Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

I'm Luke Sergott, I cover life sciences tools and diagnostics here at Barclays. It's my pleasure to have Emily Leproust, the CEO of Twist; and Jim Thorburn, the CFO. So we're already kind of 30 seconds over. So when I say we just started jumping into that stock -- the shock clock. So I don't know.

I look at where the business is now versus where it was in 2018 and I look at where the stock is now versus where it was in 2018, and there's a massive disconnect here. Can you walk through how you see -- I mean the business is from -- it's 6x the size it was back then? Talk about the evolution here and really the forward trajectory as you see it from the business as it is today, versus where it's trading.

Yes. I mean in 2018, at the time of the IPO, the business was $24 million of revenue. Last year was $203 million. NGS was just beginning, it was $2.7 million. Last year was $99-plus million. Ginkgo at a time was 34% of the revenue. So there was some customer concentration, Ginkgo has grown, but now it's less than 10%. The number of genes that we shipped were 250,000 -- 247,000 then was 558,000 last year. Number of customers were 700, now is more than 3,300, right? So from -- you're only as good as the numbers you are and from the numbers, I think objectively, we have delivered everything we said we would. And now the next one for us is get to the breakeven point and get to profitability. And so we've made a significant investment in our production capacity. We've opened the factory of the future. And so now we're sort of leveraging the investment that we've made in the production tool to ramp revenue, ramp gross margin breakeven and then ramp from there.

Yes. I think the thing I would add is back in 2018, there was a lot of skepticism if whether we could actually deliver in terms of the growth rates, particularly NGS, we were new in the market then. And we were projecting numbers roughly around $20 million and doubling the year after. And we managed to exit given that. I think what's also important is we've launched -- we've been investing heavily in R&D and launched a bunch of new products. So we've got a track record of executing in terms of growth, executing in terms of managing the gross margin and in terms of improving gross margin and actually executing in terms of launching our new products and actually managing the business. So you're looking at where we're at now, we've -- as Emily highlighted, we've launched the factory of the future. We see new opportunities. So it's like going back in time, it said we're a $200 million business versus roughly a $20 million business. So the question is, can we continue to execute, can we continue to take share and really charge into the makers market and really go after the large pharma opportunity?

Yes, that's a great set up here. So -- and also, I think back then -- so the argument has always been on the profitability within the business. Whenever you would do teach-ins, they'd say, "Oh, well, it's a commoditized business. you're just buying [ Oligos. ] There's no real competitive moat there. And you've grown throughout that, and your gross margin back then was negative."

Negative.

And now you're guiding to 40%. So talk about -- right now after you put up, I think it was like 34% in the last quarter, now you're guiding to roughly around 30% to 31%. Talk about trajectory here outside of this year, but the step-up throughout the year and then after the fact of the future is that capacity.

Yes. So I mean, as you highlighted, Q1, which is the December quarter, the gross margin was 45%, or just over 45%. This quarter, gross margin does decline to 30%. So the question is what's happening when your revenue is increasing? What's happening as we're bringing along the factory of the future that comes with a branch of fixed cost. So our focus as we bring on the factory future is if you look at our revenue profile for the year, we're guiding in terms of revenue of $261 million to $269 million. Q1 revenue is about $54 million, guidance this quarter is about $56.5 million. So we get strong back half weighted in terms of revenue. As we scale the revenue, we get increased contribution margin. The overall contribution margin for the company we're targeting at 78%. We have 2 businesses, NGS and Synbio. NGS contribution margin, which is the difference between price and material cost is about 80%. The Synbio contribution margin today is about 65% to 70%. And as we scale the factory of the future and launch the fast genes, the contribution margin on the fast genes is higher, because we're getting a price premium. So it's critical as we see the revenue scale delivering that growth, we see our actual gross margin improve. And next year, we're projecting gross margin around about 49%. And that's driven by growth in the top line, increased contribution margin success, particularly on the Fast Gene business.

And so it's all -- a lot of that is just from the mix on the fast gene. So let's dig in on that. Talk about the demand that you're having for those. Really, what is so transformational about the fast gene versus the legacy product that you guys were offering? Does it open up new markets is there?

Yes. So with the genes that we have now, we can go after the DNA buyers, and in the [indiscernible] different subsegments. There are people that want many different genes. So shorter [indiscernible], we probably are the only gaming [indiscernible] because nobody else has the opportunity. and then if you want 50 genes fast, we're probably also very dominant from that point of view. If you want 1 or 2 genes, we're about the same speed, [indiscernible], but our cost is much lower. So that's why we have been growing. And then what we are seeing is that beyond those DNA buyers, the DNA makers and those people we talk to them, they are extremely speed sensitive. They're [indiscernible] telling us even if it was free, I will not take it because we're -- we just can't wait for those genes to do the next experiment. Biotech companies, we have a dozen PhD scientists waiting for the [indiscernible] to do some characterization and they can't wait to test the synthesis of those [indiscernible] themselves or those genes themselves. So that's the opportunity that we have is if we can lower the speed beyond what we have today, we'll be able to go to those companies and say, well, instead of doing it yourself, we'll do it for you, and it's going to be more expensive than a "slow" gene. And by the way, that's not the marketing name, but -- it may be more expensive than a slow gene, but it's going to be as fast as they do it themselves and probably maybe the same price, may be a bit cheaper than if they do it. And so it's an opportunity for us to go after the maker's market that we can't touch today and be able to get a price premium, knowing that the production line to make a slow or fast genes is the same. And so the cost of making a slow or fast gene but if we can give any [indiscernible], any sense about the standard is that is 100% cross-margin contribution.

