Ginkgo Bioworks Holdings Inc (DNA) 2021 Q3 法說會逐字稿

Good morning, everyone. This is Anna Marie Wagner, I'm the SVP of Corporate Development at Ginkgo. I'm joined today by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. We're honored that you chose to start your week with us, and we're looking forward to updating you on our tremendous progress so far this year.

Needless to say, it's been an exciting quarter. And to help warm up the crowd, I just wanted to remind you that during the presentation today, we'll be making forward-looking statements. Those involve risks and uncertainties, so please refer to our filings with the Securities and Exchange Commission to learn more about those risks and uncertainties.

During our quarterly earnings call, we will, of course, be updating you on our financial progress. But we also want to use these opportunities to continue to build a deeper understanding of what we're doing at Ginkgo. And so after our financial updates, we'll always feature a strategic deep dive each quarter, which today will be led by Jason. If there are topics you'd like to see in a future deep dive, please let us know.

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 via Twitter, use the hash tag #ginkgoresults or via e-mail at investors@ginkgobioworks.com.

And now without further ado, I'll hand it over to Jason to kick things off. Jason?

Thanks, Anna Marie. So just do a quick intro and you'll hear from me later in the deep dive.

So our mission here at Ginkgo is to make biology easier to engineer. We do that by operating as a horizontal platform. And I think this is a key idea about Ginkgo. We want to program cells for customers across a range of industries on this common platform. And then we monetize that platform similar to how a tech company would, but by capturing a portion of the value of the applications that are developed on top of that platform.

And myself and the founders at Ginkgo have been working on this mission since we met at MIT almost 20 years ago now. And the technical progress and tangible results that we've seen over the past year feels like a real inflection point at Ginkgo, but honestly, across the synthetic biology industry in general. And I could not be more excited to share our results with you today.

So one of the most important things for us is new program additions on the platform. That's one of our most important KPIs. And you might remember this summer, we updated our expectation for the year from 23 to 30 of those new programs. We remain on pace to hit that. In fact, we added 10 new programs in Q3.

Ultimately, Ginkgo's success is measured by our customer success, right? And we saw some awesome progress in our customer cell programs. And so I'm excited to be able to announce today that just last week, Cronos confirmed the performance of a second strain following on from one we announced earlier this year. This one will be producing CBGV. We delivered that strain and it has paid a second equity milestone in that program, which will be included in our Q4 financials.

So again, this is one thing that I get the most excited about is seeing organisms go out the door to customers, customers excited to be commercializing those and then value flowing back to Ginkgo.

Additionally, Aldevron, commercial has commenced commercial operations for vaccinia capping enzyme, VCE. This is one of the ingredients used in the manufacturing process for mRNA vaccines. And it's produced from a strain that we delivered in Q3 that yielded an over tenfold improvement in yield compared to Aldevron's previous process.

So really excited about this. It's an opportunity for an impact in the world and also a chance to see value come back to Ginkgo again from our customer success.

And finally, just last week, Synlogic announced that -- it's a big week, that they're advancing a Ginkgo-engineered strain for the treatment of homocystinuria to IND-enabled studies.

I'm so excited about this, right? So we've seen Ginkgo's organisms on a path to go into patients in therapeutics, it's been a long-time goal for the company, to be honest, and it's something we hope to see a lot more of in the future.

On the biosecurity side, this has really picked up steam with now 10 state-sponsored K-12 contracts, over 1,500 schools being served by our biosecurity brand, Concentric. As of the week of November 1, we were collecting over 220,000 samples per week. I could not be prouder of how the team came together to respond really to a crisis here, and it's truly a privilege to be building really part of the world's biosecurity infrastructure.

And I think this is -- I've talked about this previously. This I think is an absolutely critical thing in a post-COVID world as we are building out the tools to make it easier and easier to program and engineer cells. We have to build this type of security -- biosecurity globally, and I'm proud that, that Ginkgo is a part of that.

Finally, we capped off the quarter with our official listing on the New York Stock Exchange with the ticker DNA. We stand on the shoulder of giants with that ticker. We hope to do the prior owners, Genentech proud. And finally, we are thrilled to be able to see many of you at our conference, our Annual Meeting Ferment. Just a couple of weeks ago, over 700 people, that was a real thrill to see everyone, and we're hopeful that more of you will come back and join us next year.

And so now I'm going to hand off to Mark to share the details on our financial performance this quarter.

Great. Thank you, Jason. Now before we get into the financial slides, first some context. We are very pleased to report a strong quarter in terms of revenue. Total revenue in the third quarter of 2021 increased to $78 million, representing growth of nearly 6x the third quarter of 2020. Year-to-date, total revenue grew to $165 million, up from $45 million in the comparable prior year period.

This quarter's financial results highlight the tremendous progress in growing diversity in our business model as we receive significant revenue contributions from foundry services, downstream value share and biosecurity.

So now moving to cell programming highlights. We added 10 new cell programs to the foundry platform in the third quarter of 2021, bringing the total number of new programs to 21 year-to-date. As a reminder, our new cell program count is a key KPI that we're focused on as this metric drives both near-term foundry revenue and potential future downstream value share. We only count a program that has a certain expectation of scale and are typically doing several proof-of-concept programs in addition to reported numbers, which can ultimately lead to larger paid programs.

The 21 new programs we added year-to-date compares to 15 new programs added in the comparable period last year, representing 40% growth. We supported a total of 61 active programs in the year-to-date period across 30 customers on our foundry platform. We continue to see good industry diversification in new programs as well as further proof points in therapeutics and newer field for us, with 6 of the 21 new customer programs being from the pharma and biotech industry and the rest diversified across the many other industries in which we participate.

