Codexis Inc (CDXS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Codexis 2016 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Jody Cain. You may begin.

This is Jody Cain with LHA. Thank you for participating in today's call to discuss 2016 Second Quarter Financial Results and Business Progress. Please note that a slide presentation featuring the chart of the company's product pipeline to accompany today's conference call commentary is available on the Investor section of the company's website at www.codexis.com. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the company's Chief Financial Officer.

During today's call, management will be making a number of forward-looking statements. These forward-looking statements include 2016 financial guidance, including total revenues and gross margin as a percentage of total revenues; the company's expectations regarding future uses of CodeEvolver technology platform by GSK and Merck, the progress and timing of the transfer of CodeEvolver technology platform to Merck and the potential for milestone payments under company's license agreements with Merck and GSK; the company's expectations regarding future, potential future CodeEvolver licensing partnerships; the company's expectations regarding revenue growth relating to enzyme sales to Merck for use in Januvia in the second half of 2016 and in 2017; the company's expectations regarding product growth for 2016 for the second commercial enzyme and its commencement of the third round of protein engineering R&D services for second food industry customer; the company's expectations regarding the development of therapeutic drug candidates; the company's ability to expand into adjacent markets; the company's successful completion of its obligations under a collaborative research and development agreement with a leading biopharmaceutical company, and the potential for Codexis to receive additional payments depending on the customer's election to use the new enzyme developed during the program; the company's intention to continue to manage its cost related to new product development and litigation while maintaining a healthy cash balance; and the company's plan to drive towards future sustained profitability.

These forward-looking statements are based on assumptions, and are subject to risks and uncertainties that can 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 the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2016, and the company's Form 10-Q filed on May 9, 2016, for some of the important risk factors that could cause actual results to differ materially from the forward-looking statements made on this call. The content of this call contains time-sensitive information that is accurate only as of today, August 9, 2016. 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.

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

Thanks, Jody. Good afternoon, everyone, and thank you for joining us. I'm delighted to report on our strong operational and financial performance for the quarter with net income reaching $2.2 million on revenues totaling $16 million. It is great to show double-digit percent full GAAP profitability for the company at this revenue level. These results reflect the successful completion of the first full transfer of our proprietary CodeEvolver technology under our licensing agreement and a fulfillment of our first R&D collaborative agreement with a major biopharmaceutical company.

At the beginning of the year, we shared our outlook for strong growth for our core biocatalyst product business, and I'm proud to report that we delivered on that in the second quarter with 62% year-over-year revenue growth. Our excellent performance throughout the first half of 2016 gives us confidence that we will achieve our growth expectations for the full year 2016.

Gordon will provide more detail on the financial highlights shortly, but first, I'll share some business highlights starting with our licensing agreement with GSK. In slightly less than two years, we successfully completed the full transfer of our CodeEvolver technology platform, under our nonexclusive licensing agreement with GSK. This was no small feat as the transfer included GSK building a fully functional laboratory at its facility in Pennsylvania to house the CodeEvolver technology, as well as extensive training of GSK personnel in the use of the platform, the sharing of our extensive enzyme libraries, and a host of other activities.

Importantly, the technology transfer went smoothly and was met with GSK's satisfaction in each phase of the process. As this was our first technology transfer, we anticipated facing a number of hurdles, some of which we knew, and others that emerged along the way. I am proud of our Codexis team's performance and solutions-oriented approach that allowed us not only to successfully complete the transfer but to do so ahead of schedule.

We now know much more about the transfer process, and that experience is translating into tech transfer execution processes that are benefiting Merck and set up future CodeEvolver platform licensees to receive our protein engineering capabilities with increased confidence. We view developing additional nonexclusive platform licensing agreements for our CodeEvolver protein engineering technology as a key part of our business model. These agreements allow for near-term revenue generation during the technology transfer phase, which under our agreement with GSK, included upfront and milestone payments totaling $25 million.

The next step is for GSK to begin using the CodeEvolver technology to develop its own enzymes. As I will describe later, we are now set up with specific opportunities that can yield the future backend revenues from the GSK platform license agreement. Those backend revenues would come in the form of milestone payments that can range from $5.75 million to $38.5 million per protein development project, cumulative across the life of the protein, based on GSK's successful application of the license CodeEvolver technology.

