Twist Bioscience - More than Synthetic Biology $twst
Thanks to all who are reading this week - criticism is welcome.
Excitement about synthetic biology probably hit its peak in late ’21, when Ginkgo Bioworks went public via merging with a SPAC. The stock has fallen ~90% since then, and it’s fair to say results so far have been disappointing. Twist Bioscience, a DNA synthesis company, was a beneficiary of this general excitement. At one point it traded at 30x sales, a number which is even more remarkable once one realizes gross margins at the time were ~39%. The company went public in late 2018, and its stock is down 75% from its all-time high in early 2021. Interestingly, however, it's up over 170% over the past year and ~215% since initially going public. The business can be split into a few different components:
Synthetic Genes & Oligo Pools – Twist’s bread and butter. Synthetic genes and oligo pools are both manufactured DNA strands, although oligonucleotides are single-stranded rather than double-stranded. This was the company’s raison d’etre in its early days, and also why Ginkgo accounted for 32% of sales at the time of Twist’s IPO. Synthesizing DNA is not a unique value proposition, but synthesizing DNA for a much lower price is. Twist management argues that its lower prices are structural and technologically enabled, rather than a banal attempt to slash prices in order to gain market share. The company’s miniaturized the DNA synthesis process onto a silicon chip, enabling much higher levels of production, with fewer chemical reagents, as compared to traditional methods.1 For competitors to meet Twist’s prices over the long term, they’d need to develop a similar technology.
NGS Tools – We’ve been able to sequence DNA since the late 70s, but Next Generation Sequencing allows scientists to sequence more DNA faster. Importantly, these DNA samples need to be adequately prepared before being sequenced. It’s worth emphasizing that Twist is not doing its own sequencing, and so isn’t a competitor with Illumina’s machines. In recent years, Twist has had a lot of success providing NGS sample preparation for both liquid biopsy and MRD diagnostic tests. Liquid biopsy companies, like Grail, test blood and urine to look for early signs of cancer. Minimal residual disease tests, or MRD tests, serve the other end of the spectrum, and search for cancer cells present in the body after treatment. Thus far NGS Tools revenue has exhibited a lot of variability from quarter to quarter, but growth is strong when looked at from year to year.
Drug and Target Discovery Solutions – A suite of products to help pharmaceutical companies develop drugs. Like Ginkgo, Twists charges its customers service fees and also has milestone and royalty agreements should the therapeutic succeed. Thus far this business line hasn’t delivered any blockbuster results.
The revenue contribution from each of these business segments, as well as by industry, has changed significantly since the company’s IPO, as one can see below (Antibody Discovery doesn’t have a figure for 2018/19 as it was lumped in with DNA libraries. Both of these comprise the Drug and Target Discovery Solutions segment):
These changing figures reveal an important truth about Twist’s business: it’s not only a synthetic biology play. In late 2020/early 2021 the company was frequently mentioned in the same breath as Ginkgo, and for good reason. Twist is Ginkgo’s sole DNA manufacturer, and, like Ginkgo, it benefits from a bull market in synthetic biology. The more companies, particularly startups, design recombinant DNA to be inserted into cells, the better Twist’s synthetic genes revenue line performs. Unlike Ginkgo, however, the company’s success doesn’t hinge upon synthetic biology having a host (no pun intended) of new applications over the next decade. As seen above, Twist has had an increasing amount of success with its NGS tools, particularly with its applications to cancer screenings. It’s unclear whether synthetic biology will live up to all of its hype, even if current advancements are exciting. What is clear is that people will always be looking for better methods to detect cancerous cells.
The cancer screening market also has the advantage of being (and understandably so, although Bill Gurley may have a good argument to the contrary) heavily regulated. Once a liquid biopsy or MRD test is FDA approved, any changes to the NGS sample preparation process need to be revalidated by the regulatory agency.2 Put differently, Twist’s NGS tools are similar to Transdigm’s aerospace parts – switching to a competitor’s offering is not an easy task! As it stands, many of Twist’s cancer screening customers remain early stage, so there’s a significant revenue ramp opportunity should any of its customers’ tests receive approval. Twist is perhaps best described as a picks and shovels play on liquid biopsy and MRD test adoption. One of the risks to its NGS Prep business would be Illumina pushing its own sample preparation products on customers, but that’s a move the sequencer company’s unlikely to make after its acquisition of Grail was blocked. There are, however, a few larger risks to the NGS tools segments that are worth mulling over. One is that the cost of whole genome sequencing falls to such a degree that diagnostics companies decide it’s no longer worth isolating specific parts of the genome for samples.3 I’m skeptical of this, as it seems like a decision one would make in a zero-rate environment and then reverse once investors focus more on expense lines. It may not have been worth companies’ time to monitor Snowflake and AWS bills during Covid, but managements quickly changed course once performance was measured on something other than revenue growth. The second risk to Twist is that as sequencing prices continue to fall the company’s forced to lower its prices as a consequence. It likely helped Heico that Boeing airplanes weren’t getting dramatically cheaper every year! Twist having to lower NGS tools pricing isn’t necessarily a threat to the bull case, but it becomes one if the market it sells into doesn’t grow as prices fall. It’s at least possible that liquid biopsy tests are extremely helpful for detecting breast and prostate cancer but much less helpful for detecting other forms. This in turn would have an impact on the likelihood of insurance reimbursement, the diagnostics venture market, and how large the early cancer-detection market could become over time.
