Codexis Inc (CDXS) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Codexis Inc. Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Jody Cain. Ma'am, you may begin.

This is Jody Cain with LHA. Thank you for participating in today's call to discuss Codexis' third quarter financial results and the company's business progress.

Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the company's Chief Financial Officer.

Earlier today, Codexis issued a new release announcing financial results for the third quarter of 2018. If you've not received this news release or you'd like to be added to the company's e-mail distribution list, please contact LHA in Los Angeles at (310) 691-7100 and speak with Kasha Chen.

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 November 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 view the earnings release that was accompanying today's 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 pleased to report another outstanding financial performance across-the-board for Codexis in the third quarter. Each of the Performance Enzymes and Novel Biotherapeutics segments delivered 20-plus-percent revenue growth year-over-year in the quarter, plus delivered positive double-digit percent segment incomes.

In parallel, corporate expenses declined by a double-digit percentage. All combined, we reported revenue growth of 70%, a breakeven non-GAAP income and added cash onto the balance sheet versus the end of last quarter.

The financials feature the highest quarterly product sales in years, gross margins on product sales greater than 50%, and R&D revenues nearly 3x higher than the prior year quarter. While sales to Merck, Tate & Lyle and Nestlé Health Science were the largest contributors, 9 other customers registered greater than $100,000 in sales, including 3 at $0.5 million plus.

It is extremely rewarding to see the company accelerating and expanding on so many fronts all at once.

A testament to the strength and skills of our team, Codexis is recently acknowledged for the second year in a row as one of the best and brightest companies in the San Francisco Bay Area to work for.

Let me highlight a few more successes over the past few months for our Performance Enzymes segment. We completed our first shipment of the 3 new Performance Enzymes to Tate & Lyle for the production of its zero-calorie TASTEVA M stevia sweeteners, make marking the successful transition of this program from R&D revenues to product sales. In their 6-month earnings call earlier today, Tate & Lyle's CEO chose to highlight TASTEVA M stevia sweetener as a leading new product launch for the company.

In addition to showcasing that their TASTEVA M launch was 12 months ahead of schedule, he added that early customer interest has been strong. It's early in the commercialization process for Tate & Lyle for this product, but we expect, over time, that enzyme sales for TASTEVA M will become one of the largest products in our Performance Enzyme portfolio.

We successfully concluded our first significant R&D project for another one of the world's global top 10 pharmaceutical companies. We are set up to grow with this new client going forward. Our Porton partnership efforts are gaining traction. We are successfully helping them set up their protein catalyst screening capabilities in China, and we are jointly visiting global customers and building new opportunities for each other.

One of our pharmaceutical customers has received a major company approved -- country approval for its new drug, which will be manufactured using a Codexis protein catalyst. A long-term supply agreement has been executed, commercializing what is expected to grow to a low single-digit $1 million per year peak product sale for Codexis in the future.

We welcomed Claus Ladefoged as our newest member of the Global Business Development team. Claus comes to Codexis with 27 years of experience at Novozymes, which stretches back to Novo Nordisk. We are excited about his ability to drive growth with our current customer base, and open new customer opportunities.

We sponsored filled 2 days of meetings at our booth, gave a keynote speech and held a workshop at the SynBioBeta 2018 Conference held last month in San Francisco. The event clearly placed Codexis in a prominent place at this leading global summit on synthetic biology. Our workshop presentation from R&D Senior Vice President, Dr. Jim Lalonde, detailing Codexis' tour de force in enzyme engineering, describing the design of the multi-enzyme catalyst system for Tate & Lyle's TASTEVA M stevia sweetener, attracted a standing room only crowd with folks outside the door having to be turned away.

Turning to molecular diagnostics. Last week, we held our first workshop and ran our first booth at the Association of Molecular Pathologist, or AMP Conference in San Antonio, Texas. The successful event demonstrated our growing impact within this important target sector for Codexis. Over the 3 days at AMP, we had over 30 private meetings with leaders from prospective customers and partners. At our well attended workshop, a scientist from a leading next-gen sequencing company that field-tested our Evo 4 DNA ligase presented their results comparing us against a leading incumbent supplier's enzyme.

