Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

All right. Good afternoon. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce our next company this afternoon, Twist Bioscience. [Operator Instructions] With that, let me turn it over to Emily.

Thank you, Tycho. Good afternoon, everybody. I'll start with sharing my presentation. So I think the producer will share the slides. While they do that, I'll say that it's great to be here, although the virtual meeting doesn't have the same magic than the in-person meeting. So moving to Page 2, just a quick reminder that I will be making some forward-looking statements today. On Page 3, just to set the stage, as you may know, hopefully, that at Twist we write DNA. And we are very excited because DNA is changing the world. On Page 4, we are highlighting some of the great work that our customers are doing with our DNA. And they are modifying these algae and E. coli to produce chemicals by fermentation instead of from fossil fuel, which is more sustainable, but also cheaper. They are modifying plants or bacteria, work leading with plants, for instance, to deliver nitrogen at the root of plants instead of using fertilizer, which is cheaper and also more sustainable. They are developing therapeutics, vaccine biologics, diagnostic test, and we can even use DNA to store data for the long term. Moving to Page 4. We have -- sorry, Page 5. We have built a platform to do that. And on the left, we are showing what our competition does, they make oligo one at a time, a piece of DNA one at a time, they can make 96 oligos at the same time in the same format, in the same space. On our silicon chip, we can make 10,000 times more. We can make a million oligos. And they are conveniently clustered in cluster of 100s, so we can do molecular biology. And [ either -- some of ] those oligos turn them into guide RNAs, make antibody variants. And so that miniaturization is a unique advantage of Twist, of the platform, and we've built software around it because we make all the products for all the customers at the same time on the same chip, and then they get spread out. So we need to track. Page 6, based on this platform, we've been able to get significant revenue growth. And here, you can see since 2016, we've grown from $2 million to $11 million to $25 million, $54 million and last year ending September, we had $90 million revenue. And our business model is such that we do have high fixed costs, but we have low variable costs, which means that once we [ have absorbed ] the fixed cost, any dollar above that, big portion of that drops to gross margin. And so that's why as our revenue ramps, we'll be able to show that our gross margin ramps as well. Moving to Page 7. From this platform, we are building on 4 different businesses, 2 are tools businesses, where we get the DNA sequence within a DNA samples and we get paid. One is in synthetic biology, one is in NGS. There's no reimbursement issue. There's no FDA approval. And so they provide the base, the -- most of the revenue ramp. And then in addition to those, we have 2 options to a big potential upside, one in drug discovery and one in data storage. So in the next few slides, I'll share -- I'll go into each of those details. So starting on Page 8, an overview of synthetic biology. We have a product line where we sell genes, guide RNA for CRISPR, variant libraries for protein engineering, products for pharma and drug discovery, such as IgG, and we're expanding. Page 9 is an overview of our e-commerce solution. And so that is key to what we do. And as a customer, you can go on our website, upload your sequences, we analyze them on the fly. If the arrows will tell you, there is an editor to go edit, you can optimize, modify, find the aminos that you want. And when you're happy, we can -- you can just choose your vector, and we'll give you in real-time a quote. It literally takes 2 minutes and it's beautiful, intuitive and frictionless. And 99% of our gene and oligo [ approve ] order come from e-commerce. Moving to Page 10. Why we win in synbio? Initially, we competed on price. But since then, we've added scale. If you want thousands of genes, we are probably the only platform that can do it. We have user experience service. We now are on par on speed, and we've added more flavors of DNA. And we are investing in the factory of the future, which we'll talk on the next slide. Page 11, please. So -- sorry, Page 11. And so where we are in synbio, at this point, is only -- we are scratching the surface. We have 1,600 customers. We've shipped 339,000 genes last year, but it's only 10% of the bio market. And so we have a lot to go to gain market share. And with the long tail, that is a $1.4 billion opportunity, we have lots of room to grow. On Page 12, we have a few opportunities that we are pursuing to get there. One is to launch products that are useful for pharma. And so IgG is our next focus with our commercial ramp. Clonal ready gene fragments are useful for the long tail of the market as well as the B2B integration. And with the factory of the future, we'll be able to double our capacity and reduce turnaround time to be even more competitive. So that's what I'll say on synbio. Moving to Page 13 to NGS. In NGS, we do targeted sequencing. And there's a number of application. The main one right now for us is liquid biopsy, but we also do a lot of kits to/for rare disease, detection oncology, population genetics and because of COVID now, infectious disease. And on the left, you can see that we have the full product line. We have