Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Hi, everybody. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPM. Pleased to introduce our next company, Twist Bioscience, joined here by the management team. We will be doing a brief presentation and then a Q&A afterwards. And so now without further ado, CEO, Emily Leproust.

Thank you very much for the invitation and the introduction. It's a great pleasure to be here. I'll start by saying that today, I'll be making some forward-looking statements. And so at Twist, as you know, we have a platform to write DNA, and we have enabled a large number of applications shown on the screen. And beyond DNA, once you've made the DNA, you're halfway there to get to the RNA and then you're almost there to make to the protein. And so we are expanding our product line into RNA and proteins. And really, there's 3 things to remember for today's presentation, is that at Twist, we are continuing to deliver innovation to create differentiated products. We are deploying commercial variants to enable fast revenue growth, and that we have a path to profitability, as we had been talking a bit more recently. So the platform that we have, writing DNA from scratch on the left here. I'm seeing the 96 Well Plate that everybody else uses to make DNA oligos. And on the 96 Well Plate, you can make 96 piece of DNA at the same time. Twist chip is the same size as the silicon -- as the 96 Well Plate. But we can make 1 million oligos so we have much larger scale, we use a much lower volume. And that miniaturization is what drives the cost down. As a quick reminder, the customer never sees the silicon. We use it in-house to build our products. And all the benefit that we derive in the different product lines come from a silicon chip and we can make all the products for all the customers at the same time on the same silicon chip. In addition to the silicon, because all the products and all the customers are together on the same chip, we also have built some very sophisticated software infrastructure to be able to keep track of where each product is and to make sure it is shipped to the right address. With this platform, we've been building a business. At the time of the -- when we started from a revenue point of view, we had a bit more than $2 million revenue. And last year, we -- in our fiscal year ending in September, we had almost $204 million revenue. As we ramp revenue, once we've absorbed the fixed cost from the silicon platform, we're able to drive improvement in gross margin. In the last quarter, we had 45% gross margin. Double clicking on those numbers, looking at the last, I think, 16 or 18 quarters, at the beginning, most of the revenue was in SynBio, so in green. And then we launched a product suite in NGS in blue. And then we launched, in purple, our Biopharma services. So as you can see now, we have 3 revenue-making, revenue-generating product line that are all growing nicely. And so in the next few slides, I'll talk about each of our 4 businesses. As I said, 3 are revenue generated -- generating. And the first 2 are what we call our core business, so SynBio and NGS. And then the 2 premium solution businesses that we have are Biopharma services and DNA data storage. So first, SynBio. In SynBio, we serve a number of markets. One of them is pharma. So people use our products to do target discovery, target validation, drug discovery, drug development, but we also sell biotech and its industrial chemicals' companies that are doing enzyme engineering and cell engineering. And we serve those customers with a very extended product line of genes that are clonal, non-clonals, oligo pools, libraries, and we haven't sell IgG. So if you want a protein for your drug discovery, we can actually make the protein and ship you the protein. In Biopharma -- sorry, in SynBio, by and large, why we win is we have a cost differentiation. We also have amazing scale, great quality. In some cases, the quality is perfect. So it's hard to do better than perfect. And we focus extremely on the customer experience. We often say that the DNA is free, people pay for the user experience, and we have very high net promoter score, and that helps in our compounding, delivering our compounding plan. Looking at what's coming up. We have a product road map that is -- very robust. As I mentioned earlier, one of the area where we're going into is RNA synthesis. Once you've made the DNA, you're almost there to the RNA. And our customers are actually dragging us into the RNA market since RNA is now a new modality. And so people that want to do RNA drug discovery need products -- in addition, we see a big opportunity in Fast genes. And so those are also perfect genes, but delivered at a higher speed. And obviously, they will have a higher price. But because the cost structure is the same as a slow gene, we have an opportunity to improve our margins. Some of those products are enabled by our investment in the Factory of the Future, which is a very substantial investment in the Portland area near Oregon. And this is the next evolution of the platform is going to enable us to have more revenue, more capacity, further so to launch new products, and we are on track to ship products this month. Then second business that I want to detail a little bit is our NGS business. So there, the market as we share that we serve are diagnostic markets where companies use our product to develop a diagnostics test that are mostly in cancer or rare disease or genetic diseases, but we also serve -- start to serve basic and translational research group as well. And in NGS, our products are more