Good day, and welcome to Codexis Third Quarter Financial Results Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I would like to turn the conference over to Jody Cain. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's Codexis call to discuss the company's third quarter financial results and recent business progress. 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 beliefs and expectations of management as of - the statement as of November 5, 2020. You should not place undue reliance on the 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 and 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. Now I'd like to turn the call over to John Nicols. John?

Thanks, Jody. Good afternoon, everyone, and thank you for joining us. We are very pleased to report another quarter of exceptional execution. We delivered strong sequential growth with revenues of $18.4 million and solid progress across all growth verticals. Product revenue for the quarter, again, exceeded our pre COVID expectations. In Q3, sales to 3 customers topped the $1 million mark with Merck's Januvia active ingredient, sitagliptin, continuing as the leader. Allergan, another top 20 global pharma company, was the next leading contributor, followed by Urovant Sciences for vibegron, its product candidate for overactive bladder. Sales of vibegron to Urovant and pharma have been very strong so far this year, and we expect another strong quarter from Urovant in Q4. The FDA's determination on Urovant NDA for vibegron is rapidly approaching with an assigned PDUFA date of December 26, and a positive outcome bodes well for future sales of this product for Codexis. Additional momentum during the quarter came from another top 20 pharma customer, who needed a significant batch of our enzymes to make their drug substance for Phase 3 trials. As anticipated, our larger volume manufacturing partners have remained consistently operational to date with minimal impact from the pandemic. This is allowing for the continued production of critical materials from them. Our supply chain team continues to successfully manage the logistics on schedule. Given our strong execution to date and our outlook for the fourth quarter, we expect full year product revenue to be nicely above our pre-COVID-19 guidance range and very close to what we delivered in 2019. A favorable mix in product sales led to another quarter of strong product gross margin. At 57% in 3Q and 56% year-to-date, 2020 is tracking well above historical product gross margin averages. In the fourth quarter, we expect more…

Thanks, John, and good afternoon, everyone. Starting with the Q3 top line, total revenues for the third quarter of 2020 were $18.4 million compared with $21.9 million for Q3 of 2019. Revenues for Q3 of 2020 included $13.0 million from the Performance Enzymes segment and $5.4 million from the Novel Biotherapeutics segment. Product revenues for the third quarter of 2020 were $8.4 million compared with $10.4 million for the prior year period, with the decrease due to the timing of demand for various enzymes. Within product sales, Merck, once again, had the strongest showing during Q3, while Allergan and Urovant also had strong showings with each of these contributing more than $1 million in revenue in the quarter. R&D revenue for the 2020 third quarter was $10.0 million, primarily due to contributions from our Nestlé Health Science, Takeda, Novartis and Merck collaborations. R&D revenue for the third quarter of 2020, included $4.6 million from the Performance Enzymes segment and $5.4 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the third quarter of 2020 was 57%, up from 51% a year ago, with the increase due to the change in product mix. Turning to operating expenses. R&D expenses for the third quarter of 2020 were $12.0 million. This included $5.2 million from the Performance Enzymes segment and $6.4 million from the Novel Biotherapeutics segment. The increase in R&D expenses from $8.7 million a year ago was primarily due to higher regulatory expenses, higher headcount, higher allocable expenses and outside services. SG&A expenses in Q3 of 2020 were $8.8 million, which included $2.7 million from the Performance Enzymes segment and $0.5 million from the Novel Biotherapeutics segment. The remaining $6.0 million is included in corporate overhead and depreciation. The increase in SG&A expenses from $7.9 million a year…

