Codexis Inc (CDXS) 2014 Q2 法說會逐字稿

Welcome to Codexis second-quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Ina McGuinness of LifeSci Advisors, Codexis investor relations firm. Please proceed.

Thank you, operator. Earlier this afternoon Codexis released its financial results for the quarter ended June 30, 2014. The press release is available on the investors page of Codexis.com. If you have not received the press release or if you would like to be added to the Company's distribution list, please call LifeSci Advisors in New York at 646-597-6979 and speak with Veronica Molina.

This call is being webcast and a replay will be available on the Company's website for 30 days. All information provided on today's call is as of the date of the live broadcast, Wednesday, August 6, and except as required by law, Codexis disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.

Participating in today's call from Codexis are President and Chief Executive Officer, John Nicols; EVP, Chief Administrative Officer, General Counsel and Secretary, Doug Sheehy; SVP Research and Development, Dr. Jim Lalonde; and VP and Corporate Controller, David McCaman.

With that I would like to turn the call over to Doug Sheehy. Doug?

Thank you. During the course of today's call management will make a number of forward-looking statements. These forward-looking statements include our forecast for a number of full-year 2014 financial metrics including total revenue, total gross profit and cash flow. The ability of our biocatalyst to reduce our customers manufacturing costs, our expectation that we will collect on a $5 million milestone payment in 2014 under our agreement with GSK, and the benefits that a codeveloper of license can bring to a potential licensee.

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 during the call. 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 March 13, 2014 for some of the important risk factors that could cause actual results to differ materially from the forward-looking statements made on this call.

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

Good afternoon and thank you for joining us. It is a very exciting time here at Codexis and as promised, you are seeing the key deliverables for the breakout year of 2014 fall in place. Our core Biocatalyst business is spawning new blue-chip customer partnerships, new commercial products and new leveraged business model offerings. The combination of these positive developments along with our proven cost control discipline and prudence is enabling us to today substantially improve our financial guidance for fiscal year 2014.

Specifically we now expect to generate a positive cash flow in 2014, a major financial milestone for the Company and one to be delivered well ahead of any prior expectations. We are very pleased to review each of these positive developments in today's call with you.

Let me remind you about our passion here at Codexis. Proving that much of the world's pharmaceutical and find chemical manufacturing processes should be redesigned using better, more cost-effective catalysts, catalysts derived from sustainable biological sources, Codexis's biocatalysts. Two fundamental premises drive our belief in Biocatalysis. First, biocatalysts can reduce our customers' manufacturing costs. And second, biocatalysts are only installed in a small fraction of the potential drug manufacturing processes that would benefit from their application. When customers join us in becoming aware of these two points, they then focus on how to get biocatalysts more widely installed across their portfolio. It is here that Codexis shines and wins business showcasing our CodeEvolver protein engineering prowess and our speed and success rate at hitting or exceeding customers' cost savings targets.

As you are increasingly hearing from us, our CodeEvolver protein engineering is the key to the technology that we leverage to drive our business models and financial results.

I would like to take a few extra minutes on today's call to describe CodeEvolver in a bit more detail for you. For that, I am pleased to introduce Dr. Jim Lalonde, Senior Vice President and Head of Research and Development at Codexis. While Jim may be new to our investors he is no stranger to the industry and our customers having been a top R&D leader at Codexis for the last 10 years and a veteran of biotech and chemical industries for the last 24 years. Jim?

Thanks, John. We are extremely proud of the CodeEvolver technology that we have developed at Codexis. What we have been able to do is harness protein evolution, nature's powerful algorithm for engineering in the biological world and use it to create biocatalysts that enable highly efficient manufactured chemicals.

This protein engineering technology, this ability to create new enzymes by evolution in the lab is a product of more than 12 years of development and hundreds of millions of dollars of investment integrating the best of Silicon Valley big data bio thematics with best-in-class synthetic biology tools. We use these tools to design and create diverse genetic libraries that code for our new enzymes. We then use proprietary methods to select from these libraries, genes that code for our target enzymes.

Now the key to our success has been the development of efficient methods for picking out the best performing enzymes for our customers' tightly defined application. We work very closely with our customers to design the ideal process and then we evolve an enzyme that enables that ideal process. So over the years we have developed highly automated methods for testing thousands of enzymes per week to pick out the best-performing catalysts for the idealized process.

