Codexis Inc (CDXS) 2011 Q3 法說會逐字稿

Good day, Ladies and gentlemen. Welcome to Codexis' third quarter 2011's earnings conference call. At this time I would like to turn the conference over to your presenter, Mr. Henk Adriaenssens, Vice President of Investor Relations. Sir, you may proceed.

Thank you, and good afternoon. Today, after the market closed we announced our fiscal third quarter 2011 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. These forward-looking statements include our projected full year 2011 revenue and adjusted EBITDA, our ability to convert biomass to sugar and to turn that sugar into high value chemicals and fuels, the timing of when Codexis and Chemtex will pilot production of detergent alcohols, the ability of Codexis and Chemtex to develop and commercialize economical detergent alcohols from biomass, our ability to enable the production of lower cost ethanol in Brazil, the timing of when Codexis can deploy its technology to improve first generation ethanol processes in Brazil, and our expectation that our pharmaceutical sales and margins will increase in the future.

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 Securities and Exchange Commission on August 3, 2011, for some of these important risk 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 compensations to our net loss. This non-GAAP measure, 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.

Thanks to everyone for joining us on the call and online. I'm pleased to announce excellent financial results and more importantly, continued achievement of milestones on the path to commercialization of our fuel and chemical products. It was an eventful quarter for Codexis with significant progress in our ethanol program with Shell and Raizen, an achievement of critical commercialization milestones with CodeXol detergent alcohols.

As a reminder, in the second quarter, Raizen was officially formed and became our largest shareholder. We appointed Pedro Mizutani head of Raizen's upstream business and a leader in the Brazilian ethanol industry to our board of directors. We also announced the successful scale of our cellulosic enzymes in Mexico City, and the achievement of two Shell technical milestones.

We continue to accelerate progress this quarter. We signed an agreement with Raizen to use our technology platform to improve current yields of first generation ethanol in Raizen's 24 ethanol mills. We've planted the Codexis flat in Brazil with the formation of Codexis Brazil and appointed a business leader with deep experience in biofuels and chemicals.

We continue to make terrific progress on cellulosic [socethanol] with Shell. Our revenues and EBITDA were helped this quarter by the validation of the two ethanol program tentacle milestones by Shell, which we reported in the June quarter. We notified Shell of our achievement of two more milestones this quarter. As we've discussed, achievement of milestones indicates we're on track to deliver high performing, low cost cellulosic enzymes. Achievement of these milestones was in addition to continuing our excellent track record of growth and execution in the pharmaceutical business, and more technical and commercial progress with CodeXol detergent alcohols. I'll talk more about these later after Bob reviews our financial results.

Thanks, Alan. Let me start by taking you through a discussion of our third quarter financial results and then provide our outlook for the full fiscal year of 2011. Revenue for the second quarter was $33.3 million, up 23% versus the third quarter of 2010. Sales of pharmaceutical products were $12.2 million for the quarter, up 29% over the prior year quarter.

As we noted on last quarter's call, we exited Q2 with a strong order book and our Q3 results reflect shipments of those orders. Sales in the quarter included deliveries of intermediates of two products which received US and European regulatory approval in 2011, and a large enzyme delivery associated with an expected 2012 process change.

Pharmaceutical product gross margins were 18% in the quarter, up 8 points from last year, reflecting growth in the mix of innovator versus generic products and the mix of intermediates versus enzyme sales.

With the transfer of our share ownership from Shell to Raizen, Shell is no longer a related party. As such, the former category related party collaborative R&D revenue' no longer applies. All R&D funding is now reflected in the revenue line 'collaborative R&D.' We'll continue to discuss Shell R&D funding, but will no longer report it as a separate line in our financial statements.

Revenue from collaborative R&D was $19.2 million in the third quarter, up $2 million, or 11%, from the prior year. The growth was driven about evenly by revenue from our carbon capture program with [Alstema] Alcoa and collaborations with pharmaceutical customers, and by increased R&D funding from Shell, reflecting the recognition of the milestones we announced in Q2. If Shell validates the two new milestones we achieved in Q3, we'll earn revenue for achievement of four of six milestones for the year, in line with our guidance.

