Graphic Source: Twist Bioscience Corporation
Introduction: What is Twist Biosciences?
Twist Bioscience Corporation (NASDAQ:TWST) is a high-growth synthetic biology company that launched a uniquely low-cost DNA synthesis platform in 2016 based on proprietary silicon chip DNA writing. This has since been leveraged to produce a wider-range of synthetic DNA-based products. Founded in 2013 with commercial operations beginning in 2016, TWST has since grown to revenues of $54M (2019) with over 400 employees across offices in CA-USA and Israel.
Products: TWST’s main products include Synthetic Genes (3Q: 46% of revenues), Next Generation Sequencing tools (41%), DNA & biopharma libraries (7%), and Oligonucleotide pools (6%). Clients choose TWST’s products primarily because they are typically 1/3-1/4 the cost of rival-products. Customers outsource DNA synthesis to organizations like TWST due to the high cost of equipment and expertise required to produce these niche products at a required-quality standard.
Customers: TWST’s main client segments as of 9m 2020 were Industrial Chemicals (37% of revenues), Healthcare (36%), Academic research (25%), and Agriculture-related (2%). Regionally, TWST brings in revenue globally from the USA (61%), EMEA (32%), APAC (6%), and the rest of the Americas (1%). Total customer count as Q3 2020 was 1,377 versus 834 in the same period (1,900 YTD), reflecting broader exposure, but potentially adding price pressure in the future though gross profit margins remain unaffected (9m average: ca 24%).
Management: TWST’s Management has seen changes in a good way starting from FYE 2019 till now. The starkest change has been the transition from senior management’s operational and sales expertise to long-term scientific development focused on data-storage with specialties in therapeutics (new chief scientific officer, Aron Sato). The new COO, Patrick Weiss (internal promotion), brings extensive experience of turnarounds and transitions to profitability which may hint towards the company’s profitability focus. All in all, a revised board and younger management seem to highlight a brighter more ambitious scientific future for TWST with potential profitability-steps.
Finances: TWST has achieved a 3-year revenue CAGR of 71% with 2019 alone reaching $54.4M (114% y/y). The company has yet to achieve bottom-line profitability with a 2019 net income of ca -$108M and cash flow from operations at -$87.9M. TWST did, however, achieve and has maintained positive gross profit since 2019 for the first time in the company’s history (9m: $13.8M).
Trends: Several industry trends are arising that could adjust demand upward including the rising need for fuel alternatives (particularly in the EU), increasing demand for protein therapeutics, and personal medicine alongside new research in synthetic drugs and vaccines, especially post-COVID. 2019 showed hints toward further collaboration, increased interest, and M&A with Amyris (AMRS) acquiring the alt. sweetener Purecane (food-tech), Cyrus Biotech collaborating with MIT/Harvard to optimize CRISPR (boosting Cyrus’s Rosetta tech), Novozymes (OTCPK:NVZMF) opening an innovation campus for research into bio-solutions and Precigen, an Intrexon subsidiary, opening a new manufacturing plant in the USA for Gene therapy manufacturing.
Investment thesis: Twist Bioscience has impressed consistently with revenue growth and has attracted much investor attention counteracting the share dilutions that are common to high-growth synthetic biology companies. The new management seems to have profitability oriented focus with ambitious scientific aspirations that seem to keep pace with an ever changing market. A 3-year CAGR of 71% is no joke and TWST’s cash basis seems sufficient for shareholders to be without worry. After much careful analysis, TWST is a buy and the following report will explain why and what to watch for on the downside.
Sector: Synthetic Bio 2020-2025 CAGR of 23.9%
On a sector basis, the Global Synthetic Biology Market is projected to exhibit stellar-growth across various estimates ranging from a 23.9% CAGR to 37%. The former seems a bit too optimistic, but a 23.9% 6-year CAGR on a forecasted period of 2020-2025 seems to be the most accurate basis for investors to gauge future growth conditions for TWST. In terms of the global market, the largest opportunity currently is bio-medicine and healthcare versus others such as industrial and environmental areas (contrary to TWST’s revenues). In terms of the fastest-growing segment, oligonucleotides and synthetic DNA (TWST’s core products) are the leaders with rising demand based on wide use cases (pharma, personalized medicine, chemicals, and industrial enzymes amongst others.
