Good afternoon, and welcome to the Codexis Second Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Bruce Voss. Please go ahead.

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's Codexis call to discuss second quarter 2020 financial results and recent business progress. A slide presentation featuring an updated product pipeline to accompany the conference call commentary is available on the investors section of 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 August 6, 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 actual results. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any time; and the currently contemplated impact of the virus on the company's operations, financial results and outlook is the best estimate based on available information. 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 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, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating the business. These non-GAAP financial measures are presented solely for informational and comparative purposes and 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. With that said, I'd like to turn the call over now to John Nicols. John?

Thanks, Bruce. Good afternoon, everyone, and thank you for joining us. It's highly gratifying to report on our strong execution through the COVID-19 pandemic to date. We delivered better-than-expected financial results for the second quarter with revenues of $15 million. That's up 21% over the prior year. R&D represented over 2/3 of our total revenues and delivered a 72% increase versus the prior year. Product sales came in as we had expected, and favorable mix showcased product gross margins well above historical averages in the quarter as well. Importantly, we are forging ahead remarkably well through the effects of COVID-19. Our R&D operations are getting closer to their pre-pandemic operating levels. We have adapted the physical layout of our lab facility and are staggering employee shifts to ensure the safety of our scientists as we rebuild R&D operations. Continuing the remote operation of our general and administrative employee base for the foreseeable future also helps to increase social distancing for the R&D team at the site. Our ability to reopen operations at a faster rate than anticipated when we held our last call in May helped to drive our excellent R&D revenue performance for the quarter. Our expectation is to return to full R&D capacity toward the end of the summer. I'm especially proud of the strong revenue results given that our lab was shut down or operating at low capacity for a large portion of the quarter due to the COVID-19 pandemic. While customers across the board have maintained their demand for our collaborative R&D project work, the shelter-in-place requirement effectively extended time lines for most of our partner-funded R&D project work into the future. Our ability to catch up on those time line delays is limited, but the good news is that this COVID-related revenue effect is expected…

Thanks, John. And good afternoon, everyone. Starting with the Q2 top line. Total revenues for the second quarter of 2020 increased 21% to $15 million from $12.3 million for Q2 of 2019. As John mentioned, our revenues for the quarter were above our expectations due to the timing of revenue recognized from our Takeda partnership, yet the timing of those revenues does not affect our full year revenue expectation from Takeda. Revenues for Q2 of 2020 were split relatively evenly between our Performance Enzymes segment and the Novel Biotherapeutics segment at about $7.5 million for each. Product revenue for the second quarter of 2020 was $4.5 million compared with $6.2 million for the prior year period, with the decrease due to the timing of demand for various enzymes. Within product sales, Merck once again have the - had the strongest showing during Q2, and Kyorin also made a meaningful contribution. R&D revenue for the 2020 second quarter increased 72% to $10.5 million primarily due to revenue from our Takeda collaboration. R&D revenue for the second quarter of 2020 included $3.0 million from the Performance Enzymes segment and $7.5 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the second quarter of 2020 was 62%, up from 56% a year ago, with the increase due to product mix. Turning to operating expenses. R&D expenses for the second quarter of 2020 were $10.9 million. This includes $5.0 million from the Performance Enzymes segment and $5.5 million from the Novel Biotherapeutics segment, with the remaining $0.4 million attributable to depreciation and amortization expenses. The increase in R&D expenses from $8.3 million a year ago was primarily due to higher head count and higher allocation of occupancy-related costs, partially offset by lower lab supply expenses and outside service fees. SG&A expenses…

Thanks, Ross. I'd like to close out our prepared remarks focusing on the momentum we are building in our Novel Biotherapeutics segment. We already highlighted the great start to the new gene therapy partnership with Takeda. The use of CodeEvolver to generate novel transgenes to enable differentiated gene therapy candidate design, now validated by Takeda, is gaining interest in the wider gene therapy universe. Our Novel Biotherapeutics business development team is gaining traction with other potential partners on the approach, and we look to step up our self-invested pipeline programs in this area now that our lead programs for this modality have been partnered to Takeda. The partnership with Nestlé Health Science also continues to build momentum. We expect them to report top line results from its first clinical trial with CDX-6114 in patients for the treatment of phenylketonuria or PKU before our next quarterly investor call. In addition, for CDX-7108, our partnered GI disorder program, we have advanced the program significantly despite COVID-19, having successfully completed our GMP manufacturing campaign at our CMO partner site and having advanced much of the required preclinical toxicology testing so far this year. We are also pleased to inform that Nestlé Health Science has decided to work with us to discover in parallel 2 orally administrable enzyme disorder targets, stepping up the funded partner work above the minimum requirement specified in the strategic collaboration agreement we extended together in the beginning of this year. Finally, I'm excited to welcome Dr. Jennifer Aaker to our Board of Directors. Jennifer is the General Atlantic Professor at the Stanford Graduate School of Business; a best-selling author; and a renowned expert on leveraging behavioral science to help companies and leaders build cultures that harness purpose, story and technologies to positively impact human well-being. She brings to us…

[Operator Instructions]

While we're waiting for our first question, I'd like to alert you to our participation in several upcoming virtual investment conferences. We will be presenting at the H.C. Wainwright 22nd annual global investment conference, which is being held September 14 to 16; and at the Cantor Fitzgerald global health care conference. We will be presenting Thursday, September 17, at 8 a.m. Eastern Time. We will feature webcasts of our presentations at these virtual conferences on our website at codexis.com. Okay, operator, we're ready for the first question.

