Codexis Inc (CDXS) 2013 Q1 法說會逐字稿

Welcome to Codexis' First Quarter 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 expressed written consent of Codexis is strictly prohibited.

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

I would now like to turn the conference call over to Mr. Doug Sheehy, Codexis' Senior Vice President and General Counsel. Please proceed, sir. Thank you.

Thank you, and good afternoon. Today after the market close, we announced our fiscal first quarter financial results. The press release is available on the Investors page of our website at codexis.com.

With me today are John Nicols, our President and CEO, and David O'Toole, our Senior Vice President and CFO.

During the course of today's call, management will make a number of forward-looking statements. These forward-looking statements include our forecast for 2013 pharmaceutical revenue, pharma product revenue, product gross margins, total gross margins, and total cash burn.

The ability of our existing AMRI and Strem arrangements, along with future new partnerships to generate new development projects for Codexis, our ability to expand our pharma pipeline, our ability to continue to improve our CodeXyme Cellulase enzymes, startup timelines for the CodeXol demo plant, the ability of Codexis' new corporate strategy to achieve long-term profitable growth by growing our pharma business and expanding into new markets, such as enzyme therapeutics, agrochemicals, cosmetics and food additives, our ability to secure funding partners for CodeXyme Cellulase enzymes, and CodeXol detergent alcohols.

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 annual report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2013, 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.

Now I'd like to turn the call over to John Nicols.

Good afternoon, and thank you for joining us. e first quarter was a very productive start to 2013 for Codexis, as we continued to grow our pharmaceutical business with the achievement of both significant top-line and margin growth and the formation of new partnerships to fuel future growth. Concurrently, we continued to advance our technology and partnering initiatives in our fuels and chemicals programs, all while further reducing our operational expenses and cash burn.

In pharma, we achieved over 30% growth in product sales in the first quarter over the fourth quarter, while our product gross margin hit 38%. We are very pleased with these results, which were driven by some of our long-term pharma partnerships beginning to significantly pay off.

In particular, we began to recognize revenues from commercial enzyme shipments in the first quarter through our partnership with Merck. As background, we formed a long-term collaboration to develop enzymes for use in Merck's pharmaceutical manufacturing in 2007, which has since been extended to 2015. Last year, Merck received FDA approval for the new process using our enzymes for manufacturing sitagliptin.

Our pharma results in the first quarter were also bolstered by our longstanding collaboration with the specialty pharma company Exela Pharma Sciences and its partnership with Hikma Pharmaceutical for the development of argatroban injection. As a result of FDA approval for argatroban in 2012, Codexis received a one-time milestone payment and began to receive royalty revenue in the first quarter.

In the quarter, we also secured important collaborations with Albany Molecular Research, or AMRI, and Strem Chemicals to expand our network for greater access to potential partners and customers. We are working closely with AMRI, a leading custom research and manufacturing organization, to identify and implement new biocatalytic manufacturing routes within their extensive pipeline of customer projects. Customers are poised to benefit from the combination of AMRI's process development and Codexis' enzyme design strengths, and that should lead to new opportunities for Codexis to serve with our biocatalysts.

Additionally, we formed a new product distribution arrangement with Strem Chemicals, a leading global supplier of laboratory chemicals, under which Strem will have exclusive distribution rights for our 100-milligram Codex screening kits for our transaminase and ketoreductase enzyme platforms. Strem markets the leading niche catalog for bench chemists looking for catalysts.

We are confident that this increased visibility will lead to the use of Codexis' biocatalysts in significantly more early-stage chemistry development projects. We continue to expand our pharmaceutical business through these and other new partnerships, which we expect to further bolster our development pipeline.

With the recognition and visibility that comes from these partnerships, and particularly with our extended collaboration with Merck, we are continuing to see interest from a growing list of leading pharmaceutical and biotech companies as they understand how our specifically tailored biocatalysts can improve their drug manufacturing processes. We are confident this trend will allow us to grow our pharma pipeline in the development cycle for novel on-patent drug candidates, as well as in the development of second-generation processes for pharmaceuticals already on the market.