I'm also pleased to report solid progress in finalizing our second CodeEvolver licensing deal. We are on track to complete the remaining phase of the technology transfer under our agreement with Merck and to earn an $8 million milestone payment later this year. Merck continues to be an outstanding partner to Codexis.

I mentioned last quarter that we expanded our relationship with Merck beyond our CodeEvolver licensing agreement and enzyme sales for Januvia, to now also include the ramp-up of our in-house R&D service projects for them. Two new R&D teams are now in place and dedicated to this work. We booked the first full quarter of R&D fees from these projects with Merck in the second quarter.

We continue to advance CodeEvolver licensing discussions with other pharmaceutical companies. These discussions reinforce our belief that protein engineering is of growing importance for the research and development of novel drugs, as well as the mutual attractiveness of our CodeEvolver platform licensing transactions to leaders in this industry. Since announcing our first deal with GSK, we have provided qualitative guidance that we would enter into a new CodeEvolver licensing partnership at least once every one to two years. We continue to uphold this guidance.

Moving on, last month, we reported the successful completion in our R&D collaboration with a leading global biopharma company. We announced this collaboration a year ago, and since then, we exceeded the parameter set forth in every phase of the agreement. Along the way, we earned upfront, R&D service, and success fees, totaling $3.25 million. This was a collaborative effort in which we used CodeEvolver to develop a novel enzyme for use in our partner's preclinical therapeutics program. It's highly gratifying to report on our accomplishments in this first significant agreement with a major company in the biopharma industry. We are now positioned to receive additional payments from this partner, depending on their election to use the developed enzyme.

Turning to progress with our core business of engineering and commercializing novel proteins from our CodeEvolver platform. As I mentioned at the beginning of today's call, we saw over 62% growth in biocatalyst product sales for the quarter. A large portion of that growth came from increased shipments of enzyme to Merck for the production of their blockbuster diabetes drug Januvia. The Januvia business has been a solid source of revenue growth in the first half of 2016, and our outlook is for continued revenue growth in the second half of 2016. Our visibility into 2017 also indicates further revenue growth next year, as our enzyme is increasingly being used in a greater portion of Januvia manufacturing.

It is at this time that I would like to call your attention to the project pipeline snapshot that we posted in the Investors section of Codexis' website prior to this conference call. Many investors have requested that we provide a snapshot of our pipeline, and to keep that snapshot current going forward.

Of course, we are proud to do so, as our pipeline is the lifeblood for the company's future revenue growth prospects. Let me start by explaining the construction of the pipeline, then I'll provide some broad implications from the pipeline, weaving in developments from the second quarter of 2016.

The construction of the pipeline. The row headers are self-explanatory, covering the different categories where CodeEvolver protein engineering can add value to our targeted customers and markets. Note that we have not included a row for pharma projects prior to and through Phase 1, as projects in these early drug development stages drive very modest revenues for Codexis. However, you should note that activity to support these early-stage projects is a very dynamic part of our business with our pharmaceutical customers. Over the last two years, we have sold over 150 unique enzymes, probably targeting over 150 different drug substances for dozens of customers at stages earlier than Phase 2.

In addition to our modest revenues pre-Phase 2, it is nearly impossible for us to know the specifics of all these customer development activities. On the flip side, we have solid visibility to biocatalyst projects that have advanced to Phase 2 clinical trial -- sorry, Phase 2 clinical trials or later for our clients. Hence, these projects are detailed on our pipeline snapshot.

Next, for any project to register on the pipeline, it has to have generated at least $100,000 in R&D service revenues, and/or enzyme sales over the last two years. Today's pipeline snapshot covers the period from the third quarter 2014 through the second quarter of 2016. For completeness, we have added Codexis' self-funded projects. For this project type, Codexis must have invested in excess of $100,000 in cost, over the prior 2 years, to register on the pipeline.

