Earnings Call Transcript - DNA Q2 2022

Anna Marie Wagner, SVP of Corporate Development

Good afternoon. This is Anna Marie Wagner, SVP of Corporate Development at Ginkgo Bioworks. As usual, I'm joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. We thank you for joining us and we look forward to providing you with an update on our last quarter. 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. We'll follow our standard agenda for these calls, providing an update on our financial progress, while also taking time to dig deeper on our strategic priorities. We’ll end with a Q&A session and I’ll take questions from analysts, investors, and the public. As usual, you can submit those questions to us in advance via Twitter, #GinkgoResults, or e-mail at investors@ginkgobioworks.com. All right, over to you, Jason.

Jason Kelly, Co-Founder and CEO

Thanks, Anna Marie. So we always start with this slide because our mission drives much of our long-term strategy and even many day-to-day decisions here at Ginkgo. Very simply, we want to make biology easier to engineer and we do that by scaling our platform for programming cells. I like this slide here as a summary of the way our business works at Ginkgo. Our customers bring us ideas for what they want our cell to do. And we use our platform to engineer a cell that meets the customer's specifications. Our platform consists of two pieces: our Foundry and our Codebase. Our Foundry is an automated lab. I'm sitting here in Boston in a lab today, and we believe the key value proposition for our customers is that we're able to turn what's typically an underutilized fixed cost investment for most companies, in other words, sort of a physical R&D lab in their facility, into a highly efficient variable cost for them. We can invest at Ginkgo in large-scale infrastructure so that our customers can benefit from the scale economies we generate by having one set of infrastructure serving many customers instead of just scaled for one. We'll spend some time today talking about our pending acquisition of Zymergen, which we believe will drive our Foundry capabilities. The other asset is our Codebase, it's a learning asset that accumulates as we run more experiments, includes physical strains, data, various tools for programming cells. These learnings can help us avoid having to reinvent the wheel on every new program. In other words, it can help keep us out of the lab in many cases from having to do that lab work. If we have something we can put to work from a previous project that's relevant to a new one, that can increase the probability of program success and reduce the total amount of work and, therefore, cost of these programs. And for the potential customers tuning in today, our whole model is to make this platform available to you as fast as we can. So if you see a project we've done that's similar to what you are interested in or a technology we've acquired or highlighted, please do reach out, you can get access to these technologies and have them applied to your products in a matter of weeks. So I want to give a quick preview into some of our recent highlights before turning it over to Mark to walk through our detailed quarterly financials. One of the most important metrics for our success is seeing new customers choose to work with Ginkgo for their R&D efforts. In the second quarter, we added 13 diverse new cell programs including with Novo Nordisk and Sumitomo Chemical. We're grateful for these customers' trust and believe these additions are further validations of the value of our cell programming platform. As a small aside, you will note we're only disclosing here three customer names on this page compared to the 13 new cell program additions I mentioned. We often get asked whether we put out a press release for every new program; people want us to be doing that. The short answer is we don't do that. We follow our customers' lead here, and sometimes our customers choose not to announce when they may want to keep a program confidential because it's a new area they're moving into or it might be a new program that's part of one of our ongoing collaborations, and they might not consider it enough of a big deal to announce it. The big utility of announcements is that they help educate our potential customers on the kinds of work we do at Ginkgo. It helps them realize that Ginkgo's platform is relevant in their market. So basically, it’s good marketing material. We do push for them when we can, but it's not always possible with the customer. In biosecurity, we executed very well through the remainder of the school year and have achieved $247 million of year-to-date revenue, while our K-12 testing business has been quieter over the summer just because many schools are closed as expected. We're very excited to be seeing traction across longer-term biosecurity opportunities including being awarded a contract from the CDC to expand our traveler-based COVID-19 monitoring services, with an overall potential to exceed $61 million to Ginkgo and its partners based on CDC program options and public health priorities. I'm really proud to see that coming in. It's really exciting. We'll talk more about it coming up. But biosecurity has been a core focus for us over many years and has a deep relationship with our cell programming business. I'm becoming even more excited about our positioning in biosecurity, well beyond what's happening in K-12. We've had several other significant updates since our last call. We received our third equity milestone payment from Cronos based on work we delivered to them. We're proud of our partnership with Cronos and our ability to realize meaningful downstream value share from those programs. Of course, in July we announced the pending acquisition of Zymergen and the Bayer Agricultural Biologicals assets. We'll talk a lot more about those transactions in just a moment. We also acquired certain assets from Bitome, which is developing real-time metabolite monitoring that we hope will help accelerate product development timelines across our cell programs. Finally, we are thrilled to have added Dr. Kathy Hopinkah Hannan to our board. She brings a wealth of experience and compliments our other board members quite nicely. So, welcome, Kathy.

