TWST - Twist Bioscience: Progress On Margins Could Put A Floor Under The Stock

2023-05-24 11:27:03 ET

Summary

• Twist's moderate growth and large losses continue to place downward pressure on the stock.
• Twist is increasing its focus on profitability, but the shift in strategy also raises questions about the growth outlook.
• If Twist can continue to grow its core business, transition to profitability and commercialize data storage, the stock should do well over a longer time frame.

Twist's ( TWST ) stock has performed poorly in recent months on the back of soft growth and large losses. A headcount reduction and the opening of Twist's new production facility should be supportive of growth and margins later in the year. Twist remains susceptible to a difficult macro environment in the near term, but the stock should do well longer term if the company can continue to execute.

Factory of the Future

Commercial shipments from Twist’s Oregon facility began in the most recent quarter. All of Twist’s genes, gene fragments and the vast majority of Oligo Pools have been made in Oregon since around early April.

The Oregon facility is currently a drag on margins but is expected to be accretive in the future as it will lead to greater manufacturing efficiencies and enable premium priced products. Twist is expecting to launch fast genes with premium pricing in the fall.

SynBio

SynBio revenue increased by roughly 31% YoY in the second quarter, with orders also increasing by 31% YoY. Twist shipped to approximately 1,600 SynBio customers, primarily biotech and large pharma companies. This represented approximately a 14% increase over the corresponding period in 2022. Genes revenue increased to 18 million USD in the second quarter and Oligo Pools contributed approximately 3.3 million USD revenue.

Twist’s management team has stated that the company still needs to implement several software solutions before fast genes can be launched. One set of software tools is aimed at reducing labor requirements during manufacturing so that genes spend less time waiting. The other solution is an e-commerce tool that will enable dynamic pricing, which Twist believes will be critical to capture value from fast turnaround times. Fast genes should be supportive of Twist’s bottom-line as their premium pricing will result in higher gross profit margins and Twist does not expect to need additional commercial headcount to support the business, due to the company’s e-commerce portal and digital marketing capabilities.

NGS

Twist’s NGS business also continues to grow, although revenue is lumpy and dependent on customers commercializing their tests. Twist’s NGS revenue in the second quarter increased 26% YoY, driven in part by several larger customers pushing shipments from December into January. Orders in the second quarter increased 19% YoY. Twist served approximately 600 NGS customers in the second quarter, with the top 10 accounting for roughly 38% of NGS revenue.

Twist plans on introducing RNA workflow tools to its NGS portfolio in the near term, which should be supportive of growth. 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.

Twist is now providing early access to its enhanced Whole Genome Sequencing (eWGS) solution, which is focused on non-human genomics applications, and initial customer feedback has reportedly been positive. eWGS enables researchers to obtain simultaneous low-pass whole genome data along with deep coverage of selected regions. Twist is initially targeting agricultural customers as cost per sample is tight and researchers desire higher resolution. Twist expect these to be large contracts, which as a result are likely to take time to negotiate.

Biopharma

Biopharma revenues increased by roughly 6% YoY in the second quarter, with orders declining by approximately 32%. This decline has primarily been attributed to issues with the integration of Abveris. These issues appear to be related to systems and sales territories and have reportedly been resolved, with a revenue lift expected within six months. Twist had 93 active programs at the end of the second quarter and 66 programs with milestone and / or royalty agreements.

Twist recently resized the Biopharma organization and now expects to break even at approximately $40 million USD revenue, rather than the prior 80 million USD figure. Twist also is slowing investments in internal candidates and trying to monetize them. This is quite a dramatic shift and raises questions about the competitive positioning of Twist's biopharma business. In addition to integration issues the macro backdrop is a headwind with the funding environment constraining biotech startups.

Data Storage

Data Storage is another area where Twist is slowing the pace of investment in an attempt to accelerate its path to profitability. Twist continues to develop its technology but is delaying the launch of a distributed on-premise business and is no longer planning on providing early access for the gigabyte chip. Twist is still developing an enzymatic solution though, which will eventually be needed for an on-premise deployment.

Despite the reduction in investment, Twist is still planning on demonstrating an end-to-end gigabyte Century Archive service in 2023, with a commercial terabyte Century Archive expected in 2025. With the reduction in spending, DNA Data Storage operating expenses in FY2023 are expected to be approximately $40 million USD.

Financial Analysis

Twist reported 60.2 million USD revenue and 64.2 million USD of orders in the second quarter, handily beating guidance. While second quarter results were reasonably robust and Twist has suggested that it's not being impacted by the macro environment, guidance for the remainder of the year was lowered, which management attributed to caution in the wake actions taken to address the company’s cost structure. Revenue guidance was lowered from 261-269 million USD to 235-238 million USD, with guidance lowered across segments.

Twist’s gross profit margin was 30.8% in the second quarter, with the increase in cost in large part due to $5 million USD expenses associated with the commercialization of the Factory of the Future. Twist also had roughly 1 million USD scrap associated with the Factory of the Future in the second quarter.

After the strategic actions taken to accelerate Twist's path to profitability the core business is expected to reach adjusted EBITDA breakeven exiting the fourth quarter of FY2024 at a revenue run rate of 285 million USD. The cash costs associated with the restructuring are estimated to be approximately 10 million USD, with anticipated cash savings of approximately 10 million USD per quarter beginning in the first quarter of FY2024.

Twist recently eliminated approximately 270 positions, including:

• Eliminating duplicate SynBio production positions across the South San Francisco and Portland sites
• Reducing the size of the Biopharma team
• Reducing the SynBio and NGS organizations by roughly 25%

While this will help move Twist closer to profitability, it also raises questions about the growth outlook going forward.

Twist's stock is relatively inexpensive based on its core business, even without considering potential downstream value in biopharma and the data storage business. There remain doubts about the company's ability to achieve profitability. Cost reduction initiatives and an improvement in gross profit margins from the Factory of the Future are important first steps towards proving the viability of the business model.

For further details see: