May 7, 2013
Executives
Doug Sheehy – SVP & General Counsel John Nicols - President & CEO David O’Toole - SVP & CFO
Analysts
Edward Westlake – Credit Suisse Securities (USA) LLC Weston Twigg – Pacific Crest Securities Enrique Akashi – Piper Jaffray
Operator
Welcome to Codexis’ First Quarter Earnings Conference Call. This call is being webcast live on the Investors section of Codexis’ website at codexis.com.
This call is the property of Codexis and any recording, reproduction or transmission of this call without expressed written consent of Codexis is strictly prohibited. As a reminder, today’s call is being recorded.
You may listen to a webcast replay of this call by going to the Investors section of Codexis’ website. I would now like to turn the conference call over to Mr.
Doug Sheehy, Codexis’ Senior Vice President and General Counsel. Please proceed, sir.
Thank you.
Doug Sheehy
Thank you and good afternoon. Today after the market close, we announced our fiscal first quarter financial results.
The press release is available on the Investors page of our website at codexis.com. With me today are John Nicols, our President and CEO; and David O’Toole, our Senior Vice President and CFO.
During the course of today’s call, management will make a number of forward-looking statements. These forward-looking statements include our forecast for 2013 pharmaceutical revenue, pharma product revenue, product gross margins, total gross margins and total cash burn.
The ability of our existing AMRI and Strem arrangements along with future new partnerships to generate new development projects for Codexis, our ability to expand our pharma pipeline, our ability to continue to improve our CodeXyme cellulase enzymes, startup timelines for the CodeXol demo plant, the ability of Codexis’ new corporate strategy to achieve long term profitable growth by growing our pharma business and expanding it to new markets such as enzyme therapeutics, agrochemicals, cosmetics and food additives, our ability to secure funding partners for CodeXyme cellulase enzymes and CodeXol detergent alcohols. These forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ significantly from those projected.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Please refer to our annual report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2013 for some of the important risk factors that could cause actual results to differ materially from the forward-looking statements made on this call.
Except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call. Now, I’d like to turn the call over to John.
John Nicols
Good afternoon and thank you for joining us. The first quarter was a very productive to 2013 for Codexis.
As we continue to grow our pharmaceutical business with the achievement of both significant top line and margin growth and the formation of new partnerships to fuel future growth. Concurrently, we continued to advance our technology and partnering initiatives in our fuels and chemicals programs all further reducing our operational expenses and cash burn.
In pharma we achieved over 30% in product sales in the first quarter over the fourth quarter, while our product gross margin hit 38%. We are very pleased with these results which were driven by some of our long term pharma partnerships beginning to significantly pay off.
In particular, we began to recognize revenues from commercial enzyme shipments in the first quarter through our partnership with Merck. As background, we formed a long term collaboration to develop enzymes for use in Merck’s pharmaceutical manufacturing in 2007, which has since been extended to 2015.
Last year Merck received FDA approval for the new process using our enzymes for manufacturing sitagliptin. Our pharma results in the first quarter were also bolstered by our longstanding collaboration with the specialty pharma company Exela Pharma Sciences and its partnership with Hikma Pharmaceutical for the development of argatroban injection.
As a result of FDA approval for argatroban in 2012 Codexis received a one-time milestone payment and began to receive royalty revenue in the first quarter. In the quarter we also secured important collaborations with Albany Molecular Research or AMRI and Strem Chemicals to expand our network for greater access to potential partners and customers.
We’re working closely with AMRI, a leading custom research in manufacturing organization to identify and implement new biocatalytic manufacturing routes within their extensive pipeline of customer projects. Customers poised benefit from the combination of AMRIs process development and Codexis enzyme design strength and that should lead to new opportunities for Codexis to serve with our biocatalysts.
Additionally, we formed a new product distribution arrangement with Strem Chemicals, a leading global supplier of laboratory chemicals under which Strem will have exclusive distribution rights for our 100 milligram Codex Screening Kits for our Transaminase and Ketoreductase enzyme platforms. Strem market, the leading niche catalog for bench chemist looking for catalysts, we’re confident that this increased visibility will lead to the use of Codexis biocatalyst and significantly more early stage chemistry development projects.
