Codex DNA, Inc.

Good day, and thank you for standing by. Welcome to the Q3 2022 Telesys Bio Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephones. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, CEO Todd Nelson. Please go ahead.

Thank you. Good afternoon, and thanks for joining us for Telesys Bio's third quarter 2022 earnings call. With me on the call today are Chief Operating Officer Eric Esser, Dan Gibson, Co-Founder and CTO, and our VP of Finance, Brent Tunder. Our third quarter press release is available now on the Investors section of our website. Before we begin, I'd like to inform you that certain statements we make during the call before we're looking, these statements involve known and unknown risks and certainties that may cause actual results of different materials and those expressed in reply. Factors include those referenced in the Safe Harbor Statement included in our earnings release and in our filings with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on November 8, 2022. Finally, any percentage changes we discuss will be on a year-over-year basis unless otherwise noted. And with that, we can get started. At Telesys Bio, our mission is to inspire and empower scientific breakthroughs across life sciences and translational research applications. Our automated, on-demand, multi-elmic and synthetic biology solutions enable scientists to streamline and standardize both building and testing of DNA and mRNA, allowing us to address large unmet needs in our targeted markets. Our customers and collaborators include premier academic research institutions, rapidly growing biotech companies, and nearly all of the top 25 biopharma companies. Our systems are utilized by academics, and industry scientists worldwide in various discovery activities, ranging from the discovery of novel infectious disease vaccines, developing precision immunotherapies for cancer and antibody therapeutics, to the creation of engineered meat substitutes and sustainable cellular agricultural products. Our BioXP automation solutions allow scientists to synthesize and assemble DNA and mRNA with the push of a button. allowing our customers to bring critical products to the market in an unprecedented amount of time. We believe that our strong financial momentum will support the long-term mission of the company. And with that, I'll turn the discussion to a recently reported financial results and corporate update. To start, I'd like to review highlights from the third quarter into the first nine months of 2022. In the third quarter of 2022, we grew total revenue by nearly 140% compared to the prior year period. including contributions from Eaton Bioscience acquired in Q4 of last year, overall growth in the third quarter was 83%. For the nine-month period ending September 30, 2022, total growth excluding Eaton was 69%. We sold 13 bios fee units during the third quarter, bringing the number of units sold during the first nine months of 2022 to 47 units. Instrument revenue was up 28% and 37% respectively for the third quarter nine-month period ending September 30. We also experienced a record quarter for BIOPSP kit sales, which has continued a strong growth trajectory, posting 69% growth over the prior period and 58% for the first nine months of the year compared to the same period in 2021. And we're very pleased with the initial market uptake of the recently launched BIOPSP 9600 kit. Collaborations, royalties, and other revenue grew 224% for the third fiscal quarter and 170% for the first nine months of the year, respectively. Gross margin improved significantly during the third quarter from 41.7% in Q3 of 2021 to 54.8% in Q3 of 2022. For the first nine months of 2022, gross margin improved from 42.9% to 50.9%. Margin expansion Third quarter, as compared to the same period a year ago, was largely driven by a positive next shift to higher margin products, including the Biospeed 9600, mRNA, and lower cost of DNA raw materials. Our vision has never felt more achievable. We've made significant progress developing new, innovative applications for existing Biospeed systems that drive sales of on-market products, and we are developing paradigm-shifting future technologies. These innovations have the potential to fundamentally transform our industry, and at the same time, position Telus' bio to serve significantly larger and broader addressable markets. Inherent in this vision is our path towards improving our growth and operating margin, becoming a profitable company in the second half of 2024, and delivering value to our stakeholders. With that, I'll pass the call to Brent to review our financials and updated 2022 financial guidance.

Thank you, Todd. Detailed financial results for the third quarter were included in today's press release. In my remarks today, I'm going to walk through our income statement, touch on a few key financial metrics, and finish with our updated financial guidance for 2022. Telesys Bio is well capitalized with cash and short-term investments of $49.9 million as of September 30, 2022. Revenue was $6.7 million for the third quarter of 2022, which was a 140% increase in total revenue from $2.8 million for the same period in the prior year. This strong growth was driven by a record quarter for BioXP kit revenue, totaling approximately $884,000, up 69% year-over-year, and solid contributions from Eaton Sequencing Services and Oligo production revenue, which totaled $1.6 million. Royalties and other revenue also grew due to revenue related to the Pfizer collaboration agreement.

Organic growth for the core business net of even contributions was 83% for the first nine-month period.

