Ginkgo Bioworks Holdings Inc (DNA) 2022 Q1 法說會逐字稿

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. Thanks again 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 some 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. We'll provide an update on our financial progress while also taking an opportunity to dive deeper into an area of strategic importance as folks continue to develop a deeper understanding of what we're building. As I said before, if there are topics you'd like to see in a future deep dive, just let us know. We'd love to include those in the future. 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, including right now, via Twitter. The hashtag is #GinkgoResults, or via e-mail at investors@ginkgobioworks.com.

And now I'll hand it over to Jason to kick things off.

Thanks, Anna Marie. As a reminder, Ginkgo's mission is to make biology easier to engineer, right? And this sort of focus on the tools and technologies of synthetic biology is really what led to the platform business model that we're really pushing here at Ginkgo. And the way that works is a customer brings ideas to Ginkgo for a cell that they want to engineer to do something, and we use our platform to engineer to program that cell for them to meet their specification, right?

And the reason customers want to work with us is there are 2 core assets in that platform. The first is our Foundry, right? So this is a highly automated lab, and the sort of key value proposition for our customers is we can take what is typically an underutilized fixed cost investment, i.e., their internal R&D labs at their site and turn that into a highly efficient variable cost for them if they instead engage with Ginkgo's Foundry as a service provider of that sort of lab activity. And the analogy here is something similar to what you saw where companies made the choice to outsource on-prem servers and IT to cloud server providers. That sort of transition is similar in spirit and those scale economics also similar in spirit to what we're trying to achieve with the Foundry.

The second asset we have at the company is what we call our code base. And the code base is a data asset. And it's basically, as we do these projects for customers, we're accumulating physical strains, data, genetics, various learnings. We're training models, machine learning models and so on that we can then make available, so that we don't need to reinvent the wheel for every new cell program when a customer comes to us. We have to leverage the experience of our previous work. And so for the potential customers that might be tuning into the call today, our whole model is to make that platform available for your project as fast as possible. So if you see something we've done in your industry or related project, and you say, "Oh, that's similar to something I'm interested in." That means that's the type of thing Ginkgo is getting better at. You might -- definitely, it would be a good opportunity to reach out.

If you see a technology we've acquired. We'll talk today about -- we've completed acquisition of FGen, really interesting tech. If that's an interest for your project, we can make that available quickly specifically for your work. And so it is an idea of making these things available fast, so that you don't have to make those investments yourself.

One of the most important metrics for our success coming up, and we've got a great quarter here, is seeing new customers choose to work with Ginkgo for their R&D efforts. So in this first quarter, we added 11 diverse new cell programs, including some that will put us deeper into new areas of engineering for the company. One I think is really exciting is a company called Light Bio that's engineering plants to glow. And so this is a project where we're working to improve the brightness of these petunias they have. There's a project in anaerobic bacteria for microbiome applications, so being able to work with cells that grow without the presence of oxygen, right? And so that requires different types of investments on our platform that we've been making.

Our biosecurity efforts, which we view as a critical component of our platform, and we'll talk about, continue to grow well in the first quarter of 2022, particularly as new variants threaten to disrupt schools opening after the holidays with Omicron. Concentric, our biosecurity and public health business, has continued to build real trust in the market, has now served well over 5,000 organizations and generated $147 million in the first quarter alone.

We spent a lot of time in our last earnings call talking about the many challenges of building a business on the back of hard technology, like what we're developing here. We're fortunate to have a strong financial foundation with about $1.5 billion in cash, which gives us the runway we believe we'll need to achieve our mission. In the process, we will aim to become the sort of obvious partners for the world's cell programming.

One opportunity that our financial position unlocks is M&A. We're ramping up our M&A activities in 2022. And since our last call, we closed our acquisition of FGen, as I mentioned, and welcomed that team led by Andreas Meyer to Ginkgo. We also announced a series of planned transactions with Bayer, including the acquisition of their West Sacramento R&D team and facility, and a large new collaboration with them, which is super exciting. So I'm excited to talk about that transaction, and we'll spend a fair bit of time coming up talking about that.

So with that, I'm going to hand it off to Mark to walk through our first quarter financial performance.

Thanks, Jason. Our first quarter financial results reflect strong growth driven by continued execution of our biosecurity business. We also continue to see new cell program growth and diversification in our Foundry. Total revenue in the first quarter of 2022 increased to $168 million, representing growth of nearly 4x the first quarter of 2021.

I'll start by discussing our cell programming business, which we also describe as our Foundry. We added 11 new cell programs to the Foundry platform in the first quarter of 2022. As a reminder, our new cell program count is a key KPI that we're particularly focused on. Adding more programs benefits us strategically by driving our scale economics, diversifying customers and programs, accumulating code base and accumulating potential sources of downstream value share. We only count a program that has a certain expectation of scale and are often doing several proof-of-concept programs as well, which can ultimately lead to larger paid programs.

We supported a total of 64 active programs in the first quarter of 2022 across 32 customers on our Foundry platform. This represents substantial growth and diversification in programs relative to the 44 active programs in the first quarter of 2021, with strong growth coming from the pharma and biotech industry, in particular. Foundry revenue was $21 million in the quarter, a decrease of 5% when compared with the first quarter of 2021. When compared to the prior sequential quarter or the year-over-year comparable quarter, Foundry revenue was impacted by the timing of downstream value share and the mix shift driven by new programs still ramping up versus certain large programs completing in 2021.

It typically takes some time for new programs to reach mature run rates. And due to our contract structures, we often recognize an outsized portion of the contract revenue in the later stages of a contract. As expected, we also see some impact from our active decisions to tune deal structures to optimize for future downstream value share in our customer collaborations, sometimes in exchange for lower upfront usage fees. To be clear, this type of volatility is not unexpected at our stage. And as we'll share later, we are reiterating our full year Foundry revenue guidance.

Also as a reminder, in the third and fourth quarters of 2021, we recognized sizable milestone payments relating to our collaboration with Cronos. In the first quarter of this year, we did not recognize revenue from any material milestones. And so this is an example of where timing of downstream value share can affect trend lines, again, something we consider in our annual guidance.

And one additional comment on related party versus third-party revenue mix. Related parties represented 63% of Foundry revenue in the first quarter of 2022 compared to 56% in the first quarter of 2021. This mix shift primarily represents the timing of revenue relating to certain programs. And it's not a reversal in the general trend that we saw last year with related party revenue mix decreasing. As a reminder, though, we do not manage the business around related party revenue mix or set particular targets for this metric, as related party revenue simply highlights certain companies in which we are granted a significant equity position as newer royalties as compensation for downstream value. And as we've discussed in the past, this type of transaction is a part of our business model, which we view as strategic and which we intend to continue.

