Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, and good morning to those of us -- those of you joining us from the West Coast. My name is Doug Schenkel. I am with Cowen & Company. I'm one of the life science and diagnostic tools team members. It's my pleasure to welcome Emily Leproust and Jim Thorburn, the company's Chief Executive Officer and Chief Financial Officer, and that company is Twist Bioscience. Welcome to the 41st Annual Cowen and Company Healthcare Conference. Emily and Jim, Twist is addressing several interesting markets, as you know, and Twist is a key enabler of the synthetic biology industry. And increasingly, the company's growth is driven by demand for NGS-based products, which are sold both to clinical and academic customers, and you're making tremendous progress in securing multiple pharma partnerships and non-dilutive funding to advance data storage. So there is a tremendous amount that's going on exciting at Twist. Emily, I thought what we would do is I'll hand it over to you for a little bit to maybe spend 5 to 10 minutes walking us through the story. And then we can use the balance of our time on Q&A.

Thank you very much, Doug, for the invitation and the introduction. As you know, we will be making some forward-looking statement today. So at Twist, we are very excited because we are writing DNA and we believe that DNA is changing the world for the better. And our customers are using our DNA to do some incredible things. They are using our DNA to modify algae, yeast and E. coli to produce chemical through fermentation of biomass. It's more sustainable. But the real driver, nobody cares what's the real driver, is it's cheaper, and it can make chemicals that you could never make from oil. In food, you can now deliver nitrogen at the route of plants using engineered bacteria, eliminating the need for fertilizer. All the biological drugs, vaccines, antibodies, T cell therapies, cell therapies need DNA as a starting point in diagnostics for precision medicine and molecular diagnostics, you need DNA to do that analysis. And then last but not least, in Q4, we even sold DNA to Netflix for storing data in DNA. So we've built a silicon platform to serve those 4 markets. 2 of them are tools businesses in Synbio and NGS, where we give DNA, we get money and we're even. There is no reimbursement risk, no FDA approval risk. And then embedded in this, we also have 2 businesses in drug discovery and data storage that had the potential to provide large upside. And so you get the mix of downside protection, good growth and still the upside potential. The TAMs that we are serving are big and growing in the core business. The TAM is $3 billion and growing at 20%, 25%. Drug discovery is many billions of dollars of TAM possible, in data storage, we are saving a $35 billion TAM of the archiving market. So the next few slide, I'll just do a very quick dive in each of the 4 business, just 1 slide each. In Synbio, we sell genes, basically [indiscernible] clones. So instead of cloning lab, you go to Twist website. You choose your gene, your vector, get your quote in 2 minutes, you order it. A few days later, you get it. And we win because of price. So it's perfect DNA. And we win, our price is $0.09 a base. The market is $0.25 a base, so we are 2 to 3x cheaper. We also have a unique scale. If you want 100 genes or more. We're probably the only game in town to deliver that quickly. We have a great user experience with our e-commerce, 99% of our orders comes from e-commerce. We have service. On speed, we are average. And then we've been adding more flavors of DNA, and we have announced our Factory of the Future, where we'll increase our capacity and also get much faster turnaround time. In NGS. There, we serve liquid biopsy, cancer diagnostic, rare disease diagnostic, population genetics. We win because of quality. And so the price of our kit on the left is the same as the competition. But because of the quality, there's less noise in the sequencing and our customers report that they need half of the sequencing once they go with us. So if you're doing liquid biopsy, it's very important that your cost per sample be as low as possible. And that sequencing saving is really well appreciated, they're valuable. Also, we can make new panel much faster. And so again, in liquid biopsy, and you need to do a lot of designs to find out which biomarkers are associated with particular cancers, that fast iteration is huge. And then last but not least, we are the only provider where you can go from the DNA onto the sequencer in 1 day. Moving to drug discovery. The idea in drug discovery is pure pharma company. You'll give us your target, you pay us upfront, you pay us milestones, you pay us royalties, and we give you a drug that's ready to go into preclinical development. It's an antibody, it's human-derived, fully human, highly potent. And so -- and we can do half things, and we can do it fast. So we have an advantage over others. One is we have more DNA than anybody else. So we -- all we can eat DNA buffet, so we can make more mutants. And drug discovery is a shot on goals type play, the more shot, the better. In the middle, also the mutants are actually smarter because instead of using a random DNA where most of the mutants could never be a drug because they will have immunogenicity or they have liability, with our DNA, since they're made from scratch, we can use the rules of the human repertoire. We can use sequences that have been found in human. And so all of the mutants that we design are human derived. And then last but not least, we have automated a lot on the processes. So we are just more productive. And so that combination of those 3 things means that we can do things that others can do, and we can do it faster. And that's why partners are paying us milestones and royalties. We are not a CRO because CROs don't get milestones or royalties. And then last, in terms of the business, but not least, in data storage, the idea is that when if you have a file that has a bunch of 0s and 1s, we can convert it into ACGT. We can make the DNA, it still work for hundreds of thousands of years or more. And so you can store data in DNA. We've done it with Microsoft, with Netflix, the United Nations, it just grows. But it's expensive. When we started, we were at $1,000 per megabyte, and we have to get down to 100 terabytes -- $100 per terabyte. So we have to be the same price as a hard drive. We are well on our way to do that. We've moved from 50 micron to 10 micron. The 10-micron chip is working. We have the 1-micron chip in hand. We said it will be working this year. And then we'll have the 150-nanometer pitch chip in hand next year. So it just a few years away from having a prototype commercial production. So we are to kind of wrap it up. We have very aggressive goals. I'm not going to go through details, but each of those business lines, we are executing really aggressively to deliver value. And as a summary, we have a silicon platform that writes DNA on silicon. We are going after a large and growing market. We always go with a highly differentiated value proposition. We never do a me too. Life's too short to do a me too. We are building a portfolio of high growth businesses. We have validated our business model. We have validated our revenue growth, our margin growth. And then again, as a team, we have delivered a high revenue growth, and we want to continue. And it's all thanks to very outstanding track record of execution and innovation from all of the Twist staff. And with that, that concludes my initial remarks.

