intrexon Corporation Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Steven Harasym, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Welcome to Intrexon's Second Quarter 2019 Investor Call. I'm Steve Harasym, Vice President of Investor Relations, and I'm joined by Thomas Bostick, Intrexon's Chief Operating Officer; and our CEO, R.J. Kirk. During this call, we will make various forward-looking statements. Investors are cautioned that our forward-looking statements are based on current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from those indicated by our forward-looking statements. Please read the safe harbor statement contained in the earnings release as well as Intrexon's most recent SEC filings for more complete description. On today's call, we will provide an update on our progress, including updates on clinical developments and transactions. We will conclude with a Q&A session. I would like to begin by providing an overview on some of our health programs. Next slide. Precigen continues to advance its clinical and preclinical portfolio in oncology, autoimmune disorders and infectious diseases. Most notably, we now have patients in the clinic using our UltraCAR-T therapeutic platform, which are first-in-class investigational cell-pair therapies, that can be rapidly administered following nonviral gene transfer. In June, we announced that PRGN-3006 began dosing in the Phase I/Ib study for patients with AML and higher-risk MDS. In this week, we announced dosing in the Phase I study of PRGN-3005 for patients with advanced recurrent platinum-resistant ovarian, fallopian tube or primary peritoneal cancer. With dosing underway in 2 trials using our UltraCAR-T therapeutic platform, we believe we are 1 step closer to disrupting the current CAR-T treatment landscape, with the goals of increasing patient access through shortened manufacturing time, decreasing manufacturing-related cost and improving outcomes using advanced approaches for precise tumor targeting and control of the immune system. We look forward to providing you with updates in the coming months. Next slide. Another Precigen program, which continues to advance is PRGN-5001, which is our multifunctional therapeutic candidate, designed to treat solid tumors. Updated preclinical models in head and neck cancer shown here, demonstrate potential superiority to approve an anti-PD-1 checkpoint inhibitors. Next slide. Outside of Precigen, I will provide a few updates on other therapeutic programs. One is our majority-owned subsidiary Triple-Gene, which is working on potential treatments for heart failure. We continue to move forward, evaluating INXN-4001, which is the world's first investigational Triple-Gene drug candidate, to target heart failure, which is a leading cause of death in humans. We aim to address the limitations of current treatments, with our investigational, nonviral plasmid-based therapeutic candidate, which is designed to drive expression of three cardiac effector genes involved in heart failure. Triple-Gene completed dosing in the first cohort of advanced heart failure patients, maintained on left ventricular assist devices. These patients were administrated INXN-4001, to explore the safety of our Triple-Gene effector drug through minimally-invasive retrograde coronary sinus infusion delivery route. Following review of data from cohort 1, an independent data and safety monitoring board, agreed to proceed into the second cohort. We look forward to providing dosing and data updates by year-end. Next slide. Our wholly-owned subsidiary, ActoBio Therapeutics continues to progress its micro-based therapeutic clinical program. We announced that an independent data and safety monitoring board recommended advance into the next stage of the Phase Ib/IIa clinical trial for AG019, our potential disease modification therapy for type 1 diabetes. We have initiated enrollment of the next 2 patient cohorts in the study, dosing adolescents, in the Phase IIa arm in a combination of dosing AG019 plus teplizumab in adults. Enrollment in these arms is progressing well. As a reminder, type 1 diabetes is an autoimmune disease, affecting over 1 million children and adults in the U.S. with no treatment available for the underlying condition. Finally, in ActoBio, our partner Oragenics is nearing completion of the enrollment of patients in the Phase IIb clinical trial for AG013, for the treatment of oral mucositis, which is one of the most common adverse effects associated with chemotherapy. We are hoping to share first-line data early next year. Our final update here is going to be around our fine chemicals business, specifically the cannabinoid production. In June, we partnered with Surterra Wellness, in an exclusive global licensing agreement to advance Surterra's cannabinoid production at a reliable, efficient, cost-effective industrial-scale utilizing Intrexon's proprietary yeast use to fermentation platform. I will now turn the call over to Tom for an update on some of our nonhealth programs, our ongoing transactions and for a financial update.

