Yesterday I discussed the science of genetic engineering, or at least its application to synthetic biology. Today I’d like to discuss how Ginkgo Bioworks is trying to monetize genetic engineering and gain all the value of its total addressable market.

To recap, genetic engineering is used for the production of biological molecules. If you have a drug for curing a disease you’ll need to produce mass quantities of it to both get through clinical trials and sell to patients down the road. In modern cases, that drug will usually be produced in specially made genetically modified organisms, and then purified out of those organisms using a specific purification pathway. The end result is a pure drug, which is something that the FDA demands and patients really want as it cuts down on variability and potential side effects. This is the business that Ginkgo Bioworks wants to get into, they want to be the ones producing those genetically modified organisms and validated those purification pathways. The organism and the pathway then become akin to intellectual property (IP) for the production pathway of that drug. So say you’re a company that own a drug but has no ability to produce it at scale, Ginkgo will develop a production pathway and charge you the lowest possible price for doing so (making zero profit themselves). They do this because their IP specifies a revenue sharing agreement whereby they get a cut should you manage to sell your drug in the future. This system is what gave Ginkgo such a ridiculous valuation based on TAM, if they can be the lowest-cost provider of drug production pathways, then every single company will want to contract with them, and so they’ll get revenue from every single drug on the market.

The problem is… that’s not how it seems to have worked. First, Ginkgo wants to drive down the cost of producing these production pathways, but they’re competing with companies that already work at economies of scale far greater than them. Let’s start with just the first step of the producing a production pathway: you had to get DNA for your drug and insert it into an organism. There are already many companies that will do this job for you if you’re willing to pay up. Those companies include heavy hitters like Genescript (market cap of more than 3x what Ginkgo was at its peak) and Thermo Fisher (the 600lb gorilla of this sector). These companies have driven down the cost of DNA, genetically modified organisms, and other tools to the point that Ginkgo doesn’t seem much like competition. Now Thermo Fisher And Genescript to my knowledge won’t make an entire pathway for you, but they will you a large part of the pathway for dirt cheap and then sell you the tools to finish it up yourself. But that still means that for many of the steps, Ginkgo is competing with companies that are far larger than it which are better able to deploy economies of scale than it. So Ginkgo might not even be offering you the best price possible when you compare with using some of the big boys instead. And remember they need to be offering the best price possible as they don’t even make money by selling you this process, instead they need to entice you to sign the deal where they get a portion of your future revenue.

Then there’s the fact that their business model relies on successes but self-selects for failures. It’s important to start by remembering that most drugs which go through clinical trials will fail to make any money whatsoever. Ginkgo’s business model is to produce a drug production pathway and sell it for zero profit and bank on the revenue sharing portion to make them money, but they of course understand that most of these revenue sharing agreements won’t make any revenue. But then what type of drug discovery company will even take such an agreement? A large drug company (Johnson and Johnson, Pfizer) already has the in-house tools produce a drug production pathway, they have little reason to enter a revenue sharing agreement especially when Ginkgo’s cost might compare unfavorably with just buying stuff from Thermo Fisher and doing the rest themselves. A small drug company is exactly the type Ginkgo needs to go after, but what type of small drug company? A small company that has lots of money and a product they are very certain is a hit also will be dissuaded by the revenue-sharing agreement, why fork over so much future revenue unnecessarily? On the other hand a small drug company will less money, or a drug company that has a product it isn’t sure of, those would be the kind of customers who would willingly bet on Ginkgo, but they are also the customers who will be least likely to succeed at bringing their drug through clinical trials. If they have no money they could easily go bust before they make it, and if they’re unsure of their drug then it probably means their scientists know it’s a long shot. So Ginkgo’s business model is forcing it to self-select and take on the customers who are least likely to make it a lot of money through the revenue sharing agreement.

And that’s important because the revenue sharing is supposed to be how the company will grow larger, and until it grows larger it can never compete with the big boys on economies of scale, therefor never address it’s total addressable market because there will always be big companies for whom it’s cheaper not to even work with Ginkgo. This is a chicken and egg problem, they need to grow large to reach economies of scale and drive down the cost of their services, and they need to drive down the cost of their services to make it more enticing to sign those revenue sharing agreements, but as long as their services are still higher they’re stuck in a holding pattern. It’s important to note that at this point that Ginkgo had a loss-from-operations of about 650,000,000 dollars in Q3 2022 alone. They are expected to have total 2022 Revenue of around 500,000,000 dollars. They lost more in a single quarter then their expected year-long revenue and that trend shows no sign of changing. Their cash on hand at the end of all this was 1.3 billion dollars, and with plenty of stock to sell and loans to take out, they can continue this business for a while yet. I’ll talk more in a future post about their burn rate and their losses, but it’s important to note that this is where the company is: growing but not necessarily at at rate that will let it achieve lift-off. It needs find some way to make its revenue-sharing business model work, either by driving down their costs so much that other companies have to use their services or by somehow enticing more winners instead of losers to use their services. The only part of the firm that is close to break-even is the “biosecurity” arm a COVID-monitering and diagnostic service that will likely fade as the salience of COVID continues to fade. Perhaps they can pivot to new avenues of biosecurity, flu monitoring? Either way this work is much lower margin than the synthetic biology revolution that was supposed to propel their TAM, and stock price, into the stratosphere.