Codexis Inc (CDXS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Codexis Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Jody Cain. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's Codexis call to discuss 2017 second quarter financial results and business progress. Joining me from Codexis are: John Nicols, President and Chief Executive Officer; and Gordon Sangster, the company's Chief Financial Officer.

During this call, management will be making a number of forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the current beliefs and expectations of management as of August 9, 2017. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the company's control and that could materially affect actual results. For details about these risks, please see the earnings release that accompanies this call and the company's SEC filings. Codexis expressly disclaims any intent or obligation to update forward-looking statements, except as required by law.

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 excited to provide highlights from another quarter of solid financial performance, plus share commentary on the excellent progress we're making across the board in 2017 so far.

As in the first quarter, accelerating product sales growth continued to be a centerpiece of our progress in the second quarter. Our product sales more than doubled over the prior year quarter to $6.6 million; and year-to-date, we are 74% ahead of last year. And the outlook for the second half of 2017 looks even stronger as we expect product sales to exceed those of the first half.

Accordingly, we are raising our product sales guidance for 2017 by $4 million to between $25 million and $27 million. It's terrific to see the acceleration of product revenues unfold in 2017. Our new guidance range for product sales reflects step-out growth of 63% to 76% over those generated in 2016. Product gross margins for the quarter also continued to be strong at 43%. This is the second consecutive quarter in which gross margins on product sales exceeded 42%, well ahead of the 36% we delivered in 2016 and warranting a 2017 guidance increase on this key financial metric as well. Already just at the halfway point of 2017, we have nearly matched all of the product gross profit dollars we earned in 2016: $5.4 million in the first half of this year versus $5.6 million for all of last year.

In addition to accelerating growth at higher margins, our product sales continued to diversify across a growing set of customers in the second quarter. Sales of protein catalyst to Merck, plus Tate & Lyle, led the way, each generating more than $1 million. In addition, a diverse set of customers each bought significant amounts of enzymes during the second quarter. Of those, one global top 20 pharmaceutical customer purchased 2 different product batches for 2 of its drugs in clinical development. A leading generic drug customer bought routine product protein catalyst batches for the production -- commercial production of 2 of its generic drug products. Yet another global top 20 drug company bought a proprietary enzyme for one of its late-stage developmental drug candidates. And finally, we sold one of the largest product batches in our history into Japan to enable the manufacturing of the Phase III drug candidate of a leading Japanese pharmaceutical company.

We also delivered solid results in R&D revenues in the second quarter as well, which grew by over $1 million sequentially from the first quarter of 2017. R&D revenues in the quarter benefited from the first revenues generated from the new low-cost enzymatic process development partnering project we announced in March with Tate & Lyle. Excitingly, the results of that project to date have exceeded our expectation and Tate & Lyle's. Our R&D team is doing a great job unlocking the power of proteins for this important new food ingredient target for Tate & Lyle.

In addition, we are thrilled to have dedicated a Codexis R&D project team to focus on serving the biocatalysis development needs of yet another global top 20 pharmaceutical customer. Similar to the dedicated R&D teams we have had in place for Merck for years and continue through today, this leading pharma customer will now have one of Codexis' protein engineering teams working against their list of improved drug manufacturing process targets. This dedicated project team arrangement was initiated in the second quarter and is a significant step forward for us in developing intimacy with this great customer, where the partner, workflow efficiency benefits accrue, helping liberate more cost-saving potential at a faster pace than our typical project-by-project approach.

Before shifting gears to the exciting progress of our internal development programs, I'd like to highlight the growing customer diversification evident from a product and R&D revenues discourse. Five major pharmaceutical companies contributed significantly to our second quarter revenues, on top of our largest customers of Merck and Tate & Lyle. Our model continues to yield a broadening customer base across the world's leading pharmaceutical companies, and that bodes well for the future growth of our pipeline.

Next, I'd like to shift gears and provide you with an update on our exciting progress with CDX-6114, our orally dosable enzyme therapeutic candidate for phenylketonuria, or PKU, disease. Here, the Codexis team has finalized efficacy testing in our fourth preclinical model, demonstrating step changes in efficacy as we moved from lower-order animal trials to trials involving larger, more complex animals. Growing confidence from successes in these 4 preclinical models, coupled with reduced CDX-6114 dosage requirements, are being well received in our continued discussions with potential commercial partners, so was our acceleration of the time line to be able to start human trials. We now expect to start one -- Phase I trials in early 2018, 4 to 5 months ahead of our prior schedule. To do so, we will be spending more heavily on CDX-6114 in the second half of 2017 than previously forecast.