Thank You, Steve. Next slide. Over the first half of the year, Okanagan Specialty Fruits placed fresh slice Arctic apples to select market as well as sold our dehydrated fry cut ApBitz apple snack on Amazon and launch this product in retail stores. The intent was to use our limited volume 2018 apple crop to build market channels for the expected increasing volumes. In April, the company planted 955,000 new Arctic Apple trees on 650 acres in Washington State. This planting included the first 80 acres of Arctic Fujis, which received approval from the FDA in April of this year. Orchid operations now totaled 1.9 million trees on 1,250 acres. We are expecting to crop 217 acres of orchard in September, October, with an estimated 10,000 bins or 8 million pounds of apples anticipated. This is a 5-fold increase over 2018. Our Arctic Golden harvest will be completed in September and the Arctic Grannys in September. The company has plans to expand sales in the food service market channels with the 2019 crop. Next slide. Oxitec, a wholly-owned subsidiary of Intrexon, successfully completed the first pilot project of its second-generation friendly Aedes aegypti Technology in Brazil, a mosquito strain that unlocks new performance features, greater cost-effectiveness and scalability over Oxitec's first-generation mosquito, in partnership with the municipal public health authorities in the city of Indaiatuba, the pilot project demonstrated the new strain's effectiveness when compared to a controlled area in suppressing populations of the Aedes aegypti mosquito. The primary vector of dengue, zika, chikungunya, and yellow fever in four densely populated urban communities throughout the city. Relative to the untreated control area, releases of friendly-male mosquitoes, achieved an average of 89% peak suppression across 2 communities, treated with a low-release rate of mosquitoes in an average of 93% across two communities treated with a higher release rate, demonstrating excellent performance in the environmental conditions prone to dengue transgression. One significant takeaway was that the low-release rate area generated suppressions levels not far off from the high-release areas. But with 5x fewer mosquitoes released, highlighting the potential the strain has to deliver strong suppression at far lower cost. Additionally, Oxitec has submitted an Experimental Use Permit, EUP, to the Environmental Protection Agency, EPA and is working closely with the EPA leadership to secure approval of the application this year. Approval of this EUP will allow Oxitec to implement its first U.S.-based pilot project with its second-generation mosquito technology in 2020. Next slide. Based on our assessment of the company's present activities and prospects for concluding several transactions, management continues to believe the company's stated goal is achievable with respect to achieving the same net cash and short-term investment position at year-end as the company held at April 3, 2019. We have identified and implemented significant operating cost reductions. However, based on progress to date and the ongoing evaluation of the company's strategic direction in long-term best interest, management has determined not to proceed in continuing its efforts to achieve the full initial target of $70 million in operating cost reductions. Instead, we will concentrate our focus on our overall net cash and short-term investment position. Intrexon is aggressively pursuing several transactions in various stages of closure. Intrexon entered into a nonbinding letter of intent and received a nonrefundable cash deposit for the sale of Exemplar Genetics, a wholly-owned subsidiary of Intrexon, focused on developing miniature swine models of human disease. The transaction is expected to close within the next 30 days, pending completion of diligence. We are considering offers for the sale of Trans Ova Genetics. The company expects to close the transaction in Q4. Trans Ova Genetics offers industry-leading embryo transfer technologies as well as advanced reproduction technologies, in vitro fertilization, sexed semen genetic preservation and cloning for dairy and beef cattle and in small ruminants sheep and goats. The company also implemented targeted reduction of nonessential programs, including closure of Animal Sciences division. While these assets have provided great value to the company, the sale and closure of these assets and others will help to streamline the company and significantly reduced future operating costs. And now, for a financial overview. Second quarter and 6 months revenues were $36 million and $59.3 million, respectively. Decreases of $9.3 million and $25.6 million from the prior year periods. Our reported revenues continue to reflect the strategic direction to transition away from the ECC model and instead focus on internal programs and platforms, that represent our most compelling opportunities. Total operating expenses for the quarter were $73.4 million and $155.4 million for the year-to-date period. Decreases of 23% and 17% over the prior year periods. These declines reflect some of the cost-cutting moves made in the second quarter as we execute against our plan. We ended the second quarter with a cash balance of $125.8 million and as referenced in previous comments, expect to finish the end of the year with the same cash balance on hand as at April 3, 2019. I refer you to the earnings release and 10-Q for additional financial information. Thank you. I would like to now turn the floor over to our CEO R.J. Kirk for questions and answers.

