Nov 8, 2016
Executives
Bruce Voss - IR, LHA John Nicols - President and CEO Gordon Sangster - CFO
Analysts
Matt Tiampo - Craig-Hallum RK - H.C. Wainwright Jay Colby - Ladenburg Steve Schwartz - First Analysis
Operator
Ladies and gentlemen, thank you standing buy. Welcome to the Codexis’ 2016 Third Quarter Conference Call.
At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will go to question-and-answer session.
[Operator Instructions]. As a reminder, this call is being recorded today, November 8, 2016.
And I’d now like to turn the call over to Bruce Voss. Please go ahead.
Bruce Voss
This is Bruce Voss with LHA. Thank you all for participating in today’s Codexis’ call to discuss 2016 third quarter 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. 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, revenue growth and gross margin as a percentage of total revenues; the Company’s expectations regarding future uses of CodeEvolver technology platform by GSK and Merck 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 and its core biocatalyst R&D and product businesses including growth in enzyme sales to Merck for using Januvia in the fourth quarter of 2016 and in 2017; the receipt of new orders for services and products for 4Q 2016, as well as prospects for increased orders and new business with new major pharmaceutical companies; the Company’s expectations regarding product growth for 2016 for a second commercial enzyme and its commencement of a third round or protein engineering, R&D services for a second food industry customer; the company’s expectations regarding the development of its own therapeutic drug candidates; the Company’s ability to expand into adjacent markets and it’s anticipation of launching an enzyme for use by customers outside of food ingredient and pharmaceutical industries; the Company’s expectation that it will continue to receive licensing payments based on its biopharmaceutical partner having exercised its options for a non-exclusive license to a novel enzyme developed by Codexis for the partner’s preclinical therapeutic development programs; the Company’s intention to continue to manage its cost related to new product development and litigation while maintaining a healthy cash balance; and the Company’s plans to drive towards 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 forms 10-Q filed on May 9, 2016 and August 9, 2016 for 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, November 8, 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.
I’m proud to report another quarter of exceptional financial results by Codexis. Net income was $1.4 million on revenues reaching $14.9 million, which included $4.1 million in product revenues.
When introducing 2016 revenue guidance, we noted our expectation for growth and product revenue as key component. It’s gratifying that year-to-date, our product revenues have increased by more than 60% versus last year.
Growth in product sales indicates the momentum of our engineered enzymes the increasingly utilized in our customers’ processes. Our third quarter revenues also included $8 million in milestone revenue earned from the successful technology transfer of our CodeEvolver protein engineering platform to Merck.
As with the successful tech transfer to GlaxoSmithKline, we satisfied Merck at every step in the process and successfully completed the transfer ahead of schedule. We continue to show exceptional execution for transferring the technology to our CodeEvolver protein engineering platform licensing partners, noting that each individual tech transfer is customized for the given partner.
As a result of our strong performance, we are reporting our second consecutive quarter of profitability. We also have gained greater visibility on full year revenues as we move towards the end of the year, allowing us to raise the low end of our previous revenue guidance range.
We now expect revenues to be between $47 million and $49 million, representing growth versus 2015 of 12% to 17%. If delivered as expected, Codexis will have delivered its third consequent year of double-digit revenue growth.
Solid sustained financial results like these can only flow from proven business approaches that generate value for both shareholders and clients. Our traction with engineering novel proteins that improve manufacturing processes and reduce costs for the major pharma clients is remarkable as we close 2016.
Highly visible pressures to reduce drug pricing for these clients is making cost reduction a growing imperative, and Codexis is increasingly being called on to help on that. Seven out of the top 10 largest pharmaceutical companies are working significant programs with us in the final two quarters of 2016, seven out of the top 10.
Referencing Contract Pharma’s top 25 pharma and biopharma report published July, August 2016 as well as the current Codexis pipeline posted on the Investors section of codexis.com. Let me give you a feel for the exciting broad progress we are now making with large pharma.
First and foremost, let me start with Merck, as the depth and breadth of our relationship with them is the blueprint by which we desire to drive all other major pharma relationships. Merck is one of our CodeEvolver platform licensees, a major commercial user of Codexis enzyme for a blockbuster drug and that expanses continuous user of Codexis R&D with the aim to drive lower costs more widely across its drug pipeline.
