Welcome to the Twist Bioscience Fiscal 2022 Third Quarter Financial Results Conference Call. .

I would now like to turn the conference call over to Angela Bitting, SVP of Corporate Affairs and Chief ESG Officer. .

Thank you, operator. Good morning, everyone. I'd like to thank all of you for joining us today for Twist Biosciences conference call to review our fiscal 2022 third quarter financial results and business progress. We issued our financial results release this morning which is available at our website at www.twistbioscience.com. .

With me on today's call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on financial and operational performance. Emily will come back to 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 2 weeks. .

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 our 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 ongoing 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, Angela, and good morning, everyone. During the third quarter, we continued to benefit from our position as a high-quality low-cost leader especially in the midst of a volatile macroeconomic climate. We reported record revenue of $56.1 million and almost $60 million in order with [ strength ] coming from both Synbio and NGS.

Beginning with Synbio, we reported strong revenue of $22.1 million and while we did see some disruption coming both from China lockdown and COVID [ we did ] well from both the manufacturing and commercial perspective. .

As a reminder, we make all of our United States we provided an advantage of our companies who make genes in China. Orders for the quarter were $20.5 million with a decrease sequentially due primarily to [indiscernible] from foreign exchange in Europe and overall consistent with our pattern last year.

We have completed the build-out of our additional capacity in the first [indiscernible] which allows us to produce over 200,000 genes per quarter enabling us to meet the increasing demand for genes in particular, while we bring on the factory of the future in Portland. .

We received temporary certificate of occupancy for the factory of the future in late June and are now in the process of bringing you up to the site. We will go through the startup process of [ IQOCPQ ] which is instrumentation and qualification, operational clarification and production qualification.

This is a process that we have gone through each time we move locations. So it's a familiar activity we've completed successfully 3 times. .

In the past, we physically moved the equipment from one site to another over a short period of time usually a weekend, which is significantly more difficult than setting up a new fab with new hardware while running a 24/7 production schedule.

This time for the factory of the future while entailing all new hardware while continuing operations in South Francisco. .

We remain on track to generate the intra revenue out of the factory of the future in January 2023, and as reminder, bringing this lab online with a large lever of DNA factor. [indiscernible] there is a large market of people who currently make their own DNA because they needed it more quickly than is accessible today. .

With the factory of the future, we have the ability to significantly reduce our [indiscernible] time to address this market opportunity. As a side benefit we expect we'll be able to command premium pricing and better margin.

We intend to begin operations with our Synbio product suite and work towards introducing genes with faster parenting shortly thereafter. .

For NGS, we reported revenues of $27.8 million in order of $30.4 million. We forecasted a strong back half of the year for NGS and this quarter is consistent with our guidance. The strength in NGS is driven by many factors including scaleup of customers developing liquid biopsy as they prepare to launch a commercial test.

Our success in radiating within existing customers and new business wins. During the quarter, we launched 2 new products for cancer research, the methylome panel and our product to support our customers in developing Minimal Residual Disease test or MRD. .

These products build out our oncology offering and further differentiate us from our competition. For MRD specifically, we introduced a disruptive product that is customizable and highly cost-effective with a rapid turnaround time.

But like PCR or amplicon-based test which capture 2 specific sequences our panel captured up to 500 sequence is highly scalable and compatible with [indiscernible] and all genome protocols. .

To be clear, this product is incorporating into our customers' workflow and must go through pilot testing validation and verification before scaling up for commercial use. We expect the revenue to grow as customers go through this process. We also launched several new controls for monkey pox and the [indiscernible].

Importantly, we see continued effect of our circulating tumor DNA oncology controls which we believe will be less dependent on public health cycles than respiratory controls. This product line as a whole has delivered consistent revenue and is a nice entry point into new accounts. .

This week together with [indiscernible] we received [ advantage of ] emergency use authorization for our NGS assay for the identification and differentiation of SARS-CoV-2 [ pangolin lineages ] as well as the identification of specific genomic mutations.

While we're more than 2.5 years into the pandemic the virus continues to evolve and our customers still need the most robust tools to respond. During the quarter and specifically at the [indiscernible] Conference in June it was clear that the sequencing wands are back with new providers entering the market and bringing differentiated solutions. .

