Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down

Writing about Calyxt (NASDAQ:CLXT) in the past, my concern was never whether the company’s core TALEN gene editing technology (licensed from Cellectis (CLLS)) worked, whether it could work in agriculture, or whether it could develop credible modified crops. My concern was whether the company could execute, and the answer was definitively “no”.

Now the company is on to its third iteration, attempting to remake itself as a “synthetic biology” company that harnesses its core competencies to develop and produce sustainable plant-based molecules for use in end-markets like pharmaceuticals, food/supplements, and cosmetics. The company starts this next chapter with less than $25 million in cash and not much time to convince potential partners of the validity of the platform in order to secure partnerships.

The basic concepts behind the company’s PlantSpring and BioFactory platforms seem credible, but this company has never given investors a reason to believe that they can deliver, and this is at best a speculative bet that Calyxt can secure enough capital to prove the commercial viability of this latest plan.

 

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Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down

Calyxt Needs To Secure More Commercial Partners As Cash Dwindles

 

Since my last update, Calyxt (CLXT) has shifted strategy once again and named a new CEO to run the company. Though the strategy shift makes sense – a pure licensing approach instead of a mixed approach of licensing traits and selling some seeds – the reality is that it’s been about a year since the company moved toward a licensing model, and there’s not much to show for it. On top of that, the new CEO has no real relevant experience where the seed/trait-licensing business is concerned.

I do still think that Calyxt’s gene-editing approach to modifying crops has merit, but the reality is that there’s only about three quarters’ worth of cash on the balance sheet, and trait licensing agreements don’t typically include large upfront cash amounts. Though the potential returns of a successful outcome are indeed large, that path is becoming increasingly narrow and treacherous and this is really only a name for investors willing and able to take very speculative risks.

 

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Calyxt Needs To Secure More Commercial Partners As Cash Dwindles

Calyxt Using A More Conventional Model To Pursue Significant New Agri-Bio Market Opportunities

What do you do when a publicly-traded company continues to pursue a business strategy you don't agree with? If you're me (and I am…), you step aside. There are just too many options out there to just settle for a model you don't like and hope it works out.

That brings me to Calyxt (CLXT). While I did see some potential in the company's former commercial model - one that involved using TALEN gene-editing technology to develop crop seeds with desirable traits, but then attempt to directly commercialize consumer-oriented products - I fundamentally disagreed with it. Since then, the company has shifted to a seed/trait licensing model more in line with what Bayer (OTCPK:BAYRY) and Corteva (CTVA) and other agri-biotechs use, and this is a model I'm comfortable with.

Calyxt is still a risky, speculative play. While TALEN gene-editing technology does have some advantages in the lab (faster development, etc.), there is still both developmental risk and commercial acceptance risk. Still, I like the market opportunities that Calyxt is targeting and I think this is a speculative play well worth considering.

 

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Calyxt Using A More Conventional Model To Pursue Significant New Agri-Bio Market Opportunities

Calyxt Continues To Make More Progress Than Is Shown In The Share Price

Make no mistake, Calyxt (CLXT) still has a long row to hoe. Although this bio-ag has now logged its first commercial sales in multiple product types, the company is likely somewhere around five years away from its first profitable quarters and six or so years away from being free cash flow positive. Moreover, a lot of the growth I model for Calyxt comes its high-oleic soybean product, a product category that has attracted plenty of competitive attention, and there is still a risk that a segment of consumers turn against gene-edited foods in the way they have against genetically-modified foods produced from seeds developed by the likes of DowDuPont’s (DWDP) Corteva or Bayer (OTCPK:BAYRY).

Although the shares have rebounded from the time of my last update, I don’t believe the shares fully reflect the progress and potential of the company. There have been some pushouts relating to commercial and development pipelines, but nothing out of the ordinary for a company at this stage, and there is meaningful upside from here as the company scales up its HO soy program and advances other projects to the market.

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Calyxt Continues To Make More Progress Than Is Shown In The Share Price

Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

Timing matters with stocks. While the “true believers” won’t ever want to hear it, there were, and still are, meaningful operational risks attached to the Calyxt (CLXT) story. I believe those risks, coupled with a general “risk-off” switch in market sentiment has had a lot to with the ongoing decline in the share price since my last update (today’s Goldman Sachs upgrade-inspired rally not withstanding).