content, catalog content, custom content, all the [ bids buffer ], adapters enzyme that you may need. And Page 14, a new announcement that we are able to make today is we had announced last quarter that we had a significant SNP to microarray conversion. And we're able to select Regeneron is a customer that switched from using a SNP microarray for conversion genetics to Twist. And first of all, it's cheaper, it's stable. [ If it's not cheaper ] that nobody switches. But in addition, the content can be evolved, and this is the first content, I believe, in population genetics, where it is not a Caucasian centric SNP content. It's a more global diverse SNP progression such that disease insight can be derived for the whole progression. Moving to Page 15. In NGS, why we win is because of our quality. On the left, because we are higher uniform -- we have higher uniformity of oligo synthesis. And we can reduce the [ noise ] of sequencing and our customers report that they need to sequence half as much with Twist as with the competition to get the same answer. And so we win there. And then in the middle, we can very quickly customize. And for instance, in liquid biopsy, there is a lot of need to move to change the design to find out the right genomic location, and that is a key feature. And then finally, on the right, we have reduced some hybridization step from 16 hours, down to 15 minutes. So we are the only workflow where we can go from the DNA to the sequencer in one day. Moving to the next slide, Page 16. In NGS, we had more than 1,000 customers. Last year, 5 -- 55 of our customers are in production, meaning they use Twist every day. We are not shy in letting other sell our DNA. There are certain companies that sell our DNA under their brand. And as I mentioned, we are -- we're the, so far, 3 significant SNP microarray conversion. So now we know that it works. We have the proof points. And we can radiate from there. So our goal is to do more pilots, drive conversion for the targeted sequencing market and then add applications such as SNP. Moving to Page 16 (sic) [ 17 ]. Overall, the -- on the left, you see the number of customer for the main business of synbio plus NGS, great customer growth. And on the right of orders [ as low ], we have seen a great growth of orders. And starting in 2018, you see a gray bar starting to grow that's NGS. We've been able to add a new market. And starting 2020, you start seeing a purple bar that is from our biopharma business that I will talk next, which is starting to ramp. And so now this is our -- the third time that we are penetrating a new market, and we feel quite confident that we'll see great growth from there. So moving to Page 18. Now that we've seen the main business, I'll go through the details of our verticals in drug discovery and data storage that represent the potential upside. So Page 19, first, in biopharma. We are going into offering drug discovery service. And I get often a question of why do you win? There's hundreds of company doing antibody discovery optimization. And so first, on the left, we have more DNA than the competition because we make our own. And so where competitors may have one library, we make 5 libraries a month. So we have libraries of library. In the middle, what also people do is they synthesize random sequencing of DNA. So most of those [ custom ] sequences could never be a drug, they have immunogenicity, they have liability, whereas 100% of our mutants are human derived, and they follow the rules, the human repertoire. And so therefore, we can have a better explicit variant that are more likely to be a good drug. And then on the right, finally, we have automated and miniaturize most of the processes. And so from library production, screening, reformatting, affinity testing and functional testing now that is automated. So that is why we have more productivity, and we can do things that others cannot do. Page 20. We have been deploying that ability in biopharma to gain businesses. And we now have 13 partnerships. We can't always disclose the name of the company, but you can see that the indication are very diverse from autoimmune to oncology to dermatology to neuro and the modality also is -- are different. We do VHH, nanobodies, antibodies, bispecific, ADCs, we can do everything. And all of those partnerships give us upfront payment and 8 out of them we are earning milestones and royalties. So we are not CROs. CROs don't get milestones on royalty. You can see the progress of that work. Moving to the next slide. In addition to those partnership, we have been doing work on our own. And so here, I'm showing the list of targets against which we have functional antibodies. I'll pick on 2 of them. Next slide, first, on A2A, Page 22. So A2A is a key protein in immuno-oncology. We know that the market for checkpoint inhibitor has grown rapidly. And it's literally life changing or life saving for people that respond to a checkpoint therapy -- checkpoint inhibitor, but the vast majority actually don't respond. And so there is an opportunity for more target. And A2A is one of those targets that could be the next checkpoint inhibitor. There are 4 drugs in clinical trials that are small molecule against A2A, but no antibody. If you go to the next slide, Page 23, the manufacturing, the way [ A2A ] works. When a cancer cell is under lack of oxygen, adenosine is expressed -- adenosine immunosuppressant, it creates in the tumor macro environment, it prevents T cells from killing the cancer cell. And so by having an antagonist to A2A will be to potentially