Switching to CodeXyme and CodeXol, our biofuels and detergent alcohols platforms, we have continued to make large strides in optimizing the technology this year. In March, we announced the launch of our next-generation Cellulase enzyme packages, CodeXyme 4 for dilute asset pretreatment and CodeXyme 4X for hydrothermal pretreatment processes.

CodeXyme has been tested against other commercially available Cellulases, and we have found the performance to be equal or better than alternative enzymes across various feed stocks and pretreatment types. These Cellulase packages exhibit excellent performance, converting up to 85% of available fermentable sugars at high biomass and low enzyme loads, enabling what we believe will be among the lowest cost in use Cellulases available once we are in full-scale production.

We have also made significant improvements over previous generations with CodeXyme 4 and 4X, having increased performance of 10% to 20% over CodeXyme 3. We expect to be able to deliver this kind of continued improvement from our world-leading R&D team with future CodeXyme generations and are already working on these.

For CodeXol, our detergent alcohols platform, we have achieved mechanical completion of our 1,500-liter demonstration facility in [Ribrocca], Italy, with our partner, Chemtex. We have begun commissioning the demo plant and look forward to the results when the plant runs later in this second quarter. For both CodeXyme and CodeXol, our efforts to secure commercialization partners remain a top priority, and I will discuss this aspect in greater detail later in this call.

Overall, we are very pleased with our developments in the first quarter of 2013. Not only did we achieve strong product revenue growth and significant gross margin expansion, but we continued to drive the operational efficiency of Codexis, resulting in a lower cost structure and a modest cash burn of $3.1 million for the quarter.

Maintaining a strong balance sheet is crucial to our success, as we reposition the company for further growth in the pharmaceutical industry and other new markets.

Before I go into some more specifics for the quarter and our forward strategy, I'd like to turn the call over to David O'Toole for the financials.

Thanks, John. Before I begin, let me say that as a result of the August 2012 termination of our collaborative research agreement with Shell and the resulting loss of associated collaborative research and development revenue, we believe that year-over-year comparisons for the first three quarters of 2013 are not an appropriate measure of the company's financial performance. As such, all comparisons given here are on a quarter-over-quarter basis, comparing the first quarter of 2013 sequentially with the company's fourth quarter of 2012 financial results.

For the first quarter of 2013, we reported total revenues of $11.5 million, a 45% increase from $7.9 million in the fourth quarter of 2012. Product revenue for the first quarter of 2013 was $9.1 million, a 34% increase from $6.8 million in the fourth quarter of 2012. Product revenue for the first quarter included revenue of $2.1 million from a one-time sale of inventory to Arch Pharmalab in connection with the new enzyme supply agreement.

Product gross margin for the first quarter of 2013 was 38%, an increase compared to 15% in the fourth quarter of 2012. Collaborative research and development revenue for the first quarter of 2013 was $2.3 million, consisting of services of $0.6 million, an increase of 20% from $0.5 million in the fourth quarter of 2012, and royalties and licensing fees of $1.7 million, a 240% increase compared to $0.5 million in the fourth quarter of 2012. The increase in royalty and licensing fees was primarily due to $1 million in revenue recognized from the launch of argatroban.

Research and development expenses in the first quarter of 2013 were $7.3 million, a decrease of 31% from $10.6 million for the fourth quarter of 2012. Selling, general and administrative expenses in the first quarter of 2013 were $8.1 million, an increase of 12% compared to $7.3 million in the fourth quarter of 2012.

The decrease in research and development expenses and increase in selling, general and administrative expenses was primarily caused by the realignment of certain departments, including supply chain, engineering, quality control, and quality assurance into a newly created commercial operations department, resulting in $1.6 million of expenses that were reclassified from research and development to selling, general and administrative beginning as of January 1, 2013.

