Twist Bioscience Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Welcome to Twist Biosciences Fiscal 20 24 Second 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 Please be advised that today's conference is being recorded. I would now like to turn the conference over to Angela Binney, SVP of Corporate Affairs. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone. I would like to thank all of you for joining us today for Twist Biosciences' conference call to review our fiscal 2024 Q2 financial results and business progress. We issued our financial results release after the market, and the release is available at our website at www.twistbioscience.com. With me on today's call are Doctor.

Speaker 1

Emily Laproux, CEO and Co Founder of Twist and Adam Lapona, CFO of Twist. Emily will begin with a review of our recent progress on Twist business. Adam will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and direction. We'll then open the call for questions.

Speaker 1

We would ask that you limit your questions to only one and then re queue as a courtesy to others on the call. As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for 2 weeks. During today's presentation, we will make forward looking statements within the meaning of the U. S.

Speaker 1

Federal securities laws. Forward looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods are subject to risks and uncertainties These risks include those set forth in our press release we issued earlier today as well as those more fully described in our filings with the SEC. The forward looking statements in this presentation are based on information available to us as the date hear us and we disclaim any obligation to update any forward looking statements except as required by law. We'll also discuss adjusted EBITDA, which is a financial measure that does not perform with generally accepted accounting principles.

Speaker 1

Information may be calculated differently than similar non GAAP data presented by other companies. When reported, a reconciliation between GAAP and non GAAP financial measures will be included in our earnings documents, which can be found at our Investor Relations Web site at www.quipbioscience.com. With that, I will now turn the call over to our Chief Executive Officer and Co Founder, Doctor. Emilie Labroust.

Speaker 2

Thank you, Antela, and good afternoon, everyone. I'm thrilled to be here today to share the remarkable achievements and outstanding performance our company has delivered over the past quarter. Our strong results validate the hard work, dedication and innovative spirit that define our team at Twist. We have made significant strides in executing our growth strategy, increasing our customer base and driving towards profitability for the business. Our proprietary platform for making Sandeep DNA remains at the core of our product portfolio, defines our competitive advantage in all markets, and enables our flywheel for growth and the strong financials we share today.

Speaker 2

For the course of the second quarter, we continued our robust growth trajectory, increasing revenue 25 percent year over year to $75,300,000 Orders for the quarter reached a record level of over $93,000,000 The strong quarter was driven by growth in our synthetic biology product line, including text messaging, and bolstered by consistent strength in NGL. We reported a 41% gross margin for the quarter, an increase of 10 margin points versus the same period last year. We do see puts and takes in the margin quarter to quarter, which Adam will discuss in his remarks. That said, over the next several periods, we expect the initiatives we are thinking will drive us to a gross margin above 50% by the end of fiscal 2025. To that detail for synbio, revenue increased to $29,800,000 with very strong orders of $44,900,000 Synbio revenue grew 24% year over year and 11% sequentially.

Speaker 2

Orders in Synbio included significant blanket purchase order, where customers placed a single blanket order for a large amount and then orders against that PO over the course of the next several quarters. Twist received blanket POs routinely, primarily in the Q1 of the calendar year as budget reset. That said, this level of bank FPO exceeds prior year significantly. We believe this increase is due to our diversified product lines, including X-ray Gene and consistent rapid turnaround time, both of which give our customers confidence to commit to a solid year. As you know, in late January, we expanded our Xpress gene offering from a limited launch, including about half of our chronogene volumes to include all chrono genes.

Speaker 2

At the time, we began a marketing campaign and outreach to potential customers buying from competitors or making their own genes. So still relatively early days for Xrefs Gene, we are pleased with the progress to date. Keeping in mind that our current quarter, our fiscal Q3, will be the 1st 2 quarters that includes all ExpressGene offerings, we want to provide a bit more color around the success to date. Approximately 15%, 1 5 percent, of Chronology's revenue for the Q2 came from XpressGain. Genes.