In the third quarter with Merck, we number one, completed the CodeEvolver license tech transfer and recognized an $8 million milestone payment; number two, delivered $1 million plus sales of the enzymes to Merck’s blockbuster Januvia diabetes drug franchise; and number three, lined up and began operation of several new dedicated R&D project teams for their growing list of protein engineering targets. Note that these new dedicated R&D project teams lined up in the third quarter are on top of an already running set of dedicated project teams.
Each of these R&D teams running in parallel at Codexis are focused on different protein engineering targets. Merck sees how widely applicable our protein engineering approach can be to improve their drug manufacturing processes.
Merck is not alone. Also in the third quarter, we delivered multi -- I’m sorry, we delivered $1 million plus commercial product sales to another top 10 pharma company’s commercial drug manufacturing process.
We finished a six-digit enzyme improvement project for a third top 10 pharma company, with aim to improve their recently launched drugs manufacturing route. We lined up a six-digit clinical product order batch for 4Q to a fourth top 10 pharma customer for a Phase 1 oncology drug.
We are finishing in 4Q a six-digit enzyme improvement project on a late stage Phase 2/3 clinical drug candidate for our fifth top 10 pharmaco. And we broke open a set of enzyme improvement RFPs for yet a sixth top 10 drug company.
This one, a company we had never done any material business prior. And finally, number seven with GSK.
I’m delighted to report that in 3Q, we recorded our first project specific milestone revenue from GSK under the backend economics of our CodeEvolver licensing agreement. This collaborative project use CodeEvolver to develop an enzyme to optimize a new biocatalytic process for one of GSK’s drugs already on the market.
This is the first instance of what we believe will be a series of growing backend revenues from our CodeEvolver licensing partnerships. Clearly, we are building momentum with large pharma clients.
But that’s not the only place we are successfully applying our CodeEvolver protein engineering technology. In the biotherapeutics arena, we were pleased in 3Q to be advised that our biopharmaceutical partner exercised its option for a non-exclusive license to a novel enzyme developed by Codexis.
The enzyme was developed using CodeEvolver for use in one of the partner’s preclinical therapeutic development programs. We collected a modest annual payment from them in 3Q and expect those annual payments to continue and potentially grow in the future.
In addition, we are advancing the development of our own pipeline of biotherapeutic assets. Advancements have been made on animal trials and pre-IND planning for our overall biotherapeutic candidates for phenylketonuria disease.
We have started early stage animal trials on the second therapeutic enzyme for a different disease condition and have begun discovery efforts for a few other disease targets. All these targets are well-suited to have our CodeEvolver protein engineering deliver against.
And finally, our efforts outside of pharma continued to progress as well. By year-end, we expect to finalize the third funded R&D chapter of our work with our second food industry partner.
In addition, we have advanced our self-funded enzyme development project for a food ingredient with wide industrial interest. And we are approaching the launch of an enzyme that we have been developing for a wide set of potential customers in a new industry outside of pharma and food.
Our pipeline of projects is diverse, growing and satisfying a very significant set of the world’s leading companies. CodeEvolver protein engineering is delivering value in our target markets and creating a stronger, growing company for our shareholders we invested in.
With that, I’d like to turn the call over to Gordon for a detailed review of our financial performance. Gordon?
Gordon Sangster
Thanks, John. As John stated, we are reporting strong financial performance for the third quarter of 2016 with the recognition of the milestone payment and the significant increase in biocatalysts product sales.
Revenues for the quarter of $14.9 million, compared with 14.917.4 million for the third quarter of 2015. The decrease is attributable to higher revenues recognized on achievement of milestones and revenues from a revenue sharing arrangement in the 2015 quarter, partly offset by higher biocatalyst product sales in the 2016 quarter.
Biocatalyst research and development revenues were $10.4 million versus $14.5 million for the third quarter of 2015, The decrease was due to the timing of milestones under technology transfer agreement. In the third quarter of 2016, we recognized an $8 million milestone for the completion of the CodeEvolver technology transfer to Merck whereas in the third quarter of 2015, we recognized the $6.5 million milestone from our collaboration with GSK and the $5 million milestone from our collaboration with Merck.
Biocatalyst product sales increased by 123% or $4.1 million compared to the same period in 2015. This growth was primarily related to increased shipments of enzymes to Merck for the production of Januvia as well as increased shipments to another core major pharmaceutical company.
We expect revenues from Merck to continue at this higher level into next year and beyond. Revenue from our revenue-sharing arrangement for our argatroban with Exela in Q3 was $445,000.
