Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) Q4 2022 Earnings Call Transcript

Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) Q4 2022 Earnings Call Transcript March 1, 2023

Anna Marie Wagner: Good afternoon. This is Anna Marie Wagner, SVP of Corporate Development at Ginkgo Bioworks. As usual, I’m joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. We thank you for joining us and look forward to providing you with an update on the last quarter and full year ’22. As a reminder, during the presentation today, we’ll be making forward-looking statements, which involve risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission to learn more about these risks and uncertainties. We’ve got a packed agenda for today, but we’ll follow our standard format, providing an update on our financial progress and guidance for the year while also taking the time to dig deeper on our strategic priorities.

In particular, as we alluded to in our last call, today we’ll be providing more information on the downstream value potential we see at Ginkgo. We’ll enter the Q&A session, and we’ll take questions from analysts, investors and the public. You can submit those questions to us in advance via Twitter, #Ginkgoresults or e-mail at investors at ginkgobioworks.com. All right. Over to you, Jason.

Jason Kelly: Thanks, Anna Marie. We always start with the slide because our mission drives much of our long-term strategy and even many day-to-day decisions in the company. Very simply, we want to make biology easier to engineer at Ginkgo, and we do that by scaling our platform for programming cells. So how does that work? An easy way to think about Ginkgo is that companies are outsourcing their research to us. In the biopharma industry, that would be called a CRO, a Contract Research Organization. But for traditional CRO, biopharma companies aren’t — they’re normally outsourcing simple research work that they really just don’t want to do. Think like running an animal study or synthesizing a chemical, whereas when they’re coming to Ginkgo, it’s really to outsource work that they can’t do themselves internally.

They want to access Ginkgo’s automation scale, our data, other IP assets, again, that aren’t available in-house. You can see a comment here from one of our biopharma partners, Novo Nordisk, CFO, Marcus Schindler, saying they are open to external partners who bring new and complementary expertise and talking about our unique capabilities in Synbio. That’s a similar refrain we’re hearing in discussions and mirrors what we saw in our large deals with Bayer last year as well. The most obvious example of an asset we have that our customers don’t have internally is the scale of our automation. So we’ve invested hundreds of millions of dollars to date to build out both physical hardware here in Boston. That’s where I’m sitting today, as well as custom software to run our lab like a factory.

As you can see a video on the right here, of the newest technology that we’re super excited to be integrating the software and automation that’s coming in via our acquisition of Zymergen that closed in October of 2022. For the potential customers listening on this call, this infrastructure is all available quickly to you as a service. I really like our no pipettes logo down here. Look, I spent five years during my PhD at MIT, working at the lab bench with a pipette in my hand. There are brilliant scientists at our customers who are instead spending their time designing experiments are instead really running ultra-low throughput experiments by hand with pipettes. It’s clear to me that the future will be total automation of the lab work associated with cell engineering and Ginkgo is really hoping to lead in making that happen.

Biotech scientists should put down their pipettes and make use of Ginkgo’s automated lab services to do their work. The last point I’ll make on the foundry is that it gets better with scale. In other words, unit costs fall as our output in the facility goes up. This is something you traditionally see in manufacturing of things like microchips or cars, but you don’t normally see this in R&D. So by using Ginkgo Services, we expect that year-over-year, the scientists at our customers will have more capacity unlike those pipettes they have that aren’t getting any better. All of that automation generates something really important data. We call this data, our code base and because we retain rights to reuse the data generated when we do projects for customers, this asset grows each year.

I’m sure you’ve been hearing a lot this year about new AI algorithms. The big secret is that these algorithms are mostly commodities. Everyone has its access to larger the same tools. And what’s really proprietary is the data you use to train the model. And Ginkgo has built a very unique asset there in the biological space and is adding to it every day. And again, for our customers, these types of AI models are available to you as a service. Most companies in the biopharma space would keep an asset like this to themselves to develop their own drug pipeline, but Ginkgo is a services company, not a product company, so you won’t see a drug pipeline here. We want to make this available to our customers. So Mark will discuss our financial performance in a minute, but I want to emphasize how proud I am of the team for adding 20 new programs in Q4, which took us to 59 programs for the full year towards the high end of our guidance range.

On the right, compared this to the first quarter of 2021, where we only added four programs. This is a huge deal. Each new program at Ginkgo adds a combination of service revenue, downstream value, demand to drive the scale of our foundries and IP data assets, like I just mentioned. The bulk of that program growth was driven by our penetration into the biopharma and ag industries, which you can see on the left side, this is awesome to see. These industries have large biotech R&D budgets, and they are some of the most valuable products in biotechnology. Overall, in 2022, we demonstrated diversification in both the markets we’re signing up programs in and in the types of downstream and value share we’re closing. I think it’s often underestimated how valuable that type of diversification is, especially for a services platform.

