Codexis, Inc. (CDXS) Q1 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Codexis, Inc. Q1 2015 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Jody Cain. Ma’am, you may begin.

This is Jody Cain with LHA. Thank you for participating in today’s call to discuss Codexis’ 2015 first quarter financial results and business progress. Joining me from Codexis are John Nicols, President and Chief Executive Officer, and Gordon Sangster, the company’s Chief Financial Officer. During today’s call management will make a number of forward looking statements. These forward looking statements include the company’s forecast for full year 2015 financial metrics, including total revenues and total gross margin as a percentage of total revenues, the timing of completing the Wave 2 tech transfer with GSK and of recognizing revenues from the Wave 2 GSK milestone, the company expectation of driving towards future sustained profitability, the company’s plan to pursue additional CodeEvolver technology licensing agreement, the ability of the CodeEvolver technology to develop new drug candidates, and the company’s plans to continue preclinical studies in 2015 for the PKU enzyme therapeutic program. These forward looking statements are based on assumptions and are subject to risks and uncertainties that can cause actual results to differ significantly from those projected during the call. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Please refer to company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2015 for some of the important risk factors that can cause actual results to differ materially from the forward-looking statements made on this call. The content of this call contains time-sensitive information that is accurate only as of today, May 7, 2015 and except as required by law, Codexis disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Now, I’d like to turn the call over to John Nicols. John?

Thanks, Jody. Good afternoon everyone and thank you for joining us. I’m pleased to report that our first quarter 2015 results show steady progress in support of our drive towards sustained profitability and combined with our view of prospects for the rest of the year reinforce our confidence in achieving our financial guidance targets for 2015. Let me start with financial highlights. Revenues for both our core biocatalyst product and our biocatalyst R&D businesses grew over the prior year, albeit modestly. This is the sixth consecutive quarter of year over year growth in biocatalyst R&D revenues which is noteworthy as we view this business is a key indicator of our longer term commercialization prospects. Revenue from the revenue-sharing partnership declined, which we anticipated, due to the expiration of the formulation patent for argatroban in June of last year. Importantly, we continue to expect revenue growth for the full year of 10% to 19% compared with 2014. Also, during the first quarter, we saw a significant improvement in gross margin, driven by stronger product margin mix and we reduced operating expenses compared with the prior year through our focus on cost management and efficiencies. Gordon will provide more details on financial results in a few minutes. Moving on to some recent operational highlights, let me start with our non-exclusive worldwide licensing agreement with GSK which is our first licensing agreement for the CodeEvolver protein engineering platform technology in the healthcare field. I’m pleased to report that we are performing well on the Wave 2 tech transfer activities. The CodeEvolver lab at the GSK facility in Pennsylvania is now up and running and is being operated by the GSK personnel we trained. Additionally, we recently started the second biocatalyst collaborative development project. While the first collaborative project under the GSK CodeEvolver license involves reducing the cost of the manufacturing of a commercial drug, the second project is working on a development stage drug program. Given our performance to date, we’re on track to complete Wave 2 activities and recognize the associated $6.5 million milestone payment in the second half of this year. We believe that our new CodeEvolver licensing model is proving to be a highly beneficial wave for Codexis to drive our business forward. Not only does it allow us to generate larger earlier returns than our traditional approach, but it also deepens and expands our relationships with major customers as well as enables accelerating the penetration of biocatalysts across a wider drug manufacturing universe. Our continued success in delivering the license on time to GSK should further support our efforts to pursue similar relationships with other large pharmaceutical customers. On last quarter’s call, we’ve reported completing two of the three biocatalyst orders with two pharma customers that we announced in the latter part of 2014. These orders are for drugs that are currently in clinical trials. I’m pleased to report that we have now completed all three orders. In addition, this quarter, we supplied another material biocatalyst order for clinical trials. This order was with yet another major pharmaceutical client and was for follow-on materials needed as the client’s drug advanced to a later clinical phase. We are encouraged that our proprietary biocatalyst for each of these drug processes could lead to larger and recurring enzyme sales should the drugs make it successfully through human trials. Shifting to the food industry, I’m pleased to report that we delivered our second shipment of enzyme to our leading food ingredient client for their continued test marketing. This nearly $800,000 follow on enzyme order encourages us that the client’s test marketing is proceeding well and increases the probability that we may soon commercialize this product into substantial and sustained enzyme business going forward. I’d like to highlight that the many customer developments we are discussing today reflect the growing quality and variety of our sales revenue. R&D service revenues are growing. These create tomorrow’s product sales opportunities. Our products under development are advancing towards commercialization. And we’re collaborating with an increasing number of clients. In this year’s first quarter, we recorded product sales of at least $200,000 each with five clients. In the same period last year, we had only two clients with product sales of at least $200,000. We see this as clear evidence of the momentum that is building for our core biocatalyst business. Finally, let me update you on Codexis’ own drug development candidate, an oral dosage enzyme therapeutic for the rare disease Phenylketonuria or PKU. The program is well on track. We continue to work on advancing preclinical studies to validate the efficacy of our proprietary candidate. We’re progressing discussions to find an attractive partnership deal to sustain the program’s advancement. We look forward to providing continuing update on this exciting prospect as we move through the rest of this year. With that, I’d like to turn the call over to Gordon to review our financial results. Gordon?

Thanks, John, and thanks for joining us on the call today. Total revenues for the first quarter of 2015 were $6.8 million. Biocatalyst product sales increased 3% to $3.1 million and included a second shipment of enzyme to a major food ingredient customer, as John just mentioned, as well as higher sales to a variety of pharmaceutical customers. This effectively matched sales of $2 million to a major pharmaceutical customer in the year ago quarter. Biocatalyst R&D revenue increased 2% to $2.2 million. Revenue from the revenue-sharing arrangement with Exela Pharma Sciences was $1.5 million. The revenue decline from the prior year was anticipated due to the expiration of the formulation patent for argatroban in June 2014, allowing for generic competition in the subsequent quarters. Gross margin as a percentage of total revenues for the first quarter of 2015 increased to 79%. This is sharply higher than the 64% we reported a year ago and was above our 2015 outlook of 70% to 75%. As John mentioned, higher-margin is mainly a function of the revenue mix. Total operating expenses, excluding the gain on the sale of our Budapest subsidiary in 2014, decreased by over $800,000 or 7% compared to the year ago quarter as we controlled spending to match the revenue line. R&D expenses for the first quarter were $5.3 million. This was higher than the prior year that included the gain of $760,000 from the sales of our former Hungarian subsidiary. Excluding this non-recurring item, R&D expenses for the first quarter of 2015 decreased by $300,000 or 6%. SG&A expenses decreased by 9% year over year to $5.6 million, due primarily to reductions in legal expenses and headcount. We reported a net loss for the quarter of $5.6 million, or $0.14 per share. Non-GAAP adjusted net loss was $2.9 million, or $0.07 per share, an improvement over a non-GAAP net loss of $4 million, or $0.11 per share for the first quarter of 2014. Cash and cash equivalents as of March 31, 2015 were $22.2 million, compared with $26.5 million as of December 31, 2014. Turning to our outlook, we are affirming or 2015 financial guidance as announced on our fourth quarter conference call. We expect total revenues of $39 million to $42 million, representing growth of 10% to 19% over 2014. We expect revenues to fluctuate on a quarterly basis given the project nature of our business, the timing of customer production runs and clinical trials, and the timing of milestone payments and royalties. We have greater visibility over the span of the year and our revenue growth outlook for 2015 is based on our estimates on our customers’ forecasts. We expect stronger growth in the second half of 2015 compared with the first half. This revenue guidance also assumes recognizing $6.5 million milestone payment related to our licensing agreement with GSK, which we expect to earn in the second half of 2015. And we expect 2015 gross margin as a percent of total revenues to be in the range of 70% to 75%. I’d now like to turn the call back to John.

Thanks, Gordon. We’re executing on our multi-part business strategy that includes the following. One, licensing the CodeEvolver platform technology to pharmaceutical partners for their own in-house protein engineering; two, continuing to pursue and develop opportunities with pharmaceutical customers to integrate our proprietary biocatalysts into their manufacturing processes to reduced costs; three, accelerating adoption and penetration of our biocatalysts into adjacent markets, including the food industry; four, leveraging our CodeEvolver protein engineering strength to generate R&D service and licensing agreements whereby we enable and accelerate the discovery of our pharmaceutical partners novel biologic developments; and finally, five, using that same approach to develop our own novel therapeutic drug candidates. We plan to execute on this strategy while remaining financially disciplined with the goal of driving Codexis to sustained profitability and growing profits from there. Before closing, on behalf of Codexis, I’d like to welcome our new shareholder, Vivo Capital, which has taken a substantial stake in our company previously held by Raizen, the Shell joint venture in Brazil. We’re pleased to welcome an investor with so much experience in the life science and healthcare field. In closing, we’re optimistic about our future. We see a growing recognition among customers of our value proposition for designing novel biocatalysts that reduce production costs. Simultaneously, we’re becoming increasingly efficient at minimizing the expense and time to deliver these projects. Our CodeEvolver platform technology is the key, providing us with the distinct advantages of engineering novel proteins faster and better than most others. With these comments, I’d like to open up the call for questions. Operator?

[Operator Instructions]

While we’re waiting for the first question, I’d like to mention that we will at two upcoming investor conferences. First, Gordon will be presenting at the B. Riley Investor Conference next week on May 12 at 8:30 a.m. in Los Angeles and Gordon and I will be attending the Craig-Hallum Institutional Investor Conference on May 27 in Minneapolis. A webcast of the B. Riley Conference presentation will be available on the Investors section of our website at wwwcodexis.com. Okay, operator, we’re ready for the first question.

And our first question comes from Matt Tiampo from Craig-Hallum Capital.

Just a couple of quick ones from me. I wanted to start off, if I remember correctly, you spent not very much money to date on the development of your PKU asset. And I know that at least a decent portion of the exorbitant cost that we hear about for drug development in general is preclinical. I was just wondering if you had a sense or if you could give a sense for how that compares to what you’ve spent, so how your spend compares to what one of your competitors might spend for a similar stage asset?

You’re right, so far to date, Codexis has only invested a modest amount of money to create our PKU oral enzyme therapeutic candidate. And as we have moved into 2015, we’ve done an increasing amount of work with third parties to do more trials in animals. So the amount of money that we’re spending on third party has increased a bit, but as you can see it’s covered inside of our total operating expenses which decline versus the prior year nonetheless. It’s hard for us to comment on how our costs of developing this project at this stage compared to the others. We just know we’re being very efficient with our spending to build up data that proves the efficacy of our candidate.

Do you have an update or do you know when we might see additional data for that asset either clinical data or news on the licensing front?

I think we’re really primarily focused on partner discussions. I don’t believe we will provide a lot of detail to the general market on how our product is developing, we’re more inclined to share that data under confidentiality with our chosen partner candidates, of which we’re encouraged on the number who are in principle interested in this asset.

And then I guess just two from me really quick and I’ll hop off. First one is I think the original development of the PKU asset was with idle R&D time, have you had a lot of idle R&D to put towards another assets and is that something that you’re pursuing at this point? And then the second is product gross margin seem to be meaningfully better than maybe we would have expected. Can you give us any additional color as to what causes that and if it’s at sustainable level going forward?

I’ll take the first part of question and then Gordon can respond to the second part, Matt. On the first part, yes, we had some idle R&D time as we developed, did the enzyme evolution for our PKU drug candidate over the last 18 to 24 months. And so those costs were effectively sunk during that period of time. And we generally operate at a very high R&D project capacity utilization and we currently are. So the amount of idle R&D time is modest at most over the recent past and for the near future. And just to address another element of your question, we’re currently doing very limited amount of work on advancing other drug candidates. We’re really focused on, our spending is focused on generating proof of concept data for the PKU drug as a priority over advancing other potential candidates that we could imagine investing in as additional enzyme therapeutic candidates.

I’ll take the second question, Matt, about the difference in margin improvement. The real reason for that is the $2 million shipment that we had last year to a large pharmaceutical customer with lower margin product, whereas we replaced that effectively in the first quarter, at least, with a series of additional revenues to a variety of pharmaceutical customers that were of higher margin. So basically that’s the difference in the margin for this quarter.

[Operator Instructions] And our next question comes from Steve Schwartz from First Analysis.

John, thanks for giving the color around some of the larger customers. And if you could, I’d like to ask if you could just provide a little more. So when you stated you have five this quarter over $200,000 each versus two last year, are the two last year in the five this year?

And the answer is one of them, but not the other one.

So there is some turnover in customer that could be big or not, it’s not big?

The other customer did not repeat this quarter versus the same quarter last year, it’s a steady business to that client. And it’s just a matter of the timing of our product being delivered for campaigns for that company to make their product. So it’s not that it fell off, it just didn’t come into this period and it just highlights and shows just the general lumpiness that some of our commercial product business can result in.

Are all five of those customers pharma customers or the food customers in there as well?

One out of the five is the good ingredient customer that we’re highlighted in the call.

And of the four that are in pharma, is what you’re selling them for commercialized product approved product or are those products for trial drugs?

It’s a mix of both, service revenues to some of those clients, commercial product revenues to some of those clients and clinical orders, enzyme orders for clinical trials which was also highlighted. So it’s a mix of all three, Steve.

And then if I could ask about the Wave 2 payment, the $6.5 million, will you recognize all of that or will any part of it be amortized?

We will recognize all of that once we’ve completed Wave 2, Steve.

The initial upfront, we’re amortizing over three years, which is the maximum it could take, but the milestone for tech 2 transfer, we would recognize all at once.

What moves the amortization on that first payment, so what you just said, Gordon, caught my ear that it could take up to three years, is there a situation where all of a sudden you would just recognize it immediately?

I guess if all of the activities were completed prior to the end of the three years, then we could. But conservatively from an accounting point of view, we recognize that $6 million over three years which is about $0.5 million a quarter.

And our next question comes from August Fern from August Fern Consulting.

In the last call, you guys talked about a second food customer, today you’re just talking about one food customer. Are you working with the other customer still? Is that second project still going? Are you looking at multiple customers or are you really just focusing on one at this point?

We certainly highlighted the progress with our lead customer, but we’re working widely in other adjacent markets and we continue to have good prospects in the food industry beyond this lead project.

Are those still in the prospect phase and not in the customer phase?

Yes, and there is also customer stage for one of our projects as well.

And I’m showing no further questions at this time. I’d now like to turn the conference back over to John Nicols for any closing remarks.

Okay. I’d like to thank you, in closing again, for joining us this afternoon. We’re excited about our growth prospects and our ability to manage corporate expenses with the goal of driving Codexis towards sustained profitability. We look forward to providing a progress report on our next quarterly conference call. Have a great day.