Welcome to Twist Bioscience's Fiscal 2020 Fourth Quarter and Full Year Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference call over to Jim Thorburn, Chief Financial Officer. .

Thank you, operator. Good morning, everyone. I'd like to thank you all for joining us today for Twist Bioscience's conference call to review our fiscal 2020 fourth quarter and full year financial results and business progress. We did issue our financial results this morning, which is available at our website, 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 on Twist business. 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. .

As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for 1 week. .

During today's presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance.

Our expectations and beliefs regarding these matters may not materialize, and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. .

The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we cannot, at this time, predict the full extent of the impact of the COVID-19 pandemic and any resulting business or economic impact. We disclaim any obligation to update any forward-looking statements, except as required by law. .

With that, I will now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust. .

Thank you, Jim, and good morning, everyone. Fiscal year 2020 has been a transformative year for Twist. In early December of last year, we reported our results from fiscal 2019 and provided revenue guidance of $80 million to $84 million for fiscal 2020. .

While we withdrew our guidance given the uncertainty of the pandemic, and closure of many customer sites, I'm extremely pleased to report record revenues of $90.1 million for fiscal 2020 and $32.4 million for the [ fourth quarter ]. Our strength in revenue was driven by the innovation and commitment to execution from our entire team at Twist.

They worked through exceptional, uncharted circumstances to deliver great products to our customers. Against the incredibly disruptive backdrop of the COVID global pandemic, we delivered growth in our product lines and adding new products to specifically address the evolving SARS-CoV-2 virus. .

I'd like to note that unlike some of our peer companies, our record revenue is not a function of COVID-19 related products.

And in fact, while our synthetic RNA control for SARS-CoV-2 and our NGS panels to sequence the virus definitely contributed to our revenue, it is our stable synbio and NGS products with growing initial revenue from our Biopharma division that has catapulted our successful this fiscal year.

Illustrating our momentum, we reported record orders of almost $117 million for the full year with $42.7 million for the fourth quarter, setting the stage for growth into 2021. .

Diving into the business, I'd like to begin with synbio, where we reported 30 -- sorry, $43.8 million in revenue for fiscal 2020. Over the course of the year, we focused on building out our product line specific to biopharmaceutical and biotech customers.

We introduced new preparations of DNA specific to our customer needs on time and on budget in addition to building the capability to provide IgG antibodies at scale. DNA preps, as we call them, launched in the second quarter, and we are seeing customers engaging diligently and initial orders gaining traction. .

In the fourth quarter, we received initial IgG orders from our early access customers, and we expect revenue to ramp up moving into and through calendar 2021, now that the capacity is available internally, and while we are building the e-commerce infrastructure.

In addition to products for pharma customers, we expect to launch clonal-ready gene fragments in the next month. This product will be useful for the long tail of the market for those customers, who need a few genes at a time. Often, these are academic customers, who will make their own genes instead of buying them. .

As we look ahead into fiscal 2021, we have 2 areas of focus. The first is on what we call the Factory of the Future. This is the next evolution of our platform, which we expect to launch in 2022, and will allow us to bring additional differentiation, including a faster turnaround time for all of our products.

We anticipate our Factory of the Future will double our current capacity and will serve as the second manufacturing site outside of the Bay area.

We believe this facility will provide us the capacity to scale revenue to $500 million and we look forward to evolving our business to add new differentiators to unlock segments of the synbio market we cannot address today. .

The second focus would be around our business-to-business capabilities. Currently, we have an exceptional frictionless e-commerce system that tracks orders from initial purchase to shipment.

We are now focused on building capabilities to facilitate business-to-business interactions that will expedite order placements to enable us to be an approved bundle within certain systems. .

For instance, currently, a customer, the University of California is required to generate a PO within their accounting system before placing an order. A B2B integration will enable these customers to place an order on our website without needing a specific PO from their institutions, removing significant barriers to order. .

Moving to Genomics and targeted NGS. We launched our NGS product line in 2018, and I am pleased to report that for the first time, revenue for the fiscal year is approximately equal to our synbio revenue.

This is an exceptional testament to the power of our platform to disrupt established markets and offer innovative products to support our customers strive to improve health and sustainability.

We expect continued growth for this product line, particularly as it is a long sales cycle, and many of our customers are using our products for clinical trials.

The timing of their scale up and the associated revenue ramp for Twist is dependent on their success in the clinic, and we're confident in the growing revenue stream, but we do expect it to remain lumpy in the near term. .

In fiscal 2020, with the emergence of COVID-19, we launched a new product line of synthetic controls, initially for SARS-CoV-2 and subsequently for other respiratory diseases. These controls can be used to develop and routinely ensure the diagnostic tests accurately detect pathogens.

This product line as well as our COVID-19 specific panels, opened the opportunity to pursue new customers now we have now shipped controls and COVID-19 panels to 841 customers as of September 20 -- sorry, September 30. These customers are now familiar with Twist and we are working to sell additional products into these accounts..

In addition to the controls, we now have an infectious disease product line, which we believe will be critically important going forward as we continue to fight COVID-19 while navigating ongoing outbreaks. To that end, last week, we launched the comprehensive viral panel, which screens over 3,100 viruses. .

Continuing to our product line expansion, we introduced our methylation solution earlier this year to our early access customers. We have provided great feedback to date. We expect to make these products available more broadly in early 2021.

In addition, we intend to add multiplex indexing to our product mix, a highly technical workflow extension to our current universal dual indexes. We believe this will better support customers developing liquid biopsies and cancer diagnostics further differentiating our product offering. .