In his speech, he publicly validated our findings of enhanced conversion of low input DNA and expanded genomics coverage, plus showcased other important performance benefits using our Evo 4 DNA ligase, on both liquid and solid biopsy samples. In addition, Codexis R&D leaders generated significant attention at AMP from our first data release for our second molecular diagnostics enzymes, a DNA polymerase that we have been developing for next-generation sequencing.

CodeEvolver is once again demonstrating its unique ability to create novel protein structures and performance advantages, this time for the most important and largest enzyme class for the molecular diagnostics arena. All in all, excellent progress for our Molecular Diagnostic Enzyme business launch, setting us up well as we move into 2019, and growing our confidence that this business will become among our top performers in the years to come.

Moving on to our Novel Biotherapeutics segment. We are proud to have announced earlier this morning the successful completion and top line results from our first-ever clinical trial with a Codexis-developed biotherapeutic candidate, CDX-6114, our orally administrable enzyme candidate for the potential treatment of phenylketonuria, or PKU.

I'd like to take a little extra time on the call now to explain the trial and its results for you. In summary, we conducted a Phase Ia double-blind placebo-controlled single-ascending dose study with CDX-6114 in 32 healthy volunteers, and all defined endpoints for this study were met. The primary endpoint for the study was the evaluation of safety and tolerability of CDX-6114. We are pleased to inform you that CDX-6114 was well tolerated at all dose levels in the study, and no serious adverse events or GI-related symptoms were observed in any of the volunteers.

In addition to assessing CDX-6114's safety and tolerability, there were 2 secondary endpoints for the Phase Ia study design. They were, respectively: the evaluation of the pharmacokinetics and the pharmacodynamics, commonly referred to as PK and PD, of single doses of CDX-6114. Pharmacokinetics involves the study of how a drug itself moves throughout the body. CDX-6114 is administered orally and is designed to treat PKU in the gastrointestinal tract or GI. Given the mode of administration and the size of the molecule, we did not expect significant systemic absorption, and this was confirmed by analyzing CDX-6114 levels in blood samples at various times post dosing. It is encouraging to report that as expected, there was no evidence of systemic exposure at any of the dose levels in the Phase Ia study.

The other secondary endpoint for the study was the assessment of the pharmacodynamics of single doses of CDX-6114. Pharmacodynamics involves the study of how the drug interacts with the body. CDX-6114 is designed to degrade phenylalanine, a prevalent amino acid, which PKU patients cannot metabolize effectively. In our Phase Ia study design, we set up to quantify the blood levels of cinnamic acid, a pharmacodynamic marker of CDX-6114's action on phenylalanine. Cinnamic acid does not exist naturally in human biology. So if it is observed, it indicates that CDX-6114 is converting phenylalanine in the GI tract. As phenylalanine metabolism is essential challenge in PKU patients, such results would correlate to the desired activity of CDX-6114.

The Phase Ia study was also set up to test for a dose-dependent response. In other words, whether varying CDX-6114 dose levels would translate to differential cinnamic acid production. We are pleased to inform you that we indeed saw a dose-dependent pharmacodynamic response, as measured by cinnamic acids level in the blood of CDX-6114-treated healthy volunteers.

In summary, we are encouraged by the outcomes of our Phase Ia study. CDX-6114 was well tolerated across the entire dose range, and valuable for pharmacology data was generated to support and guide the continuing clinical development of our lead biotherapeutic candidate. We have been sharing and discussing data with our counterparts at Nestlé Health Science. We expect their decision regarding option exercise on CDX-6114 to be made in the first quarter of 2019.

Before Gordon reviews our financial results, I want to thank William Blair Asset Management for their invitation to present at a special event they held last month in Chicago. This event focused on leading-edge trends in artificial intelligence and provided us a platform to discuss Codexis' artificial intelligence capabilities, core within our CodeEvolver protein engineering technology, to a room of highly engaged institutional investors. It's exciting to be recognized by top-tier institutional investor as being a leader in applying artificial intelligence in solving real-world challenges.