Speaker 2

As of March 31, we had received more than 1600 orders for Xpruit Genes since launch in November, with more than 700 accounts purchasing Xpruit jeans to date. This includes more than 100 net new accounts specific to X3 jeans. We define net new accounts as a new customer organization entirely, or it can be a new shipping address at an existing institution. Both count as net new accounts. Customers receive extra jeans in about 5 to 7 days, significantly faster than our standard jeans turnaround time.

Speaker 2

For this speed, they upped into a premium price. We vary this premium based on capacity within our large recent Oregon facility, a site custom build for this product line and a site of LR for expansion into other significant products. Because we make oral technologies on the Express timeline, the increase in price premium truly drops to gross margin. At the end of February, we began differentiating the premium between academic and industry customers. With industry groups receiving a higher premium, a common practice in the industry.

Speaker 2

Moving to NGS, we posted another very strong quarter as revenue grew to $40,800,000 an increase of 40% year over year with $42,500,000 in orders. This quarter, strength for our NGS portfolio came from customers who have advanced their assets into clinical studies and became commercial as well as growth in the smaller NGS customers who are earlier in the development processes. Several clinical customers include Twist in their assets, and we applaud the incredible progress each is making for patients in rare disease, cancer detection, early cancer detection and monitoring of minimal residual disease. Our panels are incorporated into a number of different, sometimes competitive tests, and what we see other times is that providers are adopting these tests. The volume of commercial tests increases with patient adoption, as each test that is run requires Swiss DNA.

Speaker 2

We have customers who are doing very well leveraging the Twist Chemistry advantage and others who need additional funding to continue scaling. The benefit of our business model is that we have diversified our revenue across many customers and applications, with no single customer accounting for more than 10% of our revenue. In addition, we continue to add smaller accounts that have the potential to grow significantly as the volume of their application or test runs. Up until this year, our NGS product portfolio has been focused primarily on target enrichment for the analysis of DNA, RNA amylase inhibitors. As we have said before, we want to offer our customers a complete workflow solution from the sample to the sequencer, and we are confident that our latest products solidify our leading position in the liquid biopsy and MRD, while expanding our differentiation within other areas of the workflow.

Speaker 2

Importantly, we introduced differentiated products to enhance science and clinical capabilities. In February, we added an incredibly powerful cell free DNA library prep that captures many molecules that may otherwise be missed in these assets. Because the sensitivity of the liquid biopsy research assay begins with the bbrep, capturing more molecules can improve the signal to noise ratio and the sensitivity of the test. We believe our innovative DNA library prep provides an advantage here, and the initial commercial performance is very encouraging. During the quarter, we announced technology early access for a second truly differentiated library prep, the ultra high throughput library prep kits.

Speaker 2

We believe this is the highly differentiated product we need to convert customers using microarray to NGS plus sequencing with applications in AgBio and Genotyping. We believe this is a very large market opportunity, We expect that this product will drive NGS revenue in the medium to long term as it requires a change in workflow for the customers from acquired readers to sequences. Surprisingly, for our customers in Europe, we launched a CE Mark portfolio of Precision DX products to support the evolving regulatory landscape in that geography. This is a first foray into the regulated market, and we look forward to continued evolution in markets beyond Europe. We believe our experience with regulated products will inform any future product developments driven by FDA's moves to regulate laboratory developed tests or as it is, in the U.

Speaker 2

S. For biopharma, revenue was $4,700,000 with order increasing to $5,800,000 dollars We'll continue to deliver on programs for our partners across a spectrum of offerings. Importantly, we expect at least 1 partner to initiate human studies with an antibody discovery in Twist platform within the next year. For data storage, we remain focused on technology development and enablement the terabyte CenturyArchive workflow for early access in Canada 2025. Progress continues, and we see this area of our business as a valuable asset with optionality at multiple points of development.