We believe that as the cost of sequencing comes down, it will continue to drive the upward trajectory of sequencing volumes overall. As it relates with for our NGS tools and specifically target [indiscernible] we expect demand to increase particularly in applications that require deep sequencing like liquid biopsy and MRD.

Importantly, our products work with a variety of sequencers for short and long read. We're sequential [indiscernible] and look to work to the continued growth of this market. .

For biopharma we reported $6.2 million in revenue and $8.8 million in orders. Revenue increased significantly year-over-year but it's down sequentially primarily due to project delays and a few calculations due priorly to budget constraints as specific customers but we expect a strong Q4.

We announced partnerships with [indiscernible] in the United States and Ildong in South Korea. We added 6 new partners for Twist Biopharma for a total of 53 partners. We initiated 11 new programs with 50 active programs ongoing as of June 30. .

We now have a total of 67 completed programs for Twist Biopharma of our 110 in total active and committed programs, 55 as milestones and royalties. Twist Boston [indiscernible] 70 projects underway. In the third quarter Twist Boston signed 7 new partnerships in addition to expanding existing relationships.

We had the pleasure of hosting an official ribbon cutting at our Quincy site, a streamlined facility that enables state-of-the-art individual activity discovery work for our partners. Turning to Revelar, the company [indiscernible] Twist Biopharma with initial COVID-19 antibody assays. .

Their lead antibody candidates neutralize every [indiscernible] of concern of the SARS-CoV-2 virus including Omicron. Unfortunately, recent data shows that it does not neutralize the latest [indiscernible] though it may pair well with other treatments.

At this time, Revelar does not intend to initiate the clinical study for the antibody and will seek a partner to move it forward. .

In April, we entered in a research exclusive option and license agreement with Astellas from one of our Twist Bioscience discovered antibodies.

Under the terms of the agreement, we will work with Astellas to jointly conduct research activities to further identify and optimize proprietary Twist antagonist antibodies that target an undisclosed checkpoint inhibitor. .

Astellas has the exclusive option to license any development candidate generated as part of the collaboration. We're very excited about this partnership as it is our first out-licensing agreement.

Astellas is a leader in immuno-oncology with its CAR T and [indiscernible] and it's a fantastic validation for the Twist Biopharma discovery and optimization platform. .

Another term of the agreement Twist received an upfront payment and upon [indiscernible] of the licensing option Twist will receive an additional cut were entitled to receive success-based clinical milestones and royalties on product sales for each product developed of the agreement.

This is a nice side for Twist and we serve as an initial base to build on as we pursue larger and later-stage opportunities. .

Our Biopharma team continues to advance multiple antibodies through the discovery and optimization path. And because we're targeting [indiscernible] we have the capability to move multiple programs forward in parallel.

In regard to the overall macro environment in biopharma and the more restrictive funding environment we continue to find out that our current offerings resonate. .

We do see some projects push out bid due to project management but in large part, we believe those projects are not going away. We differentiated approaches for antibody discovery. We see solid interest and engagement with both partners and potential partners.

And with a growing list of biopharma customers, our risk is diversified across a number of accounts and not dependent on just a few. On data storage we continue to debug our fully integrated [indiscernible] with electronic controls at 1 micron pitch. .

Our objective is to synthesize up to 1 gigabyte of data in a single run. Once we are able to achieve this synthesis we will introduce a commercial data storage solution for early access customers. To enable the fastest time to market, our [indiscernible] archive will be offered as a storage as a service solution.

Initially, we will start with the writing service which will expand into writing, storing and retrieving with pricing shared as we approach launch. .

As the technology matures and increasing automation can be realized, we expect to introduce an accessible archive solution targeted to our data center environment which will be located on premises at hyperscaler sites. Earlier this week, we shared a new white paper detailing the enterprise [ storage ] market from further market research.

This report highlights the dramatic need from new enterprise storage technologies that can be deployed at massive scale with minimal power consumption. DNA that storage fits these features and has the opportunity to address the coming demand that will not be able to be served by current storage technology for perspective. .

The unmet demand could be as large as 27 zettabyte of data in 2030. And as a reminder a zettabyte is a billion terabytes. And a terabyte is the highest capacity available in an iPhone today. The report estimates that about 75% of all data will be [indiscernible] data growing from about 60% today.

And key industry executive interviews indicated the need for indefinite storage of data which means that they do not intend to delay data ever. .