Gross margin as a percentage of total revenues for the third quarter of 2016 was 81% and this compares with 93% for the third quarter of 2015. The higher gross margin last year reflects revenue mix favoring milestones.
Turning to operating expenses, R&D expenses were $5.5 million for the third quarter of 2016, a 9% increase from the prior year period, primarily due to higher outside services and increased costs associated with prior headcount. SG&A expenses for the third quarter of 2016 decreased 3% to $5.2 million from the prior year, primarily the result of a reduction in rent expense, reflecting the portion of our facility.
We are reporting net income for the third quarter of 2016 of $1.4 million or $0.03 per diluted share compared with net income for the second quarter of 2015 of $5.4 million or $0.13 per diluted share. On a non-GAAP basis, adjusted net income for the third quarter of 2016 was $4 million or $0.09 per diluted share compared with adjusted net income for the third quarter of 2015 of $8 million or $0.19 per diluted share.
Turning to our year-to-date financial results, total revenues for the first nine months of 2016 were $38.9 million, up 29% over the prior year and included $26 million biocatalyst R&D revenue and $11.1 in biocatalyst product revenue. Gross margins of 81% on total revenues for the first nine months of 2016 is tracking in line with our guidance for the full year.
R&D expenses for the first nine months of 2016 were $16.3 million compared with $15.5 million for the first nine months of 2015 with the increase due to consulting fees for the evaluation of potential new drug development targets as an investment in our future growth, higher outside services and increased cost associated with modestly higher headcount. SG&A expenses were $18.5 million for the first nine months of 2016, up from $16.3 million from 2015 due mainly to higher legal expense and higher consulting fees relating to exploring business development opportunities.
We reported a net loss for the first nine months of 2016 of $3.3 million or $0.08 per share, which was a significant improvement from a net loss for the prior nine-month period of $5.5 million or $0.14 per share. On a non-GAAP basis we’re reporting adjusted net income of $4.5 million or $0.11 per diluted share for the first nine months of 2016 compared with an adjusted net income of $2.3 million or $0.06 per diluted share for the first nine months of 2015.
Cash and cash equivalents as of September 30, 2016 were $14.9 million. This does not include an $8 million milestone payment we earned and recognized in the third quarter and received payment for in October.
As such, the milestone was recorded in accounts receivable on our balance sheet as of quarter end. We expect to continue managing our cost related to new product development and litigation while maintaining a healthy cash balance.
In connection with our effort to increase cost efficiencies in the quarter ended September 30, 2016, we began the process of liquidating our Indian subsidiary, In order to accomplish this, we’re legally required to maintain our subsidiaries cash balance in an account managed by a legal trustee to satisfy our financial obligations. This balance was previously classified as unrestricted cash and is now included in restricted cash under current assets on our consolidated balance sheets on total $0.9 million on September 30, 2016.
And finally, we are narrowing our 2016 revenue guidance range that we introduced on our 2015 fourth quarter call. We now expect total revenues for 2016 to be $47 million to $49 million, which represents 12% to 17% growth over 2015.
Our prior guidance was for $46 million to $49 million. Revenues for the first nine months of 2016, totaled $39 million.
So, we’re tracking well against this new expectation. Our revenue guidance assumes growth in our core biocatalyst R&D and product businesses, and we are narrowing our expectation for the range of gross margin as a percentage of total revenues to be in the 80% to 82% range for 2016.
We’re tracking well against our guidance outlook with gross margin for the first nine months of 2016 at 81%. We’ll be introducing financial guidance for 2017 during our fourth quarter of 2016 call in early March.
With that I would like to turn the call back to John.
John Nicols
Thanks for that financial review, Gordon. Let me close by highlighting our excitement in regards to our progress on multiple fronts.
First, as was highlighted in today’s call, our CodeEvolver platform technology is proving its ability to engineer and commercialize enzymes that can reduce the costs and environmental impact of a growing list of manufacturing processes. And this is of increasing importance at this critical time when pharmaceutical companies face increased pressure on their drug pricing.
Accordingly, we continue to be encouraged about our advancements discussing CodeEvolver platform technology licensing with other pharmaceutical companies beyond GSK and Merck. Since announcing our first platform license deal with GSK, we have stated that our plans are to enter into a new CodeEvolver licensing partnership at least once every one to two years and we affirm the outlook once again today.
Second, we continue to impress clients with our protein engineering capabilities. The platform deploys leading-edge synthetic biology modules uniquely working in concert to create improved proteins.
Biology tool enhancements like next-gen sequencing and artificial intelligent bioinformatic algorithms are driving margin improvements. And their orchestration into CodeEvolver is enabling us to create new enzymes across the growing class of enzyme types more quickly and effectively than ever.
Additionally, given the robustness of the platform coupled with the deep experience base of our scientific staff, we are able to move our R&D team seamlessly from one project onto other without time delays or other inefficiencies. With this fluidity and a robust pipeline of both customer funded and self-funded programs, we can be rapidly responsive to customers to start new protein engineering projects for them.
Finally, on the financial front, as we move toward year-end, it is gratifying to narrow our revenue guidance to the upper end of our previous guidance range. We are looking forward to completing our third consecutive year of double-digit top-line growth as we make progress in driving Codexis toward sustained profitability.
Before opening the call to questions, I’d like to introduce the newest member of Codexis’ executive team, Michael Aldridge, joined Codexis last month in the newly created position of Senior Vice President, Corporate and Strategic Development. Michael is charged with the important functions that include the global expansion of our biocatalyst business, striking new licensing transactions and building momentum for our own biotherapeutic pipeline.
He is already tapping into an extensive network of context he established during his years as a pharmaceutical executive and healthcare investment banker. 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’d like to mention that we will be participating in two upcoming investor conferences. We’ll be presenting and webcasting at the Craig-Hallum Alpha Select Conference on Wednesday, November 16, in New York.
In addition, we’ll be presenting at the LD Micro Main Event Conference on December 7, in Las Angeles. We will also be holding one-on-one meetings with investors during the JP Morgan Healthcare Conference during the week of January 9, 2017 in San Francisco.
Please let us know if you’re interested in the meeting. Okay, operator, we are ready for the first question.
Operator
Thank you. And our first question comes from Matt Tiampo of Craig-Hallum.
Your line is now open.
Matt Tiampo
Good afternoon gentlemen, congratulations on a strong third quarter. Couple of quick questions from me.
First, it seems like Merck is seeing some ongoing price pressure on Januvia, but it sounds like they are also seeing a nice volume uptick there. Just wondering what, and if it’s possible for you to parse out how much of your strength for that enzyme has come from just simply taking share within the Januvia supply chain and how much maybe from end market growth?
John Nicols
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Matt Tiampo
Great. And then, on the potential for another platform licensee, I assume you have some capacity to move forward on that front since you’ve got Merck and GSK.
Should we be thinking about sort of the five top 10 pharma that you’ve highlighted in your call as being sort of the most likely targets you think for a third license deal?
John Nicols
I think they’re amongst the most likely for sure. I think that the platform license arrangement is most valuable to the largest of the drug company, because they have the largest drug pipeline to consider enzyme improved processes.
So the larger, the more likely that client would be able to justify the cost and effort of platform license. And then also just to state the obvious, the fact that we are working so intimately with these other five companies besides Merck and GSK is evidence that these companies are also quite aware and are working active projects to install our enzymatic approach to manufacturing of drugs.
So, those are very strong conditions for making them targets for the next platform license.
Matt Tiampo
Great. And maybe trying to go back to Merck for one second.
How many internal R&D teams you have sort of committed to Merck’s ongoing development and how many teams do they have at their facility working on their license portion of the platform?
John Nicols
I’m not going to answer the first question explicitly. Merck has just finished tech transfer.
They have purchased the license and have set up a team that can do multiple protein engineering projects in parallel, certainly more than two, maybe as many as four or five with the team and the equipment that they set up. But currently, they are just about to embark on stepping up their parallel projects in their brand new CodeEvolver facility.
Right now, we have more than their capacity projects installed in place right now within Codexis’ R&D team. So, it’s more than their platform [ph] currently.
Matt Tiampo
Great. And then, on your oral PKU asset, what are the next steps that we should be looking for in terms of progress with that asset, anything, your message that over the coming months?
John Nicols
Yes. We continue to be encouraged by the progress of our oral PKU drug candidate.
I highlighted in the prepared remarks that we’ve done additional animal testing that encourages us and that we’ve done additional planning to be able to approach the FDA to be able to trial the drug in human trials that’s so called IND event. And so, we’re doing mostly planning work right now.