Mark Dmytruk, CFO

Thanks Jason. Our second quarter financial results reflect strong growth driven by solid execution in both our cell programming and biosecurity businesses. Total revenue in the second quarter of 2022 increased to $145 million, representing growth of over three times the second quarter of 2021. I'll start by discussing our cell programming business, which we describe as our Foundry. We added 13 new cell programs to the Foundry platform in the second quarter of 2022. As a reminder, our new cell program count is a key performance indicator that we're particularly focused on adding more programs; it benefits us strategically by driving our scale economics, diversifying customers and programs, accumulating Codebase, and accumulating potential sources of downstream value share. We supported a total of 73 active programs in the second quarter of 2022, across 36 customers on our Foundry platform. This represents substantial growth and diversification in programs relative to the 46 active programs in the second quarter of 2021, with strong growth coming from the pharma and biotech industry, as well as the food and ag industry segments. Foundry revenue was $44 million in the quarter, more than double the second quarter of 2021. Foundry revenue benefited from downstream value share revenue related to the previously announced achievement of an equity milestone for Cronos. We recognized $18 million of revenue in connection with this milestone in the second quarter. As we have previously discussed, at our stage of business, we continue to expect this type of revenue lumpiness as milestones relating to various customer collaborations may be earned in certain quarters. Now turning to biosecurity. Our concentric offering continued to perform extremely well in the second quarter of 2022, generating $100 million of revenue in the quarter. Biosecurity revenue consists primarily of product and service revenue from our end-to-end COVID testing offering, and the growth was driven primarily by K-12 pool testing, which was elevated in Q1 but continued to deliver strong volumes through the remainder of the school year. As expected, we have seen revenue for our K-12 programs decrease substantially through the summer vacation months starting in June. Biosecurity gross margin was 36% in the second quarter, an approximately six percentage point decline from the prior quarter performance. As volumes fell from Q1, the infrastructure we maintain to serve our clients, for example, nursing contracts that have minimum hour requirements, was less efficient and resulted in this lower gross margin. We continue to be very pleased with our performance in biosecurity, and while we will continue to be conservative in our guidance given the inherent uncertainty in this area, we are encouraged to see government investments being made in long-term biosecurity infrastructure. 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. R&D expense, excluding stock-based comp, increased from $52 million in the second quarter of 2021 to $72 million in the second quarter of 2022. R&D expense related to the Foundry increased as expected year-over-year driven by expansion of Foundry capacity and increased breadth of capabilities to support both current and future collaborations. G&A expense, excluding stock-based comp, grew to $48 million in the second quarter of 2022 compared to $20 million in the second quarter of 2021 as we invested in business development and all other G&A functions to support the growth of new customers and programs, a higher level of Foundry activity, and our biosecurity offering, along with our expenses incurred in becoming a public company. We also incurred significant legal and other professional fees related to M&A, largely due to the two very significant transactions we announced in July. Net loss, it is important to note that our net loss includes a number of noncash income and/or expenses as detailed more fully in our financial statements. Because of these noncash and other nonrecurring items, we look to adjusted EBITDA as a more indicative measure of our profitability. Adjusted EBITDA in the quarter was negative $23 million compared to negative $38 million in the comparable prior year period. A full reconciliation of EBITDA is provided in the appendix to this presentation and in our earnings release. Adjusted EBITDA was favorably impacted by the growth in our biosecurity business in the quarter. And finally, CapEx in the second quarter of 2022 was $10 million, reflecting Foundry capacity and capability investments. CapEx has continued to be impacted by the timing of equipment purchases and projects, and so we would expect to see significantly higher CapEx in the second half of this year. One final comment on stock-based compensation expense. As a reminder, we provided extensive disclosure in our Q4 earnings release relating to GAAP accounting for the modification of restricted stock units that had been issued prior to us becoming a public company. Our Q4 disclosures indicated that as of December 31, 2021, we expected a further $2.2 billion of stock comp expense to be booked in 2022 and beyond relating to this adjustment. The calculation