Aug 10, 2016
Executives
Jody Cain - SVP, LHA John Nicols - President & CEO Gordon Sangster - CFO
Analysts
Matt Tiampo - Craig-Hallum Jay Colby - Ladenburg Steve Schwartz - First Analysis Sean Lee - H.C. Wainwright
Operator
Welcome to the Codexis’ 2016 Second Quarter Earnings Conference Call. [Operator Instructions].
I’d now like to turn the conference over to your host Jody Cain. You may begin.
Jody Cain
This is Jody Cain with LHA. Thank you for participating in today’s call to discuss 2016 second quarter financial results and business progress.
Please note that a slide presentation featuring a chart of the company's product pipeline to accompany today's conference call, commentary is available on the investor section of the company's website at www.codexis.com. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the Company’s Chief Financial Officer.
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.
The company's expectations regarding future uses of CodeEvolver technology platform by GSK and Merck the progress of timing of the transfer of CodeEvolver technology [indiscernible] and the potential for milestone payments under the company's license agreements with Merck and GSK. The company's expectations regarding potential future CodeEvolver licensing partnerships, the company's expectations regarding revenue growth related to [indiscernible] to sales Merck produced in Januvia in the second half of 2015 and 2017.
The company's expectations regarding product growth from 2016 for second commercial enzyme and commencement of the fair ground [ph] protein approaching engineering R&D services for -- include industry customer, the company's expectations regarding the development of therapeutic drug candidate, the company's ability to expand into adjacent markets, the company's successful conclusion of it's obligations under a collaborative research and development agreement with a leading biopharmaceutical company and the potential for Codexis to do additional payments depending on the customer selection to use the new enzyme developed during the program. The company's intention to continue to manage it's cost related to a new product development and litigation while maintaining the healthy cash balance and the company's plans to drive 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 8, 2016 and the company's Form 10Q filed on May 9, 2016 were some of the important risk factors that can 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, August 9, 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, Jody. Good afternoon everyone and thank you for joining us.
I’m delighted to report on our strong operational and financial performance for the quarter with net income reaching $2.2 million on revenues totaling $16 million. It is great to show double digit percent or GAAP profitability for the company at this revenue level.
These results reflect the successful completion of the first full transfer of our proprietary CodeEvolver technology under a licensing agreement and the fulfillment of our first R&D collaborative agreement with major biopharmaceutical company. At the beginning of the year we shared our outlook for strong growth for our core biocatalyst product business and I'm proud to report that we delivered on that in the second quarter with 62% year-over-year revenue growth.
Our excellent performance throughout the first half of 2016 gives us confidence that we will achieve our growth expectations for the full year 2016. Gordon will provide more detail on the financial highlights shortly but first I'll share some business highlights starting with our licensing agreement with GSK.
In slightly less than two years we successfully completed the full transfer of our CodeEvolver technology platform under our nonexclusive licensing agreement with GSK. This was no small feat as the transfer included GSK building a fully functional laboratory at its facility in Pennsylvania to house the CodeEvolver technology as well as extensive training of GSK personnel in the use of the platform.
The sharing of our extensive enzyme libraries and a host of other activities. Importantly the technology transfer went smoothly and was met with GSK satisfaction in each phase of the process.
As this was our first technology transfer we anticipated facing a number of hurdles some of which we knew and others that emerged along the way. I'm proud of our Codexis team's performance and solutions oriented approach that allowed us not only to successfully complete the transfer but to do so ahead of schedule.
We now know much more about the transfer process and that experience is translating into tech transfer execution processes that are benefiting mark and set up future CodeEvolver platform licensees to receive our protein engineering capabilities with increased confidence. We view developing additional non-exclusive platform licensing agreements for our CodeEvolver protein engineering technology as a key part of our business model.
These agreements allow for near term revenue generation during the technology transfer phase which under our agreement with GSK included upfront and milestone payments totaling $25 million. The next step is for GSK to begin using the CodeEvolver technology to develop its own enzymes.
