2023-12-20 05:06:09 ET
Summary
- Pfizer Collaboration: Partnership for RNA drug discovery; potential $331M value; aligns Ginkgo's synthetic biology with Pfizer's drug development expertise.
- Financial Performance: Q3 shows mixed results; Cell Engineering revenue is up to $37.2M, but overall revenue is down to $55.4M from $66.4M.
- Strategic Shifts: Biosecurity revenue dropped to $11.8M; substantial cost reduction; net loss decreased; signs of share dilution.
- Investment Recommendation: Sell Ginkgo Bioworks' stock; concerns over financial stability and market sentiment outweigh the potential benefits of the Pfizer partnership and other ventures.
At a Glance
Ginkgo Bioworks' ( DNA ) third-quarter report for 2023 paints a complex financial story, illustrating the fluid and ever-evolving world of biotech. The company's shift towards cellular design and genetic engineering has notably boosted its Cell Engineering revenue. However, there's a noticeable overall revenue dip and a decrease in Biosecurity service income, which seems to echo the changes in the global landscape post-pandemic. In an interesting move, Ginkgo Bioworks has also entered into a strategic partnership with Pfizer, focusing on RNA drug discovery. This collaboration is a clear signal of Ginkgo's dedication to staying at the forefront of innovation, even as they navigate through some tough market conditions. In this report, I take a closer look at Ginkgo's financial stability, gauge market reactions, and provide an investment outlook. This analysis aims to offer a well-rounded view of a company straddling the line between cutting-edge biotech developments and the need for financial readjustment.
Q3 Performance
Ginkgo Bioworks' Q3 2023 report shows a mixed financial performance. The company's revenue of $59.8M indicates solid demand for its cellular design and genetic engineering services. A key highlight is the increase in Cell Engineering revenue to $37.2M, up from $24.7M Y/Y. This growth, however, contrasts with a decline in overall revenue to $55.4M from $66.4M, hinting at a strategic pivot in the company's business model.
The significant reduction in Biosecurity service revenue to $11.8M from $36.5M is a crucial aspect, likely impacted by the diminishing relevance of COVID-19 testing products. This shift underscores the challenges of adapting to post-pandemic market conditions.
On the expense side, Ginkgo Bioworks achieved substantial savings, cutting operating expenses to $341.8M from $721.3M. This reduction, primarily in R&D and administrative costs, contributed to a decreased net loss of $302.9M, compared to $670.1M Y/Y.
However, the company's financial structure shows signs of strain with evident share dilution. The weighted average common shares increased to 1.95M from 1.63M, helped by stock-based compensation increases.
Ginkgo now forecasts its 2023 revenue to be between $250M and $260M. Revenue from Cell Engineering is anticipated to be $145M to $150M, while Biosecurity might contribute up to $110M.
Ginkgo Bioworks and Pfizer: RNAissance in Drug Discovery
Ginkgo Bioworks and Pfizer ( PFE ) have joined forces in a venture focusing on RNA drug discovery, marrying Ginkgo's expertise in RNA technology with Pfizer's prowess in drug development. This collaboration, potentially valued at up to $331M, is a notable milestone in the biotech landscape, underscoring the increasing trend of synergies between cutting-edge biotech firms and well-established pharmaceutical giants.
At the heart of this partnership, Ginkgo is set to harness its synthetic biology platform to enhance RNA construct optimization. This process is pivotal in boosting the stability and effectiveness of RNA molecules, a key factor in their application for therapeutic purposes. RNA-based treatments are particularly promising due to their capacity to directly target genetic roots of diseases, an area where conventional drugs may fall short. Nevertheless, the hurdles of maintaining RNA molecule stability and ensuring effective delivery have been significant impediments, issues that this joint endeavor aims to tackle.
For Pfizer, this agreement signifies a strategic expansion into the rapidly evolving domain of RNA therapeutics. The significance of these therapies is magnified by their adaptability and swift development potential, attributes that are immensely valuable in responding to new health crises.
Looking at the bigger picture, this alliance serves as a testament to the increasingly convergent paths of synthetic biology and pharmaceutical research. It underscores the vital role of innovative platforms in forging advanced therapeutics and reflects a shift towards more collaborative approaches in the realm of drug development.
