Great. Good afternoon, everyone. Thank you for joining us. My name is Matt Sykes, Life Science Tools and Diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming the management team from Twist Bioscience today. Emily Leproust, the CEO and co-founder, and Jim Thorburn, the CFO. Emily, Jim, thank you very much for joining us today.
Thank you.
Yeah.
Maybe, I think it would be helpful to maybe for you to set the stage first, talk about the most recent results and kind of what sort of trends you're seeing for the business over the course of the second half of this year.
Yeah. In terms of recent results, we actually announced in early May, record revenues, very strong orders. We're really well positioned from an overall business point of view because we launched the Factory of the Future in early part of this year. We also announced in May that we took a significant RIF as we leveraged the Factory of the Future. We're well positioned in terms of our cost structure, well positioned in terms of having the capacity and being able to support the launch of new products such as Fast Gene, we get the RNA products. All this does is support our continued position of increasing market share in our business. Overall, we see that customer base continues to expand.
Even though we're hearing a lot of comments about the market being weak, we are actually gaining share against the competition, which gets back to the value of our product.
Great. Maybe just digging a little bit deeper on that recent headcount reduction, maybe talk us through the dynamic of what led to the layoffs, why now, how do you think this impacts Twist moving forward?
We made a very significant investment in our Factory of the Future. That was a multi-year, $100 million investment, which we executed through COVID when supply chain was hard, and that was done on time and budget. That was a great achievement. We saw that the gene production was going well in the Factory of the Future. In early April, we decided to stress test the Portland facility. We sent 100% of the gene volume and the vast majority of the Oligo Pools volume to Portland, where actually put the gene production team in San Francisco on paid leave. That stress test was very successful.
The Factory of the Future was able to handle all of the volume, and we couldn't see a difference in performance between San Francisco and Portland. That gave us the opportunity to say, "Well, we don't need two production sites." The Factory of the Future enables us to launch in the near future a Fast Gene, which we could not do in San Francisco. It became a very obvious choice to pick Portland as our gene and SynBio product or production site going forward. Therefore, the decision was to de-duplicate that production capacity. So we laid off all of the gene production site from San Francisco.
You know, since we were doing a RIF, we always said, "If we do a RIF, it has to be only one. We have to just do the cut deep enough that it's only one time," just because we really need the remaining team to be highly focused, excited, and committed to the vision that we have for the company. We looked at... Because we didn't want to do a drip of cuts. We looked comprehensively throughout the company, and we saw that we were able to remove 25% of the workforce, that 60% of that dollar cost reduction came from the COGS line, 40% came from the OpEx line.
That enabled us to do a few things. One is to get to Adjusted EBITDA breakeven with less revenue. For SynBio and NGS, which what we call our core business, that brings that Adjusted EBITDA breakeven from $300 million revenue down to $284 million revenue per year. For biopharma, it brings the Adjusted EBITDA breakeven from $80 million a year down to $40 million a year. Combined, it's a run rate of $81.5 million per quarter. That's the Adjusted EBITDA breakeven, so that's less than it used to be. That's number one, first benefit. Second benefit is we can achieve that earlier. We've guided that we can achieve that in September next year, so six quarters from when we announced it.
Then third, we get there with more cash in the bank, $220 million instead of $170 million. So, it frankly, de-risks the commercial execution, and it ensures that we don't have to raise money again. That enables us. In addition to the cost reduction we've done with Oslo, reduced the investment in our DNA data storage business. So all combined, while it's very difficult to let people go, those were great employees. It makes for a business that gets to Adjusted EBITDA even sooner with less revenue and more cash in the bank. At the end of the day, it just, it makes us a better company.
Got it. Just talking about sort of the guidance changes for this year. In terms of my view, they seem very conservative, particularly given the quarter that you had just reported. Can you talk about your approach to the current guidance? What, what kind of factors, are there macro or industry, are you actually baking into that guidance? Is there some element of under-promising and over-delivering, which I think is probably necessary in this environment, given sort of the expectations of the market?
Yeah. So, so in terms of the guidance, there's sort of two key factors, three key factors. One is we, on the biopharma business, we dropped our guidance this year from $37 million-$40 million, it was original guidance, down to $26 million. The question is, why do we do that? Well, last year, we acquired a company called Abveris. We had an earn-in. We couldn't integrate the organization. Consequently, we had a commercial issue with that, i.e., they impacted our orders. The team at Abveris missed their earn-in, they were demotivated. We couldn't integrate the Abveris team into the Twist team. We saw the business impacted by that. We reset the business, reset the guidance based on that own internal dynamic.
