Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

All right. Good morning, everybody. Luke Sergott from Barclays. I cover Life Science Tools & Diagnostics. Up with me, I have Adam Laponis, CFO; and Patrick Flynn, the kind of Swiss Army knife at Twist, I'd say that, officially Chief Operating Officer. It's a pleasure to have you guys up here. It's a little change of pace.

I'd love to kick off and talk about just the recent announcement, the new product you guys offered. And then it's a good segue also into getting the NIH. But you launched Express Genes for the academic market. So talk a little bit about that and the strategy that you guys see?

Thanks, Luke. It's good be here. It's -- the Express Genes for academics, we announced this week that we are offering for a limited time basis. Express Genes at 0 premium. And really, when we look at what's going on in the marketplace today, we see an opportunity to go on the offense. It's really around how to help meet the needs of customers and how do we do it in a way that allows us to give them more shots on goals and take some share. And if you look at the markets we played into the last 3-ish years where biotech had some significant funding challenges, we've been able to higher quality, faster speed, and better service -- really drive the share gains in that space in a challenged funding environment. We know we are underpenetrated in academia and we -- although we have seen stability in the months since the election in that segment, we do think there's an opportunity to accelerate our share gains given some of the turbulence around funding.

Yes. And I guess on the academia, you just mentioned that you guys were under-indexed to that market. Talk about why that is and kind of where your focus has been? And now trying to get into the market, obviously, with the noise that's been going on with the NIH and the cuts there, how the -- what you guys have been seeing from orders in labs and early uptake with your existing customers before the Express Genes?

Sure. It's the -- if you kind of -- if you look at the customer base we serve, there's many customers -- companies out there that have over 100 to 1,000 customers. We have a few thousand. We knew early on that we wanted to go after where the biggest opportunities lie and that was with some larger accounts in pharma and other areas. And now that long tail of academia, we're really -- we've honed our digital presence. We've got a great sales team, and we've got the right product now with the speed of Express that can really meet the needs of that long tail. We think we're right to take share. And we've seen -- since the launch of Express a year ago, every time we run a promotion on Express, we see an increase in take rate and an increase in adoption. So we think there's a winning proposition here to really go after that market in a time when they need our help.

Just to underline what Adam said, the power of speed, the Express portfolio really does allow us to push more aggressively into that market, partnering that with digital spend, then also the tools to make it easier to transact with us, B2B type interaction, integrating well with procurement systems, just strengthens our channel and makes that customer experience little bit stronger. So again, we do see opportunities for great improvement. If you look at spend constraints, our value proposition is really straightforward. It's more shots on goal for dollars spent. And the second thing is if this truly does ripple through to a point where there's essentially fewer PhD students, less postdocs, then our value actually becomes even longer in that -- friends don't let friends clone. And so therefore, we're going to be able to pick up a great deal more work for that segment. So to be continued.

And I guess on the -- your exposure to NIH is small directly. But the overall exposure is going to be much higher. So talk about global exposure versus just U.S. and then what you've been seeing there from early on within those customers?

As you can imagine, we watch this pretty closely. But we -- about 19% of our business globally is in academia, but a little less than half of that is in the U.S. And the NIH -- call it, just 9% or 10%. The NIH itself, the direct spending what we can see in tease out is about 2% of the global business. So we've been watching those order trends pretty closely, and then we haven't seen any disruption in the order trends since the change of administration.

And within that customer class when you think about where you have a bigger presence, I mean, the time to the customer, the length, the accuracy. I mean, that would feel like that you would be more exposed to like a big genome center or somebody that needs the probes or the genes a lot faster. Talk about could you segment out that U.S. exposure by particular customers or application type?

