Earnings Call Transcript - DNA Q3 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 look forward to providing you with an update on the 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. As usual, 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. You can submit those questions as usual to us in advance on Twitter, #GinkgoResults or e-mail at investors@ginkgobioworks.com. All right, over to you, Jason.

Jason Kelly, CEO

Thanks, Anna Marie. So, we always start with this slide because our mission drives much of our long-term strategy and even many of the day-to-day decisions in the company. So, very simply, we want to make biology easier to engineer at Ginkgo and we do that by scaling our platform for programming cells. So, what does that look like, right? We work with our customers to define what they want to develop. In other words, the specification for the cell they want to engineer. And this is a key idea. We are operating our platform as a B2B service to enable our customers to develop end-products for consumers. Our platform consists of two assets, our foundry and our code base. Our foundry is an automated lab. The key idea here is that we're able to turn what is typically an underutilized fixed cost investment for most companies, in other words, the sort of physical R&D labs that our customers might have in their facilities, into what's now for the customer a variable cost available to them as a service. This attribute is particularly attractive to our customers in a more challenging economic backdrop, especially small companies that might not even need to build these facilities in the first place. Being able to turn R&D spending on and off is a benefit. Our customers also benefit from the scale economics that we can generate as we invest in our platform. Our code base is a learning asset. It accumulates as we run more experiments and includes physical strains, data, and various tools for programming cells. We can reuse these learnings in incremental programs, which in turn increases the probability of program success and reduces program cost for customers. I know some potential customers may be listening right now as well as you follow our new program announcements and the new capabilities that we're building both organically and through acquisitions. We do have four acquisitions that closed just this quarter. Please do reach out. We'd love to work with you. And, again, we do operate as a service business. It's very easy to get on the platform. We'd love to get you on the platform. Okay. Before I turn over the call to Mark to discuss our financials, I do want to highlight a few recent highlights at the company. We continue to focus on attracting new programs to the platform. We are pleased to add 15 new programs in the third quarter. I specifically want to highlight our Merck collaboration announcement because we continue to see really strong momentum in the pharma and biotech vertical. Here, we were able to leverage our fungal strains and other expertise to win an enzyme development project with a blue chip pharma customer with up to $144 million in milestone payments. In biosecurity, we executed well as the school year started. Additionally, we are once again increasing our financial guidance for this business. More importantly, we continue to see real traction across our long-term strategic initiatives. I’ll have more to say on that topic later in the call as well. Finally, we closed four acquisitions in October, and I’d like to give a special shout-out to the Ginkgo team and the new team members from the acquired companies. This is an enormous lift for a company Ginkgo size, and the process went amazingly well. Importantly, we closed the Zymergen transaction more quickly than we initially anticipated, which presents a real strategic advantage for us. We completed the Bayer acquisition, strengthening our capabilities in the agricultural biologics vertical and also announced two smaller transactions; Circularis, which has a circular RNA and promoter screening platform that will help drive our work in cell and gene therapy, and Altar, a longtime partner of ours that has a screening platform that will facilitate adaptive laboratory evolution. These technologies strengthen and broaden our capabilities, and we’re excited to welcome these teams to Ginkgo. I think our recent M&A activity demonstrates our ability to play offense in the current market environment, while still thoughtfully managing our cash balance and multi-year runway. That’s something you’ve heard me talk about before, and I consider it strategically important for the company to maintain that. Now, we won't be able to do a deep dive on our biopharma work this quarter, but I do want to highlight some recent results we shared at the Society for Immunotherapy of Cancer conference last week, just here in Boston, where we received a great reception from biopharma companies regarding the data. The ability of a CAR-T, which is a type of immunotherapy for cancer, to persist post-administration in a patient and continue to kill tumor cells is partly driven by the signaling domains of the CAR. What we did was build a 10,000 member CAR library. We introduced that library into primary human T cells to look for combinations of signaling domains that would improve on the challenge of T cell exhaustion, which is a significant challenge in the field. We tested these by serially challenging the CAR-T cells both with hematological and solid tumors and saw some nice results, including a number of designs that outperform canonical CAR signaling domain designs in head-to-head comparisons in our assays. We’re very happy to dive in on this more deeply with interested parties. This internal work showcases the advancements we've built over the last four years as we expanded our foundry capabilities into mammalian cell engineering. This is not us developing a new therapeutic of our own, but it demonstrates to customers what the platform is capable of. Expect to hear more from me on the applications of the platform in cell and gene therapy. This is a great time to talk to us if you're a biopharma company. Everything you see here is available as a service today to accelerate your drug development efforts, and we will be sharing more detail on all our biopharma platform capabilities at the JPMorgan conference later this year or early next year. That's a quick overview of our recent highlights. With that, I want to hand it off to Mark to walk through our third quarter financial performance.