In terms of the other businesses, NGS and SynBio, we dropped the year guidance by roughly 6%-7%. The question is, well, if orders are so strong, why do you do that? Two factors. On the NGS side, we have a kits business. NGS business, essentially, kits and panels. On the kits business, we had a subcontractor, and we had parts of the kits assembled in San Francisco. We're consolidating that in the Factory of the Future in Portland, and there'll be additional qualification required. We were prudent in terms of our guidance there. In terms of the SynBio business, we moved the genes operation, and we've got other SynBio operations, we're moving to the Factory of the Future between now and September.
As you build these restructuring activities, there's only a certain number of people within the organization that are aware of it. You can imagine if you're a manager, and suddenly one day you're told you're losing 25%, 30% of your organization, we're anticipating disruption there. Based on that disruption in a core business, we thought it was prudent to take the revenue down. I've done this in a number of different companies previously, and there is always unanticipated consequences, so you've got to factor that in. However, if you just step back, we are gaining share, orders were strong, and we feel good about the actions and feel good about where we are with Factory of the Future.
Yeah, maybe expanding on the Factory of the Future, recently came online, and maybe talk about some of the dynamics of getting that facility up and running. You've already addressed some of them, but, you know, what do you think Factory of the Future brings to Twist that people are not quite appreciating at this stage?
Yeah. Pre-Factory of the Future, when we only had the San Francisco facility with over $200 million of revenue capacity, and we could see our revenue go up into the right. We also, from experience, we know that it takes at least 18 months from deciding that you need a new site and signing a lease to having a site that is operational. We knew that we had to make the decision ahead of time to go for it. Actually, I think we decided in, I think December before COVID, that we needed that extra capacity. We had to look for a site.
We decided to be outside of the San Francisco Bay Area in order to be able to access a different talent pool. By the same time, we wanted to be just a day trip for our engineers to go and do whatever tweaking, maintaining that had to be done on our own machines, on our own custom process. It left us with Seattle, Portland, Reno, Phoenix, San Diego area. Portland was the right choice for us for a number of parameters, but mostly access to a great pool of talents, a cost structure that was quite competitive. We decided on Portland, and the next step is to find the site.
We found the site, but we had to take it down to the studs, and then build the facility. Do all the TI, all the tenant improvements, all the CapEx at the time. The day the construction was finished, the day we got the certificate of occupancy, I think we had $35 million of CapEx that were ready to be deployed the next day. We had to stage all that. Again, remember that that was happening all during COVID, when supply chain was stressed.
We installed the equipment, we started the hiring of the talent. About, I think 75 of the employees moved from San Francisco to Portland. That was great to have a base of employees that were very experienced on our process, that knew our culture. That was very useful as a startup of the business. We had to do IQ, OQ, PQ. IQ, Installation Qualification. You know, is the machine bolted to the floor? Are they plugged in? The OQ, Operational Qualification. Do the robots move the way we want? PQ, Performance Qualification. Are we making genes the way we want to?
Again, it's something that we've done multiple times, so we're quite experienced, but it's a very disciplined, very thorough process of bringing up operations. Then once we had that, we started practicing making genes, so that happened in the fall last year. In January, we were ready to go live in production, where we will direct some of the orders away from San Francisco into the Portland facility. As I mentioned earlier, that ramp-up worked really well as planned, and we were so confident that in April, we were able to completely move 100% of that volume away from San Francisco.
What that means in terms of the future of Twist, that means that now the capacity that we have for the company went from $200 million to $500 million revenue capacity. We've made a very significant investment in our fixed cost that now we can leverage, and we target our variable contribution to be 75%-78%. That means that once you've absorbed the fixed cost, every $10 million of orders on... in addition, that bring $7.5 million-$7.8 million down to the margin line, so it's very significant. The first thing it brings us is that extra capacity.
And as we run the business, we know that we needed it, and if we didn't have that extra capacity right now, we'll be in trouble. That was the right decision. The second thing that Portland gives us is the ability to launch new products that we could not in San Francisco. We are just too space constrained. We've been very clear about Fast Gene being one of those new products that are going to be important to our growth in the future. Again, we could not have done Fast Genes in San Francisco. We've also said that we launch actually, we are being driven by the market into RNA synthesis.