Now turning to biosecurity. Our Concentric offering continued its strong upward momentum in the first quarter of 2022, generating $147 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 pooled testing, which continued ramping up in Q1 due to the Omicron variant and the demonstrated benefits of pooled testing in schools.

Biosecurity gross margin was 42% in the first quarter, consistent with the prior fourth quarter performance. We're extremely proud of what we've accomplished thus far in biosecurity. It's remarkable what our team has built in such a short time, and it's a privilege to be able to provide this service and help communities save. But in this nascent market, we've been consistently cautious about projecting forward revenue due to uncertainty. You'll see that conservatism reflected in our updated guidance, and we'll continue to provide regular updates as the business evolves. Jason will talk in more detail on what we're doing to build on the foundation we have in biosecurity.

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. Also, I want to draw your attention to a new segment reporting schedule that we are including in our financials going forward and which is replicated in the appendix to this presentation. R&D expense, excluding stock-based comp, declined from $60 million in the first quarter of 2021 to $56 million in the first quarter of 2022.

We incurred a significant amount of R&D expense relating to our biosecurity offering in the first quarter of last year, approximately $23 million, which was substantially phased out by the second half of 2021. 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 $42 million in the first quarter of 2022 compared to $18 million in the first quarter of 2021, as we invested in business development and all other G&A functions to support the growth of new customers and programs, higher level of Foundry activity, and our biosecurity offering, along with our very extensive public company readiness efforts.

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, including: one, stock-based compensation; two, mark-to-market adjustments on equity investments where we have elected the fair value option; three, reductions in the carrying value of those platform ventures accounted for as equity method investments, which we typically record in the quarter that equity is issued to us; and four, mark-to-market adjustments on public and private placement warrants inherited as part of the destack that are now classified as a liability on our balance sheet. 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 $2 million compared to negative $51 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 first quarter of 2022 was $4 million, reflecting Foundry capacity and capability investments. CapEx was impacted by timing of equipment purchases and projects, and so we would expect to see significantly higher CapEx in future quarters 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 issued prior to Ginkgo 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 $659 million stock compensation expense in the first quarter relates to this wind-down, and we would 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 first to the end markets as well as between new and existing customers in full year 2022. We are increasing our full year guidance for total revenue to $375 million to $390 million, an increase of $50 million from our prior outlook. We are reiterating our Foundry revenue outlook to be in a range of $165 million to $180 million for full year 2022. We have line of sight to material downstream value share in the latter half of the year, which we expect to drive significant growth versus the prior year. In addition, we have launched over 30 new cell programs in the past 3 quarters. And as those programs ramp up, we expect to see a higher contribution of revenue from Foundry usage fees. And of course, we expect our strong pipeline to contribute a significant number of new programs to be launched during the course of the year.

Based on our strong performance in biosecurity in the first quarter, we now expect biosecurity revenue to be at least $210 million for full year 2022, an increase from our prior outlook of at least $160 million. As was the case throughout 2021, there still remains significant uncertainty in the biosecurity market in general. Many of the state K-12 testing contracts we're supporting are funded through the end of the school year, and there is uncertainty about the funding available and 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 also uncertain.

In summary, we are pleased with our overall progress. We are executing on new program growth on the Foundry platform to drive scale economics, program diversity, accumulation of code base, the accumulation of potential future downstream value share. Another strong quarter from biosecurity is contributing positively to cash flow and providing further signals that we are well positioned to capitalize on a longer-term business opportunity. And the company's total cash position of $1.5 billion remains strong and provides us with a multiyear runway to execute on our ambitious growth plan.

And now Jason, back to you.

Thanks, Mark. This is a great quarter for Ginkgo. Our strategy at the company right now is actually pretty simple. We want to maintain a strong cash margin of safety. And as Mark mentioned, ending the quarter with about $1.5 billion in cash surely does that for us right now. We want to add new programs from a diverse range of markets and customers. And we want to keep increasing the scale of our platform, which, as I talked about earlier, improves the economics of the work we do for customers, right? As our scale goes up, we have lower costs. And then ultimately, we can provide that back to customers over time.

If we keep doing that in the coming years, then well, I think Foundry revenue will be a little lumpy, in other words, we'll see more or less quarter-to-quarter based on when programs finish and provide that downstream value share, which ultimately is a bit out of our control because many of those things are dependent on customer activities, it should position us quite nicely to keep growing year-over-year. And so I think this is an important strategic point for us as a company and to stay focused on making the investments that allow us to grow that platform with a good margin of safety and add a wide and diverse range of customers. So I'm thrilled we're doing that.

Okay. So the last time we spoke on this strategic session, we spent a lot of time kind of level setting about the current market environment and talking about both the difficulty in what we do at Ginkgo as well as our strong footing to accomplish that big mission. And so today, I wanted to go over a few topics. First, as Mark just described, we're wrapping up another extremely strong quarter in our biosecurity business. We'll talk about the impact we've been having there and some of the new technologies we're piloting to continue to expand that offering.

Second, I wanted to spend the most time today talking about our recent announced transaction with Bayer. This is a great opportunity for us in ag biologicals and a signal of what we expect to come in other areas. And finally, I hate to say it, but the market hasn't changed a ton since our last call. We said it then and we'll say it again, it's not fun to live through a bear market, but we think it's valuable for Ginkgo. We're careful about maintaining a comfortable margin of safety in this kind of market environment, and our balance sheet will allow us to accelerate our leadership, while others in the sector may need to pull back.

All right. So let's dive in. So as Mark mentioned, we did over $140 million in revenue just in Q1 in biosecurity. At Ginkgo, we tend to make big bold decisions and lean in when we think we're right. And leaning into biosecurity in the early days of the pandemic was no exception But frankly, the team continues to astonish me with their ability to execute here. It has not been easy to do this in this environment. If you play back the tape to January, for example, schools were under enormous amount of pressure, Omicron was taking off completely. And the team, again, I want to just publicly give credit to an enormous amount of effort by the team at Ginkgo in biosecurity to deliver there for our customers and their communities.

So the biosecurity we've built to date is a very strong foundation, and it's also got us a seat at the table to help shape the solutions that we hope will prevent future pandemics, right? We expect to continue to support local communities and keep children safely in school through these state-wide K-12 testing programs. And we are expanding our offerings over time to actually include less disruptive methods. So you can see here announced that one of the demonstrations we're doing in wastewater testing as a way to do testing in schools. As it stands today, we do, in most places, group pool testing, sort of Q-tip in the nose, and they're all being collected and run at a nearby lab. Could we make that even lighter weight on schools through things like looking at wastewater?