We continue to expand our pharmaceutical business through these and other new partnerships which we expect to further bolster our development pipeline. With the recognition and visibility that comes from these partnerships and particularly with our extended collaboration with Merck, we’re continuing to see interest from a growing list of leading pharmaceutical and biotech companies as they understand how are specifically tailored biocatalyst can improve their drug manufacturing processes.
We’re confident this trend will allow us to grow our pharma pipeline in the development cycle for Navo (ph) on pattern drug candidates as well as in the development of second generation processes for pharmaceuticals already on the market. Switching to CodeXyme and CodeXol, our biofuels and detergent alcohols platforms, we have continued to make large strides in optimizing the technology this year.
In March we announced the launch of our next generation cellulase enzyme packages, CodeXyme 4 for dilute asset pretreatment and CodeXyme 4X for hydrothermal pretreatment processes. CodeXyme has been tested against other commercially available cellulases and we have found the performance to be equal or better than alternative enzymes across various feedstocks and pretreatment types.
These cellulase packages exhibit excellent performance converting up to 85% of available fermentable sugars at high biomass and low enzyme loads enabling what we believe will be among the lowest cost in new cellulases available once we’re in full scale production. We’ve also made significant improvements over previous generations with CodeXyme 4 and 4X having increased performance of 10% to 20% over CodeXyme 3.
We expect to be able to deliver this kind of continued improvement from our world leading R&D team with future CodeXyme generations and are already working on these. For CodeXol, our detergent alcohols platform, we’ve achieved mechanical completion of our 1,500 leader demonstration facility in Rivalta, Italy with our partner Chemtex.
We’ve begun commissioning the demo plant and look forward to the results when the plant runs later in this second quarter. For CodeXyme and CodeXol our efforts to secure commercialization partners remain a top priority and I will discuss this aspect in greater detail later in this call.
Overall, we’re very pleased with our developments in the first quarter of 2013, not only did we achieve strong product revenue growth and significant gross margin expansion, but we continued to drive the operational efficiency of Codexis resulting in a lower cost structure and a modest cash burn of $3.1 million for the quarter. Maintaining a strong balance sheet is crucial to our success as we reposition the company for further growth in the pharmaceutical industry and other new markets.
Before I go into some more specifics for the quarter and our forward strategy, I would like to turn the call over to David O’Toole for the financials.
David O’Toole
Thanks John. Before I begin, let me say that as a result of the August 2012 termination of our collaborative research agreement with Shell and the resulting loss of associated collaborative research and development revenue, we believe that year-over-year comparisons for the first three quarters of 2013 are not an appropriate measure of the company’s financial performance.
As such, all comparisons given here are on a quarter-over-quarter basis comparing the first quarter of 2013 sequentially with the company’s fourth quarter of 2013 financial results. For the first quarter 2013, we reported total revenues of $11.5 million, a 45% increase from $7.9 million in the fourth quarter 2012.
Product revenue for the first quarter of 2013 was $9.1 million, a 34% increase from $6.8 million in the fourth quarter of 2012. Product revenue for the first quarter included revenue of $2.1 million from a one-time sale of inventory to Arch Pharmalabs in connection with the enzyme supply agreement.
Product gross margin for the first quarter of 2013 was 38% an increase compared to 15% in the fourth quarter of 2012. Collaborative research and development revenue for the first quarter of 2013 was $2.3 million consisting of services of $0.6 million, an increase of 20% from $0.5 million in the fourth quarter of 2012.
And royalties and licensing fees of $1.7 million, a 240% increase compared to $0.5 million in the fourth quarter of 2012. The increase in royalty and license fees was primarily due to $1 million revenue recognized from the launch of argatroban.
Research and development expenses in the first quarter of 2013 were $7.3 million, a decrease of 31% from $10.6 million for the fourth quarter of 2012. Selling, general and administrative expenses in the first quarter of 2013 were $8.1 million, an increase of 12% compared to $7.3 million in the fourth quarter of 2012.