able to release that block and enable destruction of the cell by -- of the cancer cell by the T cell. A2A is important because you want to be specific. A1 is important to normal cells. And so you definitely don't want to target A1. And then A3 over there is low affinity. So A2A is the one to go after. On Page 24, some data on the left, we're able to find high affinity binder to A2A. In the middle, we have in vitro functionalization -- in vitro functionality with very low IC50. And on the right, we show that we have high specificity to A2A, not to the A1 or the A3, and we also have cross reactivity to the mass version. So this lead could be one of those antibody that gets licensed in the future. Page 25 in the -- in addition, we have COVID antibodies. I don't want to spend too much time on it, but we have COVID antibodies on Page 25 are well characterize. On Page 26 on the data -- functional data from hamster, you can see that even at the dose of as low as 1 milligram per kilogram, we have a highly potent antibody. The last few minutes, Page 27, I'll talk about data storage. Data storage is important. Page 27, I'm showing the image of the first earth rise. So in the back is the earth, and it's data that has been -- we extracted from the tape by NASA, 40 years later, and it's garbage. The data is all corrupted. It's because magnetization does not last. And so potentially, DNA has the opportunity to be more permanent. And so it's not like a tape or hard drive where you have to go from one to the next every 5 to 7 years, DNA will last for hundred thousands of years. And so the opportunity, Page 28, is to take a file, which is a bunch of zeroes and ones and put that into ACGT in the computer on the Twist silicon platform, we can certify it. And then when it's done, we can store the data, the file, the physical piece of DNA as long as you want and when you want it, when you want to read it back, you just PCR out the file, sequence it and get your file back. It works great. We've done dozen of demonstration with Microsoft, Netflix, the United Nations, the Montreux Jazz Festival, it works every time. Page 29, the opportunity in terms of market is large. It's a $35 billion opportunity. And what we are going after is the bottom part is the cold storage. It's archiving. It's data that is read not often. I don't know if -- on my screen, I'm not seeing the slides anymore. But -- so we were at Page 29. And so that data is infrequently read or not at all. And so that is the opportunity where we can convert people away from hard drive [ alternative ] to DNA. So Page 30, where we are, we have a clear development path. We -- our current platform to make oligos, the feature size of 50 micron. And so -- now the slides are up again. So our feature size are 30 -- 50 micron. And so we have a development from that to lower the size of those features from 50 micron and get to a 10 micron pitch, then a 1 micron pitch and then 150-nanometer pitch. When we're at the 150-nanometer pitch, we are at the same price as the hard drive. And at that point, customers are telling us that they will convert. And so we reported that our 10 micron pitch chip is working. We have the 1 micron pitch chip in hand, and we want to get it to be working by the end of calendar 2021. Next slide, Page 31. In addition to the technical work, where we, [ frankly, need a growing ] work for commercialization. And so we spearheaded a data storage alliance with Microsoft, Illumina and Western Digital joining as well as a number of other companies. And the idea is to create an industry roadmap, create a bigger pie and an open garden that creates a bigger pie and grease the wheel for future commercialization. Next slide, Page 32, to wrap up around our opportunity. We are going after big TAMs, $1.8 billion for synbio, $1.2 billion for NGS. Those are growing quickly. And then drug discoveries is many billions of dollars of opportunity and data storage is $35 billion. So the turnover we're going after is large. Page 33 is a recap of our financial performance over the last 16 or 17 quarters. We've had great growth. We can see that initially in synbio Ginkgo was a big part of Twist. Ginkgo keeps growing. But the rest of the business is growing faster. In 2018, we started to introduce NGS, which was a small contribution at the beginning and grew. And then lately in the last few quarters, we started to see the contribution of our biopharma business. Page 34, I'm highlighting the aggressive goals that we've set for ourself for next year. I won't go through the details, but it's already online. And the idea is that we want to push very hard in each of those. We want to be #1 in a world where there is no #2 in each businesses. And we are aggressively executive -- executing the day-to-day to deliver this quarter, but we're still playing a long-term game of making sure that we do the right thing today to reap the benefit in the future. Last but not least, we are right on 20 minutes, Page 35, just a quick recap of Twist. We have a platform where we can write DNA. And from that platform, we are going after a large and growing markets. We always go with a differentiated solution, we [indiscernible]. And we are building a portfolio of growing businesses. And now our business model is validated as revenue grows, margin grows and we have been delivering high revenue growth which will continue. And at the end of the day, it's all thanks to the Twisters that have demonstrated a great track record of execution and innovation. So with that, I'll stop and open it for questions.

Great. Thanks, Emily. I'm going to start off with biopharma since you highlighted the Regeneron news. If I go back to last year, you'd originally guided to 5 to 10 partnerships. You did 13, 4 of them in the fourth quarter. You talked about the fact you make more DNA is a real competitive advantage. Are there other drivers of these biopharma partnerships? And what are the kind of big opportunities around biopharma for you guys as we think about 2021?

Yes. So in 2020, it was important for us to have as large as possible a number of partnership because we know that the next inflection point for Twist will be having a Twist antibody in a clinical trials in a human patient. And so by adding more partners -- because we don't control the timing of each of them, but having more partners, we are able to make sure that we get to that stage as quickly as possible. Now we are moving into a slightly different mode where we're not trying to maximize the monetization. And so one way to sign even more, which we are trying to. But another way is there could be more concentrated bets where we may be able to rent the platform with some exclusivity around timing or around geography or indication, which means that there may be less partner but more economic value. So the measure of success in biopharma is creating economic value. The one thing that Jim and I report every quarter is the upfront payment. So we book that as order. And then as -- even though we get the money upfront, as we go through the project, we convert the bookings into revenue. And so from the delta, we can see how fast we go, which is actually very fast. So that's good. We report that. But we need to keep in mind that the bigger part of the account value will come later from milestones and royalties.

On COVID, you reported preclinical data from 3 proprietary antibodies discovered using your own biopharma library platform, which you may outlicense. Can you give us an update on how you're thinking about developing those or outlicensing them at this point?

Yes. So we're probably not best place ourselves to go into the clinic. That's not necessarily what we want to do at this point. And so those antibodies are available, like you mentioned, for licensing if people are interested in moving them into the clinic. Admittedly, we started late on COVID. We started March 26 last year when people already add antibodies mid-January. And so we don't have an intrinsic advantage in COVID because COVID is not hard to drug. But we do have an advantage that we are fast. And so the work we did on COVID was [ very ] to show that very quickly, we could have highly potent antibodies. So the minimum we are using that as marketing data. It's opening a lot of doors. And we are studying quite closely the evolution of the virus. And the U.K. variant, the South African variant has already antibody that used to be developed for them that don't work anymore. And so we anticipate ours still do. But to the extent that there's an evolution of virus where new antibodies are needed, this time we won't be late. We won't start late. I think we'll be in a good position to take advantage of it. So all that to say that we may or may not license those antibodies. If we do create, it's upside. But the data and the learning that we got has been extremely valuable. And we signed some of the partnerships sooner and faster than we will have if we had not had those COVID data packages.

And then what about other disease targets? I think you've talked about, over the next 18 months, you've got 7 areas you've identified with the goal of generating antibodies against your own targets and then outlicensing. Can you talk about some of the more encouraging areas that you're focusing on now beyond COVID?

So it's a great question. So we are not public on -- which are those 7 targets for competing with them. We've done quite a bit of analysis around what would be a good target for us. So ideally, we want either an intractable target where having an antibody will be beneficial or use more of a fast follower approach where others have shown that target are basically relevant, but we can come up very quickly with a better antibody. So those are the 7 areas that we are targeting from now. It's not a big investment of Twist resources, of Twist capital. But over the next 18 months, we believe that we'd be able to start licensing those out. And that's the second avenue that we have to generate economic value. In addition to the partnership, we think we can also spin outlicense out some assets that will contribute to the cash flow of the company.