kits solutions, where you get a box with multiple reagents, there is a protocol, there is a presale support, post-sale support. So it's a little bit higher value product. And what we offer is all the regions that you need to go from the DNA to the sequence. And so the adapters, the enzymes, the beats, the buffer, the blockers, everything is available, and it's mix and match. You don't have to, but it's there. And the value proposition not only it's high quality, but with having all the reagents, when you go and run a diagnostic test, if there's something wrong, you only have one neck to choke and that's mine. And so it's very -- it's a good selling point to our customers. And so besides that, the reason we win in NGS is that we actually play a quality game. The quality of our oligos made on the silicon chip is higher, especially the uniformity is higher than if you make them in a 96 Well Plate. And what that means is that when you do the sequencing, you don't have to sequence as much. And typically, our customers report that they need 50% less sequencing once they've used our product than when they use a competitor's product. Where we are going is we're making good inroads in oncology applications, such as liquid biopsy and MRD. And there is a space that we have not explored much, and that is the RNA sequencing space. That's a wide space for us and that one significant opportunity for growth going forward. Some of the questions that we've received recently around what happens when the cost of sequencing goes down. So the cost of sequencing going down is a fact of life. It's like gravity or the speed of light. And here, we're showing over the last 20-plus years, what happened to the cost of sequencing. At the same time, the number of samples that have been processed is going up. And so what that means for us, we try to put a new slide with some data out today, it's really -- we see the world in two dimensions mostly. One on the left is for low cost of sequencing applications, like rare disease, where you only need 30x coverage. In the past, it used to be $750 total to do a whole genome, which is kind of expensive. And so if you were to do an exome, it was only $180. So that's why exomes have been very popular. And with the new sequencing technology, now the word genome is coming down to $350 and the exome is going down to $146. And so yes, the whole -- the genome is cheaper, but there's still a very substantial saving that you have for doing an exome. And so we think the exome has some staying power. And then on the right, in the oncology application, in this case, liquid biopsy, where you have to sequence down to 50,000x coverage. If you were to sequence the entire genome by 50x coverage, it's $1 million, you will never do it. Even with the new technology, it's $300,000 plus per sample, you'll never do it either, at least not at scale. And so there, the panel have the opportunity to provide a very focused view on maybe 200,000 basis or a little bit more. And in this example, it used to be $143 per sample. And with the new sequencing technology, it would be $121 per sample, which means that the lower cost enables probably penetration of bigger market and more sample coming onto the platform. So as a reminder, in liquid biopsy and MRD, we are not developing our own test. What we do is we sell the reagent to diagnostic companies that are doing the development, the clinical validation that are taking, frankly, also the reimbursement risk. What we do is we provide the tools for them to develop their own test. And so those 2 markets together, the SynBio plus NGS, we see that as a $6 billion TAM -- SAM sorry, serviceable market, that we actually can participate in. A few things that I'll mention, one is the liquid biopsy market and MRD market, which we think is about $300 million today. Again, that is not the market size of selling MRD or liquid biopsy test. It's the serviceable market, the cost of the reagents that go into those tests. Another area that's very important for us going forward. And sorry, that liquid biopsy and MRD, that $300 million is poised to grow significantly. And as more sample gets processed, that means that more Twist DNA gets utilized, and so we can participate in that growth. And then the second thing I'll mention is the DNA makers market at the bottom, the $1.4 billion. Those are people that do not buy DNA. But once we have the Fast gene, for instance, product enable [indiscernible] by the Factory of the Future, we think that we'll be able to drive some of that market to us. Moving on. The last point I'll make on those core business together is one that we've been growing the number of customers to more than 3,000. And we have publicly disclosed that when we get to $300 million revenue, we will reach adjusted EBITDA breakeven for the core business. The third business that we have is our Biopharma Solution business. So there, we sell a service. So in the previous 2 business, we are selling a product, now we sell a service. You give us a target. We use -- in-house, we'll do the discovery and the optimization of the antibody and we'll give you a biomolecule that is preclinical ready. There, one of the reason we win is that we have a very comprehensive approach with some in vitro approach, so naives -- in the discovery, some in vivo approaches. We also have AI/ML, and we have been positioning ourselves as the drug discoverer of labs result. As you probably know, there are hundreds of companies that do antibody discovery and optimization. But we are very unique in the sense that we can do things that others can't. And that is shown in the