As I will describe later we are now set up with specific opportunities that can yield the future backend revenues from the GSK platform license. Those backend revenues would come in the form of milestone payments that can range from $5.75 million to $38.5 million per protein development project cumulative across the life of the protein based on GSK's successful application of the license CodeEvolver technology.
I'm also pleased to report solid progress in finalizing our second CodeEvolver license we are on track to complete the remaining phase of the technology transfer under our agreement with Merck and to earn an $8 million milestone payment later this year. Merck continues to be an outstanding partner to Codexis.
I mentioned last quarter that we expanded our relationship with Merck beyond our CodeEvolver licensing agreement and enzyme sales for Januvia to now also include the ramp up of our in-house R&D service projects for them. Two new R&D teams are now in place and dedicated to this work.
We booked the first full quarter of R&D fees from the these projects with Merck in the second quarter. We continue to advance CodeEvolver licensing discussions with other pharmaceutical companies, these discussions reinforce our belief that protein engineering is a growing importance to the research and development of novel drugs as well as the mutual attractiveness of our CodeEvolver platform licensing transactions to leaders in this industry.
Since announcing our first deal with GSK we have provided qualitative guidance that we would enter into a CodeEvolver licensing partnership at least once every one to two years. We continue to uphold this guidance.
Moving on last month we reported the successful completion in our R&D collaboration with a leading global biopharma company. We announced this collaboration a year ago and since then we exceeded the parameters set forth in every phase of the agreement.
Along the way we earned upfront R&D service and success fees totaling $3.25 million. This was a collaborative effort in which we used CodeEvolver to develop a novel enzyme for use in our partners preclinical therapeutics program.
It's highly gratifying to report on our accomplishments in this first significant agreement with a major company in the biopharma industry. We are now positioned to receive additional payments from this partner depending on their election to use the developed enzyme.
Turning to progress with our core business of engineering and commercializing novel proteins from our CodeEvolver platform. As I mentioned at the beginning of today's call we saw over 62% growth in biocatalyst product sales for the quarter.
A large portion of that growth came from increased shipments of enzyme to Merck for the production of their blockbuster diabetes drug Januvia. The Januvia business has been a solid source of revenue growth in the first half of 2016 and our outlook is for continued revenue growth in the second half of 2016.
Our visibility into 2017 also indicates further revenue growth next year as our enzyme is increasingly being used in a greater portion of Januvia manufacturing. It is at this time that I would like to call your attention to the project [Technical Difficulty].
Many investors have requested that we provide a snapshot of our pipeline and to keep that snapshot current going forward. Of course we are proud to do so as our pipeline is the lifeblood for the company's future revenue growth prospects.
Let me start by explaining the construction of the pipeline, then I'll provide some broad implications from the pipeline weaving in developments from the second quarter of 2016. The construction of the pipeline, the row headers are self-explanatory covering the different categories where CodeEvolver protein engineering can add value to our targeted customers and markets.
Note that we have not included a row for pharma projects prior to and through Phase one as projects in these early drug development stages drive very modest revenues for Codexis. However you should note that activity to support these early stage projects is a very dynamic part of our business with our pharmaceutical customers.
Over the last two years we have sold over one 150 unique enzymes probably targeting over one 150 different drugs substances for dozens of customers at stages earlier than Phase 2. In addition to our modest revenues pre-Phase 2 it is nearly impossible for us to know the specifics of all these customer development activities.
On the flip side, we have solid visibility to biocatalyst projects that have advanced to Phase 2 clinical trials or later for our clients. Hence these projects are detailed on our pipeline snapshot.
Next, for any project to register on the pipeline it has to have generated at least $100,000 in R&D service revenues and/or enzyme sales over the last two years. Today's pipeline snapshot covers the period from the third quarter 2014 through the second quarter of 2016.
For completeness, we have added Codexis' self-funded projects. For this project type Codexis must have invested in excess of $100,000 in cost over the prior two years to register on the pipeline.
The column headers are important as well. Pre-commercial projects are related to products that are either still in development by us or have yet to be commercially launched by our customers.
