All right, I think we're going to get started now. Welcome back to the 45th Annual TD Cowen Healthcare Conference. I'm Brendan Smith, Senior Biotech and Life Science Tools Diagnostics Analyst, and it's my pleasure to introduce to you today the CEO and co-founder of Twist, Emily Leproust, to my left, and to her left, the CFO of Twist, Adam Laponis. Thank you, guys, for joining.
Thank you for having us.
Yeah. There is a lot going on at Twist and in the sector in general. Let's just dive right in here. You know, Twist is marching towards profitability, obviously. What did initial doubters get wrong about the company's long-term profitability potential, and what has kind of left to continue to put a period on the end of that sentence?
Yeah, I mean, so we have a business model that we've built and we've demonstrated over the last eight quarters that it's working, where we've been able to deliver revenue growth. Then we're able to deliver 75%-80% of that growth, dropping to the gross margin line every quarter. I think it was 81% last quarter, but on average, we're shooting for 75%-80%. Then we've shown over the last two fiscal years, basically three fiscal years, three flat OPEX. When you have ramping revenue, ramping gross margin dollars, and flat OPEX, as a result, our losses have shrunk, are shrinking. When you continue that trend, our goal as a company on our style is that we're able to adjust EBITDA breakeven and then cash flow breakeven without having to raise money. That has been our little focus.
The revenue ramp is not an accident. We have very strong innovation, very productive R&D, launching very innovative, very differentiated new products. We deployed commercial violence, and it has been working. The last thing I'll say is for the gross margin, we have a guide that we get 50% gross margin in Q4 this year, our quarter ending in September. We're at above 48% in Q1. A year ago, we're at 40%. We're definitely, things are going really well. It's a combination of mostly the volume, because we do have high fixed costs. Again, as you ramp revenue, the variable cost is low. It's a slow some CPI, some continuous process improvement that we have been doing. The point of the CPI is to take away some cost.
For instance, last quarter, we shared the example of a pipette that we were using that we've replaced with a new technology that removed millions of dollars of cost over time. The goal of our CPI is to make sure that we add capacity in a way that does not add a lot of CapEx. Basically using sustaining level of CapEx to add capacity. The reason we are doing that is we don't want to be in a situation in the future where we run out of capacity and we have to put a lot of new fixed costs online that will lower our gross margin. We're not doing that. When we start the factory of the future, we believe to have $500 million of capacity. Now we're on track to have $700 million capacity.
It is very important for us that not only we ramp revenue, not only we increase gross margin, but also we do not want to get in a situation where the fab is full and then we have to spend a significant amount of money.
Okay, that's a great overview of a lot of things we want to kind of click into here. Maybe let's start on the gross margins. You talked about 50% by Q4 of this year. Based on where you're seeing the business now and your vision for how to grow Twist, where could that end up moving forward? I know that this was the goalpost a couple of years ago. There's questions about if you could get there. Based on how you're trying to grow this business, where do you see margins beyond Q4 of this year?
Brendan, thank you. It's a great question. It's one we spend a lot of time looking at. We said when the business was in the gross margins in the 30s, we weren't happy that it started with a three. It's in the 40s, we're not happy it starts with a four. When it gets to the 50s, we won't be happy it starts with a five. We do see the continued ramp in gross margin beyond 50%. The 75%-80% of revenue growth dropping to that gross margin line, we see continuing as we continue to expand capacity. We're also as a balancing act. We said it a number of times that I'd much rather manage a $2 billion revenue business at a 50% gross margin than a $700 million revenue business at a 70% gross margin.
We will optimize the business for gross profit or gross margin dollars. It's not going to be a gross margin %, but we do see a path well beyond the 50%.
I think, Emily, you also touched on scalability, right? I know we talked about this this morning, but when you go to Factory of the Future, and then Angela gave me a tour not too long ago, it is striking to go into all these rooms and have so few people and be able to operate the capacity. I guess maybe speak to why that is so intentional, the integration of automation into the existing business franchise today that maybe people are not quite appreciating.
Yeah, I mean, for us, we know that the vast majority of our competition is DNA is made in China. We had a competitor brag on their earnings call that they use 400 PhDs to make DNA. Why you would brag about it, that's beyond me. For us, we're competing, even if it's PhD, it's still low-cost labor. Frankly, competing with low-cost labor, the only way is to have no-cost labor. We had to, from the beginning of Twist, we said we can't hire people to push pipettes manually. We have to have automation. That has been the strategy from the beginning. I think it served us well from a point of view of having really high quality, really high scale, the ability to customize many flavors of DNA because there is no human that has to make any decision.