DNA data storage is well positioned to meet this upcoming demand as a new storage media with the key features of density parallel durability, reproducibility and universally technology. In parallel with our technician development, we continue to make significant strides in building a market for DNA data storage. .

The DNA data storage alliance became a technology affiliate of the Storage Networking Industry Association known as NIE.

This is an important evolution of the alliance from an educational organization into a group that will also drive stand down development that are required to build an interoperative ecosystem for the DNA data storage industry as a whole. .

And now I'd like to turn it over to Jim to review our financials. .

Thank you, Emi. We had another good quarter at Twist. Revenue for quarter 3 was $56.1 million which is a sequential growth of 17% and year-over-year growth of 60%. This brings our year-to-date revenue to $146.3 million.

Orders were $59.7 million for the quarter, a sequential increase of 9% and 53% year-over-year, bringing our year-to-date orders to approximately $164 million. .

Gross margin for the quarter was 44.8%. We shipped to approximately 1,900 customers for the quarter and now have shipped to approximately 3,000 year-to-date, and we ended the quarter with cash investments of approximately $528 million. Now provide a deeper dive starting with NGS.

As we have highlighted on our previous calls we anticipated a pickup in our NGS orders for the second half. .

And then in the third quarter orders rose to $30.4 million, an increase of 64% year-over-year and sequential growth of 29%. This increase was primarily due to liquid biopsy as well as other clinical and diagnostic applications.

During the quarter, we received orders from approximately 550 NGS customers which is a decline from 750 in the previous quarter. This is due to fewer customers ordering COVID controls. .

And as noted in previous calls that our COVID control revenue has not been material. The top 10 NGS customers based orders of approximately $14 million or 48% of our orders primarily due to pickup in our liquid biopsy customer demand.

Our pipeline for larger opportunities continues to scale and we're now tracking 249 accounts, up from 231 noted in our last earnings call. 114 have adopted Twist an increase from 104 last quarter. .

The increased orders flowed through and our NGS revenue for the third quarter increased to $27.8 million up sequentially 20% and an increase of approximately 50% year-over-year with the top 10 customers accounting for 50% of our revenue during the quarter. .

Returning to Synbio orders which includes genes, DNA preps, IGG libraries and all good pulls declined sequentially to $20.5 million in the third quarter from $23.6 million.

This is primarily due to a decline in clonal genes orders particularly from [indiscernible] which we believe is mostly related to seasonality and we had the same slowdown this time last year.

[indiscernible] bio product revenue for the quarter was approximately $22.1 million up from $18.4 million, a 20% sequential increase and approximately 54% increase year-over-year. .

Some of the highlights include shipping to approximately 1,500 Synbio customers. Genes revenue was strong in the quarter and rose to $17.4 million up from $14.2 million in the second quarter and $11.2 million in the third quarter of fiscal '21. We shipped approximately 163,000 genes in the quarter and that's up from 124,000 last quarter. .

All of good pools had a strong quarter with revenue of $3.3 million up from $2 million in Q3 FY '21 with the increased demand primarily from the health care segment.

Now to biopharma, we continue to scale our biopharma business and orders rose to $8.8 million from $7.8 million in the second quarter and revenue for the quarter was $6.2 million down from $6.6 million in quarter 2, primarily due to project timing issues and 5 project cancellations primarily due to budget constraints. .

For a Twist biopharma antibody platform we now have 53 partners up sequentially from 47 and have 50 active programs with 67 programs completed and back in the hands of our partners. Of our total programs, 55 include milestones and royalty agreements.

Our Abaris Twist Boston business doing well with 54 customer service in the quarter including 37 projects on the Beacon platform. Please note orders may not translate into revenue but provides a trend line for each product group. .

I'll now cover our revenue breakdown by industry. Health care revenue Quarter 3 was $29.4 million up from $17.4 million in the third quarter of fiscal '21. Industrial Chemical revenue in quarter 3 was $15.7 million up from $9.4 million in the third quarter of fiscal '21.

Academic revenue in quarter 3 was $9.5 million and that's up from $7.7 million in the third quarter of fiscal '21. I'll now briefly cover our regional progress. .

EMEA third quarter revenue was $15.5 million as compared to $12.7 million in the third quarter of fiscal '21. APAC continues to deliver robust growth revenues increasing to $4.8 million, and that's up from $3.1 million in the third quarter of fiscal '21. The U.S.

including Americas, revenue was $35.8 million in quarter 3 of fiscal '22 versus $19.3 million for the same period of fiscal '21. Now moving down the P&L. .