The decrease in research and development and increase in selling, general and administrative expenses was primarily caused by the realignment of certain departments including supply chain, engineering, quality control and quality assurance into a newly created commercial operations department resulting in $1.6 million of expenses that were reclassified from research and development to selling, general and administrative beginning as of January 1, 2013. When combined research and development expense and selling, general and administrative decreased by $2.4 million or 14% compared to the fourth quarter of 2012.
The overall decrease was due to reductions in headcount and other discretionary expenses. Overall, our total cost and operating expenses for the first quarter were $21.1 million and a 11% decrease from $23.7 million in the fourth quarter of 2012.
Net loss for the quarter was $9.6 million or a loss of $0.25 per share based on 37.8 million weighted average common shares outstanding in the first quarter of 2013. This compares to a net loss of $15.5 million or a loss of $0.41 per share during the fourth quarter of 2012.
We ended the quarter with cash, cash equivalents and marketable securities of $46.1 million compared to $49.2 million on December 31, 2012. Now, I would like to turn to our financial guidance for the full year 2013.
For the full year 2013, we reaffirm the guidance we gave on our prior call. We continue to expect total pharmaceutical related revenue in the range of $35 million to $40 million of this amount we expect product revenue to approach $30 million.
We expect that our product gross margin will be in the range of 30% to 35% and total gross margin for pharmaceutical revenue will approach 50%. Regarding cash burn, we continue to expect a cash burn range of $12 million to $16 million for the year.
We do expect that cash burn for the second quarter will be higher than cash burn for the first quarter. Now, I would like to pass the call back over to John for some additional commentary.
John Nicols
Thanks David. Now that we’re off to a strong start to 2013, I would like to outline our corporate strategy to achieve long term profitable growth in greater detail.
First and foremost we’re going to continue driving growth in our pharmaceutical business. We plan to pursue new collaborations with big pharma and biotech partners to integrate our products and services more deeply into the drug development manufacturing processes for both clinical stage and pharmaceutical products already approved in on the market.
We will continue to use our long term Merck partnership as a case study and a model for replicating this success with other major pharmaceutical companies by leveraging our core strength namely, designing and making enzymes faster than competitors through our CodeEvolver enzyme evolution platform which enables creation of enzymes that can deliver pure compounds with higher chemistry yields under harsh industrial conditions. Well, we’ve emerged as the market leader for biocatalyst enabling more efficient manufacturing processes for the pharmaceutical industry; we plan to leverage our core technology platform to expand into other markets.
One area that we’re particularly excited about is the field of enzyme therapeutics. While, our technology has revolutionized the manufacture of small molecule pharmaceuticals and is currently used in the production of some of the world’s best selling drugs, we’re now also working to apply our technology to generate new and improved biologic therapeutics in a broad array of applications.
We’re excited about the prospect of extending our longstanding protein, engineering and technological expertise into the pharmaceutical industry in this way. Success for Codexis in this space will translate into new joint development arrangements with backend royalties and/or milestone opportunities.
Early discussions with potential partners to work on their drug discovery candidates are encouraging. We are also exploring additional commercial opportunities by targeting biocatalyst, i.e., what we already do so well in pharma into other complex chemistry applications.
Market such as agrochemicals, cosmetics and food additives are excellent target markets for our core enzyme development and commercialization capabilities and we’re undertaking a proactive business development approach to link up with important players in these industries. While these parallel markets are not occupying a substantial portion of our time and resources currently, we do expect them to grow, as we find more profitable opportunities.
Codexis has already begun actively participating in relevant industry tradeshows and conferences during 2013 and we will continue to provide update in the coming quarter. Finally, turning to our strategy for CodeXyme and CodeXol, our main initiative is to secure funding partners by the middle of this year and we remain encouraged by our recent discussions with a number of interested parties.