[Operator Instructions]. The first question comes from Jason Butler with JMP.

I had two. Maybe first on the methanotroph platform. Could you -- given the agreement you just announced, can you maybe speak to more details on what ownership or rights that Intrexon will retain to the platform as well as what it's cost or expense, sort of, spend commitment that it has to the program going forward?

Yes, thanks for the question, Jason. So we'll be providing more details as we move forward. But in general, our object here and this was directed by our Board was to secure for our shareholders as much upside as we possibly can have from this program, while eliminating the need of Intrexon to fund this program any longer. We've been working on our Methane Bioconversion Platform for over 5 years. We've spent a lot of money in it, actually more than that's been spent by other 2 partnerships we've created to fund certain targets from that platform. So it's quite a bit of investment and I've been -- on these calls previously, I've said, this is very, very potentially, very likely, in my opinion, will prove out to be the most valuable biotechnology ever created because -- and I make that statement based on the total addressable market, that should be available from this platform. And I still believe that. So it was very important to our Board that we secure upside advantage. But nevertheless, we've told all of you and we've made a commitment to our shareholders, and we have a commitment to ourselves and commitment to our Board that we're going to become a more focused company, and we want to marshal our assets toward those elements of our portfolio that we regard to be the most strategic, of which, I'll just site here, Precigen is obviously #1. So that being the case and we're calling that this company is first and foremost, a health care company. We began as a health care company. It was entirely health care company when I become CEO. And that is clearly what our public shareholders will value, we believe. And so that's what we're doing. So the overall object here is to -- and I would invite the way you would -- should think about this is, all of our interest in our Methane Bioconversion Platform, all of the facilities, all of the technologies that support their platform, will be transferred to a new entity, MBP, LLC I believe is its name. And so we began with a super majority position, over 80%, I believe, equity ownership position. But we do not believe that, that will help, in fact, the subscription agreement of -- Governor Dewhurst alone will, I think, that thing alone will take us down to, I think, something in the 60s and that's before anything else may happen. So I'm just -- I'm only guessing here so it's something in that neighborhood maybe 70%. But the point is, over time, we expect to be dilutive in this enterprise, which is, I think, appropriate. But on the other hand, we're enabling this enterprise. As I commented before that I think, Intrexon's number one job is the enablement of enterprise, and we're really proud of the companies out there who are existing based on our enablement. This is going to be a great one in my opinion.

Great. Helpful. And then just a quick follow-up on the health program so for Precigen 5001, can you just walk us through the highlights of the data in a little bit more detail about the differential efficacy in preclinical models versus PD-1? And then any more color you can give us on the therapeutic in terms of this modality or mechanism of action?

On the latter, well, on both of your questions, I'm afraid that I have to -- I want to defer at this time. But I'll trade you, on this call, 3 months from now, Dr. Sabzevari will be here and she will really be the star of the show. We'll want to talk about our data at that time. Right now, even though I will tell you we're very excited about everything that's going on at Precigen. We're just not going to talk about any more data than Dr. Sabzevari already has released.

The next question comes from Tycho Peterson with JP Morgan.

This is Tejas. I just had a quick one on your commentary on Arctic apple, you said you have, I think, a five-fold increase this fall in production. How should we think about translating that into an impact on revenue starting perhaps the fourth quarter and then beyond? Or is it sort of still too early to dimension that?

Yes, Tom Bostick here. I say it's too early to talk about it, but we are in the process now working with food service and retail to secure the contracts for -- or the purchase orders for the next season. So we'll start harvesting, as I said in October, September and October and we'll know as early as perhaps in August and September what those purchase orders are coming in. One thing I would say is that the 2018 crop was only much smaller, 1/5 of what we're doing this time and when you have a crop that small, when you go into the retail stores, they want a stream of products that's going to come in and it was hard for us to guarantee that with such a small supply. So we do expect that with this larger supply we will be able to purchase orders throughout the season.

