Codexis Inc (CDXS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Codexis Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bruce Voss. Sir, you may begin.

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's Codexis call to discuss second quarter financial results and the company's business progress. Please note that Codexis has posted updated pipeline snapshot slides on the Investors section of its website to accompany today's call. 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 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 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 news 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, Bruce. Good afternoon, everyone, and thank you for joining us. I'm proud of our outstanding financial and operating performance with year-over-year revenue growth of 31% for the second quarter and 51% for the first half of 2018. Our growth has been driven by sharply higher R&D revenues with significant contributions from collaborators, Nestlé Health Science and Tate & Lyle.

Our R&D revenue streams are becoming an increasingly sustainable part of our business, as our customers recognize the value of the CodeEvolver protein engineering platform, and they established dedicated project teams at our Redwood City Facility to more rapidly advance their programs.

For example, I'm pleased to report that we've recently added a second dedicated project team for Nestlé Health Science to accelerate the development of the novel biotherapeutic program we initiated when we struck our platform partnering deal with them in the fourth quarter of last year. Combined with teams from Merck, Tate & Lyle and another major pharma company, we had 10 funded dedicated project teams working here at Codexis at various times during the second quarter.

Sales to the pharmaceutical industry continued to provide the majority of our $11-plus million of Performance Enzymes segment sales for the quarter. We did significant business with 2 new customers during the quarter; 1, a major U.S. pharmaceutical company; and the other, a leading Japanese pharma company, reinforcing success against our goal of widening our adoption across a larger set of customers and pharma manufacturing processes.

Our new partnership with Porton designed to extend our pharma reach even further, was announced in the quarter, and the joint teams have gotten off to a solid start in establishing new workflows and customer engagements in our first few months.

Other efforts to drive growth in Performance Enzymes continue to advance nicely as well. For the molecular diagnostics industry, we have staffed up our internal team to 3 industry veterans now. And we are lining up for the promotion of our DNA ligase and 1 other new high-performing enzyme at the Advanced Molecular Pathology or AMP conference in early November. We remain very confident in the development of this business, as we finish 2018 and move into 2019.

Excellent progress in those industries, but the major highlight for our Performance Enzymes segment comes from the food industry, where we are proud to announce the commercialization of new performance enzymes from our second partnership with Tate & Lyle. Here, the Codexis team engineered a suite of enzymes that enables Tate & Lyle's novel bioconversion route for manufacture of their new zero-calorie TASTEVA M stevia sweetener. Tate & Lyle describes its newest food ingredient as a Reb M stevia sweetener that starts from the stevia leaf, offering a clean sugar-like taste and consumer-friendly labeling.

TASTEVA M is expected to eliminate the bitter taste that has held back the widespread adoption of historical stevia sweeteners into food and beverage applications. Reb M has been known in the industry as a better-tasting type of stevia for some time. But its limited availability in the stevia leaf and its high cost to manufacture have been major challenges. Here is where Codexis came in.

Codexis conceived of a new process to make Reb M back in late 2016, one that could potentially break through cost barriers and one that could enable a clean pathway to patentability in a crowded intellectual property landscape. The problem back then was no enzyme could be found anywhere, in nature, in our libraries or from competition that could make even a minuscule yield of the contemplated process for Reb M from stevia leaf extract.

Less than 2 years later, Codexis teams created, patented and commercialized the needed suite of enzymes, several of which required over 100 amino acid sequence modifications that now enable the low-cost route for industry-leading partner Tate & Lyle's TASTEVA M commercial launch. Others have been working on alternative routes to Reb M for nearly a decade and most have yet to commercialize.

During the second quarter, we completed all pilot scale registration batches for the TASTEVA M enzymes, earning us significant R&D milestones. In July, we received a verbal commitment from the Generally Recognized as Safe, or GRAS, expert panel that our enzymes can be self-affirmed as GRAS. Great accomplishment by the teams at Codexis and Tate & Lyle and a model for both of us on how to best forge an industrial technology partnership. We look forward to sharing updates on our enzyme sales to TASTEVA M going forward, encouraged that it will develop into one of the largest products in our performance enzyme portfolio in the future.

