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$TWST: A Potential Future Winner
Weekly Semi Deep-Dive
Summary: recent success in trying one of $AMRS´s products encourages me to keep digging around in the syn bio space. $TWST seems like a remarkable company with great long term potential, although not cheap.
Pulling the $AMRS Thread
I am seeing a combination of cannabigerol and squalane (Terasana by $AMRS) cure the acne of a close relative of mine. The results are spectacular, specially when compared to other traditional methods that were simply not working.
Further, Terasana is not only curing the acne but simultaneously not causing side effects of any kind. If anything, it is improving the overall dermatological condition of the patient. I cannot convey across the screen how rare this is in the whole acne space, with most succesful treatments causing some sort of indirect harm.
The point is that Terasana is the first product I personally come across that is fundamentally enabled by synthetic biology, that is simultaneously superior to existing alternatives. In the context of the $AMRS bull case, this seems to not be their first success.
For this reason, whilst the pendulum in the market is swinging back and we cannot be sure of where it will end, I believe there is great value in continuing to study the synthetic biology space. It is likely to eventually become the predominant value added differential layer of our economy. The early bird will catch the worm.
$TWST´s Source of Value
Remember: synthetic biology is about making things through biology, by inserting genetic code (instructions) into cells and have them produce whatever we want. $TWST is essentially a DNA (genetic code) writing machine, which means it occupies a core position in the synthetic biology space.
$TWST´s main focus is on making genetic code for cheaper, faster and more accurately than anyone else. This is valuable because in order to create a real product through biology, you need to run many parallel tests, which uses up a lot genetic material. Hence the importance of cost and speed. Further, little errors in the genetic code translate into very large and costly production errors down the line, so accuracy is key.
Currently, the syn bio space is gaining traction in producing useful molecules (the building blocks of organisms). Yet, the industry´s full potential lies in producing useful organisms. One can imagine a day a decade or two from now in which we program cells to make cars, phones or even houses.
As the industry advances in this direction, cost, speed and accuracy in genetic material production will become exponentially more important, in line with radically more complex outputs. Hence, a succesful focus on these three attributes is likely to pay off exponentially too.
Lastly, whilst $TWST has not seen traction here yet, we are currently producing a lot of data and storage is costly. Data production is going to continue increasing exponentially and so will overall storage cost. 1kg of DNA can store all the information ever recorded by human kind, so you can tell where we are headed in this sense. Also, data stored in DNA can persist so long as the DNA itself persists, which is its specialty (evolution).
$TWST has two core technological assets:
It´s ability to miniaturize DNA synthesis.
Its growing library of genetic information, that feeds off its synthesis prowess.
DNA is made up of the letters A, C, G and T. Each letter stands for a given molecule, such as the one below:
DNA synthesis (production) is about putting the letters together in a specific order, to form the desired genetic code. To do so, the traditional method is to chop off a specific part of the molecule and join that end with the next letter. You do this successively to add new letters. This is way harder than it would seem.
$TWST has made this process far more efficient by miniaturizing it, enabling dramatically increased throughput and hence lower costs.
Further, they use this ability to synthesize DNA in order to populate a growing library of genetic information. Customers can use this library to better figure out what genetic code is optimal in order to achieve their desired goal, which enables them to save money and time. Customers can also order whatever genetic material they want through an API, which helps in automating the process.
The thing with DNA is there are many nuances to it. Little modifications to a given snippet of genetic code can make a world of a difference in terms of the final output, for the better and for the worse. The library gets more useful through time as it gets richer with data that captures these nuances, which is a direct function of $TWST´s synthesis capacity.
Whilst I have studied the process of DNA synthesis in depth, I must recognize I have a blind spot in terms of how easy it is for $TWST´s core technology to get displaced. I believe this company to be one of the disruption prone vertical components that I have been writing of recently. It is hard to predict when and if a better technology may emerge elsewhere.
For now, however, the company seems to be at the bleeding edge of DNA synthesis, so it is a worthwhile addition to our mental map. Recently, it announced the development of new technology, which seems to set it further apart from competition, or at shows that they are actively looking for incoming threats. This may point to some powerful culture within the company, that facilitates innovation. Probably worth a deeper look further on.
$TWST´s revenue growth track record is formidable, with solid quarterly growth, but we still do not know when it will be profitable or if the growth is healthy at all, with quite a red bottom line overall:
$TWST´s ability to synthesize genetic code is also desirable in genetic sequencing activities (NGS) it seems, which now account for most of the revenue growth as you see above. According to $TWST (oligonucleotide = fancy word for genetic code):
“Historically, a significant constraint in many NGS applications has been the high cost and long turnaround time of oligonucleotide production. Highly accurate and reproducible oligonucleotide production is required to produce high quality target enrichment data. Traditionally, the lack of options for oligonucleotide production forced researchers to choose between using less precise methods or to reduce the number of samples in their study.”
The issue here is that there are plenty of companies providing oligonucleotide production for NGS such as Ilumina, which is quite a strong company, and unit economics are not looking great. The company may be getting distracted from its core activity here.
$TWST´s funding comes predominantly from issuing equity, which is quite dilutive for shareholders, as may be evidenced by the graph below:
On the other hand, this does lead to a healthy balance sheet with $465.8m cash in hand and practically no debt. Operating cashflow is $(152.1m) in the TTM, so this seems to afford them a good 2-3 years of runway from here.
FCF is $(73m) in the TTM, so there is no focusing on FCF over EPS kind of play here yet. We may see this as the new factory comes online, potentially yielding better economies of scale and ultimately a healthier bottom line.
Valuation wise, $TWST does not seem cheap, with a P/S ratio of 20. The future the company is pointing at may eventually justify the price, however, as is the case with other companies in the sector.
I am now intrigued to figure out whether the move into NGS is inherently a bad better or whether I am missing something.
Until next time!
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