The column headers are important as well. Precommercial projects are related to products that are either still in development by us or have yet to be commercially launched by our customers. Examples include improving an enzyme to enable a product to reach commercially relevant performance, or improving an enzyme for a product that is still in development by our customers. The commercial column shows projects or products, therefore, that had been fully commercialized by both ourselves and our customers, and hence are sources of sustained revenue for Codexis, should they continue to register on the pipeline.

You will note that we show a precommercial column today labeled CodeEvolver licensee driven, since as you know, our platform licensing partners can create biocatalysts on their own, and because Codexis is set to generate sustained revenues from those projects that are different from the revenue generation from projects we drive on our own. Currently, all of the CodeEvolver licensee driven projects are precommercial. But as those commercialize, we will gladly add that new column to our pipeline.

Hopefully, that helps you clearly understand how our pipeline has been constructed. We will include the latest pipeline snapshot in our current corporate presentation, which is always posted to the Investors section of codexis.com. We intend to update the pipeline periodically, but at least annually going forward.

Now let me turn to providing broad comments about our pipeline for a few moments. First, you will note that Codexis is currently executing on 29 unique, significant projects across the spectrum of our target applications. Twenty of those are biocatalyst projects, aimed at reducing the cost of small molecule drugs and are spread nicely across the development life cycles. Seven of those our commercial, and are currently generating sustained product sales for Codexis. Thirteen are in later-stage development.

Of note, our fastest-growing segments across the small molecule categories are biocatalyst in development by our CodeEvolver licensee partners, and biocatalysis deployed against patented, already on the market drugs. Two years ago, we had very few projects populating these categories.

Today, we are benefiting -- well, I'm sorry, we are beginning to see the backend benefits of our CodeEvolver business model accrue. As evidenced by three late stage projects that we have been working on with GSK and Merck. In the case of biocatalysis for patented drugs, we are now working on projects with four of the top 20 pharmaceutical companies, which includes our two CodeEvolver licensing partners plus two others.

Our second commercial enzyme beyond sales to Merck for Januvia, which I've already highlighted, is also experiencing strong year-on-year product sales growth for both the second quarter and the first half of 2016. In addition, the Codexis' precommercial patented drug project entered its second chapter of protein engineering R&D service work in the second quarter of 2016, encouraging us that this leading pharma partner is growing increasingly serious in transforming its commercial drug process to a new Codexis biocatalytic route.

Finally, rounding out the pipeline commentary, let me highlight the project list outside of small molecule pharma. As you know, none of these projects existed three years ago, with the exception of the early R&D for the food ingredient project that has now grown to be one of our leading commercial product revenue streams. Today, we have nine projects up outside the small molecule pharma industry; four of which we are self-funding.

In the partnership projects categories, in addition to the successes already detailed with our biopharma collaboration, we are pleased to have recently started another round of protein engineering R&D service work with our second food industry customer. That project, which was initiated in the fourth quarter of 2014, generated significant R&D service fees for us in the second half of last year, is now beginning its third round of funded R&D. It's exciting to see that food project continue its advancement with that great client once again.

Finally, I will close out the section highlighting our four self-funded, protein engineering projects, starting with the development of our own rare disease enzyme therapeutic candidate. We view of our drug discovery program as one of the highest value applications for our CodeEvolver technology, with prospects to create an early-stage drug pipeline with minimum cash investment. Through our consulting work earlier this year, we identified a priority short list of highly promising targets for new therapeutics, and our R&D teams have initiated work in developing these candidates.

We've already proven our ability in drug discovery with the development of our enzyme therapeutic asset for the rare disease, phenylketonuria, which we continue to develop on our own. Additionally, our growing approach into biologic drug discovery was met with an enthusiastic reception at the international Bio conference held in San Francisco in June. We were greeted with interest by numerous potential biopharma partners, to discuss both collaborative drug development project ideas, as well as potential partnering of the novel drug assets we are developing through our in-house efforts. We look forward to providing you with more details for both of our PKU program and our new therapeutic target work in the coming quarters.