We've also continued our collaboration with the CDC and XpresCheck to provide testing services for travelers and utilizing our sequencing capacity to help identify and track new variants. So our program, we're quite proud, was the first in the U.S. to identify Omicron subvariants Ba.2 and Ba.3, and among the first to detect Ba.4 at the country's ports of entry in April 2022. And then we do this work, we share these samples with the CDC laboratories for further characterization. And that's been a really nice engagement with public health leaders and the government. And I think that's actually quite important in the long term for these technologies.

Finally, we're launching pilots across several new modalities, new ways to do this that we believe will support a more preventative approach to biosecurity, right? Because that's really the future here is making sure things like COVID don't happen again. And as part of that, identifying novel pathogens in less disruptive ways, I mentioned wastewater. There's also technologies like passive air monitoring, collecting the air in the room, having that get on a filter and doing a test today back in a lab and maybe in the future right there in that device, I think kind of like a smoke detector, right?

And again, I'd highlight, we've got a pandemic thrown at us, we weren't expecting that, and we sort of went to battle with the technologies we had. With some time and sort of modern synthetic biology and biotech tools, we can do a lot better. And it's not on this page, but we're also seeing a real traction in our work with international organizations and countries. Biology does not respect borders. We've seen that in the pandemic. And so our biosecurity here in the U.S., frankly, needs to be global biosecurity. That's the only way we get this right. And we're looking forward to sharing more details with you on our emerging international efforts in upcoming calls.

Before I move off biosecurity, I do want to mention that, although I'm very proud of the commercial value biosecurity is creating for Ginkgo as a business, as we said before, one of our cultural tenets here is that we care how our platform is used. In other words, the technology we're developing here at Ginkgo, we wanted to have a positive impact in the world. And I think what we've been doing in K-12 schools is a great example of that. I wanted to share just a few of the many comments from our partners there.

So Dr. Mark Ghaly, Secretary of California Health and Human Services Agency, gave a presentation, showed that chart there and talked about how California was among the lowest pediatric hospitalizations compared to other states. This is in part about the important mitigation tools that we've equipped schools with throughout this year. We've built and put a lot of energy into building our testing capacity last year. Governor Sununu in New Hampshire talks about the flexibility and scalability of the state testing program and that the communities there can scale these programs up or down based on testing data about transmissibility in that school. And I think this is actually a really important point, as you see these things come in waves, right? So having the technology there in the event you need it again to keep your school open, which very much was a big part of the story with Omicron in many states, you want to have them available.

And from Cleo Hirsch, Executive Director for COVID response at Baltimore City Public Schools, "Instead of just having to make blanket district-wide decisions, we actually have live-time data," right? And that idea of sort of like a weather map, like what's the weather like today, so you can make local decisions, I think, is an important way to think about things in the future for biosecurity.

And I do want to highlight Cleo and the Baltimore City Public schools. They were one of the earliest adopters of the sort of regular school testing in the entire country, right? This thing that we're now doing in thousands of schools really, in many ways, pioneered with the folks at Baltimore City Public Schools. Her team have been leaders throughout this to keep their community schools open and safe through the waves of this pandemic. And we're excited to expand on these efforts as the biosecurity industry works in close concert with public health leaders, right? There's not, it's a private sector, it's a public sector. Both together is going to be the best way to do this to reduce the impact of infectious disease. And as I mentioned, with modern biotech, we can just do a lot better than the tools we had when this whole thing started. And so I'm heartened that governments in the U.S. and worldwide will step up after this kind of wake-up call of COVID-19 to invest in this infrastructure, and we are seeing that, and we're quite proud to be playing our role here.

Okay. So I wanted to use most of my time today with you to chat about the planned transaction that we just announced with Bayer. As a reminder to this earlier, Ginkgo is a horizontal platform. In other words, we want to serve any application of engineering cells in any market, whether it's a small company or a large company, we think, ultimately, we serve all those customers best by putting them on the same platform. And so we, as a result, work on diverse programs across a variety of industries and technical approaches. You can see some of our customers here in consumer and tech, industrials and environment, ag, including nutrition, pharma and biotech. And I do think this perhaps is one of the things that remains one of the more unique things about Ginkgo in the industry.

But today, I do want to kind of laser us in and focus on one of those segments, in particular, agriculture. Okay. So we recently announced our plans to acquire Bayer's Agricultural Biologicals R&D facility, and I'll talk about what I mean by that, and their team in West Sacramento, California, and also our planned follow-on multiyear strategic collaboration with Bayer, okay, so as a customer. So I wanted to chat with you about that transaction and the opportunities we see in agriculture, because I think this is going to be a critical market for Ginkgo coming up as we continue to grow.

All right. So just to state the obvious, because sometimes I think people forget about the agriculture industry. It is a major backbone of society. It's where your food comes from, but also things like you've a cotton shirt on, that's a product of the agriculture industry; you're eating a hamburger, if it's meat or plant-based, agricultural industry; ethanol going into fuel blends, that's coming from the agricultural industry. And the inputs that enable this industrial ag sector are huge, right? You have hundreds of billions of dollars going to help farmers grow larger and healthier plants every year.

And if you want to understand, there's sort of like 2 big areas of technology development in ag. So first is the biology itself, right? So take corn, like the genetics of the corn plants have been being improved for literally thousands of years, right? People have been breeding, right? Mixing, oh, this is a tall plant, this is a tall plant, let's breed them together, and like that process has been improving the underlying biology itself, frankly, into pre-industrial times, okay?

And then second is all the technologies wrapped around that biology. So chemical fertilizers, pesticides, herbicides for killing weeds, automated farm equipment, drones to map it, all these other things that are sort of wrapped around that plant, okay? And the upcoming story is that, in my view, the tools of biotechnology and synthetic biology, as those improve, more and more of these adjacent tech that's kind of wrapped around the biology will become part of the biology itself, okay? And that was a little bit the story of the first era of biotech, which really launched in earnest in the 1990s. Roundup Ready was a very valuable genetic trait that was built by Monsanto. That was approved in 1996. So that first round of biotech, people are most familiar with that in the area of seeds and traits. In other words, putting genetics into the corn plant itself and in the case of like a Roundup to try to enable a more efficient herbicide.

And so -- however, the other biology that's out in the field are all the microbes that live in the soil and on the plant itself, okay? And these are also important contributors to the output of that field of plants. And this is what is called biologics, agricultural biologicals or biologics in the ag industry. And today, there are products in the market like this. and they're sold using wild microbes. So microbes that have been identified in the field that, okay, this particular microbe provides a nutrient or provides some defense against a pest, and so it can be applied as a seed treatment like coated on a seed, so that when you plant the seed, the microbes grow along with it. That's one example. It can also be applied to the soil or foliar. But there's this market for biologicals in the industry today.

