Ginkgo Bioworks: demystifying the hype behind the synthetic biology business

The Boston-based genetic engineering company Ginkgo Bioworks [DNA] made its debut on the NYSE on 17 September. Since then millions of its shares have already been snapped up by Cathie Wood’s Ark Invest and Baillie Glifford.

At a Ginkgo event in October, Wood revealed why her firm was betting big on synthetic biology stocks: "There is going to be explosive growth that most people in the financial world do not expect," she said as reported by Business Insider.

Many biotechnology companies are unprofitable due to the heavy investment in research and development involved. Ginkgo is no exception. According to regulatory filings with the SEC, it reported losses of $126.6m and $119.3m in 2020 and 2019 respectively.

Ginkgo makes money in two ways. The first is through contracting manufacturers at the research and development stage of products. The money from this is already starting to flow – $44m in what’s known as foundry revenue was reported for H1 2021 and the company is expecting foundry revenue for the full year to be over $100m.

“There is going to be explosive growth that most people in the financial world do not expect” - Cathie Wood

 

The other money earner is royalties from companies that go on to sell products that have been developed using its technology. These can include drugs, fragrances, food and materials. The advantage of this revenue stream is there’s no capital expenditure involved. The flipside is it relies on other companies to successfully bring their products to market.

In an interview with the MIT Technology Review published a few weeks before the IPO, CEO Jason Kelly likened the company’s cell programming platform to an app store. Much like an app store will take a percentage of each sale, Kelly said royalties will help Ginkgo to eventually become profitable.

Speaking about the importance of Ginkgo’s platform, Kelly said: “People in biotech are brainwashed to think only products matter.” He added that he himself isn’t a product man, and neither does he have any intentions of turning Ginkgo into a product company.

 

Ginkgo’s business model

Ginkgo’s business model has drawn criticism. Including from activist short-seller Scorpion Capital, which described it as “a colossal scam, a Frankenstein mash-up of the worst frauds” back in October.

In a 175-page attack on the company, Scorpion Capital claimed that Ginkgo’s current income was based on “a dubious shell game” composed of customers that the company had either helped create or invested in.

“We don’t think that is a problem – starting a biotech company should be as easy as launching a website” - CEO Jason Kelly

 

Citron Research agreed with the basis of the report. The firm wrote: “[Ginkgo] is by no means a scam, rather it is a scheme and a very legal one. The same type of scheme that has made a new generation of investors weary of Wall Street.”

One criticism of Ginkgo’s model is that start-ups seem to be launching on Ginkgo’s platform and then leveraging the company to secure capital, resources and launch products. In a statement issued to Fierce Biotech, Kelly said: “We don’t think that is a problem – starting a biotech company should be as easy as launching a website.”

 

Ginkgo’s share price

Having priced its IPO at $11.15 apiece, the Ginkgo share price reached a 52-week high of $15.86 on 9 November to close on 21 December at $11.31.

Raymond James analyst Rahul Sarugaser has a price target of $14.50 on the stock, implying an upside of 38%.

In a note to clients seen by Cantech Letter, Sarugaser said he’s expecting the company to report a loss of $161m for 2021 and a loss of $114m in fiscal 2022. He’s forecast 2021 revenue to reach $192m – regulatory filings show it made $88m in the first half of the year, up from $31m in H1 2020 – and to then jump again to $261m in 2022.

“How broad its network [of partners] can become is the big question governing the company’s future. But, in our view, one thing is sure: the more important synthetic biology becomes, the more Ginkgo wins” - Raymond James analyst Rahul Sarugaser

 

While Ginkgo has high-growth potential, there are still question marks over its profitability. But Sarugaser believes the company is in a strong position to benefit from an uptick in demand for synthetic biology.

“How broad its network [of partners] can become is the big question governing the company’s future. But, in our view, one thing is sure: the more important synthetic biology becomes, the more Ginkgo wins,” Sarugaser wrote.