Good day, ladies and gentlemen, and welcome to the Q2 2019 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 to 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, Mr. Bruce Voss. Sir, you may begin.

This is Bruce Voss with LHA. Thank you all for participating in today's Codexis' call to discuss second quarter 2019 financial results and business progress. Please note that Codexis has posted an updated pipeline snapshot slide presentation on the Investors section of codexis.com to accompany today's call. 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 August 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, Bruce. Good afternoon, everyone, and thank you for joining us. The second quarter was another very solid performance for Codexis, as we continued to deliver against the critical objectives we established for 2019. Expanding our customer base, commercializing installations in pharma manufacturing, adding to and strengthening our CodeEvolver platform licensing network, breaking out in molecular diagnostics and other new industrial verticals, advancing our Novel Biotherapeutics pipeline, bolstering the cash on our debt free balance sheet and on-boarding critical new human talent, all of these were delivered in this very productive second quarter. Let me now walk you through some details to highlight our progress, starting with product sales. Product sales were up 68% year-over-year and led the way for us in the second quarter. As usual, enzyme sales to Merck for their manufacturing of the active ingredient in Januvia were a solid seven-digit baseload for our product sales. Excitingly, in addition, we have generated over $1 million of product sales with another top 25 pharmaceutical customer in the quarter as they began the manufacture of registration batches for their planned 2020 drug launch, following its recent New Drug Application or NDA acceptance by the FDA. In total, eight customers purchased over $100,000 of products in the quarter, up from five customers in the second quarter last year, reinforcing the accelerating penetration of our Performance Enzymes in real world manufacturing processes. Urovant Sciences was among the leaders for our product sales, as they lined up supplies for their planned NDA filing with the FDA in early 2020 for vibegron a potential treatment for overactive bladder. Rounding out the list of clients with more than $100,000 in product sales, were two more top 25 pharma customers each meeting batches of Performance Enzymes for their clinical stage drugs, two leading generic pharmaceutical…

Thanks, John. Total revenues for second quarter of 2019 were $12.3 million, compared with $13.5 million in Q2 of 2018. Second quarter of 2019 revenue included $10.6 million from the Performance Enzymes segment and $1.7 million from the Novel Biotherapeutics segment. Product revenue for the second quarter of 2019 increased by 68% to $6.2 million from $3.7 million a year ago, with the increase due to demand for enzymes for both generic and branded pharmaceutical products. R&D revenue for the 2019 second quarter was $6.1 million versus $9.8 million in Q2 of 2018. As John mentioned, the decrease was primarily due to those conditional services in the prior year's Q2 to Tate & Lyle for their sweetener product, which is now transitioned to product revenue. This decrease was partially offset by the revenue recognition of a software license fee from Merck. R&D revenue for the second quarter of 2019 included $4.3 million from the Performance Enzymes segment and $1.7 million from the Novel Biotherapeutics segment. Gross margin and product revenue for the second quarter of 2019 was 56% up from 30% a year ago, with the increase due to product mix. Turning to operating expenses, R&D expenses for the second quarter of 2019 were $8.3 million, and included $5.1 million from the Performance Enzymes segment, and $2.9 million from the Novel Biotherapeutics segments. The increase in operating expenses from $7.4 million in the prior year period was primarily due to higher expenses relates to headcount, allocation of occupancy related costs, and lab supplies, partially offset by lower outside services. SG&A expenses in Q2 of 2019 were $7.9 million, which included $2.1 million from the Performance Enzymes segment and $6 million from the Novel Biotherapeutics segment and the remaining portion is included in $5.1 million in corporate overhead and depreciation expense.…

