Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining us. My name is [ Martine Azaravitz ]. I'm from the life science tools and diagnostics team here at JPMorgan. It is my pleasure to introduce our next company, Twist Bioscience. Just as a reminder, after the presentation, we will have a Q&A. And if you're in the audience who want to ask a question, raise your hand and somebody you will pass you over a mic. [Operator Instructions]. And with that, I will turn it over to the Twist CEO, Emily Leproust.

Thank you very much for the invitation and the introduction. It's my great pleasure to present the Twist story. And also, I think, that I'll be making some forward-looking statements. So for those of you that are new to Twist, we make DNA from scratch, and we have delivered consistent revenue growth as well as market share expansion, and that is, really, on the strength of a very strong commercial execution, execution from the upstream, execution from marketing and R&D to develop exciting new product. And we now have a very defined path to profitability. And really, all of that is possible because of our platform. And we have a silicon platform where we can write DNA. We've miniaturized the chemistry, so instead of writing DNA in a 96-well plate, we can write with million oligos or piece of DNA at the same time. And from that one chip, we can make all the products for the customer, all the applications and all the markets at the same time. And even though we started with DNA, we've been extending into RNA and protein. Sometimes we get the question about how does all of your product lines fit together, and I'll talk about our product groups later. But really, I'd like to -- I like this view that shows how all the products are interconnected. And so it all starts from the silicon chip. We make the oligos so the oligos is where the magic happens. And then we have a back end where we can either sell oligos or we can assemble them into gene fragments, or in clonal genes or in IgG or we can assemble them into variant libraries that together with the IgG, from the basis of our biopharma solution or we can amplify them to make NGS panels. And so really, again, the value of the platform is the silicon chip. And I often say that the back end, the rest is remarkable by how unremarkable it is. It is sophisticated. It is highly automated. But without the oligos, you don't have the fuel to run the car. And so based on that, as I mentioned, we have a very strong platform. We've built a very powerful production line that can make millions of oligos every day. We have a very scalable infrastructure. We can make hundreds of thousands of genes and serve thousands of customers. The user experience is exceptional, thanks to our focus with e-commerce to transact. And we built a business model that is very similar to a semiconductor industry, where we do have high fixed costs, but we have very low variable costs, which means that once we have absorbed the variable cost, every extra dollars of sales, a very high percentage drops to the bottom line. And so overall, we have a business model that is quite differentiated and different from our peers and competitors. And I think it's a very compelling business. Looking at the financials over the last few years. When we launched, our first year, we had a $2.3 million year. By the time of the IPO in 2018, we had 10x-ed, $25 million. And then last year, we 10x-ed again to $249 million for the year. As we ramp revenue, with a slow ramp of gross margin, last year was an exception as we added a second manufacturing site, our "factory of the future," online. And so there was a temporary dip in gross margin. But as we ramp revenue again, we anticipate that the gross margin will grow again. If we double-click at looking by quarter, I think the view there, going -- kind of starting from the time of the IPO, where most of our revenue was in blue, SynBio. Over time, we've grown SynBio. We've added NGS, grown it. We've added Biopharma. And so we have a highly diversified number of businesses or product group. But again, they all come down to the same silicon chip. So that's really a very powerful way of producing, where on the same chip, we can serve all of those groups. In the next slide, I'll go through each of our product groups. The first 3 SynBio, NGS and Biopharma Solutions are revenue generating. And then the last one, that strategy is not yet. So starting with SynBio. Again, from the silicon chip, we have hundreds of SKUs that we serve from clonogenics, fragment, oligo pools a number of different variant libraries, even IgG. And the main customer that we serve are in the top left with our SynBio tools. Those are pharma and biotech companies that are discovering target, validating target, discovering drug, validating drug, engineering drugs. We also have a number of industrial chemical companies that are engineering enzyme or engineering cells. And so the number of end markets, the number of applications that we serve is really high. Historically, we won because of our cost, our scale and our quality. And the last few years, we've made a deliberate effort to invest in speed. So while, in the past, when we started in 2016, where we are slow compared to the competitors, to about a year ago where we were on par with our competitors in terms of speed. Now with the launch of Express Genes and building our Express portfolio, we're actually best-in-class. And there's a lot of questions around the Express Genes, so over the next couple of slides, I'll try to demystify it a little