I continue to believe that Calyxt has an intriguing IP position in gene-edited crops and that gene-edited crops may well be a “next wave” of bio-ag innovation that drives a host of improvements for both farmers and consumers. Still, the market’s willingness to accept foods containing gene-edited crop ingredients has yet to be tested, and Calyxt’s unconventional commercialization model creates execution risk. I believe today’s share price significantly overstates that risk, but the share price is likely to remain volatile given that operating profitability is likely four to six years away and the commercialization strategy is unproven.

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Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

A Rough Summer Has Knocked Calyxt Down

So far, not so good for my late June high-risk/high-reward call on Calyxt (CLXT). The “high risk” part has certainly come through promptly, but shareholders have seen the shares sell off about 25% after a summer that certainly offered more bad news than good, highlighted by the surprising resignation of the CEO in late August only a couple of months after the equally-surprising resignation of the CFO, and a decision in Europe that puts the acceptance and development of gene-edited crops at risk.

Assessing these developments is not easy. Both executives may have had disagreements with the board of directors and/or Cellectis (CLLS), which still controls the company, and those disagreements may have included the unusual business model Calyxt is pursuing with its high-oleic soybeans and other consumer-oriented products. It is also possible that they saw fundamental issues with the technology and/or its path to commercial acceptance. Unfortunately there’s really no way to know at this point, and the one remedy I do have is to increase my discount rate to account for greater risk and uncertainty.

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A Rough Summer Has Knocked Calyxt Down

S & W Seed Trying To Restructure, But Liquidity Looms As A Threat

S & W Seed (SANW) is trying to restructure away from an alfalfa market that has proven far more challenging than expected, and as I said in my last update, I like the company’s plan to expand into other crops like sorghum and sunflowers (I’m less bullish on stevia). Unfortunately, as I noted in that last piece, S&W doesn’t have much room to maneuver, as the company’s liquidity is low and access to capital is going to come on less than favorable terms to current shareholders.

I continue to believe that this stock is basically a binary bet, and I don’t tend to like to have those in my portfolio. While I think the company’s efforts to leverage new alfalfa varieties developed with Calyxt (CLXT) have promise, as does the expansion into sorghum and sunflowers, it sounds like the next year is still going to be challenging for the alfalfa business and I’m concerned about the amount of dilution the company will experience in pursuit of a business model that generate meaningful cash flow (or acquisition interest) down the line.

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S & W Seed Trying To Restructure, But Liquidity Looms As A Threat

Calyxt Going Boldly Forward With A Different Bio-Ag Model

With Syngenta and Monsanto off the market, investors don’t have a lot of great pure-play investment options for bio-ag, even though this remains a very large and vibrant area of R&D activity. This brings me to Calyxt (CLXT), a company custom-built to apply gene editing tools to the development of new crop varieties. Although there is little comparison between what Calyxt is now and what Syngenta and Monsanto were in the years leading up to their acquisitions, I nevertheless believe this is an interesting speculative option in the bio-ag space.

Modeling a pre-revenue company like Calyxt involves considerable guesswork, and that guesswork is made all the more difficult by Calyxt’s decision to pursue an uncommon (and in my opinion, risky) commercialization strategy with its initial products that will see the company take a much more direct role in selling semi-finished products (ingredients) to food companies, rather than the proven model of selling seeds (and technically licensing traits) to farmers. While absolutely acknowledging the elevated modeling risk and uncertainty, I believe Calyxt shares have some appeal at this level if you accept the premise that the company good reach $500 million in revenue in six years, over $1 billion in nine years, and $2 billion in 15 years.

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Calyxt Going Boldly Forward With A Different Bio-Ag Model

S&W Seed Following A Better Plan, But Execution Remains A Key Unknown

Small-cap seed company S&W Seed Company (SANW) has certainly weathered some ups and downs in recent years, not all of which were or are in management's control. While the company has taken cogent steps to build out and improve its alfalfa business, policies in key markets like Saudi Arabia have undermined the company's progress. At the same time, though, the company has suffered from a sometimes-incoherent and scattered set of corporate priorities.

New management has been clear about what it wants to do, and most of the new plan sounds good to me. It's going to take time for these plans to bear fruit, though, and the company doesn't have much of a safety net left to withstand significant disappointments or delays. While there's certainly upside from here if management can get the business stabilized and growing again, the risks are high, and the company's ability to execute under new management is still unproven.

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S&W Seed Following A Better Plan, But Execution Remains A Key Unknown