However, these sort of first generation of biotech were passed over as targets for genetic engineering. That was really focused on the plants. And that's what's begun to change in the last few years. And so I'll give you my favorite example of this. I really like to give this one because this is around nitrogen fertilizer production. I was actually a chemical engineer, my original training at MIT, and sort of the pride of chemical engineering is a process called the Haber-Bosch process, and it's how we make synthetic nitrogen fertilizer. You basically pull nitrogen out of the air, right, a lot of nitrogen in the atmosphere. You pull that air through a big chemical plant, you burn natural gas, you put the nitrogen together with hydrogen, you get ammonia, and you bag that up, you ship it out to fields. About $80 billion worth of this goes to the farmers, goes on the crop, right?

A chunk of it actually ends up in runoff going into local water supplies, creating environmental issues around algae blooms and things like that. And also, it's about 4% of global natural gas. It's a huge greenhouse gas emitter, but we've got to eat, right? And that synthetic fertilizer is absolutely necessary to our food supply today. It is also unsustainable, right? In a carbon-neutral future, the amount of greenhouse gas we're producing to do this is something that we need to get off of.

And so one of the most exciting new solutions to this problem coming up is to leverage biology to produce that nitrogen fertilizer. And what's cool is we know biology can already do this. So you might remember, like in elementary school, learning about crop rotation or your plant legumes, right, like soybean, for example. And legumes have, on their roots, microbes that are factory running Haber-Bosch, right? They're pulling nitrogen out of the air and they're making it available to the crop, right? But they're doing this for free. And so as a result, legumes use a lot less fertilizer. And the reason you did that crop rotation was that these would help revitalize the soil for a different crop like a corn that does not have those nitrogen fixing or collecting microbes.

And so we've had a joint venture with Bayer join over the last few years working on moving that pathway, that nitrogen fixation from these other microbes that like live on legumes into microbes that would live on corn. And I'm excited that as part of the planned transaction coming up, Bayer will be taking those biological assets forward for further development from our joint venture. And this sort of out-licensing to a commercial partner, with follow-on downstream value coming back to Ginkgo upon commercial success, that is the hope for outcome across all our cell programming projects, right, as you know. And so we'd love to see this sort of nitrogen fixation succeed at scale. It will be a big commercial opportunity.

It's also the sort of product that highlights how synthetic biology can have transformational impacts as we march towards a carbon-neutral economy, right? I mean this is the sort of thing that, look, AI and machine learning and computers just don't help, right? They don't solve fundamentally a problem because it is a physical problem and out in the real world. We need things like synthetic biology, certainly enabled by the tools of machine learning and that. But at the end of the day, you need actual physical object in the field. And biology, in my opinion, is one of the key technologies here. From my perspective, this couldn't be in better hands from here on out than with Bayer to work to commercialize it.

Okay. So it's not just nitrogen fertilizers, though. That's one piece of this upcoming partnership. There are enormous opportunities to impact greenhouse gas emissions across all of agriculture, and we should create more sustainable solutions, solutions that are resilient to changing climate. And tactically, you're seeing this now, unstable global supply chains that currently support the ag industry are really being tested, right? We've seen this recently with fertilizer prices, as what we've just been talking about here, but also via regulation in places like the EU that are regulating out a number of chemical pesticides in the coming years where there's not, at the moment, a great replacement for that pesticide. And farmers are going to need something, right, to resist those pests to maintain efficiency.

And so I think this is really an opportunity for biological solutions in agriculture, probably better than they've ever been. But the reason that to date we've used chemistry is the stuff works really well, right? So there's a high bar on these technologies to really beat those synthetic chemicals. And so that's where we think bringing the tools of synthetic biology into ag biologicals is really critical, right? We shouldn't be limiting the tools in our toolkit when attacking these big societal problems. And engineered biology will be a significant part of the solution across fertilizers for sure, but also pest control, disease control, all of these areas, I think biologicals have a shot at developing new products.

Okay. One of the things we've learned, and I'll talk a little bit about our work in industrial biotechnology, like making things like flavors and fragrances and foods and doing those types of projects for customers is that Ginkgo needed to have a strong understanding of sort of how customers go end to end when they work with us, right? And so that includes sort of the beginning of a process around sort of like doing the cell engineering and working with our Foundry and code base, but it also means we need to invest in understanding fermentation and scale-up, downstream purification and formulation, and things like that to help our customers be able to ultimately bring that product all the way to market and transfer them to a process that can go in scale. And you've seen us do this, for example, with our partner, Cronos, in Canada recently.

Agricultural biologicals, there's a difference in that value chain compared to industrial biotech. Some parts are similar, but some parts are very different. And we need to have different capabilities if we're going to also offer end-to-end biologicals to anybody in the ag industry that wants to develop it. And so you will see us getting better at things like formulation and downstream purification and also things like greenhouse trials. And so as part of this transaction with Bayer, I'm very excited that we'll be bringing in a lot of those assets into Ginkgo. And we believe this transaction will dramatically accelerate the innovation that's possible in ag biologicals.

So to quickly summarize the 3 parts of the transaction, first, we plan to acquire Bayer's West Sacramento agricultural biologicals R&D facility and team. You can see a picture of it off to the right. It is absolutely an incredible facility. It's got great lab space and also an amazing strain collection. So these are wild strains that have been collected from nature. They're a great source of both kind of host cells that you could use to put new genetics into, but also their genomes contain interesting genetic code that might be relevant to put into a different cell as we develop these biologics. So really having that as a code base asset is very valuable for us, and they have a whole strain banking system. They have pilot fermentation scale to be able to grow these, add biologicals up to then go into trials on fields, right? And they have greenhouse capacity to do those sort of early greenhouse trials before they would go to wider field trials.

The team is absolutely terrific. They have been leaders in this space with several large product innovations in biologicals coming from this team over the past couple of decades. So that's actually a really nice asset for us as we go to -- let's say, you're a start-up customer in ag biologicals and you had a great idea for a biological that would help fix carbon. Well, we have a team here that's thought about different aspects of how natural microbes do that over the last years. They understand what types of things have sort of historically tactically been able to actually work in a field when it got to brass tacks, and that's all available. That sort of consultary services are available by engaging with Ginkgo, you get access to that team.

Second, as part of building this unique ag platform, we plan to integrate the R&D platform of Joyn Bio, which is our 50-50 JV with Leaps by Bayer. The team at Joyn is fantastic, and they've been at the forefront of applying synthetic biology to ag biologicals. And we are thrilled to sort of supercharge them via this transaction. And last but not least, plans, as I mentioned, to start a large new collaboration with us, Ginkgo, across multiple programs and multiple years. And so this significantly, we believe, derisks the investment for us as we have a very large anchor customer to help baseload demand on the sort of end-to-end ag platform as we make it bigger. This collaboration will focus on several different areas, including nitrogen fixation, like I mentioned, building on the work Joyn has done, as well as new programs in crop protection. This is also a great trend we hope to see more of over time where companies are choosing to outsource R&D to platform providers like Ginkgo, right?

