Twist Bioscience Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 12 speakers on the call.

Operator

Welcome to the Twist Biosciences Fiscal 2023 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising you your hand is raised. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to Angela Biting, SVP of Corporate Affairs and Chief ESG Officer, please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for Twist Biosciences' conference call to review our fiscal 20 20 3 Third Quarter Financial Results and Business Progress. We issued our financial results release this morning, which is available at our website www.twistbioscience.com. With me on today's call are Doctor.

Speaker 1

Emily Leproust, CEO and Co Founder of Twist and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist Businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and directions, and then we'll open the call for questions. We would ask that you limit your questions to a maximum of As a reminder, this call is being recorded.

Speaker 1

The audio portion will be archived in the Investors section of our Web and will be available for 2 weeks. During today's presentation, we will make forward looking statements within the meaning of the U. S. Federal securities laws. Forward looking statements generally relate to future events or future financial or operating performance.

Speaker 1

Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any We'll also discuss financial measures that do not conform with generally accepted accounting principles, including adjusted EBITDA. Information may be calculated different than similar non GAAP data presented by other companies. When reported, a reconciliation between these GAAP and non GAAP financial measures will be included in our earnings documents, which can be found on our Investor Relations website at www.twistbioscience.com.

Speaker 1

With that, I will now turn the call over to our Chief Executive Officer and Co Founder, Doctor. Emily Leproust.

Speaker 2

Thank you, Angela, and good morning, everyone. The Q3 of fiscal 2023 highlights continued management of our business with a particularly strong quarter for the core business. We reported record revenue of $63,700,000 exceeding our guidance of $60,000,000 to $61,000,000 and with orders of $63,800,000 setting the stage for future growth. Beginning April 1, we shipped the vast majority of Cymba Manufacturing at this new site. Taking a step back, in December 2020, we signed a 10 year lease agreement for the space in the height of the pandemic.

Speaker 2

We made $100,000,000 investment to build out the site, which we knew would be instrumental in our next set of growth for synbio product line, Our team completed the Factor of the Future on time and budget even amid global supply chain challenges, The successful completion and the operation of our second manufacturing site demonstrates the ability of our team To plan and execute on a difficult project and lay the groundwork for future growth. We shipped about 159,000 genes out of Wilsonville this quarter and that number will continue to expand. By point of comparison, we shipped less than 12,000 genes out of South San Francisco in the same period And these were genes that had started production before we began pressure testing the Factor of the Future in April. For the core business, We continue to expand our customer base and take market share. In Syndio, our consistent turnaround time of 10 to 14 business days for clonogines and In addition to scale, in the past, price was our primary differentiating feature, but today We see almost every customer review highlights fast turnaround time as a key benefit.

Speaker 2

We will continue to drive speed as we move towards the planned introduction of fast gene in the fall timeframe. Between today and the launch in the fall, we are working on 4 key activities. 1st, We're using the software module of the internal manufacturing execution system to minimize the time that genes are idle and then testing the implementation of that software. 2nd, refining the molecular biology processes to reduce processing time where we can safely be done. 3rd, retraining the manufacturing associates, so we adjusted the new of the streamlined progression process and 4th, higherizing our e commerce platform to be able to transact with dynamic pricing.

Speaker 2

In addition, we're working on the marketing side to prepare a robust launch targeting current and future customers. I'd like to know that when we launch, we believe this will be a disruptive And we also believe there will still be efficiencies to gain in the future, further improving our turnaround time for genes and fragments. While the fact of the future is producing the vast majority of our Symbio products, our South San Francisco site continues to manufacture all of our NGS panels, Delivering excellent results for the quarter. We continue to receive positive feedback from customers. Some highlight that using our QMST4 target enrichment Sales them approximately 50% of downstream sequencing cost, reducing the customer COGS overall.

Speaker 2

In this macroeconomic environment, That value proposition resonates. We continue to win pilots in head to head trials against our competitors. In addition, We were pleased to see several positive proof points for the liquid biopsy field over the last quarter. We are substantially tied to the commercial success of our customers in this field And we believe these important tests will continue to demonstrate their value in detecting cancer and recurrences early as well as guiding treatment decisions. Expanding our market opportunity during the quarter, we launched a robust RNA Seq portfolio and the initial feedback is very positive.

Speaker 2

We have many customers trialing the products and have received initial orders. As we believe this product portfolio opens up the RNA research markets with workflows, We are particularly excited about this launch. Like all of our products, it takes time to drive revenue growth. Products we Today, I do not produce immediate revenue, but grow over the next 1 to 4 years. Through the introduction of innovative products that meet industry needs, We have carved out an issue for the core business that we expect will continue to radiate and extend within the markets we serve.

Speaker 2

Overall, The core business continues on its growth trajectory and we have delivered very good results again this quarter. Turning to biopharma. Revenue and orders both came in below our expectations. We shared in May that we were experiencing internal integration challenges and those issues have resulted in the lower numbers for the quarter. Our lagging indicators or those that we see today Underscore our headwinds, which includes deep timing, open headcounts for the sales team and internal integration challenges.