When combined, research and development expense and selling, general and administrative expense decreased by $2.4 million, or 14% compared to the fourth quarter of 2012. The overall decrease was due to reductions in headcount and other discretionary expenses.

Overall, our total cost and operating expenses for the first quarter were $21.1 million, an 11% decrease from $23.7 million in the fourth quarter of 2012. Net loss for the quarter was $9.6 million, or a loss of $0.25 per share, based on 37.8 million weighted average common shares outstanding in the first quarter of 2013. This compares to a net loss of $15.5 million, or a loss of $0.41 per share during the fourth quarter of 2012. We ended -- we ended the quarter with cash, cash equivalents, and marketable securities of $46.1 million, compared to $49.2 million on December 31, 2012.

Now I'd like to turn to our financial guidance for the full year 2013. For the full year 2013, we reaffirm the guidance we gave on our prior call. We continue to expect total pharmaceutical-related revenue in the range of $35 million to $40 million. Of this amount, we expect product revenue to approach $30 million. We expect that our product gross margin will be in the range of 30% to 35% and total gross margin for pharmaceutical revenue will approach 50%.

Regarding cash burn, we continue to expect a cash burn range of $12 million to $16 million for the year. We do expect that cash burn for the second quarter will be higher than cash burn for the first quarter.

Now I'd like to pass the call back over to John for some additional commentary.

Thanks, David. Now that we are off to a strong start to 2013, I would like to outline our corporate strategy to achieve long-term profitable growth in greater detail.

First and foremost, we are going to continue driving growth in our pharmaceutical business. We plan to pursue new collaborations with big pharma and biotech partners to integrate our products and services more deeply into the drug development and manufacturing processes for both clinical stage and pharmaceutical products already approved and on the market.

We will continue to use our long-term Merck partnership as a case study and a model for replicating this success with other major pharmaceutical companies by leveraging our core strengths, namely designing and making new enzymes faster than competitors through our CodeEvolver enzyme evolution platform, which enables creation of enzymes that can deliver pure compounds with higher chemistry yields under harsh industrial conditions.

While we have emerged as the market leader for biocatalysts, enabling more efficient manufacturing processes for the pharmaceutical industry, we plan to leverage our core technology platform to expand into other markets. One area that we are particularly excited about is the field of enzyme therapeutics. While our technology has revolutionized the manufacture of small-molecule pharmaceuticals and is currently used in the production of some of the world's best-selling drugs, we are now also working to apply our technology to generate new and improved biologic therapies -- sorry, therapeutics in a broad array of applications.

We are currently evaluating opportunities in a number of therapeutic areas such as enzyme replacement and cancer. Applying our protein improvement technology to an enzyme like phenylalanine ammonia lyase, or PAL, an enzyme in the development to treat phenylketonuria, PKU, we have shown that we can significantly improve its stability under physiological conditions. We recently filed our first patent application for our initial work in this area. Further work to address issues with such therapies like immunogenicity is underway.

We are excited about the prospect of extending our longstanding protein engineering technological expertise into the pharmaceutical industry in this way. Success for Codexis in this space will translate into new joint development arrangements with backend royalties and/or milestone opportunities. Early discussions with potential partners to work on their drug discovery candidates are encouraging.

We are also exploring additional commercial opportunities by targeting biocatalysts -- i.e., what we already do so well in pharma -- into other complex chemistry applications. Markets such as agrochemicals, cosmetics, and food additives are excellent target markets for our core enzyme development and commercialization capabilities, and we are undertaking a proactive business development approach to link up with important players in these industries.

While these parallel markets are not occupying a substantial portion of our time and resources currently, we do expect them to grow, as we find more profitable opportunities. Codexis has already begun actively participating in relevant industry tradeshows and conferences during 2013, and we will continue to provide updates in the coming quarters.