Now with the Express Gene, 100% of our genes are made express. Obviously that automation has served us well. At the same time, automation is also really hard. We had to invest $1 billion to do the R&D and to build the infrastructure. It is a very, very serious deployment of capital. In the current environment, if we were to start Twist today, I do not even know if we could raise that kind of capital. Also, we remember the first few years of Twist where revenue was ramping very nicely, but our margins were negative because if you have a high fixed cost, until you absorb your fixed cost, the margins are negative. Even just a few years ago, people were wondering if we could, let alone get to 50% gross margin, could we get gross margin positive, right?
It needs a lot of vision to go do automation. It's a little easier to hire a human as you go. The problem for our competition and the opportunity for us is that our competitors that use 400 PhDs, if their volume doubled, they won't because we're here to take it away from them. If their volume doubled, they will need 800 PhDs. If our volume doubles, that's fine. We have all the machines. We don't need anything else. It's right there. Pack up the truck. Once you have scale, automation is really the way to go. That's why we're able to drop 75%-80% of every incremental dollar. I don't recommend it to anybody because it's just extremely difficult to raise that kind of capital, deploy it in a way that's efficient.
Yeah, you also are now touching on a couple of times now competition being made in China too. Obviously, I think a lot of the tools competitors have gotten caught up in a lot of, let's just say, headwinds, geopolitical headwinds. Let's clump them all together, right? Whether that's trade tensions, whether it's NIH funding uncertainties. Speak a little bit to your relative positioning versus other Simbio competitors, but then also maybe just remind us your exposure to NIH and things within that, kind of your relative customer breakdown to give us a better understanding of your positioning in this environment.
I'll start with the tariffs, and then I'll let Adam talk about the NIH. In terms of tariff, the majority of our competition, DNA is produced outside of China. To the extent that there are tariffs, it's a headwind for them. It's a headwind for us. At the same time, tariff or no tariff, we're going to win. We're going to win by winning. I think when we go in front of a customer, we're not talking about where it is made. We're talking about which one is delivered faster, which DNA is a higher quality, and which DNA is cheaper. It's ours, whether there are tariffs or not. Yes, tariffs are probably good for Twist, but for us, it's almost irrelevant in the way we're going to compete and win. I'll let Adam mention our NIH exposure.
Yeah, and so if I look at academia and NIH, I mean, I think one of the strengths of Twist is the diversity of our customer base with thousands of customers, hundreds of SKUs, and a variety of exposures to different end markets. We have spent a lot of time in the last five weeks since the administration changed looking at what's coming out of our US academic business. What we know historically is that 19% of our business globally is academics. A little less than half of that is in the U.S., and only about 2% of our overall global revenue is directly NIH related. What we've been tracking is how has our U.S. academic customers' performance been. It's been very stable for the last five weeks since the administration changed.
In fact, if you look at the order rate trends the last five weeks, the average order rates are up from where they were from the month prior, even the 13-week rolling prior to the administration change. We are not seeing a slowdown yet. We are obviously sensitive to the fact that some of our customers are having challenges. One of our strengths as a company is that we are nimble. What we will do is we will react to meet the customer's needs. Whether it be marketing programs, customer support, or other things, we are going to be quickly innovative in meeting those needs. We see any opportunity for a reduced amount of funding, similar to what may have existed in the biotech industry for a number of years where we were gaining share, we see as an opportunity for share gains.
Because when a customer is looking at their supply chain, we offer that opportunity for more shots on goal at a lower price and a higher quality. I think that's a nice segue into this conversation about spending trends too, right? I think we talked about this a little bit this morning, but as we're thinking about even AI integration, right, with a number of different customers, maybe talk a little bit about what that is able to do and what that's able to unlock in the use of DNA from your customers and how wider adoption of that for the exclusive purpose of trying to invest in cost and time savings could actually feed back into your Simbio business.
Yeah, we see AI as a huge driver, a very huge positive driver of the Simbio business. I talked to a lot of customers, and in antibody discovery biomolecules, so VHH, IgG, IgM, antibody type, we see more and more customers leveraging antibodies, sorry, AI. What that means was in the past, people will study repertoires. They will have a framework, and then they will make mutations on that framework, and they will create, it's called combinatorial mutation, but really it's random mutation. Now we're very good at making that, and we can compete on quality. Some people still do that, but what we're seeing is a shift to AI-driven discovery where the AI spits out some explicit sequences, and they do not look like each other. There is nothing in common. It's all 100% different.
