Codexis, Inc. (CDXS) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Codexis, Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Jody Cain. Thank you. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's Codexis call to discuss 2019 fourth quarter and full year financial results and business progress. A slide deck to our company management's prepared remarks is available on the investor section of the company's website at codexis.com. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Ross Taylor, 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 February 27, 2020. 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 the 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. Today's conference call remarks it will include both GAAP and non-GAAP financial results. Codexis believes the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of its business, enables a comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to the key metrics used by management in operating the business. These non-GAAP financial measures are presented solely for the informational and competitive purposes. It should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today. 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 posted a short slide deck on the investor section of our website to accompany today's call, and I encourage you to follow along. Let's start on Slide 3. 2019 was an excellent year for Codexis, delivering strong financial results and continuing the strategic momentum building for both our Performance Enzymes and Novel Biotherapeutics business segments. Financials were led by an exceptional 24% year-on-year revenue growth delivered by the Performance Enzymes segment. Within Performance Enzymes, pharmaceutical manufacturing was the star in 2019, growing over 37% versus 2018, showing that even the most established of our three growth strategies can deliver step out results. There we landed our third CodeEvolver platform licensing deal with Novartis, recognized nearly $3 million in back end revenues from our first two platform licensees and saw three customers Phase III drugs using our proprietary protein catalyst filed for or receive FDA approvals. 10 pharmaceutical companies added meaningfully to our revenues in 2019, five of which are global top 25 majors that have yet to secure a license to bring our CodeEvolver platform technology in house like three of their peers already have. On top of that, our strategy to penetrate new markets with Performance Enzymes continues to build momentum. Enabled by our enzymes Tate & Lyle's fully commercialized the better tasting Stevia Sweetener is in the hands of the world's leading food and beverage brands, staging for ultimate breakout adoption. In next generation sequencing we partnered our DNA Ligase with Roche, one of the world's leaders in the space and readied our DNA polymerase product to launch into and penetrate that products larger customer base. And finally, we materially advanced to brand new clients, leaders in their spaces into new exciting application categories for Codexis enzymes. And on top of these solid developments, we dramatically stepped up the build out of a successful drug discovery and development franchise within Codexis in 2019. What started about five years ago as a cautious toe in the water is now a powerful value creating business segment for the company. Our first program CDX-6114 for phenylketonuria has advanced to become Codexis first drug candidate to be administered to patients, driven by our partner Nestle Health Science. In addition, the Codexis therapeutics discovery team has in the space of just a few years, generated positive preclinical research proof of concept results and has begun IND enabling work for two of our other pipeline programs in 2019. And finally, the team has generated positive and differentiated preclinical data for the therapeutic candidates in our pipeline that are not designed to be orally administered, which are those targeting two lysosomal storage disorders. I'm pleased to report that we're working to finalize an agreement with a new partner involving these candidates. We look forward to communicating the details of that new biotherapeutic partnership to you in the coming months. Bringing the segments together, it is worth noting that our total 2019 revenue growth of 13% was accomplished despite formidable $10 million plus headwinds from the conclusion of major partner funding chapters in both the Stevia and PKU projects in the prior year. Cash burn from operations was very manageable, roughly $12.5 million, far below new equity funds raised, leaving us with over $90 million of debt free cash, the highest year-end balance in the company's history. All of this success rests on the shoulders of the truly amazing team here at Codexis. We added more colleagues to the halls and labs at Codexis in 2019 than in any year since I joined in 2012. Plus we managed a successful and seamless CFO transition. In parallel, the next level of R&D leaders stepped up while we finalize an extended and crucial search process to transition to new executive leadership over our platform technology. I'm proud to say that in 2019, we were again recognized for the third consecutive year as one of the San Francisco Bay Area and nation's best and brightest firms to work for. Now 160 strong, we thrive upon deeply held and common core values of integrity, innovation and collaboration. There is a powerful collective pride for the company that we have recreated over the last six years. And we're scaling to handle the continued step out growth that we demand from ourselves and know our investors have come to expect from us as well. More business commentary later, but first, let me turn the call over to Ross to go into more details about the financials. Ross?

