Earnings Call Transcript - DNA Q1 2023

Anna Marie Wagner, SVP of Corporate Development

Good afternoon. I'm Anna Marie Wagner, SVP of Corporate Development at Ginkgo Bioworks. I'm joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. Thanks as always for joining us. We're looking forward to updating you on our progress. As a reminder, during the presentation today, we'll be making forward-looking statements, which involve risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission to learn more about these risks and uncertainties. So, we just hosted our annual conference Ferment and all that's geared towards our customers understanding why customers are choosing Ginkgo is important to our investors. And so we're going to spend some time today recapping some of the themes from that event. As usual we'll end with a Q&A session and I'll take questions from analysts, investors, and the public. You can submit those questions to us in advance via Twitter #Gingkoresults or e-mail at investors@gingkobioworks.com. All right. Over to you Jason.

Jason Kelly, CEO

Thanks, Anna Marie. I'm thrilled to be here with all of you today. We recently held Ginkgo Ferment, our significant annual meeting, where around 1,000 attendees joined us in person, along with many more online. In my keynote, I emphasized that at Ginkgo, we're not just investing in clinical trials, field trials, or product launches; instead, we're focused on enhancing our platform for our customers. A key goal of the event was to learn from our customers about their needs, and I strongly believe that fulfilling those needs will ultimately benefit our investors as well. When we support our customers, we also support all of you. You'll hear more today about the reasons customers are choosing Ginkgo's platform and the insights I gathered at Ferment. When we started Ginkgo, one of the main critiques was that a general-purpose platform wouldn't be effective in biotech. While it might succeed in tech, the lab work for a mammalian cell is significantly different from that for bacterial cells, complicating the use of a shared robotics platform and relevant machine learning models across sectors like biopharma and agriculture. I’m pleased to report that we are refuting that notion. We currently serve some of the world's leading biopharma companies, including Novo Nordisk and Merck, and recently secured a large deal with BI, along with partnerships with major chemical companies like Sumitomo and Solvay. We also continue to work with longstanding clients like Givaudan, a top flavor and fragrance company, as well as leading agricultural companies like Corteva, Syngenta, and Bayer. The diversity in our customer base, including startups working on innovative solutions in these industries, demonstrates the strength of our platform and business model, which spans various industries and customer sizes. A standout feature of this year’s Ferment was the fact that most presenters were our customers. They participated in panels and delivered 12 lightning talks, showcasing what they're achieving by utilizing Ginkgo's platform. This approach is crucial because potential new customers want to hear success stories from peers who are already deriving value from our platform. Those video presentations are available on YouTube, and I highly recommend checking them out. The variety of applications from our customers generates excitement and prompts others to consider how they could leverage our platform as well. As I've mentioned before, our customers contribute to enhancing our platform, allowing us to grow and improve. This is akin to the economies of scale seen in industries like auto manufacturing or semiconductor fabrication. With each new customer, we can reinvest in our platform, expand our facilities, reduce costs, and learn from project data to streamline future endeavors. While our investors should be thrilled with every new customer addition, the customers themselves should also be enthusiastic, as each new partnership leads to better infrastructure. That's why it's noteworthy that in 2022, we increased our active programs by 60% and the rate of new program additions by 90%. These figures indicate that our growth strategy is benefiting our customers, and we anticipate continuing this trend for many years to come. Now, I’ll pass it over to Mark, who will guide you through our Q1 financials, after which we will explore some key themes from Ferment. Over to you, Mark.

