Codexis Inc (CDXS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Codexis, Inc. Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Ms. Jody Cain. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's call to discuss Codexis' 2017 fourth quarter and full year financial results and the company's business progress. A slide deck to accompany today's call is available on the Investors section of the Company's website at codexis.com. 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 the Private Securities Litigation Reform Act of 1995 to the extent the 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 March 8, 2018. 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 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. We've posted a brief slide presentation on the Investors section of our website to accompany today's call. I'm very proud to report on an exceptional finish to a highly productive year in 2017. Fourth quarter revenues reached nearly $22 million, more than double those for the fourth quarter of last year, fueled by a 78% increase in product sales and our first revenues recognized from our biotherapeutics partnership with Nestlé Health Science.

Gross margin on product sales were the highest for the year as well and exceeded 50% for the first time in recent history. On the bottom line, we generated nearly $1 million profit, despite heavy spending in the quarter for the development of our lead biotherapeutic enzyme.

Turning to Slide 3. Our full year financial results were equally impressive, as we achieved or exceeded all 2017 guidance metrics for the fourth consecutive year. 2017 revenues reached $50 million. This was an exceptional accomplishment by the Codexis team, especially considering that $22.5 million of revenue in 2016 was non-recurring from the CodeEvolver licensing deals with GSK and Merck. We delivered this by succeeding on multiple fronts in parallel.

First, a high point throughout 2017 was the strong showing by product revenues, which grew 74%, reaching the upper end of our upgraded guidance range. Gross margin on product sales of 46% exceeded our 2017 guidance. In addition, those product revenues were increasingly spread across a growing list of customers, highlighting the accelerating penetration of our protein catalyst into our target markets. In fact, in 2017, 13 products produced by 11 customers each used more than $500,000 of Codexis' protein catalysts. This is up from just 4 in 2016. Our activities to diversify beyond the pharmaceutical industry also paid off, where for the first time, more than 10% of company revenues were generated from the food industry.

In addition to widening our protein catalyst penetration across more clients, we deepened relationships into a growing set of those customers. In 2017, 4 customers secured dedicated protein engineering teams at Codexis, up from just 1 in 2016. Over a given year, a dedicated team can work across a stream of different targets, creating protein discovery efficiencies for the client, while securing predictable and reliable R&D service baseload revenues for Codexis. These arrangements are a clear sign of customer endorsement of the applicability of our CodeEvolver protein engineering across their portfolios. They enable more Codexis proteins to be created in a given time frame and can be a stepping stone for more expansive partnering arrangements with those clients going forward.

Regarding major deal-making, we proudly landed and began executive on 2 major new partnering arrangements in 2017. With Tate & Lyle, we are collaborating to create a new process for a food ingredient heretofore effectively uncommercializable, due to its high cost and limited availability. Since the collaboration commenced a year ago, CodeEvolver has engineered protein catalysts that enable a breakout low-cost process for Tate & Lyle ahead of schedule and exceeding the catalyst performance expectations established.

With continued progress at this pace, these protein catalysts can become amongst our very top product sales generators as well as our fastest to commercialize to date. That highlights the enhanced attractiveness for Codexis to develop novel protein products for other industries, faster commercialization time lines and larger peak revenue prospects for a given targeted development. Other industrial verticals beyond our growing success in food hold similar prospect for Codexis.

In this quest, our next target to offer a suite of improved enzymes for molecular diagnostic and biology applications got off to an excellent start in 2017. Here we engineered our first enzyme, a DNA ligase that demonstrates superior performance. 90-plus percent conversions achieved in less than 3 minutes for our enzyme compared with 50% or lower conversions requiring more than 10 minutes for competitive ligase. Our enzyme innovation was the subject of posted presentations at the Association for Molecular Pathology meeting last November and at the Precision Medicine World Conference in January. Last month I presented at the International Molecular Medicine Tri-Conference to a well-attended highly-engaged audience.

We continued gearing up for a successful penetration into this market, having recently welcomed former QUIAGEN executive, Shawn Clairmont, to take on a new role that brings her extensive expertise to lead the area's commercial activities for Codexis.

