Mar 3, 2016
Executives
Bruce Voss – Investor Relations John Nicols – President and Chief Executive Officer Gordon Sangster – Chief Financial Officer
Analysts
Matt Tiampo – Craig-Hallum Swayampakula Ramakanth – HC Wainwright Kevin DeGeeter – Ladenburg Steve Schwartz – First Analysis James Liberman – Wells Fargo
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Codexis’ 2015 Fourth Quarter and Full Year Conference Call.
At this time, all participants are in a listen-only mode. Following managements’ prepared remarks; we will hold a question-and-answer session.
Operator Instructions] As a reminder, this conference is being recorded today November 4, 2015. I’d now like to turn the call over to Mr.
Bruce Voss of LHA. Please go ahead sir.
Bruce Voss
This is Bruce Voss with LHA. Thank you all for participating in today’s call to discuss 2015 fourth quarter and full-year financial results and business progress.
Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the Company’s Chief Financial Officer; Douglas Sheehy, the Company’s Chief Administrative Officer, General Counsel & Secretary will be available for the Q&A session. During today’s call, management will be making a number of forward-looking statements.
These forward-looking statements include 2016 financial guidance including total revenues and gross margin as a percentage of total revenues, key assumptions relating to the Company’s August 2015 CodeEvolver license agreement with Merck, including the timing of recognizing revenue for the second technology transfer milestone payment in 2016, the expectation that Merck will ask Codexis to perform more research services for Merck in 2016, and 2017 beyond services currently required in the license agreement and the expectation that the technology transfer process will finish in 2016. Key assumptions relating to the Company’s July 2014 CodeEvolver license agreement with GSK, including the timing of completing Wave 3 tech transfer, and of receiving the associated $7.5 million milestone payment, and the expectation that the technology transfer process will finish in 2016.
The Company’s expectation that it will see growth in its core biocatalysis R&D services and product business is in 2016, the product revenues will be the fastest growing category in 2016 and that revenues in 2016 will be relatively evenly distributed among the four quarters other than the Merck and GSK milestone payments. The Company’s expectation that it will work in a new adjacency industry in 2016, maintaining a healthy cash balance in 2016 and enter into a third CodeEvolver license transaction in 2017 or sooner, the Company’s expectation that it will prevail and its litigation against enzyme works, the Company’s plan to continue to invest in the evaluation of its oral enzyme therapeutic program for the potential treatment of PKU and to invest in new R&D therapeutic assets.
The Company’s belief that its CodeEvolver platform technology can create a stream of new therapeutic assets across a range of therapeutic modalities and the Company’s plan to drive toward future sustained profitability. These forward-looking statements are based on assumptions and are subject to risks and uncertainties that can cause actual results to differ significantly from those projected during the call.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Please refer to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2015 and the quarterly report on Form 10-Q filed with the SEC on November 6, 2015 for some of the important risk factors that could cause actual results to differ materially from the forward-looking statements made on this call.
The content of this call contains time-sensitive information that is accurate only as of today, March 3, 2016, except as required by law, Codexis disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Now, I’d like to turn the call over to John Nicols.
John?
John Nicols
Thanks, Bruce. Good afternoon everyone and thank you for joining us.
It is with great pleasure, that I review for you today the very solid, strengthening position of Codexis 2015 marked the second year in a row of double-digit revenue growth for the company. Not only did we deliver $41.8 million in sales last year, a growth of 18%, we did so with a continuation of expanding gross profit margins on our sales.
Two years ago in 2013, our gross profit margins were 54% last year and nearly $10 million higher sales. Our margins were a remarkable 84%.
With these top line improvements coupled with our controlling of R&D and SG&A expenses to very stable levels, you can see our dramatic progress towards corporate profitability, reducing net losses over the prior year by over $11million or 60%, and delivering our first full-year of non-GAAP profitability in 2015. For 2016, we are putting forward today annual guidance metrics that continue that strengthening, guiding to grow our revenues again by at least 10% and continuing to deliver these exceptional gross profit margins of greater than 80%.
Our business model is driving improvement in all the core areas, as we start 2016. CodeEvolver licensing revenues have been leading the way in the recent past and that continues in 2016.
We expect to finish the technology transfer chapters for both of our ongoing CodeEvolver deals with GSK and Merck in 2016, setting us up confidently for another year of growth in this revenue category. It has been highly rewarding to successfully collaborate with clients such as these two great pharmaceutical companies.
These relationships have become intimate and have prospects to change and grow in satisfying ways, beyond just the work of transferring the platform technology. For example we are delighted to see Merck, lining up to have us do even more R&D work for them in 2016 and 2017 than what was included in the originally negotiated licensing deal.
This CodeEvolver licensing partnership revenue growth expectations built into our 2016 guidance do not include the possible upside of another platform license deal in 2016. As you know, we continue to develop additional CodeEvolver licensing prospects.
We remain encouraged by that pipeline and forecast a third deal to come in 2017 with some possibility that it could land sooner. Other key biocatalyst R&D revenue categories are also poised for solid growth in 2016.
New R&D projects with partners set up to develop completely novel, value creating proteins that only CodeEvolver can uncover, is a crucial part of showing success for our business model. Not only are these collaboration projects a healthy growing source of short-term revenue, they also create the seedlings for tomorrow’s product and/or licensing revenues.
We delivered solid growth in these collaborative R&D projects revenues in 2015. Focusing on the larger projects of greater than $250,000 each noting there are many other smaller ones, we drove successful results in multiple projects that spanned all three of our target market segments in 2015.
Here are some of the key highlights: in pharma, we completed a proof-of-concept project in the fourth quarter with a major pharmaceutical company other than GSK or Merck. That targets reducing the cost of their recently launched blockbuster drug.
In the biopharmaceutical arena, we advanced well into the second stage of development in support of that partner’s preclinical biologic drug development program. And in food, we completed the first chapter of our project with our second food industry client.
We met or exceeded our pre-negotiated protein improvement targets in all three of these R&D projects and we expect to continue to generate revenue from all these projects again in 2016. In addition, we expect to execute on multiple additional new protein engineering projects against all three sectors in 2016.
Notably, in addition to that expectation in both small molecule and biologic pharma we have started additional new food ingredient projects with our first customer in the food industry and are expecting to commence new work in a new adjacency industry in 2016. We look forward to detailing those new projects and their revenues, as the year unfolds.
In the product revenue category, we are delighted to show the start of a rebound in revenues. In 4Q 2015, we delivered $4.5 million in sales, by far the largest quarterly product sales in 2015.
These sales were led by $1.7 million food ingredient enzyme order being recognized. The largest product shipment we have ever made to that customer.
On top of our strong close to 2015, we forecast that product revenues will be the fastest growing category for the company in 2016. For the year, product revenue growth of approximately 20% will be led by advances in sales to Merck’s Januvia diabetes franchise and to our food ingredients customer in particular.
Medium-term, we see these two base-load products continued growth as secure. And we expect to layer on top of them, a growing stream of new products commercializing from our pipeline of successes from the R&D collaborations previously described.
Add on top of that, having preferential terms to supply some CodeEvolver licensees, with products from proteins that they design on their own, and we hope we can increasingly envision the flywheel of our business model that is always had us excited. Success like we’re showing now is built on our ability to work collaboratively with customers, to create and commercialize novel value adding technology and patients.
We must defend what we have worked over a decade to build. In this light, last week we announced the filing of a patent infringement lawsuit against enzyme works and its founder.
We do not take the decision to litigate lightly. However, in this start – in this situation, we clearly believe we had no choice.
Given that enzyme works has been producing exact duplicates of our patented enzymes and misappropriated trade secrets related to the proprietary technology used to develop and to produce those enzymes. It is statistically impossible, that enzyme works coincidentally produced 100% exact molecular copies of our enzymes.
This form a blatant disrespect for our intellectual property harms not only our business, and ultimately our shareholders, but also our customers. We fully expect to win this lawsuit based on the evidence.
Now let me turn back to business and update you on our efforts to develop novel therapeutics. As you know, we filed a patent application and announced in late 2014, our successful deployment of our CodeEvolver protein engineering in creating an early stage therapeutic asset as an orally dosed enzyme targeting the treatment of patients with the rare disease Phenylketonuria or PKU.
We have advanced the enzyme, we developed through a series of animal studies in parallel with efforts to better learn the potential value of our company’s first independently owned therapeutic asset. The experience has been satisfying to Codexis showcasing what is a very high value target application for our world leading CodeEvolver protein engineering platform.