Mark Dmytruk, CFO

Thanks, Jason. I'll start by discussing our Cell Engineering business. As a reminder, we now refer to Cell Engineering revenue rather than foundry revenue as it is more reflective of the business. You'll see that updated throughout our 10-Q. We added 13 new cell programs and supported a total of 97 active programs across 60 customers on the Cell Engineering platform in the first quarter of 2023. This represents substantial growth and diversification and programs relative to the 64 active programs in the first quarter of 2022, with strong growth coming from the pharma and biotech and the food and agriculture segments. We added several large new customers to the platform including Boehringer Ingelheim, Syngenta, Solvay, and a new program with Sumitomo, in addition to a good mix of programs with earlier-stage customers across industries. As Jason mentioned, we think both of these customer segments are important. It's an important validation of our capabilities when we add large multinational customers like BI and Syngenta, who have strong internal R&D capabilities, but we're also very proud of our ability to enable the next generation of leaders. Cell Engineering revenue was $34 million in the quarter, up 59% compared to the first quarter of 2022. As you can see in the charts at the bottom of the page, this growth was driven entirely by our services revenue with third-party customers and is reflective of diversification in the customer base. Now turning to Biosecurity. Our Biosecurity business generated $47 million of revenue in the first quarter of 2023, a solid result as this business transitions away from K-12 COVID testing services. Importantly over 20% of this revenue came from what we believe will become more recurring sources, such as federal and international contracts, while that proportion was well under 10% in Q4 of last year. Biosecurity gross margin was 52% in the first quarter of 2023, which benefited from some one-time items. You can see on the right that we're really thinking about this business globally now and not just domestically. We believe there will be strong network effects in this business as biology does not respect borders. We have now collected samples from flights originating in 72 countries through our airport program. We believe this type of infrastructure can provide an early warning system for future biological threats. And now I'll provide more commentary on the rest of the P&L. Where noted these figures exclude stock-based compensation expense which is shown separately. Starting with OpEx. R&D expense excluding stock-based comp increased from $57 million in the first quarter of 2022 to $115 million in the first quarter of 2023. G&A expense, excluding stock-based comp increased from $42 million in the first quarter of 2022 to $84 million in the first quarter of 2023. These operating expense items increased year-over-year as expected as we invested in our platform in various functions to support our growth during the past year and layered in the four acquisitions we closed in the fourth quarter of last year. Included in these numbers in the first quarter of 2023 is approximately $19 million of one-time M&A and integration-related expenses. Stock-based comp, you'll notice the significant step down in stock-based comp year-over-year. As a reminder, this is because of the catch-up accounting adjustment related to the modification of restricted stock units when we went public rolling off. Over 60% of the total $75 million stock comp expense in the quarter related to RSUs issued prior to us going public. To help folks model this more precisely, we have provided a new appendix slide in this deck for your reference. Net loss. It is important to note that our net loss includes a number of non-cash income and/or expenses as detailed more fully in our financial statements. Because of these non-cash and other non-recurring items, we believe adjusted EBITDA is a more indicative measure of our profitability. We've also included a reconciliation of adjusted EBITDA to net loss in the appendix. Adjusted EBITDA in the quarter was negative $100 million compared to negative $1 million in the comparable prior year period. The decline in adjusted EBITDA was attributable to both the higher run rate of expenses in cell engineering and the as-expected decline in Biosecurity revenue. And finally, CapEx in the first quarter of 2023 was $19 million, reflecting foundry capacity and capability investments as well as leasehold improvements. CapEx was impacted by the timing of equipment purchases and projects, and we would therefore expect lower levels of CapEx on average in subsequent quarters this year. In terms of our outlook for the full year, we are reaffirming our guidance for 2023 including 100 new cell programs, at least $175 million of cell engineering revenue driven by services revenue, with additional revenue potential from downstream value share and at least $100 million of Biosecurity revenue. As we shared in our last quarterly update call, we expect our new program additions and revenue to ramp during the year and believe we have a solid backlog and pipeline to support our outlook. In conclusion, we're pleased with our overall progress in the business while navigating a challenging macroeconomic environment. We're adding new programs to the platform in a way that improves the platform and balances both near-term and long-term economics. We are focused on our cost structure with new investments in spend generally targeted to discrete areas, such as our mammalian capabilities and we continue to manage our balance sheet and cash flows to maintain a long runway while retaining flexibility to capitalize on near-term strategic opportunities, with $1.2 billion of liquidity at quarter end. And now Jason back to you.

