Cutting-edge bioengineering-as-a-service company Ginkgo Bioworks (DNA 10.60%) gave investors an update on its third-quarter earnings on Nov. 8. When it did, management provided hard data as well as a handful of clues about the company's near-term future.
Here are three of the most important things to keep an eye on. All three are especially important considerations if you're thinking about starting a position in the stock.
1. Progress with improving the biofoundry's margin
Ginkgo has two core goals right now: growth and profitability. Management thinks that due to economies of scale in bioengineering and biomanufacturing, the business should be able to pursue both of those goals at once. The idea is that by getting more projects running on its platform comprised of industrial-scale laboratory automation, robotics, and artificial intelligence (AI), the cost of serving each project will drop.
But so far, the data only weakly support that assertion that scaling up makes profitability rise, which makes it all the more important for investors to keep an eye on progress. In the last 12 months, Ginkgo's quarterly gross margin has indeed increased steadily with each quarter, but the company remains deeply unprofitable, and its net profit margin is actually worsening. In the same period, it burned $405 million in cash. At the end of the third quarter, it had more than $1 billion in cash, equivalents, and short-term investments, so going out of business isn't an immediate concern. Nonetheless, especially for more conservative investors, without a clear trend leading toward consistent profitability and generating positive cash flow from operations, Ginkgo is on borrowed time.
2. New collaborations are now in play
Collaborations are a lifeline for Ginkgo because they bring much-needed revenue in the present, as well as often the potential to capture more revenue in the future in the form of royalties or additional milestone payments. Plus, its high-profile collaborators including Pfizer, Eli Lilly, Novo Nordisk, Moderna, and Merck, among many others, tend to lend credence to the idea that working with the biotech is a good way to save costs and improve research and development (R&D) efficiency. Thus, any new partnerships or expansions of existing partnerships is good news for shareholders, not to mention the company's long-term health.
Its recently announced drug discovery collaboration with Pfizer could be worth as much as $331 million in milestone payments, plus the potential for royalties downstream. That's yet another vote of confidence in the utility of its platform. Aside from Pfizer, it also forged collaborations with a Swiss food technology company, a meat alternative company, and a biomanufacturing start-up. For now, it looks like potential partners are still flocking to work with Ginkgo, continuing the very positive trend.
3. A macroeconomic update or forecast
The final thing to consider is management's impressions about the macroeconomic environment now and in the near future. Lately, in many earnings calls of other healthcare companies, a general weakening demand across the board has been a growing concern.
Ginkgo makes its money differently than most other businesses in the economy, and that provides it with a measure of security. It would be quite the shock if its collaborators suddenly terminated their development programs ahead of their natural conclusion or failed to pay their milestone fees, and such outcomes almost certainly will not happen even if the economy takes a nosedive. Harder times for its prospective partners and customers means that it might need to lower its expectations for onboarding new programs.
In Q2, it had a total of 105 programs, up from only 46 in the same quarter of 2021. It added 21 new programs to its foundry in the third quarter. But, it now expects to only add a total of up to 85 new programs for the year. That's a notable downward revision from management's expectations in Q1, when it called for onboarding 100 new programs in 2023.
Still, that ferocious pace of scaling will be difficult to maintain even if the economy is going like gangbusters. If management sees trouble on the horizon, it'll signal that the company's strategy will be shifting from pursuing growth to preferring optimization, if only temporarily. The market might not like that, but it'd also imply buying opportunities for value-sensitive investors who have some cash on hand during a downturn.