Foundry revenue increased to $35 million in the third quarter of 2021 from $12 million in the third quarter of 2020, representing over 200% growth. Similarly, foundry revenue for the year-to-date period increased to $79 million, representing growth of 84% over the comparable period last year.

Importantly, foundry revenue in the third quarter includes an equity payment we received for achieving a commercial milestone with Cronos, the first time that Ginkgo has received significant downstream value share. And as Jason mentioned, Cronos has also just confirmed that we hit their spec for a second molecule, which triggers the payment of a second equity milestone, which will be reflected in our Q4 financials.

And then finally, just to make a comment on related party revenue. So related parties represented 38% of foundry revenue in Q3 2021 and 47% of year-to-date foundry revenue. This compares to 63% of foundry revenue in Q3 2020 and 70% of foundry revenue in the 2020 year-to-date period. So this mix shift toward more third-party revenue was due to both the downstream value share received from Cronos, which is not a related party as well as just general diversification in the business.

So if we could now turn to biosecurity. Our biosecurity offering generated $43 million of revenue in the third quarter and $86 million of revenue year-to-date. This tremendous growth has now exceeded our recently expanded full year target in just the first 9 months of the year. Biosecurity revenue consists primarily of product and service revenue from our end-to-end COVID testing offering, and the growth is being driven primarily by K-12 pool testing.

We have now been awarded state-sponsored K-12 testing programs in 10 states. And as of last week, are collecting over 200,000 samples weekly. Biosecurity gross margin was 48% in the quarter, a significant improvement versus prior quarters and this is primarily due to maturation of the business and the benefits of larger scale.

Now if we could turn to the detailed P&L. I'm going to provide a little bit more commentary on the other line items. So starting with R&D expense. R&D expense grew to $53 million in the quarter driven by expansion of foundry capacity and increased breadth of capabilities to support both current and future collaborations, along with further development of our biosecurity offering.

G&A expense grew to $29 million in the quarter as we invested significantly in business development and all other G&A functions to support the higher level of foundry activity and our biosecurity offering, along with our very extensive public company readiness efforts.

Now to provide a quick comment on the net loss line item, it is important to note that our net loss includes a number of noncash expenses as detailed more fully in our financial statements. And these include, just by way of example, mark-to-market adjustments on equity method of investments where we have elected the fair value option. It includes reductions in the carrying value of those platform ventures that we account for under the equity method, and we take those reductions in the quarter that the equity has issued to us.

And then thirdly, it also includes mark-to-market adjustments on the Soaring Eagle public and private placement warrants that came on to our balance sheet as a result of the merger. Those are all reflected as a liability. Because of these noncash expenses, we look to adjusted EBITDA as a more accurate measure of our profitability.

Adjusted EBITDA in the quarter was negative $18 million, and for the year-to-date period was negative $107 million. A full reconciliation of EBITDA is provided in the appendix to this presentation and in our MD&A. Adjusted EBITDA was favorably impacted by gross profits in biosecurity this quarter and by downstream value share, which typically drops straight to the bottom line.

CapEx in the year-to-date period was $51 million, reflecting foundry capacity and capability investments. Examples of this include the substantial completion of our new broad use foundry, Bioworks6, which is located in our Boston headquarters as well as foundry space build-out in Cambridge, Massachusetts.

And so now if we could turn to outlook, I'd like to provide some brief commentary on revenue outlook for the rest of the year. We expect to add an incremental 9 new cell programs in Q4 for a total of 30 new programs in 2021. We expect foundry revenue to exceed $100 million for the full year 2021 inclusive of both downstream value share and services revenue. And then with respect to biosecurity, as a reminder, in August, we updated our biosecurity revenue outlook to be at least $75 million for the full year. Given our strong third quarter results, we expect to significantly exceed this revenue target for the full year.

While we're not providing a point estimate on revenues, there's still significant uncertainty in the K-12 testing market in general and the fact that circumstances of the pandemic change regularly, we are confident that Ginkgo is positioned well in this market.

We expect biosecurity revenue of at least $110 million for the full year. We further believe our performance in building an offering of this scale from scratch in such a rapid time frame is indicative of a strong execution capability on future opportunities as the biosecurity market further evolves.

And before I wrap, I'd like to make a comment on how we're thinking about guidance and breaking out foundry revenue in future time periods. We are internally evaluating this right now, but we do not anticipate that it will make sense for us to either guide to or break out foundry services revenue and downstream value share revenue as separate components.

As we are now reaching the phase of company maturity where we are seeing downstream value share hit the top line, we are seeing in real time that there are customer confidentiality considerations as well as situations in which it will be a smart business decision for us to make trade-offs between the 2.

And so just to conclude, in summary, we think this quarter demonstrates the strength in the business model. We're seeing an increase in diversity of customers operating in many industries, developing a wide array of different products on the platform. Downstream value share is a tangible commercial proof point, and it typically drops straight to the bottom line. And the progress in our biosecurity offering is truly impressive.

And so now, Jason, back to you.

Thanks, Mark. Great to see. I just want to say, I am continually impressed by the Ginkgo team. So just in the last 3 months, we took the company public, hosted a 700-person plus annual meeting, managed launching K-12 testing at the start of the school year, across -- which, as parents on the call know is a slightly stressful time in general for parents, across 18 states and continue to deliver steady successes and cell programs for our customers.

The team at Ginkgo did not blink and it has been awesome to watch. In addition to reading out our financial performance, I want to use these quarterly earnings calls to give a deep dive on aspects of the business that we are hearing questions on from investors, both institutional and retail. So please keep those questions coming. It will help inform what we put in this section in the future. We also had a short report, yes, I noticed come out about a month back. And while the guy that did it wasn't especially serious, he did make a bunch of serious claims publicly about Ginkgo's financial practices.

So not surprisingly, given the nature of the claims, we also received an informal inquiry from regulators at the DOJ and commenced an independent investigation led by our Audit Committee and supported by an independent law firm and forensic accounting firm.

I'm happy to report that the investigation found the claims were baseless, and I'm going to give you a readout on that as well today.

Okay. So I'm going to cover 3 topics in the deep dive. First, I want to talk about our horizontal business model as we're really pioneering that model in biotech, bringing it over from the tech industry. Second, sort of the silver lining to a bunch of baseless claims being made about the business is that it gave us a chance to make sure our house was in order. So I want to give a few comments from my seat here on that.

And then finally, I want to dig a little deeper into the financial structures and motivations of the types of deals we do for our 3 major customer types. Sort of the first, the large and midsize companies; second, these existing start-ups out in the world; and then third, new start-ups that launch day 1 on the platform.

These deals are designed based on what works best for each customer type. And I want to outline how they work and the progress we've been seeing across all 3 categories. Okay. So let's dive in.

So number one, we're bringing a horizontal business model. Common in tech into the biotech space. And the key ideas is we are going to serve customers in any market vertical that needs cell programming. So it's obvious today for, say, Amazon Web Services that it doesn't matter what market your website is to go use their services. And in my view, it will eventually be equally obvious that doesn't matter what market you're in, who you would use for your cell programming platform to be independent of that.

And so we don't want to organize our customers at Ginkgo by market vertical, okay? We want to organize them really by the stage of the company they are in. That's a much better predictor of the type of commercial arrangement preferred by that customer.

So with the larger midsized companies, such as our deals this year with Corteva, Biogen, Aldevron and Selecta, the customers are often paying foundry service fees in cash and downstream value share via royalties or milestone payments.

And as a reminder, this is kind of -- these value share payments are kind of similar to like an App Store model, right? So we get a piece of the downstream value of the products that we enable. So in our deals with the startups, both the -- the deals with start-ups now, both the existing and newly formed, those companies often prefer to offer Ginkgo equity in their company as for either these service fees or for the downstream value share.

And in those cases, this often create related parties in our filings, but it's a great structure for start-up customers. And so ultimately, like that's what matters as we've been creating these deal structures is what is going to be work best for customers, what creates the least friction to get them on the platform. And so that's really what we've oriented around because start-ups, frankly, are one of the most important parts of our business model, they're key customer segment because they haven't invested already in large R&D labs.

They don't have that sunk cost that the big companies do where they already have big labs and all that equipment and infrastructure. So they can, in many cases, start foundry native, right? Like they can be born on our platform. And this is something that happened with cloud computing. We had cloud-native companies come along, people talked about this 10 years ago.

That's really exciting. It really speeds up the launch of companies and can save them a lot of upfront cash. And so I'll talk about these in more detail coming up. I wanted to highlight how all 3 types of these deals are important for Ginkgo, why as a horizontal platform, that's the right way to approach the market and that we plan to do more deals of all these types just like we've done in 2021 in the future.

This slide here, just to flag it is from our pipe deck. So for those of you who are kind of engaged with us during that process, I think it nicely highlights that we've been planning for a while here to really develop an ecosystem of services around our platform and developer community, okay?

And that ranges from things like capital access, like we see with our structured partnerships and platform ventures to manufacturing access, like we work with Cronos to help them bring their facility online in Canada. We do community building like our Ferment event and so on. And you have seen this be key in the tech world. You have to bring together a community of people that are going to build on your platform. We are doing that very deliberately, and we want to keep offering them more ways to get value by engaging with Ginkgo alongside our technology platform.

Okay. Number two. All right. So as I mentioned, the short report made a number of claims publicly about financial misconduct. We are lucky to have a very strong leadership on our Board, and this triggered an internal investigation that concluded there was no basis in those claims. And look, I'll give you a little more context on our Board.

We have 2 sitting CEOs, and Reshma Kewalramani at Vertex and Christian Henry at Pac Bio. Shyam Sankar, the sitting President and COO at Palantir. We have 3 former CEOs in Marijn and Harry and Arie from Bayer and MGM and Kite, right? Christian heads up our Audit Committee, and he is following these claims in the short report, the Audit Committee called for an independent investigation. And the Audit Committee brought in as part of that Milbank as an independent counsel. The team was led by former DOJ prosecutors, engaged Ankura as forensic accountants to support their investigation.

Just to share how extensive this process was, the team reviewed thousands of pages of documents following an examination of electronic records, e-mail, Slack messages, financial, internal and external documents. They also conducted extensive interviews. And so I'd like to take a moment to thank the Audit Committee and the Milbank and Ankura teams for their diligence, their care and their time in this process.

I'd also like to express my admiration for the Ginkgo team, particularly our finance and legal teams who had to do all of this on top of their day jobs, keeping Ginkgo's ordinary operations humming just as you heard from Mark, during a very busy time for the company.

And as I mentioned, it is also not surprising in the case of public claims of financial misconduct to hear from regulators. And shortly after the report came out, we received an informal inquiry from the DOJ which is why I'm very happy to report today that based on the independent investigation, the Audit Committee found that any suggestion of fraud, reporting violations, accounting errors or other wrongdoing contained in the short seller's report were unfounded. And importantly, that no restatement of our financials was needed.

I will say, as CEO, it is very, very rewarding to see so many parts of the company and so many people on the team strenuously pressure tested like this, and see them pass with flying colors. It is a testament to the culture we've been building at Ginkgo the last 13 years now. And I'm not going to call the process following up on the short report, particularly fun, but it was rewarding, and I'm glad we're through it.

