Codexis, Inc. (CDXS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Codexis Incorporated 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 follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Jody Cain. Ma’am, you may begin.

This is Jody Cain with LHA. Thank you for participating in today’s Codexis’ call to discuss the company’s 2018 fourth quarter and full year financial results and business progress. A slide deck to accompany today’s call is available on the Investors section of the company’s Web site at codexis.com. 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 the Private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the current beliefs and expectations of management as of February 26, 2019. 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 could materially affect actual results. For details about these risks, please see the earnings release that accompanies this call and the company’s SEC filings. Codexis expressly disclaims any intent or obligation to update 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. As Jody mentioned, we have posted a brief slide presentation on the Investors section of our Web site to accompany today’s call and I encourage you to follow along. I’m exceptionally proud of Codexis’ performance during 2018 as we executed on a wide array of strategic objectives and achieved or exceeded all of our financial guidance metrics for the fifth consecutive year. Let me turn your attention to Slide 3. We’re pleased to report that 2018 revenues reached nearly $61 million, an increase of 21% over 2017. R&D revenues led the way, as expected, up 50% year-over-year. Per guidance, product revenues delivered a similar result in 2018 cementing in the prior year’s huge gains. And importantly, we continued to expand product gross margins again exceeding guidance and topping 50% for the year. In Performance Enzymes, revenues grew a solid 7% into our traditional pharmaceutical manufacturing sector making up just under 60% of sales. But revenue progress into the other sectors took off in 2018. Performance Enzymes sales into non-pharma sectors grew by 39% and our sales in Novel Biotherapeutics segment grew by 76% year-over-year. This result rapid growth in new sectors on top of solid core pharma manufacturing growth is the core result we have been engineering here at Codexis. So it’s a true pleasure to highlight for 2018. In addition to those financial accomplishments in 2018, we delivered on many strategic fronts as well. So let’s review some of the highlights by segment, starting with Performance Enzymes. Here our proudest accomplishment was the commercialization of enzymes that enabled the proprietary process for Tate & Lyle’s most recently launched sweetener, a better tasting zero calorie stevia sweetener Tasteva M. Codexis started R&D on those enzymes engineering proof of concept and patentability on our own in late 2016. Then we struck our Tate & Lyle’s partnering deal in the first quarter of 2017 and this enabled the funded enzyme R&D to kick into high gear. By the end of 2017, our enzymes from CodeEvolver were orders of magnitude more effective. And then in 2018, the partnership shifted to each party’s concerted scale up commercialization and GRAS registration efforts. Commercialization was accomplished in the third quarter of 2018 and Tasteva M was out on the market, from concept to commercial in less than two years. We are excited to learn from Tate & Lyle that their initial customer interest has been strong and that some niche products are already using Tasteva M commercially. We expect over time that enzyme sales for Tasteva M will become one of the largest products in our Performance Enzymes portfolio. Beyond food, the launch of enzymes for molecular diagnostic markets led the way for us to penetrate other non-pharma verticals in 2018. Our first enzyme, a DNA ligase was launched in 2018, trialed by dozens of target customers and at the AMP conference in San Antonio in November, we had one of those target customers present their trial results which validated our claims of superiority in next-gen sequencing or NGS workflows. As we close 2018, we generated our first sales and find multiple leading NGS players seeking to gain preferred access to our EVO T4 DNA ligase and convince us to partner with them versus going to market on our own. In parallel at AMP, we showcased superior technical results for our DNA polymerase in late-stage R&D which garnered additional wide market interest. DNA polymerase is the largest enzyme class used in the fast growing nine digit molecular diagnostic market worldwide. With these two enzyme successes in 2018, we are hitting the mark to materially penetrate this growth market in 2019 and beyond. In pharma manufacturing Performance Enzymes, we continued to build this core business in multiple strategic ways in parallel in 2018. Eight pharma companies contributed greater than $1 million each in sales in 2018, a significant widening of material pharma market adoption versus last year. One of those, a top 10 global pharma company, had never purchased significant amounts from us in any year prior. Porton Pharma Solutions was also one of these two eight pharma customers in 2018, as we completed the transfer of high throughput protein catalyst screening capabilities to them in the fourth quarter. We are proud to go from deal to $1 million plus revenues in less than a year and to have finally partnered our catalytic enzymes into the extensive opportunity pipeline of a leading pharma contract manufacturer’s operations. The partnership is off to a solid start. With yet another of our top eight pharma clients, KYORIN of Japan, we now add to our list of fully commercialized protein catalyst installations. Last month, we announced a multiyear supply