Codexis Inc (CDXS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Codexis' Third Quarter of 2012 Earnings Conference Call. This call is being webcast live on the investors section of Codexis' website at codexis.com. This call is property of Codexis' and any recording, reproduction or transmission of this call without express written consent of Codexis' is strictly prohibited.

As a reminder, today's all is being recorded. You may also listen to a webcast replay of this call by going to the investor section of Condexis' website.

I would now like to turn the call over to Mr. Douglas Sheehy, Codexis' General Counsel. Please proceed.

Thank you, and good afternoon. Today after market close we announced our fiscal third quarter 2012 financial results. The press release is available on the investors page of our website at Codexis dot com. WITH me today is John Nicols, our president and Chief Executive Officer; and David O'Toole, our Senior Vice President and Chief Financial Officer.

During the course of today's call, management will make a number of forward-looking statements. These forward-looking statements include our forecast for 2012 revenue, adjusted EBITDA, year-end cash, and total pharmaceutical product sales. Our ability to obtain rights to CodeXyme in Brazil, our expectation for development funding from [Raizen]. Start up timelines for the CodeXol demo plant, the development of a market for cellulase enzymes, expected improvements in our operational productivity and efficiency.

The effect of the new Arch agreement on our financial results; improvement in our pharmaceutical product pipeline from our Merck relationship; and profitable sales growth in our pharmaceutical business. 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 undo reliance on these forward-looking statements. Please refer to our Form 10-Q filed with the Securities and Exchange Commission today, November 7, 2012, for some of the 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 today's call 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, impairment of marketable securities, and stock compensation to our net [loss].

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

Now, I would like to turn the call over to John Nicols.

Good afternoon, and thank you for joining us. The third quarter was an important phase in Codexis' transition as we worked to best position the Company for a long-term growth and value creation. We remain focused on our key priorities of growing the profitability of our leading pharmaceutical products and services business and driving our unique technology platform towards commercialization in the fuels and chemicals markets.

During my first full quarter of CEO of Codexis we made significant progress in moving the Company towards these goals. Before getting into financial and business specifics for the quarter, let me highlight the hard but crucial work this quarter of strategically realigning the Company for our forward growth strategy following the loss of Shell funding.

As promised, we did not waste any time in acting to reduce costs to ensure that these reductions timed as closely as possible to the completion of our Shell collaboration and loss of R&D funding.

Mission accomplished. These actions include the difficult decisions to reduce headcount by approximately 130 employees in Redwood City and the closure of our Singapore facility resulting in a reduction of approximately 45 employees.

This right-sizing of our organization is expected to enable marketed improvements in the productivity and efficiency of our operations, and is designed to maintain the most optimal mix of R&D resources for our development programs in pharma, fuels, chemicals.

Additionally, a key priority has been to solidify our senior management team with the right mix of capabilities to lead Codexis into a new phase of commercial execution. Again, mission accomplished. As you know, I joined Codexis in June after a 22 year career of various leadership roles at Albemarle. Shortly thereafter in September, we named our new CFO, David O'Toole who joins on today's call.

David brings with him over 25 years experience in accounting and finance, including prior CFO roles at public biotech companies. David's expertise is a welcome addition to our team. These new executive team additions blend well with the wealth of veteran expertise remaining from Codexis. Dave Anton, who has led Codexis' R&D efforts since joining in 2008 will now head our Bioindustrials business.

Matt Tobin, who has led R&D teams since before Codexis' spinout from Maxygen will now head the corporation's global R&D organization. Peter Seufer-Wasserthal, who has been key in monetizing Codexis in pharma will continue to lead that segment. And rounding out the executive team is Doug Sheehy, who has led as General Counsel since well before the IPL. With this team in place and significant overhangs now behind us, I am confident in Codexis' direction and the opportunities that lie ahead.

Before discussing these opportunities in greater detail, I would like to turn the call over to David for the third quarter's financials.

Thanks, John. Good afternoon. For the third quarter 2012, we reported total revenues of $26.3 million, a decrease of $6.9 million compared to the $33.3 million in total revenues for the same quarter last year. This decline from the prior year quarter was due primarily to a decrease in product sales. Product revenue for the quarter was $7.1 million, a 41 decrease from $12.2 million in the prior year quarter. Product revenue in the third quarter was weakened by an expected shift out in time for demand of certain non-patent pharmaceutical products.

