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Ginkgo Bioworks is a Buy, says Raymond James

Raymond James analyst Rahul Sarugaser likes the new acquisition coming from Ginkgo Bioworks (Ginkgo Bioworks Stock Quote, Charts, News, Analysts, Financials NYSE:DNA), with Sarugaser reaffirming his “Outperform 2” rating on the stock in a Monday report. 

Boston-based Ginkgo, a cell programming technology platform that uses bioengineering to program custom-made cells, announced on Monday a deal to acquire fellow biotech company Zymergen in an all-stock transaction valuing Zymergen at $300 million. The deal has the approval of both boards of directors, with an estimated closing date of the first quarter, 2023. (All figures in US dollars.)

Ginkgo Bioworks said the acquisition will accelerate its horizontal synthetic biology program, integrating Zymergen’s automation, software and data science tools and biological assets. The deal will see Zymergen shareholders acquire 0.9179 Ginkgo shares for each Zymergen share, representing 5.25 per cent ownership of Ginkgo following the transaction.

“We are thrilled to integrate Zymergen’s capabilities into our Foundry, which we expect to accelerate the growth of our platform as we continue to deliver on our mission to make biology easier to engineer for our customers, helping us drive down the costs of cell programming as we invest in scale. We can’t wait to welcome Zymergen’s technical teams, who will support our scaling objectives,” said Jason Kelly, Ginkgo CEO and co-founder, in a press release.

Sarugaser said he views the deal “very positively” for Ginkgo, calling it both opportunistic and strategic and carrying with it the potential for Ginkgo’s customers and shareholders to materially benefit long term.

“There are few companies in the world that have invested more than DNA and ZY into their technology platforms for cell programming, so this transaction represents the coming-together of two of the most advanced automated infrastructure systems in the entire world of synbio,” Sarugaser said in his report.

Sarugaser gave three main reasons for Ginkgo shareholders to be excited by the deal: First, Ginkgo will be getting world-class technology at a very attractive price, as Ginkgo would own the core automation, software and engineering technologies that Zymergen has been building for the last ten years; second, Ginkgo is well-situated (in fact, Sarugaser said there is no company better-situated) to realize the value of Zymergen’s technology, boosting the deal’s accretive value; and third, Sarugaser said Zymergen’s existing pipeline of projects are all upside as Ginkgo said the deal was executed  assuming zero revenue from Zymergen, with lots of upside potential.

“ZY has ongoing programs (internal and partnered) in several areas, notably advanced materials and drug discovery. We believe DNA is probably the best company in the world to maximize the value of these programs by (1) spinning them out as stand-alone companies/JVs (à la Motif Foodworks, Aracaea, Allonia, Biomedit), or, (2) plugging them into current or future cell program partners. In this way, DNA is akin to the world’s most liquid marketplace for cell programming assets,” Sarugaser wrote.

At the same time, Sarugaser pointed to two areas that give him a bit of pause about the acquisition. One is that Ginkgo is using shares as currency and its share price is down 70 per cent since its go-public, but the analyst said of the two options of using stock or cash, Ginkgo’s approach is the lesser of two evils as the current environment gives primacy to the preservation of cash. Secondly, Sarugaser said Zymergen could become a cost albatross for Ginkgo, noting that the consensus is calling for the company to generate negative $241 million in EBITDA in 2023 followed by negative $280 million in 2023. 

On this point, Sarugaser said ZY is continuing to aggressively strip out costs prior to the deal’s closing.

“DNA would rationalize further post-close, and there are certain deal provisions that protect DNA against e.g. ballooning real estate/construction costs,” he wrote.

As for Ginkgo Bioworks’ own financials, Sarugaser is expecting 2022 revenue and EBITDA of $381 million and negative $160 million, respectively, and 2023 revenue and EBITDA of $422 million and negative $179 million, respectively. The analyst pegs DNA’s EV/EBITDA as going from negative 36.6x in 2021 to negative 24.3x in 2022 to negative 21.6x in 2023.

Ginkgo last reported earnings in May where it showed $168 million in revenue for the first quarter 2022 compared to $44.1 million a year earlier. Revenue broke down into $21.5 million from its Foundry platform and $133.0 million in Biosecurity Service revenue and $13.9 million in Biosecurity Product revenue.

Ginkgo said Concentric, its biosecurity and public health offering, grew rapidly during the first quarter with its COVID monitoring programs across the US, saying Concentric has now tested more than nine million samples for COVID.

“Concentric is well-positioned to play a role in the response to longer-term needs, including endemic COVID-19 and broader infectious disease preparedness and public health response,” Ginkgo said.

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