And finally, our partnering deal with Nestlé Health Science announced in October is arguably the best partnering deal we have put in place so far this decade. It established an immediate return on our investment in developing the orally administrable enzyme therapeutic candidate targeting patients with phenylketonuria or PKU disease. It also set the stage for CDX-6114's continued funding and provides very attractive potential future economic rewards to Codexis. Upfront payments and milestones can total up to $357 million plus additional tiered royalties up to low double digits on product sales.

Equally important, the deal establishes the credibility of Codexis in the huge biotherapeutics discovery and development arena, an area we've been ramping up our capabilities and investments over the recent past. In addition to the anchoring PKU deal, we now have 5 additional enzyme therapy candidates in discovery, 1 newly funded by Nestlé Health Science, 2 additional amino acid metabolism disorders of potential interest to Nestlé, and 2 more programs directed at the needs of lysosomal storage disease patients. These programs are increasingly validating CodeEvolver as an effective widely applicable drug discovery engine. In parallel, we have established effective drug development competencies, both internally as well as through orchestrated external partners.

We have successfully driven the preclinical development project management for CDX-6114, capstoned by having already produced enough on-spec cGMP quantities to carry the program's clinical drug substance needs well into 2019. Furthermore, we have convinced Nestlé Health Science that Codexis has the right talent and plans in place to manage our first human drug trials, which are set to begin in the next 3 to 4 months.

It is with great pride that I share all these substantial business accomplishments for Codexis in 2017, but humbly all the recognition is due to the roughly 120 remarkable employees that dedicate themselves to our great company. Recognized in 2017 as one of the best and brightest companies to work for in both the San Francisco Bay area as well as the nation as a whole by the National Association of Business Resources, it's an honor to serve as their CEO.

Let me now turn the call over to Gordon to provide more details on our financial results. Gordon?

Thanks, John. I'll now move on to some highlights of our financial results starting with the fourth quarter.

Turning to Slide 4. Total revenues for the fourth quarter of 2017 increased 118% to $21.7 million compared with the fourth quarter of 2016. As John mentioned, product sales for the 2017 fourth quarter increased by 78% from the prior year to $7.6 million, which reflected an increase in demand for our enzymes across a broad customer base.

R&D revenues for the quarter were up 132% to $12.4 million from the prior year and included a significant contribution from Nestlé Health Science related to the development of CDX-6114 as well as other projects.

Revenue from our revenue-sharing arrangement for the argatroban injectable drug with Exela was $1.7 million for the fourth quarter of 2017, up from $400,000 for the fourth quarter of '16. The increase was primarily due to $1.5 million in revenue for an exclusive license in connection with the termination of our revenue-sharing arrangement with Exela.

Gross margin on product sales for the fourth quarter of 2017 increased to 53% from 46% for the prior year, with the improvement due to product mix.

Turning to operating expenses. R&D expenses were $9.4 million for the fourth quarter of 2017, up from $6 million in the prior year. The increase was due primarily to higher outside service expenses related to CDX-6114 and to increased costs associated with higher headcount, partially offset by the absence of amortization of intangibles.

SG&A expenses for the fourth quarter of 2017 were $7.9 million compared to $7 million for the prior year. This increase was primarily due to higher legal fees and costs associated with higher headcount, partially offset by lower depreciation expense.

We reported net income for the fourth quarter of 2017 of $970,000 or $0.02 per share. This is a substantial improvement from a net loss for the fourth quarter of 2016 of $5.3 million or $0.13 per share. On a non-GAAP basis, adjusted net income for the fourth quarter of 2017 was $3.1 million or $0.06 per diluted share versus an adjusted net loss for the fourth quarter of 2016 of $2.8 million or $0.07 per share.

Turning to our full year financial results. Total revenues for 2017 were $50 million, which is a 2% increase over $48.8 million for 2016. Revenues for 2016 included recognition of $22.5 million from American GSK related to nonrecurring technology transfer R&D milestone payments and deferred revenue. Revenues for 2017 included $26.7 million in product sales, $20.7 million in R&D revenues and $2.6 million from the revenue-sharing arrangement with Exela.

