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

Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) Q4 2023 Earnings Call Transcript February 29, 2024

Ginkgo Bioworks Holdings, Inc. reports earnings inline with expectations. Reported EPS is $-0.09 EPS, expectations were $-0.09. Ginkgo Bioworks Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Megan LeDuc: Good evening, I’m Megan LeDuc, Manager of Investor Relations at Ginkgo Bioworks. I’m joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. Thanks as always for joining us, and we’re looking forward to updating you on our progress. As a reminder, during the presentation today, we will 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. Today, in addition to updating you on the quarter and full year, we’re going to dive deeper into Ginkgo’s evolution as a data generator and systems integrator within the biotech R&D ecosystem and biosecurity.

As usual, we’ll end with a Q&A session, and I’ll take questions from analysts, investors and the public. You can submit those questions to us in advance via Twitter at #Ginkgo’s – #GinkgoResults or email investors@ginkgobioworks.com. All right, over to you, Jason.

Jason Kelly: It’s been a busy and exciting week here at Ginkgo, and it’s a great week to remind everyone of our mission, which is to make biology easier to engineer. We don’t take this mission lightly, and achieving it requires not only our own infrastructure investments here at Ginkgo, but also truly to drive change across the culture of the industry, fostering collaboration over competition, especially among tool developers. And I’m going to spend a bunch of time today talking about that. I’m really excited about our progress. And as we’ll dig into the strategic sections, you’ll see how we’re building and integrating a set of capabilities we believe could really revolutionize how biotech R&D is done. Before we get to that, I want to say, if you want to imagine a little bit of what a world would look like when biology gets easier to engineer, it looks a little something like this.

So engineered biology becoming an everyday part of our lives, not just something we experience when we’re sick in a hospital or things like that. And this photo is a real photo of the Firefly branded petunias that one of our customers, Light Bio, just launched to the public. And we’re working with them to make these plants an order of magnitude brighter today to see them you have to be in a really in a dark room. But now you may not think that bioluminescent flowers are going to sort of change the world like a blockbuster drug. But you know, the reason I got into biotech was really because of movies like Jurassic Park. And if you look at some of the younger employees here at Ginkgo, they were inspired by things like Avatar. And this idea that we could start to really design biology and build more beautiful things in the world, I think is going to be an inspiration, especially for kids that want to get into biotechnology.

And I promise you, you fast forward 10 years, you’re going to see high school students designing their own flowers in their DNA programming classes. And I think this first product from Light Bio is the start of that. Okay, now the road to that consumer biotech world though, leads through this, this road. And Ginkgo continues to lead in B2B sales to large R&D groups at both big and small biotech companies across the three major industries of biotech: industrial, agriculture, and most importantly, for our conversation today, biopharma. And I want to really take a minute and focus on our progress in biopharma in 2023. So we added several new biopharma programs in 2023, including with Pfizer, Boehringer Ingelheim, Novo Nordisk, Merck, as well as successfully completing our first project with Biogen.

See also 20 Best Warm Liberal Places to Retire and 14 Social Security Spousal Benefits and Loopholes You Need to Know.

Q&A Session

All of these are hugely important for Ginkgo. First, it is a wide range of different projects we’re doing with these companies. We’re doing manufacturing R&D for Novo, biocatalytic enzyme development for Merck, RNA drug discovery for Pfizer, small molecule natural product drug discovery for Boehringer. And that breadth is a huge vote of confidence for Ginkgo’s sort of core thesis of being a platform business model. So we believe that our robotics, our data, and you’re going to hear today, our AI models will be relevant to product developers across all biotech, either modalities of drugs or different industries in biotechnology. And these deals represent that thesis being confirmed by customers in the biopharma industry, right? This is not Ginkgo getting into enzymes or Ginkgo getting into RNA drugs.

These are customers who are experts in those fields, choosing to look at our platform and see that it gives them leverage. And for potential customers on this call, I want to be very clear. We do not have our own product portfolio or drug pipeline at Ginkgo. Everything we build, we build to serve you, our customers, like the ones on this page. And we’re looking forward to continuing to build the best platform we can to serve your needs going forward. Speaking of what’s going to propel our business in 2024, we plan to expand our capabilities. You’ve heard us talk about our foundry and code base, which is really our robotics and our data at Ginkgo. And we’re going to continue to build that out with new RAC deployments. This is the robotics technology from Zymergen, which I’ll speak more about today, and the building of Biofab1, which I’ll get into more in the strategic section, our new big integrated facility.