Examples include improving an enzyme to enable a product to reach commercially relevant performance or improving an enzyme for a product that is still in development by our customers. The commercial column shows projects or products therefore that have been fully commercialized by both ourselves and our customers and hence our sources of sustained revenue for Codexis should they continue to register on the pipeline.
You will note that we show a pre-commercial column today labeled CodeEvolver licensee driven since as you know our platform licensing partners can create biocatalysts on their own and because Codexis is set to generate sustained revenues from those projects that are different from the revenue generation from projects we drive on our own. Currently all of the CodeEvolver licensee driven projects are precommercial but as those commercialize we will gladly add that new column to our pipeline.
Hopefully that helps you clearly understand how our pipeline has been constructed. We will include the latest pipeline snapshot in our current corporate presentation which is always posted to the investor section of Codexis.com.
We intend to update the pipeline periodically but at least annually going forward. Now let me turn to providing broad comments about our pipeline for a few moments.
First you will note that Codexis is currently executing on 29 unique significant projects across the spectrum of our target applications, 20 of those are biocatalyst projects aimed at reducing the cost of small molecule drugs and are spread nicely across the development life cycles. Seven of those are commercial and are currently generating sustained products sales for Codexis, 13 are in later stage development.
Of note our fastest growing segments across the small molecule categories are biocatalyst in development by our CodeEvolver licensee partners and biocatalyst deployed against patented already on the market drugs. Two years ago we had very few projects populating these categories.
Today we are beginning to see the backend benefits of our CodeEvolver business model approve, as evidenced by three late stage projects that we have been working on with GSK and Merck. In the case of biocatalysis for patented drugs we are now working on projects with four of the Top 20 pharmaceutical companies which includes our two CodeEvolver licensing partners plus two others.
Our second commercial enzyme beyond sales to Merck for Januvia which I've already highlighted is also experiencing strong year-on-year product sales growth for both the second quarter and the first half of 2016. In addition the Codexis pre-commercial patented drug project entered its second chapter of protein engineering R&D service work in the second quarter of 2016 encouraging us that this leading pharma partner is growing increasingly serious and transforming its commercial drug process to a new Codexis biocatalytic route.
Finally rounding out the pipeline commentary, let me highlight the project list outside of small molecule pharma. As you know none of these projects existed three years ago with the exception of the early R&D for the food ingredient project that is now grown to be one of our leading commercial product revenue streams.
Today we have nine projects outside the small molecule pharma industry for which we are self-funding. In the partnership projects categories, in addition to the successes already detailed with our biopharma collaboration we are pleased to have recently started another round of protein engineering R&D service work with our second food industry customer.
That project which was initiated in the fourth quarter of 2014 generated significant R&D service fees for us in the second half of last year is now beginning its third round of funded R&D. It's exciting it's exciting to see that food project continued it's advancement with that great client once again.
Finally I will close out this section highlighting our four self-funded protein engineering projects starting with the development of our own rare disease enzyme therapeutic candidate. We view our drug discovery program as one of the highest value applications for our CodeEvolver technology with prospects to create an early stage drug pipeline with minimal cash investment.
Through our consulting work earlier this year we identified a priority short list of highly promising targets for new therapeutics our R&D teams have initiated work in developing these candidates. We've already proven our ability in drug discovery with the development of our enzyme therapeutic asset for the rare disease phenylketonuria which we continue to develop on our own.
Additionally our growing approach into biologic drug discovery was met with an enthusiastic reception at the International Bio Conference held in San Francisco in June. We were greeted with interest by numerous potential biopharma partners to discuss both collaborative drug development project ideas as well as potential partnering of the novel drug assets we are developing through our in-house efforts.
We look forward to providing you with more details for both our PKU program and our new therapeutic target work in the coming quarters. Regarding our self-funded projects outside the therapeutics arena, both are advancing very nicely from a technological point of view as we move closer to taking steps that could monetize them in their respective marketplaces.