Gross margin on product revenues was 46% for 2017, exceeding our 2017 guidance. R&D expenses for 2017 were $29.7 million and SG&A expense were $29 million.

We reported a net loss for 2017 of $23 million or $0.50 per share. And this compares with a net loss for 2016 of $8.6 million or $0.21 per share. On a non-GAAP basis, adjusted net loss for 2017 was $14.9 million or $0.32 per share versus adjusted net income of $1.7 million or $0.04 per diluted share in the prior year.

Cash and cash equivalents as of December 31, 2017, were $31.2 million, up from $19.2 million as of December 31, 2016.

Let me now introduce our financial guidance for 2018, which is highlighted in Slide 5. Our revenue guidance is based on the adoption of ASC 606 and a reconciliation of revenues will be available in our Q1 10-Q in early May. We expect total revenues for the year to be between $60 million and $63 million, a 20% to 26% increase over 2017. We expect approximately 45% of 2018 revenues to be reported in the first half of 2018 and 55% in the second half of the year. Our revenue guidance does not include another major transaction.

We expect product sales to range from $25 million to $28 million. We expect gross margin on product sales to be between 45% and 48%. Separately, we expect operating expenses such as the combination of R&D and SG&A expenses to be relatively unchanged from 2017 at around $60 million with expenses spread evenly throughout the year.

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

Thanks, Gordon. As you described, our outlook is for another highly productive year in 2018. Slide 6 outlines the strategic objectives that drive long-term growth, giving us confidence in achieving the 20-plus percent revenue growth cemented into our 2018 guidance.

Clearly, we will continue our relentless focus on our CodeEvolver protein engineering platform technology. Artificial intelligence computational competencies at the center of our ability to discover proteins that meet our customers' needs at an ever-increasing pace enable our unique product-creating synthetic biology machine. Branded as CodeEvolver, it has enabled all of our recent successes and will continue to be our core technological focus going forward.

Second, we will continue to accelerate penetration into pharmaceutical manufacturing with our growing portfolio of protein catalyst products. We are widening our impact across more customers and their processes and are deepening out technology within a growing list of elite partners who seize the importance of low-cost green manufacturing enabled by CodeEvolver. The list of drug substances that have a Codexis protein catalyst installed and commercialized continues to build momentum. Plus our pipeline of elite customers that secure our dedicated protein engineering teams is also poised to grow. And these arrangements set the stage for ultimately installing our CodeEvolver inside their R&D operations via a CodeEvolver platform license. From established CodeEvolver platform partnerships, 100% margin revenues from the back ends are expected to start their growth, generating low 7-digit revenues in the second half of 2018.

On top of growth generated from our leadership in protein catalysis for the pharmaceutical industry, we will layer a stack of growing revenues in an increasing set of newly penetrated industrial verticals. Sales into the food industry are expected to continue to outpace total sales growth, staying above 10% of corporate sales in 2018, led by our strong partnership with Tate & Lyle.

In addition, we anticipate meaningful sales revenues to be generated in the molecular diagnostics and molecular biology markets, led by our DNA ligase and followed by other new enzymes to be introduced. On top of these, we plan to announce the development of additional products and partnerships that position us to enter other profitable niches within the growing $5 billion industrial enzyme marketplace.

And finally, 2018 will follow the step-out successes of 2017, establishing ourselves increasingly as a significant biotherapeutics discovery and development player. We will drive the advancement of CDX-6114 in collaboration with Nestlé Health Science through the midyear start of human trials that would earn us a $4 million payment and towards Nestlé's option exercise trigger in early 2019. Also, we set a new attractive target of bringing at least 2 more drug candidates in our pipeline to partnerable status before the end of next year. Like CDX-6114, we expect these next partnerable drug assets to be discovered and patented by Codexis, proven effective in pivotal preclinical trials and driven toward or into early human trials by our teams.