Our gross margin for the quarter was approximately $25.2 million or 44.8% of revenue as compared to 40% in Q3 FY '21 and up from 38.3% in Q2. The increased gross margin reflects the impact of higher revenues in particular higher NGS revenues and thus leveraging our fixed costs.

Also note, the factory of the future start-up costs are recorded in G&A and COGS include stock-based compensation of $1.2 million and depreciation of $1.7 million for the quarter. Now to operating expenses. .

Our Q3 operating expenses which includes R&D, SG&A and change in fair value and mark-to-market adjustments of acquisitions was approximately $86.3 million as compared to $79.2 million in quarter 2.

To break it down R&D for the quarter was $36.8 million, an increase from $31.2 million in quarter 2 and that's primarily due to increased spend associated with biopharma, which includes Abveris and Revelar and also increased data storage and IgG spend. .

SG&A in quarter 3 was $53.7 million as compared to $54 million in quarter 2. Start-up costs for the factory of the future included in G&A expenses were $4 million in quarter 3 and that's up from $2 million in quarter 2.

Change in fair value of contingent considerations and indemnity holdbacks for the quarter resulted in a gain of $4 million versus a gain of $6 million in quarter 2. Stock-based compensation for quarter 3 was approximately $20 million.

Depreciation was $3.1 million for the quarter and amortization of $1.4 million primarily associated with acquisition, amortization of intangibles. .

Our net loss before tax was approximately $51.2 million that levered to $6.8 million for quarter 2. CapEx for the quarter was $40 million including approximately $30 million for the factory of the future. And this now brings a factory to future CapEx investment to approximately $73 million.

Given the global supply chain challenges we've been strategically investing in our inventory which means approximately $43 million compared to $45 million at the end of quarter 2. .

We ended the quarter with cash investments of approximately $528 million. And I'll now provide updated financial guidance for fiscal '22. We enjoyed strong bookings in the quarter, however, due to seasonality.

And as more SARS-CoV-2 variants continue to merge we're projecting Q4 revenue to be approximately $56.5 million which brings our revenue for the year to be approximately $203 million and that's up from previous guidance in the range of $191 million to $199. .

Synbio revenue in quarter 4 is estimated to be $21 million sequentially down from Q3 which we noted they were particularly strong combined with lower Q4 revenue expectations in the year. Our Synbio guidance for the year is now $80 million which is up from previous guidance of $71 million to $73 million.

NGS revenue is estimated to be $27 million in quarter 4 and our total revenue is now projected to be approximately $97 million for NGS and that's up from our previous guidance of $94 million to $96 million. .

Biopharma revenue including Twist Boston is estimated would be $8.5 million and our biopharma revenue guidance for the fiscal year is expected to be $26 million as compared to our previous guidance of $26 million to $30 million. Our FY '22 gross margin is projected to be approximately 40%. .

Operating expense which includes R&D, SG&A and mark-to-market are expected to be approximately $330 million for the year including $125 million in R&D expenses and that's down from our previous guidance of $130 million.

Mark-to-market for the year is projected to be $12 million favorable factory of the future start-up costs inclusive of the SG&A [indiscernible] to be $12 million for the year. .

Our net loss guidance before tax for the year will be approximately $250 million which includes stock-based comp of approximately $80 million, depreciation of $14 million, amortization of intangibles is projected to be $5 million. CapEx for FY '22 is projected to be in the range of $95 million to $100 million.

And as we highlighted on our last call, we're focused on managing our cash and scaling our core business to $300 million in annual revenue and adjusted EBITDA breakeven. .

We have [indiscernible] on scaling our biopharma business adjusted to EBITDA breakeven at $80 million in annual revenue and we believe we have the cash runway to achieve both. And with that I'll turn the call back to Emily. .

To echo Jim’s comments, we remain focused on driving towards profitability. Specifically for Synbio, we are focused on bringing the factory of the future outside of Portland, Oregon, with initial revenue generated from this facility in January 2023.

For NGS, moving into our fourth quarter with $30 million in other [indiscernible] finish the second half strong.

We will continue to focus on radiating within existing customers, offering differentiated products and expanding our market share as we seek to enter the market between the standard and the sequential particularly in the areas of liquid biopsy, MRD and RNA. .