This allows us shift to where the action is. So if there’s a lot of demand in a certain area in pharmaceuticals, we can go there, certain area industrial biotech or ag, we can go there. If the market conditions favor certain types of deals whether it’s royalties or milestones or equity or whatnot, we can move. So I really am excited about the range of diversification we had in ’22. I think it was really an amazing year for us that sets us up well. Biosecurity had another solid quarter and we’re very excited about that business transitioning towards longer term recurring monitoring contracts like we’ve been doing at airports. Mark will talk about some of the biosecurity financial highlights coming up, and I’ll dig into that business in my strategic section as well.

Finally, we ended this year with over $1.3 billion of cash on the balance sheet, which provides us with a multiyear runway and is an important source of competitive advantage in this market environment. All right. I’ll hand it off to Mark now to go through the numbers, and then we’ll dig deeper into some of the things we’re focused on.

Mark Dmytruk: Thanks, Jason. I’ll begin with the discussion of our cell engineering business. Before I dive in, you may notice on the slide that we’re referring to cell engineering revenue instead of foundry revenue as we’ve done historically. We believe this is more reflective of the business and is the term we use internally. And so even if it is a bit of a mouthful, we’ll be updating our filings to refer to it in this way going forward, so we did not make this decision in time to get it incorporated into this 10-K. As Jason mentioned, we added 20 new cell programs to the cell engineering platform in the fourth quarter of 2022, which brought us to 59 new cell programs for the full year 2022. This represents 90% growth compared to the full year 2021 and is a key outcome as we believe new programs are a critical driver of Ginkgo’s long-term value.

We supported a total of 96 active programs in the fourth quarter of 2022 across 54 customers on our platform. This represents substantial growth and diversification in programs relative to the 60 active programs across 30 customers in the fourth quarter of 2021. Cell engineering revenue was $53 million in the quarter, up 56% to the — compared to the fourth quarter of 2021. Cell engineering services revenue, which excludes the contribution from downstream value share was $36 million in the fourth quarter of 2022 compared to $21 million in the fourth quarter of 2021, an increase of 73%. We saw a meaningful sequential increase in cell engineering services revenue compared to the third quarter of 2022, which demonstrates solid execution and platform scaling, including a contribution from the new Bayer programs.

Cell engineering revenue was $144 million for the full year 2022, an increase of 27% compared to the full year 2021. Cell engineering services revenue was $106 million, an increase of 23% compared to the full year 2021. Now turning to biosecurity. Our Concentric offering continued to perform well in the fourth quarter of 2022, generating $45 million of revenue in the quarter. Biosecurity revenue for the full year 2022 was $334 million an increase of 66% compared to the full year 2021. Full year 2022 biosecurity revenue exceeded our previously announced guidance and more than doubled the original guidance we provided back in March of 2022, primarily due to the durability of COVID testing services through the year. Biosecurity gross margin was 33% in the fourth quarter, an approximate 8 percentage point decrease from the prior quarter performance.

The sequential decrease in gross margin percentage was driven in part by an inventory reserve for purchased products. And now I’ll provide more commentary on the rest of the P&L, where noted, these figures exclude stock-based compensation expense, which is shown separately. Starting with OpEx. R&D expense, excluding stock-based comp, increased from $55 million in the fourth quarter of 2021 to $113 million in the fourth quarter of 2022. G&A expense, excluding stock-based comp, increased from $39 million in the fourth quarter of 2021 to $78 million in the fourth quarter of 2022. These operating expense items increased year-over-year as expected as we invested in our platform in various functions to support our growth, layered in the four acquisitions we closed in the fourth quarter and had relatively high consulting expenses, the latter of which we do not expect to continue at the same rate.

For example, included in these numbers is approximately $26 million of onetime M&A and integration related expenses. R&D expense increased from $219 million in the full year 2021 to $314 million in the full year 2022, while G&A expense increased from $106 million in the full year 2021 to $228 million in the full year 2022. Included in these numbers, we incurred approximately $46 million of one-time M&A and integration expenses in the full year. As you think about 2023 R&D and G&A expenses, the fourth quarter 2022 levels, excluding one-time costs is a decent starting point. By the end of 2023, we’ll largely phase out Zymergen related transition costs for instance, certain G&A support functions, and we’ll also make some targeted investments in the core business, which could largely offset.

Net loss, it is important to note that our net loss includes a number of non-cash income and/or expenses as detailed more fully in our financial statements. Because of these non-cash and other nonrecurring items, we look to adjusted EBITDA as a more indicative measure of our profitability. Adjusted EBITDA in the quarter was negative $80 million compared to positive $1 million in the comparable prior year period. Nearly half of this decline is attributable to the biosecurity segment as demand for COVID testing services declined. Full year 2022 adjusted EBITDA was negative $173 million compared to negative $106 million in the full year 2021. This decrease was driven by higher operating expenses year-over-year, partially offset by higher revenues.