numbers. In the past, I have shown some versions of this slide. As a reminder, this is the first time that we are combining the original Twist biopharma business with the historical number from the adverse business that we purchased. So some of those numbers are a little bit higher that you may have seen. But in the bottom right, what's important is those 59 programs where we are earning Milestones and Royalties, right? The CRO, they don't get Milestones/Royalties, but because we can do things that others can't in this case, as of September in 59 cases, and we're able to get those Milestones and Royalties. And today, we announced an additional one from Astellas. In addition to doing work for our partners, where they give us a target, we give them biological molecule. We also have our own pipeline of antibodies, where we have chosen targets that we think are interesting, and we use the extra capacity that we have to prosecute them. And the goal is to out-license those at the preclinical stage and coming at a little bit more value. And so far, we have NF1. Last year, we sold an option to a license to Astellas. The -- I'll just spend a minute on an additional biomolecule, and it is for the top program around DKK1. So for those of you that may not know, DKK1 is very important in cancer. Cancer cells have DKK1 expressed on the cell surface. And DKK1 has a double whammy effect. One is that it is tumorigenic to the cell. And in addition, it suppresses the immune system. And so if you can find an anti-DKK1 antibodies, you'll be able to activate the immune system and stop the tumorigenic effect. And there are molecules -- there's at least one molecule in the clinic, but there are some questions around the potency and the dosing frequency. And so we think this could be a very nice fast follower for a company to license. So if I summarize for Biopharma, there's multiple ways for us to monetize it. At the bottom is upfront payment. And so we get typically a front payment with 50% to 60% gross margin. In at least 59 cases, we were also able to get Milestones and Royalties. We have all antibodies that we can out license. Again, end of one so far. But once we've done it once, we know how to do it again and how to maybe accelerate the cadence. And we also have the opportunity to do spinouts if the opportunity presents itself. And we've guided that for the Biopharma business, we have -- we will achieve adjusted EBITDA breakeven at $80 million of revenue. Moving to the last business, which is a non-revenue-generating business at Twist yet, is our DNA data storage business. It sounds like science fiction, but I promise it's only science. And what you can do is if you have data, zeros and ones, you can convert that into ACGTs in the computer, on the silicon chip, we can make DNA and that becomes the file, that becomes the data. And it has the benefit of being extremely dense, longevity that are really long. And if you need the data, you just put it in the sequencer and you can get the zeros and ones back. We've done lots of demonstration. It works great. And now we are on the path to commercialization. And so to do that, we had to get to the next step of the platform evolution, which is create even more density to lower the cost. And the current chip that we are working on, which is a proof-of-concept chip, is 24x smaller, but we have 256 million oligos instead of 1 million. And so it's about 6,000x better. And this is the first step towards more and more density on the chip and continued lower cost. With that chip, we are able to -- we've been able to announce that in the later part of Canada '23, we'll be able to have our first early access product launch. And so what that means is that we'll actually sell a century archive. So it's data that is -- that is storable, stable for 100 years or more. And this is very appealing to people that are doing long-term archiving, which is a big part of the archiving market. The initial target customers will be people that have very high-value information, but also the time and involvement that are forgiving. We know that early access, there's always something to learn. And so we're not going to go out on thousands of customers, it can be a few customers that are really desperate to get the product and that are forgiving so that we can do the last mile of product development together. So all in all, we will see growth from all of our businesses. And we've guided revenue growth to $261 million to $269 million revenue for next year and $350 million for this year -- sorry, and $350 million for the following year. And we also provided a 2-year guidance on revenue, gross margin, OpEx and year-end cash balance. Last but not least, the way the company is built on the silicon platform where we are miniaturizing the use of chemical where naturally -- excuse my pun, but in our DNA, we are highly sustainable. We use 99.8% less chemicals, and we also have a very diverse employee population. So in summary, we have a very innovative platform in silicon to write DNA. We're going after a large anchoring market. We always go with highly differentiated products, which enable us to grow quickly and sustainably. We have validated business models. And so now it's all about executing, delivering those revenue, delivering gross margin and achieving our past profitability. This is not where we stop. Breakeven is not the goal. The goal is to, after that, keep growing. We have $500 million of capacity with our Factory of the Future investment. And so we intend to leverage it to the full extent. Thank you very much for the attention, and looking forward to the Q&A.