Let me now turn the call over to Gordon to discuss our financial results. Gordon?

Thanks, John. I will review the quarter and our year-to-date results, and then discuss financial guidance.

Total revenues for the third quarter of 2018 were $16.9 million, up 70% versus Q3 of 2017, with $12.1 million from the Performance Enzymes segment and $4.8 million from the Novel Biotherapeutics segment.

Total revenues for the third quarter of 2018 were relatively evenly split between R&D revenue and product revenue.

R&D revenue for Q3 was up 181% to $8.5 million, and included significant contributions from Nestlé Health Science related to the development of CDX-6114, and our second R&D project with them, as well as from Tate & Lyle for completing the final development work related to the Performance Enzymes for their TASTEVA M stevia sweetener.

In addition, we completed a project for a new top 10 pharmaceutical customer that John mentioned earlier.

Product revenue for the third quarter of 2018 was up 21% to $8.4 million, with the increase due to higher customer demand for enzymes.

Gross margin on product revenue for the third quarter of 2018 was 55%, up from 43% a year ago with the increase due to product mix.

Turning to operating expenses. R&D expenses were $7.9 million for the third quarter, including $4.8 million from the Performance Enzymes segment, and $2.9 million from the Novel Biotherapeutics segment. The decrease from $8.1 million a year ago was primarily due to lower outside services, partially offset by higher headcount and lab supplies.

Lab supplies expense rose as a result of the larger number of projects flowing through R&D.

SG&A expenses for the third quarter of 2018 were $7.3 million, which includes $1.9 million from the Performance Enzymes segment, $0.2 million from the Novel Biotherapeutics segment and $5.2 million in corporate overhead. The decrease from $8 million last year was due primarily to lower legal expense, partially offset by higher headcount.

The net loss for the third quarter of 2018 was $2 million or $0.04 per share, which compares with a net loss for the third quarter of 2017 of $10.2 million or $0.21 per share.

On a non-GAAP basis, the net income for the third quarter of 2018 was $91,000 or $0 per share, versus a non-GAAP net loss a year ago of $8.2 million or $0.17 per share.

Turning to our year-to-date financial results, total revenues for the first 9 months of 2018 were $44.5 million, up 57% for the first 9 months of 2017. Product revenue was $18.3 million and R&D revenues rose 186% to $26.2 million. These consisted of $15.7 million from the Performance Enzymes segment and $10.5 million from the Novel Biotherapeutics segment.

Gross margin on product revenue for the first 9 months of 2018 and 2017 remained unchanged at 44%.

R&D expenses and G&A expenses for the first 9 months of 2018 were both $22.5 million. Of note, total operating expenses for the year-to-date period were up 9% over the prior year, while our revenues increased by 57%.

We reported a net loss for the first 9 months of 2018 of $10.4 million or $0.20 per share, which compares with a net loss for the first 9 months of 2017 of $24 million or $0.53 per share.

On a non-GAAP basis, the net loss for the first 9 months of 2018 was $3.4 million or $0.07 per share, versus a non-GAAP net loss a year ago of $18 million or $0.39 per share.

Cash and cash equivalents as of September 30, 2018, were $54.2 million, up from $31.2 million, as of December 31, 2017.

In reviewing our 2018 financial guidance, we are narrowing our expected total revenues for 2018 to be between $60 million and $62 million. This represents a 20% to 24% increase over 2017.

We expect product revenue to be between $25 million and $27 million. We are raising our guidance of gross margin on product revenue to be between 47% and 50%, and we expect operating expenses in 2018 to be relatively unchanged from 2017 at around $60 million.

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

Thanks, Gordon. I'm exceptionally pleased with our financial performance through the first 9 months of 2018, and I'm proud of our team at Codexis in achieving a wide array of strategic performance objectives. We are building our core business and successfully entering new verticals, while controlling expenses, adding 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 competence 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 our 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 add to our growth in 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 commercial products 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. Also, multiple discussions are underway to develop enzymes for several other industrial markets.