In the food space, we have generated new enzyme technology that positions us to profitably approach additional partnerships with a wide array of food ingredient manufacturers. In the project targeting an industry outside pharma and food we are encouraged by our early enzyme developments targeting the creation of a new set of products engineered to uniquely address that industry's fast moving enzyme performance needs.
We look forward to providing updates on both programs in future quarters. It is notable that we have been financing the R&D investment in these four diverse potentially very attractive Codexis projects with funds generated by our own operations with negligible impact on our cash balance.
We see these self-funded projects as a great use of funds to accelerate the company's growth for our investors. With that I'd like to turn the call over to Gordon Sangster to reveal more details regarding our financial performance.
Gordon?
Gordon Sangster
Thanks, John. As John stated we are reporting strong financial performance for the second quarter of with revenues reaching $16 million up a 166% over the prior year second quarter.
Biocatalyst [indiscernible] revenues totaled $12.1 million in the second quarter of 2016, this increase from the prior year second quarter reflected the recognition of revenue from the completion of the technology transfer phase of our CodeEvolver licensing agreement with GSK. The [indiscernible] $7.5 million milestone payment from the third and final phase of the tech transfer as well as $2.5 million an accelerated deferred revenue related to the early completion of the technology transfer phase.
You may recall that we report to the $6 million upfront payment from GSK in July 2014 upon entering this licensing agreement and we have been recognizing the statement [Technical Difficulty] quarterly basis. It's a successful early completion of the technology concept phase of our agreement, we were able to recognize the remainder of the upfront payments in the second quarter.
Also included in our R&D revenues was the recognition of a milestone payment related to the successful completion of our collaboration with the major biopharmaceutical company that John discussed earlier. Biocatalyst product sales in the second quarter of 2016 were $3.3 million up 62% over the prior second quarter.
The year-over-year growth was primarily related to increased shipments of enzymes to Merck for the production of Januvia as well as increased shipments to another major pharmaceutical company. We expect contributions from Merck at this higher level July 2016 and into next year.
Revenue from our revenue sharing arrangement for our for argatroban with Exela in Q2 2016 was $658,000. Gross margin is a percentage of total revenues for the second quarter of 2016 was 86% which was up from 79% in the second quarter of 2015.
This margin expansion related revenue mix including revenue recognized from the completion our GSK technology transfer and biopharma R&D agreements. R&D expenses were flat year-over-year of $5.1 million for the second quarter 2016 but were down from $5.7 million for the first quarter of 2016 when we reported incremental growth in consulting fees related to the evaluation of new drug development targets.
SG&A expenses for the second quarter of 2016 were $6.4 million, a 21% increase from the second quarter of 2015 but a 6% decrease from the first quarter of 2016, this year-over-year increase was a result of higher marketing and legal expense. We are reporting net income for the second quarter of 2016 of $2.2 million or $0.05 per diluted share compared to the net loss for the second quarter of 2015 of $5.4 million or $0.14 per share.
On a non-GAAP basis net income for the second quarter of 2016 was $4.8 million or $0.12 per share compared with a non-GAAP net loss for the second quarter of 2016 or $2.7 million or $0.07 per share. Turning to your year-to-date financial results, total revenues for the first six months of 2016 were $24 million up 87% over the prior year six month period and included $15.6 million in biocatalyst R&D revenue and $7 million in biocatalyst product revenue.
Gross margin was 80% on total revenues for the first six months of 2016 distracting with our guidance for the full year. R&D expenses for the first half of 2016 of $10.8 million increased modestly compared with the first half of 2015.
SG&A expenses were $13.2 million for the first six months 2016 up from $10.9 million for the first half of 2015 due mainly to higher legal expense and outside services. We reported a net loss for the first six months of 2016 of $4.7 million or $0.12 per share which was a significant improvement from a net loss for the prior six month period of $10.9 million or $0.28 per share.
