TWST - Twist Bioscience: Progress Hidden By Execution Issues And Soft Demand

2023-08-24 10:32:36 ET

Summary

• Twist continues to expand its SynBio and NGS businesses, but its Biopharma business has had execution issues.
• Twist is focused on reducing costs, but it is still probably at least several years from GAAP profitability.
• As part of its cost reduction efforts, Twist has scaled back investment in data storage, potentially delaying commercialization.
• Twist's stock is inexpensive, given the company's long-term potential. Further margin improvements and a healthier demand environment may be needed for the stock to rerate though.

Twist Bioscience (TWST) is slowly making progress in its core SynBio and NGS businesses, but its Biopharma business has execution issues and investment in data storage is being scaled back, potentially delaying commercialization. A greater focus on costs is leading to an improvement in margins, which should continue into FY2024 as production at the Wilsonville facility is ramped. Twist is still a long way from GAAP profitability though and given soft end market demand, will need ongoing successful product launches to support growth.

Factory of the Future

The vast majority of Twist's SynBio products are now being shipped from the new Wilsonville facility, with over 90% of the genes shipped during the quarter coming from the site. At the end of Q3 FY2023 Twist had four writers in South San Francisco and four writers in Wilsonville, with space for an additional 12 writers in Wilsonville. Twist doesn't currently have any writers on order though and believes current capacity will serve its needs for the foreseeable future.

The Wilsonville facility is a big part of the Twist story, as it will support gross profit margins, allow the business to scale and enable the introduction of new products. Twist invested 100 million USD into the site over the past few years and now needs to realize the potential of the facility in coming quarters.

The "Factory of the Future" is expected to drive SynBio growth, specifically for clonal genes and gene fragments. Twist plans on introducing fast gene production around fall, which should help to create more pricing power for the SynBio business as well as introduce new revenue streams. Twist expects fast gene revenue beginning in the first quarter of FY2024, although it is expected to be a gradual build as Twist penetrates the long tail of the DNA makers market. This could be an important development as Twist believes the DNA makers market is much larger than its existing SynBio market.

Twist still has work to do before launching this business though, including:

• Design and testing of software which improves workflows and minimizes gene idle time
• Refining molecular processes to reduce processing time
• Retraining manufacturing associates
• Updating its ecommerce platform to handle transactions with dynamic pricing

SynBio

Twist is now shipping the majority of genes, gene fragments and oligo pools from the Wilsonville facility. SynBio revenue growth was roughly 17% YoY in the third quarter, which is respectable given that the macro environment is negatively impacting demand.

Future SynBio growth will be enabled by:

• Fast genes
• RNA
• GMP certification

The Wilsonville facility should also help to differentiate some of Twist's existing SynBio products. Twist began ramping production of its IgG product in 2021, targeting customers involved in drug discovery and development. The IgG launch appears to have underperformed expectations though, with Twist stating that the product is not differentiated . Twist expects that the launch of fast genes will help to bring differentiation and accelerate the growth of products like IgG.

NGS

Twist's NGS business grew approximately 19% YoY in the third quarter, supported by growth in liquid biopsies. The liquid biopsy market continues to grow at a healthy pace driven by:

• Increasing insurance coverage
• Adoption across more use cases
• International expansion

This will likely be an enormous market in time, but growth is throttled by the regulation and the need for insurance coverage. Twist believes that its NGS business is sticky and will grow alongside its customers as they commercialize.

Twist also recently launched a portfolio of RNA sequencing tools. This should support growth as RNA assays are often run multiple times, as the same sample can give different results at different points in time. RNA workflows will primarily be for the research market, an area where Twist has historically had a smaller footprint. Customers are trialing the product and initial feedback has reportedly been positive. While Twist has received initial orders, it has stated that revenue will likely build gradually over a 1-4 year period.

Biopharma

Biopharma revenue and orders came in below expectations in the third quarter, which was attributed to internal integration challenges. There has also been some market impact from the difficult macro environment, although Twist has stated that there is strong interest from top pharma companies.

Twist appears to be blaming much of its current issues on a lack of commercial talent. The company has open headcount for Biopharma business development managers and is looking to roughly double its current sales team from five to 10. While the business is currently struggling, Twist has stated that where it has commercial talent it secures deals.

Twist now has an integrated Biopharma offering which covers:

• In vitro discovery and optimization
• In vivo discovery and screening
• In silico lead optimization and candidate selection

In regard to internal assets, Twist is prioritizing five programs.

Data Storage

Twist has cut back on investment in its Data Storage business to help reduce cash burn. The company still plans on investing 40 million USD in FY2023 and FY2024 though. Despite reducing investment, Twist still plans on demonstrating an end-to-end Gb archive workflow by the end of 2023 and launching early access of a Tb archive solution in 2025. While Twist insists that it is maintaining its competitive lead, despite reducing investment, there are serious competitors in the space.

Catalog DNA introduced a prototype DNA writer in 2018. The company is trying to develop a DNA-based computing platform rather than just DNA data storage. Catalog's device takes an inkjet printer type approach to convert scaling into a mechanical problem. The system combines smaller chunks of DNA dispensed through inkjet printing which enables megabits per second write speeds. Traditional approaches, whether utilizing phosphoramidite chemistry or enzymatic methods using Terminal deoxynucleotidyl tranferase (Tdt), are rate limited by sequential single nucleotide addition with slow cycle times.

Evonetix is developing benchtop machines that use semiconductor technology to synthesize thousands of independent sequences on a single chip. To do this, the company has re-engineered phosphoramidite chemistry to enable thermal control of the synthesis cycle and developed new ways to assemble DNA into genes. Evonetix is also developing enzymatic DNA synthesis technology. While Evonetix is targeting the data storage market, it also plans on synthesizing DNA for markets like SynBio and NGS.

Molecular Assemblies and DNA Script are both developing enzymatic synthesis technology for the production of long, pure, and accurate DNA.

Financial Analysis

Reasonably strong SynBio and NGS growth was somewhat offset by weak Biopharma revenue in the third quarter. Demand in China has also been soft, which is a slight drag on the business. Twist is now expecting roughly 7 million USD revenue from China in FY2023, which would be in line with FY2022 and down from Twist's initial expectation of 9 million USD revenue.

Twist is guiding for 63-64 million USD revenue in the fourth quarter of FY2023, which would represent roughly an 11% YoY growth rate.

Twist's gross profit margins remain depressed due to the transition to the Wilsonville site. Margins have likely bottomed though now that the facility is on line. Twist's gross profit margin was approximately 34% in the third quarter and is expected to be around 36% in the fourth quarter.

Twist is cost conscious at the moment, which is unsurprising given the difficult funding environment and the company's high cash burn. Twist is attempting to reduce costs and has cut back on investments in its Biopharma and Data Storage businesses. The annual savings from restructuring activities is estimated to be 40 million USD , with a 23 million USD reduction in operational costs and a 17 million USD reduction in R&D. Full cost savings are not expected to be realized until the first quarter of FY2024 .

While improved profitability is a positive, Twist is still a long way from breakeven. The company is targeting adjusted EBITDA breakeven for the core business exiting Q4 FY2024 , but actual profitability may not come for several years after this, dependent on growth.

Valuation

Given the long-term potential of the business, Twist looks reasonably valued just based on the SynBio and NGS businesses. Taking into account the Data Storage business and the potential downstream value from the Biopharma business, the stock looks deeply undervalued. Twist will need to make further progress on margin before investors begin to value the company's long-term potential again though.

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