Codexis, Inc. (CDXS) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2019 Codexis Inc. 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 how to participate 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, Ms. Jody Cain. Ma'am, you may begin.

This is Jody Cain with LHA. Thank you for participating in today's call to discuss Codexis' first quarter 2019 financial results and business progress. Please note that today Codexis' filed Form 8-K with the SEC announcing Third CodeEvolver Technology Transfer and Licensing agreement. The Form 8-K is available 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 beliefs and expectations of management as of May 6, 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 quarterly news release that accompanies this call, as well as 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. We're off to a great start in 2019 here at Codexis. Today, in addition to announcing strong first quarter financial results and solid strategic progress widely, I'm thrilled to detail the signing of our third CodeEvolver platform licensing deal, this time with Novartis. Please refer also to the 8-K filed this afternoon. Now three out of the top 10 global pharmaceutical companies have chosen to invest in bringing CodeEvolver in-house, validating how widely applicable the cost saving and sustainability benefits are for protein-based catalysis in drug substance manufacturing. Novartis, like Merck and GSK before them, had all options available to them to access protein engineering technologies to liberate these benefits and each of them chose a CodeEvolver license from Codexis. These great partners exploit the over 250 and growing issued patents and patent applications that cover our CodeEvolver platform technology worldwide. Combined with unique partnered access to the great scientific team at Codexis, our growing pharma platform licensing network is assured to stay at the vanguard of protein engineering for many years to come. This CodeEvolver deal with Novartis is structured similarly to our other platform licensing deals. Let me take a few minutes to highlight the most important elements for you. The agreement enables Novartis to nonexclusively set up in-house and use our proprietary CodeEvolver protein engineering platform technology to research, develop and commercialize novel performance enzymes for use as catalyst in the manufacture of their pharmaceutical products. The license is exclusive for the research, development and manufacture of novel enzymes for use by Novartis for drug substances owned or controlled by Novartis. As with all of our CodeEvolver deals, Codexis will retain full ownership of the platform technology, including improvements that may be created by Novartis. Now that we've executed the agreement, we will initiate transferring and training Novartis on the CodeEvolver platform technology. The transfer period is planned to last a maximum of 22 months and will be comprised of three waves of activity. At completion of the tech transfer, Novartis will have its CodeEvolver lab in Switzerland established and commissioned with Novartis' team proficient at running the platform technology independently. For tech transfer, Codexis has triggered a $5 million upfront payment already, and that will be followed by two additional tech transfer milestone payment opportunities that combine to an additional $9 million. Following the completion of tech transfer, Novartis has agreed to purchase CodeEvolver improvements over a multiyear period. During this improvements period, Codexis will earn annual payments that combine to $8 million in total. Comparing the front-end payment structure of this Novartis transaction with our prior two CodeEvolver deals, I would like to highlight that these $22 million in total upfront and milestone payments are much more spread over time, enabling a more stable financial bridge, while we wait for the back-end economics to kick in. Regarding the back-end economics, the Novartis deal is modeled of the successful structure used in the Merck deal with some nice improvement features. The key back-end opportunity for Codexis from the Novartis deal is a negotiated dollar payment for each kilogram of Novartis drug substance that is produced using the protein created by Novartis, using the CodeEvolver license. We refer to these as usage payments. These usage payments can begin in the clinical stage for Novartis drugs and will extend throughout the commercial life of each affected drug substance. There are no caps or limits to these usage payments. In addition and similar to the Merck deal, the Novartis agreement includes preferential rights for Codexis to be able to supply proteins that Novartis creates using the license. This opportunity to preferentially supply starts after the Novartis drug completes a Phase I trial earlier than without prior deals and extends to five years after the drug's approval. The base of the deal focuses on setting up Novartis to create and commercialize protein catalyst for small molecule drug processes. Novartis also sees value in using CodeEvolver to create and