Codexis Inc (CDXS) 2011 Q1 法說會逐字稿

Welcome to the Codexis First Quarter 2011 Earnings Conference Call. I would now like to turn the call over to Henk Adriaenssens, Vice President of Investor Relations. Please proceed.

Thank you and good afternoon. Today after the market closed we announced our fiscal first quarter 2011 financial results. The press release is available on the Investor Relations page of our website at www.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 expectations that Victrelis, Incivek and atorvastatin will drive our pharmaceutical product growth in the future, Iogen's ability to reduce cellulosic ethanol this year using our technology at Iogen's facility, our expectations that the Shell/Cosan joint venture will create additional opportunities for us in biofuels, our ability to apply our core technology to produce bio-based chemicals, our projected full year 2011 revenue and adjusted EBITDA, the number of FTEs that we expect to be funded in 2011 in our Shell biofuels program, our expected success rates on our 2011 Shell research milestones, our expectation that we will increase investment in bio-based chemicals, our belief in the market opportunities in bio-based chemicals, our ability to produce sugar from waste biomass, our ability to convert sugar directly to high value end products, and our ability to create products that are tailored to the needs of our customers and partners.

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-K filed with the Securities and Exchange Commission on February 10, 2011 for some of the important risks factors that could cause actual results to differ materially from the forward-looking statements made on this call. Except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that 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 introduce the quarter.

Good afternoon, and thank you for joining us today. We had a strong first quarter, with revenue of 31 million, up 21% year-over-year. Driving this growth were sales of enzymes and intermediates to our pharmaceutical customers, which were up 105% year-over-year. As we have been highlighting for several quarters now, we are applying our proprietary technology platform to multiple high growth markets.

Our revenue today comes from pharmaceutical product sales and funded research in biofuels and carbon capture. We are also pursuing bio-based chemicals opportunities, which I will talk more about later in the call.

We had a terrific quarter in pharmaceuticals, driven by shipments of more than $5 million of an intermediate for boceprevir, the intermediate for Merck's investigational hepatitis C [true candidate], now trade named Victrelis. Victrelis and Vertex's competing candidate, now trade named Incivek, both received positive recommendations from an FDA advisory committee last week.

We are suppliers of intermediate products for both drugs and expect they will drive strong growth in our pharmaceutical business in 2011 and well beyond. We also saw strong growth in atorvastatin products ahead of Lipitor's patent expiration in November 2011 and expect atorvastatin to remain a growth driver for Codexis in the future.

In biofuels, we're continuing our work with [Royal du Shell] in what we believe is the largest biofuel program of its type in the world. And it's not just research. We are scaling our technology at Iogen's demonstration plant in Ottawa, Canada and expect to produce cellulosic ethanol using Codexis technology there later this year.

We're also anxious to begin working in Brazil with [Hiesen], the new Shell/Cosan joint venture which will be the largest sugarcane ethanol producer in the world and will be Codexis' largest shareholder upon consummation of the joint venture.

While we've had to be patient as Shell and Cosan work through the regulatory procedural processes inherent in a $12 billion joint venture, we expect that this JV will create opportunities for us in biofuels that extend beyond those that we have been working on with Shell for the last four years.

We began talking last quarter about our opportunities in [biobizz] chemicals following the acquisition of Maxygen's underlying gene shuffling technology intellectual property in October. Our first chemical target is detergent alcohol, a $4 billion market opportunity for a range of products currently produced using either palm kernel oil or petroleum as a feedstock. We can also apply our powerful technology to produce other chemicals from non-petroleum feedstocks and are aggressively pursuing those targets.

We're making very strong technical progress in carbon capture with Alstom, and in April we announced an agreement with Alcoa to develop our carbon capture technology to capture CO2 emissions for treatment of bulk site residue, a byproduct of aluminum manufacturing.