We continue to focus on converting customers, who are currently using SNP microarrays technology, and we've have had some incredible success in this effort with a very large customer making this switch in the fourth quarter. We expect to continue our success in winning new accounts with this approach.

And moving into fiscal 2021, we see a significant opportunity to pursue conversion in AgBio, where SNP microarray is very common with millions of samples processed every year. While the cost percentile is smaller than in health care, the overall volume is much larger. .

In addition to synbio and NGS, we see growth coming from the expansion of our OEM strategy. We strive to own the workflow upstream from sequencing and leverage the channel reach of other companies. We now have 13 different companies selling our NGS and synbio products under their brand name.

And this unique strategy has allowed us to book approximately $5 million to $6 million in revenue in fiscal 2020, and it is poised to grow. .

Turning to our vertical market opportunities. Our Biopharma business continues to excel. Over the course of fiscal 2020, we anticipated that we will sign 5 to 10 partnerships, and I'm pleased to report that we have signed 13 revenue-generating partnerships with 8, including milestones and/or royalties.

4 of them were signed during the fourth quarter of fiscal 2020, and our pipeline of opportunities remains robust. We are now beginning to deliver data for our partners, who signed in earlier this year and our platform continues to impress. .

We will look for ways to share this data on associated clinics, but given the confidential nature of our partnerships, it may not be possible in all cases. And in addition, public release of this information is dependent on our partners' approval. .

In addition, we reported preclinical data for 3 proprietary antibodies that we discovered using our biopharma library platform. The data showed 2 of our single domain VHH Nanobodies protected against weight loss at all those levels, including the lowest dose of 1 milligram per kilogram in preclinical hamster models of SARS-CoV-2. .

In addition, the third IgG antibody discovered through Twist collaboration with Vanderbilt University Medical Center, were found to protect against weight loss at 5 and 10-milligram per kilogram.

While we may out-license these antibodies for a wide range of opportunities, the proof-of-concept validation for our ability to go from target to effective antibody data in preclinical model is helping us build a robust pipeline of potential partners in biopharma vertical. .

We have demonstrated that we can monetize our biopharma platform through revenue-generating partnerships, and our next evolution is to generate antibodies against our own targets and then license them out for further development. We have identified 7 key disease targets where we believe our biopharma platform can generate differentiated antibodies.

We intend to advance development of these targets through our discovery and optimization platform, and we will be pursuing out-licensing opportunities for these antibodies over the next 18 months. .

Moving to data storage. Last quarter, we reported an important technical breakthrough that we believe will facilitate further minaturization of our silicon technology.

We continue to make very good progress and we are now producing synthetic DNA for data storage on 5-micron devices, spaced 10 microns apart from each other, a dimension called the pitch. This is an incredible accomplishment and an important step on our technology road map for data -- for DNA data storage.

Right now, we are using this chip in an R&D capacity to extra volumes to demonstrate that it works. .

In parallel, while ensuring that it works, we already designed and have received our next silicon chip with even further minaturization. The second chip has 300-nanometer devices on a 1-micron pitch. With each engineering and technical accomplishment, we work within a chip in an R&D capacity first to debug it.

Once we have a working prototype, we then move it into the development phase, while in parallel, designing the next minaturization of the chip, taking into account our experience with each iteration. Ultimately, we plan to scale down to 150-nanometer pitch or less. .

Once we achieve our target chip design, we will follow the same pathway of debugging and developing. And for the final iteration, we will focus on scaling up to full commercialization. This is the same process we used for current commercial scale silicon platform to have experience and success to build upon. .

In addition to our technical progress, earlier this month, we announced a significant alliance for DNA data storage, which brings together the leader in this field to advance an industry road map and drive awareness and widespread adoption of this new long-term storage option.

We, along with Microsoft, Western Digital and Illumina are founding members and several additional organizations working in this field have joined the group. It is important to note that this alliance does not change the timing of our internal technology road map.

What it does is build consensus around the opportunity for new storage medium, priming the market when the technology is ready for entry, and we are pleased to lead the charge. .

At this time, I'd like to turn the call over to Jim to review our financial results for the quarter. .

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. And would like to thank all our Twisters for another terrific quarter and an outstanding year of progress. .

Our orders for the fiscal year achieved a record $116.7 million, and revenue was $90.1 million, and our gross margin scaled to 31.8% for the year.

We believe it is important to have a strong balance sheet in these uncertain times, and we concluded the year with approximately $290 million cash and short-term investments, and we exited the year with strong operational results. Our revenue for the quarter was $32.4 million we booked $42.7 million orders. .

Our Biopharma business is doing really well with an additional 4 revenue-generating agreements in the fourth quarter, and we also had record NGS revenue and orders. Our gross margin is notable in the fourth quarter with positive 46%, and we grew our customer base to approximately 2,200 from 1,300 in the previous fiscal year. .

Now let me share with you more details on our orders for the fourth quarter.

Our NGS orders were $23.6 million, and we received orders from approximately 600 NGS customers with the top 10 accounts placing orders of approximately $15 million in the fourth quarter, and for the full year, our NGS orders were approximately $54 million, and that's comparable to $28 million in fiscal 2019.

So we're making a lot of progress in NGS and our larger opportunity customers contributed about $34 million of the total FY '20 NGS orders. .

Our pipeline for our larger opportunities continues to scale, and we are now tracking 150 accounts, up from 132 accounts we noted on our August earnings call, and 55 were adopted, and that's an increase from 47 in the previous quarter. .

Now turning to synbio. Our synbio orders, and this includes orders from genes, libraries and oligo pools and Ginkgo were $16.2 million in quarter 4 and brings our total synbio orders for the year to approximately $58 million. And that's a 40% year-over-year growth.

