Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Hey, good morning. Thank you, everyone, for attending the UBS Virtual Health Care Conference. This is Gregg Genova from the UBS equity sales team. The session is a fireside chat with Twist Biosciences. Happy to have here with me, Emily Leproust, Founder and CEO; and Jim Thorburn, CFO. So I have plenty of questions prepared. If you'd like to ask a question, please use the UBS conference website to input a question, and I'll be happy to ask Emily and Jim.

So with that, why don't I jump right in? So of course, front and center right now is COVID-19. I know you guys had some puts and takes. So let's first cover the positives. You had nearly, I think, $500,000 in revenue on the positive side from 3 main areas: the reference sequences, the enrichment panel, and of course, the custom antibody drug discovery library. So can you talk about those 3 items first?

Yes, happy to do that, and thank you for having us. And so in response to COVID-19, we launched a couple of COVID-19 specific products. So one is our RNA synthetic control. So we provide the full virus in RNA form in a tube, and we have 2 versions. We have the Wuhan version and we have the Australian version of the virus. And that's very useful for people that are developing RT-PCR test or NGS test to check whether their test is working. And it's also being used routinely by hospital every -- a few sample every 6, 12 or 24 samples. They can run the positive control to make sure that the assay is working. So we launched that in mid-March. So it's first time for the company that we sell RNA, but it's the -- kind of the early in class, where we are the only companies with the full RNA control, and we are part of the guideline on the FDA website. We also launched an NGS panel. And the idea of the NGS panel is RT-PCR tests are great to give a yes/no answer. They're fast. But it says -- it will give you yes, yes, no. If you need NGS, you'll be able to sequence the entire sequence of the virus, which would be useful to see virus evolution and whether -- and that could have impact in -- for vaccine development of our antibody development as well as could have impact on policy. If you get a virulent strain emerging somewhere you may want to go back into lockdown or shelter-in-place, it may impact what you do in the ground. So that NGS has not yet taken over as a method to test broadly, but we have a test ready if that happens. So those are 2 COVID-19 products. We announced those 2 at about $400,000 of revenues in just 2 weeks with about 231 customers. And it continues to sell this quarter. In addition, we sell genes and -- that are used for vaccine development and therapeutic -- to therapeutics development. And so those are our regular products that our customer just order from the web. But not always able to quantify, which one of those is for COVID or not. We can't always know if an antibody is for cancer target or for COVID. So we can't fully characterize the opportunity, but we are aware of customers that are running specific big projects about -- for -- against COVID. And then finally, the last thing we do against COVID, which is kind of a potential upside for us, is we've used our own drug discovery platform to go after COVID-19, and we found dozens of antibodies against the spike protein of the coronavirus or the S2 receptor, the human receptor, and those are available for licensing for diagnostic or therapeutics. And the data that we generated has really broadened the funnel of biopharma partners we're talking to. So that could be a potential upside.

To follow up on that last one. So targeting the S1 protein and then the human receptor, the S2. So when will we hear some more about this? I think on your last quarterly call, you mentioned potentially June. So when we can get more color on that? It seems very exciting?

Yes. So in the June time frame, we should have a readout on the -- how neutralizing those panels of antibodies are. So again, we have antibodies against both the S1 receptor -- sorry, the S1 spike and the S2 human receptor. I think this is -- people have been focusing mostly on the S1. And of course, we did. But because for us, our platform is so powerful, we actually did both in parallel, and we didn't find a couple of antibodies. We found, I think, we have more than 50 antibodies for -- against S1 and more than 150 against the S2 inhibitor. And so that means that we have many potential antibodies to choose from. So the June time frame is when we have the next readout of the -- how neutralizing those are. There could be some follow-up about combination afterwards because we know on which epitope each of those antibodies bind. And so we may be able to do cocktails of combination of antibodies that quester different epitopes. And then, as I said, the data that we have has enabled us to have a lot more discussion. And so we don't have any deals signed, but we are also trying to monetize the antibodies that we have in licensing opportunities.

Are you guys playing a part in the serology test? We've been hearing a lot about the serology tests that are going on right now. This is what you're doing, play a part in that as well?

