Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Great. So we're hosting Twist Biosciences for our next fireside chat. I have with me Jim Thorburn, CFO; and Angela Bitting, SVP of Corporate Affairs. Fireside chat format. If anyone in the audience has any questions, feel free to use the app, and we can bring them up here on the iPad. But with that, I'll go ahead and get started.

So Jim, Twist's portfolio touches on several fast-growing areas like Discovery, NGS, SynBio. Where do you see the largest growth drivers over the near term and maybe over the long term?

Yes. It's an interesting question. I mean, over the last few years, we've been growing at roughly twice the market. The overall market is about $3 billion. If you just look at our last quarter numbers, we're up roughly 50% year-over-year. So if you look at the 2 key elements of the portfolio, NGS and SynBio, this year, we're projecting NGS to be about $94 million to $96 million. Looking at SynBio, it's just over $70 million. So the last few years, NGS is growing pretty rapidly ahead of SynBio. However, that's because our fundamental investments in NGS a couple of years ago that gives a leg up with the products we launched, and we get significant value proposition in the marketplace. Over time, as we continue to invest in SynBio and see the expansion there in pharma, driving drugs, antibody discovery, et cetera, we see lots of opportunity for SynBio to accelerate, particularly when we'll talk later about the Factory of the Future. So over time, we see the portfolio to be roughly about 50-50. So what's interesting as we continue to scale is a number of customers continue to expand. We see roughly a universe of 100,000 customers. This last quarter, we had 2,000. So we get a lot of opportunity in customer growth and geographic footprint as well. And we're particularly excited about SynBio, just huge opportunity we have there. That's why we're investing about $100 million in Factory of the Future.

Great. That's a good transaction maybe to talk more about the Factory of the Future. You've invested, like you said, quite a bit there in that program. And just -- maybe just elaborate more on how that fits in your growth strategy and maybe provide an outlook there. And when do you break even?

Yes. So in terms of Twist, founded in 2013, first revenue is 2016. So over a short period, I mean this is the third or fourth time we've scaled up. And what we're essentially doing is industrializing biology. We get the front end of the process, so you have us printing on the silicon wafers. That compares to the 96-well plate. So if you look at our competitive advantage of printing on the silicon wafers versus 96-well plate, we can print a roughly about 10,000 genes in the same surface area. For those of you who are not familiar with the size of a silicon wafer, it's roughly the size of this phone here. So the last few years, we've been improving out, can we actually scale up at our customer base and really leverage that competitive position? We've invested significantly around the silicon platform. And what does that mean? It means a lot of software. It means upfront. We've got e-commerce so it's easy for our customers to transact. It's easy for our customers to follow the product as it goes through the process. And in the back end, we've added robotics. So we're talking about total industrialization of the product from genes through proteins. So as we go forward, the Factory of the Future is the next scale-up event. Today, we have in South San Francisco about 70,000 square feet. Annual revenue is just -- capacity is just over 200 million when we launched Factory of the Future. So the stage we're at in developing the Factory of the Future is we start qualification -- production qualification roughly around July, and it takes about 6 months to ramp up in terms of -- to revenue. So what are we doing in that 6 months? We're debugging the processes. We've -- we're in process of hiring about 200 employees. We're laying out the facility. And we see first revenue around January next year. So in terms of how we're thinking about the business, the potential revenue between our San Francisco footprint and the Factory of the Future in Portland, annual revenue is about $500 million. In terms of the break-even point, and we're talking about break-even point for core business, which is NGS and SynBio, that's roughly about $300 million as adjusted EBITDA breakeven. At that level, we're looking at margins about 50 -- gross margin about 50%, 51%. And so then the question is, okay, how do you calculate that? How do you know that you're going to be at 50%, 51%? Well, the way we look at our cost structure is we have fixed cost, fixed operational costs. And those operational costs are employees, assets, heat, light and power facility costs. That -- combined 2 facilities will be at roughly about $80 million, $84 million a year. So you say, roughly about $85 million a year. And then if you look at the 2 businesses, SynBio and NGS, the contribution margin for those businesses, NGS is about 80%, SynBio is about 65% to 70%. As we scale the factory, we're obviously leveraging supply chain. So we're targeting combined contribution margin around about 78%. So that's the basic modeling for us to get to adjusted EBITDA breakeven at $300 million.