In biopharma, we expect to have partnerships, programs and move up the value chain both for our service offerings and for our internally generated antibodies.

As we get closer to the earnout for the Boston team we are planning an integrated portfolio of antibody discovery and optimization offerings, capitalizing on efficiencies and showing that 1 plus 1 equals more than 2. .

The combined solution truly differentiates Twist from the rest of the pack and we look forward to cross-selling as well as broadening our reach following the earnout period. In data storage, we have a road map to reach terabyte scale.

We have our first fully integrated [indiscernible] electronic control enhanced and are actively bringing the system to achieve synthesis up to 1 gigabyte of data in a single run. .

We will continue to drive market awareness while actively participating in the development of interoperability standout for the industry. Overall, while we cannot control the overarching macro environment we have a differentiated platform technology in our silicon-based DNA synthesis process.

We have an exceptional team who comes to work every day to be the best. .

We have a plan to reach adjusted EBITDA breakeven for the core business without accessing the capital markets again. And we have tremendous opportunities ahead to grow our market share in each area to introduce new products and to truly disrupt markets. .

With that let's open up the call for questions. .

Our first question comes from Matthew Sykes with Goldman Sachs. .

Maybe the first question just on the biopharma business. I know the full year guide is coming at the low end of your previous guidance. You guys talked about some project cancellations due to budget constraints but also about trying to shift into later-stage programs.

Could you talk about sort of your mix of potential emerging biotech targets and their funding issues? And do you expect additional project cancellations? And then secondly, what is the strategy to move into later stage for biopharma? And how do you think that plays out from a timing standpoint?.

So as you are aware there is a little bit of macroeconomic headwinds where the funding for private company in biotech. It’s a little bit more difficult now than it was a few quarters ago. And so we are seeing a little bit of that. However, we have a very strong and differentiated offering. And we have a large number of partners.

And so we are not as sensitive as if we only had a few partners that had issues. .

So the combination of our offering and the breadth of the people we are talking to insulate us a little bit. And as a reminder, we are the high-quality low-cost leader. We have the leading edge of antibody discovery. So the offering that we have seen still resonate quite a bit. .

As far as your second point, what we have seen on the biopharma side so the historical Twist antibody discovery that we have been able at secure [indiscernible] and which means that we are able to participate a little bit more into later stage value add.

We have not done that yet with the adverse team the Twist Boston that we brought in that historically, that's not what their business was doing. .

And so now we can apply some of the learnings of how to approach commercialization of our services from the Twist Biopharma, the original one. We can apply those learnings to the Twist Boston and participate more in the downstream economics. So like you said there'll be some timing to it. But it's an upside that we'd like to start capturing. .

And then like a similar version of the first question but taking the other side of it and you mentioned a little bit. Just given your scale and cost advantage not just in biopharma but probably more importantly in Synbio and given the kind of cost containment environment that we're in.

How do you feel Twist is competitively advantaged in this space given the fact that you can probably provide your customers cheaper materials at a larger scale? Do you think that will resonate if this cost conservation environment continues into '23? And do you feel like you're well positioned in that area?.

Yes, absolutely. On the Synbio side that is definitely a strong selling point. We've always been significantly less expensive than our competitors with exceptionally high quality, same or higher than the competition. And so there were some segments where that resonated really well.

If you look at the [indiscernible] of the world where the approach is to train more data points to get an advantage. .

They're having a lower, having a vendor with a partner with a lower price per gene and that is extremely advantageous to that business model. So there we were already being strong. On the biopharma side frankly, in our interactions in the past with some biopharma company and they were telling us budget not an issue. And now budget is an issue for them.

.

And so for that segment, the biopharma segment where they buy our tools. So the [indiscernible] IgG. The everyday product that already had are definitely resonating. So definitely a much bigger impedance match than on the biopharma services. Services are a little bit more expensive. They are somewhat premium pricing. .

But on the Synbio side there's definitely a perfect match between what the researchers are feeling on their on their budget or the perception of future pains on their budget. And the products that we have that really stretches their dollars and enable them to get more and better and better for a fixed budget. .

We have a question from Vijay Kumar with Evercore ISI. .

Congrats on the 3Q beef here. Maybe, Jim, one on the guidance here. If I look at the gross margin of the Q really strong but the guide implies Q4 a step down. Your book-to-bill came in a little low. You implied Q4 revenues implies flattish Q-on-Q.