However, product revenue improved 5% sequentially over the second quarter as sales of our atorvastatin intermediates improved after the industry wide inventory buildup associated with the expiration of the 6 month generic exclusivity for atorvastatin. Revenue from collaborative R&D was $18.6 million in the third quarter, down $600,000 or 3% from the prior year quarter.

Collaborative R&D revenue in the third quarter of 2012 includes $7.5 million in satisfaction of the remaining full-time employee equivalents and milestone payments that would have been due under the Shell research agreement.

Turning to margins, product gross margin in the third quarter was 10% compared to 18% in the prior year quarter. The 8% reduction in gross margin was due to a higher percentage of sales from generic products in the third quarter of 2012. Our total operating expenses for the quarter were $22.1 million, down 14% versus the prior year quarter.

The change was driven by a 15% decrease in R&D expense, and an 11% decrease in selling, general, and administrative expenses in the third quarter. These decreases were primarily due to reductions in headcount and other discretionary expenses offset by a non-recurring -- restructuring charges of $706,000 and a write down of our investment in CO2 solutions of $753,000. Net loss for the quarter was $2.3 million or a loss of $0.06 per share compared with a loss of $0.08 per share for the same quarter last year.

For the third quarter adjusted EBITDA was income of $3.2 million compared to income of $2.6 million in the prior year quarter. We ended the quarter with cash, cash equivalents, and marketable securities of $53.9 million, compared to $57.4 million on June 30, 2012. Capital expenditures for the quarter were $0.1 million.

Turning to our outlook for the full year 2012. Recall that our guidance policy is to give annual guidance, which we update each quarter. For the full year 2012 we are reaffirming our guidance that was provided on our second quarter call. With the formal ending of the Shell R&D funding agreement, we will have no collaborative R&D revenue in the fourth quarter. In addition, we have executed effective November 1st, a new enzyme supply agreement with Arch Pharmalabs.

The effect of this agreement will result in lower fourth quarter gross revenues from our atorvastatin generics business, but will provide a greater gross margin primarily because a vastly simplified business processes.

To illustrate the potential impact, if the new enzyme supply agreement had been in place for the 9 months ended September 30th, our gross revenue from the Arch arrangement would have been approximately $4 million with a gross margin of around 55%. Compared to what was actually recognized under the prior agreement of approximately $15 million of revenue with an overall gross margin of 5%.

As a result of the termination of the Shell R&D funding agreement and the execution of the new Arch agreement, we will have a decline in total revenues for 2012 relative to our full year 2011 total revenues of $124 million. We also continue to expect 2012 adjusted EBITDA to be negative and anticipate year-end cash, cash equivalence, and marketable securities to be approximately $45 million.

Now, let me turn the call back over to John.

Thanks, David. At this point I'll provide some highlights of our successes in our key business segments. I will begin with our CodeXyme cellulase enzymes for the hydraulic systems cellulosic biomass to sugars. Let me start with how proud I am about the great results from our R&D team developing CodeXyme. During the last several months, we have gained evidence from an independent assessment that validates that our cellulase enzymes are equal to or better than the leading enzyme products available today.

In just 3 years time we have been able to catch up to much better capitalized longer standing cellulase producers. This progress gives us a seat at the table for what I believe will be the largest development for the global enzyme industry over the remainder of this decade; that being the new enzyme application to convert second generation biomass feedstocks into fermentable cellulosic sugars for fuel and chemicals.

Truly, this is a great milestone for Codexis, especially now that we have gained the rights from Shell to market CodeXyme to a third party.

In previous quarters our ability to address the fuels market, and the largest application of CodeXyme was limited to our partners Shell and Raizen. On August 31st we achieve a key milestone in building the long-term value of CodeXyme by securing from Shell an agreement that grants us broad rights to commercialize CodeXyme for biofuels applications worldwide. Codexis' marketing rights exclude Brazil as Raizen currently has exclusive rights to the CodeXyme technology in that country.

