Okay, let's get started. Good morning, everyone. Matt Sykes, Life Science Tools and Diagnostics Analyst at Goldman Sachs, and I have the pleasure of being joined by Emily Leproust, CEO and Co-founder of Twist, and Adam Laponis, CFO. Emily, Adam, thanks for joining me today.
Thanks for having us.
Thank you.
Maybe just for the people in the audience, a brief overview of Twist, who might not be as familiar with the story, and just sort of a couple quick bullet points from you, Emily.
Yeah, sure. So, chemistry of writing DNA has been known for a long time, published in 1982, optimized by thousands of years of grad student. I put my four years in. And, so you get a bottle of A, C, G, and T, and people use a 96-well plate to build DNA. And what we've done fundamentally is we ported that chemistry, the same chemistry, instead of using a 96-well plate, we have a silicon chip with the same size, but we've miniaturized the chemistry so that now we can make 1 million pieces of DNA, instead of 96. We call that the front end, and we make oligos up to 500 base pair.
Based on that front end, then we have multiple back ends to make different kind of products, and they are, they're grouped by four product groups. One is our SynBio product groups, where we make oligo pools, fragments, clonal genes, libraries, IgG. And there, we mostly serve the drug discovery, or the enzyme engineering, industrial, chemical, academic market. We have another product group, which is around NGS. So there, we take our oligos, we amplify them, and that make panels to focus the sequencing on areas of interest. The main applications, they are clinical diagnostic, liquid biopsy, so early cancer detection, therapy selection, minimal residual disease. We also support cancer detection, genetic diseases, and there's also a little bit of academic sequencing in there.
The third product group is actually a service, where you give us a target, we use our products, and we discover a drug for you. And then the last product group, which is not revenue at this point, we can use our DNA to store data, long term. And so there, we're developing a technology, what we call a Century Archive, where we'll be able to store data for 100 years in a way that where the total cost of ownership will be competitive against hard drive and tape.
Got it. And you recently launched Express Genes. Can you maybe talk about the customer feedback you've gotten so far, and how the ramp has trended versus your expectations, just given the importance of that product launch for you?
Yeah, no, thank you. So, in the gene space, in Synbio, the time to get the gene is ten days, so all the competition. And, in November, we did a partial launch. In January, this year, we did a full launch of Express Gene, where we make the same product in half the time. And, to be clear, all of our genes are made express. We make 100% of our genes in five days, and then if you order them in what we call standard, we'll wait 5 days before we ship it to you. So you still get them in ten days, but they stay in our freezer for five days.
So 100% of capacity is express, and we're able to charge a premium for express. So even though the cost is the same, we can get a margin improvement when people choose the express option. The way it has gone is quite amazing from an operational point of view. It does what it says on the label. Every Monday, we look at the KPIs of, you know, speed and on time and in full and first order deal closer. So we look at all the KPIs of up, and it does what it says. So that's great. People have been buying. And we vary the price.
The price varies based on capacity, and so it can go from 20% premium to 200% premium. What we've seen is what you expect, a classic supply-demand curve. And then people, the next step can come to us, and they want a fixed pricing, which we're happy to give in exchange for volume commitment. We're also seeing net new customer that we're converting from being makers to buyers. And so in our Q2, which ended in March, we reported that 15% of our genes revenue were Express. And so overall, it's gone quite well. The customer feedback has been great, and so we look forward to leveraging this.
Frankly, only in class capabilities, our competitors can make a few Express Gene, but the way they do it is, they skip the line for a small fraction of the gene, their genes. So maybe 1 or 2% of their genes can be made express. That's very different to us, where 100% is made express. So over time, if we can convert the entire market to doing things express, we could have a massive competitive advantage because we're the only ones that can make all of the genes express.
So longer term, what are your expectations of that mix from standard to express, based on what you've seen from customers so far and based on what you think the value that you're providing to those customers? I mean, there's some fear that some customers might just forgo the time savings that they have just for the cheaper price. However, it seems like given the launch and the traction you've had, how has that influenced how you think about the ultimate sort of mix of express versus standard?
... You know, what we're looking at at the end of the day is we want growth—we want to optimize growth margin dollars. And so you can—we've been modeling different options. What if you get, you know, 100% of the genes and you quote unquote only get 25% premium? Or what if you get 20% of the genes, but you get 200% premium, what's the best? And so the good news is we—we have option. We are learning the response curve that customers are willing to pay for. And we have optionality. We don't want to paint ourselves into a corner. The good news is that the product works, customers want to buy it.