Shifting gears to provide key updates in our Novel Biotherapeutic segment, we are similarly pleased to share positive progress for our recently initiated Phase Ia trial with the oral enzyme therapeutic candidate, CDX-6114, for patients with phenylketonuria or PKU disease. This first in human trial with CDX-6114 is evaluating the product safety in 4 cohorts of healthy volunteers, receiving increasing dose levels of CDX-6114. Initiation of this Phase Ia trial has triggered a $4 million milestone from Nestlé for Codexis that we expect to receive in the third quarter.

In the few weeks since beginning this trial, dosing of the first 3 cohorts has already been completed successfully, and we are now moving on to the fourth and final dosing level. We are on track to report top line results from this Phase Ia trial in the fourth quarter of this year.

Recall that the top line results can provide efficacy indications via biomarker measurements in healthy volunteers as well as a safety evaluation. Following the top line report, we expect that Nestlé Health Science's decision whether to exercise their option to take over the forward development of CDX-6114 will be known by early 2019.

Our efforts to advance other novel biotherapeutics in our pipeline are also encouraging. To that end, I'm delighted to welcome Dr. Hicham Alaoui in the newly created position of Vice President Biotherapeutics Research and Development. Dr. Alaoui brings valuable drug discovery skills and expertise in-house into Codexis.

The creation of this new position demonstrates the company's continued conviction to rapidly build out our biotherapeutics discovery and development capabilities and to follow our success in bringing CDX-6114 into early clinical trials. Hicham is directly responsible for advancing our biotherapeutics discovery pipeline and accelerating drug candidates towards the initiation of clinical trials.

Before turning over the call to Gordon, I'd like to review our updated Codexis 2018 pipeline snapshot posted today to our website, which provides a favorable report card on our substantial progress over the past year ending June 30, 2018. As you can see on Slide 2, we've added 10 projects to the pipeline during the past year. And on Slide 4, you can see that we have added 17 over the past 2 years. That's a 65% increase in 2 years' time.

Our strategy is to expand our pipeline across multiple industries and applications in parallel. And at this more detailed level, we are showing excellent pipeline momentum as well. For example, we have doubled the number of late clinical Phase II or III projects over the last 2 years to now stand at 14 Codexis performance enzyme installations.

Similarly, the number of performance enzyme projects in other industries has increased to 8, and equally important, now covers 3 different industrial verticals. The total number of performance enzymes that have commercialized increased from 8 to 9 in the past year, and noting the TASTEVA M discussion, increased by another 1 in July.

Finally, the number of projects that Codexis is self-funding has grown from 4, 2 years ago, to 11 currently. Led by the growth in our novel biotherapeutics pipeline investments, these programs have the prospect for generally larger economic rewards to Codexis than funded projects, increasing pipeline numbers with increasing diversity, advancing to commercialized sustained revenues. That summarizes our 2018 pipeline snapshot.

I'm proud to unveil all of this impressive growth and progress in our pipeline, which I attribute entirely to the dedication and talents of the Codexis' team. Let me turn the call over to Gordon to discuss the financial results now. Gordon?

Great. Thanks, John. Total revenues for the second quarter of 2018 were $13.5 million, up 31% versus Q2 of 2017, and it consisted of $11.2 million from the Performance Enzymes segment and $2.4 million from the Novel Biotherapeutics segment.

R&D revenues for Q2 were up 162% to $9.8 million, and included significant contributions from Nestlé Health Science related to the development of CDX-6114 and from Tate & Lyle related to the development of enzymes for their TASTEVA M stevia sweetener.

Product revenues for the second quarter of 2018 were $3.7 million versus $6.6 million in the prior year, with the increase primarily due to the timing of customer demand for enzymes. Gross margin on product revenues for the second quarter of 2018 was 30% compared with 43% a year ago, with the decrease due to product mix. We expect gross margin on product revenue to increase in the coming quarters.

Turning to operating expenses. R&D expenses were $7.4 million for the second quarter, including $4.7 million for the Performance Enzymes segment and $2.4 million for the Novel Biotherapeutics segment. The increase from $6.3 million a year ago was primarily due to costs associated with higher headcount and lab supplies. Lab supplies expense rose as a result of the increasing number of projects flowing through our R&D facility due to increased efficiencies.

SG&A expenses for the second quarter of 2018 were $7.4 million, which includes $1.7 million for the Performance Enzymes segment, $0.3 million for the Novel Biotherapeutics segment and $5.4 million in corporate overhead. The increase from $6.5 million last year was due primarily to higher recruiting costs and stock-based comp expense.

