Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Hi, everybody. Welcome. My name is Matt Sykes. I'm the life science tools and diagnostics analyst at Goldman Sachs. I have the pleasure of hosting Twist Biosciences this morning, Emily Leproust, Chief Executive Officer and Co-Founder; and Jim Thorburn, Chief Financial Officer. Emily, Jim, thank you for joining.

Thank you.

Thank you.

Great. Why don't I kind of let you set the stage firstly and then talk a little bit about some of the key accomplishments over the past 6 to 12 months and your most recent results and maybe some key opportunities and goals that investors should be focused on for the balance of the year now that we're sitting at midyear?

Yes. So for us, it's sort of about revenue growth and delivering better revenue growth because the silicon platform that we have, we can't really shrink our way to greatness. So what we have to do is drive the revenue to the point where we can break even. And so we have guided that when we get to $300 million for the core business, which is NGS and SynBio, will be at that adjusted breakeven point. And so really pushing to get that in 2 ways. One is launching great products; and then the second is around commercial execution. So we can only talk about our March number, but we got $48.2 million of revenue and -- for the quarter. And before COVID, our full year was $50 million of revenue. So we are on a great path of growth, and it's not an accident. It's because of the products that we've launched and the commercial execution. In terms of the product, what has happened on the NGS side, we've been focusing mostly on most -- methylation in the past. So that has been the product launch that is now driving the growth. There were product launches before around liquid biopsy that are the current growth, and then right last week at AGBT, we've announced that we have a new personalized panel for MRD detection that is fast and inexpensive. So that's the accomplishment around NGS in terms of SynBio. At the time of the IPO, we were mostly focused on NGS, which we have rebalanced our investment, and we have launched products that are very specific and resonate really well with pharma. And so as a result, those [ credit to ] IgG are now getting great traction in pharma. Looking ahead, a big, big milestone for us would be our Factory of the Future. This is a key investment to enable us to, first, increase the capacity that we have. Up until now, we only have $200 million capacity. And basically we are -- by the end of the year, we will be full. So we need that extra capacity to be able to ramp further the revenue. And Factory of the Future is going to enable us to also have a faster turnaround time product that will also enable us to drive into the makers market of SynBio. So all in all, I think, the company has done well, launching innovative, disruptive product. And the company has done well turning those products into great revenue growth. And I think we have a very good opportunity in the next few quarters to leverage our Factory of the Future to get to that breakeven point and beyond.

Got it. I think I would just add, back to the last couple of years, we've had disruption from COVID, had gone through labor shortages, tight in terms of labor market. We're now seeing the macroeconomic environment impacting -- will impact a lot of companies. I think if you look at what Twist did, back to Emily's point, we've executed well in lots of different environments. And we launched the Factory of the Future, started working with that back in October '20. We were lucky enough to get ahead in terms of lead times and getting all the tooling onboard. So we're really positioned to scale aggressively next year and leverage fixed cost. And what that then offers is higher margin opportunity plus an expanded footprint in a very, very tight market over the next year. So our cost advantage and our ability to deliver fast will suit that environment. I mean obviously, we got to keep executing as we've done for the last few years.

Very helpful introduction. I think one thing that I've always been impressed by Twist is sort of the ability to simultaneously develop new revenue streams. But at the same time, you provide almost an equal focus on sort of the current businesses that you have. How do you think about internally allocating your time and resources within the company to drive that growth, the existing growth that you have and then new revenue stream? And we're talking about drug discovery now. We weren't talking about that a few years ago. Have you found that internally allocating your resources were challenging in the current market environment? Or is it giving you more focus?

That's a good question. I think that definitely there's asset management team. One of the most simple that we can do is around asset allocation, and another one is making sure that the culture is maintain as we grow. And I think we've always been extremely deliberate in doing 2 things. One is what do we have to do to crush this quarter to execute in the short term extremely well with this. So what do we have to do today so that we love our lives 2 years from now, so that's short term and long term. And for instance, the storage, now we're about to -- we are very close to being able to launch a product, but that has been a many year project. And so we always had to have a look forward thinking that, well, in 2023, 2024 and beyond, we will need a new revenue stream. And so that's why we've always had a small investment on data storage. But to your point, frankly, there are just so much cake to eat that we have to be organized in cake eating. And I think one of the key for us is to make sure that everything that we do comes back to the silicon chip because if the advantage of a new product launch comes back to the silicon chip, actually, it's not a huge lift to launch that new product. And so for instance, last week, I was asked, "So you launched MRD product. Was that -- is that a big bet?" I think it's not a big bet because it's not a huge lift of investment to launch that product because it's leveraging our entire infrastructure of software, our entire infrastructure of silicon. And so it's just a small tweak to what we do. And so that enables -- again, that silicon chip enables us to add more SKUs in a way that is very capital efficient and enables us to add more flavors of DNA, if you will, without being a huge investment. And so I think that, that has been the secret over the year, is making sure that whatever we do, it leverages the silicon chip, and that would be very deliberate in what we do. So as an example, I just mentioned earlier that we've launched an NGS solution for methylation. But when we made the decision, we could have done methylation and RNA. And we said, look, if we do both, probably, we're not going to do either well. And so we focused on methylation first. We had an opportunity to get market leadership, and so that's what we did. Now we can look at RNA for NGS. And so that's kind of how we think, is leverage the silicon chip and then be focused so that when you launch something, it's highly disruptive, highly competitive and innovative because that's when you get fast revenue growth.

Yes, it's interesting because you're describing the platform, right? And I say, 1.5 years, 2 years ago, there was a massive value put on platforms that hadn't been developed yet. But the platform is actually continuing to be developed, and they're actually starting to execute now. But the multiple isn't there anymore, and so I think it's more about the execution phase. As long as you're going back to that silicon chip, that platform where your advantages are, I think that's the common dominator in the whole thing, correct?

Exactly. And we have a list of products that we could launch today, we just don't have yet the resources to make that small [ sort of ] investment to launch it. And so that means that once we have the Factory of the Future is there's a number of products that they will be able to quickly launch that will drive our revenue growth and without a huge investment to do that.

I think more importantly, it also can drive some margin expansion. Yes, if you [indiscernible] platform, and you've talked about sort of the long term. I've got a lot of financial questions here, but I'm just kind of excited, so I'll just skip forward. But you talked about this for the long-term margin targets for the overall business, but then also SynBio and NGS. Can you just talk about the path to those and sort of outline again what the sort of long-term targets are that you see for that business?

Yes. I mean we've got -- I mean, we've invested -- well, what, since 2013, we've invested in the platform. So it's really sort of continuing to build a moat around the platform. So it comes with high fixed costs. So as we move into the Factory of the Future, we're estimating our fixed costs for running a factory, which is the labor, depreciation, there's all the standard factory operating costs, to be about $84 million a year. Our contribution margin, that's defined as the price less the material cost for NGS, about 80% this year has been pretty consistent with that and SynBio 65% to 70%. As we scale into the Factory of the Future and revenue goes up, we're targeting adjusted EBITDA breakeven at $300 million and the gross margin at roughly 50%. One of the advantages going into the Factory of the Future, sort of the opportunity to go after the makers market for -- on SynBio, which is $1.4 billion a year. That also with the fast turnaround also gives us pricing leverage. So ultimately, as we scale the business to $500 million, we're estimating that roughly 50% would be NGS, 50% SynBio. The SynBio contribution margin or scale, so the average contribution margin for both business, we have at 78%. So we're targeting gross margins in the range of 55% to 60%. And we see that huge opportunity because we'll be able to also leverage as our customer base continues to increase. As Emily has highlighted, that will give us more opportunities to drive more products through the factory as well.