agreement with KYORIN for a Codexis developed proprietary enzyme used in the manufacture of vibegron, an active ingredient in Beova for the treatment of overactive bladder. Beova was approved and commercially launched by KYORIN in Japan in the second half of 2018. We have also supplied the same enzyme to Urovant Sciences for their manufacture of vibegron. Urovant holds the marketing rights to vibegron in the rest of the world outside Japan. Urovant has indicated they expect to announce top line Phase 3 results from vibegron in the first half of this year. Rounding out the pharma manufacturing strategic accomplishments, we are pleased to have recently entered into a multiyear technology upgrade package with Merck which as you know licensed our CodeEvolver protein engineering technology platform in 2015. We are delighted with Merck’s decision to capitalize on the productivity enhancements we have made over the last few years with our CodeEvolver technology. Valued at low single digit million dollars, this is the first material backend revenue created by Codexis from its CodeEvolver licensing business model. Merck continues to set the standard for deploying protein engineering for pharma manufacturing. Merck’s list of uses start with their consumption of our largest protein catalyst product in a growing percentage of their commercial drug substance manufacturing for their flagship product JANUVIA plus their procurement of multiple parallel dedicated project teams at Codexis throughout 2018, plus having an installed CodeEvolver license they operate in-house and now procuring multiyear upgrades for this platform. We continue to believe that most of the world’s largest drug companies have comparable applicability span for benefitting from our protein engineering technology and we continuously work to bring other pharma companies towards the Merck high bar. Switching to the Novel Biotherapeutics segment, our success advancing our orally administrable enzyme therapy candidate CDX-6114 for phenylketonuria or PKU was the most remarkable step-out performance for Codexis in 2018. Here we successfully ran the company’s first-ever clinical trial, a Phase 1a study in healthy volunteers which showcased the drug’s safety and tolerability plus a resultant dose dependent pharmacodynamic response. In addition, we opened an investigational new drug or IND filed with the USFDA and completed a solid dose formulation assessment that earned Codexis a $1 million milestone from Nestlé Health Science in the fourth quarter. We are highly gratified by Nestlé’s decision earlier this month to exercise their option to exclusively license CDX-6114, which triggered a $3 million milestone payment. Nestlé Health Science has now assumed essentially all of the forward clinical development and commercialization activities for this enzyme. To-date, we have earned $21 million under the CDX-6114 collaboration. From here, we have the potential to earn additional pre-commercial milestone payments up to a total of $86 million plus up to $250 million if CDX-6114 goes commercial. We are also entitled to tiered royalties on commercial sales of CDX-6114 ranging from mid-single digit percentages to low-double digit percentages. In addition and importantly, the clinical and partnering success of CDX-6114 provides substantial credibility for our Novel Biotherapeutics strategy to discover a pipeline of differentiated drug candidates using our CodeEvolver platform and credibly developing those towards and into early clinical development. We currently have five additional enzyme therapy candidates in our Novel Biotherapeutics pipeline beyond PKU, to target inborn errors of amino acid metabolism disorders, to target lysosomal storage disorders and the fifth program is a funded partnership with Nestlé Health Science. During 2018, we increased the staffing for this pipeline, brought in specialized drug discovery talents and secured increased funding from Nestlé for that discovery partnership, all of which has enabled us to accelerate advancement of the pipeline significantly. We are encouraged and excited about these programs in the Novel Biotherapeutics business we have credibly developed in 2018. Throughout 2018, we also strengthened core resources to ensure our forward momentum continues. Financially, our clean debt free balance sheet ended with over $50 million in cash bolstered by a successful modest equity raise in the second quarter. We’ve retained and added to our human talent in parallel. Protein engineering R&D team capacity has grown smartly to keep up with demand, new industry veterans have been brought in to strengthen core growth areas in biotherapeutics research, molecular diagnostics and industrial enzymes. And adding to that, I’m exceptionally pleased to welcome Laurie Heilmann who recently joined Codexis as Senior Vice President of Business Development and Marketing. Laurie brings us more than 30 years of industry experience with a proven track record of transformative strategies resulting in increased revenue growth, profitability and global brand awareness. I’m delighted with our outstanding business accomplishments. I’m proud of the great Codexis team and their dedication to our success. It’s highly gratifying to announce that for the second consecutive year, the National Association of Business Resources has named Codexis as one of the Best and Brightest Companies to Work For in both the San Francisco Bay area and in the nation as a whole. Our outstanding team has been decorated with an award that Gordon and I see every day, a diverse, hardworking, super smart group of people who collaborate creatively to make Codexis the great company that we are. Let me now turn the call over to Gordon to provide more details on our financial results. Gordon?

Thanks, John. I’ll review the fourth quarter and full year results and then introduce our 2019 financial guidance. Total revenues for the fourth quarter of 2018 were $16.1 million. This compares with $21.7 million in Q4 of 2017 which included the recognition of $1.7 million of non-recurring revenue in connection with the termination of a revenue-sharing agreement and almost $8 million in initial R&D revenue from Nestlé. Fourth quarter 2018 revenue included $13.1 million from the Performance Enzymes segment and $3 million from the Novel Biotherapeutics segment. R&D revenues for Q4 was $8.8 million including $2.8 million from Porton in licensing fees for completing the technology transfer. This compares with $14.4 million of R&D revenue in Q4 of 2017 which includes the revenues from Nestlé. R&D revenue for the fourth quarter of 2018 included $5.8 million from the Performance Enzymes segment and $3 million from the Novel Biotherapeutics segment. Product revenue for the fourth quarter of 2018 was $7.3 million which compares with $7.6 million in Q4 of 2017, with the decrease due to timing in the demand for enzymes. Gross margin on product revenue for the fourth quarter of 2018 was 67%, up from 53% a year ago, with the increase due to product mix. Turning to operating expenses. R&D expenses were $7.5 million for the fourth quarter including $4.4 million from the Performance Enzymes segment and $2.9 million from the Novel Biotherapeutics segment. The decrease from $9.4 million a year ago was primarily due to lower consulting fees and outside services related to CDX-6114, partially offset by higher headcount expenses. SG&A expenses for the fourth quarter of 2018 were $6.8 million, which included $1.8 million from the Performance Enzymes segment, $0.2 million from the Novel Biotherapeutics segment and $4.9 million in corporate overhead. The decrease from $7.9 million last year was due primarily to lower legal fees and lower stock-based compensation expenses, partially offset by higher consulting and accounting fees. The net loss for the fourth quarter of 2018 was $461,000, or $0.01 per share, which compares with net income in the fourth quarter of 2017 of $970,000, or $0.02 per share. On a non-GAAP basis, adjusted net income for the fourth quarter of 2018 was $1.6 million, or $0.03 per share, versus non-GAAP adjusted net income a year ago of $3.1 million, or $0.06 per share. Turning to Slide 4, I’ll review our full year 2018 financial results. Total revenues for 2018 were $60.6 million, up 21% from $50 million for 2017, product revenue was $25.6 million and R&D revenue was 50% to $35 million, which consisted of $21.5 from the Performance Enzymes segment and $13.5 million from the Novel Biotherapeutics segment. Gross margin on product revenue for 2018 was 51%, up from 46% for 2017 with the increase due to sales mix. R&D expenses and SG&A expenses for 2018 were $30 million and $29.3 million, respectively, compared with $29.7 million and $29 million, respectively, for 2017. Of note, total operating expenses in 2018 increased by just 1% versus the prior year while our revenue increased 21%. We reported a net loss for 2018 of $10.9 million or $0.21 per share which compares favorably with the net loss for 2017 of $23 million or $0.50 per share. On a non-GAAP basis, adjusted net loss for 2018 was $1.8 million or $0.04 per share versus non-GAAP adjusted net loss for 2017 of $14.9 million or $0.32 per share. Cash and cash equivalents as of December 31, 2018 were $53 million, up from $31.2 million as of December 31, 2017. Let me now introduce our financial guidance for 2019, which is highlighted on Slide 5. We expect total revenues for the year to be between $69 million and $72 million. This represents a 14% to 19% increase over 2018. We expect approximately 40% of 2019 revenues to be reported in the first half of the year and 60% in the second half of the year. We expect product sales to range from $26 million to $29 million. We expect gross margin on product sales to be between 48% and 52% and we expect total operating expenses to be approximately $18 million per quarter and those are expected to be divided relatively evenly throughout four quarters. This increase is primarily due to higher headcount, increased rent expense and Novel Biotherapeutics segment expenses. With that, I’d like to turn the call back to John.

Thanks, Gordon. Slide 6 outlines the strategic objectives to drive our near and longer-term growth and they also drive the confidence we have in achieving or exceeding our 2019 financial guidance. Our strategy begins with our relentless focus on our CodeEvolver protein engineering platform technology. Proprietary artificial intelligence competencies are the heart of our ability to discover proteins that meet customer needs at an ever accelerating pace. Merged with other cutting-edge synthetic biology practiced by the dynamic scientific teams at Codexis, CodeEvolver is a unique constantly improving synthetic biology platform that rapidly creates novel high-performing proteins. In parallel, our constantly improving business processes are accelerating making money from those proteins. The revenue generating capabilities of CodeEvolver are unparallel we believe in this fast growing synthetic biology universe. We have been building our protein discovery and commercialization business steadily and relentlessly over these past five years. Many seeds have been planted in a growing list of industries and with a growing set of the world’s most innovative leading companies. This has been driving sustained double digit revenue growth and as you’ve heard from Gordon we’re guiding to do so again in 2019. We will do this despite the need to overcome two seven-digit headwind items in 2019. The next milestone from the Nestlé CDX-6114 deal is not expected in 2019 and the shift from last year’s R&D revenues from the Tate & Lyle’s stevia program is not expected to be offset by first full year commercial enzyme product sales to Tasteva M. However, we expect to more than overcome these headwinds powering through with revenue growth elsewhere to make our strong revenue guidance. This will unfold for you in 2019 with an acceleration of announceable deal flow across both of our segments. You’ve already begun to see this in the first two months of this year with the KYORIN, Merck and Nestlé announcements. From here we expect new protein engineering R&D deals that will or have already created successful new performance enzymes in traditional markets as well as new ones with our existing clients and with new ones, deals that add to our pre-commercial project pipeline and advancement of prior projects to fully commercialized status. Deals that show deeper penetration into our big pharma clients, like dedicated project team expansions and possible new CodeEvolver licensing deals and a growing stream of backend revenue generation announcements from our historical platform licensees. In molecular diagnostics, we expect to deliver sales, breakthrough milestones that firmly validate our growing market penetration and generate the return on investments we have smartly made over the last few years. In Novel Biotherapeutics, we will share details from our pipeline showing you preclinical data that validates that CodeEvolver is creating differentiated patentable new drug substances, i.e. partnerable status for at least two of our programs beyond PKU and quite possibly a deal or two monetizing those biotherapeutics assets. Modest spending increases are warranted near term, but nothing that will threaten our medium-term quest for full profitability or utilize much of a dent of our cash balances in 2019. We’re so excited to show off another breakout year for the company in 2019. With those comments, I would like to open up the call for questions. Operator?

Thank you. [Operator Instructions].

While we’re waiting for our first question, I’d like to alert you to our busy schedule of upcoming investment conferences. We will be participating in the Cowen Healthcare Conference on March 12 in Boston; the ROTH Conference being held March 18 to 19 in Laguna Niguel, California; the UBS Global Healthcare Conference being held May 20 through 22 in New York; the Craig-Hallum Conference on May 29 in Minneapolis; the KeyBanc Capital Market's Conference May 29 through 30 in Boston; and the Jefferies Global Healthcare Conference being held June 4 through 7 in New York. Webcast of our presentation at the Cowen, UBS and Jefferies conferences will be posted to the investor sections of www.codexis.com. Okay, operator, we’re ready for the first question.

Our first question comes from Brandon Couillard with Jefferies. Your line is open.

Thanks. Good afternoon, guys.

Hi, Brandon.

John, I would love to get a little more detail if you could share with us kind of your thoughts on the moving pieces, the pluses and minuses within the product revenue guidance for the year with a thought that perhaps given that Tate’s ramping, you got the Merck upgrade, you got – backend royalties and milestones coming from Merck or GSK and then you got molecular diagnostic product revenues, we might see a little bit more growth in that line. And then, Gordon, could you just help us quantify the two headwinds between the PKU revenues, related revenues that won’t recur and then the delta between the headwind from Tate as far as the falloff of R&D revs actually not being as much as the incremental product revenues?

Okay. So first part of the question was asking about the year-on-year growth in product revenues, so Brandon thanks. So once again as usual there is – we have a diverse side of products that we sell. Actually we have nine different customers who each procure at least $0.5 million worth of enzymes in 2018. And there’s just general puts and takes. We have several of those products which were significant batches of clinical stage materials. So we don’t see those repeating given the progression of those clinical programs for those customers. So we have a few falloffs from the clinical list in 2018. We expect some new areas, some new clinical programs to come in and offset that. We do expect growth in product revenues for the Tate & Lyle’s stevia. It won’t be huge. It will be in the very low single digit million dollar product sales we expect based on conversations with Tate & Lyle. So it will be ramping. They’re breaking into their clientele as we speak. As I mentioned, they’re encouraged by the initial customer feedback and early installations of their product and their customer base. But they don’t expect a big breakout in volume in this first full commercial year for stevia. So we’re being realistic. I think there’s upside there, but we’re being realistic in our outlook there. I think on the upper end of our guidance, we said we would exceed 10% year-on-year product sales growth. I think that’s quite possible. But just to give a practice range, it would be a modest lift or up to 10% or 12% growth in product sales which is our guidance range. Underpinning a lot of our sales is sales of enzymes to Merck’s manufacturer of the drug substance in JANUVIA and JANUMET and that’s year-on-year; pretty stable, maybe slightly down but pretty stable year-on-year. So we don’t see a big lift in sales year-on-year to JANUVIA which has been – which is our largest product in sales as you know. And then finally in molecular diagnostics, our sales are branching into both product sales and licensing oriented sales as we build our outlook for 2019. So there is some nice lift in product sales that will come from molecular diagnostics. But our overall expectations for growth in molecular diagnostics will spread between R&D revenue sales and product sales. So hopefully if you had additional questions in the product revenue space, by all means. But hopefully that gave you a good feel for the pluses and minuses in the outlook for product revenues. So I think Gordon, you had the second question from Brandon around the two headwinds.

Yes, the two headwinds, I’m looking at a couple of the programs John referred to from top 15 pharma companies for product revenues that we will not be recurring. We don’t expect in 2019 that we had revenues from in 2018. At the same time, the CDX-6114 for Nestlé we had roughly $9 million in that for this year. So we don’t expect obviously that to repeat since they’ve taken over the option now. We will have some revenue from that in the first quarter. We’ll be able to recognize the option license. But that is going to be one of the headwinds. The other is Tate & Lyle’s stevia that John referred to where we’re able to earn R&D revenues last year, which we’re not going to translate into the same level of product revenues in 2019. But we do expect there are numerous other ways that we can get up to the 14% to 19% growth that we talked about in our guidance.

Got you. And then on the molecular diagnostics business, I’ll be curious on some of the feedback you’re getting from those early beta trial users and how you’re thinking about sort of the commercial model between an exclusive arrangement perhaps with one party versus making and selling enzymes and how that I guess you expect to sort of play out or what the most optimal approach is?