A full reconciliation of EBITDA is provided in the appendix to this presentation and in our earnings release. And finally, CapEx in the fourth quarter of 2022 was $26 million, which was a sequential increase as expected as we invested in boundary capacity and capabilities. CapEx in full year 2022 was $52 million, significantly below our initial expectations at the beginning of the year as we sought to optimize our capital efficiency. We expect CapEx to remain at similar levels in 2023. Regarding stock-based compensation, as a reminder, we provided extensive disclosure in our Q4 2021 earnings release a year ago relating to the GAAP accounting for the modification of restricted stock units issued prior to becoming a public company. Our stock-based comp in the fourth quarter of 2022 was $111 million, a substantial step down sequentially and as the GAAP impact of our pre-public company restricted stock units declined and we expect a further normalization in 2023.

Before I move on to 2023 guidance, I’d like to make two comments relating to the 2022 financials. First, we graduated from emerging growth company status shortly after going public. And so this is our first year filing on an accelerated timetable, 30 days earlier than last year. While we believe our numbers are finalized, we and our auditors at EY need some extra time to complete procedures and documentation. We are submitting a notification of late filing and intend to file our 10-K as soon as possible, but in any event within the 15-day automatic extension period. Second, this is also our first year in which we are required to formally report on our internal control environment under Sarbanes-Oxley sections 404A and 404B. While we did assess a material weakness in our SOX control environment, it had no bearing on the accuracy of our financial statements.

The weakness was principally due to: one, the fact that we rely extensively on external resources and specialists to supplement our internal team; and two, the level of documentation we need to produce in order to evidence the operation of certain controls. This is something we believe can be remedied in 2023 by expanding the team, further training and investing in more automation of our data flows. I’d like to thank the team for the tremendous work done to date. SOX is not an easy lift for a new public company and the progress we’ve made from where we were in Q1 to Q4 has been substantial, all during a year in which we grew the business significantly and completed multiple acquisitions. Now I’d like to provide some commentary on our outlook for the full year 2023.

We expect to add 100 programs in 2023. This guidance reflects another year of strong growth, 69% year-over-year. We remain excited about our new program pipeline despite the macro environment. And in some cases, that environment might even work to our advantage as customers look to outsource their R&D environment efforts. We expect total revenue for the full year 2023 to be at least $275 million. Our cell engineering revenue guidance is at least $175 million, which we expect to ramp meaningfully over the course of the year and excludes the impact of any downstream value share of revenue. I want to pause here because our employees are listening — our employees are listening to this call, and although, this represents 65% growth in services revenue from 2022, we know that we have even more aspirational goals and that our internal targets are higher than this.

However, maintaining credibility with the investment community is very important to us and we want to commit to an outlook that reasonably reflects the business as we see it today. And we’ll continue to remain nimble with operating expenses and cash preservation in this environment. I also want to be clear that we’re still working towards the achievement of downstream value share in 2023, including additional Cronos milestones. But given the lumpiness of this potential revenue we are only prepared to give services guidance at this time. To that point, our guidance of at least $175 million of cell engineering services revenue represents 65% growth over the full year 2022. And our fourth quarter 2022 performance is supportive of our growth expectations for that business in 2023.

Our biosecurity guidance range is at least $100 million. Importantly, we expect nearly half of this revenue to come from emerging product lines that are expected to be more recurring in nature, such as federal and international partnerships supporting pathogen monitoring and biosecurity infrastructure development beyond just COVID-19. For the remaining half of the revenue, that primarily comprises our K-12 COVID testing businesses. We are approaching guidance similar to how we have during the past couple of years. Our guidance includes business that we have visibility into, specifically testing commitments that we expect to last through the remainder of this full year. We have included only a marginal contribution from the K-12 COVID testing business in the second half of the year, although, we do have opportunities to continue working with state governments on testing services, and other biosecurity projects.

We reiterate the usual caveat that even where we have known contracts, our K-12 COVID testing business is inherently uncertain. In summary, we are pleased with our overall progress and outlook. We had a solid quarter of cell engineering, execution and expect strong program growth and services revenue growth in 2023. Biosecurity continues to perform well and evolve as we expect a meaningful contribution from more recurring revenue streams in the coming years and the company’s total cash position of over $1.3 billion remains strong.

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Jason Kelly: Thanks, Mark. Before I move on to our strategic section, I want to comment on our guidance approach for the year. So last year, we got a fair bit of feedback that people didn’t like us combining services and downstream value share together as part of the cell engineering revenue we guided to in 2022. And as you’ve seen with Cronos over the past year, the timing of downstream value share, for example, those milestone achievements we received can be unpredictable. So in 2023, we’re going to guide only to services revenue to take some of the quarter-to-quarter noise out of the story. Also, I want to reiterate something Mark said about what we’re aiming to do this year in the cell engineering business. although a target of at least $175 million in cell engineering services revenue, it does represent a 65% increase over 2022.

The Ginkgo team listening in today knows they’re expected to deliver on even higher numbers than that. The reason we’re pushing higher there is that improving efficiency in converting our platform output into cell engineering services progress is the number one internal focus for Ginkgo in 2023. To give you context, that wasn’t our primary focus in ’22. In ’22, we’re really focused on shoring up our demand for our services. And I want to make sure we were able to build the sales infrastructure and onboarding program, onboarding systems to handle many more program launches per quarter. And I think we did see that, and I wanted us to expand into the larger biotech R&D budgets of both the biopharma and ag industries. And I’m super happy with how that went in ’22, and we’re going to keep pushing there.

