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Twist Bioscience Delivers Steep Loss in Fiscal Q2 2019

Maxx Chatsko, The Motley Fool

The hangover following a successful initial public offering (IPO) continues for Twist Bioscience (NASDAQ: TWST). The company, which writes custom DNA sequences for genetic engineering and biotech research applications, touted record quarterly revenue and impressive year-over-year growth. But the business has delivered worsening operating losses for several quarters in a row.

While the balance sheet sported $104 million in cash, cash equivalents, and short-term investments at the end of March 2019, the business is far from a sustainable trajectory. A deeper look at the financial numbers in the context of the market opportunity for synthetic DNA reveals the high degree of risk in management's growth strategy. Here are the major takeaways from Twist Bioscience's fiscal Q2 2019 operating results.

A man teaching a child with a model of DNA.

Image source: Getty Images.

By the numbers

Most scientists and investors think of Twist Bioscience through the lens of its core technology platform: synthesizing DNA. That's not misguided. After all, manufacturing custom DNA is how the business generates the majority of its revenue. While such products are being increasingly used in pharmaceutical, industrial biotech, and agricultural biotech applications, the market opportunity is limited by economics and under constant threat from technological innovation.

Case in point: One customer accounted for 34% of total revenue in 2018, and that client has the ability to synthesize custom DNA in-house after acquiring the former leader in the niche industry. 

That bitter reality explains why Twist Bioscience is furiously attempting to expand its offerings beyond writing DNA, but those efforts have proven expensive. Very expensive. It's the reason that revenue growth is being swamped by increases in operating expenses. 

Metric

Fiscal Q2 2019

Fiscal Q2 2018

Year-over-Year Change

Revenue

$13.6 million

$6.2 million

120%

Gross profit

$1.8 million

($1.9 million)

N/A

Operating expenses

$39.8 million

$22.8 million

75%

Operating income

($26.3 million)

($16.6 million)

N/A

Net loss

($25.9 million)

($16.9 million)

N/A

Data source: Press release.

As the table above shows, quarterly revenue increased by $7.3 million year over year, but quarterly operating expenses increased by $17 million in that span. Will pumping capital into R&D prove successful? Well, some of the diversification efforts are off to a promising start, while others are unlikely to contribute financially for quite some time.

Investors might be surprised to know that the fastest-growing source of revenue is not synthetic DNA, but target enrichment panels for next-generation sequencing (NGS) applications. Those products help customers determine which regions of a genome to focus on when sequencing DNA. For a company built on writing genes, the irony of expanding to reading genes is likely not lost on investors, but it's probably more economically viable. It's also incredibly competitive and pits Twist Bioscience against Illumina, which is also a major investor in the DNA synthesis leader. Then again, maybe that's the point.

Twist Bioscience is also developing products and services targeted at biopharma customers, which could lead to revenue-generating partnerships in the long run. Then there's the DNA data storage project with the University of Washington and Microsoft (together the second-largest source of revenue in recent years), and the focus on opening a facility in China.

A road with years written on it.

Image source: Getty Images.

Looking ahead

Twist Bioscience generated $25 million in revenue in the first half of fiscal 2019, up from only $10.5 million in the year-ago period. It remains confident that gross profit will continue to improve as revenue grows, which is a reasonable expectation.

Management increased full-year 2019 revenue guidance to be between $50 million and $52 million from a previous target of about $48 million to $51 million -- a midpoint the business is easily on pace to beat. That's balanced out by the fact management also increased its expectations for annual net loss, from a previous target of about $93 million to a new midpoint of $98 million. 

More important for investors to consider is the significant rate of cash burn. Twist Bioscience saw its balance of cash, cash equivalents, and short-term securities decrease by $26 million in the quarter. Guidance suggests the business will end fiscal 2019 (the period ending Sept. 30) with less than $60 million in capital. In other words, the company will certainly need external capital from a stock offering or debt offering well before it's within shouting distance of sustainable operations. If growth from NGS products stalls out post-launch, or biopharma collaborations fail to materialize, then that could leave shareholders in a precarious position.

A hand pressing down on a balance to cancel out the weight of many coins on the opposite side.

Image source: Getty Images.

A technology leader your portfolio should avoid for now

There's no question that Twist Bioscience is the leader in DNA synthesis. It has the best commercial-stage technology platform with respect to quality, volume, and price. But the dustbin of history is littered with companies that had the best technology and never stumbled upon a profitable business model. That's especially true in life sciences.

Investors should be encouraged by a strong start to NGS product revenue, but the business seems a little overextended and unfocused. Does it really make sense to spend money on futuristic DNA data storage projects or questionable Chinese expansion (and risking intellectual property theft) given the overall financial position? After all, the business posted an operating loss of $48.5 million in the first half of fiscal 2019. That's not sustainable, and it might only pay off if Twist Bioscience achieves success across all of its current R&D efforts. That could prove to be a risky bet.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina and Microsoft. The Motley Fool has a disclosure policy.