Table Source: Self Created | Data Source: Twist Biosciences 10Q (June 2020)
This impressive 23.9% market CAGR stems from increased demand for R&D in synthetic biological products that cluster around medicine (rising disease states: diabetes, cancer), healthcare-improvements, food-tech (decreasing land options), and energy production (e.g. biofuels), amongst others. In Europe (32% of TWST’s revenues), growth was due to government initiatives tackling global problems (e.g. climate change, energy, environmental protection, and healthcare, amongst others). Claiming 42% of the global market in 2018, North America (61% of TWST’s revenues), growth was focused around gene synthesis, and genome engineering, amongst others. Broadly, the decreasing synthesis cost is aiding the R&D budgets applied to the sector and their associated demand/results are driving TWST’s growth. The highest CAGR market for TWST would still be the Asia-pacific region (particularly India/China), but as of 9m 2020, it represented only 6% of TWST’s revenues.
Graphic Source: Markets and Markets 2020 Synthetic Biology Report
On the sector impediments side, the lack of predictability in biotech and its technical constraints related to the early growth industry stage hinders the investment assurances that are needed for driving continued capital. Additionally, the general difficulty of bio-engineering and the high-risk iterative process adds a level of risk to capital and project outcomes. The last point has added downward pressure with government concerns related to bio-safety, ethics, and reimbursement with increased regulations hurts pricing power.
Competitors: TWST competes for market share against the profitable and large conglomerate Thermo Fisher Scientific (TMO) across all its core revenue segments and competes segment-wise against several acquired players such as Sigma-Aldrich Corporation, a subsidiary of Merck & Company (MRK), GenScript Biotech Corporation (OTC:GNNSF), and GENEWIZ – owned by Brooks Automation (BRKS) for core-syn-bio products and against Illumina (ILMN) and Integrated DNA Technologies – sub of Danaher (DHR) in life science tools and diagnostics. In the antibody discovery market and DNA digital data storage, TWST has no public competitors, but several private enterprises exist.
Sales Strategy in 2020-2021: TWST’s sales strategy for this market can be broken down into 3 areas: 1) direct sales force targeting synthetic DNA customers, 2) international distributors, and 3) an e-commerce platform launched in Q4 2017 being presented as the core of their future growth. Besides the sales strategy, operationally, the company aims to focus on developing further their DNA synthesis platform aided by custom libraries (e.g. anti-GPCR) and proprietary tools and libraries.
For the scientific-inclined readers, areas of further development include SNP conversion, products for liquid biopsy, oncology, data-packages, 5-10 new collaborators, launching Immunoglobulin G (antibody) product line / clonal-ready gene fragments, and continually advancing DNA Data Storage. The last being TWST’s pet-project that seems to be taking the spotlight.
TWST’s financials & forecasts:
TWST has shown great growth (3-year 71% CAGR) but has yet to achieve financial profitability.
Table Source: Self Created | Data Source: Twist Biosciences, Seeking Alpha
Revenue/cash flow: From $2.3M in revenues in 2016 to $54.4M in 2019, TWST has shown an exceptional ability to scale with 114% revenue growth in 2019 alone. Although bottom-line profitability has not been achieved, gross profit ($7M), which became positive in 2019 for the first time in the company’s history, shows the beginning of a strong-trend towards profitability. 2020 certainly will not be nor the next fiscal year, primarily due to necessary R&D expense growth to $35M (+75% in 2019) and SGA at $80M for commercialization (increasing headcount and salaries expenses needed for expansion +$18M, legal and regulatory expenses +$12M) with 2019 EBITDA at -$103M. The company as of 9M 2020 has achieved $13.8M in gross profit maintaining the trend towards profitability from top-line down successively and with new management, within the next few years, a positive bottom line can be expected.
Table Source: Self Created | Data Source: Twist Biosciences 10Q (June 2020)
To better understand the source of growth for 2020, below is the breakdown of revenue by various end-points. It can be seen that gene synthesis and next-generation sequencing still make up the majority of revenues for TWST at a combined 87% of 9M 2020 revenue, which is explained by the industry’s broader growth and these products being a necessary tool for the research undertaken. It can be also be seen that 2020 is certainly expected to outperform 2019 in revenue terms (9M 20: $57.7M vs FYE 19: $54.4M) and gross profit (9M 20: $13.8M vs FYE 19: $7M).