Accordingly as we continue to invest in the evaluation of our preclinical PKU therapeutic enzyme, we have also decided to embark on new R&D projects with the aim of developing additional early stage therapeutic assets. As you know up to now essentially all of our therapeutic R&D efforts were dedicated to the PKU program.
Now it is time for us to develop additional scientific data to validate our belief that CodeEvolver can be a platform for potentially creating a stream of early stage therapeutic assets across a range of varying therapeutic mechanisms. We look forward to keeping you up-to-date in this area for the foreseeable future.
Finally and in closing this section it is my pleasure to welcome David Smith to Codexis' Board of Directors. David brings a wealth of life science and financial experiences plus an energetic engaging style that will clearly add to and compliment what is already a high performing dynamic board for our corporation.
With that overview, I'd like to turn the call over to Gordon Sangster to review our financial performance. Gordon?
Gordon Sangster
Great. Thanks, John.
Overview of our financial highlights starting with the fourth quarter. Total revenues were $11.6 million and this compares with $14.2 million in the prior year quarter, which included a $5 million milestone payment from GSK.
We're reporting $6.4 million in biocatalyst R&D revenues which included licensing fees from our biopharmaceutical collaboration as well as fees from a new R&D project to develop an enzyme for a recently launched drug. We also recognized $3.1 million from a settlement for past-due payments and a buyout of future payments associated with royalties from a non-core legacy customer.
Biocatalyst product sales were $4.5 million down about $300,000 from the prior year changes – due to changes in timing of customer orders and product shipment. Biocatalyst product sales included $1.7 million in shipments during the quarter to our food ingredient customer.
Our revenue-sharing arrangement with Exela contributes $773,000 to revenues. Gross profit as a percentage of total revenues for the fourth quarter of 2015 improved to 78%, up from 75% in the 2014 quarter due to product mix.
R&D expenses were $5.2 million up about $3 million from the prior year due to higher employee related and outside services expenses partially offset by a lower laboratory supplies and equipment depreciation expense. SG&A expenses were $6 million, 17% increase from the fourth quarter of 2014 primarily due to an increase in employee related and legal expenses.
The net loss for the quarter was $2.1 million or $0.05 per share. This compares with net income of $345,000 or $0.01 per share for the fourth quarter of 2014, which benefited from the $5 million milestone payment from GSK.
Non-GAAP adjusted net income for the quarter was $622,000 or $0.02 per diluted share compared with non-GAAP adjusted net income a year ago of $2.8 million or $0.07 per share. Turning to our full year financial results, total revenues for 2015 were $41.8 million up 18% from the prior year.
Revenues for 2015 included $11.4 million in biocatalyst product sales, $25.6 million in biocatalyst R&D revenues and $4.8 million from the revenue-sharing arrangement with Exela. Gross margin for 2015, improved significantly to 84% up from 72% for 2014, due to favorable product mix.
R&D expenses for 2015 decreased 9% to $20.7 million primarily due to the recognition of non-recurring, non-cash impairment charges related to the write-down of certain assets in 2014 as well as lower equipment depreciation expense in 2015. The decrease was partially offset by again from the sale of our Hungarian subsidiary in 2014, as well as higher employee related and outside service expenses in 2015.
SG&A expenses increased a modest 2% to $22.3% in 2015 due to higher employee related expenses. The net loss for 2015 was $7.6 million or $0.19 per share this is a substantial improvement from the net loss of $19.1 million or $0.50 per share for 2014.
Non-GAAP adjusted net income for 2015 was $3 million or $0.07 per diluted share compares favorably with non-GAAP adjusted net loss for 2014 of $5.8 million or $0.15 per share. Cash and cash equivalents as of December 31, 2015 were $23.3 million versus $26.5 billion as of December, 31, 2014.
Also we expect that we can manage both the cost of the new product development and the cost of the litigation and still maintain a healthy cash balance. As a final topic today, we are introducing 2016 financial guidance as follows.
We expect total revenues to be between $46 million and $49 million representing growth of 10% to 17% over 2015. This guidance assumes growth in our four biocatalyst, R&D and product business.
It also assumes the recognition of two milestone payments totaling $15.5 million related to our CodeEvolver licensing agreements with GSK and Merck. It does not include a new platform licensing agreement.
Based on the orders in hand and forecast from customers we expect our revenues this year to be relatively evenly divided between the four quarters other than the milestones, which we expect to earn with GSK and Merck. We expect gross margin as a percentage of total revenues are going to be in the 80% to 85% range.