There is some price sensitivity that we are trying to learn. We also see that industry is going to pay a different premium than academia, so the curve has split, and now we charge different premium for different type of customers. And so time will tell, but we have a huge opportunity and a great tool to be able to gain more market share and drive people towards us to maximize our gross margin dollars.
You have a different pricing dynamic for academic and biopharma customers, which is kinda customary in the industry. Are you seeing a difference in demand from either one of those two segments in terms of reacting to that dynamic pricing?
Matt, it's a great question, and I think what's interesting to see is the curve, that kinda supply and demand curve. It looks amazingly similar, whether it's academic or industry, that you see is the variability customer by customer is actually greater probably than the variability, you know, across any segment.
Yep.
We are seeing, though, as you kind of aggregate it together, that the curves look a bit different between academic and industry. So what we've mentioned, the premium we're charging in industry is a bit higher. And then, of course, what we're really trying to do is drive trial. When you think about the long tail in the Synbio space, where we have maybe 3,000 customers, but there is, you know, 100,000 customers possible. So we always talk about, "Hey, we've got about 100,000 to add," and that long tail of trial is what we're really trying to drive. So what we will do, and we're doing it right now actually in academia, is we're running a promotion, and it's gonna be on for a couple of weeks, and it's a 20% premium in academia.
But what we're really trying to do is get people to try it once, 'cause once they do, they tend to really like it. And so there's a dynamic we're playing with it. We're seeing is there's a much longer tail of academia, and there's a little bit less of a a little bit more of a price sensitivity there.
Got it. BioSecure has been a pretty hot topic in the industry, and there was some recent news on one of your competitors out of China, potentially being influenced by BioSecure. Could you talk about what kind of opportunity that could represent, how you're positioned if BioSecure Act were to go through, or even if it wasn't sort of the decisions that are being made currently in that space, and what kind of opportunity that is for Twist?
I'm happy to start, and, Emily can fill in. I think so BioSecure, as the Act's currently proposed, does not include our competitors. So what's the new news that's come out, and I think it, and this is important, is that the Select Committee on China has asked the FBI to investigate, GenScript. And I think for us, what BioSecure has done is raise awareness to the supply chain. And I think in specific terms, if you think about, DNA being a self-documenting or self-documenting piece of IP, you look at any, you know, patent, filing, the first line is oftentimes the sequence of the DNA.
So understanding where that DNA is being manufactured, what access to that IP a government might have, even if the company is not a bad actor, just the nature of the IP protection in a given market where it's being manufactured, I think that awareness has been made across the industry and the supply chain decisions. The accelerant here now is because it's a direct competitor that's been named and is being investigated, the question then becomes, how do people respond? Our statement, and I think this is important, is we have the capacity today to support our customers as well as the rest of the market. We manufacture 100% in the United States, and we see this as an opportunity to be there for our customers and other customers as well.
Got it. How do you think the launch of Express Genes has changed the competitive environment in Synbio? Is there a risk that competitors catch up to you as they look to develop similar products? Like, what are the barriers to entry you've created? Clearly, the Factory of the Future was a big lift for you to do, and so there's clearly a lot of costs involved in doing that. But what do you think sort of the moats that you've built around Express Genes that currently exist today?
Yeah, and so there's obviously an IP moat. The technology that we have on silicon chip is, you know, very, very strongly IP protected. There's also a software moat that is a little bit underappreciated. If you go on our website, ordering DNA is a little bit like ordering coffee. There's 1 million combinations at Starbucks, and we've been able to digitize that upfront capture of what people want, and everybody wants something different, and then be able to combine all of the orders on the same chip. All the customers, all the products on the same chip. We have a chip that starts at 12:00 P.M. and a chip that starts at 12:00 A.M., so we accumulate the orders during the day, and then we start.
And then, at the end, being able to put the right DNA in the right configuration, the right tube with the right barcode, and ship to the right address with the right invoice. And so that software aspect cannot be underestimated, so that's another moat. And then I think the last moat is our ability to leverage the investment we've made on the Silicon chip and being able to launch a lot of new product extensions that such that now we have thousands of SKUs and support hundreds of applications and thousands of customers. That is not easily replicable, and it gives us a lot of resiliency on the business.
It does happen once in a while that you have one of our customers maybe goes bankrupt or one customer retires, but you can't feel it because, again, it's a very diversified product applications and customers. I think in terms of competitors' response, often, I think our competitor starts with denial. We've heard it when we started talking about Express Genes that we get in five days. I think the answer we heard were it's impossible, can't be done. And of course, it can be done. We are doing it. We're doing it at scale.
