Ginkgo Bioworks: Audacious vision — but unproven track record playing in major league

Part 1 — A high-level overview of the bull and bear case on Ginkgo and how we got here

Hi friends 👋

Welcome to Health & Wealth — your weekly source of the latest health research and biotech trends. Many of you are new here, after reading my piece on Bionano. Thank you so much for joining! 🤗 My goal is to provide honest commentary to help you become a more informed investor and health optimizer.

Some context before we get started with this piece — I plan on releasing part 2 on Ginkgo soon. I've done more research on Ginkgo and need some time to piece together / consolidate my thoughts to bring you the best content possible. Plus, I'm waiting on ARK Invest's report later this week and if Ginkgo themselves will make any moves in response to the recent short report. Some may call it procrastination. I call it Bayesian thinking 😎

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Article Highlights

• Love or hate them — Ginkgo Bioworks DNA 0.00%↑ is quickly becoming one of the most talked-about biotech companies today. Ginkgo makes organisms to help other biotech companies create innovative environmental, human health, and food sciences products.

• At a mind-blowing $27 billion valuation with backers including Bill Gates and ARK Invest, Ginkgo is officially playing in the major league, which means undergoing the glare of public scrutiny.

• Bulls believe in the promise of tomorrow's synthetic biology world and Ginkgo's ability to create 10x better products, with network effects making them hard to displace.

• Bears doubt Ginkgo's ability to scale and manufacture products at a profit and question their reliance on their subsidiaries as a sign they're unable to drum up significant demand.

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Last week, we talked about how we read DNA. Now let's venture into a really nutty area of science that involves asking the question — how do we make DNA and program biology itself?

What I'm referring to here is the nascent field of "synthetic biology." It means that you are the architect and builder of biology.

Unlike genetic engineering that involves copy-pasting DNA, the new era of biology involves actually making DNA through a scaleable, automated manufacturing process which is then introduced into organisms (bacteria, fungi, human cells, etc.) This makes cells programmable, similar to how computers are programmable.

Ginkgo Bioworks (DNA) is aiming to become the engine room of synthetic biology. They want to make entirely new organisms or substantially enhance existing ones for various applications that can impact all of us — the environment, human health, food.

They've called themselves the "AWS for biology," in which other companies can piggyback on its technology to produce the products they want, much as tech startups use Amazon Web Services to supply their underlying computing and data storage needs.

This is an audacious goal. But having raised almost $3 billion and with a mind-blowing $27 billion valuation as of October 19th 2021 — despite only scraping together $77 million revenue in 2020 — the company is officially playing in the major league. It needs more than just a strong narrative to succeed.

I've been putting off talking about Ginkgo, but it has evolved into something that I can no longer ignore. If you haven't been following, this is what's going on right now in a nutshell:

Adam Singer @AdamSinger

$DNA is going to be a hot name for years, half my feed thinks it's a scam half thinks they're the 2nd coming of christ [no position]

Needless to say, Ginkgo is heavily divided right now. People see the future of synthetic biology and the role Ginkgo will play in it very differently. Amid all this chaos, the smart move is to separate anything you can be relatively sure about and use these as anchors. I'm here to try to serve as a fair commentator, giving you the play-by-play. My purpose here is to inform and educate — not to give investment advice.

There are essentially two questions to sanity check ourselves:

1. Does their science show real potential, and are the use cases compelling enough?

2. Does their business model add up, and is it sustainable?

I will cover this much more in my second post on Ginkgo but for now, let's start to untangle the debate here:

• The bull case for Ginkgo

• The bear case against Ginkgo

• So what's next?

The bull case for Ginkgo

The bull case is purely on growth and long-term potential, not price or revenue to date. We all know that Ginkgo is insanely expensive.

To be a Ginkgo bull, you believe in three things:

1. Synthetic biology is in its infancy but has massive potential, and Ginkgo will be at the forefront in this future.

2. Their iterative design, build, test, and learn process makes creating 10x better enzymes much faster and at scale.

3. By approaching organisms themselves as the product, Ginkgo introduces a network effect that makes Ginkgo immutably defensible and hard to displace.

Expanding on each a bit:

1. Synthetic biology is in its infancy but has massive potential, and Ginkgo will be at the forefront in this future.

Most bulls don't expect revenues and the number of customers to skyrocket overnight. They recognize that synthetic biology is still a teenager, but they believe this is the decade it will become an adult and go into the world. There is a graveyard of failed companies, but there are also enough successes that make passing up Ginkgo at this stage hard.

The question is how much demand there will be to hire Ginkgo as a biology contractor to build their dream products, and how soon. Bulls are betting that this moment has already arrived, given Ginkgo has 49 active programs in 2020 and expects to start over 500 new programs by 2025.

