Telesis Bio Inc

NASDAQ:TBIO

Good day, and thank you for standing by. Welcome to the Q2, 2023 Telesis Bio Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised, today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Jen Carroll, Vice President of Investor Relations.

Thank you, and thanks for joining us for Telesis Bio's second quarter 2023 earnings call. With me on the call today are Telesis Bio Founder and Chief Executive Officer, Todd Nelson and our President and Chief Operating Officer, Eric Esser. Our second quarter 2023 financial results press release is now available on the Investors section of our website.

Before we begin, I would like to inform you that certain statements we make during the call will be forward-looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such 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 August 10, 2023. Finally, any percent of changes we discuss will be on a year-over-year basis unless otherwise noted.

And with that, I will hand the call over to our CEO, Todd Nelson and we can get started.

Thanks, Jen. Welcome everyone and thanks for joining today's call. We're pleased with the progress the company is making in this challenging environment, and I want to highlight that this is the fourth consecutive quarter that we've successfully reduced or maintained our operating expenses while growing revenue on a year-over-year basis.

As you'll see in this quarter's results, we continue making progress with our strategic collaborations, which grew both our revenue and installed base, delivered new BioXp kits to the market, secured additional financing, and strengthened the Board of Directors through the addition of Paul Meister, former Chairman of ThermoFisher.

I'm also pleased to announce that during the second quarter we achieved another technical milestone in our research collaboration with Pfizer, something that further validates SOLA, our enzymatic DNA synthesis platform. We remain encouraged by the progress we have made and look forward to continuing to validate this platform with our partner.

SOLA remains a disruptive technology that will drive production of integrated workflows to the bench shop and will continue to accelerate discovery timelines for our customers through the ability to deliver on-demand gene synthesis, mRNA and eventually protein synthesis products with unprecedented speed and accuracy.

Customer adoption of our newly launched products remains encouraging, and moving forward we intend to increasingly focus our efforts on maximizing the commercial impact of our differentiated workflow solutions based on our mRNA, cell-free DNA scale-up and long-build BioXp DNA kits.

We have a highly compelling offering at the benchtop for these solutions, which will catalyze further adoption of our products into our targeted workflows for antibody discovery, pathway engineering, precision medicine, and mRNA vaccine discovery.

Now, moving on to our second quarter financial results. Our detailed financial results for the second quarter are included in today's press release. During the quarter, our total revenue grew at 53% despite continued macroeconomic headwinds that impacted our product revenue results.

While we saw solid revenue growth of 36% in our instrument business and our overall product revenue increased year-over-year by 14%, our BioXp kit revenue was down 16% during the quarter against a very tough comp in 2022. We noted that for the first half of 2023, the BioXp kit growth is greater than 10%, and we anticipate that this rate will accelerate in the end of the year with new product launches.

Revenue for the first half of 2023 was $15 million, an increase of 33% from the $11.3 million in the prior period. Gross margins came in at 65.8% for the second quarter and compared to 48% for the same period in the prior year and were 61.5% for the first half of 2023 as compared to 48.6% in the prior period of 2022.

Strong contributors to this continued expansion include collaboration milestones, but also reflect positive mix shift in revenue from recently launched products within our growing BioXp portfolio and our efforts to vertically integrate reagent and instrument manufacturing.

Operating expenses for the quarter of $13.7 million for the second quarter of 2023 were down 20% as compared to $17.2 million for the same period in the prior year. This decrease primarily is a result of ongoing cost-cutting efforts, including a reduction in force during the current quarter that was intended to focus the team on our most profitable and near-term revenue opportunities. And operating expenses for the first half were down 14% to $28.1 million compared to $32.8 million for the same period in 2022.

Total net loss of $8.3 million reflects a decrease of 44% compared to $14.8 million in the same period in the prior year and net loss per share was $0.28 for the second quarter of 2023 compared to $0.50 for the corresponding prior year period. The corresponding net loss for the first half of 2023 was $19.4 million compared to a net loss of $28 million for the same period in 2022, representing a 30% decrease. Cash, cash equivalents, restricted cash, and short-term investments were $47.5 million as of June 30, 2023.

And with that, I'll move on to provide a brief update on our product development and commercial status. During Q2 we accomplished several important product development initiatives, including the on-time launch of three new BioXp kits, bringing our total offering to 12 kits across both the 3250 and 9600 systems.

Of note, we completed the first commercial shipment of our BioXp Select DNA Cloning Kit, which enables an on-demand and automated benchtop assembly of DNA fragments via our own proprietary Gibson assembly method or Golden Gate assembly cloning methods beginning from the customer’s existing linear DNA.

This product launch broadens our appeal to customers that have used Golden Gate Cloning methods in their workflows, and by doing so, Telesis Bio customers are now able to perform automated cloning at the benchtop for the two most commonly used cloning methodologies. And these kits are now available on both the 3250 and 9600 systems.

Second, we launched our proprietary BioXp NGS Library Prep kit for Plasmid Sequencing, which enables on-demand and automated library preparation of plasma DNA for use in next-gen sequencing applications. This kit represents a major milestone in the evolution of the BioXp system and now provides customers with a more complete solution across many synthetic biology and genomics workflows.

And third, we introduced the long fragment kits on the 9600 system. With this launch, customers are now able to build 96 high-fidelity genes of up to 7.5 kb in a single, fully automated overnight run. This is a key advancement in DNA Synthesis Automation for longer genes, and we're pleased with the initial product launch numbers, which are being driven by adoption by customers for rapid mRNA Template Synthesis in precision medicine and vaccine discovery.

The team here at Telesis remains focused on delivering an expanded range of differentiated products that enable researchers to optimize and accelerate discovery through push-button automation of complex molecular biology at the benchtop. We remain in the early stages of adoption in our targeted workflows and expect growth to accelerate as we move deeper into these workflows where we have disruptive technology in differentiated products that will serve to increase the value proposition of the BioXp platform.

Moving on to gross margin, which continues to expand. Gross margins continue to expand as a result of mixed shift to higher margin products like the 9600 system, mRNA kits, long fragment builds, and a suite of select kits for the BioXp.

We briefly mentioned a few minutes ago that we anticipate gross margins will continue to improve as we complete the vertical integration of oligo manufacturing with commitment to substantially offset our existing external supply by the end of 2023. This, when combined with our initiative to likewise vertically integrate the manufacturing activities related to the BioXp instruments, should accrete to gross margin with full year effect of these three initiatives taking place in 2024.

And finally, a brief comment on the status of our base cost structure. As mentioned earlier in the call, we are pleased with the progress the company is making in this challenging environment, and I want to highlight again that this is the fourth consecutive quarter we have successfully reduced or maintained operating expenses, while growing revenue on a year-over-year basis. As such, we continue to remain confident that our path to profitability, estimated to be the end of 2024, remains on track.

In closing, I want to share that our team is very experienced operationally, strong strategically, and that we remain focused on achieving near-term commercial goals, furthering new and existing partnerships, controlling costs, launching new products, and improving profit margins.

And with that, I'll ask the operator to open the call for questions. Thank you.

Thank you. [Operator Instructions]. And our first question comes from Brandon Couillard from Jefferies.

Hey, thanks. Good afternoon, Todd. I mean just big picture, obviously the capital equipment demand backdrop has gotten tougher based on what we've heard from most of the other tools companies in the quarter. Have you seen a change in the demand backdrop from your point of view, any sort of elongation in sales cycles, longer capital approval times or a shift in budgets? And then secondarily, could you just recap what instrument growth did on a year-over-year basis to keep you on the set? Thanks.

Yes. Hi, Brandon. Thanks for the question. So, instruments for BioXp platform, instrument growth is up 36%. We sold 17 instruments. The mix was about 15, 3250 is 9,600. So, you can see from that mix that the 9600, which is also the more expensive of our two systems, is a little bit less than what we'd anticipated. We've made up for that with more 3250 systems. So overall, I feel good about that.

But the mix does reflect extended sales cycles, more signatures to get things through, extended amounts of time for the sales team to get things from a lead opportunity through a customer, so sales cycles have extended. We've seen some CapEx pressure on the 9600, and we've pivoted, in a sense when we go to the customer to make that up with 3250.

So we're happy with the 17 overall, but I think we'll begin to see an uptick in the 9600 as this macroeconomic condition at some point resolves.

Got it. That’s helpful. Can you quantify the Pfizer milestone you booked in 2Q and remind us, are there two more that you anticipate in the back half, and how big are those?

Yes. So, we signed that agreement in 2021. We've successfully achieved two of the four milestones. The cadence is generally, Brandon, that it takes about a quarter to achieve the milestone, and so we just achieved one in Q2. So Q3 we'll be working to achieve the next milestone. So I'd anticipate one more milestone in 2023, and then there's one more milestone in 2024 and you could anticipate that happening at the same cadence in 2024.