So in the -- potentially, so -- it depends. In the serology test, where you're trying to see that someone has an antibody against SAPHO. Did someone get sick in the past. Maybe they didn't know it. Do they have antibodies now? This is kind of an easy test in a way. You -- all you need is the antigen. So you need the protein sequence. And so now people can buy that gene from us. But there's many sources to get it, and it's just 1 gene could. It's not a big opportunity for us to see did I get the virus in the past. However, there was also some serology tests about do I have the virus now. So people potentially may want to use antibodies that bind the virus to take a cheek swab and say, do I have the virus, yes or no, right now, that could be quite interesting. And there, our antibodies are potentially really good for that. And so we have about 50 of those available for screening. So we could participate. If someone needs an antibody, ours is available to put into the mix.

Got it. Just sticking with COVID, but moving to the -- I guess, those were the tailwinds. So let's talk about some of the headwinds. Can you talk about what areas you guys have seen weakness in? Obviously, you guys have been -- you had children placed for a while out of your academic and lab, customers have been shut down. Any update on kind of on that front? Any -- now that we're starting to get excited about opening back up. Have you seen your customers kind of loosen things up, get back to work?

Do you want to take that, Jim? Or you want me to take it?

I think -- so a couple of comments there. I think it's based by region. Certainly, if we go back to last quarter, we saw a pickup in bookings in China towards the end of the quarter. For this, most recently, I can only talk about through the end of March into April, what we're seeing is in Europe, although March was a very challenging month. Europe is ahead of us in terms of the shutdown and reopening schedule and that's varying by different countries. But certainly, the conversations we are having with a number of the end customers in Europe is they're looking at, particularly the larger ones. They definitely been ordering from us, as we discussed in the call end of last quarter, and we're optimistic in terms of how we can position ourselves to get a larger share of their market. We built up our supply chain. And we have a platform that in March really delivered. We shipped in fact 2,000 genes in the month of March. Our key operations and R&D staff are working through the shelter-in-place. We're providing protective equipment, and with conversations we're having, I have gone from just providing just DNA. We're now talking about providing DNA prep and IgG. So we believe we can get a larger share of wallet. We've historically focused on larger customers. And although the number of smaller customers have definitely been impacted and as you noted academic has been impacted. I think we've been quite fortunate and -- that we target larger customers. And we brought -- as I said, we brought on 2 new synthesizers towards the end of last quarter. We're going to bring another 2 on over the next 4 or 5 months. So we're really positioning for a strong rebound. And as we continue to scale the business, we want to go after more of that market. And believe we're well-positioned to get a greater share of the market.

Great, I guess -- shifting, I guess, away from COVID for now at least. What stood out in your last -- your fiscal 2Q in terms of what area should investors focus on most and why? Anything you guys think it's not well understood enough in the marketplace?

I think -- so just -- I think a couple of points on Q2. One is it's a very strong quarter for us in a challenging environment. Second is even in strong quarter, even in a challenging environment with a very strong quarter, we have plenty of capability in launching new products, innovating. Our gross margin was 30%. We saw the challenge of COVID launch 2 new products. I think it highlights, as Emily mentioned earlier in the conversation. It really highlights our platform. Our antibody team has done a fabulous job. And as we continue to scale the business, I think people will be looking at Twist in terms of not only providing genes, provide NGS, our products. We can provide IgG and provide antibodies. So we are more of a complete provider of synbio products and also NGS and antibody, and it is really leveraging our platform.

So on NGS, you guys have a lot going on there, spending product lines, customer base. Some customers moving from pilot to commercial. So can you just walk through your revenue guidance this year? Why think you pulled guidance? So I guess, can you just walk through kind of the moving parts in NGS from a topline perspective?

