Can Ginkgo Bioworks Scale Fast Enough Before It Fails?
“Never invest in a business you cannot understand.” Those pearls of wisdom come from
Margaritaville Wall Street icon Jimmy Warren Buffett, who rarely invests in tech companies and has still done OK for himself. As retail investors in emerging and disruptive technologies, it’s impossible for us to understand everything from gene editing to generative AI. That’s why we focus on the business model – things like recurring revenues and software-as-a–service (SaaS) – and the value proposition. The former boils down to how are you going to make money in a way that is sustainable and scalable. The latter is about why anyone would want to buy your product/service/platform in the first place.
Take the example of Snowflake (SNOW), a company that won over Buffett when it IPO’d in 2020. Did he understand the technical aspects of developing and maintaining digital warehouses where customers store and analyze data. Nope, but the concept was clear enough: Data is the oil that makes the digital world run including generative AI. Snowflake makes it easy to pump that data in and out of the cloud, as well as refining it for an almost infinite number of use cases – just like we take black gold and turn it into everything from diesel to drinking cups. Snowflake offers a unique business model that charges clients based on how much data they use. In turn, customers that value the service validate that business model by driving triple-digit revenue growth and a net retention rate of 151%. Cha-ching
Ginkgo and Its Elusive Value Proposition
And then there is a company like Ginkgo Bioworks, a stock that we have long considered going long on. A leader in potentially one of the most exciting industries today, synthetic biology, Ginkgo helped us reimagine the concept of nanotechnology by turning cells into living factories. These repurposed microorganisms can churn out everything from flavors and fragrances to biological solutions for keeping both people and plants healthy. However, Ginkgo has apparently struggled to communicate its value proposition. At least that’s the vibe one gets after reading the verbose shareholder letter pinned to the front of the company’s most recent annual SEC report.
“Platform service providers that capture value from customers’ applications are common in information technology – cloud computing providers, app stores, payment processors – but are atypical in biotechnology. We will use this letter to outline some of the key features of our model, address some common questions we hear from shareholders, and highlight our recent progress in support of our goals.”Credit: Ginkgo Bioworks
The nine-page thesis letter does its best to explain the nuances of selling Ginkgo’s horizontal cell engineering platform to different industry verticals, especially its newest market, biopharma.
“The conventional wisdom is that specialization and prior expertise in an area is really the only thing that matters and so customers either specialize themselves or seek out specialized companies for R&D partnerships. As a horizontal platform, Ginkgo is often not top of mind when customers are thinking about who to work with in specific areas.”Credit: Ginkgo Bioworks
In other words, customers do not yet recognize the value proposition, and it’s up to Ginkgo to lead the horses to water. How will we finally know when these industries have that eureka moment? The “ultimate proof,” management goes on to say, is “obviously a portfolio of recurring cash flow streams in the form of royalties on successfully completed projects, but that is the laggiest of all lagging indicators.” Ginkgo remains well short of that, as we noted earlier this year, after the company declined to forecast downstream revenues. In the meantime, and after 15 years in business, the leading indicator of success is not revenue growth but … wait for it … new programs.
Ginkgo Shows Signs of Scaling
Broadly speaking, that makes sense. Ginkgo’s platform improves with scale. Its cell-engineering foundry is a highly automated lab powered by robotics, AI, and other software. Similar to other factories, as scale increases (measured by data generated per R&D dollar spent), the output efficiency should theoretically increase as well. In addition, more programs help grow Ginkgo’s vast Codebase of biological data used to program cells. One value proposition, Ginkgo believes, is that success breeds success: new cell programs drive improvements in the platform, which drives customers to outsource even more new cell programs.
As we can see, the number of cell programs is indeed growing. Ginkgo increased its cumulative total number of programs by 36% last year. In fact, it’s worth noting that the company has doubled the number of programs in two years. Basically, the idea is to increase the odds (scale up) so that something will actually pay off in big milestone payments or a blockbuster product with huge royalties until the end of time. Gingko refers to this cycle as a flywheel:
Let’s play with a little math and see where this goes. We’ll use round numbers and some simple assumptions. Last year, Ginkgo had $106 million in cell program services and 112 active programs. That averages out to just under $1 million per program. In 2021, the average was about $1.2 million per cell program ($86 million/71 active programs). The price drop is intentional, as Ginkgo wants to make it cheaper for customers to outsource R&D to its foundry, so they’ll initiate more programs on the platform. Indeed, Ginkgo boasted in its forlorn love letter to shareholders that it doubled the output of its cell factory while reducing the cost of strain tests by 30%. The strategy is focused on building volume, because if you buy enough lottery tickets, you may just hit the jackpot.