Regarding our self-funded projects outside the therapeutics arena, both are advancing very nicely from a technological point of view, as we move closer to taking steps that could monetize them in their respective marketplaces. In the food space, we have generated new enzyme technology that positions us to profitably approach additional partnerships with a wide array of food ingredient manufacturers. In the project targeting an industry outside pharma and food, we are encouraged by our early enzyme developments, targeting the creation of a new set of products engineered to uniquely address that industry's fast-moving enzyme performance needs. We look forward to providing updates on both programs in future quarters.

It is notable that we have been financing the R&D investment in these four diverse, potentially very attractive Codexis projects, with funds generated by our own operations, with negligible impact on our cash balance. We see these self-funded projects as a great use of funds to accelerate the company's growth for our investors.

With that, I'd like to turn the call over to Gordon Sangster to review more details regarding our financial performance. Gordon?

Thanks, John. As John stated, we are reporting strong financial performance for the second quarter of 2016 with revenues reaching $16 million, up 166% over the prior year's second quarter. Biocatalyst R&D revenues totaled $12.1 million in the second quarter of 2016. This increase from the prior year second quarter reflected the recognition of revenue from the completion of the technology transfer phase of our CodeEvolver licensee agreement with GSK. This signaled through to the $7.5 million milestone payment for the third and final phase of the tech transfer as well as $2.5 million, an accelerated deferred revenue related to the early completion of the technology transfer phase. You may recall that we reported a $6 million upfront payment from GSK, in July 2014, upon entering this licensing agreement. And we have been recognizing this payment (inaudible) quarterly basis.

[Moving to] the successful early completion of the technology transfer based on our agreement, we are able to recognize the remainder of the upfront payments in the second quarter. Also included in our R&D revenues was the recognition of a milestone payment related to the successful completion of our collaboration with a major biopharmaceutical company that John discussed earlier.

Biocatalyst product sales in the second quarter of 2016 were $3.3 million, up 62% over the prior year second quarter. The year-over-year growth was primarily related to increased shipments of enzymes to Merck for the production of Januvia, as well as increased shipments to another major pharmaceutical company. We expect contributions from Merck at this higher level throughout 2016 and into next year.

Revenues from our revenue-sharing arrangement for argatroban with Exela in Q2 was $658,000. Gross margin as a percentage of total revenues from the second quarter of 2016 was 86%, which was up from 79% in the second quarter of 2015. This margin expansion reflected revenue mix including revenue recognized from the completion of our GSK technology transfer and biopharma R&D agreements.

R&D expenses were flat year-over-year at $5.1 million for the second quarter of 2016, but were down from $5.7 million for the first quarter of 2016 when we reported incremental growth in consulting fees related to the evaluation of new drug development targets. SG&A expenses for the second quarter of 2016 were $6.4 million, a 21% increase from the second quarter of 2015, but a 6% decrease from the first quarter of 2016. This year-over-year increase was a result of higher marketing and legal expenses.

We're reporting net income for the second quarter of 2016 of $2.2 million or $0.05 per diluted share, compared to the net loss for the second quarter of 2015 of $5.4 million or $0.14 per share. On a non-GAAP basis, net income from the second quarter of 2016 was $4.8 million or $0.12 per share compared with a non-GAAP net loss for the second quarter of 2015 of $2.7 million or $0.07 per share.

Turning to our year-to-date financial results. Total revenues for the first six months of 2016 were $24 million, up 87% over the prior year six month period and included $15.6 million in biocatalyst R&D revenue and $7 million in biocatalyst product revenue. Gross margin of 8% on total revenues for this first 6 months of 2016 is tracking with our guidance for the full year. R&D expenses for the first half of 2016 of $10.8 million increased modestly compared with first half of 2015.

SG&A expenses were $13.2 million for the first six months of 2016, up from $10.9 million for the first half of 2015, due mainly to higher legal expense and outside services. We reported a net loss for the first six months of 2016 of $4.7 million or $0.12 per share, which was a significant improvement from a net loss for the prior six months period of $10.9 million or $0.28 per share.

On a non-GAAP basis, we're reporting net income of $507,000 or $0.01 per share for the first six months of 2016, compared with a non-GAAP net loss of $5.6 million or $0.14 per share for the first half of 2015. Cash and cash equivalents as of June 30, 2016, were $22.4 million versus $23.3 million as of December 31, 2015. We expect to continue managing our cost related to new product development and litigation while maintaining a healthy cash balance.