The net loss for the second quarter of 2018 was $3.7 million or $0.07 per share, which compares with a net loss for the second quarter of 2017 of $6.3 million or $0.13 per share. On a non-GAAP basis, the net loss for the second quarter of 2018 was $1 million or $0.02 per share versus a non-GAAP net loss a year ago of $4.3 million or $0.09 per share.

Turning to the year-to-date financial results. Total revenues for the first half of 2018 were $27.6 million, up 51% from the first half of 2017. R&D revenues rose 189% to $17.7 million, and consisted of $12 million from the Performance Enzymes segment and $5.7 million from the Novel Biotherapeutics segment.

Gross margin on product revenues for the first 6 months of 2018 was 35% versus 44% for the prior-year period. R&D expenses for the first half of 2018 were $14.5 million, and SG&A expenses were $15.1 million. Of note, total operating expenses for the year-to-date period were up 17% over the prior year, while our revenues increased 51%. We reported a net loss for the first half of 2018 of $8.4 million or $0.17 per share, which compares with a net loss for the first half of 2017 of $13.7 million or $0.31 per share.

On a non-GAAP basis, the net loss for the first 6 months of 2018 was $3.5 million or $0.07 per share versus a non-GAAP net loss a year ago of $9.8 million or $0.22 per share. Cash and cash equivalents as of June 30, 2018, were $53.6 million, up from $31.2 million, as of December 31, 2017. You may recall that in April of this year, we completed a public offering for net proceeds of $37.3 million.

Today, we are reaffirming our 2018 financial guidance, which we introduced on our conference call in March. We expect total revenues for 2018 to be between $60 million and $63 million, and this represents a 20% to 26% increase over 2017. We expect product revenue for 2018 to be between $25 million and $28 million. We expect gross margin on product revenues to be between 45% and 48%. And we expect operating expenses in 2018 to be relatively unchanged from 2017 at around $60 million, with expenses spread evenly relatively throughout the year.

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

Thanks, Gordon. We performed exceptionally well in the first half of 2018 and are tracking against our financial and strategic performance objectives for the year. Our substantially bolstered pipeline and our successful expansion into new verticals add to our confidence in our long-term growth prospects and success.

Our strategy begins with our relentless focus on our CodeEvolver protein engineering platform technology. Proprietary artificial intelligence competencies are at the center of our ability to discover proteins that meet our customers' need at an ever-accelerating pace.

Merged with other cutting-edge synthetic biology practiced by the dynamic scientific teams at Codexis, CodeEvolver is a unique platform that creates products and generates revenue. CodeEvolver is at the core of all of our recent successes and will continue to be the competitively advantaged scientific heart of the company going forward.

In our Performance Enzymes segment, we will continue to accelerate penetration of pharmaceutical manufacturing, with our growing portfolio of protein catalyst products. We are broadening our reach across more customers and processes, and deepening relationships with more of the world's leading pharmaceutical companies.

Industry recognition of the power of our CodeEvolver technology is evidenced by our growing pipeline. We are broadening our reach to a universe of smaller pharma and biotech companies through innovative partnerships, such as the one with Porton Pharma Solutions.

We will amplify our success in the Performance Enzymes segment by extending CodeEvolver to serve a growing list of industrial verticals beyond pharmaceuticals. Our successful expansion into new verticals is evidenced by 2 rapid and impactful commercializations for the food industry, in collaboration with Tate & Lyle.

In addition, we are just now starting to penetrate the growing $6 billion industrial enzyme marketplace, first, with a series of high-performing enzymes for molecular diagnostics and molecular biology applications. As well, multiple discussions are underway to develop enzymes for several other industrial markets.

And lastly, we are further establishing the significance of our novel biotherapeutics discovery and development segment. Our success in bringing CDX-6114 into clinical development and our expanded expertise in this area bode well for more biotherapeutics discovery and development programs to advance from this team over the medium and long term, increasingly validating CodeEvolver as a drug discovery engine.

Importantly, we have sufficient cash on our balance sheet to smartly advance our internal biotherapeutics programs as well as to capitalize on a wealth of additional opportunities for our proprietary CodeEvolver technology to further penetrate current markets and enable expansion into additional industrial verticals.

