Ginkgo Bioworks has found itself at the center of controversy since the release of a report by Scorpion Capital in October 2021, which labelled the synthetic biology company one of the worst frauds in the last two decades. Following the accusation, Ginkgo’s stock, trading under the symbol DNA, plummeted drastically, leading to significant ramifications for both the company and its investors. This report not only triggered an immediate 12% drop in share price but also initiated a wave of legal actions and investigations, including disclosures of a Department of Justice inquiry into financial misconduct.
Scorpion Capital’s report raised substantial concerns regarding Ginkgo’s business operations, primarily alleging that much of its revenue stemmed from related-party transactions. The revelations painted a grim picture of the company’s financial health, suggesting that reported revenues may not accurately reflect legitimate business dealings. In response to these serious allegations, Ginkgo initiated an independent investigation, which ultimately concluded that there was no basis for the accusations of fraud or reporting violations.
Ginkgo’s CEO, Jason Kelly, responded to these allegations in 2021 by asserting that Ginkgo’s platform enables the swift creation of new startups and reaffirming the company’s dedication to fostering biotech entrepreneurs. Additionally, Ginkgo disclosed that the Department of Justice had started investigating its business practices. Following these events, shareholders initiated a lawsuit in October 2021, accusing Ginkgo of misleading investors and misrepresenting key business transactions.
In response to the DOJ inquiry and the shareholder lawsuit, Ginkgo instigated an independent investigation. The results revealed that the company did not engage in the misconduct detailed by Scorpion Capital, including fraud, violations of SEC reporting, or accounting inaccuracies. During a November 2021 earnings call, CEO Jason Kelly shared insights from the independent investigation, stating:
“And shortly after the report came out, we received an informal inquiry from the DOJ, which is why I’m very happy to report today that, that based on the independent investigation, the Audit Committee found that any suggestion of fraud, reporting violations, accounting errors, or other wrongdoing contained in the short seller’s report were unfounded and importantly that no restatement of our financials was needed. I will say, as CEO, it is very, very rewarding to see so many parts of the company and so many people in the team strenuously pressure tested like this and see them pass with flying colors. It is a testament to the culture we’ve been building at Ginkgo the last 13 years now. And I’m not going to call the process following up on the short report particularly fun, but it was rewarding, and I’m glad we’re through it.“
Despite this, uncertainty looms large over Ginkgo Bioworks. Investors are understandably wary, as the company reported significant net losses of approximately $205 million in the latest quarter, coupled with a negative free cash flow of $110 million. Although Ginkgo had a considerable cash reserve of $1.2 billion at the end of the first quarter, the ongoing cash burn necessitates a cautious approach moving forward.
In a recent development, Ginkgo has decided to pay a $17.75 million settlement to investors to resolve claims related to the Scorpion Capital report, signifying the company’s intention to move past this tumultuous chapter. Nevertheless, the lingering questions about its business practices and revenue generation remain critical for investors. As the company continues to navigate these challenges, the outcome of the investigations and market response will be pivotal in determining its future trajectory and restoring investor confidence.
Ginkgo Bioworks stands as a cautionary tale in the volatile world of biotech investments, highlighting the importance of transparency and ethical business practices in earning the trust of investors and consumers alike.
Ginkgo Bioworks: About the company
Ginkgo Bioworks, established in 2008 by a group of five MIT scientists—Tom Knight, Reshma Shetty, Jason Kelly, Barry Canton, and Austin Che—was initially named DNA 2.0. The founding concept revolved around the idea of utilizing DNA as a digital code to program cells similarly to computers. The founders were motivated by the prospect of synthetic biology, which strives to create innovative biological systems and products to tackle significant global issues like climate change, food security, and healthcare.
In 2011, the company rebranded itself as Ginkgo Bioworks, taking its name from the ginkgo tree, one of the planet’s oldest living organisms. Its logo features a stylized version of the ginkgo leaf, known for its unique fan shape. The motto, “The Organism Company,” encapsulates the company’s aim to engineer organisms for various applications across industries, including agriculture, pharmaceuticals, and chemicals.
The company stands out as one of the most successful and well-supported biotech startups globally, securing over $2 billion in funding from investors including Viking Global, Baillie Gifford, Bill Gates, and Cathie Wood’s Ark Invest. It went public in September 2021 through a SPAC merger with Soaring Eagle Acquisition Corp., achieving a valuation of $15 billion. Additionally, the company acquired the ticker symbol “DNA” from Genentech after its acquisition by Roche led to its discontinuation.
However, the company’s future has been called into question following a harsh short-seller report from Scorpion Capital, which labelled Ginkgo as a “colossal scam” and described it as a “Frankenstein mash-up of the worst frauds of the last 20 years.” Even the MIT Technology Review expressed skepticism regarding Ginkgo Bioworks’ narrative, disputing its $15 billion valuation, which seems more reliant on vision and potential than on tangible products and revenue. The publication appears to be critical of ventures from its own alumni, particularly those linked to synthetic biology.
At the heart of Ginkgo’s operations is a platform that integrates automation and machine learning to design, test, and refine synthetic organisms within its “foundry.” This platform comprises software, hardware, and wetware components that facilitate the rapid and scalable engineering of microbes. The software element includes tools for creating DNA sequences, simulating biological pathways, and conducting data analysis.
The business model centers on providing this platform as a service to other biotech firms, helping them avoid the expenses and time sinks associated with replicating the early stages of design in synthetic biology. Ginkgo charges its clients for access to its foundry and may also take royalties or a share of the revenue generated by those clients.