Speaker 2

We have seen some market impact from the restricted biotech funding environment, though we also see strong interest from top pharma companies Throughout the world, particularly in APAC and EMEA. These relationships take time to first turn close, impacting deal timing particularly for the quarter. In addition, we have key open headcounts for biopharma business development measures, which have been open longer than we anticipated. On the positive side, we know that where we have commercial talent, we secure deals. We are looking to roughly double our from biopharma from 5 to 10.

Speaker 2

It does take time to onboard and ramp up, so this is not an immediate fix for revenue, but we play the long game. We continue to see interest in our robust biopharma services, particularly the newly launched Twist Gold Standard offering, which combines in vivo, in vitro and in silico discovery approaches. And we continue to make progress on internal processes that we believe will set us up for operational success as the deals increase. Moving from our barfarma service referring to our internal asset monetization, we have focused our efforts and prioritized 5 programs and we're in discussions around all products. As we will cover next, we expect to hold short of our previous guidance for biopharma for the year, But I want to reiterate that we will continue to evaluate, analyze and manage the business to ensure value creations over the short, medium and long term.

Speaker 2

For data storage, we expect to demonstrate an end to end gigabyte Sentry archive workflow by the end of calendar 2023. Following on this, in calendar 2025, we expect to launch a terabyte sensor archive solution. Moving to corporate developments, We are now 3 months beyond our substantive action to accelerate our path to profitability through the shift in manufacturing and resizing the company. While the full cost savings will not be realized until the fiscal Q1 of 2024, the organization has adapted to the changes. With the reductions we have made across the business, we wanted to ensure that we also had the ability to hire key positions.

Speaker 2

Rob Werner joined us as our Chief Accounting Officer in late May, Bringing a wealth of technical accounting expertise and global accounting experience, Chad Gandy joined us in late June as our Chief Information Officer, Bringing expertise in a range of areas including application and solution architecture as well as data analytics. We are looking forward to how both executives will accelerate our With that, I'll turn it over to Gene.

Speaker 3

All right. Thanks, Emily. We had a truly outstanding quarter with a record number of customers served despite a more difficult macroeconomic environment. Revenue for quarter 3 was $63,700,000 which is year over year growth of approximately 14% A sequential increase of 6% and ahead of our guidance of $60,000,000 to $61,000,000 Orders were $63,800,000 for the quarter, An increase of approximately 7% year over year and declined sequentially by 1%. Gross margin for the quarter was 34.3%.

Speaker 3

Our customer base continues to grow, and we shipped to approximately 2,200 customers as compared to 1900 in the Q3 of fiscal 2022. We achieved this growth in the quarter when we transitioned to the Factory of the Future, and we're truly proud of the organization's ability to execute this major transition. And we concluded quarter 3 with cash and investments of $357,000,000 Now turning to NGS. Our NGS revenue for quarter 3 was a record $33,200,000 representing 14% sequential and 19% year over year growth. Our 3rd quarter orders were $33,200,000 a sequential increase of 19%.

Speaker 3

Our NGS orders year to date grew to approximately $2,000,000 about 22% growth over the same period in fiscal 2022, with the revenue for the top ten, Customers accounting for approximately 39% of our NGS revenue, and we served approximately 560 NGS customers in fiscal quarter 3. Our pipeline for larger opportunities continues to scale, and we're now tracking 279 accounts, up from 270 noted in our last earnings call, 134 have adopted Twist as compared to 131 last quarter. Now let me turn to synbio, which includes genes, DNA preps, IgG, libraries and oligo pools. Revenue rose to $25,900,000 Another record representing sequential growth of 7% and year over year increase of approximately 17%. Orders for the quarter were $27,000,000 and that's a sequential decline from $30,900,000 and is consistent with annual trends Our Syn Bio customers placed blanket purchase orders in the March quarter as they set out their new budgets.

Speaker 3

Acinetobio orders year to date have grown to approximately $85,000,000 up from $66,000,000 in the same period in fiscal 2022, which is 28% growth as we continue to take market share. In Q3, we shipped to approximately 1800 Syn Bio customers, which has grown from approximately 1500 in the Q3 of 22. Of note, our customer base for synbio includes large pharma and biotech companies as well as academia. Our genes revenue increased to $19,300,000 as compared to $17,400,000 in the Q3 of fiscal 2022, which is year over year growth of approximately 11%. As we highlighted, we transitioned our gene production to the facts of the future this quarter and shipped approximately 171,000 genes in fiscal quarter 3, an An increase of approximately 5% year over year, and we want to recognize our operations team for terrific execution.

Speaker 3

Our oligo pools and library business continues to do well. And now moving to biopharma. Biopharma revenue for the Q3 of fiscal 20 20 was $4,600,000 down sequentially from $7,000,000 Orders for the quarter were $3,500,000 down sequentially from $5,300,000 in the second This decline is primarily due to challenges Emily described and has also reflected the number of active programs, which declined from 93 to 78. We're addressing these short term challenges, and they're actively rebuilding the commercial team. I'll now cover our revenue breakdown by industry.

