Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Welcome everybody. I am Matt Sykes, the senior life sciences tools and diagnostic analyst at Goldman Sachs. And today we have the pleasure of welcoming Twist Biosciences to our conference. I want to introduce Emily Leproust, the Chief Executive Officer; Jim Thorburn, Chief Financial Officer; and Angela Bitting, the Head of Investor Relations. Emily, Jim, Angela, thank you very much for joining us. We're happy to have you here. Maybe I thought we just -- Thank you. Maybe I thought we'd just start out and kind of set -- turn it over to you to set the stage a little bit and maybe talk about some of your -- the recent quarter, some of your views on the year and just kind of set the stage for us to start out.

Great. thank you. So I'll share my screen, so I can show a few slides. For those of you who don't know Twist, of course, I'll make some forward-looking statement. But for those who don't know Twist, we write DNA from scratch, and we are quite excited because the DNA is changing the world for the better. And our customers are using our DNA to engineer algae, yeast and E. coli to produce chemicals from fermentations from oil. It's more sustainable, but it's so cheaper, and it can make material that you could never make from oil. Our customers are using our DNA to modify plants, for instance, delivering nitrogen at a root of plants instead of fertilizer. DNA is a source of all biotherapeutics. In diagnostic, there's a huge need for precision analysis of mutations. And then last but not least, we can also store data in DNA. And one of our metrics last year encoded one of their series in DNA. We are able to do that thanks to our platform. So on the left side, I'm showing the 96-well plate that everybody else is using to make 96 oligos or 96 pieces of DNA. In the middle, we have a 96-well plate where -- sorry, in the middle, we have a silicon chip, that is the same size as an 96-well plate, but with miniaturized chemistry. So we can do the synthesis of a million pieces of DNA, so 10,000 times small. And those are grouped into 100. So we can do molecular biology and create up to 10,000 genes on the same chip. And then we have built a software platform on top of the silicon because we make all the products for all the customers on the same chip at the same time. And then we send it afterwards to the right customers. So software is key to what we do. Now we've been able to leverage this platform to generate some significant revenue growth. Here, I'm showing over the last 5 years, our revenue growth from $2 million to $90 million. And in terms of this year, in the first half of this year, we've already achieved $60 million in our second quarter ended in March. And so you can see that our gross margin is getting better as the revenue goes up. And that is because we do have a relatively high fixed cost because of silicon but our variable costs are very low. And so once we pay -- once we've absorbed the fixed cost, every extra dollar, vast majority of it drops as gross margin. And so in Q2, we had a gross margin of 39%. So we achieved that by leveraging the platform to build 4 businesses. 2 of them are in tools in SynBio and NGS. You give us a DNA sequence. We give you DNA, you give us money. We are even. So it's a little bit of an analog business where the revenue goes up and up and up. And we have no FDA risk. We have no reimbursement risk. And then in addition to the tools business that is growing quite nicely, we have 2 options for big potential upside, 1 in drug discovery and 1 in data storage. So I have 1 slide each for each of those businesses, just to give you a quick highlight. First, in synthetic biology. The market is $1.8 billion, we've about 10% of the buying market. And so our opportunity is to go after big users, reach a long tail of customers. There are 100,000 users. And then convert the makers into the buyers. So we are doing well, but we are really only scratching the surface. And of note, 99% of our gene orders comes through e-commerce. In NGS. NGS there, we enable targeted sequencing for liquid biopsy, cancer testing, rare disease detection, infectious disease. And the market today is $700 million spent in the targeted sequencing path. And that does not include big growth opportunities in NMRe. And so there the idea for us is all about getting more and more pilots. We win the pilots, then drive the conversion to growth. And then we are looking always to add new application. And for instance, last year, we had 1 order of $9 million for a company that shut down their microarray division or usage and moved to our sequencing. So a big opportunity there as well, and we have 55 customers that are routinely using Twist in production. Sales in biopharma. So in biopharma, what we do is partners give us a target and we discover a drug for them. We give them a drug. And so we have 21 partners so far in areas that are very diverse. For instance, the indications are quite broad. We have partners in cancer, neurology, immuno-oncology, infectious disease, we even do cats and dogs. And the modalities are quite diverse. We do VHS, antibody, bispecific, ADC, TCR and so on. And we are not a CRO, even though we discover antibody for people, we do things that others can do. And so we want milestones and royalties, and I'm glad to say that 17 of the programs that we have, have milestones and royalties. So those 3 businesses are currently the revenue-generating businesses. As you can see here on the left, the growth of customers over the years. On the right, you can see the growth of orders. Starting in 2018, we made a big investment in NGS. So now NGS is about half of SynBio. And then last year, we started to see a small sliver of biopharma which is poised to grow as well. And last, our last business is in data storage. It's quite a complicated story. So I only have 1 slide, but the idea is that you can store data in DNA. And right now, we are only engineering roadmap to go from 15-micron features on the chip to 10-micron to 1-micron to 150 nanometer. And once we reach 150-nanometer, we'll be able to achieve $100 per terabyte of data stored, which is the price we need to enter commercialization. So we're well on our way, the 10-micron chip is working. We are halfway through our 1-micron chip. And next year, we'll have the 150-nanometer chip. So in addition to the technology for data storage, we also have formed a DNA data storage alliance, which is Western Digital, Microsoft, Illumina and many others. And so as our technology matures, we are leveraging that alliance to develop our good market strategy. My last slide, at Twist, as customary, we have built a platform to write DNA on silicon. We're going after a large and growing market. We always go with a differentiated value proposition. And we are building a portfolio of high-growth businesses and those business models are now validated. We have delivered high growth as well delivered gross margin. And at the end of the day, we are addicted to revenue growth, and we've been able to post a very good one. And it's all thanks to track record of execution and innovation from all the Twisters. So Matt, I think that concludes my introduction.