While it’s fairly typical for a software company to go public without yet reporting profitability, it’s a good deal less common, regardless of industry, for a company to go public with negative gross margins. Twist achieved this rare feat, reporting gross margins of -26.5% in its first public fiscal year. Margins have improved significantly since then, as seen below:

The bulk of this margin improvement is driven by typical economies of scale. Building manufacturing facilities is not a cheap endeavour, particularly when you don’t yet have many customers! NGS Tools have also buoyed margins, sporting a higher overall profile than Twist’s typical synthetic gene offering. Much more recently, margins have been helped by its Express Genes product. As the name suggests, this is Twist’s synthetic gene offering but delivered faster. While the company’s synthetic DNA offering is cheaper than competitors, its delivery time has historically been in line with, or slightly behind, industry averages. The company’s lack of speed has meant it’s struggled with certain pharma companies and academic researchers who prioritize turnaround time above all else. These are prospects who manufacture DNA in-house not necessarily because they want to, but because waiting for genes to arrive would slow down critical research. In other words, the Express Gene offering not only boosts margins but also grows the market Twist can serve. This upcoming quarter will be the first that fully incorporates this new product, something worth keeping in mind when thinking about how margins might shape up for the full fiscal year. Pricing for Express Genes is dynamic, and based on current manufacturing capacity.
It's worth taking time to understand how Twist’s S&M expenses will shift over time, particularly given the differences among its business segments. The company’s go-to-market strategy for its synthetic gene offering started out high touch, with sales reps rather than an Amazon-like experience. This approach, however, presents a challenge if company management is correct about the growth prospects of the synthetic biology market. A key part of the thesis for Twist is that the market it sells into is artificially small given the complexities/time requirements of making DNA in-house and the expense of ordering it from another provider. As discussed with Ginkgo, lowering the cost of starting a biotech company should increase the willingness of VCs to fund such companies, which will lead to more companies getting funded, which in turn leads to a greater chance of one of these companies succeeding, which will then further increase excitement about the asset class, etc. etc., until Twist’s total addressable market is much larger than it was at the start of its existence. This is good for Twist, but only assuming that its sales model doesn’t rely upon individual sales reps. AWS wouldn’t have succeeded to the same degree if entrepreneurs had to do much more than enter some credit card info to get started! To capture this long tail of the market, Twist customers can now place orders for synthetic genes online. This e-commerce capability also solves for the inherent churn issues present with earlier stage, smaller, customers: it’s hard to have sales reps for customers whose LTV is subject to science risk and the vicissitudes of the venture market! It’s equally hard to have sales reps when a portion of customers are academic research labs, and so are unlikely to scale in any massive way. Ordering online has not yet been extended to NGS Tools, but it’s reasonable to expect that to happen over time.
It's not easy to get excited about Twist’s valuation, which currently sits at ~8x this year’s sales. That’s for a business that expects to have gross margins of 41.5-42.0% this year, that doesn’t technically have recurring revenue, and that can only scale so much before it has to build additional manufacturing capacity. Management expects margins to be above 50% by the end of 2025, but that’s still a far cry from software’s more typical 80%. That said, there are also signs of promise for Twist. While revenue isn’t strictly speaking recurring, 98% of its fiscal 2023 topline came from existing customers. This figure was 63% in 2017, but has stayed at 97% or above since 2018. Management doesn’t disclose any sort of NRR figure, nor do they give data on customer cohorts by year. However, if we ignore spend by specific cohorts we do still know that spend from existing customers increased ~18% from ’22-’23, and ~50% in the year prior. For Twist, not all increased spend is created equal. On the NGS tools side, it’s likely a reflection of where a customer is in the regulatory process rather than necessarily an indication of loving the product. Ideally, management would split up the existing customer revenue figure by business segment, and even more ideally by Synthetic Gene product. As Express Genes is rolled out, increased spend by those who typically manufacture genes themselves would indicate Twist’s product is good enough to replace not just competitors, but an in-house function. That in turn would suggest that Twist has managed to grow its addressable market, making its existing valuation more credible. The company is also in a position to benefit from any reshoring that might occur for DNA synthesis. One of the company’s key low-cost competitors is GenScript, which was recently flagged for its potential ties to the CCP. As U.S. companies seek to comply with the Biosecure Act and shift dependencies away from China, it’s probable that they’ll move orders to a low-cost, but U.S. based, provider. Twist’s Drug and Target Discovery Solutions segment hasn’t yet produced any big successes, but management did disclose last quarter that one of its partners is beginning human trials with an antibody Twist helped discover. Software businesses may have recurring revenue, but they typically don’t have the option value of massively benefiting when a customer develops a blockbuster drug.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
As an aside, it’s a good sign when the environmental section of a company’s annual report simply details how much more efficient its process is when measured against competitors. Using less resources to make the same product should mean lower prices for the end customer, market share gains, and is an incredibly effective way to pursue sustainability.
“Once we're included in a test that reaches the market, it is very sticky, as they will need to revalidate through the regulatory agencies for any changes.” - Q4 2022 Earnings Call.
This risk is listed on pg 20 of Scorpion’s short report on the company.