Mark Dmytruk, CFO

Thanks, Jason. Our third quarter financial results reflect solid execution in both our self-programming and biosecurity businesses. Total revenue in the third quarter of 2022 was $66 million, representing a decline of 14% compared to the third quarter of 2021, primarily due to a lump sum equity milestone in foundry revenue in Q3 last year. We've discussed previously that quarterly lumpiness is inherent in foundry revenue, which you'll see when reviewing the past six quarters sequentially. That said, we're very pleased with how total revenue is landing on a year-to-date basis. I'll begin with the discussion of our cell programming business. We added 15 new cell programs to the foundry platform in the third quarter of 2022. As a reminder, our new cell program count is an important long-term value driver. We supported a total of 85 active programs in the third quarter of 2022 across 43 customers. This represents substantial growth and diversification relative to the 54 active programs across 27 customers in the third quarter of 2021. We continue to see strong growth from the pharma and biotech industry as well as food and agriculture segments. Foundry revenue was $25 million in the quarter, down 29% compared to the third quarter of 2021. The third quarter of 2022 did not include any large milestone payments, while the third quarter of 2021 foundry revenue benefited from downstream value share revenue related to the achievement of an equity milestone for Cronos. Now, turning to biosecurity. Our Concentric offering continued to perform well in the third quarter of 2022, generating $42 million in revenue in the quarter. Biosecurity revenue consists primarily of product and service revenue from our end-to-end COVID monitoring services, with the largest driver being K-12 testing. Biosecurity is performing ahead of our expectations as COVID monitoring services have shown durable demand, evidenced by schools reopening and resuming testing in late Q3, and other entities, such as the CDC, extending contracts. We're also encouraged by government investments being made in longer-term biosecurity infrastructure. Biosecurity gross margin was 41% in the third quarter, which is an approximately 5 percentage point increase from the prior quarter's performance. The sequential increase in gross margin percentage was driven partly by favorable revenue mix. I'll now provide more commentary on the P&L. These figures exclude stock-based compensation expense, which is shown separately. R&D expense, excluding stock-based compensation, increased from $53 million in the third quarter of 2021 to $73 million in the third quarter of 2022. R&D expense related to the foundry increased as expected year-over-year, driven by the expansion of foundry capacity and increased breadth of capabilities to support both current and future collaborations. G&A expense, excluding stock-based compensation, grew to $59 million in the third quarter of 2022, compared to $29 million in the third quarter of 2021. We invested in business development and all other G&A functions to support the growth of new customers and programs, as well as a higher level of foundry activity, biosecurity offering, and public company requirements. We also incurred approximately $12 million in transaction and integration costs, primarily related to the four transactions we closed in October. In this environment, we are very focused on containing operating expense increases to areas that are customer-facing and that drive growth, such as business development and initiatives that will drive foundry productivity. In Q4, you will also see the OpEx impact of the two large acquisitions we just closed. We will of course report on that inorganic impact in detail when we report our Q4 results, but at a high-level outline, the new run rate OpEx related to the Bayer transaction is expected to be largely offset by the revenue from our new collaboration with Bayer. The new run rate OpEx related to the Zymergen transaction is largely a pull-forward of spend that we would have incurred organically in 2023 and 2024 to build these capabilities. We will also incur significant one-time transaction costs and near-term integration costs, particularly related to the Zymergen acquisition. As Jason discussed earlier, we closed Zymergen with a significant cash balance, which significantly mitigates the impact of the