Okay. Number three, I'm super excited to use this opportunity on the deep dive to share some of the financial structures and motivations for the types of deals we do for our 3 major customer types, larger midsized companies, existing start-ups and then new start-ups that launch day 1 on the platform.

And as I said, these deals are designed to fit each type. So let's dive in with large companies first. So it's worth noting Ginkgo is doing large enterprise sales, right? And I did this myself. The commercial team has always rolled out to me. I did a lot of hands on enterprise selling back in the early days of Ginkgo. It really helps to be able to tailor those deals to a particular customer. What works for Bayer might be different than what would work for Roche.

And so -- but in general, the larger midsized company customers deals where the kind of fees are paid in cash and the downstream value is in the form of royalties or milestones. Three good examples of those sorts of deals, you can see here. So our collaboration with Aldevron, there, the fees were -- we did pro bono as part of our COVID-19 work for the upfront fees, but then it incorporated royalties on sales with the product.

In our Cronos collaboration, we negotiated largely fixed R&D fees with commercial milestones downstream upon completion. In other words, like the amount we were getting paid as we did the process was fixed over time rather than a function of the work we did here. And then our collaboration with Givaudan, the service fees are based on the amount of work we do and we get a royalty as the downstream value share mechanism, okay? So you can see even with the big companies, a little bit of variability.

On the existing start-ups, the reality of startup companies is they're more cash-sensitive than large companies. And by the way, I know this, right? We started in Ginkgo, we're bootstrapped for 6 years, right? Like when cash was tight, cash is king, right? And so our platform, however, like offers tremendous value to these companies, right? Because they can forego completely building out that in-house cell programming R&D infrastructure and instead focus all their R&D efforts on the product-related things.

So if you take a company like Motif, for example, they would invest in food scientists rather than biotech scientists, right? And so that's a big leveling -- that's an opportunity for a lot of leverage for those companies. And so the opportunity afforded by getting those companies on our platform when they're small, also is very good for Ginkgo.

Like this is well understood in tech. Amazon gives free credits on AWS to Y -- or at least they used to Y Combinator companies, Stripe famously got Shopify when they were pretty small, it's now a $200 million market cap company. And so our approach is not to offer free services yet to those companies, but to take equity in place of cash for foundry service fees.

And this aligns us with the investors on their cap table. And it also helps the start-ups conserve that cash that's quite precious to them. So we've done a number of deals like this with startups, recently with Huue, SaponiQx, Cambium and Tantu and this is something I think we will keep doing in the future.

So I will say -- I think we've hit on something with these start-up biotech companies. We hosted our first cell developer virtual conference last week we had over 500 people register for this, right? So if I look back, I think 5 years ago and said like, yes, we put up a flag like this and 500 people would sign up, it was certainly not how things used to be.

So start-up and entrepreneurs are really hungry for access to the Ginkgo platform and not having to build those labs themselves, I get this. You can see the kind of time line on the left here from Ginkgo's history, right? We spent a long time trying to scrounge to get the money to build out the labs to do the work here and it's not easy.

We want it someday to be as easy to launch a biotech as it is to launch a website. That day is not yet, right? And so everything we can keep adding to make that easier, I think, creates new opportunity for Ginkgo and our customers.

Okay. So what is really exciting is companies that don't already exist and haven't even built any R&D lab infrastructure. But on day 1, this newly formed start-up can just be born on our platform, okay? And so with this approach, I think this moves the needle almost the most to solve this problem because it saves completely those upfront fees for the customer. And these companies hopefully, we'll never need to build it. And Ginkgo also helps connect strategic and financial investors to amazing entrepreneurs to get these companies off the ground.

So we're getting a lot more interest here because of the success of some of our earliest platform ventures, for example, like Motif. And like most recently, Arcaea is an example of a platform venture where Ginkgo does not invest any cash, okay? But we are paid in cash revenue over time as we perform the R&D services. But in lieu of like a royalty on the downstream value share, we get equity in the company, okay?

And so we get an equity position for that downstream value share. But importantly, we're getting cash for foundry services today. So now that initial equity grants does need to be accounted for under GAAP, okay? In other words, we have to earn it. And while I encourage you to read our public filings for the precise detail and accounting treatment, the end result is that we book a deferred revenue liability on our balance sheet when we do these sorts of deals. And we plan to do many more of these Arcaea type deals. They are great for our customers. They're great for Ginkgo, and so we'd love to do more of them.

I will say one of the things that's really exciting when you launched these platform native type companies is you can recruit CEOs that are expert in the specific product vertical of the company rather than bioengineering PhDs, right? And not that there's anything wrong with bioengineering PhD CEOs. But like this is -- we've seen this in tech nowadays, right? Like the people who launch companies are often -- they might be experts in product design or in some particular vertical. They no longer need to be necessarily a software engineer, right?

And so for example, John McIntyre, the CEO at Motif, he was a senior executive at PepsiCo and a number of food companies before that; Jasmina, previously ran and launched a beauty brand, Mother Dirt; Mike Miille, the CEO of Joyn, was previously the Head of Biologics at Bayer and CEO of a company called AgraQuest in the biologics space; Nicole, prior to being the CEO of Allonnia, was -- had a long career at DuPont Water Solutions and Solvay.

This is really enabling. Like there's a lot of people out there who could launch cell programming apps, but don't have that kind of base bioengineering experience. They make for excellent CEOs. We've seen that success already. And you can see it also in the type of investors that are then showing up alongside these companies, right? So we have great financial investors like BlackRock and Ontario Teachers coming into these companies. We've also been fortunate to get vertical specific strategic investors that want to stay close to technologies emerging in their industry. So Givaudan, Chanel, Bayer are companies that have participated in these. So it's really -- it's a cool ecosystem to be building.