Now that RNA is safe because billions of people have had RNA, there's a large number of companies that are seeing mRNA as a new drug modality. Those companies, for the discovery, optimization, development of those mRNA drugs, they need access to large numbers of different RNA sequences. Once we've made the DNA, you're basically three steps away from RNA. It's in vitro transcription, capping, purification, boom! With the Factory of the Future, with infrastructure we have now, we'll be able to launch new product, where we'll be able to add more value to the DNA we have, make RNA, make Fast Gene, that enables us to access new market, ramp revenue, ramp gross margin, and again, something that we could not have done in San Francisco.
I mean, I just want to touch on that comment you made on RNA, which is something relatively new in terms of what you've been talking about. In terms of, like, helping us understand that opportunity, obviously, there's pretty robust mRNA pipelines going on, but maybe do you have an idea of what that RNA market could mean to Twist?
Again, just to make sure there's no confusion, we will not make RNA that are used as a drug in production. We can make RNA to help in the R&D, in the discovery, development, optimization of RNA sequences. I think it's still early days, the market is probably not very big right now.
Mm-hmm.
It's also not very big because the access to the variety of RNA sequences that are needed are not there. Nobody can make 10,000 RNA sequences routinely, quickly. There's a little bit of a chicken and an egg, where the market is not yet big just because the supply is not there. We see it as an opportunity for us. Again, it's not a massive investment of new CapEx.
Mm.
We can leverage the fixed cost investment that we've already made, and so those are the kind of product line extensions that we like. It started with genes that were fragments and then clonal genes, then we did maxiprep, then we added IgG, and now we're gonna add RNA. Again, it's an opportunity for us to get more wallet share of the customers. Again, leveraging our fixed cost investment, so it's directly accretive to the bottom line.
Got it. Maybe talking a little bit more about SynBio. Last quarter, you highlighted, you know, and you just talked about the launch of Fast Gene in order to target that maker market. Which I think you sized at like $1.4 billion, roughly. What do you see as your sort of go-to-market strategy and differentiating factors that Twist will be offering, versus any kind of competitors? By competitors, I mean essentially in-house production of that. What can you offer them that's differentiated that you think will break into that market? I guess the second part of that question is, once Fast Gene is launched, like, how can we kind of measure your penetration into the gene maker market?
Yeah, great question. Fast Gene, maybe to set the stage, right now, if you want to buy a gene, you can buy from someone like Twist Bioscience, and we have competitors, but basically you get DNA in 10 to 14 days. Our current differentiation is that we are $0.09 a base, the competition is about $0.20-$0.30 a base. We're two to three times cheaper for clonal perfect genes delivered in 10 to 14 days. The other differentiation that we have today is scale. If you want five, 10, 20 genes, you can choose from a number of companies, again, we'll be cheaper.
If you want 1,000 gene, we may be the only game in town, because we are the only one with the high throughput to be able to make 1,000 genes in one shot. The DNA makers market, that $1.4 billion opportunity, those people, they don't buy gene because they can't wait 10-14 days. There's two categories of customer. One customers are biopharma companies that maybe half of their volume comes to us. The other half, they do themselves. They make the DNA themselves, they make the ITG themselves, just because they need that DNA faster, and that speed is about five to seven days.
If you have a number of scientists that are waiting for the material, it's more expensive to have those scientists wait than making them your, yourself. That's the first category of customer. The second category are the academic customer, the postdoc, and the grad student, that have to go through the design, build, test, cycle multiple times before they get to the publication. An extra five days for buying genes from us now, if you have to do that five, 10 times, that just elongates the time to get to your answer. They go and they will clone day and night to not have to. They clone days and nights.
Even if we gave them the DNA for free, they would not want it, because again, it's too slow. Those are the two customers that we can go after with Fast Gene. That's what we'll offer in the fall, where we'll make DNA in five to seven days, which is the same time as if you clone it yourself. There is one more competition to consider, it's not very compelling. If you want to buy DNA that is five to seven days, you can, but right now it's extremely expensive. It's $1 a base. The market of people that will pay $1 a base is tiny, that's not really the competition we're going to go after.
I think, yes, we'll take that business, but we really want to go after the DNA makers that cannot wait one more day, five more days to get their DNA because their experiment is so urgent.
The other approach would be instead of outsourcing, is the gene makers buying technology that allows them to more efficiently produce their own DNA in-house. I know there's a number of private companies who are doing this. To me, it doesn't seem like the scalability is there for what they need. Maybe talk about sort of the decision point for the gene makers to either buy in technology to improve the process and still do it themselves, versus outsourcing to Twist?
