How Twist Industrialized DNA Synthesis

    Twist Bioscience is a pioneer and market leader in DNA writing, having developed a disruptive DNA synthesis platform that industrialized the engineering of biology. At its core, Twist uses this platform to “write” DNA on a silicon chip. This chip enables them to write 10,000 times the amount of DNA compared with conventional methods, at 1/10 of the cost, while using a fraction of the chemicals. Twist combines this platform with proprietary software, a scalable infrastructure, and an e-commerce platform to create an integrated offering. The company is growing so fast that it has reached capacity at its manufacturing facility and is building a new facility, which will more than double its capacity. The end markets in which Twist operates are growing at 20+% annually, and we believe Twist will be a key enabler for this growth for years to come.

    Twist’s revenue is comprised of three segments: SynBio, which comprises 37% of its revenue and is the foundation of Twist; NGS, which leverages the core tech, is the fastest-growing segment, and comprises 49% of revenue; and Biopharma, which is a newer segment that also leverages the tech to do drug discovery (15% of revenue).

    The SynBio (synthetic biology) segment sells tools to companies that genetically engineer compounds to replace chemicals or limited natural resources for industrial, agricultural, or medical use. One of the fastest-growing applications for synbio is in biotech. For example, Novo Nordisk, a Danish pharma company, recently partnered with genetic engineering Gingko Bioworks to “grow” medicine to treat chronic illnesses. Synlogic, a Cambridge-based biotech company, has engineered a bacteria to treat PKU, a rare metabolic disorder. HTEC member Codexis is making a name for itself in biotech through various innovations, including their recently engineered enzyme that Pfizer is using to produce Paxlovid, a world-leading COVID treatment.

    Twist’s secret sauce, as noted above, is the DNA synthesis platform that it launched in 2016, which essentially industrialized the engineering of biology by “writing” pieces of DNA on a silicon chip roughly the size of a smartphone. With this technology, Twist can write 10,000 times the amount of these DNA pieces as conventional methods, at 1/10 of the cost. Twist also has a lower environmental footprint, as its silicon chip uses a fraction of the chemicals that are typically needed in DNA synthesis. Twist combines this platform with proprietary software, a scalable infrastructure, and an e-commerce platform to create its integrated offering. Customers simply need to go online, upload the DNA sequence that they want, choose their configuration, and place their order.

    The NGS business, which now comprises more revenue than SynBio, sells prep kits used by pharma, researchers, and academia. The prep kits are used to prepare a DNA sample to be placed on an NGS (next-generation sequencing) instrument. The NGS market has been growing rapidly and is expected to grow by 20% CAGR for the next five years. As such, it has attracted many entrants and has become a highly competitive space. What makes Twist’s kits unique is that they cut down on sequencing costs, and can make custom tools faster.

    The rapid growth of the NGS end market has driven Twist’s performance in this segment (55% y/y growth in FY’21). We expect the market growth to accelerate in conjunction with further innovation in genomics, such as liquid biopsy and minimum residual disease testing. Additionally, as Illumina’s patents expire in the coming years, new entrants will bring more sequencers to market. The cost of sequencing will decline, which will drive an increase in utilization. Twist is very well positioned for this expansion as its technology is agnostic, and can work on any brand of sequencer.

    The third revenue segment, Biopharma, further leverages Twist’s platform to discover new drugs. The company either partners with biotech companies to develop antibodies against a target the partner provides, or it develops proprietary antibodies on its own that it seeks to license out to biotech companies to develop and commercialize. This business generates revenue in the form of up-front payments when contracts get signed with partners who bring targets. Current partners include Takeda and Boehringer Ingelheim, while Astellas Pharma has an exclusive option to license a compound Twist developed internally. There are also potential “call option” revenues in the form of milestones and royalties as these antibodies progress through their lifecycles of development and commercialization.

    Twist’s share price has been cut by more than half in the first half of 2022, for several reasons. First, macro factors like inflation and rising interest rates have shifted investor sentiment largely away from high-growth technology-forward companies that are not yet profitable, particularly those that were previously trading at nosebleed valuations. Second, an adjacent company in the space, which went public in 2021, had a rough first few months out of the gate, driving negative sentiment on the whole space. In our view, Twist is being inaccurately penalized by the market. While most pure-play SynBio companies are in the business of making things with synthetic biology, Twist is what we consider an enabler of the industry, as it provides the pieces of DNA that other companies use to make their products. The company reported order growth of 32% in its FYQ2, which we believe indicates continued strength in the end market demand.

    Further dividing it from this group, Twist is not new to public equity markets. It has been publicly traded for nearly four years and has delivered a revenue beat for at least the last 10 consecutive quarters, which we believe is a strong indicator of management’s ability to set expectations and deliver on its targets.

    There have also been competitive concerns as more companies enter the DNA writing market—like DNA Script, a company that sells a DIY DNA printer. That being said, this entire industry is still in its early stages, with plenty of room for more entrants. Also, Gingko Bioworks, a leader in synthetic biology and a long-standing client of Twist, recently signed an agreement that tacked on another four years to this relationship. This validates Twist’s competitive advantage as an industry pioneer and technology leader.

    Finally, the company does expect some gross margin pressure while it ramps up capacity in its new factory. Current market sentiment does not have a strong appetite for companies facing near-term pressure on profitability. However, we believe the pressure will be temporary as the new factory scales up, and that eventually, Twist will be able to increase margins through the high-value proposition it will offer once it adds new capacity. The company expects to break even on profitability with SynBio and NGS when their combined revenues reach $300 million, and with Biopharma when its revenue reaches $80 million. Given the rapid growth of these industries, we expect this to happen in the next 2–3 years.

    Overall, we view this as a high-quality company with a long tailwind of growth, and a path toward profitability. The stock has largely been de-risked by the recent market compression, and it’s just one of many undervalued companies in the HTEC portfolio that offer a compelling reason to be long right now.



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