Maybe last one on biopharma, and it's a competitive question. Distributed Bio was recently acquired by Charles River Labs. I think they paid 5x sales. Can you comment on how their antibody discovery platform is similar to your biopharma efforts? And if enzymatic synthesis works for molecular assemblies or DNA script, in the back half of '21, what will be your competitive response, even if you could use those technologies, couldn't IDT or Agilent use those as well?

Yes. There's 2 separate questions. So we were big fans of Distributed Bio and the principal there, Jake Glanville, so congratulation to him. Actually, we -- part of the software that we use, the [ custom ] software actually we licensed it from Distributed Bio. And what -- what it does it generates a file of antibodies that follow the rules of human repertoire that should be tested. But that file is very hard to actually make. However, with our platform, we -- on a silicon chip, we're able to make exactly one at a time each of those antibody. So we have the advantage compared to Distributed Bio and other antibody platform that we make our own DNA. And so that's a key differentiator, and that's why we can do things that others can't. And that's really that's how we get into pharma companies. There are so many -- frankly, there are so many antibody discovery that the way we get in is by telling them, give us your hard project, give us the project that you fail, give us your intractable. And once we are in, thanks to that, we're able to convince them to also give us the easy stuff. But we don't usually start with the easy stuff. We start with the hard stuff. So that's your first question on the biopharma competition. And then on your question on enzymatic synthesis, there is a number of companies that can -- that are working on a new way to write DNA. And instead of using the chemistry that was published in 1982 by [indiscernible] that was optimized by thousands of years of grad student. I put my 4 years in. That chemistry works. [ You bind with a lot of ACGT ], and it does work. And so new companies are trying to use enzymes to do the same thing. And that is completely compatible with our platform. We are not a chemistry company. We buy the chemicals. And so if there is a better, better [indiscernible], we could deploy it on our silicon chip on our platform and very quickly use it. And so we are student of the area. And there's 3 characteristics that we will look for. One is the cost. The other is how fast, how many nucleotides per minute we can add. And the third is the quality of the length of the DNA. And we've been public that actually, we will pay more if we could get access to the chemistry that is faster or make [ longer ] DNA. But we will not have to revamp our platform, our platform is compatible for that. So we'll see what happens. And if there is a chemistry, we'll be happy to license it. But I think right now, those companies have been careful to go after markets where we don't play in. And so for instance, we don't play in the PCR primer market, and that's where they -- this seem to be going, which makes sense.

But could it change the competitive dynamic if IDT or Agilent took a license as well?

No, no because -- again, they will only take a license to the chemistry. They still need the hardware. They still need the miniaturization. They still need to be able to have a way to make 1 million oligos at the same time. They still need to have the infrastructure around it that we've built. And so we see a competitive advantage, not in the chemistry. We see it in the platform. So they could try to develop a platform similar to us. Once you have it, it's great but, as you know, it's quite costly. We have to invest quite a bit of capital to get here. And so that's hard to do for big companies. And then we have patents. So we'll definitely be defending our position. So I wouldn't be too worried if IDT or Agilent took a license.

Synbio question and really kind of around Ginkgo, they've had very strong growth. So the question is, revenues are only slightly above the minimums this year and fiscal '21 guidance calls for more of the same. Given your comments about the contract terminating in mid-2022, maybe assuming the end of fiscal third 2022, should we think that you're planning for $8 million to $9 million in Ginkgo revenues in fiscal 2022? How do you think about the outlook there? Jim, can you take that one.

Yes. No, the -- we said the forecast of '21 at roughly $11 million to $12 million for Ginkgo, which is under the contract. We got platform scales. They get great pricing. So our view is that we -- good partnership with Ginkgo, and we feel very well positioned to work with Ginkgo going forward.

But why are revenues only slightly above the minimums in the near term?

Because I'm conservative and under promise and over deliver. And trying to forecast the middle of a pandemic is always tough. And I think you've seen this last year that we've exceeded every quarter. So that's the way we set our forecast, Tycho.

Yes. And then gross margin question for you, Jim, that came in. If the factory of the future isn't coming online until fiscal 2022 and assuming the timing of that CapEx won't impact '21 COGS. Help us understand why gross margins won't expand in fiscal '21.