Using [whist] CO2 to turn whist bulk site residue into valuable fertilizer is a great potential application of our technology platform. Alcoa and the US Department of Energy are funding this program as part of a DOE initiative to convert CO2 industrial emissions into useful, renewable products.

With that, I'll turn it over to Bob to discuss our financial results.

Thanks, Alan. Let me start by taking you through a detailed discussion of our March quarter financial results, and then provide our outlook for the full fiscal year 2011.

Revenue for the first quarter was $31 million, up 21% versus the first quarter of 2010. Sales of pharmaceutical products were $12.9 million for the quarter, up 106% over the prior year quarter. Driving our strong performance in pharmaceuticals were sales of boceprevir intermediate to Merck, and sales of intermediates to generics manufacturers.

Pharmaceutical product gross margins were 10% in the first quarter of 2011, up 5 points from the fourth quarter, reflecting changes in product mix. As we've said before, we expect margins to vary quarter to quarter based on the mix of generic versus innovator products and the mix of intermediates versus enzyme sales.

Related party collaborative R&D revenue, the R&D funding we get from Shell, was $14.8 million in the first quarter, down 8% from the prior year quarter. Recall that in Q1 2010 we recognized $1.4 million in revenue for achievement of a 2009 Shell technical milestone that was validated in 2010. In 2010 our technical milestones were achieved and validated within the year. Excluding the milestone impact year-over-year revenue was roughly flat.

Revenue from collaborative R&D was $2.7 million in the first quarter, up $661,000 from the prior year. The growth was driven by revenue from our Alstom partnership on carbon capture, as well as continued enzyme evolution service work for pharmaceutical customers. We earned $616,000 of grant revenue from the US Department of Energy related to our carbon work in the March quarter.

Total operating expenses for the quarter were $22.8 million, up slightly from $21.6 million in the prior quarter. The year-over-year increase is primarily attributable to the amortization of the intellectual property acquired from Maxygen.

Adjusted EBITDA for the first quarter was $1.8 million compared to $2.8 million in the prior year quarter. The decrease was driven by the $1.4 million Shell milestone from 2009 that was recognized in Q1 of 2010, and lower grant revenue from the Singapore Economic Development Board.

Turning to the balance sheet, we ended March with cash, cash equivalents and marketable securities of $82 million compared to $74 million at year end. The increase in cash was primarily driven by higher collections from Shell. Note that we've recorded $16.3 million in long term marketable securities, reflecting investments with maturities of greater than one year.

Now, let me turn to our outlook for 2011. Recall that our guidance policy is to give annual guidance which we will update each quarter. For the full year 2011 we expect revenue of $120 million or more. As seen in our strong first quarter results, we expect continued growth in pharmaceutical product sales and in collaborative R&D revenue.

As we've said previously, for the remainder of 2011 we expect to maintain 128 funded scientists working on biofuels with Shell and expect to achieve 80% of our regular and 50% of our stretch Shell technical milestones. We expect 2011 adjusted EBITDA of at least $5 million.

As Alan highlighted in his comments, we see significant opportunity for Codexis in bio-based chemicals and are increasing our investments in R&D and in commercial resources to develop our commercial chemical products and continue to build partner and customer relationships.

I'll turn the call back over to Alan for a summary of our strategy.

Thanks, Bob. As you've heard, we're off to a terrific start in 2011. We continue to build and expand on our proven directed evolution platform. This has allowed us to create more value in existing markets, as we are doing with boceprevir for Merck, and it has allowed us to pursue new markets, as demonstrated by our recently announced collaboration with Alcoa.

Our code evolver technology already touches millions of people's lives. We have been manufacturing intermediates for some of the world's most innovative pharmaceutical companies on the world's biggest pharmaceutical brands, including Pfizer's Lipitor and Merck's Januvia and Janumet. And what may be the next megabrands, Merck's Victrelis and Vertex's Incivek.