On a non-GAAP basis we’re reporting net income of $507,000 or $0.01 per share for the first six months of 2016 compared with a non-GAAP net loss of $5.6 million or $0.14 per share for the first half of 2015. Cash and cash equivalents as of June 30, 2016 were $22.4 million versus $23.3 million as of December 31, 2015.
We expect to continue managing our costs related to new product development and litigation on maintaining a healthy cash balance and finally we’re reaffirming the 2016 financial guidance that we introduced on our 2015 fourth quarter call. We expect total revenues to be $46 million to $49 million representing growth of 10% to 17% over 2015.
As I mentioned revenues for the first half of 2016 total $24 million so we’re tracking well against these expectation. Our revenue guidance assumes growth in our core biocatalyst R&D and product businesses.
It also assumes the recognition of two milestone payments totaling $15.5 million related to or CodeEvolver licensing agreements with GSK and Merck. As we reported today we recorded the first of these milestone payments of $7.5 million from GSK in the second quarter of 2016.
We expect to earn the $8 million milestone payment from Merck later in the year. As a reminder our revenue expectations do not include a new CodeEvolver licensing agreement and we are reaffirming our expectations for gross margin as a percentage of total revenues again to be in the 80% to 85% range for 2016.
We're tracking well against our guidance outlook with gross margin at 80% for the first half of 2016. With that I would now like to turn the call back to John.
John Nicols
Thanks for that financial review, Gordon. We are excited about our performance on our licensing and collaborative agreements and core businesses that are producing strong quarterly results.
We are also executing on our strategy to capitalize on multiple high value applications afforded us through our world leading CodeEvolver technology platform to enter into adjacent markets and to develop our own therapeutic product candidates. As Gordon mentioned, we are tracking well against our outlook for 2016 to be another year of strong growth and we are making progress in driving Codexis towards sustained profitability.
With these comments I would like to open the call to questions. Operator?
While we’re waiting for our first question I would like to mention that we will be participating in three investor conferences in September. We will present at Rodman & Renshaw Healthcare Conference in New York of September 12 and at the Keybanc Capital Markets Conference on the following day in Boston.
We also will be at the Ladenburg Healthcare Conference in New York on September 26. A webcast of the Rodman 7 Renshaw presentation will be available on our website.
Okay, Operator we’re ready for the first question.
Operator
[Operator Instructions]. And our first question comes from the line of Matt Tiampo with Craig-Hallum.
Your line is open.
Matt Tiampo
I wanted to drill down a little bit and get some clarification on and thank you for providing the pipeline snapshot, it's very helpful but I should [indiscernible] first and this is sort on patented drugs in the biocatalyst partners [indiscernible] small molecules column. Those are patented drugs that are already commercially available where you'd be designing an enzyme to lower the cost.
So is that a correct way of thinking about that column?
John Nicols
Yes exactly correct, Matt.
Matt Tiampo
And second to clarify under partner projects for other opportunities and maybe I missed this in the prepared comments but there are two Codexis driven projects listed under developed novel biologics, we know about one with the biopharma customer that we've been discussing over the past nine months to a year now but am I missing something? What's the second -- I don't know it's--
John Nicols
Matt, the second project is smaller but a meaningful project with another key customer who I believe never provided any specific details on that particular project.
Matt Tiampo
Okay. And is it to develop a potential therapeutic asset using your technology?
John Nicols
Yes, it was involved in discovering or developing novel therapeutic candidates, yes, novel biologic therapeutic candidates.
Matt Tiampo
And is it ongoing or has that -- that agreement ended?
John Nicols
That specific R&D service agreement has ended but it could lead to a follow on work. It has not yet done so.
Matt Tiampo
And then maybe if you comment a little bit on the potential for an additional license deal I know there is one embedded in your guidance for '16 but I think previously you've mentioned your confidence in being able to take the deal in 2017, maybe just--
John Nicols
Sire. In prepared remarks we you upheld our qualitative guidance that we expect to sign a new CodeEvolver platform licensing deal once every one to two years.
