Codexis Inc (CDXS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, welcome Codexis Fourth Quarter and Full Year 2010 Earnings Conference Call. I would now like to turn the call over to Mr. Doug Sheehy, General Counsel at Codexis, Inc. Thank you.

Thank you, and good afternoon. Today, after the market closed, we announced our fiscal fourth quarter and full year 2010 financial results. The press release is available on the investor relations page of our website at codexis.com

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. These forward-looking statements include our ability to convert biomass such as the gas and sugarcane tops and leaves to sugar and to use that sugar to produce chemicals and fuel products.

Our ability to improve yields on current ethanol production for the Shell Cosan and JV, potential interest from water customers to use our enzymes for waste water treatment are projected full year 2011 revenue and adjusted EBITDA, expected growth in our pharmaceutical product sales in collaborative R&D revenue from Alstom.

The number of FTEs that we expect to be funded in our Shell biofuels program in 2011, our expected success rates on our 2011 shell research milestones are expected increase investment in biobased chemicals and water treatment in 2011, our ability to get to the market faster and create more value by Codexis by working with partners and our ability to generate recurring commercial revenues through enzyme sales, product sales, and royalties.

These forward-looking statements 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 Form 10-Q filed with the SEE on November 4, 2010 for some of the important risk facts that could cause actual results to differ materially from the forward-looking statements made on this call. Except as where required by law, we disclaim any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that could occur after this call.

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, warrant related costs, and stock 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, and thank you for joining us today. We just completed another strong quarter capping off a terrific year. Our results reflect the growing application of our disruptive technology to address real customer needs.

For full year 2010, we generated 29% revenue growth, with growth of 77% in sales of enzymes and intermediates to pharmaceutical customers. We generated positive EBITDA every quarter and ended the year with more than $72 million in cash.

In addition to our strong 2010 financial results, we made substantial progress toward our longer term commercial opportunities in the five markets in which we compete. Let me take a moment to review our strategy.

At our heart we are an enzyme company. We believe we are the best in the world at evolving and producing enzymes to create real economic advantage today with our customers like Merck and Pfizer, and tomorrow with partners like Shell in fuels, Alstom in carbon capture, and others in chemicals and water treatment.

One of the most powerful applications of our enzyme technology is in the area of converting biomass to a source of inexpensive sugar. There are a number of companies working on the conversion of sugar to chemicals or fuels; we are a leader in that area. But unlike others, we have also developed enzymes that convert biomass, whether sugarcane to gas or wheat straw, or wood pulp, or anything else to fermentable sugars.

With sugar prices at 30 year highs, and the high cost and long lead time associated with planting more sugar and constructing new mills, extracting more energy from existing crops has never been more valuable. We are uniquely positioned to produce sugar from biomass and use that sugar to produce chemical and fuel products.

Our progress in biofuels was clearly evident in 2010. We achieved all four of our regular and three of our four stretch technical milestones with Shell, putting use ahead of peers on performance needed to achieve commercial targets. Shell and Cosan are working toward completion of their $12 billion joint venture.

The JV received European union regulatory approval earlier this month, paving the way for shareholder approve and launch of the world's largest sugarcane biofuels company. Upon the consummation of the JV Shell Cosan will become our largest shareholder with a 16.5% stake in Codexis.

We believe we can help Shell Cosan improve yields on current ethanol production. We also believe we can use our enzymes to unlock more sugar from Cosan's 700,000 hectares of sugarcane fields. Two-thirds of the energy in sugarcane is in the bagasse of tops and leaves and not efficiently used today.

Our ability to unlock that energy releasing more fermentable sugars has the potential to create enormous value. We are very excited about our progress to-date, and believe that our technology and the Shell Cosan joint venture offer the most promising opportunity in all of biofuels today.

Importantly, we are not just focused on biofuels, but on applying our proprietary technology platform through a multi-market approach which vastly expands our future addressable market.

Let me give you a couple quick highlights of our great progress in 2010. In pharmaceuticals, we made our first large shipment of enzyme for Januvia, Merck's blockbuster type 2 diabetes drug. With Merck, we won an EPA Presidential Green Chemistry Award. We also made our first shipment of Boceprevir, Merck's hepatitis C drug candidate for a market that global data forecasts will be $8.5 billion in 2015.