Got it. And then on Trans Ova, I mean, I know you have said that you have plans to try and sell the asset by the end of this year. But I mean, should we be thinking or just removing it from the model, starting in 2020 at this point or is it still too early? And then secondly, is it fair to call sort of -- some sort of an inflection there, given year-over-year you're now flat sequentially, you're up a fair bit, because I think, last quarter, R.J. you had called out issues in the cattle business and weather in the Midwest being a drag on growth. Is that now sort of behind you?

Yes. We're pretty committed to our transactions here, Tejas. So as Sir General Bostick indicated, so by the fourth quarter, we do expect to close the transaction on Trans Ova. Obviously, the field has been -- the field has always been cyclical. It's been cyclical for all of recorded time and it is going through a bad cycle. It really has nothing to do with our decision. Our decision, ultimately, was based on, which ones of the -- our businesses enterprise of which they're about 15, I think, which ones, really constitute for our shareholders a strategic holding. We acquired Trans Ova based on our belief that we would be able to do a couple of things, and we were able to do one of them and the other one is still in progress. You have to call time sometimes. I still think that the object #2, goal #2 with regard to Trans Ova is achievable technically. Can't give you a date on when that will occur. So the bottom line is it doesn't have a lot of nexus to the rest of our strategic holdings. Notwithstanding that, it is an outstanding business. It is by far the leader in its field, it's the leader internationally in its field. It is the #1 driver of genetic gain in dairy cattle. I'll go further. They, to all intent and purposes, define what the standard is for a high-performing elite member of that species. So it's just -- it's an absolutely marvelous team, it's a marvelous business. I think it's going to be a great business with us or without us. But it's just not strategic for Intrexon currently. And so you should expect the transaction by year-end.

Got it. And then R.J. on your plan to just not pursue that $70 million in cost out this year. Can you just, sort of, walk us through what sort of OpEx cuts we should expect? I mean, obviously it's going to be less than $70 million, but are you willing to sort of quantify that? And then any specific programs in terms of bioengineering versus the health care side of the business, where those cuts will be, sort of, specifically focused?

We're not going to quantify as a goal, Tejas, other than to say -- reiterate what we said in April and what we said in this call, which is that we feel confident that we will end the year with the same cash balance, just through our cost cutting and through our transactions that we will end the year with, at least, as much cash as we had at the end of 1Q, which, I believe, is $175 million or so. So that is what -- that's where I'll guide you and the reason that we have to come back today and say that we are not going to expect to see $70 million in cuts from operating costs is because as we got into this and as we began our partnering discussions and also, some discussions around some possible dispositions of some businesses, we learned that you could really cut too far too fast, you could impair your ability to sell a business at the same value that you would otherwise receive by just cutting it too much. So if you've asked or could we have achieved the $70 million target, there's no question, we could have. We simply in the face of what we were -- the real-time data that we were receiving in terms of partnering and dispositions on other things we have decided we would like to considered disposition. We decided that cutting that deeply would not be in our best interest. So that's the reason for the qualification on that, but just remember, that the whole point always was to really provide the company, the runway that we expected is going to launch in 2020 by achieving the things that we've talked about for this year, and we're really focused on these things. So the number one thing is, really, what's the cash balance and we're focused on that, and we expect to achieve it.

[Operator Instructions]. The next question comes from Derik De Bruin with Bank of America.

Can you give us the -- basically just a breakdown on how to look at upcoming health care milestones? And just -- you've got some -- you have things in trial now, I'm just -- can you give us, sort of, like what you're expecting in terms of potential data readouts in second half of '19, in 2020, just to sort of make sure that we're understandings of, like, how the news flow, the data flow is going to come out?

