Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Awesome. Good morning, everybody. Thank you for making it to the health care conference. I'm Luke Sergott. I cover life science, tools and diagnostics. With me, I have Emily Leproust, CEO and Co-Founder of Twist; and brand new minted CFO, Adam Laponis. So thank you again for making it.

I guess we could just jump in from here. So first 4 quarters, the Express Genes, talk about the initial uptake, any surprises there that you're getting from where you thought that you'd have strength or any -- some that you thought that you'd have better penetration than you do. Can you just give a state of the union on the watch?

Yes. Great. Thank you for the question. So as a quick reminder, Express Genes are genes delivered faster in 5 to 7 days, which is quite exceptional. We had launched a minimal launch in November. And then in January '24, that's when we have -- we had the full launch of Express Genes and that's when we started trying to acquire customers. So the first clean quarter actually will be our Q3, so the quarter that ends in June. But as far as the surprise -- surprising or almost unsurprising it was in terms of what our expectation. We knew we had a highly differentiated product that nobody else can touch. And what we've seen is that we saw uptake with all of the expected companies, academia, industries, government. We also -- the pricing model is such that there is a dynamic pricing based on the capacity that we have. So every 12 hours, we start a chip. And as -- if the chip is -- if the fab is full, the premium is a little bit higher. If the fab is less full, the premium is lower. And what we saw -- what we are seeing is a response care almost like you would expect it. If the premium is really, really high, there's little uptake of premium. If the premium is very, very low, there's a lot of it, and it's kind of like a linear curve in between. So overall, I would say that the market is behaving in the way you would expect it. And I think it is kind of exciting to have this amazing look into what customers are willing to pay and we can provide an amazing experience with our customers, again 5 days is really unprecedented at scale and at the same time at Twist we can maximize the utilization of the chip to optimize our gross margin.

So let's talk a little bit about, I guess, the 5 days you're talking about, nobody else can provide that. But what's the response been from competitors? Or talk about the share gains that those conversations you're having when one of your customers use IDT or GenScript or any of the others?

Yes. And so nobody can do it at scale, right? If you want to buy 1 or 2 genes, you can find someone and pay a dollar base and get it. But for us, all of our genes are made expressed, they're made at scale. The response -- frankly, the biggest response we saw was on social media with the competitor IDT, they had an ad that said genes on earth are not right shares. You don't need surge pricing. And if they're going to compare us to Uber and the taxis, totally fine with me. But it's kind of where we are. We've deployed our investments we've made over now more than 10 years, we've deployed our technology to build something that is absolutely game changing for our customers. And so there is not much that they can do, and we've already been hearing through the grapevine that some of our competitors are focusing on other products that we are not seeing. And so I wouldn't want to be in their shoes because it is just a very, very competitive product that provides an amazing service to customer.

And when you say at scale, what do you mean? What is that -- like what are the applications, like give us a sense of volumes that you're offering there versus the 1 or 2 genes?

Yes. So we shared that our capacity, our fab is 3 million genes a year, right? And last year, we sold -- we shipped less than 600,000 genes last year, right? So we have a lot of capacity. And so that's what that means at scale is you can come and say, "Today, I want 1,000 genes." And well, it's no problem for us. And one customer can order 1,000 and another can order 1,000 genes, it's absolutely no problem for us. So that's what that means at scale. At the same time, we are very happy as well with serving the one gene customer. And that is the scalability of our system is we can have a few customers with thousands of genes, but we can have thousands of customers with a few genes. And they get it fast, but they also can choose every other things on their order. They can choose if they wanted deliver dried or resuspended or normalized. They want it in a tube or in a plate. And so we have digitalized on the website the taking orders to exactly the specification of the customer. And again, we can do that for thousands of customers, thousands of genes.

Yes. And it's just more a question on like the application. Like who's -- like a Roche lab or Biotech Lab, like how many genes are those guys ordering in a year?