And earlier this month, we announced an enzyme supply agreement with DSM, a $10 billion Dutch Life Materials and Sciences Company adding to our existing relationships with Dishman and AMPAC. Also during January, we announced our first customer agreement in Japan with Dainippon Sumitomo Pharma.

In carbon capture, we won a nearly $5 million grant from the US Department of Energy ARPA-E program, and signed a development agreement with Alstom to use enzymes to economically separate carbon dioxide from post combustion flue gas in coal-fired electric power plants, the world's largest emitter of greenhouse gases. We are very pleased to be working with Alstom the world leader in integrated electric power plants and air quality control systems.

In chemicals, we are now pursuing the $4 billion detergent alcohol market following our transaction with Maxygen in October, giving us sole ownership of our gene shuffling technology and the right to use it in more fields.

Production of detergent alcohols leverages the work we are already doing with Shell on fuels, and we are making rapid progress. Since October, we have hired Bill Rothwell, a former Chemicals Executive from Shell to head our chemicals business, we have produced detergent alcohol in our labs and we are in discussion with potential customers.

Lastly, we are encouraged about the potential use of cellulase enzymes for wastewater treatment. These events give me great confidence in the bright future of Codexis, and I will talk more about our plans in a few minutes.

First, I will turn it over to Bob to discuss our financial results and 2011 guidance.

Thanks, Alan. I am very pleased to share Codexis' financial performance for the fourth quarter and full year 2010. We, again, achieved results inline or better than promised in our first full year as a public company.

Starting with fourth quarter results, revenue for the quarter was $29.8 million up 23% versus last year. Sales of pharmaceutical products were $8.6 million for quarter up 67% versus last year on strong sales of the (inaudible) statin products. Because the bulk of our fourth quarter sales were intermediate to generics manufacturers, gross margin was lower than prior quarters at 5% versus 15% for the full year.

Related party collaborative R&D the revenue we earn from Shell for our work on biofuels, was $19.3 million up 3% from Q4 2009. Collaborative R&D was $1.5 million in the quarter versus $400,000 last year. The increase was the result of higher enzyme evolution service work for pharmaceutical customers, and our first revenue from Alstom for our work with them on carbon capture.

Lastly, we earned $500,000 from our grant from the US Department of Energy related to our carbon work.

Total operating expenses for the quarter were $22 million down more than $2 million versus the prior year, mostly as a result in reduction of royalties to Maxygen associated with the Shell milestone payments. Note we began advertising the intangible assets associated with the Maxygen transaction, and will be advertising the $20 million purchase over an approximately six year period.

As the result of the higher revenue and lower expenses, adjusted EBITDA was $4.4 million for the quarter compared to a loss of $1.1 million in the fourth quarter of last year.

Turning to the balance sheet, we ended the year with $72.4 million in cash. Recall on our third quarter earnings call we said while we finished the third quarter with $99 million in cash, it did not include the impact of the October spend of $20 million, which we spent to acquire Maxygen's gene shuffling IP portfolio, and about $4 million spent paying off debt. Ending cash also reflects a timing difference from last year in collections from Shell.

In 2008 and 2009, Shell elected to make payments in December for R&D services invoices due in January. They did not do so this year. The result is about $9 million in lower year end cash, but more consistent quarterly cash flow in 2011.

For the full year, we recognize revenue of $107.1 million versus $82.9 million last year, an increase of 29%. Product sales were $32.8 million, up 77% year-over-year. Gross margin on product sales was 15% compared to 10% last year. Revenue from Shell was $66.1 million for the year, up 6% primarily from higher milestone revenue.

Collaborative R&D more than doubled with full year revenue of $4 million versus $1.7 million last year. We also earned $4 million in government grants including grants from the Singapore Economic Development Board for our R&D work there, and from the US Department of Energy ARPA-E program for our work on carbon capture.

Operating expenses were $86.2 million, up 2%. R&D expense was $52.4 million, down $2.3 million as the result of lower royalty payments to Maxygen. SG&A expense increased $4 million to $33.8 million [for] higher compensation cost and costs related to being a newly public company. Full year adjusted EBITDA was $9.9 million, an improvement of $17.2 million versus our loss of $7.3 million last year. Our net loss narrowed from $20.3 million last year to $8.5 million this year.