Great. Thank you. That was a great overview. Now we'll shift to the Q&A portion. If anybody has questions, please feel free to raise your hand, and we have a mic runner in the room that will help you out. And if anybody has a question on the webcast, please feel free to submit your question via the web portal. But I guess to start, on the NGS business, so you noted last quarter that NGS revenue will be down sequentially this quarter as a number of large customers pushed out orders in December to January and February. So you've noted that they should rebound in fiscal second quarter. What gives you confidence that this rebound should occur? And just can you give us some color on what the nature of those pushouts were?

Yes, I can answer that. You hear me? So in terms of the way we build up our forecast, we build up our forecast with it, by customer. So we had a pretty clear line of sight in terms of customer expectations and deliveries per quarter. And as we announced our results on the 18th of November, a couple of customers had highlighted that they were instead of taking shipments in December, they're pushing out to the January, February timeframe. So as we look at the NGS business, we've got about 600 customers. We track the top 259 right now. Those are customers with revenue above $250,000 a year that we're targeting, about 120 have adopted Twist. That means they've designed them into their tests. So we have a really close relationship with those customers, and they give us good line of sight in terms of expectations, in terms of deliveries and understanding if we're having to push out based on what's happening in their business.

You also noted that the Chinese New Year will pressure fiscal second quarter results. Can you give us some color on how you are viewing the change in COVID policy there, if that's affecting demand at all in China?

We did note in the last earnings call that we were seeing a sequential decline in NGS. Part of that was due to China as well. There's a couple of customers pushing out, is the transition in the market, China is about $7 million a year revenue for us. So it's not material. However, I mean like the U.S., we have a fairly close line of sight with our customers. And our job is to support them as they go through this transition. And we did see that when we're going into the fourth quarter, we did see that initial impact, and we'll give an update in terms of what's happening in our next earnings call.

And maybe a quick clarification. It was not the Chinese new year, it was China COVID.

Okay. Maybe shifting to Biopharma. You noted 59 projects that include Milestone and Royalty payments. Wondering how you're targeting higher value relationships in this business to drive that number higher?

Yes. So it's really a marketing positioning as being a drug discoverer of last results. When we go to customers, they may know us really well on the SynBio side. So there's no doubt they're discovering drugs, they buy our tools. They buy genes and IgGs and Maxiprep. So they know us very well as a provider of DNA, but they don't necessarily know us well as the drug discoverer. And frankly, they can be quite surprised. And so what we found the best positioning for us was to just ask them to give us their toughest project. Literally I siad, give me the project that you've been failing for 2 years, 5 years. And it's a little bit of a risk because those are hard targets. But so far, we've been successful every time where in-house, we've been able to discover an antibody. And so when we go back 6 months later, it was a fully [indiscernible] and derived highly potent antibody, it really boosts the credit that we have as a drug discoverer. And at that point, we can see the light bulb open, and then we get the easier project, and then we're able to add some milestones and royalties.

Can you give us an update on how your Twist Boston offering is key to the portfolio here? You noted you have 36 projects on the Beacon platform. Is this becoming a core competency or an area of strategic differentiation that's made a difference in recruiting customers?

