Aug 15, 2013
Executives
Doug Sheehy - Senior Vice President and General Counsel John Nicols - President and CEO David O'Toole - Senior Vice President and CFO
Analysts
Daniel Baksht - Pacific Crest Securities
Operator
Good day, ladies and gentlemen. Welcome to Codexis’ Second Quarter Earnings Conference Call.
This call is being webcast live on the Investors section of Codexis’ website at codexis.com. This call is 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 call over to Doug Sheehy, Codexis’ Senior Vice President and General Counsel. Please proceed.
Doug Sheehy
Thank you and good afternoon. We announced our fiscal second quarter financial results on August 9th.
The press release is available on the Investors page of our website at codexis.com. With me today are John Nicols, our President and Chief Executive Officer; and David O'Toole, our Senior Vice President and Chief Financial Officer.
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, product revenue, atorvastatin revenue, product gross margins, total gross margins for pharmaceutical revenue and total cash burn.
Actions that Codexis may take to protect its interest under the Dyadic license agreement, our ability to maintain rights under the Dyadic license agreement, our ability to earn milestone payments under our joint development agreement with a market-leading food ingredients company, the ability of our collaboration with Purolite to allow for the reuse of our enzymes at commercial scale and to target more manufacturing customers, the future launch of immobilized transaminases kits, our belief that CodeXyme cellulase enzymes and CodeXol detergent alcohol will perform at commercial scale and decrease manufacturing costs, our ability to secure additional partnerships that will expand our pipelines and 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2013 for some of the important risk factors that could cause actual results to differ materially from these forward-looking statements made on the 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 hand the call over to John Nicols.
John Nicols
Good afternoon and thank you for joining us. First, let me address the delay of our previously scheduled earnings call from last Wednesday to today.
The only reason we delayed this call was the receipt of a letter from Dyadic on July 30th, alleging that Codexis is in breach of the Dyadic license agreement. Instead of preparing for this call last week, we focused our efforts on getting our quarterly report on file with the SEC in light of the Dyadic letter.
As we announced last week, we believe that we are not in breach of the Dyadic license agreement and that the Dyadic letter is unjustified and without any legal or factual basis. We are still considering all available remedies to protect Codexis’ interest under the Dyadic license agreement.
Moving to our second quarter results, Codexis remains on track to deliver our step-out profit contribution year in our core biocatalysis business in 2013. Though 2Q had relatively low sales as expected and as we guided you in our prior quarter call, we continue to project full year 2013 biocatalysis revenues in excess of $35 million with an average contribution margin of 50%, delivering on that would put us at least 60% ahead of last year's biocatalysis contribution margins of $10.9 million.
The biocatalysis profit growth is coming from a diversity of sources. We added nine new service projects in the second quarter.
Three of those projects are with new clients, who have never worked a service project with us prior. These new service projects provide profitable revenue cover for our R&D costs in the short run while adding to the list of potential new commercial biocatalyst products, should the project’s concepts advance in the longer run.
Sales to Merck doubled in the second quarter of 2013 versus the same quarter last year. In addition, several of the new service projects come from other bluechip pharma customers.
The power of biocatalysis and Codexis’ global leadership to deliver it continues to prove out. Adding to our widening biocatalysis penetration, we are proud to have made a material breakthrough for this business outside of the pharma industry.
In the second quarter, we entered into a joint development agreement with a large market-leading food ingredients company. Because of the confidentiality, we are precluded from providing the name of the company or specific details.
The deal represents the first success in our adjacent market strategy focused on entering the many complex chemistry markets paralleled to pharma that can benefit from our competitively advantaged biocatalysis platform. Under the terms of the agreement, Codexis will earn milestone payments based on enzyme performance and cost reduction improvements during the lab, pilot and commercial scale product development phases.
The project has begun to deliver material sales for us in the second quarter and is expected to continue to do so through the rest of 2013 and beyond. At Codexis, we are also always pushing the envelope to develop new technologies that will continue to keep us ahead of our competition in delivering high-performing biocatalysts for our markets.
It is in this slide that we are pleased to have announced in the quarter a new joint collaboration agreement with Purolite to develop and market immobilized enzymes for the pharmaceutical and adjacent industries. The support resins that Purolite provides will allow us to use our enzymes under different conditions and reuse them at commercial scale.
And we will also be launching a kit of immobilized transaminases as an extension of our Codex screening kits. Over the past 30 plus years, Purolite has established itself as the premier manufacturer and innovator in the world for resins for enzyme immobilization and this joint collaboration puts their strength together with ours to target even more manufacturing processes that can be cost effectively disrupted by Codexis biocatalysis.
Finally, we are rounding up our buildout of our growing biocatalysis business. We are pleased to have landed Scott Watson as our new Vice President of Sales and Marketing.
Scott has extensive experience directing sales teams in the pharma (inaudible) chemical industries. And we are already benefiting greatly from Scott’s knowledge to access the customer opportunity in this space.
Switching gears to our bioindustrial businesses, let me start with CodeXol detergent alcohol, where we are pleased to highlight a significant milestone that program in June. Along with our partner, Chemtex, we announced the successful scale-up in the production of CodeXol detergent alcohols using cellulosic sugars.
The scale-up was achieved at a 1,500 liter demonstration facility at Chemtex’s R&D complex in Tortona, Italy and is a key milestone in the development of a fully integrated biomass to detergent alcohols technology. Chemtex’s PROESA pretreatment technology and Codexis’ CodeXyme 4X cellulase enzymes were used to produce the cellulosic sugars from non-food biomass while the CodeXol detergent alcohol fermentation process technology converted the sugars into detergent alcohols.
We believe this is the world’s first successful large scale effort to produce commercially relevant detergent alcohols from cellulosic biomass feedstock. And it demonstrates the ability of our cellulase enzymes and CodeXol technologies to perform at a commercial scale and decrease the manufacturing cost in the future.
We continue to be in discussions around partnering our CodeXol program and believe that this successful result will assist us in that process. Turning to our CodeXyme cellulase enzymes business, over the past quarter we continue to be encouraged by prospective customers about how well our CodeXyme 4 and 4X enzymes work in making low cost cellulosic sugars from a variety of second generation biomasses.
We can continue to be in discussions with final candidates around partnering with us to share in the funding needs to commercialize this business. Those discussions are taking somewhat longer than expected and have been complicated by the recent letter we received from Dyadic alleging that we are in breach under the license agreement we have with them.
As we stated in our recent SEC filing on the matter, we believe that we are not in breach of the agreement and are considering all available remedies to protect our interests under the Dyadic license agreement, while in parallel engaging in discussions to try to resolve the matter directly with Dyadic. It is primarily for these reasons that we have increased our cash burn guidance for 2013.
Before I provide some final summary comments and take questions, let me hand the call over to David to review the second quarter financial results.
David O'Toole
Thanks John. As we have previously disclosed for our first quarter of 2013 results, we will not be presenting year-over-year comparisons for the first three quarters of 2013.
We do not believe that these comparisons are an appropriate measure of the company’s financial performance due to the termination of the collaborative research agreement with Shell affective August 31, 2012, and the resulting loss of associated collaborative research and development revenue. As such, all comparisons given here are on a quarter-over-quarter basis, comparing the second quarter of 2013 sequentially with the company’s first quarter of 2013 financial results.
For the second quarter 2013, we reported total revenues of $7 million, a 39% decrease from $11.5 million in the first quarter of 2013. Revenues for the six months ended June 30, 2013 were $18.5 million.
Product revenue for the second quarter of 2013 was $5 million, a 45% decrease from $9.1 million in the first quarter of 2013. The decrease in product revenue was primarily due to continued weakness in our generic product business, which I will discuss in more detail later.
Product revenue for the six months ended June 30, 2013 was $14.1 million. Product gross margin for the second quarter of 2013 was 27%, compared to 38% in the first quarter of 2013.
Product gross margin for the six months ended June 30, 2013 was 34%. Collaborative research and development revenue which consist of license payments, R&D services, milestone payments and royalties was $2 million for the second quarter of 2013, a decrease of 14% from $2.3 million in the first quarter of 2013.
Research and development expenses in the second quarter of 2013 were $8.6 million, an increase of 18% from $7.3 million for the first quarter of 2013. Selling, general and administrative expenses in the second quarter were $7.2 million, a decrease of 11%, compared to $8.1 million in the first quarter.
Changes in both research and development, and selling, general and administrative expenses compared to the prior quarter were related to further realignment among departments following the significant organizational changes that we started late last year. When combined total operating expenses increase slightly to $15.8 million in the second quarter, up 2% from $15.5 million in the first quarter of 2013.
The increase was primarily due to a charge of $400,000 to write down certain accounts receivables from Arch Pharmalabs Limited, our Indian manufacturing partner for which recovery was determined be uncertain. Net loss for the quarter was $12.6 million or a loss of $0.33 per share based on 38.1 million weighted average common shares outstanding in the second quarter of 2013.
This compares to a net loss of $9.6 million or a loss of $0.25 per share during the first quarter of 2013. Net loss for the six months ended June 30, 2013 was $22.2 million or a loss of $0.59 based on $38 million weighted average common shares outstanding during the period.
We ended the quarter with cash, cash equivalents and marketable securities of $38.9 million, compared to $46.1 million on March 31, 2013. Now, I would like to turn to our financial guidance for the full year 2013.
For the full year 2013, we are adjusting our prior outlook. We could -- we continue to expect total pharmaceutical related revenue in the range of $35 million to $40 million.
However, we now expect product revenue to be approximately $25 million versus our prior guidance, which was closure to $30 million. We continue to 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 are adjusting our prior guidance for cash burn to now be in the range of $16 million to $19 million for the year versus our prior guidance of $12 million to $16 million. As John explained earlier on this call, the CodeXyme partnering process is taking longer than expected which means that we’re maintaining the business in a self-funded mode longer than our prior guidance had factored.