We continue to engage in discussion with Raizen, the world's largest producer of ethanol from sugarcane and our largest shareholder, about our best path forward for monetizing our CodeXyme technology in Brazil. Those discussions center around Codexis obtaining rights to market CodeXyme broadly within the Brazilian fuels market like we have already achieved in the rest of the world with Shell.

Although we do not expect to receive any development funding from Raizen for CodeXyme, Raizen will remain a target customer for CodeXyme should they decide to build capacity for second generation ethanol in Brazil.

Our approach to secure Raizen as a CodeXyme customer has proceeded at a regulated pace due in part to the fact that Raizen has yet to publicly announce capacity investments in second generation ethanol. As you can see these recent months have been instrumental in positioning Codexis for capitalizing on its opportunity to be amongst the world leading cellulase enzyme company in this large developing market. Our newly earned rights to approach this market for commercialization opportunities are proceeding well and are a corporate priority.

Shifting briefly to CodeXol detergent alcohols, we remain nicely on track. We continue to make advancements in our proprietary microorganisms productivity and the construction of our 1,500 liter demonstration scale facility in Rivalta, Italy with our partner Chemtex remains on track for start up in the middle of next year.

Closing out with our pharmaceutical products and services business, near-term sales weakness continues for the second straight quarter. We expect some sequential sales improvement through the rest of this year, but not as strong as previously anticipated due to select on patent order slippage into 2013.

While the rapid growth over the last few years in this segment has slowed in 2012, nonetheless I have grown increasingly excited by the growth outlook for this business. From the FDA's recent approval for our enzyme manufacturing process in Merck's blockbuster Januvia, to our expanding early to late stage pipeline.

We are also confident that our recently extended collaboration agreement with Merck will continue to bolster our product pipeline with potentially high value sales in the future.

David earlier mentioned our new business relationship with Arch in our generic (inaudible) atorvastatin business. This is a good deal for Codexis' shareholders, increasing our profits from the same volume of atorvastatin served by simplifying and focusing on the enzyme part of the value chain. Their relationship with Arch remains very strong, not only for the atorvastatin product line, but for an increasing portfolio of on patent compounds as well.

Finally, I would like to close by highlighting the robust fundamentals underlying our pharma business serving new and patented drugs. In a market that until recently saw enzymatic processes as a niche tool, we are now seeing increasing penetration and wider adoption of the diversity of biocatalysts that Codexis is the clear world leader in providing.

Our growing pipeline sets us up well for delivering strong profitable sales growth into the future. Evidence the sharp increase in sales of enzyme screening kits and panels. These have led -- have been leading to step jump increasing in early drug development, 5 digit dollar research, and 5 digit dollar research orders of enzymes, which in turn has led to our enzymes being increasingly included in new patent applications filed by our pharmaceutical customers.

We are very pleased with the position we have serving the global pharma industry. We are investing in this area to ensure its continued profit growth going forward.

Despite the many challenges, I believe we have made drastic and valuable progress in just a few short months. I am very excited about the many opportunities that lie before us. We look forward to continuing our forward momentum and building a valuable, and dynamic company.

Thank you. And I would now like to ask the operator to open up the line for questions.

(Operator Instructions)

Our first question is from the line of Patrick Jobin from Credit Suisse.

Hi, Good afternoon, guys.

Hey, Patrick.

Good afternoon.

I just wanted to touch on 2013. Any ideas as far as your growth outlook there? Kind of how you're going to position the Company for '13?

Yes, let me start. David, please fill in as you feel appropriate. 2013 obviously will be a year without any funding for the CodeXyme from Shell, unlike 2012. The revenue outlook from that segment will be down accordingly. Our pharmaceutical business has had an off year in 2012 versus the recent past. We expect that the revenue outlook for that business taking into account the new relationship with Arch will be up especially on the profit side for 2013.

Then on the cost side, you have noted the intense work that we have done to dramatically reduce the cost of our operations as we end this year and go into next year. Generally, we are set up to give you much clearer guidance as we have in the past in the beginning of 2013, after we close out our fourth quarter earnings.

Okay. Then on the CodeXyme outlook now that you're somewhat more liberated to engage other parties. Can you maybe give us a sense as to the number of discussions that are ongoing? When from a timing perspective you might expect those to convert to either announcements or potential revenue?