Expectation:
Conservatively speaking, the outpaced 3Q growth (beating historical trends of seasonality) does not guarantee outsized fourth-quarter revenue growth; however, Q4 typically is the return to business activity post-summer slowdown and in 3Q/4Q 2019 was ca 15% and 2018 of 29% growth whereas the former is a foundational benchmark for Q4 results. Actual 9m/9m is up +49% and considering the benchmark for Q4, the fiscal year 2020 should come in with revenue of $82M (+51% y/y) beating July analyst expectations by 17% ($70M revenue expectations) which have now (in August) been updated to $80.5M citing improved dynamics.
Balance Sheet Composition:
As of Q3 2020, the balance sheet seems rather stable with few causes for concern. The cash on hand as of 3Q 2019 (typically slightly higher than FYE) was $312M (+93% 9m/9m) enough to cover at least 2-years of the projected FYE CFO+Capex burn rate of -$154M. Total debt consists largely of Capital Leases (ca 68%) with only $3.8M of current portion LTD+interest (P&I) due in 2020 and 3.5M in 2021.
Table Source: Self Created | Data Source: Twist Biosciences, Seeking Alpha
With increases in PPE, cash, and manageable accounts receivable, TWST’s BS is a plus for this rapidly growing company.
Expectation:
Stability is the clear expectation outside of capital raises. $3.8M of P&I from total debt in 2020 and 3.5 in 21′, there is no reason for concern with the only overlaying factor being the cash burn rate which from a CFO+Capex formulation will amount to -$154M in 2020. This presents a calculated 2-year coverage which raises no serious red flags after the recent capital raise, but may not hinder TWST from doing another in 2021. Broadly, shareholder dilution is the concern if growth stalls, as the company has Q/Q flooded the market with shares growing from 19M in FYE2018 to 33M in 2019 to 44M in Sep 2020. Investors seem ill-concerned due to the high-growth nature of the company and the potential profitability catalyst coming, but investors should understand the growth vs dilution dilemma.
Valuation: Over-valued with a premium of 435-475%, but growth compensates
It is quite difficult to ever justify an average premium to the peer group of 435% for FWD EV/Sales and 475% for FWD Price/Sales multiples but in TWST’s case it’s due to impressive comparable growth.
For the investor, understanding that this premium is based on expectations of outsized growth (3-year CAGR: TWST’s 71% vs TMO’s 7% vs OTC:GNNSF’s 21% vs ILMN’s 9%) and a rapidly expanding market share will help to assuage concerns of the premium. It partially compensates for the EV/Sales FWD multiple variations of 31.7x for TWST vs TMO’s 6.3x vs GNNSF’s 8.3x vs ILMN’s 15.7x. An investor should understand the above premiums and decide whether or not the sentiment primarily on growth expectations/future profitability of TWST is likely to remain.
If we expect that the sentiment on synthetic biology and its associated premiums will remain with the core catalyst being expanding market share in a large growing sector, we can justify a valuation that presents the below:
Table Source: Self Created | Data Source: Twist Biosciences, Seeking Alpha
As introduced earlier, TWST commands a high premium due primarily to expectations of higher than average growth amongst the sector which explains its 435% premium. Base case assumptions introduce the author’s projected revenue of $82.2M for FY2020 with the current FWD multiple, which is slightly below analyst expectations 34.94x (2020). This valuation is highly dependent on the EV/Sales multiple which has been quite volatile over the recent 6-months. 2021 expectations are primarily based on extrapolating current operating results and incorporating analyst expectations, which for FY2020 lagged exceptional Q/Q results.
Data by YCharts
In the short term, we are currently waiting to see how post-COVID sentiment plays into the multiples above, and the stock price currently ranging in the upper quartile of the 52W range (18.52-71.99).
Conclusion:
Overall, we can see that TWST is the growth story amongst synthetic biology plays, but is highly exposed to the overall industry sentiment with a high priced premium investors must pay. Revenue growth has been exceptional beating analyst estimates consistently but is counteracted by consistently increasing shares outstanding. The cash infusion from new shares has brought cash to a stable level, able to cover about 2-years of cash burn, but with increasing expenses attributed to consistent expansion, investors must keep a close eye.
It is the author’s opinion that TWST is a solid short-to-medium-term investment under good-market conditions. Due to youthful-scientific management with profitability-planning expertise, consistent revenue growth under a booming sector, stable balance sheet with enough cash, and a deserved premium valuation, TWST is a “buy” with a FYE price target conservatively estimated to be between base-to-optimistic conditions at $68 (7.5% upside).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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