With that, I’d now like to turn the call back to John.
John Nicols
Thanks for that financial review. As Gordon just detailed, we ended 2015 with strength, and that is carrying forward into our providing a solid financial guidance outlook for Codexis in 2016.
Our strategy to drive our flagship CodeEvolver protein engineering technology into as many high-value commercializable applications as possible, is working well. We hope this call brings you together with us in sharing the enthusiasm for our continued success in 2016 and beyond.
With these comments, I’d like to open the call for questions. Operator?
Operator
[Operator Instructions]
John Nicols
While we are waiting for our first question, I would like to mention that we’ll be presenting at the B. Riley Investor Conference being held in Los Angeles on May 25 and 26.
We hope to see you there. The webcast of that presentation will be available on our website for those of you unable to attend.
Okay, operator, we’re ready for the first question.
Operator
Our first question comes from the line of Matt Tiampo with Craig-Hallum. Your line is open.
Matt Tiampo
Good afternoon, gentlemen, and congratulations on strong finish to the year. I wanted to ask quickly, I mean additional asset that you’re hoping to pursue this year.
Maybe you can give us a little bit color coating on what sort of impact that may have on the P&L and our path forward sort of breakeven and if that moves that out [indiscernible].
Gordon Sangster
It potentially moves depending on other things, but we think between about $1 million to $1.5 million in total. And that’s mainly due to adding two new teams to go after some of these potential assets.
John Nicols
Just Matt, we have to add new people in the R&D area, because the R&D capacity of the company is full up today with funded projects. So in order for us to go after these new therapeutic areas, we have to do some modest incremental hiring.
Matt Tiampo
Okay, great. And maybe just following up on that.
In terms of PKU and your plans for PKU in additional funding and development there, what you think the question that you need to answer to find a partner, a viable partner for at the terms that you’d look like are?
John Nicols
Sure, Matt. This is John.
Where we’ve been doing like I said in my prepared remarks, series of animal studies around our PKU enzyme, therapeutic enzyme and we continue to do experiments that lead us ultimately to the decision to advance to IND enabling preclinical studies. And those studies are a notable, potential increased expense.
And we haven’t reached that milestone point at this point. So if we were to continue to see the advancement of the PKU therapeutic enzyme to that point, we would detail that in a subsequent call.
And clearly our primary goal as a company continues to be drive to corporate profitability. And so, as we bring forward – should we bring forward the PKU asset for additional funding towards IND enabling preclinical studies.
We would have strong buyers to partner that asset to try to partner that asset to make sure that the funding impact on our company is regulated and doesn’t dramatically impact our pathway to corporate profitability.
Matt Tiampo
Okay, great. Maybe just switching gears for a minute quickly.
Can you give us a little bit more color on the impacts that enzyme markets had on your business? When you started to see them show up in a marketplace?
How meaningful a competitor, I know you said [indiscernible] they’ve then so far. And then also anything you could help us get to that magnitude of both of their impact, and what special spend could be on the label side in 2016?
Thanks.
Douglas Sheehy
Hey, Matt this is Doug, I’ll take this question. We’re not going to probably speak with great specifics about the potential impact or the actual impact that we’ve seen from enzyme works, but generally we have noted them increasingly in the marketplace over the last few years.
So we’re – it’s really not, use the bunch to quantify it, but we have noted them in the marketplace. And it was a partial motivation for why we decided to take the action that we did.
Matt Tiampo
Okay. And then maybe Gordon on the potential impact in the expense standpoint?
Gordon Sangster
We can’t go into a lot of detail on that, Matt. I can tell you that we can comfortably afford to handle the litigation to its conclusion and maintain a healthy cash balance.
Matt Tiampo
Okay, great. Thanks guys, I’ll hop back in the queue.
John Nicols
Okay. Thank you, Matt.
Operator
Our next question comes from the line of Swayampakula Ramakanth with HC Wainwright. Your line is open.
Swayampakula Ramakanth
Thanks. And good afternoon gentleman, it’s a great year that you just concluded 2015.
John Nicols
Thanks, Ramakanth.
Swayampakula Ramakanth
And going to 2016, in your prepared remarks, you talked about a third potential pharma partner coming up. So what amount of work has been done?
And where are you in terms of signing this potential partner for revenues? Are any of the potential revenues included within your guidance at this point?
