Ladies and gentlemen, thank you for standing by. Welcome to the Codexis’ 2015 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks; we will hold a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today November 4, 2015. I’d now like to turn the call over to Mr. Bruce Voss of LHA. Please go ahead sir.

This is Bruce Voss with LHA. Thank you all for participating in today’s call to discuss Codexis’ 2015 third 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 be making a number of forward-looking statements. These forward-looking statements include financial guidance for full year 2015, including total revenues and gross margin as a percentage of total revenues, key assumptions relating to the company’s August 2015 CodeEvolver license agreement with Merck, including the timing of recognizing revenue for the second technology transfer milestone payment, the expectation that Merck will use the platform technology to develop novel enzymes to manufacture its pharmaceutical products, and the potential for Codexis’ to receive additional payments under the Merck agreement based on Merck’s use of the CodeEvolver technology to manufacture commercial APIs. Key assumptions relating to the company’s 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. Key assumptions relating to the company’s July 2014 CodeEvolver license agreement with GSK, including the timing of completing Wave 3 tech transfer, the timing of receiving the associated $7.5 million milestone payment, and the potential for Codexis’ to receive additional contingent milestone payments and royalties under the GSK agreements. The company’s ability to deliver an enzyme order to one of its food industry customers in the fourth quarter of 2015, its expectation that the fourth of 2015 will have the highest product revenue for any quarter in 2015, its plan to continue to develop its novel or enzyme therapeutic product candidate for the treatment of PKU, its ability to control R&D and G&A expenses in 2015, its ability to reduce…

Thanks, Bruce. Good afternoon everyone and thank you for joining us. I’m pleased to start by highlight the strong financial and operational performance of Codexis in the third quarter of 2015. Net income reached $5.4 million on revenues that exceeded $17 million, which included the recognition of $11.5 million in milestone revenues. We previously stated that achieving CodeEvolver technology transfer milestones would be a key in increasing revenues in the second half of 2015, and we are delivering on that promise. As a result of our strong performance, we are increasing our outlook for gross margin for the second time this year. We now expect 2015 gross margin as a percent of total revenues to be between 80% and 85%. We raised our 2015 outlook for revenue in August to between $41 million to $44 million, and today we are affirming that expectation. It’s highly gratifying to achieve two milestones during the third quarter from our non-exclusive CodeEvolver technology platform licensing agreements. With GSK, we’ve recognized a $6.5 million payment by successfully completing Wave 2 of our technology transfer. We announced our CodeEvolver licensing agreement with GSK in July 2014 to develop novel enzymes for use in the manufacture of its pharmaceutical and healthcare products. At that time, we received an upfront payment of $6 million. We then earned our first milestone payment of $5 million in the fourth quarter of last year for the successful completion of Wave 1 of the technology transfer. We expect to receive an additional $7.5 million payment from GSK in 2016 with the expected completion of the third and final wave of the technology transfer process with GSK. As a reminder and recalling that there are limitations on the number of projects where back-end payments will apply, we have the potential to receive additional…

Thanks, John. Total revenues for the third quarter of 2015 were $17.4 million, compared with $7.5 million in the third quarter of 2014. Biocatalyst R&D revenue increased 332% to $14.5 million, due mainly to the recognition of $11.5 million in milestone revenues from GSK and Merck that John mentioned earlier. Biocatalyst product sales were $1.8 million compared with $2.6 million in the prior year due to the timing of customer demands. Our revenue-sharing arrangement with Exela PharmSci contributed $1.1 million down from $1.5 million for the prior year, due to increased generic competition. Gross margin as a percentage of total revenues for the third quarter of 2015 was 93% and was favorably impacted by the recognition of $11.5 million of milestone revenues from GSK and Merck. R&D expenses remain relatively unchanged to $5 million compared with the year-ago quarter and SG&A expense increased 5% to $5.4 million compared with the third quarter of 2014, due to higher employee related costs partially offset by lower legal fees. We reported net income for the quarter of $5.4 million, or $0.13 per diluted share, compared with a net loss of $4.6 million, or $0.12 per share, in the prior year period. The non-GAAP adjusted net income for the quarter was $8 million, or $0.19 per diluted share, compared with a non-GAAP adjusted net loss of $1.9 million, or $0.05 per share, for the third quarter of 2014. Turning to our year-to-date financial results. Total revenues for the first nine months of 2015 were $30.2 million, up 43% from the first nine months of 2014. Revenues for the 2015 period included $6.9 million in biocatalyst product sales, $19.2 million in biocatalyst R&D revenues, and $4.1 million from the revenue sharing arrangement with Exela. Our gross margin improved considerably to 87% for the first nine…