Yes. So yes, we track the number of large customers for NGS. And those are ones that can -- we estimate to contribute roughly $250,000 a year in terms of revenue. When we first started tracking the pilot through the validation, through scale up and adoption, we were tracking roughly about 80. That has since grown to 90 and that is 113, 43 so far have adopted, which means moving into production. We're designed into their assets. And so in terms of the first half, you're right, we did pull guidance. But in terms of the first half, overall bookings were $50 million for NGS. The orders were about $21 million. And the first half revenue for NGS was just under $15 million. So if you look at the customers that have adopted about $8 million of the $15 million was from the customers that are in production. We believe we've got a very strong value proposition. We believe we've got wind in our sales there, and we're having more conversations, particularly after the Agilent litigations behind us. And the -- as I said earlier, even in Asia, towards the end of last quarter, we saw strong demand from an ordering point of view for our NGS products. So I think -- obviously can't give guidance, but we've got a lot of the metrics going in the right direction. And last year alone, we shipped $21 million. In the first half this year, as I noted earlier, revenue for NGS is $15 million. So we're making terrific progress.

So clearly gaining share there. Who are you displacing mostly within these markets? And from a competitive standpoint, if you do lose, why is that?

Well and as...

Go ahead, Emily.

So in NGS, historically, Agilent and Roche were the first to market back in 2009. Historically, IDT has been extremely competitive in the last few years. So we are mostly competitive -- competing against IDT/Danaher because Agilent basically already lost a bunch of accounts to them. But there's still a few accounts where we're also seeing Agilent and it's much easier to win against Agilent. The benefit of our uniformity and the lower cost is even more obvious with an account that is using Agilent, but even against IDT, we're able to show that the uniformities is significantly better and that the cost saving for sequencing is significant. And it does not mean that those customers are going to spend less overall, they'll spend good amount of budget there. They'll just be able to run more sample. And so it's a great benefit to customers who with the budget that they have be able to run more samples without having to buy more sequentials. So those are who we mostly fish.

Got it. So maybe shifting to synbio and Ginkgo, can you just remind us the key terms of your current contract with them, how this relationship is going and what investors should expect when this contract term ends? And how we should think about the opportunity to expand revenues with Ginkgo?

Yes. So we're -- it's a 4-year contact -- live contract, and we're 2 years into it. The relationship with Ginkgo is great. They've been fabulous anchor account for Twist. The revenue in first half for Ginkgo was about $6 million. And as we've highlighted earlier in the year, the contract for this fiscal year was roughly just under $11 million. So it's some shipments to date have been in line with the contract. And our belief is we provide a very strong competitive offering. We've increased the gene length from 1.8 kb through 3.25 kb. We keep investing in our synbio business, expanding the portfolio. And our belief is that we provide a very strong competitive advantage for Ginkgo. They've told us that they can get the scales -- we can provide them the scale of genes that's not available elsewhere. And our belief is we're going to be well-positioned to support Ginkgo's growth over the next few years and beyond the contract.

And -- you touched on it a little bit, but I guess for the non-Ginkgo part of the business, similar to the NGS question, if clients don't use Twist, who do they use and why? Are there any upstart competitors to watch for in this space?

Yes. So the main competition there is some official with GeneArt brand, again, Danaher and IDT. So IDT does not sell clonal gene. They sell non-clonal fragments. We have GenScript based out of Hong Kong. We have GENEWIZ now part of group's formation based out of China as well. There is Eurofins. There is Bioneer. There's maybe 20 competitors. None of them are [ owned study ]. They all use the same old technology of 1912 play that we are replacing. So we are the only group with the technology advantage. There, our position is very strong. We are priced at probably 2x to 3x lower than they are. So for instance, a clonal gene for us is $0.09 a base, a clonal gene with our competition is in the $0.20 to $0.25 a base. So -- but again, we are not shrinking the market, we are offering more shots on goal to customers. Yes, does that make sense? Anything else you'd like to know on the competition?

No, that was perfect. So maybe let's shift to pharma, bring us up to speed on the market opportunity there between biobetters and de novo discovery. You guys have collaborations right now. Are these meaningful revenue opportunities themselves? Or are these more cases to prove your technology approach for future payouts?