Speaker 3

Healthcare revenue for the Q3 of fiscal 'twenty three was $34,000,000 as compared to $29,400,000 in the same period of fiscal 2022. Industrial Chemical revenue was $16,800,000 in the Q3 of fiscal 2023 As compared to $16,700,000 in the Q3 of fiscal 2022 and academic revenue was $12,400,000 in the Q3 of fiscal 2023 compared to $9,500,000 in the same period of fiscal 2022. Moving to our regional programs for Q3 fiscal 2023. EMEA revenue rose to $19,100,000 in Q3 fiscal 'twenty three versus $15,500,000 in Q3 fiscal 'twenty two. For APAC, overall revenue increased to $5,700,000 compared to $4,800,000 for the same period of 2022 And U.

Speaker 3

S. Revenue increased to $39,000,000 in the 3rd quarter versus $35,800,000 for the same period of fiscal 2022. And then moving down the P and L, Our gross margin for quarter 3 was 34.3% as compared to 30.8% in quarter 2, which reflects the sequential revenue growth leveraging our fixed COGS and the initial impact of our cost reduction announced in early May. Our cost of revenue for the 3rd quarter was $41,800,000 as compared to $41,700,000 in the previous quarter. And as we continue to transition some of our operations from San Francisco to the Factory of the Future, In the current quarter, we expect to see the full benefit of our cost management in the Q1 of fiscal 2024.

Speaker 3

Our operating expenses for the fiscal quarter, including R and D, SG and A, change in fair value, mark to market and restructuring costs was approximately 80 $2,700,000 as compared to $86,300,000 in quarter 3 fiscal 2022. To break it down, R and D for the Fiscal quarter was $24,500,000 a decline from $36,800,000 in the same period of fiscal 2022, primarily due to a decrease in Revilar spending As Revilar was deconsolidated as of September 30, 2022. Excluding the impact of Revilar, the decrease was driven by $3,800,000 in cost reduction Activities as well as decrease of $2,300,000 in stock based compensation expense. R and D does include D and A, Storage R and D spend of $6,000,000 and biopharma R and D spend of $6,000,000 in the Q3 of fiscal 2023. SG and A in Q3 was approximately $46,100,000 as compared to $53,700,000 in Q3 FY 'twenty two.

Speaker 3

This decline is primarily due to a reduction in stock based comp of $7,000,000 Prior to the future pre commercialization costs, including SG and A, Approximately 1,100,000 associated with a number of labs that are in pre commercialization phase, and we anticipate they will be operational by the end of fiscal year. Restructuring costs for the quarter were approximately $13,000,000 including $9,000,000 for employee severance. In addition, we incurred non Cash restructuring costs are approximately $4,000,000 for asset and leasehold impairment associated with the transition of our Syn Bio activities from San Francisco to the fact of the future. Stock based compensation for the Q3 was approximately $10,800,000 Depreciation and amortization for the quarter was $8,300,000 associated Commercialization of the factory of the future, an increase of $7,100,000 in the previous quarter. CapEx investments In quarter 3, it was approximately $4,000,000 which brings our total CapEx cash spend for the 1st 9 months of fiscal year to 25,000,000 I will now cover our outlook for the year.

Speaker 3

As we've highlighted, the launch of the Factory of Future is going well with a strong quarter of operational performance. Our Syn Bio and NGS businesses are doing well, and we're addressing the challenges with our biopharma antibody business. For FY 'twenty three, our year to date revenue as of the end of the Q3 was approximately $178,000,000 For the Q4, we're increasing our guidance to the revenue in the range of $63,000,000 to $64,000,000 and that's up from the previous guidance $62,000,000 to 63,000,000 and therefore increasing our fiscal year 'twenty three guidance to $241,000,000 to $242,000,000 range, And that's up from $235,000,000 to $238,000,000 For FY 'twenty three, we are projecting synbio revenue of approximately $98,000,000 At the top end of our previous guidance range of $96,000,000 to $98,000,000 we are projecting NGS revenue for FY 'twenty three to be approximately $120,000,000 which is an increase from $113,000,000 to $114,000,000 in our previous guidance range and reflects stronger orders we discussed earlier. We expect biopharma revenue of $23,000,000 to $24,000,000 and that's a downward revision from $26,000,000 reflecting our previous comments on biopharma challenges. For Q4, gross margin, we are projecting approximately 36%, which includes costs in San Francisco associated with operations that we are migrating Normalizing out these costs, we will be projecting 2% margin increase from 36% to 30 8% for the Q4.

Speaker 3

On the expense side, we're projecting research and development expense of approximately 26,000,000 SG and A expense of approximately $47,000,000 for the quarter and restructuring expense of approximately 1,000,000 For full fiscal 'twenty three, for gross margin, we expect approximately 36% for fiscal 'twenty three. Our operating expense guidance for the year is $308,000,000 as compared to the previous guidance of 3.13 to 3.19. We're now projecting R and D expense of approximately 109,000,000 As compared to $112,000,000 to $114,000,000 in our previous guidance, we expect SG and A of $189,000,000 as compared to The previous guidance of $197,000,000 to $200,000,000 primarily due to the impact of lower stock based compensation. Mark to market is projected to be a credit of $6,000,000 onetime restructuring cost of $14,000,000 including both severance and non cash. Other income and expense for the year is projected to be approximately $12,000,000 Depreciation and amortization is projected to be approximately $29,000,000 And that's unchanged from our previous guidance and our projection for stock based comp and amortization declined to $32,000,000 from 43,000,000 Operating expense for DNA Storage is expected to be approximately $40,000,000 and that's consistent with our previous guidance.