Yes.

Then maybe just highlight the competitive position that you see CodeXyme might have.

Okay. There are three questions in there. The first question, we are engaged in ballpark, a handful, maybe slightly more difficult conversations with commercialization partners. We're having good conversation. The market is generally very receptive to the technology position that we developed under the Shell arrangement.

I highlighted it in the call that we have got in third party validation that our enzymes technology is equal, or maybe slightly better than all competitive enzyme products that are available for biomass conversion today. It's a rather good position and we have been received warmly accordingly.

I think that answers two of the questions.

This is a corporate priority, Patrick, to really put a clear commercialization pathway in place for our company and obviously for our investors. I would be hopeful that within the next couple of quarters we will be providing our company -- our investor base with milestones according to that goal.

Okay. Just last question, and then I will back in queue. But, I guess more on the financial side -- if we take your color on the gross margin under the new Arch agreement. I guess that is about half of the product revenue or a little bit around that. Would you expect that type of gross margin to continue? Then are you expecting more on patent revenue in '13? Or, should we expect that gross margin to increase for that side of that portfolio?

The on patent -- the outlook for growth in 2013 versus 2012 on on patent is up and up more strongly than it would be expected in the generic side. We should have an improving mix of on patent versus generic. Then you heard David O'Toole provide you with some details about the improved margin outlook of the large atorvastatin enzyme business versus the past. Clearly, both fundamentals bode well for increased margins in 2013 versus 2012 in our pharmaceutical products and services business.

Great, thanks.

You're welcome.

Your next question is coming from the line of Chris Kovacs from Baird.

Hi, guys, thanks for taking my question. I just want to start out the news earlier or last month that Raizen had selected Iogen to work with them on a plant. I just want to get your reaction there. How you feel - it leaves you see in terms of [your] position with Raizen?

We received the public announcement that Raizen was working with Iogen to further advance the process technology for second generation ethanol. We took that as good news. It just is a good public sign of progress from Raizen.

However, Raizen has yet to make a firm corporate public commitment to build second generation ethanol capacity in Brazil. Although we know they are studying at the indication of working with Iogen to support the fact that it is a serious agenda for Raizen. They track their pathway for investing in second generation ethanol. It has been slower frankly than we would have expected for them to come forward with their investment plans.

Obviously, as our leading shareholder and a key partner for Codexis, we have working with them very closely. We gave some color in the script that those discussions have led to us not expecting any R&D funding. However, we still work closely with them as a potential prospect for buying CodeXyme enzymes as we commercialize them in the future.

Okay, thanks. And then, as just a follow-up. Obviously, you talked about focusing on cost reduction in Q3. As we look into Q4 and then in 2013, how much realistically do you -- are you targeting or do you think you can take out of the SG&A and R&D lines? Where do you want that to be optimally?

Maybe I will ask David to respond to that question.

Yes, I mean, we're still working through our 2013 plan. We have already done the major restructuring in 2013. We still are focused on taking as you indicated some SG&A costs that want to reduce. We have, in the previous call, we indicated that we want to target a cash burn in the low million (inaudible) -- the [million] digit -- less than [a million] is what I am trying to say. I think that is still our target is that we want to get our expenses in line with the revenue that we are going to be generating next year.

Great. Thanks, guys.

Thank you.

Your next question is coming from the line of Mike Ritzenthaler from Piper Jaffray.

Good afternoon. So just a couple of questions about the revenues. We had been expecting the $7.5 million kind of clean up from the Shell arrangement. But obviously, the collaboration revenues were a lot higher. Was there anything unusual in that upside that happened with that clean up?

No, there wasn't. The only one as you indicated was the $7.5 million of collaboration from Shell that was the clean up.

Okay. Would you mind breaking down between FTEs and milestone payments? I guess I am -- is it safe to assume that clean up is done?

That clean up is done at this point.

Okay.

As of the end of the third quarter. We have not received the payment. But that is sitting on our balance sheet. That will be collected in the fourth quarter.

Mike, I would add. This is John. I would add that the milestone portion of the $7.5 million was a minority of that $7.5 million.