Yes, and that will play out this year, I’m quite confident. The attention and the validation of the superiority of our DNA ligase, the first product that we launched about a year ago has been very significant. As I mentioned in the prepared remarks, we have made our first sales. Those would be bulk enzyme sales to bulk users of enzymes directly and we’ve been lining up to make bulk sales to bulk users throughout 2018. In parallel, we’ve garnered significant interest from major channel players in the NGS market space and we’re being entertained right now by multiple leading companies to consider an exclusive partnering arrangement. And it all depends on the nature of the deal and the degree of controls and the economics of the deal whether we would proceed in that fashion because we have a very solid base case for going to market on our own that we’ve been exploiting and developing all through 2018. So it’s a very exciting place for us to be with DNA ligase and you’ll see this story unfold very positively and the nature of which could be either of those paths as we move through 2019. That’s all specific to the first product. The second product which has a larger addressable market potential is garnering great interest based on late-stage R&D results. I’m actually on a plane tonight to go to the AGBT conference which is along with the AMP conference are probably the two leading molecular diagnostic conferences in the world, and a team of Codexis and myself will be out, not only working on the best way to monetize the DNA ligase, but also positioning ourselves for hopefully an even more successful penetration with the second product in the first half of this year. So we’re really, really excited and encouraged and emboldened and I think the prepared remarks speak to that in these comments and to our excitement and enthusiasm for our success forthcoming in molecular diagnostics this year, Brandon.

Super. I’ll hop back in the queue. Thank you.

Thank you.

Thank you. Our next question comes from Matt Hewitt with Craig-Hallum Capital. Your line is now open.

Good afternoon and thank you for the progress update.

Thanks, Matt.

A question regarding the internal programs, you provided a little bit more detail. I’m wondering at what point you’ll provide the exact candidates that you’re working on. Is that when they’ve been partnered? Is it when trials have begun or have been completed, just a little bit more granularity there?

Yes, we have optionality here. So we certainly won’t make any announceable disclosures until we’ve got our patentability and we’ve got preclinical model data that would show the performance in non-human animals. But we’re progressing in many of the programs with data like this at this point. So if we could wait until we partner, we could broadcast a little more widely to generate market interest. So I made it really clear in the prepared remarks, you’ll be seeing data. We’re excited about the progress we’ve made in 2018. We’ve built up a significant part of our team to accelerate the advancement of the other five programs, including the one that’s in partnership with Nestlé and we’re very encouraged that we’re going to have some material announceable successes in this area this year.

Great. And then regarding the number of teams or maybe where the number of teams sit today relative to maybe a year ago? Could we get some color there?

Yes, we’ve been adding modestly to our R&D headcount. And I’d say year-over-year we probably have added – in terms of headcount, we probably added 15% to the headcount. But then you’ve got to factor that every year. We get productivity enhancements. We are able to engineer a novel protein faster and quicker. So the overall expansion of protein engineering capacity is probably out more like 25% or 30%. We wouldn’t be adding this headcount unless we had the demand for it. So we’re juggling a very significant pipeline of opportunities that either had begun or are in the middle of or about to start protein engineering work, which has warranted that expansion of protein engineering R&D capacity.

Okay, great. Maybe one last one from me and I’ll hop back in. Regarding the Urovant, it sounds like we’re going to get some data maybe here later in the first half. How should we be thinking about contribution from that if they are in fact able to garner FDA approval?

Yes, we see this – assuming they’re successful and combined with the KYORIN Japanese sales, it’s the same enzyme, the enzyme is fully commercialized. So we’re not doing any R&D work or scale-up work. We’re ready to go as soon as they need additional material as is evidenced by signing a multiyear contract already with KYORIN. So we see this market being in the mid to low-single digit million dollar enzyme sale at above average margins as it fully develops, as the sales for Urovant and KYORIN penetrate as they expect. It’s not going to be as big as a JANUVIA enzyme sale, but it’s a nice size target. We’re super happy that KYORIN has already received their approval and has already begun to purchase commercially. We’re hopeful that Urovant follows this year. We’ll wait for that news and we’ll talk about that when that happens. But that gives you a feel for the peak revenue that we hope and believe that this will ultimately achieve after our customers penetrate their patient markets.

Great. Thanks very much.

You’re welcome. Thank you.

Our next question comes from Doug Schenkel with Cowen. Your line is open.