So both. So if we step back to 1.5 years ago at the time of the IPO, pharma was really an idea. We just hired our CSO. We hired a team of 12 people. And the idea was to build the vertical where we could create -- reach through in -- for therapies. And we spent 2019 building the data set that we could use to convince our future customers. Drug discovery is a very science-focused area. And so in order to build our book to prove to the world that we could do it, we did what we have to do in pharma, which is we did the hardest stuff. And so we picked GPCR targets and are very heart to drug, and we pick 7 of them, and we found -- we discovered antibody -- functional antibodies against all of them. And so that shows the power of the technology, and we've been able to use that data to convince companies to pay us to do work for them. And initially, there were smaller deals. But now that we are delivering on those deals, those companies are coming back with more. And so we have very big customers, and doing work for them, we're able to generate data that we can share in an anonymous manner to other people to convince more people to choose us. And in the last 6 months, we've had $1.4 million order booked in the pharma business and $800,000 of revenue in our pharma service. So it's not Fortune 500 yet, but it shows that it's starting to pick up. And more importantly, 2 weeks ago at the earnings call, we were able to report that now we have groups that have signed contract with us with milestones and royalties. So we've been able now to sign a deal where we can comment milestones and royalties. So we are not a CRO. CROs don't get milestones and royalties. And what that means is that now we have enough data to convince people that we can do something that is unique. And as we get more data, as we get signed more of this, what will happen is the number will increase the -- and the economic share that we get will increase. As you know, in pharma, more risk means less economics. And so as we have more data and more [ diff ] for the whole belt, the risk goes down and the economics share goes up. And there will be a point, and there's still a lot of work to get there, but there will be a point where we'll be able to sign the top 20 pharma companies on our services, and that should be a transformative catalytical event for us because once we can attract a top 20 pharma, it shows to the other 19 that we are safe and so it should increase our opportunities. As you know, big pharma, they tend to be a bit more conservative. They'll rather pay more later than take a risk early. And so -- but as we get more data, more deals, we'll get closer to our goal of signing one of those. And the work we've done against COVID-19 has generated a lot of data that and increase the funnel of people we are talking to and should be useful in getting more deals in the near term.

Great. I was going to actually -- so my follow-up was going to be if pharma was kind of distracted right now given COVID-19, but it sounds like it's the opposite that your work on COVID-19 has kind of accelerated some of those conversations with top 20 pharma companies?

Yes, there is definitely -- I mean, that's what the goal initially was to -- that's what the goal initially was to demonstrate that our platform works against COVID-19 as a marketing tool to reach more people. And of course, if we can help that's fantastic. And if we can license one of our antibodies, as an upside that's even better. But definitely, the goal was to generate data to have more conversation, and that's definitely working.

Great. How about shifting to storage, this is a big opportunity. Can you update us with time lines and proof points? And also, has this market opportunity been developing according to plan? Or is it slower or faster? And why?

Yes. So that's a storage again at the time of IPO was the longer template. Drug discovery was medium-term player, and now 18 months later, we are going to see business, referring to the deals, proof points. So since I've been working well on the drug discovery side, but on -- similarly on data storage, I'm quite pleased with the progress to date. There's 2 tracks for data storage. One track is on the technical track, and we've been able to develop a road map, that will lower the cost down to -- from where it is today to a price that is on par with the hard drive. People are willing to switch to the DNA to store data, but they probably don't want to pay premium. But if you are the same price as a hard drive, it really opens up your market opportunity. And so we want to get to $100 per terabyte. So now we have an engineering road map to get there by shrinking the size of the feature from 50-micron where it is today to 7-micron to 50 nanometers. So we had the engineering road map and we've announced in prior earnings call that we've pulled the trigger on the design and build of a CMOS chip. And to get -- to go into the direction, the cycle of designing, building and testing a CMOS chip is fairly long. It's in -- it's 18 months. And so we don't have a report every quarter on the progress, but the team is on track, and we've added more engineers on the team to help with that. So the first aspect is the technology aspect. And when we have the results from the CMOS chip, we will definitely share it. And then the second aspect is more of a business aspect, funding business or market creation, market discovery. And we are very pleased that we're able to secure a non-dilutive funding from the -- from IARPA to help accelerate the project. And so we are part of the consortium that got $25 million. Twist got $9.15 million -- is getting $9.15 million directly. And then there's another $4 million or $5 million that goes to a third-party that -- for work that will benefit Twist or advance our work. And so that funding is going to accelerate what we do. And then in addition, we keep looking for other ways to build the market and create proof points around the market, and those will come in the future. But overall, very, very pleased with the work of the team on data storage. And I'll say that all of our businesses have done well on the core business. The revenue growth from synbio and NGS has been as expected or better from the IPO time. The data proof point and business that we are offering to get -- for biopharma is a slow thing ahead of what we thought it would be. And similarly, data storage has been doing great. So overall, the team at Twist has been executing really well and building on our platform and continuing to innovate to take share and grow the business. So I'm quite pleased with what we are doing in the short term, medium term and long term. So we're not a one-trick pony. We are building a portfolio of businesses that each will have -- that which are -- that are at different stages of maturity. Whether they each have either the potential for high-growth or demonstrating high-growth.