Yeah, I mean, there are a few companies that are either selling now a desktop or that are saying that they will sell a desktop in the future. It's a decentralized model. I think when we talk to our customers, the only two things they care about when they buy DNA is, when do I get it, and how much, right? If desktop was faster and cheaper, they'll do desktop. If decentralized is faster and cheaper, they'll do decentralized. Yes, the desktop, they have a huge set of limitations. The first limitation is actually, it's not faster. It's actually faster to buy from us. Second, like you said, the scale is not really scalable.
You know, if they are set up for making 32 genes, you get 32 genes. You want 320 genes, now you need 10 machines, or you need to do 10 runs, that's even longer. If you want one gene, well, too bad, you have to pay for 32 genes. That scalability up or down is not there. The cost is also more expensive than if you buy from us. Last, you get a gene that is non-clonal. Making a fragment is the easy part. The hard part is to clone that into a perfect gene. It's more expensive, it's slower, it doesn't scale, and it's non-clonal. I mean, what's not to like?
There, I mean, you get one check to note, one neck to choke with Twist.
Yeah.
I mean.
Yeah
... I mean, within five days, you get what you want, and if you don't get it, we'll still deliver what you need.
The issue is if you're sitting there with a decentralized model, you got a footprint to support their box, and you've got all the surrounding labor, you've got all the chemicals associated with it. It may be appealing in the short term, but as you scale, you're gonna have to figure out how you outsource.
Got it. Maybe shifting to the NGS tools segment. You know, a lot of this is tied to sort of the commercial ramp of your customer base, which at times can be lumpy, and there's some transactional nature to it. At the same time, I think Twist has done a really good job of creating a recurring revenue stream and attaching yourself to things like liquid biopsy and other areas where there's really good growth dynamics. Maybe talk a little bit about what you see as differentiating from the competition in the NGS tools market. It's a very good market with good margins.
Mm-hmm.
There are competitors, unlike synthetic biology, where you kind of dominate that market and there's clear differentiation. On the NGS tools, there are other competitors. Maybe talk about how you've either gained share or some level of differentiation with your business that you think is setting you apart.
Yeah, no, great question. On the SynBio side, what we've talked about is mostly a price differentiation so far, and with Fast Gene, we'll add a speed differentiation. That's the differentiation on SynBio. On NGS, it's a different positioning. It's a quality positioning. If you buy a kit from us or from our competition, you know, IDT, Agilent, it's basically the same price. However, the quality of the DNA is such that there is less noise in the sequencing, and so you have to sequence half as much when you use our chemistry than if you use the competition. What we sell to our customer in NGS is a COGS reduction of half, 50% of the sequencing cost going down. That's what we sell.
That means that when they switch to us, either they keep the difference as margin, or they lower the price of their tests to be more easily reimbursed or get better commercial traction. That's the base commercialization is a quality play. You know, it's not me saying it, now it's our customers who have YouTube video where, you know, the Broad Institute, they show the curve and, you know, with Twist is half of the sequencing that you need. It's very well documented by now. The second, that's in production. Like, every day, there's patients coming in, we provide cost saving of 50% of sequencing cost per patient.
Even before that, as you're developing the test, what we provide is an extreme level of customization of what is the content of my assay. With the competition, the way they make the DNA is 1990s DNA synthesis technology, they have a very hard time to make panels of small amount of patient testing, right? 'Cause some customers, during the development, they just want to test 24 samples or 100 samples, and we can do that very quickly, very cost effectively. Not only we have a quality advantage as you run the test in the end, but during the development of the test, we also have a very fast, inexpensive customization.
The last value proposition that we bring back to the one neck to choke that Jim mentioned, because we come in with the probes, but we sell the full set of reagents from the sample to the sequencer. We sell the laboratory prep, we sell the enzymes, the beads, the buffer, the adapters, the UDI, UMIs, and the baits. All the reagents you need from the sample to the sequencer comes from us. If there's something wrong that happens, again, you only have one neck to choke, and that's mine. That is a strong value proposition because if something goes wrong, there's no finger pointing, customer really appreciate that.
You know, one thing I wanted to ask you about that business specifically is we've seen some mixed results from one of the competitors you mentioned. They've been having a more challenging time with the genomics, the genomics business, and a lot of it has to do with sort of specific customer exposure in terms of the funding environment for certain diagnostic companies. Yet you showed pretty strong results in the last quarter. Is this a share opportunity, or is this a customer exposure difference? Maybe just talk about the trends that you're seeing within the NGS business relative to what might be out there in the market.
Well, across the board, we're just taking market share. You mentioned in NGS, our competition, they seems to be struggling. We are doing well, and that's because we are taking market share in our Q1. We mentioned that we had a very significant win. That's a customer that used to be with IDT and now it moved to us. It's a plus one for us, it's a minus one for them. It's very significant for us on the upside. The same thing is happening with on the SynBio side. On the gene side, one of our competitors mentioned that year-over-year, their gene business went down 12%. Ours was up 30%.
I'm sure for them, it looks like the market is dead, but, I think it's we are taking market share. In, in an environment where focus is on cash burn, getting to Adjusted EBITDA breakeven, what we sell, again, is in SynBio is more shots on goal for a fixed budget. In NGS, we sell a margin expansion. I think those are value proposition that resonate even more strongly in a funding environment that is difficult.
We continue to see our pipeline of large customers continue to scale and increase. If you look at the cost of sequencing coming down, you're seeing more and more applications. If you just go back to our basic value proposition, where we save 50% in sequencing, and from sample to sequencer within a day, you know, we have a very compelling solution. As we continue to build on the platform, we're seeing our cost advantage continues to improve because we see our overall COGS per unit declining. This is a self-fulfilling circle here. Particularly when we scale the Factory of the Future with Fast Genes, we'll get a leg up again.
Jim, maybe with this transition, to margins.
Mm.
You guys have given pretty specific margin guidance, on sort of a per segment basis. I think some of the questions regarding the stock recently has been sort of the margin compression that we've seen.
Yeah.
When does it trough? When does it start to recover? What are sort of the normalized margins we should be expecting for each of these segments? Maybe help us just sort of define what you see the margin trajectory being, and what sort of-.
Yeah.
You know, in the case that you can disclose, that you can talk about it, like, what do you think the normalized margins are for each of these business we should be thinking about longer term?
Yes. We saw our margins, this last quarter two, drop to about 30%, from approximately 45%, previous quarter. Why did the margins drop? We are bringing on the Factory of the Future, you're increasing your fixed COGS. This quarter, which is our June quarter, we're projecting, gross margin to be approximately 30%. What's happening in this quarter is we're starting to ramp the Factory of the Future. We've still got the cost of San Francisco, for part of the quarter. As we continue to scale the business, our gross margin, we're projecting for Q4, which is December quarter, is about 36%. You're seeing 45% down to approximately 30%, 30% then up to 36%.
As we continue to scale the Factory of the Future, San Francisco costs have come down. We're really leveraging the Factory of the Future, Portland footprint, and with the launch of Fast Genes, we're going to see higher contribution margin. As we continue to scale the business for Q4 next year, we're going to get to Adjusted EBITDA, break even revenue, for the core business with SynBio and NGS, at annualized $285 million. For biopharma, we're targeting Adjusted EBITDA break even at revenue of $40 million a year.
As we continue to scale the business, our long-term targeted gross margins range of 55%-60%, and that's driven from, we have a platform, we get fixed cost, we continue to launch new products, and if you've been watching the sort of announcements, the new products we're launching have higher contribution margins than the current base business. It's continuing to scale and continuing to launch value-added products into the marketplace.
Got it. Maybe in the, in the minute we have left, there's a lot of other things that we didn't get to that I want to talk about, but maybe, Emily, you can kind of talk a little bit about what do you think is misunderstood about Twist at this point? What do you think the market is missing?
Maybe one thing that maybe is a bit misunderstood is, when we look at the market that we are serving, almost no customers want the same thing. It's not there's a single bullet, that there's one product, everybody gets the same. It's not. People want different flavors of DNA. They want different fragments, different genes, different vectors. They want it dry, they want it wet, they want it re- suspended, they want it normalized, they want it with the glycerol stock, they want it in a special plate. That's really what we've built, is a digital platform where we can, it's like Starbucks with, you know, any different combinations of products that you want.
Not only we can book the order in our e-commerce, but we can produce it, ship that right, perfect flavor of DNA to the right address at scale, low cost, and with amazing differentiation. I think sometimes that's lost, but that really is the reason why we've been able to grow revenue very quickly, is because we have this amazing technology that enables us to do that.
Perfect. Why don't we leave it there? Emily, Jim, thank you very much.
Yeah. Thank you so much.
Thanks.