Got it. Maybe staying on SynBio. I mean you've talked in the past only about turnaround time actually being one of the most important factors. I think you initially had thought it was cost and then realized turnaround time was almost as critical, if not, more critical. So maybe talk about where you currently are today with your existing offering and then the level of improvement you'll see in turnaround time once Factory of the Future is fully ramped up?

Yes. Absolutely, the -- what -- for the makers market, which is the bigger market, is $1.4 billion, yes, when we started Twist back in 2013, the hypothesis was that, that market was price sensitive. And when we launched Twist, we were first going after the buyer market. And the numbers speak for themselves. You're only as good as the [ numbers ] you are. We've been doing quite well. However, when we tried to expand into the makers market, what we found actually was that when we have the product, do you want to buy it, what we found is that, actually, that market is actually very speed sensitive. It's either the drug company, it has co-facilities. And they have dozens of scientists waiting. And so any days that you can shave in the production actually saves a lot of money because those scientists can go to work and make sure that the patent life of drug is as long as possible. And so there, they don't care as much, at least in the past, don't care as much about price. It was more about speed. And then the second submarket of the makers market are the post or kind of grad student; and for them, it's about time to publication. And since they have to go through multiple experiment cycles, again, they rather spend nights and weekend in the lab to clone themselves than buying it. And so what we found is that in the makers market, even if the DNA was free, if it's slow, they wouldn't want to switch. And our offering has been resonating really well in the makers market -- sorry, the buyers market, sorry, because in the buyers market, we are about the same speed as the competition. We are faster. We have better scale or a better user experience, but in terms of speed for [ a lot of our ] genes were about the same. And so when we have the Factory of the Future enabled our fast gene delivery, we'll be able to both be able to convert the makers market and show them look, now we are faster than you. And so I think we'll be able to convert them. And in the buyers market, in addition to being lower cost and higher throughput and better user experience, we'll also have speed; and so that will help us tremendously as well in the buyers market. So it's -- that -- the speed of the gene is the one product feature that we are missing, and that should definitely fuel our continued growth in SynBio.

How incumbent is your growth in SynBio on the overall development and growth in the SynBio industry? I mean we've had some fits and starts in that industry. Ginkgo was clearly a key customer of yours, and they appreciate probably the scale and the price because they're -- given the volumes. But how many others are out there? And do you need to have this SynBio industry really start to grow rapidly in order for the investments you're putting in Factory of the Future and the capacity you're bringing on to really be able to deliver that? Or do you think there's enough growth as is right now and you can benefit from that?

Yes. So there is definitely enough growth as is now. Both growth and with the speed, I think we'll be able to take market share on top of it. And so the $1.8 billion market is definitely big enough for the size of the Factory of the Future. And actually, the Factory of the Future is probably not going to be enough over time. And the other thing with SynBio is that initially, we are looking at SynBio startups, kind of the Ginkgos of the world. And now what we're seeing is that even the big pharmas that were resistant to SynBio, now on their own, they figured out that we need to follow some SynBio principle for drug discovery. And so that has been a great win in ourselves, and that's why our -- a lot of our revenue growth has come from biopharma.

Got it. So switching to NGS tools, I mean this is a business that when I initially started looking at it, the key questions I had was what were sort of the specific end markets or use cases that you were most leveraged to; and two, how recurring is the nature of these revenues. Is it very transactional? Or is there a recurring element to it? And I think over the past couple of quarters, you guys have addressed both of those and have come away fairly positive on that. But maybe you could talk about, again, there's obviously the liquid biopsy that you guys have talked about, but other -- some of the important customer segments within NGS tools and then sort of the transactional versus recurring nature of the revenue. Are you seeing repeat customers come back? And are you able to develop that sort of recurring revenue stream?

