Welcome to the Codexis Fourth Quarter and Full Year 2022 Earnings Conference Call. A question-and-answer session will follow the formal presentation. [Operator Instructions]. And now I'll turn the call over to Brendan Strong from Argo Partners. Please go ahead. Thank you, operator. With me today are Dr. Stephen Dilly, Codexis President and Chief Executive Officer; Kevin Norrett, Chief Operating Officer; and Sri Ryali, 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, including our guidance for 2023 revenue, product revenues and gross margin on product revenues as well as our strategies and prospects for revenue growth and successful execution of current and future programs and partnerships. To the extent that statements contained in this call are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of the statement date, February 23, 2023. 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 Codexis' control and could materially affect actual results. Additional information about factors that could materially affect actual results can be found in Codexis' filings with the Securities and Exchange Commission. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. I'll now turn the call over to Stephen.

Thank you, Brendan, and thanks, everyone, for joining. As we laid out in the fourth quarter of last year, we continue to focus on prioritizing programs where Codexis has a clear competitive advantage, and we're pleased with our recent momentum. The financial results that we delivered in the fourth quarter were exactly on target and we ended 2022 with $114 million in cash, providing us with runway through the end of 2024 and giving us plenty of time to demonstrate that our new focus strategy is working. A significant activity during the second half of 2022 and early 2023 has been adding to the strength of our leadership bench. This has been happening across our executive leadership team and Board and in less visible ways throughout the organization. We've achieved this while reducing overall headcount since November. To quickly recap the changes outlined in Slide 3. We Kevin Norrett, Chief Operating Officer; and Meg Fitzgerald, Chief Legal Officer and General Counsel, both joined us last fall. More recently, Sri Ryali joined us as Chief Financial Officer in January. Sri has a strong background of leading financial organizations within biopharmaceutical companies and his commercial expertise has further strengthened the breadth of our team's collective experience. We've also added new capabilities in FP&A, commercial assessment and in our translational team. Importantly, this is also happening on our Board with the recent additions of Rahul Singhvi and Stewart Parker, both bringing demonstrated track records of success in leading pharmaceutical and genomic therapy companies. Our core strength of engineering unique purpose-built enzymes for use across a range of target markets remains central to our business. However, in line with the strategy we outlined during last quarter's call, we've been deliberate about selectively deploying our platform where we see the most potential for value creation.…

Thank you, Stephen. Moving to Slide 9. We have continued to modestly invest in our pharmaceutical manufacturing focus area to build a pipeline of Phase II and earlier clinical programs, which should ensure continued growth into the latter part of the decade. However, these opportunities are customized one-on-one projects with some taking 5-plus years to market. When we look at our life sciences focus area, we have developed a pipeline of enzymes to address many challenges across multiple customers, outlined on Slide 10. We have designed our enzymes to be more sensitive, more robust and more optimized to easily drop into existing workflows. A good example is our newly engineered DNA ligate for next-generation sequencing or NGS. Ligase enzymes are used to barcode the pieces of DNA in a sample so they can be read on a sequencer, making them critical to detecting a signal. Natural ligases have a ligation efficiency of approximately 40% to 50%, meaning that about 50% to 60% of any DNA sample goes on barcode and therefore, is not sequenced or detect. In comparison, our newly engineered DNA ligase achieves over 90% ligation efficiency. This is a significant improvement when you are searching for a needle in a haystack across small tissue sets. Not only is this ligase more sensitive and efficient, but it was developed using common test kits and buffers, but it is an easy drop-in solution across multiple customer workflows. Earlier this month, I had the opportunity to discuss our preliminary data from our DNA ligase white paper with many potential customers at the Advances in Genome Biology and Technology Conference, or AGBT. There was a lot of interest in this enzyme from multiple large NGS players, and we plan to deliver the research-grade version to customers for testing in the second quarter.…