We recognized $1.9 million in grant revenue in the quarter, primarily from the receipt of funding from the Singapore Economic Development Board related to our laboratory in Singapore. We also extended our grant relationship with (technical difficulty) through 2013, and broadened the scope of reimbursable expenses beyond pharmaceutical enzymes, reflecting Codexis' Singapore role as our center of excellence for single enzyme evolution.

Total operating expenses for the quarter were $25.7 million, up $4.6 million versus the prior year quarter. The year-over-year increase is primarily attributable to the amortization of the intellectual property acquired from [Axogen] in October of last year, and investments in our CodeXol detergent alcohol program. Of the $4.6 million increase, $3.7 million is from higher R&D spending.

Adjusted EBITDA for the second quarter was $2.6 million, up 24% from the prior year quarter. Turning to the balance sheet, we ended September with cash, cash equivalents and marketable securities of $70.7 million versus $72.4 million at June 30, 2011. The change in cash was driven primarily by capital expenditures related to our expansion of laboratory space in Redwood City.

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 are reaffirming our expected revenue of $120 million or more and adjusted EBITDA of $5 million or more. We expected continued growth in pharmaceutical product sales and validation from Shell of the milestones we achieved in Q3. With that, I'll turn the call back to Alan.

Thanks, Bob. In today's uncertain economic climate, Codexis is well-positioned with a strong balance sheet, minimal cash burn, and a growing pharmaceutical business with a strong order backlog. This foundation, along with our strong partnerships with Shell and Raizen support our ability to realize the vast revenue potential of our technology platform in biofuels and biobiz chemicals.

Our strategy has remained consistent since our IPO. We have world-leading proprietary technology and know-how to evolve enzymes and microbes. We partner with some of the world's largest and most successful companies who provide the capital, manufacturing expertise, and market access to enable long term success.

While more than half of our revenue today comes from R&D funding, we expect in the future to earn revenue from three sources - the sale of enzymes, the sale of products made using our enzymes and microbes, and royalties from the use of our technology.

Codexis transformed pharmaceutical manufacturing by driving the adoption of our biocatalasis solutions which, prior to Codexis, were a promise that hadn't become reality. We now have more than 50 pharmaceutical companies using our enzymes for everything from early stage compound development to production of some of the world's best selling drugs. We intend to repeat that revolution in biofuels and biobiz chemicals where our CodeEvolver platform enables us to extract sugar from non-food biomass and to turn that sugar into high value chemicals and fuels.

I spent much of last quarter's call introducing CodeXol, our new detergent alcohol offering. We have a strong business plan and we are executing the plan. We are making excellent progress with our partner, Chemtex. As a reminder, we signed an agreement with Chemtex last quarter to develop CodeXol detergent alcohol from biomass using Chemtex PROESA pretreatment technology and engineering capability. We're making rapid progress in the lab and anticipate piloting production in the first half of next year.

On the commercial side, we crossed a significant milestone in the quarter. Earlier this year, we provided initial samples of CodeXol for customer use testing. I'm pleased to report we received positive feedback of the performance of those samples providing important confirmation that CodeXol can be utilized in existing product formulations.

Equally important, we've added critical commercial infrastructure including sales and business development leaders with deep industry experience to drive faster market adoption. We're also taking positive steps with feed stock and manufacturing partners to establish local production capability in several geographies. I'm confident our ability to produce sustainable, economical detergent alcohols will be a winner in this growing market.

I was fortunate this past quarter to spend quite a bit of time with investors, sell side analysts, and industry leaders in the biofuel space. Brazil was top of mind among all parties for several reasons. Brazil is the second largest producer of ethanol in the world, and will produce more than six billion gallons of ethanol this year. And it's the fastest growing consumer of ethanol in the world with demand estimated to double in the next ten years.