commercialize protein catalyst that can enable efficient manufacture of bioconjugated pharmaceutical ingredients. Codexis has developed earlier some proof-of-concept protein catalysts for these types of drug substances where a small molecule is reacted or conjugated with a biologic compound. For such processes, the usage payment to Codexis will be significantly higher. It is also important to note that, given Codexis' growing success in discovering and developing our own Novel Biotherapeutics, we have not granted Novartis a right to commercialize proteins as therapeutic agents, as part of this agreement. Novartis can use CodeEvolver to perform research and early development for Novel Biotherapeutics, but continued development and commercialization of such would require a new agreement with Codexis. Our entire team at Codexis is super excited about this new chapter with Novartis. While it has taken a while for Novartis to embrace the CodeEvolver license with us, the path to the deal has been a natural one. It required first a growing awareness of our technology, followed by a stream of project work and then the installation of a dedicated protein engineering team, all in order to build the business justification over time for their platform license investment. Other leading pharmaceutical companies are following this track currently too, which encourages us that we will follow with other big pharma platform partnerships in the future. Reinforcing that point, another top 10 pharmaceutical leader installed a dedicated project team for its first time in this first quarter of this year. Other elements of Codexis' business are advancing very nicely on course as well. Given the time I spent on this important new Novartis transaction today and the 2019 strategic objectives detailed just over two months ago in our year-end quarterly call, I will just provide a quick set of highlights to illustrate our continued widespread progress. Let me start with the food sector, whereas last week, we announced the signing of a multiyear enzyme supply and licensing agreement with our partner Tate & Lyle. As you know, this agreement covers a suite of novel performance enzymes, developed at Codexis that are used in the manufacture of Tate & Lyle's new better-tasting, zero-calorie Stevia sweetener branded as TASTEVA M. Tate & Lyle reports strong initial customer interest in TASTEVA M with some nutrition and bakery products formulated with TASTEVA M already commercially available. We expect over time that our enzymes for TASTEVA M will become among the leading revenue-producing products in our Performance Enzyme portfolio. We loved the quote from Tate & Lyle's executive in the press release and I quote, "The partnership model is a hallmark of speed and innovation for both partners, leveraging the global market and manufacturing reach of Tate & Lyle together with the unique technological capabilities and speed of Codexis." This exemplifies what we try to do with all of our opportunities, partnerships and markets. Let me follow that quote, highlighting that we landed three new six digit projects so far this year, each with a new partner and each in new industrial applications. We aspire to develop those opportunities and partnerships over time to have similar impact and customer quoting as we built with Tate & Lyle in the food industry. Other first quarter highlights saw a 30% year-over-year product revenue growth, led by strength that Merck, product revenue from Urovant Sciences was also in excess of $1 million for Q1 for the proprietary performance enzyme used in the manufacture of vibegron, its product candidate for the treatment of overactive bladder. You may recall, we announced a supply agreement with KYORIN Pharma for supplying the same performance enzyme for their overactive bladder product in Japan. Urovant announced positive top line Phase III results with vibegron last month, which bodes well for future sales as Urovant holds the marketing rights to vibegron in the rest of the world outside Japan and China. Rounding out our Performance Enzymes segment, we continue to successfully penetrate next-generation sequencing enzyme markets with our DNA ligase and are readying our second offering, a DNA polymerase for launch later this year. Not much new to report in this sector over the past two months, but we remain on track in establishing growing profitable sales in this vertical in 2019. Finally, our Novel Biotherapeutics segment is making solid progress year-to-date as well. Nestle Health Science exercised its option for exclusive license to CDX-6114 for the management of phenylketonuria or PKU during the quarter, generating a $3 million revenue recognition event plus added significant R&D revenue for the additional therapeutic discovery work we have been collaborating on. The rest of the Novel Biotherapeutic pipeline is making solid progress as well, encouraging us that we will deliver on our goal to have two programs beyond PKU reach the partnerable status by late 2019. Let me now turn the call over to Gordon to provide more details on our Q1 financial results. Gordon?

