Welcome to Twist Bioscience's Fiscal 2021 First Quarter Financial Results Conference Call. Please be advised that today's conference may be recorded. I would now like to turn the conference over to Jim Thorburn, Chief Financial Officer.

All right. Thank you, operator. Good afternoon, everyone. I'd like to thank all of you for joining us today for Twist Bioscience conference call to review our fiscal 2021 first quarter financial results and business progress. We did issue our financial results released this afternoon, which is available at our website at www.twistbioscience.com. With me on today's call is Dr. Emily Leproust, CEO and Co-Founder of Twist. Emily will begin with a review of our recent progress, and I will report on our financial and operational performance. And Emily will discuss our upcoming milestones and direction. We will then open the call for questions.

Thank you, Jim, and good afternoon, everyone. In the first quarter of fiscal 2021, we continued to innovate and execute across each of our business areas, including synthetic biology, NGS, biopharma, and data storage. We beat our first quarter guidance of $25 million to $26 million with a reported revenue of $28.2 million and showed significant growth of 64% over the first quarter of fiscal 2020 when we reported $17.2 million. That said, this is the first time in 16 quarters that we have not shown quarter-over-quarter growth. This is due primarily to a very large $9 million order last quarter that included about $6 million that came in early according to our expectations. I want to acknowledge that my streak is broken, but for a very good reason, and the business remains strong. Importantly, with the revenue for the quarter, we met a significant milestone and now have a trailing four-quarter run rate of $100 million. We also received strong orders for the quarter of $33.6 million. Now I'd like to dive into the details of each of our four business segments. Beginning with synthetic biology, we reported $11.5 million in revenue and very strong quarter. We see strength across the board for our genes and gene fragments. In addition, over the course of fiscal 2020, we enhanced our product offering specific to two groups of customers, pharmaceutical and biotech companies and the long sales cycle of the market, where customers will order a small number of genes or fragments. For pharma and biotech customers, we introduced large preparation of DNA, something we call preps, and the commercial launch of this product is wrapping up nicely. We expect additional customers to adopt these products into their drug discovery and acquisition pipeline moving forward.

Okay. Thank you, Emily. As Emily noted, we have delivered another very strong quarter in what continues to be an uncertain environment due to the COVID pandemic disruption. We would like to thank all our investors who supported our recent equity raise as we strengthened our balance sheet to support our growth investments. Revenue for the quarter was $28.2 million as compared to our guidance of $25 million to $26 million. Additional highlights for the quarter include $33.6 million in orders, with another strong quarter in NGS, including $4.5 million in revenue from one liquid biopsy customer. Our biopharma business continues to develop strongly with an additional $1 million in revenue-generating agreements in the first quarter. Gross margin for the first quarter was positive 35.5%, and we grew our customer base to approximately 1,500 customers. We also signed a lease for our Oregon Factory of the Future and stepped up our investment in DNA storage. We ended the quarter with cash and short-term investments of approximately $587 million. Now I will provide more details on orders for the first quarter. NGS orders for the first quarter were $17 million, and that is growth of 44% year-over-year. This quarter, we also had a $4.5 million order from a liquid biopsy customer, and we believe we are very well positioned and excited about the future of population genotyping, liquid biopsy, and the MRD opportunities for Twist. During the December 2020 quarter, we received orders from approximately 570 NGS customers with the top 10 accounts placing orders of approximately $10 million. As we noted in previous calls, the RNA positive controls are not a material component of our revenue. However, they have contributed to our customer growth, and we're seeing these customers return to purchase other NGS and synbio products. Our pipeline for our larger opportunities continues to scale, and we're now tracking 160 accounts, which is up from 150 accounts we noted in our last earnings call. 59 have adopted our platform, and that's an increase from 55 last quarter.

Thank you, Jim. In conclusion, we started our fiscal year strong and look forward to an important year ahead. Looking into fiscal 2021, for synbio, we expect the continued growth and diversification of our revenue stream, a commercial ramp for DNA preps, and the production ramp for IgG, a marketing push for our current environment, continued focus on B2B solutions to allow us to capture specific multisite institutions and preparing the infrastructure and software platform for our Factory of the Future to enable strong growth in 2022 and beyond. For NGS, we expect continued revenue growth and customer ramping production, full launch of our methylation solution, the technical addition of CMI, and continued conversion of SNP microarray for Twist sequencing. For biopharma, we fully expect to continue to find partnerships to expand our technology base and generate revenue while advancing our own internal pipeline of antibodies and pursuing out-licensing opportunities over the next 18 months. And for data storage, we will continue to drive our engineering roadmap to further maturation, execute on the contracts, and pave the way for market adoption of this new storage medium. With that, let's open the call for questions. Operator?

