A – Megan LeDuc: Great. Thanks, Jason. As usual, I’ll start with a question from the public and remind the analysts on the line that if they’d like to ask a question to please raise their hands on Zoom and I’ll call on you and open up your line. Thanks all. All right, welcome back everyone. As usual, we’ll start with a retail question and then I’m just going to go down the line here of folks who raised their hands first. So, Steve Mah, you’ll be first after our retail question. But the first one, this goes to both Jason and Mark. Is there a measuring stick we can use to evaluate your success as earnings are not yet there, i.e., such as deal announced versus expected?
Jason Kelly: Yes, I can take that one. So I actually think there’s a few good measuring sticks if I look at sort of what our strategy is in 2024. So first, I think you can watch our cash burn. I think it is a tough market in general for biotech companies, and we don’t want to have to be raising if we don’t want to be raising. And so we’re really focused on why you see us ending 2023 with in such a great cash position, more than $950 million in cash and equivalents in the bank. And you want us to see us raise our revenues while reducing our OpEx. So that’s a big goal for us in 2024. Towards that end also watching how our sort of campaign costs move, right? So in the last year, you saw us drop those campaign costs 40% to 50%.
This is an example of us seeing these scale economics that we’ve been talking about for such a long time at Ginkgo, where our infrastructure does get less expensive with scale. So as we take on more business, our per – kind of program per campaign costs can fall. And then finally, I’d watch for blue chip biopharma companies being added onto our customer list. So each one of those partnerships, we get that first deal with Merck or that first deal with Novo Nordisk. You’ll see us adding more business behind those. Mark talked about this, but the research budgets of those biopharma companies are huge. And so there’s actually a lot more business to come behind a first deal. So each one of those has a lot of lifetime value to us. So those are some of the things I would watch for in 2024, since those are some of the areas the teams are going to be focusing on.
Megan LeDuc: Thanks, Jason. Like I said, Steve Mah [Cowen], you’re up first. Your line is now open.
Steve Mah: Oh, great. Thanks for the questions. I have a three parter on the technology network. So first, how can we begin conceptualizing the technology network platform? How is Ginkgo going to monetize that? And then two, what’s the incentive structure for the 25 plus parties involved? And also for customers, are customers asking for these multifunctional platforms? And then three, aren’t you competing with your network partners to some degree? Just try to help us understand the whole dynamics of this technology network. Thanks. I’ll get back in the queue.
Jason Kelly: Love it. Yeah. All very good questions. So I’ll give you a little bit of sort of – first you asked how to conceptualize it and in particular, like how do you monetize it? So, sort of the easiest way to think about it is it makes it easier for us to bring to bear new technologies and tools as part of customer projects where the customer is interested in it without us necessarily having to, for example, acquire that technology, right? So I’d give you an example. We acquired Circularis a few years ago. That was circular RNA technology. Our technology in the RNA space helped us get a deal with Pfizer and RNA. There’s a world where, with a more mature partner network, we’re able to draw in a few pieces of technology from smaller RNA tools companies, put them together on Ginkgo’s automation, and land a deal that we otherwise wouldn’t have been able to get, right?
And so that’s new business for us, right, by us being able to have more tools to bring to bear and Ginkgo, again, I mentioned this before, but selling outsourced infrastructure services is not a thing that is commonly being done in the biotech market today. So our sales team is very specialized. And so I think our ability to go out and land those customers is something that’s valuable to the other tool companies in the space. So that’s why they’re excited about it. From the customer half of the equation, it’s hard if you’re a big biopharma company and there’s tens of new small AI companies, tens of new small RNA companies, right? Like people do search and evaluation, but they’re usually doing search and evaluation around a drug asset, doing search and evaluation to go look at all these small tool players.
Frankly, the big biopharma companies, I think, have a hard time doing it. It’s just a lot, and it’s hard to compare them, they’re early. So Ginkgo can also be this sort of clearinghouse interacting with many different players and again, making that easy, right? Making it easy for biopharma companies to tap into that innovation, because there is more innovative tech happening at these startups than is happening in-house in many cases, especially for emerging modalities. So that’s the other side of it. And I think the incentive in that case can be pretty straightforward. Ginkgo gets more business that we wouldn’t have otherwise had. These small companies get a distribution channel by tacking on to Ginkgo programs with customers. All right.
