Description

Company: Precigen Inc (PGEN)

Security: PGEN 3 ½ 07/01/23

Bond Price: 78 (30% YTW)

Timeline: 6 to 12 months.  

Situation: Asset sale to pay down maturing busted convertible bond.

Overview:

PGEN’s $200MM 3.5% convertible bond matures on 7/1/23 and trades in the high 70s for a 30% YTW.  The company has an EBITDA positive animal health business that at the low end of valuation covers the convert at current market prices, with zero value ascribed to the remaining business. The company plans to detail its updated financial strategy within 2Q22 regarding the 2023 convertible note. The expectation is for a sale of the animal health business at the face value of the convert and a par redemption in the next 6 – 12 months.

Segments:

The company reports three segments:

·         Biopharmaceuticals

o   Clinical-stage biopharmaceutical focused on gene and cell therapies. Lead products are PRGN-3005 and PRGN-3006, autologous chimeric antigen T Cell (CAR-T) therapies from Precigen’s UltraCAR-T platform as well as PRGN-2009, an immunotherapy that uses Precigen’s AdenoVerse platform to target human papillomavirus-positive (HPV+) solid tumors.

o   Upcoming catalysts: positive PRGN-3006 (AML CART) data later this year.

·         Exemplar Genetics, LLC, (Exemplar, )

o   https://precigen.com/companies/precigen-exemplar/

o   MiniSwine Yucatan miniature pig research models and services.

o   Primary domestic production and lab facilities are located in Flandreau, South Dakota, and Johnson County, Iowa. Facilities include 66,000 square feet of production, lab, and office facilities.

o   In August 2014, PGEN acquired 100 percent of Trans Ova. Trans Ova controlled 51 percent of Exemplar. In February 2015, PGEN acquired all of the minority-held equity interests of Exemplar (307,074 shares, for a total value of $8.88MM) and started consolidating Exemplar's results beginning in August 2014.

·         Trans Ova (an established cattle reproductive business)

o   https://transova.com/

o   A bovine genetics company founded over 40 years ago that offers reproductive services to the cattle industry. The subsidiary serves dairy and beef cattle offering services such as: embryo transfer and IVF processes.

o   Production facilities of 275,000 square feet of production and office facilities and 360 acres are located in Sioux Center, Iowa. Regional production facilities and land in California, Maryland, Missouri, South Dakota, Texas, Washington, and Wisconsin

Key Assets:

Trans Ova (an established cattle reproductive business)

Trans Ova was acquired on July 1, 2014 for $110MM of total consideration ($60MM cash, $30MM stock and $20MM in deferred payments) representing a 1.7x 2013 revenue multiple.

Revenues for Trans Ova are driven by customer demand for pregnant cows and more procedures performed due to stronger beef and dairy industries. Revenues for 2021 benefited from price increases, market share gains and higher eat and dairy prices. EBITDAM expanded from operational efficiencies gained through reductions in workforce and improved inventory management. Management has guided $95 - $100MM in revenue for 2022 and adj. EBITDA growth of flat to up 20%.

Public comps (ELAN, ZTS, VIRP FR, GNS GB, IDXX) in this sector trade in the low double digit on a forward EBITDA basis however they are a mix of animal science, animal pharmaceuticals and animal healthcare. GNS GB (Genus plc) is a pig, dairy and beef livestock animal breeding company similar to Trans Ova (and a likely buyer) with over a third market share in the US. GNS GB trades at 19x 2022 EBITDA and 17x 2023 EBITDA with 15 – 20% EBITDA growth in the next two years. This much larger peer is the best public comparison.

The convert currently trading in the high 70s implies a 8.6x to 7.2x 2022 EBITDA multiple on the business, with zero value ascribed to the remaining business.

Trans Ova legal overhang

In 2012 and 2016 XY, LLC (XY) brought two patient infringement lawsuits against Trans Ova. In total, 12 complaints were bought up with 10 dismissed on 3/20/19.

Between appeals (Court of Federal Appeals) and cases remanded back to the United States District Court, District of Colorado. There are two outcomes:

A settlement on 12/1/20 of one of the two patent infringement lawsuits (original filed in 2012, appealed between 2016 and 2020). In this case, Trans Ova remitted to XY a settlement payment and recorded a loss of settlement (total 2020 company loss from settlement was $11.4MM).

The second case was filed in 2016. There are 5 Trans Ova patents contested by XY at the District Court level with an early 2023 trial expected. PGEN’s management believes a settlement is likely, such as a royalty on sales.

Biopharmaceuticals

The company’s lead programs are PRGN-3006 (anti-CD33) in AML (acute myeloid leukemia) and PRGN-3005 (anti-MUC16) in ovarian cancer. While the investment thesis does not rely on these two drugs, there is potential upside from their approval.

The company’s lead products PRGN-3005 and PRGN-3006 are potentially differentiated CAR-T assets. CAR is chimeric antigen receptors, genetically engineered allogeneic cells developed and infused into a patient to help in detecting and fighting cancer cells. These two assets may address some of the key limitations borne by conventional CAR-T such as safety, efficacy in solid tumors and cost of goods

PRGN-3006 received Fast Track, announced in April 2022. Management in the next few months expects to host a pipeline update call. If PRGN is approved and captures 15% of the market, this could be a $1bn revenue generating drug priced at $300K+ per treatment. PRGN-3006 targets the CD33 in AML patient population, this is a group that has basically failed every other therapy, including all the monoclonal or conjugated therapies. These patients have very few months in front of them. The large market is driven by 85% to 90% of the tumor cells in these patients express the CD33 protein coding gene targeted by PRGN-3006.

PRGN-3005 (anti-MUC16) in ovarian cancer with a much smaller addressable market, potential for the drug to ramp to a few hundred million in sales (15% of the market is $500MM in sales at $300K per treatment).

Risks

Cash burn – the company ended Q1’22 with $142.1MM in cash, cash equivalents and investments. CFO was a negative $58MM for the LTM period. Earlier this year the company stated they have a runway until the end of 2023 and plan to give a more detailed outlook in the coming quarters.

Catalyst

Asset sale Trans Ova and convert paydown.