Ginkgo Bioworks (DNA) has certainly caught investors' attention, although the sparkle may have worn off somewhat since the trendy stock's 65% decline since the beginning of 2022, but the power of synthetic biology suggests there's a whole new supply of potential.
Ginkgo Bioworks' public debut in 2021 are helpful in explaining much of the stock's decline. It was launched through a SPAC that gave it a market valuation of almost $15 billion, almost four times the previous private valuation.
Ginkgo Bioworks was never focusing on the valuation of its SPAC agreement, rather on the cash haul. The investment vehicle provided more than $1.6 billion in gross proceeds to the business than it had in the previous 13 years combined, largely compensating for the excessive valuation and subsequent stock losses.
Because $1.6 billion provides a long-term cash flow for the existing business. It can also fund many additional investments and acquisitions. Investors should be asking if Ginkgo Bioworks is actually putting its war chest, which stood at just under $1.5 billion at the end of March 2022, to good use.
Explaining Recent Strategic Investments
Ginkgo Bioworks is a synthetic biology business that operates robotic labs, known as foundries, for biotech research and development. It's important to note that the term "biotech" shouldn't be confused with "biopharma."
At the end of July 2022, the company announced two key acquisitions.
The cell engineering agreement includes reorganizing an earlier R&D agreement with Bayer (BAYRY) - Get Bayer AG ADR Report. That included consolidating Joyn Bio, buying a California research lab from Bayer for $83 million, and inking a new three-year partnership for research services.
Ginkgo Bioworks claims that its cell engineering agreement with Bayer is the largest in the company's history. The company intends to "significantly offset" operating expenses acquired in the restructuring. That would be significant considering the company's foundry revenue is at a disadvantage today.
Second, it announced the intention to buy Zymergen, a fellow synthetic biology pioneer, in a $300 million round of deals. The peer had gone through some difficult times and fumbled away a strong technology position by focusing on the wrong commercial projects.
However, the acquisition will increase operating expenses starting in 2023 and will not generate any revenue for the foreseeable future. If the integration costs aren't realized, Ginkgo's operating expenses may increase significantly.
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Both acquisitions are expected to close by early 2023. It may not be obvious right now, but the timing will be crucial for investors.
What Happens If Biosecurity Revenue Dries Up?
Ginkgo Bioworks took steps to help treat the coronavirus epidemic as a global challenge. This section of the business is billed as biosecurity income.
Biosecurity revenue is profitable (most quarters anyway), contributing to the loss-making foundry revenue. However, the segment's future is hazy as testing volumes decline. While the company expects full-year 2022 biosecurity revenue of at least $210 million, nearly $147 million was generated in Q1 2022 alone.
Biosecurity revenue might be less valuable in 2023 as acquisitions become integrated. The $1.5 billion cash hoard provides a great deal of flexibility and minimizes the dangers associated with integrations, but mergers that aren't up to expectations might reveal a flaw in the strategy.
Zymergen reported a $68 million operating loss in the first three months of 2022. It will require substantial restructuring and reorganization. During the same time, it's possible that attempting to fulfill every possible biology application will become unfocused and inefficient.
Pay Attention to the Details
Ginkgo Bioworks can use this cash flow to maximize its core technology platform and business model.
That doesn't mean investors or Wall Street analysts can't get lazy. If management isn't careful with how it allocates funds or how thin it distributes resources, investors might see their business suffer a rapid decline. That's especially true if biosecurity revenue fails beyond 2022.
The business needs to dramatically increase the margins on foundry income and provide high-quality services to customers. Doing so gives the business the opportunity to earn future royalty streams from commercialized goods.
Ginkgo Bioworks counted more than 21 customer programs in flavors and fragrances in 2016. They represent 18% of the business' total programs signed between June and March 2022. Only two or three have been commercialized six years later.
Investors may forego the risk of a large cash position for the time being. Just remember to pinch yourself first before succumbing to the hype; in this stage of development, anyway.