Jason Kelly, CEO

Thanks, Mark. It's always exciting to see new customers signing up for our platform. I want to emphasize that we invest a lot of time engaging with our current customers, including running annual surveys to understand how they use the platform and how we can improve it. I want to share some insights on why our customers are choosing to outsource to us. Our customers are specialized in various fields, like pharmaceuticals or industrial biotechnology, while we serve as a general platform. I will also discuss the service offerings Ginkgo is launching to better align with our customers' language and needs. Additionally, I'm thrilled about the progress our Biosecurity business is making globally. So let's get started. I previously showed this slide, but I want to highlight again how unique our customer range is, both in size and industry. We wanted to understand why these customers are choosing our platform. Through surveys and discussions, we gathered valuable feedback. A notable quote from Brian VanDahl at Novo Nordisk captures the essence: "Science is undergoing a revolution. Large-scale data sets paired with AI are expanding opportunities in biology. We can now explore questions that traditional research methods couldn't address." Businesses across various sectors—such as automotive, finance, and media—are looking for large data sets to train generative AI models, which is also relevant for biopharma and BioAg R&D departments. This feedback highlights how Ginkgo allows for more data per R&D dollar due to our infrastructure. Moreover, our platform offers customers access to data and insights across all ongoing projects, not just their own. Many companies are new to large-scale data projects, so having access to our data scientists helps them navigate this. Speed is another critical factor. Biotech is known for its slow pace of work, and smaller companies face significant upfront costs in lab construction; using our services can eliminate these costs. We aim to replace the fixed costs of large R&D departments with a more flexible variable cost model, which is essential for the pharma industry. Our recent acquisition from Zymergen has brought us innovative technology in flexible automation. This means customers developing therapeutic drugs or agricultural products do not need to be experts in lab automation—just as they wouldn't need to be data center experts to use cloud computing. At Ginkgo, we're focused on providing cutting-edge technology to help customers maximize their R&D investments. A quote from Marcus Schindler at Novo Nordisk illustrates this point; he mentioned that they collaborate with Ginkgo due to our ability to engineer custom biological systems on a genomic scale. At Biogen, Ginkgo supported the exploration of numerous design ideas that helped their manufacturing processes. The scale of data and activity available with Ginkgo is remarkable. Customers can leverage not only their project data but also a wealth of other ongoing biotech efforts nationwide. Our platform compiles this data to train models that can lead to discoveries like new proteins or enzymes, which is a competitive advantage. Feedback from companies like Sumitomo underscores how Ginkgo's transparency and data richness are significant strengths. Furthermore, Merck has praised our team's professionalism and experience—asserting that our experts facilitate data navigation. Nicholas Ohler from Lygos recognized the talent within our team, emphasizing the rapid success of their project that aligns with Lygos' goal of creating sustainable products. We have seen similar enthusiastic feedback regarding how quickly clients can achieve results. For instance, Trent from Microba mentioned that Ginkgo's resources accelerated their drug discovery pace beyond what a traditional CRO could offer. Bob Reiter at Bayer highlighted that open innovation allows companies to access superior biological solutions more quickly. A particularly compelling example is Jasmina, CEO of Arcaea, who shared her journey from launching her company to presenting their first product just a year and a half later—an impressive timeline for biotech. This rapid turnaround is possible as startups can leverage Ginkgo's high-throughput automation instead of investing in expensive lab infrastructure. This model mirrors tech shifts in cloud computing that allowed early internet companies to avoid costly hardware investments. Looking at the inefficiencies within small biotech companies, we see R&D spending fluctuate dramatically over time, resulting in potential layoffs in tight capital markets. Our proposal is to allow scientists to access services as needed. For example, Prokarium's Kristen and Synlogic's Dave have highlighted how collaborating with Ginkgo propels their projects forward. If you're interested in using our platform, the first step is to visit our website. However, for those looking to quickly assess Ginkgo’s relevance to their projects, we launched services like Ginkgo Enzyme Services, which have been well received. Recently, we've introduced four additional services: Ginkgo Microbe Services, Ginkgo Cell Therapy Services, Ginkgo AAV Services, and Ginkgo RNA Therapeutic Services. Acquisitions like Bayer's Ag Biologicals R&D group and StrideBio enhance these offerings. StrideBio's work in gene therapy, particularly with AAV capsids, has generated significant interest since our acquisition. Our discussions are ongoing with several companies eager to incorporate these advancements into their products. With Ginkgo's automation capabilities and extensive experience, we're well-positioned to extract value from these assets, ensuring mutually beneficial partnerships. We also recognize our customers' desire to de-risk cell engineering projects while improving cost-effectiveness and speed. To address this, we've transitioned to a success-only payment model for our mature services. Customers pay only when we succeed in delivering results, which reflects a more engineering-focused approach to biological research. Finally, I'd like to highlight our progress in Biosecurity. As we navigate the current technological landscape, it's crucial to build robust biosecurity measures alongside the growing tools for bioengineering. We've expanded our biosecurity efforts, initially focused on COVID-19, to include international collaborations for monitoring public health threats. Our work with the CDC in airports exemplifies our commitment to innovative surveillance methods. In conclusion, I’m excited about the evolution of our platform and the feedback we've received from our customers. We're dedicated to using that input to enhance our offerings continuously while prioritizing safety as we expand biosecurity efforts globally. Thank you for your time today. Now, I'll hand it over to Anna Marie for Q&A.