We envision value creation from each of these partnerable assets approaching that of the Nestlé deal and obviously given that kind of success, we'll continue the biotherapeutics business buildup well beyond 2018. Our progress across these fronts will further strengthen Codexis as a dynamic thriving company. These are very exciting times here at Codexis with more to come, as we continue to accelerate, unlocking the power of proteins.

With these comments, I would like to open up the call for the questions. Operator?

(Operator Instructions)

While we're waiting for our first question, I'd like to alert you to our busy schedule of upcoming conferences. We will be presenting at the 38th Annual Cowen Healthcare Conference on March 12, next week, in Boston; the H.C. Wainwright Global Life Sciences Conference being held April 8 through 10 in Monaco, France; the KeyBanc Industrial and Basic Materials Conference being held May 29 through 31 in Boston; the 15th Craig-Hallum Institutional Investor Conference being held May 31 in Minneapolis; and the Jefferies Healthcare Conference being held June 5 through 8 in New York. Webcasts of our presentation at the Cowen and Jefferies healthcare conferences will be posted to the Investors sections of www.codexis.com.

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

Our first question comes from the line of Brandon Couillard with Jefferies.

John, certainly sounds like there's quite a lot happening in the pipeline. I mean as you look out to 2018 and pointing to product revenues that are roughly flat, what are the pluses and minuses in that outlook there? I would have thought that perhaps Tate ramping up would have been a somewhat bigger contributor in '18. What are the moving parts there?

So yes, so and specifically focused on product sales revenues, is that correct, Brandon?

That's right.

Yes, so there's some puts and takes. Some of the products that we produced last year will not repeat, and we don't expect them to repeat in 2018 just given the lumpy order pattern of some of our customers in the pharmaceutical industry. So a few moderate-sized products will not repeat and they'll be offset by growth in other products in 2018. So plus-minus, we're basically cementing in the very significant product revenues that we generated in 2017 and at quite similar gross margins.

Okay, thanks. And then with respect to the NGS business, nice to see the new director, Shawn Clairmont, coming on board. Can you sort of talk about the commercial plan, how you expect to go to market here, how you're thinking about direct versus distribution, and at a high level really how big you think this opportunity can be in 2 to 3 years and how you can help us sort of think about sizing the opportunity there?

Yes, sure. So right now, we have our DNA ligase in the hands of multiple significant potential customers, and they're all in various stages of testing our ligase and validating the kind of performance that we found in-house for our ligase. And we are getting a lot of interest and a lot of confirming discussions with these clients. As we build the credibility with these customers, we will be working to potentially enter into some sales arrangements with those customers. And with that kind of established market and technical presence, I think it gives us a fair amount of optionality on how to build the business from there. We could continue to offer enzymes as an independent market or to customers like these and others and/or we could establish partnership arrangements with players who have more channel presence, have more direct access, more direct relationships with a larger list of customers than Codexis could generate quickly. That would enable us potentially to penetrate more rapidly, albeit probably at the expense of some of our gross margins. So we're going to be looking at these options carefully as we move in -- through the beginning of this year and through 2018. Longer term, this is one of the best product opportunities that the company sees in front of itself. With these kinds of validations from beta testers, we could be in product sales mode very quickly. We've lined up the supply chain to be able to sell product as we speak. And the market for enzymes that are used in various genomic applications, whether it be next-gen sequencing or polymerase chain reaction or otherwise PCR applications, pretty remarkably -- pretty good size market for us to target. We estimate that it's in the range of $100 million of sales of enzymes today are being consumed in those markets. So for us to achieve penetration like we aspire to, clearly can put this into an 8-digit product sales at above average margins for Codexis in that 3-year time frame. And that's what we would hope to be able to accomplish.

That's helpful. And the last one, it doesn't sound like you've embedded any contribution from any incremental CodeEvolver deals. Yet it feels like there's still quite a bit of interest from third parties in the platform out there. Is that simply conservatism or are you de-prioritizing those types of transactions? And how have your conversations with other pharma partners sort of developed kind of over the last 6 months?