And lastly, we are increasingly establishing Codexis to discover and develop Novel Biotherapeutics. Our success in meeting all defined endpoints in our CDX-6114 Phase Ia clinical trial, 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.

We have sufficient cash on our balance sheet to smartly advance our internal biotherapeutic 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 a growing list of verticals that can benefit from our performance protein engineering capabilities.

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 will be participating at the Craig-Hallum Alpha Select Conference and presenting at the Canaccord Medical Technologies & Diagnostics Forum. Both conferences are being held in New York City on November 15. A webcast of our presentation at the Canaccord conference will be posted to the Investors section of Codexis.com. For those of you heading to San Francisco for the annual JP Morgan Healthcare Conference in January, we will be holding one-on-one meetings during that conference.

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

Our first question comes from Doug Schenkel from Cowen.

This is Ryan on for Doug. May be first on the CDX-6114. Great to hear that all the safety endpoints were met, and that you saw a dose-dependent pharmacodynamic response. When should we expect to hear more data, including what the doses were in the 4 cohorts, full safety data and phenylalanine reduction data? And why didn't you include more details in your announcement today?

This project is now under a collaboration arrangement with Nestlé Health Science. So we're collaborating and we're working with Nestlé. The primary focus for Codexis now is to ensure that Nestlé has enough information as the key deliverables for them to call their option exercise. So until and thereafter, we chose not to share all of the specific details of the CDX-6114 Phase Ia study that we performed.

Okay. And then, excited to see the strong progress in the MDX and NGS enzymes. Can you talk a bit more about your go-to-market strategy and provide more details on the reception among potential customers at AMP? And when should we begin to expect meaningful revenues from these products?

Yes, good question also. So we expect to start generating meaningful revenues early next year. We haven't generated any meaningful revenues this year. We've been lining up quite successfully for a penetration and launch into this market, now with 2 products. For the first time, we showcased the second product, which actually is a more meaningfully important product for this space, a DNA polymerase. It's not quite finished in R&D yet, but early stage -- or the mid-stage results that were presented at AMP were extremely encouraging. To your first -- the first part of your question, our go-to-market strategy is to promote the ligase, which is ready for sales to customers, to users who can handle enzymes in bulk, that's a subset of the market. And we're focused primarily on companies that are developing laboratory techniques for either liquid or FFPE solid biopsy tumor analysis. And we're starting to validate not only from our own R&D but also with clients, like the gentleman who presented at the AMP workshop that we held. He validated more than just the specific targeted performance attributes. He also highlighted a few other attributes which are meaningful in the measurement of trace cancer DNA fragments in either liquid blood biopsy or in solid tumor biopsy. So our primary approach is to focus on getting validation from these end users, generating meaningful sales from these end users. This will enable us to build a much broader market awareness. Of course, we are potentially set up to consider partnering with major channel partners. We're starting to talk to some of these companies with some encouragement. And so all in all, that's our general approach for going to market in MDX, so hopefully, that was some good color and detail for you.

And our next question comes from Brandon Couillard from Jefferies.

John, just a -- at a high level, could you sort of talk about the CodeEvolver deal pipeline, whether you're still involved in any negotiations, conversations with any potential licensing partners? And with respect to Merck and GSK, give us an update as to your expectations for collecting some of those initial back-end royalties that you kind of talked about potentially coming in the back half of this year?

Sure, great. So we continue to highlight our widening and deepening penetration in the world of pharma manufacturing and benefits for our CodeEvolver and our protein catalyst that come from CodeEvolver, for improving the cost and efficiency of drug manufacturing has been the primary reason for making CodeEvolver deals, like we did -- have already done with Merck and GSK. So the more we expand the numbers of companies we work with, the more we set them up to see the value of CodeEvolver, delivering meaningful manufacturing improvements for their pipeline. And we're now spreading extremely well across the world, especially the larger pharmaceutical companies, and they're the companies that are most likely to be able to afford the price tag of a CodeEvolver platform license. At least one of them is advancing to potentially consider a CodeEvolver license, but we're -- we haven't landed one this year. It's been a little while since we have. But the prospects for a continuing flow, over time, of CodeEvolver platform licenses remains encouraging. With regards to the back-end revenue and economic opportunities that are developing under the platform licenses we already have with GSK and Merck, there's a significant small single-digit million milestone with one of those 2 parties that may close this year and may slip into next year. When we put together our guidance outlook, we did not assume it was in this year's numbers. It's just taking a little longer for that partner to reach the particular event that leads to that milestone payment being recognizable and accrued by Codexis yet, but it's early next year if it's not at the end of this year. So we'll update you on that as we close out our full year results in the beginning of next year.

One for Gordon. Can you just remind us how much in terms of rev rec is still left to be realized from the Nestlé PKU licensing deal in terms of the $14 million and then the $4 million? And any chance you could quantify the revenues from the paid shipment, and how you expect those to sort of ramp from the first initial, I guess, shipment to them for the sweetener?

Yes, sure. Nestlé, we have about $3 million left to recognize in Q4, split between the upfront recognition of the $14 million and the $4 million. And then separately, the strategic collaboration team that we've put in place with us. So roughly $3 million, Tate & Lyle, the shipment...

There is also some that we expect in the first quarter of next year.

Yes. I was thinking about it. And then Tate & Lyle, that shipment was several hundred thousand dollars and it's too early for us to forecast what that will be in '19. But based on their CEO's comments at his earnings call this morning, it sounds like there's growing strong demand for that product. So we'll be able to clarify that in our guidance that we'll give early next year.

One more for John, if I can sneak one in. On the PKU, the data that came out today, did it provide any insights as to efficacy indications via biomarker analysis by chance?

Yes, it did. We had the dose response pharmacodynamic results that we highlighted in this morning's press release, and I detailed a little bit more in the earnings -- in the prepared remarks. So indeed, yes. We saw, with increasing doses of CDX-6114, there was increasing production of the cinnamic acid biomarker, and that's an indication of the activity of CDX-6114.

(Operator Instructions) And our next question comes from RK from H.C. Wainwright.

A couple of quick questions. On the CDX-6114, I'm just trying to understand, at what point -- is there a time limit for Nestlé to decide on that option, on the calling option? And depending on how they decide, what will be your decision in terms of moving forward with this product?

Yes. We're encouraged by the results of the Phase Ia study. I can't speak on behalf of Nestlé, they're looking at the same data. So the completion of the Phase Ia study was one of the most important but not the only deliverable for us to provide to Nestlé before we can call the option exercise. And then they have a negotiated amount of time to decide. So our full focus, RK, is to get them to make that decision. And we'll see how they decide as we move into the first quarter. We have a good degree of clarity on the timeline to call the option. So we've given very sharp expectations in today's prepared remarks that we expect their decision will be made in the first quarter. So I think we'll just stay focused on our key path forward.

Perfect. And in terms of Performance Enzymes, it certainly seems to be running around pretty low. And what is the sustainability of that revenue line? And how should we think about this over the next couple of years?

Yes. The sustainability of growing the top line in Performance Enzymes continues to just move very well this year. I didn't break out the Nestlé, but it will grow on the whole company at 20-plus-percent. We'll share our guidance for next year in the beginning of next year. The opportunity pipeline continues to grow. Just to highlight a couple of examples, I highlighted that one of the projects that was in pre-commercial has commercialized. I gave you a sense, it's not a huge project, but it's a nice-sized product that will be covered by our patents and generating above average gross margins going forward. So that transitions from a -- an uncertain spotty revenue line to a more certain stable revenue line. That's really good. The new top 10 pharma company, we only did a modest amount of business with that company in the third quarter. That's lined up to grow going forward, we're excited there. We're going to start getting back-end revenues from one of our platform licenses as we close this year, beginning of next year, back to Brandon's question, where we haven't even started to show materiality of sales for molecular diagnostics. I continue to share our enthusiasm for that becoming a material business for the company and one of our leading businesses going forward. We haven't done a significant amount of real revenue generation outside of pharmaceuticals and biotherapeutics and molecular diagnostics and food yet. However, inside Codexis, we are talking to great companies in multiple other industries. So we have a high degree of confidence that those will translate into meaningful R&D projects and, ultimately, products in those spaces too. So to just kind of amplify the opportunity space is significant. Our ability to execute is getting better and better, both in terms of creating the protein with an ever-accelerating pace using CodeEvolver, and with our ability to commercially work with these great companies. So the machine is running really great and we're having a lot of fun here, as evidenced by the accolades about the culture of our company.