Now on to our outlook for 2011. As we have said previously, while we have high visibility in the pharmaceutical product sales the timing of those sales by quarter can vary. As a result, we will continue to give annual guidance with updates each quarter.

For full year 2011, we expect revenue of $120 million or more. We expect continued strong growth in pharmaceutical product sales, and growth and collaborative R&D revenue from Alstom for our carbon program. We also expect to maintain 128 funded scientists working on biofuels with Shell.

We had two unusual items in 2010, which do not repeat in 2011. First, we earned unusually high Shell milestone revenue in 2010 from recognition of 2009 and 2010 milestones during the year. We also benefited in 2010 from a prior year's catch up in grant revenue from the Singapore Economic Development Board.

We expect will hit 80% of our regular Shell milestones and 50% of our stretch milestones in 2011; the same expectation we had entering 2010. The impact of lower milestone and EDB revenue is about $4 million.

We expect 2011 adjusted EBITDA of at least $5 million, reflecting increase in investments in commercialization and technical resources to develop biobased chemicals and enzymes for water treatment. As Alan noted, biobased chemicals are a new market opportunity for us subsequent to the Maxygen transaction, and leverage our work to-date with Shell in fuels.

The development of enzymes for water treatment, including cellulases, also leverages our platform. Both markets have significant long-term potential for Codexis.

With that, I'll turn the call back over to Alan.

Thanks, Bob. As we said before, our business model is quite simple. First, focus on what we do best. We are a platform company using our proprietary technology platform to solve real world problems and create economic advantage. We are not a technology push company, but a market backed enterprise working to solve some of the world's largest challenges. It is a single platform with multiple market applications.

Second, we work with world leading customers and global partners with the capital and expertise to develop and apply the technology in the multi-billion dollar markets to which it applies. Exploiting such large market opportunities requires billions of dollars of capital and access to huge global markets.

Working with customers like Merck, Shell, and Alstom are essential to realizing our potential. We believe no one has a better group of world leading partners in our target market.

Third, we are focused on our driving our products as quickly as possible to market creating economic value for Codexis shareholders. By working with our partners on the development of our products we are able to create them with full knowledge of their application, tailoring them to the unique needs of our customers.

We expect to commercialize some products on our own, but in markets like fuels and carbon capture with established global infrastructure and enormous capital needs, working with partners will enable us to create more economic value and get to market faster, without having to seek outside investment capital.

As we think about the future, we expect to make the full transition from a company significantly funded by R&D to one generating recurring streams of commercial revenue. We expect those revenues in three key areas. One, enzyme sells to pharmaceuticals, fuels, carbon, and water customers. Two, product sales to chemical, pharmaceutical, and water customers. Three, royalties from the production of fuels and other products.

We will be talking more about our strategy in the weeks and months ahead, but I have never been more optimistic about the enormous potential of this Company. Thank you to our employees and customers for our excellent 2010 results, and to our shareholders for your continued support.

Now, to your questions.

(Operator Instructions)

And our first question comes from the line of Weston Twig, with Pacific Crest Securities. Please proceed.

Hi, thanks for taking my question. Quick question on the Shell Cosan joint venture. I'm wondering if there is any revenue from that venture in your guidance for 2011. And if not, what kind of upside potential could there be?

Wes, we do not expect revenue from Shell Cosan in our 2011 guidance. I think as we said before the opportunity to improve the yeast that Cosan is using for gen one ethanol is potentially low hanging fruit for us and we have an opportunity to do that, but I think that is probably a 12 month development project for us.

Okay. And then, on the chemicals market, is there any chemicals market revenue in that guidance?

No there isn't. It's Alan here. No. We deliberately not put that in the guidance for 2011. I think our success in chemicals in 2011 will be judged by announcements about go to market partners, end customers, offtake agreements. This will be our first commercial bioindustrial product. It is a significant advancement for the Company.

We have already made material in the labs. We have identified multiple customers. It is a direct leverage on the four years of intense work that we have done with Royal Dutch Shell. The target market is worth $4 billion. People are buying hundreds of thousands of metric tons of this product every year, so it is a real market, real customers.

