In today's video, we're continuing our coverage of the gradually unfolding train wreck that is Kathy Woods Arc Invest. One of Ark's worst performing ETFs is the Arc G Genomic Revolution ECF which has underperformed the S&P 500 by More than 70% over the past 5 years. We've already discussed one of this Etf's Holdings Ginko Bioworks. In a previous video today we're talking about another synthetic biology company called Twist Biosciences.

Twist is a top 10 holding in the Arc GF Additionally, Arc Invest is the single largest shareholder of the company, owning 12% of its shares. Outstanding! Founded in 2013 and Iping in 2018, Twist promised to revolutionize the field of synthetic biology with its gene editing microchip, which they claim can create synthetic genes thousands of times faster than traditional methods. This could accelerate the discovery of life-saving drugs, develop new strains of hyperproductive plants to end world hunger, and variety of other revolutionary use cases. This hype caused the share price to Surge to almost $200 in 2021, giving the company an almost $10 billion valuation.

Since then, the stock has fallen by almost 90% costing Arc's investors hundreds of millions of dollars of losses in this video. We'll take a deep dive into Twist Bioscience why investors were so excited about it 2 years ago, and why it share prices performed so disastrously. Since synthetic DNA is nothing new, The first commercial product made with synthetic DNA was an insulin product called Humulin marketed by Eli Lily and gaining FDA approval in 1982. Medical researchers can create artificial strains of DNA which have useful properties in drug development or other fields.

Companies like MC Thermofisher and Agilant have been doing DNA synthesis for decades. Historically DNA Synthesis has been a timeconsuming and expensive process where technicians need to manually Place various liquids and chemicals into test tubes one at a time. Twist created a silicon based chip, which which contains what are kind of like thousands of microscopic test tubes. They claim that this can massively speed up the process, making it far more efficient and cost effective.

In addition to synthesizing DNA they can also do DNA sequencing, which is basically reading DNA They claim that with their chip, they can do genetic sequencing for 50% cheaper and two times faster than traditional methods. With such an impressive technology, it's no wonder why investors were so excited to buy a piece of this company. So how does this translate to a business model? Instead of developing new drugs on their own, Twist sells its DNA synthesis and sequencing services to other companies. A drug company such as Tequita or Regeneron will tell Twist what type of DNA they need and Twist will synthesize it for them.

If you look at their customers, there are a couple that stand out specifically: UNICEF and Netflix are customers of Twist. This is weird. What could they possibly want with synthetic biology? Twist has a third segment which we haven't talked about yet called data Storage. Digital storage takes the form of ones and zeros on a computer's hard drive.

They convert these ones and zeros to nucleotides and write it as a synthetic strand of DNA. The physical DNA can be stored in sequenc at a later date to extract the data, turning it back into ones and zeros that can be read by a computer. Last year, they gave an investor presentation talking about the future growth opportunity. They've been working on data storage since at least 2018 and have thus far not generated significant Revenue, But they expect to be generating billions of dollars from data storage within the next 5 years.

Eventually, they expect this segment to grow to $35 billion of Revenue When I first read this, I Thought this: DNA data storage was storing some type of complex genetic data that couldn't be stored on a traditional computer. Surely, they're not trying to store regular data with DNA but it turns out that's exactly what they're trying to do. They want to store regular data like text files and MP4s with DNA. The whole idea is absurd on its face.

It's an over engineered and overly complex solution for a problem that's already been solved. What possible justification could there be to store data with DNA Because DNA can store data on a molecular level, it can theoretically take up far less physical space than a traditional hard drive. A number of startups have tinkered around with this. In 2019, a Boston based startup called Catalog packed 16 GB of Wikipedia articles into DNA strands.

They could have just bought a $5 flash drive on Amazon to achieve the same result. Once the data is stored in DNA it can take many hours to sequence it and convert it back to computer readable binary code. Imagine waiting several hours to load a Wikipedia page. DNA Data Storage is basically just a science experiment.

There are not yet any real world use cases on any significant scale. So what has Twist been doing with Netflix In UNICEF In 2020, Twist helped Netflix to encode one episode of one of its shows into DNA It was purely a marketing gimmick. The show in question was called Biohackers a science Fiction Thriller about an evil biology. Professor The DNA storage of the first episode was designed to gain media attention for the show.

The show was stored on Netflix's regular data centers. just like all of their other shows. The the DNA storage had no effect on their actual operations. The UNICEF thing was another marketing gimmick.

They encoded the UN convention on the right of children into DNA This is a 21-page text file. Just like with the Netflix Biohackers gimmick. There's no real world utility in doing this. The fact that a publicly traded company would waste money and resources on such a dumb gimmick is already a huge red flag.

But what about the core business of DNA synthesis and sequencing? How is that one doing? Since going public, Twist's Revenue has grown quite nicely, increasing 10-fold from $25 million in fiscal 2018 to $245 million in fiscal 2023 their fiscal year and September 30th. But profitability doesn't look good. Given that their DNA sequencing chip is far faster and cheaper than previous methods, you would expect them to be highly profitable. But even as their revenue grew, their operating lost balloon to over $200 million this year.

So what's going on? Twist Bioscience was founded by Dr Emily Leous in 2013. Before founding Twist, she was a senior employee at Agilant Technologies where she worked for more than a decade. Agilant is a massive medical technology company which also does DNA synthesis and sequencing. It is a competitor to Twist Bioscience.

In 2016, Agilant sued Twist for sealing Trade Secrets. They claimed that while L Pral was working at Agilant, she took DNA sequencing technology and recreated it at Twist, thus violating Adelante's Trade Secrets and agreements she signed as an employee. Twist denied the accusation, but in 2020, they agreed to pay a massive $22.5 million settlement. While they did not admit to any guilt, it's hard to believe that they would have settled for such a large sum if the accusations were completely baseless.

And if Twist's technology is based on Stolen designs from Agilant, can it really be possible that their DNA sequencing chip is so much better than everyone else in the industry, including Agilant? In November of last year, a hedge fund called Scorpion Capital released a short report which attempts to explain what's going on behind the scenes. They claim to have talked to former Twist employees who say the company's DNA sequencing microchip isn't the Panacea that the company claims. Even with the chip, the process is still very labor intensive as many preparations are needed to fill it up with the necessary materials and many things have to be added individually. The chip itself only does one part of the process; other parts still have to be done manually by lab technicians.

Some employees say that using the microchip actually slows down the process compared to doing everything manually. Allegedly, Agilant The Twist Founder's former employer made similar chips many years ago and tried to sell them. They eventually abandoned the project because it was a flop. Twist posted a press release calling the short report inaccurate with many distortions and inaccuracies.

They did not give any specifics about what was inaccurate, although they did Point investors to their inaugural ESG report. The ESG report talks about the company's monthly culture conversations, which explores topics including Lgbtqia plus identity and agism how this is supposed to be relevant to the short report. I'm not sure it's impossible for us to independently ver verify the allegations in the short report, but if we just look at Twist's financial statements, we can see some Oddities As their revenue has grown, their gross profit has also grown. In recent years, they've posted impressive gross margins of around 40% These strong gross margins are consistent with their claims of the DNA sequencing chip being far more efficient than the traditional processes used by their competitors.

Yet, despite the strong growth in Gross margins, their operating losses have ballooned to over $200 million in each of the last 2 years. Since their IPO Twist, spending on research and development as skyrocketed, This has prevented them from achieving an operating profit despite their impressive gross margins. Cost of goods sold, which is used to calculate gross margins represents all expenses incurred to conduct the DNA sequencing and ship the finished product to customers. This includes the technicians who operate the microchip.

Etc Research and Development represents expenses incurred in researching and developing new products. or Technologies We looked at the career section of Twist's website and filtered for research and development. We found this job job posting for a research associate. The listed job responsibilities included supporting day-to-day operations, service, and troubleshooting for manufacturing.

It also included fulfilling orders for custom products that deviate from standard operations workflows. Based on this description, it looks like the research associate helps with the DNA sequencing for complex customer orders that the regular production team can't handle. In which case the research associate is actually a production worker. This possibly indicates that Twist is misclassifying production workers as researchers to shift costs out of cost of goods sold and into research and development.

But why do this? Either way, a cost is a cost and it has no impact on reported operating profit. But such a misclassification if it is indeed happening would help to juice gross margins for Innovative growth. Companies like Twist investors typically don't mind if they're losing money so long as there's a path to profitability. If your gross profit margins are high, the more your Revenue grows, the more gross profit you will generate.

If you grow enough, eventually your gross profit will be enough to cover your fixed cost such as R&D and general administrative costs. If your gross profit margin is very low, the path to profitability becomes much more difficult. That's a potential motivation for misclassifying expenses. If we think about things in this context, we can speculate as to a more Sinister motive for their data storage segment.

We've explained previously why we think this is a horrible idea and is likely a massive waste of money, but maybe this is a useful distraction for investors to explain away their massive reported R&D expenses. There's a chance we miss Staken Twist's DNA sequencing microchip could indeed be revolutionary, and their data storage Venture might emerge as a major success. However, considering the nearly 90% Plunge in the share price from its peak, it appears that few aside from Kathy would maintain their faith in the company. All right guys, that wraps it up for this video.

What do you think about Twist Bioscience? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.