And so what's the turnaround time that really unlocks that maker's market, is it 3 days?

So it's about 5 days for [indiscernible] or your gene in your vector maybe [indiscernible] and it's about 2 to 3 days for a fragment, so not [indiscernible].

And that's all going to be on the factory of the future. So within the factory of the future, you have your legacy plays to do your legacy factory in San Fran with the 2 big printers and then the factory of the future, how do you segment which -- how much is being made for fast genes and then is there a dedicated printer for fast genes and that kind of library? Or is it basically still maintaining at the airline shift like you guys talked about?

Yes. So if you look at Portland right now, Portland has the same performance at San Francisco, meaning that if we send a gene to one or the other, the external experience is the same. The customers can't feel that it was made in one place or the other because it's the same turnaround time. However, we are going to deploy [ extra software ] modules in Portland, frankly, to remove the human decision-making to speed up that process. So it's [indiscernible] hardware and people and building a different and additional software that will shrink the time it takes to make genes. And when we launched that, again, the cost of making a slow and fast genes would be the same. But if there is a gene order that comes in, that goes into Portland, and if it's a slow gene order, it may wait before it goes on the production line or it may wait after we get it done. [indiscernible] it for 10 days, and we're ready in 5 days, it's going to wait 5 extra days in the freezers before shipping.

That makes sense. And within that market, are there outside of biotech and pharma, who would else be that bankers' market?

And then there was a [indiscernible] of pharma and pro forma Biotech, another big chunk are academic group. So those are the -- so the PhDs that are going to go on in the lab, spend nights and weekends, because they needed that to get the publication to get -- to graduate or get the next jobs and that gives them rather go through the tedious pain of [indiscernible] themselves than waiting a few extra days, because speed for them is everything.

Al right. And so sticking with the Synbio business overall, this is a business that was expected to start to desell as NGS was taking off, but it's really been strong. It really hasn't slowed down at all. What's been driving -- what's been the underlying demand and driver here?

It's just a big market. We don't even give 15% of market share. We are extremely competitive, differentiated product from a scale point of view, from a cost point of view, for user experience, we're on e-commerce as frictionless even and beautiful. And corporate, very finance commercial execution. I think it's compounding. We are getting more and more customers, we are getting more wide sale. And we will with time we think that Bio and NGS can be 50%, 50-50. There is a lot of base around growth in both market opportunities and has been by the next kick in Synbio. But as we said, we have been driving the RNA market because now RNA has been seen as a desirable modality for drugs. Lot of people are asking for [indiscernible] to drug discovery or being derived into long finance, we have opportunity in [ CG and PD&A. ] So there's a lot of growth opportunity in Bio that we can realize.

So if we go back in time. Back to 2018, when you look at the product portfolio and or certainly from a customer point of view, you are sort of driven by Ginkgo, the great partner. And we've expanded -- we've invested heavily in terms of R&D. We see the benefit of that. We expanded from 1.8 KB to 3.2 KB, 5 KB. We've launched IGGs, launched [indiscernible] Over time, we've also seen the turnaround time come down. Last quarter was incredible in terms of turnaround time. And as a turnaround time has consistently shrunk, we've seen more and more customers come to Twist, come to the platform. So remember, this has all been through COVID. So you had the disruptions on supply chains as well. We managed to ensure that we had a buffer of inventory, supported our customers, supported our growth. Yes, we've seen demand for antibody genes increase as well. So it's back to the product investing, delivering and executing.

Yes. It's clear. I met with Patty at AGBT. I don't want to be on the bad side, on [indiscernible] bad side. All right. So if we could talk a little bit about the NGS side, there's been -- overall, within the genomics market, it has been softer across the board. We've seen some type of destocking. There's been COVID headwind. Just give us a [indiscernible] as you see it from your perspective. You guys haven't been impacted by it at all. So talk about why you're insulated from the overall headwinds.

Well, I think starting with the product, we give our customers a leg up in terms of reducing costs and go from sample to sequencing the day of little overall. If you look at the order book in Q1, particularly for NGS, it was $31 million, which is a record for us. We had actually one major customer win part of that but those increase in orders. And why did they come to Twist is back to the value of the product. We continue to win in terms of [ pilots. ] The pipeline of larger customers continues to scale. In terms of the short-term issues, I know we did have some customers that pushed out from December to January quarter. In my opinion, that was because they were managing their year-end. So it was interesting this year, we're looking at approximately $120 million revenue in NGS, up from just $100 million last year. First half is about $50 million. The second half is about $70 million. So what's driving that $50 million to $70 million? Well, if you go back over previous years, our second half has always been stronger. This larger customer that came on board in January gave us more insight in terms of when they place their orders, they were placing their orders for the March quarter and for the September quarter. So as we continue to scale customer base, continue to see more applications, we're seeing more and more opportunity in the NGS market. Yes, it may move around quarter-to-quarter. But overall, we're gaining share in that marketplace.