But demand is now coming in nicely. So in ’23, the big challenge for us is all about driving efficiency in the platform to deliver on that demand while we keep costs down on running Ginkgo. So how will we drive that efficiency? First, by a standardization. So you may see us talk about Ginkgo enzyme services. This is a good example of this. We’re trying to offer a more standard offering to the customer so that the work we get is actually easier for us to drive internally more efficiently. And that’s good for the customer, too, it makes the projects more reliable. However, in the market today, the majority of customers are still looking for really customization in their cell engineering. And so most important for us, is to drive improved operational efficiency across all our projects and to drive up our utilization of the facility across all our projects.

And I included a few snapshots, so you can get a little in the weeds here from our most recent weekly business review meeting to give you a sense of how we approach this, right? So these are three out of 66 slides in that deck. But on the top, you can see variance versus plan, which is something we measure internally against our — what we call our rate card output. So this is basically a measure of billable work. And each of those columns is one of the teams of the company. And so we spend a lot of time talking about the teams on the right side of the chart, where are they getting stuck? Is it a planning problem? Is it a demand problem? On the middle chart you can see a similar calculation broken out by program. So each one of those dots is a program we’re running, the size is sort of on an absolute basis, how much is going through it.

And ideally, the programs are on the 45-degree line where the performance of the program matches the plan. And so we spend a lot of time on the ones that have the largest deviation. And down on the bottom, you can see a snapshot of what we might do to look ahead and try to address bottlenecks on the foundry. And so the rows there are individual foundry teams. You can see in red, areas where we are overcapacity. That might be a bottleneck. If we relieve that bottleneck, it might allow us to tap into some of the spare capacity in the greens. And the most important point here, though, overall, is we treat our labs and infrastructure like a factory. We look at overall equipment effectiveness and people utilization. And to solve bottlenecks, we leverage tools like staggered shifting and S&OP implementation, performance boarding, all supported by proprietary software and automation running at a unique scale.

Approaching biotech R&D like running a factory is really the secret sauce of Ginkgo. I don’t know anyone else doing anything like it at our scale, and we will be leveraging the heck out of that as we try to hit our goals in 2023. All right. Moving on to the strategic topics. So first, downstream value share is a critical value driver for Ginkgo and has significant financial potential for us. So I want to spend some time digging in on that topic. Second, you’ll see that through 2022, we grew a ton in biopharma, super excited about that. We will continue that. So I’m going to talk about our strategy there. And then finally, we’re projecting biosecurity revenue to decline in ’23, given the end of the COVID public health emergency in the U.S. in May.

However, you’ll also see a significant increase and what we would describe as more infrastructure-like programs, and we expect this to translate to more recurring fee-based revenue mix in ’23 and beyond. We don’t look at biosecurity as a COVID business. We never have. It’s not something we plan to stop doing. So we’re going to talk about it. Okay. Let’s dive in. So this page is just a quick snapshot of our business programs or really the core unit economic of Ginkgo’s business. They drive both upfront fees and downstream value. As you’ll see on the left side of this slide, our program mix has changed quite a bit over the past year, driven entirely by third-party customers. And as I mentioned, we’re penetrating more traditional biotech end markets like biopharma and ag.

And I’m really happy how our program mix has diversified in the last year. Those programs each come with upstream services revenue, including cash and non-cash consideration what you can see on the top right is expected to accelerate this year. But programs also come with downstream value share. It’s not as visible on the financial statements today, but it is a large portfolio of potential future value that we’re building. So let’s dig deeper on that downstream value share. Okay. So there are three categories of downstream value share: royalties, milestones and equity. Royalties are the most common and they cut across all of our verticals. In other words, all the different markets. Royalty rates will often reflect the margin structure of that industry.

So in other words, we’ll see higher royalty rates in higher margin industries and lower ones in lower. Rates also vary by the program stage. They vary by our leverage in that industry and our role in the full value chain. So we’ll show some illustrative numbers on the next slide, but it does vary program to program. And you’ll notice on the right hand side, significant growth in the last year in programs that have milestones. In other words, we’re signing up more deals with milestones. We’re increasingly pushing for these types of deals in order to be compensated for technical success and to pull forward value when a customer’s product has a longer time to market. And you’ll see that, particularly in the biopharma space and in ag. Finally, equity has been a useful tool for us historically, but it’s becoming a less common form of downstream value share for Ginkgo.

It does give us some diversification benefit, we gain exposure to the whole company versus single product. However, as our growth has been driven by third-party customers and traditional biotech customers, royalties and milestones have just become a much greater part of our portfolio. And that’s really the big takeaway on this slide. You’ll see about 60% of our ’22 — 2022 new programs have some combination of those two structures, and that compares to less than a quarter of our programs two years ago. Okay. So downstream value is hard to model even when you have perfect information, but it does have — we think it has significant financial value, and we wanted to share more data on this than we have previously. So you all have better tools to model it.