And finally, we are reaffirming the 2016 financial guidance that we introduced on our 2015 fourth quarter call. We expect total revenues to be $46 million to $49 million, representing growth of 10% to 17% over 2015. As I mentioned, revenues for the first half of 2016 totaled $24 million. So we are tracking well against this expectation.

Our revenue guidance assumes growth in our core biocatalyst, R&D and product businesses. It also assumes the recognition of two milestone payments totaling $15.5 million related to our CodeEvolver license agreements with GSK and Merck. As we reported today, we recorded the first of these milestone payments of $7.5 million from GSK in the second quarter of 2016. We expect to earn the $8 million milestone payment from Merck later in the year.

As a reminder, our revenue expectations do not include a new CodeEvolver licensing agreement. And we are reaffirming our expectation for gross margin as a percentage of total revenues, again to be in the 80% to 85% range for 2016. We are tracking well against our guidance outlook with gross margin at 80% for the first half of 2016.

With that, I'd now like to turn the call back to John.

Thanks for that financial review, Gordon. We are excited about our performance on our licensing and collaborative agreements, and core businesses that are producing strong quarterly results. We are also executing on our strategy to capitalize on multiple high value applications afforded us through our world-leading CodeEvolver technology platform to enter into adjacent markets and to develop our own therapeutic product candidates. As Gordon mentioned, we are tracking well against our outlook for 2016 to be another year of strong growth, and we are making progress in driving Codexis towards sustained profitability.

With these comments, I'd like to open the call to questions. Operator?

(Operator Instructions) One moment for question.

While we're waiting for our first question, I'd like to mention that we will be participating in three investor conferences in September. We will present at the Rodman & Renshaw Healthcare Conference in New York on September 12 and at the KeyBanc Capital Markets Conference on the following day in Boston. We also will be at the Ladenburg Healthcare Conference in New York on September 26. A webcast of the Rodman & Renshaw presentation will be available on our website.

Okay, operator, we're ready for the first question.

And our first question comes on the line of Matt Tiampo with Craig-Hallum. Your line is now open.

Good afternoon, gentlemen, and congratulations on the strong quarterly results. I wanted to drill down a little bit and get some clarification on -- and thank you for providing the pipeline snapshot. It's very helpful. But I just want to make sure that we're, that I at least am understanding it correctly. First -- and this is sort of maybe pedantic, but on patented drugs in the Biocatalysts for Partners to Reduce Small Molecule column, those are patented drugs that are already commercially available where you'd be designing an enzyme to lower the cost. Is that the correct way of thinking about that column?

Yes, yes, exactly correct, Matt.

Okay, great. And then, second, to clarify. Under partner projects for other opportunities, and maybe I missed this in the prepared comments, but there are two Codexis-driven projects listed under developed novel biologics. I think we know about one with the biopharma customer that we've been discussing over the past 9 months to a year now. But am I missing something? What's the second? I don't know if that's ever --

Yes, Matt, the second project is smaller but a meaningful project with another key customer. However, we've never provided any specific details on that particular project.

Okay. And is it to develop a therapeutic, a potential therapeutic asset, using your technology?

It was -- yes, it was involved in discovering or developing novel therapeutic candidates, yes, novel biologic therapeutic candidates.

And is it ongoing? Or has that agreement ended?

That specific R&D service agreement has ended. But it could lead to follow on work. It has not yet done so.

Okay, great. And then, maybe, if you could comment a little bit on the potential for an additional license deal. I know there isn't one embedded in your guidance for 2016, but I think previously, you've mentioned your confidence in being able to ink a deal in 2017. Maybe just guessing -- but thanks.

Yes, sure. In the prepared remarks, we upheld our qualitative guidance that we expect to sign a new CodeEvolver platform licensing deal, once every 1 to 2 years. So the last deal that we inked was with Merck, and that was in August of 2015. So to be specific, we expect to ink a third deal before August of next year, and we have a list of clients that we're in discussions with, potential platform licensing deals and we're encouraged that we'll be able to close the third deal in that time frame.