And I guess, just talking more on the SynBio opportunity, Twist announced recently a new 4-year supply agreement with Ginkgo. Can you maybe talk a little bit about that relationship? And then what is the opportunity with SynBio than ex Ginkgo as well?

Yes. I think -- so it sort of combines into the Factory of the Future because we had to make the decision of the Factory of the Future about 18 months ago. And at the time we knew the Ginkgo agreement was ending around March time frame this year. So it's exciting for us for Ginkgo to come back in and actually agree to minimum commitment over the 4-year period of roughly $58 million. So our minimum commitment is, I think, $10 million this year. The contract runs from 1st of April to the end of March. So the first year contract is $10 million, second year contract is $12 million, third year's $17 million, the last year is $19 million. So for us, it is important. A, the partnership is really working well. And what's also extremely exciting for us is Ginkgo is also interested in significant upside. And that reinforces our investment in the Factory of the Future because we're also seeing demand coming in from pharma customers for the likes of IgG proteins. So what does that mean? So as we scale our gene business and as we scale Ginkgo and as we scale, say, IgG and other products, that requires more capacity for genes. So there's 2 genes to 1 IgG. And so the value we also see is as we launched the Factory of the Future is fast genes. So what does that mean? Our gene delivery times today are between 11 and, say, 16 days, 17 days. As we launched the Factory of the Future, we have -- we set up the process that allow us to deliver genes much faster. We haven't disclosed that speed yet. But what it does do is allow us to go after that fast gene market. So what does that really mean? So if you think of the SynBio business, it's about $1.8 billion. Of that $1.8 billion, $1.4 billion is makers, $400 million is the producers. We're targeting the producer market today. When we launched the fast genes, what they really love is getting the product quickly. So you think of university students, so you think of research, you think of anybody who's wanting to get instantaneous genes. That market is $1.4 billion. So that's the market we're going after. So roughly just over 3x the current market we're penetrating right now.

And maybe just on that -- so seeing the next 3 to 5 years, I guess, what does that market look like with Twist? And what kind of role does Twist play? And what's the growth to really penetrate, I guess, that $1.4 billion market opportunity there?

Well, I mean we have a platform that is scaling. We're adding customers every month. We're launching -- I mean we're investing over $130 million R&D, roughly about just under 50% as we invest in the core business. So we're launching new products continuously. And what's interesting is our focus on pharma has actually significant benefit of the company. Health care is now 50% of our business. So as we target that $1.4 billion, you're going to see a lot more customers. So what does that mean? That means the customer concentration obviously declines. I mean it used to be -- a couple of years ago, it was all Ginkgo. But now Ginkgo is -- it's not material. I mean it's a great relationship. Great contract, but it's certainly not material. So we're going to see more and more emerging opportunities with pharma, IgG and other products that really leverage the Factory of the Future.

I guess maybe switching to the NGS side of the business. Twist has a lot going on there, expanding product lines, customer base, customers moving from pilot to commercial. Can you maybe just walk off -- walk through -- us through what the NGS guidance is for the year and then what you're assuming on the growth there?

Yes. So NGS guidance for the year is 94 to 96 and the -- we keep getting questions about why isn't it more aggressive. If you go back over the last couple of years, last year in FY '20, we actually -- or sorry, FY '21, we had one large order for about $4.5 million. And then the previous year, we had a $9 million order for Regeneron. So you take those out, we're scaling at more than twice the market growth rate. So what's driving that is the value of our product. So what is the value of the product? Well, you're sequencing is going to, say, 50% in sequencing cost. And if you look at the current market situation right now, that means you can leverage your sequencing tools, that capital infrastructure by coming to Twist because you're going to save 50%. In addition to that, we've got a faster workflow. So you can go from sample to sequencer within a day. And our focus there is to launch reagents, launch tools so that we can dominate that space between sample and sequencer. If you look at how we scaled the business, we got approximately 750 NGS customers last quarter. 230 of them were what we call large customers, above $250,000 a year. If you go back a year, there was roughly around 100. What was interesting is the way we look at the 230 is about 100 were adopted. What does adopted mean is it means we're designed into their new assays. So as those assays test -- those tests are sold and the volumes are increased, then our revenue will increase associated with that test volume increase.