Yes. So [indiscernible] starting at antibodies, there's 2 types of therapeutic companies, some therapeutic companies are focused on the discovery. So they want hundreds or thousands of sequencing at a time because they are maybe reformatting antibodies or they are making mRNA sequences that they want to screen for function. So in the discovery stage, it's hundreds to thousands. Once they move into clinical work, that goes down because in clinical work, maybe they only have 5 or 10, yes. If you go back to the application of enzyme engineering, the number of sequences can be much bigger than thousands because they're looking for what is the effect of mutations on an enzyme function. Actually, we are seeing customers on enzyme engineering where the number of mutants that they are in tested is so high that actually they don't want it one gene per well, they want it as a pool because pooling -- screening of a pool is more effective. And then another application is customers that are doing cell engineering. So developing or mutating the chemical engineering of what's happening inside E. coli call or yeast cell to redirect the metabolism and produce a chemical that -- by foundation that is not alcohol. And so there again typically when you look at when customer published their sequence at the end, they say, they may have 600,000 mutations in the final construct. So in terms of scale, based on application, the more mutant that people can afford, the more mutants that people can put their hands on and the faster, the better the outcome for them and the faster they get to go to the next stage.

And so is this almost a new market for you that just wasn't able to be addressed with the past technology? Or is this kind of just expanding?

So there's 2 markets. There's the buyer's market. So in the buyer's market, we're spending what we can do. But then there's also that market of the maker's market that people that just are cloning in their own lab. And that for us is new because people are cloning themselves just because it's faster to do it yourself. And our view is that France won't let France clone, but at the same time, you have to be able to do it faster, and so now we can. And so when we think in terms of the impact of Express Genes, to us, so -- to go back to your initial question, it's going well, people are adopting, people are ramping. So that's great. And at the same time, for us, we really need to bring net new customers. Because if we have customers where we already had all their budget and now they buy Express Genes, unless the budget grows, we're just getting the same dollars. And yes, it's better margin, but at the end of the day, it's still the same dollars, so we are very much focused on now bringing net new customers, people that never bought from Twist before because that is what regrows the pie and really impacts the gross margin meaningfully.

Any KPIs, the early KPIs on that new customers?

As of KPI, I look at it every day. Every day, we look at what's the net new customer, for sure.

Okay. All right. I'll give you a minute here. Adam, let's talk the LRP. So I understand 11 days there and you don't want to commit to anything. Just kind of walk us through the thinking since you've been on, you've looked at the LRP, any kind of thinking there, changes that you'd like to make or...

No, Luke, and thanks for being here. It's great to have a bit more tenure under the belt, now maybe I'm at 2 months today, I think. In terms of how we're thinking about it, I think what Emily just talked about Express Genes is a good example of how we're thinking about things moving forward. So when you look at something like Express Genes, where there's a high degree of uncertainty, we've baked in some assumptions for that into our thinking for '24 and beyond. And now we're testing to see how those assumptions are playing out. I think the thing I would impress is this is a generational shift. This is not a onetime sugar rush type of change. It will take time to convert. And so some of what we're seeing, even like in the procurement cycle, some major accounts, we've gotten confirmed interest from a number of large pharma companies to move to Express Genes. We still know that, that procurement cycle doesn't take a week or 3, it takes months to quarters. So we're seeing these things happen. We're very confident in where we're going. There's a high degree of uncertainty in the exact timing. So the way I'm thinking about things like that is let's not get on the wrong side of that forecast. We know where we're going to be. We know that this is going to be a meaningful portion of our business moving forward. But the pace at which we get there has a degree of uncertainty, particularly on Express. So some of the things you'll see in some of the guidance was the reflection of some of that uncertainty and that conservatism. When I look out further and have the other side of the business, the NGS or elsewhere, I'm very encouraged by the growth. I mean, the growth we're seeing is substantial. It is more heavily customer concentrated on the NGS side. So with call it, 10 customers representing over 40% of our volume in Q1, and that number continuing to trickle up. But which customers are in the top 10, every quarter shifts a bit. But if you look at it over time, you're saying, "Hey, there's some lumpiness in that business, let's make sure we look in the right -- the wrong side of the forecast either." Again, extremely encouraging to see that path. So the way I kind of go back to is what we're going to do is we're going to forecast based on what we know. And we're going to have -- where we have confidence in the short run, but the longer term as we go forward, I'm very encouraged in both the revenue trajectory, the gross margin expansion from Express Genes as well as expanded NGS. And of course, we're going to continue to manage very carefully our operating expenses and our cash so that we never need to go back to the market for future equity raise.