That's great. Thanks, Emily. Jim, I think you mentioned before, the Agilent lawsuit that you settled, how important was this? What does it mean for the management team and the company's strategy?

I think it was important to get that behind us. The loss has been around the company for a number of years, and so a couple of components to it, one is customers were perhaps -- and some investors were perhaps wondering about the legitimacy of the lawsuit and the potential impact because there's always the fear of the unknown. And just getting it behind us sort of lifts that cloud, lifts the overhang. And my belief is there's certainly an overhang in terms of a number of the customers because at the end of AGBT, and I'm talking about the NGS products, I met with the NGS sales team. And I just asked them for their feedback on AGBT, what was working, what we have done better. And one of the comments that kept bubbling up is there's a number of customers coming looking forward with new projects that they had really -- they had talked to us before, but they asked us to really engage with them. So engagement level went up. We also saw last quarter we shipped to roughly about 300-odd customers from NGS point of view, 340. I think that was a record. And you go back to '18, we're shipping to less than 40 customers. So I think in terms of what it was from -- it was a distraction, but Emily is very focused leader and didn't let it interrupt our focus in terms of growth and strategy and execution. But it's certainly great to get that behind us. Certainly from a -- it's interesting from a cash point of view, the burn last quarter -- our loss is about $31.8 million. Of that $31.8 million, there is about just over $5 million of external legal expenses associated with the litigation. So if you were to step back and when you look at the business, so roughly, it's about $26 million loss excluding the litigation expenses, such legal expenses. And then in terms of -- from an adjusted EBITDA point of view, there's about $6 million of stock-based comp and depreciation. So our quarterly loss is about $21 million. So we've got a reduced burn rate, more customers considering us. And just the overhang behind us, I think, is a major win for the company. And we can get on with doing business, which is building our customer base, building products and really leveraging the platform.

Great. We just have -- it looks like we just have 3 minutes left. So I want to just turn it over to you guys. Emily, Jim, anything -- any closing remarks, anything I didn't cover that you'd like to close with?

I mean I'll make a couple of comments. I think this last quarter has highlighted we do have a disruptive platform. We got a 30% gross margin. We increased our customer base in a very challenging quarter. I mean our employees really delivered 32,000 genes in March; 88,000 genes in the quarter; $19 million revenue; 30% margin. And we get a strong balance sheet, and we're going to execute on growing the business. And we're looking forward to getting a larger share of the wallet, and I'll turn it across to Emily.

Yes. Thank you. Jim, you summarized it perfectly. I think we keep executing, and it's not a surprise. It's based on a strong foundation of technology and very aggressive commercialization. And we keep our eyes on the golf. We are not dealing our product launches. And so we are focused on continuing delivering the growth, both on the core business and now trying to realize the value of biopharma and continuing investing in data storage, which when we have another of those -- this fireside chat in 2 years it would be closer to better storage revenues like we are now with drug discovery. So I think our strategy of long-term, short-term and medium-term portfolio growth is working. And it's a testament to the dedication of the Twist of -- that we're able to do that, both in good times and especially in challenging times like we are living right now.

Well, great. And I hope in 2 years from now, that fireside chat, we will be up on a stage instead of virtual, but we'll see. Thank you, Jim. Thank you, Emily. Yes. Thank you, guys. Really appreciate it.

Thanks, Gregg.

Thank you so much for your time.