Okay, great. Thanks, guys. I'll hop back in the queue.

And our next question comes from the line of Kevin DeGeeter with Ladenburg. Your line is now open.

This is actually [Jake Colby] on for Kevin. Thanks for the questions. I guess, first, since you have your in-house therapeutic pipeline targets optimize now, how do you see this business model evolving from here? And how do you drive these assets to a point where you can ultimately monetize them?

Sure. So to be clear, we have -- we've done consulting legwork in the beginning of this year, to help us to prioritize from universe, the potential therapeutic targets to go after diseases that we could provide a therapeutic beneficial product towards. So we just started with that list, that prioritized list. We have just begun to do brand-new R&D to create new therapeutic candidates. So that's the stage we're in. So we're in early discovery efforts using the CodeEvolver platform to create new therapeutic candidates at this stage; so, very early stage, outside of the work that we've done for PKU, which we've just given more detail on historically to our investors.

We see our CodeEvolver platform as a very cost-effective way to discover and do early optimization of new enzyme therapies. And in general, those are targeting rare orphan diseases. It's a similar size R&D team to create a novel therapeutic, before you go into actual animal testing, to what we do for every other client, for any small molecule work or partnership deal for the food industry, et cetera. It's a typical size team. It's a typical length of project, certainly less than a year in this discovery stage. So we see this as an extremely cost-effective platform to create early-stage drug candidates that ultimately, would be hopefully it prospects to go into animal trials and down the road, human trials.

So our premise is, is that CodeEvolver platform can create a stream of therapeutic candidates very cost effectively. And we're looking forward to generating that pipeline of therapeutic candidates, and advancing them and appraising you of our progress over time.

Okay. That's helpful. And then, so I guess with the PKU program, sort of, what are the next steps here? And I know the process, to kind of monetize, this has been a little longer than initially thought. And so, what are the challenges that you've learned from that, that you will use, for some of these new enzymes?

The PKU project is -- its intent is to develop an enzyme that would be orally dosed for the treatment of the PKU disease. So we've been doing extensive animal research on showing the efficacy of our drug candidate after it's being orally dosed to animals. So we've done significant work there. We've learned a lot. We're encouraged by the results of the animal testing that we've done to date. In parallel, we've done a significant amount of work to detail what it would take for Codexis to ultimately be able to do human trials. And that requires what is usually referred to as IND-enabling studies, which includes the ramp-up of efforts to improve the manufacturing routes, to do enhanced toxicological work on the drug candidate.

We are -- we have yet to fully indicate to our investors that we intend to do that work. We are finalizing our animal research chapter. And we're approaching the gate where we inform our investors about our intent or not to advance into doing full IND-enabling studies, that -- those IND-enabling studies are generally more expensive than in third-party spending than we've had to incur so far for the PKU project. So we've also indicated consistently, that as we move towards those human trials, with that -- with those IND-enabling studies, that we are very likely to perform a market test to see what the preclinical asset would be worth to a host of potential strategic partners.

So we're moving towards really telling you firmly that we're doing all of those activities, and we have yet to give that firm clarity at this point. Is that helpful?

Yes, yes. That is -- is that sort of a two half 2016 type of announcement, or some time in 2017?

Yes, I think, second half of this year or maybe early next year. It's in that range.

Okay. And then, one last one -- is there -- with the GSK agreement ending the tech transfer, is there an opportunity to bring some of the people that were working on the tech transfer into the in-house development for these new assets?

I'm not sure I quite understand.

We were constantly moving people and teams around to fit the priorities and time. So, yes, the people weren't devoted only exclusively to GSK. So they are moving between Merck and other projects, including the self-funded ones.

Okay, great. Thank you. And congrats on the quarter.

And our next question comes from the line of Steve Schwartz of First Analysis.

Good afternoon, John, Gordon. So, if I could have my moment with your new slide, and thank you for creating that. You have the line in there for products and processes in other industries, and that's two-in-one. I presume that's related to the food opportunities?

Today, those three projects in that row are all associated with the food industry. That's correct. Not necessary long-term, but today that's true.