And I guess the NGS consumables space is very competitive, and you've highlighted the speed and the pricing. Who do you think that you're disrupting more in your space and with the NGS products?

So maybe I'll jump in here. And I think what really differentiates our NGS products is the fact that they are uniform. So the uniformity that we bring to the table is unparalleled. And so when we go head-to-head against IDT or Agilent, there's not even a competition there. And because of that uniformity, it saves our customers on sequencing cost, as Jim was saying. And so if you think about it, when we make NGS products, we make 1 million pieces of DNA on a chip at a time. And our competitors make 96 pieces of DNA at a time. And so there will always be differential in the reagent lots, and so there will always be some slight difference from batch to batch. When you're making a million at a time, it's very different than making 96 at a time. And so we then see that in the uniformity where you don't have to over-sequence or under-sequence, and that's what really makes a difference for our customers.

Yes. I mean it really goes back to the strength of the platform, the way we've miniaturized everything. And in that environment is the preciseness that really shows through in the NGS portfolio. And that obviously impacts uniformity. So that means we're well positioned for growth within the liquid biopsy marketplace because the 50% reduction in sequencing is actually far greater in that marketplace. And then we've got the opportunity with MRD coming up as well. So...

Yes. Actually, that leads into my next question. So I think you launched the CT tumor DNA reference for the development of the liquid biopsy. And also you mentioned the MRD product. I guess, just how do you think about Twist's role in, let's say, the liquid biopsy market as it evolves over the next several years?

So we've got roughly 20 customers we're working with in liquid biopsy and say that you're talking about the -- of the 230 larger customers. There's a bit 20 that we've certainly gone public with that we're working with. I think GRAIL is well known. They quoted in their S-1 that actually Twist was their sole source DNA provider. As we continue to penetrate those customers, so some of the larger ones will have as today but -- that they are selling, but we are designed into the new assays or adopted from new assays. And as we continue to work with those larger customers with a move in the MRD space as well, we're getting footprint into that validation and development pipeline and their engineering resources that's positioning us well for the next-generation products. So we're excited about the NGS opportunity. And what's interesting, we ever do a tour of a facility, you'll see -- you'll go and visit the synthesizer room. And it's a small space, probably like the front half of this hall or this room here. Then right above is NGS space. the NGS space is roughly in the same footprint. And that NGS space is -- drives today, what, $94 million to $96 million of revenue. So we don't need a lot of space for NGS. We obviously, when we opened up Portland, it's really focused on SynBio and scaling up the SynBio business. But what it also allows us to do is, as we phase up in Portland, we can expand our NGS capabilities both in [indiscernible] San Francisco, potentially up in Portland. So that will then give the -- our customers a dual-source opportunity.

And I guess just also touch on any updates on any other products Twist might be launching there. I think there's some enzymatic products and just how this fits into the portfolio.

So in terms of enzymatic, we announced in January that we had developed an enzymatic synthesis method. And when we were looking across our portfolio as to what we were going to need as things move forward, particularly for data storage, the enterprise version, we knew that we would need an enzymatic synthesis method because people will not use chemicals in large data storage facilities. And so we would have rather preferred to rent or buy. But when we looked across all of the different enzymatic synthesis companies, we didn't find what we needed. And so we developed it ourselves. And that is the Twist way, for sure. We continue to innovate. And what we've been able to do is make a low-cost, scarless, enzymatic synthesis method. And the reason that's important is because all of the other enzymatic synthesis methods currently are very expensive. They use a lot of a molecule called NTP. And the way that we've been able to mitigate that is to tether the enzyme to the base. And there is another company that has done the same thing. However, when that gets cleaved off, it leaves a scar on every single base. And we have found a way to do that in a scarless method. And so it looks like natural DNA, just like you would see in the synthetic DNA that we make on a very regular basis. And so we believe that the enzymatic synthesis will be exceptionally beneficial in our enterprise data storage systems and also for different products that we don't offer today. So we don't envision replacing phosphoramidite chemistry that works very well at scale today. What we do see is opportunities like cell-free plasma DNA that might be an opportunity or decentralized synthesis as well.