Speaker 3

And for fiscal 2024, we also expect $40,000,000 operating expense for data storage. Net operating loss for the year is projected to be Approximately $220,000,000 inclusive of one time charges, approximately $14,000,000 for restructuring. CapEx for the year is now projected to be $35,000,000 and that's a decrease $40,000,000 previously and ending cash is projected to be approximately $325,000,000 compared to previous guidance 3.20. Before concluding, I wanted to briefly recap the impact of restructuring activities we announced in May. We estimate the overall annual savings to be $40,000,000 including $23,000,000 from operations to the transition of our Syn Bio operations to the factory of the future Approximately $17,000,000 in R and D, and we've built these savings into the guidance we provided.

Speaker 3

In summary, We're commercial shipping from the factory of the future. We're continuing to gain market share, add to our customer base and are focused on managing our cost structure as we scale. We anticipate exiting the Q4 of fiscal 2024 at adjusted EBITDA breakeven for the core business with adjusted EBITDA Breakeven. For biopharma, no delay, but we continue to manage all our business areas actively. We define adjusted EBITDA as EBITDA excluding stock based compensation.

Speaker 3

As I finish my remarks today, I'm sure that many of you read our 8 I'll concur with these earnings. And I want to say that after 5 years as CFO at Twist, I'm excited to apply my operating A semiconductor background in a new way to facilitate our next phase of growth. I'm a big believer in the opportunities We'll lay ahead for Twist and look forward to continue to contribute to our success. And with that, I'll turn the call back to Emily.

Speaker 2

Thank you, Jim. As many of you know, Jim joined us when our revenue was approximately $5,000,000 per quarter And the strategic financial equity has been integral to get us to where we are today, having reported over $63,000,000 in revenue for the fiscal Q3. Having spent the last 5 years in the CFO role, I am pleased that Jim will continue to provide guidance for our commercial scaling and operational leverage efforts As well as using a semiconductor background as we advance development for data storage. I'd like to personally thank Jim For all you have done to date and look forward to his contributions to other areas of the business, we will conduct a search for the CFO position and as soon as this is filled, Gene will transition into the new role. In closing, the core business is reaping with growth opportunity for profitable and scalable growth ahead.

Speaker 2

We have made good progress towards the launch of Fas genes, which will be available to customers in the fall of this year. For this important growth driver, We are targeting the $1,400,000,000 DNA makers market. This is a market made up of scientists and researchers in large pharmaceutical companies and academia They make DNA instead of buying it as they need it faster and more cost effectively than we believe it can be delivered from virtually any source today. In return for delivering fast genes, we will charge a premium price. Optimizing our current clonal genes and fragments workflow through software and operational efficiencies, We will be able to make all of our fast genes at the same COGS as standard speed genes with incremental price Power from FastGiant is dropping directly to the bottom line.

Speaker 2

We expect to be increasing revenue for FastGiant in the Q1 of fiscal 2024. It will be a gradual build as we leverage our digital marketing infrastructures and tools to reach the long tail of the DNA mackerels. For NGS, our workflows continue to be included in more and more assays and we believe the growth of our NGS opportunity will be sustainable for the foreseeable future. We launched a robust R and D workflow for research scientists, an area where we have a significantly smaller footprint to date, but believe we can grow and expand. Biopharma, we have work to do to turn the business around.

Speaker 2

We have interest in the offerings, both our services and our out licensing opportunities and we're working to For data storage, we're working toward delivering an end to end gigabyte century archive workflow And subsequently, the terabyte data storage solution was early released to key customers in calendar 2025. And with that, let's open up the call for

Operator

questions. Thank you. And our first question will come from Vijay Kumar with Evercore ISI. Your line is open.

Speaker 4

Hey, guys. Thanks for taking my question and congrats on good gross margin execution here. Emily or Jim, maybe my first question on orders here, down sequentially on a dollar basis. Looks like biopharma down, NGS slowed down. When you look at those orders, can you maybe talk about customer conversations you're having Cross SimBio, Biopharma Diagnostic end markets, as you're exiting fiscal CQ, How are those conversations progressing?

Speaker 4

And given high single sort of trajectory here in orders, Is that an indication for how we should be thinking of revenues for fiscal 2024?

Speaker 3

Vijay, it's Jim. Thanks for the question. As you stand back and look at the business in terms of orders, On Syn Bio, your point is correct. In orders did decline sequentially. And we saw that pattern last year and the previous year.

Speaker 3

So we saw a decline from the March to June quarter. So there's a couple of reasons for that. One is we're making progress in terms of penetrating large pharma. And what we see with a number of customers is they have their budgets allocated for the year and They secured blanket purchase orders with us to give us an indication of their business for the year. I think if you step back and you look at our growth, You look at where we are quarter to date orders versus the same situation last year.

Speaker 3

We're up in Roughly about 20 odd percent. We are seeing a strong customer growth. The fact of the future is going well, and we're continuing to gain market share. So as we look forward for next year, we See the launch of the fast genes. We see the growth in terms of NGS.