It's been a challenging year for Brazilian ethanol producers with yields down significantly versus last year, and concern next year will be difficult as well, putting an enormous pressure on mills to increase production. Brazil has vast tracts of arable land and is working hard to expand sugar production to new areas. But development of new geographies requires large amounts of infrastructure, capital and time. Our partners in Brazil estimate it takes five years to develop green field sugar cane sites, too long to meet rising demand. Growers in Brazil are also planting newer varieties of sugar cane, with higher sucrose and total biomass yields. But this, too, takes time. To meet demand, Brazil will need to plant more fields and improve cane varieties, but it's not enough.

We believe the only way Brazil can meet that demand is to produce cellulosic or second generation ethanol. Two-thirds of the sugar in sugar cane is in the [vigos] and tops and leaves. Sugar cane biomass, including opportunity cost of burning for electricity, costs about $50 a ton. It takes about 3.5 tons of biomass to produce a ton of ethanol. So the feed stock for a ton of ethanol costs about $175. This compares to more than $500 for sucrose from sugar cane juice. With highly efficient and flexible Codexis enzymes, we can enable the production of more and lower cost ethanol leveraging existing infrastructure.

Our biggest shareholder and partner in Brazil is Raizen, Brazil's largest sugar and ethanol producer. In September, we announced an agreement to use our technology to improve yields of first generation ethanol. We're working collaborative with a group of Raizen engineers dedicated to this initiative, with the objective of recognizing enzyme sales and royalties next season.

I'm highly confident in our ability to create real value for customers who need it and create real value for Codexis shareholders. I'm enthusiastic about our progress with ethanol in Brazil, with CodeXol detergent alcohol, and with the continued growth of our existing businesses.

Moving forward, I expect our costs to accelerate on all fronts. In celluosic ethanol we are exhibiting rapid progress toward commercially viable enzymes with Shell. Meanwhile, we are working toward first general yeast deployment with Raizen as early as next season. Our business development team continues to do stellar work with our CodeXol detergent alcohols and we look forward to sharing the details of that progress in the quarters to come.

Last, but certainly not least, our pharmaceuticals business is delivering robust sales growth and increasing margins, trends that we expect to continue for the foreseeable future.

Before we turn it over to questions, I'm also excited to announce that we will be hosting our first annual investor day on December 7 in New York City. At this meeting, we will expand further on our strategic growth areas and partnerships and do a deeper dive into the economics and current landscape of the Brazilian biofuels market. We look forward to seeing you there.

Thank you for your attention. And now over to your questions.

Thank you, ladies and gentlemen.

(Operator Instructions)

Our first question comes from the line of Ed Westlake of Credit Suisse. You may proceed.

Hi. Good afternoon everyone. I was just looking at your EBITDA guidance for the year of just over five, which means you only have to make $600,000 in the fourth quarter. Could we do some comments on that?

Sure, Ed. It's Bob. I think what you're really asking is there anything different between Q4 this year and Q4 last year. And I'd note a couple of things. The timing of milestone achievement with Shell technical milestones this year has been a bit earlier in the year than it was last year. And as a result, we won't earn as much Shell milestone revenue in Q4 this year as we did last year. And we're also spending a bit more on detergent alcohols, as you know, and R&Ds. So, our spending will be a bit higher than last year.

As a result of those two things, I don't expect EBITDA in Q4 of 2011 to be as high as it was in 2010.

OK. That makes a load of sense. Just on the pharma side, Codex screening you made the announcement a week or two ago, which you flagged in the release, any progress in signing up new customers as a result of having those Codex screens with 50 pharma companies?

Yes. I'd say a couple of things on that. We've seen a significant increase in sales of our mini panels - literally about 5X where we were a year ago. So, very strong pipeline growth. That said, the sales cycle in the business is long. And so while I expect, this is great news for the long term health of our pharmaceutical business. I don't expect a significant change in the near term in which the blockbuster drugs that we're a part of we expect will drive the bulk of our revenue growth.