Finally, turning to our strategy for CodeXyme and CodeXol, our main initiative is to secure funding partners by the middle of this year, and we remain encouraged by our recent discussions with a number of interested parties.

As a reminder, we are currently in the process of identifying potential partners for CodeXyme and CodeXol so that we can leverage our partners' engineering, manufacturing and/or commercial expertise, as well as their ability to fund the commercial scale-ups of these businesses.

In closing, I would like to highlight that we are very encouraged by the progress that Codexis has made during the last couple of quarters, particularly in the necessary rightsizing of our operational structure after the loss of Shell R&D funding, reducing our cash burn, and demonstrating significant growth in our pharma division. We now have a strong, stable management team in place after a period of transition, and I believe we are very favorably positioned to capture significant value creation for our shareholders.

While 2012 was a difficult transition year, the Codexis story continues to evolve in an exciting way with expanding opportunities, all based on our core ability to uniquely tailor enzymes that efficiently drive chemical processes in a variety of markets. We feel that 2013 will be a very clarifying and encouraging year for our overall direction, and we look forward to updating you in the coming months around new partnerships and products that will help us build on this progress.

And with that, I'd like to turn the call back over to the operator for question-and-answer.

Certainly, thank you. So, ladies and gentlemen, we'll now conduct the question-and-answer session. (Operator Instructions). And our first question is from the line of Ed Westlake of Credit Suisse. Please proceed with your question.

Hey, guys, good afternoon.

Hey, Edward.

Just a quick question, obviously. You mentioned a one-time payment for the argatroban. How much of that was in 1Q? Just thinking about the revenue beat that you've got there for pharma.

Well, the total for argatroban in the first quarter, as I mentioned, was $1 million.

Okay, just $1 million, okay. And that was the -- so that was the one-time payment, and then going forward royalty will accrue? Is that correct? Do I hear you correctly?

No, that is not correct. Actually it's -- part of it was a milestone, which is one-time, and then the remainder is the royalties, or the revenue share.

Okay. And then a broader question. I mean, in terms of handicapping, you know, getting funding or getting a partner to take on, say, CodeXyme around midyear and CodeXol, I mean, can you give us any more color in terms of, say, the number of interested parties, who you're speaking to, to give some sense of whether that will close?

Hey, Ed, pretty delicate question. This has been obviously a core priority for the company, in parallel with driving the continued technological improvements, which I highlighted in some detail on the call. Myself and key members of the management team have been working as a priority to reach out to dozens of potentially interested parties to consider working with our CodeXyme -- with Codexis on our CodeXyme business in a strategic way.

And we are, you know, substantially through the process of assessing, you know, the most interested potential partners. And, you know, with a milestone like success targeted for the middle of the year, we are -- we're having good success to advance those discussions.

So who -- who we're talking to is clearly not to be disclosed at this point, but it's a priority process and the conversations proceed encouragingly.

Right. And good luck with those. And on the enzyme therapeutics, I mean, obviously, you know, huge different array of applications, but any sort of idea of the sort of total addressable market, as you think about revenue potential down the road in a sort of [a wrist case]?

Yeah, it's hard to assess the addressable market. The -- we are targeting where our ability to engineer enzymes would have the most impact. We have a priority list of a handful current priority therapeutic areas that we are engaging in discussions with potential partners. We highlighted one such area in the call today, which is clearly encouraging to us.

And, you know, our approach would be to help such a partner pharmaceutical company to come up with better drug candidates than theoretically they're able to do by themselves. And we have a pretty compelling and convincing story to pharmaceutical companies and, indeed, we can help them to do that.

So I think success, as I highlighted in the call, would translate into joint development agreements, with, you know, cost coverage plus margin opportunities in the short run, and ultimately, if we're successful and the partner's successful with their candidate, that it could lead to milestones and royalty payments for us. So I hope to layer a number of these in over the coming quarters and years to create a portfolio where we've delivered such successes.