Thanks, Gordon. I'm sure all of our investors and analysts have read the tandem press releases we issued this afternoon, which included the announcement of Gordon's plan to retire. I want to add a deep and heartfelt thank you from all of us at Codexis, Gordon, and particularly from me personally for all you have done for the company since you joined us as CFO five years ago. You will be missed, and your colleagues at Codexis wish you all the best in your retirement. At the same time, we welcome Ross Taylor as our new CFO, effective August 19th. Ross brings to Codexis more than 20 years of healthcare financial leadership experience, most recently as CFO of Abaxis, which is now part of Zoetis. Given his extensive industry experience and equity capital markets background, I am confident he will seamlessly step in to help Codexis continue to grow and succeed. Additionally, his significant analytical strengths and strategic approach, refined across a diverse set of businesses and industry sectors position him to add significant value as we expand across a growing set of markets and partnerships. We look forward to Ross's arrival and to get him up to speed and impactful quickly and effectively. Gordon will help facilitate the transition through the end of August. Now let me close this call like usual by highlighting our strategic objectives to drive our near and longer term growth. Our business strategy begins with a relentless focus on our CodeEvolver protein engineering platform technology. We are delighted with the increased recognition our technology is garnering from global top 25 pharma companies and by growing customer base that spans multiple verticals. Proprietary artificial intelligence competencies are at the core of our ability to discover proteins that meet customer needs at an ever accelerating pace.…

Thank you. [Operator Instructions]. Our first question comes from Brandon Couillard with Jefferies. Your line is now open.

Hey, before Brandon jumps on -- I apologize, while we're waiting, I'd like to alert you of our busy investment conference schedule this fall. We will be presenting at the Cantor Fitzgerald Global Healthcare Conference being held October 2 through 4 in New York, the Stephens Nashville 2019 Investment Conference being held November 19th through 20 and the Stifel Healthcare Conference being held in November 19 through 21 in New York, and finally, the Craig-Hallum Conference being held in New York November 12th. Webcast of our presentations at these conferences will be posted to the Investors section of codexis.com. Okay, operator we are ready for the first question.

Brandon Couillard, your line is now open.

First off, Gordon it’s been a pleasure working with you, I had no idea you were considering retirement, but wish you the best.

Thanks a lot Brandon.

John, it would be great if you could, to the extent you're willing and able to -- would love to get some more detail on the two new customer partnered programs in the molecular diagnostics segment. If you could elaborate kind of on what the application set is and perhaps the potential size of the opportunity and maybe the timelines for I guess these becoming much bigger sort of product revenue generating endeavors?

Sure. Yes. We are really happy that we have secured these two new projects with these two new clients. The enzymes that we're engineering right now with our CodeEvolver platform are not targeting the enzymes that are needed for next generation sequencing workflows. These are over and above that particular application, which we continue to see strong -- strengthen and that we talked about many times in the past. So these are newer targets. They both are very customized, they’re more niche in terms of the potential applicability and one of them is targeting a different class of diagnostic, not genomic diagnostic that we're all familiar with using next-gen sequencing or polymerase chain reaction. These are diagnostics of other types of biomarkers in human biology. We're excited, we’re working with one of the great leaders in this space and the progress of that R&D project is proceeding quite well. And there could be multiple targets that this partnership could go after. In other words, more than one particular biomarker could benefit by more than one Codexis enzyme. The second application is more of a molecular biology application. It's also a niche type of enzyme. And it's going to enable this particular class of clients to manufacture their products more efficiently. And we see this as a growth segment for the company. And we're partnered up with a leader in that space as well. So that's a little more color about these two new growth applications for the company Brandon.

I appreciate that. And on the back of the Casdin Capital raise, should we expect this really accelerates the biotherapeutic development activity, kind of where do you see the pipeline progressing kind of over the next 12 months now that you have that funding back?

Yes, I think clearly it gives us optionality to do so but quite frankly we're driving that pipeline as hard and as fast as we can. We're working on five programs in parallel to the Nestle led PKU program, that we've already out-licensed to Nestle in the beginning of this year. And we're driving as hard as we can. Now those programs as they move through their early discovery and preclinical development cycle will require more capital as they continue to be successful. But those are relatively modest capital spends. And we'll keep you posted on how those unfold. It might add to a lot of our costs this year, for example, although it's a piece of why we continue to uphold higher operating expense outlook for the rest of this year than we’ve so far been spending this year. Next year the spending associated with that pipeline will go up naturally with the successful advancement of those assets in our pipeline. But I'd say not only those -- the option of the cash, the additional cash on our balance sheet enable us to drive the pipeline effectively and give us a lot of runway for that therapeutics pipeline. It also enables us to take some smart bets on developing Performance Enzymes without customer partnered money. We did that with the early days of our Stevia program before we ever showed the enzymes that we believe we could discover, to Tate & Lyle and others we had done significant proof-of-concept work on our own account. We think that was a key element for us to drive a much more attractive commercialization deal with Tate & Lyle. So we look to do that as well to help accelerate our growth in Performance Enzymes too.