Anna Marie Wagner, SVP of Corporate Development

Great. Thanks, Jason. We'll switch to Q&A in a few moments. Before we do, I wanted to get through a couple of housekeeping items. In my role, I respond to a lot of investor e-mails, and I'd like to make it easier for all our investors to benefit from the questions that are being asked. And there's been a couple of recurring themes. So I've added two new slides into the appendix materials that I'm hoping will be helpful. The first which Mark alluded to provides more clarity around stock-based compensation. And in summary, the vast majority of the stock-based compensation we've recorded since going public is related to shares granted prior to going public. That's been a common source of confusion. So, hopefully, that will help clarify that as well as provide some modeling tools around what's left. The second slide provides some additional details on stock sales by our founders. This data is all publicly available, but some of the market data providers don't accurately pull our share counts because they sometimes exclude different classes of shares. As you'll see on the appendix slide our founders still own over 400 million shares. That represents over 20% of the company. They did have some mandatory sell-to-cover transactions when their RSUs were settled and have put in place small 10b5-1 plans. But both of those are dwarfed by their core holdings most of which sit in illiquid Class B shares. So I'm hopeful that those slides are helpful. Now we'll move on to Q&A. As usual, I'll start with a question from the public and remind 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. It looks like everyone has managed to reconnect, so we'll go ahead and get started. The first question, as I mentioned, always comes from retail. This comes from Mark De on Twitter. Since the number of projects is the best leading indicator for future platform revenues, how do you feel about your original forecast of adding 100 projects for 2023? When looking at the pipeline of projects, are you on track?