Thanks John. I'll review our Q4 and full year results and then discuss the 2020 financial guidance we're introducing today. Total revenues for the fourth quarter of 2019 were $18.7 million, up 16% from Q4 of 2018. Revenue for the 2019 quarter included $17.1 million from the Performance Enzymes segment and $1.6 million from the Novel Biotherapeutics segment. Product revenue for the fourth quarter of 2019 was $4.9 million, compared with $7.3 million for the prior year period, with the decrease due to the timing of demand for various enzymes. R&D revenue for the 2019 fourth quarter increased 57% to $13.8 million. This increase was primarily due to revenue from the Novartis CodeEvolver agreement we announced today partially offset by lower revenues from Nestle Health Science and Porton. R&D revenue for the fourth quarter of 2019 included $12.2 million from the Performance Enzymes segment and $1.6 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the fourth quarter of 2019 was 30% compared with 67% a year ago, with the decrease due to product mix. Turning to operating expenses, R&D expenses for the fourth quarter of 2019 were $8.9 million. This included $4.5 million from the Performance Enzymes segment and $4.0 million from the Novel Biotherapeutics segment, plus $0.4 million allocated to corporate expense. The increase in R&D expenses from $7.5 million a year ago was primarily due to higher outside service fees, higher headcount, higher allocation of occupancy related costs, and increases in lab supplies, partially offset by lower consultant fees and stock based compensation. SG&A expenses in Q4 of 2019 were $7.3 million, which included $2.0 million from the Performance Enzymes segment and $0.5 million from the Novel Biotherapeutics segment. The remaining portion of SG&A expenses of $4.9 million is included in corporate overhead expense and depreciation expense. The increase in SG&A expenses from $6.8 million in the prior year period was primarily due to higher facilities costs and headcount, which were partially offset by reductions and allocated occupancy related costs and outside service fees. The net loss for the fourth quarter of 2019 was $0.6 million or $0.01 per share. And this compares with a net loss for the fourth quarter of 2018 of a $0.5 million or $0.01 per share. Turning to Slide 4, I'll review our full year 2019 financial results. Total revenues for 2019 were $68.5 million, up 13% from 2018. Product revenue was $29.5 million, up 15%. R&D revenue increased 11% to $39.0 million and consisted of $28.7 million from the Performance Enzymes segment and $10.3 million from the Novel Biotherapeutics segment. Gross Margin on product revenue for 2019 was 47% compared with 51% for the year, with the change due to the product mix. R&D expenses for 2019 were $33.9 million and SG&A expenses were $31.5 million. We reported a net loss for 2019 of $11.9 million or $0.21 per share, which compares with a net loss for 2018 of $10.9 million or $0.21 per share. Turning to Slide 5, we reported another outstanding year from the Performance Enzymes segments with revenue growth of 24%, making up 85% of our total revenues in 2019. In addition, income from our Performance Enzymes segment almost doubled to $14.7 million from $8 million in the prior year. Moving to our Novel Biotherapeutics segment as shown on Slide 5, our Biotherapeutics segment revenues were $10.3 million, compared to $13.5 billion in 2018. The Biotherapeutics segments had an operating loss of $5.2 million in 2019, compared to income of $2.6 million in 2018. We expect revenue and income for this segment to remain volatile as it is driven by partnering milestones, R&D milestones and R&D fees. Also, we anticipate we will continue to make significant investments in this business. Turning to the balance sheet, cash and cash equivalents as of December 31, 2019, were $90.5 million, up from $53 million as of December 31 of 2018. This increase includes the proceeds from the $50 million private placement we completed in June. Let me now introduce our financial guidance for 2020, which is outlined on Slide 6. We expect total revenues for the year to be between $78 million and $82 million, which represents growth of 14% to 20% over 2019. We expect approximately 40% of 2020 revenue to be reported in the first half of the year, and 60% in the second half of the year. Within the first half, we expect approximately 40% of revenues being Q1 and 60% in Q2. We expect product sales to range from $25 million to $27 million. And we expect gross margin on product sales to be between 43% and 47% based on our outlook for product mix. With that, I'll turn the call back to John.

Thanks Ross. I like to now take a few minutes to discuss the business fundamentals that have enabled our sustained top line momentum, starting with Performance Enzymes on Slide 7. This is a new relatively dense slide, but this scorecard for Performance Enzymes momentum is highly instructive and helpful in communicating our business model. Furthermore, it underpins the confidence we have for continuing to sustain future double digit revenue growth over the medium and long term. Partner funded R&D projects are where it starts. Those projects add to the pre-commercial project pool. In June 2016, we had 11 active pre-commercial projects in our pipeline. Three years later, we nearly tripled that to 31 active projects. Notably that growth covers the fact that some projects drop off the list because they either become inactive or advanced to the commercial stage the latter of course being the goal. Growth of commercial projects in the pipeline naturally lags R&D projects. From mid 2016 to mid-2019, the total number of commercial projects grew by two from nine to 11. Having 31 pre-commercial projects now to advance versus 11 three years ago bodes well for accelerating the growth of commercialization milestones. Also, an increasing percentage of our projects are targeting industrial factors that should reach commercial stage more quickly than those targeting pharmaceutical manufacturing, especially those projects in the clinical stage. Once a project reaches commercialization revenues become more sustaining or recurring. Our product revenues plus sustaining sources within our R&D revenues, i.e. back ends from our CodeEvolver licensees and other commercialized licensing deals contributed $33.5 million of revenue in 2019, which is up 30% on a compounded annual basis over the last three years. Notably sustaining revenues contributed 58% of the Performance Enzymes segments total revenues in 2019 compared to 34% in 2016. The other 42% of segment revenues consist the partner funded R&D project revenues and upfront revenues from CodeEvolver platform deals. While these are non-recurring, they're of course valuable sources of additional revenue. But note the effect of CodeEvolver front end revenues, large periods to period swings, excluding CodeEvolver front ends, the segments revenues grew at a 28% CAGR over the last three years with them included a much dampened 9% CAGR. Regarding partner funded R&D project revenues, even though each project itself is non-recurring, we've demonstrated consistent growth in landing new funded projects, noting its 25% CAGR over the last three years. Rounding out the scorecard the remaining metrics focused on pipeline quality. Here we highlight the more than doubling of significant revenue generating customers, and the more than 10% increase in gross profit margin on the products we sell today versus three years ago. As I will review with the last slide, which focuses on 2020, some short-term circumstances will cause several of these measures to slow or modestly decline in 2020. Nevertheless, the power and momentum of the Performance Enzymes pipeline will push through over the longer term, driving the business on its long-term double digit revenue growth trajectory. Let me now shift to Slide 8, which focuses on the build out of our Novel Biotherapeutics pipeline. As Biotherapeutics discovery and development was a very small part of Codexis's activities as recently as just three years ago. Now the segment is a core part of how we are building value for our future. That foundation derived from our solid track record of success, building the pipeline that is summarized on this slide. Our Novel Biotherapeutics pipeline is now advancing seven programs in parallel, up dramatically from where we were three years ago. Starting with CDX-6114 for phenylketonuria, Nestle Health Science reports to us that their current patient trial is nearing completion. And though efficacy readouts are not yet available, they informed that no adverse safety events have occurred to date. In parallel, they have lined up to start a multiple ascending dose, Phase I/b trial for CDX-6114 in patients in the coming few months. We are excited to see the continued clinical progress for CDX-6114 noting that essentially all of Codexis's spending on the program is now behind us. Nonetheless, Codexis is set to potentially generate hundreds of millions of dollars of backend cash flow if CDX-6114 continues to successfully advance. The conclusion of the Phase I/b trial is the next potential milestone event for Codexis and that is expected to be assessed around the middle of 2021. In addition to the already partnered PKU asset, the Codexis therapeutics discovery team has in the space of just a few years also generated positive preclinical proof of concept results for two of our other pipeline programs in 2019. Importantly, each of these programs has also passed a critical investment justification gate, often called the development candidate nomination gate where the cost and timelines for the preclinical development work to enable initiation of clinical trials is assessed and approved. These IND enabling work expenses are significant, potentially in the range of five to $10 million per program. So the long term business case and the differentiating value of the preclinical results must be deemed sufficient to justify the upfront