Stanford phd candidate Calvin schmidt posts about investing opportunities in synthetic biology. Available for consulting on potential investments in this area.

Notes on the Twist S-1 filing

Last week, on October 3rd, Twist Bioscience filed an S-1 document with the United States SEC, detailing their intention to hold an IPO. Most companies go public about a month after they file their S-1, so you and I could soon hold TWST stock. The S-1 filing is more than just a simple press release telling the public of their IPO plans, it also includes a fairly detailed prospectus that gives us the first look at the numbers behind Twist’s business. This includes sales and profit data, asset and debt values, ownership fractions, and customer details. I’ve spent some time looking through the filing, and here are some of the more interesting numbers that jumped out at me.

Twist may IPO at unicorn market cap.

The most important number in the filing - the potential valuation - has been left blank, as has the number of shares being offered and the proposed price. This is not unusual for an S-1 filing, most filings leave that part blank initially and file an amendment after two to three weeks to include that data. However, the filing does include the valuation of their most recent fundraising, which we can use to estimate what the initial market cap may be. That fundraising was their Series D, which sold roughly 102 million shares for $220 million from 2016 to 2018. Twist has around 214 million shares total, so the Series D values the total company at around $500 million. Some time has passed since then, and it is likely that the value of the company has grown in that time, making a $1 billion market cap possible, especially when you consider that Twist is a well-known company in a hot field.

Update: The initial market cap will be about $425 million, below the Series D valuation and far below unicorn status.

Twist doesn’t really need the money.

As of June 30, 2018, Twist had around $90 million in cash on hand leftover from the roughly $300 million they raised from venture capitalists. Obviously, as a young company that is growing quickly, they are still unprofitable and need to spend money to keep the lights on as they move towards profitability. They lost just over $50 million in the first nine months of 2018, so the cash they have will likely sustain them through the end of 2019. That fact, combined with the rather low amount they are looking to raise in the IPO - $86.3 million - points to another purpose for the IPO: liquidity for employees and investors.

Twist’s price-sales ratio will be very high. But that might be ok.

Twist will likely end 2018 with around $25 million in revenue. This would lead to a price-sales ratio of about 25 at their most recent valuation and a ratio of 50 at a $1 billion cap. The current NASDAQ ratio is around 4 - its highest since the tech bubble - so a ratio of 50 would be very high. It implies that investors think that Twist will be quickly growing their revenue, which, to be fair, Twist is doing. They grew their revenue 133% from 2017 to 2018.

We can see if this ratio is at the right point by comparing to similar companies at similar stages. It is tough to find comparable companies to Twist. They work with biotechnology, but their main product isn’t a therapeutic and they don’t need to seek regulatory approval before selling. This IPO is closer to a tech IPO - they have a product they are selling, and are now looking to expand their market share and lower their cost of business. Similar recent tech IPOs are Upwork and Eventbrite. They are both a little larger, with current market caps around $2 to $2.5 billion, but both have price-sales ratios of about 10. Though Twist’s ratio is higher than these, it is also growing its revenue much faster, which may justify that high ratio.

Update: At an initial market cap of $425 million, the ratio will be a more reasonable 17.

Twist’s margins are improving.

Twist currently loses money on every base pair they ship. Their revenue for the first nine months of 2018 was $17 million, while it cost Twist $29 million to make those products. This doesn’t even count Twist’s other costs like research and development and general administration. However, from the same period in 2017, Twist’s revenue grew 133%, while its cost of goods only grew 34%. It’s not guaranteed that Twist will be able to improve these margins forever, but there are signs that they could be profitable within the next few years.

Other data, presented without comment:

  • 32% of 2018 revenue came from one source - Ginkgo Bioworks. Furthermore, 91% of their revenue in 2018 came from recurring customers.

  • Sales from outside the US is becoming a bigger portion of Twist’s business, likely due to their efforts marketing in new areas.

  • Twist has shown steady quarter-over-quarter growth of 20% to 40% in booking orders. However, only about half of those bookings translate to revenue, for whatever reason.

  • Twist acquired Genome Compiler for $2.4 million in shares. At the current valuation, those shares are worth closer to $10 million.

  • In addition to gaining more market share in general DNA synthesis, Twist will be focusing on dominating verticals such as biologics library development and DNA data storage.

Takeaways from SynBioBeta SF 2017