Yes. No, that was great. Thank you, Emily. I think that was hugely helpful. You probably took care of most of my questions just with that presentation, but I'm going to press on anyway.

I think one of the things that has been really impressive is just you've developed multiple verticals over time and the speed at which you've been able to do that is really impressive. And maybe you could just talk about how you see the value of the Twist platform? And what allows you to do -- what you -- it allows basically you to do in terms of speed and scale?

Yes, I think you've got it. By miniaturizing the chemistry that is known on silicon. So again, we are not inventing new chemistries. The chemistries we use have been published in 1984. But by shrinking the chemistry that is known, we're able to massively increase the scale of the DNA that can be made. And we're also massively lowering the cost, and we've been able to achieve best-in-class quality. So that is a platform we have. And actually, we see a lot of opportunities, and that's why we've been quite aggressive in going into those 4 verticals. And we are leveraging different value propositions. So for instance in NGS, it's a quality play. In SynBio it's a price play. In biopharma, it's a play around the hard to drug target. And then in data storage, it will be a total cost of ownership play. So we try to be very thoughtful terms of how can we leverage the technology to have a massively differentiated advantage in each market segment we serve and just take share. So at the end, I think, I'd like to say that we are a category defining market-leading company, and that is all thanks to our silicon platform.

Got it. And maybe you could talk about sort of the decision process or the thought process that happens at Twist to go into a new vertical. Like how organic and collaborative is that process to deciding here's the next vertical, we're going to do it. And how does that decision happen at Twist?

So I would say that the 4 verticals we're in now, those were in our mind when we started Twist in 2013 that we pitched them. By then, investors told us, these investors told us don't look at the data storage, that's 10 years away, nobody cares. And so we started talking about it. We spent a little bit every year on it. So that they were right. It was 10 years away, but I'm glad we started working on it in 2013 and not now. So it will be very transparent. We haven't created a new vertical in a while. Those were always in our plan. That being said, so that vision comes from me, I am the CEO. But that being said, we try to be -- to run as savant leaders. We are very aggressive in what we want to do, but as we realize that we're only as good as what the Twisters can produce. And so we try to be -- the vision and mission is set by the management team, but we expect the rest of the company to make it happen. And we serve as savant leaders. And you come to me, the first thing I will always say is what can I do for you? And so I will say that the -- we rely on a very broad-base within the company -- to -- for each of the Twisters to come in and contribute to the -- to executing and delivering what we need to deliver.

Got it. Maybe just focusing on the SynBio side for a moment. You've had a scale and cost advantage for some time, and you also make it pretty easy for customers to access via the digital channel, which you show in your slides. How do you continue to improve upon these advantages as the market grows? Can you continue that scale advantage, cost advantage, ease of use advantage as that market grows and perhaps competition comes in?

