Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm [Noah Burhance] of Tycho Peterson's Life Science team. It's my pleasure to introduce our next company, Twist. Just a quick reminder. If you have any questions, feel free to submit them on the website. And with that, I'll turn it over to Emily.

Thank you, Noah, for the introduction. It's a great pleasure to be here. So a [standard thing] that I will be making some forward-looking statements today. And today, I'll talk about 3 things. One is a quick reminder of our vision, how we executed that vision, and how we are setting up the company for success with multiple revenue streams. So first, DNA is reinventing many different industry and markets from fragrance to cancer treatment, all the way to the preservation of cultural data with new storage capabilities. And at Twist, we write in a [different fashion]. Our customers use our DNA to improve health and sustainability. And we have built 4 different businesses. One is in synbio. The other is in NGS. Third is in biopharma and the fourth is in data surge. And today, we'll talk about each of the opportunities in those markets. Page 6 shows a small sampling of the almost 3,000 customers that we have, and our customers are in international organizations, such as pharma company, large and small biotech, academic, government and even Netflix. The basis of our success is really the technology that's foundational to what we do. On the left, I'm showing what everybody else is using for writing DNA and that is the 96 well plate, where we can make 96 pieces of oligo of DNA, called oligos. And at Twist in the middle, we have a silicon chip that is the same size as the 96 well plate, where we can make 10,000 times more, we can make one million oligos. And we make all the products for all the customers on the same chip at the same time. And so we have built a base, [we think] a software architecture to keep track of all those orders. And thanks to that platform, we are leading with innovation and execution. Over the last 5 years, we've set very aggressive goals for ourselves, and we've done things that others thought were impossible. Now, we've done all of that with very thorough biosecurity and a great focus on being environmentally mindful. So moving on to execution. Let's look how we've done. And especially at the time of the IPO 3 years ago, we had a lot of questions, which was, could we ramp NGS revenue? And we did. Could we expand our margins? And we did. Could we create a name for us in biopharma? And we did. And finally, we achieved a proof of concept with the DNA data storage, and we did. So that's of great execution. And overall, we've grown our revenue substantially over the last 5 years, as well as we've run our margins, and we believe that we have a lot of opportunity left for us in 2022 and beyond. More and more details. We started getting revenue in synbio in 2017. In 2018, we added NGS and in 2020, we added biopharma and now we have 3 revenue-generating businesses. And the success there came, on the left, from the number of customers that is growing and on the right, getting orders, which is a predictor of future revenue growth. Next, I'll jump into each of the sub businesses. So first, starting with core business, which is seen by synbio, NGS. I'll start with synbio. In synbio, we have a lot of different products. Genes and fragments are used for drug discovery for development of organism to make chemicals and new materials. Oligo pools are used to link genotype and phenotype using CRISPR. Our variant libraries are used for enzyme engineering as well as drug discovery and then for large biotech and biotech companies, we have developed specific solutions around larger massive DNA and even protein. In synbio, we win because we have the lowest cost products at high quality and also, we have scale. So if you want one gene or 1,000 genes, it takes the same time. We see a lot of opportunities remaining for us to grow our synbio market. In NGS, NGS is a fast-growing product for us. It's now about half of our revenues and there the goal is to really dominate the space between the sample and the sequencer. We have library preparation products. We have Targeted Enrichment products that enable high-value applications, such as liquid biopsy, MRD, oncology testing, population genetics, infectious disease and so on. And there, the reason we win is because of the quality of our DNA. We synthesize DNA that is extremely uniform, and that enables our customers to get a cost saving in sequencing. It's about half of -- the cost of sequencing is [indeed] half of our competition. And there too, we see great opportunities. As we have baked in into new assays, when those assays go commercial, our customer burn a little bit of [Swiss] DNA every time they analyze efficient. In biopharma, we use the same platform, the same platform as for NGS and synbio. And there, we look at partners to discover targets for them or optimize antibodies for them. And the number of partnership is growing. I'll show you that in the next slide. And our advantage is that because we make all our DNA explicitly, all of our DNAs are human derived and fully human and we have miniaturized all the steps or most of the steps of our drug discovery process from screening to panning to sequencing of the heads to reformatting of the IgGs to the functional testing and affinity testing. And what that means is that we are just more productive. And so we can go to customers and say, give us a project that you failed. And so far, 100% of the time we've been able to deliver a fully human derived highly potent antibody. This has been quite successful. We have 44 partners, 41 active programs, 32 completed program and 35 