We have a product and it is going to be, I think, one of the biggest things we will do this year and is completely leveraging in, as I said, all the work we are doing with Shell. I would remind everyone on the call that the Shell relationship is exclusive to fuels only, and does not extend beyond liquid transportation fuel.

Great, very helpful. Just another -- one more question on the revenue side. How much revenue do you have modeled from Alstom, from that relationship in the 2011 guidance? And how much --

We have not broken it out, Wes, but I'll tell you -- it is a much smaller program than Shell. Development of carbonic anhydrase enzyme is a single enzyme evolution project. And so, we got some scientists funded by the DOE ARAP-E program on it in modest number funded by Alstom, but much smaller than our Shell program.

Weston Twig. Okay, very helpful. Thanks, guys.

And our next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please Proceed.

Good afternoon guys. Just a follow up on the questions from Pacific Crest on the chemicals business. Is that still the strategy to go after that using your own capital or maybe using some sort of shared capital structure with a go-to-market partner -- less asset-light than you pursued in the past?

Absolutely. The relationship with have with Shell -- and I would imagine a very similar model with Alstom because of the sheer size of the capital required, that strategy is very asset-light. And you are correct. I think this one will be different.

In a way I'm glad it will be different because this will be the first product that we will be able to sell as Codexis. And we will be able to take advantage of the end game in that regard in terms of revenues and the market opportunity. With that said, I do not envisage Codexis will be investing in a multi-million dollar ton manufacturing facility.

What we are good at is in developing a process that will significantly advantage a manufacturer of this product. Fermentation of sugar, if it is just sugar that is available on the open market, converting that into a chemical has some severe disadvantages. Sugar is traded at a 30 year high. The yield losses of converting sugar to fermented products is more than you would get in the case of fermenting it into ethanol, and therefore that process is challenged.

The way to release value and to secure an economical advantage on any fermentation of sugar, whether it would be to fuel product or a chemical product, is to be able to back into great biomass. And Codexis is the only company that I know of that is operating as an world leader in development of a biomass to sugar platform, which is our cellulosic platform, and at the same time has developed unique microbes that can ferment those sugars to a product.

So, we will be bringing a unique economic advantage to bear that leverages on all of the work we have done with Shell. In the case of Shell the biomass to sugar to fuel is clear, but this leverages the biomass to sugar to chemicals. And therefore, I believe we will find the manufacturing partner, but we will still be able to command a significant chunk of the revenue because of the technology advantage we are bringing to bear.

That's helpful. And then I guess a similar question for the water platform is, the -- to the extent you can leverage the cellulase knowledge that you have built over the years of your collaboration with Shell, but that would be more of a waste water treatment application and less -- you don't have to build a new plant. It would be an additive to water treatment plant. Is that right?

Yes. That is right.

Just on that -- just to add to Bob's confirmation there, more importantly the enzymes that are used in water treatment today are cellulases. So, we are taking about the same platform that we have developed for converging of biomass to sugar.

The enzymes, the super enzymes that will be coming out of Codexis and will be scaled up this year which is probably -- again, one our major programs, the same platform -- our proprietary production system, will not just produce enzymes for a chemical business, not just produce enzymes for our fuel business and our fuel partners, but it will be the same enzymes that will be used in what will be an emerging and significant water treatment business.

So, a lot of this really does not require significant investment from where we are today. So, the Company is at really a very interested in flexion point, where we are able now to leverage all of the hard work of the last four or five years.

Excellent. Thanks. One last question, and I'll jump back in cue. On Januvia, I am not exactly sure what the market opportunity -- the size of the market opportunity that you guys have in Januvia. So, if all of the Januvia made after it goes live is made using your enzymes, can you give us kind of a sense of what sort of revenue stream we could see from that?

I'll tell you two things about that, Mike. One is, I don't expect significant revenue for Januvia in 2011. I think our pharmaceutical growth will be driven by other products just given the timeline that Merck is operating on in seeking FDA approval for the manufacturing change from the current chemical process to the biological one and to now using our (inaudible) enzymes.

And with that said, it is a great opportunity for us both in terms of long-term revenue, which is in the -- we have not guided 2011, but certainly several million dollars a year. I remind you this is an enzyme sale and not an intermediate sale. So, the absolute revenue dollars with an enzyme sale are lower, but the margins are very, very attractive.

