And so – and in the biopharma space, the commercialization can take time. It’s got to get through, for example, clinical trials, et cetera, and those kinds of approvals. So it is sort of a longer time horizon. But what I can tell you, just to get sort of very specific and tactical about 2024. We do have a significant number of downstream value share opportunities in play for 2024. In fact, really almost an order of magnitude higher than what we’ve had in prior years as potential opportunities. They are binary in nature. And so that is just the fact. They are also, for the most part, I would say the impact for in-year revenue in 2024 still remains small on any given opportunity. Some of them are more significant than others. But it’s really sort of a small potential impact.
So higher number of opportunities, relatively small potential impact for 2024. But certainly, there’s a lot of opportunity for us to achieve downturn value share in 2024 are much higher than the $4 million that was achieved in 2023.
Mark Massaro: Okay, great. And then congrats on the acquisitions, notably two in AI machine learning. You guys have $944 million of cash in the balance sheet. Looks like you used $370 million this year or last year. Can you give us a sense for what the priority is with respect to cash in the balance sheet? How much do you think might be used for further acquisitions? It seems like AI is a pretty significant focus area this year. And then as I think about the cash, it appears to me that you have at least two years of cash. But can you just give us a sense for what you think the cash utilization will be in 2024? And again, just help us frame where the cash balance for M&A is as a priority this year?
Mark Dmytruk: I’m happy to take both of those, Jason. So on the M&A front, the cash. Generally speaking, I think, as you know, we’re structuring deals as where the consideration is stock and not cash. And so those are generally not uses of cash. Secondly, we structure the deals with relatively low upfront consideration, with higher consideration in the future in the form of kind of earnouts. And so, again, the sort of key point there is our M&A activity is not a significant use of cash right now and wouldn’t be expected to be in 2024. Of course, there’s always the chance that a particular attractive opportunity comes up and we would evaluate that. But that’s been the kind of recent history. On cash burn, I think, Mark, the best way to think about it is, as you can see from the financial statements, about a $370 million sort of overall burn in 2023.
So you should expect us to improve upon that meaningfully in 2024. And I think more important – that’s a combination of revenue growth as well as some OpEx reduction. And I talked a lot about what we’re doing sort of on OpEx and spend management on the earnings call. And so think about cash burn improving in 2024. And I think good execution on that puts us on a trajectory to further improve on that number in 2025.
Mark Massaro: Okay, thanks, guys. I’ll hop back in the queue.
Jason Kelly: Yes. Mark, the only thing I would add is I do think this just touch on the topics of sort of DVS and that cash position. Like from my standpoint, I like how our numbers are looking as we’re growing demand on the platform. You’re not seeing us actually spend. This wasn’t like huge amounts of new capacity build in the last year. This was really efficiency gains from more volume coming through improved automation. So I like my scale economic. I like that I’m adding a lot of new business in the market with the biggest research budgets in the world. And I like that we barely penetrated that market, so I have a lot of room to run. The thing that screws me up is if I get over my skis on cash. And so we are watching that, right?
Like and I’m not counting on DVS, downstream value share, to do it for me. I love DVS. I’m here for it. I hope some of our equity positions get sold for a bunch. I hope we get more milestones. It’s all great. But when you think about how I’m running the company strategically, I’m going to make sure that the fees that are coming in from cash are there to, or the cash coming in from fees are there to support our efforts as we bring our kind of revenue up and our OpEx contained relative to it, that we can get there without needing to do a fundraise, I don’t want to do. So I want you to know that I’m really trying to do that absent of DVS, and I think it’s great to have it, but it’s not something I want to count on.
Mark Massaro: Okay, thanks guys.
Operator: Thanks, Mark. Our next question will come from Matt Sykes at Goldman Sachs. Matt, your line is now open.
Matt Sykes: Great, thanks for taking my questions. Maybe the first one. Jason, I want to go back to the government end market. I mean, you saw an increase from like six to 14 and really haven’t talked about it much in the past. And I think the RFP structure simplifies the sales process, certainly relative to large pharma, which is like a different ballgame. But I would also love to know how are those contracts structured because it would seem to me there might be some opportunities for more upfront relative to downstream value. We’d just love to get more details as this business grows, how can that have an impact on sort of the financials longer term? And what do you expect that end market to grow at over the course of maybe the next you like longer term?