above spend. It's important to note that our net loss includes several non-cash income and/or expenses, as detailed fully in our financial statements. Given these non-cash and other non-recurring items, we look to adjusted EBITDA as a more indicative measure of our profitability. Adjusted EBITDA in the quarter was negative $70 million, compared to negative $18 million in the comparable prior year period. A full reconciliation of adjusted EBITDA is provided in the appendix to this presentation and in our earnings release. The adjusted EBITDA declined year-over-year due to the decline in revenue and increase in operating expenses. Finally, CapEx in the third quarter of 2022 was $13 million, reflecting foundry capacity and capability investments. We expect an increase in CapEx in Q4 relative to previous quarters as we complete certain projects, including our bioworks seven facility. But in general, we are applying the same discipline to CapEx investments as we are to OpEx increases. One final comment on stock-based compensation expense; we provide extensive disclosure in our Q4 2021 earnings release relating to the GAAP accounting for the modification of restricted stock units issued prior to becoming a public company. Substantially all of the $563 million in stock comp expense in the third quarter relates to this ongoing wind down, and we expect significantly smaller amounts to be booked in the fourth quarter and in 2023 and beyond due to this wind down. Now, I'd like to provide some commentary on our refined outlook for the full-year 2022. We expect to add an incremental 16 to 21 new cell programs in the fourth quarter for a total of 55 to 60 for the full-year 2022. This guidance reflects robust growth, as we are almost doubling our new program additions year-over-year, despite a challenging economic climate. Jason will discuss our thinking further in providing a range on new programs later in the call, but we are encouraged by the depth and quality of our sales pipeline. We are increasing our full-year guidance for total revenue by $35 million to $40 million over our prior outlook to a new range of $460 million to $480 million. We are revising our foundry revenue outlook to be in a range of $150 million to $170 million for the full-year 2022. When we provided our initial full-year 2022 guidance in March, we explained that the range was partly dependent on the timing of the downstream value share, and that we would update you all as we learned more. Now that we’re closer to year-end, we have a better sense of the potential timing of certain specific events. Our previous guidance included revenue in 2022 from several discrete milestone payments, three of which we have not yet earned. The low-end of our new guidance range assumes that we receive one of those remaining milestone payments in 2022, with the remainder anticipated in 2023. The upper-end of the new guidance range assumes that we received all three remaining milestone payments in 2022. While this reflects our best estimate at this time, there is still some risk with respect to the achievement of any one or all three milestones. However, based on our significant technical progress to date, we remain highly confident that we will achieve them in the relatively near term. The guidance revision exemplifies the lumpiness that can arise from downstream value share timing at a company of our size. On biosecurity, based on our strong performance in the quarter, we now expect biosecurity revenue to be at least $310 million for full-year 2022, an increase of $50 million from our prior outlook. As was the case throughout 2021 and the first half of 2022, significant uncertainty persists in the biosecurity market in general. Despite the increase in testing volumes at the start of the fiscal school year relative to summer levels, visibility into near-term volumes remains limited. More importantly, we're seeing traction in our broader biosecurity efforts, including passive monitoring and international programs, though this remains an emerging business and is not yet a meaningful contributor to our guidance. In summary, we're pleased with our overall progress. We are executing on what is now a diverse portfolio of 85 programs on the foundry platform. Biosecurity continues to perform well, and the company's total cash position of over $1.3 billion remains strong. And now, Jason, back to you.