Speaker 3

NGS this year is going to be about 120,000,000 which is in line with the original November projections that we issued at the end of last year. So overall, business is really, As Emily highlighted, the business is ripping. Yes, we have a short term issue in biopharma, which we're addressing. We've got a great integrated offering. So overall, I feel good about the business, I feel good about where we're positioned with Fastjeans And we continue to gain share.

Speaker 4

Understood. And I did see you had a slide on fiscal 2024 assumptions, Jim. Looks like your cash burn projector for fiscal 2023 is about $180,000,000 that's stepping down close to $100,000,000 $105,000,000 for next year. When you think about that step down in cash burn, how much of this is being Driven by your assumptions on revenue growth versus gross margin improvements versus OpEx coming down for fiscal 2024. Some qualitative comments I think will be helpful.

Speaker 3

Yes. So you got a combination of Three areas. One is we're managing our costs. I mean, as you look at The numbers in terms of exiting this year in terms of R and D and SG and A, we brought that down. Originally for the year, we're anticipating R and D of $130,000,000 We're now down Significantly below that, SG and A we're managing.

Speaker 3

In terms of overall cost, We announced actions in May this year. We estimate that's going to say it was about $40,000,000 a year. As we exit this year, we'll go about $325,000,000 cash in terms of next year, our key focus. And this is why I'm transitioning to my new role is we're going to manage our cost structure as we go forward. We're going to drive top line growth and we're going to get to adjusted EBITDA breakeven for the core business in Q4 next year.

Speaker 3

And we feel good about the opportunities and feel good about executing to that plan.

Speaker 4

Jim, are you seeing OpEx on a dollar basis will be down next year versus fiscal 2024, is that the assumption?

Speaker 3

What the assumption is we're going to be managing OpEx as we go forward, and we're going to be leveraging our cost structure. So the goal is as we increase our revenue next year, we're going to see improvement in terms of our gross margin And we're going to get to Jeff Stiva to breakeven for the core business at the annualized revenue of $2.85 by quarter 4 next year. So essentially, the takeaway is you can take a look at our Q4 cost structure. We're going to manage roughly A number that guesses to the adjusted EBITDA breakeven for DNA storage, we're going to be managing DNA storage to $40,000,000 OpEx Next year, which is the same as this year.

Operator

Thank you. And one moment for our next question. We have a question from Matt Sykes with Goldman Sachs. Your line is open.

Speaker 5

Hey, good morning. Thanks for taking my questions. Maybe just first, Emily, on the biopharma business. I know you took some restructuring actions Last quarter, Jim referenced some sequential slowdown in orders, and I think you pushed out the EBITDA breakeven for the guide next year. Just how are you thinking about that business today?

Speaker 5

I know we're dealing with a lot of cyclical pressures, but From a structural standpoint, from a competitive position standpoint, how are you feeling that business and what are you looking to in terms of commit investment to that business over the next year or 2?

Speaker 2

Yes. Thank you. Thank you, Matt. So as you know, we serve the biopharma industry in 2 ways. 1, we sell Products in that we recorded in our Syn Bio segment and then we sell service that we recorded in our biopharma solution.

Speaker 2

And the in the syn diastolic, when you sell products, It's going fine. So our view of the market is that it's all going well. And so we have a particular issue in our biopharma services. And when we analyze and look at particular territories, if we have commercial talent in a territory, we win business. And it's not a surprise because To your point around competition, we have a very competitive offering.

Speaker 2

The combination of our in vivo, in vitro Insilico solution is extremely competitive when we have commercial talent. And so The execution issue that we have in BioPharma Solutions right now is that we do not have enough commercial talent to cover all our territories. We have 5 currently. And the most important thing for me, the one that I am focusing on the most is making sure that we hire Talent in all the territories and if we can replicate what's happening in the successful territories, I'm quite confident that the business will grow the way we expect it. So in terms of Milestones I'm looking for is 1st hiring of the talent training them, then getting orders, then getting revenue.

Speaker 2

That's the Sequence of event in which we're going to turn the business around. And as Jim mentioned, We are managing it very actively and we'll continue to do so.

Speaker 5

Great. Thanks for that. And just for my follow-up, Just on the for Emily and Jim, just on the transition on Jim, your transition. Maybe just talk about the timing, why now? And in terms of, I know you hired a search firm, but are there thoughts on internal versus external exploring all possibilities?

Speaker 5

Just kind of want to get a sense for one timing, why today and then kind of what your thoughts are in terms of replacement?

Speaker 3

Yes. In terms of timing, business is in good shape. I mean, the key issue we challenged over the last year was bring up Fracture the Future. That's going well. We're seeing a lot of interest and we have line of sight To get to adjusted EBITDA breakeven Q4 next year, so the timing from an overall commercial and business point of view is Good in terms of that line of sight.

Speaker 3

And Emily, maybe you can answer the rest of the question.

Speaker 2

Yes. I think in terms of the search, it would be an external Recruit at this point, we're just starting the process. I haven't talked to anybody yet, but it would be external.

Speaker 3

Thank you.

Operator

Thank you. Our next question will come from Puneet Souda from Leerink Partners. Your line is open.

Speaker 6

Yes. Hi, guys. Thanks here. So first of all, Jim, good luck in the new role. Couple of questions, I would say.