For the year, total genes orders grew from approximately $33 million in fiscal '19 to $47 million in fiscal '20, and Ginkgo orders increased from $8 million to approximately $12 million. And please note Ginkgo accounted for about 10% of our total orders for the year. .

Now to Biopharma. Biopharma orders in quarter 4 were $2.9 million, and we signed 4 additional revenue-generating partnerships, bringing the total to 13 with 8 of those including milestones and/or royalties.

Biopharma orders for the year were $5.2 million, and we're looking very strong heading into fiscal '21, with future upside for milestone and royalties. .

In terms of our segment orders, we saw the academic segment pick up in Q4 with orders of $8.5 million as compared to $5.4 million in quarter 3 with a large order of approximately $2 million from one institution, which will be billed over the next couple of years, contributing to our growth. .

Our Healthcare segment recorded strong bookings in the quarter. With $23.6 million due to strong orders in NGS, Biopharma partnerships and continued progress in expanding into large pharma. Industrial biotech bookings for the quarter were $8.8 million which included Ginkgo bookings of $3.5 million.

Please note, we provide orders not to directly translate into revenue, but more to provide a trend line for each group. We also anticipate both NGS and Ginkgo orders to be lumpy quarter-to-quarter. .

Now moving from orders to revenue. We reported revenue of $32.4 million in quarter 4 and that's another record quarter for Twist. Our NGS product revenue for the quarter climbed to $20.2 million. And for the year grew from $21 million in fiscal '19 to $44 million in fiscal '20.

As expected, the second half of the year was very strong for NGS products, and $9 million was booked and billed to 1 customer in quarter 4. This is a customer we have worked closely with for a number of years, and is another confirmation of the transition from SNP microarray to NGS. .

And also note in our original FY '20 revenue projections, we anticipated approximately $3 million of this order to come in during Q4. And so while lumpy, less so than any seen on the surface. .

Now touching on synbio. Our synbio product revenue for the quarter was $11 million, which is down sequentially from $11.8 million in previous quarter; however, Ginkgo declined from $2.8 million to $1.8 million sequentially, and that's mainly due to the timing of the projects.

Our Q4 genes revenue was $8.6 million versus $9.6 million quarter 3 that's mainly due to Ginkgo, as noted earlier, and revenue declined due to the summer impact of EMEA. .

For FY '20, our synbio business was approximately $44 million versus $33 million in FY '19, with Gingko revenue for the year at $10.7 million versus $9.2 million in the previous fiscal year. And Gingko now accounts for approximately 12% of our revenue in fiscal 2020. .

Our genes business, which is doing extremely well. We shipped approximately 339,000 genes in the year, and that's compared to 288,000 last year. And our genes revenue grew from $26.7 million in FY '19 to $35.2 million in FY '20, and that's an increase of approximately 32%.

And it's worth highlighting the revenue are longer genes, which is 3.2 and 5 kb genes in FY '20 climbed to $14 million, and that's up from $9 million in FY '19. .

Our preps, which we launched in April, right in the middle of the pandemic continue to scale nicely, and we billed approximately $1 million for the year. .

Now Biopharma. Our revenue for the quarter was $1.3 million as it build a rapid antibody discovery project activities which includes timing, screening and high throughput IgG purification. We are very excited about the progress we're making, and highlight our biopharma revenue rose to $2.4 million for fiscal '20. .

I will briefly cover the regional progress. U.S. grew to $59.2 million in FY '20 from $36.9 million in fiscal '19. EMEA revenue grew to $25.8 million in fiscal '20 versus $14.7 million in fiscal '19, another year of terrific growth in EMEA, and EMEA now accounts for 29% of our worldwide business.

APAC revenue for the year was $5.1 million versus $2.8 million in fiscal '19. .

In terms of how we're doing by industry, the industrial biotech revenue was $29 million for fiscal '20, which is approximately 32% of our business. Health care is now our largest segment and accounts for 44% of our business with revenue of $40 million in fiscal '20 as compared to $17.4 million in fiscal 2019.

This growth is primarily due to the success in NGS, Biopharma and continued success in penetrating large pharma. .

Academic revenue in fiscal '20 was $19.6 million, and that's compared to $13.8 million in fiscal '19. Agricultural revenue was $1.4 million versus $1.2 million in the previous fiscal year. .

Now moving down the P&L. Our gross margin for the quarter was $14.9 million, or 46% of revenue. And for the year, our gross margin was 31.8% of revenue, and that's up from 12.8% in fiscal '19.

As we've noted before, the increase in our margin reflects the impact of scaling our revenues, leveraging our fixed costs and the benefits of a higher mix of NGS products and terrific execution by our organization. .

Our operating expenses, excluding cost of revenue for the fourth quarter increased to approximately $39 million. And that brings our total operating expenses excluding Agilent litigation settlement to $146 million as compared to approximately $116 million in fiscal '19. .

In terms of year-on-year comparison, R&D for the year increased to $43 million from $35.7 million in FY '19 and that's due to increased investment in our resources. We increased our headcount from 102 to 130. And also note that FY '20 includes $2.5 million offset -- expense offset for the IARPA grant. .

In terms of SG&A, this increased to $103.3 million from $88.1 million in FY '19, and that's primarily associated with investment in our commercial organization. We've scaled our organization from 122 heads in sales and marketing to 166.

Also, we had increased commissions associated with higher revenue, and stock-based comp increased by $5 million from FY '19 to FY '20 in SG&A. .

Our net loss for the quarter was $24.3 million, and that's down from $28.2 million loss in the previous quarter. And that's mainly due to the higher gross margins associated with scaling our revenue.