Maybe while you touched on the data -- the DNA storage opportunity. I think the TAM for this has been sized $35 billion, pretty large opportunity there. Can you just maybe provide us some updates on time lines, proof points? And has this market opportunity been developing according to plan? And just updates on the overall outlook there?

The data storage market doesn't exist today, the DNA data storage market. There is no storage company using DNA, and so it is a new market to be created. And one of the things that we did early on is found the DNA Data Storage Alliance. And so currently, there are more than 50 members, and they are across the spectrum of the different segments of storage. And all of those companies with the founding members of Twist, Illumina, Western Digital and Microsoft, have come together to really push that forward. And that alliance is focused on educating the market and making sure that the market is ready when the data storage solutions are ready. That's coming along very nicely. We recently announced that we joined the Digital Preservation Coalition as Twist and also joined the Storage Networking Industry Association, which is -- as a voting member. And so that is an organization of, I believe, 100,000 storage professionals. So really making inroads, and DNA synthesis is raising in visibility significantly. And as that continues to evolve, we'll see more and more as the solution gets closer to the marketplace.

And you touched on it, maybe just could you talk a little bit more on the DNA storage alliance. You mentioned we just welcomed the 50th member. Just talk a little bit on the working dynamics among the members. And what's the outlook for this alliance in maybe advancing the data -- DNA storage industry?

The idea there is really to build a bigger pie, right? And so we could each go after smaller pieces. But together, we can really go far. And one of our Board members, Nelson Chan, was instrumental in building an alliance at SanDisk. And so we followed that protocol, and it really is working as we anticipated it would to educate the marketplace. We've issued a white paper, and we'll continue to educate the marketplace in terms of presentations at the leading storage conferences. It's a very nice working relationship among the different parties. Each brings something a little bit unique to the table. We're all interested in filling that space because there is no storage medium coming along that will serve the needs of the community moving forward. There's not a single storage other than DNA that will fill that insufficiency today.

Yes. You got to realize in the terms of data storage for archival storage today, the medium is tape drive. So then you go back and say, "Okay. How long has tape drive been around?" It's been around since the '50s. And if you're storing data, I think there's a Wall Street Journal article showing a room with all these tape drives in it for all the -- it was either the NBA or maybe it's one of the other sporting -- I think it was maybe the football league. But anyway, you look at that space and they're having to replace it every 5 to 7 years. We can actually do the exact same, obviously, smaller footprint. It will not deteriorate. It lasts forever. You save density. You can save in terms of -- from an environmental footprint, it certainly shrinks it down. So I think the opportunity is huge. But there's a huge need for it as well. So the alliance, just the expansion of the alliance and all -- the alliance will continue to evolve, but that just continues to support -- there is a significant demand for this opportunity. I mean we're actually shipping data storage products today. An example would be Netflix. And our job, our role here is to make it cost-competitive and -- so that the end user does not see any cost impact. And we've launched the 100-year archival product.

Not quite yet.

No?

We've announced that we will launch a century archive, and ultimately, an accessible archive as well.

And I guess just lastly on the data storage. Any concerns on data security and maybe certain foreign governments such as China limiting access there? Just any thoughts on that?

We take data privacy and data security very, very seriously. On the synthetic biology side, we have a robust biosecurity system to screen every customer and every sequence and lead the industry both with publications as well as engagement across all different stakeholder groups. So we will continue that and evolve that for DNA data storage to ensure that the security remains utmost of importance.

Great. And actually, I have a few audience questions here. Maybe the first one: has the strategy for drug launch has changed in recent years? And has COVID had any impact on how you go to market with new drug developments?