I'll give you a few highlights. There's a lot to be proud of for Motif, which launched just a couple of years ago. They raised $226 million Series B this summer.

They're launching their first couple of products. But the coolest thing was at Ferment, we had 700 people there, and everyone got to eat Motif meat -- animal free meatballs, which -- we had a lot of good food at the event, but those were by far the best. And as I mentioned earlier, Arcaea is a super exciting new company and Jasmina built that. Well, she was an entrepreneur resident here at Ginkgo and publicly launched it with $78 million in funding, just at the day of Ferment -- day before. And they had, again, Chanel, Givaudan and others coming in there, really thrilled to see her applied biotechnology in the beauty industry.

Joyn started trials of its nitrogen fixation, disease pest solutions. This is one of those areas that gets me so excited. So it can be hard to really appreciate how massive and resource-intensive the ag industry is, 4% of global energy consumption, 5% of global greenhouse gas. The nitrogen fertilizer alone is a $70 billion industry. We need to do better in this space and really excited that Joyn has the potential to do that.

And along the same lines, biology is a whole new approach in waste remediation. So the complex chemical pathways that allow biology to break things down can be applied in areas like remediating toxic source waste and things like that. And so I think Allonnia is really a great area to be expanding biotech into, and I'm super excited to see what they do there. All right, so I told you a little bit about Motif, but I'd love you to take a minute to hear it from John, the CEO of Motif himself about the impact of Ginkgo's platform following their recent $226 million fundraising.

(presentation)

That's great. Yes, I have to say that project with John, looking at all the different species sort of like a Noah's Ark situation around here, it was really fun to pull those genes from all those different organisms. So yes, we're working with the team at Motif has been great. Working with John has been awesome, and he's got amazing snacks.

So we're really excited to be working with them. All right. So I really have this -- I love this picture of Ferment. We had over 700 people turn out just a couple of weeks ago in Boston. It was really, really great to get the community back together in person after not seeing each other for a long time.

The diversity and strength of the ecosystem developing around us here at Ginkgo, it's so exciting. We look forward to continuing to welcome new partners and potential partners in the future. This is a lesson we've learned from the tech companies, Apple, Microsoft, others, you have to nourish this ecosystem of developers so they can get the most out of your platform. Everyone wins when that happens, right? And I think we're at this moment where for our community, they're starting to say, hey, if Ginkgo develops more stuff, that's good for me, right? And so that's a really exciting moment, and we're really thrilled to play that role in the community.

I want to show a slide here of some of the products. At the end of the day, the success of Ginkgo's platform is written in the success of our customers. And so if you look at products from Aldevron, Cronos and Motif, I mentioned that I think at Ferment that the exponential growth our platform output, right, like what's coming out of the foundry means that we did more lab work in the last year of Ginkgo than the first 10 years combined, right?

So it's not surprising that we're seeing the rate of cell programs finishing and going to market for customers increasing. And you can see in this chart, one of the things that makes Ginkgo's platform so unique, there are 6 species, 4 end markets, 3 product types, 6 different customers represented just in the 8 products shown here, right?

So that breadth of work on 1 common platform, has really been our vision for Ginkgo since day 1 of the company, right? So it is rewarding to see that. That is a difficult technological challenge to pull off, and I'm really proud of the progress we've made there.

So I'll end on this. One of the things that comes with being the leader sort of in an emerging technology area, whether it's electric cars or synthetic biology is that people are going to try to tell you why what you're doing is not going to work, right?

But honestly, it's worth it, right? We've been working for 20 years to be able to have an event like Ferment a couple of weeks ago and seeing the community in synthetic biology rally around the emerging technologies, getting excited about the leverage via our platform was incredible. And it's especially incredible because the Ginkgo platform improves with scale. So like the more excitement, the better we're going to get, right? And I haven't been this excited about synthetic biology since the day, honestly, I started my PhD at MIT.

And I love that many of you listening have chosen to come on this ride with us. What you choose to invest in moves the world in that direction, right? And Ginkgo is going to strive to continue to be clear and transparent about the direction we're heading, and we hope you're as excited as we are about that direction. So thanks so much for your time today and look forward to taking your questions.

Great. Thanks, Jason. So we're just going to switch over to Q&A in just a second here. (Operator Instructions)

Everyone. All right. We're going to kick off Q&A now. I'm going to start with a question from Twitter just as everyone is getting acquainted and raising their hands. I see a bunch of hands raised there. So [Tejas], it looks like you were the first. So you'll be the first question once we take one from Twitter here.

So Jason, I'm going to give this one to you. It's from BEZ on Twitter who by the way came to Ferment. So during the height of the pandemic, pro bono work was done leading to a 10x of mRNA capping enzymes and resulting in a great partnership with Aldevron. What is Ginkgo's strategy for managing pro bono work going forward?

Yes. So this is a pretty cool experience for us because that project really cranked. I mean, we did that in sort of around about a year and kind of start to finish on the R&D side. And one of the takeaways for us was because we were doing a pro bono we like the team, I think was just really controlling the kind of design of the project end to end. And that's a process when we work with our customers, that is very collaborative. And so I think one of our takeaways here was we should really make sure we're like packaging projects, like when we engage with a customer on a project where they're going to get engaged from the first day, we should be a little more clear like here's exactly what we would do, right?

And we can now lean on this experience, I'm like, look, like this maybe would be a lot more effort in the facility than you would traditionally imagine doing, but that might be a function of, well, you've been kind of limited working at the lab bench with pipettes. And so you don't actually design those experiments at the same scale our internal team would.