Yes, great questions. So clearly I highlighted a lot of detail that shows just how much we're widening our penetration into pharma manufacturing and deepening relationships. As we promoted the CodeEvolver platform license increasingly widely and held forums to educate the larger players in the pharmaceutical universe to have a CodeEvolver license like we did with GDK and Merck works. It's led to more and more adoption of our technology. It just hasn't led to the next CodeEvolver deal being right in front of us. So specific to your question, we did not embed another CodeEvolver deal in our guidance revenue of $60 million to $63 million.

Nonetheless, we're layering in kind of intermediate deals with these dedicated project teams. So an increasing number of customers are installing extended dedicated work with Codexis through these dedicated project teams. And these are really, like I said in the prepared remarks, really great stepping stones for potentially entering into the next CodeEvolver license.

So we're not de-prioritizing it. As we put in place these dedicated project teams, we're generating pretty remarkable economics from those dedicated project teams, and so they're-- but also economically kind of in the middle range of having 1 project between having a single project and having a CodeEvolver license in place. So it's working really nicely for us and we're quite pleased.

And our next question comes from the line of RK with H.C. Wainwright.

A couple of quick questions, it is really nice to see on the non-GAAP basis you showed net income in the fourth quarter. And going forward, how should we expect this and at what point or at what revenue run rate would we see a profitable year, at least on the operational level?

Yes, non-GAAP profitability in Q4 was excellent and we're looking -- if you take a simple split of our revenues, 45% first half, 55% second half and layer in the OpEx as fairly flat. Then the second half of 2018 we're headed toward profitability on a non-GAAP basis certainly. And we'd look to sustain that into 2019 as well, if possible.

Okay, that's fantastic. With the previous caller, you discussed a little bit on the NGS [plan]. What I want to explore with you is besides the DNA ligase that we are talking about, how in the long run, how do you want to take this business segment? Because this could be an interesting piece of your total company. And how do you want to take this business segment and run with it, say, 5 to 7 years to get in the long term? What's the current strategy and how could it actually evolve?

Yes, I think Brandon asked a similar question in his list of questions. And so obviously we take things one step at a time. We're incredibly focused on getting the technological validation with major players. And with that validation, which we expect, then we create an awareness and attention to the larger players in the industry that CodeEvolver protein engineering is going to make a significant difference in the use of especially next-gen sequencing for very challenging targets in molecular diagnostics, like liquid cancer biopsy, et cetera. And so really that's, full force, that's what we're focused on. That, in parallel with the commercialization of our products so that when customers want to purchase, we're ready to supply and generate revenues. And from there, I think it lends -- the position lends itself for a lot of optionality. And I think I described that we could partner with a deeper channel player and penetrate faster probably at some – at the expense of some margin, or we can retain independence and maximize margin and maybe grow the volume a little slower. And we're going to figure out what the right way to play is. And that could -- maybe just giving a little more color over what I said to Brandon, that could differ by different market segments. As we, for example, work in PCR, we may choose to partner versus NGS. We may be more inclined to be independent. Also as we look at academic or research applications, molecular biology applications, which are much more diffuse, that probably lends itself to a partnering model, all things equal, compared to larger molecular diagnostic applications. So that's how we're thinking about it. And you're right, this should and we expect will become a very significant part of our company's revenues over that 5- to 7-year time frame because it's already a large market consuming enzymes. We believe our enzymes are better than current incumbent enzymes. And the market itself is growing rapidly by all accounts, double-digit growth rates, as next-gen sequencing increasingly gets validated as a genomic tool. So hopefully, that gave you a little more color to these really good questions.

In your slide presentation, on your Slide 6, the first bullet which says you want to utilize the uniqueness of the CodeEvolver in acceleration of protein discoveries. I understand that could be a very overall kind of a statement where you obviously use it amongst the different segments, whether it is pharmaceutical manufacturing, [hormone] manufacturing or in the biotherapeutics business. Are you trying to do anything different from these 3 segments? That's question A. And question B is within these 3 segments, [obviously] in a pharma manufacturer, I should not call it as a mature segment at this point. But you have done quite a bit of work already in that segment. Of the other 2 at least, on the biotherapeutics business and the -- and your own -- on the enzyme business, what is -- where is it that you're putting a lot more energy now because you are trying to build these other 2 segments as well? So those -- if you can help us understand so we know in the long term where we should think about -- how we should think about Codexis.