Okay. The first question comes from Matt Hewitt with Craig-Hallum Capital Group.

Honestly, with the pipeline update and all the information you just provided, we can probably spend another hour just going through some of these items, so I'll try and pick smartly. First of all, congratulations on all the advancement on the pipeline. A couple of things that hop out here: How should we be thinking about the timing regarding the movement from the pre commercial to commercial? When you kind of upload this table, are you thinking over the next 12 to 18 months? Or how should we be thinking about that?

Every program has a different fundamental pathway to commercialization, Matt, and so that's part of why we segment the pipeline by different market area. Many of our - starting from the top, many of our programs are targeting manufacturing improvements for clinical-stage drug manufacturing. And oftentimes, we're starting those programs with customers as early as Phase I, in their Phase I stage of their programs. So it takes many years from the start of a program, a - of a development program, in Phase I for that customer's product to ultimately get commercialized. We'll commercialize our enzyme quicker, but then we're waiting for their continued clinical development, successes and ultimate approval for a project in that category to go fully commercial. But then as you move down the chart and we focus on some of the other performance enzyme markets like food, ingredients or life sciences: Here we can commercialize much quicker. We can set our sights on a new project. We can put our teams to work to engineer the novel enzyme. That often takes in a range of 6 months. I shared today that the project with Molecular Assemblies for DNA synthesis is going to be a longer project. So that one, we expect about a year. And if we hit our targets, we can commercialize quite quickly thereafter. We have to scale up. We have to get registration. We have to trial in commercial-scale facilities at the customer site, but from that point, our customers are set up to go to market. So you've seen in the new growth sectors the new growth vectors for Performance Enzymes. From the start of a program to fully commercial, we can get through that time line in as fast as 2 years, and we've done that multiple times. So the time frame for any given project that's pre-commercial or in development stage to move to fully development, it depends mostly on the target application and the success not only of our enzyme engineering capabilities but also on the success of the customer to go to market themselves. Hopefully, that was helpful.

Yes. No, that's perfect. During your commentary regarding next-gen sequencing, you indicated that you could end up having your first sale in that area here pretty soon. How should we be thinking about the magnitude or the contribution? I don't know. Is it 6 figures, 7 figures? Just help us quantify that.

Well, of course, it depends on the time frame. So for the DNA polymerase, I think we've highlighted for our investors that this is the largest current enzyme used in next-gen sequencing. So we're targeting a large current enzyme use, and we believe we're bringing performance improvements forward with our DNA polymerase. So this enzyme opportunity, if we're successful like we plan to be, could become an 8-digit product sale for Codexis. It will take its time. The actual revenue contribution for the DNA polymerase in 2020 will be modest, but it's great to see that we're starting. We're rapidly approaching making actual product sales for that product which we've just recently launched. So it's showing a lot of good interest. So it's - it will have its early beginnings with product sales this year, and we look forward to sharing those with you as we unfold our third and fourth quarter results. And then we're targeting for it to grow from there to, hopefully, a peak revenue that's 8 digits or larger.

Okay, very helpful. Maybe one more and then I'll hop back in the queue. I just want a point of clarification. I think you had mentioned that, product revenues, you expect to actually come in near the upper end of your prior guidance range. And if I'm not mistaken, that was $25 million to $27 million. Just is that - do I have all those numbers and everything accurate?

Yes, exactly. That's exactly what we wanted you to hear. Thanks.

The next question comes from Brandon Couillard with Jefferies.

John, curious if you can just maybe delve into a little bit more. You seemed a little bit cautious about kind of the R&D activity and some of the projects coming back fully online. What aspect of the operations are still constrained today?

Yes. So not all the employee base is back on site. We've had to spread our employees around. We've - there's been some, I'd say, modest single-digit kind of productivity hit from spreading the team out from the new workflows to ensure that our workforce is safe. So we're bringing in a few additional employees smartly to build up that capacity, but generally we're really, really proud and pleased and impressed with the R&D group's ability to rebuild the R&D capacity. We shared in the prepared remarks that we're currently operating at a majority capacity. We've said that in the press release as well, and it's a strong majority of our pre-pandemic capacity. And so we've got - most of our R&D project work is back in motion as we came to press today. So we're in a good shape. We do still have some opportunity to build it up even further, but the heavy lifting of getting the R&D operations and the R&D revenues that are generated from that back in place have been - are now behind us.

Okay. And then John, I think you mentioned in your remarks something to the effect of perhaps a greater willingness to self-fund some of the biotherapeutic programs that you're working on. Can you sort of talk about how your risk appetite has maybe evolved over the past 12 months? And when we might learn a little bit more about some of the other programs that are in the pipeline in terms of your being in a position to sort of share with us more details on where those programs are and kind of the progress you've made.

Yes, sure, sure. Thanks. I'm happy to do that. So really all of our big successes in Novel Biotherapeutics have started with self-funded projects, of the large majority of them. The PKU program started as a self-funded project. We built proof-of-concept, preclinical proof-of-concept, data. And then we did the Nestlé partnership. The Fabry program and the Pompe disease program we started a little bit later were both self-funded projects, and the data we generated from those projects enabled us to strike a very attractive deal with Takeda. So we're kind of - right now, we're a victim of all this great partnering success because most of our - many of our pipeline projects are now in partnerships. So we're rebuilding our pipeline of programs. Now we're going to self-fund once again. Some of those programs are in other amino acid metabolism disorders. Some of those programs are in other GI-oriented disorders because we believe we have a competitive capability, a comparative capability to develop enzyme treatments that are orally administrable given all the experience that the company has to stabilize enzymes in very aggressive situations like in the human GI system. And then I showcased in the - my prepared remarks today that we're looking to rebuild some project pipelines that - project in our pipeline that are going to create some new self-funded gene therapy targets for the company as well riding on the success that we've had with Fabry and Pompe and with Takeda. We have freedom outside of Takeda's arrangement to work on other disorders. So that's going to be a new area of pipeline development for the company. So that gives you some feel for the self-funded pipeline in the therapeutics area that we're building at this point.

Great. Just last one, for Ross. Any color you can share with us, as far as your expectation for the phasing of revenues between the third quarter and the fourth quarter? I understand Takeda kind of - some of those perhaps kind of came a little bit earlier than you expected, but just anything you can tell us about the back half of the year worth stating?

Yes, not a whole lot of clarity I can give, Brandon, just because some of this is hard for us to forecast. And as you know, we've really moved away from giving guidance, but I think just conceptually you can - you've heard that our R&D operations were definitely hindered quite a bit in Q2. A lot of the quarter, we were shut down, didn't start ramping things back up until May. That trend is progressing in through Q3. And then in Q4, we would expect to be back to kind of near-full capacity at the end of the summer, as John mentioned. So Q4, we would hope, would be a more normal pace for the R&D operations. So I think that type of trajectory, you can use to help with your modeling, but it's tough for us to say much beyond that.

Yes. I will just add that we gave you some color, and Matt asked about it as well, around product sales. That gives you pretty good visibility to what we're expecting for the second half on product sales, and that's up versus the first half. And then generally the company delivers materially stronger results in the second half versus the first half pretty much every year for the last number of years, so - and we're hopeful, barring any kind of unforeseen change in the impacts of the pandemic on Codexis, that that's the way the second half unfolds for us.

[Operator Instructions]. The next question comes from Jacob Johnson with Stephens Inc.

This is Mason on here for Jacob. Just a few quick ones from me. On Allergan, Kyorin and Urovant, I think there was going to be a pullback in terms of sales to these customers in 2020 due to some stocking ahead of drug launches. Any updated thoughts on the demand from these customers as we look into 2021?

Yes. The demand for that group of 3 customers looks really strong year-on-year for 2021 versus 2020, and we're actually seeing a little bit of traction in that group of customers based on their good successes in their launches. So we highlighted a material order from - product order from Kyorin in the second quarter. That was nice to see. And so yes, it will be a down year versus the really strong 2019 product sales, maybe not quite as down as we had thought, which helps us to move the expectation to the upper end of our prior expectation range, but certainly the - all 3 customers are set up for nice year-on-year growth in product sales in 2021 versus this year.

Got it. And then just one more. For the Takeda agreement, it looks like you guys are eligible to receive payments up to $22 million as reimbursement for your services and certain preclinical milestones. How should we be thinking about the pace and timing and size of these R&D efforts in the payments that are corresponding with them?

Ross, I'll let you jump in on that. I'll add if necessary.

Yes, yes, sure. Yes, Nathan, that $22 million is comprised of both development milestones as well as R&D payments. And I think the R&D payments will be spread over the next 2.5 to 3 years, and the development milestones will also be spread during that time period. I think it remains to be seen exactly how even that may be over the subsequent three years, but we do expect to have at least several million dollars in R&D revenue associated with Takeda during the second half of this calendar year.

At this time, there are no further questions, so this concludes our question-and-answer session. I would like to turn the conference back over to John Nicols for any closing remarks.

Okay. Well, thanks, everybody, for your questions. We've stayed very strong and navigated well through the pandemic while continuing to build an even stronger future for Codexis. So thanks again. Everyone stay safe and well. We look forward to talking again in the future.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.