So good question. We're -- we forecast gross margins to be 32% fiscal '21, which is the same as last year. A couple of issues around that. We're conservative with our forecasting. Second is we will see a ramp in terms of we've got underutilized capacity in areas such as Maxi Prep, our DNA prep. So I'm once again conservative with the forecast, our view is as we continue to leverage increased revenue and leverage our fixed costs, our gross margin should scale. Our longer-term gross margin target is 55% to 60%.

Maybe one for Emily on NGS, an incredibly strong 2020, surpassing synbio. Can you just talk about the ramp to date relative to expectations at the outset? What's the breakdown between production, late validation, early validation pilot customers. How should we think about liquid biopsy adding to the mix as we think about these companies scaling up? And maybe lastly, can you just talk on plans to scale operations globally around the NGS business?

Great question. How are we doing compared to the outlook at the beginning. Frankly, I'm never happy. So if you look at the number, it's really good. But I'm always asking why are we not doing better? But I think realistically, we have a great product. Customers are seeing the difference in performance, lower their cost. And so going into an entrenched market with many competitors, we had to be significantly better to be able to make inroads. And so we've had some really good growth in the last few years. But I'll say that, that growth was still only at the beginning of the evolution because it takes years to go from a pilot to validation, scale up, and now we are speaking of liquid biopsy. We have a number of customers in the liquid biopsy space that are in clinical trials. And so those are meaningful revenue, it contributed to our growth. But I think it's a fraction of what we could get or will get once those clinical trials get completed and once those product go commercial. So we are very bullish on the trajectory. And -- but it's not an accident. We are taking market share quickly in the entrenched market because the product is much better. And that all goes back to the platform. And also we've been quite aggressive in commercializing. And so I think that trend should continue. And then with SNP microarray conversion, one more example of going beyond the threshold market and disrupting again another of the entrenched market. But I think now we've seen multiple times, we've shown that with Twist plus sequencing, we can get lower cost of SNP detection, and you can as well make it better content. In terms of global production right now, the -- all of the NGS products are made in the U.S., but we -- ultimately, we will -- we have plan where ultimately we'll make at least, for China, our production of NGS in China. And then if we need to expand to other geography, I think, it's all possible depending on market needs. And definitely, our factory of the future will enable us to build infrastructure to do that more easily later. But I don't anticipate we will do anything until our factory of the future is all up and running. And then depending on how the market grows, we'll have options.

Maybe just in a closing minute or 2 on DNA storage. You've had some interesting developments there. You're designing the next silicon chip, further miniaturization, 300-nanometer devices on a 1 micron pitch. Can you maybe just talk about milestones and things we should be paying attention to over the coming year? And then the alliance was notable. Obviously, a lot of key partners, could that accelerate the path to market? You talked about it maybe not necessarily changing the time lines, but why wouldn't it given who you're partnered up with?

Yes. So the purpose of the alliance is to grease the wheel for commercialization once the product is ready. And so it basically creates use of case, make sure that all the CIO of all companies are ready for pilot, the budget that their mindset is set for adoption. So that's the goal of the alliance. But there is no technical work on the alliance. The technical work is completely independent at Twist. It's been a long effort. The investment was minimal previously because we had to be careful about capital allocation, as we move the ball forward enough to get the eye up funding, and that enabled us to make significant milestone that we reported last year, having that 10-micron chip working was very important. So that now we know that it will miniaturize well, and that enabled us to do a fundraising last December. So now we have the capital. We have $100 million allocated to the next step. And in terms of milestones to look at, we've guided that by the calendar Q4 of this year, we'll have our 1 micron chip working. And that by 2022, we'll have the 150-nanometer chip in hand. So once we have that, it's a few quarters to get to a prototype production. So that is the machine that gives us production scale, data storage at the price point of a hard drive or $100 per terabyte. At that point, we'll be ready to commercialize. And so that's why we've pushed on the alliance because now that we have a line of sight to the product working to the technology working, we want to start the commercialization process. By no mean, it's not easy. It's a hard grind from an engineering point of view to get to the 150 nanometer. But as we said before, there is no [ number price, no records ] on the way. It's just hard engineering. So milestones are get to 10 -- get to 1 micron chip to work, get the 150-nanometer chip in hand, and then we'll be very close.

Great. Well, we hit the top of the session. So I want to thank you for taking the time and enjoy the rest of the conference, and we'll talk to you soon.

Thank you very much, Tycho.

Okay. Bye-bye.

Thank you.