Okay. And then I guess a good segue into that, you're talking a little bit about NGS. The genomics market has been relatively soft across different players. You guys continue to put up decent bookings on and a lot of that is coming from liquid biopsy, just had a bunch of launches at AGBT. So kind of walk through the new product launches that you guys are bringing out and the demand environment that you see and how you're relatively insulated versus some of the others?

Yes. Great question. So for us, yes, we've been focusing on product expansion with a few category of product. The first -- the reason why we win when we get the customer is because of our DNA, because of our panels, but now we've been expanding around those panels. The big launch that we had at AGBT is our CF, cell-free DNA library prep kit. So what happened in library prep is if you take a sample and you have to add an adapter to each molecule of DNA before you can enrich it and before you can read it. And what we found is the ligation. As is well known, the ligation is inefficient. And so what that means is that even though you're in an application liquid biopsy where you're looking for the needle in the haystack, you leave a lot of the molecules behind because of that missed ligation, and so we've had a new kit with an amazing ligase that is an engineered ligase, where there is no molecule left behind. And so -- and there's a bunch of data that shows that when you do the library prep with our ligase, you get more molecule, you get more coverage, you get more detection of what you want, you have less missed calls. And so we think that's going to cement our leadership in liquid biopsy. So that's the first one. The second one that we announced was our Precision Dx Kit. And so in Europe, we are the supplier to lab-developed test. And there is a regulation that's coming up, IVDR that's where we saw an opportunity to have where we've launched now 3 CE-marked kits to help our customer in those regulated markets. And so one kit is library prep that is diagnostic to the panel to the content, another kit is the Exome content and the third kit is the combination of the library prep and the Exome. So this is the second product launch. The third one was around sequences. We are sequencer-agnostic. And as you know, there is sequencing one's going out. And with new technology coming out and competing with Illumina, we want to make sure that our kids are compatible with all of them. And so we announced our collaboration with Element, where part of the difficulty with new sequencing technologies is that you may need a conversion from an Illumina-like library prep to the, in this case, an Element library prep. And so what we're doing is we're developing a native kit just for Element. And then the last one, which I'm very excited about is the product for our ag market. What we know in ag is the number of samples are very large. The market is very large. But the price sensitivity is also very high. And so we are launching a new kit especially for ag and there's a killer ad, a killer feature in our library prep and that is self-normalization. Because what happens is when you get hundreds of thousands of samples, there's just no way you can individually quantify how much DNA there is in each of the samples. And there is no way that you can then normalize it to make sure that your sequencing coverage is uniform. And so without that normalization step, the value of the kit is just not there. And we've invented a new way to do self-normalization in the tubes. We just put the DNA, you don't have to quantify it, just do the library prep and it's not magic, it's just science. After the process, it's just a very uniform distribution of each sample. So we think that with this library prep, we'll be able to really make an inroad in the AgBio market, we've been talking for a while, but AgBio has been keeping at it. And that was the one missing feature, and now we've got it. And so not only -- and the other thing that self-normalization affords you is it makes the automation actually much easier. You don't need as much CapEx, again to process those hundreds of thousands of samples. And so we think that we've got a good one there, and I'm very excited about the prospects for this fourth product. So overall, at AGBT, you can see a spectrum of products all the way from -- we are doing really well in liquid biopsy. We continue to innovate, have a new ligase that just makes us even better than we used to be all the way to in AgBio, where we don't have a big market share right now, if at all, coming up with, again, very differentiated, very innovative technologies to enable us to keep the growth profile that we've had.