I really, I'm not low on empathy in general, but I feel bad for them because, you know, I don't see how you could do it with a 96-well plate. It's really the benefit of the silicon chip. And so, and that's just the beginning. We keep investing in the process, the same engineering team that build the Factory of the Future, then they move to Express Gene, and we deliver that. Now, that team is moving to a number of continuous process improvement, where we are able to tweak the process to do a few things. One is increased capacity, two is lowering time, and then third is reducing cost.
Just one example on the front end, I think some of you may have visited our fab, you may have seen our writers. So we have four in San Francisco, four in Portland, and a few months ago, we went from 13 minutes per cycle down to six minutes per cycle. And so what happens is, now the same hardware, the capacity doubled. So we have four in Portland, four in San Francisco. Now, it's the equivalent of eight with no capital expenses. And because now it takes half the time, which we use a lot less reagents. So already we had a cost advantage. Already, we use less reagents, 99.8% less than our competitors, but now that has been cut even more.
So, more capacity, lower cost, and it's half the time, so it's faster. And so, because of the new recipe, we found out that we could make 500 base pair oligos, the same quality as previously our 300 base pair. And so a few months ago, a few weeks ago, we launched our product called Multiplexed Gene Fragments, about 500 base pair piece of DNA, directly synthesized. So it may not seem exciting to a room of investors, but to our customer, being able to synthesize 500 base pairs in one shot, enables them to do, to synthesize a heavy chain or a light chain of an antibody, or alpha or beta chain of a TCR directly.
And so now we can make very large libraries of alpha or beta chain or heavy or light chain, and that's an exciting new tool for drug discovery that was enabled by the engineering of the process. And so we'll keep doing that. And, and I think it makes it harder and harder for the competition to keep up with us. We can do Express Gene for all of our genes. They can't. Now, we can make libraries that are 500 base pairs. They can't. And so we'll keep doing that. And, and we are nowhere near the end of our engineering, our engineering path, where I think actually at the end of the beginning, there is so much more that we can do, and we will.
I remember when I toured the Factory of the Future, there was still empty space within the factory that can easily be repurposed into additional capacity. I'm assuming you haven't tapped into that yet, but the capacity expansion you do will be much less costly than it was for the initial factory set up, too, so it's more flexible.
Yeah, exactly. So, in Portland, we had space for 16 of those front-end writers. There were four, there is four now, and we initially installed four, but our own capacity model, so we thought that we will need 16 over time. And now we will be at the point where probably we'll be thinking of going from four to eight. But because of the recipe change, we don't need to go from four to eight. We can stay at four for a lot longer. And so, we'll probably have the opportunity to use that empty space for other things-
Mm-hmm.
Because now for as far as the front end writers, we have plenty of capacity, plenty of room. And so as we are being driven by customers to make cGMP DNA, we are being driven into making mRNA for personalized therapies. We have the ability to leverage that space for other product extension, which again, is not a huge investment. We've made the big investment into the technology, into the Factory of the Future, and all those new NPIs that we can launch are relatively smaller R&D investment, but if you don't have that basis of the silicon chip, you can't do it.
... Got it. Let me just switch gears into the NGS tools segment. You guys have had consistently impressive growth in that segment. Competitors have consistently, over the last number of quarters, called out weakness in demand. Our assumption is you've been gaining share in that market for some time now. What are some of the key advantages that you think that Twist has relative to competitors, that are allowing you to take that share, if I can assume that?
Yeah, so maybe I start on the— So it's really a technology advantage and then a business advantage. On the technology advantage, just the quality of our DNA enables our customers to sequence half as much per patient as they used to, or if they have to, if they use a different kit. So the price of our kit is the same as the competition, so it's not a play on the price, but it's play on the quality. And now it's been widely demonstrated by our customers is when they switch to the Twist chemistry, they're able to sequence less and take an advantage in terms of growth margin.
In an environment where funding is more difficult, a lot of our clinical diagnostic customers have been focusing on commercializing a test that brings them good growth margin. So that's the main benefit. And then there's a number of business benefits. For instance, we can customize the panels very quickly, very cost effectively. And so as they develop their new test, that's very useful. We have the ability to fully customize the products that they get from us. They can get a custom SKU. They can choose, do they want the buffer in a gallon or in a tube, in which concentration? You know, they can choose really everything they want, custom SKU for them.
And then the last part is, we are becoming expert at supply chain, which means that as they ramp, even if their forecast is not quite perfect, even if they are caught surprised that they need more than they had told us, we have built the ability to be responsive on the supply chain. And then, you know, it's great that we win on the science, but at the end of the day, what really makes a difference is supply chain.