Speaker 6

First one on biopharma. Emily, if you could step back a little bit on about this business and talk about, I mean, look, you had meaningful cuts here. You're replatforming, you're not reaching breakeven in that business in 2024 as you expected. You're lowering your guide again. The biopharma discovery CDMO peers are calling out benefit From rationalizing of trials that's ongoing out there, so it appears at a high level that you're losing share as well.

Speaker 6

Wondering when you look at the business overall, how does this fit into the Twist's growth profile and outlook in the longer run? You're obviously doing well in the NGS core business of serving customers on the research side and the growth side. But Just trying to understand how biopharma fits into the overall strategy and picture for the company longer term?

Speaker 2

Yes. No, thanks for the question. So as a reminder, in our biopharma services, what we sell Discovery services, so discovery of antibodies, bispecific HS, ADCs, Some TCR, some cell engineering, so we are selling services for the early stage Of the drug pipeline, so drug discovery, some optimization, some developments, but Typically, we stopped at the preclinical stage. And actually on the synbio side, when we sell our fragments, our genes, our oligo pools to those same customer, We are also listening to those customers for the discovery development Optimization. And so the benefit to Twist of having both the product and the service That's when we get in front of a pharma customer, small biotech, large biotech pharma, we're able to sell the full money.

Speaker 2

We're able to Tell our customers and if you're going to do the work yourself by using our gingine fragments, IGG from syn. Io, you're going to be more effective, more productive in your efforts for antibodies and drugs and that is working. That message resonates well. And then what we are saying at the same time is and by the way, If you have a target for which you are not able on your own to find a therapy or if you have too many targets And you're not able to prosecute all of those internally. Outsource those target to us, we'll discover the antibodies for you as a service and And then go into the biopharma service business.

Speaker 2

And so we are serving the same customer and having both menu of Product and services is synergistic. Right now, it's benefiting more the symbiotic side. As I mentioned, we have some commercial execution issues in some territories on the biopharma service. But having the 2 together, we see it as a net positive. And again, well, I'm quite Optimistic as I see the territories where we have commercial talents, it works.

Speaker 2

So if it works once, do it again. And of course, we'll monitor their activity, but we're quite optimistic for the future.

Speaker 7

Okay.

Speaker 6

Got it. Then just a brief one on the writers. Can you just remind us how many writers you have currently operational in Wilsonville? And What do you expect that number to be by year end?

Speaker 2

So right now, we have 4 writers in San Francisco As well as 4 writers in Wilsonville, they're all operational. In Wilsonville, we have There is for 12 additional writers. At this point, we do not have we don't have writers on order. So for the foreseeable future, those 4 plus 4 are going to serve our needs.

Speaker 6

Got it. Thanks.

Operator

Thank you. We have a question from Luke Sergant with Barclays. Your line is open.

Speaker 7

All right. Good morning, everybody. Thank you for the questions. Jim, it's a no lock is needed, man. You're going to I mean, you're going to be missed.

Speaker 7

On the so quickly here on the liquid biopsy partnerships, can you tell us how to think about When we should start seeing if you guys are on the MRD, but as that MRD ramps across that space, How do you think about the growth in the NGS side? And can you just remind us or give us some type of directionality on The economics that you guys achieve per sample?

Speaker 2

You want to take that, Jim, or you want me to take it?

Speaker 3

You can take it, Emily.

Speaker 2

Thank you, Luc, for the question. So as a reminder, as you know, We get baked in into liquid biopsy MRD assays. And as we win this pilot, as the customers get Validated and as they go commercial, we are tied into their commercial success. And the way I see it is, they use our reagents in their production And so every time they analyze a patient, they use some regions from Twist. And so We participate as a function of their revenue Rand, in terms of the dollar amount that we try to get, typically We think that around 10% of the air COGS is a fair value.

Speaker 2

Sometimes we get more. And it also depends on the extent of the chemistry they use from us. Some customers, they only use the DNA And for the capture, and so that's how we win from the we win based on the quality of our DNA. And then In many cases, we're able to extend to the other components of the chemistry. We and sometimes we said the full solution, all the reagents From the sample to the sequencer, so the barcodes, the beads, the adapters, the enzymes, buffer, everything.

Speaker 2

And at that point, we're able to expand The percent of the curve that we can comment.

Speaker 7

That's fine. And then as factory future starts coming online, when can we expect you guys to start taking orders there? Is that 4Q is that next quarter? And then as the initial demand and interest is coming online there, how are you guys are you seeing more interest for the jeans, the pools, like Which of the products are you guys getting most interest or initial interest on right now?

Speaker 2

Well, all the segments are going well. Libraries And then euros in any case, laboratories are going really well at fragments as we have We've started to accelerate the speed at which we can ship fragments. Right now, fragments are Also doing really well. And what my expectation is as we launch Fas genes in the fall, That also should be a great driver, of course. So I'll say, depending on the customers we touch, There is something for everybody to like and that's a testament to the quality The product, how priced right they are and The user experience that they get from TwistSuite, I often say that the DNA is free people pay for the user experience.

Speaker 2

And from the time they get on the website to the time they get the Invoice, it is very frictionless, beautiful and intuitive experience and that It's a key element that is often missed of our success.