So in terms of our biopharma development, we are working with about 47 partners right now as well as developing our own internal compounds. We're early in the process, so where Twist really works is in the discovery phase as opposed to the development phase. And in terms of COVID, not on the biopharma side, we did develop some COVID antibodies, which we then spun out to a company called Revelar. But also on the core business side, we developed COVID controls, and that's really COVID in a tube. So our CEO likes to say, "It's so safe, you could brush your teeth with it." You shouldn't, but you could. And it's chopped up in 5 different pieces, and it cannot be reassembled, some tips and tricks there. But what that has been really instrumental for is, one, for the research community, you do not have to be in a BSL-3 lab to work with those COVID controls. You do if you're working with a COVID virus, as you know. And two, it's brought Twist into a number of accounts where we weren't there previously it really expanded our market, and then we have been able to -- they're now familiar with Twist, and we've been able to sell additional products there as well.

Great.

Yes. I think just an addition on COVID generally, pre-COVID, our annual revenue was about, what, $50 million. So essentially, over the last couple of years with 4x the revenue. And what's also interesting is that we invested in the supply chain early on to protect us in case of any issues in terms of stock-outs. We certainly increased our inventory significantly during COVID. We'll continue to be in a strong, robust supply chain. But we're also hearing in the marketplace some of our competitors are having supply chain disruption. We've been aggressively focusing on the key items, key chemicals, reagents, et cetera, that are required. And we've been able to scale up the number of customers. So overall, I think COVID has reinforced our platform. The ability to scale, leveraging the IP, leveraging the technology, leveraging industrialization. And we have a very -- from an employee base, we've got a very light footprint from an employee base compared to competition. We also, from a facility point of view, have a light footprint compared to competition. So as COVID has accelerated digital transformation, it's also accelerated or helped confirm our value proposition and is giving us opportunities to expand further up into the pipeline, whether it's pharma or new products that keep emerging.

And another audience question kind of along that lines, but can you talk about any challenges or opportunities you see in the current macro operating environment with rising inflation, supply chain pressures, et cetera, and maybe even also touch on pricing there, too.

Yes. In terms of -- I think when there is disruption, there's an opportunity. So if you look at SynBio, the gene business, and you look at the 1.8 KB genes, we sell those for $0.09 a base pair. Competition is selling at $0.20 above a base pair. So we're very well positioned in this environment for customers coming to us because they may have supply chain issues and coming to us to be more cost-effective. As we continue to scale, we believe we'll have more pricing leverage, a, with our suppliers; and b, with our customers as we launch new products such as fast genes. So I think this environment for us is a great opportunity for -- to continue to scale up. And I think what's also interesting is the -- you take a look at the Ginkgo contract, I mean, they've laid out $58 million minimum, but they've also earmarked potentially additional business as their business is successful, and they know they can come to us and get the capacity. So then you translate that to whether it's pharma to industrial chemical companies, whether it's to academia, they know that we are bringing on the capacity. We know how -- we have a robust supply chain, and they know they'll get the product when -- at the right time. And also we are looking at potential selective price increases in this market environment. But that's going to be supported by customer experience and making sure we scale into the marketplace.

And then I guess just on inorganic or organic growth opportunities just over the next few months, I guess, capital deployment. Where do you see the outlook there?

So in terms of capital, I mean, our job #1 is to scale Portland, scale it successfully, give an ROI, get to adjusted EBITDA breakeven at $300 million. Also in the biopharma business, we just consolidated -- we just purchased Abveris. That is going great in terms of the relationship to great in terms of execution. We just upped our investment in Abveris. We added another $7 million CapEx to beef out their Beacon platform. So that gives them the ability to scale, and it offers faster cycle time. And you're seeing that with a number of customers that are being added there. So in terms of looking at the current environment and looking at the opportunities, I mean, we're very focused on managing cash. We have roughly over $600 million cash in the balance sheet. We have line of sight to getting to adjusted EBITDA breakeven. And we have also line of sight in terms of pharma business and getting to adjusted EBITDA breakeven over the next few years as well as they scale that business. So for the pharma business, we're looking at adjusted EBITDA breakeven at roughly $75 million to $80 million. Today, for pharma business, this year's guidance is $26 million to $30 million.