Got it. Adam, maybe, you know, you talked about the gross margin target of greater than 50% in 2025, as you benefit from operating leverage, impact from Express Genes. Does this gross margin require a specific revenue target, or are there cost savings initiatives that, you know, and mix playing a role there, too? Maybe just talk through sort of the contribution of how you're getting there.
Matt, great question. So if I kind of step back in time and say, "Hey, where were we a year ago?" So in Q2 of 2023 or fiscal Q2, we were at a 31% gross margin, having just launched Back to the Future with the new higher fixed cost. What we've been able to do over the last year, through our revenue growth, is bring that to 41%. And so the predominant driver of that gross margin accretion is revenue growth. We're also seeing a tailwind from Express Genes and some of the starting to see the beginning of the continuous process improvements. But really, the predominant driver of that ten margin points is higher revenues. What you're seeing is about 80 cents on the dollar of incremental revenue is dropping to gross profit.
When I look forward, the forecasts we're assuming in 2025, to get to that 50% gross margin by the end of Q4 of 2025, the primary driver is still the revenue growth. Express Genes, the continuous process improvements are baked into that assumption, but they're the minority of that driver. So it's mainly driven off the fixed capacity and the ability to leverage that over time. And I think the exciting thing for me now is, just how far can we take that? And I don't, we haven't quantified that yet, but as Emily was alluding to, these continuous process improvements aren't only improving time and cost, they're also really improving our capacity. So where we said before, we had the fixed capacity for $500 million in revenue, I think we have the opportunity to take that a lot farther.
Just how much further is, we still have work to do.
Got it. I want to follow up on something that came up in the prior quarter, blanket orders. Not a new concept to you, but relatively new concept to, I think, others. And particularly in Q2, you saw an increase in that. Do you expect to see these large blanket orders in Q2 of every year, just given the seasonality? Or how should we be thinking about this going forward, and what's the potential impact to order growth as we lap this blanket order dynamic?
Matt, yeah, again, I think the... Yes, we did see a step up in the blanket purchase orders in Q2 fiscal for us, which was calling it the January Effect.
Okay.
We saw about $30 million in total blanket purchase orders for the quarter. Had it been a more normalized quarter, what we've seen historically, we would have expected closer to $20 million. The step up really was in the SynBio side, about $10 million incremental from where we-- the trends we'd expect to see in that period. I do expect the trend to continue annually, but I think there is some seasonality in it. But that $10 million, you know, whether a customer would use it as: Hey, we're gonna use that over the next two, three, or four quarters, that's a great thing, because it's just a tailwind to us long term. But I wouldn't expect that, that, that, I'll call it the January effect, to happen every quarter, but I do expect it to happen in future Januaries moving forward.
Got it. And so there might be some increased volatility in orders on a quarterly basis, but it does give you significantly higher revenue visibility, correct?
Absolutely. Higher revenue is building, but what we're really seeing, I think, and the encouraging thing is to me, is customers are willing to make a commitment. Where, I mean, I think Emily hit the nail on the head of what we saw back at the beginning of 2023, is we had met parity in terms of timelines and delivery, and we consistently hit that. And that consistency is what I think is giving our customers the confidence to say, "Hey, we want you to be a one of one maybe, instead of a one of two. And therefore, we're either committing a larger blanket purchase order, or we're just committing one for the first time versus, you know, going month by month." So yes, I do have a better visibility to the forecasting.
Yes, it does bode to the tailwinds overall, but it is, yeah, I think there's gonna be some a little bit more noise in terms of the sequential ordering of how orders come in over the course of the year.
Okay. And then one other question we got from investors is we'd love to kind of clear up a little bit. Is that, you know, and Emily, you mentioned before, is sort of the pharma customers that are locking in a fixed premium on Express Genes in return for committed volume, and how that is different from blanket purchase orders, in specifically the increase you saw in fiscal 2Q. But just sort of just to help contextualize that for investors, difference between that, that fixed price for a committed volume versus blanket orders.
Yeah. Let's talk about the blanket purchase orders in general. Like, this is more of an indication, it's not a financial commitment-
Yeah.
and they haven't given us a sequence to go build upon.
Got it.
So this is saying, hey, it's kinda like, just like I make a blanket PO to buy my Amazon data storage for the services for the current entire year, my AWS. I don't, I give them an invoice, I get billed monthly, but I know that I'm gonna want that, and it varies how much I use every month. The same goes for us. So this is an indication of what the account wants, it's not an actual commitment. Versus on the Express Gene side, that contract, that is an indication that, hey, they will move their business to Express Genes, and they'll give us, and we'll give them a fixed price for doing so, and they're giving volume commitments on that over a period of time. And so that looks much more like an actual contract.