Thank you, Kevin, and good afternoon, everyone. Let me dive into the highlights of our full year 2022 financial results, starting with Slide 15. Total revenues for fiscal year 2022 were $138.6 million, an increase of 32% from $104.8 million for the prior year. including enzyme sales related to tax loaded, which were $75.4 million and $34.5 million for 2022 and 2021, respectively. Total revenues for fiscal year 2022 were $63.2 million, a decrease of 10% from $70.3 million in the prior year. Product revenues for 2022 were $116.7 million, an increase of 65% from $70.7 million the prior year, primarily driven by enzyme sales related to tax Slovin, -- excluding these sales, total product revenues for fiscal year 2022 were $41.3 million, an increase of 14% from $36.1 million in the prior year. R&D revenues were $21.9 million for fiscal year 2022 compared to $34.1 million in the prior year. The decrease was driven by lower license fees and decreased revenue from milestone payments as well as lower R&D fees from existing collaboration agreements. Product gross margin for fiscal year 2022 was 67% compared to 69% in the prior year. The decrease was primarily driven by changes in sales mix and higher shipping costs. Turning to operating expenses. R&D expenses for fiscal year 2022 increased to $80.1 million compared to $55.9 million in the prior year. Selling, general and administrative expenses for fiscal year 2022 were $52.2 million compared to $49.3 million in the prior year. We also recognized $3.2 million in restructuring charges related to the workforce reduction plan we announced in the fourth quarter of last year. The net loss for fiscal year 2022 was $33.6 million or $0.51 per share compared to $21.3 million or $0.33 per share for fiscal year 2021. As of December 31,…

Thank you, Sri. In closing, we've delivered exactly what we promised last quarter in terms of Q4 revenues, cash position and cash runway. Our difficult strategic decisions towards the last few months of 2022 have paid off in opening up many potential avenues for revenue generation going forward. I continue to be excited about the development of the team as we equip ourselves for the next leg of a journey. Now we'd be happy to take your questions. Operator?

[Operator Instructions]. Our first question is from the line of Steven Mah with Cowen Company.

Congrats on the therapeutics progress, and welcome Shri. Can you guys hear me... Thank you. NO problem. So, a question on 7108. Can you provide some color on the initiation of the Phase II study in early 2024? Is there a reason why it can't start earlier?

The time line is principally driven by CMC considerations. We want to get the final formulation in place by the time we go into the very definitive Phase II program. And we're actively working on that right now. And we're confident that we can have everything in place for early 2024. We will obviously try and beat that if we can.

Okay. No, understood. And then I saw in the separate press release, you said the Phase II study is expected to take about 12 months. Is there a sense for the number of patients that are going to be in that Phase II trial? And what I'm getting at is, given that it's a fairly rare disease, will the trial be able to enroll that quickly to achieve that timing?

So yes, there's a number -- let me unpack that a little bit and say in terms of trial size in the Phase II study, the next one that we'll be initiating, we see that somewhere in the range of 40 or 50 patients. The Phase Ib, which was relatively slow to enroll, was using essentially a single site, and we're going to be going to multiple sites in multiple countries for the Phase II. We're sharpening the pencil on exactly how many right now. But given the sort of the nature of the protocol, we'd expect 15 to 20 centers to do that sort of 40 to 50 patients, which should, therefore, go a lot quicker.

Okay. Understood. -- for the additional color. So maybe just pivoting over to Life Science tools enzymes, specifically on the second-generation DNA ligase for Indice prep. On the Roche right of first negotiation, you mentioned they had 90 days. Does that mean that they have 90 days to come up with a deal with you guys and then that's really available to transact with other counterparties?

Sure. Stepen, this is Kevin. Essentially, we have 90 days of good pace negotiations. If we want to continue past that, we can certainly open that discussion with them longer, but we can obviously open the discussion with other players at that time.

Okay. All right. Perfect. And then on the first-generation ligase that they already have license is there a status you can share with us on the status of that kit?

Sure. First thing, just to clarify, this is a newly engineered DNA like as opposed to a second generation. So, it was engineered off on a different backbone just to clarify that point. And then secondly, we've been communicating with Roche over the launch of the EVOT4 DNA ligase that they licensed from us in 2019 and are expecting our first commercial sales this year, but don't have clarity exactly what quarter at this point.

