Raymond James analyst Rahul Sarugaser likes the look of the newly expanded partnership between Bayer AG and Ginkgo Bioworks Holdings (Ginkgo Bioworks Stock Quote, Chart, News NYSE:DNA). Sarugaser maintained his “Outperform 2” rating and target price of $11.50/share on Ginkgo for a projected return of 146.2 per cent in an update to clients on Friday.
Headquartered in Boston, Ginkgo Bioworks Holdings builds bespoke living cells through the use of its Foundry + Codebase platform, where the Foundry is the suite of physical infrastructure on which Ginkgo undertakes its cell programming work, while the Codebase is Ginkgo’s expanding catalogue of institutional biological knowledge it uses on to execute new projects.
Sarugaser’s updated analysis comes after the company announced expansion to its platform capabilities in agricultural biologicals through a series of transactions with its core agricultural partner, Bayer AG, which Sarugaser cites as affirmation of Ginkgo’s business model.
“For BAYN—a global leader in agricultural innovation—to adopt a strategic focus on commercialization and shift to ‘an exclusively external biological research discovery pipeline’ through its partnership with DNA provides us further evidence of DNA’s value as a powerful R&D partner, not just for start-ups, but for some of the best-resourced and most capable R&D organizations in the world,” Sarugaser said.
The deal will see Ginkgo acquire Bayer AG’s West Sacramento R&D site, which presently functions as the headquarters for Bayer Crop Science, part of Bayer’s Biologics group. The 175,000 square foot facility gives Ginkgo access to Bayer’s agricultural strain collections, including microbial-based crop protection products like SerenadeSoil fungicide, BalladPlus fungicide, and Sonata fungicide, as well as pilot scale fermentation, formulation, and greenhouse facilities.
In addition, Ginkgo will also look to integrate R&D platform assets from Joyn, which is focused on developing engineered nitrogen-fixing microbes to replace synthetic nitrogen fertilizers.
The deal also produces a new multi-year agreement between Ginkgo and Bayer AG to advance agricultural biological products devoted to nitrogen fixation (Joyn’s marquee product), as well as new offerings like next-gen crop protection and carbon sequestration.
“With this agreement, BAYN would become DNA’s anchor agricultural customer, but the deal would not preclude DNA from working with other customers in the sector,” Sarugaser said. “Also, we can see a future where ag-bio start-ups, noting DNA’s expanded lab-to-field development capabilities, begin signing up for cell programs with DNA at an escalating pace, creating for BAYN a de facto innovation and M&A pipeline.”
According to Sarugaser, the deal is expected to close before the end of the calendar year and will expand Ginkgo’s capabilities in agriculture from agricultural biologicals discovery to cell engineering to formulation to field trials and would transform its early joint venture with Bayer AG into a full suite of cell programs with up-front R&D fees and downstream value-capture, likely through royalties.
“Bayer, Ginkgo, and Joyn share a common vision, which is to enable biological products to be a critical part of the solution to the world’s greatest agricultural and environmental challenges,” said Jason Kelly, CEO and cofounder of Ginkgo Bioworks in the company’s April 22 press release. “We are incredibly impressed by the success of the Joyn team and the deep expertise of Bayer’s West Sacramento R&D team, and are thrilled to have them join Ginkgo as we build deep end-to-end capabilities in ag biologicals on top of our large scale horizontal platform. We believe we’re bringing together the most innovative minds in agriculture with the experience of a team that has brought several effective biological products to market for Bayer – opening this platform up to the world has the potential to truly revolutionize the field.”
After Ginkgo Bioworks ended the 2021 fiscal year at $314 million in revenue, Sarugaser forecasts an increase to $381 million in 2022 for a potential year-over-year increase of 21.3 per cent, followed by a 2023 projection of $420 million for a potential year-over-year increase of 10.2 per cent. (All figures in US dollars.)
From a valuation perspective, Sarugaser forecasts the company’s EV/Revenue multiple to drop from the reported 18.9x in 2021 to a projected 15.6x in 2022, then dropping to a projected 14.1x in 2023.
Meanwhile, with continued investment in play, Sarugaser continues to forecast adjusted EBITDA losses going forward, following the reported $106 million loss in 2021 with a projected $130 million loss in 2022 and a projected $142 million loss in 2023.
In Sarugaser’s view, Ginkgo is reaching into a new dimension with this agreement, particularly pointing to access to new infrastructure and testing capabilities.
“With this deal, DNA has taken a big step toward being the agriculture industry’s goto platform for the development of field-ready engineered organisms,” Sarugaser said. “Onboarding significant lab-to-field R&D assets in agriculture creates for DNA another key avenue for the deployment of engineered cells from its platform.”
Ginkgo’s share price momentum has ground to a halt in 2022 with a 55 per cent loss over the last four months, dropping from its 2022 high of $8.69/share on January 3 to a 2022 low of $2.83/share on March 14, though it has rebounded by 37.1 per cent since then.
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