Note stock-based comp for Q4 was $5.1 million as compared to $4.1 million in quarter 3, depreciation in quarter 4 was $1.9 million, that's up from $1.7 million in Q3, as we brought on the new writers. .

For the year, our net loss was approximately $140 million and that's including $22.5 million for the litigation settlement with Agilent, which was booked in quarter 1, also includes approximately $17 million for stock-based compensation and approximately $7 million for depreciation.

CapEx was approximately $10 million for the year, with major investments for capacity expansion, primarily for new writers and lab equipment. .

I will now cover our outlook for fiscal '21. We're positioning the company for strong growth in FY '22 and beyond. And although there's a great deal of short-term uncertainty and challenges of the pandemic keep evolving, our view is FY '21 will be a dynamic year. .

Our revenue guidance for '21 is in the range of $110 million to $118 million. This includes Ginkgo revenue in the range of $11 million to $12 million for the year. Non-Ginkgo synbio is estimated to be in the range of $41 million to $44 million for the year. NGS revenue is estimated to be in the range of $54 million to $58 million.

And Biopharma revenue is expected to be approximately $4 million for the year. .

Our gross margin guidance for the year is approximately 32%, and will scale from 27% in quarter 1 to 37% in quarter 4. Our margin, as always, is influenced by mix and also impacted by new capacity utilization as we launch new products, such as IgG and scale our DNA preps. .

We're targeting very large growing markets and expanding significantly faster in those markets. We have demonstrated our platform scales and demonstrated our ability to tap into additional revenue streams. We're optimistic about the opportunity ahead and continue to invest for growth and build our moat.

And as such, we're stepping up our investment in innovation in fiscal '21. .

Operating expenses, which includes R&D and SG&A, were approximately $174 million for the year. We are stepping up to the plate and increasing our investment in R&D to approximately $60 million in fiscal '21, and that's up from $43 million in fiscal '20.

In addition to increasing our core synbio and NGS resources, we're increasing our DNA storage investment to approximately $15 million in R&D and Biopharma investment to $12 million in fiscal '21. Note the DNA storage investment in FY '20 was about $3 million. .

Our net loss guidance for the year is expected to be in the range of $136 million to $141 million, and this includes stock-based comp of $20 million and depreciation of $7 million. CapEx guidance for the year is $30 million, and that includes expansion into our new facility, as Emily highlighted.

As we're well through our December quarter, we're projecting our revenue in December quarter to be in the range of $25 million to $26 million. .

And in summary, we view our outlook to be prudent for fiscal '21. Fiscal '21 will be a dynamic year, and we're stepping up to the plate and pursuing large, growing markets and investing for our long-term success. .

And with that, I'll turn the call back to Emily. .

Thank you, Jim. In summary, we achieved an amazing quarter and year bringing light into the challenges of 2020. We beat our pre-COVID-19 revenue expectations, delivering exceptional products, more importantly, service to our customers throughout the global pandemic. .

2020 has tested our people, our plans, and our resilience, and I am extremely pleased to say that as an organization, we have risen to the challenge. In a tough context, we are like MacGyver. We use the tools we have, we create those we do not, and we always, always persevere. .

Looking into fiscal 2021 for synbio, we expect continued growth and diversification of our revenue stream, ramping pharma-focused products, including DNA preps and IgG, launch of our clonal-ready gene fragment, B2B solutions to allow us to capture specific multisite institutions, and a significant index -- investment in our Factory of the Future to prepare for strong growth in 2022 and beyond.

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For NGS, we expect continuous revenue growth and customer ramping production, full launch of methylation solutions, technical addition of UMIs, continued conversion of SNP microarrays to Twist plus sequencing, particularly in AgBio and an expanded OEM strategy. .

For Biopharma, we will continue to sign partnerships to expand our technology base and generate revenue, and we will also begin to advance our internal pipeline of antibodies, pursuing out-licensing opportunities over the next 18 months. .

For DNA data storage, we will continue to drive our engineering road map towards further miniaturization. In addition, we will execute on our agreement with IARPA and begin to pave the way for market adoption of this new storage medium. .

As COVID-19 cases are escalating rapidly around the world, we do not know what fiscal 2021 will bring, but we do know that we will face it head on, navigate through it. We have an incredible team of Twisters driven to make a broader impact through the power of our platform. .

With that, let's turn the call for questions. .

Operator?.

[Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan. .

I'll start with the guidance. You are coming in a bit below the Street here at the high end. I understand you want to be conservative. So maybe Emily, can you just talk about where you see the conservatism baked in the guidance? I know you're talking about $4 million in biopharma contributions milestones.

Could there be upside there?.

And then on Ginkgo, that does imply, at midpoint, a decent deceleration, actually down about 11%.

So can you maybe just talk to the dynamics there and what would be driving that to decline double digits?.

Yes. Thank you, Tycho. Good morning. Indeed, we are prudent. I will let Jim give you more details around this question. .

Yes. Hi, Tycho, this is Jim. Yes, I mean, we're -- we came off a very strong quarter 4. As usual, we want to be prudent. And really give guidance that is meaningful and thoughtful.

So we've built up, particularly on NGS, we've build up our revenue by customer, understand where the customers are in terms of converting through the pilot and scale up in adoption phase. So we see potential opportunity there. .

Ginkgo, we have a 4-year contract. We're about 2.5 years into the contract, and as Ginkgo business is lumpy, we want to be mindful of the challenges that we're all going to face over the next year. So we believe we pitched our business very conservatively. .

We see upside with synbio. We continue to make progress on large pharma. We see upside in terms of IgG. We also are doing well on scaling our DNA preps.

