TWST - Twist Bioscience: Continued Progress Despite Headwinds

2023-11-23 02:13:28 ET

Summary

• Twist Bioscience's business is facing weak demand, but the launch of Express Genes and wider commercialization of liquid biopsies should support growth in 2024.
• The company believes that issues in its Biopharma business have been resolved and as a result it is expected a return to growth.
• Twist's valuation is still favorable, but the company's ongoing losses leave the stock vulnerable to shifts in investor sentiment.

Twist Bioscience's ( TWST ) business remains under pressure due to the weak demand environment, although the launch of Express Genes should help to support growth in 2024. Twist also believes that some of the issues in its Biopharma business have been resolved and as a result expects a return to growth going forward. Margins are also improving as the Wilsonville facility begins to scale and Twist pulls back on more speculative investments.

I previously suggested that progression in Twist's business was being hidden by macro headwinds and temporary execution issues. This has proven to be the case so far, but the stock has remained fairly range bound. While Twist continues to have enormous long-term potential, it is still several years away from profitability, leaving the stock vulnerable to shifts in investor sentiment.

Synthetic Biology

SynBio revenue in Q4 FY2023 was 26.5 million , roughly a 23% increase YoY. Genes were responsible for approximately 75% of SynBio revenue in FY2023. Oligo pools contributed approximately 15% of revenue and Libraries 10%. Twist shipped approximately 634,000 genes in FY2023, a 13.6% increase YoY. Twist's SynBio customer base increased approximately 17% in FY2023 to 2,700.

While demand continues to be pressured by the macro environment, pricing appears to be relatively stable and product innovation is helping to support growth. Twist recently launched Express Genes, which have a turnaround time of only 5-7 business days. This business has been enabled by process improvements that have halved production times and represents the culmination of a multi-year period of investment in Twist’s Factory of the Future at Wilsonville.

Around half of clonal gene orders currently qualify for the Express Gene service, but Twist plans on expanding this over time. Twist hopes Express Genes will help it to scale up volumes with existing customers and attract new customers. The speed of Express Genes also unlocks additional applications including long genes, complex genes, additional IgG antibodies and mRNA production.

Twist is currently directing sales efforts towards its existing customer base and doesn’t expect to begin aggressively marketing Express Genes until early in 2024, when any potential production issues have been ironed out.

Many organizations still produce their own DNA in large part due to time sensitivity. Twist refers to this as the Makers’ Market, and it believes Express Genes will allow it to penetrate this market. This market is estimated to be worth approximately 1.4 billion USD , expanding Twist’s opportunity significantly. Twist currently only has a very small share of this market, which comes from people that need to make very long genes. These buyers purchase small genes from Twist and assemble them into long genes.

Express Genes are a premium priced product and should be supportive of Twist’s gross profit margins as the business begins to scale in 2024. Pricing is dependent on demand and Twist has stated that in the first week of availability the Express Gene pricing premium fluctuated between 20% and 50% .

NGS

NGS revenue in Q4 FY2023 increased 27% YoY to approximately 37.1 million USD. Twist served roughly 1,020 NGS customers in FY2023. Growth was primarily driven by Twist’s top 10 customers, who accounted for around 37% of revenue in FY2023. Twist tracks customers which it believes have the potential to spend more than 250,000 USD per year and is currently serving 131 out of 279 of these customers.

Twist’s value proposition in NGS is largely based around downstream sequencing cost savings for customers. The company's largest NGS customers are diagnostic customers, and the tight financing environment is forcing these customers to improve their margins, supporting demand for Twist’s products.

Twist expects future NGS growth to be driven by MRD monitoring, liquid biopsy screening and RNA-seq. Twist stands to benefit significantly as the adoption of liquid biopsies increases. Therapy selection is still the dominant use case, but the market is moving towards MRD and screening as the technology improves. These are much larger markets and should support NGS test volumes. Adoption is a function of both the ability of liquid biopsies to detect cancer from DNA in blood at extremely low concentrations and insurance coverage.

Biopharma

Twist believes it has now addressed the integration issues within its Biopharma business. The commercial team is also fully staffed, which should help return the business to growth going forward. It typically takes 6 months for a sales rep to ramp though, and another 3-6 months for orders to translate into revenue.

Biopharma revenue in Q4 FY2023 was only 3.4 million USD , although orders rose sequentially to 5.8 million USD. While the number of active programs declined, the number of projects started in the quarter increased from 34 in Q3 to 44 in Q4. The majority of orders came from large pharma customers.