And the final one for me to let other people have a thing. You said that as early as next season on first gen yeast. I mean, at this point is it possible to sort of give a guestimate of the sort of revenues you might be able to earn in first gen in Brazil?

Yes. I'd start with saying the most important thing in this agreement is it gives us the ability to get our products in use in mills in Brazil in a timeframe that demonstrates our technical capability with Raizen and with mill operators beyond Raizen. So this is more about driving adoption that it is about revenue in the near term.

I think to size it as we've talked about, we think the kind of improvement we can drive is in the single digit improvement in yields with Raizen's production of roughly 600 million gallons of ethanol annually. It's a 12 million to 24 million gallon kind of improvement at $2.50 to $3 a gallon in total value creation.

We have not yet settled on commercial terms with Raizen, so I don't know the percentage of that revenue that we will get. But I certainly expect that if we're successful in some of the initiatives that we have in the near term, we'll begin to roll it out next year. I don't expect huge revenue next year, Ed, but I certainly think we can earn some and build on that beyond.

Great. Thank you.

Our next question comes from the line of Chris Kovacs of Robert Baird. You may proceed.

Can you guys hear me?

We sure can, Chris.

Great. Staying on the first gen ethanol, I thought we signed an agreement that you still retain the commercialization rights for that. Have you had any talks with any partners outside of Raizen?

It's Alan. No, we haven't. I can give you a very straight answer to that. Our priority is to get the development work done and validated in a Raizen mill.

I think, as Bob said, a key word to describe Codexis is adoption. Whether it's enzymes for first generation or a cellulosic system for second generation, it is our stated number one priority in this company to be the leader, the world's leader, in providing an operating system of choice, which will transform global biofuels and biochemicals industry. Every single one of our peers is currently utilizing expensive sugar as a base feed stock for their products. At Codexis we can enable our peer group, not just Codexis, and transform an entire industry.

I'd much rather get Raizen up and running since they are the market leader in Brazil, and they're very keen really for everyone in Brazil to enjoy the benefits and the overall savings will be greater the more enzymes we produce as a unit cost to argument. I don't think there'll be in trouble in rolling it out beyond Raizen. But that's not necessarily our priority today.

That makes sense. And then, I think in looking back a few months, I think you've spoken before about the patent for Lipitor expiring in November. Obviously, that'll probably get you guys more sales as generic (inaudible), and such. How do you think that's going to affect your gross margin profile going forward?

We don't think it'll affect it, Chris. The good news and bad news is, because Lipitor has been such a big drug for so long, margins on atorvastatin with Pfizer are relatively low. So we don't see them changing in the generics market. And, as you know, we've been selling in the generics market for the last several years and in the non-regulated market for the last several years. And so our expectation is that margins will be stable in that product line.

Great. Thanks for taking my questions. I appreciate it.

Our next question comes from the line of Weston Twigg of Pacific Crest.

Hi. Thanks for taking my question. Actually, I have just a couple of questions here. First, you mentioned the cellulosic ethanol opportunity in Brazil, and I'm just wondering if you have rights to launch that in Brazil, or do you still need Shell's permission?

The actual technology rights, they've already been transferred to Raizen. But there is still required cooperation from Shell. And whereas it's not prohibitive, we are required to have cooperation from Shell.

That said, I think the argument for June tracking deployment for our cellulosic enzymes with multiple feed stocks and additionally with multiple pre-treatment processes is in everybody's interest, not just Codexis, not just Raizen's, but Shell's.

Because of the very real political pressure and economic pressure being brought on sugar and ethanol producers in Brazil to produce more ethanol, and bearing in mind that Shell is a 50% shareholder of Raizen, I honestly done envisage there being any issue with accelerating deployment. Raizen is very keen to do it. Plants have been identified. The processes of the pre-treatment part, the partnerships have been identified. Our enzymes are ready to go. So, our confidence is very high that this is going to be a major activity for us in 2012.