Thanks Ross. I'd like to close out our prepared remarks by focusing on the momentum we are building as a company. In our Novel Biotherapeutics segment, we are creating significant value and substantial pipeline opportunity through our partnership with Takeda, leveraging CodeEvolver to validate a novel approach to enable differentiated gene therapy candidate design. In parallel, our partnership with Nestlé Health Science, now with 4 programs advancing, also continues to build momentum, leveraging CodeEvolver to validate new approaches to address gastrointestinal disorders. Importantly, these groundbreaking partnerships and the proof-of-concept data we are generating are attracting the attention of other potential partners and setting us up to perform our own new self-funded GI and gene therapy programs. In parallel, we have continually widened our Performance Enzymes customer base and are now raising our product revenue expectations for 2020 to exceed our pre-pandemic forecast. We have accomplished this while successfully entering new verticals in life sciences and food ingredients with more to come. Importantly, while we remain vigilant in protecting our employees against the COVID-19 virus, I'm pleased to report that the effects of the pandemic on our business, at this time, are largely behind us, noting forward uncertainty. Our team continues to respond brilliantly and deliver exceptional progress. Our expectation is to deliver sequential revenue growth again in the fourth quarter, which is expected to result in full year revenues near or above last year, despite the impact of the COVID-19 pandemic. Before opening the call to questions, I want to highlight our participation in this year's virtual Synbiobeta Conference, which was held just about a month ago. This conference resides on the cutting-edge of synthetic biology, and every year showcases the rapid advances in this dynamic field. Our scientists participated in several breakout sessions, covering pioneering developments, including one session…

[Operator Instructions]

So while we're waiting for our first question I'd like to you upcoming virtual health care conferences. We will be participating in Stifel Healthcare Conference on Monday, November 16; the 11th Annual Craig-Hallum Alpha Select Conference on Tuesday, November 17; and the Stephens Annual Investment Conference 2020, on Wednesday, November 18. We will post webcast of our presentations at the Stifel Healthcare Conference and Stephens Annual Investment Conference to the Investors section of our website at codexis.com. I also invite you to visit our newly redesigned website with more robust and aesthetically pleasing content and easy navigation. Okay, operator, we're ready for the first question.

Today's first question comes from Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Congratulations on a solid quarter of progress despite what has remained a relatively challenging environment. Maybe first up, and thank you for helping us understand the vaccine opportunity a little bit. Could you maybe walk us through, I understand it's not necessarily the first batch, but help us understand how this progresses with those second batches, which are ultimately the ones that are going to be distributed to the world? How does that process work?

Yes. Yes. So I mean, it works in - as it traditionally does. We showcase our improved enzyme. We showcase the data that we've generated that ascribed the benefits. In the case of the T7 RNA polymerase, we believe that our enzyme will be significantly more cost-efficient versus the incumbent RNA polymerases that are currently specked into these processes. And we convinced that those benefits are significant enough to warrant the customer to go through a change management to: number one, validate that they see the benefits that we see in our labs and to showcase our supply chain capabilities and time lines to effectively serve their supply chains. And we've been working that process. We worked this process since - basically, since we started the partnership with Alphason that we announced at the end of April. And we've gotten really good response from customers, and we're encouraged that customers for this particular market and other markets that require RNA polymerases, are very interested and will ultimately spec in our products, leading to our - ultimately, our product sales on our P&L.

And then regarding the DNA polymerase you're in contracting there. Maybe what are the conversations like with those customers? How should we be thinking about that as we get through this year and into next year? And how are those opportunities may be expanded?

Yes. It's going really well. There are many users of DNA polymerase. Essentially, any company that runs a polymerase chain reaction, diagnostic workflow or an nex-gen sequencing workflow uses the DNA polymerase. We've tuned our DNA polymerase to be effective or to be differentiated for our next-gen sequencing applications. So we've been approaching multiple companies to showcase the improved benefits that we have for our DNA polymerase versus several well entrenched incumbents in this industry. And we're getting validation of our benefits with multiple of those companies, and we are working to, like I said in the prepared remarks, to ultimately transact our first commercial sales as we close out this year. And we still see this as a terrific product for having made the investments. It's a large product. It's growing very quickly because of genomic diagnostics growth, particularly next-gen sequencing growth. So we're still very confident and very - we're looking forward to penetrating this market and growing it as we close out this year. And move through next year. Ultimately, this could be one of our largest products in our portfolio, if we continue to be successful as we project.

That's great. And maybe one last one for me and then I'll hop back into queue. But regarding the Urovant opportunity, another nice quarter from them over $1 million, I think you said. Now they've got a PDUFA date coming up here in the United States, how should we be thinking about that market opportunity? Is that a similar size to the existing market? And what could that mean for your opportunity as you look at fiscal '21 and beyond?