Yes, absolutely. We very much believe that if we don't cannibalize our own products, someone else will come and will do it. And so we have -- begin that culture of innovation of pushing the envelope forward. For instance, in SynBio, we've announced a big investment in the factory of the future. And that factory of the future is going to serve 3 purposes. One is, increased capacity because we are running out. We only have $200 million of capacity at this point. Second is to lower the turnaround time. We increased the speed for some of our products, so they are manufactured. And then third, open a new market by being able to create new products. And so we are constantly looking at how can we maintain our advantage. And so we are not waiting for others to come and compete with us. We're actually moving the ball forward and making it harder to compete. So again, it goes into the strategy of redefined markets where we can be market leaders and we just deploy technology. We execute very aggressively. We commercialize very aggressively. And then we defend it with our technology innovation by pushing the envelope forward.

You mentioned the factory of the future, I was going to ask about it later time. But maybe address that now in terms of what it does in terms of capacity turnaround times, the timing of it? How are you -- you could just give us a little more color on the factory of the future.

Yes, Matt, just quickly. Sorry Emily, do you want me?

Go ahead.

All right. Yes, just quickly commenting on it. Yes, it's allowing us to broaden our moat in terms of capacity. In the first phase, we see annual revenue opportunity of about $500 million a year. Obviously, as we continue to industrialize the process. It's going to give us opportunity in terms of efficiency, faster turnaround time, being able to broaden the revenue streams we can tap into. So it's consistent in terms of supporting our customers as they grow. We have a larger footprint to support their capacity needs or their demands. We've also taken additional step of -- right to first refusal on additional facilities. So the overall first phase about 110,000 square feet currently in San Francisco. We got about 70,000 square feet. We have an opportunity. We secured that opportunity to add an additional 100,000 square feet. That allows us to tap into the infrastructure, the personnel investment and resources we make in Portland gives us continuity of supply and also taps into a lower cost market place as well. So overall, it continues to build our moat. The other advantage of having faster turnaround time is that we can also, from a pricing point of view, it gives us more pricing leverage as well. All that contributes to improving our gross margins.

Got it. Got it. Thank you, Jim, that's really helpful. Just talking about the NGS tools business now shifting over to that. One, what do you see as sort of the current size of the market and the growth rate that you're seeing there? But also, I kind of see that business sort of selling the picks and shovels to a very fast growing end markets. And I think case in point, one of your recent announcements was in methylation, servicing the fast-growing liquid biopsy area. Perhaps maybe talk about some other areas where you can access sort of the fast-growing end markets within NGS tools and maybe discuss a little bit on the methylation announcement you made?

In terms of market size, as I mentioned in my slide earlier, we see the current market for NGS target its sequencing to be $700. So that excludes the sequencing. That is just for the library prep and the enrichment that we do. So that is the dollar we can touch. And that is poised to grow very -- quite dramatically. For instance, if you just look at the potential of MRD, the market potential of MRD is about $15 billion. It's 15 million patients a year, x $2,000 each. If the DNA is 5% to 10% of that market, we could be looking at $700 million to $1.5 billion additional revenue opportunity just from MRD. And so there's just a lot of big opportunities coming up, where we could participate and have a very competitive advantage. We are also looking at the SNP microarray, SNP on that sexy. They were I think, the first SNP publication was in 1996. It was before I came into the U.S., which was a long time ago but it's still being used today. And we've been able to show with multiple users that Twist for sequencing is cheaper than a microarray. So we have a huge opportunity there to potentially convert the entire market. It's -- those are big ships to move. Those are big customers that have a lot of samples. They are currently running scanners and hub station and work station, and we have to convert them to a library prep and sequencing. So it's not easy. It's not instantaneous, but we've been working at it, and we see that there's continued opportunity to gain market share there. And then to your question around methylation. What we do at Twist, is we regularly look at what we can do. We make a list of all the things we can do. And frankly, there is so much cake to eat. We have to be organized in cake eating. And so we make a list of things we can do, and we force rank them by how big the market is and how big of differentiations we can have. And then we make a line of what we do and which we don't do. For instance, RNA-seq, single cells, visual seq, that has all been under the line for now. But one thing that we put over the line in previous years was methylation. I think methylation is a huge opportunity. And we can have a huge differentiation because in methylation, you need many more probes to detect the methylation state. And so that's why we went all in, and we have launched a full solution that has a very innovative methylation conversion method from NaB combined with our probes and combined with a designing software to design the probes that we work for capturing different methylation state. And so that was launched recently. And feedback so far has been very good, and we think that, that will help us solidify our position as the best supplier for liquid biopsy tools. So we'll never have a liquid biopsy assay ourselves. But we want to provide the tools to DNA, the regions for liquid biopsy companies to get the best performance they can at the lowest price. And so I think we'll be able to -- would be able to make big dent in the marketplace, thanks to methylation.