Thanks, Emily. That was great. Twist can synthesize 10,000 more oligos than most of your competitors, if not all of your competitors. What you talked about in your presentation across all the end markets you're targeting is you're leveraging the ability in different ways to produce longer genes with shorter turnaround time and to customize increasingly via your e-commerce engine, not to mention cost advantages in many instances. These things together have allowed you to move into new verticals, right? I think if we go back to when we first met pre-IPO, you were just going after Synbio. And I don't mean to say just like it's not a big thing, but there is 1 target. Over time, almost annually, you have moved into a new vertical, whether it's Synbio, to diagnostic NGS and then playing a role in drug discovery. And I think down the line, we're all excited about the possibilities in data storage. But I guess is as we think about the variables in the equation, the levers you can pull and the track record of moving into these new adjacencies, do you have a good funnel at this point of additional adjacencies that you can move into as you continue to improve on these metrics? And should -- as we think about Twist, should we more or less expect that there's going to be at least one new product category that this platform allows you to move into annually?

It's a great question, and I'm glad you mentioned it, and it's all thanks to the platform that we have that enables us to go into applications and be either best-in-class or first in class in each of those. And you're right, every -- quite a few times a year, we make a list of what are all the things we could do with the platform. And there's 100 things, and there's so much cake to eat that we have to be organized in cake eating. We can't do all of those 100, and we picked the 5, the top 5 of top 10 and we do it, and we do really well. We just launched methylation, so there's a bunch of resources that freed up. But if you notice, we almost do nothing in single cell, we do nothing in RNA. We do nothing in special genomics, not because we can't. There are things we could do, but we are focused on other things. And so to go back to your question of, can you expect one more thing a year? I think the answer that I'd like to give is that you can expect continued revenue growth. And as a management team, we do whatever it takes to make that happen. And it could be that, yes, we're going to one more or it could be that, no, maybe the equivalent is just so good as we focus on that even more because that will deliver the revenue growth. So that's, I think, what I like with the management team that I've built, which is that ability to be direct where we are going and then be very strategic in how we get there and then execute very aggressively to that path. So there's a lot of things we can do, but we want to be disciplined and only do it one at a time in a way that builds value without distraction.

In this context for maybe building off of what we just talked about, how important is the Factory of the Future? How should we think about that in opening up new opportunities and increasing an already robust TAM?

Yes. I mean if I can just jump in. The Factory of Future is critically important. Our current capacity is about $200 million. We're now serving more than 2,000 customers. We've got a great platform that can target different markets, and we've done a good job of being able to penetrate those markets. So the Factory of Future allows us to expand not only our production capability to roughly $500 million a year, it also gives us the ability to expand through space, through innovation, through engineering into areas like IgG, expand our DNA prep and also offers, from a continuity point of view, a different location in Portland versus San Francisco. So we can scale more rapidly and more aggressively into those new market opportunities. So I think it's pivotal and key for our future growth.

Thank you for that, Jim. That's helpful.

There's one point I didn't mention there. I mean it also positions us well for faster turnaround time service, and I think also in terms of being able to tap into a broader workforce. So we see the faster turnaround time leveraging on platform, expanding our workforce and really giving continuity of supply to our customers.