Yes, definitely. So when we started Biopharma, we were selling basically an approach where you use naive synthetic library for drug discovery. And it's a great positioning. What you're saying is that you are not dependent on immunization. But clearly, you can go after any targets. So that was very powerful. At the same time, some customers really tied to immunization. And so we saw an opportunity with Abveris, where by combining the ability to do in vitro naive libraries and in vivo immunization where we are actually able to potentially upsell the customer by offering more of a guarantee because now you have more than one option. In addition, so -- and then what attracted us to Abveris was that they were not doing any immunization. They had access to a hyperimmune mouse, which actually can be better than a humanized mouse because when you have a hyperimmune mouse, that means that even if you have a target that's really similar to the mouse gene, you still get an immune response. And you get antibodies to more epitopes of the target. And so that was the first attractive point with Abveris was their hyperimmune mouse. The second attractive point was instead of doing the old way of finding out which was the hits from the immunization, they actually had invested not only the capital of -- in Berkeley Lights in the Beacon machine, but slow the knowledge of how to use the machine. So it's a very powerful machine. But it is a slow, kind of like you're a regular driver, you get put into a Ferrari. You don't necessarily know how to drive it. And so they have developed the capabilities to [ how ] get the best out of the Beacon. And so those 2 capabilities were quite unique that they were attract -- attractive to us. And so now we have under one roof, all of this, plus some AI and machine learning tools that we've bolted on through partnerships and -- that means that now when we go to a pharma customer or partner, we have all of the ways to discover antibody under one roof. And so that gives us some upsell capabilities, some guarantee capabilities. And in the past, the adverse technology had not been able to commend milestones and royalties. -- and we think that we'll be able to change that.

That's helpful. I'll pause here if there's any audience questions. All right. Maybe we can talk towards Factory of the Future a little bit. Jim, this one might be for you. So Twist gross margins are expected to be 39% to 40% in fiscal '23 as the Factory of the Future, I'm sorry, starts shipping product this month. Can you just walk us through the puts and takes of the gross margin structure here? How much utilization of the Factory of the Future do you assume in the guide?

Yes. So we came forward with the guidance for this year and next year. This year, we highlighted our gross margin will be 39% to 40% and next year, gross margin will be 49%. So a couple of drivers. We're coming off Q4 where the Q4 '22, where the gross margin was 45%. As we bring on the fixed cost, we see an impact to our gross margin. There's 2 -- there's 3 major levers when you're looking at gross margin. One is the volume of business. The second is the mix of business. And the third is in terms of efficiency and yield within the factory and how we manage our cost structure. So if you look at our NGS business, our NGS business contribution margin is approximately 80%. Contribution margin is defined as the difference between price and materials. The SynBio products include genes. They include oligo pools, include libraries, include IgG and Maxiprep. The contribution margin there is 65% to 70%. As we launch the Factory of the Future, we have the opportunity of driving efficiency and improving turnaround time. So in the fall of this year, we're launching what's called our Fast genes. The Fast genes product is targeted at the makers market. As Emily highlighted in the slide, that's a $1.4 billion market that's not available to us today. We're just scratching the surface. The advantage of the makers market is you get a higher price for genes. So what we see as we scale the Factory of the Future, and we are targeting revenue in FY '24 of $350 million, $300 million of that revenue is what we call the core business, NGS and SynBio. What we're seeing over time is that the contribution margin combined for the core business about 78%. Question is why is it 78%? Well, as we scale, the Fast genes get a higher price, see more efficiencies and leverage our fixed cost, we're going to see the contribution margin increase because of the Fast gene pricing, improved efficiency. And as we scale throughput, we're going to leverage our fixed cost. So we see the gross margins in FY '24 increasing to 49%. Our longer-term model for gross margin is in the range of 55% to 60% for our core business. And as Emily highlighted, for the pharma business, we're targeting adjusted EBITDA breakeven revenue about $80 million and the gross margin for the Biopharma business is 60%. So getting back to it. We've invested in the Factory of the Future. It's about a $100 million investment. There's a large market for us to go after. We've got to execute scale and with that scale and execution, we're going to see the gross margins improve.