Jason Kelly, CEO

Thanks, Mark. I wanted to follow up with a quick comment on our revised guidance. As we approach the end of the year, we have a much better idea of the timing on binary events like program launches and milestone payments compared to when we guided in March and tried to predict the whole year ahead of us. Just as we’ve been updating on the biosecurity side, if we have solid reasons to update you all, we want to share that information on the cell engineering side as well. Establishing our trust with you all as we launch as a public company is important. That said, the team at Ginkgo is aggressive, and we're motivated to hit the high end of the range we've provided, and I do think we have some space to pull that off. We've spoken to you a couple of times about why we're so excited to be acquiring Zymergen, as well as the Bayer Biologics Group. The Bayer deal closed around when we expected, while the Zymergen deal closed much earlier than expected. I want to explain why I think that early close is such a big deal strategically. I also want to discuss program additions to highlight the impact on scaling our platform and as a reminder of the significant value potential from downstream economics on those programs. Sometimes that gets lost, so I'd like to highlight it. Lastly, I’ll update you on our progress in biosecurity as it expands beyond K-12 COVID monitoring. We’re seeing really encouraging signs there. So, let’s dive in. As you may remember, we expected Zymergen to close in Q1 2023, but instead, we closed last month. The faster timeline here means that Zymergen brought in more cash, and we can start working immediately on the potential upside opportunities. At close, Zymergen came in with over $100 million in cash, even after accounting for all transaction-related expenses, including severance, bonus acceleration, advisory fees, and insurance premiums. You can think of that as a truly net cash number. As we discussed, there are a couple of discrete items that represent potential upside to our base case. While we won't continue to market Zymergen's products independently, we don’t expect to invest greatly in those. However, certain more advanced products, such as the functional barriers and 3D printing programs, are attracting inbound interest, and we will continue to explore strategic alternatives to partner or sell those assets. Additionally, Zymergen's real estate footprint was a significant area of due diligence for us in evaluating the transaction. We do have more real estate than we need right now and are working to consolidate our footprint. Positive results in these efforts could drive material upside to our cash flow forecast. We are already in advanced negotiations to sublease one of these properties starting next year, which is great to see. I also want to discuss the team fit because I'm really excited about how well the Zymergen team fits with our near-term goals at Ginkgo. The difference between Zymergen and Ginkgo is that Zymergen was pursuing a product business model, while Ginkgo operates as a B2B services business model. Underneath, we’re both building strong horizontal technology platforms. This fit is huge for how valuable this team and technology can be in enabling Ginkgo's 2023 goals. It can happen very quickly because there's a lot of cultural overlap between the teams. I was feeling that energy when I interacted with the Zymergen team; it was really exciting. The proactive support the former Zymergen folks provide to support our ongoing programs and technical plans has been noticeable. I’ve already seen substantial contributions from those teams, and this is just barely getting started as of last month. It's a tremendous win to have them onboard so quickly and aligned with our services business model, bringing Zymergen's team and technology expertise to our customers instead of just applying it to internal projects. It's a big deal to have this happen now instead of next year, and I'm thrilled about it. It's also worth noting that Zymergen underwent significant standalone restructuring efforts prior to closing. To put these changes into context, Zymergen had over 750 employees in spring 2021 and ended last year with over 500. It's important to understand just how much Zymergen's cost structure has changed. The people who joined the Ginkgo team can be categorized into three main buckets. The first is the automation and software team, which will become deeply integrated with Ginkgo, helping drive our core platform development. The second bucket comprises Zymergen’s remaining product teams, which will focus on R&D partnerships with customers, and we’re already seeing traction there. The ultimate size of this team will depend on the outcome of some strategic alternatives for some assets, aligning with Ginkgo's program objectives for next year. Lastly, several G&A personnel joined with the acquisition, and they will help ensure a smooth transition as we integrate the companies. Eventually, we expect our G&A team size will scale down as our integration increases. Overall, this is a really transformational acquisition for Ginkgo, and we’re thrilled to have the talented former Zymergen team on board so