of which was based on the stock price of $13.59 on November 17, 2021. Substantially all of the $607 million stock compensation expense in the second quarter relates to this ongoing wind-down, and we continue to expect most of the remainder to be booked in the rest of 2022 with a small tail that extends into 2023 and beyond. Now I'd like to provide some commentary on our revenue outlook for 2022. We continue to expect to add an incremental 60 new cell programs with diversity in end markets as well as between new and existing customers in full year 2022. We are increasing our full year guidance for total revenue by $50 million over our prior outlook to a range of $425 million to $440 million. We are reiterating our Foundry revenue outlook to be in a range of $165 million to $180 million for full year 2022. We continue to have line of sight to material downstream value share in the second half of the year. I do want to remind folks again that just as we saw in both our first and second quarter results, based on the specific technical progress achieved, stage of maturity of our programs, and the timing of any milestone payments, we can see lumpy Foundry revenue on a quarterly basis. Our annual guidance represents our current forecast of that timing for the remainder of the year. Based on our strong performance in biosecurity in the second quarter, we now expect biosecurity revenue to be at least $260 million for full year 2022, an increase of $50 million from our prior outlook. As was the case throughout 2021 and the first quarter of 2022, there still remains significant uncertainty in the biosecurity market in general. Although several state and government programs have elected to extend K-12 and community testing programs, there is uncertainty about the actual level of testing in the next fiscal school year. Ginkgo is actively working on new opportunities in biosecurity, including internationally. However, the timing and amount of revenue from these opportunities is uncertain. In summary, we are pleased with our overall progress. We are executing on a diverse range of existing programs and new program growth on the Foundry platform. Another strong quarter from biosecurity is contributing positively to cash flow, and the company's total cash position of approximately $1.4 billion remains strong. And now, Jason, back to you.

Jason Kelly, Co-Founder and CEO

Thanks, Mark. This is another strong quarter for Ginkgo. We executed well in both our cell programming and biosecurity business. I’m really pleased we were able to revise our 2022 guidance higher for two quarters in a row now. Okay. So we spoke with you all recently about the pending Zymergen and Bayer transactions. I encourage you to go watch that call on YouTube if you want the full details. But I do want to spend a bit of time on these transactions today as we expect that they will meaningfully benefit our platform and our customers. I also want to address a key focus area, both for the market and for us here at Ginkgo, which is cash runway and our path to profitability. Finally, we recently released our inaugural sustainability report, and I want to spend some real time there, because ESG is not a box-checking exercise for us here at Ginkgo. It is fundamental to our strategy. So rather than sort of publishing that report and calling it a day, I did want to spend some time walking you through our approach. So I'm super excited about both the planned acquisitions of Zymergen and the agricultural biological assets from Bayer. We've had a long history of successfully acquiring and integrating technologies into Ginkgo's platform, and we're excited about the capabilities that we expect these two new acquisitions will provide for our customers. I’ll dig into the strategic rationale for these two transactions in just a minute. But I want to remind you of the basics. The Zymergen acquisition is really focused on bringing on strong Foundry capabilities and accelerating our technical roadmap at Ginkgo. The deal is structured as an all-stock transaction with a fixed exchange ratio, representing approximately 5.25% pro forma ownership of Ginkgo following the transaction. And as you’ve heard me say many times previously, we have long respected the Zymergen team and the technology approach that they use, which is very complementary to ours at Ginkgo. We’re super excited to welcome them into the company. The Bayer acquisition is quite different, and we expect it will result in the development of an entirely new capability and offering at Ginkgo in the agricultural biological space and the launch of a new collaboration with Bayer, which builds significantly on our partnership over the past five years. We’ll be acquiring from Bayer their fully owned R&D facility in West Sacramento, along with its strain collection team and expertise for $83 million, which we can pay in cash or stock at our choosing. As I mentioned, we’re also entering into a new multiyear collaboration with Bayer, under standard terms, including upfront R&D service fees and with the potential for downstream value in the form of royalties. We’re excited to grow our relationship with Bayer, and we celebrate their leadership