Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

The opportunities to characterize each -- against each other is tricky. I think the methylation products in the early stages, some good customers, bringing the technology on board. It sits beautifully with the platform, large complex panels that you're going to start small to do your proof-of-concept work. And you're going to take that large complex panel and scale it out in mass. So the technology works well there. So we're in early stages of testing. Obviously, the couple of customers have adopted we do expect that to relate out across the business more effective or more aggressively over time as those adoptions continue. And on the genotype and by sequencing, we're pretty excited about that. Again, the tape general again, but good, good progress with them. The addition of the iGenomX technology, simplification of workflow, the ability to customize we see that conversion will start to pick up over the coming quarters. I think we look forward to that. That's truly just enablement. And unfortunately, it's a lumpy business. You have to sunset of technology and come on to new workflow just takes time. And so we're engaged with a lot of good customers with high volume, high-value projects. It's just a matter of time.

And I think it's interesting is looking at NGS when you go back a year ago, I mean Patty touched on, the business is lumpy. I mean the last 2 quarters, as we've scaled, I mean, the top 10 accounts for maybe 40% of the business. So you're seeing the increased number of customers, broader adoption, touching new market segments, and that's helping it in terms of having a more balanced business. I mean still we won't be bringing on our large order, but it's going to be lumpy to the upside.

Right. Best way through lumpy business is more lumps.

Yes.

I guess just thinking broader picture on the NGS business, key advantages there tend to be lower cost and time to result. What is driving customers to use Twist and you think what factors of your platform do you think are the most important?

I think first to Jim.

This is the value proposition. It saves so much in sequencing, fast hybridization. -- even from an R&D point of view, the more shots and goals because our panels are cheaper. Fast turnaround in terms of R&D. I mean you've seen that pipeline of customers increased from atleast track 6 to 70. We're now approaching 200. It's actually scaled a little bit more than I personally expected, but I tend to be conservative anyway. But I think just -- it's growing opportunity. You're seeing new new market segments appear.

Absolutely. And uniform -- the product performance is -- obviously, that's table stakes. There's nothing touches in terms of performance. The unstated need in the market was the ability to customize. Now that's what customers truly, truly wanted but couldn't get from some of the old school technologies. So we brought that to market about 3 years ago, and that's what's put mean there's a mention statement on the genomics space from about 15 years ago when I was in just some of the earlier sequencing centers, buying from a titan would rather share a toothbrush than a design, right? So if you could get fixed content from what was on the market at the time that that's good, a bit better would be the ability to get the exact design that you want. And ultimately, for a lot of our customers, content is what gives them differentiation. The only way to get that done quickly and scalably. So that's sort of proof-of-concept experiment all the way up to the [ Hager ] reagent that they want for their lab, it's coming from the Twist platform. And I think that's what we're starting to prove out.

And that's also helping us micro array conversion as well.

Yes. I mean there is a sunset happening there, right, so it's a myopic view on a genomic experiment. And so we've proven out quite effectively that the Twist's NovaSeq is a superior option. So again, we'll continue to pound on that. Same thing. Sunsetting is hard. It just takes longer for the customer to get a proof data, but it's coming.

And do you think that that's where you're -- I guess you're displacing most within the NGS market or what are the additional opportunities to expand into?

So that's a good one. So from a sales tactic standpoint, I have a red laser dot on the large sort of ACE1 and Danaher customers. We can see them. We're engaged and the product benchmarks very well against the -- So we're engaged a lot of the important accounts there. And I think we'll continue to execute on the ground very effectively there. Now those are the big guys to establish the market that's really truly ready for something different.

And I guess, just maybe moving on to the biopharma. You reported a lot of new partnerships in the quarter, I think, 31 or maybe that was the prior quarter. But can you talk about -- What this means for the overall business and what you might expect to see an upside from maybe milestones or royalties?