And talk about your -- you gave us a metric of -- you used to talk about the size of the customer, right? So you had -- I forget the number now, over $250,000. And talk about how that's grown and really the [ length and expansion of ] strategy and how that's progressed.

Yes, it's approximately $250 million last quarter. Yes, it's grown by about 50%. And what we also track is adoption. That means that customers have adopted us into their assays. That's about 50% of the $250 million. So that metric continues to grow, and it's a nice pipeline. We define it as customers that potential revenue is $250,000 per year. So what's exciting in that is we have a top 10. What's interesting is the top 10 is normally about 30%, 40% of revenue on a quarterly basis, but the top 10 keeps changing. Like watch for [indiscernible] rates, they're all moving around. So although we can talk, is actually the number of customers changing in that top 10. So we get a broad customer base. And providing meaningful dollars in excess of $250 million and a number of them are signed longer-term contracts with us, which gives us visibility. We can be asking questions, how can you predict forward what's going to happen FY '24? Well, the answer is we have a number of customers who have given us indication what this year looks like and what next year looks like. And that helps us go with a new understanding where the business is going based upon that customer feedback.

And on the liquid biopsy front, the -- this is expected to be a significant inflection for the entire space, but your position there well as they do panels, and you bring that cost of sequencing. Can you talk about how you guys see it playing out, the number of players that you guys were embedded into the workflow and any more wood to chop there?

And so at the time of the IPO, one of the reasons to go IPO is that we saw a big opportunity in liquid biopsy and those diagnostic customers, frankly, they needed visibility in our business to make a 10-year bet on using our region. And so at the time of the IPO, we had $2.7 million of revenue that is on to more than $90 million revenue for NGS. And that -- a lot of that growth was us doing highlights with liquid biopsy companies winning those [ pilots. ] So those are small R&D spend for them. Then they go through a scale-up, so that's more R&D spend. and go through validation, that's more R&D spend. And then finally, when the test gets finalized in those in production. And there that's where for us the number gets significantly bigger and as we are baked into the production, we are on the curve line of those companies. So over the last 4 years from the IPO, a lot of our revenue growth was on the R&D side. But now we're seeing more and more of heads that have been in the development phase now going to production. And that's where we start to see those bigger chunkier orders as they're deploying their business, they are buying ahead of time, all the reasons that the [indiscernible]. So in terms of the numbers, we are in more than 20 liquid biopsy companies at different stages of development in production. And that's why we think there is a lot of significant future growth in revenue as more of those tests online, as more of those test takes volume away from previous test. We are in a great position to capitalize on that, because we have been winning those tiers over the last few years.

And so in that NGS market, are you seeing any of the headwinds that a lot of the other players are facing from destocking or just to solve for the demand environment?

Certainly, I mean go back to the original [indiscernible], orders were strong in Q1. We did see some [indiscernible] in to Q2, comprehended that in our forecast. And the guidance based on the conversation with customers, they're highlighting the June quarter growth as September quarter growth. So I think it is back to we get a fundamental value proposition in this business. We won a large account in a tough macroeconomic environment, why did we win is back to the value. So we see more opportunity unless it may get noise quarter-to-quarter, but the market is going to grow and we're going to out accelerate that growth in the market.

All right. And then the last 2.5 minutes here, we'll talk on the biotech piece. The number of active programs here continue to climb. When should we start seeing this part of your -- how much control do you have after it's out of your hands? Is it just all on the client?

So what we do as a quick backdrop, we do drug discovery and optimization. So you give us a target, we give you a biomolecule, a VHS, a fab [indiscernible] by ABC, TCR engineered cell. So -- and then we give it to you at the preclinical stage, and then the customer has to do the rest. We get paid upfront fee, but -- and then we collect about 50% to 60% gross margin. So we don't subsidize the R&D of our partners. But then in 63 cases, we had programs where we are earning milestone and our royalty. And so at some point -- to your point, at some point, we'll get some milestones and royalties to come to us. It's not in our guidance. So it's an upside. And yes, unfortunately, we are not at all in control. They get to decide how they push it that with space in which modality. And so that's why it's considered upside and we're not guiding, because we don't fairly know the timing. However, Jim's team has spent quite a bit of time talking with the customer and [indiscernible] to know exactly where those molecules are in the pipeline.

What's interesting there, we got 63 customers obviously get milestones and royalties. So the interesting thing for us is to figure out where they are, get more confidence in terms of potential for milestones and royalties and we've got a large portfolio, how can we creatively monetize that portfolio? So I think as they continue to progress, I think there's more opportunity for us. Perhaps it is something creative than last time. Yes, like [indiscernible] has done stuff like that.

Yes. Yes. There's a paradigm. Well that's all the time for today. Thank you.

We could keep going here. All right.

Thank you.