Okay. All right, that sounds good. And you have historically earned, on past calls, talked about two projects. Is that right?

Historically, we've given visibility to two projects, including some additional color on the project with our second food industry company. But we've also informed that we started doing early R&D work for a second project, with our lead food ingredient company that's led to the commercial product that we've spoken to many times.

I see. Okay. And then the other question I had, the answer to this could be very complex. I'm certainly not looking for that. But just with respect to your revenue run rate, in the product category and in the R&D category, what is the turnover quarter-to-quarter in each of those revenue streams? In other words, is 50% of that revenue something that you see consistently across three, four quarters? If maybe 90% of the revenue turned over quarter-to-quarter, what makes me think about this question is your comment about the two project teams that you now have working for Merck, where I see that element, that revenue component, being consistent from quarter-to-quarter. So can you give us any color on the sort of thing, I would appreciate it?

Yes, let me try, and Gordon could add to my comments, I'm sure. And it's best to separate product revenues from R&D revenues. So on product revenues, we have a good bit of visibility. The products are being supplied in general to customers who are making drugs that are already on the market. So they are planning their supply chain, and we're a key part of their supply chain. So we have a good bit of visibility to product revenues. And it enabled us to give you pretty sharp outlook guidance at the beginning of the year to be able to grow our product revenues over 20% in 2016 versus 2015. And we have certainly, started to do that in the first half of 2016.

On the R&D revenue side, it's a little more complex. First and foremost, the milestone payments from our CodeEvolver licensing partners fall into that revenue category, and I think there we give a lot of very consistent, sharp guidance on when we expect and the magnitude of those milestone payments. The large majority of the remainder of the revenue in that category is associated with funded R&D work. And there, it's -- a project team will work on a specific protein engineering project, with a specific client, for a period of time. And when that project hits its end of funding or hit its milestones, the project ends at least in that chapter. As you hear, it comes back frequently; but in that chapter it ends. And then those teams move on to other projects.

We've found the best way to give you some feel for predictability of that revenue stream is a slide that we have been routinely providing in our corporate presentation. It shows you the four quarter moving average of our R&D service fees, excluding the lumpy tech transfer milestone payments. And I'd encourage you to look back at that slide. It shows a very healthy double-digit, relatively consistent growth of revenues on that basis over the last two to three years. I forget the exact time frame.

So hopefully, those comments are in line with what you're hoping to hear from us. And maybe Gordon has a comment or two, also? Steve, is that working, or --

Yes. No, that works. And with respect to product, so it sounds to me like in any given quarter, you could be booking revenue on a shipment that, that customer didn't buy that product the quarter before or the quarter after. Certainly, you knew it was coming in that quarter, maybe three quarters before, but it sounds to me like there's a lot of turnover in the source of the revenue from quarter-to-quarter in the product business.

Yes, I think that's broadly true, Steve. Certainly, I think Merck Januvia has ramped up this year, so we're seeing that was a good foundation for our quarterly revenue or product revenue growth. At the same time, we do get orders that fluctuate from quarter-to-quarter, depending on where the product is at the inventory levels of the different customers. So overall, we expected strong product revenue growth this year of 20% to 25% and we're actually exceeding that at the moment.

Yes, okay. That's very helpful. Thank you.

(Operator Instructions) Our next question comes from the line of Sean Lee with H.C. Wainwright.

Hi, John and Gordon. Thank you for taking my question. Just two quick clarifications, if you could help me. On your chart, the licensee driven projects, those are initiated by GSK and Merck after this technology transfer?

That is correct. And as we hope to continue to expand our CodeEvolver licensees, those partners' projects would fall in that column as well.

Great. Also, second point, I think -- I've been reading that you've been expanding your science teams so you can have more current projects ongoing. Could you provide us with an update on how many scientists or how many teams you have right now? Or what are your -- if you have any plans to expand them further?

Yes, right now, we have, I think, it's between -- I think it's about 54 people in our R&D ranks. And those 54 R&D scientists can manage, at any given point in time, somewhere between 12 and 15 different protein engineering projects concurrently. The 54, is up over the last 18 months, I'd say close to 10, five to 10 up, over the last 12 to 18 months.