I’d like to provide some additional context for the change in our guidance for product revenue. The product revenue we projected at the beginning of the year included revenue of approximately $3.5 million under our enzyme supply agreement with Arch Pharmalabs for the production of atorvastatin.
Due to a number of reasons, including financial difficulties at Arch and significant competition for Arch from low-cost Chinese manufacturers, the atorvastatin revenue has been and will continue to be materially weaker than our prior projection from the second quarter through the rest of 2013. However, we’re exploring a number of options to get this business turned around in the fourth quarter.
In spite of lowering our product revenue guidance, we are able to maintain our total revenue and margin guidance for 2013, primarily as a result of increased service revenue and increased royalties from Exela for the sale of argatroban projected for the remainder of the year. Now, I would like to pass call back over to John for some closing remarks.
John Nicols
Thanks David. In summary, we here at Codexis remain very encouraged by the growth prospects for the company in the coming quarters and years ahead.
Our biocatalysts business is on track to hit our revenue guidance for the year with significantly improved profitability compared to 2012 and in the coming quarters we expect to announce additional partnerships that will further expand our product pipeline. At the same time, we have achieved a key milestone in our chemicals program by demonstrating with our partner Chemtex that our CodeXyme cellulase enzymes and CodeXol technology can produce detergent alcohols at a commercially relevant scale from cellulosic biomass.
Finally, we know we need to provide full clarity and deliver key milestones associated with our attractive CodeXyme business and we are focused on delivering those to you. And with that, I’d like to turn the call back over to the Operator for question-and-answer.
Operator
(Operator Instructions) And our first question is from the line of Weston Twigg, Pacific Crest Securities.
Daniel Baksht - Pacific Crest Securities
Hi, there. This is Daniel Baksht actually calling in for Wes.
Thanks for taking my questions.
John Nicols
Hi, Daniel.
Daniel Baksht - Pacific Crest Securities
So, with respect to your pharma business, could you give us some more color on what you expect from your different customers or your overall demand over the next few quarters so that the we can actually model that opportunity?
John Nicols
Sure. This is John.
We have a significant diversity of first -- both customers and products that we provide both service revenue, generate some royalty revenue and sell products to in the pharmaceutical area and the -- with the exception of the change in the business relationship with Arch which we spoke about prior quarters and the change in the atorvastatin business that David spoke to earlier in this call. The general growth trajectory for the pharmaceutical revenues are quite solid, certainly double-digit looking forward in a 12-month kind of horizon.
Occasionally, it can move quarter to quarter rather significantly. So we had significantly stronger revenues in the first quarter for example than we did in the second quarter.
So there is a quarter-to-quarter lumpiness that on an aggregate over a 12-month period will build up to nice double-digit growth for our Pharma revenues and our business model is built to ensure that those -- those revenues on average are delivering the kind of margins that we did in the first half and we are projecting for our full year 2013. Merck is our largest customer in the area of pharmaceuticals and the business relationship and the project list with Merck are growing and is healthy.
We have a significant number of other key customers and with the exception of the atorvastatin business, those are in aggregating good shape and we are layering in new projects as I described and other customers that help us to bring that kind of revenue growth to reality going forward.
Daniel Baksht - Pacific Crest Securities
This is a follow-up. You mentioned that sales from Merck doubled -- I think I heard year-over-year.
Just wondering could you comment on what percentage of revenue Merck currently makes up?
John Nicols
No. We don’t provide that kind of granularity on a customer basis.
They are very significant customer in that segment. They are the largest customer.
But we don’t provide a specific confidentiality on our -- I don’t think it is a critical reflection of the business any way.
Daniel Baksht - Pacific Crest Securities
Okay. Fair enough.
Switching gears for the -- on the Dyadic license agreement, in the event that you are not successful in resolving that agreement what would you say is the cost or structure for buying or licensing a similar license with say a Novozymes’ or a DuPont’s if you could comment on that, that will be great?
John Nicols
I made a couple of comment too. We are going to -- certainly we are not going to project the outcome of discussions with the Dyadic and the situation with Dyadic on this call.
It’s a very recent development. We are working it as a priority as a company.
Second, companies like Novozymes and DuPont are highly unlikely to license to a company like Codexis because their core -- their business has this area as a core area for their companies as well. It would be very difficult for Codexis to rebuild its technology position for CodeXyme, should we lose the Dyadic license.
Daniel Baksht - Pacific Crest Securities
Okay. I appreciate the time.
That’s all I got. Thanks.
John Nicols
Sure.
Operator
(Operator Instructions) At this time, ladies and gentlemen, I am showing no questions in queue. I would like to turn the call back over to Mr.
John Nicols for any closing remarks.
John Nicols
Okay. Thank you, everybody for participating in the call.
We look forward to updating you again in early November. Thank you very much.
Operator
Ladies and gentlemen that concludes today’s conference. We thank you for your participation.
You may now disconnect. Have a great day.