All right. And then last couple here. So the Biosecure Act. You don't have a lot of China presence, but some of your competitors are based in China or have massive presence there. So talk about are you starting to get inbounds from some share gains or how do you see that, that market or how do you think that the legislation kind of impacts the market in the near term?

Yes. Yes, we don't have a lot of exposure to China, partly because even though we make genes in 5 days, it's amazing, the next day, you -- in China through FedEx or DHL or whatever. But then the customs process to get in, it's multiple days. And so even though we make the gene fast, we're not competitive in China because of that import bottleneck, so we don't have a lot of exposure. And as you know, DNA sequences are extremely valuable. If you sequence a human in China, you're not allowed to send that sequence information outside of China. It has to stay within the boundary. And so I think there's a recognition that sequence information is extremely high -- extremely valuable IP. And I think that revision is trying to happen in the U.S. too. You have pharma companies that are -- or enzyme companies that are sending their most valuable IP, the DNA sequence outside of the U.S. And when the sequences come into the hands of our foreign adversaries, are we sure that, that IP is safe. And so I think there is some thinking about how do we make sure that the valuable IP that is in the DNA sequence is safe. So for us, 100% of our DNA is made in the U.S.A. So we definitely don't have any problem there. But it could be an opportunity for us as people realize that maybe they should not send their DNA sequences to foreign adversaries.

Yes. Or get the DNA from China shipped here.

Exactly.

All right. Last -- probably last one here on -- let's talk a little bit about the margins. We can talk about that. So lot of moving parts you were talking about earlier that you don't want to guide to anything unless you're like absolutely certain of it. Dynamic pricing, you have the factor of the future. Walk through how you guys see the -- or how you think about the margins are going to layer on throughout the year, you have pretty much an incremental step up all the way from your 2Q through the rest of the year?

Thanks, Luke. I mean, to me, the big learning in the last couple of months is just how much capacity we have as a corporation and we hit it well. We did around 600,000 genes last year, but we have capacity for 3 million. When you look across the business, we said things like we have the capacity -- depending on where you are in the bottleneck, but easily get to double the revenue we have today, we get to $0.5 billion mark in revenue annualized with the capacity we have. So that means we have a pretty large fixed cost base. And so what we're seeing is every incremental dollar of revenue is contributing pretty significantly into that gross margin. So whether it be an NGS or beyond the SynBio side, particularly with Express Genes, we're seeing a nice uplift in gross margin as we continue to see the revenue growth sequentially throughout the year. That, of course, is one element of it. That's the top end of the spectrum. The other piece that, I think, is equally important that we're starting to focus on now as well is how do we drive down cost out of that fixed base. And that really wasn't a priority until very recently. So with me coming on board and some other really senior talent in the supply chain and manufacturing operations side. Now that we're at scale, now that we have Express Genes launched, we can start going after some of those costs. But those things take time. And so an initiative launched today may get savings in cash next quarter and hit the P&L after you get through inventory the quarter after, but we're seeing that start now, and that's an exciting time as well.

And then as you think the -- like you just -- everything you just talked about from a contribution or incremental margin, you're significantly under capacity. So where do you think that what you're seeing come in now? What's that dropping through? And then where do you think that, that can ultimately go?

I think the way I've said in the past is we are encouraged by being back to the 4 in the gross margin, but we are not happy with that. We -- and I will not be happy until it starts to 5. And when I get to a 5, I probably still won't be happy, but we're going to see that continue to move. But I think it's a recognition that there's room to expand significantly over time, but it comes with growth and that focus.

Yes. Makes sense. All right. Thank you.

Thank you so much.

Thank you.