Again, I mentioned this earlier, but the analogy here is the move from on-prem servers and IT departments to like cloud computing. We want to see more of this, right? This move by Bayer is a step in that direction for the ag industry, and we hope it's an indication of where that industry is headed. So I'm super excited about this deal to get done and the team and what we'll be able to do together in agriculture. It's a big move for Ginkgo and it's great.

I want to give one last bit of detail just again for potential customers that are listening on the call. So the new capabilities we expect this transaction to bring us and then we can offer to customers listening out, probably you can see here, we plan to be able to support customers end-to-end in ag biologicals. And that allows us to work with both small and large customers. As you can see that, well, obviously, we can get access to our code base and Foundry like anything else, but we also have these sort of capabilities that are ag specific, translational implanted studies for early screening, helping translate research in the labs of the greenhouse, deeper expertise in formulation for different applications, right?

Like we need expertise to know what's the right mixture to put with your live microbes that allow it to survive and packaging for a year before it's going to end up on a seed and so on. We have those assets now coming in through the transaction when it closes. And depending on the size or the capabilities of the customer, we can be flexible. So if you're a start-up, you might use every part of it that you see on the slide. But if we're working with a large company, maybe some of the tail-end assets, you want to use your in-house infrastructure, your in-house formulation. That's fine, right?

What we want to make sure is that we have a full suite of solutions. So whoever needs those front-end things, cell engineering, we have all the end-to-end to offer them so that they don't have any barriers to signing up.

And our goal would be to have every developer of ag biologicals engage with our platform somewhere on this value chain, right? We believe we have the pieces in place and are excited for the commercial team at Ginkgo to have the opportunity to find new customers for us in agriculture.

Okay. So I wanted to just end on another quick check-in on the market, our investor call, lots of folks focus here. So in our last call, I shared this quote from Amazon's 2000 shareholder letter, where Bezos references Ben Graham's famous quote, that's sort of "in the short term, stock market is a voting machine, and in the long term, it's a weighing machine," right? And the general idea here is that, eventually, stocks value tracks to the intrinsic value, as they describe, of the company, which is really the discounted future free cash flows, right? Like that's it. That's how corporations work.

And in the near term, though, a million external events, whether it's interest rates or wars or anything else can drive -- or exuberance can drive stocks up or down, right? And so we're careful to message to the team, and I hope the team listens to this as well at Ginkgo, that really Ginkgo's orientation is around making a heavier company. right? We want to make the right long-term moves that drive free cash flow. And then we want to make sure we keep a margin of safety in cash to not be influenced by short-term moves in the market to then make bad long-term decisions. You won't see us do that. And we've tried to be very clear about that with the type of investors we want to get on our cap table.

So again, just to summarize, we have a great cash position, and we'll carefully continue to manage our business to maintain that margin of safety, so we don't need to raise capital at an inopportune time. We continue to see strong demand with increased interest from customers that, frankly, we couldn't have gotten in the door with 3 years ago, due to our increased brand and scale. We expect to add new programs across diverse customers and industries, ranging from large multinationals to brand new start-ups. And in this market, there are also more opportunities for M&A, right? We have a deep pipeline, which we expect to open up many more valuable opportunities for us going forward.

Finally, our biosecurity business has proven to not only be a strong source of cash flows that support our cell engineering business, but remains a strategically important part of our platform. So once again, I'll end on this slide. People forget that when they invest, it influences how the world develops, right? And if we want to see breakthrough technologies come into the world, we will need to be careful in this environment and look for companies that have the runway to make it to scale, but with sort of rising interest rates and the environment, I think investors will have the opportunity of sort of a breakthrough technology and long-dated growth companies at a discount in the near term. Now while we should be thoughtful, we should also invest in the world we want to see exist.

Happy to take your questions, and I'm really excited for the sort of long-term-minded investors we'll see on our cap table coming up here at Ginkgo. Thanks so much.

Great. Thanks, Jason. We'll switch to Q&A in a few moments. As usual, I'll start with a question from the public. (Operator Instructions) Thanks, all. We'll see you in a second.

Okay. I think we're all here. So as usual, I'll take the first question from retail, and then I will be turning it over to the analysts who are on the line. Matt Sykes, it looks like you first raised your hand. So stay tuned.

But the first question is going to come from Twitter from The Rabbit. Please discuss on the call as to why your Foundry revenue was so light this quarter. You missed analyst estimates quite a bit, and revenue was down from the year ago quarter despite 11 new clients. Are you lowering the upfront fees for higher back-end economics?

Yes, I can take that, Anna Marie. So Mark spoke to this in the financial section of the talk, but I'll expand on it a bit. So the short answer is that quarters can to be lumpy, which I'll explain why in a second. And that's why we haven't been providing quarterly guidance. And analysts will take their best swing at it. And as Mark mentioned on the call, we've reiterated our full year guidance, but to give you a bit of a longer answer, there's sort of 3 considerations when comparing Foundry revenue, either quarter-over-quarter or sort of year-over-year. So first is the timing of downstream value. So as you understand, as part of our business, we're going to get some amount of fees where customers are paying us as we are developing an organism for them. And then at the end of that project, there will be some type of, often, downstream value share based on a commercial or manufacturing milestone, okay?

And the key feature of that is that is dependent on the customer doing things, right? So if it's a royalty on sales, the customer has to go out and get customers and sell. If it's a key manufacturing milestone, the customer needs to go to scale and hit that manufacturing milestone, right? And so there's a fundamental sort of lack of our control on that process that's just baked into the business model, right? Now I know this is also different than sort of like app store economic models where you're taking royalty on an app in an app store. Again, it depends on which apps go to market. I think the issue is we're at the beginning of this, right? And so I think this could get smoother over time as we have more products on the market, you have sort of a base of royalties, and then new additions are sort of small relative to the base. But for a while, while things are coming in for the first time, I think you should expect it to be lumpy like this because of downstream value share.

The second sort of question of why is this trending relative to us adding a good number of new clients in the last quarter. So an important thing to understand is if you look at how our collaboration structures work, often most of the revenue during the life cycle of a program is recognized in its later stages, right? So there's some sort of mix as we grow where, as new programs are ramping up, and as a reminder we signed 30 new programs in just the last 3 quarters, we'll see those contribute more revenue, and that will offset some of the mature deals completing and rolling off. So even though you'll see a lot of new programs in the quarter, that's not going to immediately show up in that Foundry revenue.

And then third, as the 2 other questions noted, we do have the ability here to flex our deal structures to optimize for downstream value share versus upfront fees and so on. And so we can make that decision based on a number of reasons, right? That could be based on customer interest and so on. And so it could also affect existing deals. Just to help you understand this a little better, let's say we have a flat fee deal with the customer. In other words, we're getting a certain amount of fees regardless of how much lab work we do, and we have a number of collaborations like this.