Yes. I think that's one of the things that I think it's almost like a relatively derisked way to access really fast-growing markets without having to take a bet on an individual assay or a specific technology, which is kind of something that I appreciate about the Twist story. Maybe if we kind of move onto the drug discovery, which I think is a pretty exciting opportunity for you guys. And maybe give us an update on -- you had a slide out there with some of the updates on the partnerships and programs, but how do you see this business evolving over time, as you kind of increase the royalties and milestone revenue stream. And how big of a business do you think this could be for Twist? It seems like from an economic standpoint, it's a very large opportunity. And I just want to kind of get your longer term view on the drug discovery vertical for you.

I totally agree, drug discovery is a huge opportunity for us. I think I'm very comfortable saying that I believe that biopharma on its own could make the rest of our tools seen by NGS a rounding error. It is definitely an opportunity that is slower developing. It takes some time to convince people to choose Twist. It takes some time for the project to go through. But I think the quality of what we do is such that we're able to make a big difference, and we are seeing it right now. But partners that picked us. Once they get the results, they actually come back. And so in the past, we were just reporting a number of partners. And now we are reporting partners and program because we are reaping customers. And initially, our positioning was about the hard stuff -- give us the hard stuff. But we've been able to evolve the positioning to -- now that once they try us for the hard stuff, they actually give us the easier stuff and they're willing to pay more. So it takes some time, but I think the progress so far is great. We -- last quarter, we had $2.5 million of orders. So a run rate of $10 million a year. And the funnel is full. The feedback is very fantastic. And we are -- I think we are on track for making biopharma a very, very big opportunity for Twist.

Great. And when you think about the relationships with the biopharma, how do you approach them in terms of potential exclusivity or licensing themselves? I know you want to balance sort of the syndication of risk, but also over time, try to retain some of the economics yourself. So kind of in short, what is your thought process on the long-term goals from a partnership standpoint within -- with your biopharma customers?

I mean when we started commercializing our biopharma solution, frankly, the feedback we had is, Twist, who are you? We've never heard of you. You're not a drug developer. And so that's why we decided that the only way we could make meaningful inroad quickly was to pick a positioning, it was unique. And our unique positioning is -- give us the hard stuff, give us what has failed, and give us what you can't do. And so basically, we've positioned ourselves as the drug discovery of last resort. And so that has enabled us to make inroads very quickly, get a number of programs, and we are betting a 1,000. We are delivering on those efforts, and we're doing very quickly. And so when you're the customer, you struggle or you outsource to a company that have struggled for a long time and something got nowhere. And then Twist in 6 months comes in and poof! makes it work. I think it's just an amazing, wonderful demonstration of the power of the platform. And so that makes the second discussion much, much easier. In terms of the economic -- the discussion are getting easier. The first few deals, we did it completely for free because we were unknown. But now that we have data, we've been able to ask for upfront payment. We've been able to get milestones and royalties. And that second conversation for the second program is a lot easier and much easier for us to command bigger economics because once the customers have tried it, I think they see the value. So we want to turn Twist biopharma, the discovery of an antibody like IBM was the case where nobody gets fired for choosing IBM. I think that's where we want to get to. And over time, we see that our economic gets better and better.

And how would you think about exclusivity? It probably depends on the size of the potential relationship, but how would you think about exclusivity with some of these?

If there is enough zeros in the check. It's possible. This is America. Everything is for sale. For enough money, I will fly and wash your car. So yes, everything is possible. We are very open to it. But obviously, it would be very different structure. But I think that's where we are going. I think that there will be a point in time where some companies that used Twist for a while, are going to say we can't -- not have it for ourselves. It could be an exclusivity of time, it could be exclusivity of modality of targets or geography. But I think we are open to those discussions, but it won't be cheap.

Got it. And maybe let's just talk about data storage opportunity. I know way back when investors didn't want you to talk about it, but I think we're getting closer, and the promise is getting closer. So maybe just talk a little bit about the value proposition of using DNA storage versus traditional and just give us an update, I know you did on your slide, but just in terms of the time line, particularly on the cost side.