Speaker 2

As we look at margins, in fiscal Q1, we reported a strong gross margin driven primarily by mix and significant NGS revenue. We maintained our margin in the Q2, beating our guidance by 2 points with continuous strength in our MGS business as well as Express GIM contribution. As we look over the next 18 months, in addition to driving revenue growth, which is the primary driver of margin, we intend to continue to focus on margin improvement initiatives, including product enhancement, operational excellence, in sourcing and process optimization. In addition, we're in the process of mega shifting contracts with suppliers and in some cases with customers willing to provide volume commitments for fixed premium pricing on Express G. We believe these initiatives, as well as further volume leverage of our fixed costs, enable our ability to improve our margins by several points, and we see a path to gross margin north of 50% by the end of fiscal 2025.

Speaker 2

With that, I'll turn over the call to Adam to discuss our financials.

Speaker 3

Thank you, Emily. Revenue for the Q2 increased $75,300,000 growth of 25% year over year and approximately 5% sequentially. Orders increased substantially to $93,200,000 with strong orders driven by significant blanket purchase orders expected to be used over the next three quarters. This includes approximately $21,000,000 for Syn Bio $9,000,000 for NGS. As Emily said, gross margin came in higher than expected at 41% for the Q2 of fiscal 2024.

Speaker 3

During the Q2, we shipped to 2,253 customers. We ended the quarter with cash, cash equivalents and short term investments of approximately $293,000,000 Taking a deeper dive into revenue. Synbio revenue increased to $29,800,000 growth of 24% year over year with orders increasing to $44,900,000 We shipped 193,000 genes in the quarter. Synthetic genes revenue, which includes both clonal genes, gene fragments and IgG increased to approximately $22,400,000 growth of approximately 24% year over year. Approximately $15,600,000 or 52% of our synbio revenue was from clonal genes, but $2,200,000 in revenue coming from Express Genes.

Speaker 3

Within the synbio umbrella, OYO pool revenue increased to $3,900,000 and DNA Library's revenue increased to $3,500,000 year over year growth of 19% 25% respectively. MGS revenue for the Q2 grew to approximately $40,800,000 compared to $29,000,000 in the Q2 of fiscal 2023, an increase of 40% year over year. For the quarter, revenue from our top 10 NGS customers accounted for approximately 36% of revenue. Orders increased to $42,500,000 which we anticipate sets the stage for further NGS growth. We served 558 NGS customers in the quarter, with 138 having adopted our products.

Speaker 3

For biopharma, revenue was $4,700,000 with orders increasing to $5,800,000 We had 67 active programs at the end of March 2024 and we started 34 new programs during the quarter. Looking at revenue by industry, healthcare revenue rose to $40,900,000 for the Q2 of 2024 compared to $33,800,000 for the same period of fiscal 2023, reflecting the increased uptake of our products by pharma, biotech and diagnostic companies. Industrial Chemical revenue rose to $20,300,000 in the 2nd quarter, up from $14,400,000 in the same period of fiscal 2023, strong growth year over year. Academic revenue was $13,700,000 for the Q2 of 2024, up from $11,100,000 in the same period of fiscal 2023, with growth coming from both SymBio and NGS customers. Looking geographically, Americas revenue increased to approximately $45,900,000 in the 2nd quarter compared to $34,900,000 in the same period of fiscal 2023, growth of 32% year over year.

Speaker 3

EMEA revenue rose to 22,300,000 quarter versus $18,800,000 in the same period of fiscal 2023, growth of 19% year over year. APAC revenue increased to $7,200,000 in the 2nd quarter compared to $6,500,000 in the same period of fiscal 2023, growth of 11% year over year. China revenue was $1,400,000 a small percent of our total revenue for the quarter. Our gross margin for the Q2 increased to 41.0%. We saw strength from Express Jeans revenue lifting margins offset by a contracted SymBio customer who placed and received a large order within the discount terms in Q2.

Speaker 3

Our NGS offerings continue to have strong gross margin performance. However, we did see and expect to continue to see puts and takes in our gross margin based on contracted customer mix for margin fluctuates based on the individual customer orders in a given quarter. Finally, I am encouraged by the enterprise wide focus on gross margin improvement initiatives and also expect these initiatives will take multiple quarters to result in a material impact. In total, operating expenses for the Q2 were 124 $200,000 compared with $121,800,000 in the same period of 2023. Breaking this down, cost of revenues increased to $44,400,000 in the Q2 of 2024 compared with $41,700,000 in the same period of fiscal 2023, primarily due to higher product volume as well as increased depreciation and amortization expense, mostly due to the build out of our new manufacturing facility in Wilsonville, Oregon.