Well, let's say, we're getting close to the end of the project and we see a big downstream value share milestone waiting for us, we might very rationally choose to spend more effort in our Foundry relative to the flat fee we're getting to get to that milestone, right? And so that's an example where it can even affect what we do with historical programs and that balance of sort of fees versus downstream value share could be reflected there as well. So for all these reasons, I think quarterly volatility in Foundry revenue is not unexpected for us. And we do take that into consideration when we set the annual guidance.

All right. Matt Sykes from Goldman Sachs.

Two quick ones. And I'll just mention both upfront. Just on the last quarter call, you talked about, and Jason, you just referred to it kind of being able to tune the types of contracts you're signing? And just looking at the number of programs you've put up each quarter, should we be thinking about maybe you're introducing a little bit more selectivity in terms of the number of programs you're taking on or certain agreements to your ability to tune those contracts?

And then the second question is just on the Bayer collaboration. I think in the release you mentioned that portion of the operating expenditures will be offset by some of the fees generated for the collaboration. Could you just talk about how much that offset is? And if this collaboration changes your OpEx profile going forward?

Yes. So I'll take the first one, and Mark, do you want to take the second?

Sounds all right.

So yes, with regard to how we choose which programs to take on, one of the things I do caution the commercial team is not to try to pick winners in the market. In other words, we don't really see ourselves as an end product developer here at Ginkgo. In other words, I'm not a therapeutic drug developer, I'm not a fragrance developer, I'm not an ag biologicals expert in terms of what's the right next products in that market. Our customers ultimately are. And so what we're looking for when we're choosing who to get on the platform is often appetite, right?

Like how excited are they to basically take this transition, which is a shift from how the market works today, right? The status quo, if you wanted to do a cell engineering project and you launched a company tomorrow, the expectation from your VCs and others would be, you'll start running lab space, you buy a bunch of equipment, you hire some scientists to get to work. And so one of the questions is like, where is the customer who's got the appetite to push a lot and believes in this sort of outsourced R&D? And that's why I'm excited about the Bayer because you see that happening with really a large customer in that case for a whole category of work for them.

And then by the way, that's been the only work with Bayer, right? But they've decided to sort of outsource that work out to the wider market of providers, right? And so I think like that's one of the big ones. And then second is just quality of deals, right? What's the opportunity for downstream value share, fees, and so on. But there's no more to it than that. We're not really again trying to overfit to either a certain market or things like that sort of -- we take it as it comes.

And Mark, do you want to address the Bayer transaction?

Yes, sure, Matt. So as you know, when we talked about the deal, when we disclosed it, we did say we're bringing on some operating expenses, but the collaboration with Bayer itself and the new programs with baseload demand pretty well and largely offset the operating expenses. So I wouldn't look at the Bayer transaction as in any way materially changing our OpEx profile. And certainly, it wouldn't change in any significant way our sort of cash runway.

Tejas Savant from Morgan Stanley.

So Jason, one follow-up on the Bayer partnership here. It doesn't sound like it, but can you just clarify to the extent to which this is exclusive in the sense that you do now have an anchor tenant who clearly has a strong interest in the field? Does this sort of preclude you or perhaps sort of make other potential customers, especially the larger ones, a little bit weary of engaging with Ginkgo?

And then as a sort of unrelated follow-up there, any color that you can share on those OUS opportunities on the biosecurity front? I know you mentioned funding uncertainty beyond July 1 in the past, but outside the U.S., if you can help us sort of prioritize or size some of the opportunities that might come into focus for biosecurity in the next 12 months, that will be helpful.

Yes, happy to do that. So one of the things we think about on the -- so to answer your question about the Bayer transaction, just to repeat it, right? It's sort of like, hey, if you're taking a large customer in a certain category, does it prevent you from working with other companies in that sector, right? And so I think one of the things we try to be clear about with customers broadly at Ginkgo is that the model here is to be like an Amazon Web Service, right? You have competing companies leveraging Amazon Web Services. It's a net benefit to the entire industry because everybody is getting better economics on one piece of the stack needed to get a product to market. And there's plenty of other places to compete above that sort of base sort of platform, in this case, of delivering web services and data centers and all that, okay? And so that is very much the model, and we're very clear about that with partners.

We are always arguing, right? Like any customer is going to try to lock us into an exclusivity. And just as -- pretty sure we have now, I mean as we've been signing the Bayer deal, so I certainly can't comment on exactly how it's going to work. But what I can say is our intent here and the reason we're acquiring a large team and platform in West Sacramento is to make that broadly available, right? And I do think both large companies in the space and start-ups in the space will be excited to get access to our platform when the deal is concluded. But it is always a discussion with partners on that. But that's our philosophy when it comes to how we want to work in the market.

And then the second question was about outside of the U.S. opportunities around biosecurity.

Yes. I mean -- so we don't have anything specific there yet to ask. But what I would say is we have a core belief that biology doesn't respect borders. We think COVID-19 is an existent proof of that fact. And so if you're the U.S. government, for example, and you're trying to enable U.S. biosecurity, I think the right framework to think of is global biosecurity. And I think COVID-19 was a wake-up call that there were a lot of cracks in our current system of global biosecurity. I think you're going to see -- and you're hearing people talk about this from 18 different directions. I think Bill Gates just had a thing out about his idea for a certain type of organization to be able to jump in into hotspot areas and things like that. Look, I don't actually know what ultimately this will look like, but what I will say is our expectation, I think, of the biosecurity arena is that we do need to operate globally if we want to be really the preeminent provider of sort of biosecurity technologies. That's the right way to think about the business. So that was really what we were getting out there with that comment.

Next, Matt from William Blair.

Just wanted to get an update on how funding dynamics and the volatile markets obviously are impacting the rate, and maybe you are bringing on new customers or new programs on your platform and whether or not you've seen these factors to have a slowdown in company's decision-making and just exactly how much of an impact that had on the number of programs that you added in the quarter.

And then a bit of a follow-up just in terms of the new customers and the new programs that you're adding. Have you seen this impact in terms of the volatile markets and fund dynamics maybe slow down new customers coming onto the platform? Or are you also seeing some existing customers that hold off on adding new programs at a rate that you would have expected maybe a few months ago?

Yes. So this is a good -- sorry, yes, I'll jump in on this because I find it's fascinating. So I think jury is out a little bit. There's different dynamics that can either favor us or hurt us, right? So obviously, companies being flushed in giant pools of venture capital should drive money to service businesses providing services to those companies, right? Like that feels obvious. The only caveat is the normal mental model is they raise those piles of money, rent a lab, buy a bunch of equipment, and hire scientists to do the work, right? So their actual mental model to date is not to outsource it to service providers, is to use all that money to build on R&D team to do cell engineering. And so we are trying to affect this like -- again, this mentality shift, which is what I'm so excited about seeing in the Bayer deal.