We have used this technology to enable manufacturing methods that were previously not possible knocking out several steps in the chemical manufacturing process, creating protein catalysts that are stable under harsh chemical manufacturing conditions or making an enzyme that can do a previously unknown chemical transformation. These novel enzymes can many times eliminate the need for traditional capital intensive chemical manufacturing facilities.

Our highly talented scientific team that we believe to be the best in the world in enzyme evolution has been recognized with awards from the US EPA, from the scientific community and from our customers. Their efforts have produced more than 150 patents and patent applications for our CodeEvolver technology but really what gets us excited every day is doing things that were previously not possible, working with our customers like Merck and GSK to create new enzymes that can solve important problems like the clean manufacture of a new drug or a protein therapeutic that can itself treat a disease.

I realize this explanation only touches the surface of this great CodeEvolver technology that we are harnessing for the business. My R&D team and I are continuously challenging ourselves to find and implement new ways to improve CodeEvolver even further. We are committed to maintaining the protein engineering competitive advantage that we believe we have at this moment. Our ability to continue to do so will be critical for our future and there is no better team to deliver on that than the R&D team here at Codexis.

With that let me turn the call back over to John.

Thanks, Jim. Let me now review some of the recent business highlights. I will review the natural pipeline progression starting with new customer milestones then cover new product commercializations and close with the new GSK deal and our new licensing business model for our CodeEvolver protein engineering platform technology.

On the customer acquisition front, we are pleased to have recently executed two new master service agreements or MSAs with two major global customers. As I discussed a few weeks ago, we have entered into a major partnership with GlaxoSmith Kline, GSK. We did not have an MSA with GSK prior so now we have added our 11th MSA with the top 20 major pharmaceutical companies and our eighth out of the top 10.

In addition, we executed an MSA with our second major customer in the wider fine chemicals arena outside of pharmaceuticals. While we are now allowed at this time to disclose the identity of this customer, we are very excited to begin working with them to bring our biocatalyst into their manufacturing processes going forward.

Entering into an MSA is an important milestone for our sales cycle with customers but the real fruit from our business model comes from projects that spawn commercialized products, licenses or services that we can deliver on a sustained long-term basis to our customers. Last year in 2013, we added two material new commercial products to our growing list of sustained revenue generators. Those were a chemical intermediate based on our proprietary biocatalyst for a Novartis generic drug. And the second, a revenue-sharing arrangement with Exela Pharma Sciences for the injectable anticoagulant drug, argatroban. Both of these delivered material revenues in the second quarter.

This year in 2014, we are on a good pace to continue to add to our growing list of sustained commercial revenue generators spawned from our project pipeline. Today we highlight our first two for 2014.

In addition to the GSK CodeEvolver license that I will address in a moment, I am also pleased to announce that we have executed a new multiyear contract to supply enzymes to a major European generic drug manufacturer in the second quarter. In addition to the multiyear contract signing, we also generated our first material revenues from this customer in the second quarter.

Again, this milestone demonstrates our continuing success in overhauling pharmaceutical manufacturing with our biocatalysts as well as evidence that our pipeline is producing commercially sustainable revenue generating business.

Finally, I want to emphasize again our excitement for having recently executed the new CodeEvolver license agreement with GSK. I spoke with you at length about this groundbreaking deal just a few weeks ago so I won't do so again here. We have collected our $6 million upfront payment from GSK in the last half of July and we are actively involved in CodeEvolver technology transfer efforts as I speak. We remain confident in the collection of the next $5 million milestone payment from GSK in the second half of 2014.

The CodeEvolver license like we just executed with GSK is a natural alternative for us to present to customers equally convinced as we are on the wider prospects for applying biocatalysts or protein engineering more generally. The benefits versus our traditional offering are clear, enhanced ability and competitive advantage for the customer to develop novel products or processes, reduced variable costs to develop a biocatalyst and finally, the enabling of a variety of additional controls versus working arm's length with Codexis. We see these as compelling benefits to some select innovative customers.

We have recently begun promoting a CodeEvolver license to other companies besides GSK and we will keep you apprised of how those discussions unfold and advance over time.