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

(Operator Instructions)

While we're waiting for our first question, I'd like to mention that we'll be presenting at 3 investor conferences held in New York City in September. These include: the H.C. Wainwright Global Investors Conference being held September 4 to 7, the CL King's 16th Annual Best Ideas Conference on September 13 and the Janney Montgomery Scott Health Care Conference on September 18.

Webcasts of our conference presentations will be posted to the Investors section of codexis.com. Okay, operator, we're ready for the first question.

Our first question comes from Brandon Couillard with Jefferies.

John, just first on the product revenues in the second quarter. Would you sort of elaborate on the timing comment, was that related to more than one customer? And then any chance you could share with us how many total customers you served in the second quarter there?

So it's more than one customer, but it's not anything that we didn't predict and project. And you have to be careful with how many customers because we do a lot of small-value orders for products out of our library, but they are pretty small. The number of customers who exceed $100,000 or couple hundred thousand dollars, I think Gordon is taking a look at it, is in the 5 to 8 range.

Got you. Then as far as the pipeline goes, clearly, nice growth in terms of absolute numbers. Any chance you could sort of help us force rank the different buckets in terms of the relative sizes of the revenue opportunities?

Yes, I think -- I wouldn't characterize any one category within pharma manufacturing as being potentially larger than any other. So there you've got developmental clinical projects or patented on-the-market projects or generic.

Probably the differentiation between those 3 is how quickly we could ultimately commercialize a product. Obviously, if we're working to create a protein catalyst for a customer's project that is in the clinic, we have all the clinical time -- development time that we have to wait in order for our project to ultimately be commercialized. Where if we're creating a protein catalyst for a drug that's already on the market or a drug that's generic, our ability to engineer the protein and then commercialize it can be quicker. That's -- so there's only minor differentiation, I'd say, within the Performance Enzymes for pharma manufacturing.

The other categories for Performance Enzymes for food, for molecular diagnostics, for other industrial sectors, these, I believe, will all have the prospect of being larger peak revenue opportunities, on average, than any protein catalyst project for the pharmaceutical arena. There we're targeting generally larger volume customer projects or we're addressing existing industrial enzyme markets where we can establish a market share against incumbent suppliers and incumbent competitors.

These are generally larger targets for us, and that's already become evident in the projects that we've successfully commercialized now for Tate & Lyle in the food industry. Both of those projects are larger, on average, than amongst the largest of our pharmaceutical projects.

And then, of course, Novel Biotherapeutics programs is a whole different dimension. So I think that's probably primarily addressing your question. Did that do a good job or did you have some follow-up with that?

No. Yes, no, that is helpful in terms of just framing things. I guess, lastly, with respect to Tate number 2, the product that's commercializing, is it safe to say that the product revenues from that project in 2019 will be equal to or greater than the R&D revenues from that this year? Is there some mismatch that we should sort of be aware of as we think about that big revenue opportunity moving to commercial scale next year?

I think that's hard to project. It may or may not be equal to the R&D revenues that we've generated this year because the R&D revenues have been significant for the company. So it'll be very much a function of how well TASTEVA M does in Tate & Lyle's markets.

And if it does well in its early adoption, we could see product revenues approach the kind of revenues that we've generated this year. But there's certainly a prospect that it will not penetrate their markets that quickly.

Our next question comes from Matt Hewitt with Craig-Hallum Capital.

This is Charlie Eidson on for Matt Hewitt. First, with the success that Tate & Lyle has in utilizing Codexis' performance enzymes, have you had any other discussions with other food players in the space?

Yes, sure, we're having discussions with other food companies in the space. For sure, there's interest in that market amongst other players.

Okay. I mean, are they looking at your success with commercializing TASTEVA M? And since you've been able to have that -- I mean, I guess, this is the announcement here, but -- never mind, never mind on that question.

One more. Pipeline, it looks like you had 50% growth from '16 to '17, 30% growth from '17 to '18. As we look towards '18 to '19, would -- obviously, law of small numbers, would 25% be a reasonable target?

It's a reasonable target. So we have -- we generated 7 growth -- we grew the pipeline by 7 in 2017 versus '16. We grew the pipeline by 10. I would hope and aspire that we continue to grow the pipeline by double-digit going forward, like we did this year.

Okay. And then has there been any progress towards a potential CodeEvolver deal with that third top 10 pharma customer that you mentioned? Has that secured a primary dedicated team?

Yes, we are certainly continuing to discuss the option of CodeEvolver platform licensing with multiple large pharmaceutical companies. And we continue to be optimistic in other major pharmaceutical companies endorsing a CodeEvolver license, like we've already put in place for Merck and GSK.

Our next question comes from Doug Schenkel with Cowen.

This is Ryan, on for Doug. You talked about the entry into a third industrial vertical within your pipeline. With the product now in your pipeline snapshot and partnered with a customer, are there any more details you can provide on who the partner is or what the industry vertical is?

No, not at this point. It did register on our pipeline. We're very rigorous about filling out our pipeline snapshot. And you'll notice in Slide 3 what it takes to register, and it's at least $100,000 of revenue generated and/or $100,000 of internal cost. It's not a huge bar.

But we have progressed project work in this space, as is evidenced by the pipeline. It is early days. We are encouraged not only by the program that's indicated on the pipeline snapshot, but other conversations with other players in other industrial verticals. So we just continue to be optimistic about how widely applicable CodeEvolver and protein engineering can be in various industrial sectors.

Got it. And maybe one on Porton, you talked about the early progress. Do you still expect to have some installations with Porton by year-end or early 2019? And can you say anything else about how that's -- that partnership is progressing so far?

Yes. The partnership is progressing well. We're doing some technology transfer with them. We're co-promoting the partnership, both the combined capabilities of Porton Pharma Solutions as a leading CDMO and Codexis as a leading protein engineering catalysis company. We've been co-promoting to customers together. So it's really kind of formative work that we've done in the first couple of months.

So the prospect of having a material installation this year is real. It's maybe a little optimistic at this early stage, but it's real, it's possible, it'll be great news for us. And as we move into 2019, I'm very confident that we'll be sharing some detailed results of real material impact for the company from that partnership.

Very helpful. And then maybe just one last quick one on gross margin. Can you provide a little bit more detail on product gross margin in the quarter and what makes you comfortable that you'll achieve the significant step-up implied in guidance for the second half?

Yes. I think that the product revenues were weighted towards Merck for Januvia's sitagliptin product line. So that tends to be a lower margin than our newer products. And we're seeing a significant ramp up, especially in Q4, of margins, based on the different -- the variety of customers that we've got and the higher margin component for those product lines.

Yes. I would add that we have a good bit of visibility, of course, into the remainder of the year as product sales to bolster our confidence and being inside the guidance range that we provided for both sales and margins.

Our next question comes from Drew Jones with Stephens.

Just one for me, just in trying to understand the opportunity on the food side of the world. The GRAS certification you guys received, is that specific to the enzymes you used in TASTEVA or is that a blessing, broadly speaking, of Codexis enzymes?

No, it's not broadly. We have to get GRAS affirmations for each individual enzyme. So in my prepared remarks today and I think even in the press release, we spoke about GRAS self-affirmation, and those were specifically for the enzymes for TASTEVA M.

So going forward, is there anything you can glean from this initial run through GRAS that can be used going forward, maybe condense that time line at all, or is it going to be pretty standard? What would be ...

Yes. I mean, it was -- actually, Drew, this is the second time that Codexis has received GRAS affirmations for its enzymes. The first commercial success we had with Tate & Lyle that led to the execution of a supply agreement that's in place today for them for another sweetener, we received GRAS affirmation for that back in 2016.

That was the first time we had ever gotten GRAS self-affirmation of any of our enzymes. So we applied a lot of learnings from that to the self-affirmation of these enzymes for TASTEVA M.

And actually, part of the reason we're -- part of the reason we were able to accelerate commercialization alongside Tate & Lyle was just how quickly we were able to get those GRAS self-affirmations this time. So we're very proud of the team's ability to have affected a very quick regulatory self-affirmation in this project for TASTEVA M. So thanks for the question.

(Operator Instructions) Our next question comes from Swayampakula Ramakanth with H.C. Wainwright.

Couple of quick questions. I would like to hear some additional commentary on your commercialization efforts on the DNA ligase and other enzymes in that arena. And also, I believe last quarter there was some commentary on some folks doing evaluations on your enzymes. So where is that process at this point?