It’s worth noting that Ginkgo hasn’t innovated any new hardware; instead, it sources all the equipment for its foundry from suppliers like Thermo Fisher and Pacific Biosciences. While Ginkgo has developed proprietary software to manage these machines, the hardware itself is available to all of its competitors. The company has collaborated with numerous firms, including Bayer, Roche, and Cargill, to engineer microbes for various purposes, such as producing nitrogen fertilizers, synthesizing antibiotics, and fermenting animal feed.
Scorpion Capital Report
Scorpion Capital published a comprehensive 175-page report on Ginkgo Bioworks, based on extensive research and interviews with former and current employees of both Ginkgo and its partner companies. The report brought forth several serious accusations against Ginkgo, including:
Inflating Revenue Through Related-Party Transactions: It was asserted that a significant portion of Ginkgo’s revenue is generated from offering research services to entities that it has established, funded, or controls, such as Joyn Bio, Motif Foodworks, and Cronos Group. According to Scorpion Capital, an astounding 72% of its foundry revenue in 2020, along with nearly all deferred revenue, came from related-party “customers” crafted and influenced by Ginkgo through its ownership stake and board representation.
Investments from Ginkgo and its largest investors circulate back to the company, recorded as either current or deferred revenue. This tactic reportedly highlights Ginkgo’s prolonged inability to secure real revenue from independent third-party clients, necessitating a cover-up facilitated by its key stakeholders.
These entities are described as non-independent third-party customers, essentially acting as shell companies that funnel money back to Ginkgo to artificially inflate its valuation. Additionally, the report accused Ginkgo of employing accounting tricks to recognize revenue prematurely from these companies, despite the absence of actual cash transactions or delivered products.
An ex-Ginkgo employee with experience at Intrexon claimed that Ginkgo emulated their strategies, stating that he had enough industry experience to see through Ginkgo’s related-party maneuvers, particularly noting that the money is simply “going from the left hand to the right.”
The report also charged Ginkgo with misrepresenting its role in the development of COVID-19 vaccines and treatments, as well as exaggerating its potential in various sectors such as agriculture, nutrition, and health.
Scorpion Capital published that Ginkgo failed to reveal that the bulk of its 2020 revenue was derived from related-party transactions involving companies funded, founded, or overseen by its executives. The report indicated that 72% of Ginkgo’s revenue in 2020 and nearly 100% of its deferred revenue by 2021 stemmed from such transactions.
The SEC enforces stringent regulatory standards to safeguard investors from potential misrepresentation of revenue figures linked to these transactions. For instance, Regulation S-K, Item 404, and Regulation S-X, Rule 4-08(k) require firms to disclose related-party transactions within their financial reports, ensuring that investors are adequately informed about their nature and implications.
As pointed out by Scorpion Capital, Ginkgo’s apparent failure to accurately disclose these transactions negatively impacted investors. To exacerbate the situation, some partnerships that Ginkgo announced between May and September 2021 also involved related parties. Following Scorpion Capital’s revelations about the connections between Ginkgo and its clients, the company’s shares plummeted by 12% and have not fully recovered since. Furthermore, Ginkgo’s revenue saw a dramatic decline in 2023 after peaking at $477.7 million in 2022.
Ginkgo-Synlogic Link
Scorpion Capital accused Ginkgo of artificially inflating its revenue through its subsidiaries, where Ginkgo both creates and controls other entities that act as its customers.
A prominent example mentioned is Synlogic, a biotech firm focused on developing synthetic biotic medicines utilizing Ginkgo’s platform.
In June 2019, Ginkgo and Synlogic unveiled a scheme involving an $80 million equity investment from Ginkgo into Synlogic, which was presented as a premium investment coupled with a long-term strategic collaboration. However, this investment did not entail a cash transfer; rather, it granted Synlogic the right to purchase Ginkgo’s shares at $9 each. The collaboration was structured around research credits that Synlogic could use to access Ginkgo’s platform, rather than cash transactions.
Scorpion Capital revealed the Ginkgo-Synlogic arrangement as a facade and a shell game, characterized by Ginkgo essentially paying itself to record revenue. The report claimed that Synlogic does not operate as a genuine customer but as an entity under Ginkgo’s control.
The report highlighted Ginkgo’s 13.5% stake in Synlogic, alongside the fact that Ginkgo’s largest shareholder, Viking Global Investors, possesses a 16.4% share in Synlogic as well.
Scorpion also contended that Synlogic lacks viability, branding it a loss-making venture with no substantial products or revenues. The report indicated that Synlogic has incurred a cumulative net loss of $338 million since its inception, burning cash at a concerning rate.
Furthermore, it noted that Synlogic has no approved products or advanced clinical trials, and its lead candidate, SYNB1618, aimed at treating phenylketonuria (PKU), failed to demonstrate any efficacy in phase 2 trials. The report argued that Synlogic relies heavily on Ginkgo’s funding and services for its survival.
Conclusion
Ginkgo Bioworks, a player in the synthetic biology sector, has faced significant scrutiny following a report from Scorpion Capital, which labelled the firm as a major scam, likening it to historical frauds. This assertion negatively impacted Ginkgo’s stock prices and public perception, leading to legal challenges and inquiries into the company.
Ginkgo has denied these claims and stands firmly behind its operational model, even releasing a counter-argument to the allegations. The eventual outcome of this situation is still uncertain, as both parties continue to present contradictory evidence and arguments.