So the last deal that we inked was with Merck and that was in August of 2015. So to be specific we expect to ink a third deal before August of next year and we have a list of clients that we’re in discussions with potential platform licensing deals and we're encouraged that we will be able to close the third deal in that timeframe.
Operator
And our next question comes from the line of Kevin DeGeeter with Ladenburg. Your line is open.
Jay Colby
This is actually Jay Colby on for Kevin. I guess first since you have your in-house therapeutic pipeline target optimized now.
How do you see this business model evolving from here and how do you drive these assets to a point where you can ultimately monetize them?
John Nicols
Sure. So just to be clear we have consulting legwork in the beginning of this year to help us to prioritize from the universe of potential therapeutic targets to go after diseases that we could provide a therapeutic beneficial product towards So we just started with that list that prioritized list, we have just begun to do brand new R&D, to create new therapeutic candidates, so that's the stage we're in.
So we're in early discovery efforts using the CodeEvolver platform to create new therapeutic candidates at this stage. So very early stage outside of the work that we've done for PKU which we have skipping more detail historically to our investors.
We see our CodeEvolver platform as a very cost effective way to discover and do early optimization of new therapies and in general those are targeting rare orphan diseases. It's a similar size R&D team to create a novel therapeutic before you go into actual animal testing to what we do for every other client for any small molecule work or partnership deal for the food industry etcetera.
It's a typical size team. It's a typical length of project, certainly less than a year in this discovery stage.
So we see this is an extremely cost effective platform to create early stage drug candidate that ultimately would be hopefully prospects to go into animal trials and down the road human trials. So our premise is that CodeEvolver platform can create a stream of therapeutic candidates very cost effectively and we're looking forward to generating that pipeline of therapeutic candidates and advancing them and enterprising you of our progress over time.
Jay Colby
So I guess that the PKU program sort of what are the next steps here and you know I know the process kind of monetize this is a little longer than initially thought and so what are the challenges that you have learned from that you will use for some of these new enzymes.
John Nicols
The PKU project it's intent is to develop an enzyme that will be orally dosed for the treatment of PKU disease. So we've been doing extensive animal research on showing the efficacy of our drug candidate after it's being orally dosed to animals.
So we've done significant work there, we've learned a lot. We're encouraged by the results of the animal testing that we've done to-date.
In parallel we've done a significant amount of work to detail what it would take for it Codexis to ultimately be able to produce human trials and that requires what is usually referred to as IND enabling studies which includes the ramp up of efforts to improve the manufacturing route to do and enhance toxicological work on the drug candidate. We have yet to fully indicate to our investors that we intend to do that work.
We are finalizing our animal research chapter and we're approaching the gate where we inform our investors about our intent or not to advance into doing full line IND enabling studies that those IND enabling studies are generally more expensive than in third party spending than we've had to incur so far for the PKU project. So we've also indicated consistently that as we move towards those human trials with those IND enabling studies that we are very likely to perform a market test to see what the pre-clinical asset would be worth to the host of potential strategic partners.
So we're moving towards really telling you firmly that we're doing all of those activities and we've yet to give that firm clarity at this point.
Jay Colby
Yes that’s sort of a two half '16 type of announcement or sometimes.
John Nicols
I think the second half of this year maybe early next year it's in that range.
Jay Colby
Okay. And then one last one, is there with the GSK agreement ending the tech transfer, is there an opportunity to bring some people that were working on the tech transfer into the in-house development for these new assets?
John Nicols
I'm not sure I quite understand.
Gordon Sangster
We're constantly moving people and teams arriving to [indiscernible] so people weren’t devoted only exclusive to GSK so they are moving between American dollar projects including the [indiscernible].
Operator
And our next question comes from the line of Steve Schwartz of First Analysis. Your line is now open.
Steve Schwartz
So if I could just have my moment with your news slide and thank you for creating that, you have a line in there for you know products and processes and other industries and it's two and one. I presume that's related to the food opportunities?
John Nicols
Today, those three projects in that row are all associated with the food industry, that's correct. Not necessarily long term but today that's true.
Steve Schwartz
And have historically in past calls talked about two projects is that right?