So there was actually a learning on kind of program design, I would say that fell out of that. And then I think it was also a pretty cool instance of, hey, there's a global scale problem. Ginkgo cares how our platform is used, sometimes that's making sure it's not used in a negative way. But sometimes it's also, hey, make sure it's used in a positive way, right? And we can put our foot on the scale at Ginkgo to go do that when we feel it's the right thing. And then it's a cool experience here with COVID that also turned out to be quite financially beneficial at the end, even though that wasn't really, I would say, the motivation when we first launched that pro bono work. So those are probably my 2 learnings. It's not a bad thing to push in an area if it's one we care about. And then secondly, the program design.

Great, thanks. [Tejas], I'm going to allow you to talk, so you should be able to ask your question now, but you will have to come unmute.

Jason, I appreciate the color on the short report and certainly has been something on a lot of investors' minds. So I appreciate you addressing that upfront. Just a couple of quick follow-ups there. Mark, I believe in your prepared remarks, you mentioned not breaking out sort of foundry versus downstream economics going forward. Given that sort of choice that you've made, how should investors think about modeling the trajectory of foundry revenues in '22 and beyond?

And then, Jason, you mentioned sort of getting a clean chit from your internal inquiry with the auditors. How -- is there anything that's remaining to be done in terms of the process with the DOJ inbound at this stage?

Why don't we start with the question on guidance and our plan there and then we can take the second question.

Yes. Yes. So the reason that I made that comment is we are sort of learning in real time right now that there are going to be situations, particularly in these early days where downstream value share may only be attributed to a few customers where breaking that out may create confidentiality issues.

The second thing that we're realizing very much in real time is that it can make sense for us to make trade -- it will make sense for us to make trade-offs between downstream value share and foundry services. And to do that sometimes also very much in real time. And the Aldevron is a great example, where we don't -- we didn't recognize any foundry services revenue for that at all in 2021, and yet it has a very significant potential to contribute revenue to us.

And so we're sort of in this kind of real-time learning mode [Tejas] where we're evaluating this question. And that's why we made that comment because the line is blurring between the 2.

We would expect to be providing you with guidance on foundry revenue and to be held accountable to that. We would expect to be providing you with guidance on new programs and to be held accountable for that. But sort of breaking out the 2, like I said, the line is it's just blurring a bit and we are very much kind of evaluating sort of how best to do that going forward.

Yes. And the only thing I would add on that front is we will -- I mean it's going to vary by customer, right? You will see like in the case of our Cronos value share, that is publicly disclosed, right? So you'll see publicly that in Q3, that was about $12 million through that value share milestone. So there'll be some customers, that's not an issue, but we do have this challenge, particularly while the number of programs giving value share is small, that there'll be folks who don't want that information out there. And so we need to be sensitive to that. So that's where a chunk of this comes from.

Yes. And then Jason, the second question from [Tejas] is around any next steps or further process on the internal investigation.

Yes. Right. So sort of as I said in the earnings call, right, shortly after the short seller report comes in, we received a preliminary inquiry from the DOJ and formal. Based on that, on the independent investigation, the Audit Committee found any suggestion of fraud, reporting violations, accounting errors, other wrongdoing contained in the short seller's report were unfounded. And importantly, that no restatement of our financials was needed. We are cooperating with regulators. There's not too much more I'd add at this point on it.

All right. I'm going to go ahead, Matt Larew, I should have given you the warning, but you're the next on the list. I'm going to allow you to talk. So you can go ahead and ask your question. (Operator Instructions)

Okay. Can you hear me?

Yes.

Good deal. So Jason, you referenced at the recent ecosystem events you hosted with Ferment and then the cell developer event last week. Just curious if you could share any feedback or data points in terms of the potential new partners that you engage with, things you're tracking internally really to determine the success of those events?

And then the second part, if I could. Just more broadly, with a lot of CDKs now underway, maybe just remind us how the CDKs are able to break down barriers to entry for new partners in terms of the capital intensity and sophistication required by those partners?

Sure. Yes. This is a great question. So yes, maybe just to give a little extra context, right? Like I mentioned, we had Ferment, which is our big in-person event here in Boston, and that's really serving a -- we highlight some of the developers on the platform. So you've got to hear lightning talks from a number of the companies that have been successful developing or launching on the platform. So there's other companies in the room that get to hear that. It also brings investors in that are interested in synthetic biology. Many of you folks at analyst community and others are there to join and some of the technology providers like Emily Leproust from Twist and folks like that, right?

So it's a broader tent. The virtual event was really launching our CDKs and these are cell development kits. And the analogy is a platform software company like an Apple would have a software development kit an SDK. And this is basically a set of tools given to app developers that they can more quickly launch apps on Apple's platform. Clearly in Apple's interest to have these out in the world, and it's great for developers because it's now less friction for them to get product built.

And so the same spirit is applying with our CDKs. We want to make it easier and faster for someone launching a new company or a start-up that already exists to come and say, "I can engage Ginkgo's platform. I can get a product built quickly, get it out in the world and start making money." And then Ginkgo does well, again, through our value share mechanism in that case.

So that's why we're doing these things. And that's the 2 different types of events. Our internal metrics really tracking are entirely around follow-ups with the commercial team and the deal team. So based on the -- we base on a funnel and like people sign up, people attend and then how many real leads do we get on the backside of that.

We haven't disclosed any of that specifically, but that would be the internal metrics we'd be driving against. My biggest motion on this is just 2 years ago, that there was almost no inbound to Ginkgo, right? Like this is just a new concept because of our profile going up, and in particular, the success of people who engaged our platform 2.5, 3 years ago now showing progress. People see that and like proofs in the pudding.

And so that is now driving for the first time, really, the opportunity to the market like this. That really all previously was largely outbound like kind of sales. And so that's what I would say.