programs have milestones or royalties. So, we are a premium offering. I won't go through the details of the indication on modality, but you can see it very broad and meaning data. Of course, it's quite universal because we do not require an immune response to get a hit. Late last year, we acquired Abveris, who have an in vivo approach to drug discovery. And the 2 -- and together with what we have at Twist gives us a great opportunity to have a comprehensive offering because with -- there are 3 ways to discovery antibody. Synthetic libraries we have, animal base, which now we have with Abveris and through a number of collaborations and partnerships. We also have AI and deep learning approaches to drug discovery. So, we are a one-stop shop. That means that we also have a great opportunity to monetize and 2022 will be the year of monetization for biopharma. And we have 3 routes to monetization. The first one is to just find more partners, which provide more upfront payment on milestones and royalties and they adding more data is super useful. The second is we have discovery through our own internal pipeline of antibodies and we can license out those assets. And we should license at least one asset before mid-2022. The third opportunity to spin out assets, find a management team, spin out the assets in an independent company and really syndicate the risk while still sharing quite a bit in the upside. Speaking of spin out, we have done our first spin out late last year. And we have a great management team that licensed out the lead COVID asset from Twist. And that asset, RBT-0813 was in certification last year -- last week, sorry, where it was found to neutralize both the Delta and Omicron variants. So it's quite universal antibodies and Twist will receive milestones up to $100 million and mid-single digits in royalties. And this lead antibody should be in the clinic by mid-2022. And Revelar can also license 5 other assets from Twist. And finally, following the [story] of our drug discovery, we have more assets that we have discussed from our antibody pipeline, discovery pipeline in immuno-oncology, oncology and inflammations that are available for out licensing. Moving on to our third business -- fourth business, sorry, data storage. The amount of data that is being stored is increasing dramatically. And the archiving part of data storage where DNA can help is expected to reach to 60% to 80% of the storing market. So that's a good news. However, there is a problem in data solution and that is shown on the right with the data from Gartner. The baseline for storage shipment is one zettabyte this year, and that is expected to grow to either 12-zettabyte to 32-zettabyte. So, there's a 10x to 30x growth coming in the next 10 years. And the current technologies, paper drive and flash are not able to scale to those levels. And so there is a huge gap and DNA right now is the only technology that has the potential scale to solve that area in light blue of potential insufficiency. DNA is super dense, and DNA does not require migration, does not require maintenance, does not require energy and so therefore, it's a great opportunity. So what we are looking for with data storage is leveraging the density to provide the scale and solve the storage data front that's coming. DNA has the longevity, and we are introducing the concept of century archive. That's a segment that does not exist. But right now, the segment that exists is 5-year storage, but you have to migrate again and again. But with Twist, we could be the first century archive. DNA is immutable and sustainable. So overall, in terms of use cases, we look at DNA to provide deep archive first. And then over time, there is going a need to provide what's called computational cold storage, which is not only new store, but you can compute a large amount of data using the power of enzyme, which is very hard to do with hard drive. So really to get there, we have to lower the cost of DNA synthesis. And that's what we've been on a mission. We started at 50 micron, which is where the original technology is 5 micron. And last year, we announced that we got a 1 micron chip work. So that means that right now, we are at a gigabit scale of storage, and that derisks tremendously the platform. So next, I'd like to finish with the investments that we are making to increase our revenue, expand our markets. And I'd like to start by saying that all of those investments are baked in into the guidance that we gave earlier at the end of last year. So starting with our markets, our revenues are growing in synbio and NGS, but we are growing twice the speed of the market, twice the rate of the market. We have great opportunities in synbio to capture the DNA makers. With a faster turnaround time with our DNA, we should be able to get to that market. In NGS, the market is growing and potentially could grow very significantly because liquid biopsy and MRD are not really baked in yet in the size of the market. So as those liquid biopsy, as those MRD assay get approved and go commercial, that will increase significantly the share that we can go after. So, objective is to capture market share and grow faster the market. And last, in drug discovery and data storage, there is a huge upside potential for us. So the first very significant investment we are making is the Factory of the Future in Portland. The goal is to increase capacity, double the capacity. And with the additional space that we have, be able to launch new product and especially, a faster turnaround time product that should really help us penetrate the market and get better margins. To give you a bit more details or a flavor around that, in synbio and leveraging the platform in the Factory