I think more importantly in some ways the work that we did on Januvia and the green chemistry award that we won for Januvia and some of the press that surrounded that, with quotes from Merck describing how we saved them from having to build a plant, because the capital needs with our enzymes are so much lower than with their chemical process it started opening doors with other pharmaceutical companies.

It is a great revenue opportunity for us, but I think almost more importantly it really puts a stamp on the value of our technical in this phase.

Okay, great. Thanks, guys, and congrats.

And our next question comes from the line of Stuart Bush with RBC Capital Markets. Please proceed.

Hi, Alan, and Bob. Congrats, on a good year.

Thanks, Stuart.

Thanks, Stu.

I was hoping you could dig into a little bit and lay out the economic case for the detergent alcohol market. What sort of process or equipment change would customers need to undertake to use your enzymes? And -- like, would there be a change in the operating conditions of the plants, for example? Can you clarify what you mean by a $4 billion target market? Is that the addressable market of the current catalyst that are used there?

Okay, and great question by the way. So, thanks for that. Firstly, let's deal with the current product and where it is coming from, how it is made, and how it is used.

So, the $4 billion market is the total addressable market for the generic group, the class of products that are called detergent alcohols. There are principally two types. There are high carbon numbers, C16, C18, or they're C12, C14. The bulk of these products come from palm oil. And palm oil has got some serious sustainability issues associated with it.

And the major customers of these products are fast moving consumer goods companies who are very sensitive to consumer resistance. So, you have actually a perfect storm here where you have a class of chemical that is used in virtually every soap, detergent product that is used in -- households around the world that's currently sourced principally from palm oil where people are desperate for bio-sustainable alternative.

Our process would provide exactly that at a significantly reduced cost. For the driver of that is that our raw material would be biomass which his essentially a very low cost -- I'm not say free, but low cost.

We have already said in this call that two-thirds of the sugar cane that Shell Cosan grows is currently under utilized carbon, so it would be perfect use of that if we could direct that, break it down into sugars using our proprietary cellulase platform, and then ferment that product into this detergent alcohol, which looks very similar to diesel which is how we ended up developing the product in the first place.

But we believe it will be a much more attractive market opportunity for us as a chemical as opposed to a diesel. The market adoption I think will be relatively easy for the reasons I said and the product is identical to the product that is currently manufactured.

So, if our partner is someone who is currently producing it then they would require a different capital equipment. But since the market is growing significantly, particularly in the BRIC countries as the emerging middle classes demand things like -- demand wanting to wash their clothes in warm water for the first time in their lives, or turn on a washing machine, then you are really talking about a new market.

So, new capacity will be required anywhere. So, involving new capital does not necessarily concern me. The product though is identical and the specs are identical, So, there are no changes to the ultimate formulations that get in to the hands of the ultimate customer. That, I think, is the most attractive thing.

That is extremely helpful. Thanks. Alan, I think you mentioned, you commented in the Q&A period about you not assuming much chemical and other revenue on the product side outside of pharma. What sort of split should we assume in your guidance between product sales and R&D and grant revenue?

I think we expect continued growth in product sales. So, if I break that down a little bit, [Wes], and we guided it at a detail level, but I can you some general direction which is product revenue will grow from pharmaceutical product sales. And, as you know we got good visibility on pharmaceutical product revenue as we enter the year. A substantial percentage of that is already booked in backlog.

In collaborative R&D, which is the non-Shell portion of R&D, we expect some growth as the result of the Alstom program which just started in November, and a full year of the ARPA-E grant from the DOE, which if you remember we won about half way through the year of 2010. So, we get some benefit from ARPA-E and Alstom.

On the Shell portion of R&D, we said we expect to continue to have 128 scientists. So, that funding will be about flat year every year. And we actually expect we will have a bit of decline in milestone revenue. If you recall in 2010, we actually earned a 2009 milestone later in 2009 and that revenue was then recognized in 2010.

So, our 2010 Shell milestone revenue was unusually high because of the collection of a 2009 milestone and the great performance we had on our 2010 milestones in the year. So, I think we'll see a bit of decline there.

And then, in terms of grant revenue, we will have the ARPA-E grant as I mentioned. But in Singapore, we had to catch up for some prior years in the EDB grant from Singapore. So the revenue -- our grant revenue is down a couple million bucks year-over-year as well, as we talked about a couple million in milestone and a couple million in grant revenue difference year-over-year that are down for us.

Great. One last question. To that end, Bob, what dynamics will need to transpire to drive that 128 number of scientists with Shell higher, or if any?

Well, I'd be speculating to say certainly the Shell Cosan deal -- when we expected that transaction to get shareholder approval and Brazilian approval here in the near future. And whether it is 128 scientists or more that could change the number. I certainly sit here enormously optimistic about our potential with Cosan.

I think every time I see another slide that Cosan presents or more information on the opportunity there I get more excited about it. But, that is the only significant change I see in bio -- that is a pretty big one in biofuels.

Maybe I can add just a little bit more color to that. I think every time we talk -- and I know it is three months sometimes it can seem a lot longer because there is so much going on, but this whole biofuel industry is really accelerated now and it is taking shape.

And I think it is a lot clearer now what are the drivers for this industry, and how we can actually turn it into reality. It is becoming very clear to most of us that sugar is now front and center of this whole story.

But there lies the biggest problem. Sugar at the moment is trading at 30 year highs because it like plasma screens and washing powder and shampoo, is a prerequisite to call yourself middle class in the emerging economies. One of the reasons why diabetes is such as an expanding disease is because people want to eat sugar. It is a mark of prosperity in a lot of the developing world.

So, sugar is going to become more expensive, more in demand, and it is at the heart of this solution, and it is also the biggest problem. At Codexis because Shell I think has shown tremendous vision and foresight, for four years now we have been developing what is the world's leading cellulase platform. And, we will role that out this year.

We are focusing on wheat straw, which is the major source of cellulosic biomass in China and Russian and in Canada, where Shell has a subsidiary where we can utilize it on wheat straw actually almost in the field, and in Brazil the other major brick country on sugarcane bagasse.

This is critical in understanding the central role that Codexis will play in delivering Shell's biofuel strategy, but also in solving the world's renewable problems. Too many times we hear about companies that are saying that they will convert sugar into this product and that product, and the problem is where is the sugar going to come from, and what price is it going to be.

Cellulosic is now critical in delivering not just our strategy, not just in delivering Shell's strategy, but it is actually going to be critical in delivering everybody else's strategy in the bioindustrial space.

And, I think the next six to 12 months are going to be incredibly exciting for us because we know we have the world's leading cellulase platform and we look forward to deploying it. And I think that deployment will be, as I said, at first in North America on wheat straw and in Brazil on bagasse.

The connection with the number of FTEs is clear. Shell Cosan, which has in its possession 100% of all the sugarcane that used to be in Cosan, is very focused on adding value and 700,000 hectares of sugarcane produces a lot of bagasse and tops and leaves. And we can release tremendous value for Shell Cosan. And I would imagine if they wanted to put FTEs and accelerate in that program that might be a good idea.

Great. Thanks so much, guys.

And our next question comes from the line of [Vichelle Shaw]. Please proceed.

Hi, this is actually Anthony Kidd taking over for Vichelle today. Thanks for taking my question.

Hi, Anthony.

Hi. I have a couple of questions. First, can we expect a larger contribution from the Alstom R&D agreement in the future? To my understanding this business model is -- I think as you mentioned before that it is similar to the Shell Codexis related party collaborative R&D. How should we think of this business in the future?

I would describe it as more similar to our first agreement with Shell. So, I certainly expect we will have more revenue in 2011 from Alstom, but I think we are still at the what I describe as tester stage where we are demonstrating the capability of our carbonic anhydrase enzyme tested in their facilities with their equipment.

And so, if things are successful on both sides and the economics make sense, it has the opportunity to potentially expand, but it is dependent upon that being successful.

Okay. How long does this phase actually last?

This phase will carry us through much of 2011. It is a six to nine month program.

Great. And then another question, I understand you already gave the revenue kind of split for 2011, but do you have any comments on the gross margins among the different product segments?

Well, we do not have segments, but all of our product sales at the moment are pharmaceuticals. And so, our margins are going to be based on our pharmaceuticals. I think what we said is depending on the mix of what we sell, our margin rates can vary.