It's a good question. It's pretty broad. I think the unique element of Twist is we serve thousands of customers and particularly in the academic space, it's a long tail of folks and labs across the world. It's a lot different than the major genomic centers where they might be buying hundreds of thousand dollar a box versus a single lab buying $100 to $200 gene. So there is a dynamic here. I think we're different, in a sense of we're not selling major capital equipment, and we're not plugging a box into a wall and then doing a big procurement contract. This is something that -- this is the standard reagents you're using in your everyday lab use. So we think there's a dynamic difference. But we do see a variety of cross academia of who's using our products, but it spans the gamut, I'd say.

Okay. And then from when you launched the Express portfolio, I mean, you have not just Express Genes anymore, but you launched that and that was always going to be targeted towards the more industrialized user, right? I mean, just from a -- what it offers from a need perspective. And then the thinking was that, okay, when you penetrate that market, you'll start going to academia. Do you just view this opportunity to get in with just Express Genes is just like, hey, we'll strike when everybody is on their back foot and go after them and continue that commercial violence that you guys talk about? Or is this like you started to penetrate that industrial market a lot faster than you were expecting?

I think the surprise -- we had a core hypothesis when we launched the Express product offering, think of an Industrial segment or the Healthcare segment would receive it more welcome -- would be more welcoming than the Academic segment. What we found was it's across all segments which was -- is actually very, very interesting. And so, obviously, the time it can take a student to do their own cloning experiment, if we're too slow, we don't solve the problem. But now that we're down at sort of 4 to 7 days at scale, that fits quite beautifully. And then, of course, in the enterprise selling, more tons per year is just good for business. And so that's been very well received just for existing customers. But again, with our speed at scale, which none of our competition has, we are definitely starting to see that be more broadly adopted, particularly in the Healthcare segment. What it also allows us to do is then move along the value chain a little bit and essentially have wallet share. So it's not just about the gene as you were saying, we can then move downstream into prepped product. For those in the antibody space, we're either -- we can be producing IgGs and doing characterization work. So the value, as we walk along goes -- essentially like $100 worth of DNA all the way through to high hundreds of dollars depending upon where we leap off. So it's a very, very enabling platform. And just from a competitor standpoint, I don't really think about ever being on the back foot. Twist is not built for being on the back foot. We are built for offense. And so that really does allow us to push into markets where we are in customer segments where we are underserved, right -- we are underserving right now.

Yes. I know we've been hammered on the academic government side, a lot on the SynBio, but when you look at your NGS tools and how that's kind of -- you guys are looking for like a close to 24% growth at the midpoint within that business in 1Q or 2Q. Think about -- walk us through what you're seeing from the NGS side, where the SynBio side, you're not going to see as much pressure. You might be thinking -- as you're selling into these larger genomics-oriented centers and if there's CapEx spending or there's projects being wound down, your NGS tools piece would take a bigger hit?

Yes. I mean, we continue to be very bullish on the NGS product offering. We have some customers at various different cycles of essentially commercialization on the platforms. So we're seeing growth at our mature customers who fully adopted in the commercializing products on the back of the technology. Our value proposition resonates more than ever and what the technology and why we win in the sequencing space is our price point for target enrichment remains the same as everybody else. But we save you sequencing costs through more effective and efficient enrichment. That value proposition resonates across the board. So we'll continue to drive that out into the market with the platform being easy to adopt and it scales quite beautifully as the customers get stronger and bigger and come to market. And the second part that we're seeing, we massively underserved the front end of the sequencer. So expanding out the menu of products we've got upfront of the sequencer means, again, we've got a serviceable opportunity that just continues to increase. So things like an RNA-Seq product offering that's starting to get some traction in the market. And we're obviously very excited about what's coming in the MRD space where we've got tremendous value to bring to the customer base there. We've just launched a beautiful new product called FlexPrep for high throughput sample preparation. It's an incredibly straightforward workflow that we think we'll see ultimately the beginnings of the end of the microarray as that starts to transition towards sequencing. So we like what's happening. So menu expansion, more workflows and leveraging our core strength from enrichment.