Thanks, Gordon. We have been performing very well and we expect a strong selling from our traditional businesses during the fourth quarter. We are integrating CodeEvolver protein engineering technology into more pharmaceutical applications to improve manufacturing processes. We continue to reduce the time and resources for producing commercial enzymes for this core business that consistently contributes to our revenue growth. We are executing well on our CodeEvolver technology platform licensing agreements, having achieved two significant milestones in the third quarter and expect to reach two more in the 2016. We are accelerating adoption and penetration of our biocatalyst into adjacent markets most notably the food industry. We are enabling and/or accelerating development of novel biologic drugs by our R&D collaborations. And finally, we are continuing the development of our own novel biologic drug candidate designed from our CodeEvolver protein engineering platform technology. We are proud of the financial and operational results, we have achieved with this unique recipe and are confident in our ability to continue to grow and move toward sustained profitability, as we close 2015 and move into 2016. With these comments, I would like to open up the call to questions. Operator?

[Operator Instructions]

While we are waiting for our first question, I would like to mention that we’ll be presenting at the LD Micro main event conference being held in Los Angeles on December 2 and 3. We hope to see you there. We will post the webcast of that presentation to our website, for those of you unable to attend. Okay, operator, we’re ready for the first question.

Our first question comes from Kevin DeGeeter from Ladenburg. Your line is open.

Hi, this is actually James Colby on line for Kevin, how are you?

Hi, Jay, doing good, how are you?

Great. So, as I’m sure the Merck recently completed a positive Phase 3 study of long-acting DPP-4 inhibitor which was non-inferior to Januvia. Can you comment on the potential impact as might have on Januvia economics of the drug is approved and how you position Codexis the life cycle management and in terms of being involved in next generation product.

Hey, this is John. A good question our sales of enzymes to Merck’s production of Januvia are an important part of our revenue, but it’s a minor part of our revenue but in the 2015 mix of revenues. We are involved in supplying the enzymes to Januvia we are not involved in the manufacture of all Januvia production and we do not see a significant potential near-term effect even if a new drug like, when you referenced where to be approved. So we are not expecting to be impacted any appreciable extent in any near-term horizon Jay.

Okay, thank you. And then does Codexis have any contracts, if the second drug is approved?

We are not at liberty to speak to other projects that we working on with Merck at this point.

Sure. And then related to Merck again with their licensing agreement, was the transition of the research and development services that you provided to Merck. Was that completed in Q3?

We completed all the milestones for all the tasks of the first milestone, but there’s still second milestone of $8 million. But we expect to be able to achieve during 2016, Jay.

Sure. I guess that was referring to the actual service that Codexis has used to provide two month prior to the agreement. I was wondering if there was any of that revenues in Q3 2015 related to the transition?

Yes, that there was one month roughly of those service revenues, but when the deal we signed early August then that was folded into the technology transfer.

Okay, great. Thank you. And then I still have a couple of financial questions. For [indiscernible] is 3Q 2015, and how you see run rate going forward? Or is there one-time items for everything the decline was so sharp?

No, I think we probably forecast that – flat going forward with 3Q and there is a chance to come back during next year, but forecast is probably 3Q for the moment.

Okay, great. And then lastly looking at your guidance that implies $11 million or $14 million in revenue in 4Q?

Yes.

What’s driving this assumption? I know you mentioned $1.03 million contracts with food customer. What else is driving given you guys the confidence?

We have all of them, the food industry customer we’ve got shipments timed. We expect product shipments to be roughly double what they were in Q2 or Q3. So we’re much higher on the product revenue side of things. We’ve got some projects for R&D that we’ll be able to recognize revenues for in the fourth quarter, and then we’ve got a brighter kind of milestones and royalties coming through in the fourth quarter. So we’re looking for exactly that range kind of $11 million to $14 million.

Okay, great. Thank you.

Yes.

Thanks, James.

Our next question comes from Steve Schwartz from First Analysis. Your line is open.

Hi, good afternoon, gentlemen.

Hey, Steve.

Hi.

Let me start with the press release and biocatalyst product sales. The $1.8 million you referenced, that sum is due to timing and customer demands.

Yes.

Should we presume that’s getting pushed to the fourth quarter or into 2016? And how much are we talking about here?

Fourth quarter, certainly, as we just said is roughly double what we had for Q3. Part of it is in the prior year. We had shipments of about $800,000, the food customer. So that didn’t repeat. We did have an order for them in Q1. We’re expecting a bigger order to go out in Q4, so simply that lumpiness in terms of customer demand for product.

Okay, all right, thanks Gordon. And then John, in your prepared remarks, you talked about the enzyme being delivered to the biologic customer. And please remind us again now that since you’ve exceeded expectations on that first step, they have okayed you for second step work. What does that mean in terms of revenue?