Yes, so let me do the best I can, and it's a really good, insightful question. Probably the first place to start in giving you a feel is just what are we doing with our R&D, our protein engineering R&D capacity today? And that gives you a feel for the relative priorities of these 3 segments. Those being catalysts for pharmaceutical manufacturing and other industrial enzymes, like molecular or diagnostic enzymes, and third the biotherapeutic discovery and development. Today, still about half of our R&D teams are applied against pharmaceutical catalyst opportunities. As you point out, our reputation is much more ingrained there. Our opportunity set continues to grow. And so we continue to do a significant amount of protein engineering for pharmaceutical manufacturing operations accordingly. And so that's roughly half of our R&D capacity. Both of the other 2 areas however, have grown. Because if you rewind to 4 years ago, essentially all of our R&D capacity was being applied against just pharmaceutical manufacturing. So we've gone from 100% of R&D utilization for pharma manufacturing to 50%-ish. So that just shows the other 2 areas are growing faster for Codexis and that's now increasingly translating into top and bottom line results. Now in our food industry, sales is over 10% from essentially nothing 3 or 4 years ago. We're generating revenues from biotherapeutics through the Nestlé deal now. So I could see incrementally the other 2 segments growing faster than pharma manufacturing. But also we're expanding R&D capacity as well. The next comment, the final comment I'd make in this direction is we have also in parallel, we have increasingly been investing in our own protein R&D. These are proteins that we're creating that are not being funded by partners. And we've done that in the past to create proteins for the food project. Then we ultimately partnered that in the second project with Tate & Lyle, the one we announced in March last year. We've also been investing on our own account for the molecular diagnostic enzymes. And of course, we've been investing in our biotherapeutic pipeline. A somewhat larger majority of our self-investments in protein innovations are in the biotherapeutics area. And that's an indication of our growing confidence to be able to discover novel biotherapeutics. The value of a potential innovation for a protein as a therapeutic exceeds any other potential protein innovation that anybody can envision. So the prospect is greater and we like the way we monetize that protein innovation in biotherapeutics with the Nestlé partnering deal. So I think that leads us to do a little more investing in our own proteins for biotherapeutics than in the other categories.

And our next question comes from the line of Matt Hewitt with Craig-Hallum.

Congratulations on all the achievements in 2017. A few questions from me, first, just a point of clarification just so I make sure I understand. So you are working towards and believe that there's an opportunity for a CodeEvolver deal, but you are not factoring that into your guidance for '18? Is that correct?

That's exactly correct.

Okay, great. And then secondly, CodeEvolver deals versus dedicated teams internally, is there a difference either from a revenue standpoint and/or margin standpoint? I mean are you indifferent, depending upon how the client wants to or the customer or partner wants to bring it in or use your team? Does it matter from a margin perspective in particular?

Yes, there's tradeoffs. And indifference is when there are a lot of multiple project teams, we may become indifferent. Say, if we have 3 or more project teams, we may become indifferent to a CodeEvolver deal. But it takes that kind of order of dedicated project capacity that would put us in that place. So for the most part, we're trying to drive these large pharmaceuticals towards CodeEvolver deals. They all move at their own pace. We can influence that, but only to a certain amount. And fundamentally if we have a project team in place, we'll generate for each project team, we'll generate 7 digits plus. And you've come to appreciate what kind of revenues we generate from the technology transfer chapter of the CodeEvolver deal, it's greater than that. But it ultimately, we will drive those R&D projects to zero in a CodeEvolver license in general. So the dedicated project teams could last longer. They can sustain longer. Also on the back end of a dedicated project team, Codexis owns the protein that's created. On the back end of a CodeEvolver platform license, the licensee owns the protein that's created. And so that sets us up for a different kind of backend margin revenue outlook from a dedicated project team compared to a CodeEvolver license. So yes, there are tradeoffs. They're both really good approaches. We think that on average, more and more large pharmaceutical companies should drive towards a CodeEvolver platform license. And we're instigating that. But we're also patient and taking our time and generating good growing revenue in the meantime with a growing set of clients.

