Ginkgo Bioworks is Toying With Wall Street

The synthetic biology pioneer has underpromised and over-delivered on biosecurity revenue in 2022. Here’s what comes next.

Companies across the economy have reduced full-year 2022 revenue and earnings guidance as tightening financial conditions start to bite. Ginkgo Bioworks  (DNA)  hasn’t been one of them – not during the most recent earnings season, anyway.

The synthetic biology pioneer has been buoyed by a subsidiary providing coronavirus testing services for schools and airports. The so-called biosecurity business has nothing to do with synthetic biology or its core technology platform. However, the segment has represented a source of operating income, cash flow, and positive surprises in recent quarters.

Ginkgo Bioworks originally told investors to expect full-year 2022 revenue of at least $160 million from the biosecurity unit. That was increased to at least $210 million in May and increased to at least $260 million in August. Considering the segment generated $247 million in first-half revenue, there’s a good chance the latest guidance is conservative, too.

On the one hand, that suggests Wall Street estimates will keep lagging the unit’s performance. On the other hand, individual investors know biosecurity revenue could fall off a cliff in 2023.

Ginkgo Bioworks Strikes While the Iron Is Hot

Ginkgo Bioworks has two business segments: foundry and biosecurity. The former is considered the core business, while the latter started out as a nice-to-have and could morph into something more durable. Maybe.

Foundry revenue is generated from providing research and development (R&D) services for customers, collecting milestones for achievements, and possibly royalties on sales of commercialized products. This segment generated an operating loss of $108 million in the first half of 2022.Biosecurity revenue is generated from providing products and services related to coronavirus testing. This segment generated an operating income of $71 million in the first half of 2022.

In other words, foundry services are the core business, but the decision to marshal resources to provide testing at the beginning of the pandemic (and gobble up government funding in the process) has provided an important financial boost for the company. As second-quarter results demonstrate, the benefits have endured longer than initially expected.

Other companies that redirected spare capacity to pandemic testing efforts have also outperformed expectations. Exact Sciences  (EXAS) – Get Exact Sciences Corporation Report initially told investors to expect full-year 2022 revenue of about $45 million from coronavirus testing, but has since increased guidance to about $55 million.

Similarly, coronavirus testing revenue has been heavily skewed toward the first half of 2022 throughout the industry. Ginkgo Bioworks has achieved 95% of its biosecurity revenue guidance in the first six months of the year. Exact Sciences and Fulgent Genetics  (FLGT) – Get Fulgent Genetics Inc. Report have already achieved 75% and 78% of expected segment sales, respectively.

There are structural differences between the trio that impact how and when revenue is generated, but the comparison suggests the synthetic biology pioneer is toying with Wall Street analysts.

If investors assume Ginkgo Bioworks follows a similar trend as Exact Sciences and Fulgent Genetics, then it may deliver $330 million in full-year 2022 revenue from biosecurity – well above guidance calling for at least $260 million.

That would differentiate the synthetic biology pioneer. Unlike others, it’s expanded as the pandemic faded and testing volumes declined nationally. 

Exact Sciences reported $236 million in revenue from coronavirus testing in 2020 and another $143 million in 2021. It expects revenue of roughly $55 million this year.Fulgent Genetics reported $385 million in revenue from coronavirus testing in 2020 and another $870 million in 2021. It expects revenue of roughly $480 million this year. It provides a more direct comparison to Ginkgo Bioworks, as both have leaned heavily on government funding and providing testing in schools.

By contrast, Ginkgo Bioworks generated biosecurity revenue of $201 million in 2021, but has already generated $247 million in the first half of this year. Although the company plans to expand the segment beyond coronavirus and the United States, the growth achieved in 2022 has been primarily related to an expanded footprint and government contracts.

All Good Things Must Come To an End

Investors certainly can’t complain about biosecurity revenue, which provides operating income and cash flow for the overall business. However, investors should acknowledge the uncertainty ahead.

Government funding for coronavirus testing services is likely to drop precipitously from 2020 and 2021 levels – or stop altogether – in 2023. Federal, state, and local governments are eager to hand off the responsibility to commercial markets. That will cutoff funding for schools and airports, which have represented the bulk of testing volumes for Ginkgo Bioworks and Fulgent Genetics to date.

While Ginkgo Bioworks plans to continue investing in the biosecurity segment beyond the pandemic, it will be difficult to match the once-in-a-generation testing volumes required in the last two years. Things like monkeypox and the latest bird flu might capture headlines, but they simply don’t represent the same revenue opportunity.

Sure, all the technologies exist to provide surveillance of emerging public health threats. Testing individuals at the airport, or performing passive surveillance of airplane or airport sewage (fun!), is not beyond the industry’s capabilities. I’d probably argue that’s something governments should fund. But the reality is political appetite and willpower are likely to dwindle over time.

The souring forecasts for biosecurity revenue perfectly illustrates one of my famous reminders to investors: You invest in businesses, not technologies. Investors should start to refocus their attention on the core foundry segment.

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