in embracing outsourced R&D to automated lab platforms like Ginkgo, which we believe is an inevitable trend across the biotech industry. Actually, yes, I do think it’s worth giving a bit more color on this. We see things sort of like the beginnings of the cloud compute industry. Companies that had large in-house IT departments with big fixed cost in-house server infrastructure had to go through a transition process where they moved that to external cloud service providers. Bayer is making a decision to do something similar here by divesting their in-house microbial engineering work in ag biologicals. They're essentially divesting their in-house microbial team and their in-house labs. That's what we’re acquiring. And it helps this transition for Bayer to do this that we’re bringing on members of their own team, their current team, and putting their expertise on top of our robotics at Ginkgo. In my view, companies should start to plan for this transition. I think many of the companies out there doing microbial engineering today are likely overdue in making this shift to highly automated lab platforms instead of trying to do this R&D slowly by hand in their in-house labs. So I’m really excited to see that signal coming from Bayer, and I hope to see more of it in the industry. To put these transactions in context a bit more, it’s kind of helpful to frame them in terms of the vertical and sort of horizontal impact of these two transactions. Bayer is about expanding our capabilities in the ag biologicals vertical. I spent some time last quarter describing the scope of the agriculture opportunity. It’s a massive market. It’s central to our lives. We desperately need more sustainable and efficacious solutions in ag right now. The West Sacramento assets are expected to bring important capabilities outside of strain engineering. This is why I think this is quite complementary to what we currently have strengths in at Ginkgo, including translational research capabilities such as in planta assays to be able to test in the plant, pilot scale fermentation, and formulation expertise. We believe having a world-class end-to-end development platform is going to significantly improve our ability to serve customers in the ag space. Not only will we be working deeply with Bayer across nitrogen fixation and crop protection, in areas like carbon sequestration, we’re also excited to work with new customers on the platform. In addition, we expect this transaction to relieve some of the limitations we’ve had working in ag biologicals due to the structure of our original relationship with Bayer and our joint venture Joyn. This allows us to work much more easily with new customers on our platform at Ginkgo in the ag space, which we believe will represent a compelling revenue opportunity for us. By contrast, the Zymergen acquisition is really about improving our horizontal capability. Zymergen pursued a very different business model to Ginkgo. As such, the market is focused much more on their product portfolio. But at Ginkgo, we’ve long admired what their team built in lab automation and technology. In particular, they developed automation architecture designed to optimize for flexibility. Flexibility is typically the enemy of scale when it comes to automation. Some of the technologies they built, we believe, can drive significant efficiencies at Ginkgo, and we’re excited to develop those and pass that value on to our customers. Additionally, Zymergen’s team fits well into Ginkgo's existing hiring plans, and we expect that adding them will accelerate our growth plans. Ultimately, the Zymergen transaction will significantly improve our platform and benefit our customers in the form of lower program costs and increased probability of program success. We'll keep you all updated as these transactions progress. I want to cover that background quickly in case you missed our conference call on July 25. For details on those transactions, do watch the YouTube video on our IR page. I think it’s worth seeing. So, I want to address a couple of points. First, I want to be clear that we expect to maintain our runway with Zymergen and Bayer in the fold. We underwrote and structured the transactions with that priority in mind. For Zymergen, we expect the pro forma cost structure to be well below that of the combined stand-alone companies. Zymergen is continuing its cost and program rationalization and expects its burn rate to decrease significantly in the near-term. More importantly, while we’re excited that the Zymergen team is joining Ginkgo and will accelerate our hiring plans, these additions should meaningfully offset expenses that we would have otherwise budgeted. Regarding Bayer, while this is a brand-new capability and incremental expense, we expect the R&D service fees from this upcoming contract with Bayer alone to significantly offset the expenses that we’re taking on. The multiyear Bayer anchor contract is expected to provide a strong base of demand, and any fees associated with new ag customers on the platform, which we hope to get, would present upside to that outlook. So, together, we feel we’re in a very strong financial position. We have nearly $1.4 billion