On the last point I'll make briefly because I didn't touch on that much in the earnings call. The idea behind the CDK and the first ones we launched are for protein production is to give like a pretty defined box and say, listen, if you're trying to make, in this case, a low-cost protein, we have some existing assets. We have host strains that produce proteins at low cost. They're all -- one of them is really well scaled up on the foundry. The other 1 is in sort of beta and getting on to the foundry.

You can deploy those in that area, and we can move really fast. And in a first engagement for Phase I is only $100,000. That's a low-cost in the biotech world. And so that idea of making it less frictional just to get started with us is really the key idea there. Yes, it's a great question. Thanks for that Matt.

Great. And just to give everyone a heads-up, we'll probably go 5 to 10 minutes late since we started late, so apologies for the late start, but we'll give a little extra time here. Rahul, you'll be next on the question list. I'm going to go ahead and take 1 from our investor inbox in the meantime as you get ready.

So we got one into the inbox that says climate change and pollution are some of the most important challenges mankind is facing. In what areas could synthetic biology have the greatest impact? And is Ginkgo planning to start any JVs to accelerate the change and attack climate change?

Yes. So I'll move quick. So I mentioned that Ferment, that in the lightning talks for next year's Ferment, I'd love to see a bunch that were about climate application specifically. I do think this is a big opportunity right now because you have seen the success of companies like Tesla, for example, passing $1 trillion. You had Bill Gates just a few weeks ago, say in climate, there will be 8 to 10 Tesla scale companies. So you have actually suddenly a lot of investor interest.

But the big companies in the space, the big energy companies have been slower for a variety of reasons to consider adopting biotechnology. That's a great opportunity for us in the platform ventures area, right? Like that's why we do those things. It's like, well, we have a lot of investor interest, but there's less existing partners and start-ups are just getting going, let's do some. And so folks that want to launch those types of things, we do think there's a great opportunity there. I will also point out Joyn Bio, which I mentioned on the call, focused on nitrogen fertilizer production -- synthetic nitrogen fertilizer is a huge greenhouse gas emitter. So that's already in that direction. I think that's a wave that will support them.

And then when it comes to kind of environmental cleanup, Allonnia, is working in that area. So we already have a few folks -- customers on the platform, but I'd love to see more, and I think we will see more hopefully.

Absolutely. All right. We'll do a few more analyst questions here. I would just ask 1-part question so that everyone gets a chance. And Rahul, I'm going to go ahead and allow you to talk.

Great. Can you hear me okay?

Yes.

Jason and Anna Marie, Mark. I'm just going to follow up a little bit based on [Tejas'] question. Congratulations on hitting that second milestone. The Cronos partnership, of course, that's something that we watch carefully and we expect to book that in Q4. So with the first equity milestone booked in this quarter, Mark, if I heard you correctly, you mentioned that this equity payment was attributed to foundry revenue.

So given that this upfront book value of the equity has now been booked to foundry revenue. How should we be thinking about treating book versus mark-to-market incremental value of that same equity going forward?

Yes. So we will do an evaluation -- a mark-to-market adjustment at each reporting period end. And we also -- because -- yes, and there are some sort of GAAP adjustments that we make to that to account for just the type of equity that we have. And so -- so it's -- and that gain or loss flows through the other income expense line on the P&L.

All right. Harsha, I should have given you the heads-up that you can probably see that you're next in line. So I'm going to go ahead and allow you to talk, and then [Matt], you'll be next.

Can you hear me?

Yes.

Just a very quick one on related party revenues given all of the recent focus on this topic, could you perhaps talk a little bit about your plans when it comes to accelerating the pace of new additions of new programs in the platform via direct equity investments and what that might mean for near-term share related party revenue? So I'm wondering as you deploy some of the capital you've raised and this existing program scale should we actually expect related party revenue share to increase over the next year or so? And how that mix shifts?

Sure. Mark, do you want to comment on how we're thinking about it from a projection standpoint, then I can comment on some of why we -- what I think is likely to happen sort of philosophically.

Yes. So just kind of, I guess, maybe just general trending, as I discussed, we generally see the mix shifting towards more third parties versus related parties. And -- but we don't have a particular sort of bias one versus the other, like we don't inherently think that's a good mix shift or a bad mix. It's just a factual one. It is indicative of just the sheer number of new customers we brought on this year.

I mean the customer count was significant and the program count was significant, and those are weighted to third parties. And so that's just as a factual matter, that's why the mix shift is happening. And I'm not sure that we really think about it kind of from a projection point of view, per se. So...

Yes. Yes. Thanks, Mark. So what I would say is there's these 3 buckets of customers. And I mentioned they're sort of mid and large. There are existing start-ups and then there are brand-new star-tups on the platform. I think we are seeing a lot of excitement in the start-up category, right? I think that we are seeing a lot of inbound. I would say, for the large companies -- I think the reality is that's still going to be solid enterprise sales, right? In other words, it's going to be like what we do every day around here, it's having meetings and going out and the business development team and getting deals done, right?

We're good at it, but it does take time. And so I think you're seeing a change in customer behavior on the start-ups and the start-ups tend to, but not always, tend to lead to more related parties. I would agree with Mark.

We're not -- it's not like a certain thing we're trying to solve for in terms of our direction. Our strategic goal is as many new programs on the platform as quickly as possible and then delivering on those programs for customers so we can realize value share. How that ends up shaking out, related or not is less of a guidepost for us.

All right. [Matt] from Goldman, I'm going to allow you to talk, and then Rachel from JPMorgan you'll be next.

Just 1 question for me on biosecurity you mentioned release, it's an uncertain business. I'm just wondering how you're thinking about the durability of biosecurity revenues going forward as it relates to testing and/or infrastructure?