I think, I mean, just look at the evolution of biopharma over the last -- I mean last year, we're targeting, I think, between 5 and 10 partnerships with milestones and royalties. We're now at 26 agreements with potential milestones and royalties. And what's fascinating to me is just watching the volume of projects coming through, plus the number of customers that are coming back and saying new agreements. And we had -- I guess, teach-in, I think it was sometime last year, it's probably worth watching the videos on that, that are still online. But there's more and more opportunity -- we're getting -- I mean, my view is because of the frequency, the types of customers that can't share all the customer names, looking at the milestones, looking at the royalties, looking at the targets we're going after. We're obviously getting more credibility a lot more work to do there, a lot more opportunity. But also that knowledge is being shared in the rest of the company as IgG, as an example. So I think in terms of milestones royalties, the number of years down the road. However, the key metric to watch is the number of projects and the number of projects or agreements with milestones and royalties because actually is giving us more shots on goal. And we're leveraging off our advantage or leveraging off the DNA platform. And it's -- I mean, Patty, you're seeing it from a sales side, but in the business development teams and they're making progress as well.

Right. It's a relatively new team. It's the third sales channel we've built within the organization. We put it together about 16, 17 months go, we're just learning sales velocity. The teams really truly -- we truly understand the value proposition there. I think we've managed to get the verification and validation in the market. And so -- we would just expect that team to continue to perform at a very high level and continue to accelerate the rate of growth. So these are early-stage discoveries that have -- We're optimistic about the view. And again, just pulling the pieces together with the wholesome bio story, it's going to -- there's going to be some interesting lift across the other side of the business from it.

Yes. When you're looking at the biopharma bookings, I mean, last quarter, the bookings were close to $5 million. So what does that mean? That's upfront work in services. So that translates into revenue over the shorter term. But it also highlights the level of engagement we've got to cover the customers. And there is a broad diversity of applications -- So that's -- I guess -- so I remember when we were doing the IPO, there's a lot of questions about NGS. Well, NGS grew to $20-odd-million, $40 million, $70 million. We talked a little bit about biopharma. And I -- Emily, I know sees this, I'm seeing this and Patty who've put BD teams in the field. We're seeing a massive opportunity for us in terms of biopharma. There's a lot of focus on antibodies. Now I mean, it's a large opportunity for us to go after, and we're gaining more credibility. So it's another market segment we can go after and leveraging the platform.

And I asked this kind of earlier on some of the other ones. But I guess maybe within biopharma, where is it that Twist is winning?

Well...

I mean there's good disease indication, in particular, it's jumped out. It's strong in rare disease, I/O strong, oncology space is strong.

We went after GPC, a difficult drug targets. We've also got out-licensing opportunities. We have a number -- what was it, about 9 or 10?

Right.

So I think you're going to see over the next year, something will happen there. We'll partner with somebody. I don't know what the deals look like. But I think we will share in the upside economics. So what's happening there is you're getting more antibody discovery opportunities with milestones and royalties, you're also getting more opportunity to out-license. So a year's time, this is going to be -- it will out deliver NGS in terms of potential economic value.

Right.

And maybe one last one here, just on the biopharma side. you've discussed quite a bit the Regeneron partnership. But maybe looking out to the future, what do you think are the future applications out there that could come from this partnership?

That's a good one. It's been great working with John and the team at Regeneron on the SNP diversity panel. I think that, that product is particularly interesting, again, as you think about the sunset of the array, building more diversity and the ability to customize into that panel is something an array just cannot do. And so as we take that product out to the broader community, that's got to have a positive impact in drug discovery and understanding the mechanism of disease, if you're pulling from a more, I guess, a more diverse enrichment panel. So we think that will have a positive impact not just for Regeneron but for the broader drug discovery community. Good start. We look forward to more work with them.

Got it. Appreciate it. And then I guess looking at storage, you've kind of really framed this as a huge opportunity, I think, a $35 billion TAM. Can you maybe update us a little bit on the time lines and proof points here? And who -- how do you see this market developing according to plan or maybe slower, faster? Maybe just kind of talk a little bit there.