While this will affect our second half operating expenses and P&L, total program costs through Phase I completion are not impacted, but rather simply accelerated. And hence, we expect this year's extra spending will translate into commensurate savings in 2018.

With improved confidence from the preclinical trials, the lowering of dose levels to reduce the ultimate cost to administer to patients and earlier human data results, we are increasingly encouraged by the potential opportunities presented by our PKU program.

Our growing successes in applying our CodeEvolver technology into new uses outside of protein catalysis continue as well in molecular diagnostics, as our first product launch into that existing enzyme market is moving very nicely toward commercialization. Our initial offering is a patent pending DNA ligase engineered by CodeEvolver for rapid and efficient product formation at low DNA concentrations. Reliable detection of trace DNA targets is a core need for players in the rapidly developing next-generation sequencing in diagnostic markets, especially for the detection of cancerous DNA from blood samples, otherwise referred to as liquid biopsy. Validating the relevance of our DNA ligase enzyme for liquid biopsy, our internal testing has shown rapid, nearly complete conversion of low-concentration input DNA into sequencing-compatible product, significantly exceeding the performance of DNA ligase, as commonly used in next-gen sequencing workflows.

Given these encouraging results, we are now currently expanding the beta testing program to encompass a broad swath of new high-volume enzyme users in the molecular diagnostics field. Marketing, sales and distribution channels to support the ligase product launch are being developed in parallel with a target release date for the availability of commercial material around year-end. We also have begun CodeEvolver engineering efforts targeting additional enzymes that are needed for the molecular biology and diagnostics markets. We are very excited and pleased with our team's solid progress in this new arena.

That rounds out the business highlights from our growing pipeline. For those seeking additional information about our pipeline, we have posted to the Investors section of our company website today an update to our Codexis pipeline snapshot, with data current as of June 30, 2017. Note there is a modified, more informative format to this year's pipeline chart. And going forward, we are only focusing on projects directly controlled by Codexis.

More importantly than the format is the content. Our pipeline has grown by 7 projects or 27% over the last year. We're very proud of our solid second quarter and first half results and the strength we see for the remainder of the year. Accordingly, we are reaffirming our annual revenue guidance of between $50 million and $53 million for 2017. A significant part of that second half revenue step-up will come from an anticipated major new deal that we expect to announce in the near future. We look forward to announcing and detailing that for you.

In addition, we have clear visibility for delivering continued growth in both product sales and R&D revenues in the second half as well. 2017 is shaping up extremely well accordingly.

Before handing over to Gordon, let me take a moment to provide an update on our litigation against EnzymeWorks, which we initiated last year. It is with great pride that we can report that yesterday, Judge Orrick at the federal court in San Francisco, entered an order awarding summary judgment to Codexis on our 10 claims of patent infringement against EnzymeWorks. The stipulated order establishes EnzymeWorks uncontested infringement of 10 of our patents that covered dozens of engineered enzymes and also establishes the validity of these Codexis patents for purposes of the case. The summary judgment order is a key milestone in the lawsuit and eliminates the need to have a trial over EnzymeWorks infringement of our patents. There are still some disputes that remain to be resolved at a jury trial, like the willfulness of EnzymeWorks infringement, the personal liability of EnzymeWorks Founder, Alex Tao, for the infringement, the monetary damages owed to Codexis and EnzymeWorks misappropriation of Codexis' trade secrets. Still, Tuesday's order brings closure to an important issue: EnzymeWorks blatant infringement of Codexis' patents. We are grateful that the legal process vindicated our claims and has protected Codexis' innovations.

With those opening remarks, let me now turn the call over to Gordon to provide more details on the financials. Gordon?

Thanks, John. I'll share some highlights of our financial results, starting with the second quarter. Total revenues for the second quarter 2017 were $10.3 million. This compares with $16 million for the second quarter of 2016, which included $10 million on the recognition of revenues from GSK related to R&D milestones. Excluding these milestones in the prior period, revenues for the second quarter increased by 72%.

As John stated, product sales from 2017 second quarter increased by 101% from the prior year to $6.6 million, which reflected an increase in demand for our enzymes for both branded and generic products. Product sales were generated across a broad customer base that increased enzyme deliveries to Merck for Januvia and shipments to Tate & Lyle under the multiyear product agreement as major contributors. We expect our next product shipments to Tate & Lyle in the fourth quarter of this year.

R&D revenues for the quarter were $3.4 million. This compares with $12.1 million for the prior year, which included the recognition of a $7.5 million milestone payment for the completion of our CodeEvolver technology transfer to GSK and $2.5 million in deferred revenue related to the early completion of that transfer. These prior year events were partly offset in the 2017 second quarter by a significant increase in service revenues from a major pharmaceutical company as well as service revenues from Tate & Lyle under the R&D agreement, which we announced in March of this year.