Yes. RK, I didn't spend a lot of time in prepared remarks this time. Spent more time last quarter. But we're on an excellent track. I think we highlighted in the beginning of the year hiring an industry veteran from Cyagen.

She has brought in 2 field hands who have been working in the molecular diagnostics, molecular biology industry for a long time as well. They're out remotely working directly with customers on those commercialization trials, with a growing number of customers.

So just kind of reiterating what we said last quarter, we developed a DNA ligase with, what we see in our assessments in our shop, with remarkable improvements in conversion, in ligation conversion efficiency. We have gotten validation from customers indeed of our performance enhancements from our tests, and we're working with a growing number of clients with a stronger and bolstered team to drive those customers to their -- through their qualification processes and ultimately to commercial arrangements. So we continue to be very encouraged on the DNA ligase.

The second enzyme for molecular diagnostics, we haven't disclosed what that is yet. We're working on the patenting side. We're working on affirming the validation of its performance enhancements. And we're seeing encouraging results in our internal shop, and that encourages us to put the package forward in a very formal way at a very core conference, the AMP conference in early November.

So all measures, the market penetration plan is very much on track for penetration into that quite large market for us. So hopefully that helps you to get a little update on the color there.

Yes. No, that's very helpful actually. Then moving on to the PKU enzyme, the CDX-6114. It's great to see that the trial is underway, and potentially you're going to get some data by the end of this year.

Is there a milestone payment associated with release of the data for the Phase Ia? And also, when Nestlé decides to continue with the development of this product, would you get another milestone when they start their Phase II study with that product?

Sure. So I can answer the first question very explicitly. So with -- as we provide the top line report to Nestlé in the fourth quarter and a few other deliverables, we -- with that, we will call the option exercise on Nestlé Health Science. That will initiate a window of decision-making for Nestlé Health Sciences. And upon the closing of that window, they will have had to have made their decision, whether they are going to take over the further development or not.

If they decide to take over the continuing development of CDX-6114, then we would be eligible for a $3 million option exercise payment. And so that would be the next cash opportunity for Codexis from the Nestlé arrangement with regards CDX-6114.

After -- let's assume that they exercise their option and take over the continued development for CDX-6114, from that point forward, we will be set up for a stream of additional pre-commercial milestone opportunities. We have provided the amount of those milestone opportunities in aggregate.

Publicly, we've not disclosed publicly what triggers the various milestones through the approvals of CDX-6114. But yes, we will earn additional, assuming the drug does well, assuming Nestlé exercises the option, we are set up to earn additional milestone payments through clinical development.

Okay. And then, in that same business segment, last time, you were talking about additional pipeline products behind CDX-6114. Any color or any commentary there?

So I highlighted a very important hiring success for the company, bringing in a multi-decade discovery veteran in, Dr. Hicham Alaoui.

We didn't share any color on the other projects. Just to refresh. Several of those programs are similar in nature to the PKU program. They are also addressing rare inborn errors of amino acid metabolism diseases where we think we can provide an oral solution to those diseases as well.

Several of our pipeline projects are targeting that kind of disease issue, and several others are addressing lysosomal storage diseases. Those programs, in aggregate, are doing well. They're advancing. We're encouraged, that's why we're hiring, that's why we're stepping up our investments in these areas.

But the final comment, I said earlier in my prepared remarks was our partnering success with Nestlé, outside of CDX-6114, is doing quite well. And so you might recall that when we struck the deal with Nestlé in October of last year, not only did we set up the option arrangement on CDX-6114, we also entered into a strategic collaboration where we started to work -- put CodeEvolver to work and Codexis teams to work to create a new protein therapeutic that neither Codexis nor Nestlé Health Science had ever worked on before.

We started that work in October. We've been working on it ever since with one dedicated project team. And the prospect and the progress of that program has warranted an amped-up investment. And we now are -- we've established the second parallel team for that program, given how well the project is working. So we're increasingly encouraged by that partnering project that we're working with Nestlé Health Science accordingly.

Great. No, that's very helpful. So the last question from me is on Porton relationship. I know you gave some color there and you're stating that you're encouraged by the progress and potentially you could be announcing something, some kind of a project by the end of the year.

How is the economics of that relationship going to be looking like in the sense if you sign up an initiated project? Is there any color that you can provide us to, since it's a combined effort, who gets what and what kind of economics would Codexis recognize from that?

Yes. Sure. There's 2 potential economics from a successful project working with Porton and a pharmaceutical customer. First is if there is an enzyme available and we don't have to do protein engineering, it could lead to product sales through Porton from Codexis to that client.

And that would be a great development that they find a new installation that we hadn't found prior, which of course is the primary benefit for Codexis with the partnership is to use Porton's larger access of the world of pharma manufacturing to go find other places where protein catalysis can fit.

But oftentimes, products off of the shelf aren't ready to hit economic targets for clients. So that leads to the second economic opportunity is where the customer who Porton's working with sees the benefit of improving a protein, creating a new engineered protein catalyst, which would require some R&D time and service. So we could generate R&D revenues from the Porton arrangement by securing new engineered protein services opportunities that will ultimately we hope, of course, turn into product sales. So either or both of those.

And I'll just refresh, based on the deal with Porton, Porton's kind of on the hook to use those protein engineering services or pay us a minimum modest fee on an annual basis. So we're setup to generate that economic, regardless of whether engineering services are procured by the Porton partnership or not. So I think we're well set up to penetrate.

And really the hope for success from that deal is new installations, an acceleration of our pipeline, the growth of products in R&D services. That's what we're hoping for and driving for.

Our next question comes from Steve Schwartz with First Analysis.

Nice quarter. One question, possibly in 5 or 6 different parts. But John, in your prepared remarks, I think you referred to the company's self-funded therapeutics pipeline increasing from 4 projects to 11 projects, did I hear that correctly?

Somewhat. You heard that we went from 4 self-funded projects 2 years ago in the pipeline to 11 self-funded projects currently. But not all of them are therapeutic projects. If you look at the details of the pipeline chart, roughly 7 of the 11 are novel biotherapeutic discovery programs and 3 are in the molecular diagnostic and molecular biology arena and 1 is targeting a generic drug application.

Okay. And when you had 4, 2 years ago, I mean that was CDX-6114 and 3 others, right. How far back would you have to go that you had those 4? I mean, this goes -- the 4 goes back before Tate & Lyle, back when you guys were still writing about Shell in your filings, right, I mean, it goes way back.

No, not really. Actually -- so the 4, actually I have it in front of me, 2 of them were novel biotherapeutics and 1 of them -- 1 of those 2 was indeed CDX-6114, 1 was another therapeutics target. One was the food ingredient project.

And so if you go back to the early start of the enzymes for TASTEVA M, we started that project on our own account. It was so risky, frankly, because like I said in the prepared remarks, there was no enzyme that could do any of the conversion that we envisioned, not in that 0.000 yield. So we couldn't pitch that. Or if we could, people would -- we would lose a lot of backend benefit if we tried to get people to help us at that stage, so we did it on our own. And so that was project number 3.

And the fourth project was the early days of the DNA ligase. So honestly, those 4 projects are all quite new. When I joined the company in 2012, we weren't doing any of those. In 2013, we weren't doing any of those.

In 2014, we had just started the PKU projects. In 2014, I mean, this is all unaudited, but we had 1 self-funded project and that was CDX-6114. We hadn't envisioned the stevia project at that point in time, and we certainly hadn't started the molecular diagnostics. So that kind of takes you back a little farther and that's pretty accurate good memories of all the history, Steve.

Yes. Okay. And with that answer, so then the nature of my questioning here is changing a little bit because I remember in the early days, you basically worked on like the PKU project with spare time from your researchers, right. And certainly with these other 3 projects that made up the 4, the -- in those cases, you were being paid outright, I think, to work on those.

So this takes me to ultimately why I'm bringing this up. You've got the 11. You've hired some people. The good doctor has come in to lead the program. How much are you committing in capital to this, do you estimate, at this point, number one?

And then number two, how did you develop the additional 7? I mean, I think maybe the answer to that is obvious at this point, but just so I'm clear on where the new projects are coming from, especially where they fall into the therapeutics arena?

Yes. No, I think these are really good essence questions of the growth of Codexis over the last 3 or 4 years, right? Because 4 or 5 years ago, we couldn't afford to do self-funded work.

And you're right. In the beginning of PKU, we had some idle R&D capacity, and so we put them to work on our own target idea, right, very early days. And look at where it's come.