And yesterday, we announced three new M&A deals, as well as our technology network that brings together over 25 companies from different parts of the industry, particularly focused on AI and biopharma, where we’re seeing the most sort of inbound research demand. We made the choice many years ago to be a horizontal platform technology company. And inherent in that choice, it means we’re going to be able to – it doesn’t mean we’re not going to be able to specialize in everything. Our value really comes from scale and integration. To bring together these more specialized technologies through M&A and partnership, we think is key to driving success across the industry. And you’re going to hear a lot from me about that a bit later. But before I get too deep into that, I want to hand it over to Mark to discuss our financials.

Mark Dmytruk: Thanks, Jason. I’ll start with the Cell Engineering business. We added 23 new cell programs in the fourth quarter of 2023, which brought us to 78 new cell programs for the full year 2023. This represents a 32% increase over 2022. Importantly, we continue to be successful in adding new programs with large enterprise pharma customers. We will provide some additional detail in a moment on our penetration in biopharma, as this trend provides a critical new perspective on our aggregate new programs metric. We supported a total of 131 active programs in the fourth quarter of 2023 across 80 customers on our platform. This represents substantial growth and diversification in programs relative to the 96 active programs across 54 customers in the fourth quarter of 2022.

On a full year basis, Cell Engineering services revenue was $139 million in 2023, an increase of 31% compared to the full year of 2022. As discussed in prior quarters, the services revenue growth was offset by a decline in downstream value share from equity milestones achieved in 2022, resulting in total Cell Engineering revenue of $144 million in 2023 being approximately flat compared to 2022. When looking just at the fourth quarter of 2023, Cell Engineering revenue was $27 million, down 49% compared to the fourth quarter of 2022, primarily due to the decline in downstream value share just mentioned. Services revenue, which excludes the impact of downstream value share, was also down year-over-year. As discussed in the past, we often see inter-quarter lumpiness in services revenue, even though the underlying foundry platform output is more level, and that is because of the timing of revenue recognition, the achievement of certain technical milestones, contract-specific factors and related accounting adjustments.

And so, for example, the actual platform work that we did for customers in Q4 was comparable to Q3, even though we had a significantly different revenue result. Now, turning to Biosecurity briefly, our Biosecurity business generated $8 million of revenue in the fourth quarter of 2023 at a gross margin of 15%. Biosecurity revenue for the full year 2023 was $108 million with a gross margin of 50%. As a reminder, our K-12 COVID testing contracts ended in the third quarter, and the business has now moved entirely towards building out both domestic and international infrastructure for Biosecurity, highlighted, for example, by our CUBE-D announcement earlier this week in our expanded CDC multi-pathogen surveillance program announced in Q4. Before getting into the rest of the P&L, I’d like to talk about how we’re managing cash flow and cash expenses in this environment.

We finished 2023 with nearly $950 million of cash on hand. From our balance sheet, you can see that our total use of cash in the year was about $370 million. Both of these figures were favorable to our internal targets, despite the revenue shortfall relative to our original guidance. Over the past 18 months, we have been assessing every area of cash spent with the goal of identifying categories that should be decreased, categories that should be constrained, and areas where targeted investments are appropriate. In 2023 and in our planning for 2024, we took the following actions. The completion of our integration efforts relating to the four acquisitions that we had closed back in the fourth quarter of 2022 has resulted in cost synergies at this point, particularly as relates to G&A expenses and the Zymergen transaction.

You will see that reflected both in the fourth quarter of 2023 as well as in 2024. We are also reducing certain G&A spend in supporting functions such as finance people and legal by decreasing professional services and consulting spend, and bringing more capabilities in house. Due to improved equipment capacity, we rationalize CapEx in 2023. The majority of the spend in 2023 related to various smaller projects and in 2024, the majority of the CapEx relates to the build out of the new Biofab1 facility to support future growth and efficiency. And then building on the operational improvements discussed on our second quarter earnings call, we are constraining OpEx in our microbial platform, which is our most mature platform capability. As we increase revenue in these programs, we are driving higher productivity.