quickly. It’s exciting, and it’s a privilege to work with that team. Now, I want to discuss the importance of program additions as a metric. Sometimes folks can, sort of, solely focus on near-term foundry fees for programs and miss the bigger value from downstream economics on our customers' products. Let’s break this down into three parts. First, how we sell these new programs is a critical performance measure for Ginkgo, and our management team is very focused on it. We're expecting to grow new programs by almost 80% year-over-year in 2023, from the 31 we had last year to a range of 55 to 60 this year. This is a testament to the team's efforts, and I would love to see us on the high side of that range. I know those listening want to hear about the biotech R&D spend outlook for 2023. While we don’t plan to provide guidance today for 2023, I want to share some thoughts on our program outlook. We still have ample opportunity to tap into our addressable customer base at Ginkgo. Several customers in the biopharma sector are hearing about us for the first time in meetings over the last six months. For example, at the SITC meeting mentioned earlier, many were just learning Ginkgo is also working in mammalian cells. Therefore, we are somewhat insulated from total R&D budgets as we're not heavily penetrated already. Instead of focusing solely on market fluctuations, we must evaluate the strength of our sales pipeline and demand from customers, both of which I'm optimistic about for 2023. We’re not seeing any deceleration in that pipeline as we close out the year. We're also continuing to evolve how we sell our services. For example, we hope to have a segment of our offerings increasingly standardized from the customer perspective. This includes more standard milestones, cost structures, IP terms, and timelines. Such standardizations could accelerate our sales cycles, reducing the time spent negotiating details and leading to more efficient utilization of our platform. A great example of this is in the enzyme space, such as in our new Merck collaboration. That’s exactly the type of standardized offering we want to promote more of this year and next. Now, regarding each new program's value, we gain both near-term and long-term benefits. Each new program contributes learnings to our code base, enhancing our data and intellectual property that we can leverage in future projects, improving their ease of execution. Importantly, this could also drive operational improvements in our foundry. Just as a chip fabrication plant or chemical plant becomes more efficient as it scales and grows, the same applies here. As we increase output by adding new programs, the overall performance and functionality of the platform improves, making it easier to attract new customers. This is one reason why our team is determined to add new programs, as it fundamentally enhances the platform's capabilities. Additionally, we generate upfront R&D fees from new programs, helping mitigate resource allocation risks while we build our code base and scale our foundry. We spoke last quarter about our flexibility in structuring programs. If the market tightens, we can consider increasing upfront cost coverage based on new programs. I want to stress that even from a near-term perspective, it's only one of the many sources of value when we sign new contracts. Finally, I’d like to mention that when a new program is tied to a new customer, such as Merck or others, it adds extra value because we can expand via inside sales with these customers going forward. This 'land and expand' approach is generally more straightforward than onboarding new customers initially, as we can build that relationship. We aim to grow our program numbers in the coming years. Lastly, I want to remind everyone about the significant downstream optionality created by increasing our new program additions, ramping from 31 last year to over 55 that we're targeting this year. As we anticipate robust growth next year, every program offer a chance to share in the value of our customers' products through royalties, equity, or milestone payments. We often get asked why we don't vertically integrate into final products. The total addressable market (TAM) for end products is vast, and that would increase our earnings directly. However, we believe we can still capture downstream exposure by partnering with customers while diversifying our risk across individual products. This allows us to build a much larger platform than if we were solely pursuing our own products. The growth in new programs creates multiple opportunities, diversifying exposure to various end markets and products. We’re involved in an extensive range of markets, from fragrances to gene therapy, which helps mitigate risk. Importantly, downstream value carries essentially 100% incremental margins, and we believe it represents the most valuable part of our business. It takes longer to realize than near-term foundry fees, which leads to some being overlooked or pushed aside. While it is challenging to model exact timing and amounts for downstream value due to the indirect nature, we remain confident that having numerous shots on goal will lead to significant