I can start and then Jim can talk about the recurring versus transaction. So what we enable in NGS is we provide the tools for diagnostics companies to make a diagnostic test. And so there's definitely a big focus in liquid biopsies, so it's early cancer detection, minimum residual disease, oncology, rare disease, population genetics, inflammation, infectious diseases. So in all of those areas, we provide the tools; and the customer journey is, first, you do a pilot, right? So the customer is thinking I'm going to do a new liquid biopsy assay or I'm to do a test for some kind of cardio disease or whatever they are going after. They have to do a pilot test. And so they're going to test us versus the other suppliers. There's going to be a small number of samples, maybe 50, maybe 100. And from that pilot, they're going to decide which company they're going to take further into optimization, scale up and then the very heavy lifting of validating that diagnostic test. And so that is the customer journey. And so we get to participate, one, in getting revenue while they develop the test. And once that test is approved and commercialized, then we get to benefit from every time a patient is tested, there's some Twist DNA that is being used. There's some revenue that we get. So that's the setup. And then maybe Jim can talk about more details.

Yes. And so if you look at our NGS customer base, it's about 700-odd customers. Maybe between 700 and 800. We track the largest customers. Those are revenue $250,000 a year and above. They've scaled over the last few years. The last quarter was about 230. So once we get designed into test, we classify that as adopted. So 100 of them adopted into the test. So what's interesting is if you look at our NGS business, it's grown from $3 million to, what, $21 million, then to $43 million to $70-odd million, and this year, we're projecting $94 million to $96 million. You go back in time and you look at the $40-odd million in FY -- I'm getting my years right, at FY '20 included Regeneron. And you take off that $9 million for Regeneron, you're down there about, say, $32 million, roughly $33 million revenue. Then you go back to last year. We had $70-odd million in terms of revenue. There's about $5 million part from 1 customer. So you look at this year's revenue. We don't have a large customer contributing to that. So what we're seeing is as we continue to scale the customer base and we get adopted and designed in, we're seeing more consistent volume across our customer base. So we're not having these spikes or lumpiness. And this will continue to expand because we focused on the $250,000 above. We're now focusing on the next tier down below. And what we're seeing there is a lot of recurring business because we've been through that phase of pilot, scale-up, validation, adoption as the tests keep selling. Then they're back for more NGS product. So we're feeling pretty good about where we are positioned in terms of base. Then as liquid biopsy MRD takes off, we're extremely well positioned to share in that growth for those new opportunities over the next few years. And then there's a continued microarray to NGS conversion. So I think the applications will continue to expand particularly as sequencing cost comes down as well. So obviously very bullish on the NGS space, but also I think one of the sleepers in the portfolio over the last few years has been SynBio. It continues to grow, and it was great to see the Ginkgo contract had sort of segued into -- then to Ginkgo. I think there and industrial side, we've got lots of customers, lots of different applications. So that is going to be just as exciting as NGS on -- over the next few years.

Great. Maybe shifting over to the biopharma drug discovery business. I've been surprised with the scale that you've built this business in a short period of time. I mean essentially almost from proof of concept to $25 million in a very short period of time. What do you think makes Twist unique in this market? And how do customers get comfortable with your value add to include downstream kind of component -- economics component with the licensing royalties based on the services you had provided? And how did you show that proof of concept and be able to develop that so quickly so that now it's like, okay, yes, no, I'll give you a portion of that?