Thanks, John. Total revenues for the first quarter of 2019 increased by 11% to $15.6 million from $14 million in Q1 of 2018. First quarter 2019 revenue included $10.1 million from the Performance Enzymes segment and $5.5 million from the Novel Biotherapeutics segment. Product revenue for the first quarter of 2019 increased by 30% to $8 million from $6.2 million in Q1 of 2018 with the increase due to shipment of enzymes to Merck from manufacture of Januvia and to Urovant for their drug for overactive bladder. R&D revenue for the 2019 first quarter was $7.6 million and, as John mentioned, included the $3 million milestone payment from Nestle Health Science for exercising the CDX-6114 option. This payment was not received during the first quarter. This compares to $7.9 million of R&D revenue in Q1 of 2018, which included revenue from Tate & Lyle for the development of the suite of Performance Enzymes for TASTEVA M that is now transitioning into product revenue as well as recognition of the license fee. R&D revenue for the first quarter of 2019 included $2.1 million from the Performance Enzymes segment and $5.5 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the first quarter of 2019 was 45%, up from 38% a year ago with the increase due to product mix. Turning to operating expenses. R&D expenses for the first quarter of 2019 were $8 million, including $4.4 million from the Performance Enzymes segment and $3.3 million from the Novel Biotherapeutics segment. The increase from $7.2 million a year ago was primarily due to higher headcount, higher allocable expenses and increases in lab supplies and stock compensation offset by lower outside services. SG&A expenses in Q1 2019 were $8.4 million, which included $2.1 million from the Performance Enzymes segment, $0.5 million from the Novel Biotherapeutics segment and the remaining portion is included in $5.9 million in corporate overhead and depreciation expense. The increase from $7.7 million a year ago was primarily due to increase in cost associated with facilities and headcount and higher consulting fees and stock compensation, which were partially offset by decreases in a variety of outside services. The net loss for the first quarter of 2019 was $5.1 million or $0.09 per share, which compares with the net loss for the first quarter of 2018 of $4.7 million or $0.10 per share. On a non-GAAP basis, excluding noncash depreciation and stock-based compensation expenses, adjusted net loss for the first quarter of 2019 was $2.8 million or $0.05 per share versus a non-GAAP adjusted net loss a year ago of $2.5 million or $0.05 per share. Today, we are affirming the 2019 financial guidance, which we introduced on our conference call in March. 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 first half of the year and 60% in the second half. 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 $72 million. With that, I'll turn the call back to John.

Thanks, Gordon. Our business strategy begins with the relentless focus on our CodeEvolver protein engineering platform technology, which delightfully received a resounding endorsement by Novartis today. Proprietary artificial intelligence competencies are at the core 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 powerful constantly improving platform that rapidly creates novel high-performing proteins. In parallel, continuous business process improvements are accelerating our ability to monetize those proteins. Quite frankly, we believe the revenue-generating capabilities of CodeEvolver in the high-growth synthetic biology segment are unparalleled. We have been building our protein discovery and commercialization business steadily and relentlessly as well. We are delivering on our goal of increasing announceable deal flow with the Novartis and Tate & Lyle transactions as substantial recent examples those follow Nestle's option exercise and complementary protein catalyst commercialization events with each of KYORIN Pharma and Urovant sciences in the first quarter. Furthermore, we're delighted that we are beginning to develop a series of new customers in a growing list of verticals, each with new R&D projects initiated with us this year. In molecular diagnostics, we expect to deliver sales breakthrough milestones this year that firmly validate our growing penetration into that attracted market. And in Novel Biotherapeutics, we will be showing you preclinical data that validate the ability of CodeEvolver to create differentiated patentable new drugs and we will be bringing at least two programs beyond PKU to partnerable status by year-end 2019. This is requiring modest spending increases in the near term, while managing our cash balance and without losing sight of our medium quest - for medium-term quest for profitability. More to come on all strategic fronts going forward. With that, I'd like to open up the call for questions. Operator?

[Operator Instructions]

While we're waiting for our first question, I would like to alert you to our participation in a few upcoming investment conferences. We'll be at the UBS Global Healthcare Conference being held May 20 through 22 in New York. We'll be at the Craig-Hallum conference on May 29 in Minneapolis. We'll also be presenting at the KeyBanc Capital Markets Conference on May 30 in Boston. And lastly, we're presenting at the Jefferies Global Healthcare Conference being held June 4 through 7 in New York. Webcast of our presentation at the UBS and Jefferies conferences will be posted to the Investors section of www.codexis.com. Okay. Operator, we're ready for the first question.

Our first question is from Brandon Couillard with Jefferies.

John, just to start with the Novartis deal. Certainly nice to see another CodeEvolver partner come on to the line here. Could you just help us understand what exactly - number facets about those sort of back-end terms that are different with this relationship compared to GSK and Merck that might compensate you for what is - seems to be like a relatively smaller, somewhat upfront payment? And then Gordon, how much of the $14 million in general is baked in - already baked into revenue guidance for '19? And just to confirm, that was already contemplated in your previous outlook?

Okay. We'll take those in turn Brandon, okay? So yes, the back-end contributions that we hope to see flow from the Novartis deal are indeed more attractive than the back-end structures that we were able to negotiate with GSK and Merck several years back. It starts with the usage payment structure. Unlike previous deals, we are - we have the opportunity to earn usage payments during the clinical stage. There are higher usage payment negotiated per kilogram of API produced with the Novartis back-end transaction. There are no limits or caps on the amount that back-end usage payments that we can accrue over time from the Novartis deal. And similar to Merck, we also have negotiated some preferential rights to supply the proteins that Novartis creates using the platform license. Those we'll start actually earlier than we were able to negotiate with Merck in the clinical and starting with Phase I and similar to Merck, they would go - the preferential rights would continue five years after the drug substance gets approved. So in total, we're quite pleased with the overall attractiveness of the back end. And we're also pleased that the $22 million of upfront milestone payments, which is right in the middle of Merck and GSK's are spread more logically over time as we wait for those back ends to generate.

Hey, Brandon. Yes, we did anticipate this deal in our guidance for the year. But we are - we hope to explore the rev rec to the extent that we'll be recognizing it depending on the level of internal efforts that goes into each of the projects that are encountered in the deal so that's something that we'll be able to talk more about, I think, in August.

Then John, can you just sort of talk at a high level about the cultivation process with the Novartis, how long this process has kind of been in dialogue? And any color you can share with us about your pipeline of potential other CE platform partners and the likelihood that we could see, perhaps, a fourth take-on license, perhaps this year?

Yes. I think it's optimistic to think that our fourth CodeEvolver license will be transacted this year just to cut that off very quickly. It takes time for these large pharmaceutical companies to build up the business case that justifies these kinds of licensing expenses to be paid to Codexis. Plus, Novartis, GSK and Merck have all had to also invest in putting a team in motion to run the platform license. So overall, it's a fairly material investment for these customers. So it has taken some time. Honestly, we've been talking to many of the leading pharmaceutical companies since we first transacted these deals with GSK and Merck. And we've been slowly moving the group towards embracing a CodeEvolver license, Novartis the first to actually crossed the line, since Merck. And we're very pleased and proud of it. As I described in the prepared remarks that it was a natural, very deliberate time line from the beginnings of those discussions to actually transacting the platform license. But it went through some significant growth in revenue for Codexis, right? It's - it moved through working on more projects together and then it moved into a stage where we had one or two parallel dedicated protein engineering teams working for Novartis, and that's seven-digit revenues for Codexis in any given year. And then ultimately, this year it tipped over in a term sheet renegotiation and then it probably took us another three or four months to do a full-binding transaction from agreement on a broad set of terms.