John Nicols
Historically we've given visibility to two projects including some additional color on the project with our second food industry company but we've also informed that we started doing early R&D work for a second project with our lead food ingredient company that's led to the commercial product that we've spoken to many times.
Steve Schwartz
Okay. And then the other question I had the answer to this could be very complex I'm certainly not looking for that but you know just with respect to your revenue run rate in the product category in the product category and in the R&D category, what is the turnover quarter to quarter in each of those revenue streams, in other words even though 50% of that revenue something that you see consistently across three, four quarters you know is maybe 90% of the revenue turned over quarter to quarter and what makes me think about this question is your comment about the two project teams that you now have working for Merck where I see that element, that revenue component being consistent from quarter to quarter.
So can you give us any color on that sort of thing, I would appreciate it.
John Nicols
Yes. Let me try and then Gordon could add to my comments I'm sure.
And it's best to separate product revenues from R&D revenues. So on product revenues we have a good bit of visibility, the products are being supplied in general to customers who are making drugs that are already on the market.
So they're planning their supply chain and were key part of their supply so we have a good bit of the visibility to product revenues and it enabled us to give you pretty sharp outlook guidance at the beginning of the year to be able to grow our product revenues over 20% in 2016 versus 2015 and we have certainly started to do that in the first half of 2016. On the R&D revenue side it's a little more complex.
You know first and foremost the milestone payments from our CodeEvolver licensing partners fall into that revenue category and I think there we give a lot of very consistent sharp guidance on when we expect and the magnitude of those milestone payments there. The large majority of the remainder of the revenue in that category is associated with funded R&D work and there it's a project team will work on a specific protein engineering project with a specific client for a period of time and when that project hits its end of funding or hits it's milestones the project ends at least in that chapter.
As you hear it comes back frequently but in that chapter it ends and then those teams move on to other projects. We've found the best way to give you some feel for predictability of that revenue stream is a slide that we have been routinely providing in our corporate presentation, it shows you the fourth quarter moving average of R&D service fees excluding the lumpy tech transfer milestone payments and I encourage you to look back at that slide, it shows a very healthy double digit relatively consistent growth of revenues on that basis over the last two to three years, I forget the exact time frame.
So hopefully those comments are in line with what you hoping to hear from us and maybe Gordon has a comment or two also? Steve is that working or?
Steve Schwartz
No that works. And with respect to product, so it sounds to me like in any given quarter you could be booking revenue on a shipment that you know that customer didn't buy that product the quarter before or the product or the quarter after and certainly you knew it was coming in that quarter maybe three quarters before but it sounds to me like there is a lot of turnover in the source of the revenue from quarter to quarter in the product business.
Gordon Sangster
I think that's probably true, Steve. Certainly I think Merck Januvia has [indiscernible] of this year so we’re seeing that as a good foundation for our quarterly revenue, our product revenue growth at the same time we do get orders the fluctuate from quarter to quarter depending on where the product of -- the inventory levels of different customers.
So overall we still expected strong product revenue growth this year of 20% to 25% and we’re actually exiting that at the moment.
Operator
[Operator Instructions], Our next question comes from the line of Sean Lee with H.C. Wainwright.
Your line is now open.
Sean Lee
Just two quick clarifications if you could help me, on your charge license fee driven projects those are initiated by GSK and Merck technology transfer?
John Nicols
That is and as we hope to continue to expand our CodeEvolver licensees those partners projects would fall in that column as well.
Sean Lee
Also a second point on, I think I’ve reading that you've been extending your science team so you can have more current projects ongoing. Could you provide us with an update on how many scientists or how many teams you know right now or if you’ve have price expanding further?
John Nicols
Yes right now we have I think it's about 54 people in R&D ranks and those 54 R&D scientists can manage at any given point in time somewhere between 12 and 15 different protein engineering projects concurrently. The 54 is up over the last 18 months I'd say close to 5 to 10 over the last 12 to 18 months.