So, the next event for us to detail for our investors is explicit statements of our progressing towards those milestones, sharing a little more data about the efficacy in the animal trials and starting to detail how we might be approaching strategic companies to consider a market testing of what this asset might be worth with strategic partners at this preclinical stage.
Matt Tiampo
Great. Any thoughts on timeline as to when we might hear more about that?
John Nicols
Yes. Last quarter, I got a similar question, Matt.
I don’t recall if it was you or somebody else. But we said that it would be towards the end of this year or early next year.
And it’s unlikely to be before Christmas, but still very likely that we’ll give a lot more clarity as we begin next year.
Operator
Thank you. And our next question comes from RK of H.C.
Wainwright. Your line is now open.
RK
Thank you. Good evening, John.
Just couple of quick questions. You talked about some of the top 10 pharma companies working with Codexis at this point.
So, what’s the nature of these relationships in the sense, are they more like the Merck kind of relationships or the GSK? And also within the new five, if we can call them that, what’s the timeline in terms of where the relationship is such that can you kind of keep them over the next couple of years or next three, four years as one at a time or they can -- can they come up as a lump sum in the next year to 18 months?
John Nicols
Okay. I’ll do my best.
The good news is that the amount of activity we have with the largest pharmaceutical companies right now has been accelerating and is a very strong part of our activities and our revenues. So that’s really good.
We detail a lot about Glaxo and Merck, so I’ll keep those comments about these two clients off to the side and just focus on these other five. I mentioned that one of these companies we have never done any business at all with.
That’s extremely encouraging. So, we’ve gotten them to understand our technology, gotten their openness about their chemistries of their small molecule drugs to the point where they’re excited and we believe are set up to start doing real enzyme engineering work to overhaul potentially multiple of that great clients processes.
So that’s from nothing to an exciting activity set for the Company. But it’s very early stage.
As you know, we go through a progression of relationship -- business relationship with clients when we are working through reduce cost of their manufacturing processes by designing enzymes from R&D where we design a novel enzyme for R&D fees. We work with the clients get the enzyme to hit performance targets with R&D fees.
Often times then, we will wait because those most of our projects, the big pharma are targeting clinical programs. So, we to wait for needs for material.
We then will supply batches of clinical orders. I highlighted one of those in my prepared remarks with one of these five clients.
Those are nice six-digit orders that they need to enzyme to make their drug to do their next clinical phase, all the way to getting our enzyme, our commercially designed enzyme to be installed in their commercial process, so that when they make the drug that they’ll need the catalyst, the biocatalyst to make their drugs, and they will be consuming and buying our products on a somewhat regular basis kind of like we are doing with Merck and their Januvia business. So that’s the complexion of how revenue unfolds over time.
I just described the multiyear process. But I think the whole effort with these five clients is relatively modest or earlier stage.
Some of them are in clinical phase programs for our clients, some of them are in engineering stage. And we mentioned two of our product sales are fully commercialized, one to Merck with Januvia and a second one to an unnamed large top 10 client as well.
So, hopefully that helps, RK. I know I didn’t answer your question precisely but that gives you sort of a good complexion of how revenue should unfold with these clients over time.
Maybe one more comment before I open it back up to you. Ultimately, when a client sees just how widely applicable the protein engineering approaches to designing novel drug process, there is a tipping point where they see that it’s far more economically and strategically beneficial for them to enter into a platform licensing arrangement instead of working with us on a project-by-project basis.
And we’re helpful that over time -- and Matt Tiampo asked the question that over time some of these companies will advance to platform licensing relationships like we’ve got with GSK and Merck.
RK
No, that’s great. And then, from your press release and also in your opening remarks, you’re talking about the GSK’s project specific revenue that you received this quarter.
Is this the kind of average size that you’re expecting in the future? And what kind of visibility do you have, because you talk about how excited you are for series of growing revenues based on these relationships?
Again, we always get into trouble of understanding the timing of these things; is there any color on that would be helpful?
John Nicols
Sure. Certainly, we’re excited that we’re already starting to see revenues from the backend of these platform licensees, the first one with our first deal with GSK.
The way, the milestone structure is set up in the contract with GSK, it’s a stream of milestone payments that grow as the drug for GSK grows. So, this is an early milestones.
So, it’s small relative to our hope for longer term milestone payments from GSK. So, if this particular project continues to advance, the next milestone payment for this particular program would be larger than the payment we just recognized and received in the third quarter.
Visibility will be challenging. But these could be significant pieces of our overall revenue.