But as we stand back, the pandemic is raging here in the U.S., and we want to make sure that we calibrate our focus for the future, which has continued to grow for FY '22 and beyond, invest strongly in FY '21 and position us when we're going to get to the other side of this pandemic. .

Okay.

But Jim, just so we're clear because Ginkgo as a company is obviously growing very quickly, but the 11% decline, you're just saying that's lumpiness in relation to that part of the guidance?.

Yes, that's just lumpiness in that part of guidance. We have a 4-year contract, which is scaling. The minimum has actually come in above the 11% to 12%. But based on what we're seeing is we just want to be measured in our forecast. It's not a reflection of Ginkgo's business. It's a reflection on our conservatism. .

Okay. And then Emily, on the COVID antibodies, I know you talked in the press release about either developing these on your own or partnering. I'm just curious about how you're thinking about that opportunity. We've seen some of your peers like Adaptive with the Amgen deal, that Amgen chose not to move forward with that.

So what's your view of the potential to partner up on the COVID antibodies? And would you potentially do all 3 internally if you couldn't find a pharma partner?.

Thank you. Great question. So from the beginning, the idea was to use the light of COVID to generate some data that we could leverage in a marketing approach. And the data that we've had from COVID has been useful, including some of the deals we have in Biopharma and in making sure that the funnel is full.

That being said, we -- if there's opportunities to license it -- to license one of these out, we will pursue it. However, we did start late. We started at the end of March when everybody started looking for COVID antibodies in the early January. .

In addition, COVID is not hard to target. And so the benefit of our platform, which is being able to find antibodies against ancillary target is not fully applicable. So that being said, we now have really positive data in a preclinical animal model. So that is good.

And we've always said that if we license one of those antibodies, it will be an upside for us. .

So we are still in execution with a number of groups, but this probably not a big drive for us to do it ourselves, right? I don't think we are set up to go and do clinical work with those antibodies ourselves. However, it's still possible that someone licenses one of them out.

However, even if that does not happen, the market impact and the benefit of those antibodies to give us credibility and help us in our commercial endeavors for Biopharma has been already very, very positive. .

Okay. And then before I hop off, 2 quick ones. You had an NGS one-timer in the quarter.

Can you maybe just talk to that? Was that maybe stockpiling? And then separately, on the Microsoft, Illumina data storage announcement, other milestones we should be paying attention to for 2021 for you guys?.

I mean on the -- sorry, Emily. .

Go ahead. .

On the NGS -- all right. Yes, Tycho, on NGS, the $9 million is not stockpiling. The $9 million is one large customer we've been working with for over 3 years. We had originally anticipated that we would ship about $3 million in Q4 and $6 million in FY '21. They came back in and basically want to do all the product in one lot.

They're actually using that right now. So we're very optimistic. This is SNP microarray to NGS conversion and we're very optimistic about seeing some more large orders coming in the future for us. .

And then on the data storage on the alliance, we don't yet have the details of future public announcements for the alliance. That is the work that the alliance will work together. Again, the idea of the alliance is to help prepare the market such that when there is a product available, the market is already prompted.

So there will definitely be activities in that market preparation point of view. And then in parallel, our technical work is going full steam ahead. So that is a milestone that we are in full control. We may not be able to give a substantial update every quarter, but I would anticipate that over 2021, there should be more update on the technical side. .

Our next question comes from Doug Schenkel with Cowen. .

I just want to start with a couple of questions on I guess, what I would call end market outlook questions. So one is on pharma, one is on data storage, and then I want to follow-up with a couple of financial questions. So starting on pharma, I may have missed it in -- actually, no, I did catch it.

So you talked about in your prepared remarks, the fact that heading into 2020, you were looking for a total of 7 to 8 biopharma partners. I think you got to 13, if I took that down correctly in my notes.

With that in mind, as we think about 2021 pharma revenue guidance of $4 million, I'm just wondering what's driving that? How much of that is milestones, product sales collaboration? Essentially, what are the components of the $4 million? And then what's the importance of the new partners to that number, especially some of the more recent ones?.

Thank you, Doug. Yes. So we -- at the beginning of the year, we guided 5 to 10 partnerships, and we ended up at 13 paid partnerships and then in addition to upfront payment where we get paid, it's important to us that we start accumulating milestones and royalties, so that we can stack them.

And so 8 of those partnerships had milestones and/or royalties. .

And so to answer your question, when we announced an order number, that is the upfront payment part of the business. That is the bond that we know we would get, for sure. And even though that payment is received upfront before we start the work, we actually book the revenue as the work gets done.

And so the revenue next year will be the upfront payments that we booked as order last year and then as we do the work, we can conduct it in revenue. .

So I'll say 2 things. One is that it takes some time to do drug discovery. And even though one of our key attribute is that we are fast, in addition to being able to do hard-to-drug target, it's not a 30-day thing. And so there is a process that we're running in-house.

And when we get to that -- to the end of the process, at that point, we would have converted the full upfront payment from booking to revenue. So that's where the $4 million reflects.

And then as we sign more partners this year, some of that work may be completely in '21, and that may increase the revenue or if not, it's going to be a revenue that we capture in '22..

And then the second thing I'd say is that in addition to that upfront payment that we do report on every quarter, either as order or revenue, in addition, we are stacking up milestones and royalties, which we believe will be the majority of the economic value. Unfortunately, the -- we are not in control of when that happens.

And so for instance, some partners may be motivated to be -- to grow very fast, may slow things down as programs inside the company changes. There may even be some assets where the partner decides to completely abandon it for business reasons and nothing to do with our antibodies.

And so therefore, the more business -- the more partner -- partnerships we can sign with the more milestone and royalty, that means that the sooner we get one of the Twist antibodies into the clinic, and sooner we stop collecting those milestone -- revenues. However, we're not going to guide on it. So when that happens, that will be upside. .