1. Their iterative design, build, test, and learn process makes creating 10x better enzymes much faster and at scale.

I will go into more detail about this in my next post, but the historical backdrop is that inserting genetic material into organisms to produce ingredients that wouldn't otherwise be produced naturally is not new — it's been done since the 70s.

Perhaps the most well-known example is when Genentech created bacteria that can produce insulin, replacing the need to extract insulin from animals to treat type 1 diabetes. This was a seminal medical innovation and massive commercial success.

But as Axial Partners describes it, "this work was artisanal: there was little-to-no automation, and production and assembly of DNA was a limiting factor." So instead, Ginkgo was founded on the belief that biology can be programmable using reusable code (a "library" of DNA sequences) to make experimentation faster, more reliable, and reproducible.

By creating a better toolkit to design and build organisms, costs will decline. In addition, more experiments also create more designs, which means less work is needed to make subsequent new organisms.

An analogy to be made here is what Ford did to automate the assembly of cars. Before Ford introduced the car assembly production line, cars were assembled one by one with little automation.

This all makes sense in theory, but theory is always different than in practice. I want to see home runs — that Ginkgo created 10x better organisms that their partners love and can't wait to put out in the world commercially. In my next post, I will be highlighting some specific case examples of what exactly they've done and what their customers have decided to do with their engineered organisms after the handoff. Critical to understand if you want to evaluate Ginkgo's potential.

The bottom line: A 200,000 square feet automated lab will amount to nothing if their customers don't love what Ginkgo builds for them.

1. By approaching organisms themselves as the product, Ginkgo introduces a network effect that makes Ginkgo immutably defensible and hard to displace.

Ginkgo's central premise is that the organism is the product.

In contrast, their competitors like Amyris believe that the organism's produced ingredients are the product to be sold. So they've built out huge 200K liter fermentors because they believe the viable business model is selling the ingredients they produce in bulk.

But Ginkgo believes differently. They believe what's valuable is the design of the organism themselves. As Ginkgo CEO Jason Kelly put it:

"We give you a tube the size of a thimble that’s got a cell with the genome that you need. And that is all that leaves [Ginkgo's] big factory. And then you as the customer would grow that in your big tanks"

They make the organism itself the product by being the Y-combinator incubator for synthetic biology companies. So if you want to grow something — antibiotic, flavor enhancers, fragrances, etc. — you hit up your boy, Ginkgo Bioworks.

Stanford bioengineering professor Drew Endy, who is a godfather of synthetic biology, explains:

"Ginkgo is positioning itself, I think, to create coordination solutions on a networked bioeconomy... DNA printing is getting a lot better, we’re buying most of the DNA print capacity in the world — bigger, bigger, bigger, faster, faster exponential improvements. But what’s actually impressive, is they’re implementing network strategy. They’re creating a coordination solution, which is where people go to get the biology they want. Coordination strategies appear within networks. The interesting thing about coordination strategies is that once they form, they’re very hard to displace. That’s very different than an exponential strategy where you could get displaced, because somebody will leap ahead of you and then you’re behind."

— Drew Endy [7investing podcast]

Bulls also like to point out that Ginkgo’s projected revenues don't account for the royalties and equity investments from their customers — which won't materialize until these products are commercialized. Their layered revenue model is kind of similar to the model I previously described for MaxCyte, a company that grows as cell therapy companies grow.

Okay, now let's turn our attention to the bear case and what the bulls may be missing.

The bear case against Ginkgo

In early October, a short-seller rocked the boat by calling Ginkgo Bioworks a scam in their 175-page short report.

Scorpion Capital @ScorpionFund

1 We are short $DNA. Ginkgo Bioworks is a colossal scam, a Frankenstein mash-up of the worst frauds of the last 20 years. At $23B market cap, it is rare to see a related-party scheme on Ginkgo’s scale in the US markets – it is, quite simply, the US version of the “China Hustle.”

The stock dipped after this was published but seemed to rebound shortly after.

Ginkgo bulls and the market seemed to think nothing of these allegations:

Sheep of Wall Street @Biohazard3737

The report is garbage. But I understand how it was an "easy target" (rich valuation, complicated technology) and how with most of the recent SPACs trading below 10, it was an opportune time. This was to be expected and I'm glad it's done, so that we can move on. $DNA

But I think it's worth acknowledging the serious challenges Ginkgo faces in the coming years.

1. Making money in industrial biology is notoriously difficult. It's easy to prototype in the lab but hard to commercialize a product that people will buy and use.

2. Call it what you want — but reporting spinoff ventures as their "customers" and having that revenue make a round trip back into investing in their "customers" is cheating.

3. Ginkgo has yet to prove they're able to drum up significant demand, and their credibility is undercut given they rely so heavily on their subsidiaries as their "proof."

Taking a closer look at each:

1. Making money in industrial biology is notoriously difficult. It's easy to prototype in the lab but hard to commercialize a product that people will buy and use.

Engineering an organism that performs well in a petri dish or laboratory reactor is just the beginning. Organisms need to be fine-tuned to thrive in huge tanks to manufacture something at scale. Drew Endy co-founded DNA synthesis company Gen9, which Ginkgo Bioworks acquired, and he owns shares of Ginkgo Bioworks as a result. However, even he has his doubts:

"It’s easy to prototype biology that demonstrates you can do something, but then you have to actually bring that to market. So I could prototype something in a laboratory, but that’s not going to earn me revenue. What’s going to earn me revenue is an actual manufacturing process that actually results in people buying something and using it — that downstream set of activities. You could have the best bioworks [the factories Ginkgo has] in the world that’s doing the prototyping in Boston, but if you don’t have something that’s going to scale to go to market, good luck."

[7investing podcast: Drew Endy]

When expectation vs. reality hits

This is the uncomfortable truth of life sciences. And it concerns me that Ginkgo seems dismissive of the scaling and commercialization problems, saying over-simplistic statements about how "If you were Bayer, you would grow a tank to put it on a field. If you’re Synlogic, it’ll go into clinical trials as a therapeutic, right? But Ginkgo doesn’t do any ongoing manufacturing."

That sounds equivalent to a fancy consulting firm coming in to give you suggestions on how to run your company better, only to leave and say, "I'm sure implementing these changes will be easy. Good luck!" ✌️

Not all of their partner programs need to succeed for Ginkgo to succeed, sure. But if close to none of them succeed, that's a big problem.

1. Call it what you want — but reporting spinoff ventures as their "customers" and having that revenue make a round trip back into investing in their "customers" is cheating.

I dislike how the short report used deliberate sensationalist labels to amp up their fear-mongering tactics. But this point is hard to ignore:

This is no secret. The MIT tech review piece on Ginkgo that came out late August 2021 made mention of this unusual strategy Ginkgo uses:

"As part of the agreement, Synlogic did cut a check for $30 million in cash to Ginkgo for foundry services [fees for use of Ginkgo's lab] aimed at improving its strains. But Ginkgo simultaneously invested $80 million in Synlogic at a sizable premium to its stock price at the time. In effect, the money took a round trip, starting as cash in Ginkgo’s bank account and ending up as payment for foundry services."

But the problem is this is being done on a large scale. In 2020, 72% of Ginkgo's fee for use revenue was coming from one of the subsidiaries they helped start or invested heavily in:

Originally came across this table in this video, but I can't seem to find the source.

Whether you see it as a scam or a way to jumpstart a flywheel, their revenue to date is essentially manufactured. Crisprtalk explained what's going on simply and somewhat bluntly what this “shell game” means.

This is a very unusual practice, even in the tech world — Palantir is the only one I can think of doing something like this. But, even then, the percentage of their revenue from related parties is not nearly as large as Ginkgo's.

1. Ginkgo has yet to prove they're able to drum up significant demand, and their credibility is undercut given they rely so heavily on their subsidiaries as their "proof."

What's peculiar to me is that in the wake of this controversy, none of their existing customers stepped up to defend Ginkgo by telling investors how much they love using Ginkgo.

In addition, many of the partners they prominently feature are their subsidiaries — Motif, Joyn, Genomatica. I would like to hear more from their "true customers" such as Roche, Aldevron, Biogen, Corteva, and Sumitomo. I hope to dig more into this and report on what I find in my next post.

So what's next?

Synthetic biology is so nascent that discerning whether a promising company is hype or fraud is tricky. It's also clear that creating something that hasn't existed before makes it hard to answer these seemingly basic but hard-to-answer questions: "How do we value this stuff as a potential investment? How do we evaluate equity stakes in other biotech startups and other sorts of partnerships?"

Overall, I believe synthetic biology holds a lot of promise, but many road bumps are still ahead. Investors shouldn't expect a smooth ride.

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More to come on Ginkgo here. If you're new, subscribe, so you don't miss it:

I don’t hold a position in DNA. I’ve just been pulling out the popcorn watching on the sidelines. It's been a dramatic few weeks.

But so much noise also drowns out valid signals, and it's been hard for me to identify healthy doses of objectivity out there. People are either too smitten with the grand vision or callously dismissive. So if you have any good finds on Ginkgo, please send them my way. I will take a look.

What about you? Bull or bear? Let me know on Twitter @healthwealthgen.

Thanks for reading!

Christina