Sean Lee
Do you’ve plans to expand on that for the next year or so?
John Nicols
We see solid demand drivers for our R&D teams and really this is the core capacity of our company, these protein engineering teams and so it's likely that we'll continue to do some incremental hiring in the R&D ranks and that's really just that would be an indication of the strength of the outlook for doing protein engineering in a very positive driver for the company.
Operator
Thank you. And our next question comes from the line of [indiscernible] with Morgan Stanley.
Your line is open.
Unidentified Analyst
Follow-up on that question, do you know how many scientist that Merck or GSK both are working even [Technical Difficulty] do you have an idea of -- greater the number the better success rate?
John Nicols
Really I'm not at liberty to share their head counts but I will say that their staffing for their CodeEvolver labs are less than Codexis' and you know remarkably so but not trivial at all. They both have the ability to do multiple protein engineering projects in parallel and they have a footprint that can handle more than they're currently staffing up for.
Unidentified Analyst
Okay. Second question, in the impression I’ve [Technical Difficulty] revenues from two or this [indiscernible] industry because time to market will be quicker.
Did you mention either growth in food area you mentioned [Technical Difficulty] growth rate in the food enzyme area?
John Nicols
For our commercial food enzyme the business is solid. It hasn’t been a near term driver but we continue to have very strong expectations for the growth product revenues for that product for the foreseeable future.
Unidentified Analyst
Am I correct that at least of these products is actually on the shelf on the market right now?
John Nicols
Our enzyme is used in a product that has been launched into the market, yes.
Unidentified Analyst
The potential for few other, are these -- one that’s in the market right now are test markets or is this something makes you--
John Nicols
We think it's been on the market long enough that it would not be considered in test marketing, it's been given a brand name, it's been marketed by a leading company. So you know our estimation it is commercial.
Unidentified Analyst
Okay. In the industry that [Technical Difficulty] cost savings measure for an industry process or is this an enzyme that we believe I guess what I would recall to solve a new problem or solve a problem in a different way.
John Nicols
We haven't given a lot of detail on this target yet Greg, as you know we’re excited about it and we have set an expectation to deliver something of meaningful this year. We’re doing R&D right now.
I would say that this enzyme is potential set of enzymes is targeting an industry that's already using enzymes and we see changes in the needs for those and pulling in the need for novel enzymes, enzymes that don’t exist today and that that's our bread and butter, that's what CodeEvolver does, it creates enzymes that don't exist today. So we're excited to deliver some new enzyme solutions to an industry that already uses enzymes.
Unidentified Analyst
All right. So you're going to be a competitor to somebody else out there that’s providing an enzyme?
John Nicols
That is implicit in my statement, yes.
Unidentified Analyst
Okay. And then the law suit with your previous employee, I forgot the name of the company, are any of their -- nay of your customers continuing to buy from this previous employees company or has that stopped and now the revenues are coming back to you all?
John Nicols
So to be very precise this person that we've filed a lawsuit that is now the Founder of a Chinese competitor, never worked for Codexis directly. He worked at a company, a major company who did collaborative work with Codexis at the time that he worked for that company.
So he sat across the table from Codexis' as a collaborative partner but he was never an employee of Codexis and we saw evidence of his infringement of our enzyme technology, we took assertive action to protect our portfolio whereas Gordon detailed a little bit, we’re in the middle of the litigation process. No real remarkable news to report on just due process the revenue impact from taking filing the lawsuit against this Chinese competitor has been and was expected to be negligible in the short run.
Operator
Thank you. and I'm showing no further questions in the queue.
I would now like to turn the call back over to John Nicols for any further remarks.
John Nicols
Okay, I would like to close by thanking you for joining us this afternoon. We're very proud of our strong financial and operational performance for the first half 2016 and we're excited about our prospects for the quarters and years to come.
We look forward to providing a progress report on our next quarterly conference call. Have a great evening.
Thank you.
Operator
Ladies and gentlemen thank you for participating in today's conference. This concludes today's program.
You may all disconnect. Everyone have a great day.