bit. And so first, looking at the competitive landscape of genes. On the left side, I'm comparing the price that can be commanded at different speed. And so historically, we were in the bottom right of the chart, we are selling genes at 10 days on time for $0.9 a base, which is 2 to 3x cheaper than the what the competition did. But when -- now that we launched Express Gene, we have a 5 days turnaround time offering, which, even though we have a dynamic pricing, the price changes every day based on the demand and the capacity in the fab. Again, our price at 5 days is significantly lower than other offerings in the market. And in addition, looking at the right, there's another fundamental difference in our fast gene compared to the competition. he way we make genes, all of our genes, 100% of our genes are made fast. So our capacity for Express Genes is very high. Whereas with the competition, the way they make their gene, they have a very small capacity at making fast gene. Basically, what they do is, for a few genes, they skip all the lines. They get in front of the lines. So it's kind of like heroic effort to make a few genes expressed or fast. Whereas, for us, again, all of our capacity is fast. And if you order standard genes from us, we will make it fast in 5 days and then we'll wait 5 days before we ship it to you. The second view of our Express Gene is our portfolio of products. Again, we don't sell -- it's not a one-size-fits-all. Every customer want their own flavor of DNA. And so here, I'm showing the product portfolio, starting with fragments. We don't call them Express, but they are expressed. They are shipped in 3 days, extremely high quality. We have our standard clonal genes, which are shipped in 10 days. And then we've recently launched our Express Clonal, which are shipped in half the time, again, perfect waiting and with dynamic pricing. And we've said that in early 2024, we'll expand to all of our gene products with Midiprep and Maxiprep. And then later, we'll launch our Express IgG product. So as you can see, we are really making a concerted effort to have the entire product portfolio of SynBio with an expressed opportunity -- capability, which, again, because the COGS is the same for Express or non-Express, enables us to get better margin. In addition to being fast and high-quality and low cost, our gene production is also extremely sustainable. And how sustainable it is, so we compare it. And we compared, what does it take, in terms of carbon emission, to make one gene. And the Twist way is equivalent to driving a car or 0.9 miles and the standard way is to drive -- is equivalent to driving a car for 59 miles. So you show a customer and you switch to Twist, if you buy 1 gene a day, you save your commute away in terms of carbon emission. Moving to the second product line or product group that we have, and that is NGS. In NGS, it's different. Again, it all starts from the same silicon chip. But what we do is we make panels. And those panels can be fixed. They can be custom. They can be with sort of Alliance Panel. And the vast majority of our products are used by diagnostic companies, where they take DNA from patients. They use our products and they provide a clinical report to the customer, to the patient. And the applications can be diverse from rare disease diagnostics, which uses low depth of sequencing to maybe 3x coverage; to cancer testing, which maybe needs 500x coverage; to liquid biopsy testing, which may require 50,000x coverage and/or MRD. In addition to the panels, we also have the entire reagents needed to go from the sample to the sequencer. The reason we win in NGS is slightly different. We win because of the quality of our DNA synthesis. And that quality means that the -- when we make a panel of thousands or hundreds of thousands or even of 1 million probes, that panel is very uniform, meaning that the relative consolidation of the probes is very balanced, and that means that, as a customer, you can save in sequencing costs. And typically, when people switch to us, the sequencing cost can be decreased by half. And we've made a big push in DNA sequencing, and we are one of the leader supplier to liquid biopsy companies and MRDC companies. Recently, we've made a push in RNA-seq as well. And to help exemplify how we serve the NGS market, I prepared this double view. And the first top view is a sequencing workflow view. And you can see from the sample to the sequencer, all the regions that are needed to prepare a sample, we have the reagents for it. We have the enzymes, we have the buffer. We have the adapters. We have the beads, the blockers, the probes, the UMI, UDI, everything that you need. And then the second view below is more of a disease view, what our customers use. And here, we are taking the example of cancer, which is one of our leading products. But there, from the initial cancer screen to therapy selection, treatment response, surveillance and MRD, our customers use our products to be able to have early detection, all the way to disease monitoring. So those 2 businesses or product groups seen by an NGS together, the TAM is about $6 billion. So we are only scratching the surface with the revenue that we have. And there are 2 high-growing market opportunities that we have. The first one is in liquid biopsy for NGS, where the library pre-portion of liquid biopsy is about $300 million now and projected to grow to $2.2 billion. And again, we are one of the leader provider in that space. And then the second opportunity that we have for SynBio is