So with royalties, you’ll see a chart here showing how our royalty rates vary by industry and type of project in that industry, ranging from low-single digits to double-digits on product revenues. Milestones on the other hand, are actually much easier to quantify for you because we can just add up the dollar potential in all our contracts. And so we’ve not done enough of these that we’re not like kind of giving away individual contracts that don’t want us to. So we were able to aggregate this. We added $2 billion of aggregate cash revenue potential from milestones in 2022 compared to about $200 million in 2021. And I want to be clear, just over $1 billion of that comes from our partnership with Selecta, which we shared previously in a press release.

So listen, we’re not trying to convince you that we’re going to get the full amount, that $2 billion or even a significant percentage of it. You can think of this as a bit like modeling a drug pipeline where you have to factor in discounts for technical and commercial success for us to get those commercial milestones, in particular, the dark green ones. Though what I like about Ginkgo is that those 2022 milestones are across 23 programs. So again, we are diversifying our portfolio in ways I think are healthy for the business. Finally, we aren’t going to attempt to provide valuations for our equity stakes in private companies, but we have received equity for downstream value from 14 companies in addition to others that we — where we’ve been paid with equity for cell engineering service fees.

So that’s all potential value, and we’re excited about that because of the rate of new program growth, we’re adding a lot of new potential value every quarter. However, eventually, that potential value needs to turn into realized value at Ginkgo. And that happens when programs complete, so the technical work has to finish. And importantly, it needs to be commercially relevant to customers for us to really get big checks. And while we’d love to show you really flashy blockbuster examples of that, and we do believe those will come in time, we don’t have them yet. What we do have is some singles and doubles already. We’ve been able to stack up about $1 million of royalties and a couple of million of product revenue streams that are more recurring revenue that you can see on the left.

And then we’ve achieved tens of millions of sort of one-time milestones through our Cronos partnership, which we’ve been discussing over the past several quarters. Finally, although we haven’t monetized our equity positions to date, we do expect in the next year or two, there will be liquidity opportunities in that portfolio. We’re sometimes asked about our philosophy on this. And it ends up basically varying depending on how these programs play out. Okay. So I want to bring it all together by laying out an illustrative biopharma discovery program. You can see the timing difference between fees, milestones and royalties and also the potential embedded in even a single-digit royalty rate in this market. Bottom line is, I’m really excited about the downstream value share potential that resides in our current program portfolio.

The 100 programs we plan to add in 2023 should significantly strengthen our potential downstream value. So I look forward to updating you on our progress over time here. Okay. All right. So let’s talk about biopharma, which is one of the areas I’m excited to add a lot of downstream value share. So I’m going to continue to remind you about biopharma because it is the most valuable and fastest growing market for us in terms of new programs, but it’s also the newest market for Ginkgo. So the thing to understand about the biopharma industry is that therapeutics come in many different flavors. These are referred to in the industry as modalities, okay? So small molecules is one modality, and that’s drugs like aspirin or statins, right? Biologics is another modality, and that’s drugs like insulin or antibody therapies for cancer.

Then you have RNA therapeutics like the COVID vaccine and newer modalities like gene and cell therapies. So Ginkgo is very unique in the industry and that our platform can support both discovery, that’s up at the top, and manufacturing programs in a wide variety of these modalities. How do we know that? Because we have signed deals with very scientifically skeptical R&D leaders and companies across all these modalities. So really proud of all the logos you can see on the slide there. These are very sophisticated customers who typically have their own highly capable internal R&D teams that they can use for these projects. So it means a lot to us when they choose to work with Ginkgo and stat. So why would a customer work with us? It’s a question I frequently get asked if they could just hire their own scientists and do it in their own labs.

And as I said at the very start of the call today, it is because Ginkgo is offering things, automation, scale or data or IP that the customer simply can’t access in-house. It is as simple as that. We have to have something differentiated or these customers won’t sign up. Importantly, biopharma customers often want to see scientific data that shows the application of our platform in their specific area of interest like, for example, their modality or whatnot. I don’t have time to review it all today, but I’d recommend you watch my talk from the JPMorgan Healthcare Conference, just back in January as it was largely focused on biopharma since there’s a lot of potential customers in the room there. And you could see data I shared on the right here in gene editors and cell therapy.

And in fact, we had over 80 customer meetings at JPMorgan this year. So really a night and day difference from a couple of years ago for Ginkgo in our ability to sell in the biopharma market, and that’s thanks to having all this new data demonstrated in these different modalities. Okay. So the question I also get asked a lot is, if biopharma has such big R&D budgets to support near-term cell engineering service revenue and bigger downstream value share opportunity given the value of therapeutics like, why didn’t Ginkgo just start in the biopharma market? Why do we start in the industrials market? And the reason for that comes back to our business model. So I will remind you, we are a services business. So that means that in order to move into a market, customers have to choose to work with us.