potential across various biological products markets. Moving forward, we aim to quantify the downstream value potential better. For example, when we sign up, say, 15 deals this quarter—what long-term value could that yield for Ginkgo if we are successful technically and our customers succeed commercially? While we need to consider technical and commercial success probabilities—like calculating for a drug pipeline—I think it will help clarify the long-term value of our program. In some cases, we can even share specific numbers, such as the $144 million potential milestone in the Merck deal, $115 million in Biogen, or $200 million per product for Selecta. However, many customers prefer to keep specific figures discreet, which is understandable, so we’ll work on aggregating more information in the future now that our program count is increasing. Closing thoughts on biosecurity: There's clear momentum in this space. This fall, we saw several significant White House initiatives prioritizing biosecurity, indicating the U.S. government’s clear interest. Ginkgo is well-aligned with these priorities and ready to help lead this industry’s future. So, how can we envision long-term biosecurity infrastructure globally? Our initial COVID response offerings have paved the way, building a collection platform that connects specific collection activities to local labs executing lab analyses on samples. While COVID monitoring remains essential, we are focused on promoting widespread biological risk surveillance and mitigation. Our collection platform now extends beyond pooled COVID testing in schools, incorporating comprehensive entry testing, wastewater monitoring, and proactive biological risk mitigation measures. We’ve also added essential modules to our platform, including our acquisition of epidemiological data assets. The CDC is now incorporating data from our airport program into their variant tracking models, and we recently hosted the Director of IARPA at Ginkgo for a press conference announcing the success of Ginkgo’s ENDAR program. I want to elaborate a bit on this since it epitomizes biosecurity's future direction. IARPA, akin to DARPA in the intelligence sector, launched this program years ago with several participants, well before the pandemic. Ginkgo has been involved in biosecurity pre-pandemic, though not at our current scale. We believe it’s critical to complement the possibilities of cell programming technologies with safety measures against misuse. The goal of the IARPA program is to identify whether a DNA sequence was genetically engineered. If, for instance, a suspicious organism appears at a major venue like an airport, we want to ascertain if it’s naturally occurring or engineered. In this program, we were provided samples containing engineered and non-engineered organisms without knowing their identities, and our technology accurately identified their nature. We ranked among the top performers and are attracting substantial interest in this technology globally. IARPA’s program manager for this effort noted strong demand for all our platforms, not just from the U.S. but also from partner nations within the intelligence community’s network. This vision emphasizes the distinct role biosecurity will play beyond diagnostics or therapeutics. Products like ENDAR—essentially a monitoring tool—represent a truly distinctive biosecurity offering. This is not merely a diagnostic tool; understanding whether a piece of DNA has been engineered is crucial. We expect to see more products like this emerging. In the U.S., the government is increasingly prioritizing biosecurity and biodefense. Recently, we announced a CDC contract to enhance our traveler-based COVID-19 genomic surveillance program at U.S. airports. Following this, the Biden administration issued an executive order on the bioeconomy, along with a national biodefense plan. I had the opportunity to address the summit about the executive order at the White House in September. In my decade of engaging with the U.S. government on biosecurity and synthetic biology, this progress has been unprecedented and exciting, not just for Ginkgo, but for everyone in synthetic biology and biosecurity. While biosecurity is vital in the U.S., we must recognize that biology knows no borders. Ultimately, global biosecurity infrastructure is crucial, and we're starting to see traction in the latter half of the year. So far, Ginkgo has publicly announced MOUs with governments in Saudi Arabia and Rwanda, leveraging our expertise in data collection and analysis at U.S. entry points to facilitate similar endeavors internationally. I believe biosecurity is a fitting closing topic because our strategy and activities illustrate our commitment at Ginkgo. Biology impacts all our lives, and particularly in biosecurity, infectious diseases transcend borders. We believe everyone deserves sophisticated surveillance and monitoring tools to protect against pathogens. Working with global public health institutions is crucial. You know I've said before that we can achieve a world with significantly lower infectious disease prevalence, and I hope we're working towards that goal. I'm happy to take your questions. Thank you.