Well, cash pressure on small biotechs can help change people's minds, right? So you might look at that and say, "Well, you know, I don't know if I want that big lease cost in Kendall Square, right? I don't know if I want to buy these several million dollars worth of equipment right in the first weeks of the company, right?" So there's an interesting trade-off there where I think it remains to be seen. And obviously, just to flag it, also the private funding market lag a bit, but I think there is, and you're reading a lot about this now, so a lot of the VCs are starting to crack down there, too. But it's been a little laggy. So I think maybe in the next quarter we'll see a little more of it play out. Does that make sense?

Yes. Very helpful.

Rahul from Raymond James.

Perfect. So clearly, there's a lot of interest around the Bayer deal, as is our question. So one of the things we talked about in the early days, what Jason remarked was that a way to get to the anticipated 500 projects in 2025 was to sign up these anchor partners. And of course, with Bayer, we're seeing this first real anchor partner. So my question is 2 parts. One, how should we see this partnership, as you consummate the deal, lend to potentially greater rate of new onboarding of projects? And second, how does this partnership portend similar anchor partnerships in other sectors, particularly biopharma?

Yes. So this is a very good question. So yes, I mean I would say there are 2 interesting things here. So in general, any large customer for Ginkgo, and like I think a good example of this would be like Givaudan in the fragrance industry, right? Where if we initially do -- initial in that case was a very small pilot project many years ago, but any first project that then goes well can lead to more business, right? So I think that's like just one very generic frame here. It's like taking a large company customer, building a relationship, proving it out and then expanding from there. And that, because of the size of their R&D budgets and the scale of their needs, there actually could be many future projects, okay? So that's all still true. And we're doing that across many customers. So if that was the definition of anchor customer, I think we have many other anchor customers as well. I do think what's unique in this case is really a strategic choice Bayer is making to actually just do this work externally.

And I think in therapeutics, you kind of see this where like a lot of the large pharma companies have really focused, overwhelming in many cases, on really their skills in development and kind of passed research off into what is ultimately like a small biotech ecosystem. So I think that kind of model, you're starting to see a little bit taste of it in ag biologicals. That's a really exciting trend for a platform like us. And so I will flag that there's that extra element. But other than that, I mean, yes, we do good work with them, and this will kick off if it all closes with a multiyear partnership that we should be able to keep doing more and more. I mean that's really the idea behind Ginkgo.

Mark Massaro at BTIG.

Terrific. So yes, I wanted to ask, one of your partners is Berkeley Lights, and I believe they're scheduled to deliver one or more workflows over to your facility in Boston later this year, if not already did recently. Can you just speak to what type of capability Berkeley can deliver to your Foundry and whether or not that can enable the potential for new customers or new capabilities?

Yes, sure. So maybe I'll just expand a little bit on like how we drive improvement in our Foundry, right? So you saw a share when we gave the year-end update, sort of our -- we call it Knight's law, which is the sort of goal to triple the output of our foundries and roughly halve the cost of this metric that we track on the strain test. So like how do we continue to drive that underlying technology improvement at the company? And so some of the things are like automation, right? So if you come to our newer facilities, you see more and more sophisticated automation. Some of the things are the biology and biochemistry, like we are inventing new better ways to do the experiments we do.

But the third area is really in liquid handling, not to nerd out too much on this, but like the size of the drop of liquid that you can manipulate in the lab, as that shrinks, you actually use less reagents right? So it helps to reduce that to help us continue that cost drop as we're doing this work. And so the reason we like the Berkeley Lights machines is they're using a microfluidic technology that really allows us to continue to substantially shrink the reaction volumes that we're working with when we're doing -- not everything, like those machines aren't, they're not general-purpose liquid handlers, but for the type of work they're doing, a certain wide class of assays that are roughly based on what you can see with a high-powered microscope, pretty neat.

And so that's why we like them. We think it's ultimately a very flexible platform, and that's why we have the relationship that we do. But that's the category and it's in that sort of continuing to shrink the volume of liquid we can work with to help us drive Knight's law, which we ultimately think serves the whole industry by helping to reduce the laboratory cost of cell engineering.

Great. And just as a follow-up to that, I know you got the question from Twitter. The Foundry revenue came in a little bit light of our estimate. I guess, should we expect your related party revenue just to kind of kick back up later this year? And maybe can you give us a sense for how you expect to end the year both as related party and third party as a percentage of Foundry revenue for the year?

Yes. So Mark, you want to talk about sort of what we would say about the year? And then I can maybe speak to related parties generally.

Yes. So Mark, I mean, we don't break out sort of guidance in that kind of a subsegment. But just to maybe reiterate some comments we've made in the past on related parties. So first of all, generally speaking, we're not expecting related party to be sort of a significant or outsized source of growth when you compare 2022 versus 2021. And the sort of uptick in related party as a percent of total revenue that you saw this quarter is not sort of a general shift in trend. As you know, last year, the general trend was that mix was declining, and it has more to do with just timing. And even if you look at a base of $20 million of revenue, a couple of million bucks here or there can actually swing on mix shift. So I wouldn't really read into the kind of uptick this quarter as some kind of a trend. And I would just reiterate what we said in the past, which is the related party revenue mix isn't something that I would expect to be sort of an outsized contributor to growth for the year.

My only addition there, Mark mentioned this on the call, but it's not something we manage to, right? The related parties fall out of basically type of deal structure that will offer where -- again, depending on the company, they may prefer, in lieu of royalty, us to take equity in the company, as an example. That's one of the deal structures that end up with us holding equity, right? There's others too. But it's generally us using equity as a deal-making tool that's creating related parties. And as far as I'm concerned, it's a sales weapon for us, right? So I'm happy to keep doing it. But it is something, again, that we're not managing towards. I just want to highlight that interesting case, whichever way it goes at the end of the day.

Next question will be from Steve Mah at Cowen.

Okay. Great. A lot of ground already covered, but maybe a follow-up question on new partner adds.

Jason, you talked about using Ginkgo can ultimately save partners' money versus buying their own infrastructure. But have you seen a trend where there's a push towards more back-end loaded deals as smaller partners try to conserve cash? And if so, can you see any read-through to Ginkgo in the short term?