Our first question comes from the line of Tycho Peterson with JP Morgan.

This is Eleni on for Tycho. First, wanted to start with guidance. You've left top line guidance unchanged despite the beat this quarter. But you increased the gross margin guidance just to account for the higher margins in the quarter, so essentially leaving the rest of the year the same. Is this just typical conservatism? Or is there something else to call out here?

It's conservative. We are in the middle of a pandemic. We're off to a really strong start, and we see good strong synbio business. We're experiencing good business in Europe. In the US, we had a $4.5 million shipment on liquid biopsy. So our NGS business is going strong. The synbio business is going strong. Regionally, we're doing well. And at the same time, we're being conservative. We saw our gross margins increase to 36%. And we feel good about improving our gross margins as we increase our revenue. Our longer-term gross margin target is 55% to 60%, and we're on track for that. But just to summarize, we are being conservative and prudent in the middle of the pandemic.

And then another question on something you highlighted, the Regeneron SNP conversion. Can you talk a bit more about the line of sight you have to additional SNP conversions over the next couple of quarters? And sort of the economic value or framework of how to think about that?

So we do know that SNP microarray conversions take some time because we go after customers that are using microarrays; they have a high volume of samples. And in order to get in the door, we need to show that we can be cheaper than the microarray. Nobody will switch if it's more expensive. And so now with Regeneron, Helix, and Ancestry, we have multiple data points that it is the case, so it's easier to get in the door. Then the next step is, in addition to being cheaper, I think there are some benefits to using Twist for sequencing. And that is that the content can be evolved. With the microarray, you are stuck with the content; you can't do anything. And so that is another big positive. In the case of Regeneron, they use that ability to enhance the content and to not be just Caucasian-specific, but to be global human genetic diversity. And then the next step is, once the content is defined, to enhance that so it takes a little bit of time because people have to remove the instrument to bring in the new automation and bring up the protocol process at scale. But once you're in, it's a very sticky solution. So yes, our intention is to keep converting customers. They may not all be the size of Regeneron, but we think that our solution offers a true differentiation compared to kind of the old technology at microarray.

And then on biopharma, you've had great traction signing revenue-generating partnerships. Just wondering if the $4 million you include in guidance is just sort of the initial upfront payments? Or if there is a component of milestones or royalties that would offer upside to your guide?

So the guidance is only for the upfront payment part. There may be milestones or royalties, but if and when those happen, more like when they happen, that will be upside. And so at some point, we anticipate that really at milestone and our royalties from the contract we signed. And most likely, the first one to deliver upside would be the contract that we signed in the past, not just this quarter. I mean it takes time for us to do the work. And then it takes time for the preclinical work to happen to get to the IND and then to go to the next steps. But what we report in orders and revenue is only upfront payment and any milestones working with the upside.

And if I can ask one last question here. How much of the backlog or orders you saw this quarter are COVID related? And how much revenue contribution from COVID is contemplated in your FY '21 guide?

In terms of COVID, COVID is not material. We've had a lot of success with the RNA positive control panels that we've released in the March time period. And that's actually grown into infectious disease panels. So we are seeing a lot of new customers. We've added about 500 to 600 new customers there, and they're actually coming back for additional NGS and synbio business. But in terms of actual COVID revenue, it's not material. What's particularly interesting for us is the increased number of customers and the increased share of wallet we can go after in those customers.

Our next question comes from Doug Schenkel with Cowen.

I actually just want to touch on a few of the important but high-level drivers to long-term growth. Just starting on next-gen sequencing, it's been interesting going back to the IPO seeing. You talked about the TAM growing there. I think when you first went public, we talked about the NGS TAM maybe being $400 million to $600 million, call it, $500 million at the midpoint. Now we're talking about $700 million. I'm just wondering if you could kind of break down what's expanded that? I assume it's things like microarray conversion in other areas, opportunities in liquid biopsy. I'm just wondering what's driven the expansion of the TAM? And are there other opportunities to take it beyond what we're thinking about today?

And so first, I'll start by saying that we are conservative in our TAM estimation. And that is the dollar that we could touch if we had 100% of the market, so it's not aspirational. And so the increase in the TAM has been mostly driven by the emergence of new applications. You mentioned liquid biopsy is definitely a big one. Another one is MRD, minimal residual disease. And so if you think of MRD alone, there are 15 million cancer patients in the U.S. If they get tested once a year and the average price is $1,000, that's $15 billion of spend on MRD. And of course, we can't list all of it. We can only test the DNA library prep portion of it. But we think that the $700 million that we're estimating today is actually going to increase further, thanks to the emergence of liquid biopsy and MRD. And I will note that SNP microarray is not included in that $700 million. We believe there is another $500 million available for SNP microarray conversion.