Then one last one. Anything you can help us with as far as timing of when you might expect to share some of that preclinical data for the other Novel Biotherapeutic programs that are in development this year?

Yes. I think it's unlikely that we'll do it in the next few months, but in the second half, you should expect to see at least one or more of the programs where we're detailing data that show the differentiation that we're building with CodeEvolver and our therapeutic pipeline. So hang tight, we'll have that data for you this year.

And the next question comes from Matthew Hewitt from Craig-Hallum.

Maybe just a follow-up on that last one. With the data that you're going to present, is that something where you would issue a press release and just announce it? Or it will be in conjunction with some type of an industry conference? Just trying to think about how that will be structured.

It's likely - it's possible that, that would come forward as we start to detail partnering discussions. It's also - we need to have our patentability in order, we need to have secure and compelling preclinical research data to show the mode of action is being validated in animal models. It's all of the above. And we're excited about what's happening in the pipeline, and we're developing these assets well in parallel and we're encouraged that we'll delight you when we're ready to share those kinds of developments.

Great. All right. And then maybe one more for me. Regarding the Tate & Lyle agreement, you provided a few details there. But as we think about maybe over the course of this year, is it your expectation that they're going to be launching that product into several other or more consumer-based products? Or is it kind of a demand base where their customers are coming to them saying, hey, we want TASTEVA M in this product or that product? Just help us understand how that product can grow.

I'm encouraged by the data that Tate & Lyle is providing to us about how assertively their out marketing this as what they think that could be the most preferred non-caloric sweetener to be put on the market over time. So they're looking at wherever clients are formulating non-caloric sweeteners into their products. Whether they be beverages or solid food products, they are promoting assertively as one of their ways to differentiate themselves in their market. So I'm very encouraged that they are pushing for their customers to formulate using TASTEVA M as assertively as they can. And I think we've been clearer over time, we expect that they will be successful. They're already being quite successful. And that this will translate into one of the leading product revenue items in our portfolio over time. And today our largest product revenue item is the enzyme that's sold to Merck for the manufacture of sitagliptin, Januvia, and that's ballpark right at $10 million of annual sales. So hopefully, over time, the Stevia enzyme sweet would grow beyond that point. And we're encouraged, although, it's quite early days and it's really hard to predict the slope of that curve right now.

[Operator Instructions] Our next question comes from Doug Schenkel with Cohen.

You mentioned, John, in your prepared remarks three new projects with three new partners and three new industrial applications. Can you share anything else on these projects? And if not, if you've said what you're prepared to say about these at this point, when do you think we'll hear more?

Yes. Can't say very much more. I did share that they were - each of those projects were at least six digits or over $100,000. They - each of those projects were less than $1 million each. So they're in that order of magnitude. These are significant exploratory work to validate that enzymatic intervention in these three applications can bear fruit for the clients' applications. So we're really excited. This is not a trivial breakthrough, and it's great to see three of them stack all around the same time. These are new applications for Codexis. I won't speak to whether these are new applications for the clients at this point. But be it to say that there is not a guaranteed probability that these explorations will lead to follow-on enzyme development activities, protein engineering services, which are more material R&D revenue projects for Codexis. But I'm hopeful that at least some or maybe all of them lead into that stage, just like we've been able to advance early exploratory work with Tate & Lyle in their two different food applications over the recent past. So hopefully, they track like this. If they track from these exploratory projects, they would enter into larger R&D service work. And if the R&D service translates into enzymes that perform in a way that it delivers value to the client then we would move into commercialization and those would be great milestones. Just to connect the dots, these industrial applications are not burdened by the painfully slow drug development cycle. So in the case of Tate & Lyle, from early days like we're in with these three new applications to full commercial status, took us between two and three years. So if it tracks that well, we could have several new products that turn into multimillion dollar businesses like they have with Tate & Lyle in the food sector.