We are focused on margin dollars because we can eat dollars not rates. But, if we sell more generics or more intermediates versus products to innovators or enzymes the margin profile is very different.

I think the thing if you said what might swing margins one way or another, with Lipitor coming up patented in November 2011 we continue to see strong growth in the (inaudible) statin sales to generic manufacturers. Those are relatively lower margins, so they may put some pressure on margin rate, or the expansion of margin rate.

We've also been successful with Boceprevir, their hepatitis C therapy that we expect will launch in 2011, and by all indications may be their next blockbuster drug. Margins on that are certainly better. So, depending on how mix swings we'll see some variation in margin.

Thank you. That's very helpful.

And our next question comes from the line of Ed Westlake with Credit Suisse. Please proceed.

Hey. Good afternoon, well done, guys.

Robert Lawson Thank you.

Thanks, Ed. Nice to speak to you.

The feedstock for the chemicals, I mean, is that still -- I mean, obviously, Brazil. But I mean, could you talk through about the timing of when you might actually start to commercialize this business?

Yes. Absolutely. It has to do with feedstock. I know we said this before, but it is important to repeat it. Our technology's feedstock agnostic. It's one of the key differentiators of the Codexis platform.

So as I said, I believe that we will be able to utilize wheat straw where it grows the most and we'll be able to utilize sugarcane, bagasse, where it grows the most. I think the principle roll-out will be on those two feedstocks, but I wouldn't rule out paper and pulp as well.

As to timing, well, the first thing that needs to happen, and we are well on track to do this, is we need to scale up our proprietary cellulase system. And I hope the next time we talk, I'll be able to describe it with the brand name. Because we're that close to market now. That's actually on my desk as we speak.

But we are moving that product, that technology, to market. We need to scale up at a demonstration scale and we will be doing that over the coming months. Once we deploy it at scale, it will then basically go north and south. It will go north to Iogen, they have a pilot plant and feedstock already waiting for it. That is almost certainly a 2011 event.

And as soon as Shell Cosan becomes a functional, operating legal entity, and as Bob said, we're just awaiting shareholder approval now, then we will be working very quickly to do some form of deployment at a Shell Cosan facility in Brazil. I would love to do both this year, but of course we can't really make any predictions about Shell Cosan at all until the JV becomes a formal, legal entity.

And just a follow-on then, so presumably you're pretty confident that this pathway from -- even from wheat straw to detergents is economic at the current sort of efficiency of the process?

I'm absolutely confident, Ed. Because the process was developed for diesel. But the fact that it -- the fact that we're going to sell the product as a chemical was only facilitated by the, what now looks, very shrewd acquisition of Maxygen's assets in October for $20 million. And I'm very pleased to say that I believe we're deploying our shareholders' money very wisely.

That process is identical to the one we developed for Shell over the last three years. The target molecule is identical to a diesel molecule. It's just the field of use is different. So we're going to be able to fast-track deployment, and that was essentially enabled by the acquisition of Maxygen's intellectual property portfolio that brought with it a broad enough fields.

So I think movement here will be swift, and I see it becoming an inflection point for the Company in terms of where the Company is heading. It'll be our first product, first product sales in bioindustrials and we're very excited about it.

And you should be, I think. On the -- a separate note, on pharma, you've been trying to get to new customers. Obviously, you mentioned the collaboration with DSM. How is that going, in terms of capturing new innovator companies?

I think early days with DSM and with DSP in Japan. I think the great thing about those deals is they are sort of one too many. We signed a deal with one customer, who's got access to many of their customers. So, it can accelerate the deployment of our technology.

And feedback on the mini-panels from Europe?

Well, it's excellent. And I know that's of interest to you, Ed. That's why I'm pleased we're able to talk about the Japanese company. That's significant. Anyone -- and I know a lot of us are experienced business people on this call, but Japan is a long haul, as we know in business. And getting any inroads into Japan is an achievement in itself and usually leads, then, to rapid adoption. There's a lot of herd instinct in that market.

I also believe it will have a knock-on effect in Europe, and we're seeing fairly rapid adoption. Our objectives this year, in that business, are to increase, significantly, the number of innovators using the panels. And I wouldn't say that now, openly, on this call, if I didn't believe we were going to be able to follow through. But they work -- they've lowered the entry barrier. They've reduced the initiation cost to the customer significantly and have made it much more user friendly. And that is accelerating adoption significantly.