And maybe just kind of continuing down the line with questions like this. And kind of high-level as we just think about the long term. On drug development, regarding the drug development candidates you have in-house, how are you making the decision on which targets to prioritize? How are they progressing? You noted GPCR previously and adenosine receptors today. There's other ones you've mentioned in the past. I'm just wondering if you could share any details on how those are progressing? And then I guess the third part of this question is, how should we think about the possibility of essentially drug co-spin outs over the next 12 to 18 months in the absence of other out-licensing opportunities?

In 2019, we set a range of targets and successfully developed functional antibodies against them. We chose these targets because they were difficult to address, aiming to demonstrate scientifically that we could achieve this. Our intention was to substantiate our capabilities to build a solid data package and secure the commercial partnerships we are now cultivating. At that time, our focus was more on showcasing our expertise rather than selecting targets based on business significance. However, things have since evolved. Last year, we disclosed that we have worked both internally and externally to pinpoint seven targets that hold business relevance. We believe these targets have the potential to attract commercial interest. The antibodies we currently possess are available for licensing if required, but we feel confident that the seven targets we are exploring will be commercially appealing. Regarding monetization, our primary goal is to pursue out-licensing for these targets. However, we remain open to other possibilities, including the potential spinout of a new company, allowing another party to take on the capital risk while we share in the economic returns. Ultimately, we will choose the method that is easier, quicker, and offers the best financial benefits for Twist.

And last one on data storage. I mean, it's great to hear about the progress you're making there. I think this has gone from being something that was viewed as an exciting possibility and a source of optionality for the company. Now it seems like you're making enough progress where we can put more confidence in the program actually turning into something, which is great. I'm wondering if you could talk a little bit about the partnerships with Microsoft, Alumina, and Western Digital. What is each partner bringing to the table? And are there delineated responsibilities between each of those? And then a second part to the DNA data storage question is, I'm just wondering if some of the improvements that you're making specific to getting to essentially cost targets and speed targets that are associated with making data storage commercially feasible would be leverageable for other purposes across your business?

We are leading the data storage alliance and are pleased to have others join us. The aim is to expand opportunities for everyone involved. In the storage sector, it's important to avoid closed technologies, like the proprietary Zip drive from the late '90s. Our analysis suggests that locking everything in makes it difficult to gain traction and sustain growth. Therefore, our focus is on uniting companies to establish an open standard, allowing us to create a larger market. The alliance's goal is to outline the industry's roadmap, create use cases, and educate CIOs so that when products are ready, companies will have the budget and willingness to pilot and adopt new technologies. This initiative is meant to facilitate future commercialization, and we believe it is timely given the work still needed, but we see progress. We want to ensure that by the time our product is ready, we have already commenced our go-to-market strategy. Regarding potential synergies, we've learned a lot during the development of our silicon chip over the years, and we're applying that knowledge to this project. This has led to better solutions because we've been working on it for the past seven years. While our primary focus on data storage isn't driven by this, it's logical that innovations in technology and science could benefit our core business over time. This is similar to my experience with our initial silicon platform, where it's reasonable to expect that there will be benefits in the future.

Our next question comes from the line of Catherine Schulte with Baird.

I guess, first, on the liquid biopsy customer placing the large order in the quarter, can you just talk about the commercial launch timing of that product? I can think of one that's talked about using your product as a potential second quarter launch and maybe that magnitude of an increase you could see if it does move from its clinical trials to commercialization.

You probably can guess we're not able to comment on who the customer is. I think what we can say is that we have been progressing quite well in liquid biopsy in a number of companies, and it starts with a small order for a pilot and then a big order for validation and another big order for scale-up, and now we are in the mode of clinical trials. And so I think even bigger orders. But our expectation is that once it goes commercial, the level of need that they would have would keep growing, and we are not in charge of the timing. We don't control timing when those commercial launches happen. But what I can say is that when we have the capacity, so whenever it happens, we can deliver quickly. As a reminder, in Q4, when the original order came in, we were able to very quickly, in the same quarter, make it heated. So we have capacity. And so we have confidence in our future NGS revenue ramp. However, because those now reference to the bigger order, that will create some lumpiness, but as there are multiple companies that make lumpy orders, hopefully, it will smooth out over time.

And just given the calls for increased sequencing when it comes to monitoring the different COVID variants popping up, how much of an opportunity do you see that as? And what kind of uptake are you seeing on your offerings? And how are you thinking about that contributing in the balance of the year?