investment. It's great to see that both CDX-7108 and CDX-6512 have become development candidates. And if all goes well, both are destined to start clinical trials in 2021. CDX-7108 is an orally administrable enzyme therapy for an undisclosed gastrointestinal disorder and was the subject of our partnering announcement with Nestle Health Science this January. Codexis and Nestle Health Science co-own and are co-funding that program. Rounding out the Nestle partnered programs, we were pleased to announce as well in January, that Nestle Health Science has agreed to continue funding the discovery of additional new for both parties, orally administrable Biotherapeutics candidates through at least the end of 2021. Built on the success of both CDX-6114 and CDX-7108, together, we have brainstormed a list of new targets of interest to Codexis and Nestle Health Science, where both parties see the possibilities for CodeEvolver to generate differentiated new products for improved human health. We prioritized one shown at the bottom of the pipeline, and we'll initiate work on that program soon. Codexis generates partner funded R&D revenues under this strategic collaboration agreement Back to CDX-6512, it is also an orally administrable enzyme therapy candidate, and it is targeting a rare disorder caused by a genetic mutation involved in the metabolism of an essential amino acid. Like PKU patients, these, these patients are unable to process this different amino acid and its accumulation in the body leads to significant health concerns. CDX-6512 followed a very similar preclinical research approach, and benefited from much of our CDX-6114 preclinical research learnings, allowing it to reach the development candidate nominations significantly more quickly, in a little over two years from initiation. Codexis is self-funding the IND enabling work for CDX-6512. And we plan to share more about this program including the specific disorder and the positive preclinical data we have generated somewhere towards the middle of this year. And finally, let me provide you more detail on the work in the lysosomal storage disorder area, which I mentioned earlier is leading us to expect an imminent exciting partnering deal announcement. First some background, lysosomal storage diseases are inherited metabolic diseases that are characterized by an abnormal buildup of various toxic materials in the body cells as a result of enzyme deficiencies. According to the national organization of rare diseases, there are nearly 50 of these disorders all together and they may affect different parts of the body. As you can see on our pipeline chart, we have been working on two lysosomal storage disorders, one of which dates back approximately four years. These programs unique within our pipeline are designed to be administered systemically, i.e. by injection or infusion into the bloodstream. Our teams have done some terrific work in these lysosomal storage disorder programs highlighted by a recent scientific presentation addressing Fabry disease by one of our scientists at the world symposium in Orlando a few weeks ago. Dr. Hallows' presentation highlighted our Novel enzyme therapy candidates that exhibited improved preclinical results across a range of relevant parameters including stability, half-life, activity across various critical organs such as the heart, kidney and liver, as well as predictive reduced immunogenicity. We plan to share some of this data in future corporate presentations. In 2019, we determined that we should partner our work in lysosomal storage disorders in order to accelerate and increase the chances of our assets continued development. During our process, we generated significant interest with multiple strategic partners. We believe a binding agreement is nearing finalization, and hence, we expect that to be closed and announced very soon within the next few months. We had hoped that this partnering deal would be finalized last year and that slippage was a key contributing factor leading to the slightness on our 2019 revenue guidance. We look forward to providing you updates on this exciting development in the near future. We are super proud of what we've accomplished in our Novel Biotherapeutics segment and are very encouraged about continued advancements in the pipeline and for significant value creation to flow from that in the future. Now, let me close out our prepared remarks by summarizing the company's outlook for 2020 by turning to Slide 9. The Novel Biotherapeutics segment is expected to lead the company in delivering our new annual revenue guidance target of growing from between 14% and 20%. Growth of partner funded R&D with Nestle, developing CDX-7108 and the new discovery collaboration program, plus expected revenues from our anticipated new lysosomal storage disorder partnership, more than offset the roughly $4 million to $5 million headwind from not generating any revenues in 2020 from CDX-6114. Strategically we will be driving our pipeline forward as assertively as possible and warranted. That will require a significant increase in third party spending, especially for driving the two development candidates towards the clinic as a priority this year. We expect that will add somewhere between $2 million and $3 million per quarter to the segment's R&D expenses comparing to last year. In Performance Enzymes, we expect