John Nicols
Sure. Just to be clear, you’re asking about our prospects for a third CodeEvolver licensing deal like we’ve done with GSK and Merck, correct?
Swayampakula Ramakanth
Yes, kind of.
John Nicols
Right. So SRK [ph] we have been promoting this idea to the large pharmaceutical companies for over a year now.
And we have a list of prospects that are advancing discussions with us on that same kind of deal that we’ve done with GSK and Merck. Several of them have advanced, and we’re encouraged, and that gives us the encouragement to give clear statements of expectation that we expect to close another deal like GSK and Merck, certainly by 2017, by next year.
We believe it’s optimistic to think that we will finalize the transaction for a third CodeEvolver license in this year, and so hence we have not included any revenues at all for a third CodeEvolver license in our 2016 guidance. If we were to conclude a transaction with the third CodeEvolver licensee in 2016, that would be all revenue and cash upside for our company.
Swayampakula Ramakanth
Okay, great. And then, regarding the collaboration, regarding the current work with Merck, one of the things which I thought was going to be interesting for 2016, was for Merck to completely transform their generally agenda of manufacturing processes, utilizing your CodeEvolver enzyme.
Is that process, pretty much underway – where is it in that process and how confident are you that they were converted 100%. So you benefit from them?
John Nicols
Sure. It is certainly well underway.
It’s a very complicated process in a complicated manufacturing network of Merck’s. We are supporting their increased installation of the enzymatic processes across that network of Januvia and Janumet production.
And that is what is leading us to showcase growth and product revenues for the enzymes that go into the Januvia franchise as part of our outlook for 2016 and what gives us confidence that it will continue with the growth of our enzyme to Merck's Januvia will be secure going forward and those were in my prepared remarks. So that's all good.
We don't expect and Merck has not let us to expect that 100% of their manufacturing would ever be based on the enzymatic route because of complications for regulatory approvals in various countries around the world. However we do expect that ultimately will lead to expect by our customer that ultimately the majority of their production will be based on our enzyme and we're certainly well below the majority of the production today.
So this is a really solid growth outlook for Codexis’ product revenues and a key part of why we're increasingly confident about growing product revenues in 2016 and thereafter.
Swayampakula Ramakanth
Okay. The next question is on the biotech partner that you are talking about that.
How does that success in this new subsector help you in flagging new customers? And what kind of success rate are you meeting in that round?
John Nicols
Sure. We're really proud of the work we did with this biopharma partner.
We've been able to highlight it in each of the last couple of earnings calls including this one. How we – in this case we exceeded the expectations for protein to engineering performance in that program.
And that's – we can't – we weren’t able to disclose who we're doing it with and what we're doing exactly. So we’re just showcasing it as a success but without specificity.
However, that success coupled with our efforts in the PKU, therapeutic enzyme development, are two clear case studies that we can point to, to show potential new partners what CodeEvolver protein engineering can do for biologic development. And so we're encouraged.
And we're hopeful that we'll strike more deals like that and be able to speak to it in upcoming investor calls, okay.
Swayampakula Ramakanth
Okay. And then in the food ingredients business what's the market opportunity there for Codexis?
And it is a very competitive market, and what sort of penetration do you feel comfortable that you could achieve?
John Nicols
We’re really just scratching the surface. We’ve been working in the pharmaceutical arena for over 10 years as you know.
And we just started to approach companies in the food industry just two or three years ago. So we’re extremely pleased to now have commercialized our lead enzyme that we did $1.7 million of sales in the fourth quarter of 2015.
We’re really pleased with the pace of that commercialization, we’re extremely pleased with the scale of the enzyme sales that that opportunity is leading us to. We have shown in the prepared remarks that we expect that business to grow again in 2016 compared to a quite strong 2015 revenue performance.
And we are also happy to disclose that we started additional work with that same client and did a significant R&D project with a second client. So we’re really just scratching the surface now with three projects one which has accelerated very nicely and two others that we hope will commercialize and then hopefully move our projects in the food space to come.
So really hard to quantify but it’s a growing percentage of our product revenues, it’s a growing percentage of our collaborative R&D project work as well.
Swayampakula Ramakanth
Okay the last question for Gordon. You gave a wide range in terms of revenue guidance going forward.
So what’s the push and pull within that growth range and how do you plan to manage that?