Well, let me just step back, look at data, it's growing at 25% a year. Just think of all these new centers coming out, how much data has just been recorded I think each 1 of us has immense amounts of data. We're going after in the DNA storage we're going after the cold storage segment, archival segment. So what does that mean? Well, you've got Amazon and Google that are servicing that's data that's maybe at once a month, once a quarter, once a year. So it's written once and probably read never warm data. That market is right, it's about $35 billion. So I mean our economics there is that cost of ownership, currently, that market is serviced by tape. There's about 4 or 5 suppliers in that business. It's a sunset business to those 4 or 5 suppliers, they're not investing a lot of money. As data keeps increasing, 25% a year supply, from a semiconductor point of view, it's growing about 19% a year. So you've got discontinue in the market in the coming about 4 or 5 years. We're going to go after that cold storage market. We already had initial indications. If you just look at the alliance we set up with Microsoft, Seagate, Western Digital examples, Illumina's a part of it. I mean that was set up in November last year. We now got 34 in the alliance that's providing an ecosystem for DNA storage. We're also good the IR per contract. We're proving out the concept. So as we progress on the technology, we're seeing -- moving to the next generation, we've got to be target is $100 per terabit. So over the next year, we're going to have our Alpha chip. We'll have early customer engagement. So I think towards the end of next year, based on the semiconductor life cycle design as you scale down the geometries about 18 months. So I think you just got to watch the milestones and what we're talking about over the 18 months. But the ecosystems coming together, you got lots of interested parties. You've got a need in the marketplace. So it's a very compelling opportunity. So $35 billion, we get 7% to 10% of that market. we've got to get through all the technology milestones, but it's definitely a great opportunity for us. And once again, it's leveraging off the platform. And yes, I think everything we're doing is the core platform. We've got IP around it. We continue to expand and do the storage is just an expansion opportunity.

And maybe just to dig in a little bit more on the DNA data storage alliance that you mentioned and partnerships with Illumina. Maybe can you describe some of the other companies evolve in the alliance? And what do you think is the alliance is intending to achieve?

Well, I think first of all, if you want to learn something about data storage. They've got a great white paper out there. The alliance is sharing information, Alliance is developing the ecosystem. The alliance is actually coming up with innovative ideas of our applications is confirming that there is a technology opportunity -- If you look at the market we're addressing is not instant access. It is -- maybe you need it once a quarter. So retrieving data can take hours or days. So the competitive technology there is optical. So you get DNA storage with a very light footprint. I mean I'm sure you can store all the data in the year and internet in that mug. So you just think of the density and then longevity so you can replicate the data in terms of longevity is tens of thousands of years. I mean [indiscernible], I mean it will start to degrade after, what, 7 years -- maybe technology gets to 10 years, but you still have to degrade it. Anything after 10 years, cost of ownership for data storage is -- I think it's on our website or some analysis there, it's about 10 years afterwards a sweet spot. So from an environmental point of view, it's also got a lot of good attributes as well. So alliance just more adding, more coming into the alliance in terms of types of companies, just continue to validate people looking at those people researching people are investing in the technology. So I think it's going to be interesting to see what happens over the next few years.

And just maybe one more on that. Have you come across any data security concerns? Or are you maybe limiting access to individuals from certain more governance. How do you think that plays into the larger landscape?

So data secure, so when you're talking about foreign governance. So let's just -- so the way Twist set up, we do have operations overseas -- if I'm answering the question correctly. We do have a China operation. For example, we're extremely concerned about IP and data security. The way we set of China is totally separate from a systems point of view, cannot get on to our corporate systems. So we've ring-fenced it. And obviously, something very vigilant about. We have invested. We get a small investment in China. More R&D investment when you got total number of people in China, what -- Yes. So from an IP point of view, we're protected in terms of types of activities. From data, we've got it ring-fenced. But we also see a large opportunity in China. I mean, last quarter, our agent bookings were a record about $3 million.

Yes. Originally, it start to pick up. I think we're starting to get the blend of product and sales, quite frankly, skills of the sales team, they're really starting to have an impact.