a modest decline in revenues in the traditional pharma manufacturing sector to be roughly offset by revenue growth in new verticals. In R&D revenues for pharmaceutical manufacturing, growth at new clients will come close to offsetting the expected lower revenue from Novartis as we complete the CodeEvolver licensed technology transfer successfully in 2020. Note that while we are advancing prospects for other CodeEvolver licenses to ultimately be consummated, the prospects for such could best fall into late 2020 and hence, we have not included the impact of that possibility in our 2020 guidance calculations. Product sales are expected to decline modestly in 2020 to the new guidance range that Ross shared of between $25 million and $27 million. All of that decline plus some can be explained by the short-term inventory reductions that are fundamental to new drug launches at Kyorin, Urovant and Allergan. Fundamentally, clients in pre-launch situations have to build their product inventories significantly in advance of launch for regulatory qualification procedures required by approving authorities like the FDA. 2019 was that type of inventory build for all three of these customers, who will require much less enzyme in 2020 accordingly. We expect this to rebound for all three clients in 2021 and beyond, as they reach steady state and their new markets. Note that our references last year to a top 25 pharma company who bought greater than $1 million worth of product several times was referring to our Allergan. Product sales to other pharma pipeline projects and clients will grow, but will likely be unable to offset the prior few senses $4 million to $5 million headwind. Enzymes sales to mark for cynical at the manufacturer are expected to be similar in 2020 versus last year. Given those sales are therefore expected to be higher ratio of total sales. There is a possibility that product gross margins could slip slightly versus 2019 to our new newly introduced 2020 guidance range of between 43% to 47%. For Performance Enzymes for other verticals, starting with the food industry, we continue to be encouraged by Tate & Lyle for our enzymes using the manufacture of Tasteva M, they're better tasting, non-caloric Stevia Sweetener. Tate & Lyle has shared that they are in the middle of many customer qualification discussions, and they are especially focused on getting Tasteva formulated into larger brands products. Customer responses to the taste and sensitive attributes for Tasteva M are very positive and have led to smaller early adopters having already commercialized products using Tasteva M with nutrition bars and other products on grocery store shelves today. Tate & Lyle has shared that the adoption timeline for larger customers can be quite long however, so we do not expect a substantial year-on-year Stevia enzyme revenue growth to be achieved in 2020. While this provides only modest near term growth prospects, Tate & Lyle continue to encourage us that their market penetration of Tasteva M is tracking to their plan, and that they have confidence in Tasteva Ms ultimate achievement of significant share of the world sweetener markets over time. Outside of Stevia in the food sector, we expect growth especially in partner funded R&D with new clients. The prospect list in food applications for Codexis continues to be strong. We expect growth into an exciting list of life science applications to be even stronger than the food arena in 2020. That starts with finalizing the tech transfer of our DNA Ligase with Roche. In addition, we are excited to commercialize our DNA polymerase into next generation sequencing markets in 2020. A Codexis team was at the AGBT Conference in Florida this week, the premier event in the space promoting our product and its differentiation versus incumbents. We continue to see life science markets as critical growth segment worthy of both self-investment and partnership with the right players and expect to continue investment and deal making in this space. The company continues to fire on all cylinders as we start off another solid year of growth in 2020. Our operating expenses are expected to grow versus 2019 accordingly. I already described the largest single factor being increased investments to drive the Novel Biotherapeutics pipeline advancements. In addition, we continue to smartly add headcount to be able to handle especially the increased protein engineering demand from all these growth activities. We will also be bringing in some new executive talent to help my great leaders and I to scale for continued step out growth that is nearing a point to be announced for new R&D leadership, as you heard already. In closing, I want to thank the entire team at Codexis for their very hard work and dedication, leading to our many accomplishments in 2019. And look forward to another highly productive year again in 2020. With that overview, I'd 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 participation in a couple of upcoming investment conferences. We will be presenting at both the Cowen and Company Healthcare Conference next Tuesday, March 3 in Boston. And we'll be at the ROTH Conference on Tuesday, March 17 in Dana Point, California. Webcast for our presentations at these conferences will be posted to the investor section of codexis.com. Okay, operator, we're ready for the first question.

All right, our next question is from Matt Hewitt with Craig-Hallum. Your line is now open.

Good afternoon, a couple for me. First, on the product revenues, a little bit late, it sounds like that's a timing situation. And you kind of helped us a little bit as far as the guidance for the year first half versus second half, is that almost entirely related to those three products in the market already. And it's just waiting for those, I guess, secondary orders to come in or are there some other items at work that are kind of delaying the reorders?

The decline from last year's – thanks Matt. The decline that we're showing in the guidance range for product sales versus the actuals for last year, that difference is less than the headwind associated with the inventory builds for those three recently launched or about to be approved drugs with Kyorin, Urovant, and Allergan. So outside of those three, there's some modest growth and the rest of the product portfolio. And I gave you some commentary about Stevia. Stevia is not quite yet at a point where its growth will be a significant contributor to year-on-year growth. It may happen towards the end of the year, but prudent forecasting says it's likely to take the rest of this year for Tate & Lyle to successfully get the adoption with the larger brands and ultimately build their need for our enzymes. So that hasn't been as much of a contributor in the short-term as we would have hoped for, but as the commentary also added, we expect that to start to take off as we get into 2021 and later.

Okay, great. And then I guess you gave us a lot of new information today. But regarding the lysosomal storage disorder opportunity, should we be expecting – is there going to be some type of an upfront licensing fee that would hit here in the – it sounds like almost first quarter, maybe second quarter? And how should we be thinking about the magnitude of that?

Yeah, we're not going to comment on the magnitude at this point. All the commentary was clear that we expect this deal to close very soon. And the structure that you outline is a reasonable expectation, some measure of upfront milestones and R&D program fees that would probably accrue to Codexis. And that will have an impact on our 2020 revenues. And we built that into our guidance.

Okay.

And Matt, just one comment that also Matt, I think depending on the structure of the deal, various terms of the agreement that can also impact how revenues are recognized, and when you're especially under 606, so just keep that in mind also.

Okay, and then maybe one last one then I'll hop back into queue. You commented on some new industrial sectors, and I realize you might not want to give specifics, but could you please help us out with size of those markets or any additional color that kind of helps formulate at least a little bit of an idea of what you're talking about there? Thank you.

Yeah. Most of the commentary focused on of course, outside of pharma manufacturing focused on food and life sciences and those were building market for enzymes. And we believe those are great targets and can be material product sales areas for the company. Outside of those three sectors, we're talking to many customers. We have good prospects, they were all relatively early so far, they haven't generated material revenues in 2019 and before, but we expect that to continue to move in the direction. If you go back a couple of years, we didn't talk about life sciences. We just talked about MDx, molecular diagnostics. If you go back three years, we didn't even talk about molecular diagnostics. If you go back four years, we didn't even talk about food. So that's how we layer it out is we kind of bring these stories forward as we actually land a partnership that brings material R&D funding into the company and whatever permissions we can get from those partners we'd love to share with our investor base. Certainly we'll be able to talk about the industrial sectors we bring in material revenues. Hopefully that helps.

Understood. Thank you.

Thanks Matt.

Thank you. Our next question comes from Doug Schenkel of Cowen. Your line is now open.

Hi, this is Ryan on for Doug. Thanks for taking my questions. Can you provide an update on how the situation with coronavirus is impacting your business today if at all? I believe you have one CMO in Switzerland and another in Italy. Have there been any material disruptions? And then can you also provide an update on Porton and overall Asia exposure? Are there any revenue headwinds and guidance for that? Thank you.

Yeah, yeah, like everyone in the world, we're watching very closely the developments of the coronavirus. Its impacts on Codexis have been nil to date. Thankfully, we haven't had any issues associated with our supply chain partners to date. We have very limited potential exposure to the Asian markets. More, it's our customers' impacts that could affect us. But we don't see those unfolding at this point either. Ross, anything you would add?

No, I think John covered all the details there, I think. Yeah, I think based on the activities we've seen from all of our customers, so far changes no changes, but clearly, we're keeping our pulse on the situation.

And, Ryan, you asked about Porton, we're keeping close to our partner. Of course, that's a relatively standalone partnership. We've set them up with screening capabilities and they've been screening our protein catalysts against their processed CMO opportunities in pharma. They took an extended shut down and I understand that they're back up. I'm sure that this is a pretty important development for them to be watching. But we don't have – we see revenues with Porton in 2020, not much being built into our guidance, but potential for upside, if they're able to advance some of their projects to more material stages that may require additional enzyme manufacturing from us or may require some enzyme evolution services to be provided to them for improving some enzymes. But those are those are largely built as upsides and they wouldn't be particularly large. They'd just be great signs of progress between Porton and Codexis in that partnership.

Excellent and then in terms of progress on the therapeutics pipeline assets, just to make sure I understand, is the ramping OpEx in 2020 entirely driven by increased spending on existing assets as these assets progress, or are you also building up further your discovery capabilities to add even more shots on goal with new pipeline assets over the next couple of years?