Revenue from our revenue-sharing arrangement for the argatroban injectable drug with Exela was $356,000 in the second quarter of 2017. This is down from $658,000 in the second quarter of 2016, but roughly in line with first quarter of 2017. Gross margin on product sales for the second quarter of 2017 was 43% compared with 32% in the prior year period, with the improvement due to product mix.

Turning to operating expenses. R&D expenses were $6.3 million for the second quarter of 2017, up from $5.1 million in the prior year. The increase was primarily due to costs associated with higher outside service expenses, including increased costs associated with the production of our CDX-6114 enzyme to support its accelerated development as well as costs associated with higher headcount, partially offset by lower amortization expense.

SG&A expenses for the second quarter of 2017 increased slightly to $6.5 million from $6.4 million for the prior year. This increase was primarily due to higher headcount, partially offset by lower legal expenses, lower depreciation and lower costs related to outside services. The net loss for the second quarter of 2017 was $6.3 million or $0.13 per share. This compares with net income for the second quarter of 2016 of $2.2 million or $0.05 per diluted share, which again reflected the recognition of milestone payments and some deferred revenue of $10 million.

On a non-GAAP basis, adjusted net loss for the second period of 2017 was $4.3 million or $0.09 per share versus adjusted net income for the second quarter of 2016 of $4.8 million or $0.12 per diluted share.

Turning to our year-to-date financial results. Total revenues for the first 6 months of 2017 were $18.3 million compared with $24 million for the prior year. First half 2017 revenues included $5.4 million in R&D revenues and $12.2 million in product sales. Gross margin on product revenues was 44% for the first 6 months of 2017. R&D expenses for the first half of 2017 were $12.2 million, an increase primarily due to higher outside service fees and increased costs associated with higher headcount. SG&A expenses for the first 6 months of 2017 were flat for the prior year at $13.2 million. We reported net loss for the first 6 months of 2017 of $13.7 million or $0.31 per share compared with a net loss for the prior year first half of $4.7 million or $0.12 per share. On a non-GAAP basis, adjusted net loss for the first 6 months of 2017 was $9.8 million or $0.22 per share versus adjusted net income of $507,000 or $0.01 per diluted share in the prior year.

Cash and cash equivalents as of June 30, 2017, were $28.8 million versus $19.2 million as of December 31, 2016. Importantly, during the second quarter, we significantly improved the capital structure of the company. In April, we completed a public offering of common stock, raising net proceeds of $23.3 million. Also at the end of June, we signed an agreement for a bank debt facility and revolving line of credit for a total of $15 million.

Let me now turn to our financial guidance for 2017. We're affirming our expectation for total revenues for the year to be between $50 million and $53 million. This guidance assumes revenue from an anticipated major new deal that the company expects to announce in the near future. It also assumes significantly higher revenues in the fourth quarter compared with the third quarter. We are increasing our guidance for 2017 product sales to $25 million to $27 million, which represents an increase of 63% to 76% over 2016. As I mentioned earlier, product sales for the first half of 2017 were more than $12 million. We're also increasing our expectation for 2017 gross margin on product sales to be between 40% and 43%.

Lastly, we are updating our outlook for 2017 operating expenses, which are the combined total of R&D and SG&A. We expect operating expenses of approximately $15 million per quarter for the third and fourth quarters of 2017. This is an increase of about $2 million per quarter from the second quarter operating expenses and includes additional costs for the accelerated development of our PKU drug candidate to move this asset more rapidly towards a Phase I trial.

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

And thanks for that financial review, Gordon. As Gordon and I had detailed on this call, we're off to a great start across the board in the first half of 2017. Our leading-edge protein engineering platform technology, CodeEvolver, continues to create new proteins. Using proprietary machine learning algorithms to find that proverbial needle in the haystack, that novel protein sequence, from a nearly infinite selection that enables previously unachievable performance attributes quickly. In parallel, we're growing and choosing what proteins to target, in what applications and markets, with what value-creating possibilities, with which partners and what collaborative model better and better as well. This all adds up to our dynamic, thriving company with leverage to help us achieve and sustain profitability. These are exciting times here at Codexis with more to come.

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

(Operator Instructions)

While we're waiting for our first question, I'd like to alert you to our busy schedule, participating at upcoming investor conferences. We will be presenting at BioCentury's NewsMakers in the Biotech Industry Conference on September 8 in New York; at the Rodman & Renshaw's Annual Global Investment Conference being held September 11 and 12, also in New York; at KeyBanc's Basic Materials and Packaging Conference being held September 12 and 13 in Boston; and at Janney Montgomery Scott's Biostorage and Bioproduction Forum on September 19 in New York. Webcast of our presentations at the BioCentury and Rodman & Renshaw conferences will be posted to our Investor sections of www.codexis.com.