As a reminder we’re currently in the process of identifying potential partners for CodeXyme and CodeXol so that we can leverage our partners engineering, manufacturing and/or commercial expertise as well as their ability to fund the commercial scale ups of these businesses. In closing, I would like to highlight that we’re very encouraged by the progress that Codexis has made during the last couple of quarter, particularly in the necessary rightsizing of our operational structure after the loss of Shell R&D funding reducing our cash burn and demonstrating significant growth in our pharma division.
We now have a strong stable management team in place after a period of transition and I believe we’re very favorably positioned to capture significant value creation for our shareholders. Well, 2012 was a difficult transition year; the Codexis story continues to evolve in an exciting way with expanding opportunities all based on our core ability to uniquely tailored enzymes that efficiently drive chemical processes in a variety of markets.
We feel that 2013 will be a very clarifying and encouraging year for our overall direction and we look forward to updating you in the coming months around new partnerships and product that will help us build on this progress. And with that I would like to turn the call back over to the operator for question-and-answer.
Operator
Certainly, thank you. So, ladies and gentlemen, we will now conduct the question-and-answer session.
(Operator Instructions) And our first question is from the line of Ed Westlake of Credit Suisse. Please proceed with your question.
Edward Westlake – Credit Suisse Securities (USA) LLC
Hey guys, good afternoon.
John Nicols
Hey, how are you doing?
Edward Westlake – Credit Suisse Securities (USA) LLC
Just quick question, obviously, you mentioned one-time payment for the argatroban, how much of that was in 1Q, just thinking about the revenue beat that you got there for pharma?
David O’Toole
Well, the total for argatroban in the first quarter as I mentioned was $1 million.
Edward Westlake – Credit Suisse Securities (USA) LLC
Okay. Just $1 million, okay.
And that was the one-time payment and then going forward royalty will accrue is that correct or you correct me?
David O’Toole
No, that is not correct. Actually its, part of it was a milestone which is one time and the remainder is the royalties or the revenue share.
Edward Westlake – Credit Suisse Securities (USA) LLC
Okay. And then, a broader question, I mean in terms of handicapping, getting funding or getting a partner to take on say, CodeXyme around midyear and CodeXol, I mean, can you give us any more color in terms of say, the number of interested parties, who you are speaking to, to give some sense of whether that will close?
John Nicols
Ed, pretty diluted question, this has been obviously a core priority for the company in parallel we’re driving a continued technological improvements which I highlighted in some detail on the call. Myself and key members of the management team have been working as a party to reach out to dozens of potentially interested parties to consider working with Codexis on our CodeXyme business in a strategic way.
And we’re substantially through the processes of assessing the most interested potential partners and with a milestone like success targeted for the middle of the year, we’re having good success to advance those discussion. So, who we’re talking to is clearly not to be disclosed at this point, but it’s a priority process and the conversations proceed encouragingly.
Edward Westlake – Credit Suisse Securities (USA) LLC
Right and good luck with those. And, on the enzyme therapeutics, I mean, obviously in a huge different array of applications, but any sort of idea of the sort of total addressable market as you think about revenue potential down the road in a sort of a risked case?
John Nicols
Yeah, we tried to assess the addressable market, we’re targeting where our ability to engineer enzymes would have the most impact, we have a priority list of handful current priority therapeutic areas that we’re engaging in discussions with potential partners. We highlighted one such area in the call today which is clearly encouraging to us.
And our approach would be to help such a partner pharmaceutical company to come up with better drug candidates then theoretically they are able to do by themselves. And we have a pretty compelling and convincing story to the pharmaceuticals and indeed we can help them to do that.
So, I think success as I highlighted in the call would translate into joint development agreements with cost coverage plus margin opportunities in the short run and ultimately if we are successful and the partner successful with their candidate that it could lead to milestones and royalty payments for us. So, I hope to layer a number of these in over the coming quarters and years to create a portfolio where we have delivered such successes.
Edward Westlake – Credit Suisse Securities (USA) LLC
That’s very clear, thanks very much.
John Nicols
Good, thank you Ed.