Ginkgo Also Shows Signs of Sinking
So far, the lottery approach has been the equivalent of winning a couple of $10 scratch-offs. While Ginkgo counts a bunch of marquee names as customers and partners – Bayer is often at the top of that list – the payoffs have been fairly small potatoes. We’ve talked before about its ongoing program with Cronos Group (CRON), a large cannabis supplier that is dabbling in marketing products using different cannabinoids in marijuana. Unlike THC and CBD, many of these active ingredients are present in low quantities. Ginkgo is developing a portfolio of these rare cannabinoids by engineering microbes that can produce them at scale.
It’s cool but not exactly profitable for Cronos, despite achieving a 2.4% market share in the gummies category in Canada a product called Spinach FEELZ™ that features the rare cannabinoid CBG with THC. Ginkgo recently hit another milestone in the Cronos program by delivering a cannabinoid hypothesized to reduce the munchies from THC. Again, kind of interesting for stoners looking to stay skinny, but not the sort of disruptive technology we expected. We also originally had high hopes for Motif FoodWorks, a Ginkgo Bioworks spinoff that was going to create platypus milk proteins for some reason. Instead, Impossible Foods has alleged that Motif ripped off its patents for engineering microbes that produce a protein for making plant-based meat look and taste like the real thing.
Is Nanotechnology 2.0 (i.e., synthetic biology) destined for the same dustbin as Nano 1.0?
Competitors or Collaborators?
Let’s pretend the issue isn’t with the platform. Maybe the problem is linked to Ginkgo’s admission that the company is not “top of the mind” for customers in specific markets, despite working with a wide variety of verticals, some of which sport some pretty familiar names.
Management has said that one strategy for getting to the front of a customer’s Rolodex (look it up if you’re under 30) is to do a better job of communicating the company’s success and expertise in specific domains. For example, in 2022, Ginkgo launched its Ginkgo Enzyme Services, which as you might expect from the name, helps customers design programs to produce these highly specialized proteins, which are the catalysts behind everything from blood clotting to destroying toxins. For instance, Ginkgo helped a biotech company called Aldevron tinker with an enzyme used in the manufacture of Moderna’s mRNA vaccine.
Again, kind of interesting, but despite publishing more than 50 rah-rah press releases so far this year, Ginkgo Bioworks is not really distinguishing itself from legacy companies who operate in the same space. For instance, Novozymes (NZYM-B.CO) is a Danish biotech that has been around in one form or another for nearly a century. One of its specialties is designing and manufacturing new enzymes using precision fermentation – turning microbes such as yeast or fungi into protein-producing factories – just like Ginkgo Bioworks.
Before spinning off from pharmaceutical giant Novo Nordisk, which still owns a controlling interest in Novozymes, the company developed the first industrial enzyme (for laundry detergent) using genetic engineering nearly 35 years ago. In fact, Novozymes competes in many of the same markets at Ginkgo Bioworks, including food, agriculture, and specialty chemicals. Novozymes is scheduled to complete a major merger this year with fellow Danish biosciences company Chr. Hansen A/S. The latter supplies enzymes and probiotics, among other ingredients, which are used in dairy and meat alternatives, pharmaceuticals, agricultural products, and more. In other words, one of Ginkgo’s biggest competitors just got bigger, with a combined revenue of about $3.7 billion.
Novozymes is one of several synthetic biology companies that Ginkgo lists under competition, along with Amyris and DSM. However, Ginkgo pitches itself as a way to supplement or even replace a potential client’s R&D lab. From this perspective, there are no competitors, just collaborators:
“[A]s a horizontal platform, we view these companies not as competitors but as potential customers and focus not on ‘beating’ them but rather on demonstrating our value proposition.”
That’s a nice sentiment, but will any of those companies be calling up the Ginkgo sales team anytime soon? As we noted last year, Amyris (AMRSQ), whose shares aren’t even worth a nickel and now trade on an over-the-counter (OTC) exchange, pivoted into personal care products. It filed for bankruptcy protection last month at the same time it was delisted. Like Novozymes, DSM is a multi-billion-dollar, multinational company (Dutch, not Danish) that produces enzymes and a whole bunch of other products in nutrition, materials, and agriculture. It just merged with Firmenich, a Swiss firm that specializes in flavors and fragrances. The combined company represents $12 billion in revenue. As for Ginkgo’s revenues, they seem to have stalled.
Last quarter’s cell engineering revenue guidance drop and talk of “strategic decisions that decouple program growth from GAAP revenue growth in the near term” means investors will continue to wait for future success stories to be realized.
Ginkgo Bioworks has always been able to tell a good story, and we keep reading and hoping. But the more we dig into its value proposition and business model, as well as understand the broader synthetic biology industry, the less likely we are to go long on the stock. The company still has about $1 billion to blow through and prove us wrong with some downstream wins and consistent revenue growth. Until then, we are firmly avoiding Ginkgo Bioworks stock.