Now, partially offsetting these cost savings actions, there are also key areas where we are investing. We are expanding the Pharma Business Development team by about 50% and are investing in our mammalian platform capabilities. And we are increasing spend related to AI, which Jason will be speaking about in more detail later in the presentation. These investments are critical to both near term and long term growth. Collectively, these actions have resulted in a net spend reduction when you compare the fourth quarter of 2023 to prior quarters and are expected to decrease OpEx in 2024 relative to 2023. The combination of our expected revenue growth and decrease in OpEx is expected to drive an improved cash burn level in 2024 and successful execution here would also put us on a trajectory for further improvements to cash burn in 2025.

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 decreased from $109 million in the fourth quarter of 2022 to $90 million in the fourth quarter of 2023. G&A expense decreased from $78 million in the fourth quarter of 2022 to $72 million in the fourth quarter of 2023. On a full year basis, R&D expense increased from $314 million in the full year of 2022 to $432 million in the full year 2023, while G&A expense increased from $228 million in the full year 2022 to $299 million in the full year 2023. These operating expense items increased year-over-year as expected as we layered in the 2022 acquisitions. These expenses also include one-time charges, both cash and non-cash, relating to M&A, integration, and other costs as detailed more fully in our adjusted EBITDA reconciliation.

Stock-based comp, consistent with prior quarters in 2023, you’ll notice a significant drop in stock-based comp in the 4th quarter and in the full year 2023. As a reminder, this is because of the catch-up accounting adjustment relating to the modification of restricted stock units when we went public has substantially all rolled off at this point. While the bulk of that adjustment is done, just under half of the total stock comp expense in the quarter is still related to RSUs issued prior to us going public. Additional details are provided in the appendix to this presentation. 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 non-recurring items, we look to adjusted EBITDA as a more indicative measure of our profitability.

Adjusted EBITDA in the fourth quarter of 2023 was negative $96 million compared to negative $76 million in the comparable prior year period. The decrease was driven by lower revenue, partially offset by lower operating expenses year-over-year. Full year 2023 adjusted EBITDA was negative $355 million compared to negative $173 million in the prior year. The decrease was driven by lower revenue and higher operating expenses year-over-year. A full reconciliation of adjusted EBITDA is provided in the appendix to this presentation. And finally, CapEx in the fourth quarter of 2023 was only $3 million. CapEx in full year 2023 was $41 million, down from $52 million in the prior year. This reflects our spend prioritization efforts. CapEx will be higher in 2024 due to the build out of Biofab1.

And as discussed, this is one of our targeted areas of investment. Before I get into our guidance update for the year, I would like to give you a bit more color on the evolution of our program mix. We have talked about how we are shifting our focus to biopharma and these two charts on the left show that progress. The most important thing to note is that 65% of our new biopharma programs this year were from large enterprise customers. That is a meaningful shift and something we think you should watch going forward. On the revenue side, we have gone from our biopharma being really just a rounding error a few years ago to making up almost a third of our overall Cell Engineering revenue this year. And we expect this kind of growth rate to continue based on the larger deals we signed in the past two years with the likes of Pfizer, Merck and Novo Nordisk along with the pipeline of opportunities are now much expanded biopharma business development team is pursuing.

This is an enormous market and as we continue to deliver for our early customers, we see significant growth potential ahead. As we did last year, we would also like to provide you with some updated data points relating to downstream value share. On the left-hand side of the chart, you can see that as of the end 2023 we have the potential to earn up to $2.4 billion in milestone payments based on customer collaborations previously entered into with the majority of these potential payments being linked to successful commercialization of a product. This figure does not include potential royalties. One clarification on this chart, you’ll see that the increase in potential milestone payments was relatively small when comparing 2023 to 2022. We actually added nearly $1.5 billion in new milestone potential in 2023.

However, we also saw some specific programs fall off during the year, and so we have removed those milestones from the total. As you would expect, most of the milestone potential is coming from biopharma customers and in 2023 from large pharma in particular. On the right side of the page, you can see how our downstream value share mix has continued to shift over the years. Just a few years ago, the bulk of our downstream value potential was in the form of equity and relatively young companies. As our customer base has shifted significantly towards larger, more mature companies, our downstream value mix has shifted towards milestones and royalties. Now I would like to provide some commentary on our outlook for the full year 2024. We expect to add in the range of 100 to 120 programs in 2024, which represents a growth rate of 41% at the midpoint over 2023.

