Good day, and welcome to the Codexis Fourth Quarter and Full Year 2020 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stephanie Marks from Argot Partners. Please go ahead.

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 date, February 25, 2021. 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. John?

Good afternoon, everyone. We are very pleased to report on strong fiscal year 2020 results for Codexis. In spite of the COVID-related challenges, which impacted our R&D operations for the second quarter and part of the third quarter last year, I'm extremely proud that we delivered our 7th consecutive year of year-over-year revenue growth. With our highest-ever quarterly product revenue in Q4, we finished the year strong on the top-line. And as our sales mix continued shifting toward higher-margin products, we also delivered our highest-ever annual product gross margin. Following our successful secondary offering in December, we closed the year with a cash balance of $149.1 million, another historical high for Codexis, which positions us well to invest in the many growth opportunities we see for the company. With the strong finish to 2020, we're poised for excellent growth in 2021, enabling us to drive our best top-line revenue guidance in years, showcasing growth of between 19% to 23% over 2020. Reinforcing that, product revenues will lead overall with growth between 20% and 30% year-over-year. Ross will provide more details on the 2020 results and 2021 guidance shortly. But first, I'll provide an update across the business. Starting with our Performance Enzymes reporting segment, we are growing the business focusing on 2 quite different markets. The first being sustainable manufacturing. This is where we built Codexis' enzyme engineering leadership over the past 2 decades. And given that history, this market represents the large majority of the company's revenues currently. Thanks to the vast scale and constantly accelerating speed of our CodeEvolver platform, Codexis' ability to discover and design ideal enzymes is unrivaled. Our novel high-performing enzymes enable our partners to dramatically reduce the cost and increase the sustainability of manufacturing their end products. Compared to using traditional non-enzymatic chemistry, which…

Thanks, John, and good afternoon, everyone. We have delivered strong 2020 results in spite of the challenges presented by the COVID-19 pandemic. Total revenues for the fourth quarter of 2020 were $21.0 million, up 12.8% compared to the prior year period. On a segment basis, $16.7 million was from Performance Enzymes and $4.3 million was from Novel Biotherapeutics. This compares with $17.1 million and $1.6 million for Performance Enzymes and Novel Biotherapeutics, respectively, for the prior year period. Product revenue for the fourth quarter of 2020 was $12.2 million, up 150% compared to $4.9 million for the prior year period. This was our highest ever quarterly product revenue with the major contributors being increased sales to Merck, Allergan and Urovant. Gross margin on product revenue for the fourth quarter of 2020 was 52.0% compared with 30.2% in the fourth quarter of 2019. The increase was due to favorable product mix. Turning to operating expenses. Our R&D expenses for the fourth quarter of 2020 were $10.4 million, up from $8.9 million in the prior year period. The R&D increases were primarily due to increased compensation, corporate allocations and outside services, which were partially offset by lower preclinical development and regulatory expenses. SG&A expenses in Q4 of 2020 were $8.7 million compared to $7.3 million for the prior year period. The increase in SG&A expenses was primarily due to higher cost for compensation, intellectual property, legal fees, recruiting and consultants, which were partially offset by reductions in allocations and corporate legal fees. Net loss for the fourth quarter of 2020 was $3.9 million or $0.06 per share compared with a net loss of $0.6 million or $0.01 per share for the fourth quarter of 2019. Turning to the full year results. Total revenues for fiscal 2020 were $69.1 million, up about 1%…

Thanks, Ross. Codexis is poised for a strong 2021. We have clear visibility to the multiple catalysts that will accelerate the company's growth ambitions across each of our 3 markets. From recently commercialized enzyme product revenue upticks to new product developments and launches, to therapeutics data generation, to inorganic investments, we're excited to deliver against all of these and more in 2021. In closing, it's exciting to consider how many growth accelerators are simultaneously in motion at Codexis. With our enhanced balance sheet, we're investing to step up our parallel enzyme discovery team capacity. Coupled with CodeEvolver's machine learning acceleration, our product generation flywheel is truly picking up steam. R&D project teams move on to discover the next enzyme, while the Codexis business team work on penetrating their markets with the growing list of enzymes poised for commercialization. In parallel, the enzyme projects we're targeting can both commercialize faster and address larger recurring revenue possibilities today versus yesterday on average as well. We're like a baseball team getting more times at bat, getting on base more frequently and with more extra base hitters on deck, all at the same time. We are incredibly excited by the nearly limitless possibilities for enzymes as a product class. We have only begun to scratch the surface of how Codexis enzymes can make a difference for the health of people and the planet, reinforcing our confidence in the step-out growth we expect to deliver as a company in our future. Now, we're happy to take your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Doug Schenkel with Cowen. Please proceed with your question.