And do you have plans to expand on that for the next year or so?

We see solid demand drivers for our R&D teams. And, really, this is the core capacity of our company. These protein engineering teams. And so it's likely that we'll continue to do some incremental hiring in the R&D ranks. And that's really just -- that would be an indication of strength of the outlook for doing protein engineering at a very positive driver for the company.

[Glad to be given a] clarification. Thanks, John.

And our next question comes from the line of Greg Bennett with Morgan Stanley. Your line is now open.

Thanks for taking my call. A follow-up on that question. Do you know how many scientists of that Merck or GSK who have working using CodeEvolver discoveries that you have put before? Do you have an idea as far -- is the greater the number, the better the success rate?

Yes. Really, I'm not at liberty to share their headcounts, but I will say that their staffing for their CodeEvolver labs are less than Codexis's and remarkably so but not trivial at all. They both have the ability to do multiple protein engineering projects in parallel. And they have a footprint that can handle more than they're currently staffing up for, so.

Okay. Second question. In the -- the impression I had earlier in the year was that a quicker ramp-up in revenues from food or this possible third industry, this new industry, just because time to market would be quicker, could you mention the growth in the food enzyme area? You mentioned the Januvia is a big factor this past quarter. But was there a mention of the growth rate in the food enzyme supply area?

For our commercial food enzyme, the business is solid. It hasn't been a near-term driver, but we have -- we continue to have very strong expectations for the growth of product revenues for that product for the foreseeable future.

So these are -- am I correct, John, that at least one of these products is actually on the shelf, that's on the market right now?

Yes. Our enzyme is used in a product that has been launched into the market, yes.

Okay. And there is the potential for two other -- are these [going to] test -- the one that's on the market right now a test market? Or is this something that makes [you monitor] --

We think it's been on the market long enough that it would not be considered in test marketing. It's been given a brand name, it's been marketed by a leading customer, a leading company. So in our estimation, it is commercial.

Okay. In the new industry that you're currently getting involved in, is this kind of the purpose of the enzyme is like cost savings measure for an industry process? Or is this an enzyme that will be used as, I guess, whatever you call to solve new problem or to solve a problem a different way?

I -- we haven't given a lot of detail on this target, yet, Greg. As you know, we're excited about it. And we've set an expectation to deliver something of meaningfulness here. We're doing R&D right now.

I would say that this enzyme, this potential set of enzymes, is targeting an industry that's already using enzymes. And we see changes in the needs for those enzymes pulling in the need for novel enzymes; enzymes that don't exist today. And that's our bread-and-butter. That's what CodeEvolver does. It creates enzymes that don't exist today. So we're excited to deliver some new enzyme solutions to an industry that has already uses enzymes.

All right. So you're going to be a competitor to somebody else out there that's providing an enzyme?

That is implicit in my statements, yes.

Okay. And then the lawsuit with your previous employee, I forget the name of the company, and are -- I mean are any of your customers continuing to buy from this previous employee's company? Or has that stopped and now that the revenues accruing back to you all?

So, to be very precise, this person that we filed lawsuit, that is now the founder of a Chinese competitor, never worked for Codexis directly. He worked at a company, a major company, who did collaborative work with Codexis at the time that he worked for that company. So he sat across the table from Codexis as a collaborative partner, but he hasn't -- he was never an employee of Codexis. And we saw evidence of his infringement of our enzyme technology. We took assertive action to protect our portfolio; where as Gordon detailed a little bit, we're in the middle of the litigation process. No real remarkable news to report on, just due process. The revenue impact from taking, filing the lawsuit against this Chinese competitor, has been and was expected to be negligible in the short run.

Okay. All right. Thank you very much.

Thank you. And I'm showing no further questions in the queue. I would now like to turn the call back over to John Nicols for any further remarks.

Okay, I'd like to close by thanking you for joining us this afternoon. We're very proud of our strong financial and operational performance for the first half of 2016, and we're excited about our prospects for the quarters and years to come. We look forward to providing a progress report on our next quarterly conference call. Have a great evening. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.