Thank you. So when we went into -- so the reason why we went biopharma is that I was traveling the world talking to our biopharma customers, and they were telling us how our DNA was transformative to their business and how they were discovering drug faster and better because they were using SynBio tools, SynBio approach and our DNA. It looks great. We were seeing great revenue. At the same time, when you look at the final value of an antibody, it can be $40 million, $50 million per base, but we sell out at $0.09 a base. So there is a huge difference in value from the DNA we make to an approved antibody. And so we thought maybe we could share in that value. So that's why we said can we also -- can we go up -- basically up the value chain. And so you're right. It was a proof of concept. We hired a CSO. And what we found is when we went out there to pitch our services, where the service is give us a target, we'll give you a drug, initially, there was not a lot of interest because we were not known as a drug discoverer. We are known as a great supplier of DNA, but when people ask how many drugs have we developed, well, it's 0. And so we had to come up with a very aggressive marketing approach. And that aggressive market approach was drug discoverer of last resort. So basically, as people were very skeptical about Twist -- again, we were walking into the Head of Biologics, very skeptical from a science point of view, basically, what we said was give us a project that you've failed. And we've done it consistently. And 100% of the time, when they give us a project where they had failed for 1, 2, 5, 10 years, in 6 months, we'll give them a fully human, human-derived antibody that is highly potent. And also that has been the eye opener for them, and they went from who are you Twist Biopharma to I get it. I see the value. You did something that even I could not do. And so now I'll give you something that's easier, and I'll be willing to pay more. And that's how we've been able to extract milestone royalties, which CROs don't get because we started at the highest -- the hardest of the hardest project. And so that's how we differentiate ourselves from the 700 or 800 other drug discovery and optimization companies, is that very aggressive marketing of starting with just give me something that is impossible, that you failed. So that's the good news. The marketing approach works. The news is that hard to grow projects are really hard. And so pertinently, we've been able to leverage the full benefit of our money of DNA where we can make more mutants than anybody because our DNA is made explicitly, not random. We can use the human repertoire. And so we have more mutant, and our mutants are fully human, human derived. And then the last piece is, because we are used to automating biology at Twist for our other businesses, we've been able to automate and miniaturize the library preparation, the panning, the sequencing of the hits, the reformatting of the IgG, the affinity testing and the functional testing. We've been able to miniaturize all of that. And so that means that we are more productive than anybody else in antibody discovery and optimization. And that's why we can do things that others can't do because the worst thing I would say would be to market, you need a hard drug and then not being able to do it. And so we've been able to do it because of the strength of the platform. And that's why it's ramping up very quickly, and that's why we've been able to get milestones on [ biologics ].

What I think is maybe not as well understood and What I think is really important, I think, for people to know about this business, though, is that you're also making like a 56% gross margin on the upfront fees, right? You're not subsidizing some else's research and relying on moonshots of drugs that might take a long time. And so I guess, how does that inform your strategy? Because then you're becoming what you are in other markets, sort of an agnostic picks and shovels provider. And does it behoove you to just try to reach as many partnerships as possible if you have the capacity so that you're generating that 56% margin on the upfront and then you're spreading your bets in terms of what actually might be successful? Or just given sort of like you're Takeda and Boehringer Ingelheim, is it more important to develop a wider relationship with a big drug company and sort of penetrate it that way? Or it may interest both. I don't know. I just think that upfront portion is actually really important because a lot of times people would do it at cost to get for the downstream. If the downstream never comes, then you're not making any money on what you're doing.

Absolutely, we are addicted to -- Jim and I are addicted to 2 things. One is revenue growth and the other is margin dollars. So that's -- thanks for pointing it out. It is absolutely 56% gross margin for the upfront. So not only it pays the bill but with gross margin. And if when there is milestone royalties, it's going to take some years, and it will be an upside then. And so to answer your question, for us, it's because we have a great process. We turn the crank every time it works. It's automated. It's good gross margin. And so that means now it's about the commercial exercise of how many programs can we sign. And so in some ways, it's a little bit of a compounding plan. Once you're into customers and we have a partner, and we get 1 target, 2 targets, 10 targets, so that -- so you penetrate their -- or their science and they choose you more and more, almost exclusively at some point, and so there is some of that. But it's also marketing our offers and making sure that every small, medium, large biotech company actually chooses Twist for their drug discovery needs. And so we have 47 partners. We want 1,000 partners. We have 100 programs. We own 5,000, 10,000 programs. So it's now -- we know it works. And we know that every additional deals is net accretive from a gross margin point of view. So now it's how many of them can we sell.