That means that you have to do direct synthesis. You can't introduce mutation. There we are best in class, if not the only game in town. As people move to AI, we see that we have a competitive advantage because those sequences have to be made explicitly. For us, it's a great advantage. The other advantage is the speed that we have is making those explicit sequences significantly faster than it used to be to make those libraries. The libraries can take easily two to four, even sometimes six weeks to make. If you give us a file that's AI and they need to be made one at a time, we're going to ship them in two days to you. From a researcher, the build time can be shrunk very significantly from weeks to days.
That means that the design-build test cycle is so much faster. The other trend that we're seeing with AI now is that customers are more interested in the data than getting the material itself. We're seeing more customers. We have a mutual joint realization that they get the molecule, and then they'll do a standard set of tests. They do thermal stability, affinity testing, functionality testing, expressibility, developability, immunogenicity. There's just a few tests. We have those tests in-house with our biopharma service. We see more and more customers saying, you know, don't send me the IgG or the VHH. Just do the test. Send me the test. Send me the data. That's another upsell opportunity for us. The loop from us giving us if you give us a sequence today, we can give you the data in 70 days.
Sometimes in 70 days, you could not even make the library. You can't even finish the library. That just accelerates the rate, and it makes us way more competitive. We see AI as a very positive development for us.
Yeah, and I think that ties back directly into what you've both spoken a lot about, this conversion kind of downstream into oligos, down to actual genes, into IgG. I guess, what do those kinds of trends mean for Twist Bioscience in 2025? And then as you kind of look to build out potential adjacencies moving forward, how are you watching those trends to make sure that you're staying on top of what the customers actually need next year too?
It means more revenue. For instance, if you sell an IgG, you could have sold two genes to a customer. That's $200, and then they do the IgG. Or you sell a $500 IgG. That's way better. It's more revenue. It's more gross margin dollar. If you sell the data, where there's extra dollars on top of it and extra gross margin dollar, if you ship the data in 17 days, but it would have taken them 25 plus days to get it on their own, that week of saving, that's much faster that they reorder. Now you've made your quarter longer. Instead of doing three cycles of order a quarter, now you can do four, four and a half. Again, that makes your quarter longer. That makes your year longer.
For us, it's all up into the right that we want to see. We do that again with flat OPEX. Longer term, we keep looking at what other opportunities are there. We see opportunities in mRNA. mRNA is now a new modality. We are in early access for mRNA offering. The feedback so far is great. Now we are setting up the industrialized version, high throughput, high scale, low cost of mRNA. We've signaled to our customers, to Sweden, that we're looking at GMP, same thing. It's all about going upstream to it and upselling our customers so that we can expand our SAM and keep our revenue growth the way we want them. It's all positive.
Okay, that's great. Now, let's also maybe kind of focus on 2025 drivers now. Maybe we can kind of go segment by segment. I think there's a lot into the NGS business. I know you guys have gotten to pretty strong growth, consistent growth of this business too. It can sometimes be the broader NGS Business overall can be a little bit misunderstood at times. Maybe speak to some of the proprietary products within Twist's portfolio that you think make that segment particularly underpenetrated in what most people would agree is probably a high-growth market for you right now.
Yeah, and so what our positioning is, we're going to provide all the reagents from the sample to the sequencer, number one. Number two, for specific application. Number three, be sequencer agnostic. All the reagents from the sample sequencer, we have it. We don't have it for all applications yet. We're very strong in liquid biopsy. In some ways, you could say that we've won liquid biopsy, the vast majority of the test users. Now, as our customers launch their commercial team to sell more of those tests, every patient gets tested, we get revenue. That's great. That being said, we keep improving our assays. We have a new ligase that improves the sensitivity because there's less molecule left behind. We are leveraging our investment in liquid biopsy to now do the same thing in MRD.
We are not in the PCR approach for tumor-informed MRD, but we've launched panels that are the same price, 500 probes, same price as the 16 probes, and can be extended to up to 10,000 probes. For customers onto bespoke R&D, we can provide them with best-in-class product, and they can choose the sensitivity they want for the price they want. It's a curve. They can choose where they want to be. Customer wants to go tumor-agnostic panels for MRD, we're there. We can also do tumor-naive. We're expanding into RNA-seq. We've launched RNA-seq products, and now it's starting to ramp. We've launched products to convert the macroarrays into Twist Bioscience sequencing. Last quarter, we reported our first macroarray conversion, multimillion-dollar customers that used to use macroarrays and now Twist Bioscience sequencing.
If you can do it once, you can do it for all the market. There is more that we have in store for the NGS market. I will say in NGS, we try to be very, very application-driven. It is not one product to sell all customers or application. The NGS market is a very developed market, very technology-forward, very skeptical customer. We lean into our deep understanding of the workflow to have the best DNA with the best enzyme, best buffer to deliver a performance advantage. That is what made us where we are. That is the recipe for the future.