But I think at the end of the day, Shell will want to be mindful that does it distract from their North American project. And they're a big company and everyone's got to dot the Is and cross the Ts. But I really, if you think about the macro forces here, everybody's aligned.

It sounds like you still need Shell's blessing or permission to do cellulosic ethanol in Brazil, but that you expect that will happen without any delays.

That's correct.

And then, I guess with respect to the Shell relationship, do you have any read for us on when Shell might be interested in ramping that technology in North America?

Yes, I do. I'm not able to speak for Shell. I'm not a Shell employee. But what I am able to talk to is Codexis' role in accelerating Shell's cellulosic ethanol program, of which we are a principle partner. I can tell you that it's our expectation that by the end of the year we will have achieved and delivered on all technical milestones which is necessary for Shell to take the next step. We anticipate and believe that Shell will take that next step early next year. I don't know which week or possibly which month, but I believe it will be in the first part of the year as opposed to the latter part of the year.

And that would be specifically related to the next step, which is the move from where we are today to a demonstration facility. I'd like to think we can articulate more about this at Analyst Day on December 7. And ultimately it is for Shell to make their announcements about their intentions. But based on my very recent discussions with Shell, their commitment and enthusiasm to deploying our technology as part of their overall program in cellulosic ethanol, which will start initially in North America, is as real today as it was four years ago.

And I guess this probably goes without saying, but you still expect that your process developed with Shell would be the lowest cost ethanol process in North America?

Well, what I can tell you with absolute certainty is that the enzymes that we developed for Shell, our cellulase operating system in combination with the preferred pre-treatment process that Shell had been developing, our enzymes in combination with that will, in my opinion, deliver the lowest cost cellulosic ethanol of any producer in the world. And that is based on my knowledge of how superior our enzymes are relative to our competitors in terms of glucose production and inherent stability and longevity in the plant and overall activity.

We've got strong metrics now, which again we'll be able to say more about at Analyst Day. And for a long time we've wanted to talk to you guys in the investment community about comps so that people can understand the true competitive advantage that our technology brings. We're getting very close to being able to do that. We're accelerating deployment of our enzymes North and South of the Equator.

But the overall product of this should be advantaged cellulosic ethanol, both economically and in terms of intellectual property. And that's why Shell has invested hundreds of millions of dollars in us over the last four years.

Great. And then finally along the same liens, did I hear you say that you expect to hit six of the six milestones? You said you would hit all the milestones this year, or was it - I thought earlier I heard the expectation was four out of six milestones this year.

Well, no. Technical milestones are distinct from whether there's revenue recognition associated with those milestones. So, we have achieved four from six in a timeframe that allows revenue recognition for all four in this financial year. The revenue 12 months is October 31 to November 1.

The remaining two technical milestones I have every expectation will still be achieved in this calendar year, as per the plan. But they will be no requisites, no associated [rhetoric] for those last two milestones, which is why our operating plan was always an assumption that we'd achieve four from six.

Perfect. Very helpful. Thank you so much.

Thanks, Wes.

(Operator Instructions)

Our next question comes from the line of Brett Wong of Piper Jaffray. You may proceed.

Good afternoon.

Hi, Bret.

The positive feedback on CodeXol, can you shine on any developments on a definitive downstream partner or executed off-take agreements for the detergent alcohol?

Absolutely. We just can't announce them today. That is what I was referring to earlier. We've made significant progress. Just for everyone's benefit, I just want to recap on the timeframe here. WE were not legally able to market this product outside of biofuels before we acquired Maxygen's intellectual property assets, which occurred late October of late last year. In that timeframe, we've moved incredibly fast. And I'm very proud of what we've achieved. We've put an entire commercial infrastructure in place that we didn't have at all prior to gen one of this year.