Speaker 7

And on the fast gene, just a Are you guys starting to take orders next quarter for the fast genes?

Speaker 2

You're getting in trouble because there's only 2 questions. As soon as it's launched, we'll

Operator

Thank you. One moment for our next question. It comes from Stephen Ma with TD Cowen, your line is open.

Speaker 8

Great. Thanks for the questions. Just a follow-up question on the BioPharma business. I think you guys said that the number of active programs have dropped. Are those drop programs, are they mostly from emerging biotech partners or was the program loss across the board From your partners, just trying to get a sense of where we're seeing most of the weakness in your biopharma business.

Speaker 2

Also, maybe we should clarify that as we finish a program, We are done. And so we drop it from the list of active programs. And then We get paid to send the invoices. And so the fact that the IT program dropped means that we finished more programs than we started. And that is a reflection of our order being Our orders right now decelerating and so the revenues will decelerate following those orders.

Speaker 2

But as I mentioned, we're highly focused on hiring commercial talent because where we have talent, we win deals.

Speaker 8

Okay. Thanks for the clarification. Yes, and maybe then on like the new partnership And yes, I appreciate that you haven't been you're not fully resourced. But have you seen a push for more partnerships with less Upfront and more back end economics, is that impacting your calculus on new partners and program adds?

Speaker 2

Yes, that's a great question. We as a guiding principle, we are not subsidizing The research of our customers and so we always want to The fee for service to pay for our work with a good margin. And if we can get tail end with marks on royalties, that's a great benefit. But we are highly focused on making sure that the upfront payment is a fair exchange for the value that And that's what we provide. So I'm not hearing of a pressure on that Upfront fee, I think it's once we are able to have the commercial tenant be able to articulate the value of what we bring, I think the fee for service is very much in line with the value that our customers

Operator

Thank you. Our next question comes from Catherine Schulte with Baird, your line is open.

Speaker 9

Hi, thanks for the questions. I guess first going back I think you said you talked about seeing revenue from those in the fiscal Q1 of 2024. Just based on your conversations with customers, what kind of

Speaker 2

Yes. Thank you, Catherine. It's a great question. So What we have seen is definitely the passive value of the faster gene It's going to be different for academic customers compared to industrial customers. And so Probably actually I think for the first time in Twist history, there will be a different price for academia as there will be for industry, Just because industry is willing to pay more for those faster genes.

Speaker 2

And then in terms of What that premium is going to be, we have set up what We call dynamic pricing, which will enable us to do price discovery with those customers to be able to get the optimal Price that maximizes the volume and the gross margin that we can extract. So we I'm not quite willing to guide it yet, but we've put in place the commercial mechanics to be able to make sure that we do not leave money on And that's what the dynamic pricing is going to bring us.

Speaker 9

Okay, great. Thanks. And then you had a nice step up in gross margin this quarter. Are you still confident in a 49% gross margin for fiscal 2024?

Speaker 3

So, good question in terms of step up in gross margin. That reflects Couple of things. One is the initial impact of cost reductions. 2nd is as we leverage the our cost structure, I see you saw the sequential revenue growth. In terms of outlook for fiscal 2024, we are focused on getting to adjusted EBITDA breakeven.

Speaker 3

And in terms of I mean, it's a good question in terms of Fastgene's. I mean, I'm Particularly excited about Fastgene's launching. A, it demonstrates the capability of the factory of the future. But B, we get premium pricing. And as we get premium pricing, that's going to reach our margins.

Speaker 3

Our long term focus, I mean, we've got over $500,000,000 of Potential annualized revenue based on our capacity at both San Francisco and Back to the future and I mean as we approach the $500,000,000 we're targeting gross margins in the range of 55% to 60%.

Operator

Thank you. And our next question will come from Rachel Fadstahl with JPMorgan, your line is open.

Speaker 9

Perfect. Hi, guys. Thanks for taking the questions. Just one for me today. I wanted to follow-up on APAC in China.

Speaker 9

So last quarter, you guys had flagged that you were starting to see a rebound in the region, but then it Like revenue stepped down sequentially there this quarter. We've heard some concerning updates across the industry out of China. So I was wondering if you could just walk us through What are you seeing in China and broader APAC? And then how did those orders really trend this quarter? Thank you.

Speaker 3

Yes. So good question. Overall, in terms of I mean, year over year, we're growing in APAC. In China, revenue did step down from our September quarter last This year to our December quarter went down to 1.4. We saw a pickup in revenue to approximately $2,000,000 in the March quarter.

Speaker 3

We saw revenue about $2,000,000 Clear there are issues in China in terms of demand. However, Overall, we're predicting about $7,000,000 for China this year, which is flat with last year. That's coming in slightly below what we had estimated. Overall, we had anticipated targeting roughly $9,000,000 this year, But we have seen pickup from Q1, and we are seeing opportunities, and that's driven by the value of our portfolio, I mean, the major products we're shipping in China are NGS and oligo pools, and we're also seeing Some other opportunities emerging. So we have a great facility there and we've got great sales team.

Speaker 3

And Although other people are seeing a sequential decline, our revenue was approximately flat from March quarter to June quarter.

Operator

Thank

Speaker 3

you.

