Ginkgo Bioworks was a $15 Billion biotech company backed by investors like Cathie Wood, and Bill Gates. It specializes in using genetic engineering to produce bacteria with industrial applications for other biotech companies.
Since its market debut, Ginkgo Bioworks stock has plunged by a whopping 80%. This is due to doubts about its valuation, technology, and business model. Scorpion Capital, a notorious short-seller, alleged that Ginkgo was faking its revenue through a complex scheme.
In this article, we will take a closer look at the history, business model, and finances of Ginkgo Bioworks, and try to understand how it went from being a promising biotech unicorn to being accused of being a massive fraud. We will also explore the potential and challenges of synthetic biology as a field, and whether Ginkgo Bioworks has any real value or impact.
History of Ginkgo Bioworks
Ginkgo Bioworks was founded in 2008 by five MIT scientists: Tom Knight, Reshma Shetty, Jason Kelly, Barry Canton, and Austin Che. Originally named DNA 2.0, and was based on the idea that DNA could be used as a digital code to program cells like computers.
The founders were inspired by the vision of synthetic biology, which aims to create novel biological systems and products that can address global challenges such as climate change, food security, and health care.
The company’s name was changed to Ginkgo Bioworks in 2011, after the ginkgo tree, which is one of the oldest living organisms on Earth. The company’s logo is a stylized representation of the ginkgo leaf, which has a distinctive fan shape. The company’s motto is “The Organism Company”, which reflects its mission to engineer organisms for various applications in industries such as agriculture, pharmaceuticals, and chemicals.
Ginkgo Bioworks's Business Model
Ginkgo's core technology is its platform that uses automation and machine learning to design, test, and optimize synthetic organisms in its “foundry”. The platform consists of software, hardware, and wetware components that enable rapid and scalable engineering of microbes. The software component includes tools for designing DNA sequences, simulating biological pathways, and analyzing data.
The company’s business model is to offer its platform as a service to other biotech companies, saving them the cost and time of reproducing the initial stages of design in synthetic biology. The company charges its customers for the use of its foundry and also takes royalties or shares of its customers’ revenues.
Although it should be noted that Ginko hasn't really invented anything new all of the hardware for their foundry are purchased from companies like Thermo Fisher and
Pacific biosciences while Ginkgo has developed some proprietary software to operate these machines, The machines are commercially available to all of Ginkgo's competitors.
The company has partnered with several companies such as Bayer, Roche, and Cargill, to engineer microbes for various applications such as producing nitrogen fertilizer, manufacturing antibiotics, and fermenting animal feed.
Rise of Ginkgo Bioworks
The company has been one of the most successful and well-funded biotech startups in the world, raising over $2 billion from investors such as Viking Global, Baillie Gifford, Bill Gates, and Cathie Wood’s Ark Invest.
The company went public in September 2021 via a SPAC merger with Soaring Eagle Acquisition Corp., valuing it at $15 billion. The company also acquired the ticker symbol “DNA” from Genentech, who stopped using it after they were acquired by Roche.
However, the company’s prospects have been challenged by a scathing short-seller report from Scorpion Capital, which accused Ginkgo of being a “colossal scam” and a “Frankenstein mash-up of the worst frauds of the last 20 years”.
Even MIT magazine was not impressed by Ginkgo Bioworks’ story. The article questioned the company’s valuation of $15 billion, which is based on its vision and potential rather than its actual products and revenue. It seems that the magazine is not very supportive of its own alumni’s ventures, especially when they involve synthetic biology. Read the article.
Short Report’s Allegations
Scorpion Capital released a 175-page report on Ginkgo Bioworks, based on research and conversations with former and current employees of both Ginkgo and the companies it works with. The report made several damning allegations against Ginkgo, such as:
Inflating its revenue with related-party transactions: The report claimed that most of Ginkgo’s revenue comes from providing research services to other entities that it created, funded, or controlled, such as Joyn Bio, Motif Foodworks, and Cronos Group.
According to Scorpion Capital, The majority of its foundry revenue, an absurd 72% in 2020, and essentially 100% of its deferred revenue are derived from related-party “customers” it created, funded, controls, or influences via its ownership position and board seats. Investments into these entities by Ginkgo and its largest investors are recycled back to Ginkgo and recorded as deferred or current revenue. The scheme reflects its woeful, decade-long failure to derive real revenue from third-party customers, forcing it to cover it up with a ploy that we believe to be enabled by its largest holders.
These entities are not independent third-party customers, but rather shell companies that exist to funnel money to Ginkgo and inflate its valuation. The report also alleged that Ginkgo uses accounting gimmicks to recognize revenue upfront from these entities, even though they have not paid any cash or delivered any products.
An ex-employee of Ginkgo who worked at Intrexon stated that Ginkgo copied their playbook; says he’s “been around the block enough times to understand” Ginkgo’s related-party games; and noted it’s the same model where money is “going from the left hand to the right.”
The report also accused Ginkgo of lying about its involvement in covid-19 vaccine and therapeutic development, and of overstating its potential in other markets such as agriculture, nutrition, and health.