Jason Kelly, CEO

Yes, I can address that. I'm currently in Qatar, just returning from dinner. I mentioned earlier that we have been significantly expanding our biosecurity business internationally, with one of our most successful sites being Hamad International Airport in Doha. We have a collaboration with the CDC where we collect wastewater and test for new variants. The flights to Doha do not overlap much with those to Atlanta, providing us with a broader data set for our biosecurity programs, and we appreciate our partners here. Regarding your question about the programs, one important point is that our percentage was 13% this quarter, which is down from last quarter. This is something we are monitoring. One challenge we're facing in large enterprise sales is that it can be somewhat unpredictable. Although these deals take longer to close, we have good visibility into our pipeline, which gives us confidence in our program count for the year. In reviewing the past year for trends impacting our ability to close programs, start-up companies, especially in sectors outside of biopharma biotech, such as industrial biotechnology, are struggling to access capital in the current tighter market. This is leading to longer deal closing times with those programs. However, we still view our platform as versatile, enabling us to pivot to sectors that are performing better, like biopharma. There is still considerable activity in biopharma from both start-ups and large companies. We have gained valuable momentum from the StrideBio acquisition and have a strong pipeline in cell therapy applications and mRNA therapeutics. I anticipate we will shift more towards biopharma while maintaining a robust sales pipeline, so I feel optimistic about the future.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Jason. All right. We'll take a question from analysts now. The first question I'll take comes from Rahul Sarugaser at Raymond James. So let me try to open your line here although we're actually having a bit of trouble. I may need to ask for a little IT support to give me permission to open the lines. And while we're doing that I'll go ahead and ask another question. This one actually coming from an employee. So for folks that don't know any time we do an earnings call the first sort of investor call that we take after our earnings call is with all of our employees. Our employees as a group are our largest shareholder. And we thought we might share some of their questions with you all as well. So this one came from an employee that chose to remain anonymous. We're increasingly talking about AI at Ginkgo. And so can you provide an overview of our AI and code-based strategy and how we're staffing those efforts?

Jason Kelly, CEO

Yeah. So I think this is actually a big deal. So I touched on this a little bit at Ferment, but one of the things that's happening is because of the impact of sort of ChatGPT in the sense that like large data, less generative AI models equals change in industries, you now have pretty much like every large corporation looking at what the impact of this is going to be on them. And that's auto companies, that's chip companies, media companies and it's also biotech biopharma companies ag companies and so on. And in order for a customer to use Ginkgo's platform they have to choose to make a change, right? So today, they have an internal R&D department doing work, and they're making products and everything else. And I'm saying change some of that spend some of those R&D dollars on our platform. As sort of like a sales motion they need to have a reason to want to change. And sometimes it's they're greedy to try to add a new product sometimes things aren't going well and they want to try something new. And sometimes something new comes along in the kind of in the atmosphere that makes them think they need to take a look. And that is what's going on with generative AI. So you have people saying hey, I think I should be looking at what happens if there's big data and models in my space. And the beauty of Ginkgo is we are a great place to generate huge data assets. And so I think AI is a core strategy. It is a very positive wind in our sails here at Ginkgo. In terms of how we're making use of it, well, we have this advantage that we have been over the last 10 years as we've done all these deals and so on accumulating a huge data asset. We've talked about this publicly many times our code base. That is beautiful data to train these types of models. So we're super excited about that. We're already seeing good results. You can see some of this in our webinars about how we do our protein engineering, but expect that to expand to a wider set of activities at the company. And I expect customers to come to us to get access to it.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Jason. All right. Rahul, I think we're all set. So I've just opened your line. Please go ahead.

Unidentified Analyst, Analyst

All right. Can you guys hear me?

Anna Marie Wagner, SVP of Corporate Development

Yes.

Unidentified Analyst, Analyst

Excellent. This is Michael Premion on for Rahul today. Thank you very much for taking our questions, and congratulations on such a successful Ferment event. That was a really spectacular display with some great reviews from your customers. So thank you for that; it was a pleasure to be there. My first question is about the overall IP strategy. I’m curious about how this year compares to last year in terms of how Ginkgo has been leveraging its existing code base for new cell programs versus doing new engineering. How much more is it drawing upon that code base now? Additionally, I would like to know the customer's attitude, especially since there was some significant pushback in the early days regarding Ginkgo's approach to holding on to the IP that you develop. Could you provide some insight on that?