of the Future, we think we can expand our protein offering, expanding to its GMP DNA, Fast DNA to go after the makers market and even RNA. In NGS, we are already baked in into a number of liquid biopsy and MRD assays. And as those go commercial, then we'll be able to participate in the growth because again, every time a patient gets analyzed, Twist gets some revenue from that. And then in the spirit of dominating the sample to sequencer space, we announced today some partnership with PacBio and Singular Genomics. Our workflow is compatible with all the sequencers and as more sequencing gets on the market, we want to make sure that our workflow is baked in into those. In biopharma, I mentioned that we'll have a first antibody in the clinic this year, thanks to Revelar. And then through the integration of Twist and Abveris, the combination of their customer base with our customer base, we believe that we have a great opportunity to ramp revenues and monetize the synbio platform that we have. In data storage, I mentioned that we have achieved the gigabase -- sorry, gigabyte scale of data storage that is 1,000 times improvement over the original platform, which was the initial silicon chip. And looking forward, we have a road map to go into the terabyte scale with our first alpha chip and then lowering the cost of storage over time. And now, we are working on this alpha chip that will give us an opportunity to go after the century segment of storage. And that will be our next commercial launch. And we haven't guided the timing yet, but we are definitely pushing for it. Now the last investment that we are making is around enzymatic synthesis. Today, we use chemical synthesis. We ship billions of bases a year to thousands of customers. However, we -- so the chemistry works very well, but we remain quite excited about enzymatic synthesis. The issue is that the errors is 5x bigger with enzymatic synthesis. The length is 3x shorter. And to be clear, the first 100 bases are easy ones. The last 100 bases are the hard ones. So the enzymatic synthesis is far away yet to be competitive. But we believe those 2 things could be solved with engineering. The real fatal flow of enzymatic synthesis is around the cost. Right now, making oligo with an enzymatic approach is 1,000 times more expensive than by an oligo on our website. And we do have 90% margins on those products. So it's really, really [foul]. And so Twist -- at Twist, we decided to jump in and really solved this problem the right way. And when we looked at why the cost was so high, really there's 2 reasons. The first reason is the chemical reason. You need a lot of NTPs that are nucleoside triphosphate and the synthesis of those NTP is [horrendous] and the purification is very inefficient. And so NTPs are just really expensive. The second issue is a biological issue. [indiscernible] is constant, which means that you need a lot of concentration of NTPs around the enzyme for the direction to go. So not only you have expensive NTPs, but you need a large excess of it. And so at Twist, we've developed a chemistry where we are basically tailoring one NTP with one enzyme, which massively reduces the cost. And so now it's a low-cost enzymatic synthesis. That's the good news. The bad news potentially is that once you have a linker, it creates a scar when the DNA is -- when the base is introduced. And over time, as the scar accumulate, the enzyme just can't go anymore, and that's why you have a limitation. And so at Twist, we have developed a unique and innovative tailor, which provides a scarless DNA that is identical to the natural DNA. And then last, the speed of discovery is slow because enzymatic engineering for DNA synthesis is [one return] to one chip, [indiscernible]. So it doesn't go fast. Because we are experts in NGS, we've built an NGS-based platform to screen thousands, up to hundreds of thousands of mutants at the same time. So that means that we can engineer accuracy faster, and we can cover an IP space more effectively because we will have actually tested those sequences. So, we're quite excited about our new approach. We think it can be useful in data storage. We think it can be useful in creating new product lines for our core business. We think it can be useful in decentralizing DNA synthesis. Think of a DNA machine next to the can, next to the coke machine in every university where you could get a pair of PCR primers for $10. And it doesn't -- all of those applications don't have to be developed by Twist, where they are happy to OEM our chemistry to help others. So really to conclude, I already mentioned that we've had significant growth over the years. And we think that we are investing in the future to deliver continued growth, and we try to be quite disciplined in how we do that investment. And so my last slide is just a very quick takeaway where, as a reminder that we have a great, I think, track record of execution, delivering revenue growth in multiple markets. Our core business bases are loaded for growth both in synbio and NGS, thanks to the Factory of the Future. In biopharma, we are leveraging the integration of Abveris to grow our revenue. In data storage, we have a road map for commercial offering. And then last but not least, we are the leader of DNA synthesis. We've made a capital-efficient investment in enzymatic synthesis. And now where the market grows, doesn't matter if chemical synthesis is better or enzymatic synthesis is better. We have it, and we can continue to dominate the DNA synthesis market. So with that, I'll pause. Thank you very much for the attention. And my colleagues, Jim, Patty and Angela will call me -- will join me to answer any questions you may have. Thank you so much.