Sure. Yes, Derik, we have -- I can refer you to our health-related deck on dna.com with -- which shows our pipeline in the list of the upcoming milestones. We specifically have announced the dosing of our PRGN-3005 and 3006 trials, the UltraCAR-T trials. We have not given any status updates as far as when we'll expect to read out there. As far as our ActoBiotics products, we have dosing in our second cohorts for our AG019, which is the type 1 diabetes drug. We just now on call announced data readout, hopefully, in the beginning of next year for 013 and oral mucositis. And then, of course, with our collaboration partner Fibrocell, we're expecting some readouts coming up in the next 2 quarters. So if you look at 5 -- 24 on that deck that was the milestones there.

Great. And just thinking about the update in mosquitoes second generation of Aedes friendly -- friendly Aedes. Any -- what are the -- you mentioned that it was potentially lower production costs, lower deployment. Can you, sort of, give an estimate on how much cheaper it is and also just any more ideas on how that, ultimately, is going to be commercialized from revenue perspective? And how to think about production cost in that market? And it was well -- just anything more clarity on the business and the cost to deploy?

Yes, I don't want to talk specifically about the cost we're still working through that and we're talking at this time, with some of the potential partners. Partners that we would have considered before that didn't want to talk to us, Rentokil, and others, Orkin, really saw our technology as competition. And one of the things, one of the features in this generation of mosquito is it -- it really turns off the resistance, well, we believe it will turn off the resistance we're testing that. But turn off the resistance to pesticides. So that, combined with the pesticides that don't work, that are limited in their ability to work perhaps 40% or so effective. We think these other companies, these pesticide companies will want to partner and make this just an integrated asset in their tools to fight mosquitoes. I think when you look at the cost, and the examples that I gave, when you see the relative numbers, 89% versus 92% or so, suppression at least in that first field trial, when we're releasing far less mosquitoes, we're obviously going to be able to bring down the cost quite a bit. But the specifics of what the cost -- or we'd rather come back to you later on that.

Fine. And then just one final question. I mean, you're selling some revenue-generating assets right now to do some more experimental, I'm just curious on sort of what is your shareholders have to say about that? What does the bondholders have to say about that? And just it seems a little unusual selling revenue-generating assets to fund more -- to fund those -- to fund somethings that are a little bit more potentially higher risk. I'm just a bit curious on what your conversations with your shareholders?

Yes, so I'm the largest shareholder. So -- and I have conversations with myself and I also have conversations with the second largest shareholder who is Merck KGaA, I've conversations with, I think, all of our main shareholders and I converse regularly with, I'd say, maybe 50 or 60 retail holders. So I think I have got a pretty good handle for how people are thinking at least those -- of the shareholders whom we communicated and I think that probably represents, in total, probably 75% or 80% of the ownership of the company, maybe more. Yes, they're probably close to 90%, as I think about it. So I think, I can speak to this topic. They're hugely supportive, Derik. And they're hugely supportive because Intrexon, as I mentioned before, was really founded as a health care company, it's always been focused on health care. Health care has always been our principal business. We made no variation on that. We did expand. And if you are thinking of a biotechnology company and you're just want to -- if you want revenues, right, I could make several suggestions to you, drug wholesalers have done tremendous revenues, you know, slightly make several investment recommendations if you're interested in that. But that's not how you -- in my opinion, and then across my career, is not how you grow value, not how you create shareholder value by itself. So I haven't encountered any, how can I put it, any resistance, or any criticism of any kind, from any of our shareholders on this topic.

And Derik, 1 quick point, I failed to mention that INXN-4001 we're expecting to give an update on cohort 1 data by year-end as well as dosing in cohort 2. So just bring that to your attention as well.

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

Sure. Well, thanks, everyone. Thanks, once again. It's actually a pleasure to be speaking with you today, and we look forward to our ongoing dialogue. As I'm speaking on behalf of the management team and indeed, on behalf of our Board, we're very seriously intended about the objectives we've laid out. We are confident that we're going to achieve the objectives we've laid out for ourselves in the balance of this year. Where -- I think the team is executing very well against these objectives and I think that we will be able to reward our long-suffering and patient shareholders, ultimately. And that's our primary mission, and we're very, very focused on that mission. So again, thank you very much, and we will be speaking to you over the next weeks and months about how we are doing. Thank you.

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