The growth was 83%, and for the first nine-month period, the growth was 69%. Gross margin for the third quarter was 54.8% compared to 41.7% for the same period in the prior year. The increase of 13.1% or 1,310 basis points was primarily driven by collaboration and licensing revenue, improved product margins resulting from price increases and increasing contributions from higher margin products such as MRNA and the launch of the BioXP 9600. For the first nine months of 2022, Gross margins were 50.9% compared to 42.9% for the prior year period. Operating expenses were $14.9 million for the third quarter compared to $10.6 million for the same period in the prior year. This increase was driven by headcount expansion primarily in our commercial, R&D, and G&A organizations. The increased personnel expense relates to sales and marketing efforts, increased product development efforts, and hiring of new leadership and professional support staff. Operating expenses for the first nine months of 2022 totaled $47.8 million compared to $26.7 million for the same period in the prior year. Net loss was $12.3 million or 42 cents per share and $40.3 million or $1.37 per share for the third quarter and first nine months of 2022 respectively. This compares to a net loss of $9.8 million or $0.34 per share and $26.5 million or $1.83 per share in the same period in the prior year respectively. Now I'd like to briefly cover our update of financial guidance for 2022. Due to our continued strong results in 2022, we are again raising full year revenue guidance accordingly. As a reminder, during our Q2 earnings call, we increased our guidance revenue to $22 million to $24 million for 2022. Based on our third quarter results, we are further increasing our revenue guidance to $23 million to $25 million. And with that, I will now turn the call back over to Todd.

Thanks, Brent. Tell us who's executing against the plan that will allow us to achieve profitability during 2024. So let me take a few moments now to walk you through the high-level landscape of our plan. On revenue growth, excuse me, I would remind investors that we've grown the business to four-year compound annual growth rate of 48%, and that we have a robust series of new BioXP product launches that should generate significant continued revenue growth in the next couple of years. As an example, the launch of the BioXP 9600 system brings with it significant revenue potential stemming from higher instrument ASP, higher BioXP kit utilization rate, and an ability to extend into adjacent markets. Additionally, we plan to launch the first in a series of BioXID DBC benchtop instruments that will allow for the same-day turnaround of CRISPR guide RNAs and all of those for gene synthesis on a single integrated device. Moreover, in the first quarter of 2023, we plan to launch a new series of modular kits for rapid cell-free DNA scale-up and mRNA synthesis for customers and use their own DNA as a starting point. This new product offering will allow customers to use this system at their convenience, and provided they have on hand our make-to-stock modular kits, they can use this system every day and multiple times a week. The result of this product launch is that we will be able to rapidly go after the largest part of the customer base that requires or desires to start with their own DNA. The advantage to Talasys Bio is that we believe we'll see increased velocity in the placement of these instruments, increased utilization of both gifts and assembly kits for de novo jeans strong potential adoption of the modular kits that have higher gross margins. And we remain on track to launch internal oligosynthesis capabilities that will allow us to offset a portion of our raw materials purchases. All told, we believe gross margin in the next 18 to 24 months should trend upwards to between the high 50s to low to mid 60s. On cash, currently we estimate that by the end of the year we will have a cash position of approximately $40 million, additional debt capacity, and over the next 12 to 18-month period, the potential to earn through the achievement of technical and licensing milestones an additional $30 million. In conclusion, let me say that we're pleased with our overall third quarter and first nine-month results and that we remain encouraged by continued strong commercial execution and progress within our product pipeline. We are focused on executing against our near-term commercial goals, launching new products, furthering new and existing partnerships, growing market share, improving profit margins, and decreasing costs. We continue to invest in talent, technology, and processes to drive long-term sustainable growth and a path toward profitability. With that, I will ask the operator to open the call for questions. Thank you.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Okay. Our first call comes from the line of Brandon Cuia from Jefferies.

Hey, Brandon.

Hey, thanks. Hey, thanks. Good afternoon, guys. Todd, could you just elaborate a little bit more on just kind of how you're seeing the order book develop for the new 9600 system, maybe the mix of new and existing users, and then how many of the 13 systems that you placed in the third quarter were comprised of the new 9600 unit?

Yeah, Brandon, thanks for the question. We'll probably bounce around the room a little bit here on the answer. What I would say to start is that we're very pleased with the initial market uptake of the 9600. It seems to fit very well with customers. We did a lot of VOC on that. So for higher throughput customers, it seems to resonate very well. In the third quarter, we shipped 13 instruments. We had a bit of a mix shift as we launched early in the 9600, and that accounted for about three to four systems. So we're really happy with that. I would say looking forward into the fourth quarter, as the book of business builds for the instruments, I think that we're very comfortable that the 9600 is going to continue to ramp. And we're happy with that. And we'll hand it over to, I guess, Eric to answer the rest of the questions.

Yes, I think the other part of the question was how many of the orders that we have for 9600s on the books right now come from or have come from existing customers versus new customers. And I think that's close to a 50-50 ratio. I don't have the exact data in front of me right now. It's a little bit less than 50% existing customers. and, you know, the rest of your customers.

Yeah, so, Brandon, we're happy with that because I think, you know, it's a new system, and so, you know, obviously you would think, well, a lot of it would be upgrades. I think we're really happy with the exposure and adoption within your customer segment. A lot of customers, I think, have been waiting for a higher throughput solution. We've now brought that to the market, and looking forward into 2023, which is really forward-looking, but I think we're really excited, and so are customers, about the ability to open up that particular system to open modular kits.

Does that answer your question? Yeah. Yeah, that's helpful. In terms of the revenue guide, as you see, the increase to the midpoint is about a million. It still implies a fairly wide range for the fourth quarter. You can see directional color on that, and to the degree to which your fourth quarter estimate changed at all, or is this just an update for the year-to-date performance?