No. That's helpful because you -- probably saying things in a much less eloquent way, but probably saying the same thing in a different way, that the $4 million is essentially all but locked in based on what you have contracted and booked already.

It's just predicated on your assumption of when certain work is going to be done, and to the extent that any of that's accelerated or there were surprised milestones or you added additional partners that would be upside to your target, if I'm understanding correctly. .

Yes. .

Okay. And then on data storage, I just want to clarify a couple of things, and this may reveal a little bit of my ignorance on this topic. But in your prepared remarks, you indicated that you achieved significant milestones on the DNA storage road map to miniaturize the silicon platform technology down to 150-nanometer pitch or less.

You also indicated that you can consistently synthesize DNA using 5-micron devices, a 10-micron pitch and that you fabricated the new R&D stage silicon chip with 300-nanometer devices on a 1-micron pitch chip. .

I don't believe I've heard you talk about pitch before, nor do I recall you delineating between different device types as recently as the recent Analyst Day when you talked about this, you really focused on reducing feature sizes.

So I guess the question is, I'm just wondering what the significance of what you described in your prepared remarks is and what this means in terms of time lines to actual product and revenue?.

Yes. No, thank you for the question. I'm happy to clarify. So you're correct that we have been talking about feature size. And so the current platform we use today has a feature size of 15 microns. So that means that the dimension on the silicon chip where we code DNA is spaced at 50 micron.

And in order to lower the cost of writing -- the cost of writing DNA, we have to make that feature size smaller. And so we had said that we go to 1-micron feature size and then 10 micron. .

In addition to that, you need to know how far away the next feature is, because if we reduce the feature size from 50 micron to 1 micron, but the next feature is still 70 micron away. So if the pitch is still 70 micron, we're actually not lowering cost. So you have to do both.

You have to reduce the feature size and you have to reduce the pitch, so that on the sensor face of silicon, you get more DNA sequences. And so that was always our intent. So we are not changing anything.

It was always the road map that we're providing a little bit more information to get even more credibility about the benefit and the great accomplishment that we are getting..

So whether in -- both, we're both shrinking the size of the device, and we're packing them closer to each other because you need both of those things to have the cost go down. So basically, there's no change on our side, but we are providing a bit more information to the Street. .

Okay. And then maybe just a couple more financially focused questions. You're essentially guiding to, if I'm doing the quick math, right, a 40% increase in R&D investment in 2021. I know Jim, in his prepared remarks, broke down the priority areas for investment.

I'm just wondering how we should measure success for this investment and over what time period? And kind of a similar question on the CapEx front. I believe that you talked about I think it's $30 million in CapEx investment this year, including the investment in the Factory for the Future.

If you could just talk about what the expected time line and magnitude of returns that you're targeting on that investment. .

Yes. Thanks, Doug. I mean, we came off of quarter 4 and really, the bookings were hot, although it does include $9 million of orders on NGS from one customer. We continue to see our customer base expand, particularly on the NGS side. We're seeing lots of opportunities because of our product strength there.

As we step back, we did increase the R&D investment, right from $43 million to roughly $60 million. We're stepping up the -- both the NGS and synbio core investment. We're also increasing the data storage investment. It was roughly about $3 million this year to about $15 million in '21.

Obviously, data storage is more longer term, as Emily highlighted, but we are seeing the ecosystem for data storage increasing. We're making progress from a technical point of view. .

In terms of the core business, we were asked a number of times to give guidance this quarter for the year. The challenge we have is giving guidance in the middle of the pandemic raging, so we believe we get prudent guidance out there. We're really looking to FY '22.

We're investing in the Factory of the Future, which will come online sometime in '22, but that's also positioning us for '23. We believe we're really going to open up the larger market opportunity in synbio with a rapid turnaround time. I mean our goal is -- I mean, we've tapped into new revenue streams from the platform, including IgG.

We're seeing a DNA prep scale. We do need continuity in our another factory outside the Bay Area. So we're really looking at how we position ourselves to get to $500 million, Doug. .

And our next question comes from Catherine Schulte with Baird. .

Congrats on a great finish to your fiscal year. First, maybe, Jim, to your last comment around guiding in the middle of the pandemic. I guess what are your assumptions in terms of COVID duration and severity? I'm just curious to get a sense for how you're thinking about that in terms of the impact on your core customers.

And then how long you're assuming the COVID-related product contributions will continue?.

So a couple of comments. I mean, I -- if we have a crystal ball, I think FY '21 is going to be dynamic. I think everybody else has a crystal ball in what's happening with COVID. All we know is that during the last 6 months, we've adapted as a company. We continue to adapt in terms of the environment. .

As we go forward next year, I mean, our goal is to continue to build our customer base and also launched new products, and we are really looking through '21. And who knows when all the vaccines are going to be distributed. But we think '22 and '23 is going to be a very strong year for us. So we're positioning for those years. .

It was interesting sort of might have caused our decision-making was back in both February and March time frame when COVID hit. We had lots of questions in terms, what should we do? Should we cut back in terms of employee salaries? Should we really be conservative? What we did is we actually got more aggressive.

We stepped up our investment, as you probably saw. We gave our employees shelter-in-place compensation during the March, April, May, June time frame. And I think that's worked to our advantage for this coming year. .

We continued COVID testing. We continue to innovate and really put more wood behind the arrow in terms of the innovation. And there's a large growing market. The market is scaling at 20%, 25% a year, and we're positioned to be #1 in that market. .

All right. Great. And then Emily, you mentioned the new Factory of the Future will allow you to address different areas of synbio that you can't today.