So it's something we need to be sensitive to. And we're investing to make sure we have the IT infrastructure projects.

That's helpful. And we talked quite a bit on the factory of the future. But maybe just thinking on to the financial statements, can you talk around maybe what are the CapEx expectations there and margin implications from this?

Yes. So I mean, the Twist business model is set up so that we get high fixed costs. So as we scale the business, you see gross margin improving. So last quarter, gross margin was 40%. This time last year, gross margin is 22%. So what's happening, we're leveraging fixed costs. So if you look at the business, we get the NGS business, we have Synbio, contribution margin, there's a difference between price and the raw material costs, reagents, et cetera. On an average, it's about 70% to 75%. So when we move into the Factory of the Future, you get fixed costs, I mean it says around $80 million, $90 million a year. You're running at $500 million in revenue. You can have gross margins targeting between -- depends on the mix between about mid-50s and 60%. So that -- And that also gives us upside opportunity because once we scale the business, we can go after supply chain economics. -- work closely with our suppliers. Also, we get pricing advantage with the Factory of the Future when you implement express genes. So I think from a margin point of view, we're looking 55%, 60% and figuring out how we could upside based on some of the products we're releasing. So I think it's a very compelling opportunity. When you just look at the overall time, we're addressing what $3 billion, that's growing to 20% a year. So you step back and go, "Wow, if we get this right, I mean, how many more Factories of the Future should be developing?" This year, CapEx, capital expenditure is about $40 million. We -- normally in December, we released our guidance for the next year. So the CapEx we're investing right now is an initial tool, building out the facility. So it's about $40 million this year. It's probably going to be -- we haven't -- I mean, as we scale up, it's probably going to be another about $40 million.

That's helpful. And maybe just touch on M&A strategy here a little bit in the final minutes. Can you just kind of provide an overview of what your strategy is and what are potential areas that you'll be looking at for acquisitions?

Yes. I mean we love all our product lines and businesses equally. I think from a Synbio standpoint, I think we're looking to bolt on from the core strength in DNA synthesis. So we'll learn more as we get further into pharma and into industrial segments to learn a little bit more about what else we can add to from a sequencing standpoint -- There's -- selling DNA is good, selling solutions and workflows is better Genomics is the first start there. There's other applications that we're looking at that we think will be tremendous growth drivers for us as we offer a more complete solution across an intact customer workflow, just making it easier to scale your enrichment or your upfront of the sequencing box is a great place for us to play. We're well equipped to sell into that market and our synthetic DNA just gives us an unfair advantage to build off. So that's sort of thoughts and biopharma, again, we're still early from a commercial standpoint. We're listening very closely to the customers. And again, there will be another area where we look to bolt-on capabilities that again just enable the acceleration of discovery.

And I guess maybe last question here, just kind of bringing it back and maybe looking at it. You've presented had a few different markets that are driving growth -- If you had to look and see which 1 market do you think is going to provide the biggest growth opportunity over the next 3 years, which market do you think it is?

You want that one?

You go first.

No I think day 1 is a clue. I think liquid biopsy segment is interesting. I think that the -- our core value proposition there is strong to the community. Our role is entirely as an enabler. I think faster torsion and content and the scalability of the platform and the subsequent sequencing performance is core to the success of our customers. And I think that resonates well. I think some of the work in the progress the guys are making is phenomenal. It is just a matter of time before that that truly pops. -- it's not 10 years and -- It's right here right now. So I'm optimistic about that.

I think , I mean, I think once we scale Portland, I think Synbio has the potential for really giving more upside there in terms of opportunities. I mean I'm still laugh with the situation of the market is growing 20-odd-percent a year, we're growing 50%, 60%. And we're on the road to be #1 in the market, and we have to make sure that we continue to have a great customer experience, protect the technology and address new markets fast. We saw how we launched RNA controls. Last year it was about innovation. So I would say love NGS, I think Synbio plus we get new opportunities for innovation.

Okay. Well, thanks a lot for your time. Appreciate it.

Okay. Thank you.

Thank you.