Gordon Sangster
I think a large part of it is the 20% growth in product revenues that we’re looking at this year driven primarily by Merck and our food ingredient customer although we are seeing ups and downs in other customer areas. But overall 20% to 25% growth in product revenues, I think it is pretty healthy.
At the same time R&D service fee revenue, we’re looking to increase and we’ve got a number of projects in the pipeline that we hope will drive that revenue line this year and offset the decline that we anticipate in Exela as well as provide more opportunities for product shipments or licensing deals in the future.
Swayampakula Ramakanth
Okay. So that Exela’s revenue which declined this year.
Is that expected the decline – not the same, I don’t if it is the same sort of decline to be expected or similar declines are expected in the future. How is that relationship set up?
Gordon Sangster
We do expect further decline although we don’t control that product line. It’s controlled by Exela obviously.
So just to be conservative, we’ve anticipated a further decline during 2016.
John Nicols
Yes, I’d add, maybe a similar percentage decline, but now that it’s off to the smaller base the actual dollar decline will probably not be quite as dramatic that we had deal with last year
Swayampakula Ramakanth
Okay. Fantastic, thank you very much.
John Nicols
Thank you [indiscernible].
Gordon Sangster
Thank you.
Operator
Our next question comes from the line of Kevin DeGeeter with Ladenburg. Your line is open.
Kevin DeGeeter
Hey, good afternoon guys. Thanks for taking my questions.
Not to kind of be the topic there but I want to appreciate your comments John with regard to the sustainability of growth around that Januvia franchise, specifically with Merck having some pretty interesting and positive data around their long-acting DPP-4. Is that confidence driven based on demand and expectation for demand as it pertains to the current formulation of Januvia or should we interpret your comments, in the context of the Januvia franchise hopefully that’s the phrase you’ve used a couple of times to include the contribution of perhaps Codexis enzymes into the next generation long-acting product from Merck?
John Nicols
Yes it’s great to observe like you that Merck’s Januvia franchise is healthy and growing. But our confident of Codexis is pretty much entirely built on our clear knowledge and actions to increase the percentage of their production that is based on our enzyme.
So it’s really our growth and sales is a function of our growth and penetration of their network of manufacturing.
Kevin DeGeeter
All right, great. Thanks for that clarity and just one or two other some of quick ones for me.
Very impressive revenue from your [indiscernible] customer in the quarter $1.7 million is terrific. Just how should we in general think about ordering patterns for the customer going forward?
Should we think about somewhat say consistent and growing potentially orders on a quarterly basis or will those tend to be lumpy perhaps or during once or twice a year?
Gordon Sangster
Yes, I think, thanks Kevin I’ll take that. We do expect this customer to help us eliminate a lot of the lumpiness that we’ve seen in our revenues by quarter in the past.
So I would expect shipments to them in each of Q2, Q3 and Q4, perhaps not quite as large as the one that we had in Q4, this certainly north of a $1 million.
Kevin DeGeeter
Okay, terrific that's helpful. And then just maybe, if I may just in the context of some of the additional personnel you’re hiring to support, expand it, research for additional therapeutic enzymes.
Should we think about the general skill set of those employees sort of being similar to the existing Codexis’ workforce in the context of really strength in protein engineering and design or well, some of those new hires also include certain skills that may enable toxicology or additional sort of preclinical work to be at least sort of manage from an in-house team as well in the future.
John Nicols
Yes, really good question, Kevin. So the people that we referred to are associated with the very earliest stage of trying to create an enzyme candidate.
And that is right in the heart of what we do for every client, its protein engineering. So these new employees to start new work for new therapeutic targets are very fungible with the existing 50 plus people we have in R&D.
So it’s a same talent pool, that they’d be added to and we’re looking basically to supplement the same characters of individuals that we already have in R&D. As we get into later stage development like we’re starting to approach with PKU asset that strains us for new types of talents.
And for the recent past and for the foreseeable future we’re primarily dependent on outsourcing and bringing in third-party experts to guide us at this stage of the company’s development as opposed to hiring in on just one potential program.
Kevin DeGeeter
Okay. And then lastly just one more from me, if I may.
And that’s just – can you kind of give us your current assessment as to when some of the downstream economics pertaining to the CodeEvolver partnerships. I’m thinking more really GSK than Merck here.
May begin to flow into the company, I guess, GSK, you’ve been working with GSK for over a year now. Is that – could we see some, after the way it free some additional economics in 2017 or is that really 2018 and beyond?