As the world population grows, we're demanding more from our limited resources. The need for alternatives is reflected in the number of companies pursuing biobizz products. There will no doubt be multiple success stories. Let me tell you why Codexis will be one of those.

Our technology platform will allow us to produce valuable end products from agricultural waste biomass. With the growing demand for sugar and with prices near all-time highs, the ability to create products from biomass is a significant competitive advantage for Codexis.

Our fermentation technology allows us to efficiently convert sugar directly into high value end products. We typically make the end product, not an intermediate along the way, thus reducing production costs for the end product. We can create products tailored to the needs of our customers and partners. We work directly with them to create what they want, not what's available from nature or a more limited technology path.

We're thrilled with our partners and progress in biofuels, carbon capture and pharmaceuticals. And we're increasingly excited about our opportunities in biobizz chemicals.

I'd like to now hand it over for questions.

(Operator Instructions). And your first question comes from the line of Edward Westlake with Credit Suisse. Please proceed.

Hey, good afternoon, everyone.

Hi, Ed.

Hi, Ed.

Hope you're well. Just, I guess, still waiting on Cosan, just an update on when that might happen and maybe if you've got any further on sort of early revenues for that.

But also progress perhaps on chemicals in terms of the sort of timeframe as to which you might be able to sort of discuss that you've got a potential industrial partner.

Sure. Let's deal with Cosan. Shell's guidance is that the Shell/Cosan JV will be operational in the first half of 2011. And we at Codexis are operating on that basis. We already have people deployed in Brazil. We're in touch with Cosan. We're very excited about the potential and we await final news of consummation of the deal.

Your second question related to chemicals. I think on our last call we made it clear that 2011 would be a critical year in the growth of this company. And it was one of the main reasons why we acquired Maxygen's intellectual property at the end of October. We stand by that.

I have every expectation that in the coming months we'll be able to lay out a path to market that'll be very clear visibility on who our partners will be, where the products will be manufactured, over what timeframe, and who the customers will be. And to be honest, Ed, I look -- very much look forward to being able to discuss that with you and your colleagues at the appropriate time.

Thanks very much, Alan.

Your next question comes from the line of Michael Cox with Piper Jaffray. Please proceed.

Good afternoon, guys. My first question is on the cash on the balance sheet, generating cash flow here in Q1. What are the plans there, and maybe I guess that's tied to the previous question on detergent alcohols, but maybe you could walk through what your thoughts are there.

Yes, Mike, it's Bob. Certainly. The -- we were pleased to generate cash. It, as much as anything, was a function of timing of receivables with Shell. Shell pays us every other month for the biofuels work that we're doing with them. And so we had collections in January and March from Shell reimbursement of FTEs. That was the principal driver of cash generation. We also paid bonuses in the quarter, was a use of cash, but was the biggest driver of cash generation.

As I sit here now with $82 million on the balance sheet, we feel very comfortable that we're well capitalized to pursue the opportunities that we see in detergent alcohols and in chemical opportunities beyond. So we are spending a bit incrementally more this year based on the upside that we see relative to the financial performance that we had thought coming into the year, and we're really spending more because the opportunity that we see in chemicals is even bigger than we thought as we've engaged in discussions with potential partners and customers.

All right. Shifting gears a bit to the pharma side, given the margin profile we've seen here over the last couple of quarters on the product side, I guess I'd be curious as to what your thoughts are on the longer term profile for the gross margin for the pharma business once we move past some of these early orders, which you seem to be not getting mulch margin on.

Yes, it's really a function of mix as much as anything. We've talked a bit before about margins on enzyme sales are quite high. But when we sell intermediates, and in many cases our customers ask us to sell them the intermediate rather than just the enzyme, the incremental margin dollars on the rest of the ingredients in an intermediate besides the enzyme are relatively low.

So from a margin rate perspective, the more intermediates we sell, the lower our margin rate. And this quarter was really dominated by intermediate sales. And the other driver of mix is sales to innovators versus off patent drugs and the mix, as you would expect, or margins for generics are lower than they are for innovators.