Our Cell Engineering revenue guidance in a range of $165 million to $185 million which we expect to ramp over the course of the year and excludes the impact of any potential downstream value share. This represents a services growth rate of 26% at the midpoint, excluding potential downstream value share over 2023. As discussed earlier, we are seeing the beginning stages of real penetration into the large pharma customer segment. We are expecting [indiscernible] to be a key growth driver in 2024. We expect that will favorably impact the composition of our program and revenue base, while the industrial biotech vertical is still dealing with unfavorable macroeconomic conditions. In addition, we also expect the government vertical to be a strong contributor to growth in 2024 based on a record pipeline we have there.

Our Biosecurity revenue guidance range for 2024 is at least $50 million. As we have in the past, we are guiding to our approximate current level of contracted backlog for the year and have a pipeline of opportunities we are pursuing beyond them. And finally, we expect total revenue for the full year 2024 to be in a range of $215 million to $235 million. In summary, we are pleased with the overall direction of progress. While we still believe that scaling the number of programs we can launch and execute is an important indicator of long-term value and are focused on driving growth there, we have placed more emphasis on our revenue targets for our team internally to complement our efforts to drive OpEx efficiency and our path to profitability.

Over the past few years, the business has been evolving from a customer base that was predominantly industrial biotech and earlier-stage companies to a customer base that now comprises more larger enterprises, along with increased biopharma industry penetration. The government vertical has also emerged as a driver of growth. We think this evolving customer profile is attractive on many dimensions. And we continue to manage our balance sheet and cash flows to maintain a multiyear runway with nearly $950 million of liquidity at year-end. And now, Jason, back to you.

Jason Kelly: Thanks, Mark. A couple of things I want to reiterate from Mark’s section. So you’ll see us giving a pretty broad range for our service revenues and new program count guidance. The reason for this is that Infrastructure Services is really new to the biotech industry. So we’re blazing a bit of a new trail here. And that adds a little bit more unpredictability in my opinion. Mark mentioned how small our current services revenues are relative to the research budgets in the biopharma industry. The reality today is that by and large, infrastructure tools for product development in biotechnology are done on premises. They’re done in-house at these companies. And that’s why getting these first deals with Merck, Novo Nordisk, Pfizer, Boehringer and others is so important.

It’s a chance for those companies to get experience really with outsourcing core research infrastructure to sort of cloud infrastructure services like Ginkgo as an alternative to doing it in-house. And the rate that those R&D decision-makers make that switch from doing things in-house to outsourced service providers is going to be what will drive big changes in Ginkgo’s revenue over the next couple of years. That’s really the driving factor, it’s less about what we can scale into. I’m confident we can scale into it. It’s at what rate do they turn that knob. And there’s unpredictability to that as it’s fundamentally a question of new sales. But we have a 90-person commercial sales team now, and we have a big focus in biopharma.

So we’re putting our backs into it. Now since the big question for Ginkgo coming up is what is that rate that biopharma leaders will adopt outsourced infrastructure services. I’m going to use the first two parts of my strategic review to really dig in on that. Why are those folks interested? What are we doing this new to make that happen? And so in the first section, Ginkgo has invested close to $1 billion in software and automation, call our foundry that is flexible enough to handle the variety of lab work needed for cell engineering across a wide range of biotech products. And this is critical for large-scale data generation that’s needed for applying, in particular, AI and biotechnology. The second section I’m going to dig in on is we want to see a robust infrastructure services industry grow in biotech.

And our view is that a rising tide will lift all boats in the industry, including Ginkgo. So we’re working to make our automation, our foundry, I’ll talk about the first section available to other service companies. So they don’t need to repeat our investments as they build the business doing this in the industry. Finally, we’ll give an update on biosecurity, where we recently expanded our strong relationship with the government of Qatar. Okay. Let’s dive in. Okay. So what do I mean when I say infrastructure services, all right? So on the left side of this chart, you can see the magical world of the tech industry, okay? So on the top of each of these boxes, you see a large company building on top of the infrastructure services of an often even larger company underneath it.