Thanks. Lastly, just follow-up for Gordon. If we just look at the back half the year, revenue guidance implies R&D revs more or less double in the back half compared to the first half of the year. Could you sort of speak to the level of confidence and visibility you have on that ramp in the second half?

Yes, we've got a pretty good visibility on that, Brendan. Part of it is we haven't recognized any revenue yet from the Novartis CodeEvolver license. So that will kick in the second half of the year and we’ve got other projects that we expect to be able to complete by the end of the year, which will help us to reach the guidance that we just announced or confirmed.

Thank you. And our next question comes from Matt Hewitt with Craig-Hallum Capital.

Good afternoon. Thanks for all the details and similar, I'd like to congratulate you on your retirement Gordon and best wishes as you move on and enjoy a little bit more freedom.

Thanks, Matt.

Absolutely. Sticking with the pipeline a little bit, first question, last quarter, you had three six-figure industrial customers that came on. I'm curious if there was any follow on with those customers or how that vertical is kind of shaping up and how we should be thinking about that going forward?

Yes, all three of those customers grew in the second quarter and the project work in the R&D chapter continues to advance well. In the prepared remarks that I gave a little more definition of what those three projects were. And two of them are these new diagnostic molecular biology application -- applications, which I detailed, based on Brandon's question. The third one was another food application and it's not really a classic food application, it’s kind of a near food application. So last quarter, we spoke to it as a new industrial sector. This time, it's really closely aligned with the food space. So we put it in there. Note it that it's not a sweetener, it's another food used for clinics, it’s enzymes. So that's where those three are. And between the three of them, there is well over $1 million of revenue that hit the P&L in the second quarter for those three new growing projects and applications.

The other I guess follow-up question would be regarding the two new -- there was a top 20 pharma customers. And if you could give us some details in the prepared remarks regarding those, it was a one stepping up ahead of an NDA early next year, the one recently received an NDA. Did I get those right? And any additional color that you can provide on those would be helpful?

Yes. I spoke to actually two unnamed the top 25 pharma companies in both the product area and in the R&D revenue area. And those are four different top 25 companies just for your information. So in the R&D revenue area, the one of the projects was a dedicated project team with a leading actually top 10 pharma company referred to in the past. And they're working a parallel process for their pipeline of drug processes. Looking at my list here, the other top 25 drug company in the R&D revenue is a company we haven't done a lot of business with historically. And we're really excited to have gotten started with that particular top 25 pharma company. And in the second quarter, we actually did a whole stack of screens. Those are usually not very high revenue, not very costly to the client, but it showed that this client really gets it and they were looking at a lot of different drug processes and early stage projects with Codexis and we're hopeful that those translate into deeper protein engineering projects with that particular top 25 pharma company. In the product area, you got it close. Urovant is the company that is ahead of the NDA filing next year. We did -- in addition, we did over a $1 million of product sales to another top 25 drug company. They’ve already gotten acceptance for their NDA. So this client is lining up for their launch next year.

That's great. May be one last one. How many teams are you currently working for the R&D process group right now? So, I'm trying to remember what the number was last quarter, but if you could give us that number for Q2? I have got it somewhere in my notes I'm sure.

Yes. Right now we are operating maybe 16, 18 parallel protein engineering teams.

Thank you. And our next question comes from Doug Schenkel with Cohen. Your line is now open.