I think, Brandon, I think the answer to that is you're right. We increased the guidance, and so 24 is in the midpoint of our new guidance. I think we remain comfortable with kind of that midpoint guidance number. For revenue, our estimates for Q4 internally haven't changed. I think we're pleased with commercial execution, provided we can operationally ship against the purchase orders that we received for the 9600s. I think we're comfortable with our estimates. I don't want to tell you I think we'll be at the high end of the range. I think we're comfortable with midpoints.

Okay. And then the gross margins improved quite a bit in the third quarter. You talked about over the next, I think, 12 months, Todd, maybe gross margins being in that mid, you know, 50s to low 60s range, kind of touching, you know, that ballpark already here in the third quarter. Should we expect, you know, that to step down for some reason in the fourth? And then maybe help us think about, you know, the The magnitude of benefit that you'll get as you begin to move some of Eaton's oligo production for your own in-house raw materials, just the magnitude of potential tailwind from that transition.

Yeah, I think Eric and I will probably go back and forth on this one. And what I would say on the gross margin, but I think on the gross margin for the third quarter, you'll see in our financials we had a little more cash booked in collaborations, which I think helped the margin accretion. We also sold 9600s for the first time, which come with higher margins in ASPs. And our product mix is shifting from, while it's growing very well, the Gibson assembly kits for de novo gene synthesis, our product mix is shifting towards higher margin MPI for MRNA, long fragment builds, and rapid ant products. So the combination of the instrument business with the 9600s, more proprietary kits coming out, and the accretion of gross margin as a result of, I think it was an acceleration of the Pfizer. Going forward, Brandon, I would say our goal, of course, and it has been since we've we started is to get the product margins into that range that we discussed. And we think we've got a realistic plan to get there. To discuss the magnitude of the basically margin recapture, I'll hand it over to Eric. I don't think we have a prepared comment on the number of basis points of accretion, but I think in general, it'll be pretty significant because it's our largest single raw material acquisition.

Yeah, that's right. I mean, we are in the process of turning on that capability that's happening this quarter and will scale as we head into next year and through the year. So, you know, certainly a tailwind. It will be significant for us relative to the overall margin. And it's one of, I think, you know, a number of the factors that will help us in the gross margin area next year as we get into the year, along with the other items that Todd mentioned. So we're heavily focused on gross margin. I think the trend will continue in Q4 and into next year, and we'll continue to see expansion of gross margin.

Yeah, and again, just a bit of a bump in the third quarter because of the amortization of a little bit more cash in the FISA milestones.

Okay, that's helpful. And lastly, just update on supply chain status right now. Are you encountering any component shortages that relate to kits or anything that might be a hurdle as far as kind of shipping against the 9600 order book near term? Anything you're seeing on the supply chain front to call out? Yes, I'll hand that over to Eric.

Yeah, Brandon, no, we don't have any significant issues right now in supply chain. I think, you know, on balance, broadly speaking, things have loosened up a bit in that regard. We don't have concerns about the supply chain around the 9600. We'll be able to fill the orders that we got.

Very good. Thank you. Thanks, Brian.

Our next question comes from the line of Paul Knight of KeyBank. Please go ahead.

Hey, Harrison.

Hey, guys. Yeah, this is Harrison on for Paul. I was wondering, given the 9,600 placements in the quarter, were those the placements that you were expecting for the full year? And I guess what I'm trying to get at is, do you expect to see some placements in the fourth quarter as well, or are you going to be pulling

uh 3250 orders from 3q into 4q now no i think what we had said um is that we anticipated so the launch was early uh it was scheduled for fourth quarter we launched it you know in september and we got three or four uh instruments shipped out in a in a short period of time uh during the third quarter um you can expect that we'll be receiving and shipping uh against orders for the 9600 in the fourth quarter. I believe in our last call, we said that we anticipated we would sell during the course of the year following the launch in the mid to high single-digit numbers of biopsy systems. We remain comfortable with that.

Okay, got it. And then I think you mentioned the Pfizer milestones equaling up to about 30 million in FY23. I was wondering if we could kind of get an update on your progress there and what's possible or likely in FY23 there.

Yeah, let me get centered. Let's reconnoiter around the comments. We've got access to about $30 million in potential milestones, technical and otherwise, over the next 12 to 18 months. Specifically for the 2023 period, We're working to achieve three or four technical milestones. That program continues to impress. We're very excited about that. We remain, I think, first to market with a large validated effort around enzymatic DNA synthesis. We're super pleased with that. I can hand it over to Dan so he can tell you a little bit about his enthusiasm around that program. three or four milestones in 2023, and I think that totals around $10 million.

Yeah, this is Dan. So exactly as Todd said, we continue to make tremendous progress around our SOLA and genetic DNA synthesis solution. We've had a lot of success building the target genes for Pfizer, and we just continue to improve the reliability and fidelity and how quickly it takes to go from sequence to those genes using the process. But the program is going extremely well.

Great. Thank you guys. Thank you.

Thank you for your participation in today's conference. This does conclude the program, you may now