Notable agreements include :

• An antibody discovery and licensing option agreement with Bayer worth up to 188 million USD
• An antibody discovery and development agreement with Ono Pharma targeted at the treatment of autoimmune diseases
• A multi-program antibody discovery collaboration with IMIDomics

Data Storage

Limited detail was given regarding the Data Storage business in the fourth quarter. Investment in this business has been moderated as Twist focuses on profitability. Twist reportedly continues to make progress on enzymatic synthesis, which will likely be necessary for the commercialization of data storage and could also leveraged in benchtop DNA synthesis equipment. Twist is also working with an industry partner on the encoding and decoding algorithm. Twist still expects to demonstrate an end-to-end gigabyte workflow by the end of 2023 and launch a terabyte solution in 2025.

Financial Analysis

Twist’s fourth quarter revenue was approximately 66.9 million USD , growing 16.8% YoY. Orders were up 14.5% YoY in the fourth quarter, although Twist suggested that this metric will become less relevant for the SynBio business as Express Gene revenue scales. Twist's customer base increased approximately 5% in FY2023 to 3,450 .

In terms of customer segments, growth remains robust amongst healthcare and academic customers but is poor amongst industrial customers.

EMEA and APAC revenue has been relatively flat over a multi-quarter period. The Americas business appears to be returning to growth though, which should be supported by expansion of the Biopharma business going forward.

While Twist's gross profit margins have begun to recover, they are still depressed. This should change as the Wilsonville facility ramps and as Express Gene revenue grows. Express Gene margins could be something like 10-20% higher, depending how much the pricing premium is. It will take time for this business to grow and impact overall margins though. The recovery of Twist's Biopharma business should also be supportive of gross profit margins later in 2024. Gross profit margins are only expected to be 39-40% in FY2024 though, which is relatively disappointing.

Despite modest growth and lower gross profit margins, Twist's operating profit margins have improved rapidly over the past 18 months. To a large extent this is a result of Twist prioritizing profitability over growth and reducing its investments. In particular, investment in the Data Storage business has been reduced. OpEx included approximately 38 million USD of Data Storage spend in FY2023. Twist expects to spend 37-39 million USD on Data Storage in FY2024.

Twist expects 285-290 million USD revenue in FY2024, which implies roughly 17% growth at the midpoint. In terms of segments, Twist expects:

• 16-18% SynBio revenue growth
• 19-20% NGS revenue growth
• 8% Biopharma revenue growth

Valuation

Twist may appear fully valued based on a revenue multiple, but a substantial portion of the company's value lies in nascent businesses. The Data Storage business is yet to be commercialized and the Biopharma business is still working through teething issues.

Current performance is also probably not reflective of the company's potential. In a more conducive macro environment Twist's revenue growth should be expected to accelerate and wider commercialization of liquid biopsies should continue to drive NGS growth.

Twist's Biopharma business has faced teething issues in recent quarters, but there are reasons to be optimistic . Twist already has 68 programs which are eligible for milestones/royalties, and as evidenced by the recent Bayer agreement, this could be material. As a reference point, AbCellera Biologics' ( ABCL ) enterprise value is approximately 550 million USD.

Similarly, Twist's Data Storage has significant potential, although this is difficult to assess, as the business is yet to be commercialized. Unsurprisingly, DNA data storage market size estimates vary widely (up to 60 billion USD in the next 10-15 years). The market is universally expected to be large though, and Twist is likely the leader at this point in time. Catalog is another leader in the space and last raised capital ( 35 million USD ) in 2021. While a valuation is not available, the amount raised suggests the company was worth hundreds of millions of dollars.

Even assigning conservative values to Twist's Biopharma and Data Storage businesses suggests that the SynBio and NGS businesses only trade on an EV/S multiple of around 2-3. While Twist doesn't have close public peers, Ginkgo Bioworks ( DNA ) still trades on an EV/S multiple of around 7. The tight financing environment and Twist's ongoing losses make it a risky investment, but there is also significant upside. Based on a discounted cash flow analysis I estimate that Twist's stock is worth around 65 USD per share.

Conclusion

Twist's current valuation presents an attractive entry point for investors with high risk tolerance. Investors could be better served waiting until demand begins to firm, Twist's Express Gene business demonstrates traction in the market and margins improve. There is a high likelihood that Twist's stock moves significantly higher ahead of these events though, as the business would be largely derisked at that point.

In coming quarters investors should look for growth to stabilize or even accelerate on the back of the Express Genes business, liquid biopsy growth and a return to growth for the Biopharma business. Gross margins should also be expected to improve due to increased utilization at the Wilsonville facility along with growth from high margin revenue sources, like Express Genes and Biopharma.

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