Was that about $2.5 million, if I remember correctly?

Yes, I think they are roughly that, that's publicly available. So I think it's $10 million in technology milestones that are divided up between four different milestones, and then I would just remind you also that Pfizer, following the conclusion of the research period has some amount of time to elect, to move forward, at which point should they choose to do that would trigger the cascade of additional clinical development and commercial milestones.

Got it. Very good. And then, I guess any chance you're willing and able to update the full year outlook in terms of revenue or installations. And secondarily, where do you expect CapEx to trend in the second half and exiting the year is [inaudible]?

Sorry, Brendan, just a clarification. You mean CapEx spending on our end or are you speaking to what we've released this far as revenue expectations and things like that?

Yes, just curious if you're willing to update revenue expectations for the year, and then secondarily, CapEx operating expenses in the second half and some of the recent cost cuts.

Yes, no update from what we did at the end of May when we completed the financing. So we're targeting from an OpEx perspective, including non-cash and one-time charges for things to be around the $55 million mark, if not better; gross margins to be in the 57% region, and revenue to be in the $35 million region.

Got it, okay. I guess one more for me, and I'll hop back into the queue. Paul Meister, obviously, a nice position moving forward, I find he's a big shot. Do you see ways for him to add value, either operationally or strategically? What do you think he brings to the table?

I mean, a lot, because he's so much more experienced than me. I'm glad to have him onboard. I think, getting the former Chairman of ThermoFisher onboard is a real testament to the company here and his management, his investment in the company alongside of others, including myself, I think shows a great fortitude and interest in the potential outcome.

I would say operationally, it's a super fair question. Paul's a very, very engaged, very smart business leader who's got direct experience in running businesses like this for 35, 40 years. So I think that he's been a tremendously good add to the board of directors, and I expect to be able to learn some great things from him. So I think it's all good stuff.

Very good. I'll jump back in the queue. Thanks.

Thanks, Brandon.

Our next question comes from Paul Knight from KeyBanc.

Hey Todd. Thanks for the time. The Eton acquisition obviously sets you up to do more internal oligo production, and you're talking about gross margins, I think what, in full effect in 2024. What type and level of gross margin would you really think about with that kind of, integration I guess is the right word for it?

Yes. So, I'll take a high-level crack at that and then hand it over to Eric Esser to answer. So, you're right. We have now implemented a proprietary small-scale synthesis oligo production facility. We've stated previously that our intent is to offset the vast majority of our external oligo supply by the end of the year, and we're on track to do that, so our target is 80% to 100% of that, and again on track to do that.

The impact of that initiative, when combined with our other two initiatives on our three-point plan to improve gross margins, should be about – and I think we've disclosed this previously, about 1,000 basis points or 10 percentage points in total, the full effect in 2024.

Yes, I think that's right, Todd.

From the base level?

From the base level, I mean I guess I can't, Paul, pull the incremental impact of the vertical integration of reagent manufacturing apart from the other two initiatives right now. I'm happy to have a follow-up call on that, but I think it's fair to say that from a product margin perspective, we would expect to see that much accretion on a year-over-year basis.

Okay. And then, could you refresh us on how the Pfizer collaboration rolls out the quarterly cadence on that?

Sure, happy to. So, again, we signed that agreement in the fourth quarter of 2021. There's a two-year research period, and there was an $8 million up front fee. The cadence of the four milestones is basically anticipated when we achieve them. We've achieved the second of four, and the cadence should be another one in 2023, presumably toward the end of the year, because we just achieved one, and then the final or fourth milestone in the first half of 2024.

So two more to go, and that ends the research period, at which point Pfizer, our collaborator, can elect to move forward with the program, at which point that would trigger the additional clinical development and commercial milestones.

Okay. And then, lastly, could you talk regarding that collaboration. How – those milestones is – yes, are you pretty comfortable with the trend, I guess is the best way to ask it.

Sorry, Paul, can you just repeat the question? You just want to know what triggers the milestones and how much they are?

The engineering specs, it seems like it was more engineering specs in the past, those obviously getting met. How challenging do you think those milestones are? It seems like you've been kind of clicking away really well. Any thoughts on that change? Is it still running pretty smoothly, is my impression?

Yes, we're very happy with the relationship with Pfizer. I think it's going exceptionally well. We've achieved half of the milestones. We're working hard on the other half, and I believe the technology is viewed by them, as their CEO has said publicly, as one of the four major strategic pillars that they are going to build their mRNA franchise around. And so we're proud to work with them to be their DNA template provider in that process.