Yes. So here's how I think about it. It is a super good question. So the thing I need to think of is -- so like I'll give you an analogy. So flu is an endemic disease, right? So we know flu is not going away, and we have a certain set of mitigations in place in society. And by and large, that's the flu vaccine that comes out. And by the way, I have to make a new one every year because of the nature of that virus, but fine.

That's like our societal mitigation to get flu to a point where it is not annoying and otherwise disruptive to society like we're comfortable with the level of mortality, and we're comfortable with the amount of impact it has on our lives. COVID-19 is going to become endemic, right? I think that you speak to experts, that's what you're hearing again and again. It's not going to just disappear on us. I think that's widely appreciated now worldwide.

The question is, what are the mitigation measures that society needs to put in place so that this thing is not annoying. And I tell you that from quarantines at schools to masks to everything else, we're not at a point yet where we get to not think about this thing in the same way we currently really, by and large, didn't think about the flu other than certain public health folks that sort of take care of us there, but society at large is not a top of mind issue.

We're not there yet with COVID. And so the question is, what will be enough? Is it just the annual vaccines and then nothing else? Well, like it's certainly not yet, right? And so the question is, where will these types of other biosecurity measures fit in? And I think the big tools in that bucket are going to be updated vaccinations and boosters.

It's going to be better therapeutics over time, and it's going to be monitoring surveillance, basically testing for biosecurity purposes, not diagnostics.

And so we obviously have stuff going on in the vaccine space as a support role, but in that sort of monitoring weather mapping type new area of testing, I'd say we are definitely a leader.

Will that end up being part of the mitigation? That's why it's hard for us to guide to exactly what it's going to be next year. But I think if it does, we're in a great spot, right? So that's how I would try to frame it out, if that makes sense. But I do think biosecurity in general worldwide is here to stay at some level. And the question is just exactly what are the set of mitigations that make COVID go away and will surveillance and monitoring be one of them.

All right. We'll take our last 2 analyst questions. And then I haven't gotten any dinosaur questions on Twitter yet, which is actually pretty disappointing. So if there are any good ones that come in, I might ask one. But Rachel, I'm going to go ahead and allow you to talk from JPMorgan.

Perfect. So I have a few questions on the new cell programs and guidance for the year. So it's great to hear that you launched 10 programs this quarter. During your last call -- during your last earnings call, you mentioned that it will be heavily weighted towards 4Q this year. So based on 3Q guidance implies 9 programs in 4Q, which is a slight step down.

So can you just talk about any programs were pull forward into 3Q? And then walk us through your approach to guidance and if there's any conservatism baked into that 4Q number.

Yes. I think Rachel at the time that we did that first half update, we mentioned that the -- yes, I'm not sure that we were necessarily trying to distinguish between how much of what was left would land in Q3 versus Q4. I will say that -- and we did say that we didn't expect a lot of revenue by Q4 just because of program start times, et cetera.

But that said, I will say that we did make a fairly aggressive push to bring those programs on as soon as we could. And that was largely because you want to have the ability to hit the ground running for 2022. And so there was sort of a very concerted effort in Q3 to just not wait and to get programs on the foundry as soon as possible because there is a start-up time.

And so -- yes, and I wouldn't -- I think we're targeting the 30 programs. I think we obviously have a pipeline that if everything landed, it would exceed that. But 30 is the number that we're comfortable with right now.

Yes. The only thing I'd add, I think it is a little tricky, again, the enterprise sale nature of it. You can't have things move a month or 2 here and there. That's like probably a little more true when we're engaging with a large company than a smaller company, but it's not all of it. And so I do think like and trying to have a big funnel. And then we know some are going to shake and move to next year or not, right, and try to really push the team to hit our annual number.

But I think you will -- it will be a little harder to predict quarter-to-quarter exactly how many programs. And I'd say it's not like a big particular driver for us versus like trying to keep the overall number going up at a healthy clip annually.

Thanks, Rachel. All right. I can't leave just 1 person hanging on their questions. I'm going to let Mark from BTIG ask his question and then we'll wrap up. Here we go, Mark.

Can you hear me?

Yes, Mark.

You guys have made good progress with Cronos and also with food ingredients, et cetera. I guess, how would you characterize your funnel in biopharma? And which particular areas are you most encouraged by, especially as we are about to turn into 2022? And how should we think about the potential for equity in milestones in '22 and '23?

Yes. So I can speak to the biopharma side. So we had David Chang from Allogene. Arie Belldegrun, who's on our Board now for Kite speak at Ferment on the area of cell gene therapy. And Arie just kind of brought up some of the history in cell therapy and how these are really the first like wholesale therapeutics that were getting developed, live cell therapeutics at Kite. And like -- and he was like, also been a 25-year. I was talking about kind of the 20-year history of synthetic biology.

And that's exciting, right? Like that whole like living cells as therapies, I would say like that's our bucket, right? And with Synlogic, that's a bacteria with -- in the area of cell therapy that's often T cells, but like that, that's where you should think about Ginkgo generally being excited. But we're also going to be supporting engineered cells to produce various things as we always do. But when it comes to like a new area, I really think we can push into, but haven't done as much to date, it's sort of that general category of sort of live cells as therapies. And so cell and gene therapy tends to be where that shows up the most.

And then was there a second part there, Anna Marie? Sorry.

No. Anything else you wanted?

No, that's great.

Great. Well, thank you, everyone, for joining us for our first official earnings call. Apologies again for the technical streaming difficulties at the beginning. We'll make sure that a full video is uploaded and well distributed. So folks who missed the first few minutes as you were transferring over, can catch up. And then we'll try to work out those things for next time. But thanks again for spending your Monday morning with us, and have a great week.

Thank you, everybody. Thanks.