When it comes to competing with the network, I think over time, frankly, I think that’s something that could happen, right? I think you see this with many platforms where you’ll have a large platform infrastructure, you might see that platform company initially launch certain products, like Apple would have seeded the App Store with certain apps that they were running. You can think of it like we’ve done that with our cell engineering services. But if it turns out other companies want to build cell engineering service platforms and it’s going to use Ginkgo’s automation, and we’re going to get lots of fees or maybe pieces of a rev share in the future and so on, what’s wrong with that, right? It works fine in iOS, and so it’s a model we’re experimenting with.
I want to say today what we have with these partners is the right to go out and sell kind of co-market to customers and see how it goes. And I think we’re going to learn a lot. You’re already seeing some of those things, we’re talking about structuring, for example, with some of the early examples I gave in the talk today. But how that ends up shaking out will be a function of when we get a customer excited about it and we’re negotiating that deal and we work out the economics. So it is today more of an experiment to see how it goes. But we had a ton of interest in it on really both sides of the market, both from tool providers to get that distribution and large biopharma and other R&D heads to get access. Does that make sense?
Steve Mah: Yes, that makes sense. Thanks for the color.
Jason Kelly: Yes. Thanks, Steve.
Megan LeDuc: All right. Our next set of questions comes from Tejas at Morgan Stanley. Tejas, your line is now open.
Tejas Savant: Hey, Jason, Mark, Megan, hope you can hear me okay.
Jason Kelly: Yes, it’s great.
Tejas Savant: Awesome. Good evening. So I want to start with one on the global tech network and then one for you, Mark, on the financials. So starting on the tech network side, Jason, in your mind, you’ve added 25 partners here. Are there any key gaps that still remain to be filled there? And then more importantly, I think this is a theme you touched upon sort of in your prepared remarks there. But can you just talk to us about the efforts underway towards convincing customers to outsource what they may view as proprietary capabilities for competitive reasons? One of the analogies that I was thinking about was if you look at sort of outsourcing penetration rates for preclinical discovery work, right, and that versus what you see in Stage 2 – I mean, Phase 2 or 3 clinical trials, there’s a function difference there. So talk to us about why you think this time and in this context it’s truly different.
Jason Kelly: Yes, super good question, especially that second one. So, on the gaps in the technology, yes, yes, tons. I mean, you can see, like for example, if you look at just a number of modalities, we don’t even have any technology partner really focused there as an example. And then inside a particular modality, again, like take an RNA or something, you could have a bunch of different approaches for delivery, a bunch of different approaches for persistence of RNA – decreased persistence of RNA in a cell as examples. And I think one thing that biopharma companies will be excited to do is try multiple approaches, right? I think one of the challenges you see with internal R&D is you often kind of get a bunch of things tried and instead of actually getting a chance to compare them all evenly, whichever one happens to get to like a sort of clinically.
So it looks like it’s qualified to go into animal studies and clinic whatever get their first go, as opposed to having tried all the different approaches you possibly could have and found the best. And I think trying them all and finding the best would be a much – would help the industry on the probability of success axis and it’s something that could be enabled with really a network of different tool providers rather than a one-off deal here and there and people just making a bet on their favorite force. And then secondly, when it comes to convincing customers to outsource, I think this is the most important question for the entire, again, what I would call infrastructure services industry in biotech, right? How do we convince again, research leaders to choose to outsource parts of that work rather than do it in-house.
And you brought up one of the challenges, which is people can think of it as something proprietary, a secret sauce and so on and Phase 2 and Phase 3 hasn’t looked at that way, although you could sort of debate, I think certain companies do focus on how the trial design and things like that. I actually think it’s less about that, to be honest, Tejas. I think it’s like – it is more that it is perceived that the work is so specialized that an outsourced provider couldn’t do it as well as you could internally. I think that’s actually been the much bigger source of resistance because you can get the proprietary with patents, right? You can still buy on all this stuff because they’ll own the IP, and you – so you’re still going to have all those same very strong proprietary protections, whether you’re using an outsourced service or doing it in-house.