They have to sign up for a deal. Say, we cannot enter a market like a product company can just because the Board or management thinks they would be great at drug development or whatever the product is. A customer has to tell us that our platform is good enough by signing up a deal. And simply enough five years ago, our platform wasn’t differentiated enough to overcome the internal scale of biopharma R&D groups. I mean these groups are very scientifically excellent and very well resourced. We could, on the other hand, overcome the scale of the smaller, less resourced industrial biotech R&D groups. So that’s why we started in that market. It was for sales reasons, right? And if you compare it to today, in industrial biotech, most companies have, as a result, either considered Ginkgo or know who we are, right?

Like we’ve been operating there for a while. But in biopharma, we are meeting potential customers that have literally never heard of us or who at a minimum, don’t have any idea what our capabilities are. That’s very exciting from like a sales potential perspective. And once we get a first deal with a biopharma company, we can often expand within that organization. We’re seeing this. We can cross-sell from a manufacturing deal and then go and sell a deal into the research groups or from a research group in one modality in the same company to a group with a different modality focus and so on. I personally really like doing enterprise sales. And this is the sort of thing that gets you really excited if you like doing these deals. It’s real — they’re really great tools.

In industrial biotech on the other hand, we believe the market potential is enormous. So the application of biotechnology and things like chemicals and materials and so on — energy, but it is much more nascent. Biotech hasn’t penetrated into that market like it has in pharma or ag. So as that biotech market grows, I think we’re so embedded with those companies in that space. We will grow alongside of that industry just as fast as it goes. Finally, in some ways, we actually have a lower hurdle to sell into biopharma customers because they’re actually used to outsourcing some of their R&D. Like I mentioned earlier, it tends to be more of the run of the mill stuff they outsource today to that contract, research CRO industry. In industrial biotech, we had to educate those companies on the sort of CRO model this outsourced services model.

In biopharma, they already know it. They just haven’t been using it for things — as much for things like discovery. So that’s huge tailwinds for us, makes the deals a lot easier to do. Okay. So I want to finish on biosecurity. This business continues to develop nicely, and I want to dive into that a bit today. Candidly, I think we’re probably not getting enough credit from this today from investors, and I think that’s a bit shortsighted. So I want to spend a little more time on it. Okay. So I want to start with a reminder that COVID response efforts — we’re not simply a nice public service Ginkgo did during the pandemic or a transitory source of cash flow for Ginkgo. Our intent has always been to establish lasting biosecurity infrastructure.

And the reason for this is that our mission at Ginkgo is to make biology easier to engineer. And it is essential that we do that responsibly and with care. And so just like the — if you think of like as a comparison, the expansion of kind of power and access to computers over decades, ultimately required robust cyber security to make sure we were using those tools safely. The expansion of capacity and access to synthetic biology is going to require robust biosecurity tools to make sure we are approaching that safely. And importantly, this is not just conceptual. As Mark discussed in his guidance, almost half of our 2023 revenue is expected to come from more recurring revenue contracts with federal and international entities. That represents a significant shift compared to this past year.

So we’re now seeing our long-term intent, like our interest in long-term usage of biosecurity filter into our financial results and outlook. Okay. So what does this evolution look like for our business? So our COVID monitoring programs, the programs that have comprised the vast majority of our biosecurity revenue to date primarily consists of a collection platform going out and sampling folks and then analysis and reporting to U.S. state departments of public health and school systems. Those activities have been primarily volume based. In other words, our revenue correlates with the number of tests we collect and much of those have been in K-12 schools. Now there’s still a path to sustainable revenue in domestic COVID monitoring, but it’s not likely in K-12 schools.

As the end of the emergency order, I mentioned earlier in the U.S., this May, we will dry up the fund states have been using to do that monitoring. However, we’ve been working on new testing modalities such as wastewater and we’ll continue to work on adding new nodes in our network domestically outside of schools. Our longer-term biosecurity infrastructure business looks a bit different. Though it does make use of a lot of the muscles we built in both data analysis and logistics over the last two years. We wouldn’t be able to move as quickly as we have been here, frankly, without the work we’ve been doing domestically. The canonical example of this is our airports program. So you can see in that program, we’re collecting wastewater from planes and also anonymous samples from passengers.

And then we’re — when we get a positive, we sequence, we look at the DNA, and we look for new variants of COVID as well as other infectious diseases. And this has been a really successful program. Early cases of Omicron and so on, we talk more about it. But we’ll have collection platforms and sample analysis but also additional assays and add-on analytics services that we apply through that platform. So for example, in partnership with IARPA in the U.S., we developed a tool called NDR, which can detect engineered DNA sequences. So in other words, okay, I just sequence this virus from an airplane, was it intentionally manipulated in a lab, okay? That’s a true real biosecurity sort of application built on top of our platform. The net of all that is a business that has significantly more service and subscription fees rather than volume-based revenue.

The growth drivers in this business today are new nodes. So for example, new international contracts in airports as well as new analytics modules that can drive incremental service fees. So we say this a lot, but biosecurity here in the U.S. requires global biosecurity because viruses do not respect borders, okay? We saw this with COVID. And you can see we’ve already begun operating our biosecurity services on multiple continents and plan to continue to expand. Our goal here is to have the equivalent of what radar systems and satellites gave us for monitoring the weather. But instead, we want to be monitoring the movement and the evolution of the DNA of infectious diseases. It is simply irresponsible that the world didn’t have a kind of bio radar network like this in place before COVID.