Hi, good afternoon. This is Kyle on for Doug today. Thanks for taking the questions. I just had a question here first about product revenue in 2021. So you guided product revenue in the range of $36 million to $39 million for the year. Would it be possible to kind of break down the components of growth here? Thank you.

I'll start. Hey, this is John, Kyle. Thanks for the question. Yeah, we're growing on the product revenue side across a couple of different dimensions. First, some our largest product revenue generators of the recent past, in particular, the enzyme sales to Merck for the manufacturer of their diabetes drug, Januvia, that's very stable year-on-year, so giving us a good base, so we don't see any headwinds there as we kick off 2021. We continue to have strength in demand from our more recent customers who have recently gotten their approvals: Allergan, Kyorin and Urovant are all setup for solid product revenue demand year-on-year. So on top of a strong base there, we see some new upticks in product revenues for other pharmaceutical companies. We see upticks, as recorded in the prepared remarks, for Tate & Lyle in the food industry. We're expecting us to generate meaningful sales revenues in the life science enzymes that we recently launched, in particular the DNA polymerase and the RNA polymerase. And so, I'd say those are the major components that lead to our confidence to deliver really solid year-on-year product sales growth of 20% to 30% in 2021 versus 2020.

That's great. Thank you and maybe just one more here. May I ask how you're thinking about Januvia revenue in 2021? I mean, as a proportion of overall product revenue, what are we thinking here?

So it continues to be our largest product revenue sale. And like I said in the previous response, it's very stable year-on-year in 2021 versus 2020. And actually, that was fairly stable versus 2019 as well. So Merck's business is doing quite well. Our sales of enzymes are very stable and very strong. So with stable sales to Merck for Januvia and growing sales overall, the ratio will be down. The percentage of our total product sales for Merck's Januvia will be down, but that's because of growth elsewhere with stable sales to Merck.

Thank you.

Thank you. Our next question is coming from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Hi, thanks. Good afternoon.

Hey, Brandon.

John, maybe starting with life sciences, I appreciate the $3.6 million revenue figure you shared for 2020. Is that 100% Roche? And then, as we look into 2021, how do we think about the magnitude of that ramp, the evolution of kind of the customer base? And, if you could speak to the sort of degree of visibility that you have, given many of these programs are kind of earlier stages in newer market, do you have some partners you're working with? Just some of those factors there would be helpful.

Sure, sure. So the answer to your first part of your question is, no, that is not to Roche. Actually, Roche is a minority of that number in 2020. So we had revenue generation associated with the Molecular Assemblies partnership. We had other undisclosed R&D partnerships in the life science arena that are exciting. They are pre-commercial. They are not - we're not able to speak to what we're doing with whom just yet, but we're excited. It's growth opportunities across the life science tools space from working new enzyme opportunities for next-generation sequencing, in some cases, qPCR, and then in DNA and RNA synthesis. And then finally, we see some opportunities in the biosensor monitoring arena. So across that space, we have several other partnerships that have generated revenue in 2020. If there was another question in there, I apologize, maybe you can state it after that detail or if that's covered, then great.

Yeah. The second part of the question is more about the kind of the forward outlook in 2021. Just do you share with as far as how to think about sort of the evolution of that customer base and magnitude of the revenue ramp as many of these new enzymes are commercialized?