Yes. I mean the continuity is smart from just a practical business management standpoint. And then again, I know I'm oversimplifying it, but when I think about the levers that Twist can pull in terms of long reads, customization quicker, lower price. I mean what you described, Jim, flips you in a position to pull those levers in a more pronounced way and to do it more quickly.

Exactly. And if I can build on that, it also shows kind of the thought process of the [indiscernible] which is building a new facility, it takes 12 to 18 months. And so we want to be very strategic and deliberate, and we made the decision with a lot of time before we actually need it. But if we had waited a year to be extra sure and then by the time you get the facilities, it's too late. And so I think that's what we do well is we're working on our second quarter right now. We are executing as much as we can to deliver a great quarter. But what do we have to do today, so that 2 years from now, we're in an even better position. We also have that deep analysis. And I think that the combination of that short term, long term, we do quite well.

Yes. I mean Doug, there's a great article on the web, you can go on and research, by McKinsey last year. I mean there's a $3 trillion to $4 trillion opportunity in synbio. And we believe that we're going to be fundamental to supporting that growth, and it's going to have a phenomenal impact on future generations. And that's our belief. Obviously, Emily's built a fabulous innovation team, but I think those are fabulous opportunities for us to have an impact on the planet going forward.

Emily and Jim, one of the last trips I did before things got shut down was to visit your new facility in the Bay Area. I mean to me, that facility seems to incorporate a higher degree of flexibility than you had in your first facility. My guess is the Factory of the Future is going to have even more flexibility and more levers that you can pull. We talked about some of the levers as I just kind of tried to simplify what Twist does and how you open up new opportunities. But I am wondering if from an application standpoint, if and as you expand, you're doing it in a way where it positions you to offer new products, completely different new products. And specifically, given how much focus there is on proteins right now in both the research and investment community, given the advancement of new tools there, I'm wondering if any of your existing or new infrastructure could allow you to move aggressively into synthesizing proteins as well.

Yes. So there's a -- in the introduction where we are going. We were DNA company but -- and we've been doing really well into selling our DNA in pharma. And what pharma does is they turn that DNA into antibody for testing and screening to find out what to optimize and mature the antibody. And when we started our own biopharma team, our CSO, Aaron Sato, did the same thing. He had access to the entire DNA buffet of Twist and then he turned those DNA into protein. And then the 2 engineers went by saying, "well, why are you doing it this way?" When I left them, everybody else does. Well, not at Twist. So we use the Twist engineering to do a high throughput antibody optimization for our pharma team, which gave them an advantage that now we are leveraging into business. But at the same time, then the Twist product management will walk by saying, "Well, I can sell that to a lot of companies." And so we to move that high throughput antibody production back into the Synbio business. And so now our biopharma team is a customer of Twist, but that ability is labeled to more companies. And we started shipping in our first quarter of last year. And the feedback from companies is great. We are providing a higher throughput of antibodies at a lower amount, but just what they need for their scientific characterization and at a lower cost, which means that with their budget, they can do more. And so it's more shot on goal for them, it's a perfect match. And so I think that's going to be a nice growth opportunity. At that point, it's still only a small amount of protein, so 1 milligram. We are not yet talking about the scaler. But those customers are saying, "Well, you're doing so good at making that 1 milligram, why don't you scale it for us, and we need to cGMP-type grade?" And we do have cGMP capabilities on our NGS product line. So as a company, we know how to do it. And so once we have the Factory of the Future, we'll be able to, to your point, extend even more in the protein realm and maybe add some cGMP level to what we do in that area. So of the 100 things we review constantly, IgG and protein made the list last year. That's why we've launched it. But there's a lot more flavors of protein that can be offered. And we already have those great partnerships with those companies. They know that when they get something from Twist, it's going to be innovative, it's going to be high throughput. It's going to be affordable, meaning that they can do more. And so we have a receptive audience. And so our strategy has been always to try to sell fries with the burger. And now that we're doing that, we'll try to sell the Coca-Cola with the burger and the fries to keep expanding our wallet share once we are into a company.

Let's build off of that a little bit, all right? I appreciate you willing to share a little bit more in terms of your vision there and what you could do in all things protein. In terms of the here and now and the drug discovery efforts where you're using your own R&D to advance discovery of antibodies. There's a little bit of confusion. I think it's clear at this point, but there's a little bit of confusion on the last quarterly call. You're up to 16 biopharma partnerships, which is great. That last update was 13. So that number did increase. The number of royalty or milestone-based agreements increased from, I think, it was 8 to 10, so there continues to be momentum, positive momentum on both metrics. As we sit here today in early 2021, how is your thinking evolving or changing, if at all, about out-licensing or spinning off promising targets? I'm just wondering if there's any appetite to maybe keep some of these internally and advance them a little bit further than you might have thought a year ago, given the environment and given the state of your balance sheet, which is quite healthy right now.