to go after the DNA-maker market. That market is very time sensitive. They are making their own DNA because it takes too long to buy it. And with our Express Gene, we think we have a great opportunity to go after the DNA makers. The other great thing that -- between the combination of the SynBio and NGS product is that we sell, as you saw, a large number of applications, but we've grown our customer base from 1,300 in 2019 to 3,400 in 2023. And so we have thousands customers serving hundreds of SKUs. And that means that we have a very resilient business model, and we've been able to ramp our revenue smoothly. Of note, on the right, about 56% of our revenue is from health care. And later in the deck, I'll show how that 56% maps to the products that we have. The third business group that we have is our Biopharma Solutions group. There, we provide a service. You give us a drug -- a target, sorry, we give you a drug. And we are the only company that has an integrated offering of in vivo drug discovery, in vitro discovery and AI ML product discovery. And we are leveraging that integrated offering to enable hard-to-drug targets. In terms of business performance, in addition to the integrated offering, we have now a full commercial team, which means that we've been able to show, in Q4, other growth compared to Q3 and -- as well as signing a few key agreements. And so we've done one quarter in a row of order growth. We need to go to one quarter in a row of revenue growth and then do that again. And I think it's going to be a nice growing business. In addition to being a great business on its own, Biopharma. The combination of SynBio and biopharma is very powerful, because we sell [ to ] the same customer. But in biopharma, we do a service and we sell to the heads of biologics. In SynBio, we sell the tools to do drug discovery and drug development to the research at the bench. And so with the combination of the 2, we serve the same customers in different ways. And so therefore, we are not a vendor, but we can be a partner. I mentioned earlier that the 56% of our revenue was in health care. This is a map of how our products map along the value chain of health care, from target identification, target validation, drug discovery, drug development and disease monitoring. We have our products mapped and so we're able to touch the customers in many different applications, in many different revenue streams, and that's what makes us very powerful. And the last thing I'll share about those 3 businesses that are revenue generating is the fact that something that's maybe underappreciated is that we have an amazing commercial channel. We deploy what I call commercial virulence. And now we are adding product extensions to that channel. We've added new talent to the company. We've elevated the game of the management team today. It's the first day of our new CFO. And that means we are prime to leverage all of that to expand our market share, drive revenue, drive gross margin, and ultimately, drive shareholder value. And in the next section, I'll talk about the fourth product group, which is nonrevenue-generating for Twist, that is DNA data storage. And we believe that DNA has the opportunity to become a new media for archiving. And our drive is our DNA. We can compare -- we can take a file of 0s and 1s, convert it into ACGT, synthesize it on the silicon chip. And when you want to read it back, you just put in a sequencer. And the benefit of DNA, there's a few, but the main one is -- the second one is the longevity. You can use DNA to archive data for the very long term. And our first product will be a century archive solution where we'll be able to archive data for 100 years. And so there, the technological development is such that we increase the density on our silicon chip. And as we started with 1 million oligo on the chip, we're going to 256 million oligos and then 10 billion. And at 10 billion, that's when we'll have a terabyte archive, and we are expected to have an early access in 2025. For the company, we have set ourselves aggressive goals. I won't go through the details, but for each product group, we have goals that we want to achieve. And we have shared guidance back in November. And our guidance was to deliver $285 million to $290 million of revenue this fiscal year and our fiscal year start October 1. Gross margin of 39% to 40%, and very importantly for us is managing the cash burn because we do not want to raise money, and we are guiding that we'll end the year at $245 million in the bank. We've also shared the guidance for Q1 and Q4. We -- and if you look at the revenue between Q1 and Q4, it increased by $10 million. And if you look at the losses between Q1 and Q4, it decreases by about $10 million. So almost 100% of the revenue growth drops to the bottom line. And in that lower right guidance for loss from operations, $38 million to $40 million, there is a number of noncash items, such as the $15 million to base comp and $10 million depreciation. So overall, this is my last slide. We are very, very excited about the business opportunity. I think we have a very innovative platform based on silicon. We are going after a large and growing markets. We have highly differentiated product, a compelling business model, with a scalable infrastructure that is also sustainable. And we are well on our way to build a scalable, profitable and growing business. And with that, I'll stop and we'll be very happy to answer your questions. Thank you. We can let the minutes know that I was exactly at 20 minutes.