Jason Kelly, CEO

Yes, I can address this. One of the main challenges we've faced with customers over the years has been their hesitation when it comes to funding projects. They often felt like they were investing in something that Ginkgo was exploring for the first time, and they were concerned about our rights to reuse those investments to build our business. Initially, we did engage in this model in several instances, but over time, as we’ve accumulated assets across different areas, the situation has changed. You can see this with the four services I announced at Ferment; each of those services now has a specific code base associated with it. When we approach a customer now, we’re not starting from scratch. For example, rather than saying, "I don’t have anything related to AAVs, but I think my robotics could help," which was the case about a year and a half or two years ago and made for difficult sales, I can now confidently state that all our infrastructure and high-throughput automation is applicable to AAVs. We can provide data to support this, along with access to high-quality capsids and additional findings from our previous work. This significantly aids our sales efforts. The most important impact is in our sales approach because customers, especially in biopharma, prefer to see relevant data demonstrating our experience in areas that interest them. Additionally, we have projects like the one with Lygos, where we can leverage prior work to expedite new projects by potentially years. There will likely be more examples of this as we continue to enhance our service offerings.

Unidentified Analyst, Analyst

All right. Thank you very much. I think as a follow-up this one will probably be for Mark. Around at the end of last year, we were waiting out some lumpy milestones. We're curious about the timing on that. I'm looking at the cell engineering revenue, where $1 million of the total $34 million was downstream revenue. Also looking at the appendix of the presentation today, where $13 million is non-cash consideration of the total $34 million. I wonder if you could just help us sort through those as the definitions and shed light on these things and then perhaps talk about those lumpy milestones.

Mark Dmytruk, CFO

Okay. So I'll take the two points in turn. First on the lumpy milestone. So really it's the same comment I think that we made on our last earnings call, which is yes, there were the two milestones that – at one point we had been expecting to hit in Q4, which spilled into 2023. And yes, we are still going after those two milestones. We believe the technical work on that is substantially complete. But I think as we had mentioned on the last call and this is still true, there are aspects of validating the completion of that work that is out of our control. It's dependent on both customer and some third-party manufacturing. And so, those are still in play, but timing is just uncertain on that. With respect to the second point that you made on non-cash considerations, so yes, first of all, the conclusion that substantially all of the revenue in the first quarter related to services revenue; that’s correct. The supplement in the appendix shows like you said the component of services revenue or total revenue that is non-cash. So we do in some cases, as you know, and we started doing this last year, we do sometimes take equity from a customer as part of the upfront consideration on a project. So, not just for downstream value share, but also for the upfront or the service fee consideration. And so, that's why we're giving you that additional sort of date point. Does that answer the question?

Unidentified Analyst, Analyst

It sure does. I appreciate that. I'll jump back in the queue.

Anna Marie Wagner, SVP of Corporate Development

All right, Mike. All right, Edmond Tu from Morgan Stanley. I've just gone ahead and opened your line.

Unidentified Analyst, Analyst

Hi guys. Thanks for taking my questions. Just to circle back on that point, Jason. How do you strike the right balance between leveraging the collective learning sort of code base for the benefit of an individual client versus making sure clients don't feel threatened that their secret sauce is being farmed out for the benefit of other customers? What safeguards do you have in place to make customers feel comfortable?

Jason Kelly, CEO

This is an important question and something we often discuss with customers. The key point is that any new intellectual property developed specifically for a customer’s application is exclusively licensed to them for that use. So, if you're creating gene therapy for a specific disease, you'll retain rights to the intellectual property generated for your drug, and it won't be available for competitors. However, we have a slightly different approach. If, for example, a capsid is used in an entirely different disease area or more broadly in pharmaceuticals, we prefer to retain the ability to reuse that asset. This often leads to discussions with customers about what is fair. Generally, we focus on assets that can be reused across various projects, such as capsids and specific internal sequences, which do not constitute the entirety of the drug but can significantly simplify the process of bringing multiple drugs to market. We strive to secure broad rights to these reusable components. For highly specific developments tailored to a customer, that becomes less of a priority. As we gather more assets over time, these discussions become smoother because I can demonstrate that we have most of what is needed for a project, and for the small part they contribute, we need them to agree on certain terms to proceed.