Thank you. Totally. I'm glad you asked this question because it's something that's definitely top of mind for me and the team. We are doing really well on the partnership side of biopharma. Like you said, we went from 8 to 10 deals with milestone and royalty. And if you read, we also said that we have a number of partnerships that are passed, the term sheet step. So the funnel is very healthy. Those are -- those deals can take some time to close, but it's looking really good. And in addition, every time we do something in that part of the business, it works. We are able to deliver what the partner wants. So it gives us a little bit of confidence that we do have something that is really good. And it's great to get a few digits of royalties. But to your point, if we were able to spin out or license out an asset later on beyond preclinical stage, we will be able to get a bigger part of the pie. And so we've picked 7 targets that we are pushing that way. The goal is to license out some of those. Over time, I think greed will take over, and we'll want to go a little bit further every time to just get more of that pie. So I like the idea of us being out because it kind of syndicate the risk if someone else capital to move assets forward. And we still participate in the upside, but the later we can do it, the more value we keep. So as Jim and I are addicted to revenues and soon we'll be addicted to revenues and milestones and royalties, we'll want to, definitely, there'll be a natural desire to move a little bit forward such that we just can keep more ourself. And so it's kind of that balance of being disciplined is the balance of how much of our capital we put to work and how much of the upside that we share. But definitely, as we gain confidence, as there is more positive data points, we want to move that direction. And that should create a lot of value.

Yes. No, no, no, that makes sense. That's great. Regarding your NGS, your next-generation sequencing capture clips. When you first moved into that market, I think we all were trying to do some math to figure out how big the market was. And I think you guys talked about that being about $0.5 billion market opportunity. And depending on who we talk to, it might have been a little bigger, a little smaller, but it was in that neighborhood. As you rolled out new products, your TAM for that product segment has got bigger. And then on top of it, the fact that you're allowing researchers to do more, and then more broadly, the science is advancing also makes the TAM bigger. So the neat thing is you're growing a lot in this category, and the category keeps getting bigger. That's a nice combo. A recent development that was announced -- I think it was this week, it could have been last week. Sorry, things are kind of blending together a little bit. But we were excited to hear about your development of a non bisulfate instead -- basically an enzymatic approach that avoids the bisulfate approach to methylation sequencing that you developed in partnership with NEB. We've seen this from others before, but when we think about a combination of Twist and NEB bringing something together like this, we thought it could potentially be exciting. How big an opportunity is this? What's different from other enzymatic approaches? And then you did announce that you partnered this with Helio. Is that an exclusive? Or is this an approach that will be available to others in the field?

So Doug, of course, that's available to everybody in the field. At Twist, we're very open to sign exclusive deals as long as there are many 0s on the check. This one is open to everybody. I agree with you, we have the best capture method. And it's especially important in methylation because you need a lot of probes as you go from 4 base to 3 bases. You need different probes to capture something that's 50% methylate than something at 0 or 100%. So I think more DNA is good. At the same time, again, we like the innovative part. We like to be best-in-class, and we are super impressed with the NEB enzyme approach. It's a lot softer. So there's more molecules that are being pushed further. And so that means that the sensitivity of the assay, we're able to look at 1 in 1,000 instead of 1 in 500 mutations or 1 in 2,000, instead of 1 in 1,000. So you have better sensitivity. And you have less bias in the hyper or hypomethylation region. And for us, it's about delivering the highest quality possible of that to the customer with the least amount of sequencing. And so it's a great partnership. And I think we have a [ coup ] as well because we have the NEB butterfly with the Twist green on the books. And so it -- we are sharing brand too, and they have a great brand. And so I think it -- both from the marketing point of view and the scientific point of view, it's best-in-class.

Yes. Beyond just having a good product, that's a powerful go-to-market partnership.

That's right.

All right. We are about out of time. Emily, if I can ask you to maybe try to do it in 30 seconds, what should we be watching for next when it comes to DNA data storage?

My next is delivering the 1-micron chip marketing work. We've got it. It's going to happen this year. It's -- we've passed big milestones last year. Last year was really good for data storage. Once we have the 1-micron chip in hand, I think we'll be very close to commercialization. And so that's the one thing to work for.

Okay. This is great. You guys always teach us a lot. It's always great to hear about all things Twist. We appreciate you taking the time.

Thank you for the great questions.

All right. Thanks, Doug. Always a pleasure.