We've developed the process to the point where we've got representative samples, we've been in the marketplace, we've had them sampled by the world's leading [interference] companies, and we've received very positive feedback.

The critical question that anybody should ask about biobiz chemicals is are they true drop-ins? If they're not true drop-ins, in my opinion, they're doomed to failure because the adoption of those products is highly problematic and there are many hurdles that need to be cleared.

These products clear in that definition of true drop-in is a major milestone for us. We are now in serious discussions and negotiations about the geographies that we will build, the three target 60,000 metric tone plants. It's my expectation that those plants will be in very different geographies and will allow us to leverage what is one of our core differentiates in value in this company. That is the ability of our scientists to adapt and evolve enzymes regardless of feed stock. We're one of the few companies in the world that can actually achieve that. So we don't care whether it's sugar cane [vigas] as feed stock or wheat straw or sugar beet.

So, we're targeting three significant geographies. We've racked fast growing markets for these products where tread flows work for us, where domestic production would give us an absolute value added in terms of market positioning. And that is where this technology will really come to bear fruit when we can deploy it regardless of feed stock. As long as there's biomass, we're not even dependent on indigenous sugar.

So, it's a very real strategy. There'll be off-take agreements with multiple buyers. Partnerships will be with different companies in different geographies. And all of that is being done in parallel. And we have every expectation of being able to articulate this a lot more than I'm able to today at Analyst Day in New York on December 7.

Thanks. One more question. Can you shine any light on your optimal mix of generic versus innovator drugs?

Not to be cute, but I'd take as much of both as we can. But I think over time I'd expect innovator as a percentage of sales to grow faster than generics. And that's really because of some of the wins that we've had this year and last year with some big fast-growing innovator drugs. So I do expect the mix of innovator versus generic to grow. And as a result of that, I'd expect our gross margins, over time, to grow.

Great. Thank you.

Our next question comes from the line of Ed Westlake of Credit Suisse. You may proceed.

Just a follow-on. Just in terms of CodeXol commercialization. Presumably, before you can sign feedstock an go forward with a sort of development decision, you need to do this pilot that you said you'll do in the first half of 2012 with Chemtex. How long do you think that pilot is going to take, roughly?

Firstly, Ed, you're absolutely correct. And I just want to say you said that as well as me. That is absolutely correct. The pilot will not take that long. It's not an arduous process. When the plants ready to go, the process is ready to go, you're talking weeks, not months.

It is important because the whole point of piloting - and I know you already know is - the point of piloting is it helps fix large scale economics. And to be honest with you, I'm consistent in my message, but I just want to reaffirm my philosophy on running a company.

It is not in the best interest of my shareholders for me, or any of the people who work for me, to rush out into the marketplace and agree off-take agreements on products that haven't yet been scaled at pilot plant with pricing that is completely plucked out of thin air. Those deals may be necessary to get IPOs aware in frothy markets, but they will doom a company to extinction if they are done casually. And that is not the position we are in, and we do not need to do that.

We've got a very strong balance sheet, which is going to be essential over the coming months with the way the world is going. And we will take our time and get it right. And the reason for that is I'm protecting our shareholders. When we enter into off-take agreements I want to make sure that we gain maximum value out and that we don't leave money on the table.

So, we've got to do it right, we've got to do it sequentially. And quality customers and quality partners respect that process. And the last thing I want to do is enter into an agreement to purchase feed stock or agree to pay a partner X percent of my revenue when even I don't know exactly what that is today. I'm an industrialist. That's the way I am. That's the way I've been trained. And that's the way I'll run this company. And we'll all be better for it in the long run.

Very clear. Thanks. Thanks, Alan.

And we have no more questions at this time. I would now like to turn the call back over to Mr. Alan Shaw for any closing remarks.

Well, thank you very much. I'd just like to thank everyone for their attention and remind you that Analyst Day in New York on December 7, and we very much look forward to seeing you all again there. We'll see you in a couple of weeks. Thank you.

That concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.