Unidentified Analyst, Analyst

Yes. Got it. That's very helpful. And then Jason, on a separate note, it sounds like you still feel like that the funding pressures are actually driving a push towards greater outsourcing. I mean clearly, we've seen the weakness get worse even with some of the CROs, now acknowledging weaker spend at mid-cap biotechs. So, I just wanted to understand, what insulates you more versus the traditional CROs.

Jason Kelly, CEO

Yes. To clarify, in industrial biotech, my perspective suggests we are facing pushback. We're not necessarily seeing increased outsourcing in industrial biotech; rather, there's a decrease in spending. This indicates heightened sensitivity in that area. However, regarding other sectors, the reality is that we haven't penetrated them deeply yet. If I were already serving all biopharma companies and they reduced their R&D spending by 30%, our earnings would be impacted accordingly. But the fact is, I've only engaged with a small fraction of the total biopharma companies. We have significant potential to attract new customers, which means we're not as affected by spending cuts at this stage. It is true that some parts of industrial biotech are reducing R&D spending, but that's not the case in biopharma, where we still have ample opportunities.

Unidentified Analyst, Analyst

Got it. Thank you for the color and the time.

Anna Marie Wagner, SVP of Corporate Development

All right. Thanks Edmond. All right, Gaurav, I've just opened your line. Feel free to go ahead.

Gaurav Goparaju, Analyst

Awesome. Thanks guys for taking my question. I know it's about midnight over there Jason, so I'll keep it quick. On the new 13 programs, right this quarter, are you guys able to break out that end market split or even the downstream potential or is that something that we should expect only on an annual basis?

Jason Kelly, CEO

Mark do you want to take that?

Mark Dmytruk, CFO

Yes, generally we will only update the downstream value share metrics discussed in the last call on an annual basis. We recently announced a large program with BI, which presents around $400 million in downstream milestone potential from that contract. The 13 programs we have are broadly diversified across various types of downstream value share. There is a significant number of royalty-bearing programs, along with some that are milestone-based and others that are equity-based. This is typical of our usual mix.

Gaurav Goparaju, Analyst

Yes, that makes sense. Thanks Mark. And then just one quick follow-up for me. On the new four service offerings, so just to make sure I understand it correctly, right? So, are these four new service offering capabilities Ginkgo previously couldn't address on the platform, or are they just a more structured and focused program version of what they worked like?

Jason Kelly, CEO

Yes, that's a great question. Ginkgo essentially operates on a broad platform that combines software, automation, and various genetic, intellectual property, and data assets available to scientists working on customer projects. Internally, this is how we function. When I approach a customer, I can showcase our 300,000 square foot facility and all the robotics we have. However, they often struggle to relate to that, as they are accustomed to traditional lab environments where scientists work manually. Therefore, our services are designed to communicate in a way that resonates with the customer. This is a sales goal for us, as we aim to clarify what we can offer in our field. For example, Ginkgo specializes in AAVs through our acquisition of StrideBio, which has attracted interest in our capabilities. Additionally, we have established partnerships with Selecta and Biogen. The acquisition of Stride also served as a marketing strategy within the biopharma sector to increase awareness about our offerings. As a broad platform, our total addressable market is substantial, but the challenge is that customers may not fully grasp our capabilities. Therefore, we plan to expand our services, creating as many initiatives as make sense for our clients. We will continue to explore and identify ways to help customers better understand how to utilize the Ginkgo platform.

Gaurav Goparaju, Analyst

Awesome. That’s clear guys. Thanks, Jason. Thanks everyone. And cheers. Talk soon.

Anna Marie Wagner, SVP of Corporate Development

Thanks Mark.