Hi. Good afternoon, guys, and thank you for taking my questions. I just want to go through a few things, just to do some clean up here and there, maybe just starting with a couple of quick clarifications on guidance really following up on Brandon’s earlier questions. First, guidance apparently factors in recognition – a full recognition of the milestone payment but no additional milestone payments from Nestlé. I just want to make sure that’s correct? And then the second clarification is on the new Merck CodeEvolver agreement. Presumably there was an upfront associated with the new agreement and presumably that was for less than the $5 million upfront that was agreed to when Merck originally in-sourced CodeEvolver. If those assumptions are correct, I’m just wondering if whatever that amount is, is included in the full year revenue guidance.

Hi, Doug. First of all, you’re correct. We were able to recognize 3 million from Nestlé for the option, but we don’t expect a second milestone during 2019. That’s much more likely to be in 2020. And then secondly, the Merck, we expect to be able to recognize that in the first half of this year, but we’re still working with Merck in terms of the actual tech transfer for the improvements. So I would expect that in the first half, likely conservatively in the second quarter.

Yes, and --

Okay, but is included – sorry, go ahead.

The magnitude of that in the prepared remarks I stated, it was low-single digit million dollar technology upgrade deal over the multiyear deal and we guided roughly half of that as an upfront and then the other half will stream out over those years, which we haven’t disclosed the exact for years. But it’s that ballpark, so low-single digit for the total value and roughly half of that is upfront.

Okay. And that’s in your guidance for the year.

Yes. We’ve already secured that deal. I think we know exactly how to do the technology transfer. So we see zero or almost no risk in that and Gordon gave you a feel for the timing of that revenue.

Okay. And then great to hear the commentary on Tate & Lyle. Do you still think that the ultimate revenue opportunity for Tasteva is around $10 million in annual revenue or do you have any signal that maybe it could be a little bit better than that given the positive early response from Tate & Lyle on their customers?

Yes, it could be bigger. We have a very deep and very positive collaboration with Tate & Lyle. As you would expect, myself and others were trying to get a feel from them on what would they say if they were in our shoes for this call. And it’s just so early to predict. But the slope of curve is great out the chute. There is a real market need, new sweeteners which arguably had less performance attributes than Tasteva M, reached much higher penetrations than this suggested $10 million of enzyme sales for Codexis. So if it goes really well, it could be remarkably better for us than the $10 million. But I think that’s not a bad ballpark. I would be disappointed if it peaks out at $5 million sales for Codexis, for example, based on all the great work, the opportunity out there, the relatively limited competition that we see Tate & Lyle faces. And so – and they’re out ahead of their competition. So we’re very hopeful that it could be significantly better. The ramp is going to be hard to see. We’re going to learn a lot this year about the ramp. And the ramp over the next 12 months will really give us a great indication for where this product is going to go for Tate & Lyle and for us. So we’re probably forecasting this on a conservative side just to be smart. I gave a little feel for that in my comments to Brandon about product revenues, but hopefully there’s an upside there. But we’re really poised in this for the medium and longer-term success and we’re going to – we’ll manage our way through 2019 because we did generate a lot of R&D revenues from the Tasteva and R&D chapter last year.

That’s great. And maybe if I could just ask one last one on the broader opportunity set. One very specific to 2019, you have talked about moving into a new market in 2019 and I’m just curious if you could give us any hints on what vertical that might be in, and if we should expect an initial partnership to address this opportunity or would you go direct like you are with NGS, MDx enzymes? So that’s really kind of the 2019 specific question. And then I guess over the next few years, given you’ve built out infrastructure to more optimally capture value associated with CodeEvolver, I’m just wondering how you’re thinking about your ability to move into additional verticals other than the ones we know about over the next few years?