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

And our first question comes from the line of Brandon Couillard of Jefferies.

John, would love if you could perhaps elaborate a little bit on your progress on the molecular diagnostics front with some of the initial assays, how that's progressed relative to your expectations and what the portfolio looks like today. I think it's my understanding that you had maybe 4 enzymes on hand and you needed perhaps another 4 to get a more complete offering for the market. Just an update kind of on the proceeding of the initial rollout.

Sure. Sure, Brandon. So we -- a little bit different than what you said. We have developed our first enzyme for next-gen sequencing use. The dominant -- the enzymes that are used are 4. So our medium-term intention is to create all 4 of those enzymes, ideally at or better than existing enzyme performance for next-gen sequencing. We're really encouraged by the performance results in our internal testing from the first enzyme, the DNA ligase. We saw the DNA ligase as a weak link in our customers' ability to generate reliable results at low DNA concentrations, like liquid biopsy. We saw this enzyme particularly deficient from incumbent suppliers. That was our first target, and our testing so far is bearing out, that our enzyme will indeed enhance the reliability and the results of liquid biopsy testing using our enzymes. And we're out right now working with a growing swath of customers to prove that out in the customers' hands. We started -- in addition, we started work on additional enzymes to use our CodeEvolver to engineer improvements to the other 3 primary enzymes that are used in next-gen sequencing, and we look forward to providing more detail on that as we move through the rest of this year.

That's helpful. And then, Gordon, in terms of the outlook for the year, 2 questions. What would you say are the biggest -- the couple biggest drivers to the increased product revenue growth outlook? And then, secondly, despite the $4 million product revenue bump, what's the offset that keeps the total revenue the same for the year?

Yes. Let me do the first question first. We're seeing increased shipments to Merck, in particular, in the fourth quarter as well as the second shipment to Tate & Lyle. So that accounts for a large portion of the increase in product revenues in Q4 versus Q3. The offset to the product revenue increase would be in R&D fees to try and make sure that we maintain our guidance of $50 million to $53 million. So some of the deals, depending on the structure that we employ for revenue in these collaborations, can affect the timing of the revenue recognition. So that's basically the reason. The offset is R&D revenue.

(Operator Instructions) And our next question comes from Matt Hewitt of Craig-Hallum.

A couple questions from me, I guess. Following up on the next-gen sequencing opportunity, as you progress in that, is this an area that you would intend to go direct in? Or do you anticipate partnering with a larger life science tools distributor to get that product to market?

Yes, Matt. We have optionality there. We could partner, which could speed up our entry into these markets, but it would come at the expense of margins being shared with a partner. But we're also lining up to have the option to go direct, at least to the major users. And so we're holding that option open for now. And we think either prospect could be very significant for the company as we finish this year. Move into next year, we're very encouraged by the results. This is a fairly large target market for the company, and so we would -- we're well on track to deliver what we hope will be multimillion-dollar sales -- product sales into that market next year. And we see the margins in this market being significant and involve our typical product margins. So we're very excited about how the rollout is progressing for us.

That's great. And then shifting gears to the PKU opportunity. I think you mentioned that you're accelerating the R&D expense this year. That should translate into lower expense next year. At what point -- see, you get through Phase I, let's assume it's good data, then you start thinking about a Phase II. So from a modeling perspective, shouldn't we just maintain that elevated rate? Or do you anticipate a pause or maybe after Phase I, that's when you go on potentially sign a partnership agreement and some of that expense falls into your partner's hands?

I think it could be the latter. As we also said in the call, we are in discussions with multiple potential commercial partners, and those partnering discussions could translate into a partnering transaction that could be even before we initiate Phase I trials or during the Phase I trials. I think it's fairly low probability that Codexis itself for our first therapeutic asset would bear the cost and risk of the Phase II trial by itself. So the probability of us carrying it into Phase II is pretty low, and we're encouraged by these partnering discussions at this point in time. So that's -- so the comment about the timing of spending is really in relationship to the total cost of preclinical, plus the Phase I expenses. Our previous outlook would have been a little less preclinical expense and more Phase I expense next year. And now we're bringing some of that forward to enable us to see and get the results from early human trials sooner, which we think it's definitely a significant benefit for the program.

And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Nicols for any closing remarks.

Okay. Well, thanks, everybody for your time and interest in Codexis this afternoon. We look forward to providing a progress report on our next quarterly conference call. In the meantime, have a great evening. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone.