Good day ladies and gentlemen and welcome to the Codexis Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference maybe recorded. I would like to introduce your host for today’s conference, Ms. Jody Cain. Ma’am, please go ahead.

This is Jody Cain with LHA. Thank you for participating in today’s call to discuss Codexis’ 2015 second 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 financial guidance for full year 2015, including total revenues and total gross margin as a percentage of total revenues. The assumptions related to the new Codexis’ CodeEvolver license agreement with Merck, including revenue recognition of $5 million upfront payment and up to $5 million technology transfer milestone payment, we expect the duration of the technology transfer period, the timing of recognizing revenue for the first technology transfer milestone payment and the expectation that Merck will use the platform technology to develop novel enzymes to manufacture its pharmaceutical products. Key assumptions related to the new collaborative research and development agreement with an undisclosed biopharmaceutical company, including Codexis’ ability to develop the novel enzyme for use in the collaborative therapeutic development program and the expected duration of the first and second stages of the development program. Key assumptions relating to the CodeEvolver license agreement with GSK, including the timing of completing Wave 2 technology transfer and the timing of recognizing the associated $6.5 million milestone payment, the company’s plan to drive towards future sustained profitability and the company’s plan to enter into a CodeEvolver technology licensing agreement every one to two years. 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 and quarterly report on Form 10-Q filed with the SEC on May 7, 2015 for some of the important risk factors that could cause actual results to materially differ from the forward-looking statements made on this call. The content of the call contains time-sensitive information that is accurate only as of today, August 11, 2015, 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 today. I’m exceptionally pleased to report on a couple of very recent strategic licensing agreements that further validate the value of the CodeEvolver protein engineering platform technology. Also today, we reported our seventh consecutive quarter of year-over-year growth in our biocatalysts R&D revenues in the second quarter of 2015. This growth is significant as we see our R&D revenue as the key indicator of the strength of our biocatalysts project pipeline enhance our longer-term commercialization prospects. Also in the quarter, we benefited from our continued operational discipline, which drove increased gross margins, reduced operating expenses and led to 37% reduction in operating loss. All of this brings us closer to our primary corporate goal of becoming a profitable company. These last few weeks have been a remarkably positive time for Codexis. We announced a non-exclusive licensing agreement with Merck, our second such agreement with a major pharmaceutical company, and today we announced our first agreement with a major pharmaceutical company. I am also pleased to report that due to our ability to execute on our business strategy with the Merck agreement in particular, we are raising our revenue and gross margin guidance for 2015. Next, let me provide a quick overview of our new agreements. We entered into a non-exclusive licensing agreement with our long-standing customer Merck for our CodeEvolver protein engineering platform technology. This deal comes almost exactly one year after our CodeEvolver licensing agreement with GSK. What Merck will be using is a CodeEvolver platform to develop novel enzymes for use in the manufacturer of its pharmaceutical products. We have received the $5 million upfront payment under this agreement and are eligible to receive up to $13 million in milestone payments related to the transfer of our…

Thanks, John. Total revenues for the second quarter of 2015 were $6 million, concurrent with $6.6 million in the second quarter of 2014. Biocatalyst R&D revenue increased 52% to $2.5 million due mainly to the higher license fee revenues from GSK. However, even without the contribution from GSK, R&D revenue increased 22% versus the prior year period. Biocatalyst product sales were $2 million compared with $2.8 million in the second quarter of 2014, noting that the prior year quarter included a large shipment to a pharmaceutical customer that did not repeat this quarter. Our revenue-sharing arrangement with Exela Pharma Sciences contributed $1.5 million to total revenues. This was a decline from the second quarter of 2014 due to the expiration of the formulation patent for argatroban in June 2014, which allowed for generic competition as we discussed in previous calls. Gross margin as a percentage of total revenues for the second quarter of 2015 was 79%. This is significantly above the 68% gross margin we reported for the same quarter last year and was due to favorable revenue mix. R&D expense decreased by 33% to $5.2 million compared with the year-ago quarter. The decline was due mainly to non-recurring non-cash impairment charges related to the write-down of certain assets and changes in fair value of assets in the second quarter of 2014. SG&A expense decreased 6% to $5.3 million compared with the second quarter of 2014 due mainly to lower legal fees. We reported a net loss for the quarter of $5.4 million or $0.14 per share compared with the net loss of $8.5 million or $0.22 per share for the prior year period. The non-GAAP adjusted net loss for the quarter was $2.7 million or $0.07 per share compared with the non-GAAP adjusted net loss of $2.6 million or…

Thanks, Gordon. We are excited about our CodeEvolver licensing model as we view this as a highly beneficial way for Codexis to drive our business forward. This model allows us to generate larger earlier returns than our traditional approach and deepens and expands our relationships with major customers. It also enables us to accelerate the penetration of biocatalysts across a wider drug manufacturing universe. Our target is to be able to announce a new licensing agreement every one to two years. Our confidence in our CodeEvolver platform has been validated by investments from pharmaceutical giants, Merck and GSK. Before opening the call to questions, I want to emphasize again our efforts to continue to successfully deploy our CodeEvolver protein engineering platform beyond the platform technology licensing model. First, we are applying CodeEvolver across a widening universe of pharmaceuticals to integrate our proprietary biocatalyst into product manufacturing processes to reduced costs. This has been a consistent source of revenue for the company over many years now. In parallel, we are accelerating adoption and penetration of our biocatalysts into adjacent markets including the food industry. This was a major highlight for the company last year and in the first quarter of 2015. We are also enabling and/or accelerating the discovery and development of novel biologic drugs via R&D collaborations. This was a notable business highlight of today. And finally, we are using the same approach that enables to develop novel biologics for customers to develop our own novel therapeutic drug candidates. We continue to hold promise for our knowledge therapeutic enzyme for the potential treatment of phenylketonuria and look forward to providing the company's plans for our proprietary drug development efforts as we close out the year. With these comments, I would like to open up the call to questions. Operator?

Thank you. [Operator Instructions]

While we are waiting for our first question, I would like to give you a schedule of upcoming conferences and we hope to see some of you there. We'll be presenting at three investor conferences in September all in New York City. These are; the Rodman & Renshaw Healthcare Conference being held September 8 through 10, the Craig-Hallum Alpha Select Conference on September 17, and the Ladenburg Thalmann 2015 Healthcare Conference on September 29. We hope to see many of you at one or more of those conferences. Okay, operator, we're ready for the first question.

Thank you. Our first question comes from the line of Matt Tiampo with Craig-Hallum. Your line is open. Please go ahead.

Good afternoon, gentlemen, and congrats on the agreement this morning. I wanted to ask a follow-up on the Merck deal. Merck has been a relatively substantial customer for you over the recent past and I want to get a better sense, can you give us a sense for the split between enzyme sales revenue to Merck, and research and development service revenue over the last couple of years and what the trends are like there? And then in a way, it sounds like to $2 million offset R&D service revenue from Merck, was that all planned to fall in the back half of the year or was maybe some of that is supposed to percolate in Q2 and got pushed as negotiations around this contract and this deal came through?

Okay. Hey, Matt, this is John. Good question. The $2 million offset that Gordon referred to in his prepared remarks were the expected revenues that were baked into prior guidance associated with R&D service revenues with Merck. And that kind of $2 million over two quarters are about $1 million a quarter has been a consistent amount of R&D service revenues that we’ve been having with Merck over the recent past. So any additional revenues that you can see from prior filings for the company were associated with products and predominantly over the recent past, those product revenues were associated with enzymes sales for the manufacturers of Genuvia diabetes drug. And if you went back a few years, we also had significant sales of enzymes and intermediates to Merck for the production of their hepatitis C drugs. As we noted in prior years and prior quarter conference calls, those revenues have fallen off to zero as a result of changes in the hepatitis C drug market. So hopefully that gives you some good feel for the answers to your question.

Yeah, I think that gives us a good sense. Any commentary around the second part about, did you see any push on Q2 from Merck R&D or was it pretty consistent even as negotiations for this contract were coming down to the wire?

I'm not sure what you mean by push. It is consistent, obviously Merck was highly motivated with us to do the CodeEvolver license deal and so somewhere in the beginning of this year, the attention shifted to let’s consummate the deal that we announced last week which of course [indiscernible] have executed.

Great. With respect to this morning's announcement can you comment at all about the current pipeline for similar types of deals? And then maybe give us a sense for what the sales cycle is like, how long negotiations went on to get to this point and who approached who at first? The current pipeline for similar types of deals and then maybe give us a sense for what the sales cycle is like, how long negotiations went onto get to this point and who approached who at first?

Okay, so a couple of questions in there. The sale cycle it sometime because this collaborative agreement is working on the heart and soul of a major biopharmaceutical company’s success which is the development of new novel biologics, so it took some time to work through the structure of the deal, the nature of the work product, the intellectual property element. So it took some time to consummate that deal, certainly multiple quarters. We promoted the idea that our CodeEvolver protein engineering could indeed enable the development and the early development discovery of novel biologics, so we initiated the concept and this particular client was one of the earlier ones to see the applicability of CodeEvolver, but we initiated the idea in the first place and of course, they chose the part of their portfolio where it was most relevant.

Great, and then any comment on pipeline for additional deals in this vein or additional conversations that you’re really having?

We’re still like we’ve highlighted multiple times we see this vector of application of CodeEvolver as being very relevant and we have other discussions that are in place and we’re hopeful that we can announce deals of a similar scope with other clients or maybe follow on projects with this particular client over the coming future. The pace of which is really hard for us to give you a firm prediction at this point.

Great, thanks guys.

Yeah, thanks Matt.

Thank you. And our next question comes from the line of Steve Schwartz with First Analysis. Your line open, please go ahead.

Good afternoon gentlemen. I apologize for any background noise if it’s distributing. But going to the Merck agreement and the revenue guidance, so you clarified one of three line items that Gordon called out a $2 million make up but there was also $1 million and $5 million, and there are $6 million that it sounds like will be recognized in 2015, am I correct in hearing it that way?

That’s the plan, we’re expecting the amortization of the upfront of $5 million to be amortized over 24 months, so we’ll be entitled to $1 million of that by the end of this year and we’re also expecting to achieve the first milestone, the Wave 1 milestone during this year, so we’d be entitled to the $5 million recognition there.

Okay. So you raised your guidance by $2 million, what’s coming up $4 million short from what your prior expectation was?

Well, it’s up $6 million, which is the $1 million plus $5 million, down $2 million for the offset in R&D fees, so you would expect $4 million, we have a couple of R&D projects that slipped from the first half of the year, so they were initiated, they will be initiated or have been initiated in the second half of this year and will slip into 2016. So the net effect of that is about $2 million drop in revenues for this year offsetting the net $4 million increase in Merck [ph] revenues.

Okay. I was a little surprised to hear when you talked about the biocatalyst product revenue having a tough comp because if I look at your quarterly revenue figures through last year, it didn’t appear that the second quarter of ‘14 had a significant bump up.

The second quarter in the prior year had about $800,000. So year-to-date, it was $2.8 million, which is why it makes a tougher comp.

I see, okay.

Q2 only $800,000 present.

Okay, and then, John, if you could just help me get my head straight around this biologics deal. Your legacy business is CodeEvolver engineering enzymes to produce or engineering bugs to produce enzymes, catalyst enzymes, now with this new deal, you’re just engineering the bug that produces the finished product, is that correct?

So what we do Steve is engineer organisms that will produce novel proteins. For our traditional business those novel proteins act as catalyst to reduce the cost of manufacturing especially small molecule drug manufacturing processes in increasingly adjacent markets. Here, when engineering organisms that will produce a protein that will enable the discovery or help in the development of a novel biologic therapeutic drug itself. So it’s a - we’re still doing the same CodeEvolver engineer novel proteins but the application is directed towards how in this new biologic deal helping a company whose job is to develop novel biologics instead of traditional where we help folks create catalysts that will reduce the cost of manufacturing their processes. Hopefully that clarifies the distinction.

Sure, sure. And you mentioned enzyme evolution and if I could call that the Phase 2, I think you said it would be 6 to 12 months. The Phase 1 if I could call it the proof of concept, did you say how long you thought that period might run?

We stated that we believe that it will be completed this year; we expect it to be completed this year.

So, just call six months, and within 2015. Okay, okay, I think that’s it from me for now. Okay, thank you both.

Thanks Steve.

Thank you. And our next question comes from the line of Kevin DeGeeter with Ladenburg. Your line is open, please go ahead.

Hi, congratulations on the announcement today, I mean really a nice transaction, really kind of a first for the Company. John and Gordon, can you just comment sort of longer term beyond kind of Wave 2, assuming your pharma partner does select a program to move forward. How we should think about potential continuing economics both in terms of clinical development and then ultimately always down the line, but commercialization as well?