That's very clear. Thanks very much.

Good. Thank you, Ed.

Thank you very much for your question. Our next question is from the line of Weston Twigg of Pacific Crest Securities. Please proceed with your question.

Sure. Thanks. Just a couple of quick questions. One, Merck, with the enzyme sales upside, is that something that should continue to trend higher through the year?

This is David O'Toole. It's going to be a little lumpy this year, but the overall -- you know, it depends on their demand. But we will -- we do foresee, you know, continued sale of sitagliptin to Merck over this year and probably getting a lot more consistent in 2014.

Okay, okay. Good. And then, on the second-gen ethanol Raizen down in Brazil, I know it's still kind of sensitive, but they have talked about publicly now making investments in second-gen ethanol. And given the tight relationship with Codexis, it's a bit surprising we haven't heard anything regarding Codexis involvement yet. Just wondering if there's any -- anything you could maybe add to that to give us a little understanding of where you are in that process.

Yeah, sure. Obviously, Raizen sits on our board and is our largest shareholder, so there's a lot of continuous communication with Raizen. They have of late made announcements to build a second-generation facility of the order of 10 million gallons in one of their geographies down in Brazil. They have indicated that they're working with a process technology company, but they have yet to make their mind up about what kind of enzyme technology they are going to apply in that facility.

And so obviously we remain in communications with them on that. They are in control of the process for the enzyme selection. And when they are, you know, finalized, then their consideration of that, then that will become public and this question will become very clear to you. I hope that's helpful.

Yeah, that is. That is. So, in other words, the selection is still open, and -- and Codexis is still engaged to some extent?

Correct.

Good. All right. That's all I have. Thank you.

Good. Thanks, Wes.

Thank you for your question. (Operator Instructions). Okay. So we'll move on to our question, and it's from the line of [Enrique Aquishi] of Piper Jaffray. Please go ahead.

Great. Thanks for taking my call. So, with regards to the lumpiness that you mentioned on the Merck sales, do you -- the seasonality for that product revenue, is that going to follow kind of that lumpiness from Merck? Or do you see total revenue and product revenue to be a little bit more stable?

I consider the product revenue to be stable, but I do think that there will be some lumpiness in the middle of the year around the orders from Merck.

Got it. Great. And is it reasonable to assume then, off of that, that you'll continue burning approximately $3 million a quarter? Or is there some seasonality that fluctuates your cash needs, perhaps relating to Merck or one of your other partnerships?

Yeah. I did indicate in the call that we do believe that our cash burn for the second quarter will be larger than the first quarter, and a little bit around that is the product revenue lumpiness. So we're still guiding to $12 million to $16 million, which is -- you know, if you annualize that, that's $4 million average. But we do think that second quarter is going to be greater than the first quarter.

Okay. And last one from me. With regards to your cost rationalization in SG&A and R&D, in the -- you know, all the new products and the partnerships that are coming in, is it reasonable to assume that these levels will continue? Or do you think or envision that perhaps additional headcount investment might be required throughout the year?

Yeah, hey, this is John. You know, the main question that we have is the ultimate outcome of our partnerships discussions with CodeXyme. And we are planning for success, and we're driving for success, and if we have success, then there won't be a noticeable, if any, headcount change in the company, and it could actually theoretically trend incrementally up. But depending on the outcome of the CodeXyme partnership transaction discussions, there could be some prospect for some additional headcount reductions.

That's helpful. Thanks for asking my questions.

Okay, good.

Thank you very much for your question. And at this time, ladies and gentlemen, I'd like to turn the presentation back over to Mr. John Nicols for closing remarks.

Okay. Well, thank you, everyone, for your participating in the call. We look forward to updating you again soon.

Thank you, ladies and gentlemen. That concludes today's presentation. Thank you once again for your participation. You may now disconnect. Have a good day. Thank you.

Bye-bye.