Operator
Thank you very much for your question. Our next question is from the Weston Twigg of Pacific Crest Securities; please proceed with your question.
Weston Twigg – Pacific Crest Securities
Sure thanks. Just a couple of quick questions, one Merck with the enzymes sales upside, is there something that should continue to trend higher through the year?
David O’Toole
This is David O’Toole, it’s going to be a little lumpy this year, but the overall, it depends on their demand. But, we will, we do foresee continued sales that have got into Merck over this year and probably getting a lot more consistent in 2014.
Weston Twigg – Pacific Crest Securities
Okay, okay good. And then, on the second gen ethanol raising done in Brazil I know it’s still kind of sensitivity.
But, they have talked about publicly now making investments in second gen ethanol and given the type relationship with Codexis is a bit surprising we haven’t heard anything regarding Codexis involvement yet. Just wondering if there was anything you could maybe add to that to give us a little understanding of where you’re in that process?
John Nicols
Obviously Risen (ph) sits our board and is our largest shareholder, so there is a lot of continuous communication with Risen (ph). They have off late made announcements to build a second generation facility at the order of 10 million gallons in one of their geographies down in Brazil.
They have indicated that they’re working with the process technology company, but they have yet to make their mind up about what kind of enzyme technology, where you’re going to apply in that facility. And so, obviously we remain in communications with them on that, they’re in control of the process for the enzyme selection and when they are finalized and they’re in consideration of that then that will public and this question will become very clear to you.
I hope that’s helpful.
Weston Twigg – Pacific Crest Securities
Yeah, that is, that is. So, in other words the selection is still open and the Codexis is still engaged to some extent?
John Nicols
Correct.
Weston Twigg – Pacific Crest Securities
Alright, that’s all I have, thank you.
John Nicols
Thanks, bye.
Operator
Thank you for your question. (Operators Instructions) In that case we will move onto our question and it’s from the line of Enrique Akashi of Piper Jaffray, please go ahead.
Enrique Akashi – Piper Jaffray
Great, thanks for taking my call. So, with regard to the lumpiness that you mentioned on the Merck sales, do you, the seasonality for that product revenue, is that going to follow kind of that lumpiness from Merck or do you see total revenue and product revenue to be a little bit more stable?
John Nicols
I considered the product revenue to be stable, but I do think that there will be some lumpiness in the middle of the year around the orders for Merck.
Enrique Akashi – Piper Jaffray
Got it, great. And, is it reasonable to assume then, you will continue burning approximately $3 million reported or is there some seasonality that fluctuates your cash needs, perhaps relating to Merck and one of the other partnership?
John Nicols
Yeah, I did indicate in the call that we do believe that our cash burn for the second quarter will be larger than the first quarter. And a little bit around that is the product revenue lumpiness.
So, we’re still guiding to $12 million to $16 million which is, if you annualize that’s $4 million average. But, we do think that second quarter is going to be greater than the first quarter.
Enrique Akashi – Piper Jaffray
And last one from me. With regards to your cost rationalization in SG&A and R&D, all the new products and the partnerships that have come in.
Does it reason to assume that these levels will continue or do you think or envision that perhaps additional headcount investment might be required throughout the year?
John Nicols
This is John. The main question that we have is the ultimate outcome of our partnerships discussions with CodeXyme and we’re planning for success and we’re driving for success and if we have success then there won’t be noticeable of any headcount change in the company and it could actually theoretically trend incrementally up.
But, depending on the outcome of the CodeXyme partnership transaction discussions there could be some prospect for some additional headcount reductions.
Enrique Akashi – Piper Jaffray
That’s all from me. Thanks and congratulations.
Operator
Thank you very much for your question. And at this time ladies and gentlemen, I would like to turn the presentation back over to Mr.
John Nicols for closing remarks.
John Nicols
Okay. Well, thank you everyone for your participating in the call, we look forward to updating you again soon.
Operator
Thank you ladies and gentlemen, that concludes today’s presentation, thank you once again for your participation. You may now disconnect.
Have a good day, thank you.