Mark Dmytruk: I’ll take sort of a part of that to just sort of kick it off. So those are structured like a fee for services agreement. So as we perform a service, we get paid in the sort of context of upfront versus DVS. It is basically all upfront as we perform the services. And I don’t mean sort of cash prepaid, I mean – I don’t mean upfront in that sense. I mean just in the context of fee for service. There is no DVS on government contracts. So those are structured in a way that they make sense for us economically to do based on the service fees.
Jason Kelly: And the thing I would add is, I think frequently what we’re seeing with government customers is they’re looking for early stage research. And so it’s also a way, although we’re not getting DVS, we’re often creating assets internally that we’re able to reuse for other things. And so it is a way to kind of generate some of that. It drives demand that is economically good for us overall in terms of the fees. And it’s a reliable kind of RFP process to do the sale. So I am really excited about it in that regard, especially in these near years where we’re trying to make sure again that the cash coming in from non-DVS, earlier research, funding and fees helps us not need to raise.
Matt Sykes: Got it. That’s very helpful. And then, Mark, just following up on some of the comments you made on the OpEx side, looking at the reduction you did Q4 to Q4 year-over-year, how should we be thinking about OpEx for 2024? I know you said that expect it to moderate, but any additional color on that would be very helpful.
Mark Dmytruk: So in the aggregate, we’re targeting, we expect total OpEx in 2024 to be less than total OpEx in 2023. And you can see that we’re sort of on the right trajectory from just Q4 – over Q4 perspective in 2023. So there’s a lot going on there. So we would expect to see sort of just a net reduction in G&A expense in your sort of classical support functions like finance and legal and people. And that’s because we’re moving from a place where we’ve been spending a lot of money on professional services and consulting to bringing more capabilities in-house at a better cost. So that’s sort of one example. But in the G&A line, you’ve also got selling expenses and we are expanding, as we’ve said, the pharma business development team.
So you’re going to have offsets against some of that G&A reduction with some areas of targeted investment. On the R&D side, sort of the same kind of thing. So there are areas where we’re either constraining, holding the line flat, or reducing expenses. And that’ll be partially offset or offset by investments, for example, in mammalian capabilities. So the net sort of effect, I think, Matt, the right way to think about it is think about Q4 as a good sort of baseline, because the earlier quarters in 2023, we were still integrating acquisitions. We were still working through sort of operational improvements. So think about Q4 as a good baseline. From there, you would see R&D expenses increase a bit quarterly because of, like I said, investments in the mammalian capabilities, and then you should see G&A decrease.
But it does get a little bit. There are puts and takes sort of across the board in terms of those line items.
Matt Sykes: Great. Thank you very much.
Jason Kelly: Again, I’ll be a broken record on this, but just to state it again. From a strategic standpoint, what I’m hoping to do is you see us with a large cash pile right now, 944 million. We want to squeeze down that cash burn by basically growing our customer base and increasing the amount of cash revenue we’re getting while containing our spending and getting more efficient, right. And if I do that, by the end of the year, I still have a good cash pile, but I have a lower burn. And then you’re once again computing how much runway I have. And the next year, I squeeze it again, and we eventually get to the point where you have no fear that I’m going to get to profitability again without needing to raise in an unfortunate environment, if that’s the one we’re in.
And so that’s my strategic goal, because otherwise, I just like my market footing, right. Like, we are getting the scale economics we want. We’re the leader. We’re getting the customers we want. So as long as I keep that train running, I’m pretty happy.
Matt Sykes: Great. Thanks. Very helpful. Appreciate it.
Operator: Thanks, Matt. Our next set of questions comes from Derik de Bruin at Bank of America. Derik, your line is now open.
Jason Kelly: Hi, Derik.
Derik de Bruin: Hey, how are you?
Jason Kelly: We got you again.
