Codexis Inc (CDXS) 2010 Q1 法說會逐字稿

Welcome to the Codexis First Quarter 2010 Earnings Conference Call. I would now like to turn the call over to Derick Sutton, Vice President of Investor Relations at Codexis, Inc. Please proceed, sir.

Thank you, and good afternoon. Today after the market closed, we announced our fiscal first quarter 2010 financial results. The press release is available on the Investor Relations page of our website at Codexis.com. An audio replay of the conference call will also be available approximately two hours after the conclusion of this call. The audio replay will be available on our website for up to 30 days.

With me today are Alan Shaw, our President and CEO, and Bob Lawson, our CFO. During the course of this conference call, management will make a number of forward-looking statements, which are statements regarding future events, including the future financial performance of the Company.

These forward-looking statements include statements regarding the timing and amounts of future grant payments, if any, from the Singapore government, our future pharmaceutical revenue growth, our 2010 cash burn rate, our 2010 revenue and EBITDA guidance, our three focus area in pharmaceuticals, our belief that our biocatalysts may decrease production capital and operating costs across multiple feedstocks in our biofuels programs, and our belief that our technology platform can be extended to future markets without significant additional investment in our platform.

These forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties that could cause actual results to differ significantly from those projected. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.

Please refer to our first quarter 2010 earnings press release today for information on the specific risk factors that could cause actual results to differ materially from the forward-looking statements made on this call.

Additionally, our registration statement on Form S-1, filed with the Securities and Exchange Commission on December 28, 2009, as amended, discusses some of the important risk factors that may affect our business, results of operations, and financial condition. And that could cause actual results to differ materially from the forward-looking statements made on this call.

Except as required by law, the Company disclaims any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call. Although this call may be replayed on a later date, its continued availability does not indicate that we are reaffirming or confirming any of the information contained in the live conference call today.

During this call today, we will discuss certain non-GAAP financial measures for comparison purposes only. The non-GAAP amount of adjusted EBITDA is calculated by adding depreciation, amortization, net interest expense, income taxes, preferred stock warrant fair market value adjustment, and stock-based compensation to our net loss.

This non-GAAP measure is in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. Please refer to our press release today for a reconciliation of non-GAAP financial measures to GAAP.

Now, I'll introduce Alan to discuss the quarter.

Good afternoon. I am pleased to welcome you to Codexis' First Earnings Call. As you know, on April 22, Codexis achieved a very significant milestone in our company's history with the successful completion of our initial public offering.

We sold 6 million shares at $13.00 per share, raising gross proceeds of $78 million. We believe this is a positive sign for our company, and will allow us to accelerate our strategic objectives as we continue to further expand our technology platform in our target markets. We had a strong first quarter. Total revenues for the quarter increased 32% versus the first quarter of 2009, and our net loss improved to $1.4 million, compared to a $6.1 million loss in Q1 2009.

We expanded our pharmaceutical opportunities and continue to make strong progress with Shell on biofuels. On May the 3rd, we received notice from the US Department of Energy of a potential $4.7 million grant for our work in carbon capture, another market in which we can apply our proprietary technology platform.

Indeed, this is an exciting time for our company, its employees, and our new shareholders. I want to thank the team at Codexis for getting us to this point and setting us up for a successful future. I'll present a strategic overview following Bob's financial review.

Over to you, Bob.

Thanks, Alan. I'll present our financial results for the first quarter of 2010. As Alan said, for the first quarter, total revenues were $25.7 million, up 32% from the same period in 2009. Revenue from our biofuels program with Shell increased 11% year-over-year, in line with our expectations. The increase was principally driven by the recognition of a $1.4 million milestone payment from Shell for a biofuels research milestone that we achieved in late 2009 and validated in the first quarter of 2010.

Additionally, we received a $2.7 million grant payment from the Singapore government related to our pharmaceutical R&D program in Singapore. We expect a payment of approximately $400,000 from the Singapore government in Q2 of this year, but don't expect any further revenue from this grant the rest of 2010.

