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Earnings Review - Pacific Biosciences & Twist Bioscience

Proverbs Chapter 15 verse 4 states, "The soothing tongue is a tree of life, but a perverse tongue crushes the spirit." It seems like common sense to speak kindly in most situations, but I often find that life's circumstances lead to things being said that aren't the most helpful. On the contrary, when I am around someone who often is patient, respectful, and positive, even during challenging circumstances, it truly is refreshing and edifying.


In today's social media world, there's always a lot to digest, more so when it comes to comments and opposing positions. While it's always hard for me, it's always a best practice to consider what someone is saying and the driving force behind it.


I think this is relevant for my final catch-up earnings review for Pacific Biosciences of California (PACB) and Twist Bioscience Corporation (TWST).

Pacific Biosciences

Pacific Biosciences designs, develops and manufactures sequencing systems to help scientists resolve genetically complex problems. Based on the novel Single Molecule, Real-Time (SMRT®) sequencing technology, the company's products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and real-time kinetic information for epigenome characterization.


The company's technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes. PacBio® sequencing systems, including consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing. Pacific Bioscience's key financial metrics as of their latest filing and on a Last Twelve-Month, LTM, period are as follows:

  • Net Cash Position: $319 million

  • Revenues: $79 million

  • Gross Margin, GM: 41%

  • Operating Cash Flow, OCF / Margin: $16 million / 16%

  • Free Cash Flow, FCF / Margin: $81 million / 101%

  • Shares Outstanding 204 million

First off, Pacific Biosciences most recent earnings filing does not contain all elements of financial updates. As such, the above information is a hybrid of information between the 8-K/10-Q. Pacific Biosciences fiscal year ends every December 31st of each calendar year. For the full 2020 year, Pacific Biosciences Revenue declined by 13%. GM increased by 300 basis points. While OCF/FCF margins and nominal values were positive, it should be noted that these include the Deferred Gain from Reverse Termination Fee with Illumina, Inc. (ILMN), as well as common stock proceeds. Key update items included:

  • SB Management, a subsidiary of SoftBank Group Corp., will make an investment of $900 million in convertible senior notes to support the Company’s future growth initiatives.

  • The Company announced a multi-year collaboration with Invitae Corporation to begin development of a production-scale high-throughput sequencing platform leveraging the power of PacBio’s highly accurate HiFi sequencing to expand Invitae’s whole genome testing capabilities.

  • Wellcome Sanger Institute committed to purchase seven new Sequel IIe systems to support the Darwin Tree of Life initiative, making it one of the world’s largest SMRT sequencing facilities.

These three separate highlights are all reflective of the company's future prospects. Collaboration with Invitae Corporation (NVTA), also a holding within the portfolio, will help to accelerate Revenue, customer acquisitions are an indicator of future potential, and Softbank's investment will be critical to funding these growth efforts. COVID has impacted the business due to customer shut downs. Key updated valuation metrics for Peloton include:

  • Enterprise Value, EV: $10 billion

  • EV/Revenues: 125 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 660 times

Both Cantor Fitzgerald and Piper Sandler increased their PTs from $45 to $62, and from $20 to $52 respectively, leading the way for the bullish stance. I've adjusted my PT at $65 as I think that the momentum may carry forward over the next 18-month period, especially with Softbank's backing.


Right now Pacific Biosciences seems like an expensive company to invest in with a less clear future. However, the company's highlights a progress, including strong investment stakes, is setting up for significant upside potential over the next five years. Analysts are targeting the company to see Revenue acceleration towards $200 million over the next two years. From there, it's all about a trajectory towards $1 billion and higher.


Like other risky Healthcare sector plays, it's always challenging during earlier stages. Pacific Biosciences has had an unbelievable SP run since the termination of the deal with Illumina. Due to perceived volatility, I initiated a very small position in the mid-$30s. Based on events and near-term prospects, I'll be looking to accumulate and build the position further in the $35-$45 range.


