Twist Bioscience Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

Twist Bioscience is a synthetic biology company that manufactures synthetic DNA and DNA-based products, primarily serving the healthcare, diagnostics, and industrial sectors with a highly specialized and proprietary technology.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Twist Bioscience operates within the rapidly evolving synthetic biology industry, where it stands out due to its silicon-based DNA synthesis platform. This innovative technology allows the company to rapidly produce high-quality, low-cost DNA products for a range of applications. Twist’s primary revenue streams are built on:

  • Synthetic Genes: These are custom-made DNA sequences designed to meet specific customer requirements, serving industries such as pharmaceuticals, agriculture, and specialty chemicals.
  • Oligo Pools: Libraries of short, custom-made DNA fragments used in a variety of applications, including DNA-based data storage and gene-editing.
  • NGS (Next-Generation Sequencing) Tools: Products that enable high-throughput analysis of genomic information, often in conjunction with Twist’s DNA library preparation workflow.
  • Antibody Discovery: A relatively newer business segment where the company employs its synthetic DNA platform to discover and develop antibody therapeutics.
  • Other applications: Twist also has a large collection of libraries of diverse genetic material. They often work with other companies to use those libraries for further research.

Industry Trends:

  • Growing Demand for Synthetic DNA: The synthetic biology market is in its early innings, with projections for strong growth due to increasing research in diverse fields, such as genomics, precision medicine, and biomanufacturing.
  • Competition in DNA Synthesis: The market is becoming increasingly competitive, with several companies offering different approaches to DNA synthesis, some with lower costs or faster times, but often reduced capacity to do longer DNA sequences.
  • Increasing Importance of Antibody Discovery: The demand for effective antibody therapeutics continues to fuel growth in this segment as cancer and other diseases with high unmet needs, are still prevalent.
  • Data Storage: This is a new market that is getting more popular and might have huge upside if it becomes mainstream. It is still at its early stages.

Competitive Landscape: Twist Bioscience operates in a competitive industry, and its main competitors can be categorized into two main groups:

  • Established Players with Traditional Methods: These companies (e.g. IDT), have extensive and long-standing relationships in the sector. They might have lower manufacturing costs for short DNA sequences and therefore have pricing power. Their method is generally older and they can’t produce longer sequences.
  • Emerging Competitors with Novel Technologies: This group is highly variable, with a good number of companies producing DNA using different methods. The industry has a lot of smaller players, many with specific niches in the market.

What Makes Twist Different:

  • Silicon-Based DNA Synthesis Platform: This highly automated and scalable platform allows for more precise control of DNA production, lower production cost, and the ability to produce high-quality long strands of DNA. This unique technology sets it apart from many competitors who rely on traditional methods. They claim they have the ability to achieve higher complexity and specificity for DNA production.

  • Integrated Platform: By offering all the necessary processes for gene synthesis, Twist positions itself to offer a complete package of products and solutions.
  • Biopharma and Diagnostics Focus: The company is increasingly targeting the high-margin and high-growth biopharma and diagnostic sectors, which they believe offer the best opportunities to leverage their technology.
  • Diverse Product Portfolio: Twist produces a large list of products, including custom-made genes, oligos, and antibody libraries.

Moat Assessment: Moat Rating: 2/5

  • Intangible Assets: Twist’s primary strength lies in its proprietary technology platform, particularly for synthesizing longer strands of DNA. This technical advantage, protected by patents and know-how, constitutes a form of intangible asset that creates a barrier to entry for competitors with traditional synthesis methods. They have more than 300 patents and more than 400 patent applications. This is, however, a moat that is susceptible to new, innovative technologies.

  • Switching Costs: Customers of synthetic DNA or DNA libraries (especially for antibody discovery purposes) will incur relatively higher switching costs because the processes in those segments are very custom-tailored for each customer. Because those processes are custom, clients often face high integration costs or need retraining if they switch to other competitors. This contributes to a degree of stickiness for their offerings in this segment.

  • Cost Advantages: Twist’s technology helps them produce DNA for cheaper. They are known for their high-volume, low-cost production, which can help them achieve a sustainable cost advantage in the industry. The cost advantage is not so strong to completely stop other players from producing low-cost DNA, especially short sequences. Also, it is worth mentioning that they need to buy some raw materials for the production, which they have yet to show a cost advantage.
  • Scale: They claim that their production capacity is very large. However, other companies could follow suit and expand their production capacity. They still don’t benefit from geographical scale (other than a few strategic alliances) and are not a monopoly.
  • Overall: Given these points, we believe they have a narrow moat of 2/5.

Risks to the Moat and Business Resilience:

  • Technological Obsolescence: The rapid pace of innovation in synthetic biology poses a risk to Twist’s competitive advantage. New technologies that offer better performance or lower costs could quickly erode Twist’s position.
  • Pricing Pressure: As the synthetic DNA market grows, increased competition could lead to price pressure, impacting Twist’s profitability. This would especially affect segments where switching costs are low.
  • Reliance on a few Customers: A significant portion of revenue comes from a limited number of customers. A loss of one or two of these customers would severely affect revenue and profitability.
  • Operational Challenges: The complexity of operating a business with such high volume and complex and ever-changing technologies increases the risk of problems that might disrupt production and delivery and therefore revenue. In their manufacturing facility, the process includes multiple different processes and equipment, which can cause problems in quality control.
    • Over-expansion: The company’s fast pace of growth means they might struggle with efficiency and with maintaining a proper level of financial strength and liquidity.
    • Dependence on Partnerships:. The company is dependent on large strategic partnerships and collaborations with multiple organizations and there is no guarantee such relations will be continued or renewed. There is also no indication how much reliance and profitability they provide the company.
  • Regulation: Government and FDA regulatory changes can hinder their R&D efforts and their ability to operate effectively. Any change in regulatory practices can drastically slow down or affect the company.