Yeah. We see, certainly, I've already alluded to in the previous question, growth in product sales for recently launched products at the end of last year, the DNA polymerase and the RNA polymerase. We're happy that we made our first commercial sale for the RNA polymerase in the beginning of this year, and we expect that to ramp. We're also looking forward to a nice uptick in significant sales of the DNA polymerase. On the product side, those 2 in life science tool area will lead for us. But then, in the middle of the year or in the first half of the year, excuse me, we'll be launching our reverse transcriptase. We're very excited about the performance and early feedback on that product. So we'll get that out into the wider market. So potentially, by the second half of the year, we may be generating product sales for the reverse transcriptase as well. Revenue generation in the DNA synthesis partnership with Molecular Assemblies should be a year-on-year uptick. We started that program in the third quarter of 2020 and we'll have at least 3 quarters' worth of activities with Molecular Assemblies. And then, we'll move towards commercialization. So that's set up for year-on-year growth. The other companies that I referred to but couldn't disclose are also set up for strength year-on-year. And then, there are new opportunities on top of that. So, all of that adds up to a lot of tailwinds in the life science tools area. So $3.6 million last year, we're certainly going to be upticking that by certainly at least low-single-digit millions of dollars year-on-year growth over that $3.6 million base, potentially even stronger than that.

Okay. That's helpful. As far as kind of the outlook goes, first on top-line, have you embedded any assumption for another CodeEvolver platform deal? You speak to the likelihood of something like that occurring. And as far as the OpEx outlook goes, I think it implies about 36% year-over-year growth, which is a pretty big step-up. Can you elaborate on kind of the main areas of investments that you're planning? Thanks.

Sure, sure. I'll certainly answer the first question. I'll take a start at the second question and Ross can fill in on the OpEx question taking from where I leave off. So for CodeEvolver, we just continued to strengthen and widen our positions in pharmaceutical manufacturing. And our ability to engineer enzymes quicker and cheaper is really getting at the primary barrier to getting enzymes installed in API processes. The cheaper and quicker we can do that, the less upfront costs that the customer needs to bear. And so, fundamentally, CodeEvolver's improvements are enabling us to reduce that critical barrier to adoption. And as that's happening and as our reputation continues to grow in this marketplace, we just continue to strengthen our position across a growing list of the world's largest companies, pharmaceutical companies, expanding in smaller companies as well. And so that just sets a really great stage for long-term us to continue to drive the largest pharmaceutical companies in the world towards CodeEvolver platform deals, just like we've already moved Glaxo and Merck and Novartis. So we expect that to happen where we did not build any new CodeEvolver platform licensing deals into our guidance for 2021. So if that were to happen, as we move through this year that would be an upside. I wouldn't give it 50% probability, it's a possibility. But we're very confident that we continue to really build the business case for several of these largest companies beyond the 3 we've already worked with in a platform licensing arrangement to ultimately justify the expense of putting in place a platform license like those other 3 peers have. So that's not built into our revenue guidance for the year, and we continue to be very encouraged that over time, we'll continue to bring more…

That's very helpful. Thank you. Last one for Ross. The product gross margin step-up of north of 50% is certainly encouraging to see. Is this a sustainable new normal? Is there a specific driver of kind of the step-up? And has something changed as far as your economics that you capture with Januvia, which I think has long been kind of the drag as far as mix goes in the - from those product revs?

Yeah, I'll address the latter part of that question first, Brandon. No, nothing's changed with the economics on Januvia. That's still the same. But I think the step-up in gross margin that you're seeing, it's really just driven by the shift in our product mix towards higher margin products. I think in response to an earlier question, John outlined how we expect roughly stable sales in the Merck's Sitagliptins will be going down as a percentage of the mix. But other much higher-margin products will be driving much of the growth you see in our new outlook for 2021. So the improvement we see is purely a mix shift. In terms of sustainability, I think, our guidance of 54% to 58% suggests we have a good chance of seeing a little bit of improvement in the gross margin in 2021. So certainly for the next 12 months, we're pretty encouraged with the trend, and I think some of that trend should continue longer term.

Very good. Thank you.

Thanks, Brandon.

Thank you. Our next question comes from Matt Hewitt with Craig-Hallum. Please proceed with your question.

Yeah. This is Lucas on for Matt Hewitt here at Craig-Hallum. I guess, first off, it was great to hear that you signed your first contract for the RNA polymerase. Is the revenue there going to be more back half weighted? Or how should we be thinking about the ramp for that particular product?

Yeah, without a doubt, I mean, both the DNA polymerase and the RNA polymerase product are designed for multiple customers, and we're promoting it to a universe of customers who we think can benefit from the improved performance of these enzymes. So it is great news. Thanks for your encouragement for making our first commercial sale for the RNA polymerase at the beginning of the year, but that's just one customer. So we expect to start selling to more customers for both of these products. And so, clearly, given the early adoption of this product in an expected set of customers, we expect back half sales to be stronger than the first half sales for both of these products.