Thanks so much. That's great. So, there's been a significant amount of competitive noise surrounding your Twist Enzymatic chemistry 3.0, or basically the difference between enzymatic versus chemical synthesis. Can you talk a bit about how this kind of place your competitive position? And then also if you can provide any details regarding the timeline or key metrics to watch for the success of the segment?

Yes. Thank you. Great question. I mean, at the end of the day, you're only as good as the numbers you are. So the timelines and metric to watch is revenue growth and the entering into the market to grow that revenue. From a competitive point of view, at Twist, we have the platform and the platform will make quite a bit of investment. It's a hardware platform. It's a software platform. It's a commercial channel. And so that investment has been made. We have it. And whether we have a -- whether we needed chemical synthesis or enzymatic synthesis for a particular sub-segment of the products that we'll be making, we will be able to choose as to what is best for that product. And so -- but that's what really the impetus for us is keep our domination of the DNA synthesis market and make sure that 2-fold for the segments where enzymes synthesis is more suited that we will be able to not only participate but dominate, thanks to a superior approach to enzymatic synthesis.

Great. And so how do you view this data storage acceleration of innovation? And as you are attempting to ramp on a significantly growing need for data storage, how do you view your cost of innovation changing? Do you view that there's any scale as you move towards your 50 [billion] oligos or will continue to become more difficult?

I can start and Jim can continue. We are making a substantial investment in data storage. And there is the [indiscernible] investment. One is the development of the production prototype. And so, I'll say that we have been quite capital-efficient up until now, mostly because we saw that up until now, if you double your investment, you don't go twice as fast. There's some fundamental science that has to be done. And now we've reached those milestones where the fundamental science has been done. And if you can invest a little bit more, you really accelerate the work that needs to be done. So now that we have that leadership position, it's really how to lose and we don't want to have a [too] limited of an R&D that will potentially enable others to catch up. So that's the first part, getting to a production prototype. And then the second part is, once you have it, once you go, once you ramp production with an investment that needs to be made there and there are the time when that happens, we'll have -- I think we'll have opportunities to consider different sources of funding. It could be external contracts. It could be debt or -- and so on. But I'll let Jim talk a little bit more about that topic.

Yes. So in terms of the storage, we've stepped up the investment this year. We're increasing investment to mid-30s with $35 million a year. We highlighted that in our last earnings call. I think the exciting thing is that as we develop the chips, we're going to see monetization opportunities for data storage. The team has done an excellent job in executing. We're seeing, as Emily -- Emily has highlighted, we're seeing a number of alternative opportunities that are coming across the horizon. And over the next year, we're going to take a look at how we can monetize those opportunities and actually to figure out how they can accelerate revenue. So...

So speaking of [kind of] monetization opportunities, can you update us on the synbio end markets and kind of we understand that, that Ginkgo has obviously gone down as part of revenues. But can you kind of provide any color as to how you're planning on continuing to grow partnerships and -- from such as maybe some of your singular customers become less important?