of cash on the balance sheet. We’re able to minimize the incremental recurring expenses associated with the two transactions described here. And most importantly, these deals enhance our growth opportunities. In the ag vertical, we can grow revenue at Bayer and other potential customers. With Zymergen's improvements to our platform, we expect to see increased efficiency and probability of success, which gives us better unit economics, NPV per program, and positive feedback on bringing new programs to the platform. In other words, the most important thing is we continue to invest in Ginkgo to make it better for our customers and drive growth. And that’s what we’re doing here. As an aside, I want to be clear that in our modeling, we made pretty conservative assumptions about certain specific items in the transaction. Zymergen plans to explore strategic alternatives for its advanced materials and drug discovery businesses preclose. This would be Zymergen’s process. We’re supportive and think we can help because of our history at Ginkgo of launching and forming companies. An outright sale of a business unit could create additional cash proceeds and reduce operating expenses. The spinout could reduce costs and create a new customer for Ginkgo, providing opportunity for additional upside through appreciation of equity holdings that we would have. We also have a deferred lease liability largely in connection with its new headquarters in Emeryville. We've assumed that liability stays with Ginkgo. However, we’ll be actively evaluating real estate portfolio rationalization, and any successful effort to consolidate the real estate could represent meaningful upside and further reduce cash burn. I'm outlining these examples not to promise that they're going to happen, but just to highlight that while we're not counting on these items occurring, there are ways we can improve the Zymergen deals' financial case. Cash runway is critical and keeping that margin of safety is important. While we built Ginkgo over the years, this has been a very important part of my job. The market is also focused on profitability, and that's a crucial topic for me. You'll see us talk about our paths to reaching operational profitability more in future earnings calls. This is something I'm spending increasing time with the team on internally. But today I want to highlight some of the structural levers we have to help us based on how our business model works at Ginkgo. I've talked about some of these before, but this level of optionality is quite useful. There are many ways to tackle our mission of making biology easier to engineer, and depending on what we run into, I want to be able to adjust our approach. The first of these levers is platform scale, which we've emphasized in previous earnings calls. More than just growth for growth's sake, a bigger platform is actually better for our customers and better for us. It improves our unit economics, much like a larger manufacturing plant would help a semiconductor or automotive company. As we build bigger foundries, our costs fall, ultimately driving company-level profitability while allowing us to offer lower costs to customers and improving our program margins. Additionally, the learnings we gain as we execute these programs drive efficiencies. If we do one project and another comes along that's similar, it requires significantly less work for us. Importantly, it also has a higher probability of technical success, which our customers love. Knowing that better outcomes for customers drive downstream value share for Ginkgo flows through at high incremental margins. But scale is just one part of the equation. We can also adjust the types and structures of the programs we choose to take on, adjusting risk sharing between us and our customers on program success. We can prioritize upfront fees rather than downstream value share when negotiating deals. These deals tend to be custom, and we can choose to adjust the customer mix based on risk sharing. The macro environment today is more challenging on capital raise than nine months ago, so it's nice to have the option to lean into upfront payments to preserve our margin of safety and accelerate our path to profitability. Another lever is program choice. We can direct our sales team toward programs with a higher probability of success or lower expected effort. We've had promising traction with our customers by introducing cell development kits, our analog to software development kits, which are used by programmers to develop new software apps. These CDKs encourage customers to go in that direction, creating more standardized programs and consistent program cost coverage. However, this trade-off means we may not take on some custom jobs. It's worth noting that we don't have much control over the timing of downstream value share, which often depends on customers bringing products to market. We understand this can be frustrating for those trying to model our revenues, as evidenced by our recent milestone achievement from Cronos, which positively impacted Foundry revenue. While we expect to hit our downstream value share milestones, slipping timing can lead to revenue lumpiness.