And to give you an example, new $1 trillion companies like NVIDIA are built entirely on top of other companies infrastructure like TSMC. So I want to emphasize, NVIDIA, $1 trillion microchip company that does not manufacture its own chips, right? Similarly, Salesforce, Netflix, many of the other Software-as-a-Service, SaaS applications that have really bloomed over the last 15, 20 years are all built on top of things like Amazon Web Services and Google Cloud, the big cloud compute providers. And every app on your phone is enabled by the iPhone or Android OS ecosystem depending on which ecosystem you’re in. So this is very powerful. It’s very enabling, and in my opinion, is why we see $1 trillion tech companies is you’re getting this unbelievable rate of innovation and people building on each other’s core infrastructure.

This is not how the biotech industry works, whether we’re talking about ag, industrial or biopharma, and we engage all areas of those different industries. Large customers typically have their own in-house infrastructure with vertical integration from R&D, often all the way through to manufacturing, okay? And our view, my view, in particular, is that part of the reason that on the left-hand side, it all works so well in the tech industry is it’s fundamentally a code-based industry, right? Like people are moving zeros and ones around, it is digital. So you have a very clear opportunity to have interfaces and standards across players where there isn’t confusion, right? Like you’re able to tell someone exactly what you want to get back exactly what you want.

Well, in my opinion, biotech is also a code-based industry, right? DNA code is common across all the products of biotechnology, whether it’s a trait in corn or RNA gene therapy going into a human. And I’m hopeful that means that we could structure our industry, our biotech industry similar to tech and see similar gains. And my hope is that perhaps one of our customers could be the first $1 trillion biotech company. Okay. Now since there are a lot of biotech investors that tune into our call, I will mention that canonical wisdom in biotech is that even if you have this great, robust platform technology that can do lots of things, you always end up vertically integrating into becoming a drug company in the biotech industry. A famous example, one that I like a lot is Millennium, really from the genomics boom in the early 2000, huge platform story, amazing leadership, great technology.

And here’s our CEO, Mark Levin, explaining we can’t afford to remain a research company. And if you look at the history of Millennium and play it out, ultimately, they did move towards creating specific drug assets before being acquired by Takeda in 2008 for of those drug assets, right? And we even hear this from potential customers of our infrastructure services, right? They’ll say, it’s fine, Ginkgo, like the story, but inevitably, you’re going to develop your own drug and compete with us. All right. So again, I want to be emphatic here for our potential customers on the call. Ginkgo today is 1,200 people. We have close to $1 billion in cash in the bank, we’re very protective of that cash. Our revenues are increasing, as you heard from Mark, while our cash burn is falling and our rate of new customers is going up.

So we are not going to end up developing our own drugs. I think we are uniquely at our scale in terms of the tech and infrastructure we built and the scale of service revenues and the number of customers on the platform. I think we are now sort of in our own category when it comes to really sticking with a platform infrastructure services business model and biotech. I’m biased, but I think we’re going to make it. And so again, for our customers, I want them to know that we’re sticking to that, and don’t tend to compete with them. Okay. So a key component of our infrastructure today is Ginkgo’s investment in flexible lab automation, all right? I mentioned earlier, we spent close to $1 billion on this. Why do you need automation, right?

Like why is that important in biotech? And why is it important to biopharma R&D leaders? And the reason is that in order to generate the large data sets that are driving modern biotech R&D, the cost per data point generated really matters because we are talking about millions and millions of data points. And I went into this more in my talk at JPM, which I encourage you to listen to. But you can see on the left here, Ginkgo’s in-house genomic data library that has about 10x the number of genes relative to the large public data sets. And importantly, on the right, we’ve run millions of assays on genes from that library and tested their performance. And that chart on the top is actually each row in that is an EC number. This is like a class, different enzyme class.

And we have hundreds of thousands of data points for each of these different EC classes. And that gives us an enormous set of label data, as we’ll talk about later when it comes to AI as well as the raw of large DNA data asset. This aggregate data is important because it’s needed to develop down here at the bottom in gray, AI foundation models in biotech, right? And if you are an AI company watching this right now and salivating over these data assets at Ginkgo, give us a call, right? As you’re going to hear in the next section, we really want to enable others to build on top of principally our automation, because we’ve invested a lot there. But also these data assets that are starting to accumulate at Ginkgo, we think they can be resources for tool developers in the industry.