Perfect. All right. Thank you for the presentation.

I guess let's start off with the last slide that you talked about, which was your guidance. So you initiated a solid fiscal '24 top line guidance of 18% at the midpoint despite some choppy end market environment, right? And you're guiding NGS growth of 20% at midpoint and SynBio 16%. So what gives you confidence in such above-market growth for '24? And then how is Twist's business insulated from customer funding pressure and other headwinds seen in our space by other companies?

Thank you for the question. I think I'll start maybe with NGS and maybe I can have Paddy talk about SynBio. So in NGS, what happened last year, I think will continue to happen this year, because of the funding environment, our customers, mostly diagnostic companies were under intense pressure to get to profitability. And so what that means is that historically, they have been developing diagnostic test. Historically, those tests were made with -- based on the technology from Twist competitors, before we were even on the market, so those are typically older test. And then newer tests have been developed on the Twist technology. And part of our marketing pitch to our diagnostic customers are that we sell them a gross margin improvement. The price of our kits is the same as the competition, but you're not going to need half of the sequencing that you used to need with the competition. And so what has happened over the last few years or last year, as our customers were under funding pressure, they rationalized their test menu, and they obsoleted a number of all tests and focused on the newer tests that had better gross margin profile, and it turns out that our test are the ones that they kept. And so over time, we see our competitors lose revenue. They don't only lose market share, but their revenue are going on done, whereas NGS, our revenue went up 25% last year, and we project that they'll continue to ramp. So that's the dynamic that happened in NGS, and will continue, and I'll let Paddy talk to us about the dynamics in SynBio.

In SynBio market, we're off to a good start. I think we proved that we could take a certain amount of market share over the last few years. As the fact of the future has come online, and we're now 3 commercial quarters into that factory being up and running, it gives us just tremendous scale to stand behind the progress the sales team is making. So with things like the Express Gene offering for turnaround time really matters. W also get the gain of the serviceable market expanding. And so over the coming quarters, as we scale that product offering, not only do I expect the sales team to execute into the current opportunity with new products sold through that channel plus possible digital channel reaching out to a broader customer base, makes us very optimistic that we can really accelerate growth. And another thing, in a tough funding environment, our value proposition resonates. Basically, more shots on goal for equivalent budget is outstanding. When your budget's tight, then it's very clear that there should be one vendor you should be going to, to maximize whatever R&D budget you have, so very optimistic outlook.

Okay. So then taking a step back at your fiscal '23, in 2Q, you took down guidance and cited that you needed some time to digest the reduced workforce. And specifically -- but you did state at the time that order book in SynBio and NGS were solid. Now that more than 6 months has passed, is that guide down? And workforce reduction, how have things progressed relative to your expectations?

Yes. So I think it's very important for us, and we have that as a North Star of the company to say what we're going to do and then do what we're going -- what we said we would. And so I think post that restructuring, which was very difficult for the people that were affected, but very necessary for the business, we've met and beat guidance, and we're guiding a strong 2024. Ultimately, it has helped us be a better company. We have reduced our burn rate. We ended the fiscal -- 2023 fiscal year with significantly higher cash in the bank that we had initially guided. And so we are just a better company with -- the revenue ramp is still there. The strength of new product introduction is still there. We're able to launch Express Gene, which is a key product portfolio for us. And so at the end of the day, it was definitely the right -- as difficult as it was, it was the right decision to do. And now it has redefined our path to profitability, and it has -- those actions enabled us to make sure that we do not need to go back to the market. And so looking ahead, in a tough environment where our competitors are losing steam, we're growing nicely. We are focusing on expanding our gross margin, managing cash, managing expenses. And we will continue to deliver on what we said we would do.

Great. So in your presentation today, you talked about expanding the portfolio of products or features on the SynBio side. So can you talk about the significance of these new products and features that you highlighted in the slides earlier? And how should we think about them from the financial standpoint?

Do you want to take that, Paddy?

We crossed paths, yes. So, I mean, it's -- what speed gives us is the ability to reach a broader customer base, and particularly to people that are time sensitive. And so that's great. So first of all, it's a nice expansion in subsequent customers. Second part is with speed, we can start to reach downstream of the DNA product. And so that opens up for example, how would you like your DNA prepped. So truly DNA, your way turned around quickly. It's a very powerful thing. Continuing along that path into the IgG space, turnaround time and scale is incredibly important. And so with the factory, not only do we have the square footage, rooms, staff, skills to make it happen, but the product performance that we're getting from that scale is really going to give us differentiation. So it's going to be a very, very nice expansion of product portfolio, again, all underpinned by speed and scale.

And if I can beat on that from a financial point of view, the second part of your question, we've introduced with Express Gene the concept of dynamic pricing. And I think it's -- we are all used to it. We are -- if you take Uber, you order your Uber, it takes 5 minutes, and you say, if you press here and you get -- you spend extra $3, you'll get it faster, so we are very familiar with surge pricing in many areas of our lives, but not in the bio and tool space. And so I think we are bringing another innovative approach. It's not innovation in the silicon chip, but it's an innovation in the business model, where we think we can leverage that -- what Paddy described as very unique product offering to be able to increase price in a way that's dynamic. And as a reminder, all of the genes are made Express even if they are not sold Express, which means that the COGS of an Express Gene or a standard gene is the same, which means that if we can convince a customer to click on, "Yes, I want it Express," that extra dollar is 100% gross margin for us. And so in addition to being able to leverage Express to take market share, we have also the opportunity to leverage Express Genes to ramp our gross margin, thanks to the premium pricing.