Can you walk through your kind of customer base and how that looks versus the regular company or the overall company from the different end markets, but I'd love to understand better from a liquid biopsy perspective, you guys just mentioned MRD, right? I mean, this is the whole idea, like these guys are focused on driving down costs, like why not everyone of them be should be using your enrichment kit on the front end?

You're sounding like Emily there. Yes, agreed. We've seen some very, very good examples. And again, savings sequencing costs, we have seen companies that partner with us do well. We've seen some examples in rare and inherited disease where company share prices exploded from sub-penny and gone up 100x and so on when you use the Twist platform and we've seen those that haven't used the Twist platform kind of go out of the business. So we think that really helping our partners to drive margin into their business and quite frankly, supporting their financial viability, it's part of the magic. And so we agree. It's a very, very enabling platform. It's quick to design your panel. It scales quite beautifully. And as you go through research, discovery, verification, validation, then ultimately your commercial scale up, we're there to stand behind you.

And then from a -- is there a tissue naive versus tissue in form, is there a particular area where you guys think that you have a better edge?

Great question. So across the board, we're really excited about what we bring to the customer base. So if there's a whole genome or [indiscernible] type play, we have a new library construction kit that's underpinned by our own proprietary ligase, super efficient, leaves no molecule behind which we think in a diagnostic setting is very important. But if you go to a situation where it's a fixed panel, like an excellent type scale panel for your MRD experiment, then I think our reputation is well known and the economics are clear for our partners. But if you go to [indiscernible] informed bespoke panel, we believe we have a best-in-class offering. Nobody else can do what we do with the speed and the quality and the economics we provide to deliver on bespoke panels. So we don't play in the current market leaders. I mean, PCR-based methodologies, it's not us. But when you look at the emerging or the emergent companies that are looking to come in and disrupt and play in the market, we think they'll do well on the Twist platform.

Sounds good. And then as you think about outside MRD and the other liquid biopsy applications, I assume that you also have products and you guys are scaling up with those customers as well, is that -- so as you think about the NGS tools business growth going forward, still targeting around 20%, I think 23% for the quarter, but scaling up to 20%. Is there -- as that continues to build, we think about this as kind of being the jump-off point or as we think about getting out of a couple of out years?

Yes. And I think the -- look, it's a great question. I think the fundamental strategy at Twist is we aren't just looking at the next quarter, we're looking pretty far down the line. When the company IPO-ed many years ago, our NGS business was a couple of million dollars. We're talking about liquid biopsy. And some of those bets, we knew were going to pay off. And it was just a matter of helping the customers through their R&D, clinical and now commercial adoption phases. We see that same type of opportunity in MRD. I think Paddy hit on some of the microarray conversion opportunity. There's a number of things we see coming down the pike as it relates to the long-term growth opportunity. And I think the core tenet is we don't want to do anything slow down the growth. We want to make sure that we're investing, not just for the current quarter, but we're investing for the long term as well. And as a team, I think we've done a -- and relatively a new member of the team, it's been amazing to watch how much the thinking is not just a quarter or 2 out, but it's a year or 2 or 3 out. We're putting bets in place that will -- we think will play out for a number of years. So I expect good things to come.

Yes. Right. And that's a good segue. Let's talk about -- I mean, these guys IPO-ed, the pushback was all this would never be a profitable business. So you had a really strong step up in the margin on the quarter. Feeling is that you pulled forward a lot of what you had available for the year. Like you guys even said on the call that shouldn't expect 250 basis points where it was sequentially step up there every quarter. But talk about what you guys have left for the year to leverage the pool, very dynamic environment, obviously, right? You're starting to offer some discounted Express Genes and academia. There will be some obviously. Just walk us through what you guys are seeing?