Speaker 3

R and D decreased to $24,100,000 compared with $27,400,000 in the same period of fiscal 2023, primarily due to the reduction in headcount as well as lab supplies. SG and A was $55,600,000 for the 2nd quarter compared with 54,000,000 dollars The increase was driven largely by stock based compensation and bonus accrual catch up as the business is performing above forecast at this time. Operating expenses included approximately $7,000,000 for data storage. Stock based compensation for the quarter was approximately $13,800,000 Depreciation and amortization were $8,300,000 for the quarter. Net loss attributable to common stockholders was $45,500,000 or $0.79 per share for the Q2 of 2024, compared to a net loss of $59,200,000 or $1.04 per share for the same period of fiscal 2023.

Speaker 3

Cash flow from operating activities continues to improve and we are driving the breakeven. In the 6 months ended March 31, 2024, net cash used in operating activities was $42,400,000 compared to $98,400,000 for the equivalent 6 month period in 2023. Moving forward, we will also provide adjusted EBITDA, a non GAAP measure. The reconciliation between the GAAP and non GAAP financial measures will be included in our earnings documents, which can be found on our Investor Relations website. Looking back in time, the Q2 of fiscal 2023 adjusted EBITDA loss was approximately $46,000,000 In the Q2 of fiscal 2024, adjusted EBITDA loss was approximately $27,000,000 For the Q4 of fiscal 2024, we see a path to an adjusted EBITDA loss of less than $20,000,000 Turning to guidance.

Speaker 3

For fiscal 2024, we now expect total revenue to increase by $12,000,000 across the range to approximately $300,000,000 to $304,000,000 anticipated growth of 22% to 24% year over year. Increase in bio revenue of $118,000,000 to $120,000,000 an increase across the range with the year over year growth anticipated to be 20% to 22%. NGS revenue of $162,000,000 to $164,000,000 an increase of $12,000,000 across the range and anticipated growth of 31% to 33% year over year. Biopharma revenue was approximately $20,000,000 a decrease of $4,000,000 from prior guidance and 13% year over year. We are increasing our expected gross margin of approximately 41.5% to 42% for the year.

Speaker 3

We are reducing our expected loss from operations before taxes to approximately $183,000,000 to $188,000,000 a decrease compared with prior guidance of $189,000,000 to $194,000,000 CapEx is still projected to be approximately $15,000,000 for fiscal 2024, unchanged from prior guidance. We project ending cash of more than $245,000,000 at the end of fiscal 2024. For the Q3 of fiscal 2024, we expect overall revenue of approximately $77,000,000 SymBio revenue increasing to approximately $31,000,000 with the full launch of Express Gene's portfolio. NGS revenue of approximately $41,000,000 on track with our increased annual guidance. Biopharma revenue of approximately $5,000,000 gross margin for the Q3 of 41% to 42%.

Speaker 3

For the 4th quarter, we expect overall revenue in the range of $77,000,000 to $80,000,000 Gross margin for the 4th quarter was 43% to 44%. In summary, I'm encouraged by the progress in an enterprise wide focus on financial discipline that I've seen during my Q1 with Twist. We will continue to maintain financial discipline throughout the organization and make progress on the path to profitability. With that, I'll turn the call back to Emil.

Speaker 2

Thank you, Adam. In closing, we are very confident in the continued impact and growth opportunities generated from our proprietary DNA synthesis platform, our growing customer base, our increasing revenue profile, our defining product portfolio and, of course, our exceptional employees, positively moved the needle for our customers across multiple industries. I also had the privilege of talking to our customers, listening to how they drive groundbreaking scientific investments in wide ranging fields from healthcare to chemicals to academia, ag bio and more. I am very proud that Twist plays an important role in facilitating this work, and we are only getting started. We are enabling our customers to produce proteins that target and destroy cancer cells, to create new diagnostic tools that detect diseases early in accuracy, to make compounds that are more sustainable and also less expensive, to name only a few applications.

