Good day, ladies and gentlemen, and welcome to the Second Quarter Codexis' Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's Codexis' call to discuss 2017 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 this call, management will be making a number of forward-looking statements within the meaning of private securities litigation reform act of 1995. To the extent the statements made by management are not descriptions of historical facts regarding Codexis. The forward-looking statements reflect current beliefs and expectations of management as of August 9, 2017. You should not place undue reliance on these forward looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could materially affect actual results. For details about these risks, please see the SEC the earnings release that accompanies this call and the Company's SEC filings. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. 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 excited to provide highlights from another quarter of solid financial performance plus share commentary on the excellent progress we're making across the Board in 2017 so far. As in the first quarter, accelerating product sales growth continued to be a center piece of our progress in the second quarter. Our product sales more than doubled over the prior year quarter to $6.6 million and year-to-date we are 74% ahead of last year, and the outlook for the second half of 2017 looked even stronger as we expect product sales to exceed those of the first half. Accordingly, we’re raising our product sales guidance for 2017 by $4 million to between $25 million and $27 million. It's terrific to see the acceleration of product revenues unfold in 2017. Our new guidance range for product sales reflects step up growth of 63% to 76% over those generated in 2016. Product gross margins for the quarter also continued to be strong at 43%. This is the second consecutive quarter in which gross margins on product sales exceeded 42% well ahead of the 36% we delivered in 2016 and warranting a 2017 guidance increase on this key financial metric as well. Already just at the half way point of 2017, we have nearly matched all of the product gross profit dollars we earned in 2016, $5.4 million in the first half of this year versus $5.6 million for all of last year. In addition to accelerating growth at higher margins, our product sales continued to diversify across a growing set of customers in the second quarter. Sales of to protein catalyst to Merck plus Tate & Lyle led the way, each generating more than $1 million. In addition, a diverse set of…

Thanks, John. I will share some highlights of our financial results starting with the second quarter. Total revenues for the second quarter of 2017 were $10.3 million this compares to $60 million for the second quarter of 2016, which included $10 million on the recognition of the revenues from GSK related to R&D milestones. Excluding these milestones in the prior period, revenues for the second quarter increased by 72%. As John stated, product sales for the 2017 second quarter increased by a 101% from the prior year to $6.6 million, which reflected an increase in demand for our enzymes for both branded and generic products. Product sales were generated across the broader customer base with increased enzyme deliveries to Merck for Januvia and shipments to Tate & Lyle under the multiyear product agreement was major contributor. We expect our next product shipments to Tate & Lyle in the fourth quarter of this year. R&D revenues for the quarter were $3.4 million, this compares with $12.1 million for the prior year which included the recognition of a $7.5 million milestone payment for the completion of our CodeEvolver technology transfer to GSK and $2.5 million in deferred revenue related to the early completion of that transfer. This prior year events were partly offset in the 2017 second quarter by a significant increase in service revenues from major pharmaceutical company as well as service revenues from Tate & Lyle under the R&D agreement which we announced in March of this year. Revenue from our revenue sharing arrangement for the argatroban injectable drug with Exela was $356,000 in the second quarter of 2017. This is down from $658,000 in the second quarter of 2016, but roughly in line with first quarter of 2017. Gross margin on product sales for the second quarter of 2017…

Thanks for that financial review, Gordon. As Gordon and I have detailed on this call, we're off to a great start across the Board in first half of 2017. Our leading edge protein engineering platform technology CodeEvolver continues to create new proteins, using proprietary machine learning algorithms to find out proverbial needle in a haystack that novel protein sequence from a nearly infinite selection that enables previously unachievable performance attributes quickly. In parallel, we’re growing and choosing what proteins to target in what applications end markets with what value creating possibilities with which partners in what collaborative model better and better as well. This all adds up to our dynamic driving company with leverage to help us achieve and sustain profitability. These are exiting times here at Codexis with more to come. With these comments, I would like to open up the call for the questions. Operator?

Thank you. [Operator Instructions]

While we waiting for our first question, I would like to alert you to our busy schedule participating at upcoming investor conferences. We will be presenting at BioCentury NewsMakers in The Biotech Industry Conference on September 8th in New York, at the Rodman and Renshaw's Annual Global Investment Conference being held September 11th and 12th also in New York, at KeyBanc’s Basic Materials & Packaging Conference being held September 12th and 13th in Boston, and at Janney Montgomery Scott's Biostorage and Bioproduction Forum on September 19th in New York. Webcast of our presentations at the BioCentury and Rodman and Renshaw Conferences will be posted to our Investor sections of www.codexis.com. Okay, operator, we're ready for the first question.

And our first question comes from Brandon Couillard of Jefferies. Your line is now open.

John, we'd love as you could perhaps elaborate little bit on your progress on the molecular diagnostic front with some of the initial assays how that's progressed relatively your expectations? And what the portfolio looks like today? I think it's my understanding that you have maybe four enzymes on hand and you needed perhaps another four to get a more complete offering for the market, just an updated kind of along the proceeding of that initial rollout?

Sure, Brandon. So, we little bit different than what you said. We have developed our first enzyme for next and sequencing use, the dominant enzymes that are used are four. So, our medium term intention is to create all four of those enzymes ideally at or better than existing enzyme performance for next gen sequencing. We're really encouraged by the performance results in our internal testing from the first enzyme the DNA ligase. We saw the DNA ligase as a weak link in our customers' ability to generate reliable results at low DNA concentrations like liquid biopsy. We saw this enzyme particularly deficient from incumbent suppliers, that was our first target and our testing so far is bearing up that our enzymes will indeed enhance the reliability and the results of liquid biopsy testing, using our enzymes. And we're out right now working with a growing slot of customers to prove that out in the customers' hands. We started in addition, we started work on additional enzymes to use our CodeEvolver to engineer improvements to the other three primary enzymes that are used in next gen sequencing, and we look forward to providing more detail on that as we move through the rest of this year.

Thanks, it's helpful. And then Gordon in terms of the outlook for the year two questions. What would you say are the biggest -- the couple of biggest drivers to the increased product revenue growth outlook? And then secondly despite that the $4 million product revenue bump, what's the offset that keeps the total revenue the same for the year?

Yes, let me do the first question first. We were seeing increased shipments to Merck in particular in the fourth quarter as well as the second shipment to Tate & Lyle. So that counts for a large portion of the increase in product revenues in Q4 versus Q3. The offset to the product revenue increase would be an R&D fees to try and make sure that we maintain our guidance of 50 to 53. So, some of the views depending on the structure that we employ for revenue in these collaborations can affect the timing of the revenue recognition, so that's basically the reason we offset our R&D revenues.

Thank you. [Operator Instructions] And our next question comes from Matt Hewitt of Craig Hallum. Your line is now open.

Couple of questions for me I guess. Following up on the next gen sequencing opportunity, as you progress on that, is this an area that you intend to go direct in? Or do you anticipate partnering with a larger life science tools distributor to get that product to market?

Yes, Matt we have optionality there. We could partner which could speed up our entry into these markets, but it would come at the expense of margins being shared with the partner. But we're also lining up to have the option to go direct at least to the major users. And so, we're holding that option open for now and we think either prospect would be very significant for the Company as we finish the year. Moving to next year, we’re very encouraged by the results. This is a fairly large target market for the Company and so we would -- we’re well on track to deliver what we help be multi-million dollar for sales -- product sales into that market next year. And we see the margins in this market being significant and above our typical product margins. So, we’re very excited about how the rule out is progressing for us.

That’s great. And shifting gears to PKU opportunity, I think you mentioned that you're accelerating the R&D expense this year that should translate into lower expense next year. At what point so you get through Phase 1, but assume it’s a good data, then you start thinking about Phase 2. So from a modeling prospective, shouldn’t we just maintain that elevated rate or give anticipated pause or may be after Phase 1 that is going potentially sign of partnership agreement in some of that expense falls into your partners’ hands?

I think it could be the ladder -- as we also said in the call, we’re in discussions with multiple potential commercial partners and those partnering discussions could translate into a partnering transaction that could be even before we initiate Phase 1 trials or during the Phase 1 trials. I think it's fairly low probability that could excess itself for our first therapeutic asset with Bayer, the cost and risk based to two trials by itself. So, the probability I was carrying it into inter Phase 2 is pretty low and we’re encouraged by these partnering discussions at this point in time. So the comment about the timing of spending is really in relationship to the total cost of preclinical plus the Phase 1 expenses. Our previous outlook would have been a little less preclinical expense and more Phase 1 expense next year and now we’re bringing some of that forward to enable us to see and get the results from human trials sooner, which we think is definitely a significant benefit for the program.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Nicols for closing remarks.

Okay. Thanks everybody for your time and interest in Codexis this afternoon. We look forward to providing progress report on our next quarterly conference call. In the meantime have a great evening. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Have a great day everyone.