Okay, great. I know there's a couple other things we want to touch on too. Maybe talk a little bit about just the Express Gene product commercial launch, things you've been hearing from that so far, and maybe what applications of the rest of the Express Portfolio are being used for and how you see those as which are some of the more faster growing opportunities there?
Express Gene, the big is drug discovery. Both antibody cell and gene therapy, that definitely has been a match made in heaven because of the speed. It's accelerated by AI, large language machine. Slow Academia has been a fast adopter of the Express portfolio. In Academia, you go and you say, I'll give you a free gene delivered in 10 days decennial, because they have such a need for speed that they'd rather clone in the lab, nights and weekends, than get a free gene in 10 days. The five days Express and the Express fragment really resonates in Academia.
Okay, maybe in the last five minutes here, help us understand within 2025 guidance, first off, where are the more tangible opportunities for upside? Again, what are the incremental ads quarter to quarter that you're really looking for that would potentially drive upside to current guidance from where it stands today?
No, I think it's a great question. If I look at just the SimBio business, the continued penetration of the Express portfolio deeper into our various customer groups, we have an opportunity there. We also have an opportunity with some of the MPIs that are coming online to dive deeper into those. On the NGS side, I think it really comes down to the adoption, particularly, as Emily mentioned, on the liquid biopsy side, those commercial launches and seeing them progress. We have said, hey, we're not expecting that next-generation MRD revenue in 2025, but we are looking for signs that there are going to be that commercial ramp coming in the not distant future. I think that's something we'll be looking for as well.
All right. I know you've had a couple of different, I would say, interesting partnerships over the past few months. You had the Zumba royalty deal, the partnership with Absci as well with an AI drug discovery. These are a little bit outside the core business, but also obviously compatible with what you are already doing. Maybe let's, what does the Twist of 2030 look like? You've done a great job of kind of building out these incremental adjacencies to the core business. Where is the space between here, just within the next three to five years, that you're already well positioned to capture? It's just a matter of ax grinding and executing on the vision from here to there?
I think it's all of the above. We're not going to give long-term guidance, but what we want is we want to get to the profitable milestone, profitability milestone first, and not stop there. We want to keep growing at the fast pace we've been growing and get through profitable growth and then leverage the benefit of the silicon chip to expand our SAM. When you talk about GMP, when you talk about mRNA, when you talk about IgG, when we talk about characterization, that is all SAM extensions. There's more beyond that that we have in mind, that we love to tell our investors, but we don't want to tip off our competition too much. There's more SAM extension coming. I'll say it's a combination of keeping the growth, profitable growth, as some of our market we're in may saturate.
We want to anticipate that and start expanding into other markets. I think fundamentally, we do not want to stray too far away from the silicon chip and the advantage that it brings us. We think that is our secret sauce, and we need to leverage it. For instance, you may say, well, how is enzyme engineering? You are talking about enzyme engineering. How does that fit with the silicon chip? It does, because to engineer enzyme, you need a lot of genes that are inexpensive. You can make proteins that are inexpensive. You can test them, and that is what the silicon chip enables us to do. I think that is where we see future growth for a long while. We have a hammer. Everything looks like a nail. At the same time, we want to be disciplined to not open up too many fronts.
That is what the management does well, I think, is we are going to crush next quarter and think about what do we have to do today so we do not hate our lives in three years. On the contrary, we love our lives. That balance between the short term and long term is what we keep doing.
Yeah, I guess one last point, just because you did mention it, and I wanted to actually circle back to it, was the enzyme synthesis, right? I know you brought this up on the past couple of calls too. Maybe just give us a sense of why, why make the enzymes in-house, what realistically that could do to your existing product offerings and how you're thinking about that being incorporated.
The main reason why we engineer on our own enzyme is to make our workflow higher performance. We're not interested in selling a bucket of enzyme. What we're interested in is because we understand the workflow so well, we understand the limitation of this step creates this side reaction, and this step isn't complete. If only it was, it would boost the performance, the sensitivity, the speed of the assay. That's the main driver. Since we're engineering on enzyme, it would be impolite not to make them cheaper. We're also getting a gross margin advantage, but the real driver is the full performance. It comes from our own deep understanding of the workflow.
That directly into your product offerings. All right, I think with that, we are just at time. I want to thank both Emily and Adam for joining us today. Always a pleasure. We will see you all around the rest of today and tomorrow as well. Thank you all for coming.