So, we will surely be giving some color commentary as we give you our 2017 financial guidance outlook in the beginning of next year, as Gordon mentioned. If we expect any milestone payments to come from the backend of these two licensing partnerships, we would likely give details in our guidance outlook those things coming or not.
RK
One last question and then I’ll step back into the queue. Regarding the biopharma partner in terms of the non-exclusive license that you recently signed with them.
Is this for the technology -- I mean, for the platform or is this for a product? And if it is for the product, could you potentially -- I mean could you see that potentially there could be additional products from the same partner?
John Nicols
It is a preclinical program area of this biopharma partner. I don’t have a lot of visibility to how many different programs that partner may have, that could in principal use the enzyme we developed.
So it’s hard for me to know. The annual payment, it’s not a function of the number of products from our clients, but actually the advancement of product through their pipeline, if that’s helpful
RK
Okay. Thank you.
Operator
Thank you. And our next question comes from Kevin DeGeeter of Ladenburg.
Your line is now open.
Jay Colby
Hi, this is actually Jay Colby on the line for Kevin. Thanks for the question.
John Nicols
Hey, Jay.
Jay Colby
So, in the prepared remarks, you mentioned that the general biotech pharma pricing trends were providing a positive for Codexis. Could you elaborate on what you’re seeing and are these conversations more of R&D-focused or product-focused working on commercial drugs or in the clinics?
John Nicols
It’s both. It’s just a broad kind of conversation at higher levels.
I think you’re aware of the higher level issues facing the large drug companies, in particular regards pricing of their drugs. And of course, they will defend the rationale for their pricing as part of their strategy but they are also increasingly looking backwards to the manufacturing groups to find ways to reduce costs as a way to mitigate potential price erosion.
And the more progressive companies are going even farther upstream and putting pressure on R&D departments to come up with better processes in the first place before they file for the FDA approval. And actually it’s in that area that we see the most energy coming back to Codexis, where we see a growing set of requests, or growing set of projects to design our catalysts into their clinical stage processes early as a way to install ultimately longer term lower cost processes.
Jay Colby
Okay, great. Thank you.
And I guess along the same lines, has this had an impact on your ability price in your contracts?
John Nicols
We price our contracts for value. We have to share the cost savings benefit with our client, otherwise they wouldn’t move with us.
So, if we create a $100 of value, just for example, we are negotiating to gets what piece of that 100. If it’s -- if we are able to design about catalyst that reduces the cost by 30%, all things equal, we are increasingly successful of getting a higher enzyme price than if we’re designing an enzyme that reduces the cost of the process by 5%.
And so that gives you a feel for the kind of customization of pricing, if you will, that is appropriate more than the way we price our enzymes to client.
Jay Colby
Okay, thanks. And then with your experience with GSK and Merck on the platform improvements, what has the lead time looked like from when you began discussions about a broad platform like this agreement, until when you signed the paper?
John Nicols
Those are the first two deals. So, they are not -- it’s really hard to translate, because we’ve been talking to many, many companies about our platform, licensing arrangement ever since we announced the GSK deal back in 2015 -- sorry, in 2014.
So, we’ve been talking to many companies for two years. And obviously outside of Merck, we haven’t yet consummated a third deal.
And some of those customers in principal we’ve been talking to for a couple of years. So it’s not fair to compare with Glaxo and Merck.
Every client has around reception to the concept of platform license justification, every client has somewhat different pipeline of drugs to consider how much money biocatalysts can save. Every client has a different attitude about how important it is to invest in cost reductions.
So, we’re finding every client to be a very unique set of conversations. But as a whole, we continue quarter-after-quarter to be encouraged that this is an outstanding model for working biocatalysts into a large company and we’re promoting it as a preferred way to work strategically with major pharma partner.
So, we’re encouraged that we’re going to continue stream of deals beyond GSK and Merck accordingly.
Jay Colby
Okay. And then, last for me.
Can you just -- what do you think about the timeline for an update on the new food industry enzyme and also the new vertical you’re working on? Thank you.
John Nicols
So, the program that we’re finishing in the fourth quarter with our second food industry company, we’ll need additional R&D chapters. It is an aggressive target.
We continue to be very encouraged by the results and the partner’s attitude to drive through those R&D chapters. So that will take some time.
The self-funded program for a food ingredient that has widened food industry interest, we’re hopeful that in the coming 12 months, at least, we’ll be disclosing what that is and how we bring in that to market and in what format. So, I think it’s that kind of timeframe.