Now let me turn the call over to David McCaman, our Vice President and Controller, to review our financial results for this year's second quarter.

Thanks, John, and good afternoon, everyone. In reviewing results for the quarter, I will make reference primarily to second-quarter 2014 results as compared to the results for the second quarter of 2013 unless otherwise stated. For the second quarter of 2014, we reported total revenues of $6.6 million, a 6% decrease from the prior year. Product revenues for the second quarter of 2014 were $2.8 million, a 44% decrease from the prior year. The decrease in product revenues was primarily due to a significant shipment of intermediate products in 2013 to the hepatitis C drug market that is no longer shipping in 2014 as a result of newer products entering that market.

Biocatalyst collaborative research and development revenues which consist of license payments, R&D services and royalties were $1.7 million for the second quarter, an increase of 6% from the prior year. Revenues from our revenue share arrangement with Exela Pharma Sciences for the anticoagulant drug argatroban grew to $2.1 million for the second quarter, a 410% increase over the prior year. On a year-to-date basis, total revenues were $13.6 million for the six months ended June 30, 2014, a 26% decrease from revenues of $18.5 million for the six months ended June 30, 2013.

Our gross margins which we define throughout as total revenues less cost of product revenues increased to 68% in the second quarter compared to 48% in the same quarter of 2013. Gross margins increased to 66% on a year-to-date basis in 2014 compared to 50% for the same period in 2013. Gross margin improvement in 2014 is a result of more favorable revenue mix compared to the prior-year period.

Research and development expenses in the second quarter were $7.7 million, a decrease of 10% from $8.6 million expensed in the prior year. $7.7 million of expense for the quarter included non-cash impairment and equipment related charges of approximately $2.5 million which are primarily related to write down of assets associated with our CodeXol program. Excluding these equipment related charges, R&D expense decreased $3.3 million or 38% compared to the prior year. The significant decrease was primarily due to headcount reductions and disposal of excess equipment as a result of winding down our CodeXyme and CodeXol programs through restructuring efforts implemented in the second half of 2013.

Selling, general and administrative expenses in the second quarter were $5.6 million, a decrease of 22% compared to $7.2 million in the prior year.

Net loss for the quarter was $8.5 million or a loss of $0.22 per share based on 38 million weighted average common shares outstanding in the second quarter. This compares to a net loss of $12.6 million or $0.33 loss per share in the prior year. Net loss on a year-to-date basis for the six months ended June 30, 2014 was $14.9 million or a loss of $0.39 per share, a significant reduction from the net loss of $22.2 million or $0.59 loss per share for the six months ended June 30, 2013.

We ended the quarter with combined cash, cash equivalents and marketable securities of $21.5 million. That compares with $25.9 million as of December 31, 2013. We have burned approximately $4.5 million in cash flow from operations for the first six months of 2014 inclusive of $1.5 million in cash proceeds from the sale of our Hungary entity in the first quarter. This compares to a cash burn of approximately $10.6 million for the same period in 2013.

Now I would like to turn the call back over to John for further discussion and a review of guidance and to close out the call.

Thanks, Dave, and thanks for stepping up to seamlessly take on the principle accounting role for the Company during our CFO transition period. On August 18, Gordon Sangster will join the Company as Senior Vice President and Chief Financial Officer. I'm excited to bring Gordon on board and am pleased that we executed his hiring in a way that ensured our time without a CFO was quite short. Gordon is a veteran of the CFO role in the biotech industry and we look forward to him hitting the ground running later this month and bringing value to the Company and our investors thereafter.

Let me take the last few minutes to close out our prepared remarks by detailing the upward revisions we are making to all of our full-year 2014 financial guidance metrics.

First, let me take a count of our first-half results against our prior annual guidance metrics. Our prior 2014 guidance metrics were revenues of $33 million to $35 million, gross profits of $19 million to $20 million and a cash burn of no more than $8 million. Our second-quarter and first-half financials have delivered well against those guidance measures.

Our cash burn result for the first half of 2014 was $4.5 million, right in line with the prior annual guidance. Revenues have been tracking somewhat low so far this year but the reality is that we have been consistently driving a significantly higher profit margin mix from our revenues. That is evidenced by our $9 million gross profit result for the first half of the year being right in line with our prior annual guidance.

With our solid progress in the first half of 2014 to date coupled with the financial expectations from the announced GSK agreement, we are now in a position to positively revise all of our 2014 guidance metrics.

First, we are raising our revenue guidance for 2014 to $35 million to $38 million. This reflects an expected revenue growth of between 10% to 19% versus our revenues in 2013. Additionally, we are raising our gross profit guidance for 2014 to be between 70% to 75% as a ratio of our revenues. This represents a gross profit growth outlook for 2014 that is between 41% to 64% higher than 2013 and is a direct reflection of the high profit margins being delivered consistently from the biocatalyst business this year as well as the very high margins associated with recognized revenues from the GSK deal.

These guidance upgrades are great news for the Company and show substantial P&L acceleration we have been engineering this year.

The final 2014 guidance revision is that we expect to generate a positive cash flow from our operations in 2014. This is a very critical financial milestone for a Company like ours and is a dramatic improvement from our prior $8 million cash burn guidance. Achieving a positive cash flow result in 2014 will be substantially ahead of any prior expectation for this crucial financial deliverable.

It should be clear to our investors based on these new annual guidance metrics that Codexis has entered into a very new and improved financial chapter in the second half of 2014 as compared to our past. We look forward to updating you on the delivery of those results in the coming quarters.

Thanks for taking the time to get updated on the excellent developments at Codexis and we hope that our prepared remarks have been informative. Let me now turn the call back to the operator for questions and answers.

(Operator Instructions). Katja Jancic, Sidoti & Co.

Thank you for taking my call. So if I understand correctly, you expect to get about $11 million from the Glaxo contract in the second half of 2014. Is that correct?

That is correct, $11 million in cash proceeds.

But your guidance, you raised it only to $35 million to $38 million. Are you expecting the other sales to slow down, are they growing slower than you anticipated?

Let me be clear, Katja. The $11 million will be in cash proceeds but we have to treat the proceeds -- we are working with our auditors on how to treat those cash proceeds in terms of how we can recognize revenue associated with these milestone payments that we expect to get this year. And so the amount of revenue will be significantly less than the amount of cash that we will generate this year but it is nowhere near $11 million, it is expected to be in the range of $5 million or $6 million.

So basically this is not recognized as revenue, am I understanding this correctly?

We are going to have to amortize the upfront payment across the tech transfer term of the agreement with Glaxo Smith Kline and so the $6 million will not all be recognized in 2014. It will be spread out over 2014, 2015 and thereafter.

Okay, that makes sense. Just one more question, in your prepared remarks you mentioned that your product gross margin declined in the second quarter. What is the reason behind that?

Product revenues were relatively modest in the quarter and the products that we made sales on this quarter were of generally slightly lower margin mix, not much but slightly lower margin mix than they have been in recent prior quarters.

Okay, that is all for me. Thank you.

Thank you, Katja.

Kevin Hanrahan, KMH Capital Advisors.

My first question would be have you already gotten the $6 million upfront payment from Glaxo?

We did. We received that in the second half of July.

Okay, so that is where I was going so basically the cash balance today would be higher than it was on June 30?

Correct.

Okay, that is good. My next question, you announced a master services agreement with a major pharma company in the fourth quarter, maybe in the November timeframe and that was not Novartis but you couldn't say who it was. Can you tell us if that was Glaxo or if it was another company?

It was not Glaxo because Glaxo really we entered into an equivalent master service agreement with Glaxo as we finalized this large CodeEvolver license deal so the major pharmaceutical company that we entered into a new MSA at the end of last year was a different drug company than Glaxo.

Okay. So it was not Glaxo and it was not Novartis.

That is, that is correct.

That is interesting. And on the last call, you just had a call when you had the major announcement with Glaxo which I think was July 15 you had a call. You talked about a new business model. Can you talk a little bit about that? In other words you are going to try to duplicate this with some of your other major pharma partners that you have?

That is correct and I spoke a little bit to that in the prepared remarks. Basically we approach drug companies either on a project by project basis where we get access to the kind of chemistry they are working on in their developmental pipeline and when we get access like that, we will try to entice them to redesign the process for one of those developmental drugs to be built with a biocatalyst that we could design. We will call that a project-by-project model, business model, with a customer.