You might notice we are still having tedious debates on where COVID even originated on. That would not happen if we had, had a robust bioradar system like this in place. But you know what, it is time to build this radar network now. And Ginkgo plans to be the leading provider of technology and services to build it. As a final note, just the other day, CDC released a favorable report on our aircraft wastewater pilot as part of their public reporting. And they found that 81% of international flights into New York City that we tested this fall had SARSCOV2 genetics in their waste. The CDC sponsorship of this work helps set us up as a real leader in this space around the world. And then our international work provides real value back to the U.S. government.

It’s a nice feedback loop there. We are honored to be supporting the CDC efforts here. It’s a really important program, and it has a lot of utility in the long run. I am really proud of the work the team has done in biosecurity in the last couple of years. Anyone who is directly involved in a very fast moving COVID response, knows it is a unique experience and provides credibility that you just frankly can’t get any other way than living through it. The biosecurity team and Ginkgo as a whole have that experience, keeping schools open across many states during the Omicron surge at the end of ’21 and early ’22 and — and that is a real lasting brand value and credibility for Ginkgo as we now expand internationally with our biosecurity offerings and the team should really be proud of it.

Okay. So 2023 is shaping up to be an important year for Ginkgo. There are plenty of challenges in building a scaled cell engineering platform and our team is committed to pushing through the next level of operational efficiency to drive our mission. We hope this has been a useful update and deep dive for you all, and I hope to see many of you in person at Ginkgo Ferment. Our annual conference in April. And if you’d like to join, please just reach out to us. All our welcome. I’m very excited about Ginkgo’s position and outlook and look forward to updating you on our progress in the coming quarters. Finally, before I hand it to Anna Marie to do our formal Q&A, I do want to just take a minute here and talk upfront about some topics that I know are top of mind for investors in Ginkgo right now.

Actually, Warren Buffett has a great quote about how if you’re transparent about what sort of company you’re building, then the investors who are aligned with that will find you. He actually gives us great analogy. He’s like you can throw a dinner party or a rave. There’s nothing wrong with either of those. But just make sure you put what it is on the invitation. And so as a reminder, this is what we put on our invitation for Ginkgo. So from the founder letter in our S-4 filing, when we took Ginkgo public, we said to our stockholders. We are seeking to build a company with enduring long-term value. We will not make decisions based on short-term market or accounting considerations, we’ll make decisions to ensure Ginkgo is the long-term market leader.

Advancing our mission is resource intensive. We expect to continue to reinvest cash back into the business to scale our platform and expand into new markets with a focus on long-term value for the company and its stockholders. Market leadership will enable us to scale, which is critical for our platform’s growth. Growth increases our future free cash flows and ultimately, stockholder value. So to be clear, we’re not here to make a quick buck or to manage the quarterly earnings, we’re here to build a company of lasting value. That doesn’t align with the time lines that some investors operate under, frankly. And there’s nothing wrong with that. They’re just — they’re not going to like our dinner party. However, we are fortunate to have some terrific long-term minded investors on our cap table for many years that have been very happy and have live been very happy to see their continued growth alongside us.

We’re also excited to see some new names at our party who have been able to take advantage of the current market environment to open new positions at Ginkgo. However, the other group that I see our invitation speaking to is individual investors that are interested in Ginkgo’s mission and in seeing Ginkgo accomplish our goals in cell programming and biosecurity for the impact it will have on the world. So I personally spend time keeping an eye on what these folks are concerned about. It’s a lot of it on social media. I wanted to chime in on a few topics. I saw coming up repeatedly from individual investors. So I’ll read and respond to a couple here to give you a jest. So this is one that came in from our e-mail, right? So I feel that your stock price is still undervalued based on the business opportunity that I believe exists and yet I see leadership selling shares in large amounts on a near daily basis.

This is a concern for me since inside our ownership doesn’t appear very large to begin with. And yet even when the stock is at near all-time lows, management doesn’t appear to have the confidence to keep their shares. Why is this? Okay. So I’m very happy to speak to this. So Reshma, Austin, Barry, Tom and I have founded the company. We started this company 15 years ago, and we bootstrapped it for about six years with no venture funding, buying equipment on eBay, the whole thing. Such that we know today, we still own over 400 million shares and over 20% of the company. So this is something I’m very proud of. So the first point to make is, as a group, the founders are larger shareholders than any single institutional shareholder in the company.

And so I hope it’s very clear. I want to clear up that discrepancy that we make and lose money right alongside our investors. Okay. So why do folks selling now? Okay. So first, we had some RSUs from before we went public that vested. And whenever an employee’s RSUs are distributed, the company automatically executes a cell to cover transaction for the tax obligations that are owed when those shares are distributed to the employee. Those sales to cover tax application. Sorry, those sales to cover tax obligations are now over. Second, about six months ago, when we’ve been public for about a year, we put in place 10b5-1 plans, which are now effective. As background, a 10b5-1 plan is set well in advance and can’t be changed without a waiting period.