John Nicols
Well, I’m glad you recognized, it’s not going to be at all material in 2016, and 2017, it’s pretty early to see those back-end revenues as well. So I think the model that back-end is slowing from either the Glaxo or the Merck, CodeEvolver licensing deals are likely to really become remarkable material in the 2018 plus timeframe.
We might start to see some growth. Some sales start to develop next year.
We don’t have any of those revenues built into our current guidance in 2016.
Kevin DeGeeter
Okay, great. That's all for me.
Thanks for your help and congratulations on the progress.
John Nicols
Thank you very much, Kevin.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Steve Schwartz from First Analysis.
Your line is open.
Steve Schwartz
Good afternoon, gentlemen.
John Nicols
Hey, Steve.
Gordon Sangster
Hi, Steve.
Steve Schwartz
I guess my first question, it sounds like you are working with an innovator who has a blockbuster drug to develop an enzyme for their process. I think you clarified it was not Merck, not GSK.
Is that correct?
John Nicols
Everything you said there is correct, yes.
Steve Schwartz
Okay. And so how – what's the timing of that.
How – from what you're looking at and I realize you're limited in what you can share as far as details, but is this something that would come to fruition in two years, three years, may be one year.
John Nicols
So let me give a holistic answer. So we're in the middle of the R&D chapter.
So in the fourth quarter, we generated R&D service revenues to start to work on the design of that enzyme. We expect that we'll have more R&D revenues from that client for this project in 2016.
At some point and I'd say in this year, the R&D will stop. Hopefully, we will have hit our performance targets.
And under the assumption that, this is deemed a better process by the clients then they go into their installation of that process. But the real timeline drag on product revenues for us is the regulatory timelines for a drug company to convert a process from that which was filed in their original drug filing to a new process.
And that's a very complicated time consuming and significantly expensive process for a drug company. So we don't – we wouldn't expect that they would get that all done in 2016 for sure and hard to even imagine that they could in the successful scenario even get it done by the end of 2017.
Now we could get some business and product shipments to validate at larger scale. So those would be nice product orders just aging for the commercialization, the commercial installation.
And if we rewind to a long time ago with Merck that's what happened. We had some listings that helped them to scale up in their actual facilities and to get ready for the regulatory filings.
But it’s quite time consuming. And so hopefully, that gives you some color on the outlook for a successful advancement of that project from the early days which we just announced.
Steve Schwartz
I see. So John, can you tell me then is it simply an update to the DMF for the drug or would they have to go through clinical trials and that sort of thing, can you remind us…
John Nicols
They would not have to go through clinical trials depending on the place in the chemistry chain for where our enzyme is used they would have to go through varying degrees of proving that their drug has not been changed by the changing process.
Steve Schwartz
Okay.
John Nicols
And so there's no clinical trials required which is good but to satisfy themselves first and then the regulatory authorities sometimes that the drug itself has not changed as a significant undertaking nonetheless.
Steve Schwartz
Okay, thank you. That's helpful.
And then John in your opening remarks you made a comment about Merck. You said that you were doing more work for them than you would originally expected and for some reason I heard that to mean you're doing work for them outside of the licensing agreement.
Do I understand or did I hear that correctly that way or is it all within the licensing agreement?
John Nicols
So you heard it quite correctly. The licensing agreement has provisions that allow us to do additional R&D service work for Merck at our R&D facilities here in California.
And there were certain amount of R&D work that was negotiated with Merck when we consummated the licensing deal and Merck has come back and asked us to do more work than that. And we're excited about that it just – it shows just how much applicability Merck sees for designing novel proteins to affect their processes.
That they forecast and see the need to have us do more work than what was originally contemplated in the licensing agreement. And they've given us an indication that that work will carry forward into 2017.
Even as we expect the CodeEvolver license tech transfer will be done this year. So a very encouraging development with Merck.
Steve Schwartz
And so would you agree that this is certainly a reflection of or addresses a concern that some people have that when you sign one of these licensing agreements you're kind of giving away the store this indicates otherwise that they still need you beyond the licensing agreement.
John Nicols
Like I said in my prepared remarks, Steve thanks for pointing this out. We’re getting very, very intimate with GSK and Merck in these licensing deals and it’s helping us to fully understand everywhere that they see protein engineering can apply and it’s given us the opportunity to talk about things that we would not have normally talked about without CodeEvolver licensing intimacy.