Our Pharmaceutical business is off to a strong start with total revenue up 39% versus the first quarter of 2009, primarily driven by an increase in product revenue from $4.6 million in Q1 last year to $6.3 million this year. This increase was primarily driven by growth in sales of atorvastatin intermediates to Pfizer and to generic manufacturers. As most of you may know, atorvastatin is the generic name for Lipitor, the world's leading cholesterol-lowering drug.

We're pleased to report that our pharmaceutical pipeline is providing us with good visibility for the remainder of the year, and we expect pharmaceutical revenue growth to continue throughout 2010. From an operational perspective, we generated pharmaceutical product gross margins of 17% in Q1 2010, compared to 16% in the first quarter of 2009.

Operating expenses increased modestly in the quarter, up $400,000, or 2%, compared to the first quarter of last year. R&D expenses declined 14% year-over-year to $13 million due to a reduction in licensing costs. SG&A expenses increased from $6.1 million last year to $8.6 million in Q1 2010. Drivers of this $2.5 million increase were costs and increased headcount related to public company readiness and an increase in stock-based compensation. Our SG&A spend in Q1 was comparable to our spend in Q4 of last year.

As a result of strong revenue growth and modest expense growth, our net loss narrowed by nearly $5 million to $1.4 million in the quarter, compared to a net loss of $6.1 million for the first quarter of 2009. That equates to a fully diluted loss per share of $0.50 for the quarter versus a loss of $2.35 in the prior-year quarter. Adjusted EBITDA improved significantly to $2.8 million in the first quarter, compared to a loss of $3.4 million in the prior year. Due to the grant revenue received in Q1, these results will not be indicative of the full year.

We finished the first quarter with $39.3 million of cash and other marketable securities, a decrease of $16.3 million from the end of 2009. This decline was primarily driven by a $7 million reduction in deferred revenue as a result of timing of payments from Shell versus R&D expenses on our Shell biofuel collaboration, which we expect will even out throughout the remainder of the year. We also saw a $4.7 million reduction in accounts payable and accrued liabilities related to costs for our IPO, and a $3 million reduction in accrued compensation with a payment of annual bonuses in the first quarter.

The cash burn in the quarter is not indicative of future quarters, as the timing of Shell payments are balanced throughout the year and the other items are expected to be non-recurring in 2010. Following the close of the quarter, we received proceeds of $72.5 million from our initial public offering.

Now, to our outlook for the full year. We expect full year 2010 revenue between $94 million and $98 million, which would represent growth of 13% to 18% versus 2009. Our guidance assumes that our 2010 revenue from Shell will be comparable to 2009 revenue. We also expect that pharmaceutical revenue will continue to grow throughout 2010. We expect our adjusted EBITDA to be positive for 2010.

The timing of large orders can create revenue and expense variability between quarters, so we'll only provide guidance for our annual results, and we expect to update our total year guidance on a quarterly basis throughout the year.

I'll turn the call back over to Alan for a more strategic discussion.

Thanks, Bob. As you can see from our performance and guidance, we're on track for a strong 2010. We are new to the public markets and there are probably some people on the line that have not met us yet, so let me take a moment to highlight our strategy.

Our proprietary technology platform enables us to create optimized biocatalysts that make existing industrial processes faster, cleaner, and more efficient than current methods and has the potential to make new industrial processes possible at commercial scale. We do this through directed evolution to create super enzymes designed for specific applications. Unlike natural enzymes, which contain DNA that can inhibit effectiveness, we designed synthetic enzymes that only do what a customer wants and not what they don't.

We're a Silicon Valley success story, combining cutting-edge biology, bioinformatics, and process engineering to develop a technology platform that can address some of the world's largest markets. Our technology is applied at scale today in the pharmaceutical industry and we're working on advanced biofuels in collaboration with Royal Dutch Shell. Our technology platform can also be applied to carbon capture, water treatment, and the creation of bio-based chemicals.