Was there any timing of revenues that benefited in 3Q? Or maybe just explain what drove the strength in the Q from the revenue and gross margin perspective?.

We had a really strong quarter. Revenue was strong particularly in NGS. And overall Synbio revenue was also good. We do have seasonality primarily driven by EMEA. You saw the same step down last year in orders.

So when we're putting together the plan based on the view in terms of where we see some of the European countries in terms of the vacation period. .

So we're prudent in terms of our forecast for the quarter. And also, we're also very mindful of what's happening with the new COVID variants. So as we thought about our guidance, we give prudent guidance for the quarter. Overall, NGS continues to do well. The pipeline continues to grow. .

And as we highlighted I mean overall NGS, the orders for the first 9 months are now $76 million, so very strong. And we saw a very strong pickup in orders in Q3. Some of that translated into revenue in Q3. And our view is that we will see a good solid Q4 and we put together a prudent guidance just based on the seasonality. .

Emily, one for you on data storage.

If I just understood you we're now at the alpha chip stage? Is it right? And what are the, I guess, hurdles going from alpha to beta? Is that a technological hurdle or maybe just lay out to us on what needs to be done and how much risk is there in this project?.

So on the data storage, the way I look at it there's 3 components. One is the bottom side of the silicon chip so the CMOS logic. Then there is the top layer of the silicon chip where the DNA is made. And then there is the chemistry that we are going to deploy and then we have to get all of those 3 components to work together.

And so the CMOS section which is very complicated, very advanced silicon technology is very similar from the alpha chip to the beta chip. .

And so getting it to work gives us massive confidence for the beta chip. And then what has to mostly get developed from the alpha to the beta chip is the top layer of the silicon chip which from our analysis are substantially less risk.

And then one now that we have been able to get the chip working at 5 microns that we are in the final stages of debooking 1 micron chip. .

We believe it would be relatively [indiscernible] still to take some time but there's not a lot of miracles that need to happen. It’s just serious engineering to go from the alpha to beta.

And so then just to put things in perspective the chip we have is at 1 micron pitch and we have 256 million features [indiscernible] And just in the recent past, one of our competitor DNA Script released a paper but their progress on data storage and their silicon chip has 256 features but we have 256 million features and their feature size is 100 micron and our feature size is 1 micron.

So hopefully, it gives you the perspective of the leaps and bounds away from what others are doing. .

Your next question comes from Luke Sergott with Barclays. .

This is Jake Putman in for Luke today.

So on factory of the future, can you give a sense of the backlog that you're seeing there? And how quickly the new capacity is going to fill and contribute to revenues? Will it be all that long certain step?.

Factory of the future, we're going through qualification right now. And we anticipate over the rest of this year we will start to do the initial debugging and testing and running initial runs. So we don't start shipping revenue until early next year. .

This quarter we had a really solid quarter in terms of orders, NGS and Synbio. We've increased our capacity in San Francisco. So we are well poised to grow the business and we're really well positioned to see the impact of the factory of the future next year as we start to record revenues in January of '23. .

And just one more if you don't mind.

Could you update us on what's going on in China and what's happening there from a share dynamics? How big the business is and what the mix is like?.

So for China, we had as we [indiscernible] earnings call we had another strong quarter in Asia. Our actual China business’s revenue is about $1.7 million, slightly I think it was flat with last quarter, last year. Last fiscal year revenue for China was $4 million. .

This year we're anticipating revenue for $7 million. Although obviously, the Chinese market has been impacted. We've done an exceptionally good job of being able to service our customers.

And we're continuing to be optimistic about our opportunities in China and Asia where we're doing extremely well in terms of gaining customers in Korea, Japan and other countries. .

We have a question from Puneet Souda with SVB Securities. .

Emily, so just a couple for me. In biopharma, given the cancellations that you're seeing and maybe fewer customers given the smaller biotechs.

Do you think this pushes out time line to get a product into the clinic or into the Phase I? And then more importantly what are you doing in that business now to ensure that you strengthened the incoming funnel for projects again because I assume that the guidance reduction that you have is related to that? But there were a number of other smaller biotechs that are under pressure that could potentially cancel those projects as well.

So just wondering what are you doing in that business to ensure that you have a stronger funnel for 2023?.