Speaker 2

We manufacture our DNA in 2 locations, 1 in California and 1 in Oregon, with a global commercial and support team to deliver superior service to all of our customers. As we look ahead, we are more excited than ever about the vast potential that lies before us. With our cutting edge technology, world class team and laser focused strategy, we are poised to capitalize on the immense opportunities that lay ahead in scientific biology, NGS, biopharma and data storage. I am incredibly proud of what we have accomplished, and I am confident that our best days are yet to come. Let's open up the call for questions.

Speaker 2

Operator?

Operator

Thank you. Our first question today is coming from Matt Sykes of Goldman Sachs. Your line is open.

Speaker 4

Hi, good afternoon, Emily, Adam and Angela. Congrats on the quarter. Maybe I could just start out on margins. You obviously beat gross margins this quarter. It looks like on the back of NGS, but a small contribution from Express Jeans of like $2,200,000 So I expect most of that beat was from NGS.

Speaker 4

But as the year progresses and Express Genes continue to grow, could you give us a sense for the contribution of margin expansion from Express Genes, maybe either providing some expectations for Expressgenes revenue growth or volumes for the balance of the year and what contribution to margin expansion is already in the guide from Expressgenes specifically?

Speaker 3

Hey, Matt. Thanks for the question. This is Adam. I'm happy to give you some of the quantitative on this and we can jump in with color as well. First, we are very excited about the Express achieved launch this quarter.

Speaker 3

And then remember when we launched it here in late January with a full offering when it was still only a partial quarter. So we expect in the Q3 here that we're currently in the end of June will be our Q1 full Express Jeans. We have not broken out the exact Express Jeans volume in the guide. We do see that contributing to the gross margin sequential improvements we have in our guide and it did help with the movement we saw this quarter. But we're still early days and we continue to use the some of the testing we're doing day to day in terms of the pricing and what we're monitoring and watching it, but we have not broken that out in our guidance at this point.

Speaker 4

Got it. And then just on the NGEST tools business, just hearing from some of your competitors in that space that are having some challenges, it seems as if given your results, you're continuing to take share there. Could you maybe just help us understand for context sort of what the market share opportunity is in the NGINX tools business for you? And what is sort of the runway that you have for accelerating growth, either given the market structure, your current penetration in share and what it could be? Thanks.

Speaker 2

Yes. Thank you, Matt. This is Emily. You're correct that we are definitely taking market share, and it's not an accident. It's based on the innovation that we've built into the product from the quality of our panel that reduces the cost of sequencing to extending to other applications to RNA and methylation.

Speaker 2

Also the fact that we now offer a full workflow solution from the sample to the sequencer. And finally, and very importantly, the us being a supply chain partner to our customers as they grow. So far, the vast majority of our the majority of our revenue come from liquid biopsy applications. And in terms of the market potential for liquid biopsy, it's really big. We are only at the beginning of liquid biopsy adoption.

Speaker 2

And as the adoption of those tests ramps, as liquid biopsy, the medical imaging market as a whole grows, our goal is to be able to capture about 10% of the COGS of our customers. So we believe that there is a lot of room to grow in liquid biopsy. For the other markets, mRNA, we are well it's very early days. The pilots and the initial tests are encouraging. And then for us, for the capture of the AgBio market that is currently being done on microarrays and where we want to move it to Twist plus sequencing, we think that that market alone could be $500,000,000 So a lot of opportunity for us.

Speaker 2

And again, it's not an excellent space on the differentiation of the products and the commercial violence that we deploy.

Speaker 4

Great. Thanks, Emily.

Operator

Thank you. One moment for our next question. And our next question will be coming from Vijay Kumar of Evercore. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my question and congrats on a really good print here. Emily, maybe my first one here on the orders here, that's a big, big number, up 45%. Were there any one timers? Was there any pull forward?