Great, thank you for kind of walking through the different scenarios there. Maybe 2 more from me. Number one, could you remind us what the next steps are on the Nestlé arrangement? Is it starting that Phase I trial or if there is something in between then for you to recognize that last lump sum of cash. And then maybe one for Gordon. Was there any impact or is there ability to quantify the impact from ASC 606 on your fiscal '18 revenue guidance?

Matt, let me take the first question on the runway for the Nestlé program on PKU. So Codexis is running the first Phase I trial. It will be in healthy patients. As I said in the prepared remarks, we expect to start that Phase I trial in around 3 to 4 months or right around the middle of this year. When we start that that would trigger a milestone payment from Nestlé Health Science to Codexis of $4 million. We'll run the healthy volunteer trial. That will take us essentially through this year and then we'll ultimately satisfy all the deliverables needed to call the option exercise by Nestlé. And as I said, that should happen somewhere in early 2019. And that option exercise, of course, is at their unilateral option. If they exercise the option that would trigger a $3 million payment to Codexis. And from that point forward, again roughly in 2019, early 2019, they would take over the continued development of CDX-6114 for PKU and the costs associated with that. And Codexis wouldn't bear any further development costs but would then just be set up for the stream of milestone payments and ultimately if successful and commercialized on the market, milestone payments plus tiered royalties.

Okay, let me jump in on the 606, Matt. So we'll have in our Q1 10-Q, we'll have a disclosure, a reconciliation between revenues under 605 versus 606. I can tell you that of all the contracts that we've assessed so far, we have lost some revenue. But we're still comfortable that our guidance for $60 million to $63 million is safe from any effects of 606 in the remaining contracts that we are still analyzing with our auditors and consultants. So if you can wait until Q1 10-Q, you'll see a full reconciliation, okay?

(Operator Instructions) And I'm showing we have a follow-up question from the line of Brandon Couillard with Jefferies.

Just a follow-up for Gordon with respect to the PKU asset. The $14 million, am I right in assuming that you're going to just amortize that ratably over the 18-month period? And then secondly, did I hear you right that Nestlé took the rights to a second compound and is there any milestone payments or payments otherwise related to that?

Okay, so the revenue recognition for the $14 million and the $4 million milestone that we expect in the first half of this year, we're recognizing that revenue on the proportional performance method. So it's not straight-lined over 18 months. So we will recognize revenues in line with the costs that we incur. So we've had to look at our costs for Q4 and then forecast them through the end of the Phase Ia trial. And then we are allocating revenue to cover those costs.

And second question is not exactly correct. So let me make sure it's clear. Nestlé, the deal with Nestlé, of course, built the option to CDX-6114 for PKU. It also put a team in motion to create a new compound in partnership with Nestlé. And the third was it gave-- we gave a right of first negotiation right to Nestlé for other amino acid metabolism deficiencies that we're working on in our pipeline. And so they'll have a right of first negotiation, no explicit economic terms of that right. Just as Codexis develops those amino acid metabolism drug candidates to a certain negotiated point that before we share those packages with other potential partners, we have to share that data package with Nestlé first to see if we can make a deal with them before we could open up other partners to look at that partnerable asset. So hopefully, that clarifies that for you.

Thank you. And I'm showing no further questions at this time. So with that, I'd like to turn the call back over to CEO, Mr. John Nicols, for closing remarks.

Okay. Thank you, everyone, for all your good questions. 2018 is stacking up to be a very productive year with growth in our core business, entry into high value new industries and continued success for Codexis in biotherapeutics. We look forward to sharing a stream of presentations at these upcoming conferences as well as our forward earnings calls each quarter throughout 2018. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.