On the first question, whether it delays [indiscernible] As a reminder, once we are done with our work we give the antibody to the [indiscernible] does the preclinical development. And then it goes into [indiscernible] So as a reminder, we don't have really any impact at all on the timing of those programs.

And we don't have a lot of the ability to that. However, we do know that [indiscernible] very close from going into the clinic and we look forward to celebrating that [indiscernible] when it happens. And it is possible that some of the partners to whom we've given back antibodies and that we are planning that we're in the process of obtaining an IND.

It is possible that some of those programs have been rationalized. But again, we have absolutely no visibility to that. And then on your second question in terms of what are we doing. .

Actually, we have a very nimble and bleeding-edge R&D team both in biopharma in South San Francisco as well as in Twist Boston in Boston.

And based on the recent dynamics in the market they actually have developed a slightly different product offering that leverage all of the infrastructure that we have but that are slightly more in tune with what [indiscernible] are looking for at the moment and especially at Twist Boston. .

We have new offerings that where maybe the cost of what we're offering is a little bit lower to the customer. Interestingly, when we look into the process it's actually better margin for us. And early indications are that is [indiscernible] with customer.

And so there's an opportunity to maybe get a little bit less revenue per project but have some product line in addition to what we already had that is potentially resonating for a market that is newly price sensitive. .

So we are definitely continuing to innovate to be very close to what the customer need, understand their needs and be able to respond with best-in-class services that responds to their scientific need and that fits their budget and that fits our financial milestones in terms of the margin profile that we want to achieve. .

Jim, on gross margin came in strong this quarter. You're guiding to a number that is higher than what we had for the year.

So I mean when we think about a factory of the future coming online, shouldn't that impact gross margins at least initially in 2023? And how should we start to think about gross margin cadence here over the next couple of quarters?.

As we launch the factory of the future, we're going to underutilize capacity that will impact gross margin. However, line of sight is to scale the factory of the future as quickly as possible. And when we're targeting $300 million revenue, adjusted EBITDA breakeven no gross margin target of about 51%.

And as we continue to scale the business we're looking at gross margin range of 55% to 60%. .

I think it's notable this quarter that we achieved gross margin of 45%. And when you look at adding back depreciation and stock-based comp, you can figure out the math for the cash gross margin. So the setup is extremely strong for us. I mean our goal is to skill factory of the future as quickly as possible.

We haven't broken out the guidance for next year yet and we'll do that on our next earnings call. .

And then on the EBITDA guidance that's $300 million.

Just to be clear does that includes only NGS and Synbio?.

Yes. So as we said in the call that's for NGS and Synbio as a core business of $300 million. And also we're targeting adjusted EBITDA breakeven at $80 million for biopharma business as well. .

Our next question comes from Matt Larew with William Blair. .

This is Max on for Matt. I wanted to follow up on Vijay's first question specifically asked about the massive gene shipments number this quarter.

Is there anything that we should be aware of there in terms of large onetime orders? And then in terms of the guidance for Synbio revenue in 2023, your updated guidance for this year I think calls for over 50% growth. .

And you've been pretty clear that you had the potential to grow twice as fast as the market.

So is it fair to think about Synbio potentially being up close to another 50% next year? Or just in general how are you thinking about the outlook for Synbio moving forward?.

So on the first part on the genes volume, if you recall we talked about capacity in 2 axis. One is total capacity. And then the second is third capacity. And as management what we have to do is product volume.

And we could see a few quarters ago that not only the total demand was growing but this was a sales demand where there were big orders once in a while coming were happening. .

And so that's why we decided a few quarters ago to increase capacity in South San Francisco before we had the factory of the future because we knew that if we didn't do that there could be a point where we may not have the capacity to say yes to those big orders coming in.

And so that's what I think we do well as the management team anticipates the need and execute really well. And so that's what we did. And the team built the extra capacity. And indeed that's what happened. .

There's been a few big orders coming in. And those are [indiscernible] amortizing the fixed cost and we're able to take them, book them, ship them in great turnaround time. And so the expectation is that this will continue. It's hard to predict.

Are they going to come in this week or 3 weeks from now? But there is multiple customers that come in regularly with very big, big orders. So that's one of the things we have to plan for it. Again, not just the total capacity but the search capacity. .

If you just step back, I mean, we're the low-cost provider in the market. When we bring on factory of the future, we've got a very fast turnaround. So this macroeconomic environment is a great setup for us. Its interesting Synbio orders year-to-date are $6 million. .