Derik de Bruin: You got me again. Yes. So I’ve been bouncing around, but did you explain why the program number, and basically you put out a press release on the 10th of January saying you were going to meet your targets, and the numbers actually came in below on the programs, and if I missed the beginning of my apologies of why it came below those from the results. But you can – can you elaborate?
Jason Kelly: So on the revenue point; we came in a little bit below. Yes, we did – I did make a comment to the effect that we did have a contract amendment late that had a negative accounting impact to revenue and so that’s really what happened with revenue. Without that we would have been sort of, well, in the revenue range. And then with program count it was really – so we certainly had the base of programs that we had started in the quarter to feel good about the guidance range, but there were just a few programs that ultimately didn’t progress far enough in the contract discussion for us to count them and that’s what happened there, Derik.
Derik de Bruin: Got it. Okay. So I had about 100 programs coming in 2024, but the revenue number is way down. I guess the revenue per active program is like, why is that falling so sharply relative it is. I mean, is it just the nature of the fact that you’re moving to more biopharma and they want to pay more downstream? What’s the delta? Because your program numbers are coming in essentially where I thought they were, but the revenues are blow. Where’s [indiscernible]?
Jason Kelly: Yes, a couple of things. So first of all the, some of the newer programs we’re doing on the industrial biotech side are coming in at a lower revenue per program or booking per program than what we’ve seen historically. And you can think of that as a function of macroeconomic conditions. In some cases, it’s because we’re doing success based pricing. So you do have like a component of the new program mix is industrial biotech that’s lower than average. The larger – that the new stuff that we’re doing with larger biopharma companies is not at all, in fact, that’s the opposite. Those are generally higher program revenue on average or booking per program on average. And so that is not at all the case that somehow those are sort of skewed to downstream value, so that moves in our favor.
The one thing, Derik that you need to look at is I would average a few quarters. So rather than taking Q4 divided by average active program, I would take like the last three quarters, let’s say, or the full year of 2023, and divide by average active, because there is the quarterly lumpiness that I talked about for a whole variety of reasons that can make a particular quarter, that can throw off a revenue per quarter per program metric, and so I would do that. I would do some averaging, and then things would make a little bit more sense there.
Derik de Bruin: Got it. And how should we think about discontinuations this year? I mean, you ended at, I think, 162 active programs?
Jason Kelly: Yes. I think the sources of growth for us right now, which are government programs and biopharma, and then within biopharma, large biopharma are all better than sort of average revenue per programs. But there’s still a very meaningful number of industrial biotech programs that we’re signing, which are often being signed at lower than average. So it’s going to be a little bit, and then as you know, Derik, it takes a while for a program to ramp up, for example, so the revenue that you actually see. So there are going to be sort of puts and takes. It’ll be a little bit of, when do programs land in the year? How quickly do they ramp up? But that’s generally how to think about it. The government and large biopharma stuff is higher than average. The other stuff is lower.
Derik de Bruin: So, Jason, I’ll ask other bigger picture questions, so not to focus on the financials. So, I mean, when you look at the outsourcing market, I mean, obviously there’s been a lot of CROs. There’s been a lot of outsourcing for the number of years. I mean, how do you sort of see – how do you sort of see Ginkgo as it fits into that sort of like larger ecosystem? Are you trying to take business from some of the other CROs that are out there, some of the other sort of, like companies are doing discovery? Do you think you’re targeting a new market niche that’s there? Sort of like how do you fit in with the bigger – just sort of like how do you see yourself slotting into the bigger biopharma services complex, shall we say?
Jason Kelly: Yes. Yes, that’s a very good question. So I spend a lot of time looking at that. I would say the major thing is that the bulk of sort of things that get outsourced into CROs into contract research today is sort of a relatively small slice of work that often pharma companies know they can do well, but don’t want to do, right? So hey, Gucci, I want you to make this chemical library for me. Hey, Charles River, I want you to run this animal study for me. Evotec’s [ph] probably the one that’s got the most when it comes to doing any kind of like more advanced or discovery-based type contracts. But selling into these research areas, again, that are principally done in-house, which, again our niche, just to remind you, Derik, is engineering of cells.