But there's no exact, guaranteed dollar revenue. In either case, though, we're only recognizing revenue upon shipping a gene. And so for a blanket purchase order or a Express Genes order, we would only recognize the revenue upon shipping of the gene.
Got it. There's obviously been a large focus the last year on Express Gene launch, but maybe talk through some of the other launches that you have in the pipeline, and how that translates to top line growth and continued margin expansion. You talked about the gene fragments, but maybe give investors sort of a sense for what that product pipeline looks like.
Yeah. So on the NGS side, we have a number of exciting launch in the recent past. So at AGBT this year, we've launched a new ligase, that's very significant because, for applications of NGS that needs high sensitivity, the current ligase that everybody else uses, half of the molecules get lost. And so we have a new ligase that basically 100% of the molecules move forward in the library prep, which means that, it increases your sensitivity of a cancer test or early cancer MRD, even genetic disease, it can be useful. So, in the past, we were the best at panels, and we had a on par library prep, and we are working to building a library prep that's best in class.
So that, that should cement our opportunity for revenue growth in NGS. Another pain point in NGS is, especially for applications where there are a large number of samples, is that upfront quantification of the DNA that you have. Because if you're gonna end up with thousands of samples on the lane of a sequencer, if you're not careful to normalize the input-
Mm-hmm.
You may have one sample that's the jackpot sample that, sorry, that hogs all the sequencing, and all the results are for that sample. So normalization quantification is a massive pain point, and we've announced a new product that has self-normalization at the ligation step. And that means that you don't have to quantify, you don't have to normalize. It's a huge boon for customers with large application, especially in AgB io, where we think we've been underrepresented. So with that, we should be able to get after the AgB io market. We also announced in NGS that we will be sequence diagnostic, so we announced an Element- native at AGBT. I think a couple of weeks ago, we announced a collaboration with Oxford Nanopore ...
Very active with Twist to develop panels, things happening in NGS. I think going forward is bulletproofing our performance advantage on human applications, and then launching new product to expand into AgB io and microarray conversion. On the SynBio side, we are leveraging speed across our entire portfolio. We want to expand our IgG offering with true IgG. We're being—I mentioned, we're being dragged into the mRNA market for personalized therapies, and initial feedback from customers is really good, where we make the DNA, and then three-step in vitro transcription, capping, purification, boom, you've got RNA. So we've done the hard part with DNA. We can industrialize the RNA making as well. We're being dragged into the cGMP area.
and so lots of opportunities, and frankly, what we have to do is really force rank things we can do. And so we try to be disciplined as a management team. There's 100 things we could do, but at any given time, we can only do five. And so we force rank things by how big is the opportunity versus how low the investment is, and we focus on that top five, and when that's done, then we move to the next one. But you can see that we have a lot of product launches, but really for the audience, it is key to understand that one, it's a disciplined approach to product extension. It's not a free-for-all, where we are very thoughtful.
And then the second is, the investment that we are making is small for each product for each product extension, and really, we're standing on the shoulders of the amazing differentiation that the silicon technology brings.
Got it. And just following up on that comment about choosing those five priorities, how nimble can you be? You said the investment is relatively small, but if one of those five priorities all of a sudden does not become a priority for a variety of reasons, can you then switch it out into something else? Can you be flexible with your decision-making in that regard?
I'm gonna speak from both sides of my mouth-
Okay.
Here on this one, because actually, it's a very key question. Very good question. So the answer is yes, we can be flexible. The team is extremely resilient. We have great... And so, we can. However, we've learned over the years that once you start something, you're better off finishing it, because if you stop, it's a trap to leverage flexibility. And if you start to change your priorities all the time, as the market evolves, launching nothing. And so, yes, we could be flexible, but in general, we try to stick with it. Because, yeah, it helps you very quickly, you're doing a lot of things and nothing ever gets launched.
Got it. Just in the 30 seconds we have left, what do you think is most underappreciated about Twist currently right now, from the investment community? What would you like to highlight?
I think it's the resilience of the product lines and the massive advantage that the front end brings us. But I think the silicon technology, even though people have seen it, have heard about it, it's still underappreciated with how so much better it is compared to what's out there, and how it enables all those extensions without the massive investment.
Got it. Emily, Adam, thank you very much for joining. Really appreciate it.
Thank you so much.