Speaker 5

Or maybe just characterize the order trends throughout the as the quarter progress?

Speaker 2

Yes, great question. Thank you. So there are 2 types of orders. Orders that are actionable today, meaning it's the order, the PO comes with the sequence. And in Syn Bio, it gets made in 5 days.

Speaker 2

In NGS, it gets made in a few weeks, gets shipped, we book the revenue. And one thing that was a bit particular this quarter is we got a bigger number of the second kind of orders, which are blanket peer orders. So those are they come from customers where they kind of have a budget and they decide typically at the beginning of the year, they decide where they're going to spend that budget with which company. And so the blanket PO gets provided, gives us a sense of volume that's coming. And then as the researcher designs the sequence that they want, they send us a sequence, the other is already there, we produce again ship and book revenue.

Speaker 2

And so what happened this quarter is we had more blanket PO orders that we typically have had in the Q1 of the calendar year. And I think that's a reflection of the fact that in our Q1, so in calendar Q4, some customers have tested Express Gene. In our Q2, Cananda Q1, more customers have tested the Express gene. And as they have received those genes on time, basically our Express Genes do what it says on the label. I think we've earned the confidence of those companies and they've been willing to give us their blanket P order, meaning they're giving us their confidence that they will order from us in the rest of the year.

Speaker 2

So I think that's the dynamic that we see. It's a reflection of the strength of our offering.

Speaker 5

That's fantastic. And then Adam, maybe just back to the question. So you don't think there was anything one off. These are underlying trends. And is that what's driving the sequential gross margins in the 3Q and the 4Q that's a pretty meaningful step up in gross margin for Q4?

Speaker 3

This is Adam. It's a great question. And I think the it's fair to say that this is not there was not a one time, but it also did break from our historical behavior that oftentimes some of our larger customers do put in blanket purchase orders at the beginning of the year. We're seeing a larger volume of that this year. So I think there is it's a vote of confidence, but it's not something I'd expect sequentially to occur every quarter because the nature of the calendar year where folks put those out.

Speaker 3

In terms of us moving forward, both in terms of the growth in the business, the increase in the guide of about $12,000,000 in the midpoint from where we were before for the year as well as the expansion on gross margin both full year and sequentially. This does play as a tailwind. I think we talk a lot about Express Jeans and we talk a lot about NGS mix driving the margin, but the number one driver for margin versus the continued growth in volume.

Speaker 5

Fantastic guys. Thank you.

Operator

Thank you. One moment for the next question. And our next question will be coming from Steve Ma of TD Cowen. Your line is open.

Speaker 6

Great. Congrats on the quarter and thanks for the questions. I've got a 3 part question on Express Genes. So first, so now that you have another quarter of experience, can you give us a sense for the customer feedback on the dynamic pricing? And I know in the last call you also talked about there was a push by larger accounts wanting to trade the dynamic pricing for a sort of like a fixed subscription like pricing model?

Speaker 6

And then second, can you give us a sense on how the increased marketing effort on Express Jeans, how that's going? And then third, on the 100 net new accounts ordering Express Jeans, what's the profile of that customer? Is it academia, pharma, biotech or mix? Thank you.

Speaker 2

Thank you. Steve, great question. In terms of the customer feedback, we haven't had any negative feedback from the premium pricing. I think people understand that we've made a significant investment. The product differentiation is very, very strong.

Speaker 2

Again, the performance is such that it does what it says on the label. So that's all positive. And at the same time, several customers would like to have predictability. And so they've been very willing to provide a volume commitment in action for fixed premium pricing. And some of that was reflected in the strong blanket POs that we have gotten.

Speaker 2

So I think that's the answer on your first question. And second question, sense on the margin. So we're not as Adam mentioned earlier, we're not breaking out margin for Xfusion at this time. The one thing that I'll reiterate is whatever is that average pricing increase, 100% of that increase drops to the gross margin line. So we anticipate that it will be a component of gross margin improvement over time.