So in our view, surveillance of the COVID virus is important beyond just the yes or no. Though the people at the very is enough, I think people want to sequence the full virus. And that's why we actually were quite early in launching our products. In terms of how that analysis is done for the full virus sequencing, there's two methods to do it. The first one is what we do, which is through hybridization. And then the second one is using PCR and then sequencing. In full transparency, the PCR approach next then sequencing is maybe a little bit easier to implement, but the results are not as good, and we have seen now yesterday, which I think the recovering is available where our customers compared the two and the hybridization approach was clearly superior, giving a better coverage of the entire genome. And so we don't report exactly; we don't report the actual number. But I can say that how our approach is superior, and we have a RUO kit out in collaboration with Biotia, and so we are trying to make it as easy as possible for customers to take it. And so we report the number as aggregate started NGS by itself; it's not significant. So it's not material, but a number of non-material products together contributes to our overall core.

And then last one for me. Just looking at academic and agriculture, you mentioned both of those were flat in the quarter. Do you think those customers are still being impacted by COVID disruptions? And what kind of growth do you expect from those markets going forward?

Catherine, I missed the first part. Did you talk about academic?

Yes, academic and ag.

So academic, I mean, it's interesting in terms of academic, although obviously, universities have been slightly impacted by the pandemic. If you look at our revenue in academic, it has been roughly flat for the last year. And that's good news for us because, obviously, when the academic institutions actually start to increase activity, we should see upside there. So I'm particularly encouraged by the academic revenue. In terms of agriculture, agriculture has been a small part of our business. I mean, last quarter, revenue was $0.2 million. So we see opportunities in the future in agriculture, but the major opportunities over the last year, we actually executed well in health care; we're seeing industrial biotech pick up, and I think that labs will ramp up as the pandemic starts to decline in the next year.

Our next question comes from Vijay Kumar with Evercore ISI.

Jim, maybe one on orders. I want to make sure I understood the numbers correctly. The $4.5 million you called out, is that like a one-off? I feel like last quarter, you guys had the Regeneron order. So is this more of a repeatable feature, or should we be thinking of about $4.5 million as one-off?

The $4.5 million, Vijay, is in liquid biopsy. I think we're very well positioned in liquid biopsy. We have a great product, great solution there. We're working with a number of customers in that area. It is lumpy. I think what I would highlight is that we're making great progress in building the NGS pipeline. And revenue for NGS last year was $44 million. We did almost $16 million in Q1. So we're very optimistic with the growth in NGS. And it's difficult to call when these large orders will actually come in, when we'll ship them. But we see growth in NGS this year. I know our guidance is $54 million to $58 million. We believe that's very prudent, but we get a good product, and I mean, the pipeline of customers keeps increasing.

And one last question from my side on the P&L. The gross margin, I guess, did you say it was a mix that is going to drag down margins for the back half? And typically, it looks like Q4 is a pretty big gross margin quarter. And OpEx, looks like it went up on the SG&A side. Maybe some comments on what's driving SG&A?

So on gross margin, our projection is conservative. In longer-term gross margin targets between 55% and 60%. This first quarter gross margin was 36%. Our last guidance for the year was 32%. So we've increased guidance to a range of $32 million to $34 million as we increase our revenue and leverage our fixed costs. We are ramping new products. So you see we have little inefficiency as you ramp the products in terms of underutilized capacity. In terms of OpEx, the increase in OpEx is primarily stock-based compensation. As you'd appreciate, the share price has increased a lot during the year. So the stock-based comp charge is higher, and then reflecting that in the increase in our operating expense guidance.

And on SG&A, Jim?

That's SG&A. Stock-based comps increased from $20 million to $32 million, so that's driving the bulk of the increase in SG&A.

Our next question comes from Puneet Souda with SVB Leerink.

The first question is about the orders. I appreciate the $4.5 million you mentioned, but that was for this quarter. Can you explain the decrease and the factors influencing it? Given the one-off orders you're experiencing, I’d like to better understand how we should view the order book for the year.

I mean, obviously, in terms of orders, the first quarter orders were about $33.6 million. So you take off $4.5 million, looking at $29 million. I mean what's notable is Ginkgo, the orders were $3.5 million, revenue is $1.4 million. We do expect Ginkgo to pick up significantly in the rest of the year. That's why we called out revenue $11 million to $12 million for the year. In terms of our guidance, I think that's where you're getting at, Puneet. Yes, our guidance is conservative. However, we have taken into account the pandemic. We are seeing very strong bookings, as noted in NGS, our pipeline NGS continues to grow. We will see Ginkgo come back in the latter half of our fiscal year. And we continue to make progress on Synbio. We are conservative in terms of where we think the academic institutions are at. But in terms of the overall $110 million to $118 million, we thought it was prudent to leave the revenue guidance in place and increase the gross margin, which reflects a higher gross margin in quarter one.