Okay, fair enough. Then, on Chemtex, the start up mid next year. What is the early read from the pilot facility? Any sort of sampling that you've done from Redwood [Falls]?

Okay. The early read is the construction is on progress. We have pictures of vessels being put in place. On a construction project point of view the timeline is going well, which continues to have us set the outlook of middle of next year for the start up.

The microorganism productivity development has gone well. We have made good progress even through the downsizing exercise. The team has done some nice improvements in the productivity of the organism. We have sampled very small scale samples from the R&D effort in Redwood City. Most of our R&D attention is focused on improving the yields from the organism as opposed to improving the specification of the detergent and alcohol being produced.

Okay. Then on the Arch. This one and the last one for me on the Arch agreement. If I understood the comments right. Sorry, there was a little bit of a break up in the line for some reason. But, I just wanted to make sure I understood that it is more of a focus on the enzyme part as opposed to the previous arrangement that had some other sort of overhead that you were responsible for. Is that true? That is what driving the 55% in the last 9 months versus the 5%.

Yes, let me start. David, please jump in.

Yes.

That is correct. Prior Codexis was responsible not only for providing the enzyme to make the intermediate. But also, was responsible for the manufacturing of the intermediate. Or actually more --

Great.

-- precisely having the intermediate be manufactured for us. But then we took responsibility for owning that intermediate, and selling, and serving the customer with that intermediate. It was a substantially more complex role for Codexis in the supply chain of atorvastatin.

Then as we advanced our collaboration with Arch Pharmalabs it became clear that there was a streamlining of that operation that could benefit both Arch and Codexis by having Codexis just focus on supplying and optimizing (inaudible) for the application. Leave other elements of the supply chain that we used to manage to be managed by Arch going forward.

All right, that makes sense. Okay, thanks, guys.

(Operator Instructions)

Our next question comes from the line of Stacey Hudson from Raymond James.

Hi, good afternoon, guys.

Good afternoon.

I just wanted to follow-up on Patrick's question. You mentioned on the 2Q call that CodeXyme sales outside of Raizen were likely a 2015 type of event. Given the conversations that you're having, do you still maintain that view?

I'm sorry, for some reason I couldn't hear your question fully. Stacey, can you just rephrase it? I apologize.

Sure, no problem, sorry. On the 2Q call you mentioned that you didn't expect CodeXyme sales outside of Raizen to happen until like 2015. Do you still kind of view that timeline as something that's reasonable, or do you see it maybe moving forward with the conversations that you're having?

Yes, I think that the outlook for 2015 is still a reasonable outlook. Practically we have not been able to engage in any third party discussions outside of Shell and Raizen until very recently. It's very early days for really building these new potential partnerships for CodeXyme.

We'll have timelines to build those partnerships. To craft them in a way that works for Codexis and our partner. Then to start to continue the development of the enzymes to ensure we stay ahead of our competition for these enzymes.

Then, of course, the build out of the enzyme factor is a connection with ethanol producers building their second generation ethanol plant. If you put some practical timeline elements on it, we're definitely into 2015 -- maybe 2016 before we start to see revenue from enzyme sales for CodeXyme.

Okay, thank you. Then on CodeXol, what do you think the time line would be for finding commercialization partners for that?

Finding commercialization partners, or generating revenue?

Announcing something as far as commercialization partners.

Yes, I think that the prospect of announcing a commercialization partner before we do the pilot run in the middle of next year is a bit low. It is possible. But, I wouldn't set your expectation that we're going to strike a commercialization, a public commercialization deal with CodeXol prior to us running the organism through the demo scale facility in Italy. That is the way we're expecting the commercialization path to unfold.

Okay.

[Run it] show it at scale, and then we'll be in a better position to strike a commercialization deal.

All right. Sure, thank you.

You're welcome.

At this time I'm showing no further questions in queue. I would like to turn the call back over to Mr. John Nicols for any closing remarks.

Okay. Well, thank you very much, everybody, for joining our call. We look forward to continuing to update you as we progress our company going forward. Thank you very much, again.

Ladies and gentlemen, this does conclude today's presentation. Thank you once again for your participation. You may now disconnect. Have a great day.