Yes, it’s a really great question. So one question nobody has asked before, it’s a good one. I’ll answer it. In these other verticals, at least in the one to three-year timeframe, one to two year for sure, it’s almost certainly going to be in partnership with a great company. I think it was a pretty unique opportunity for Codexis to launch directly with enzymes into end user market like we did with MDx with molecular diagnostics. But as I sit here with the opportunity set, it’s going to be of the character of what we’ve succeeded with Tate & Lyle. It’s going to be getting really close to a great company in a new vertical, imagining and then designing the attributes for a new protein and then Codexis using CodeEvolver to create that protein and then leveraging the partner’s channel and money to get it out there quickly and rapidly. So you’ll see deals that feel more like the Tate & Lyle deals as we venture into new verticals in the next year or two for sure. Which vertical is a great question for you to ask my new Senior Vice President of Business Development? Gordon and I are chuckling. We have a number of competing grade partnering concepts out there. Any one of several different verticals and clients, new partners could be the winner. We’re really excited by how we’re stacking up opportunities in new verticals as we moved into 2019. And actually just officially, we did have a decent R&D project in a new vertical. It wasn’t material enough for us to disclose the details of and the customer begged for confidentiality. But we did have a project that we executed last year in and of the vertical. You’ll see that on our pipeline chart. Actually you already did see that in our pipeline chart that we updated in the middle of 2018 that we’ll update again in the middle of 2019. So we’re getting traction. The materiality of the deals to-date is not announceable, but we expect that to change and we’re excited about that when that happens.

That’s great. Thanks for all the color and I’ll see you over the next couple of days, John.

Thanks, Doug.

Thank you. [Operator Instructions]. Our next question comes from Sean Lee with H.C. Wainwright. Your line is open.

Hi, guys, and congratulations on a great year. Most of my questions have been answered. I just have two quick ones. One for the Novel Biotherapeutics projects beyond 6114. So what are you looking for from the – would you look to execute similar deals as the 6114 or would you be looking to independently develop them further along?

We have the optionality, but the success that we’ve had with the partnering approach with Nestlé created such a great result. That is a base case for us. I think over time we would probably – over time we might explore the optionality of holding assets longer than we did with Nestlé, but we’ve built the internal capability to develop all the way into a Phase 1 study, to do preclinical development and of course all of that validating assets that we’ve discovered with CodeEvolver. So that’s now our tried and true model. The financial results from that success have been remarkable as you’ve witnessed. So that’s the most likely case.

Okay. Thanks for that. I’m a little bit unclear – a follow up on that is any of the potential partnership revenues from those products included in your 2019 guidance?

Yes, we have partnering revenues across the segments. Partnering revenues in the Novel Biotherapeutics could be from early revenue generation from deals that we make on the assets toward the end of the year, but it would be modest. We also have partnering opportunities from the zero assets that we haven’t done any of our own self investment in that we’re talking to multiple pharmaceutical clients about as well. So those could show up in our 2019 numbers as well. So we’ve got a modest amount of revenue built-in into our guidance, but we’ve left a lot of room for upside in that respect.

I see. Thanks for the clarification. My last question is on the gross margin. I see that for 2019 that you continue to guide for product gross margins of 48% to 52%, but you’ve managed to significantly exceed that for the last two quarters. So I’m just kind of wondering what’s the conservatism there, what are some of the pushes and pulls on that number and where can we maybe see some upside?

Yes, it really comes down to the timing of product shipments, the type of product that we’re selling and the last year were tended to be in the second half of the year. So I think we’re being appropriately conservative in terms of the overall guidance for the blended margin for the year. So if we did 51% for all of last year, I think it’s appropriate that we give guidance of 48% to 52% for this year. That doesn’t mean to say we’re going to have – we’re not going to have some good quarters for the product mix as such that you’ll see something similar to the second half of '18.

Yes, we also want to build in for the possibility that Merck needs a lot more of our enzyme. And if they do, that would be a drag on margins but it will be a great thing to happen for the company. So I think that’s also part of why we leave a little bit of room on the lower end in our guidance on margins mix with Merck being on the low end of the mix and most of our other product revenue above the 51% we did last year if that helps.

I see. Thanks for the additional color on that. That’s all I have.

Thanks, Sean.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to John Nicols for any closing remarks.

Okay. Thanks everyone for your questions. We’re set up at Codexis to deliver another highly productive year in 2019 and we look forward to providing ongoing progress updates to you. By the way, today is the birthday of Codexis. We were born exactly on this day in 2002. So happy birthday Codexis. Thanks everybody and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone, have a wonderful day.