And Puneet, to build on what Jim said, I'm not sure I would characterize it as a one-off order. We highlighted it because it's a significant next step in our liquid biopsy support as this customer goes into clinical trials. But this is not the first order from this customer, and I don't expect it to be the last either. So it just is the next step as we will go through clinical trials anymore, and then once they go to commercial launch, we anticipate that they will need even more than that.

So within that context, if you can just help me understand, last quarter, $9 million, $4.5 million this quarter. If we think about this sort of lumpiness continuing through the year, then maybe just walk us through how much of such orders are baked into the full year guide. If you can just walk us through maybe how much of liquid biopsy are you baking into the full year guide? And how much sort of the $9 million that order that came last quarter are you baking into the guide for the full year?

So the $9 million for last quarter, we actually shipped in quarter four. In terms of the way we build up the $54 million to $58 million, it didn't include the $4.5 million for the liquid biopsy customer. So we build it up by customer. We don't actually break it out by segment. I mean, as you know, we've got about 160 large customers we're tracking. They continue to give us their projections. We're working closely with them. So we're pretty conservative in terms of the way we build up the guidance, but we don't break it out by segment, i.e., we don't break it out by liquid biopsy as an example.

But it appears that these orders are becoming, I mean, routine rather than, as Emily pointed out, they're not really one-off. So I just wanted to get a sense of if those are the types of orders you're continuing to expect through the year, and they are they baked into the guidance or not?

To a certain extent, they're baked into our guidance, the $54 million to $58 million. What I'm trying to get across, Puneet, is we do track key customers, and we are conservative in terms of our projections. And we've grown the NGS business from $3 million to $21 million to $44 million, and we had almost $16 million in the first quarter of this year. Our expectation is we're going to continue to do well. However, it's very difficult to predict quarter-to-quarter, but year-over-year, we anticipate good strong growth in NGS.

And on biopharma, it appears that, obviously, you're working on that, and now you're doing cell therapy products. And it's good to see the progress on that front. But just help me understand, how should sort of the cadence of those new project adds should be through the year? Sort of how many projects are you baking into the guide for the full year? And again, also, when should we expect to see the first clinical Phase I entry of a product? What's your line of sight on the 10-plus projects that you have so far?

So we were not guided on timing for when we'll have a first with antibody in the clinic. Definitely, it's a very important milestone for us, but we are not in control of the timing because we ended the preclinical development, and then the partner takes over. So that's why, last year, we were focusing on having as many partners as possible because I think more shots on goals get us there sooner. So one of those 13 last year, where we get there first, we don't know who, but it was we have many shots on goals. As far as your first question, I think you're asking about how many new partnerships we're expecting. So we have not guided this year on the number of partnerships. We've guided on the total dollar amount for the upfront payment. And I'm quite encouraged by how full the funnel is. Those kind of partnerships are not like selling a kit. You can't close it in a week or in a month. So there's a slightly longer development time, but we are past the top sheet stage for many of them.

Regarding DNA storage, when do you anticipate it could generate significant revenue for Twist? I understand there are stability studies and redundancy needs for the storage systems. Also, when can we expect to see search trials and the data from those trials? Looking longer-term, when might we start to see substantial revenue from this area for Twist?

I mean, we've done many demonstrations by now. We've done demonstrations for a year with Microsoft at Montreux Jazz Festival, with lately in Q4 with Netflix. So I don't think we have much more to demonstrate that DNA is stable. The DNA capsule that we use that are peer-reviewed where the DNA is stable for the equivalent of 100,000 years or more. So I don't think there's a lot to demonstrate in terms of stability. That is pretty baked-in. And so what we have to do for us is go through the technology cycles. We've guided that we will have our 1 micron chip working this year and that we will have the next and final chip that we need, the 115 micron chip, in hand in 2022. So it's not a month away, but now we're talking in terms of quarters to get to a commercial launch to get to our prototype production.

That concludes today's question-and-answer session. I'd like to turn the call back to Dr. Leproust for closing remarks.

Thank you very much for everybody for staying on a little bit beyond the schedule. But it's a really exciting time to be empowering our customers to improve health and sustainability. And with health care under the microscope and elevated through the COVID-19 pandemic, we are proud to continue to innovate and execute and apply our DNA synthesis platform to ride the future of health care, diagnostics, sustainable chemicals, sustainable materials, AgBio, and data storage. With that, we look forward to sharing with you our progress in the months ahead, and thank you so much for your attention.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.