Financial Health
Turning to Ginkgo Bioworks' balance sheet , the company's liquid assets, comprising cash and cash equivalents ($1.049B) and investments ($84.97M), total approximately $1.134B. The current ratio, calculated as total current assets divided by total current liabilities, is approximately 6.78, indicating a strong short-term financial position. When comparing assets to debts, it's notable that their current liabilities stand at $168.46M, with significant non-current liabilities including deferred revenue ($170.01M) and operating lease liabilities ($403.66M).
Over the last nine months, Ginkgo Bioworks experienced net cash used in operating activities of $237.67M, averaging a monthly cash burn of approximately $26.4M. This burn rate suggests a cash runway of roughly 43 months, assuming no changes in the burn rate or additional funding sources. However, this estimate is based on past data and may not reflect future performance.
Considering the current cash runway and assuming no significant changes in their operating expenses or revenue streams, the likelihood of Ginkgo Bioworks requiring additional financing within the next twelve months seems low.
In summary, Ginkgo Bioworks' short-term financial health appears robust, given its strong current ratio and substantial cash reserves. However, the long-term financial health is more fragile due to a significant cash burn rate and considerable non-current liabilities.
Market Sentiment
According to Seeking Alpha data, Ginkgo Bioworks has a market capitalization of $3.12B, suggesting moderate market confidence given its pioneering role in cellular design and genetic engineering. Analysts project 2023 revenues around $258.65M, growing to $435.44M by 2025, reflecting strong growth prospects in cell engineering despite a volatile biosecurity segment. Compared to the S&P 500 ( SPY ), DNA's stock momentum appears weaker, with a -14.59% performance over 3 months and -8.67% over a year, versus S&P 500's gains in similar periods.
High short interest at 21.24% with 230.48M shares short suggests a significant bearish sentiment.
Institutional ownership stands at 75.72%, with new positions amounting to 14,565,225 shares and sold-out positions at 37,241,326 shares. Notable institutions include Baillie Gifford & Co and Ark Investment Management, indicating substantial institutional confidence.
Insider trades show a negative net activity, with more selling than buying in both the past three and twelve months (net activity of -4,688,667 and -41,589,188 shares, respectively), which could be a concern.
Given these aspects, Ginkgo Bioworks' market sentiment can be classified as "Mixed", balancing strong growth prospects and institutional trust against high short interest and concerning insider selling trends.
My Analysis & Recommendation
Ginkgo Bioworks' advanced technology and partnership with Pfizer, although notable, do not currently justify investment appeal. The stock is marred by Y/Y revenue declines, poor momentum, and high valuation metrics, as indicated by its "Sell" rating from Seeking Alpha Quant. Its strategic pivot has not yet yielded financial robustness. Some investors may be satisfied with a "wait-and-see" approach, but the downside risks, in my view, are too steep.
Ginkgo Bioworks' route to profitability remains uncertain, as indicated by its financials. Despite a substantial cash reserve acting as a short-term safeguard, the company's elevated cash burn rate and share dilution are worrisome for its long-term fiscal health. This concern is magnified in light of a $5B accumulated deficit, with the company still far from profitability, making its $1B cash position appear less reassuring. Market sentiment reflects these apprehensions: high short interest, notable insider selling, and a divided stance among major institutional investors all point to a lack of confidence in Ginkgo's future. Additionally, the stock's lagging performance relative to broader market indices underscores these concerns.
Therefore, I recommend selling Ginkgo Bioworks' stock. The current valuation feels bloated, given the company's financial struggles and mixed market sentiment. For investors looking to mitigate risk, diversifying their portfolio, setting stop-loss orders, and keeping a close eye on the company's quarterly reports are advisable strategies.
However, this recommendation could be proven wrong if Ginkgo demonstrates a quicker path to profitability, successful commercialization of its partnership ventures, a positive shift in market sentiment, or breakthrough innovations. Until then, the cautious approach would be to step back from this investment.
For further details see:
Ginkgo Bioworks: Strategic Shifts Amidst Financial Uncertainty