Can you just elaborate on those opportunities? And what the top priorities will be for that factory?.

Yes, thank you for the question. So as you know, the synbio market is not one size fits all. And so we already built a platform that is very flexible, and we can make very custom DNA. People can get their DNA in different vectors, in different tubes. They can get it tried, they can have it in buffer. We can normalize. So there's many, many options.

And so for any customer that is very, very high throughput, that means 100 genes or more. Our scale is really winning factors and we do really well in that segment. .

There is a segment where we can't participate much, and that is the ultra-fast DNA synthesis segment. And so right now, we sell DNA in 11 to 15 days that are on time. Anything that's below 10 days that are on time, we cannot sell.

And we see that, that is a market that is poised for growth, especially as speed is important to some partners like biopharma. So we believe that an investment in -- significant investment in speed could be transformative for us in synbio. .

Okay. Got it.

And then in terms of advancing your internal pipeline of antibodies, what would you view as a successful outcome in terms of the number of candidates you're able to out-license in fiscal '21?.

Yes. So taking the year out, taking 2021 out, the -- what we want to do is from the targets that we are pursuing as quickly as possible, develop and optimize antibodies. What we found is that we do need to do a little bit of preclinical development to convince partners to look deeper at the antibody, which is no problem.

That's something that CROs can do really well. And so we do find partners like in the case of our COVID antibodies, we find partners to do -- to get functional data in preclinical animal models.

And then so success for us would be to license antibodies at that stage, which should give us better economics than when we sign a partnership with an upfront payment because, in this case, we are taking a bit more risk. And then we have chosen the first 7 targets, what we believe are hot targets.

And so we should get some -- we expect to get some significant ROI on our investment and also the credibility that it brings. .

In terms of timing, in the remarks, we mentioned 18 months just because it takes -- it does take some time. So as you know, we -- as a management team, we are focused on the short-term and we execute quarter-on-quarter really well.

But we also do take medium and longer-term view of -- there are things we can do today to make sure that we enjoy the fruits of those trees we plant, not this year, but in subsequent years. So ultimately, the measure of success for those 7 targets will be around the licensing economics that we get when those get licensed. .

Our next question comes from Vijay Kumar with Evercore ISI. .

I had 3 questions. One, Jim, when you look at the guidance, maybe at a high level, you grew 65% in a pandemic year, even excluding the onetime or regarding Q4, revenue growth was well north of 50%. And the guidance is looking at low 30s kind of top line growth for '21.

Is this just a larger revenue base or perhaps -- maybe put some of these numbers in context for us, why would revenue growth slow down?.

Vijay, thanks for the question. So just stepping back, if you look at FY '20, we did have $9 million from one customer that came in at the end of FY '20. We had originally anticipated that would have been $3 million in FY '20 and $6 million in '21.

So you could take $6 million out of our FY '20, bring it down to $84 million, and you put that on top of what we originally were forecasting, and you're in the mid-120s. .

So the NGS business is lumpy. And the point to note is we are scaling aggressively in that business. I think the $9 million is a significant win for the company. And we are thrilled to be able to book it and ship it in one quarter. We see other large emerging opportunities ahead of us.

And then also, it's very difficult to project the timing of those opportunities so far, it's always been the upside. .

We are tracking about 150 large opportunities for NGS. Our view is we continue to scale nicely. 57 have adopted. .

When you're trying to do a forecast in the middle of a pandemic, we try to be thoughtful and prudent in terms of what's based on our bottoms-up, and based on our latest communications with our customers and based on our latest product strategy. We want to give numbers that we've got the opportunities to provide upside to.

So if we go back to the guidance we had last year, our guidance was $80 million to $84 million. We withdrew it in the middle of the pandemic. And so you normalize for the $6 million, we hit the top end of the guidance. And our belief is we're building for FY '22. We've got a fabulous platform that's scaling, and we continue to build our customer base.

So I'm very bullish in the future. .

Understood.

And when you think about the revenue base ramping up, when do you think gross margins could normalize into the 60% sort of target that you guys have?.

Well, we hit -- it was interesting, we hit 46%. I mean, we've proven our business model. When we set said the financial guidance up for the year, we were talking about 32% gross margin for the year. We essentially hit that gross margin for the year, albeit we had additional costs associated with shelter-in-place compensation.

We are ramping new product capacity. As we go forward, we're still seeing a good 60% gross margin range. It may depend on mix, it depends on capacity utilization. We've certainly proven out, we can get close to 50% gross margin.

And my view is that as we continue to scale the new factory at $500 million, we're positioning ourselves for very strong gross margins and upside revenue. And we should be able to deliver the 60% gross margin range. .

Understood. And one last one, Emily, maybe on the 7 antibody targets or disease areas you're going after. And I think I heard you mention your plan or expectation is to out-license them over the next 18 months.

If you did manage to out-license all 7 of them, what could the revenue contribution be here in terms of upfront payments?.

Thank you. We don't need to license out 7 of them to be successful. Some of those are at least within the 18-months period. The -- what we studied the process -- our study was to say, what are the hot targets of today? So we all remember the craze around PDL1 inhibitors.

So now it's too late to have a PDL1 inhibitor, but there was a point where PDL1s were hot. So we started by seeing what are the PDL1 inhibitors of today. So those are the targets that we have. .

And so therefore, those are what we consider our target. And therefore, if we're able to license some of them out, the contribution could be substantial. But it will probably be a [ by-a-buck ] type deal with some upfront payment and probably the majority of the upside as a form of milestones and royalties that we can participate in the upside.

But since the timing and the size are somewhat uncertain, it's outside of the guidance. So whatever we get would be upside. However, at this point, our analysis shows that it could be significant. .