So, what you saw in Q4, which was pretty low margin, and in Q1, which was lower than I'd expect our margins will be for the year, was really a function of the mix we had in the quarter.

Okay, that's helpful. And then on the R&D spend for the course of the year with the work you're doing on the detergent alcohol side, should we expect the R&D expense line item to step up through the course of the year?

Yes, I'd expect it to step up a little bit. I think, and I don't have your model in front of me, but certainly we did -- we reiterated guidance that we gave at the beginning of the year. But on a sequential basis, I'd expect us to spend more in R&D in the next few quarters than we did in Q1.

Okay. Very good. Thanks a lot.

Your next question comes from the line of Pavel Molchanov from Raymond James. Please proceed.

Hi. Thanks for taking my questions. just wanted to get an update on discussions with Shell regarding Canada.

Oh, absolutely. Alan here. Shell continued to be very committed to their position in Canada. When we say Canada we mean Iogen. They're a 50% shareholder, as I'm sure you're aware of what's known as Iogen Energy. It's a subsidiary of Iogen Corp.

This year our technology will be scaled up for the first time at Iogen in a pilot plant. In this calendar year cellulosic ethanol will be produced for the first time using the technology that we've developed. And we're actually very excited about that.

In terms of longer term deployment, Shell will always take a very pragmatic view, largely due to their size, the fact that they've routinely operate in a very conservative way. But to honest with you, I'm very pleased to continue to be associated with Shell. It has become clear to everybody in this sector that the capital requirements to successfully deploy second generation technology means that only a very few people will ever be able to afford to deploy. And we're very fortunate enough to be working with one of those companies.

And without having access to Iogen, we wouldn't be able to scale up our technology this year and we're very pleased to be helping Shell out there. But independently, we're looking at ways to accelerate deployment of our technology outside of Canada. And of course we're free to do that in the chemical space and we've already articulated that.

Great. And just in terms of timeline, is it still the case that you expect the Brazilian opportunity to be more near term than the Saskatchewan opportunity? Or is that still in flux?

I would say that's in a state of flux. And it ultimately will be decided by the market. I mean ethanol itself is a topic of great debate at the moment in terms of tax credits and tariffs. It's in the newspapers even today. If Congress decides to reduce the tax credits on ethanol production or the import tariffs fall, you will see a dramatic swing in imports and exports.

I think people need to be very careful about predicting where ethanol will be produced going forward. This is one of the reasons why we're extremely fortunate enough to be working with Royal Du Shell, a global player with very -- a strong international reach and with the wherewithal to be a leader in ethanol regardless of where it's produced. So it's not for me to second guess Shell and I wouldn't suggest anybody else does.

The one thing I'm sure of is that when they do deploy second generation biofuels, it will be our technology that's used.

Okay. Thanks very much.

Your next question is a follow-up from Edward Westlake from Credit Suisse. Please proceed.

I was just trying to give everyone a chance. Just on pharmaceutical company update, obviously you've signed agreements with DSM in Japan. Obviously trying to market in Europe. Should we expect to see some new customers over the next, say, quarter?

Quarter's probably a bit fast, Ed. I think the way I'd answer that is we're seeing increased uptake of the kits. We talked I think last quarter or the quarter before about changing some of the strategy around the plates and the kits that we've been sending and our IP strategy there with these kind of mini kits. And we've seen very strong uptake of those.

I think we're thrilled with the position we've got in hepatitis C therapies. And I expect you'll see some new things coming in the next few quarters. But I don't know that I'd want to predict in the next quarter.

Thanks very much.

And at this time there are no further questions. I would like to turn the call back to Mr. Alan Shaw for closing remarks.

Okay, well, thank you very much. Once more for your attention and your continued support in Codexis. And we'll look forward to seeing you in a couple of months. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.