Glad to hear that. On the Novel Biotherapeutics, could you provide any update on the products, which are in the pipeline, I believe there are 2 behind what you already have now. Is there -- if you're not going to be providing an update today, when should we hear something on the development of these molecules?

So yes. Good question, RK. So there's, actually, in our corporate deck, we show that we're working on 5 additional biotherapeutic discovery programs currently, all in parallel, in addition to the PKU project, which was the highlight of today's call. One of those 5 is in partnership with Nestlé Health Science. It's being funded by Nestlé Health Science. And as we reported last quarter, that project is encouraging enough to have gotten Nestlé to increase the funding level for the discovery and development of that particular biotherapeutic. The other 4, we're self-funding. Two of them are focused on other potentially orally administrable biotherapeutics or enzyme therapeutics for other amino acid deficiency diseases. And the final 2 are targeting lysosomal storage disease conditions that can be improved, we think, with CodeEvolver. So we're working on 5. That gives you some of the details behind some of those 5. We've staffed up in this area. We've brought in a veteran, who formerly worked at Genentech in the recent past within the last 6 months. He's hitting the ground running. We're advancing the pipeline. We're excited by the pipeline. And as we move into next year, we'll be providing more color and clarity on that pipeline.

And then the last question is related to stevia, and in general, BD associated with food. Obviously, with the success of the molecule that you engineered to help out Tate & Lyle, accompanying the comments that we heard from Tate & Lyle's CEO this morning. Obviously, things are going in the right direction there. But how has that made potential partners within the food business wanting to do more work with you, folks, especially with the real success that you made regarding the stevia model.

Yes. The food industry continues to be a leading target for Codexis in our CodeEvolver technology. We're encouraged and expect growth of new projects in the food and nutrition space, both with new clientele and with Tate & Lyle, we hope and we're working on. So it continues to be a great space. The work that we did to create the multienzyme system for the production process, the novel production process for the TASTEVA M launch for Tate & Lyle was remarkable. And I highlighted that we presented some of the details at the SynBioBeta conference, and it was standing room only, it's remarkable. And scientists and synthetic biologists and customers are taking note.

Do you think we'll hear something about this, about another deal in that business segment this year? Or most probably, it's something to be talked about for 2019?

Yes. I think, if it's this year, it would be very small. But we certainly would hope to build some color on additional projects in 2019, and certainly thereafter as well.

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

Hopping in here late, so I apologize if you've answered any of this. But tagging on to part of one of these prior questions here. Regarding your internally developed biotherapeutics. I think you had previously commented that you're hoping to have at least 1 or 2 of those to partnerable status by the end of next year. Is that still the plan? And any color around that would be helpful.

Yes, good refresher, Matt. Yes, indeed, that is still the plan. We are still very encouraged by hitting that kind of milestone in 2019. And so we just haven't provided much more color on how we're going to do that just yet.

Okay, fair enough. And then regarding the Proton relationship that was announced in April, is there opportunity for you with other CDMOs to create new relationships to broaden your opportunity set?

There are, of course. It's a pretty wide universe of good CDMO companies. And I think Porton is one of the better ones, for sure. We did provide some special arrangements in the partnership structure with Porton. So some of those may not be available if we work with other CDMOs. Oftentimes, our pharmaceutical customers will tell us to deliver our product, our catalyst to a CDMO for a manufacturer on the big pharma company's behalf. But the industries are closely aligned. I think the way we've structured the deal with Porton is uniquely set up to motivate them to get our technology in places it's never been before. So at the very least, we're going to give this partnership a really good run. And so far so good, it's a great team, it's a great leadership. It's one of the most progressive Chinese companies I've ever dealt with in my 30-year career, so I'm really excited, and these guys are working hard and we're starting to make a difference with the promotion of the partnership in the marketplace, both together and independently. So it feels good. So our -- that's a long winded answer to say so our primary focus to extend beyond our historical stronghold in big pharma is to work with Porton, and we're quite encouraged that it's going to pay off for us and them.