Anna Marie Wagner, SVP of Corporate Development

Great. Thanks, Jason. We'll switch over to Q&A in a few moments. As usual, I'll start with a question from the public. As a reminder to the analysts on the line, if you'd like to ask a question, please raise your hand on Zoom, and I'll call on you and open up your line. Thanks, everyone, and we'll be back in a moment. Great. Welcome back, everybody. As usual, I'll start with a question from the public. This one is from Twitter. Jason, going into Q4 and 2023, how is the mixture of new programs looking, and which sector are you seeing the most interest in? Also, any update on how the agriculture pipeline is looking with the Bayer deal completed?

Jason Kelly, CEO

Yeah. So, I talked about this a little earlier, but I'm really excited about the momentum we're seeing in biopharma in particular. To highlight, we've been building infrastructure now for several years, and the fruits of that are starting to pay off, especially in mammalian cell engineering. I was able to show some great results around building large libraries. We have also obtained promising results on AAV vectors for gene therapy capsid work. We're finally starting to secure those engagements. Additionally, the deals with large biopharma companies like Merck and Novo Nordisk within the last year have helped validate our credibility as an R&D partner. This has further positioned us to work with new customers in that space. Regarding agriculture, the Bayer asset and team is a unique asset in this sector. Since we just integrated them last month, I’m optimistic about the engagement possibilities as their seasoned team has decades of experience in ag biologicals. We'll see how it all shapes up in 2023.

Anna Marie Wagner, SVP of Corporate Development

Great. Thanks, Jason. Tejas, I'll call on you next, but I know that to give you time to prepare, Laurence Alexander from Jefferies couldn't join the call, but sent one into our inbox asking about biosecurity. Specifically, what kind of revenue run rate would it take to step up our level of investment and staffing to support biosecurity more broadly?

Jason Kelly, CEO

I think one of the advantages we have is that the testing built around local laboratories enables us to ramp services up or down as necessary without major capital expenditure. If we pursue international expansion, it may require some staffing investments locally to complement those labs. However, our intent is to leverage existing laboratory resources, minimizing major capital investment.

Anna Marie Wagner, SVP of Corporate Development

Great. Thanks. Tejas, I’ve just opened your line. Go ahead and Rahul, you’ll be next.

Tejas Savant, Analyst

Hey, guys. Thank you, and Anna Marie, thanks for the heads up here. I was trying to do some mental math. So, you’re calling for about $70 million in foundry revenues in Q4. Jason, you noted that the pharma budget flush isn't a major dynamic for you at this stage. Can you discuss what's driving your confidence in that number? Also, Mark, could you help us quantify the size of that first milestone that you've included in the low-end of the guidance? I think that will help us understand the quarter-over-quarter increase relative to the $25 million in Q3? What exactly are we expecting for Bayer in Q4 as well?

Jason Kelly, CEO

So, the general R&D topic revolves around getting programs started, and there are a lot of specifics related to the current initiatives we have in our pipeline. Regarding next year, our visibility into our sales pipeline looks healthy, so I’m optimistic about that continuing momentum.

Mark Dmytruk, CFO

To clarify, the low-end of the guidance assumes Q4 revenue of $60 million. Roughly speaking, we expect about half of that, around $30 million, to come from downstream value share. The remaining portion will include foundry services, and while Bayer presents a smaller component of that, we can expect the Q3 number of around $25 million to stay consistent.

Tejas Savant, Analyst

Got it. That’s super helpful, thank you. Jason, returning to your comments about the pipeline, is there any color you can provide on the mix of new versus existing customers? What percentage of these might be 'locked in' for 2023? Additionally, given that we've been hearing about an increasing selectivity in R&D funding, do you anticipate that affecting your sales cycle?

Jason Kelly, CEO

While I can't provide specific numbers for next year, our customer base is larger than it was at the start of 2022. We've enhanced our ability to facilitate inside sales, which tends to be faster as negotiations about IP have largely been established. For externally sourced sales, the Merck deal has set a precedent that should help to standardize that approach.

Tejas Savant, Analyst

Thank you, guys. I appreciate your time.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Tejas. Rahul, I've just opened your line. Go ahead. And then Matt Sykes, you’ll be next.

Rahul Sarugaser, Analyst

Can you hear me okay?

Anna Marie Wagner, SVP of Corporate Development

We do.

Rahul Sarugaser, Analyst

Yeah. Terrific. Good afternoon, guys. Thanks so much for taking our questions. Jason, it's great to hear about your plans to report and add value to the collective set of new projects onboarded. Now that Zymergen and Bayer acquisitions have closed, and considering your recent focus on biopharma, can you provide a sense of how you stratify your projects between agriculture, consumer, and pharma as we head into 2023? Is biopharma the space expected to deliver the highest present value for the onboarded projects?

Jason Kelly, CEO

Right. One aspect is that we should have our ongoing program splits in the slides. I don't want to misstate the numbers, but I can say, we’re actively looking for ways to drive our downstream value share. Each program will have timelines of about six months to two years, so we expect to continuously generate opportunities.