So really just following that track, look at how well CDX-6114 has done over those 3 or 4 years. We're now in the clinic. We've successfully dosed 3 of the 4 cohorts in a Phase Ia trial. So all that has emboldened us. And then we struck a deal, arguably one of the best, if not the best deal that the company struck in my chapter in this company, with Nestlé's Health Science division.

So all that emboldened us. This is a great pathway to create shareholder value, so we've continued to look into the world of therapeutic opportunities for applying CodeEvolver, and that's led to 6 of the 7 -- 6 other programs for Codexis.

Then really same thing, when we first started with the molecular diagnostics opportunity it was one idea. It was early, we didn't know the market that well. And we put a team to work and it's worked, right? The DNA ligase looks like a great product, and we're looking forward to showing real revenue and financial results from that investment.

And as we talk to customers, they tell us they need some other types of enzymes to be improved, just like what we're doing with DNA ligase. And so now we have a couple of other products that are going into that general sector. So there's 3.

So I mean that just gives you a feel. And as the company has grown its pipeline, it's generating more revenue. Sitagliptin with Merck is growing. We're cutting deals with Tate & Lyle and with Nestlé that they're bringing in revenue and cash. We've built the financial capacity to do more investments. So that was your first question.

So if you look at the pipeline, 11 out of 43 programs are self-funded. So it's -- in terms of capital, the primary capital input, the primary resource input is R&D capacity. So you could see -- okay, if you take away the self-sustaining revenue products, which are 9 now, 11 out of 23, so roughly 1/3 of the development projects are being self-funded and 2/3 are being funded by partners.

So of our R&D expense line, which of course is significant, roughly 1/3 of that is self-funded to create products that we have more ownership and control over. And we think that's a very healthy mix. And that mix has actually stayed roughly stable over the last couple of years.

Okay. And so as you sit down, and this will be my last question in this dialogue here, when you sit down at this point with Dr. Alaoui and you kind of set some goals, I mean, where do you see that 11 going?

I mean, I don't want to put it in the terms of a traditional specialty chemical company in terms of what's your capacity utilization and how much more can you do, but that's kind of along the lines I'm thinking, what -- do you get to 20 self-funded projects? Can you do 25? Is that -- I would imagine maybe it's highly variable depending on the types of projects. What do you think?

Yes. I mean, it's going to be a good ways before we ever get to numbers like that. And of course, it will be all presumed success, continued financial capacity for the corporation to try to accomplish our goal. It will [pick up] I guess, to that current level.

And also with the things that we're developing with (technical difficulty) although commercialized, like it should fit with Tate & Lyle, and so they'll shift from the self-funded to the sustained, call it, on the pipeline. And so there's an ebb and flow in and out as well, given the success.

So I think we're just really -- I mean, this is a very target-rich company. We have a lot of proteins that the corporation can imagine creating. And the more companies we talk to about what kind of protein, what those customers are doing and trying to do, the more we see fit for new proteins that people just haven't ever imagined could be created, and that's where CodeEvolver comes in.

You go just -- bragging again about the success with TASTEVA M. I mean, just reflect on what was in the prepared remarks. When we started that -- when we started thinking about this in 2016, we had an idea there was no enzyme that did anything, right? And then we needed to put our teams to work, and we had to make 100 amino acid modifications to make the enzyme work so that it would be low enough cost process for Tate & Lyle to say, yes, we can launch and potentially make money, right?

So it took that much R&D manipulation. Only CodeEvolver can do that. And so that's how it works around here. And we've got a lot of really exciting dialogues with companies very similar to that. Of course, many of them much earlier than what I just described with Tate & Lyle.

And when we see enough prospect and we do some business case analysis, we'll put a team to work on it because the cost of putting a team to work is not a big expense. We don't have to build factories. We're not adding a lot of CapEx to address these opportunities. We're deploying scientists in a sunk R&D laboratory to go after them. And that's the beauty of Codexis. And look what can come out in 2 years.

At this time, I'm showing no further questions. I'd like to turn the call back over to management for closing remarks.

Okay. Thanks, everybody, for all your good questions. I and the team are very proud of our strong performance for the first half of 2018, and we're excited about our outlook for a highly productive second half of the year, with growth in our core business and entering into additional high-value industries.

We look forward to providing ongoing progress updates to you and to speaking with you again when we report our third quarter results in November. In the meantime, everyone, please have a great day. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.