And as Emily highlighted, we have increased capacity in San Francisco and we're excited about the potential opportunities to continue to scale up in factory of the future and really bring a tremendous platform to the market. So you're right, we're growing twice as fast as the market.

And I mean our view is that we're going to continue to aggressively expand. .

And I wanted to turn to NGS, Jim. I think you mentioned during the call that the strength in NGS was driven by a pickup in liquid biopsy revenue. And last quarter you had mentioned that you're working with more than 20 companies developing with a biopsy test.

Just as a first part, do you have any update on this figure in terms of how many companies you're working with today?.

And then any detail you can share on how many of these customers are actually in production versus pilot and validation? And what have you learned about how volumes from these liquid biopsy developers scale over time as they move towards commercialization?.

So a very strong quarter. And as we highlighted in the second half of this year we're going to see a step-up in NGS that happened in Q3 and that was driven primarily by liquid biopsy. A number of customers we're dealing with is roughly around the same.

And the overall setup is we continue to expand the large customers we're dealing with, the number of [indiscernible] continues to scale. .

And we're seeing tremendous opportunities with all these new platforms coming in the marketplace. What that means is there's more opportunities for Twist. So I think the setup for us NGS whether it's liquid biopsy or other applications is really looking good.

I mean we've got a great product and we have a great team and it's really nice to see that orders this last quarter was $30 million. And we're very optimistic in terms of how the business is going. .

We have a question from Catherine Schulte with Baird. .

I guess first on NGS. Great to see the orders ticking up there. Were there any one-timers in that order book or in revenue for the quarter? And then guidance assumes that revenue there is down slightly quarter-to-quarter despite that uptick in orders. And Jim, it sounds like you said some of those orders turned into 3Q revenue.

But any color on the moving pieces there sequentially?.

No. There was a pickup in terms of the business. But by customer we did see some large orders come in but that's driven by a liquid biopsy, and that was driven by the nature of the demand from those customers. The small sequential decline in Q4 from Q3. I mean that's really driven by seasonality. And they've been driven by seasonality in EMEA. .

So we're just being prudent in our guidance there. We did see a big jump up from Q2 to Q3 in business and the pipeline continues to scale. And at the same time, we're being prudent in our forecasting. .

And then I was hoping you could give some more color on the Astellas out-licensing agreement. What are the next steps there? And any key steps in the timeline that where we should expect to hear updates on how that's progressing. .

The business terms have been agreed to and also now we are doing biology. So we're doing the work that we do at Twist. And the next step from a scientific point of view is extremely well defined and has been extensively agreed to in the contract.

And so it's all about going through those scientific steps and delivering the milestone that we agreed to Astellas and then start booking some of the modern 3 milestones. So we are very, very excited about it. And it's a great template for what we want to do more of. .

We have a question from Steven Mah with Cowen. .

A lot of ground already covered so I'll keep it quick. But yes, maybe just to continue on the Astellas license agreement. Just wondering how is your pipeline discussions evolved post Astellas given that it was a validating partnership in a hot area in oncology.

Has that increased the number of inbounds you guys have been getting?.

So we've had a very robust business development team and approach to having more deals like Astellas. If you follow some of the industry conferences for the first time last year in 2021 we had a significant presence at Bio. We did that again this year.

And so as you probably know bio where a lot of those business development execution around deals happen. And we can definitely see that the level of engagement gets more and more robust over time. And definitely, that is a great win in our sell to engage further with other partners on other targets that we have. .

And then my second question is given this macro environment where people are trying to conserve cash.

Has that impacted the calculus on new partner deal structures that is are you seeing less upfront payments, for instance and then more back-end economic weight? What kind of trends are you guys seeing there?.

So that's not our business model. We are not in the business of subsidizing someone's work. So far, we have been very, very steady in the pricing and actually the pricing increase from last year to this year. And so we haven't been trading gross margin for more downstream later. We have not been do that and I don't think we have any plans to do that. .

And there are no other questions in the queue. I'd like to turn the call back to management for any closing remarks. .

Thank you very much for joining us today. Our team continues to execute across the board and we have a chance to adjusted EBITDA breakeven with significant opportunities in Synbio, NGS, Biopharma and data search. We look forward to seeing some of you [indiscernible] at the UBS conference in Southern California and the Baird Conference in New York.

Thank you so much..