We haven’t disclosed the kind of billables that we’re charging out to this particular project. It’s one of our projects. It’s not particularly large or small relative to typical projects. So products are all the general guidance on the revenue, but we would have expected – frankly, we would have expected more time on the client side to assess whether to move forward, but given how well the first stage of the project went. And obviously, we instigated continuation of the project that was really delightful to see them make a rapid decision, so to say, let’s keep proceeding. And so, we’ve already started the second stage...

Okay, yes, that’s certainly good news. So thank you for that.

Yes.

Okay. And then if I could, I’m going to look pretty far out here and maybe you guys don’t even have an answer for this just yet, certainly we will talk about it in the next quarter call. But for now you’re locking down a lot of milestone payments here in 2015. It looks like you’ll probably get a nice chunk of milestones in 2016. If we’re having, me and my peers already started. Within a few months, we’re going to start talking about 2017 revenue. And I don’t see any milestone payments in 2017 yet, which would suggest – we’re going to start talking about a drop-off in revenue in just a few months. Is there something you can talk to at this point that might encourage us to maybe think about 2017 revenue at least being in line with 2016 or even in the trend of 2014 to 2015 to 2016?

Sure, let me attack that by breaking down the business and the revenues into two categories. So first on the traditional business for developing novel enzymes commercializing them, selling the enzymes on a routine basis. That business area we expect to continue to generate year-on-year growth of a double-digit nature, and we look forward to providing sharper guidance for 2016 versus 2015 in early March of next year. So that’s going to generate a nice growth of revenues year-on-year. The other key element is your referencing milestones just for the two already announced CodeEvolver licensing deals. And we’ve been consistently upholding a qualitative guidance that we will – we expect that we’ll be able to do another licensing deal once every year or two. So our first deal was announced in July of 2014 with Glaxo, 13 months later, we announced our second deal with Merck we are obviously in discussions with other companies, as we speak. We’re happy with how those discussions are transpiring. We’ve upheld that qualitative guidance that we would expect to develop another CodeEvolver license transaction once every year or two. So if we do just do the simple math from once every year or two from the announcement of the Merck deal in August of 2015, that would put us to the very earliest expectation would be in the second half of next year. But it does reaffirm our confidence that by the time 2017 is done, we would have made another transaction. And our batting average is exceptional on that so far now. So that of course is an expectation that we continue to layer these kinds of deals on top of each other. Steve.

Got it. Okay. Alright, well, thank you for that John.

You’re welcome. Thanks Steve.

[Operator Instructions] Our next question comes from Matt Tiampo from Craig Investment. Your line is open.

Hi guys. It’s Matt Tiampo from Craig-Hallum. And good afternoon and congratulations on a nice looking quarter. I want to take just, maybe a little bit more big picture for a second, refer to a kind of buzz and sort of medium mail storm around pricing, specifically drug pricing. And it’s become sort of a focal point here recently. I was wondering if that’s driven any incremental uptick in interest for you guys, if it’s been a selling point, my gut would say that it’s got to be a tailwind for you, but I’d love to hear your thoughts and what you’ve heard from your customers?

Honestly Matt, I think we’re pretty removed from any near-term impacts associated with those big gross pharma industry trends like pharma pricing. So I don’t think it’s a significant factor in where we are and where we expect to be in any reasonable foreseeable time horizon.

At the same time it could good drive interest in more CodeEvolver deals if you’re looking for the cost of manufacturing?

That is the point, yes.

Yes. Okay, great. I wanted to maybe drill down a little bit on the biopharmaceutical deal, so – and just confirm that. Now that you’ve completed the first wave, which I think was originally built at six months and it seems like that’s done in three. Would you expect to be generating sort of R&D revenue consistently from here on out as you move through the second phase of that deal?

Yes, we’re going to be generating basically, monthly project fees associated with that program during the entire second stage of the program for however long that will last. And now just to clarify, it took a little longer than three months. We started the project in June and we finished Phase I in the early part of the fourth quarter.

Great. And then, sorry, last one from me and then I’ll hop back in the queue, but in terms of some of the back-end economics on the Merck and GSK deals as we look out. When do you think the earliest you would start to see some of those milestones or volume payments being to percolate from those platform deals?

It’s an important question. Of course, we’re intimate with the programs that are being worked on by our two CodeEvolver licenses. We’ll be giving sharper guidance for 2016, but I don’t expect any remarkable revenues to come out of the back-end of either of the license fields in 2016. So, I would say your expectation that the earliest we could see some of those type of back-end payments would be in 2016 – sorry, 2017 plus.

Great, thanks guys.

You bet. Thanks, Matt.

At this time, I’m showing no further questions. I would like to turn the call back over to Mr. John Nicols for closing remarks.

Okay. I’d like to thank – close by thanking you for joining us this afternoon. We’re very excited about 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. Have a great evening.