Hi. This is Ryan on for Doug. Thanks for taking my questions. Congrats to Gordon on retirement and congrats to Ross on the new job. May be just following up on -- first on Brandon's question earlier on the R&D revenue guidance and the step up in Q4. This would seem to suggest to us that you expect another new strategic deal in Q4, is that correct? And if so, how much visibility do you have on that at this point?

We're got pretty good visibility on the back half of the year. I'd say the main thing would be the Novartis CodeEvolver license. We haven't recognized any revenue yet but that will start in the third quarter and ramp up in Q4. And we are looking at a variety of projects, some of them John alluded to right now in terms of these new verticals that we're talking about. But there are -- there’s the possibility of other deals as well in the second half.

Great. And then, I apologize if I missed this, but are you still on track to launch the polymerase for your NGS customers late this year and any update you can provide on overall NGS enzyme revenue in 2019? Thank you.

Yes. We still expect to deliver material sales in the NGS enzymes arena. Those would be focused on the DNA ligase which is already launched there out in the market. The polymerase is getting buttoned up for data trialing very shortly. So, absolutely, this will be in hand to customers and will be set up for launch before year end. So, we're still doing really good work there. We are really excited. We are getting encouraged by our clients and it's looking to be a really good target segment for the company, not only for our DNA ligase and polymerase, we also see opportunities for other enzymes that are beneficial in the workflows for running next-gen sequencing workflows.

Thank you. And your next question comes from Arce from H.C. Wainwright. Your line is now open.

Thank you. Gordon you will certainly be missed and I wish you all the best on your retirement and hopefully you'll have a better time off Codexis. On the pipeline, I believe John stated that there is one new project other than Tate & Lyle that got included into this pipeline. Could you give us a little bit more color on the opportunity and its probability of becoming a meaningful revenue line soon?

I just want to make sure I’m answering the question, Arce. So you -- are you asking about the new Tate & Lyle projects that was initiated that I referred to in our prepared remarks?

Yes.

So it's early -- it's an early start. So, probability of success in early R&D is always lower. But as we advance through the CodeEvolver protein engineering process, the odds of creating enzyme liberates value and justifies the investment by Tate & Lyle to install it commercially grows. So Tate & Lyle is the power user of our technology. They know what we can do. It's been proven now successfully several times and very impactful projects. So they usually -- these guys know how to point our technology, which is really the state of the relationship with them. So, generally speaking, a project directed with the Tate & Lyle has a little higher prospect of ultimately commercializing given their knowledge of wielding the technology, but it's still early. I would say like both of the other two successful commercial projects with Tate & Lyle, if things go well, from the beginning which as I said just started into 2Q to commercialization can take place, can all be accomplished in two years. And this is no -- this project also has that prospect.

Thank you. And then on the on the generics business, you stated that there were two additional projects over the last 12 months. How meaningful is this segment, when we -- and how much of a sense does it make for you to go and get more generics projects on board?

Looking at the pipeline in total, we have six commercial sustaining products for the generic industry. We have five pre-commercial. So those six sustaining revenue businesses are in total a lot smaller than the ones success with Merck, for example. So they're nice pieces of business, they are generally smaller in their revenue scope. And noting the pre-commercial side of the pipeline, it's pretty rare that Codexis would spend its own money to develop enzyme targeting a generic process, a generic drug process. You can see we have done that in one case. So that project is encouraging to us. But it's the anomaly, we usually drive the customer to fund those programs. So, anyway, so it's a nice segment. It's stable for growing. I think we do better business with patent holders in the drug manufacturing world on average, but we continue to support and grow this sector.

And then my last question is on Novel Biotherapeutics. So you're saying that the CDX-6114 trial is expected to start in 2020. So what is left or what needs to get done still, before the study can get started?

Yes, so this program is now under the direct control of Nestle. So the out-licensing partnering arrangement we have with Nestle, we’re informed but not involved any longer. And to be precise, what I mentioned in the prepared remarks was that we have an opportunity to earn a milestone in 2020 from the first trial conducted with phenylketonuria or PKU patients which Nestle is lining up. So it's basically a marker in your models to say that next year if things continue to go well with CDX-6114 PKU that there's another milestone on the horizon next year, not this year. And we're very close to Nestle, both in how they're running that program and in partnering projects that we have ongoing with Nestle. So we are fully confident that they're driving the CDX-6114 product as assertively and as aggressively as we would hope and as we would. So we're very pleased with the way they're running the program.