It's – the vast majority is associated with third party spending for GMP manufacturing, process development, toxicology, regulatory alignment, stuff like that. That's by far the largest category, but we are adding some headcount modestly to that area. We did a significant build out of headcount in that area over the last 18 months. But as we get a new project, like we shared with Nestle, in the January announcement, the extension of the strategic collaboration agreement led to a new program coming into our pipeline that would be just a modest additional R&D headcount.

Got it and then one more quick one, you mentioned nearly 3 million in back end revenues from CodeEvolver licensees in 2019, do you expect that to grow in 2020 and beyond? Thank you.

I think it will be about that level, if not a little bit lower Ryan.

I think from there, it's set up to grow. But we got a lot of visibility to 2020. And I agree with Ross's comments where we're not likely to generate as quite as much in 2020. But the programs that are advancing within Merck and GSKs pipeline are exciting. The program where we generated the milestone last year with GSK is advancing as best we know. And that program could lead to a significant stream of additional larger milestones over the coming three to five years if GSK continues to advance that, so that sets up for growth in that just one program quite well. And then as – I think it's a really good question. We published the detail in our prepared remarks. But we'll cover here. One of the items that came out of the back end from the Merck deal was the development of this multi-enzyme cascade for their fast-track HIV drug. The active ingredient is called Islatravir here. We shared a press release on that late last year. There is an amazing article about the development of that process in Science Magazine. And that's become a benchmark of how to best apply protein catalysis for the world to now study. But in the short run, Merck is really moving forward with that program and we're set up to be the supplier of enzymes. Again, there's a multi-enzyme cascade here, and that could be very nice material clinical orders for Codexis in 2020 and carrying into 2021.

Thank you. And our next question comes from Brandon Couillard with Jefferies. Your line is now open.

Thanks. This is Matt on for Brandon today. Just a quick one, following up on the Roche deal in December, curious how your conversations are going with others in the space, wondering if this deal could serve as a potential catalyst to secure other similar deals within the molecular diagnostics space? And then any color you can provide on discussions you're having with clients on additional biomarker activity?

Sure, great question and absolutely, the deal we made with Roche, one of the very top leaders in next gen sequencing for them to acquire a license to access our DNA Ligase was a watershed deal for us. I referenced a team of Codexis employees at the AGBT conference just this week. They just returned some of them and there was a lot of interest from players at that key conference. And of course, we're now pointing most of our efforts in the sequencing space to promote our second product, the DNA polymerase. So the publicity and the ability to attract a great partner like Roche for the first product is certainly creating some wind in our sails for the second product and we're quite excited about that in 2020 and beyond. Second question, I didn't get –

Just on any discussions with other clients on any additional biomarker activity or things like that?

Sure, broadly biomarker, the development – last year we started a really exciting program with a currently unnamed partner. It generated over $1 million of R&D revenues last year. I referenced it, but didn't spend much time on it in the prepared remarks. That program is advancing well. And broadly speaking, those are new novel enzymes that are being designed to enable potentially a range of different biomarkers to be assessed in human circulation. And I can't say much more, the partnership is going well. We're hopeful that that partnership continues to advance as we start 2020. It is currently continuing in motion, and that it reaches a milestone point where we could say more about what Codexis and that partner are doing. Thanks for the good question.

Thanks. And then I guess one quick maybe for Ross. If we just look at the product gross margins, 51% in '18, 47% last year and then the midpoint of the '20 guidance implies another slight decline year-over-year, can you help us better understand what's kind of driving that decline, is it simply mix or is there anything additional to call out there? Thanks.

Right and I think John actually addressed some of this in his prepared remarks and some of the Q&A already, but that's really driven by new mix, we expect Merck sitting within product, which is a lower margin product will likely be a bigger portion of the mix in 2020 than it was in 2019. And that's the primary driver of that anticipated decline in gross margin.

Super, thanks.

Thank you.

Thank you. Our next question comes from Sean Lee with H.C. Wainwright. Your line is now open.

Good afternoon, John and Ross and congratulations on a successful year and thanks for taking my questions. So my first question is on the revenue guidance. So based on the total revenue guidance you provided as well as the very conservative product revenues, based on calculations, you expect the R&D and licensing revenues to increase between 31% and 46% next year? So could you provide a little bit more color on which specific areas do you expect the majority of this increase to come from?