And maybe even touching a little more on the pharma business. I think Twist Boston has around 81 projects underway. Could you maybe provide an update on some of these projects? And what disease indication or modalities do you see as the largest opportunity there?

Twist Boston, as Jim mentioned, it's Abveris, right? We call it Twist Boston, but they were previously Abveris. It's been a fantastic acquisition for us. We do have 81 active programs there. We have not broken it out in terms of indication. But what I can tell you is that typically, a project through Twist Boston takes about 3 to 6 months to run. And there are 3 different types of projects. There are 2 primary projects. One is hybridoma, where you take -- you inject a mouse, you get the antibodies that are developed to a particular antigen. And then you're able to find those sequences very well. And the other is the Beacon. So there are a lot of companies that have not been able to use the Beacon -- the Berkeley Lights Beacon well, but Abveris is really a power user of the Beacon. And as Jim mentioned, we invested additional CapEx to buy additional Beacons because there -- those projects are going gangbusters. So they're really ramping very quickly. We're delivering value. And I believe that Twist Boston now has tracked 7 different antibodies that are in the clinic today.

Yes. We started off with Twist Boston, Abveris, they had 2 Beacons when they joined us in December. We added another 2 Beacons. All 4 beacons are currently full with production right now. So it's scaling up nicely, executing nicely. And the portfolio of customers is interesting because you get the blend between what's happening in Twist, Twist SynBio. You get the synthetic biology with the antibody discovery within Twist as well, plus you get the complement of the in vivo. And so you get customers that can now transition, I mean, from Abveris. They get a choice with synthetic antibodies from Twist as well, plus we're building relationships for the SynBio business.

That's right.

So it's working well.

And I guess just -- maybe just touching on just academic markets. Any thoughts there on how you're seeing funding levels and just what the outlook is on that market?

Yes. It's interesting. So if you go back and look at the data, I mean, academic has actually been pretty stable and growing through the whole pandemic. And if you look at our value proposition is that we give people more shots on goals -- more shots on goal. And if you go back to the pricing, we're the lowest at -- in genes at 1.8 KB, 3.2 and 5. Then we're going to be bringing out within the next year, the fast genes. So we are seeing the academic business grow. It is part of the long tail that we're after. So we feel very well positioned in terms of going after that and supporting that market need, particularly launching the fast genes. And our pricing, so in this environment, it's actually supporting more customers coming to use Twist just because of the price advantage. Their budgets may be -- what we're seeing is budgets have not been pulled back. But if a budget is pulled back, it gives them more shots on goal. So we will see more customers come and use Twist because they'll still want to develop products.

And then maybe in the last few minutes here, just touching on international expansion. I believe you have a China operation. Can you just maybe discuss what they are -- the international opportunities there? And then just given the COVID lockdowns, have you seen any impact in your China business?

So China business, last year, the revenue was about $4 million. This year, revenue is going to be roughly around $7 million. Last quarter, revenue in China was about $1.5 million, $1.6 million, I think. Yes, we've seen some impact over China right now. It's not material. But however, even though there's lockdowns in various parts of China, there's other areas that are not locked down. So what we're seeing is actually the demand moving to those other locations that are operating. So there is definitely an issue. However, just to frame it, the revenue in China is $7 million, so it's not material to us. However, we've managed to work around some of the issues so far.

Great. And maybe just sneak one more here this to kind of bring things altogether. So AGBT Conference coming up in a couple of weeks. Just any general thoughts there? I think Twist will be having our presence, but just general thoughts and what outlook and what to expect at the conference?

So we're excited for AGBT, and we do have an announcement coming at AGBT We'll be talking about our NGS portfolio across the board and look forward to seeing any of you who are there.

Great. Well, with that, we'll wrap it up. Jim and Angela, thank you for participating today, and we look forward to seeing you at AGBT.

Fantastic. Look forward to it.

Thanks, John. Appreciate it.

Thank you.

Thank you.