Twist Bioscience

Twist has developed a disruptive DNA synthesis platform to industrialize the engineering of biology that provides DNA for a wide range of uses and markets. The core of the platform is a proprietary technology that pioneers a new method of manufacturing synthetic DNA by “writing” DNA on a silicon chip. Twist has miniaturized traditional chemical DNA synthesis reactions to write over one million short pieces of DNA on each silicon chip, approximately the size of a large mobile phone.


The company has combined its silicon-based DNA writing technology with proprietary software, scalable commercial infrastructure and an e-commerce platform to create an integrated technology platform that enables them to achieve high levels of quality, precision, automation, and manufacturing throughput at a significantly lower cost than our competitors. Twist's key financial metrics as of their latest filing and on a Last Twelve-Month, LTM, period are as follows:

  • Net Cash Position: $585 million

  • Revenues: $101 million

  • Gross Margin, GM: 35%

  • Operating Cash Flow, OCF / Margin: ($132) million / (131%)

  • Free Cash Flow, FCF / Margin: ($110) million / (108%)

  • Shares Outstanding 49 million

  • Industrial Chemicals Rev: $30 million

  • Academic Research Rev: $20 million

  • Healthcare Rev: $50 million

  • Food/Agriculture Rev: $1 million

  • Number of Genes Shipped: 343,000

  • Number of Shipments: 31,400

Twist's fiscal year ends every September 30th. For the first quarter of 2021, Twist witnessed Revenue growth at 64%. GM increased by over 300 basis points, while OCF/FCF margins and nominal value remain largely negative.


Key takeaways included:

  • Shipped products to approximately 1,500 customers in the first quarter of fiscal 2021 versus approximately 1,000 in the same period of fiscal 2020.

  • Launched Clonal-Ready Gene Fragments, providing customers with a complete offering for genes. Twist’s best-in-class Gene Fragments, with and without adapters, can be used to build constructs and minimize the time and cost of screening for perfect clones. The resulting product is a ready-to-use Gene Fragment that is compatible with many applications including cloning, gene and protein expression, pathway and enzyme engineering and enzyme optimization.

  • Announced plans to expand its manufacturing and commercial capabilities with the addition of the “Factory of the Future” just outside of Portland, Oregon in Wilsonville. The 110,000-square-foot facility is expected to become operational in 2022.

  • Introduced new synthetic RNA controls to develop, validate and verify tests for SARS-CoV-2. The new controls include the B.1.1.7 variant of SARS-CoV-2.

  • Supplied the U.S. Centers for Disease Control and Prevention (CDC) with a customized version of Twist SARS-CoV-2 Synthetic RNA Controls for use in the CDC Influenza SARS-CoV-2 (Flu SC2) Multiplex Assay, an assay that tests for influenza A, B and SARS-CoV-2 simultaneously. In addition to using the assay at its primary site, CDC intends to distribute this multiplex assay to additional public health laboratories for testing across the United States.

Twist's strongest product category, Next Generation Sequencing, NGS, tools, grew over 100% during the first quarter, leading growth driving the Healthcare Revenue segment. Similar to Pacific Biosciences, Twist also was impacted by COVID due to customer operating challenges. Key updated valuation metrics for Twist include:

  • Enterprise Value, EV: $7.6 billion

  • EV/Revenues: 75 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: N/A

Twist, similar to Pacific Biosciences has very low analyst coverage, and saw mixed reviews post earnings with Baird increasing its PT from $125 to $200, and JP Morgan reducing its PT down to $100 per share. My PT sits at $200 per share in line with Baird, over the next 18-month period.


Twist is trading at a steep premium, and there will likely not be positive Cash Flow performance over the next few years. However, the company is progressing well, and has potential for substantial Revenue growth for the mid and long-term. Twist got too far ahead of itself earlier in the year and has pulled back to the $160s. I'll be looking to potentially accumulate more in the event the SP pulls back to the $135-$155 price range.


Conclusion

Healthcare sector stocks are always volatile. I expect both Pacific Biosciences and Twist to remain volatile as well. Pacific Biosciences has been on a tear, up nearly 93% already in 2021. There's a lot of momentum behind Pacific Biosciences, so we'll see if anything changes aside from a broad-based correction. Twist on the other hand, has lost momentum, and I am hoping to see further weakness to accumulate.

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