I can start. Great relationship with Ginkgo. Ginkgo is a great partner, coming up to the end of the 4-year contract. Obviously, we provide good pricing, good scale for Ginkgo, and we're looking forward to continuing our partnership with Ginkgo. When you just step back and look at the growth in synbio, I mean that's growing at about 50% a year compound annual growth rate from '17 to '21, roughly. Good news is we've got roughly 2,000 customers in synbio. So we see tremendous opportunity in synbio. I mean last September quarter, we had our strongest bookings in synbio. We're investing in the Factory of the Future. What that does take our annual revenue capacity up to about $500 million a year Factory of the Future. We'll complete construction, i.e., building out the labs around about end of June, start to slowly ramp in July. The Factory of the Future allows us to reduce our cycle time, target a larger part of the market we haven't been able to address, that gives us more, more pricing leverage. So our goal is to continue to outgrow the market, which means growing in the sort of mid-20s. As I said, we're growing at roughly about 50% a year. The Factory of the Future allows us to actually leverage our fixed costs, allows us to actually launch new products. So we want to be that, that sort of Amazon type -- type company to -- to synbio and just leveraging -- continue to leverage the platform.

Great. And so as the market becomes a little bit -- possibly a little bit more crowded in just to name like a few emerging players like Canexus, like Molecular Assemblies, DNA Script, et cetera, and there's other possible influences in the market like, including Danaher, Agilent, Merck. Can you talk about how you might stay off kind of a larger influence in the market and how possibly new products or announcements have -- have been key to that?

[Same thing], when we launched our initial gene synthesis approach, we -- we had a huge differentiation with price. As we launched our NGS product line, we had a huge differentiation in quality. And so basically, what that means is that every time we go into a market, we never do a me-too. We do it with the -- with the high differentiation of the product and then a very aggressive, if not violent commercial execution. And we are seeing the growth that has happened in the past. Looking ahead, we see that there's more segments for us to go into. In synbio, we -- we have gone into a protein with IgG. We can do more. We -- in NGS, we have gone into RNA production with RA control. There's more we can do. We haven't done anything in -- with cGMP DNA, but we're definitely, yes, [not out] of the market. We know there's big opportunities. And so basically, we have the infrastructure, the hardware, the software. Now, we have chemical options. These are the old chemistry or the enzymatic chemistry to really enter those new segments in a way, where we can be #1 in the world, where there is -- there is no #2. So Patty, I don't know if there's anything else you want to add.

No, I think that covers a good product execution, good execution from the sales team and the competition is good for the customer, but we'll welcome any new comers into -- into our arena. We look forward to that.

Awesome. And turning to NGS and also the company more broadly, I guess. Can you share any details on how scale up is going in regards to possible noise about China or supply chain issues more generally? And then what, if any, key risks you might see surrounding those?

Jim, do you want to -- to start on the supply chain...

Yes. So in terms of supply chain, we've been investing in building up our inventory base for the last -- since the beginning of COVID. That's worked quite well for us. We've been able to deliver significant growth. Supply chain team -- team is doing a magnificent job and trying to minimize any issues. We've taken the inventory up from less than $20 million to [ get it ] over $30 million. We will continue to keep that investment going. Also, we're positioning for the Factory of the Future. Overall, NGS business, NGS business is going well. We've got now roughly 200 large -- large customers, almost 19 have adopted Twist into their assets. We're very bullish about NGS and the growth prospects there, not only because of the strength of our product, but we're seeing more and more applications. I think you mentioned China, yes, we made investment in China. China investments growing well. China, we're seeing opportunities on NGS, particularly in China. The revenue in China is about [ $4 ] million last year. We're seeing -- because of the execution there, we're seeing a step up in potential revenue in China. We've covered that in our -- our earnings call. So -- and so our NGS is [ going ] well, new products we're launching and applications are exciting from liquid biopsy through to MRD. China investment is performing really solidly. And the Factory of the Future will also add another dimension because we will have 2 locations that will be able to produce NGS products and support the demand for our customers.

Awesome. So I guess speaking on long-term upside, you've noted that the data storage business is kind of moving closer and closer to a real, I guess, launch. Do you have any specific updates on your strategy or a potential time line, as to how you might accomplish a launch?