Ginkgo-Synlogic Scam
Scorpion Capital accused Ginkgo of faking its revenue with its own subsidiaries, where Ginkgo creates, funds, or controls other entities that act as its customers. One example of such an entity is Synlogic, a biotech company that develops synthetic biotic medicines using Ginkgo’s platform.
In June 2019, Ginkgo and Synlogic announced a scheme that involved an $80 million equity investment at a premium in Synlogic by Ginkgo and entry into a long-term strategic platform collaboration.
However, the investment was not a cash payment, but rather a gave Synlogic the right to buy Ginkgo’s shares at $9 per share. The collaboration was not based on cash payments, but rather on research credits that Synlogic could use to access Ginkgo’s platform.
Scorpion Capital exposed the Ginkgo-Synlogic scheme as a sham and a shell game, where Ginkgo is essentially paying itself to generate revenue. The report claimed that Synlogic is not a bona fide customer of Ginkgo, but rather a related party that is controlled by Ginkgo.
The report pointed out that Ginkgo owns 13.5% of Synlogic’s shares, and that Ginkgo’s largest shareholder, Viking Global Investors, also owns 16.4% of Synlogic’s shares.
Scorpion also claimed that Synlogic is not a viable company, but rather a money-losing venture that has no meaningful products or revenues. The report said that Synlogic has been burning cash at an alarming rate, with a cumulative net loss of $338 million since its inception.
It also pointed out that Synlogic has no approved products or late-stage clinical trials, and that its lead candidate, SYNB1618, for phenylketonuria (PKU), failed to show any efficacy in a phase 2 trial. The report argued that Synlogic is dependent on Ginkgo’s funding and services to survive.
Short Report’s Impact
The report had a significant impact on Ginkgo’s stock price and reputation. On the day of the report’s release, Ginkgo’s stock price dropped by 24%, wiping out $4 billion of its market value. The stock price has continued to decline since then, reaching a low of $2.99 on January 12, 2022, down 71.8% from its IPO price of $10.604.
On October 6, 2021, the same day as the report’s release, a class action lawsuit was filed against Ginkgo, Soaring Eagle, and their executives, alleging that they violated federal securities laws by making false and misleading statements about Ginkgo’s business, operations and prospects.
On November 19, 2021, another class action lawsuit was filed against Ginkgo and its executives, accusing them of trying to conceal that most of Ginkgo’s revenue was generated through other entities it created, funded, or controlled.
On December 9, 2021, Ginkgo disclosed that it had received a subpoena from the Securities and Exchange Commission (SEC) requesting information related to its revenue recognition policies and practices.
Ginkgo's Financials
Ginkgo’s total revenue was $478 million in 2022, representing an increase of 52% over 2021 and toward the high end of guidance. This revenue was mainly driven by its Biosecurity business unit, which provides COVID-19 testing and genomic surveillance services. Ginkgo’s Biosecurity revenue was $334 million in 2022, representing growth of 66% over 2021 and more than doubling the original guidance provided in March 2022.
Ginkgo’s other main source of revenue is its Cell Engineering business unit, which offers cell programming services to customers across markets such as food, health, and consumer goods. Ginkgo’s Cell Engineering revenue was $144 million in 2022, representing growth of 27% over 2021. Ginkgo added 59 new Cell Programs to its platform in 2022, representing 90% growth over 2021 and toward the high end of guidance.
However, Ginkgo also incurred significant losses in 2022. The company reported a net loss of $337 million in 2022, compared to a net loss of $217 million in 2021, an increase of 55%. This was mainly due to higher operating expenses, such as research and development, sales and marketing, and general and administrative costs. Ginkgo’s operating expenses were $815 million in 2022, compared to $434 million in 2021, an increase of 88%.
For 2023, Ginkgo expects its total revenue to be between $500 million and $550 million, representing a growth of 5% to 15% over 2022. The company expects its Cell Engineering revenue to be between $200 million and $250 million, representing a growth of 39% to 74% over 2022. The company expects its Biosecurity revenue to decline by 10% to 20% because Ginkgo anticipates a decrease in testing demand as the pandemic subsides.
Final Thoughts
Ginkgo, like many other young companies in this field, has a big problem with huge net losses. The company lost almost $205 million in the quarter, or 11 cents per share, which was worse than what analysts expected by 2 cents. This loss was smaller than the same quarter last year, which had a big charge for paying employees with stock. But adjusted EBITDA was negative $100 million, compared to almost breaking even a year before.
These big losses are making the company spend a lot of cash right now. Free cash flow was negative $110 million in the quarter, up from less than $25 million in the same quarter last year. This is not a big issue right now because the company had $1.2 billion in cash at the end of Q1, but it will need to be careful. The main issue here is that a lot of the net loss adjustments on the cash flow statement are because of paying employees with stock, which means investors are getting less ownership of the company every quarter.
In short: Ginkgo Bioworks is a synthetic biology company that has been targeted by a short-seller report from Scorpion Capital, which accused it of being a colossal scam and a Frankenstein mash-up of the worst frauds.
The report had a negative impact on Ginkgo’s stock price and reputation and triggered legal actions and investigations against the company. Ginkgo has denied the allegations and defended its business model and performance, and published a rebuttal to the report. The outcome of this dispute remains to be seen, as both sides have presented conflicting arguments and evidence.