Our Pharmaceutical business continues to gain momentum as we benefit from a growing product pipeline. We signed new commercial agreements with Dishman Pharmaceuticals and AMPAC Fine Chemicals to access previously untapped markets. Our relationships with Dishman and AMPAC give those manufacturers access to the cost reduction and environmental benefits of Codexis biocatalysts, and provide Codexis access to an increased pipeline of pharmaceutical intermediates and APIs from Dishman, AMPAC, and their customers.

Our Pharmaceutical business is important to us as a growth driver of revenue and operating income in the near term. Our focus in pharmaceuticals is on three areas; growing our pipeline of opportunities and getting them to market; increasing our share of the value that we bring to our customers; driving operational excellence across our supply chain.

In addition to the pipelines brought from Dishman and AMPAC, we're focused on growing our pipeline of opportunities with existing and new customers. We typically begin a relationship with a pharmaceutical customer through sales of our Codex Panels, which allow the customer to test our biocatalyst with their compounds. The customer can then engage us in an enzyme optimization program, under which we develop a specific enzyme tailored to their needs and licensed exclusively to them.

We then typically enter a long-term supply agreement, which generates an annuity stream for us as long as the life of the drug with minimal investment from Codexis. Our biggest opportunity is to expand the list of compounds we're working on with existing customers. Additionally, we're focused on growing the number of customers using our panels.

As our Pharmaceutical business has grown, we've demonstrated significant capital and operating cost savings for our customers. We believe our track record will allow us to increase our share of the savings we generate in the future. Finally, we're focused on operational excellence, driving continuous improvement in quality and cost.

In biofuels, we've continued to make excellent progress with Shell on advanced biofuels. Our agreement with Shell includes incentives for achieving annual technology performance milestones on the path to eventual commercialization. As Bob mentioned, we recognized a milestone payment during the first quarter of 2010. This was the last milestone that we achieved in 2009, a year in which we continued our track record of hitting every milestone Shell has given us since the inception of the Shell agreement in 2007.

Commercialization of advanced biofuels will take enormous amounts of capital and a clear path to market. By partnering with Shell, we can focus on Codexis does well -- the directed evolution of advanced biocatalysts in a capital-efficient manner. We are intently focused on enabling Shell to become the world leader in advanced biofuels, where we expect our biocatalysts to drive down production capital and operating costs using multiple feedstocks.

Shell and our world-leading pharmaceutical customers, including Merck, Pfizer, Teva, and others, are an important part of our potential success in these markets. Our revenue growth and traction with partners in the Pharmaceutical business and our performance against milestones with Shell give us confidence in the future.

Our initial public offering was an important milestone for Codexis, but it's just the beginning. Our disruptive and proprietary technology platform can be applied to multiple major and growing markets. Our growth in the Pharmaceutical business validates our commercial scalability. Our partnership with Shell provides the capital and distribution needed for an opportunity to scale of advanced biofuels, and we have more markets we can address without significant incremental investment.

Thank you for joining us for our first earnings call. I look forward to many more in the years ahead. Now, over to your questions.

(Operator Instructions)

Your first question comes from the line of Michael Cox with Piper Jaffray. Please proceed, sir.

Good afternoon, guys.

Hi, Mike.

My first question is on the cash burn. It sounds like there were some sort of unusual items here in the first quarter. Can you comment on what your expectations would be for (inaudible) over the next couple of quarters?

The anomalies in the first quarter -- we paid bonuses, which we accrue throughout the year, so that certainly won't happen again until next year, assuming we do well and earn our bonuses. The other big item in there that shouldn't be recurring is the timing of the Shell R&D payment versus our R&D expenses. Shell pays us periodically for the research that we do for them, and we collected a payment in December and they paid us, I think, once, Mike, in Q1. And if I look at the timing of those payments, because they're scheduled through the rest of 2010, I'd expect those things to even out.

The third item that we had that was an anomaly in Q1 was IPO expenses that were incurred that won't repeat. So the $16 million burn you saw in the first quarter was -- we haven't given guidance on cash, but it was a big chunk of our expected burn for the year.