Yes. Sort of if you step back and think about it, we're getting the upfront fees where you're getting your 56% gross margin. But what's also interesting is the number of milestone royalty programs. And over time, we've got an engine that's, a, delivering gross margin short term, building relationships with customers and also getting the opportunity further down the road. And we keep building that opportunity, which I think is going to become more valuable over time as we continue to refine and refine our engagements with our customers. So you're getting the money upfront plus the opportunity, which I don't think has been given any value yet. What I see is the engine that's extremely valuable.

Maybe we talk a little bit about data storage. It's been something that's been far out for a while. It hasn't been in models, hasn't really been basically part of the valuation. But we're getting closer, and you've been very clear on how you've articulated sort of the cost, path, and there's an early access program starting up. And I think it's sort of Century Archive is where it'll kind of start. But maybe talk about the time line from here for data storage. And then to the extent that you can talk about how should people frame sort of the revenue opportunity or the size of this business? Because I think there is that upside that's always been out there that hasn't necessarily been factored in. But I think it's also because it's hard to kind of put your arms around. You know the TAM is big. We don't necessarily know how the revenue opportunity will shake out.

Yes, great question. So the SAM, actually, the serviceable, it's $35 billion. And so when we talk about our market sizes, we tend to talk less about [indiscernible] and more the SAM, meaning the dollars we can go touch. And so the SAM of the storage is just orders of magnitude bigger than for the other markets that we are dealing with in SynBio, NGS and Biopharma. So just a big, big, big opportunity. Storage is all about being disciplined in our capital deployment, in our investment. And every time we've done a product launch, now we've done it in 3 different markets, we've been very careful to do an alpha access. That initial launch is key because you're going into a new market, there's always unknowns, and we want -- when we launch a new product, we always want to find customers that are best prepped for the benefit that you could bring but also have customers that are forgiving environment. And so that's what we did in SynBio, NGS and Biopharma. We have some competitors that tells me you're very lucky every time it works. Yes, our good luck continues, but it's because we have a recipe of going into -- of doing an alpha access that really teaches you the last things that you need to know before you fully push. And so the Century Archive alpha launch is around the corner. And then from that, we'll be able to expand. But when we go into market, we don't want to go in and participate. We want to go in and take over. And that is true for SynBio, NGS, Biopharma; and we want it to be true in data storage.

So that $35 billion SAM that you just outlined, is that the -- not a data storage analyst, but like the worn -- worst market, is that where you would compete in terms of not having to access the data bit, that's sort of your basically space?

That's the archiving part [ of the demand ]. So is that our -- yes, you'll get within 12, 24 hours to get the data back.

Yes, got it. And you've been in this consortium with a number of other, Microsoft and Western Digital. Like how to think about -- what do they talk about in terms of the impact on their potential business? They're obviously partnering with you, so they're involved, but still it could be fairly disruptive.

So I don't want to put words in other people's mouths, but definitely, the growing part of the market in data storage is the archiving part. They just -- it's booming. Last year, the industry shipped 1 zettabyte of data. That's going to grow 10 to 30x over the next 10 years. And with the DNA, actually, you don't even have the capacity with hard drive and tape to capture that.

Got it. Maybe lastly, you raised some money recently. You've kind of outlined that path to possibly breakeven with $300 million revenues from SynBio, NGS tools. In terms of organic spend, inorganic spend, I think we're kind of in a cash conservation mode. But anything on the inorganic side that would be helpful and sort of as you guys progress?

Yes. I mean this year is our sort of high watermark for investment. So what's important for us, continue to execute. I mean we talked about MRD. We talked to the Factory of the Future, executing, getting to adjusted EBITDA breakeven in the core business, getting to adjusted EBITDA breakeven of the pharma business and manage the next phase of growth. In terms of any acquisitions, we would look at small tuck-in acquisitions. They have to make economic sense.

Yes. And the 2 acquisitions we've done last year, they didn't add to the burn of Twist. So if we were to do an acquisition, to be in that same context, but we don't have a pressing need from something. We have very good organic value creation.

Great. We're out of time. We'll leave at that. Emily, Jim, thank you very much.

Thank you so much.

Thanks. Appreciate it, Jim.