And I’d say similarly with respect to our new enzyme for the new vertical. And as a priority on these programs, we’re very excited about both of them.
We think it makes great sense for us to fund these by ourselves, because it’s giving us additional leverage to drive better economics for launching these enzymes as we advance the R&D with our own, we basically derisk the project before we promote it to clients.
Operator
Thank you. [Operator Instructions] And our next question comes from Steve Schwartz, First Analysis.
Your line is now open.
Steve Schwartz
First question is just with respect to the milestone revenues. If you could help me understand the components of the 11.5 million, I understand, at least in my model, I’ve got some amortized amounts for about 1.1 million between the two, GSK and Merck; and then of course you took an 8 million.
What’s the rest that gets you to the 11.5 million?
Gordon Sangster
Hi Steve, it’s Gordon hear. A variety of R&D service revenue projects with major pharma and food industry customers.
We had accelerated amortization with GSK back in the -- earlier this year, because we wrapped the whole thing up. In this case with Merck, we were able to achieve all the deliverables under the milestone requirements for Wave 2 and the completion of tech transfer.
But there was some ongoing efforts through November to wrap up the whole project. So we will be recognizing some of that accelerated amortization in the fourth quarter.
Steve Schwartz
I see. So, GSK for example, when you, from July of 2014, when you amortized the $6 million, that gives you about $0.5 million a quarter.
So, you’re saying that $0.5 million was higher for GSK, because you’ve accelerated now, right?
Gordon Sangster
Well the upfront -- yes, it was amortized over three years; we finished in roughly 2. So, we were able to accelerate the remaining year, which was roughly $2 million earlier this year.
Steve Schwartz
Okay.
Gordon Sangster
Yes. So from Merck, the upfront was amortized originally over 24 months that’s what we anticipated, but we finished the project in 2015.
So, we will be able to recognize the balance of that in Q4.
Steve Schwartz
Okay. So, in other words where we had some of those amortized amounts carrying into 2017, we should be eliminating those.
Gordon Sangster
Yes, we will be able eliminating those. Yes.
Steve Schwartz
Okay. That’s good to know.
Okay. And then, just with respect to the higher payroll expenses.
So, I think you’ve commented on it in the press release and you’ve made some comments in the conference call. It sounds like it’s more salary bodies plus there are higher level of contract employees.
Merck is part of that. Is Merck the salaried people or contract people?
Gordon Sangster
It’s not -- I think it’s not contract people, it’s more we had outside services for a variety of reasons and some consulting that was earlier in the year. The increased headcount cost primarily relates to a modest increase in R&D staff, because our pipeline is so full with projects plus the internally fund there projects that we were able to modestly increase number of people in R&D over the last three or four months.
Steve Schwartz
Okay. So, is this third quarter expense level kind of your go forward rate for that expense?
Gordon Sangster
I think roughly that’s fair to say, yes.
Steve Schwartz
Okay. And then with respect to Exela and argatroban, the $445,000, is that typically this where that level will probably stay going forward do you think or…?
Gordon Sangster
That’s the best we can tell at the moment. There may be some pickup in that; I think that that will probably be a next year.
We are not anticipating a pickup in the fourth quarter.
Steve Schwartz
Okay. And then with respect to the Merck payment, the $8 million, I think when did you a press release in early October, you kind of suggested that money came in, in the fourth quarter, what’s going to be recorded in the fourth quarter.
Is there any reason of importance that we should know why it’s seems to have gotten moved to the third quarter versus fourth quarter; is that just simply some accounting mechanism?
Gordon Sangster
It’s just the accounting, because we were able to recognize the revenue in the third quarter, but we didn’t -- 30-day payment terms, we didn’t get the cash until 30 days later in October.
Steve Schwartz
Okay. All right, I have a few strategy questions, but I’ll get back in queue and if there is time, I can circle back; we’ll talk about those things.
Thanks.
Gordon Sangster
Okay. Thanks, Steve.
John Nicols
Thanks, Steve.
Operator
Thank you. And I’m showing no further questions at this time.
I’d like to turn the conference back over to Mr. Nicols for any further remarks.
John Nicols
Okay. Thank you.
I’d like to close by thanking you for joining us this afternoon. We’re proud of our strong financial and operational performance and are 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 day.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program.
You may all disconnect. Have a great everyone.