Thanks very much.

And our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Hi. Good afternoon. Thanks for taking my questions.

Hi, Pavel.

Hey. Let me first just clarify one thing about Shell. I remember the original plan was to focus on wheat in Canada first, then it switched to sugar cane and now it looks like you guys are looking to kind of refocus on the Canadian opportunity. Can you just clarify between those two?

I think there's a little bit of a misunderstanding there, but don't necessarily worry about that. Shell never walked away from Canada or Iogen or wheat straw. It is a critical part of their biofuel strategy.

I think what happened is [a] $12 billion joint venture in Brazil just dwarfed, largely, what they were doing in Canada. And of course, that in itself is significant. It's the biggest deal in biofuels. It clearly caught the market by surprise. Shell have followed through, recently, in ditching its algae venture in Hawaii. And we now, Codexis, are central to every single remaining point of Shell's biofuel strategy.

And let me remind you what they are. They're working with [Virant] on gasification of sugars to essentially diesel. They're working with Iogen on conversion of wheat straw to sugar and then sugar fermented to ethanol. Working with Shell Cosan, essentially sugarcane bagasse to ethanol and beyond, and ourselves.

And because of this platform we have, this cellulosic platform, we're actually able to add value across every single one of those ventures that Shell has in biofuels. So, I think the release from the algae deal really does focus Shell's biofuel strategy on and around Codexis. And I think this is a significant development that we haven't covered on this call.

But, Canada's important. It's a different feedstock. It's more relevant to the northern hemisphere. But wheat straw is very prolific in places like Russia and China, so I wouldn't just think about it in terms of Canada.

Okay. That's helpful. And you actually mentioned algae, this was going to be my second question, does your platform have applications for algae projects? Or, is it just cellulosics?

To be honest with you, we're not big fans of algae. I don't think we've got enough time on this call to go through that. But from -- but I approach everything from an economic perspective.

Economics first with me, science second. It always has been that way. I'm an industrialist, not a scientist or a venture capitalist. I don't believe in the economics of algae. I think it's challenged in terms of water use, challenged in terms of energy use, challenged in terms of the collection of the lipids, even if you manage to get a reasonable conversion. The answer is absolutely conversion of low-cost biomass into sugars.

The world will be overwhelmed, before we know it, with their lack of fermentable sugar. If we roll out ethanol at the rate we're going and diesel at the rate we're going and then biobased chemicals at the rate we're going, we're going to have a serious supply chain problem if we can't get cellulosics to market.

It is the only viable solution to what is known as second, third generation biobased fuel or biobased chemicals. Biomass is the most prolific form of carbon on the planet, and we need to start using it.

All right. I appreciate the color. Thank you.

Thanks, Pavel.

And we have a follow-up question from the line of Weston Twig. Please proceed.

Hi. I just wanted to ask one more question related to enzyme production. Alan, I think you mentioned, there were three revenue streams, one being enzyme sales. I'm wondering if you could update us on any potential to build out some enzyme capacity?

Yes, we're using -- today, as you know, we're selling enzymes in the pharmaceutical space and we use contract manufacturers to produce those enzymes. I think there is global capacity to produce enzymes at scale and I would expect us, as we ramp, to use that capacity to produce our enzymes.

Now I would add, again, it's an economic argument, if there is an opportunity to improve overall margins by going for make versus buy, then clearly I would expect Bob to be knocking on my door saying, I can see a better way of doing this.

But in the first instance, there is absolutely no problem at all outsourcing enzyme manufacture. It's no different to Microsoft asking someone to make their disks for them. There's no value in the disk, it's the inherent IP that goes with the disk. That's where the value is.

The value with our enzymes is the code. It's one of the reasons why the Company's called Codexis. The code is where the value is, and we own that. We have over 500 patents. We're move -- we have an incredibly strong intellectual property base, and that protects our products. The actual protein manufacturer of the enzyme, that's largely irrelevancy. But, hey, if it helps -- if it goes to the bottom line, I'll consider it.

All right. Very helpful. Thanks.

Thanks, Wes.

Okay. Ann, I think that does it for our queue. But thank you all for joining the call, and we look forward to updating you next quarter.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.