Yes, that's really helpful, john, because that's where I was going to go next is these sound like they are similar stage to where you were when you started with Tate & Lyle. So are those time lines - would you expect them to be pretty similar? Or is there a chance these could actually be a little bit quicker?

I think we were really quick with Tate & Lyle. Both parties put all focus on it. And so far, that's what we see with these quarters as well. So we're holding out that kind of a time line as a great success if it unfolds.

Okay. If I could pivot back to therapeutics and I apologize if I missed this earlier on the call. I just wanted to confirm that you still expect at least two assets to reach partnerable status by the end of the year? And I guess along those lines, are there other catalysts that we should be monitoring for this part of the franchise this year?

Yes. The first part of your question is absolutely yes. We continue ever since the middle of last year to uphold. This is a core objective for Codexis' Novel Biotherapeutics segment that we would have at least two reach partnerable status by the end of this year. And I think Matt asked questions about what it would take or maybe it was (inaudible) and we got to get our patentability in order, we got to validate and finalize preclinical research that shows the efficacy kind of results that we would need to show where will our differentiation, prospects and then we would start to show these assets to others, while we in parallel, do the preclinical development work to bring these towards the clinic. So hang on, it - we don't have data today, but we'll definitely be planning to unfold data and news events around this portfolio of four self-funded assets plus the Nestle partnered asset over the rest of this year.

Okay. And maybe just one more topic for me. On Porton, any update you can provide on the status of commercial installations? Have - they have any occurred at this point? And if not, it's there an expectation that a commercial installation could occur by year-end?

Commercial installation takes a lot longer. It takes us years to go from the beginning of work in pharmaceutical manufacturing processes to commercial installations. So we don't expect commercial installations. What we do expect and we are seeing is a lot of screening activity at Porton where Porton Pharma Solutions looks at far more pharmaceutical processes than Codexis ever can. And - so we've set up Porton to screen all of our existing enzymes that can be relevant to in their pipeline of drug process opportunities. And so Porton already, since they got up and running towards the end of last year, has screened our libraries in several dozen different process opportunities just in that short period of time. And the hit rate of attractive potential installations is exciting to us. So hang on, I think it'll translate into several different kinds of catalysts. From here, one is that they start to purchase some quantities of enzymes. They'd be modest, but they would be exciting developments or they procure some of our protein engineering services to make those enzymes better. And then down the road, we could maybe see some commercial sales agreements and/or manufacturing investments by Porton because we enable them ultimately to be able to produce some of these enzymes. So I think we're happy with the screening, we're very happy with the way they're aggressively using our technology to find cost-saving opportunities in their process pipeline, and we continue to work that relationship quite well. Thanks for asking.

Our next question comes from Steve Schwartz with First Analysis.

I guess, so first question, just with respect to the Tate & Lyle announcement last week, I recall that you'd already signed a supply and licensing agreement with Tate & Lyle. So when I saw that announcement, I was trying to parse out in my head across the history of your working with them what the difference is? Is it specifically because it's with TASTEVA M? Can you give me a little more color on that?

Yes, a fair comment. So back in March of 2017, if you go back in our announcements, you'll find an important announcement and the history of this project for Stevia, better-tasting Stevia, where we entered into a joint development agreement with Tate & Lyle. At that point, we hadn't had enzymes that were effective enough. And so with Tate & Lyle, we secured the funding to improve those enzymes and to ultimately, scale and commercialize and get registration for those enzymes alongside their scaling and registration. So that's - that was the beginnings of the R&D work that started back with that announcement in March 2017. In the middle of last year, we highlighted in one of our earnings call, I don't think we had a press release. Did we, Gordon?

No.

We highlighted in one of our earnings call that we both parties had commercialized. And for us that meant we produce that scale and we got registration GRAS - generally recognized as safe, or otherwise known as GRAS affirmation for our enzymes. In parallel, Tate & Lyle had gotten their GRAS affirmations for their manufacture of TASTEVA M and they launched at a big tradeshow in the middle of last year, it's called the International Food Technology or IFT show. So we highlighted that, I believe, in our second quarter earnings call prepared remarks back then. But from that point forward, we had to finalize many details associated with a long-term multiyear licensing supply agreement and that's what we announced last week.