Yes. So in data storage, what happens in the real-life is that if you are archiving data that you need for the long term. What happens is, right now, your only choices are magnetic support, tapes and hard drive, and it's very well-known in the field that it's just a factor of life, that magnetization goes away over time. And so if you are storing data for the long term, you have to move the data from 1 hard drive to another, from 1 tape to another every 5 to 7 to 10 years. And so -- and we can cool down the tapes in freezer and you slow down the rate of decay, but it just happens. And so what happens is that the entire industry is confronted with the fact that the total cost of ownership is just going up and up and up. If you have a dataset, every month that you want to keep it, you have to pay more and more and more. And for industries that have big data sets, those data sets are growing. The costs are becoming unsustainable. And then some companies have to decide what they will keep and that what they will not. In some cases, you can't choose by law, you have to keep the data for decades. It's just the regulation. So that's the opportunity of DNA is to say the onetime cost. You pay once and then it's stable for 100 years, 1,000 years, 1 million years, you never have to copy it again. So that total cost of ownership is flat. That's a differentiator. And so to be viable, that cost of ownership coming in and needs to be comparable with hard drives and tapes. So that's what we are driving to. That's where we want to get to $100 per terabyte because that's where the market is expecting it to be. We have an engineering roadmap to get there. There's no miracles, no Nobel prize in the way, just hard work. And I think we're well on track. The 1-micron chip -- the 10-micron chip is working, 1-micron chip is almost there. And then next year, we'll have the last chip we need.

And what kind of knowledge and what kind of -- what benefits have you gotten from working with Microsoft and you're also part of a data storage alliance that might help accelerate this vision. There's, obviously, a big validation of it with those types of partners. How they helped you accelerate this vision?

Yes. So don't really help accelerate the technology because we're in charge of our technology, there's something else but they helped quite a bit in identifying use case and communicating to Chief Information Officer that this is coming and they need to be ready for pilots, they need to be ready to have the budgets for adopting it. And so that has been extremely useful from that point of view. So thanks to the alliance, we've been able to communicate and be exposed to way more customers than we will have had on our own. So the rate of customer interaction is much bigger. And the use cases that are coming out of those interactions are guiding our approach to go-to-market strategy.

Got it. And maybe, Jim, just turning to you for a minute. Very strong balance sheet. You've done a lot of organic spend. How are you thinking about capital deployment as you move forward?

Yes. No, it's a good question. Obviously, large growing market, part of the capital is going towards expanding Portland. There will be significant investment there from a CapEx point of view as we continue to deploy robots and industrialize process there. I think in terms of overall, as we keep scaling our business, I mean our gross margins, focused on improving to the 55% to 60% range is what we're targeting. Continuing to make investments in R&D, particularly supporting the opportunities, as Emily has highlighted there. Although it's early days yet, and we're working through the technology road map. I think there's opportunity there for further investing in DNA storage. In terms of most of our investments to date has been organic. I think as time goes forward this year, I think there's more opportunity for look at tuck-in investments. But with a strong balance sheet, which positions us well to increase capacity, continue to build the moat and look at opportunities in the marketplace.

Got it. And maybe in the 1 or 2 minutes we have left, Emily, just turning it back to you. What do you think is most misunderstood or underappreciated part of the Twist story? And what are you most excited about?

So it's a hard question because I love all my babies.

I know.

I think we've seen a greater appreciation from the investor base for all that we can do. At the time of the IPO, people were understanding the vision for biopharma. They were -- withheld their judgment until we had some proof points. We are having some proof points. There's more coming. The next, I think, value inflection point for us in biopharma is around when we get the Twist to discover an antibody into the clinic. Our partners, we have completed 9 programs. So there is 9 shots on goals to get there quickly. I think it's a better appreciation for biopharma, but still some proof points to be developed. In data storage that used to be completely dismissed, I think, by most investors except for a few ones. But now are seeing engagement around data storage. I'm not sure whether we are getting credit yet for it, but we're definitely seeing engagement and discussing to dig deeper into it to understand the path forward. And then maybe the last one is around the balance between SynBio and NGS. We've seen some very strong NGS growth recently that eclipsed the growth of SynBio. The -- and in some way, that's the result of strategic decisions that we've made, the management team, which we saw an opportunity with liquid biopsy. And we saw that if we didn't act in 2018, then we will lose the opportunity because once someone with a supplier, it's hard to switch. So we put significantly more efforts and resources on NGS, which was a good bet. In 2020, we've rebalanced our investments on SynBio. And we are seeing that SynBio and pharma is picking up. And so I think one misconception maybe is that NGS will always be bigger than SynBio, and I think, we have an opportunity to keep both as 50%, 50% opportunities.

Great. Well, I think we're out of time, so we'll leave it there. Emily, Jim, Angela, thank you very much for joining. I really appreciate your time.

Thank you so much for meeting.