Speaker 2

And then last question on the 100 net new accounts. It's a mix, which is really great to see. Very good mix of, of course, big pharma customers as well as smaller pharma customers and not surprising, but very good to see. Also a lot of academic group have been testing and ordering and reordering. And obviously, when we look at the average size of an order from a former company, it is bigger than from an academic group.

Speaker 2

But I think I'd say that the majority of the net new accounts were academic groups. And so it's great to see that we are penetrating not only the industrial companies, which would have been more predictable, but also academic groups.

Speaker 6

Okay, great. Maybe just a quick follow-up on that. Did you mention that you had a different pricing structure for academic versus industry? Thank you.

Speaker 2

So yes, in the middle of the quarter, so at the beginning, it was the same premium pricing for academic and industry. And then in the middle of the quarter, we started to have a bifurcation where the premium for academic was not as strong as for industry, which is a standard practice. So I'll say that we are more now in the standard practice than we used to be.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. One moment while we prepare for the next question. And the next question will be coming from Matt Larew of William Blair. Your line is open.

Speaker 7

Hi, this is Madelyn Wollman on for Matt Larew. I wanted to touch a little bit on biopharma. I noticed like the biopharma still was an area that the guide came down. And I know you've mentioned previously that you were the process of onboarding your new BD hires. It takes about 6 months to get fully ramped.

Speaker 7

Can you talk a little bit about where the BD hires are in the process and how much of that ramping contributed to the change in biopharma guidance?

Speaker 2

Yes. Thank you for the question. We have a full team at this point in terms of headcount, maybe not fully ramped yet, But we have a full team. I travel quite a bit with that team and it's very clear that the market is there. There is no market headwinds at all.

Speaker 2

The technology, the product and service offering that we have is extremely strong with in vivo, in vitro, in silico. So in my mind, victory is certain, but timing, we are still working on it. So we were just doing all the right thing. Now we're focusing on activity, building the funnels. The orders for this quarter at $5,800,000 were encouraging.

Speaker 2

And so now we just have to do it again and grow this business. It is the smallest business of the company. It is right now the business that has the lowest growth. But it has all the characteristic of a very strong business, of a very strong Twist business, which is high differentiation of the services. And as we connect with more customers, convert more customer, I'm very confident that we can do really well.

Speaker 7

Great. Thank you. And then I think you said that Express Genes were 15% of clonal genes revenue for the quarter. Can you give any color on sort of on a monthly basis how Express Jeans as a proportion of clonal genes has trended? And that includes if you can into this quarter, its current quarter as well?

Speaker 3

Sure. This is Adam and I'm happy to talk about it. I think what we're seeing since launch, we've seen sequential increases in the Express gene business pretty much consistently month over month, partly due to the fact that we did the full commercial launch in late January this year. So you expect that natural step up. There is also the behavior as Emily mentioned earlier in the call, some of the larger institutional customers when they order the order high volume, so a couple of orders can have an impact especially early on, but we are seeing that sequential step up around month over month.

Speaker 7

Great. Thank you so much.

Operator

Thank you. One moment for the next question. And our next question will be coming from Tom Peterson of Baird. Your line is open.

Speaker 8

Hey, everyone. Congrats on the quarter and thanks for taking my questions. I just want to first start on Express Genes and some of the metrics that you provided here, whether it be percentage of clonal genes or some of these customer conversions or new account wins. How are you defining what medium term success looks like for the Express Teams offering? And if you could share any sort of targets that you're looking for over the medium term, I think that'd be helpful.

Speaker 2

Yes. I think in general, for us, success is the three numbers of revenue, gross margin and so we do have internal targets for all of the product lines. But at times, one of the strengths of the is the fact that we have a very differentiated sorry, very diverse type of customers, thousands of them working on very diverse types of applications. And so really it's all of the above product lines that contribute to the great results. And I can be sure that we are pushing the team to leverage not only Expressions, but all of the high differentiated products that we have.