Got it. Okay. No, that's very helpful, John. And it was in fact then what your comments in mid-2018, where I was trying to distinguish from the press release last week. So that's very helpful. Second question, and this is with regards to her agreement with Nestle. So of the partnership agreement that you guys published through or filed through an 8-K, quite a bit was redacted, but it seems to suggest that you're going to continue to receive some kinds of payments through the clinical trial phases of this drug. So in other words, even like - it looks like there might be one or two payments, while it's in Phase II trial. So whereas - up until seeing that agreement, I was kind of the - under the impression, you might not see anything until the drug made commercial status. Can you clarify that for us?

Yes. Thanks for highlighting this. It's very true. Actually, we are - we had the opportunity to earn an additional $86 million of milestone opportunities before the drug is even for sale in the marketplace. So from through the clinical stage through the various stages of clinical development and through approvals in major geographies, those milestone opportunities a cumulatively are $86 million. If it gets on the market, we have the opportunity to earn additional sales-based milestones, which can accumulate up to another $250 million of milestone payments that are sales milestone based plus royalties on the sales - net sales of that drug and those royalties tier up to low double digits.

Okay. So John, then to pull the question closer to the near term, and let's just say, Phase II trial work, if there is a and b Phase II, that would be maybe over the next one to three years. Are we talking about maybe a couple single-digit million dollar payments in that span?

We've never detailed exactly what the milestone schedule is from here partially because it's out of our control how the clinical program is run from here. Although, we have some visibility into how we believe Nestle plans through in their clinical trial program. But I think, we would need to have a little bit of time. It's the - first, I would say, the margin opportunity will not exist in 2019. So it'd be 2020 and beyond the next milestone associated with the clinical development with Nestle. And as we get a little closer to that and we see the progress through Nestle, we'll negotiate through some visibility to give that line of sight.

[Operator Instructions] Our next question comes from Sean Lee with H.C. Wainwright.

Most of my questions have been answered, but I just have one. I was wondering, if you could give us a little more color on the next-generation sequencing franchise? What's the market uptake and reaction so far to it? Where is the efforts - where are your efforts going to be focused on for this year? And where do you see the franchise be - by the end of the year?

So we've promised material sales breakthrough this year in this sector. The reality is, sales revenue will come from the product that we're already promoting and have commercialized the DNA ligase, which enables higher conversion of samples with trace DNA. And that is being widely considered and/or is in early use by some clients. We see significant interest in the widening of the installed base there. And in parallel, we're starting to be entertained to have discussions with larger more scaled partners that provide kits that contain the DNA ligase for example and you can imagine the kinds of companies that I refer to. Some of those are companies that actually make can sell next-gen sequencing machines and the reagents that those require. So the DNA ligase is very nicely on track, and that's going to be the source of material sales that we can generate and plan to generate this year. In parallel, we're closing in on providing our second product for beta testing. This would be a larger, potential product opportunity for Codexis. It's a DNA polymerase, much more widely used, a larger addressable market where we need to succeed and we're finalizing that product in R&D and soon, we'll be making quantities to go out to sample to target customers. These would be the same customers that we have been promoting and are starting to sell our DNA ligase into. So it's really S-curve - early part of the S-curve adoption and material for us is seven digits from very, very little last year. And then enthusiasm and excitement for how our DNA polymerase works with - as we launch that product.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to John Nicols for any closing remarks.

Okay. Thank you, everyone, for all your good questions. We're super excited about our highly productive start to 2019, our new transaction with Novartis, our penetration into sweetener markets with Tate & Lyle TASTEVA M, and we look forward to providing ongoing progress updates to you over time. In the meantime, have a great night. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone, have a great day.