So no updates on timeline. We started guiding on timeline, except to say that the next chip that we are -- so the chip we are working on now, the alpha chip could be the next commercial chip. In terms of strategy, I'll say 2 updates on strategy. The first one is that the first launch will be storage in the category of the Century Archive, which is a new segment that, that should be again is in the spirit of when we do something, we do it highly differentiated. So that Century Archive would be fewer customers and you need to start that out for 100 years, either you buy DNA, and you've don't or you buy a hard drive, and every 5 years, you have to move from one hard drive to the next. And so if the cost is about the same, the convenience factor should be a huge driver of business. So that's the first -- the first update in strategy. The second update in strategy is around the ability for us to have an enzymatic synthesis at our -- at our fingertip. The -- initially, the product would be storage as a service, and so it will be data in, data out. Everything happens within the Twist building. So yes, if it's chemicals or enzyme, does not really matter. It's transparent to the customer. However, over time, and you have seen in our -- on our chip, we have an idea -- we have the -- seen on my slide, we have a road map to get to an enterprise solution. So enterprise means there is a device at the customer, at the data center that writes DNA. And [they're] unlikely that those customers will want chemicals. And so however, they'll be totally fine with salt and water. So you can imagine the concept of a -- of a washing machine in a data center, just salt and water that writes many, many terabytes of -- of data that, that will leverage our enzymatic approach. So really those are the 2 updates on our -- on our strategy around data storage.

And then do you have any further updates about anything in relation to the data storage alliances, including Microsoft, West Digital, Illumina, et cetera?

So we are obviously big fans of the -- the DNA data storage alliance because we were one of the founder. And now there are dozens of competitors, I think I don't think that it is not always more than 39 people at group that are participate in the alliance. And the group of the alliance is really to create a bigger pie, as bigger pie as possible and to create use case to educate potential customers such that when products come out, they are readily tested into pilots and basically the industry is primed for growth. And where we got -- we got the -- the idea for the alliance from one of our Board member, Nelson Chan, who was very instrumental in the commercialization of the SanDisk flash memory and where they did something similar, but it will create an industry group that, that will create as bigger pie as possible. And then all the companies can compete to get the biggest slice of that pie. In that case, SanDisk was overly successful, and we are looking for a similar outcome for Twist.

Right. And so, obviously, you recently acquired Abveris. [Seems] that's going well. Maybe could you provide us an update on how you feel that the acquisition is informed possible future acquisitions or even how your divestiture strategy might change as you kind of grow out and spinout things?

Since Patty is running our M&A strategy, maybe Patty, you want to -- to address that question?

Well, thanks, Noah. Yes. I mean basically, Abveris is a very nice bolt-on acquisition, very, very complementary capabilities to what we have at Twist and it gives us a much more complete offering to our biopharma partners like [indiscernible] company, very fast moving, very, very similar commercial DNA, very much enjoying the integration with the team right now. And over the coming months, we'll put the entire value proposition together, and we think it's going to be a very powerful force to really accelerate endless drug discovery. As we go forward, everything that we do starts from the core silicon synthesis platform. And so from an M&A strategy standpoint, we're always looking to bolt-on products, where it makes sense. We can't do it ourselves, obviously, to continue to leverage our strength from the synthesis.

So we have 1 minute left kind of, is there anything else you might want to mention about the possible ways you would think, which you might utilize a different spinoff strategy in the future, otherwise, the other time soon.

I mean, in terms of -- in terms of spinoff, in [indiscernible] and biopharma, we have a long list of assets that I flashed in the slide earlier. Those assets are out licensable. So if -- so the first priority would be, can -- will someone out-license them. But if there are a great management team out there that are interested in spinning out some assets from Twist, we are -- we are always looking for -- for great management team. Spinout is -- opportunity is great for us because it enables us to participate a little bit more in the upside, but those management teams are hard to find. So if you are one of them, please do reach out, we -- we'll have to talk to you.

Awesome. Well, thank you guys so much, and I'm going to end this discussion.

Thank you so much.

Thanks, Noah.