So first off, I think there's a lot of credit to Paddy and the entire organization for the hard work that's gone into all the efforts to drive now the continuous process improvement that's ultimately becoming a tailwind and a cultural shift to Twist to how we do business. All that said, though, the majority of our margin gains in the last 6 or 7 quarters has been from the continued growth of the business. And so what we said is every dollar of revenue growth, we're seeing $0.75 to $0.80 of that drop to the gross margin line, whether that be because of the new product introductions or it be because of the continued commercial execution, we're seeing that being the primary driver of our margin expansion. We don't expect that to slow down anytime soon. The positive news of the last quarter, I think the timing of some of those continuous process improvements, that can vary, and those will come in chunk. But there is absolutely a lineup of things we're going after, most of which we won't talk about because they're meaningful to things like capacity unlocks, they're meaningful to helping improve our turnaround time, but they're also meaningful to cost savings on a micro basis. But on a macro basis, we'll keep hitting on the big ones. We've got a lot more to go. But we're also fighting the treadmill of inflation and whether are reagent suppliers or -- we love our employees. We like paying them more every year. We're going to balance that. And so I think the long-term view is we have a long way to go on that margin expansion. And once we get to the 50% by Q4 of this year, we won't stop, we'll keep going.

We also made a good investment in supply chain. I think if I look at the improvements in the organization over the last few years, like when you partner that with decent growth numbers, it puts us in an interesting position if you're supplying to us. When you posting high double-digit growth when everybody else is struggling in our space, and it creates a nice negotiating point. So if you want to stay in the Twist ecosystem, we're looking to have our partner help us out a bit there. That's good.

I would not like to sit across you on a negotiation.

But it's just a win-win all the time.

Yes. I guess as you think about that because you guys already are in growth mode, right? So you're not going to -- when we talk about like productivity and stuff you're not, you're actually adding people to the organization. So how much of this is on automation and when you think about the NGS tools versus the SynBio piece or Express Genes, like where are you getting these productivity initiatives? Like where are you getting the biggest lift right now?

So the way I think about it is the same talent that was used from engineering and scientific perspective to build out the factory in Oregon, shifted to focus on the Express Genes turnaround time, is now leading the charge on this wave of continuous process improvement. What you think about as in growth mode early on, everything was about how do we help serve the customer faster and grow the business faster. We gold-plated a lot of things. We're now going back and looking at that and saying, you know what, we can do 25% better there. We can do 50% better here. We can tweak the dials on this. I think the best example of that last year was the riders we have across the manufacturing sites, we have a 13-minute cycle time in between printing [indiscernible]. With the chemistry change and the process change, we were able to change the dials and move that to a 6-minute cycle time. It doubled the writer capacity, reduced reagent use, allowed us to innovate with 500 base pair direct synthesis and it's actually leveraged our employees because the same number of employees running the riders can now produce twice the number of oligos in a given day. It's impressive to watch that thinking at work. And my sense is we're still in the early innings of what that team can do.

Look, it's also such a good comment. It's something that we've understated. Obviously, we're led by DNA chemists, which is a very useful thing if you're going to be a DNA synthesis company. But our strength in automation is it's very understated. We do have a competitor manufacturing in China that recently was boasting about having 400 PhDs working on producing genes. I think it's well known over time with industrialization of methodologies where the unfair advantage is. So we're going to continue to use our skills, extreme automation in the platform and we think that's going to be an operating advantage over the coming quarters, years and decades.

Speaking of China, a lot of noise from the Biosecure Act, and there was a -- the thinking was that, obviously, customers, this would be another lever you could pull when you're on the negotiating tactic and saying, why use a lot of these customers. Update us, have you guys started to see any type of flow there now that, that has kind of come down and doesn't look to be as -- have as much teeth as it appeared to have?