Operator

Our next question will come from Matt Larew with William Blair. Your line is open.

Speaker 10

Hi, good morning. The first question would just be a follow-up to Luke's around preparation for

Speaker 5

For the

Speaker 10

last gene launch, Emily, you walked through 4 key activities that are in play here to get ready for the launch. Maybe as you think about progress to launch and potential upside or key factors To ramp in Q4, maybe stack rank at confidence level and progress on those items that you're targeting? And should we expect contribution in the Q4 here given a fall launch, which I think

Speaker 2

Thank you. Great question. Even if we launch on the 1st day of fall and it It is possible that there could be some contribution in September, but that's not what we are looking for. I think the main contribution will start in Q1. In terms of the stacked I thought that we still have to continue.

Speaker 2

What we've told the team is that we do not want the e commerce To be the long pole in the tent and so to the extent that the work in the lab Get done sooner. The e commerce is going to be ready before that. And so it's purely What happens in the lab that will drive the timing of the launch? We've launched Product many, many products that's one of the strengths of Twist is we have many different flavors of DNA and we have a good sense of what needs We're on track, very optimistic with the way things are going and It will be driven by actions in the lab, not by e commerce.

Speaker 10

Okay. Yes. Obviously, FasGene is sort of the next new product, but in May, you launched an RNA portfolio and last May, You

Speaker 3

launched ITG.

Speaker 10

So just curious what kind of traction you may have seen with ITG and Perhaps initial feedback or opportunities that you're seeing with the R and A portfolio?

Speaker 2

Yes. So Initial feedback from RA and portfolio is has been positive. We are seeing orders for people to test. And then from there, we will expect Reorder and Enram. Stepping back to The IGG launch, it's been frankly, it's been average.

Speaker 2

The Product for IGG is not quite highly differentiated. And so we expect that The differentiation from Fasgene is going to be greatly influencing the ramp. As you know, the more differentiated you are, the Faster, you run. So, within 5Gym will run faster. And as we make genes fast, we'll be able to bring that benefit to IGG.

Speaker 2

And so we think that we could get the double benefit of not only having fast genes, but also being able to Improve the differentiation of other products that are derived from genes and so our IgG are also going to accelerate in speed.

Operator

Thank you. And our last question will come from Sung Ji Nam with Scotiabank.

Speaker 11

Your line is open. Hi, thanks for taking the questions, and congrats on the quarter and to Jim on the next chapter. So maybe on the another question on the RNA sequencing portfolio, congratulations on launching that. Could you talk about kind of what the market potential there is relative to the DNA sequencing market and kind of what the current

Speaker 2

Yes, great question. So we think the market is probably about as similar size, Very different customers on the DNA side. We are targeting diagnostic companies that are using our DNA to analyze samples and provide a clinical report. On the RNA, we are mostly going after academic customers. Although over time, I think RNA Seq could go into the clinic, but right now it's mostly academic that we are targeting.

Speaker 2

The differentiation that we bring with our product on RNA Seq is 1, a much faster workflow. So you can go from sample Sequencer significantly faster with less hands on time. And so in academia, that is very useful. In a setting where maybe if it's an automated setup, It doesn't really matter or it matters less within academia and on time is key. And then we also With our RNA exome, we're about to enable customers to significantly Reduce the number of reads that are wasted on part of the RNA sequence space that is not interesting like Housekeeping genes and tRNA's and so on.

Speaker 2

And so therefore, it lowers the cost per sample. And again, that's a strong Resonance with Academia to lower the cost per sample. So those are the two differentiation. And We have a very late entrant in our NSE. We're probably number 12, I guess, in the market.

Speaker 2

But In truth with fashion, we came in with some differentiation and I think that's going to enable us to take market share.

Speaker 11

Great. That's super helpful. And then just thank you for all the color on the biopharma end market. Just curious for your liquid biopsy and MRD Customers, are you seeing relative stability from the funding or spending perspective for that segment of the market?

Speaker 2

You want to take that?

Speaker 3

Yes, yes. So I mean NGS is going well. And We've got we're building the pipeline NGS customers. In terms of overall Positioning, our customers save in terms of sequencing costs significantly. So we continue to win and gain share.

Speaker 3

So overall, I mean, we give our customers, I mean, we had great value proposition and We haven't seen any significant issues. We continue To look forward to growth in that business driven by increasing test volume and increasing adoption of liquid biopsy. And the number of customers that adopt us continues to increase. So I'm bullish on where we are with NGS, when and we just reflecting my role as CFO, 1st year in NGS, our revenue is $3,000,000 and now we're $120,000,000 and there's more and more applications emerging. And as cost of sequencing comes down, it's going to end up to be, I mean, a huge, huge opportunity for Twist And benefits the world as well.

Speaker 3

And, yes, I'm excited about where we're going to go.

Operator

Thank you. I'm showing no further questions in the queue. I'd like to turn it back to Emilie LeProusse for closing remarks.

Speaker 2

Thank you very much for joining us today. We are driving towards adjusted EBITDA breakeven for the core business and significant corporate years ahead. I am very it's a very exciting time at Twist, And I look forward to reporting our progress in the months ahead. Thank you very much for joining.

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Earnings Conference Call
Twist Bioscience Q3 2023
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