Biotech investors have no shortage of troubles at the moment. They may soon need to add a soaring U.S. dollar to the list.
Twist Bioscience (TWST), 10x Genomics (TXG), and others that serve as the engine for the biotech and synthetic biology sectors generate only about half to two-thirds of their revenue from customers in the United States. That exposes the rest of a company's sales to currency fluctuations, which have been historically brutal in 2022. Worse, the gap between the greenback and almost every global currency has widened throughout the year with no signs of slowing.
That means investors may need to brace for disappointing operating results for the quarter ended September 2022 and downbeat full-year 2023 revenue guidance from a number of otherwise strong businesses.
Why is the Dollar Strengthening?
The U.S. dollar has become more valuable since the Federal Reserve embarked on its aggressive (but necessary) path to raise interest rates in a bid to stamp out inflation. Not all central banks around the globe can raise rates at the same pace or by the same magnitude, which has created a widening gap between U.S. treasuries and bonds issued by other countries. As a result, the United States has witnessed an influx of international funds chasing higher yields and relative geopolitical stability. That pushes up the value of the U.S. dollar and pushes down the value of international currencies.
It may seem improbable that the United States, which created trillions of dollars of new money supply in recent years and continues to cough up massive deficits, would have the strongest global currency. But stability is one of the most important attributes in investing – and the nation has plenty of that to offer. Recession or not, it's one of the least bad options globally.
A strong greenback presents both challenges and opportunities for American companies. It makes imports easier, as U.S. dollars can purchase more goods and services. It also makes exports more difficult, as international buyers will find American goods and services more expensive when using their local currencies. These can be a blessing and a curse for emerging markets.
That means companies with international footprints will absorb both the positive and negative consequences. However, it could take a disproportional bite out of the growth trajectory of smaller, unprofitable technology companies that typically don't hedge currency risks. That could be a problem considering a hefty portion of their valuations comes from pricing in future growth.
How to Tell What Biotechs are Most Exposed?
10x Genomics sells lab instruments for single-cell analysis experiments, which are becoming increasingly necessary for biological R&D. The company has delivered reliable, albeit unsteady, growth over the years. Total revenue swelled from only $71 million in 2017 to $490 million in 2021. Importantly, the business achieves one of the highest gross margins in the lab hardware category and was nearing a positive operating margin. That's something few peers ever achieve.
The growth stalwart originally expected full-year 2022 revenue of $615 million at the midpoint, which would've represented year-over-year growth of about 25%. But international sales were unusually slow in the first half of the year, forcing management to significantly lower expectations. 10x Genomics now expects full-year 2022 revenue of $510 million at the midpoint, which represents growth of just 4% compared to last year.
A deeper dive into the numbers reveals that currency headwinds are playing a role. According to SEC filings, the business reported an 11% drop in first-half revenue from customers in China and Europe compared to the year-ago period. That's unusual for a fast-growing business. It's painful considering these customers represented 37% of total revenue in 2021.
Despite the sharp reduction in full-year 2022 revenue guidance announced this summer, worsening currency headwinds in the months since suggest another downward revision could be on the horizon.
- 10x Genomics generated 53% of revenue from the United States in 2021. China and Europe represented another 15% and 22%, respectively. These regions were responsible for 55%, 13%, and 20% of respective revenue in the first half of 2022.
Twist Bioscience designs synthetic DNA for various applications spanning drug development, diagnostics, and organism engineering. It's become a trendy and popular growth stock, but one that legitimately earns that title.
Whereas investors typically expect software businesses to increase gross margin as they scale revenue, that doesn't always happen when physical goods are involved. Twist Bioscience is one of the few exceptions among small-cap growth stocks in biotech or synthetic biology.
The DNA synthesis leader tends to underpromise and overdeliver, which has helped it to continuously raise fiscal full-year 2022 revenue guidance with each passing quarter. However, investors may feel a little uneasy knowing the revenue footprint has expanded globally over the years. The business generated 68% of revenue from the Americas in fiscal 2019, which slipped to 59% in fiscal 2021.
The company's fiscal year ends in September, which means the next quarterly report will wrap up fiscal 2022. It also means investors will soon receive fiscal full-year 2023 revenue guidance. Twist Bioscience has a healthy long-term growth runway, but currency headwinds and lower valuation multiples assigned to growth stocks could lead to some near-term disappointment and pain ahead.
- Twist Bioscience generated 59% of revenue from the United States in fiscal 2021. Asia Pacific and Europe represented another 8% and 33%, respectively. These regions were responsible for 62%, 9%, and 29% of respective revenue in the first six months of calendar 2022.
Be Mindful of Risks and Think Long-Term
Geographic revenue mix can be found in SEC filings for most companies. Investors can use the examples above to scour the financials of the stocks they own, biotech and otherwise. As the stock market correction has shown, it's important to be mindful of risks. That includes valuation risks, regulatory risks, development risks, commercial risks, and now currency risks.
It's possible 10x Genomics and Twist Bioscience can outgrow currency headwinds, but it seems unlikely to me that they'll escape entirely unscathed. Investors have already borne the brunt of that risk for 10x Genomics, although shares could tumble lower if full-year 2023 revenue projections take a hit.
Meanwhile, few investors or analysts seem to acknowledge that Twist Bioscience has a sizable valuation risk baked into the stock price, especially if growth starts to wobble. Shares could fall almost in half from current levels depending on fiscal full-year 2023 revenue guidance.
