Ginkgo Bioworks (DNA) has certainly caught the attention of investors. The shine may have worn off a bit considering the trendy stock's 65% nosedive since the beginning of 2022, but the power of synthetic biology means there's an infinite well of hope to tap into.
The details of the company's public debut in 2021 help to explain much of the stock's decline. Ginkgo Bioworks launched through a SPAC that handed it a market valuation of over $15 billion -- almost four times the last private valuation. It was never worth anything close to $15 billion.
That's okay. Valuation was never the focus of the SPAC deal. Instead, Ginkgo Bioworks likely focused on the cash haul, as the investment vehicle provided over $1.6 billion in gross proceeds to the business – twice the amount of venture capital it raised in the previous 13 years combined. That more than makes up for the excessive valuation and subsequent stock plummet.
That's because $1.6 billion provides a long cash runway for the existing business. It can also fund numerous investments and acquisitions. After multiple transactions, investors should be asking if Ginkgo Bioworks is putting its war chest, which stood at just under $1.5 billion at the end of March 2022, to good use.
Recent Strategic Investments, Explained
The synthetic biology company operates robotic labs, called foundries, for conducting biotech R&D. It's important to point out that the word "biotech" shouldn't be used interchangeably with "biopharma." Customers can hire Ginkgo Bioworks to genetically engineer microbes for producing medicines, agricultural biologics, food ingredients, industrial chemicals, and more.
The company announced two strategic acquisitions at the end of July 2022.
First, it restructured an R&D collaboration with Bayer (BAYRY). That included consolidating a former spinout company called Joyn Bio, buying a California research lab from Bayer for $83 million, and inking a new three-year partnership for R&D services. The cell engineering deal spans agricultural biologicals, which can be coated onto plant seeds to increase yields, ward off pests, and reduce fertilizer use.
Ginkgo Bioworks said the cell engineering deal with Bayer is the largest in the company's history. It declined to give specifics, but expects the cash proceeds from the deal to "significantly offset" operating expenses acquired in the restructuring. That would be noteworthy considering the company's foundry revenue has a negative margin today.
Second, it announced the intention to acquire fellow synthetic biology pioneer Zymergen (ZY). The peer had fallen on hard times and fumbled away a strong technology position by focusing on the wrong commercial projects. The $300 million acquisition will be consummated in an all-stock deal, which will preserve the cash balance.
However, the acquisition will increase operating expenses beginning in 2023 and will not contribute any revenue for the foreseeable future. If expected cost synergies from the integration aren't realized, then Ginkgo's operating expenses could increase significantly.
Both acquisitions are expected to close by early 2023. It may not stand out now, but the timing will prove important for investors.
What Happens When Biosecurity Revenue Dries Up?
When the coronavirus pandemic emerged as a global challenge, Ginkgo Bioworks sprung into action by dedicating some of its foundry capacity to process tests. It tracks this part of the business as biosecurity revenue.
Biosecurity revenue is profitable (most quarters anyway), which has helped to offset the loss-making foundry revenue. But the future of the segment is uncertain as testing volumes decline. While the company expects full-year 2022 biosecurity revenue of at least $210 million, nearly $147 million was generated in Q1 2022 alone.
In other words, biosecurity revenue could be less meaningful in 2023 – just as acquisitions are being integrated. The $1.5 billion cash hoard provides one heck of a runway and reduces the risks associated with integrations, but mergers that don't live up to expectations could expose a weakness in the strategy.
After all, Zymergen reported an operating loss of $68 million in the first three months of 2022. Improving that will require significant restructuring and reorganization. Meanwhile, it's possible attempting to serve every possible application of biology will come to be seen as unfocused and inefficient.
Pay Attention to the Details
Profitable biosecurity revenue and a $1.5 billion cash balance provide a lot of wiggle room. Both factors buy time for Ginkgo Bioworks to invest in the core technology platform and optimize the business model.
That doesn't mean investors or Wall Street analysts can get lazy. If management isn't careful with how it deploys capital or how thin it spreads resources, then investors could be left with a rapid decline in the health of the overall business. That's especially true if biosecurity revenue flounders beyond 2022.
The business needs to greatly improve the margins on foundry revenue and deliver successful projects to customers. Doing so creates the possibility to earn future royalty streams from commercialized products. Unfortunately, the company has a lousy track record to date.
For example, Ginkgo Bioworks counted more than 21 customer programs in flavors and fragrances in 2016. They represent 18% of all programs signed by the company from its founding through March 2022. Only two or three have been commercialized six years later.
For now, investors can take refuge in the giant cash position. Just remember to pinch yourself before giving in to the hype -- at this stage of development, anyway.