Our next question comes from Puneet Souda with SVB Leerink. .

Yes. Emily and Jim, so first question, just wanted to clarify on the NGS order.

Is there any reason you're not expecting the SNP customer that moved to NGS to not continue with Twist next year? I mean, I appreciate this is a significant lumpiness in the quarter, but just trying to understand, given the seasonal nature of it, and I assume this is a DTC and not a tissue or a liquid customer, that they should come in next year, but correct me if I'm wrong on that.

.

So good question, Puneet. We can't really share the specifics of the engagement. All we can share is that we've been working with this customer for 3 years. We see large new emerging opportunities in this space, as we've talked about, the migration from SNP array to NGS.

That -- this validates that migration is happening, and we are seeing more opportunities. Don't want to -- don't want to give away our competitive situation here because, obviously, people are watching us. .

Our view is that the customer is extremely happy with the product, and we're looking at further engagement. Timing of that is uncertain for a couple of things. One is a large order. We had originally anticipated it as between $3 million to be delivered in Q4 and $6 million this coming year, all came at once.

They could come back in the end of next year and do the same thing but that's too far out to predict. We have not, in our forecast, included in like another $9 million order. We built our forecast up by customer, and customer situations change based on their end markets situation. So we've been prudent in terms of NGS guidance for '21. .

Okay -- sorry, go ahead.

Do you have something to add?.

Yes. Yes. I think the other point I would make is that when we came out with guidance for this year, our guidance was originally fixed at $40 million. So clearly, the transition and the scaling of our large accounts is happening. And timing is just a little bit difficult to predict.

That's why we're projecting the NGS numbers of roughly around $54 million, $50 million, $58 million in this coming year. .

Okay. Got it. That's helpful. And my second question is on liquid biopsy. Wondering if you could provide any metric or give us a sense of the traction you are seeing there overall, obviously, number of trials here are ramping up and some of them in screening as well and across MRD and other segments of the market.

And I appreciate the agreement that you have with GRAIL, but wondering if you can provide something on that? And what sort of -- what's built into the expectations for FY '20 and within NGS in that segment?.

So, thank you, Puneet. So we are deeply engaged in -- with the liquid biopsy market, not only in terms of the benefit of the platform that we bring, it's particularly effective in liquid biopsy. As you know, in liquid biopsy, you have sequencer that are deep.

And so the uniformity that we bring, the benefit of that uniformity in terms of lowering the sequencing cost, the deeper you sequence, the more important it is. And so at 50,000x coverage, we are even more competitive than for cancer analysis at 500x coverage and even more than for rare disease analysis at 30 or 50x coverage.

So the product itself is particularly adapted from the performance point of view to liquid biopsy. .

Second, we are adding to that benefit to the extent that some people look at miniaturization state. We've launched for the access customers, and we'll launch more broadly, it really performed a differentiated solution for maturation. We are adding UMIs.

I'm happy to go into the details, but those are molecular bar codes, that are especially useful for liquid biopsy. .

So liquid biopsy is clearly a focus of ours, because the product is particularly adapted to it. And because the potential markets are really big. So that's the good news. However, we can't really describe what our customers do, unless they disclose it themselves.

And so we are fortunate that in the corporate mechanics of GRAIL as they were preparing to do an IPO. The S1 got released. I think it again, shows the potential power of the platform, that we are dependent on our customers to disclose the platform they use. .

And then in addition, while sales are going really well, we can only guide to what we see. And our anticipation is that when some of those clinical trials, one of those validation gets completed, and the products are commercial, the volume could be even bigger than they are. It could be substantial. So that's why we are confident in the ramp.

But we're not necessarily in control of the timing. And so therefore, we are prudent in what we guide. But again, we believe that we have a quite differentiated platform, which is especially applicable for liquid biopsies. .

Okay. That's fair. I appreciate it. And my last question is on biopharma. And this is a bit of a longer-term question.

When you look at long-term here for the revenue that you're getting currently in the upfront deals and early milestones, it appears to me that given the trial -- given that it takes about 5 to 10 years for a clinical trial to actually read out even after getting into -- the lead candidate into the trial, so it appears that the outcomes here are much more longer term.

So given -- with that in mind, when is the earliest we can see Twist Biopharma lead candidate getting into a clinical trial? Do you think that can happen in 2021? Or do you think that's going to take some -- even longer time?.

Thank you. This is something we are very interested in getting because the next -- the first time we will get a milestone is when an antibody is IND-ready from one of our partners. And that's kind of the first gate. And so we're very interested in that for 2 reason. One is to collect cash.

And then second is because another big inflection point for our biopharma will be when an antibody enters the clinic and a Twist-developed and optimized antibody gets injected into a human. .

And so we are very, very motivated to get to that point for those 2 reasons. However, it is quite outside of our hands. And so typically, once you have an antibody, you can get it in the clinic within 2 years. And so if you go back to the timing of our announcement, it could be within 2 years of that. But again, we are not in full control.

We very quickly can deliver the antibody, but after that, the partner is in charge, and if they feel they needed to go, it's not something we can influence a lot. However, that is -- that's why we have not been focusing on one partner.

We've been focusing on, let's get as many partners as we can, because then you maximize the speed at which one of them is going to go into the clinic. .

And I'm currently showing no further questions at this time. I would like to turn the call back over to Emily Leproust for closing remarks. .

Thank you, Jeanette. And thank you all for joining us today. We remain inspired by science and at Twist we have an amazing team that continuously uses grit to move the company forward, to make an impact for our customers and the world. So please take good care of yourself, stay safe, socially distanced and wear a mask. Thank you. .

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