And then as you alluded to earlier on, you've been adding some R&D teams. I guess, how many R&D teams do you currently have? And what could that grow to by year-end?

Sure. We have about 16, 1-6, parallel enzyme discovery teams currently in operation. And we are staffing up. We're taking on a new footprint. That new footprint will enable us to inhabit the space in the fourth quarter of this year. And so we expect that we'll be able to slowly ramp that up. The talent that we need to bring in is very specialized, and we're very critical about the scientists we bring into our company. So I'd say over the next 12 to 18 months, taking us into 2022, we're looking to bring that 16 teams up to something upwards of 25 teams. It's in that order of magnitude. And like I said to Brandon, we'll continue to grow the number of funded teams, but we are going to increase the number of self-funded teams to take on that capacity to take the growing chunk of that capacity as we hire up those enzyme discovery teams.

Okay. Thank you very much. That's all I had.

Pleasure. Thank you, Lucas.

Thank you. The next question is coming from Jacob Johnson with Stephens. Please proceed with your question.

Hey, thanks for taking the questions. John, on the self-funded R&D and the uptick there, should we think about more of that activity in Life Science Tools or Novel Biotherapeutics or maybe all of the above?

Yeah. The self-funding will be heavily concentrated in those 2 areas, Life Science Tools, new enzymes for new molecular biology applications. And you're starting to see us really accelerate the types of products you're bringing there, plus expansion of our pipeline in Novel Biotherapeutics. As you know, in Biotherapeutics, today we have 3 funded programs with Nestlé Health Science in addition to the PKU program with Nestlé's already taken over full control, and we have 3 funded programs with Takeda. So that's a pretty significant number. So we're building up earlier stage discovery to go after other GI disorders and other transgenes for gene therapies in a self-funded way. So - and those 2 areas are going to be the majority. We'll do some self-funded work very selectively in sustainable manufacturing. Generally, our business model and sustainable manufacturing like pharmaceutical manufacturing of food or other industrial sectors, is to get the partner to fund the development of the enzyme, the discovery work of the enzyme. But sometimes we'll selectively do our own self-funding. If we're really confident or if we want to deliver some unique proof-of-concept, we'll do some self-funded work there. But that would be a minority of the programs in that area and a minority of the programs as a whole for the company compared to Life Science Tools and Biotherapeutics.

Got it. And then, I guess, the one follow-up just on the first RNA polymerase sale. Was that for a COVID-19 vaccine? And then maybe longer term, if the success of these mRNA vaccines lead to more activity around mRNA vaccines for other diseases, could there be a longer tail of opportunities for that RNA polymerase?

Yeah. Yeah, Jacob. So first, the first sale of the RNA polymerase was not to a company involved in COVID-19 vaccine manufacturing. It was not. We've been working with those companies pretty intensively to get them to assess our improved RNA polymerase. Actually, they've very much validated the performance benefits of our polymerase versus the polymerases that are installed in their manufacturing operations. However, they're just not in a position to change anything at this point. Their attentions are focused on ramping up the supply of these materials, and change management is not getting the priority at this stage. So we put in our prepared remarks that we don't expect certainly in 2021, we don't expect to be able to penetrate today's approved COVID-19 vaccine manufacturing processes. However, the long-tail is really encouraging. I mean the success of messenger RNA-based vaccines for COVID-19 is remarkable. It's really put a huge amount of life into the pipelines for these companies, not just the companies that are making the COVID vaccines, but multiple others who are investing in discovery and development efforts for messenger RNA-based therapeutics in multiple categories, messenger RNA-based vaccines for other diseases, maybe messenger RNA-based vaccines for our next generation COVID-19, we're not sure. But all of that has really created a lot of enthusiasm for us. These companies, multiple of them have trialed our product. They're validating the performance benefits, the efficiency of our polymerase compared to the incumbent. The reduction in the [cap agent] [ph] that's needed alongside the polymerase are all being validated by this customer base. And so we're very confident that we're going to get our RNA polymerase increasingly installed in the development stages of pipelines for these kinds of companies. So we're quite bullish. It's not going to be a big, huge uptick like maybe getting installed in COVID-19 vaccine manufacturing could have been, but it'll be a very steady, and I think a very exciting ramp up for the company over the coming years.