So I do think things are going well, but we have no idea what they'll end up doing, but I think from our perspective, we're working hard to achieve the goals, and we've been doing that and we anticipate we'll continue to do so.

Okay, thanks.

Yes.

Our next question comes from Steven Mah from TD Cohen.

Great, thanks for the question. A lot of ground covered, so I'll just have a couple follow-ups. On the gross margin Todd, I think you said it was a $10 million – or sorry, a 10% gross margin impact in total in 2024. Could you give us some color on maybe separating the impact from Eton, oligos and then also bringing in the in-house BioXp manufacturing?

Hi, Steve. Thanks for the question. So I think the margin as we said, on product margin, which we haven't really disclosed. I think that analysts can back into that. On a blended margin, it'll be around 6%, and on our products, it'll be about 10%. And so that accretion will result from executing against our three-point plan. That three-point plan again, is to continue to focus more intensely on areas for the BioXp, where we have a very competitive and highly differentiated offering, better pricing, better margins, that's point number one.

Point number two, is the vertical integration of reagent manufacturing, which is directly impacted by the oligo synthesis program that you're mentioning. And then point number three is the insourcing of our instrument manufacturing. So those three things together, we believe will accrete between 600 and 1,000 basis points on a full-year basis in 2024 to the ending gross margin in 2023.

Okay. I appreciate the call out. And then pivoting over to the select kits, do you have like a pipeline of the kits you're going to roll out? Can you give us a sense for what might be next?

Yes, happy to. And just to remind you, we've got 12 kits now launched on the 3250 and 9600 systems. There's a total of 21 kits. There's 12 on the 3250, and I guess that means nine on the 9600.

I'll hand it over to Eric to run through the rest of the year's product development plan, so that you can have the answer to that.

Yes, thanks Todd. Hi, Steven. So we do have some additional kits that we'll be launching. We're launching three more kits in this quarter and two kits in Q4, so that will round out all the additional product development that we're going to do for the year. Those are really spread across the select line, the de novo line, and an expansion of the NGS library prep line that we've now launched this quarter.

Yes, and I think our efforts there Steve are to – when we get to the customer, it would be in parity from a workflow perspective on the 3250 and 9600. So what you'll see by the end of 2023 is that both the 3250 and 9600 will essentially be running the same kits.

That's right.

So one system is not disadvantaged or advantaged in a particular workflow, and that means to us, the adoption will likely be based upon needs related to throughput.

Okay, that's helpful. And then a last one for me, are you guys providing any updates on SOLA commercial launch timing?

So we still intend to launch some form of SOLA in the fourth quarter of this year, the reagent platform, and so that remains as of today on track, and we've been pleased with the development. We'll be launching that reagent platform into the CRISPR market, and so we're excited about that, and that work continues also in the gene synthesis area with Pfizer as you know.

Yes. Okay, that's it for me. I appreciate the questions.

Likewise. Thank you.

And our final question comes from Brandon Couillard from Jefferies.

Hey, thanks for taking the follow-up. Todd, just in terms of kit utilization, I think you said kit revenues are down, I think 16% year-over-year. Do they grow sequentially, and Todd, what's behind, I guess that trend?

Yes, thanks for the question Brandon. So, the interesting thing is, ironically we've seen a good – in this market good sequential growth. So we saw about 10% sequential growth Q2 over Q1 in 2023. So it's not as if though we're seeing a sequential downtick.

When we look at Q2 performance on a revenue basis compared to Q2 in 2022, it was a very tough comp, and sales in Q2 of 2022 – a lot of twos in there, sorry – nearly doubled. So sales are up about 100% due to some very large one-time orders in Q2 of last year. So that has the negative impact, essentially this quarter being a very, very tough comp, but we are seeing sequential growth quarter-on-quarter, which I view as a good thing in this market.

So we did see sequential growth. It's 10% or better, and that'll only get better mathematically as we get into the second part of the year, because the comps won't be as tough. So we are seeing sequential growth. There was a tough comp last year when sales grew at about 100% for the kits. They were up 62% in the first quarter of this year on a year-over-year basis and down 16% against the tough comp this quarter.

Okay, that's very helpful. Much different message in that context. Okay, thank you.

Thanks for asking.

This concludes today's conference call. Thank you for participating. You may now disconnect.