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Intrexon (NYSE:XON) made its public debut on Thursday, August the 8th. Shares of the leader in the field of synthetic biology ended their first day with gains of 54.6% at $24.73 per share.

Given the sky high valuation, based on the hope of future product revenues and earnings, I remain on the sidelines. While the company's products and processes could be revolutionary, Intrexon still has a lot to prove.

The Public Offering

Intrexon focuses on synthetic biology which is an emerging discipline to apply engineering principles to biological systems. The company uses its own technologies to build and regulate gene programs, or DNA sequences which control cellular functions and systems.

As such, Intrexon hopes to develop improved product and manufacturing processes for healthcare, food, energy and environmental markets. Intrexon hopes to create more effective and less costly solutions which are also sustainable.

Intrexon sold 10.0 million shares for $16 apiece, thereby raising $160 million in gross proceeds. All shares will be sold by the company with no shares being offered by selling shareholders.

The public offering values the equity of the firm at $1.50 billion. The offering took place at the high end of the preliminary $14-$16 offer range. Given the strong demand Intrexon boosted the offer size from a planned 8.3 million shares to 10.0 million shares as well.

Some 9% of the total shares were offered in the public offering. At Friday's closing price of $29.09 per share, the firm is valued at $2.7 billion.

The major banks that brought the company public were JPMorgan (NYSE:JPM), Barclays, Griffin Securities and Mizuho Securities.

Valuation

Intrexon is working with collaborators to create superior solutions which can be provided through current industry processes. The company's business model is to commercialize technologies through exclusive channel collaborations, in which partners will bring the potential processes and products to the market.

For the year of 2012, Intrexon generated annual revenues of $13.9 million, up 71% on the year before. Net losses attributable to common shareholders increased slightly to $103.9 million.

First quarter revenues were up by 145% to $4.0 million. Net losses more than doubled to $42.7 million.

Intrexon operates with $143.5 million in cash and equivalents and no outstanding debt or preferred stock investments. Including the $160 million in gross proceeds from the public offering, Intrexon will operate with a net cash position of around $285 million.

Given the lack of operating revenues, as most revenues are the result of collaborations, any valuation multiples based on past performance are meaningless.

Investment Thesis

As noted above, the offering of Intrexon has been a huge success. Shares were offered at the high end of the preliminary offering range. On top of that came opening day returns of 55%, followed by a strong session on Friday. At Friday's close, shares are trading some 94% above the midpoint of the preliminary offer range.

Intrexon is an interesting case. The company has been around for fifteen years and has been reporting large losses on the back of a lack of real product or process revenues. At the current loss rate of over $150 million per annum, the company will run out of cash within two years, despite the successful public offering. As such, dilution or bankruptcy are key risks.

To generate future product revenues, Intrexon has engaged in nine exclusive channel collaborations (ECCs), in the field of healthcare and food. The most prominent collaboration is formed with Elanco, the animal health division of Eli Lilly (NYSE:LLY). Yet none of these collaborations have resulted in a revenue generating products or processes yet, and it could take a while as gene therapies need FDA approval.

Given the significant losses, the long development trajectory, and the high valuation of almost $3 billion, I am hesitant to jump on the bandwagon. On the other hand, Intrexon is trying something really new which could be the start of a revolutionary process and turn the company into an absolute global leader in the future. Yet the $3 billion price tag is quite a high valuation. In comparison, current industry leaders like Amazon.com (AMZN), Microsoft (NASDAQ:MSFT) or Wal-Mart (NYSE:WMT), had a much more modest valuation when they went public.

Therefore I stay on the sidelines. The company could become a long term success, thereby destroying all those who might initiate a short position. Yet I see few reasons to initiate a long position on the back of the high valuation and the high uncertainty for product revenues going forward.

Source: Intrexon: Successful Public Offering For A Potentially Revolutionary Company