When we do that project in-house we are deploying our CodeEvolver platform technology that Dr. Jim Lalonde spoke to today on the call but we are doing that in our house by ourselves, the customer is not involved.

In the case of Glaxo, we have decided and worked with Glaxo in an arrangement where we will enable them to practice this CodeEvolver protein engineering technology on their own. They have decided to install it in an R&D facility in Pennsylvania and we are going to be working over the next couple of years to train them on how they could do the protein engineering in the future without us.

We see that this is a very viable model, an option for other major drug companies who like Glaxo have a wide and large and diverse pipeline and can apply Biocatalysis on multiple -- in many different products all at once. And so these our target customers, major drug companies with wide diverse pipelines that we think we can entice over time to enter into a similar CodeEvolver license like we just executed with Glaxo. Hopefully that helped you with your question.

One other question from your announcement on July 14. It says you have potential to receive numerous milestone payments in the future ranging from $5.7 million to $38.5 million per project. Is there two projects or eight or six or unknown?

It depends on the kind of project. In some categories of projects we could have unlimited numbers of milestones to work on biocatalysts for their small molecule drugs. In other categories of projects, there are negotiated limits on how many milestones Codexis can ultimately earn in the future from Glaxo.

So it a bit depends but the range of potential cumulative milestones from initiation to application in a major successful commercial drug of a customer can range anywhere as you have highlighted from almost $6 million to greater than $38 million across that set of milestones. It is a nice longer-term potential stream of revenues for the Company.

We also said in the July 14 call that we don't expect that we will earn any of those milestones this year and next and maybe thereafter, that they are likely to layer in in later years.

Okay. Thank you very much.

Thanks, Kevin. I appreciate your calls.

Austin Lewis, Lewis Asset Management.

John, great quarter. Congratulations. I just wanted to clarify in the first six months the loss from operations was $15 million and so are you expecting -- is there some non-cash components in that? Are you expecting to generate more than $15 million in the second half of the year?

Austin, this is David McCaman. So within the $15 million as of six months as we mentioned earlier, there is $2.5 million of impairment other equipment related non-cash charges so that is a component primarily of R&D.

So you would take $2.5 million out of that $15 million so it would be somewhere in the neighborhood of $12.5 million in the next six months of positive cash flow?

Well, certainly in understanding the first six months, you could take out $2.5 million and that would give you kind of an ongoing run rate.

Just to be clear, Austin, this is John. You are referring to $15 million of operating losses, income losses. When we say we are going to be cash flow positive, we are factoring in the reality that a lot of our costs are non-cash related. A lot of our R&D and SG&A are non-cash in nature and so we are not going to generate $12.5 million of cash in the second half because you are comparing the net income loss of the first half with the full-year cash expectations of the Company. We burned $4.5 million of cash in the first half of this year. And so by saying we will be cash flow positive for the full-year, we are saying that we will at least generate $4.5 million of cash in the second half.

That clears things up. Thank you.

Any other questions, Austin?

No, that will do it for now. Thank you.

(Operator Instructions). James Lieberman, Wells Fargo Advisors.

Thank you. I apologize for being on the road while asking this. I hope you can hear me. Could you give a little further clarification in terms of the revenue model as you build these relationships? Would they involve certain royalties in addition to possible sales of enzymes from you yourself or do you see your transfers allowing pharmaceutical companies like Glaxo doing their own enzymes based on your modeling?

Good question. So we are speaking to deals like GSK, the recent deal with GSK. So clearly with this deal with GSK we are building in a model, an economic model which has got more milestone and potential royalty opportunities than our traditional project-by-project model. However, we still retained the opportunity and the possibilities of selling the enzymes on a continuous basis to Glaxo and I would project any other potential future licensee going forward. So additional sales and profits from sales of biocatalyst could layer on top of the milestones and royalty payments that we could earn from Glaxo and other CodeEvolver license customers.

It really sounds like a wonderful program that you are entering into and I am very excited by what looks like a golden age for you guys. Congratulations.

Thank you, Jim. Thank you for your continuous interest in the Company. Thank you.

(Operator Instructions). At this time I am showing no further questions so I will turn it over to the management for any closing remarks.

Okay, this is John. Thank you very much for your participation in our second-quarter earnings call and we look forward to updating you again next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.