Yes. Thanks. We're really excited by the progress with Urovant and side-by-side with their - with cure and pharma, who is effectively already promoting that urinary in commence drug in the Japanese market. And so the buildup of their supply chain for Urovant up to - in advance of the PDUFA date, which clearly, they expect will be a positive result, we'll all wait and see, has been very encouraging. I think they have - that suggests that they have a strong outlook for uptake in the market as they put the product in the market post PDUFA. This will be a very nice size enzyme catalyst product for Codexis. It won't be as large as, say, the enzyme sales to Merck for Januvia have become because the volume of the drug substance is much lower than that. But we see this being at peak revenues, we could see this being in the low to mid single-digit million dollar revenue product sales revenue. And our margins are above-average for this product. So it will come with an accretive gross margin. So it's a really nice success. It's been a number of years in the making, and we're super excited to be poised for that sustained product sale, assuming they get their positive approval from the FDA.

Today's next question comes from Brandon Couillard with Jefferies. Please proceed.

John, on the product revenue line, can you speak to what you would characterize or maybe the 1, 2 or 3 biggest drivers of your sort of renewed confidence in that line of the business and your outlook for 2020 reps to be at the top end of your previous guidance? And then if you think about 2021, do you think this segment can get back to some positive level of revenue growth, maybe north of $30 million? What would you call out as sort of in the couple of biggest drivers of product growth in '21?

Yes, sure. Pleasure. Yes, the most positive development as 2020 has unfolded for us on the product revenue line has been indeed the uptake of product from the combination of Urovant, their sister partner Curin and for Allergan for their recently launched drug. When we finished last year, we had strong sales for all 3 of those customers last year. And as we were building our supply chains and forecasts for those 3 products - for those 3 customers as we started this year, pre-COVID, all of them had set our expectations that their demand for our enzyme would be limited but indeed, it's been quite the contrary that their sales have been stronger - on the strong end of their outlook, and that's driven their supply chain needs to purchase materially more enzymes from us for their manufacturing campaign. So that's by far the number 1. We've also had a nice series of clinical batch orders that have been folded this year. I highlighted in the prepared remarks that we had a significant Phase 3 - an enzyme batch for a Phase 3 manufacturing campaign for an unnamed top 20 big pharma company. And we've had several of those this year. So I think that that's also been a contributor to a really nice year in product sales unfolding for Codexis. And those kind of clinical batch orders are hard for us to predict because we don't have a lot of visibility into clinical time lines or they're hard for us to predict. As we look to 2021, yes, we believe long-term that we're going to be accelerating product revenues as a class over the long - over a multiyear period well above our average - total average corporate revenue growth. And we hope and believe above our historic…

Quick 1 for you, Ross. I think you indicated Januvia will be over half of product revenues in the fourth quarter. Can you give us expectation what you expect for product gross margins in the fourth quarter? And it looks like for the year, product gross margins will top to 50% marker, is that a good barometer for us to think about as being sustainable for '21 based on where you stand today?

Let's say, a couple of components to your question there, Brandon. I'm not sure if I got into some of those specifics that you mentioned, but you can probably back into some of these numbers. I think number 1, just related to sitagliptin. I think we communicated earlier in the year that we thought that sitagliptin would probably be - the revenues from sitagliptin in 2020 would be fairly close to where they were in 2019. And our outlook there really has not changed, but kind of close to it, maybe a little bit below. So you can kind of back into where Q4 may be for sitagliptin and then further back into where some of the other products may be. I think in terms of gross margin, John mentioned in his prepared remarks that we would be kind of at or near the high end of the range that we provided back with our guidance that we provided earlier in the year. And I think that still holds the shift in the mix that we've seen, the real benefits from Allergan, Urovant, KIOR are really driving that shift and driving up the gross margin. But again, I think at or near where we - at or near the high end of that former guidance range is where we should be for the full year. And in terms of outlook for 2021, I don't want to get into much in the way of specifics, but certainly, as we continue to see a shift in the product mix towards these higher-margin products, we should continue to see the gross margin drift higher.

[Operator Instructions] The next question comes from Jacob Johnson with Stephens. Please proceed, sir.