[Operator Instructions]. Our next question comes from Steve Schwartz with First Analysis. Your line is now open.

Let me wish congratulations to Gordon. And John, given the complexity in the life term of these licensing deals, if you let Gordon keep his cell phone, I'll be glad to harass him well through 2020 with questions on those licensing deals. But on to the more serious matters. With respect to the pipeline, you have listed Codexis self-funded pre-commercial project in food ingredients. Is that in fact what you're referring to in this non-sweetener food application? Or is that something completely different?

That's actually something completely different, Steve. Thanks for highlighting that. What I spoke in prepared remarks, and I forget which of the analyst asked the question. I was referring to a customer funded project, which generated revenue for us in the second quarter. So that's one of the three in the customer partnered line. This one in the self-funded is an enzyme that we're developing with an R&D team targeting an application that we're quite excited about. And we're using our own funds for that. Ultimately, we will seek a partner, because our channel to market is obviously very limited as an enzyme company. So we're going to develop the asset to a point where we have a compelling proof-of-concept. And then we will go out, will speak to clients and pitch them on the value that it can create. And ideally create a competition for a partner to take into market.

And so a project like this, does it spawn itself from the work you're already doing in that immediate area through like Tate & Lyle or through these other customer partnered programs or has something like that coming about?

No, it doesn't it all. Actually, it can’t. If we're privy to ideas and project concepts in our partnership discussions, those would likely be bound by confidentialities that would prohibit us to work on our own. These are in fact projects that we identify with our own market research or with our own frontline business development team where they see an opportunity for an improved enzyme. May be an enzyme that already being used by clients that has deficiencies in today's or tomorrow's markets or we see another application, where a new enzyme can deliver value where enzymes aren’t used. So these are projects that we are conceived of with our own intelligence. And then we do proof-of-concept work using CodeEvolver. We like this model very much. It's proven successful with Stevia proved and proved successful in other segments and opportunities as well.

Okay. And then sticking with the pipeline snapshot, Arce had asked about the generic opportunities for generic drugs, and certainly it's a big area on the pipeline. What direction does it go from here where you have the FDA passing through a higher volume of ANDAs right, and the pricing gets more competitive on generics which is favorable to your -- what you do. But at the same time it seems like the life cycle of the generics themselves and the market share for any given company's generic seems to be shrinking. Is it on all-in-all the market dynamics favorable to you or against you in this situation?

I think it’s more challenging. I would argue that the lifecycle of the successful generic drug is actually not shrinking over time. These drugs can get locked in for very long period of time. But you are right about the complexity of market share, because many, many generic companies have gone through the same generic drug. And so it's hard for us to position ourselves -- probably impossible for us to position ourselves against all of these companies trying to grab a piece of the market as it goes generic. So, we're selected in our partnerships where we’ve had success. It is not a very large part of our R&D utilization today, creating new proteins for generic drugs. But it continuous to hold up as a good solid target for us that will generate great returns on investments like all of our projects will.

Okay. And then my last question is just with respect to R&D expense. It seems in the first half of the year where you have been consistent in around $8 million, roughly speaking. What does the second half of the year look like for that expense? And then if you can generally touch on 2020 with some of the activities, where should we be modeling this expense at?

We would R&D expense to ramp up in the second half slightly. We are going to have full six months of some of the hedge that we’ve added in the first half of the year and also just depends on some of these programs. So, I would expect that to get back to our $72 million guidance in total OpEx for the year, roughly split evenly between R&D and G&A.

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

Okay. Thank you everyone for your questions. Congratulations Gordon for your last quarterly earnings call of your career. We're excited about our many developments over the first half of this year and we look forward to providing ongoing progress updates to you. In the meantime, everyone have a great day.

Ladies and gentleman, thank you for your participation on today conference. This does conclude your program and you may all disconnect. Everyone, have a great day.