Yes. Well, I'll paraphrase or repeat Emily's comment. We're going to win each account by winning. And what you're clearly seeing there is, obviously, we care about customer acquisition. We truly care about customer retention. And that comes from just delivering a fantastic product and experience for the customer. So win by winning is absolutely the right way to look at this. And you can see the investment in the portfolio with speed and menu expansion. I think what we're seeing is certainly a raised awareness and certainly the supply chain discussions we're having, you can see the customer base thinking about both supply chain and supply chain security for sure. And then also even just from an auditing standpoint, customers have audited the competition and then come to us. So I think we do see the beginnings of it, and I think it will continue, but it's only sustainable if we're delivering best product which we're going to be relentless in delivering. Adam, I don't know, if you wanted to add to that?

I think, Paddy is right and if anything, we are starting to see -- we're seeing tailwinds if not headwinds, but we haven't seen any tariff implemented until very recently. There's been a de minimis in this requirement. So we think it's early days. Again, I think our focus on is meeting the customer needs, executing. We see that we're taking share, and we'll continue to do it and we think that any kind of, I'll call it, trade war kind of activity is going to be a tailwind to us given we manufacture everything in the U.S.

More incremental than an actual like, hey, that's just happened. Got you. On the DNA storage, just a quick change of gears there. The prototype is ready and are you guys going out to have some commercialization this year? Is that the right time line? Update us on the time line? And then kind of what the -- the big question is, obviously, R&D and the amount of spend that you guys have path to profitability, you guys -- you're very adamant, not going to need to raise again. But like you hit that DNA storage piece, and it just still seems like this big moonshot?

So look, you say well, I think as a leadership team, we are very excited about the opportunity and the asset we're creating in DNA storage. The flip side of that is our North Star is we're not going back to capital markets to raise more money on our path to profitability. So what we're doing is we're actively managing our pace of investment. The DNA storage business 2 years ago, we were spending about $50 million a year of OpEx. Today, we're selling about $25 million. And that titration is slowing the progress of that business. And we know if we -- because it is an engineering challenge at this point, how do we continue down the progress of going from the terabyte chip -- the gigabyte chip to the terabyte chip, we know that, that engineering work takes energy, it takes time and takes investment. And by constraining the rate of investment, we're changing the pace of that. So we know that there's more work to do, but we do think we're building that valuable asset. We're excited about it. But we're not going to deviate from our North Star of -- we're committed to not coming back to the capital markets before we get to profitability.

So the commercialization part -- if we were thinking about maybe coming this year, that's probably not...

We haven't put a date on it at this point. And so the work continues, and it's really around that next-generation design with the CMOS chip and...

You just wait for that terabyte chip because that...

That will be the point where we believe there's an opportunity to commercialize the product.

Okay. And so then it's just kind of just developing -- you're not going to go past the -- you're going to stretch that out. Okay. On the -- same thing is on the biotech side. You guys had a decent -- I guess you sold off the licensor which was the whole point of filling this business out in the whole model, like talk about where you are within that business and just in other licensing or clinical trials or unlocks that you guys have from the portfolio of active programs that have finished or that have royalties? Like how this is -- like where are we in this business build perspective?

Yes. So look, we're managing that business personally myself over the last couple of quarters, and looking at some antibody discovery capability, where we're seeing -- well, first things first, it's a very important product to our general business. When we sell into the biotech and pharma segment, whether we sell your gene all the way through to full antibody discovery and characterization project, there is a very nice continuum of value that we bring to the customer base. And coming back to the licensing question, what we're seeing there is most of the assets that we've turned over and managed to get deals done, they're incredibly early. So it's really preclinical. And so the time line then essentially, I think it's fairly extended to get to a point where those milestones will engage or will start to happen. So we continue to watch the space, stay close to our customers. And as each quarter goes by, some of the assets will get closer to advancing. That's kind of the state of the universe right now. And the actual discovery business itself, we're starting to see some signs of life in terms of the leading indicators of upcoming success and growth. So we will continue there. And again, ties to the rest of the product portfolio very effectively.

Time to [indiscernible] I'd love to hear it. All right, guys. Thank you.

Thank you.

Much appreciate it. Thank you.