Okay. All right, that makes sense. On Shell, any expected change to the full-time equivalent number through the balance of the year?

We don't expect it. We don't expect a change.

Okay. And then, I guess, any qualitative comments on a Shell decision as it pertains to a biofuels facility? Any update there?

Nothing specific, Mike. But what I would say is we continue to have increasing confidence in the potential of Shell-Cosan. I was in Brazil last week. I was fortunate enough to meet the chairman and CEO, CFO, and the chief operating officer of that company. And there's no doubt in my mind that there's significant potential for Shell-Cosan and Codexis, so we're all excited about that. But the actual timing on that, of course, is entirely down to Shell and Cosan.

In terms of the production facility, I don't believe there's any change from what we said at the time of the IPO. The site has been identified, it's in Saskatchewan and I believe that Shell, Iogen, and Codexis are all moving towards a positive outcome on that. But I know more than we knew a couple of months ago.

Okay. And my last question is on the product mix. Can you provide any color as to the mix between generic and innovators in the quarter?

Yes. We haven't broken it out, but I'd describe -- we were happy with our innovator sales and we had strong generic sales, particularly of atorvastatin as Lipitor comes off patent in November of next year. We've started to see generics manufacturers ramp up atorvastatin production. So some of the upside was driven by generics, but we saw a good performance in both markets.

Okay, great. Well, thanks a lot, guys.

Thank you.

Your next question comes from the line of Edward Westlake with Credit Suisse. Please proceed, sir.

Good afternoon, and congratulations on the IPO. Just a quick question on the Q1 revenues. Presumably, we should take out the grant revenues to sort of get an underlying revenue number, say, closer to $21.6 million. Obviously, if you annualize that and apply some kind of acceleration in the second half, from your comments it appears to be sort of pharma led. Can you kind of give us some feeling as to when you feel that sort of revenue acceleration would come through?

Yes. I'd expect -- and we haven't guided by quarter, but certainly when we look at the year at $94 million to $98 million, we need to see some growth in our Pharma business as we go through the year. We've said we expect the collaborative R&D with Shell to be relatively flat year-over-year, so the growth will come from pharma.

But you won't give any guidance on timing in terms of whether it's Q2, or you think it's going to be back-end loaded at this stage?

That's right.

And maybe a follow-on question in terms of the customer base. You've had a fantastic relationship with Merck. Can you talk a little bit through at this stage in terms of any other customers that you feel are getting closer to moving from that -- we're experimenting with panels to we like what we're seeing and we want to do more business with Codexis -- and, in particular, perhaps on the drug pipeline, the closest drugs that people should be looking out for?

Okay, Ed. Yes, I'll try and give you as much color as I'm able to. You mentioned Merck. We clearly enjoy a very good relationship with Merck. Our confidence there is growing daily. We're getting more exposure to Merck's pipeline. We anticipate increasing our effort regarding Merck. And I hope as we go through the next couple of quarters, I'd like to think that we can say a lot more about how that relationship is expanding, but we're very confident.

And, of course, Januvia continues to do well, and that's in the public domain. So, Merck is a strong account. We are seeing accelerated adoption. We're not able to make any forward-looking statements regarding signing of customer A and customer B, but the adoption is in line with our expectations.

Our target was always Europe; it was one of the drivers for the relationship with Dishman and AMPAC. We talked about those companies bringing and opening up new markets. That was in the script that we just walked through. And therefore, the whole business is moving forward and is in line with our expectations, but we're not able to say or name specific new clients today.

I would add, though, Ed, that we've got strong visibility into our pharmaceutical pipeline. As you know, the pipeline, as we talked about a little bit on our road show, as -- we've got 35 drugs in our pipeline, 80% of which are launched and 90% of which are Phase III or later in the order cycle, and our Pharma business is such that we've got good visibility into pharmaceutical revenue as we look through 2010.

Thank you.

Your next question comes from the line of Weston Twigg with Pacific Crest Securities. Please proceed, sir.