Financial Analysis:

  • Revenue Growth: Twist has seen consistent revenue growth over the past few years, mainly driven by an increase in the demand of their synthetic DNA products and the expansion into new markets. Growth in 2021 was unusually high at 19% but has started to slow down again. In the last year revenues are still growing and they expect this trend to continue.
  • Gross Margins:
    • Gross margins are in the 20-30% level which is expected from the biomanufacturing sector. The gross margins are very consistent and are projected to grow in the near future. However, compared to their competitors, it is still low.
    • They do experience a significant range of gross margins depending on the product line, with high complexity products (like their DNA libraries for antibody discovery) fetching higher margins.
  • High Operating Expenses: A significant part of their operating expenses is based on the R&D that the company incurs, but other expenses are also a concern as they might decrease their profitability.
  • Profitability: Twist is not yet profitable, because most investments and operations are going toward R&D and marketing, rather than short-term profitability. Many public companies in the synthetic biology sector remain unprofitable and this is generally regarded as normal. They do have a positive operating cash flow, which can be a good sign, given that they are investing a great portion of their income.
  • Financial Leverage: The company doesn’t have a lot of debt. The debt that they have consists of operational lease agreements for facilities and manufacturing lines.
  • Cash and Equivalents: The company has enough cash to finance its short-term operations, and to continue to R&D efforts. However, their balance sheet is not very strong and might struggle to remain afloat if the company continues to not make a profit.

Understandability Assessment: Understandability Rating: 4/5

  • The technical aspects of Twist’s DNA synthesis platform can be complex to understand for someone without a scientific background, but their general business model and revenue streams are pretty clear. It involves manufacturing and selling synthetic DNA to different industries.
  • They have a clear description of its technology and its products.
  • Their financials are fairly complex, as most companies in the synthetic biology segment.
  • The complex calculations for revenue, cost, and ROIC are a bit confusing for beginners. The company has a very large R&D expenditure and the nature of the business relies heavily on innovative technology which may be difficult to measure and track.

Balance Sheet Health Assessment: Balance Sheet Health Rating: 2/5

  • Low Leverage: They have a low debt/equity ratio compared to many industrial companies, which is good. Their obligations consist of leases for equipment and real estate.
  • Low Liquidity: Despite having liquid assets and high cash reserves, they have a very negative net income and poor FCF. This puts the company in a position to possibly not be able to cover their liabilities. They don’t have enough financial wiggle room, so one small set back can put the business at risk.
  • R&D intensive: They are a company that requires a lot of R&D expenses to stay innovative. This puts a large drag on profit.
  • Unproven Business Model: The company has not shown a good history of profitability. They operate at a loss and their business model doesn’t have any assurance of working in the future.
  • Overall: The company doesn’t have any critical financial red flags, but their ability to finance operations and maintain financial stability is in question.

Recent Concerns and Management’s Response:

  • Shareholder Concerns about Profitability: The company has been heavily questioned about profitability by its shareholders and how it will make their long-term financials work.

  • Management’s Response: Management has continued to state that they will focus on revenue growth while continuing to improve margins. They aim to achieve positive profitability in the long-term, but it will likely take a long time to become profitable. They are also investing heavily in the antibody discovery division which they believe is going to yield higher profitability. Management also seems to place more emphasis on the long-term contracts that provide stability.

  • The Company’s Debt Burden and Interest Rates: With rising debt and interest rates, there are concerns about companies ability to repay interest payments.

  • Management’s Response: Their debt is mostly non-interest bearing lease agreements and they have a low interest rate on their debt overall, therefore they don’t believe they will have problems in the future.

  • Share Dilution: The company has used share issuance to acquire smaller businesses, diluting shareholders equity. There are concerns about excessive dilutive share issuance, especially if it leads to higher executive bonuses.

  • Management’s Response: They have not responded yet to the specific criticism. However, they claim the strategic acquisitions of other smaller companies will create more value for the company overall.

  • Revenue Guidance: They recently lowered their revenue guidance for the year, citing “macroeconomic headwinds”, and a slower pace of sales growth, which shows they might have trouble to fulfill promises.

  • Management’s Response: They have acknowledged that they will be facing strong headwinds in the near future, and stated that most other players in their market have already seen a slowdown. They claim they will keep working to gain market share and improve profitability.

  • Supply Chain Issues While a lot of other companies are having a resolution in supply chain issues, the company states they are still being affected by it and it is hurting growth and profitability.
    • Management’s Response: The company expects that with the new supply chain initiatives and the increased production capacity in their manufacturing facility, this impact should be minimized in the coming years.
  • Competition: There are increasing competitive forces in the DNA synthesis market, and the company must deal with new technologies and more powerful players.
  • Management’s Response: They have emphasized their cost-advantage due to their technology platform. They also believe their strong relationship with their clients will make it difficult for competition to compete directly with them.

In summary, while Twist Bioscience is operating in a high-growth sector, their moat is weak and susceptible to change. The company also faces financial challenges as they operate at a loss, therefore investors should consider the risks very carefully. The latest information shows a worrying slowdown of revenue and pressure on profitability that need to be addressed.