Yes, that's a good question. Yes, I would say you will see, certainly among smaller companies, more cash sensitivity in this environment, right? Like I think that's truism, right? Like I was saying earlier, you might see at least more interest in outsourcing, which I think is true, right? So that dynamic, I feel -- again, I don't have the data on this yet, because I think the squeeze hasn't come as much on the private companies, but it will. So you could see a change in their interest in outsourcing. But then they're certainly going to, I think, be more cash sensitive than a start-up deal typically is. So yes, you would see some of that trade, that also could be traded in us taking equity again, right, and little cash and things like that. So again, we have tools in our toolbox to help there. But I would say that, that is a sensitivity for the smaller companies.

For the larger companies, not as much, right? Often there, the mental model for those companies is like, I love the -- they're like, I don't want to do downstream value share, I'd rather pay cash or fund, right? Like again, it depends on the partner, but that's pretty common in therapeutics, for example, right? So I think it's going to affect the different size customers differently, I assume.

Okay. And then a quick one. Bioworks7, when is that going to be completed? And are you going to have enough capacity for the expected 60 new program adds this year?

Mark, I don't know if you have information on what we said about completion. Go ahead. Yes. you're muted though.

Yes, I don't have a completion date. I will say that the relatively low CapEx that you see in Q1 is not indicative of the actual efforts that we're putting into that build-out. And so there was just a lot of -- like there's timing of kind of project expenditures, equipment lead times, et cetera. And so yes, but I actually don't know the completion date. That said, it's not something that is a major driver to capacity that we need this year in order to meet this year's revenue.

All right. Looks like last analyst question here is going to come from Derik De Bruin over at BofA.

Great. So just some questions. So you talked about adding 60 programs for the year. I'm just sort of curious on what's the -- in terms of how you are thinking about active programs, because if you looked at -- I mean, if you look at this quarter, you ended Q4 with 60, you did 64, so that you added 11, so that basically means you had 7 that went away or concluded. Can you talk about how you sort of think about the net new program adds? And also just -- I know we've talked a lot about how we were thinking about this, but how many of these programs that are concluded do you think will add downstream value? There's something that's going to come out there or things that were just sort of like research projects? And basically, it's like how do we sort of model the revenue per active program? Because I know it's sort of like a moving target and it's lumpy, but it sort of matters to the model.

Yes, yes. Well said. So yes, so a couple of maybe -- and again, if I could restate sort of how do we think about net new program adds versus new program adds. And then I think sort of research projects versus commercial. So I'll take the second one first. So when we're talking about a new program, that is something that's got commercial intent, and our intent there is to have downstream value share and so on. So pure research projects without an intent to get to a product. We might do something like that, but it wouldn't end up in the programs. So that's my first point on that. Now that doesn't mean by any stretch that every program is going to be successful, right? I mean, and that's the nature, I think, of sort of biotechnology today, right?

But this is also not the customer expectation, right? In other words, if you're a start-up biotech company, you want to take the best shot you can with the dollars you have, but you are far from guaranteed, for example, that your therapeutic is going to go to market, right? And so there's sort of -- and that varies by industries or other industries that are having a more contained problem would have a higher expectation of likelihood of any given program succeeding, but probably a lower value in that program, right? And so we have that sort of dynamic, and what I like about Ginkgo is we have a nice portfolio, all right?

Now net program adds, right, is basically a function of, again, new programs launching and then old programs finishing and either waiting on downstream value share or just ending if they weren't successful. And so at the end of the day, my view on it is kind of like, the most important thing is adding new programs and then doing the best job we can with the infrastructure we have for the customers, that the customer walks away saying, "This was better than what I would have done myself," right? If the program works, I think we tend to get extra credit probably than we deserve in the sense that like some of that's going to be some random chance based on the biology. And if it fails, we probably get knocked a little harder than we deserve. But in the end of the day, the customer wants to see that we've done a better job than I think they could have done for the dollars. That, I think, is what returns repeat business to us.

So the short answer is I don't look at that too much, the net new program add. I do look at are we keeping up with Knight's law, right? Are we bringing in demand, scaling our Foundry, and I'm very focused on that. And I'm focused on, are we getting programs out the door where the customer is happy with the work. But then downstream value share will come as it comes, right? Again, I try not to overfit to that because it's not under our control and a number of them won't work just because biology is biology today still. So I know that is not a most satisfying answer, but that's the reality of how we think about it. It remains unpredictable is the short answer, Derik.

Got it. Got it. And just as a follow-up on this one. I mean when you sort of go back and you look at your Analyst Day documents that you put out way back, which is basically a year ago, on this one. How do you sort of think about visibility in terms of the programs that you put out there? I mean I think you had 136 in the model for 2023, 268 or something like that in the model for 2024. How should we think about your view on this now that you're near into this? And I think the question has been asked about the volatility in the markets and just things going on with it. I mean, what's your confidence level on those out-year projections that you put out there?

Yes. I don't know if we shared any specific views on sort of beyond '23 in terms of guidance and numbers. What I will say is, again, I think what we are trying to affect is a shift in the status quo of how this work is done. So overwhelmingly, everybody is still doing it themselves, right? So yes, market conditions are a little worse. But it's not like, I mean, an existing outsourced cell engineering market. I'm again affecting that change in the market and making the amount of difference I need to make even with the number of programs we're talking about there is still small compared to the total amount of cell engineering projects going on across every biotech company from ag to materials to food to pharma, right?

And again, I don't know which way the capital tightening will drive. It might mean less total programs happening across the industry, but higher percentage outsourced, which at Ginkgo's current scale, where we're barely penetrated, is great, right? But I just don't know today how that's going to play out. I think we have to last the next couple of quarters, especially.

Got it. And final note, final question. How should we think about the Bayer program and sort of like that to bring it out. So how should we think about revenues from that program and when we could potentially see something materialize?

Mark, I'll let you answer that, and I'll finish this off.

Yes, sorry. On the Bayer revenue?

Revenues on Bayer, yes.

Yes, Derik. So it's a pretty complicated transaction and the GAAP accounting for that is still very much kind of TBD. And so I just can't really comment on that right now.

(inaudible) video cannot play. This is Jim telling us that we should end the call. But thanks for all the great questions, everybody. And I think that concludes that -- cameras are back. But I think that wraps up our call today. Jason, any final words for folks?

Sorry, I wanted to just correct something on Derik's question with the roll forward of the programs just because I know we have a lot of listeners and it's kind of a nuance. But Derik, just so you know, the current active program count of 60 was not the 12/31/2022 balance. An active program is a program that was active at any time in the quarter. So your kind of roll forward math would be a bit off. It doesn't change the point you were making, but I know we just have a lot of listeners on this call and I didn't want to leave that sort of point unaddressed. And so some of those programs would have terminated in the actual fourth quarter, not after 12/31/2022. It's a nuance, happy to kind of take it off-line.

T's crossed and I's dotted. Okay. All right. Well, thanks again, everybody. We appreciate your time today, and thanks about the last verification, Mark. Take care, everyone.