Okay, understood. And then maybe one last one for me. As you continue to work on your internally developed pipeline, how should we be thinking about your R&D dollars? Like is there a target split between what you're investing in that pipeline, versus what's going towards your Performance Enzymes, or some of the other opportunities? Or is it purely based upon internal goals that you have for getting a project done or a new project started? Any color along those lines would be appreciated.

Yes, Matt, good. So generally, we're holding a strategic choice about how much R&D to apply against a growing biotherapeutics pipeline. Because of course, that's internally funded. The balance sheet and the P&L have to bear that cost until several years out, we can make a partnering deal. So we're careful about how much of our R&D allocation we put in that the direction. So it's been in the range of 25% of our R&D team capacity has been working on the biotherapeutics. Of course, that's up from 0 just 4 years ago, and up a lot from when we were just looking at PKU. So incrementally, that's been growing, but so has the R&D capacity for the Performance Enzymes segment. So the R&D headcount has been growing modestly. The productivity of CodeEvolver to create proteins in a given month, with a given person has gone up. So overall, we're growing the amount of protein engineering capacity in both directions, and we're holding kind of a careful line to balance success against a fixed target biotherapeutics pipeline against a large list of Performance Enzymes opportunities for R&D as well.

(Operator Instructions) And our next question comes from Steve Schwartz from First Analysis.

Sorry, I was on and off the call, and then I got dropped at my first *1. So if you've answered this already, I apologize. But of the 12 customers that are at the $100,000 and above threshold, certainly, we know where 3 of those lie, what industries. Can you talk a little bit about the other 9? And then John, I almost ask this question, I think, every quarterly call. But what's the sustainability then of the revenue from those other 9 outside of the 3 that we're already very familiar with?

Outside of the 3 that you're very familiar with, they're all pharmaceutical companies. And so there hasn't been -- well, there wasn't in the third quarter any material revenues, $100,000 or more in any other industrial segment at that time. We've already been clear that so far, this year, we haven't generated material revenues in molecular diagnostics. So we certainly hope to layer that industry and a few other industries into that kind of list. But it's all pharmaceutical customers. So really, if you take the top 12, Nestlé is tied to the therapeutics. So 11 of them are Performance Enzymes, and one of them is food and 10 are pharmaceuticals. I kind of went into a long answer for RK about sustainability of revenues. But it just comes from the company addressing and growing in multiple ways. So these 12, they're -- some of them are $0.5 million or more, some of them are based on products. So they've continued installation of those products. The approval of their drugs using those products, those set up for milestones for sustainability. The smaller ones, the less than $0.5 million are probably mostly R&D oriented, so we're working on creating a new protein for a new process. So the catalyst for that to grow is the -- their drug advances from, for example, Phase I to Phase II, and they need more product -- they need to make more product for that clinical trial, and we'll sell some more product. Or we advance into another chapter of R&D. But ultimately, the sustainability comes from when the proteins that we try to create with CodeEvolver are commercialized. And so the batting average just continues to be good. The pipeline continues to accelerate. We've never -- I probably have to check the detail, but I don't think we have ever had the quarter when we had 12 companies contributing over $100,000. It was really remarkable to see how the revenue is spreading. So that's another source of sustainability is by bringing in new customers with new targets next quarter versus this one. And so those are all dynamics that are frankly all moving in the right direction for us to sustain top line growth in the Performance Enzymes segment.

And I am showing no further questions from the phone lines. I'd now like to turn the conference back over to John Nicols for any closing remarks.

Thanks, everybody, for your good questions. We're very proud of the strong performance of the first 9 months of 2018 and excited about our future prospects, with growth coming from our core business and entering into additional high-value industries. We look forward to providing ongoing progress updates to you. In the meantime, please, everyone, have a great day.

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.