Hi. Thanks for taking my question. Actually a couple of questions. First, wondering a little bit more on the pharma revenue detail. I think you said pharma revenue was up 39% over Q1 last year, which by my calculations if $6.3 million was for the product that gets me to around $600,000 from service and R&D. Is that about right?

I'm just grabbing my notes here, Wes, to split the two. Yes, it was between $600,000 and $700,000 -- $661,000.

$661,000. Okay. And then, also wondering on the Shell milestones this year. Have those been set, and should they be a similar amount to last year or maybe slightly higher?

They've been set. As we've said, I think there are each year typically between six and eight of them, and we're in that range this year. The total dollar amount if we achieve all of them is in the single-digit millions, but roughly in line with last year.

Okay. And I would assume that's mostly Q4 weighted.

That's probably safe to say. We'll try to achieve them as fast as we can. I'd love to achieve a little bit faster than that, but that's probably the safe bet, Wes.

Okay. And then, just wondering -- you mentioned the carbon -- the grant, the ARPA grant. When do you expect revenue actually might begin on the carbon program, or is it still several years out?

The carbon story is an interesting one for us. We didn't actually play it up too much during the IPO. Our focus in the short-term is very much on pharmaceutical growth and, of course, getting Shell to market in North America, through Iogen on wheat straw cellulosic to second-general ethanol, and, of course, we've got significant upside in Brazil with the Cosan relationship.

So we didn't really get around to talking a lot about carbon, and yet carbon capture is actually accelerating in this Company. So, the grant is timely. The technical progress that we're making is significant. And if you'd asked me that question six months ago, I would have said that carbon revenue was beyond 2015 and was getting out there; it's actually looking like it's on par, possibly with second-generation ethanol.

Clearly, there's no immediate move towards Cap and Trade in the US, and it looks like that might have to wait now until a second Democrat administration. Or if the Democrats don't get in, who knows? We may never see it. But I don't think it's going to happen this year.

But what you have to remember is it's very real in Europe. This is a huge story outside of the US, and we're an international company with international clients. So, I would actually say carbon has accelerated. And I would hope that the next time we talk, or sometime between now and the end of the year, we might be able to update you more on that, but it's looking more positive in terms of time to market than I would have said six months ago.

Okay, very helpful. Thank you.

(Operator Instructions)

You have a follow-up question from the line of Edward Westlake with Credit Suisse. Please proceed, sir.

Hi. Just a follow-up on that last comment on carbon. I guess, when you're thinking about the development, you've said in the past that you're looking for a big brother type relationship, and so the initial revenues might be FTE before you get to sort of product and royalty revenues. So I guess the question is, when you're thinking about a little bit of more confidence, is that getting to commercial product revenues before 2015?

Okay. I think that's a good question and a good point of clarification, Ed, so I thank you for that. My answer was specifically related to commercialization in terms of scale-up. If we are successful in securing what we've termed a big brother partner and we follow the Shell model, then clearly we would anticipate possibly FTE-based revenue and small development scale revenue in an earlier timeframe.

But clearly, I have no visibility on that today, but your point of clarification is correct. If we are successful in following the model that we're aggressively pursuing, then you would see revenue earlier than 2015; that is correct.

And just to pile on a little bit, probably answering Wes' question on the ARPA-E Grant, as you guys are modeling that, it was $4.7 million. It's a two-year grant, and we're still working out contractual terms on it. So I don't know how much revenue we'll see this year, but given that we're already at the end of May, I don't expect it will be a huge amount in 2010.

Okay. Well, if there's no other questions, thank you, Yvette, and thank you all for joining us for this afternoon and for your support during our first month as a public company. We feel good about the quarter and the outlook for the year.

In summary, we are very excited about our progress to-date and the success of our proprietary platform technology in both the pharmaceutical and advanced biofuels markets. Overall, we are very encouraged regarding our prospects and our opportunity for growth. We appreciate your continued support and interest in Codexis, and we look forward to providing an update on our future progress.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.