Maybe one follow-up. It sounds like TASTEVA is starting to see good uptake. Can you just give us an update on this relationship, and how we should be thinking about the potential ramp from that product?

Yes, it's encouraging. It takes its time. We've been careful to make sure that the ramp is properly calibrated for our investors as they do their modeling. Tate & Lyle continues to promote TASTEVA M as one of their top new products into one of their top divisions in sweeteners. And they've been investing in global G&A to penetrate with that new product. So all really encouraging signs. And obviously, it's being taken up in the market albeit at a careful pace, at a moderate pace. So the signs of the uptake are encouraging. The pace is, as we've experienced this year, takes its time. So I think all of our previous remarks about Stevia enzymes being amongst our top product revenue generators over time, say, in a 3-to 5-year time frame, still remain firmly in our expectations. So that would put it in the range of high single-digit, low double-digit sales if we penetrate and if Tate & Lyle penetrates as we hope. And it's just going to go through a ramp as we go from modest sales, we said in the prepared remarks, a couple of hundred thousand dollars of sales in this Q3, which is better than what we've seen in the earlier quarters this year. And it will move through that kind of a slope next year. So I think as we unfold for our investors in a more detailed outlook comments for 2021, will, I'm sure, give some color as to how we see the sales ramping in 2021. And I think those dots then connect up to give validation to the ultimate peak revenue that we hope and aspire for this product.

And then just maybe a bigger picture question, John. Can you just talk about the opportunity in gene therapy for your enzymes, how your enzymes work in these applications? And then maybe outside of the Takeda agreement, I think you're working on some things internally, but let me know if that's not the case and should we expect to see at some point an additional partnership in this space down the road?

Yes. Okay, great. We're super excited about the gene therapy prospects for Codexis. And clearly, they're being validated in the partnership with Takeda. But what we do is basically, if you understand how gene therapy products are designed. Effectively, there's a delivery vector, often referred to as viral vectors that are basically packages for nucleic acid information to be packaged within. And that viral vector then delivers the nucleic acid information into the human biology to effect - to improve disease conditions. What we do is we use CodeEvolver to improve that nucleic acid information, this nucleic asset information inside the viral vector package. This commonly referred to as a transgene, some companies call it as the gene therapy payload. But what we're using CodeEvolver to do is to say, what is the optimal nucleic acid information that will express the best possible enzyme to deliver it to the human biology. So there's the word. I mean, we know how enzymes are expressed in human biology, you code DNA to express the enzyme so the nucleic acid information, i.e., DNA is then modified to express a modified, better performing protein. And so in the Fabry program, for example, we have modified the DNA nucleic acid inflammation to express a protein that has better half-life, better serum stability. We demonstrated better uptake in critical tissue like the heart, and that now takes you right back to the core CodeEvolver technology capability, making, designing better enzymes. And in the case of gene therapy, we design them and deliver them as nucleic acid information as a transgene or a payload in gene therapy. So hopefully, that's helpful and is understandable. So we designed better enzymes for Fabry. We're in the process of doing that for Pompe disease, where we just started a new program and an undisclosed blood factor disorder in the Takeda partnership, all of which is encouraging us, especially based on really positive feedback so far from Takeda that this is a really great way to bring CodeEvolver into the world of drug discovery. Most gene therapy companies, maybe all gene therapy companies, aren't really looking at improving nucleic acid information to enable a better performing enzyme to be expressed. So it's a novel approach, and that's why Takeda basically signed out for this deal. And we see multiple other gene therapy targets beyond those few that were working with Takeda, where we can bring better transgenes into - to create better gene therapies going forward. So yes, indeed, we're showcasing this to other partners, I think, long term. There's definitely a medium term. There's prospect for partners there, but we're going to start by doing our own internally self-funded gene therapy transgene programs so that we can develop proof of concept, that would be the raw material for us to advance towards the clinic ourselves and/or to showcase to other partners beyond Takeda.

This concludes our question-and-answer session. I would now like to turn the conference back over to John Nichols for any closing remarks.

Okay. Thank you, everyone, for your questions. We've stayed very strong and navigated well through the pandemic to date while building for a much brighter future. We look forward to speaking with you again in February, when we report fourth quarter and full year 2020 results. Thanks, again, and stay safe and well.

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