I'll start and John can maybe add some additional color. But given our expectations of moving our pipeline forward in the Novel Biotherapeutics segment, I think a lot of the growth in the R&D revenue will come from that area. But at the same time, we have a lot of activity, a lot of projects in Performance Enzymes and we should also see good growth in Performance Enzymes R&D revenue, but on a percentage basis, it likely will be faster in Novel Biotherapeutics.

I see, thanks for the time. And for the 6512 program you mentioned that the company expects to disclose more about – more details around mid-2020. So what can we expect from that disclosure?

Yeah, it's a promise. We just disclosed that it is past an investment gate decision. And so we have nominated it now as a development candidate. And therefore, we're prepared to invest the relatively sizable amount of expense to do the IND enabling work to carry it into clinical trials next year. So with that we don't want to stay silent on what it is. So give us a little bit of time, we'll share with you what the disease is, we'll share with you what's going on, are there solutions for patients in that disease or not yet, we'll share some insight into prevalence data, we'll share some data that we generated that helps to make the justifications decision. In other words the preclinical research data that drove our confidence that we're going to generate the return on at least the IND enabling investment and hopefully clinical investments down the road. So yeah, that kind of paints the high level overview that we'll make sure we provide on CDX-6512 for the inborn error of amino acid metabolism disorder sometime midyear.

That's good to hear. My final question is on the 6114 program, with the first study nearing completion and that's why you're preparing to set up a larger study to come in the next couple of months. Do you have any insight into whether we'll see any data disclosures on the program in the near term?

I don't have that clarity from our partner and as you know the partner is running that. They have provided information about the study designs on clinicalgov.org, sorry, clinicaltrials.gov. So both of these trials are now posted there and so it's up to them. Of course, if they go from one gate to the next, the data from the prior gate was sufficient to make that jump to spend more money and develop more clinical data. So it's always good. But yeah, I will encourage Nestle to provide that data. We'll share the impact of that kind of data, especially scientific forums can generate for them and for us, but it's hard for us to promise it, especially when we have no control over it.

I see her that's all I have. Thanks again for taking my questions.

Thanks Sean.

Thank you. [Operator Instructions] Our next question comes from Joe Munda with First Analysis. Your line is now open.

Good afternoon guys. Real quick, a lot of my questions were answered, but I wanted to touch on CapEx, what was it for the quarter and for the year and then looking out to 2020, how should we think about capacity and potentials for expansion there and CapEx spend in 2010? Thanks.

Sure Joe. Let's see, CapEx for the entire year was about $4 million just under 4 million. And it was just under $0.5 million in Q4. And in the upcoming year, we are doing an expansion of our pilot plant, so our CapEx is likely to be at least several million dollars higher than it was here in 2019.

Okay, and what does the – I guess, what does that equate to as far as capacity, the expansion of that pilot plant, is it some – is it 25%, 30% increase?

And maybe I'll cover that. The pilot plant is mostly used to do process development for ultimately a much larger scale manufacturing of enzyme Joe, so it's a core asset to develop the processes because CodeEvolver generates protein molecules at extremely small high throughput scale, and ultimately when they look good in high throughput the next step, if our products are the partnered products look good is to build a robust large scale process to fit with the manufacturing needs of the ultimate market. And so the pilot plant here in Redwood City, California, which is what Ross referred to, is crucial for that development of the new processes for new products. And so it'll enable us to do more new process development and it's going to enable higher automation, which are significant benefits for development. There's some percentage, it's a minority percentage of – use of that pilot plant to actually manufacture very small volume enzymes for commercial purposes, but that's pretty minor. Because as you know the vast majority of our product sales are enzymes of course and they're manufactured in third CMO partnerships. One of the other analysts referred to our two primary ones, one in Austria and one in Italy. And their capacity to produce enzymes is very significantly above our current capacity to pull. Our current needs to pull from that capacity. So we don't see product manufacturing limitations anywhere in the near future to be a key factor for the growth of our revenues, products or otherwise more as just development cycles as we try to describe, especially in the performance engine slide. Hopefully that's helpful color.

Yeah, it was. Thank you.

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 for any closing remarks.

Okay, thanks. Thanks, everyone for your questions. We have another exciting year ahead here at Codexis. We look forward to sharing updates and news across many developments we're working on to deliver throughout this year. Everyone, have a great day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.