Last Halloween the investors and employees of Twist Bioscience — one of the leading DNA synthesis companies — were hoping for a treat, and not a trick, as the company entered the public markets. Though the offering priced shares at the bottom of their targeted range, in the nine months since the IPO, the stock price has more than doubled. In terms of market cap, Twist has grown from $350 million at IPO to nearly $1 billion. So far, Twist has proven to be an enormous synthetic biology success story. Why has the market loved them so?
Twist, for all its market successes, still loses a lot of money. In the second quarter of 2019, it bled just over $28 million. However, even though the company is not profitable, it is moving in the right direction. A year ago, Twist’s gross margin (the fraction of a company’s sales that remain after accounting for the cost of goods sold) was negative 14.7 percent, meaning that their products were selling at a loss of 15 cents for every dollar. Thanks to core improvements in Twist’s DNA synthesis technology, the company now has a positive margin of 16.2 percent. They still are losing money overall due to general administrative expenses and R&D, but reaching positive gross margins is an important step along the path toward profitability.
In addition to improving margins, Twist has also dramatically increased sales. The most recent quarterly results demonstrated a year-over-year doubling. Digging into those numbers offers important reasons to be excited about the health of the company. One major risk to Twist’s revenue at its IPO was its reliance on a single customer, Ginkgo Bioworks, for nearly a third of its sales. At the SynBioBeta conference two years ago, they announced an enormous partnership for the delivery of one billion bases of synthetic DNA. Signing big deals is positive for a company, but having such a large fraction of the company’s sales coming from a single source made some nervous. What would happen if Ginkgo shifted to a different provider? Twist has worked to rectify this, and now sales to Ginkgo comprise only half of what they used to.
This isn’t the only way in which Twist has diversified sales. Compared to a year ago, the company also expanded its customer base across every market segment they track. Geographically, the share of sales going to the United States declined from 70 to 64 percent. The share of sales going to industrial chemicals companies declined from 48 to 39 percent. In terms of product offerings, synthetic genes used to make up the lion’s share of sales at 65 percent. Now, due to new next-generation sequencing products, genes only account for 46 percent of sales. Most importantly, this increase in diversity never came from a decline in total sales to the dominant segment — in fact, they usually increased. It’s just that sales to other segments increased faster, demonstrating an expanding appetite for Twist’s products.
Though there is a lot to get excited about in terms of Twist’s sales, they have additional products in the pipeline that have huge profit potential. One area they are exploring is DNA data storage, which I wrote about in my last column. Twist’s ability to accurately synthesize many different genetic segments makes them a perfect fit for this market. Another set of products they are working on is biologic therapies. Twist can make very high quality antibody libraries for drug discovery, and is pursuing partnerships based on this technology. Biologics can offer strong profit margins, which would make Twist’s overall numbers much better.
Twist’s fundamentals have vastly improved since they went public, and this is reflected in their stock price. These improvements won’t be easy to replicate, and came thanks to strong and disciplined leadership. At the end of the day, though, people are excited about Twist because they are excited by synthetic biology. There will be many 21st-century products that are grown, not made, and to do that, growers will need DNA. If Twist is the one who provides it, they stand to make a lot of money.9