This is a way to ensure executives of companies aren’t trading based on any near-term information that they have about the business. And you can see the sales from those plans and Form 4s that are filed publicly. So through the end of last week, my personal plan has sold 1.6 million shares. So to give you context, this represents less than 2% of my total shareholdings of approximately 95 million shares. So you don’t get to this level of ownership in a company by selling out over the years. And so the reality is, we really haven’t had that much liquidity to date and have continued to pay ourselves under market salaries as well. So in fact, if you look, I have the lowest salary, I think, I do out of the three folks on this call. But in any case, I do remain one of the largest shareholders in the company.

And so hopefully, that’s now clear to folks. The other thing I’ve seen that we don’t — is that we don’t care about the share price, right? So having it still confidence in investors when the CEOs don’t value the stock, right, is from Biodazzles11 on Twitter. So as I mentioned, the founders as a block are the largest shareholders in the company. And I promise you, we are not happy with how the stock performed in 2022. However, I also recognize that 2022 was a painful year for our investors. So we felt that, like I said, our employees who are another large group of shareholders, they have felt it — and what I can assure you is that we’re all still showing up to work every day because we believe in this mission, this company and each other here at Ginkgo.

And as founders and leaders of the company, we need to lead by example. So we have requested the Board not grant me and Reshma and Barry and Austin any new equity this year in our compensation. So the idea is we’ll only make more money this year if you do by growing the value of our existing shareholdings in Ginkgo. Okay. So I want to just cover that upfront. And with that, I’m going to hand it off to Anna Marie for the formal Q&A. Thanks.

A – Anna Marie Wagner: All right. Thanks, Jason. I appreciate that. So we’ll switch to formal Q&A in a few moments. All right. I think we’re all back here. So one more question from retail. We always start there. This is from Twitter, Ryan and then a lot of numbers that I’m not going to be able to get through. Is there more or less appetite from larger clients, the foundry services given the current economic climate.

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Q&A Session

Jason Kelly: Yeah, I can take that. So I think companies in this environment are basically focused on efficiency. And you have that affects small companies and large companies in two different ways. So the smaller companies, it does drive more interest for our services. I think they’re looking to cut fixed cost spending, move to more efficient outsourced providers like we do see that. Larger companies, I think it’s more neutral. It goes one of two ways, either similar to the small company, they’re looking to drive efficiency, open their eyes to an external provider that is a variable cost option on the services side and so on or they say, actually, we’re going to cut back our R&D budgets and just like maintain our internal stop and cut our external spending. So the bigger companies that didn’t come out in the wash a little bit, but the smaller companies, it is driving more interest.

Anna Marie Wagner: Thanks, Jason. All right. Let’s cover to analysts now. We’ll take the first question from Matt Sykes from Goldman Sachs. Matt, I’ve opened your line if you just want to unmute.

Matthew Sykes: Great. Can you hear me?

Anna Marie Wagner: Yeah.

Jason Kelly: Yeah. Hey, Matt. All right.

Matthew Sykes: Good afternoon, everybody. Thanks for taking my questions. We really appreciate the rationale for not including on downstream in the forecast. I guess I just wanted to ask in terms of behind that rationale, the inherent unpredictability of that downstream value is, I’m sure, a key part of that because I know we deal with that, too, on our end — has there been any change in terms of the cadence or pacing of potential downstream value like have projects been extended and things like that, that makes it sort of elongate that process or is it really just about the inherent unpredictability of that — of those milestones and royalties.

Jason Kelly: Yeah. So I can take part of this, and Mark feel free to add to it. So the reason we don’t want to guide is the unpredictability, right? In other words, I think two things happened last year. One, we have been saying we thought this would happen. In general, the milestones are more unprintable then that actually did happen. So that’s bad news for our interaction with all of you. But then second, internally, like the whole team got focused on like one external milestone, whatever, right at the end of the year, when at the end of the day, like, a lot of what makes those milestones happen or not is not actually in our hands and our customers’ hand. So we’re doing gymnastics that I think are not particularly mission critical for us compared to driving the efficiency and the effectiveness of the platform that will just yield more things ending.

And yes, you’ll still be dependent on a customer to do various things, but that, again, will come out in the wash in terms of stuff finishing. So I didn’t like what was happening internally. I didn’t like what it was doing for our relationship with investors and analysts and so that’s why.

Matthew Sykes: Got it. Thank you very much for that detail. Just a follow-up question. As we focus on just sort of the foundry service revenue and the fees, and you’ve talked in the past about sort of toggling contracts to depending on the type of program it is. Given the focus on just foundry service, and that’s what’s going to be modeled, is there a view to maybe try to increase those R&D fees upfront to boost the growth in that business? And then secondarily, I noticed in one of the slides you talked about trying to drive milestones earlier based on technical completion or clinical progress. Is that also a part of kind of necessary front loading, but just creating a little bit more certainty around the revenue stream that you’re generating.