Yeah. Hey, Kevin. We’re not at liberty to disclose much detail. We are eligible potentially to receive additional back-end economics after the R&D service work in Phase 1 and Phase 2 is completed. But it will depend on the program success and the partner’s election to use the developed enzyme. So there are back-end opportunities and they are predicated on those two points and the details of which will remain confidential between us and our new partner for the time being at least.

Okay. Fair enough. And on a different venue, very nice to see the increased guidance with regard to gross margin. Should we think about the inputs there being primarily related to product mix or a significant portion of the improved gross margin being driven by internal operating efficiencies in addition to product mix?

I think it’s a combination of both, Kevin. I think we’re seeing higher margin business with the milestones and the R&D services revenues that we’re expecting to generate in the second half of the year and at the same time, we’re keeping a tight lid on operating expenses. So the combination of both makes us comfortable with the revised guidance.

Okay. And maybe on a somewhat similar line of thought, have you just changed your general tenure with regard to pricing, particularly on some of these smaller R&D service agreements and how might that contribute and it just seems to me that with kind of now two very substantial R&D collaborations, it would seem to give you a little bit more leverage with some of the smaller contracts and how you think about pricing?

Yeah. Hey, Kevin, I think that’s insightful. We’ve been improving the general pricing of our R&D services over the last few years and I hope that trend will continue. We’re increasingly able to communicate and convince the client to the value we can liberate by generating these novel proteins for their specific applications and as we convince them of that, that gives us some ability to leverage that in to improved R&D service pricing, which we’ve been able to, on average, accomplish through today.

Okay. And then maybe one for me, then I’ll get back in the queue, I appreciate the additional disclosure with regard to the market agreement and particularly the impact on the service R&D line and just so I have this straight, as I think about my own 2016 model, Roche haven’t provided ‘16 guidance, we should think about there being roughly $2 million in the first half of ‘15 in R&D services from Merck that won’t repeat in ‘16 and beyond. Is that correct?

That’s correct, yeah.

Alright. Perfect. Thanks so much guys.

Okay. Thanks, Kevin.

Thank you. [Operator Instructions] Our next question is a follow-up question from the line of Matt Tiampo with Craig-Hallum. Your line is open. Please go ahead.

Hey, guys. In regards to biocatalyst product revenue, maybe you can give us a sense, how much visibility do you have in terms of your customers’ order patterns and what they might be planning to order in terms of volumes on the product revenue line?

Some, we’ve got very good visibility to and I know that in the second half of the year in our guidance, we’ve got some large shipments going out to the food customer and also to Genuvia and there are a number of smaller ones that we’re aware of, so some are based on POs, other based on ordering patterns. Occasionally, we will get a surprise like the shipment for last year, the 2.8 million in the first half did not repeat in this year, but that isn’t the same one that will [ph] happen next year. So generally I would say for most product revenues, we do have pretty good visibility for the bulk of them.

Great. And then secondly on R&D revenue and maybe just what you’re seeing out in the marketplace in terms of demand, it seems like you’re going to have a little bit more capacity, especially as the tech transfer periods with GSK and Merck sort of progress and what’s your confidence that you will be able to refill some of that capacity relatively quickly and redeploy it. I would assume that it’s pretty good, given you’ve got - it looks like an additional avenue for it at the moment, but maybe just any color that you have would be helpful.

Yeah. Hey, Matt, I’m definitely confident that we’ll be able to redirect R&D capacity towards new deals as both of these CodeEvolver licenses with Glaxo and Merck start to fall off at the end of next year, the projected end of next year. First, we’re expecting and hoping for additional CodeEvolver license deals and those could take on some additional capacity. We’re seeing a growth of opportunities to develop novel enzymes in the adjacent markets and we have continued steady growth of application of CodeEvolver in to the pharmaceutical industry. So we’re quite bullish on the application of R&D capacity that develop and generate novel enzymes for specific client needs and also just to make sure it’s clear to everyone on the call, it’s not anything to worry about until the end of next year at the soonest.

Great. Thanks very much guys.

Thank you. And I’m showing no further questions at this time and I’d like to turn the conference back over to management for any further or closing remarks.

Okay. I’d like to close by thanking you for joining us this afternoon. We are excited about the new agreements, our growth prospects and our ability to manage our expenses with the goal of driving Codexis towards sustained profitability. We look forward to providing a progress report on our next quarterly conference call. Everyone, have a great evening. Thanks.