Got it. Thanks for taking the question, John.

Yeah. Thank you, Jacob.

Thank you. Our next question is coming from Sean Lee with H.C. Wainwright. Please proceed with your question.

Good afternoon, guys. This is Sean on for RK. Thanks for taking my question. My first one is on the Biotherapeutics segment. So could you provide us with a highlight of what are the clinical and preclinical milestones we can expect from these programs this year? And also, do you plan on presenting any data at conferences and such?

So sure. So first, a major milestone event for 2021 in our Biotherapeutics pipeline will be the initiation of the first clinical trial for CDX-7108 for an undisclosed - currently undisclosed GI disorder. And in the prepared remarks, we indicated that we should start that clinical trial in the third quarter of this year. That is CDX-7108 is co-owned between Codexis and Nestlé Health Science. We've advanced the preclinical development work for that molecule substantially to enable us to have the confidence to initiate the clinical trial in just a few quarters. So that will be milestone number one. And for that molecule, we expect to be able to share more detail as that clinical trial - as we line up for that clinical trial data should be forthcoming at least a few months before the initiation of the trial on clinicaltrials.gov. That will enable us to share more about the indication and share more about the data that we've generated in preclinical development and preclinical research that encourage us to invest in the clinical development. So I'd highlight that as the primary milestone. The programs that are partnered with Takeda, Codexis' role is to generate transgenes that will be transferred in the preclinical stage to Takeda. Takeda will take the transgenes. They will install them inside of their gene therapy delivery vectors and run preclinical research with the full gene therapy candidate. That is a process that's completely controlled by Takeda. I'm hopeful that they share some data and/or allow us to share some data on how our transgenes in their gene therapy perform in the preclinical development during 2021. But we may not be able to, based on their confidentiality. So hang on, we're looking forward to being able to say some good things about the Takeda-led programs…

Thanks, John, for the additional details. That was very helpful. My last question is on the food segment. In the prepared remarks, you guys mentioned that you expect significant growth from the Tate & Lyle partnership this year. So I was wondering, maybe you can give us a bit more color on what proportion of your current product revenues comes from this segment? And why do you think it's expected to grow this year. And are you planning to make additional products in this segment as well? Thanks.

Sure. Yeah, we're very encouraged by our acceleration in the food sector. Actually, in the PowerPoint presentation that accompanied today's earnings release, you can actually see a pie chart that shows the percentage of our Performance Enzymes revenue across 3 different submarkets within Performance Enzymes. The first and the largest being enzymes used in pharmaceutical manufacturing, which has been our core business for many, many years, a couple of decades now, which is by far the largest. Also, you can see the percentage of revenues for life sciences. And we actually detailed that to be $3.6 million in 2020. And then, you can see a sliver for food and other industrial applications. And that is about 4% of our total Performance Enzymes revenue in 2020. So we're actually giving very sharp information on that question. Growth is coming largely from 2 different sources in the food sector. First, in the last couple of years, we've commercialized a couple of enzymes in partnership with Tate & Lyle for 2 sweeteners, the DOLCIA PRIMA Allulose sweetener and the TASTEVA M Stevia sweetener. Both of those are doing well, Tate & Lyle informs us in their downstream markets. Tate & Lyle grew their sales of these sweeteners in their markets. They continue to expect to grow those in 2021 versus 2020. They're getting good feedback and outlook for their sweeteners in this year, and that will pull demand for our enzymes. So we see year-on-year growth in enzyme sales accordingly to Tate & Lyle. Also, there has been other developments outside of the 2 programs that we've spoken a lot about with Tate & Lyle in the food industry, and we see success translating in 2021. We're hopeful that we can talk more about those in the coming quarters, but we have a lot of visibility to ongoing continued success in other food applications in 2021 that will add to the growth in food sales this year.

Thanks. That's all I have.

Thank you, Sean.

Thank you. This concludes our question-and-answer session. So I would like to turn the conference back over to management for any additional or closing remarks.

Okay. Thank you, everyone, for joining us today. As a reminder, we will be presenting at the SVB Leerink Conference tomorrow; the Cowen Conference next week and the H.C. Wainwright Conference the following week. We look forward to continuing to update you on Codexis' progress. Thank you very much.

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