Okay. Understood. And then if I can sneak one last question in, and this is for you, Kevin, as well. You said you'd be tweaking the sales model and modestly increasing the sales footprint to target midsized drug manufacturers. Could you give us an update on -- is that completed or give us some timing on completion of that?

Sure. So just a little bit more color on that, too. Then the last 4 or 5 months has been diagnosing sort of the approach from a commercial standpoint. And what's been surprising to me is as we've been trying to grow the segment, how little we focused in terms of front-end facing sales people in terms of pull-through of enzyme sales. Now we only have 3 products on the market, but now we've looked at not only that resourcing there and looking to modestly increase it, we're still in progress of actually doing that. So, it's not complete yet. I expect that to be done probably by the end of this quarter. And that's where I think we'll start to see some increased lift in terms of our existing products and product sales increasing.

Our next question is coming from the line of Brandon Couillard with Jefferies.

[Indiscernible] it has to be willing to kind of share the revenue base for Life Science enzymes in '22 and maybe some goal post parameters in terms of what you're expecting for growth in that portfolio in '23..

So, we haven't disclosed a lot of information around Life Sciences as it's still relatively in its infancy. As I mentioned, Stephen, we're still sort of building the sales plan. One of the things that I just in my assessment has been -- we've been very focused on sort of customized enzyme engineering agreements over the last couple of years and a little less focused on actual customer engagement and pull-through in account planning. And that's where we're focused now. So, we expect to bring more of that information towards the end of the year. But as we're getting the plans in place, we haven't put anything forward at this point, but we definitely want to provide more color on that.

Think I would add to that... In terms of our revenue guidance. The growth that we're expecting in Life Sciences, we're expecting that to offset some of the year-over-year variability in pharma manufacturing. So when you look at our revenue guidance -- the low end of that is in line with 2022 and as Kevin indicated, the growth that we would expect it to be primarily on the Life Sciences side, and we'll have more details on that throughout this year.

Okay. Then yesterday, Maraba announced the acquisition of Alphazyme who you partner with on at least 3 life sciences enzymes. Are there any implications of that deal as far as Codexis is concerned? Any changes in the commercial relationship? And do you own all the IP for those 3 enzymes that you've commercialized with them?

So first, this is Kevin. First answer is, yes, we own all the IP with regards to those enzymes. And I just recently got back from the AGBT conference where I met with those folks was aware of some of the news coming out there and our business relationship with them is really solid. They've been good partners for us in terms of being able to execute and deliver enzymes downstream. We obviously are going to look at as we have been for some time, second sources of supply. But that being said, the business relationship is in good shape.

Great. And then last one for Sri. Any color you're willing to share as far as revenue pacing for the year? I know your prior CFO like to have this 40-60 kind of framework, but any color as far as just phasing?

You're talking about just in terms of the quarterly phasing?

Yes. Our first half, second half, you do it to be aware of?

Yes. So, we haven't provided quarterly revenue guidance. I think one of the things that I've observed in the month on the job here is that the pharma manufacturing revenues are inherently lumpy and it's hard to predict those quarter-to-quarter, let alone year-to-year. So, we haven't gone as far to provide quarter-over-quarter guidance yet on revenue, we're very comfortable with the full year range of the $63 million to $68 million for total revenue.

Our next question is from the line of [indiscernible].

This is Skyler on for Do. For the partnership with MAI, do you have an update on how the soft launch is going for the DNA synthesis platform? And how near term is the plan to commercialize that in 2023? And can you comment on any expectations you have for that?

So really, we look at the MAI partnership as a validation of the TDT enzyme and the technical capability of that enzyme. As Kevin said in his comments, a lot of it is around the ability to then tweak that to be part of the RNA platform. We think that MAI are making really great technical strides in terms of producing longer oligos. But we're waiting to see just like you are in terms of do they get commercial traction when they launch. So really, we're not planning on much right now. Kevin?

No. We're being cautiously optimistic as associated with commercial uptake. We would like to see a little bit more in terms of their front-end pacing and their pull-through downstream. Again, we think they've achieved a really nice technical set of success here. So, we're waiting and seeing as you are.

Our next question coming from the line of Matt Hewitt with Craig-Hallum.

Maybe first, some clarification on the contribution. So, if I heard you correctly, there's still likely $12.5 million this year, next year, put it in Q4 if we're going to include it. I appreciate all of that. Will it still be -- will you still be recording that as revenues in the fourth quarter if and when it hits?

Yes, we would record that as revenue, but it would be noncash revenue.

Okay. Got it. And then backing that off, so your guidance doesn't include it. If you look at the core product revenues in fiscal '22 compared to your guidance, it does appear as though your revenues are going to decline a little bit. Maybe a little bit of color on what's happening with the rest of the portfolio there.

So, the low end of our revenue range of $63 million is flat to what we achieved in 2022, excluding tax loaded. I think what we've discussed that this is sort of a refocus year. We've talked about the variability in pharma manufacturing, how that ebbs and flows year-to-year, and we are expecting growth in Life Sciences to make up for that. That's how we came toward $63 million to $68 million range. So definitely a year where we are focusing for growth for life sciences that will set us up down the road.

Got it. And then maybe I think you've got 2 different groups that you're working with on commercial agreements at the moment. How should we be thinking about the structure of those contracts? Is it going to be simply hit your product sales line? Are these potential milestone royalty opportunities? Just trying to think about how they could end up impacting the financials.

So, with regards to the 2 different product lines, my assumption is you're talking about pharma manufacturing versus life sciences to clarify -- in that context,

Yes, okay. Good, go ahead. No, I just said correct. I mean how are they going -- are those deals going to be structured where you'd be recognizing enzyme sales product sales? Or how will those 2 agreements be structured? Or what are your hopes there?

Yes. I mean I think it goes back to some of Stephen's comments earlier with regards to farm manufacturing and some of the challenges there in terms of selling enzyme supply and the lumpiness associated with that. When you're an intermediary associated with the biocatalysis process, we're definitely adding value there, but it's a little bit harder to negotiate downstream royalties, particularly with some of these larger pharmaceutical manufacturers. When you move over to life sciences where we can provide a really complex and differentiated enzyme, which really enhances the workflow, that hence, gets back to the larger range of revenue you can see from this type of opportunity because some of that is straight up product sales, but some of that also could be licensing fees as well as milestones and downstream royalties. And that's how we're looking at structuring those contracts going forward.

That's really helpful...

Thank you. The next question is from the line of Jacob Johnsons with Stevens.

This is Mac on for Jacob. Just a couple of quick ones. Maybe for Sri. Can you talk about your priorities as it relates to balancing investment and managing cash burn? And how should we think about the outlook for R&D investments into this year?

Sure, in terms of the loss, I think in the fourth quarter when we announced the restructuring plan, what we initiated was a more disciplined approach to the portfolio broadly where we were focused on high-potential development programs that had high-value commercial opportunities, and that's very much in line with how we've approached thinking about our 2023 and beyond investments. Cash burn is important to us. Certainly, we're starting the year in a strong cash position with $114 million that provides those 2 years of runway and funds the programs that we talked about on the call today, including moving 7108 forward gene therapy programs as well as RNA and DNA synthesis. So, my approach will be very much in line with that and ensuring that we are looking at the overall value that the programs are contributing to the company as opposed to just any one line item on the P&L. And then in terms of your question specifically on R&D expenses, we haven't provided expense level guidance. We provided the cash burn guidance. But what I will say, again, going back to the previous direction on refocusing the portfolio. We expect that the savings generated as a result of that effort will be redeployed to these new investments in high potential development programs. So hopefully, that helps a little bit.

Thank you for the color.

Thank you. At this time, we've reached the end of our question-and-answer session. Now I'll turn the floor back to Stephen Dilly, Chief Executive Officer for closing remarks.

Well, thanks, everyone, for tuning in today. As you can tell, we're very pleased with the results that we delivered in '22 and super excited for 2023 and continuing to make progress on these focus areas. So, thanks again, and have a great afternoon.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.