Jason Kelly, CEO

Thanks, Gaurav.

Anna Marie Wagner, SVP of Corporate Development

All right. Next question will come from Matt Sykes at Goldman Sachs. And then just a reminder to the other analysts on the call that if you'd like to ask a question please do raise your hand so that I know to call on you. Thanks so much. All right. Matt, your line should be open.

Unidentified Analyst, Analyst

Hi, can you hear me?

Anna Marie Wagner, SVP of Corporate Development

Yeah.

Ivy Kozlowski, Analyst

This is Ivy Kozlowski on for Matt. Can you provide any insights on how the success-only payments have affected your win rate with customers at this point?

Jason Kelly, CEO

I think this is an interesting concept. To clarify our main goal at Ginkgo, we aim to make biological engineering more accessible. Engineering implies having a clear set of principles to follow, like when building a bridge or a microchip. However, when conducting research on cells, it's often seen more as science rather than engineering, where outcomes can be uncertain. We are working towards a more engineering-focused approach. We've observed that for specific projects, particularly in protein discovery, enzyme optimization, and certain protein production, it has started to resemble engineering more closely. We have experienced notably high success rates and can anticipate which projects will be challenging and which will be simpler. We found that even when we communicated our confidence without showing data, some customers hesitated to invest in research projects. Now we are framing these initiatives as engineering projects with payments based on delivery, and this strategy is proving effective. We currently have several projects in the sales pipeline that were transitioned to this model since our announcement. It's a promising development, and although there are risks involved, we believe customers are gaining real value from this approach. I feel optimistic about our likelihood of success and our technical achievement in these areas.

Ivy Kozlowski, Analyst

Yeah. That’s super helpful. Thank you. And then …

Jason Kelly, CEO

One last point. We are also focusing on shorter projects, aiming for those that last around six to twelve months rather than two or three years. We want to avoid lengthy projects that we have to break down into smaller, success-based segments. I prefer not to take too much risk on projects where we need to wait to see if we will be technically successful before getting paid.

Unidentified Analyst, Analyst

Right. Yes, that definitely makes sense. And then on Biosecurity revenue came in much higher than our expectations. I know you talked a little bit about it, but can you talk to your updated strategy as it relates to Biosecurity potentially becoming a more durable part of revenue than we might have previously expected. I think you said 20% is recurring but how should we think about the work down of the nonrecurring part and then also a long-term growth rate of the recurring part.

Mark Dmytruk, CFO

I will start by clarifying the numbers. In the quarter, about 20% of our Biosecurity revenue came from what we expect to be more stable sources. This does not include the K-12 school COVID testing programs. We did not adjust our guidance on Biosecurity, so in the upcoming quarter, we will still see some revenue from K-12 testing. However, we anticipate a significant decline in this revenue after the second quarter. We have little to no expectation for K-12 business in the second half of the year. The first quarter had solid results due to K-12 revenue, and we expect a bit more in the second quarter before a drop-off. Moving forward, most of the Biosecurity revenue will come from new sources. This means a large portion of the projected $100 million will be realized in the first half of the year, after which we will reset our expectations on a lower revenue base that we expect to grow over time, primarily driven by these new revenue sources.

Jason Kelly, CEO

And just a comment on what those will be that's around things like these airport programs. These what we consider to be like persistent monitoring and I think there's a few different places that could happen, but we're probably most excited about what we're seeing in the airports.

Anna Marie Wagner, SVP of Corporate Development

Great. Thank you.

Jason Kelly, CEO

Thanks.

Anna Marie Wagner, SVP of Corporate Development

So a final call if there are any other questions to raise your hand but we are just about at time. And so for once Ginkgo hosted a call that didn't run over new KPI for me. And we'll let Jason go catch this next flight. Appreciate everyone joining us this quarter and we'll see you next time.

Jason Kelly, CEO

Thanks, everyone.