I think it is a perception that the services aren’t specialized enough to do preclinical research. And I think that based on certainly what we’ve started to see here I can go on the deals we’ve been doing. I think as the technology is scaling, that’s starting to fall away. And you’re going to see just aggregate data assets going into AI models, large-scale robotics that is just bigger at the service providers than it would ever be at any one company. And I’m hopeful that, that will start to change that dynamic. But that to me is the bigger barrier.
Tejas Savant: Got it. Super helpful. And one for you, Mark. I was looking at the program ads here in the guide and also the cell engineering contribution. I think it’s $175 million at the midpoint. Can you just share some color on the embedded ramp versus the $27 million you did in the fourth quarter? I think you pointed to sort of large pharma and government as two key drivers there, but just some color around sort of the phasing of that revenue through the year. And then what are the macro recovery assumptions that you’ve baked into your back half expectations?
Mark Dmytruk: Yes. So a couple of things. First of all, we do expect the revenue to ramp during the course of the year. Second point was that when you look at Q4, it’s not a great sort of comp because we did have a specific contract amendments on a single customer that impacted revenue negatively in Q4. So it isn’t a good baseline for you to think about sort of where the launching point is for 2024. And then just in terms of sort of catalysts or opportunities, it is the things that we’ve been talking about. So we have been adding significantly to the BD sales force in biopharma over the course of the past few months. And so that will start to have more of an impact later in the year, for example.
Tejas Savant: Got it. Super helpful. Appreciate the time, guys.
Jason Kelly: And I’ll mention Mark didn’t touch on it, but Tejas, you mentioned that government. And that’s got a sort of a surprise area of growth for us, I think. And I’ve been trying to kind of chew on why this is not government associated with our biosecurity. But on cell engineering, and I think part of the reason is there’s like RFPs. Like there’s a – the government has already decided they’re going to outsource research. And so as an infrastructure or service provider, you can just compete in a very clean RFP process. So again, if you were to think back to your second question, we sort of wanted to enter world where you see more RFPs being emitted from the large biopharma research organizations, almost like the government does today to get certain types of research done. I think that would be quite interesting. And so – but that’s one of the reasons I’m pretty excited about government is it’s a little more straightforward to sell into.
Tejas Savant: Got it. Thanks, Jason. Appreciate it.
Megan LeDuc: Thanks, Tejas. Our next question will come from Mark Massaro at BTIG. Mark, your line is now open.
Mark Massaro: Hey, guys, can you hear me okay?
Jason Kelly: Yes.
Mark Massaro: All right. Excellent. Well, thanks so much for taking the question. So, it’s nice to see $1.5 billion of revenue potential coming in from downstream milestone payments this year. Would love maybe any feedback on the $1 billion that came out of the pool. Obviously, the $1.5 billion going into the pool, that is a net positive. Can you maybe just talk about some of the puts and takes of what went in and what went out? And then as we think about potentially monetizing the $2.4 billion over time, can you give us a sense for when you think you can realize this? I recognize this will not happen overnight, but just maybe a sense for how much, maybe in 2024, 2025, 2026. Just how do you guys think about that opportunity?
Mark Dmytruk: Yes, I’d be happy to take both of those. So on the downstream value share that fell out, a good chunk of that did relate to a single customer. And I think the important point is that the new downstream value share milestone potential that we added, the $1.5 billion, it was more diversified and largely speaking, coming from large pharma companies, which are more resourced ultimately to commercialize an opportunity. On the $2.4 billion of milestone potential. So first of all, remember that doesn’t include royalty potential or equity potential. So that’s just the milestone category only. In terms of the pattern of potentially realizing that, so you can see in the chart that was in the deck, a good portion of that potential is tied to the ultimate commercialization of a product.