Rahul Sarugaser, Analyst

That's really helpful. Thank you.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Rahul. Alright, Matt Sykes, I've opened your line. Go ahead, and Steven Mah, you'll be next.

Matt Sykes, Analyst

Thanks for taking my questions. Mark, can you confirm that there wasn't any Bayer revenue recognized in Q3, given your comments about base-to-base changes from Q3 to Q4?

Jason Kelly, CEO

Yes.

Matt Sykes, Analyst

And regarding the M&A, given the numerous acquisitions, what has been the strategy for integrating those companies? It's a lot to manage simultaneously.

Anna Marie Wagner, SVP of Corporate Development

Overall, integrations are progressing well. As Jason previously noted, we're thrilled with the early start with Zymergen. Most transactions involve smaller companies that can seamlessly blend into our existing team structure, which simplifies the integration process. The Bayer deal presents more challenge due to being a carve-out, as we needed to rebuild significant support infrastructure, like procurement and HR. However, we've been preparing for this transaction for a while and laid much groundwork ahead of time, streamlining the process.

Matt Sykes, Analyst

Thanks for the color.

Jason Kelly, CEO

I believe we have developed a capability that will enable smoother integrations in the future. We won’t hesitate to leverage that if opportunities arise.

Matt Sykes, Analyst

Also, I’m interested to know if you've learned anything about customer success by signing new deals. Are you applying those insights to accelerate downstream value realization?

Jason Kelly, CEO

Yes, our code base facilitates the success of downstream value share. However, we don’t aim to adjust too much in our deal frameworks. We want to facilitate customer engagement as much as possible; our focus remains on securing more programs.

Matt Sykes, Analyst

Got it, thanks. That's insightful.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Matt. Alright, Steve, I've opened your line. I believe you might need to unmute. We may have lost Steve. We'll come back to you later, Steve. Madelyn...

Steve Mah, Analyst

Just a one follow-up on Matt's question regarding deal structuring. Given the current macro environment, are you anticipating a trend towards being more backend weighted versus upfront on R&D licensing fees?

Jason Kelly, CEO

Thus far, these trends have aligned more with the company types rather than general macroeconomic influences. Larger pharma versions typically prefer advanced payments, while cash-conscious startups often favor backend weighting. That’s likely to continue, while we focus on onboarding customers quickly.

Steve Mah, Analyst

And regarding Zymergen's asset utilization, does Ginkgo plan to maintain the standalone rack automation offering, or is it going to be integrated into Foundry?

Jason Kelly, CEO

A lot of that will be integrated into our Foundry. That’s the primary strategic reason we’re enthusiastic about the acquisition. We’re focused on aligning the Zymergen team with our 2023 R&D service goals quickly.

Steve Mah, Analyst

Lastly, with respect to biosecurity concerns, are you currently developing combination tests for respiratory viruses?

Jason Kelly, CEO

I'm not certain what we've publicly announced regarding that. Anna Marie?

Anna Marie Wagner, SVP of Corporate Development

We may need to get back to you regarding that.

Steve Mah, Analyst

Understood. Thanks for the questions.

Jason Kelly, CEO

Indeed, that's what we want to happen. Having robust surveillance capabilities now feels essential for effectively monitoring infectious diseases. It would be beneficial to enhance predictive capabilities as well.

Anna Marie Wagner, SVP of Corporate Development

Thanks, Jason. Go ahead, Madelyn.

Madelyn, Analyst

As you integrate the Zymergen deal, can you provide insight on your expected cash burn profile moving forward?

Mark Dmytruk, CFO

Based on the combined effect of Zymergen and Bayer, you might expect directionally around $50 million of additional OpEx, which includes notable transaction transition costs; however, inherited cash from Zymergen should significantly offset these expenses.

Madelyn, Analyst

Great. Thank you.

Anna Marie Wagner, SVP of Corporate Development

Thank you all for your participation tonight. I do not see any further questions on the line. Jason, do you have any final comments to wrap up?

Jason Kelly, CEO

No, I think we've covered everything. Thank you all for spending your time with us.

Anna Marie Wagner, SVP of Corporate Development

Thanks, everyone.