So, very much so it’s clearly Codexis target to not have a diminishment of relationship with these clients after we’ve thought them and train them how to run protein engineering on their own and it’s great to see that start to unfold with Merck, and we hope it can unfold that way with all of our licensees ultimately.
Steve Schwartz
Yes, okay. And my next question – last question is for Gordon.
And Gordon, in your prepared remarks as you went through some of the contributors to revenue in the fourth quarter. It sounded like you noted some revenue from a royalty’s buy out from a legacy customer.
Did I steer that correctly and can you talk about that?
Gordon Sangster
Sure. Yes, you heard correctly, and we have been collecting royalties from a particular customer for I think a few years now.
But then we’ve discovered during the year that the basis for the calculation of the royalties was wrong. And so we approached them about correcting the error.
And in the process of negotiating the correction of the error, we ended up settling the disagreement with them so that we were paid for past two royalties, and achieved a settlement for our future royalties on what had been a declining royalty stream. So overall it was a good outcome for us.
And I’d point out that we don’t have non-recurring items like that in our 2016 guidance. And the quarterly revenues should settle down to a more normal even standard.
So that was really just a settlement of past two royalties.
Steve Schwartz
Okay.
John Nicols
Steve, if you don’t mind that we had built into our 2015 guidance all along, an expectation of settlement in the range that we ultimately settled.
Steve Schwartz
Okay. It doesn’t sound like you want to give me that number.
John Nicols
The number was detailed in our press release and it was $3.1 million.
Steve Schwartz
I see it here. Okay, very good.
Okay, thank you very much.
John Nicols
Yes, thanks, Steve.
Gordon Sangster
Thanks.
Operator
Our next question comes from the line of James Liberman with Wells Fargo. Your line is open.
James Liberman
Yes. Thank you.
It’s great to see how things are progressing, thank you.
Gordon Sangster
Thank you.
John Nicols
Thanks, Jim.
James Liberman
I just wondered, since you have had significant activities with a number of pharmaceutical companies over the years, might you come to a point where in fact, you don’t just get one but maybe two companies, one would do the CodeEvolver licensing. And if so, could you manage two such events in one year?
John Nicols
I’ll start with the second question first, Jim. The answer is absolutely we can manage two, maybe even more.
We’re managing two right now with Glaxo and Merck. And we would love to see that outcome unfold although we wouldn’t set an expectation that is likely we would be able to sign up more than one in a year, although we’re trying.
James Liberman
Thank you. And just another question in terms of perspective.
When you are working with Glaxo or Merck, and I guess there is a certain degree in which you’ve certainly helped in terms of transferring the CodeEvolver technology. Do you really have an intimate knowledge of their product development and might you’d be surprise that they may be closer to bring out another product using your enzyme technology, then you have knowledge of right now?
John Nicols
Yes. It’s possible, but we’re very close and pretty open door between our company and these two partners on all of the potential places where biocatalysis can make sense for them.
And in a fact, doing the CodeEvolver license, we were shrinking the cost associated with working with us, four of our projects. So it actually opens up for them to do more biocatalysis development work because they don’t have to worry about paying Codexis for the R&D time going forward after the licenses in place.
So in a fact, we’re quite close, we have good feel for those areas where we probably be surprised as in much earlier stage discovery efforts. There’s a lot of discovery efforts taking place in big pharma companies.
And the pharmaceutical companies don’t spend a lot in process development until it gets in the clinic. So we could be surprise and hopefully on the positive side for all the things that might come out of discovery.
But if you think about those projects that are in clinical stage for GSK or Merck, we probably know the large majority of those areas where it makes sense to apply a biocatalysis.
James Liberman
Okay. These really our great relationships and I’m thinking the downstream of just terrific.
Congratulations.
John Nicols
Thank you very much, Jim.
Operator
Thank you. And I’m showing no further questions at this time.
I’d like to turn the call back to Mr. Nicols for closing remarks.
John Nicols
Okay. Thank you very much.
I’d like to close by thanking you for joining us this afternoon. We’re proud of our execution and strong financial performance in 2015, and we’re very excited about our prospects for 2016.
We look forward to providing a progress report on the next quarterly conference call. Have a great day.
Thank you very much.
Operator
Ladies and gentlemen, thank you for participating in today’s program. Everyone have a great day.