Speaker 8

Great. That's helpful. And then maybe just one on the gross margin outlook, specifically kind of that 50% plus exit rate by 2025. Given the quarterly guide for fiscal 2024, how should we think about the cadence to get to that target in fiscal 2025 given the 2024 guidance?

Speaker 3

No, I think it's a great question and it's one we internally are absolutely excited about the progress we've seen. I think we go back and you look at 4 quarters ago, we were at 31% gross margin. To see that grow to 41% over the last 4 quarters is impressive. And you'll notice it did happen over time, but it's not always perfectly linear. But I think the idea here is we do expect to see those sequential gains continue as we go into 2025.

Speaker 3

And we do expect also there will be some it won't be perfectly linear with revenue growth every quarter because some of the initiatives and I'll use the example, some of the things we're doing on process improvements. You spend the energy to make the process improvement in a given period, but then you may have inventory you need to burn through before you the advantage of the cost savings and the impact on the P and L. So some of these things will take time, but we are encouraged by both the continued growth in the business as well as the progress on the process improvements we see across the business so that we expect the sequential increase throughout 2025.

Speaker 8

Thanks again. Appreciate it.

Speaker 1

Thank you.

Operator

One moment for the next question. And our next question will be coming from Puneet Souda of Leerink Partners. Your line is open.

Speaker 9

Hi, good afternoon. You got Michael on for Puneet. First question has to do with the regulated diagnostics products you're launching. We saw the FDA published their final rules for LDT. I was kind of curious if any of the changes affecting your plans for how Twist is approaching their diagnostic products and if anything incremental needs to be done?

Speaker 2

Yes. Thank you. That's a great question. We are great students of those rules. I think in general, we are quite encouraged with the new rules.

Speaker 2

They grandfathered in a number of LDTs. Regulation in general, I think, will probably benefit larger players, maybe reduce fragmentation in the market. And to the extent that we are very well penetrated into the largest player, that's good for us. The new test or the work required to validate the test will probably require more validation. And so that will probably be a tailwind for us.

Speaker 2

Then finally, over time, as diagnostic test needs to be modified, just will be a little bit harder to modify. And one of the things we provide is we make it easier to do modification. And so all in all, I think that's probably those rules are probably in the grand scheme, I think probably beneficial to us. And as you mentioned, we launched CE Marked products in Europe in the recent past. And while those exact products cannot be ported into the U.

Speaker 2

S, going through the exercise of launching those products helped us build a muscle inside the company that we'll be able to use and leverage in the U. S. With the new regulation.

Speaker 9

Great. Thanks. And then my second question has to do with biopharma funding. So we've seen a bit of an uptick in the Q1. I was curious if you have any views on where that might flow through, maybe some lag time and if you've seen differences in buying activity between large and small pharma?

Speaker 2

I'm not sure we're seeing big differences. I think for us, we are very focused on gaining market shares. And the last few years have been kind of our customers broadly have been in the mode of tightness around funding and budget. And because of the high differentiation of our products, we've been able to gain more than our fair share in market shares. So as we see now that, yes, the budgets get a little bit easier, Will we be able to keep doing this, taking more of our fair share?

Speaker 2

I think I'm encouraged by the performance of the X-ray genes in particular, where again, it does what it says on the label and it's highly differentiated. And we also have a number of products that we are planning on launching in the near term, which will enable us to take more of those budgets. And I think the order volume that we had in Q2, which is Canada Q1, those large blanket orders, it's a good first step in making sure that as the biopharma budget loosen up that we'd be in pole positions to take advantage of them.

Speaker 6

Great. Thank you.

Operator

Thank you. This does conclude the Q and A session for today. And I would now like to turn the call over to Emily Leproust for closing remarks. Please go ahead.

Speaker 2

Thank you for your time and attention today. Our unwavering commitment to pushing the boundaries of innovation has allowed us to unlock new opportunities and drive value for our customers, shareholders and the broader scientific community, and we will continue on our path towards profitability. We look forward to keeping you apprised of our progress. Thank you.

Operator

This concludes today's conference call. You may all disconnect.

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Earnings Conference Call
Twist Bioscience Q2 2024
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